BSP seen to keep rates, cut reserve requirement

The Bangko Sentral ng Pilipinas may keep its interest rates steady in 2019 but slash the reserve requirement by 300 basis points to ease liquidity pressures on banks, British banking giant HSBC said.

“Hiking cycles are coming to an end, thanks, in part, to a more dovish (US) Fed (Federal Reserve),” HSBC said in a research note dated Jan. 9.

In the United States, HSBC economists expect only one interest rate hike by the Fed this year.

“As a result, we remove our last rate hike forecasts for both Indonesia and the Philippines in the first quarter of 2019. We now see no change for both central banks in 2019,” HSBC said.

The bank expects marginal monetary tightening in Singapore and Thailand in the second quarter of 2019.

In the meantime, it said the BSP was likely to cut the reserve requirement by 300 basis points this year to “ease liquidity pressures on banks, a risk for growth.”

In 2018, the BSP slashed the reserve requirement by 200 basis points even at a time when rising inflation was a concern.  This freed up P200 billion in domestic liquidity although the BSP siphoned some of it through its weekly term deposit auctions.

As inflation is seen to ease to the target range of 2-4 percent this year, the BSP will have more leeway to slash the reserve requirement ratio, now at 18 percent of deposits and deposit substitutes.  This means that for every P1 in deposit or deposit substitutes, a bank must set aside 18 centavos in  cash or cash equivalents and may not be used for lending or investing.

In 2020, HSBC said regional central banks might sound more dovish, especially Bank Indonesia, Bank Negara Malaysia and the BSP.

Given that Southeast Asia is a possible beneficiary of the China-US trade tensions, HSBC noted that investors across the world had shifted their attention to the region.

“Yet, at the same time,  Asean’s (Association of Southeast Asian Nations) most fundamental vulnerabilities have been laid bare: structural current account deficits in Indonesia and the Philippines, pockets of high external debt in Indonesia and Malaysia, food supply chain sensitivities in the Philippines, and shifting political fault lines just about everywhere,” HSBC said.

But while pockets of the region have, at times, been hit by emerging market-related contagion and higher global rates, HSBC stressed that both external and domestic fundamentals were better than in the broader emerging market universe.

“Most importantly, there has been a firm improvement compared to the ‘dark days’ of the Asian financial crisis—and in 2018, regional policymakers have generally pursued orthodox policies when faced with market adversity. Decisive pre-emptive action in 2018 should make 2019 easier for policymakers,” the bank said.

This 2019, export growth in the region is seen to decelerate regardless of what happens on the trade war front. The downward trend in commodity markets has added to short-term pain in some places but HSBC noted that the region’s export diversity was stronger than many appreciate.

“As for trade diversion from China, we continue to believe Asean is benefiting, especially Vietnam and Malaysia, as supported by some initial data prints. Others are benefiting too, but to a smaller extent. Domestic demand should also hold up, thanks to tight labor markets and slightly expansionary fiscal policy in 2019. All in all, growth will likely be at or near potential in most countries,” it said.

HSBC also urged investors to look out for elections across the region, such as Thailand’s general election on March 10, Indonesia’s legislative and presidential elections on April 17, and the Philippine midterm elections “which could alter control of Congress, with implications on reforms.”