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BSP governor remains optimistic about PHL economic growth

Recovery, growth trajectories hinted in BusinessWorld One-on-One with Gov. Diokno

Economies around the world absorbed the deep impact of the coronavirus disease 2019 (COVID-19) — with closed businesses, disrupted operations, and shifting consumer preferences, among others.

BusinessWorld Editor-in-Chief Wilfredo G. Reyes (left) virtually interviews Bangko Sentral ng Pilipinas Governor Benjamin E. Diokno about his economic outlook for 2021 and other significant issues in BusinessWorld One-on-One held last January 13. Rewatch the whole interview here:

To respond to such impacts, the Bangko Sentral ng Pilipinas (BSP), along with other economic institutions, tapped the tools within their reach to address the widespread issues caused by COVID-19.

Seeing how these measures have helped keep the economy afloat, the central bank’s governor, Benjamin E. Diokno, is optimistic about the Philippine economy steadily recovering and returning to pre-pandemic levels in two years.

In BusinessWorld‘s “One-On-One” online interview, Mr. Diokno told BusinessWorld Editor-in-Chief Wilfredo G. Reyes that amid the Philippine economy feeling the effects of the pandemic, it is in a much better position than in previous crises like the Asian Financial Crisis (AFC) in 1997.

“I’ve seen that whenever we have a crisis in the Philippines, we run out of dollars because we have a huge foreign debt; and because we do not want capital exiting the country, we raise interest rates,” Mr. Diokno said.

Yet, Mr. Diokno recognized, “the government has been fairly aggressive in making sure that there is enough liquidity to the system” as the battle against COVID-19 continues.

Reflecting this better position, BSP’s gross international reserves amount to more than USD 100 billion. He expects this to grow at USD 110 billion this year and at USD 120 billion the following year. “This is a major departure from previous crises when we had to scramble for dollars to pay for foreign debt,” he said.

The debt-to-GDP (gross domestic product) ratio, meanwhile, was at less than 40%, which Mr. Diokno finds as “a good number compared to other countries” and so has removed the need to increase interest rates to protect the peso.

The BSP governor added that the reforms the central bank has put in place amid the public health crisis have added about P2 trillion into the financial system or about 10% of the country’s GDP.

“This will carry us on to this year and next year; and, hopefully, by the middle of next year, we will be able to go back to where we were before in 2019,” Mr. Diokno said. 

Economic growth by up to 7.5%

With the economy slowly recovering, Mr. Diokno is confident of economic growth this year albeit it remains contracted. The projected GDP growth, which indicates the value of final goods and services produced within a country during a specific period, is expected to be at 6.5% to 7.5% this 2021, rising from the expected contraction of 8.5% to 9.5% in 2020.


While figures from the last quarter of the previous year are yet to be released, Mr. Diokno expects the performance in the fourth quarter (Q4) to be “much better than the first three quarters”.

Moreover, expecting COVID-19 vaccines to reach more people in the second quarter (Q2) this year, he shared that the economic growth will be sustained and increased by 8% to 10% in 2022.

“This revised projection is based on the assumption that the vaccine will be introduced on a massive scale by the first half of 2022. Anytime that it is introduced much earlier is a plus for the Philippine economy,” Mr. Diokno said.

In contrast to the slump in Q2 of 2020, this year’s Q2 will be strong and Q4 will even be stronger, according to the BSP governor.

“Knowing the pent-up demand of consumers, businesses, and the Philippines’ propensity to observe the Christmas season, I think we’re very confident that we’ll have a strong Q2 this year and an extremely stronger Q4 this year. That will add up to the 6.5%-7.5% [projected growth],” Mr. Diokno explained.

Aside from the factors aforementioned, he sees the ongoing “Build, Build, Build” program, the early approval of the 2021 national budget (which amounts to a total of P4.5 trillion), and even the expected mild La Niña season as key drivers in economic growth this year.

Last year, numerous projects were completed amid the pandemic, among them the final section of Tarlac-Pangasinan-La Union Expressway Rosario, the Metro Manila Skyway Stage 3 Project, the Sorsogon City Coastal Road, the Laguna Lake Highway, Cagayan de Oro Port, and a new terminal in Mactan-Cebu International Airport.

“With the Build, Build, Build and the early approval of the 2021 budget, the government can frontload the disbursement of that budget. They can frontload the expenditures for infrastructure to coincide with the weather pattern. That would be a big boost,” Mr. Diokno suggested.

Remittances to add up

The BSP governor is also optimistic that the remittances from overseas Filipino workers (OFWs) will pick up this year and the next.

“We expect that as we send more Filipinos abroad… there would be higher remittances in the years to come. It will expand by 4% this year, and even by a higher percent next year,” Mr. Diokno shared.

He noted as well that contrary to the prediction that remittances would plunge by 20% last year, it shrunk by only 0.9%. For him, this “supports the view that remittances take the nature altruistic gestures by Filipinos working abroad to support families here”.

Employing a young population

Regarding employment, Mr. Diokno shared that the country’s employment rate is targeted to return to 2019 levels, which was within 5% to 7%. 

Backing up this optimism in employment is his observation that the Philippines has a younger population compared to other countries. “Europe is aging, Japan is aging, China is aging; but we have a very young population,” he said.

In order to tap this young population, given the digital transformation accelerating since the pandemic’s onset, they should be adequately trained in a new digitalized economy, Mr. Diokno stressed. “I think we’ll be ahead if we train them, give them good education, take care of their health.”

Based on data from the Philippine Statistics Authority, the median age is 24.3 years old. The Commission on Population, meanwhile, expects Filipinos in their working age (15-64 years old) to increase by just over one million from 2020 and will reach more than 71 million this year, making up 64.15% of the entire Philippine population.

Rates, reserves to remain low

The BSP governor also sees benchmark interest rates to stay low in order to support economic recovery.

Photo by Miguel De Guzman

The central bank cut those rates by a total of 200 basis points (bps) last year, causing overnight reverse repurchase, lending, and deposit rates to go down to 2%, 2.5%, and 1.5%, respectively.

Mr. Diokno also said that reserve requirements for banks are likewise aimed to be reduced further to encourage lending and boost economic activity.

Reserve requirements, which is the amount of money banks have to deposit to the central bank, were slashed to 200 bps, half of what was authorized to the BSP chief last year.

Adding to these reduced requirements, the BSP allowed banks to include new loans to micro, small, and medium enterprises (MSMEs) as part of their compliance with the required reserve ratio.

While some economists found the cuts in benchmark rates to be ‘too much, too soon’, Mr. Diokno believes that it has never been too early to make such decisions since the pandemic is not yet over. “Our policy stance is that we will keep this policy for long until such time we have seen [the economy] growing at the same pace as before,” he said.

Mr. Diokno aims to reduce reserve requirements from 18% to a single digit by 2023, when his term ends. So far, this was cut by 600 basis points to 12%. 

“Whether we will cut further will depend on whether there is still need for more liquidity. But, at the moment, there is ample liquidity; so I don’t see any need for additional cuts at this time,” the BSP chief said. “Maybe things will change once the economy starts recovering; and with the speed of recovery, we may consider an additional cut in reserve requirements.”

Banking system to remain stable

Mr. Diokno sees the Philippine banking system to remain stable, capable enough of weathering the pandemic since it has learned its lessons from the AFC. “Our banking industry is sound, well-capitalized,” he said.

He shared that the system’s capital adequacy ratio hovers around 15% to 16%, which is higher than the central bank’s prescribed rate of 10% and the international standard of 8%.

Its non-performing loans (NPL), meanwhile, is at 3% to 4%, which Mr. Diokno said is manageable and significantly lower than the peak during the AFC.

Moreover, Mr. Diokno does not see any emerging risks in the system. In fact, he finds the Financial Institutions Strategic Transfer (FIST) bill to help banks further by reducing NPLs.

“[FIST is] just a fallback position. But we don’t see any situation worsening at this time. Even without the FIST bill, the banking industry can handle the current crisis,” Mr. Diokno said.

Pending on the Office of the President after it was approved by the bicameral conference committee in December, FIST will allow lenders to offload bad loans to asset management corporations.

Going cash-lite, maybe coinless

Prior to the pandemic, Mr. Diokno envisioned a cash-lite society in the country, with 50% of transactions projected to be in digital form and 70% of Filipino adults targeted to have a bank account.

The pandemic has seen these targets being accelerated, and such move is bound to continue, although Mr. Diokno said it will not be fully cashless in his lifetime.

Yet, he said a coinless society is possible by 2025 as this will be replaced by the QR Ph, or the national QR code standard, which is intended to be put into the national ID.

With electronic payments further used since the country went on lockdown, the BSP chief sees the need to invest further in telecommunications.

“It’s now more convenient for people to transact with the banks just at the comfort of their homes… but that means we have to ramp up our investment in telcos,” Mr. Diokno said. “That’s also one of the reasons why we’re optimistic that the heavier investment now on telcos will also help economic activity.”

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