On The Edge Of A Credit Boom, Philippines Must Be Cautious Of Dangers According To Fitch Rating

Economists define credit boom, in contrast to healthy level of credit growth, as characterized by lending spree that could lead to asset price bubbles and overheating of an economy.

Fitch Ratings said the Philippines might be at an early stage of a credit boom which cites the enormous liquidity enjoyed by the banking sector that has given it ability to maintain over the medium term the strong pace of lending growth seen recently.

Fitch said the substantial resources of banks in the country would be favorable given the significant financing requirement of the public sector to support costly infrastructure projects according to the latest news in the Philippines. However, the international credit ombudsman also warned of conflicting consequences if lending and investment activities would not come along with strict monitoring by the country’s monetary officials. “[The pace of credit growth] suggests the Philippines could be in the midst of a nascent credit boom,” Fitch said in the report. “In the near term, this [robust pace of credit growth registered since 2011] could prove highly favorable… Over the longer term, however, it is likely to test the BSP’s macroeconomic management abilities after so many years of sustained onshore de-leveraging,” Fitch said.

Fitch expounded that following the 1997 Asian financial crisis to 2010, credit growth in the Philippines may be described as weak to moderate. There is risk the BSP may not be fully on guard in threat of a credit boom over the medium term, according to Fitch.

Credit extended by private firms in the country fell from 67 percent of gross domestic product in 1997 to only 28.9 percent in 2007, Fitch noted. But the figure sharply bounced to 70 percent by the end of 2011, it added.

Fitch suggested that the Bangko Sentral ng Pilipinas be prepared to implement measures that could prevent a potentially full-blown credit boom in the future. For example, the BSP could increase the reserve requirement—the proportion of deposits that banks must keep as reserves and, therefore, must not lend out—to levels that would keep lending growth at a prudent pace. The reserve requirement currently stands at 18 percent.

Since the start of 2011, credit growth has sustained a double-digit pace of growth on the back of rising resources of banks. These resources are being driven largely by increasing deposits from the public and partly by bank profits.

Fitch noted that banks in the Philippines could sustain the double-digit pace of lending growth in the next couple of years given available liquidity. It cited the P1.6 trillion in cash currently parked by banks at the special deposit account facility of the BSP. Fitch said this money could be tapped anytime for lending activities.

“The potential economic and social positives that may stem from an investment-led boom in the Philippines are substantial. That said, Fitch is wary of the potential consequences a credit boom could engender in light of ample onshore liquidity,” Fitch Ratings said.

Business Optimism Continues To Pick Up

It was showed in a survey conducted by the Bangko Sentral ng Pilipinas (BSP) that for the fourth straight quarter, local businessmen remained positive with economic prospects despite growth concerns in the US and the sovereign debt crisis in Europe.

From 40.5 percent in the first quarter, it was showed by the central bank’s Business Expectation Survey (BES) that for the second quarter of 2012 the business confidence index improved to 44.5 percent in the second quarter of the year.

Cyd Tuano-Amador, BSP assistant governor, mentioned and stressed in a press conference that this was the fourth consecutive quarter that the business confidence index has improved.

“The BES has edged again higher and this is the fourth consecutive quarter that business confidence continued to remain bouyant,” Amador said.

After dropping for two consecutive quarters to 31.8 percent in the second quarter of last year from 47.5 percent in the first quarter and the record level of 50.6 percent in the fourth quarter of 2010, the confidence index steadily improved for four straight quarters to 34.1 percent in the third quarter of last year, to 38.7 percent in the fourth, to 40.5 percent in the first quarter of the year and to 44.5 percent in the second quarter.

The confidence index is composed and computed as the percentage of firms that answered in the affirmative less the percentage of firms that answered in the negative with respective to their views on a given indicator.

Acting deputy director of the BSP’s Department of Economic Statistics (DES), Teresita Deveza, outlined the continued optimism of businessmen to the upsurge in orders and new contracts leading to higher volume of production as well as widening in business and new product lines.

Deveza also mentioned that higher government spending, seasonal upstick in demand during the summer, enrollment, and harvest seasons as well as favorable macroeconomic fundamentals.

“Also contributing to businesses’ improved sentiment were the prevailing favorable macroeconomic conditions such as lower interest rates and manageable inflation as well as the steady growth of remittances that contributes to healthy external payments position,” she said.

The Cabinet-level Development Budget Coordination Committee (DBCC) expects the gross domestic product (GDP) expanding between five percent and six percent this year due to higher government spending under the Public Private Partnership (PPP) scheme of the Aquino administration.

The GDP growth slackened to 3.7 percent last year from 7.6 percent in 2010 due to weak global trade, resulting in a sharp drop in the country’s export earnings, as well as the under spending by the Aquino government.

The survey also showed that fewer respondents expect inflation to go up but more respondents expect the peso to appreciate due to robust remittances from the overseas Filipino workers (OFWs) and robust receipts from business process outsourcing (BPO) sector.

The survey was conducted between April 2 and May 11, 2012 that had 1,587 respondent firms from the Top 7,000 corporations of the Securities and Exchange Commission.

BSP keeps key rates low

THE Bangko Sentral ng Pilipinas yesterday decided to keep its key policy rates steady, citing the need to further boost the economy’s modest growth.

“The Monetary Board’s decision is based on its view that the current monetary policy settings remain appropriate. Keeping policy rates unchanged could also encourage further investment and borrowing activities,” said BSP governor Amando Tetango Jr. shortly after the last policy rate meeting for the year.

From December 2008 to July 2009, the BSP slashed overnight borrowing and lending rates to historic lows of 4 percent and 6 percent, respectively. Yesterday, the central bank kept the same rates.

The series of rate cuts was meant to influence banks to reduce their own lending rates and encourage borrowings. Monetary authorities said borrowings should support consumption and investments, which in turn would fuel growth.

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Foreign exchange reserves hit record high of $41.3 billion

MANILA, Philippines – The country’s gross international reserves (GIR) soared to a new record high of $41.3 billion as of end-August, boosted by hefty dollar inflows from the central bank’s foreign exchange operations and international reserve assets from the International Monetary Fund (IMF).

The end-August level is $1.1 billion more than the end-July reserves of $40.2 billion, Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. said yesterday.

“The large increase in the preliminary end-August 2009 GIR level was due mainly to the general allocation of Special Drawing Rights (SDR) which was made available by the IMF to its members, including the Philippines, to boost their reserves and provide liquidity to the global economic system,” Tetangco said.

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Inflation falls to 0.2% in July, country’s lowest in last 22 years

The country’s inflation rate fell to 0.2 percent in July, the lowest level in 22 years, the government said on Wednesday, as price increases of key sectors continued to slow.

The National Statistics Office said the July inflation rate was sharply lower than the 12.2 percent inflation rate posted for the same month last year when the country was reeling from high prices of oil and rice.

It was the fifth straight month of decline in consumer prices, but analysts say prices may have now reached bottom and could start inching up in coming months.

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HSBC warns of asset bubble

HSBC warned of asset bubbles developing in the Philippines and other Asian countries due to excess money borne out of interest rate cuts and the current economic slowdown.

In a report, Frederic Neumann, HSBC economist, said Asian central banks have reduced interest rates to historic lows, triggering an expansion in liquidity that may result in higher asset prices.

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Inflation drops to 22-year low in June

MANILA, Philippines—Consumer prices rose at their slowest pace in 22 years in June, giving the Bangko Sentral ng Pilipinas room to cut rates further when its policy-making Monetary Board meets tomorrow.

The National Statistics Office reported Tuesday that the annual inflation rate last month eased to 1.5 percent from 3.3 percent in May. The previous low was in April 1987, when the consumer price index (CPI) rose just 1 percent from the previous year.

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Gov’t revives plans to sell $1-B worth of OFW bonds

The National Government has revived plans of issuing up to $1 billion retail treasury bonds per year exclusive to overseas Filipinos.

Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa C. Guinigundo said the proposals were recently re-submitted to Malacañang after a year of being in the backburner. Both the BSP and the Department of Finance’s attached agency, the Bureau of the Treasury (BTr), agreed to resume talks on the RTBs, also called OFW bonds.

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Bangko Sentral plans $500-M borrowing

The Bangko Sentral ng Pilipinas (BSP) borrowed $500-million short-term loan in March to prop up dollar reserves, according to the latest data.

BSP’s gross international reserves (GIR) still lost $510 million to $38.87 billion in March from February’s
$38.92 billion. The government and the BSP use GIR to pay off debts which as of March reached $3.4 billion.

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