Philippines: Weak Investment Climate and Fiscal DeďŹ cit Constrain Growth Prospects
slowest pace since the boom period) as consumer sentiment weakened and precautionary savings rose. Private investment dropped precipitously, and robust public spending was able to offset only some of the drop. The crisis opened up an output gap in 2008 that widened further in 2009, even though the economy was operating at near potential level before the crisis. The fall in both domestic and external demand led to an increase in excess capacity in 2009 and a TFP decline of 1.9 percent.
Government Policy Responses Overall, monetary and fiscal authorities have been prompt to react to the crisis and have introduced appropriate policies. The fiscal stimulus, however, has come at a heavy cost. Monetary and Financial Regulation Policies Monetary policy has been appropriately supportive of growth and financial system stability and liquidity during the crisis. As disinflation from the 2008 food and fuel price shock set in and the economy softened, the BSP cut policy rates substantially. Starting in December 2008, the central bank cut rates by 200 bps, bringing the key policy rate to a 17-year low of 4.0 percent (although banks were slow to follow the BSP cuts, trimming lending rates by just 146 bps in September 2009). The BSP has also taken preemptive measures to avoid a liquidity crunch, even though domestic liquidity remained adequate. The central bank lowered reserve requirement by 2 percentage points, doubling the peso rediscounting facility to Php 40 billion in November 2008 and further increasing it to Php 60 billion in February 2009. The BSP also increased the loan value of all eligible rediscounting paper from 80 percent to 90 percent of the outstanding balance of a borrowing bank’s credit instrument. The central bank has also relaxed accounting rules, enabling banks to avoid mark-to-market losses on their government bond holdings and to continue lending. In October 2008, the BSP authorized banks, through a one-time reclassification, to move some of their trading assets to hold-to-maturity (at a precrisis price). The BSP also eased its rules on the 100 percent asset cover of banks’ foreign currency deposit units and opened an interbank dollar-denominated borrowing and lending
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