By Lee C. Chipongian
With inflation expected to be below four percent by mid-year, Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa C. Guinigundo said more attention will be on liquidity condition before any talk of reducing banks’ reserve ratio is considered.
“It’s a question of timing,” Guinigundo stressed, explaining that the government plan of issuing securities and bonds soon does not necessarily mean there will be tight liquidity in the market.
“For the first instance yes, there will be tightness,” said Guinigundo. But, as soon as the government starts spending on infrastructure projects as part of the “Build Build Build” (BBB) program again, funds will flow and these will go to the BSP and then the banks will have more money for lending.
“There should be clear evidence that there is a tightness in the market (or that) the state of liquidity in the market may be affected by the decision of the NG (National Government) in terms of fund sourcing when it floats RTBs (Retail Treasury Bonds) or increase the volume of Treasury Bills or Treasury Bonds that would really tighten liquidity at the first instance,” said Guinigundo.
ING Bank economist Nicholas Mapa said the RTB issuance will depend on when the BSP will reduce the reserve requirement (RR) ratio. “The central bank will likely slash RR as early as February with inflation decelerating while domestic liquidity conditions remain relatively tight (latest M3 growth registering four straight months of single digit expansion),” said Mapa.
He thinks the BSP will cut RR in an off-cycle Monetary Board meeting this month.
Guinigundo, however, cautioned market analysts from reading liquidity conditions wrong. He said the government will soon spend the funds from any planned issuance on the BBB. On top of these funds to be withdrawn from the BSP, they also expect additional funds from the external market.
“There are more funds coming in (and) when we see more funds coming in that will also increase domestic liquidity. For (investors) to buy equities in the stock market or bonds from BTR or to invest here, they have to exchange that (foreign currencies) for pesos. Then after the exchange, that will result in higher M3 (domestic liquidity).”
International Monetary Fund (IMF) Resident Representative to Manila, Yongzheng Yang, said they have not changed their previous recommendation to the BSP to pause on RR reduction until inflation rate is decidedly within the two-four percent target. “What we suggested last year still stands,” he said, referring to the pause recommendation as far as lowering RR is concerned.
In July last year, IMF official and mission head to the Philippines, Luis E. Breuer, said the BSP should pause in its RR cuts when inflation is high or above the government target. By this time, the BSP has already reduced RR twice or by 200 bps, in February and May last year.
Breuer has said that the RR reduction led to “communication challenges” between the BSP and the market. After reducing RR early in the year, the BSP then started raising policy rate by a cumulative 175 bps by November to curb high inflation.
The RR is still at 18 percent, one of the highest in the region. BSP Governor Nestor A. Espenilla Jr. has committed to bring down the RR to single digit level as “part of an overall financial sector reform agenda.”