BSP urged to cut rates further to spur economic growth
JUDITH BALEA, abs-cbnNEWS.com | 11/11/2008 5:18 PM
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| Dr. Victor Abola, economist at the University of Asia and the Pacific |
The Bangko Sentral ng Pilipinas (BSP) should seriously consider aggressive rate cuts in its benchmark interest rates to ward off a deeper slowdown in the economy, an economist said Tuesday.
The recent orchestrated rate cuts launched by major central banks in the world as well as slowing domestic inflation gave the central bank more room for reductions, according to Victor Abola, program director of the University of Asia and the Pacific School of Economics.
"We're seeing rate cuts of up to 1 percent (until mid next year). These are needed to stimulate the economy," he told reporters.
The BSP is set to hold its next policy rate-setting meeting this November 20. Analysts widely expect it to trim its interest rates by at least 25 basis points, especially after three consecutive rate hikes and since inflation already eased for the second straight month in October.
The hope is that future rate cuts will help spur the economy and stabilize the financial markets.
Basically, trimming interest rates reduces the cost of borrowing from banks, thereby, encouraging fresh business activity. With more borrowing comes more investment, higher employment and higher growth.
Abola said the government should balance inflation targeting, which is done through the usual tweaking of money supply, with economic growth and job creation.
Employment, he explained, would best cure the country's most pressing economic problem, poverty.
"The government should not focus too much on inflation."
Abola noted the government can only do so much in providing new jobs because this role belongs primarily to the private sector. But it has the power to create an environment where policies entice rather than deter businesses to spend and expand.
Amid the ongoing global economic downturn and financial turmoil, the economist expects the Philippines to keep afloat with a respectable gross domestic product (GDP) growth of 4.5 percent this year.
Lower GDP next year
However, a much lower GDP growth is likely in 2009 as the country absorbs the full impact of adverse external developments.
Abola pegged next year's GDP growth at 4.0 percent, with exports as the main drag.
"Exports can post zero growth next year... some see a negative," he said.
"Although we are no longer heavily dependent on the US as a trading partner, our other markets are also exporting to the US. So the
negative effect on us is indirect," he added.
Abola said three of the economy's main drivers, the mining and tourism sectors and remittances from overseas Filipinos are expected to slow down too. He noted the decline in metal prices and dwindling discretionary income of foreign tourists. The general downturn across the globe will also spell less jobs for Filipinos abroad.
It is not all bad news for the Philippines next year, however, noted Abola.
He pointed out that slowing global demand would bring down the prices of oil, the main culprit for skyrocketing inflation rates earlier this year.
In fact, oil prices are unlikely to go back to July's record-high levels of over $147 per barrel in the next two or three years, according to him.
Abola sees inflation to average at 9.6 percent in 2008 and 5.5 percent in 2009.
He said easing inflation would boost domestic consumption to 4 percent next year. This, coupled with the government's spending program in social services and infrastructure, would fuel a rebound in the economy by 2010.
Weakening peso
Meanwhile, Abola projects the peso to depreciate further to 52 against the US dollar in 2009 with more foreign capital fleeing emerging markets.
"The exchange rate will continuously be under pressure. Foreign funds will still be pulling out their portfolio of investments," he said.
This means the local stock market would also continue its downward trend, he concluded.
"Up to now, the market is still characterized by foreign selling. Foreigners are always the net sellers."
