MANILA, July 14 — The current low interest rate environment is advantageous to the Philippines, which is targeted to grow as much as eight percent until the end of the Duterte administration in 2022.
Budget and Management Secretary Benjamin E. Diokno, in a statement Friday, said that “when domestic interest rates remain low, this encourages investment within the economy due to easier access to credit.”
“As such, lower domestic interest rates influence economic expansion,” he said.
To date, the Bangko Sentral ng Pilipinas’ (BSP) overnight borrowing or reverse repurchase (RRP) rate is at three percent, the overnight lending or repurchase (RP) rate is 3.5 percent and rate of the special deposit account (SDA) facility is at 2.5 percent.
The three facilities represent the central bank’s Interest Rate Corridor (IRC), put in place since June 2016 to help enhance the link between the central bank’s monetary policy and the real economy.
“The Philippines’ domestic interest rates remain at an optimal level conducive to supporting rapid growth,” Diokno said.
In the first quarter of the year, growth as measured by gross domestic product (GDP), expanded by 6.4 percent, slower than the previous quarter’s 6.6 percent and year-ago’s 6.9 percent on account of base effects of election spending last year.
Economic managers, however, believe that growth will remain strong on back of the government’s programmed spending on infrastructure and social services, among others.
In the last six years, the domestic economy’s growth has averaged at 6.2 percent, higher than the three percent expansion in the previous years.
The current government plans to invest about PHP8 trillion for its infrastructure program until 2022, to be funded mainly by government funds and official development assistance (ODA) loans.
For 2017 alone, economic managers have set an 80-20 borrowing program ratio in favor of domestic fund sources.
The Department of Budget and Management (DBM) chief said “borrowing rates have plummeted in this era of low interest rates.”
“With the cost of borrowing money at their lowest levels, we must take advantage of the favorable financing terms presented to us. This will provide funds for our ambitious infrastructure and social services program without squeezing our fiscal position with heavy interest payments,” he said.
Diokno pointed out that concerns on the possible surge of state liabilities in line with the current administration’s infrastructure investment program is “unsubstantiated.”
This, after noting the low interest rate environment, the improvement of debt-to-GDP ratio and the large gross international reserves (GIR).
Diokno said economic managers have projected the decline of the proportion of liabilities to domestic output from 40.6 percent in 2016 to 38.1 percent in 2022 due in part to the drop of external debt from about USD77.47 million in 2015 to USD73.81 million as of end-March 2017.
“This highlights that the country is doing well in paying off its debts,” he said.
The Duterte administration plans to increase deficit cap to three percent of GDP from the previous administration’s two percent ceiling but this is also targeted to come with a 6.5-7.5 percent growth this 2017 and seven to eight percent growth from 2018-22.
GIR has reached USD81.41 billion at the end of the first half this year, enough to cover 8.7 months’ worth of imports of goods and payments of services and primary income.
Diokno said the rule of thumb for the foreign reserves wasd that it should be large enough to cover at least three months’ worth of imports to cushion any impact of negative external developments that would result to foreign exchange depreciation, among others.
He said the current foreign exchange level of the country ”shall remain stable through the rest of the Duterte administration, thereby hedging against external risks and other fiscal problems.”
Similarly, inflation remains manageable, with the June level down to 2.8 percent from month-ago’s 3.1 percent.
At the end of the first half this year, rate of price increases averaged at 3.1 percent, slightly above the mid-point of the government’s two to four percent target but monetary officials are confident that inflation will remain supportive of domestic expansion.
The combination of these factors bodes well for the economy, Diokno said.
“In sum, the prevailing economic conditions will further fuel growth of the domestic economy. This will help in making the government’s fiscal strategy effective since: (1) it ensures that GDP growth outpaces our debt burden, and (2) it will allow us to raise resources for our spending priorities on minimal interest rates,” he added. (Joann Santiago/PNA)
