Wednesday, 22 July 2009

‘Underperformance’ criticized anew by BSP

P. L. G. Montecillo with a report from A. D. B. Romero

UNDERSPENDING by the government came under fire again yesterday, with the Bangko Sentral ng Pilipinas criticizing weak state efforts as dulling monetary interventions aimed at propping up the economy.

The lack of fiscal responses from the government, a central bank official said, has prompted investors to demand higher risk premiums for public debt papers and led to higher lending rates for consumers.

"Monetary policy can only do so much ... we cannot do anything about risk aversion," BSP Assistant Governor Cyd N. Tuaño-Amador told reporters.

Her remarks came a day after the government announced that it had kept its first half budget shortfall within target at P153.4 billion. Along with this, however, were missed revenue targets and below-target expenditures.

Government officials said spending, particularly for infrastructure, had improved significantly and the Budget department said it was preparing a 2010 budget that would focus on preparing the country for a global economic recovery.

Final figures are still be being determined, Budget Secretary Rolando G. Andaya, Jr. said on Monday, but he added stimulus spending could be higher than the P160 billion which is part of an overall P330-billion Economic Resiliency Plan.

The BSP, among other responses, has cut its key overnight borrowing rate by a total of 200 basis points since December of last year. The move aims to discourage banks from keeping money with the BSP and instead lend to the public. Clients, meanwhile, will be encouraged to borrow from banks via lowered interest rates.

"But that doesn’t happen because risk premiums are on the rise, so the transmission of lower rates is harder," Ms. Tuaño-Amador said.

The BSP has said only around 40% of its policy cuts have been passed on in the form of reduced lending rates, a claim she reiterated yesterday. "That means the pass-through of the BSP’s policy rates is not complete," Ms. Tuaño-Amador said.

A slowing economy has prompted the government to cut its growth forecast for the year to just 0.8-1.8% from 3.1-4.1%. It also raised its deficit cap to P250 billion, noting the need to pump-prime the economy.

State revenues for the first half totalled P545.7 billion, below the target of P581.4 billion, while expenditures hit P699.1 billion, short of the programmed P736.5 billion.

"News like the [government’s] underperformance — that’s a dampener for growth and that will impact risk aversion," Ms. Tuaño-Amador said.

Declining revenues have forced the government to issue more debt papers, the last being last week’s $750-million global bond issue. The supply of government debt in the market has lead to higher rates and investors have also demanded better yields from what they perceive as risky holdings, Ms. Tuaño-Amador said.

In last week’s auction last week, the yield on the 91-day Treasury bill, used by banks in pricing loans, climbed to 4.5% from 4.954% previously.

Ms. Tuaño-Amador said the BSP could do little to offset the government’s fiscal slack.

"It’s not our responsibility," she said. "We will react on the basis of the inflation outlook."

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