BSP studies more options to encourage banks to keep on lending
Reuters | 10/20/2008 8:12 PM
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The Philippines central bank might cut banks' reserve requirements and has the flexibility to reduce interest rates to protect the economy from the global financial crisis, officials said on Monday.
Budget figures showed that the government has increased spending, hoping to offer some support to the economy, whose exporters could suffer as major demand centres such as Europe and the United States tip towards recession in the face of the worst financial crisis in decades.
Central bank Governor Amando Tetangco said on Friday that the central bank had approved fresh measures to boost liquidity and added on Monday that the authority was studying the possibility of a cut in banks' reserve requirements to create more liquidity in the financial system.
"I have asked our monetary stability sector to study the impact of a possible reduction in reserve requirements," he told reporters.
"They are doing that now, and I would expect them to submit the results of the study and recommendations soon."
Philippine banks have to park 10 percent of total deposits in non-interest earning regular reserves with the central bank and 11 percent in liquidity reserves, which earn market interest rates. The central bank has not tweaked banks' reserves ratios since July 2005.
Tetangco said a 1-percentage-point cut in reserve requirements would free up to P30 billion ($623 million).
He said also that with inflation now coming down off a near 17-year high in August, the central bank was looking at ways to increase liquidity, adding that the bank also had the flexibility to lower interest rates.
On Friday, the central bank said it had approved measures that would boost peso and dollar liquidity to shield local markets from tight credit conditions around the world.
It approved the opening of a short-term dollar repurchase facility and enhanced an existing peso repurchase window.
It also approved a dollar-denominated deposit window for banks with excess cash to prevent foreign exchange flowing out of the country.
"With the situation now, even if there is no tightness yet, they want to feel they're awash with liquidity," Diwa Guinigundo, deputy central bank governor said, regarding banks. "They want to be sure and I think the issue is confidence."
Liquidity measures
Guinigundo said all possible measures that could boost confidence and provide comfort to banks via the availability of liquidity will be studied by the central bank.
Meanwhile, the government said it had a budget deficit of 21.6 billion pesos in September, with expenditures climbing 16.6 percent from a year earlier, as the Philippines spent more on infrastructure and social services to spur growth.
Budget figures show that spending picked from August under government plans to try to spur the economy.
"Spending is doing pretty well. This should be OK for growth, if government is really spending and creating jobs," said Jose Mario Cuyegkeng, an economist at ING Bank in Manila.
"Job creation is very important, otherwise growth in private consumption spending will remain modest."
But doubts remain on the government's ability to rake in more revenues to support its plan to stimulate the economy this year and the next and balance the budget by 2010, apart from the boost it gets from privatisation proceeds.
"My only concern is that as we move forward, 2009 may not be a banner year also, because the corporate income tax rate will fall and they lost roughly 30 billion from the income tax exemption of minimum wage earners," said Jonathan Ravelas, chief market strategist of Banco de Oro Unibank.
"There is fiscal prudence but the quest for recurring revenues continues. We need more taxes if they really need to balance the budget in 2010," Ravelas said.
The Philippines expects growth this year to brake to 4.4-4.9 percent against a previous target of 5.5 to 6.4 percent as the global credit crisis dampens demand for the country's exports and weighs down corporate earnings.
That would be hard braking for an economy that last year grew 7.2 percent, its fastest pace in more than three decades.
