Philippines May Cut Cash Reserve Ratio to Spur Growth

By Clarissa Batino

Oct. 18 (Bloomberg) -- The Philippine central bank may cut the amount it requires lenders to set aside as reserves to boost liquidity in the financial system, effectively lowering borrowing costs, to help spur growth.

``Instead of communicating an easy monetary policy to the market by reducing policy rates, an alternative is to reduce the reserve requirement to infuse liquidity,'' said Deputy Governor Diwa Guinigundo in an interview in Singapore today. Every one percentage point reduction in the reserve requirement for banks will free up about 30 billion pesos ($624 million) of cash into the system, Guinigundo said.

While inflation in Asia has started to cool, policy makers must be watchful of price pressures as they seek to boost growth amid a global economic slump and in the face of tighter credit conditions, the deputy governor said. Measures to ensure that credit flows smoothly like suspending mark-to-market accounting requirements can be explored, Guinigundo said.

``This shows the central bank is willing to support growth while showing it will remain vigilant against inflation,'' said Marcelo Ayes, senior vice president for treasury at Rizal Commercial Banking Corp. in Manila. Lowering the cash reserve means the central bank wants ``to spur economic activity.''

Bangko Sentral ng Pilipinas has made it easier for banks to get funding by starting to lend in U.S. dollars and accepting the government's dollar-denominated bonds as collateral also for peso debt. The central bank previously lent only in pesos and accepted only peso-denominated assets as collateral.

`More Accommodative'

India's central bank on Oct. 15 lowered its cash reserve ratio for the second time in a week to ease the worst cash crisis in Asia's third-largest economy since 2000. The Australian government last week announced an A$10.4 billion ($7.2 billion) economic stimulus package and South Korea is supplying $15 billion to small firms and the swap market.

``The issue here is one of liquidity and to address that, it would be useful to consider more accommodative fiscal and monetary policy, but with a view of not fueling inflation,'' Guinigundo said.

The central bank had required lenders since 2005 to keep 21 percent of their deposits in reserve as part of efforts to manage money supply and control inflation.

Inflation, which accelerated to a 16-year high in August, has already peaked, Governor Amando Tetangco said this week.

Borrowing Costs

Philippine policy-makers have room to reduce borrowing costs after U.S. and European policy makers cut rates and the nation's inflation slowed, Tetangco said Oct. 8. The central bank's next rate-setting meeting will be on Nov. 20.

Even with the possibility of recession in major economies like the U.S., Guinigundo said he's sticking to an earlier growth forecast of 10 percent for overseas remittances and 6 percent for exports in 2009. Money sent home by Filipinos working as nurses, helpers and seafarers abroad will expand at least 12 percent this year, he said.

The nation's balance of payments would probably remain in surplus by about $2 billion this year and next, Guinigundo said. That should keep the peso average between 42 and 45 against the U.S. dollar, he said. The local currency closed near an 18-month low of 48.08 yesterday.

To contact the reporters on this story: Clarissa Batino in Manila at cbatino@bloomberg.net.