Property bubble popped early by BSP

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The slight policy-tightening move taken by the central bank was intended to calm the volatility of the financial sector that, if left unchecked, could have led to the formation of a real estate bubble and a further weakening of the Philippine peso, an ING Bank economist said.

In his latest market analysis and forecast, ING Bank Manila senior economist Joey Cuyegkeng said a low interest rate environment, coupled with high liquidity growth, might encourage excesses, which could be seen in banks’ exposure to certain sectors, including real estate.

This is evident in Bangko Sentral ng Pilipinas data showing that as of September 2013, bank loans to the real estate sector accounted for almost 17 percent of the overall loan portfolio, up from 13 percent in September 2012, Cuyegkeng said.

There was also the risk of volatility coming from the movement of the local currency, which could be seen in foreign currency deposit units’ loans-to-deposit ratio in January, when it accounted for 39 percent of the $10.2 billion loans and receivables.


“This implies that $8 billion of loans are at risk to the peso weakness. Public utilities with some foreign exchange adjustment provisions bring the foreign exchange risk to consumers or users. The tightening bias would provide some support to the peso from wild volatility,” Cuyegkeng said.

In a March 27 monetary policy meeting, the Monetary Board of the central bank has indicated a bias toward policy tightening by raising the reserve requirement ratio (RRR) for commercial banks by 1 percentage point to 19 percent, effective from April 4.

RRR is the portion of deposits that banks are required to keep with the central bank as reserve. A cut in the requirement will increase the supply of pesos circulating in the economy, making the local currency cheaper.

“The objective of the pre-emptive measured adjustment is to manage the volatility that may affect the financial sector,” he said.

Following the RRR adjustment, Cuyegkeng said that the peso was the fourth-best performing Asian currency last week.

“Renewed strength came from the BSP delivering some form of tightening while targeting volatility, and from improving domestic economy,” he said.

The economist took the acceleration in imports and government spending in January as an indication that domestic demand may be on its way to recovery in the first quarter of the year.

In addition, Cuyegkeng said the central bank is likely to adjust other monetary policy tools by the second half of the year starting in the third quarter to moderate volatility and safeguard the financial sector and the economy.

“These actions would eventually provide some support for the peso as US monetary policy continues to normalize,” he added.

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