beyondbrics

The Philippines on Thursday cut its main policy rate by 25 basis points for the second time in less than two months in line with expectations. The move that could give a boost to what could be the beginning of a domestic credit and investment boom.

Hours before the central bank announced the reduction in the overnight borrowing rate to a record low of four per cent, the Philippine Stock Exchange index surged past the 5,000 level for the first time and closed 0.84 per cent up at a new all-time high of 4,897.65 – around 1,000 points above its pre-2008 high. That’s confidence, even allowing for the global surge in emerging market equities.

“The rate cut should help sustain last year’s credit rally and provide a much needed impetus to faster economic growth,” said the treasurer of a foreign bank branch in Manila. Annual growth in bank lending surged to 19.3 per cent at the end of 2011 from only 8.9 per cent in 2010 and 10 per cent in 2009, according the central bank data.

After more than decade of sluggish investments following the Asian financial crisis of 1997-1998 and political instability during the two previous political administrations, some analysts are predicting what could be the country’s first investment boom since the early 1990s.

Investors seem to be encouraged by President Benigno “Noynoy” Aquino’s promise to curb corruption in government. The government is forecasting the GDP growth rate to rise this year to 5-6 per cent, from 3.7 per cent in 2010.

“The economy should see an above trend growth by 2013 and onwards as the public and private sectors embark on its first investment cycle in 15 years,” wrote CLSA in a recent research note on the Philippines. “Private sector investment cycle is becoming more evident driven by political stability, rising business confidence, low interest rates, robust balance sheet and country’s long term demographic potentials.”

Some economists had expected the central bank to keep policy rates unchanged while monetary authorities assessed the impact of the previous 25 basis point rate cut in January and recent changes in reserve requirement policies.

Moody’s, the credit rating agency, earlier estimated that the policy changes could reduce banks’ net interest margins by as much as 38 basis points, and warned that banks may be tempted to take on added credit risk and relax lending standards to offset the decline in margins.

“I was expecting the central bank to pause for a bit to see how things are going,” said Luz Lorenzo, regional economist at securities broker ATR Kim Eng Securities. She added that the rate cuts signalled the central bank was more worried about the impact of slowing global growth than the possibility of rising credit risks in the banking system or inflationary pressures from the recent surge energy prices triggered by fresh tensions in the Middle East.

The central bank said the rate cut aimed “to support economic activity and reinforce confidence” in the country. “Global economic conditions are expected to stay subdued as fiscal and banking sector headwinds in advanced countries affect global output growth and as market confidence remains fragile,” it added.

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