IMF warns PH economy may overheat

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

“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 said in a statement Monday night, reflecting the results of the conclusion last Oct. 26 of its executive board’s Article IV Consultation with the Philippine government.

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

“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 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 added.

For the IMF, the stance of monetary policy remained appropriate, but the BSP should be ready to tighten if there would be signs of overheating.

The Monetary Board, the BSP’s highest policymaking 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.

BSP Governor Nestor Espenilla Jr. had said that monetary authorities would 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 deposit and deposit substitute 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 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.

As a whole, the outlook for the Philippine economy is favorable despite external headwinds, the IMF said.

The multilateral lender kept its gross domestic product (GDP) growth forecasts for the Philippines of 6.6 percent this year and 6.7 next year 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. Public debt is expected to fall further as a 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,” according to the IMF.