On Sept. 21, during Standard Chartered Bank’s ASEAN Webinar, Bangko Sentral ng Pilipinas (BSP) Governor Ben Diokno was quoted saying: “Overall, the total amount of additional liquidity injected into the system from these collective (monetary) measures is estimated at P1.4 trillion, equivalent to 7.3% of GDP.” In its magnitude, this is almost 30% of the proposed national budget for 2021.

When the COVID-19 outbreak began, a crucial attribution to the monetary authority was the Governor’s assurance that the BSP would be taking “decisive and immediate actions.” These included reduction of policy rates by 175 basis points to influence the decline in market rates and the cost of money. The banks’ required reserve ratios (RRR) were also slashed by 200 basis points for commercial banks and 100 basis points for thrift and rural banks. Bank regulations were also tweaked to provide relief to the industry and encourage lending both to small business and households.

We owe a great deal to the BSP for its nimble response to the pandemic. What the BSP proposed to do through its monetary accommodations were to ensure market liquidity, support market confidence, mitigate a near freeze of economic activity, sustain financial stability and protect market access to financial services.

If we are to borrow what Mohamed A. El-Erian (The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse, 2016) wrote in his April 20, 2020 Bloomberg article, what the BSP did was “stunning.” The BSP, like many central banks from both emerging markets and advanced economies have all “gone in, deploying emergency interventions in record time that have already exceeded the steps they took during the financial crisis and its aftermath.”

While commending central banks, El-Erian also warned, “no good deed goes unpunished.”

He cited five risks faced by central banks which opted for “bazooka methods,” in addressing the pandemic crisis. We focus on four most relevant to the Philippines.

First, aggressive monetary easing contributes to a possible disconnect between asset valuation and their underlying fundamentals. We seem to have been spared of this trouble whether in the equities or in the real estate market because confidence remains at rock bottom. Despite the BSP’s “all it takes” efforts to stimulate the economy and keep market activity resilient, the PSEI composite index continues to struggle at around 5,900 from December 2019’s 7,815.

Second, due to uncertainty in the pandemic trajectory, decision making is fraught with risks. It is not unimaginable that central banks could misjudge the volume of liquidity required by the market and pump in more than necessary.

Based on its own disclosure, the BSP has injected an additional equivalent of P1.4 trillion in the system. But on Sept. 22, one broadsheet reported that the “BSP siphon(ed) off P1.5 trillion of liquidity.” This was the total outstanding amount retrieved by the BSP’s liquidity facilities or its open market operations (OMO) such as the overnight deposit facility (ODF) which absorbed a reported amount of P1.09 trillion. That would be about 73% of BSP’s mopping up operations validated by the central bank’s second quarter 2020 Economic and Financial Developments Report.

In effect, since the viral outbreak, the BSP has eased monetary policy in the hope that more money and lower interest would encourage more credit activity by the banks. The money actually came from the BSP’s reduction in RRR, purchases of government securities from the secondary market, and its accommodation of national government borrowings.

The problem is that the actual increase in domestic liquidity was not P1.4 trillion but only P633 billion representing the increase in July 2020 over its level at the end of December 2019. Around P800 billion remains with the BSP because of its own mopping up operations.

Unfortunately, banks are lending less. Total loans at the end of last year stood at P10.966 trillion, declining to P10.857 trillion at end-July 2020, a reduction of more than P100 billion. Given weak credit demand, banks have been placing their excess funds with the BSP, and some with the NG which are also deposited with the BSP.

Have lending rates followed the easy monetary stance?

There seems to be some bottleneck in the transmission of monetary policy. At the end of 2019, high and low lending rates averaged 8.018% and 5.497%, respectively. At the beginning of the pandemic in January-February 2020, these rates even climbed to 10.327% and 6.037%, respectively. At end-May 2020, despite the BSP’s aggressive stance, high lending rates averaged 11.457% while the average of low lending rates hit 6.232%.

Aside from the relatively high lending rates, what could have contributed to weak credit activity was the reported banks’ tighter lending standards. BSP’s media release of July 27, 2020 reported that “results of the Q2 2020 Senior Bank Loan Officers’ Survey (SLOS) 1 showed that most of the respondent banks tightened their overall credit standards for loans to both enterprises and households during the quarter.”

Based on the modal approach — which depends on the option with the highest response among respondents — this is the first time that the majority of respondent banks have reported tighter credit standards following 44 consecutive quarters of broadly unchanged credit standards.

This type of bank behavior is naturally risk-driven. And the banks have some good basis for trying to manage risks. Latest statistics confirm that the non-performing loan ratio has gone up from 1.6% to 2.3%, from end-December 2019 to end-July 2020, or about P70 billion in past due accounts. As desolation in economic activities takes hold, banks are seeing a big decline in their loans to deposit ratio. Loans proved weaker than expected, while people refrained from spending, and in the process, kept their money with the banks.

It is good the banks have stepped up. As Bankers Association of the Philippines President Bong Consing assured in a webinar at the end of April, local banks have been building up their buffer for an expected hike in NPLs due to the lockdown of economic activities.

But complicating this build-up in bank stress is the possible concentration risks arising from “banks’ investments in government securities as well as recent efforts to boost domestic liquidity amid the pandemic.” This was highlighted by the Fiscal Risks Statement for 2021 by the Development Budget Coordination Committee. The risk could come from the fact that herd behavior among banks could trigger a sell-off of government securities (GS). Banks invest around P2.2 trillion in GS. With an increasing non-performing loan ratio, the probability of a liquidity squeeze cannot be ruled out.

Again, this is pushing on a string.

Third, by excessively inflating the economy and avoiding market failure, central banks could open themselves to accusations that they could be unwittingly favoring some sectors. Ownership of central bank policies could be undermined.

Finally, when leaders in both the Executive and Congress realize the enormous power of central banks and their capacity to move fast in responding to liquidity needs during the pandemic, it is possible that the regular quantitative easing (QE) could be modified to a more popular QE, or people’s QE. This is a populist stance, involving greater access of nearly everyone to central bank facilities.

As the IMF once proposed, “the effectiveness of intervention program depends on several factors including which assets the central bank can buy, or lend against, and who it can deal with.” Central bank accommodation of public debt could be another issue.

It is also key to a more effective health and economic management that both the risks and the burden be commonly shared by all stakeholders in a whole-of-society approach. Adjustment programs cannot be cast in stone. They should be subject to regular reassessment and recalibration as we move along. We move as one, we shall heal as one.

In this spirit, the central bank can be more modest with what it does and much more with what it can do. There is room for recognizing the limits of monetary policy and its great synergy with other public policies.

Of great relevance was the caution by Bank for International Settlements (BIS) General Manager Agustin Carstens, formerly Bank of Mexico governor and finance minister, during a panel with the Swiss National Bank and UBS in May when he said: “Central banks cannot intervene in government debt markets on a large scale for any great length of time. Eventually, the natural boundaries between fiscal and monetary policy will need to be fully restored to preserve central bank credibility.”

Diwa C. Guinigundo is the former Deputy Governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was Alternate Executive Director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.