Philippine Government needs to step up spending

Posted By on December 1, 2011

MANILA, Dec 1 (Reuters) – Joint action by major central banks to avoid a global liquidity crunch should ease the burden on Philippines’ monetary policy, but the government still needs to step up spending to stimulate the domestic economy, the head of the central bank said.

The risks to global growth, slowing domestic activity and the missing impetus of government spending have seen a number of economists factor in a rate cut at Thursday’s policy review by the Bangko Sentral ng Pilipinas (BSP).

The U.S. Federal Reserve, the European Central Bank and the central banks of Canada, Britain, Japan and Switzerland agreed to lower the cost of existing dollar swap lines by 50 basis points from Dec. 5 to support global activity.

“We welcome such moves as these take away some of the burden on our own domestic monetary policy,” Tetangco said in a text message to Reuters, hours before the BSP reviews monetary policy for the final time in 2011.

“This however does not mean that our government does not have to accelerate spending to stimulate domestic aggregate demand anymore,” Tetangco said.

Thailand on Wednesday cut interest rates to mitigate the impact of severe flooding on the economy and said it could cut again if the recovery was slow.

Last week, Indonesia cut its benchmark overnight rate by a surprisingly large 50 basis points to mitigate a weakening global economy, while Australia cut its main cash rate for the first time since the global financial crisis.

Data on Wednesday showed Philippine government spending was still running well behind schedule this year despite a pick-up in October.

Spending in the 10 months to October was 1.19 trillion pesos ($27.5 billion pesos), just 70 percent of the 1.71 trillion programme for the whole of 2011, and 5.4 percent lower than the previous year’s expenditure level.

The deficit for the first 10 months of 2011 was 74.3 billion pesos vs last year’s 270.3 billion pesos.

“Our external trade could continue to be weak, therefore we need to look inward more. Government should not be derailed in its plans to step up infrastructure spending,” Tetangco said.

Sluggish exports and a drop in public and private construction slowed the economy’s growth in the September quarter, leading some economists to believe the central bank may deliver a surprise 25 basis point rate cut on Thursday.

Four of 12 economists contacted since Monday’s data showing growth was weaker than expected in the third quarter expect the central bank to cut rates later in the day.

Before the GDP data, 11 analysts in Reuters poll last week were unanimous in saying the key policy rate would be kept on hold for the fifth meeting in a row this month.

Deputy Governor Diwa Guinigundo said on Monday there was no immediate need to ease monetary policy, with strong domestic credit, well-managed inflation and sufficient liquidity.

Unlike Singapore and Thailand, which expect their economies to shrink in the fourth quarter, Philippine policymakers see growth gaining momentum in the last three months of 2011, though this might not be enough to meet the full-year growth goal.