BSP SQUARELY RESPONDS TO COVID-19 CRISIS

The Bangko Sentral ng Pilipinas (BSP) has served as a guardian of financial stability amid the COVID-19 crisis. It implemented a long list of response measures meant to assist BSP-supervised financial institutions (BSFIs), so they may in turn serve households and business enterprises affected by the pandemic.

To shore up market confidence and ensure adequate liquidity and credit

The BSP implemented a series of cuts in its key policy rate by a cumulative 200 basis points beginning February 2020. Interest rates on the overnight deposit and lending facilities were likewise reduced accordingly. This made the BSP among the first responders to COVID-19, which was officially declared a pandemic by the World Health Organization in March 2020.

The BSP also reduced the reserve requirement ratio (RRR) by 200 basis points for universal and commercial banks and by 100 bps for thrift banks (TBs) and rural/cooperative banks (R/CBs).

The interest rate cut was meant to spur credit activities, while the cut in the reserve requirement ratio increased the amount of liquidity available for lending.

To extend financial relief to borrowers

The BSP extended regulatory relief to BSFIs, which enabled them to grant equivalent financial relief to borrowers, such as in the form of flexible and favorable lending terms or loan restructuring.

The regulatory relief measures for BSFIs included the temporary exclusion of loans of affected borrowers from the past due and non-performing classification. BSP also allowed banks to stagger the booking of credit losses from loans extended to crisis-affected borrowers. Moreover, the BSP extended payment the grace period and loan restructuring to banks with outstanding rediscounting obligations.

To incentivize lending

To incentivize lending, the BSP reduced credit risk weights of loans to micro, small, and medium enterprises (MSMEs); allowed peso-denominated loans to MSMEs and certain large enterprises as forms of alternative compliance with the reserve requirements against deposits and deposit substitutes; temporarily raised the single borrower’s limit (SBL); and deferred the implementation of the enhanced capital rules, while reducing the minimum liquidity requirements for stand-alone TBs and R/CBs. Banks were also allowed to utilize capital and liquidity buffers during the crisis

To promote continued access to financial services

To ensure that the Filipino people continue to have uninterrupted access to basic and essential financial services and products during the crisis, the BSP implemented relevant measures. These include provision of incentives for BSFIs to extend financial relief to their borrowers and promotion of digital platforms for the delivery of financial services.

Moreover, the BSP rolled out policies meant to ensure access to formal financing channels by retail clients, including those badly affected by community quarantine arrangements. The use of information technology in financial transactions has been actively promoted.

The BSP also relaxed the know-your-customer (KYC) rules to facilitate access of the public to formal financing channels. It urged BSFIs to suspend fees and charges on the use of online banking platforms, including InstaPay, PesoNet, and interbank ATM transactions. Meanwhile, the BSP waived the license fees on the provision of Advanced Electronic Payments and Financial Services (EPFS), as well as transaction fees charged for fund transfers made with PhilPaSS.

To complement the national government’s broad-based health and fiscal programs through extraordinary liquidity measures

To help the National Government bridge its financing gap as it spends on COVID-19 response, the BSP on March 24, 2020 started purchasing government securities in the secondary market.

The BSP also remitted p20 billion in advanced dividends to the National Government to further boost the latter’s resources for crisis response.

In addition, the BSP extended provisional advances to the National Government, the latest of which was the p300 billion that was paid in full on May 20, 2022, ahead of the June 11, 2022 deadline.

Aided in part by the COVID-19 response measures of the BSP, the impact of the crisis to the country’s banking system has been manageable. Banks have remained sound and stable and, therefore, able to support economic recovery and growth.

Against the backdrop of COVID-response measures by the BSP, which complemented the National Government’s own crisis response initiatives, the Philippine economy has bounced back from the crisis.

Following the pandemic-driven recession in 2020, the Philippine economy grew by 5.7 percent in 2021 and further by 8.3 percent in the first quarter of 2022.

BSP starts calibrated exit strategy

Amid the Philippine economy’s solid rebound from the COVID-19 crisis, the Bangko Sentral ng Pilipinas (BSP) has begun its exit from the extraordinary measures it implemented to support recovery.

Given that the economic recovery is in its nascent stage, the BSP is implementing the “exit strategy” in a calibrated manner, making sure not to hamper the recovery momentum.

The BSP recognizes the consequences of an ill-timed exit.

On one hand, winding down too early may dampen, if not stall, the economic recovery. On the other, late withdrawal may cause inflationary pressures and financial stability issues (for instance, keeping interest rates at a record low for too long may lead to excessive credit activities).

As such, the BSP strikes a delicate balance between providing adequate support to the economy and preventing the buildup of inflationary pressures and risks to financial stability. It does so by implementing the exit strategy in phases and in a well-calibrated manner.

Committed to transparency, the BSP has already communicated to the press, as well as to selected market participants the broad elements and broad sequence of the BSP’s exit strategy.

The first component involves the recalibration of the BSP’s monetary operations, such as the reduction in the amount of government securities it purchases in the secondary market. In the latter part of 2021, the BSP started to reduce its GS purchases amid improvements in the country’s COVID-19 situation.

The second component involves the unwinding of the measures that infused liquidity directly into the economy, such as the provisional advances to the National Government and the alternative compliance with reserve requirements (i.e., the temporary policy that considers loans extended to MSMEs and other critical enterprises as part of banks’ compliance to the reserve requirement).

From the original amount of p540 billion during the height of the COVID-19 crisis, the BSP’s provisional advances to the National Government was reduced to p300 billion, which the National Government eventually paid in full on May 20, 2022.

The third component entails the reduction in monetary accommodation or the raising of the policy interest rate as prospects for the economy to materially improve. On June 23, 2022, the BSP raised its key policy rate by 25 basis points to 2.5 percent, following the economy’s robust growth of 8.3 percent in the first quarter of 2022.

The final component involves building of buffers to ensure that the economy is prepared and resilient should another crisis strike.

The exit strategy is not calendar-driven and instead remains state-based, especially as global economic uncertainty persists.

By observing a calibrated approach to exit strategy, the BSP is making sure the Philippines’ economic recovery is sustained, and price and financial stability is broadly maintained for the benefit of all Filipinos.