BSP seen slashing reserve requirement on banks

British banking giant Standard Chartered (Stanchart) Bank expects the Bangko Sentral ng Pilipinas (BSP) to keep key policy interest rates unchanged this year but slash the reserve requirement on banks by 5 percentage points to ensure enough liquidity in the financial system.

Cited by the bank as a “rising star,” the Philippines can level up its trend gross domestic product (GDP) growth rate through 2020 to 6.5 percent from 6.2 percent during the term of former President Aquino, Stanchart economist for Asia Chidu Narayanan said in a briefing on Thursday.

For this year, the bank expects the Philippines to post a strong domestic economic growth of 6.7 percent, outperforming most Southeast Asian peers, on the back of strong domestic demand, increasing infrastructure investment and steady services sector.

Breaking down the projected trend growth rate of 6.5 percent over the medium term, Stanchart expects the Philippines to grow by 6.5 percent next year, 6.4 percent in 2019 and 6.2 percent in 2020.

Edward Lee, head of Stanchart’s Asean economic research, said Asean-6 would remain the fastest growing region in the world this year with an average growth of 4.8 percent, up from 4.7 percent last year.

But while the region has been performing well, Lee said it was still performing slightly below potential growth, noting that in a normal year, Asean-6 should grow by 5.2-5.3 percent.  This “normal” growth, however, is seen impossible given a challenging global economic environment this year.

Stanchart head economist for the Americas Mike Moran said  the global economy would endure greater uncertainty and less policy visibility this year. Political developments are seen affecting financial markets and economies.

Despite the “jungle” faced by the global economy this year, Stanchart expects the Philippines to grow the fastest among Southeast Asia’s biggest economies.  Vietnam is also expected to perform well with a 6.6-percent growth while Indonesia is seen to grow by 5.3 percent. Thailand and Malaysia are projected to grow by 3.5 percent and 3.8 percent, respectively, while Singapore is seen expanding expand by 1.3 percent.

Myanmar, considered as a “new frontier” in Southeast Asia, is the only economy seen to grow at a faster pace than the Philippines at 8.5 percent this year.

Outside Southeast Asia, Stanchart expects China to grow by 6.6 percent.

Stanchart sees the Philippines’ high-growth trajectory this year to be accompanied by benign inflation.  While inflation rate is likely to rise toward the middle of the BSP’s 2-4 percent target range this year, it said this should remain manageable.

The BSP is expected to maintain a “neutral” monetary policy stance throughout 2017, taking a contrarian view from market consensus, which calls for a 50-basis point hike in the overnight borrowing rates this year.

But while it expects the Philippine central bank to keep its key policy rates steady, Stanchart expects the BSP to slash the reserve requirement on banks to 15 percent this year from 20 percent to boost liquidity.

With the US dollar’s strengthening against the peso seen to peak at 51:$1 by the third quarter of this year, Stanchart sees liquidity tightening as the local currency regains some ground.