2021-08-01-牛津经济研究院-Philippines_Pandemic_scarring_to_lower_the_medium-term_policy_rate_3页_258kb

Research Briefing Summary | Philippines

Core Content

This briefing outlines the impact of the pandemic on the Philippines' economic outlook and the subsequent implications for monetary policy and bond yields. The key focus is on the long-term effects of the pandemic, the recalibration of the neutral policy rate, and the gradual normalization of monetary policy.

Main Points

1. Pandemic Scarring and Neutral Policy Rate

• The pandemic has caused significant long-term scarring on the Philippines' economy, leading to a revised long-term neutral policy rate of 5%, down from the previous forecast of 5.5%.
• This adjustment reflects the permanent loss in potential GDP growth due to the pandemic, with GDP levels in 2025 expected to be 8.4% lower than pre-pandemic projections.
• The neutral policy rate is the rate consistent with full employment and inflation at the central bank's target. A lower neutral rate implies slower potential growth and higher inflation relative to other economies.

2. Growth Outlook

• Despite the downgrade, the Philippines is expected to remain one of the fastest-growing economies in the region and globally, with an annual average potential GDP growth of 4.6% for 2021–2029, compared to 5.1% pre-pandemic.
• The demographic dividend will continue to support growth, as the working-age population grows faster than the dependent population.
• High savings rates and favourable returns on capital are expected to drive investment and productivity, even in the face of pandemic-related challenges.

3. Inflation and Policy Rate Outlook

• Inflation in the Philippines has been above the 4% target since December 2020, driven by higher transport and food prices.
• However, food price inflation is expected to ease due to lower import tariffs, increased pork imports, and better weather conditions.
• The central bank, Bangko Sentral ng Pilipinas (BSP), is expected to keep the policy rate at 2% until late-2022 to support recovery.
• After that, the transition to the neutral rate will be more moderate than previous tightening cycles, due to contained inflation and a slow US rate normalization.

4. Global Interest Rate Normalization

• The neutral fed funds rate in the US is expected to settle at 2%, 30bps below pre-pandemic forecasts.
• The eurozone neutral rate is even lower, at 1.5%.
• The Philippines' neutral rate will remain substantially higher than these global benchmarks due to higher inflation and lower potential growth.

5. Bond Yield Projections

• The 10-year government bond yield is expected to settle at around 6.8%, 80bps lower than previous forecasts.
• This is due to the lower policy rate and a reduced spread with US yields, reflecting lower risk aversion and better inflation expectations.

Key Information

• Pandemic impact: The Philippines is expected to experience one of the largest permanent output losses in the APAC region.
• Potential GDP growth: From 5.1% pre-pandemic to 4.6% post-pandemic over 2021–2029.
• Policy rate: Expected to remain at 2% until late-2022, then gradually increase to 5% over time.
• Bond yields: The 10-year government bond yield is projected to be 6.8%, down from 7.6% previously.
• Global context: The Philippines' neutral rate will be higher than global peers due to higher inflation and lower growth potential.

Conclusion

The pandemic has significantly altered the economic trajectory of the Philippines, resulting in a lower long-term neutral policy rate and reduced potential GDP growth. However, the country is still expected to outperform most of the world due to demographic and structural advantages. The central bank will maintain a moderate and gradual normalization path, keeping the policy rate low in the short term and aligning it with the new economic reality over the medium term. This will also lead to lower bond yields, supported by improved external conditions and better inflation expectations.