PH needs tighter financial environment – IMF

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THE Philippines’ macroeconomic prospects are expected to remain favorable going forward, but it will need to tighten its monetary policy to maintain financial stability, the International Monetary Fund (IMF) said.

“Continuing to proactively tighten monetary conditions would address both potential inflation and generalized financial stability risks,” the IMF said in a statement dated August 8.

The statement was issued after the IMF Executive Board concluded the 2014 Article IV consultation with the Philippines on July 8.

The Fund said that while the Philippine economy “continued to perform robustly in 2013” with strong macroeconomic fundamentals and financial sector buffers, domestic monetary and financial conditions “are now very accommodative.”


It warned that the country’s favorable outlook could be buffeted by external and domestic events.

“Abrupt exit from exceptionally loose monetary policies abroad, a sharp slowdown in China or other emerging markets, or a major geopolitical incident could impact global or regional trade and capital flows and adversely affect the Philippine economy,” it said.

On the domestic front, it said rapid credit growth or a disproportionate flow of resources to the property sector “could boost short-term growth but heighten volatility thereafter, impacting over­leveraged households and corporates.”

It said the Philippine economy is “well positioned for a more restrictive policy setting, together with a needed rebalancing of the policy mix towards an expansionary fiscal policy.”

The IMF said the central bank’s decision to tame liquidity by drawing down reserves and raising reserve requirements earlier this year were “appropriate.”

In its March 27 meeting, the Monetary Board of the Bangko Sentral ng Pilipinas raised the reserve requirement ratio of banks to 19 percent, then further to 20 percent at its May 8 meeting in a bid to siphon off excess liquidity from the financial system.

The IMF said additional tightening of monetary and financial conditions is needed “with a focus on measures that would not encourage a further shift in financial intermediation to nonbanks, including by raising official interest rates.”

“Providing the BSP with suitable instruments to undertake sterilization would improve the effectiveness of monetary policy. With official reserves more than adequate, the exchange rate should adjust more fully to structural balance of payments flows, while symmetrically smoothing the effect of cyclical capital flows,” it said.

With inflation continuing to accelerate, the Monetary Board on July 31 raised its benchmark interest rates by 25 basis points each. The new rate for overnight borrowing, or reverse repurchase facility, now stands at 3.75 percent, up from 3.5 percent. The rate for overnight lending, or the repurchase facility, is now at 5.75 percent, up from 5.5 percent previously.

The BSP had kept the rates steady since October 2012.

The rate on special deposit accounts was left unchanged at 2.25 percent, while the reserve requirement ratio for banks also remained unchanged at 20 percent.

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  1. Ex-Ambivalent on

    The IMF report also said (#21): “Abundant liquidity and very low short-term market rates are exacerbating the risk that prices of property and financial assets could move ahead of fundamentals. With the aggregate leverage ratio for listed companies at 100 percent in 2012, the rise in corporate indebtedness needs to be watched. Moreover, the distribution of debt is skewed toward more leveraged firms, increasing vulnerability to interest rate and refinancing risks.”

    In Box 7, there is a chart showing that 30% of listed corporate debt is owed by firms with debt/equity of 2.4 or more.