AMID the enhanced community quarantine (ECQ) due to the coronavirus disease 2019 (Covid-19) pandemic, the Bangko Sentral ng Pilipinas (BSP) continued to flush the ailing economy with liquidity through its most recent move—a 200-basis-point cut in banks’ reserve requirement (RR) ratio.
In an announcement made Tuesday, BSP Governor Benjamin Diokno announced their move to reduce universal and commercial banks’ RRR by 200 basis points effective March 30, 2020. The decision was authorized by the monetary board through a special meeting called for on Monday.
The RR is the portion of depositors’ balances that banks are asked to keep idle in the BSP’s vaults as reserves. A reduction of the RR means that banks are required to deposit less in the BSP’s coffers, thus leaving them with more loanable funds for the public.
According to economists at JP Morgan, Diokno’s recent move is expected to release P180 billion into the local cash stream. This is about 0.9 percent of the country’s gross domestic product (GDP).
“The RR cut is intended to calm the markets and to encourage banks to continue lending to both retail and corporate sectors. This will ensure sufficient domestic liquidity in support of economic activity amid this global pandemic due to the coronavirus disease (Covid-19),” Diokno said in a statement.
The cut is part of a slew of actions the BSP made in an effort to keep the economy afloat amid the Covid-19 pandemic. Last Thursday Diokno decided to cut the BSP’s main policy rate by 50 basis points as a response to the ECQ in Luzon. Three days later, the governor announced that the BSP is buying P300 billion worth of government securities from the Bureau of Treasury (BTr) to finance the government’s Covid-19 rescue package.
While the BSP has been seen to do the “heavy lifting” to keep the economy breathing, ING Bank Manila economist Nicholas Mapa said this monetary stimulus should be coupled with an effective fiscal program to deliver the funds to necessary sectors in an efficient manner.
“Monetary policy is only one side of the equation with the fiscal side needing to do its share. We can liken the economy to a sick patient, with monetary policy delivering all the medication and vitamins to help in the recovery. The medicines and vitamins will lay the groundwork to help the patient recover and fight the virus but the patient will need to survive and he will need to eat. This is where the fiscal rescue package is needed, to give the ailing economy sustenance to survive this crisis and to keep it alive long enough for the medicines and vitamins to get the patient back to full health,” Mapa said.
In its release on Monday, the BSP also said the monetary board authorized up to 400 basis points in cuts in total for 2020. Diokno said the timing or implementation of the remaining 200 basis points cut are still being explored.
“The BSP will have to assess the impact of Covid-19 on the broader economy,” Diokno said. He added that the behavior of banks, particularly their capacity to absorb, invest and lend the freed-up liquidity, will likewise be a determining factor for further adjustments.
While local banking institutions have pledged to continue servicing the needs of the local citizenry amid the pandemic response, international credit watcher Fitch Ratings said the lockdown brought about by Covid-19 will test the Philippine banks’ asset quality and profitability.
In a statement, Fitch Ratings decided to revise its outlook of local banks from stable to negative, taking into account asset quality risks and pressure on revenue from declining interest rates and the resulting economic slowdown.
“We expect pressure on net interest margins from the 50-basis-point policy cut by the Bangko Sentral ng Pilipinas on 19 March 2020, adding to the 25 basis points in February and 75 basis points in 2019. More cuts are likely in the next few months, although further cuts in the reserve requirement will offset the compression in yields to some degree. Lower revenue, in conjunction with slower credit growth, will weigh on banks’ profitability this year,” Fitch Ratings said.
Already a burden on banks’ profitability, economists still expect more cuts from the BSP this year.
“We expect the BSP to offload another policy rate cut even before the May meeting and another 200 basis points worth of RR reductions should market conditions remain tense,” ING Bank’s Mapa said.
“Amid easing in external monetary conditions and the growing downside risk to growth from the evolving Covid-19 shock, we continue to expect monetary policy support in the near term [25-basis-point cuts in each of the forthcoming Monetary Board meetings in the second quarter of 2020—May 21 and June 25)—bringing the policy rate to 2.75 percent by end-2020,” JP Morgan economists said. The bank expects the Philippines to grow by 4 percent this year.