The Philippine financial system is starting to see liquidity conditions improve, raising hopes that the additional cash now circulating may provide the economy with a last-minute growth boost as 2019 draws to a close.
In a research note to the press, ING Bank Manila said the excess liquidity that had once peaked at over P2 trillion—as measured by the idle cash that financial institutions parked with the central bank’s short-term deposit window—had since been whittled down to P559 billion “due to a confluence of factors.”
“Going forward, the factors that had helped cause the artificial tightness in liquidity have appeared to reverse their heading,” said Nicholas Mapa, senior economist of the Dutch financial giant’s local unit.
“With the Bangko Sentral ng Pilipinas (BSP) now building up its level of dollar reserves (thus, generating fresh peso liquidity), the government accelerating spending and reserve requirement ratio reductions carried out in an environment of accommodative interest rates, we can expect liquidity tightness to be addressed significantly and for the economy to get back on track as investment activity returns,” he said.
Previously, the Philippine economy was “plagued” with tightness in domestic liquidity that forced interest rates to spike as users of funds bid up the price for money. Tightness in liquidity was evidenced by the gradual dwindling of short-term funds that financial institutions deposited with the central bank, Mapa explained.
Last year, the peso came under attack from speculators, forcing the BSP to step into the spot market to arrest sharp swings in the exchange rate. Drawing down on its precious dollar reserves to do so, the sale of hard currency to calm heightened market demand and led to reduced peso liquidity from the financial system.
He also noted that the delay in the passage of the 2019 national budget also caused liquidity to tighten as the “bank account” of the national government with the BSP simply accumulated with no way of being recirculated into the system.
“The treasury single account of the government swelled to more than P760 billion, almost double of the five-year average of P414 billion as funds were ‘trapped’ with the BSP,” Mapa said.
“In 2018, with government spending soaring to more than 40 percent, we saw how the treasury single account was whittled down to less than P200 billion, only to rise steadily as national government was unable to spend funds it had borrowed through aggressive borrowing.”
Finally, the ING Bank economist said the recent slew of reserve requirement cuts—which released an estimated P300 billion into the local financial system—had also helped alleviate the liquidity situation in the local economy.