Beyond the potential for the Bangko Sentral ng Pilipinas (BSP) to ease monetary policy further, what are the broader implications of the US Federal Reserve's substantial 50 basis points interest rate cut? What effects could this have on the Philippine peso, exports (especially if the peso appreciates), equity and bond markets, and overall economic growth in the near future?
The Fed’s decision to lower interest rates generally has a positive impact on the global economy, especially for emerging markets like the Philippines. Reduced US interest rates can lead to a weaker dollar, benefiting countries with substantial dollar-denominated debt, such as the Philippines.
Last week, the BSP reported a 10.4 percent increase in the country’s external debt, which now stands at $130.2 billion as of June, primarily driven by heightened private sector borrowing.
Following the Fed's rate cut, the Philippine peso is likely to strengthen against the US dollar. This appreciation could lower debt repayment costs and enhance the competitiveness of Philippine exports.
Economists from the Institute of International Finance (IIF) suggested that lower US rates may attract more investors to emerging markets, boosting their currencies and reducing borrowing costs.
In this scenario, the Philippines stands to gain from increased foreign investment. However, a stronger peso does present challenges; it may diminish export revenues and Business Process Outsourcing (BPO) earnings, which are typically denominated in US dollars. When these earnings are converted back to pesos, their value decreases, leading to lower profits for exporters and BPO firms.
What are local economists saying about the impact of US rate cuts on the Philippine economy? Overall, they expect a positive trajectory for economic growth in the country as a result of this development.
On investment opportunities
Eduardo V. Francisco, president of BDO Capital and Investment Corp., noted that lower interest rates make it easier for individuals and companies to manage existing loans and consider new ones for business expansion, as they will incur less interest.
He explained that reduced interest rates lower the cost of borrowing, leaving individuals with more disposable income to invest.
Consequently, many investors are likely to reinvest in stocks and other assets, which can enhance overall equity market performance.
With this trend, Francisco believes the economy is poised for improvement and anticipates faster growth.
On the strength of the peso
Robert Dan J. Roces, senior assistant vice president and lead economist at Security Bank Corp., noted that a stronger peso resulting from the recent rate cuts could negatively impact exports and sectors like BPOs.
A stronger peso can make Philippine exports less competitive, as they become more expensive for foreign buyers. Additionally, BPO firms that earn revenue in dollars may face challenges as their income translates to lower values in pesos.
Conversely, a stronger peso can reduce the cost of imported goods, potentially stabilizing prices for local consumers, according to Roces.
Similar to Francisco, Roces believes that while stock and bond prices may experience fluctuations, “overall economic growth should be positive, especially if the BSP follows through with rate cuts.”
However, he emphasized that the impact will depend on various factors, including domestic economic conditions and global trends.
As a result, “Philippine markets will be closely monitoring the potential impact of the US Federal Reserve rate cut on the economy,” he added.
On boosting foreign reserves
Emilio S. Neri Jr., senior vice president and lead economist at the Bank of the Philippine Islands (BPI), stated that if the U.S. Federal Reserve continues to lower interest rates over the next year, the BSP could enhance its foreign reserves, currently at $107 billion.
This increase would aid the Philippines in managing its growing external debt, which stands at $130 billion. Neri emphasized that this strategy could be effectively implemented if the BSP maintains a comfortable interest rate differential between the Philippines and the U.S.
Moreover, Neri noted that bolstering the country’s foreign reserves is crucial for stabilizing the peso's value, particularly in the context of US interest rate reductions.
However, he cautioned that “without BSP intervention, the peso could overshoot its fundamental value and rapidly reduce the nominal peso earnings of exporters, BPO workers and overseas Filipinos, etc.”
Thus, increasing foreign reserves not only helps manage external debt but also contributes to currency market stability, safeguarding earnings for many individuals.
Cutting rank reserve requirements
Last week, the BSP announced that it will reduce reserve requirements (RRR)—the amount of money banks must hold in reserve—starting Oct. 25. Universal and commercial banks will see a 250 basis point cut, bringing the RRR down to seven percent.
The objective of this adjustment is to lower borrowing costs for banks, which should ultimately lead to more competitive pricing for financial services across the board.
Neri observed that from mid-2022 to much of 2024, the US central bank was either raising or maintaining interest rates, which constrained the Philippines' ability to build foreign reserves and lower bank reserve requirements.
Neri believes that the BSP could further reduce the reserve requirement ratio next year to align with Association of Southeast Asian Nations (ASEAN) standards.
He stated that this move will “free up much-needed liquidity and help deepen and broaden the local financial markets.”
Caution on aggressive rate cuts
The central bank should exercise caution and refrain from rushing into aggressive rate cuts, according to Jonathan Ravelas, senior adviser at Reyes Tacandong & Co. and managing director of e-Management for Business and Marketing Services.
“It is my humble opinion that we do not need to fast track the pace of our easing cycle. Likely another quarter cut this year and a 100-bp next year is enough,” Ravelas stated, citing signs of improving economic growth.
He pointed out that the gross domestic product (GDP) growth rose to 6.3 percent in the second quarter of this year, from 4.3 percent in the same quarter last year.
Ravelas warned that hastening rate cuts could lead to a slight depreciation of the peso, potentially bringing it back to the 57:$1 range, although he acknowledged that this might benefit exports.
Overall, he expects that the onset of the U.S. easing cycle will support the Philippines’ expansion plans and positively influence the markets. (Derco Rosal)