PH economy can ‘overheat’ on strong credit growth – IMF

The International Monetary Fund (IMF) has flagged potential overheating due to strong credit growth in the Philippines, even as the country’s overall economic outlook is expected to be favorable in the medium term.

In a statement issued on Monday night, the IMF said that, “Credit growth has accelerated, and although most indicators find no evidence of credit booms so far, some indicators suggest that credit gaps could approach early warning levels in 2017 to 2018.”

The IMF statement reflects the results of the conclusion of its executive board’s Article IV Consultation with the Philippine government last October 26.

“Risks to the outlook are tilted to the downside and stem mainly from external sources. The combination of high credit growth, buoyant private investment, and fiscal expansion without tax reform could lead to overheating of the economy,” the IMF said.

Overheating happens when the economy grows at an unsustainable rate as productive capacity could not keep up with robust demand.

The IMF noted that: “The main systemic risks to financial stability are high credit growth and concentration. High credit growth, especially to the real estate and household sectors, merit continued monitoring.”

“In addition, some conglomerates and real estate developers have leveraged significantly, while shadow-banking activities have expanded. The conglomerate structure and data gaps generate challenges to measure concentration but capital market development could help reduce bank loan concentration by diversifying the sources of funding for large conglomerates,” it added.

The IMF said it supports the efforts of authorities “to have legal access to information on conglomerates’ finances.”

According to the IMF, “macroprudential policies should be used to address systemic risks to financial stability.”

“In case of a broad-based credit boom, the Bangko Sentral ng Pilipinas (BSP) should raise capital requirements, supported by monetary policy tightening if accompanied by overheating. Targeted macroprudential policies should be used if sectoral credit growth is excessive,” it pointed out.

For the IMF, “the stance of monetary policy remains appropriate, but the BSP should be ready to tighten if there are signs of overheating.”

The Monetary Board, the BSP’s highest policy-making body, will meet to discuss the monetary policy stance on Thursday, even as economists expect key interest rates to be kept steady.

“The authorities’ intention to unwind the high banks’ reserve requirements over time would reduce macrofinancial risks. However, this reform should be carefully calibrated and timed, and should aim to keep domestic liquidity broadly unchanged,” the IMF said.

Governor Nestor A. Espenilla Jr. had said the BSP will soon cut the reserve requirement, which is one of the highest in the world.

The reserve requirement ratio currently stands at a high 20 percent, which means that for every P1 of deposits and deposit substitutes generated by banks, regulators require that 20 centavos be set aside as buffer, representing the portion that banks cannot lend out.

Also, the IMF said that “the exchange rate should continue to move freely in line with market forces, with foreign exchange intervention limited to smoothing excessive volatility in both directions.”

Nevertheless, the IMF said that as a whole, “the outlook for the Philippine economy is favorable despite external headwinds.”

The multilateral lender kept its gross domestic product (GDP) growth forecasts for the Philippines at 6.6 percent for 2017 and 6.7 percent for 2018, “owing to continued robust domestic demand.”

“Inflation is expected to stay near the center of the BSP’s target band due to stable commodity prices and well-anchored inflation expectations. The current account balance is projected to record a small deficit in 2017, because of strong infrastructure-related import growth,” the IMF said.

“Public debt is expected to fall further as percent of GDP. Risks to the outlook are tilted to the downside, but the Philippines is well equipped to respond should risks materialize given its strong fundamentals and available policy space,” it added.   /kga