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PHL won’t risk debt default due to COVID-19 –Diokno

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said on Saturday that the Philippines would be shielded from a debt default post-COVID-19 and would likely embark on a “U-shaped” recovery next year.

As economies across the world faced a “virulent mix of monumental debt-to-GDP ratio” and “the deepest global economic recession in the last 100 years,” Diokno said that “the Philippine economy might not escape a recession this year.”

However, the central bank chief said that, unlike most emerging economies, the country was starting from a position of strength.

“[T]hus, will not risk a debt default as a result of the COVID-19 pandemic,” Diokno said in a text message.

The BSP chief said that the Philippines’ debt-to-gross domestic product (GDP) ratio - the amount of debt relative to the size of the economy - was modest at 40.5% in 2019.

As borrowing was seen to be an aggressive fiscal stimulus response due to the pandemic and with the budget deficit-to-GDP ratio rising from 3.2% to 5.3%, the country’s debt-to-GDP ratio might hit 47.0% —still modest by international standards, according to Diokno.

“In fact, the Department of Finance has already raised some $6.9 billion of COVID-19 related loans from multilateral and bilateral sources as of April 24, 2020. The Philippines is one of the few developing countries that can borrow from multilateral institutions at largely concessional rates,” he said.

“As I said the Philippines was in a sound fiscal and monetary state when the pandemic hit the country,” he noted.

The monetary and financial condition of the country was sound and stable, the central bank chief emphasized.

“The BSP has undertaken a series of reforms that made the banking industry sound, sufficiently capitalized, and with a lot of buffers,” Diokno said.

“Interest rates have been cut by 200 basis points, while reserve requirement ratio has been reduced by 600 basis points, since a year ago,” he said.

The Philippine peso also remains steady, being the second strongest currency next to Japan among 14 monitored Asian foreign currencies after the COVID-19 pandemic.

The strength of the peso might be attributed to the Philippines’ hefty gross international reserves (GIR) and its strong economic fundamentals.

The GIR is expected to hit more than $90 billion by end-2020.

U-shaped recovery

Diokno said the Philippines will likely follow a “U-shaped” economic recovery in 2021.

“The domestic economy could slow down in first quarter 2020 and is projected to contract in second and third before gradually recovering in fourth quarter 2020,” he said.

“On an annual basis, GDP is expected to shrink by 0.2 % in 2020 before it bounces back to about 7.7 % as the impact of the government policy support measures gain traction,” the central bank chief said.

The BSP’s strong recovery projection in 2021 is based on the assumption that the pandemic is contained in the second half of 2020.  — DVM, GMA News