By Lee C. Chipongian
Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said reducing banks’ reserve requirement ratio (RRR) – in a timely manner – ensures the economy will have enough stimulus to sustain its growth trajectory of above six percent for this year.
“There are global and domestic reasons why our own GDP growth has moderated but we should not overlook the fact that inflation is low, that we remain positive on our growth projections for the full year and we have the leeway to further enhance market liquidity as needed through a further calibration of the banks’ reserve ratio,” Diokno said late Friday.
Diokno, chairperson of the Financial Stability Coordination Council (FSCC), said the inter-agency group which includes the Department of Finance, the Securities and Exchange Commission, the Philippine Deposit Insurance Commission and the Insurance Commission, is committed to have a system-wide view of risks to ensure the country’s financial stability. As such, the BSP-led FSCC should be able to manage disturbances that can spread and eventually become systemic disruptions.
“Current market conditions are again testing this resolve (and based on) 2019 updates (the) forecasts continue to expect subdued growth. Optimistic assumptions allow for estimated growth to stabilize from 2020 onwards, but the likelihood of realizing these assumptions appears to be declining. As the global economy operates at a moderating pace, jurisdictions need to adjust. But they must do so now under different market challenges, not the least of which will be the high levels of debt that built up when interest rates were low,” Diokno stated in the latest Financial Stability Report (FSR), released last week.
During its third FSCC meeting for this year, the BSP and the other agencies took note of the economy’s continued strengths while also recognizing vulnerabilities such as slowing global growth, geo-political risks and the still ripe US-China trade row. In reaction, the market has kept its “risk-off” stance by “tempering their risk appetite.”
“While market volatilities have increased in recent weeks, the advantage of the Philippines is that the economy is growing at a pace that is relatively faster than in other jurisdictions,” said Diokno. He still predicts that GDP will grow at six percent this year, or in the low end of the six to seven percent target.
He cited the opportunities that the Duterte administration’s Build-Build-Build (BBB) brings to the table, especially in risk-off market environment. The government has opened financing options to ensure the BBB has the funds to progress, and that these issuances have good returns as an investment-grade sovereign issuer.
Diokno said these are opportunities “even when there are increased volatilities in the market itself.”
The RRR reductions, with the Monetary Board deciding to cut the ratio by another 100 basis points (bps) by the first week of November on top of the 200 bps earlier cut as of July 31, guarantees there is sufficient domestic liquidity for the requirement of banks that needs the fresh cash.
Diokno had hoped early on that most of the extra liquidity will find their way to BBB financing. The RRR cuts have so far already released P200 billion in the financial system. The next cut translates to about P90 billion — more funds for banks to loan out to businesses. The RRR reductions also mitigate growth risks.
The FSR laid down specific interventions as proposals to enhance capital market liquidity, such as a fewer but deeper benchmark tenors, indexed bonds, and tenor-based pricing.
“The intention is to boost growth and to increase/direct private saving for term funding while ensuring liquidity,” the report stressed. “This is the general direction of the FSCC’s intended macroprudential intervention given current conditions and reading of brewing financial market risks. As changes in the global environment remain fluid, the FSCC can already act on what can be done but remain flexible to better respond to evolving developments.”