Economic Update

Published 26 Jun 2019

In response to a moderate slowing of economic growth, the Philippines’ central bank, Bangko Sentral ng Pilipinas (BSP), has enacted measures to boost liquidity and encourage lending.

On May 23 the BSP announced it would cut the reserve requirement ratio (RRR) for small and medium-sized banks from 8% to 6%. The cuts will be implemented in three tranches, the first of which saw a reduction of 100 basis points effective at the end of May. This will be followed by two further reductions of 50 basis points each, to be completed by the end of July.

Similarly, the RRR for rural and cooperative banks was lowered by 100 basis points, to 4%, on May 31.

By freeing up greater resources for lending, the BSP hopes to spur economic activity during a time of slowing GDP growth, which dropped to a four-year low of 5.6% in the first quarter of the year.

In particular, it hopes higher levels of liquidity will increase lending to small and medium-sized enterprises (SMEs), which have often struggled to access credit when funding is tight.

“The reduction of the RRR is a positive measure,” Cecilia Borromeo, president and CEO of LANDBANK, told OBG. “Part of the additional liquidity can be used to facilitate access to credit for small fishers, SMEs and microenterprises, especially in areas outside of Metropolitan Manila.”

See also: The Report – Philippines 2018

Trio of RRR cuts

The lowering of ratios for small, medium-sized, rural and cooperative lenders follows the BSP’s announcement on May 17 that it would reduce the RRR for universal and commercial banks by 200 basis points, from 18% to 16%, with the initial reduction of 100 basis points effective May 31.

Two further reductions of 50 basis points each are scheduled to be implemented by the end of July.

It is estimated that this could release some P190bn ($3.5bn) of liquidity into the market – about 10 times the amount freed up by lowering RRR for minor lenders.

Macroeconomic momentum slows

The moves come amid weaker growth forecasts for the economy at large, driven in part by delayed passage of the 2019 budget and lower public spending.

The 2019 budget was delayed by debates over additional spending lines added during the approval process. This resulted in reduced spending by the state, with disbursals down 3.2% from P1.03trn ($19.2bn) in the first four months of 2018 to P999.8bn ($18.6bn) in the same period of this year.

Though the budget is now ratified, it will take time for spending to ramp up to projected levels.

In addition to the lower-than-expected GDP expansion in the first quarter, weaker trade data and concerns about the flow-on effect of the US-China trade dispute led global credit ratings agency Fitch to reduce its GDP growth projection for 2019 in late May, from 6.1% to 5.9%.

Prospect of further interest rate cuts

The push to increase liquidity in the market was initiated on May 9, when the BSP’s monetary board cut the benchmark overnight reverse repurchase facility rate by 25 basis points, to 4.5%.

In addition to moderating inflationary pressures, the bank said prospects for domestic demand remain firm. It will be supported by an anticipated recovery in household spending and the continued implementation of the government’s infrastructure programme.

More interest rate cuts may be on the cards for the second half of the year. Indeed, when announcing its revised GDP projection, Fitch called for further cuts to stimulate the economy, explaining “[W]e… are revising our forecast for the BSP to cut its policy interest rate by a further 25 basis points to 4.25% by end-2019.”

Possible impact on equities, inflation

Ramon Monzon, president and CEO of the Philippine Stock Exchange, notes that lower interest rates and reserve requirements should free up more funds for lending, thereby increasing economic activity and propelling higher GDP growth.

“In the short term, a regime of high liquidity and low interest rates will have an adverse effect on the stock market, since companies will find it more attractive to raise capital from debt rather than equity. But at some point companies will reach their limits in terms of bank borrowing, and this will compel them to revisit plans to raise funds through the equities market,” Monzon told OBG.

Inflation is another area of the economy where lower rates could have an impact, and the BSP will consider prices before initiating any further cuts.

The increased flow of liquidity into the economy has the potential to put upward pressure on prices, which have cooled in recent months.

Headline inflation eased to a 16-month low of 3% in April, according to a report issued by the Philippine Statistics Authority.

This figure is towards the bottom of the BSP’s targeted range of 2-4% for the year, down from the 3.2% recorded the previous month and well below the 4.5% posted in April 2018.