BSP to hike policy rates again in Dec.

by Lee C. Chipongian

BSP to hike policy rates again in Dec.

By Lee C. Chipongian

The Bangko Sentral ng Pilipinas (BSP) is expected to go for another policy rate hike of 50 basis points (bps) on Dec. 15, lifting the overnight borrowing rate to 5.50 percent. 

BSP Governor Felipe M. Medalla said they will keep a tightening mode and maintain a decent interest rate differential between the BSP and US Federal Reserve funds rate to stabilize exchange rate pressures.

The BSP chief, however, has not yet signalled by how much the Monetary Board will increase the policy rates next month, but the possibility of again matching the US Fed action is high.

BSP Governor Felipe M. Medalla

Medalla is also ruling out a pause in the immediate future. “The forex (foreign exchange) market is expected to remain very sensitive to the interest rate differential. A 50 (bps) by the US Fed in December can’t be met by a pause by the BSP,” he told Manila Bulletin. 

He has said before that interest rate differential should be at least a 100 bps. As of Nov. 2, the US Fed rate stood at 3.75 percent to four percent versus the BSP’s five percent as of Nov. 17.

On Friday, Nov. 18, the peso vis-à-vis the US dollar closed stronger at P57.26 compared to P57.36 on Nov. 17, the day the BSP announced its expected BSP rate hike.

In a press briefing after the Monetary Board meeting, Medalla said they cannot let the interest rate differential to fall back at this time.

“We don’t really have a model that says if the interest rate is this, the exchange rate will be this, because there are so many things that cause the exchange rate to move. However, what we do know is if the interest rate differential is too small especially during times when the US economy is the only game in town, then the peso” will tend to behave abnormally, he said.

“This is the reason why right now, the US policy rate is a bigger influencer of our policy rate than normal,” Medalla added.

Weeks before the Nov. 17 Monetary Board policy meeting, Medalla has communicated early on that they will raise the reverse repurchase rate or the RRP by 75 bps. 

Medalla on Thursday said this will probably be the last time that the BSP will do a big rate increase. The recent 75 bps rate adjustment is the second one, the first was an off-cyle move last July.

The BSP has jacked up the rates by a cumulative 300 bps to battle high inflation and exchange rate pressures. As of end-October, the inflation rate averaged at 5.4 percent. For the rest of the year, the BSP forecasts inflation to exit at 5.8 percent. Medalla said inflation will peak in November or December but it will not likely breach eight percent. In October, inflation climbed to a 14-year high of 7.7 percent from 6.9 percent in September

The last time the RRP rate was at five percent was on Jan. 29, 2009, before the interest rate corridor system was implemented in 2016, which adjusted the monetary policy transmission to bring market rates closer to the BSP rate.

Medalla said the US Fed is now signalling that they could increase funds rate in smaller doses after four 75 bps in a row. This could temper the US dollar’s strength in favor of regional currencies, especially the peso which has lost P8.1 or 15.7 percent last Sept. 29 when it depreciated to its record lowest of P59 versus the end-2021 closing rate of P50.99.

The last two rate increases on Sept. 22 and Nov. 17 were essentially responses to what the US Fed did.

The BSP initially increased the rates gradually from a two percent flat rate since November 2020. It started with two 25 bps adjustment on May 19 and June 23, followed by a surprised 75 bps off-cycle move on July 14. The fourth and fifth rate hikes were 50 bps each on Aug. 18 and Sept. 22, followed by a 75 bps increase on Nov. 17. The next and last Monetary Board policy meeting for the year is on Dec. 15.

Since price stability is a key BSP mandate, the six in a row policy rate increases are intended to bring back the inflation path to within the two percent to four percent target range by 2024.

The BSP expects inflation will stay above-the-target in the near term amid broadening price pressures and second-round effects but will be closer to three percent than four percent by the second half of 2023.

No bank sought BSP support since pandemic

by Lee C. Chipongian, Manila Bulletin

Not a single bank applied for financial assistance since the pandemic began in 2020, according to the central bank’s highest-ranking official.

“No bank needed financial assistance,” Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla told Manila Bulletin.

Medalla is referring to all banks — the big banks or the universal and commercial banks, the medium-sized thrift banks, and the small rural banks supervised by the BSP.

He said banks remain adequately well-capitalized with enough liquidity and buffers even as non-performing loans (NPLs) and non-performing assets (NPAs) rose in the last two years. NPLs are unpaid loans for more than 30 days while NPAs are loans in default.

The BSP has remedial measures to help solvent banks resolve temporary liquidity problems from “causes beyond their control” such as the pandemic. It extends fully-secured emergency loans to banks as financial assistance.

Medalla confirmed that no bank has approached the BSP for financial support because of the public health crisis and its resulting mobility restrictions which impacted on borrowers’ capacity to pay loans.

During the lockdowns, especially in 2020 and the middle part of 2021, business operations were stalled and jobs were lost. Banks had limited activities but it was business as usual for majority of financial institutions via digital means.

“Universal and commercial banks have more than adequate capitalization,” said Medalla.

Based on the BSP Charter, the BSP’s financial assistance to banking institutions is limited to the amount needed by the applicant bank to overcome the emergency or financial predicament but should not exceed 50 percent of its deposits and deposit substitutes. In addition, any emergency advance will be collateralized by government securities and other unencumbered first-class collaterals such as real estate.

As for the rural banks, Medalla said the BSP will soon launch the Rural Bank Strengthening Program (RBSP) which is aimed at assisting small banks hit by the pandemic.

The RBSP, which will replace the Consolidation Program for Rural Banks, will be implemented for three years. It is described as a structured program with four key elements: strengthened capital base; holistic menu of five time-bound tracks; incentives and capacity building interventions; and review and enhancements of existing regulations. These five time-bound tracks are merger and consolidation, acquisition/third party investment, voluntary exit/upgrade of license, capital build-up, and supervisory intervention.

Under RBSP, the BSP wants at least P60 million minimum capital requirement for rural banks. For rural banks with more than five branches, the minimum capital should be P200 million.

Meanwhile, the central bank recently circulated a proposed circular for banks’ guidelines for crafting their recovery plans. Basically, the BSP wants all banks to report within 24 hours if triggers in their recovery plans are breached and to activate recovery measures within three days.

The recovery plans of banks are expected to be commensurate to their size, nature and complexity of operations, overall risk profile, and systemic importance.

Once the circular is approved, banks will submit a recovery plan every June 30. Banks have until July 15 to post feedback or suggestions to the BSP on the guidelines of the recovery plans.

Since the pandemic was declared in March 2020, the BSP closed the operations of 21 rural banks while two rural banks voluntarily surrendered their banking licenses.

As of end-May this year, the BSP is supervising 498 banks, of which 45 are big banks which control over 90 percent of total banking resources. There are currently 43 thrift banks, 383 rural banks and 24 cooperative banks.

The banking sector’s NPL ratio has dropped to a 17-month low of 3.75 percent as of end-May while gross NPLs fell to P429.11 billion in May versus P447.44 billion in April. NPAs also decreased to P550 billion from P568.86 billion previously.

As of end-March, the BSP’s loans and advances amounted to P422 billion, lower compared to same period in 2021 of P665.4 billion and slightly up from the start of 2022 of P421.82 billion. These loans and advances include rediscounting loans and overdraft credit lines.

“The BSP extends discounts, loans and advances to banking institutions in order to influence the volume of credit consistent with objective of price stability and maintenance of financial stability. It also grants loans or advances to banking institutions in precarious financial condition or under serious financial pressures, subject to certain conditions,” said the BSP.

BSP denies Philippines' economy is overhaeting

By Lee C. Chipongian

AMRO chief economist Dr. Hoe Ee Khor said it is time for the Philippine central bank to consider adjusting monetary policy stance to avoid an overheating economy.

AMRO is the ASEAN+3 Macroeconomic Research Office. “There are signs of overheating for the Philippine economy and at the same, I am saying that these are just emerging signs, it doesn’t mean that the economy will get worse,” said Khor. “The whole idea is to try to cool down the economy. The central bank should take that into consideration (moving rates) and the governor (of the central bank) is fully aware of this that there is a need.”

Khor presented AMRO’s second annual regional surveillance report on the ASEAN+3 Regional Economic Outlook (AREO) which assesses regional economic outlook and financial stability, and the discussion is part of the 51st Asian Development Bank briefings.

In the 2018 AREO report, it placed the country’s business and credit cycles in the “late” stage, along with Japan. The business cycles are in the “early,” “mid,” “late,” and “downturn.” According to Khor, most economies in the region are at mid-business cycles where output gap is small and there is stable inflation. In the credit cycle, credit growth in most economies is “slowing after the peak” or an above-trend growth, stimulated by policy actions.

The Philippines is among those economies with a slowing business and credit cycle, with Myanmar, Cambodia, China, Korea, Lao PDR, Malaysia and Singapore, however except for the Philippines, the rest on the list are in the “mid” cycle.

Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa C. Guinigundo, while appreciating the analysis behind the AMRO metrics for business and credit cycles, disagreed with the Philippines’ spot and belied symptoms of an overheating. Economies in the “late” listing indicates overheating concerns. Those in the “mid” cycles, in the meantime, would not require further policy stimulus to support growth such as most ASEAN countries plus Hong Kong.

“Supposed to be, when you are in the ‘late’ business cycle and you are slowing credit cycle, people would readily equate that with some overheating. That may not be true in the case of the Philippines,” Guinigundo said later after presentation. He was commentator to the AREO report.

Guinigundo said there is a higher demand for liquidity and even as credit continues to grow, and output growth “while maybe higher than average” – these numbers are still consistent with the potential output which the BSP assess is between 6.5 percent to seven percent. “It depends what kind of potential output AMRO has computed. In our case… it is still consistent with our computed potential output.”

“For us, we are not into an overheating mode,” he stressed. He cited the methodologies used by the Bank for International Settlements and the International Monetary Fund to further monitor evidence of overheating.

Khor emphasized the need for policymakers in the region to build policy space, especially in monetary policy, in view of a global tightening of financial conditions. “It’s time for authorities (BSP) to take measures to ensure (economy) does not get overheated. Doing a bit of tightening would make sure inflation will come back down.”