200 bps RR cut seen in 2H; lending to remain sluggish

Published January 21, 2021, 8:00 AM

by Lee C. Chipongian

The central bank is expected to reduce banks’ reserve requirement (RR) ratio by 200 basis points (bps) this year but it will not likely lead to a pick up in lending activities, not when the COVID-19 virus and its emerging variants are still here, according to HSBC economists.

HSBC managing director, Fan Cheuk Wan, also chief market strategist for Asia, said the Bangko Sentral ng Pilipinas (BSP) will likely release more liquidity by the second half of 2021 via the RR cut, and that BSP “will focus more on RR stimulus” to complement a “massive stimulus package” in government spending this year.

When asked about HSBC’s opinion on the BSP’s other plans to redistribute bank liquidity via a probable issuance of index-linked bonds, Wan said for now, the RR toolkit could be the main policy measures since there is not much leeway for a further policy rate cut in 2021 after a 200 bps cut last year, resulting to a negative real rate.

“We don’t have a specific view on index-linked vehicle to release liquidity,” she said during Wednesday’s HSBC Private Banking 2021 Investment Outlook virtual presscon. “(But) the BSP will rely more on the RR ratio to release liquidity in the banking system, that’s why we are looking for another 200 bps of RR cuts in the second half of the year,” said Wan. “This will keep the monetary policy relatively loose, while the central bank face more constraints in cutting policy rates further because in the Philippines, the inflation still remain a key constraint for the BSP to shift to an even more aggressive monetary easing, especially with the December CPI number spiking back to 3.5 percent year-on-year that is above consensus expectation of 3.2 percent.”

The rising inflation, said Wan, is a cause for concern that the medium-term inflation pressure is coming back. “That’s why a more favorable policy tool for BSP to take is the RR cut.”

As for bank lending, Wan said this will continue to decline since businesses lack the confidence to borrow with the pandemic still uncertain, even with the roll out of the COVID-19 vaccines.

“Bank lending growth continues to decline despite record-low interest rates,” she said, adding that the continued lockdowns “posed downside risks to (the) recovery path”. Major parts of the Philippines, particularly Metro Manila, has been on lockdown for 10 months.

Wan and HSBC global chief investment officer, Willem Sels, said the recovery trajectory will largely hinge on the government’s containment strategy in the fight against the pandemic.

Sels projects that GDP likely contracted by 9.7 percent in 2020 and will rebound by 6.5 percent growth this year mostly due to consumption, savings and government spending, while inflation he forecast at 2.9 percent for 2021 and 3.3 percent for 2022, both numbers within the BSP target range of two-four percent.

This year, HSBC also expects the peso vis-à-vis the US dollar will remain on the strong side at P46 by end-2021, from its current level of P48. “We are neutral on equities and peso,” said Wan.

HSBC’s 6.5 percent GDP forecast for 2021 is on the low side of the government’s 6.5-7.5 percent growth estimate.

Wan said the local economy will lag behind other Asian peers since the continued lockdown will hinder growth. She said HSBC is cautious on the growth prospects as this will depend on how the government handles the virus containment. The number of COVID-19 cases have been on the rise recently.

Also, she reiterates that bank lending growth which will continue to decline, will only reflect the subdued investment appetite and this is closely linked to the pandemic situation.

“Business sentiment will take time to recover and will hinge on the impact (of pandemic on) employment and on the economy re-opening,” she said. Companies do not have the confidence to invest at the moment but the proper containment of the virus will restore business confidence, and that is the key to restoring bank credit growth, said Wan.