The Bangko Sentral ng Pilipinas (BSP) has listed down measures that it can deploy to counter future risks that may arise in the Philippine financial markets on account of the improving United States economy.
In its latest Report on Economic and Financial Developments, the central bank said that the “normalization” of monetary policy in the US may not be entirely an unwelcome development for emerging market economies like the Philippines.
“The challenge, however, is how to respond when outflows become excessive and result in financial market instability,” it stated.
The BSP said that it can deploy a menu of actions to avoid the drying up of liquidity in financial markets, amid heightened uncertainty and increased risk aversion.
These include adjusting the terms of access in the BSP peso rediscounting facilities, lengthening the maturity of BSP lending instruments, and reducing the reserve requirement for banks conditional on the inflation outlook.
Meanwhile, the monetary authority noted that its US dollar repo facility as well as its exporters’ dollar and yen rediscounting facility will be continued to ensure dollar liquidity needs of the financial system.
“Regulatory forbearance can also be exercised to allow smoother adjustments by banks in the event of excessive capital outflows,” it added.
The BSP also said that it is enhancing the surveillance of risks in the banking system to test bank’s vulnerabilities and corporate interconnectedness.
On the other hand, the central bank said that it can also utilize its reserve buffers to help calm markets. It noted that the Philippines’ liquidity buffers are sufficient to help ease possible financing constraints given the sustained growth in liquidity and bank lending, together with the country’s firm external position.
As of end-November 2013, domestic liquidity or M3 went up to P6.7 trillion, recording a year-on-year 36.5-percent expansion.
The BSP also said that it will continue to adhere to a market-determined exchange rate policy, with some scope for occasional BSP participation to moderate excessive volatility in the exchange rate.
“This implies that the BSP will not set out to reverse the underlying trend of the peso, but only to smooth out volatility in the exchange rates,” it stated.
The Philippine peso closed at P44.395 to a dollar in 2013, recording a 3.24-percent volatility.
On banking regulation and supervision, the BSP said that it will sustain the reform momentum with a view to strengthen its resilience against shocks, and to enhance its role as a catalyst for durable long-term economic growth.
Also, the central bank said that it continues to take the lead in promoting financial inclusion with programs and reforms aimed at promoting greater access to financial services.
It added that it remains proactive in ensuring the credibility of the payments and settlements system, with the continued enhancement of its processes in accordance with international best practices.
“Finally, amid the increasing interconnectedness of global financial markets, the BSP will remain an active participant in regional and international cooperation programs and fora, in order to reap the benefits of collaborative engagement,” it added.