Moody’s: Rice tariffication, new BSP charter ‘credit positive’

Two landmark measures signed into law by President Rodrigo Duterte this month — one expanding the mandate of the Bangko Sentral ng Pilipinas (BSP) and another liberalizing the rice trade — are expected to enhance the country’s financial and macroeconomic stability, according to debt watcher Moody’s Investors Service.

This assessment is contained in a Moody’s report titled “Government of the Philippines: Reform package promotes greater macroeconomic stability, a credit positive.”

According to the report, The New Central Bank Act (Republic Act No. 11211) and the Rice Tariffication Law (RA 11203) are “credit positive” measures — meaning, they have positive implications to the country’s already investment-grade credit ratings.

“The amendment to the BSP’s charter expands its supervisory oversight over non-bank financial institutions such as money service businesses, credit granting businesses and payment system operators, which will enhance financial stability given the linkages between the banking system and these entities,” the report noted.

“In addition, the revised charter allows the central bank to issue its own debt securities, providing another tool to fine tune liquidity management and improve the effectiveness of monetary policy,” it added.

“Other notable changes include the official removal of money supply and credit levels as a basis to determine monetary policy; the prohibition of any injunction or restraining order on the BSP, except by the Philippines’ two highest courts; an increase in BSP’s capitalization to P200 billion from P50 billion; and the exemption of the bulk of its activities from taxation.”

Moody’s said that, as the Philippines posted among the fastest gross domestic product (GDP) expansions in Asia during the last 10 years, domestic liquidity declined partly due to strong credit growth.

Partly to blame for the increase in interest rates in 2018, Moody’s said, was the drop in excess liquidity to P120 billion — equivalent to 0.7 percent of the 2018 GDP, as of November 2018 — from P1 trillion in mid-2016, or 7.6 percent of the GDP.

“The issuance of its own debt [under the amended charter] will enhance the BSP’s ability to better calibrate liquidity condition through open market operations, allowing it to rely less on its deposit facilities and reserve requirements, which at 18 percent is one of the highest globally,” the debt watcher said.

“When the central bank last reduced its reserve requirement by 2 percentage points in May 2018, an additional P200 billion (1.1 percent of GDP) of liquidity was unleashed. The BSP’s intention to gradually reduce the reserve requirement will further ease liquidity constraints notwithstanding policy rate tightening since May 2018,” according to Moody’s.

Amid elevated headline inflation or the rate of increase in prices of basic commodities, the BSP’s Monetary Board hiked key interest rates by a total of 175 basis points last year.

As for the Rice Tariffication Law, which removed the import quota on the Filipino staple food, Moody’s said: “The expected increase in the volume of rice imports will diminish the price volatility of rice, helping to insulate Filipino households’ consumption to adverse agricultural shocks.”

Taking effect on March 5, this law will slap the following tariff rates on rice imports:

35 percent if rice was imported from within the Asean region

40 percent if within the minimum access volume (MAV) of 350,000 metric tons for imports coming from countries outside Asean

180 percent if above the MAV and from a non-Asean country

“The rice tariffication scheme will help alleviate local supply-demand imbalances by eliminating quantitative restrictions on rice imports, which will now be subject to tariffs,” Moody’s noted.

“Last year, weather-related supply disruptions led to a decline in the growth of rice production, leading to an uptick in domestic rice prices. Because rice accounts for nearly 10 percent of the entire consumer price index basket, higher rice prices contributed to the acceleration in overall inflation.”

Citing BSP estimates, Moody’s said the Rice Tariffication Law was expected to cut the inflation rate by 0.6 percentage point this year on top of 0.3-0.4 percentage point next year.

For Moody’s, both RAs 11211 and 11203 “will help supplement the BSP’s strong record of maintaining monetary and financial stability and help improve liquidity management amid capital flow volatility.” /atm