IMF flags sources of domestic risk
THE CENTRAL BANK should be ready to deploy its tools to temper rapid credit growth in the Philippines, the International Monetary Fund (IMF) said, flagging potential overheating despite generally favorable economic conditions.
“The combination of high credit growth, buoyant private investment, and fiscal expansion without tax reform could lead to overheating of the economy,” the IMF Executive Board said in a statement, although clarifying that there has been “no evidence” of credit booms so far.
“The stance of monetary policy remains appropriate, but the BSP (Bangko Sentral ng Pilipinas) should be ready to tighten if there are signs of overheating.”
Bank lending has been growing at a double- digit pace, with domestic credit surging by 21.1% in September which is the fastest in at least two years, according to central bank data.
And while the IMF welcomed legislative progress on the first of up to five tax reform packages, it encouraged the government “to consider additional revenue measures,” saying it “appreciates the breadth of the envisaged tax reforms, but cautions that reform efforts may have a lower revenue yield than originally projected because of dilution in Congress.”
Hence, it encouraged the government to consider reducing the exemption threshold for personal income tax, raising the valueadded tax rate, rationalizing tax concessions and exemptions, and accelerating the implementation of new excise tax rates for automobiles and petroleum products.
The multilateral lender completed its annual health check on the Philippine economy on Oct. 26, as it adopted recommendations of staff members who visited the country on July 26-Aug. 9.
The global monetary authority expects Philippine gross domestic product (GDP) to grow by 6.6% this year and by 6.7% in 2018, driven by robust domestic demand, a recovery of exports, and a fiscal stimulus coming from the government’s infrastructure push. This would mean that the government’s 6.5-7.5% growth goal is doable for the year, but that the IMF’s projection for 2018 will fall short of the officially programmed 7-8%.
Accompanying upbeat economic growth is low inflation, with the IMF seeing a 3.1% average for 2017 and 3.0% for 2018, well within the central bank’s 2-4% target band.
Sizeable foreign reserves, a low level of government debt and a budget deficit equivalent to three percent of GDP are also supportive of sound macroeconomic footing.
Current economic conditions present a “good opportunity” for the administration of President Rodrigo R. Duterte to pursue its inclusive growth agenda, the multilateral lender noted, supported by increased infrastructure and social spending to be funded by fresh revenue streams under the tax reform plan eyed in place by January 2018.
Even while the IMF said external risks pose as the biggest threat to the local economy, it flagged that “the main systemic risks to financial stability are high credit growth and concentration” among conglomerates and real property developers.
Still, the IMF said the BSP remains well-equipped to respond to possible hiccups, with higher interest rates and capitalization standards seen as immediate responses.
“Macroprudential policies should be used to address systemic risks to financial stability. In case of a broadbased credit boom, the BSP should raise capital requirements, supported by monetary policy tightening if accompanied by overheating,” the IMF added.
“Targeted macroprudential policies should be used if sectoral credit growth is excessive.”
The central bank will be tightening its watch on the property sector after it required more detailed data on real estate lending and project finance, as it enhances vigilance for emerging asset bubbles.
The IMF also cited the need to “carefully calibrate” the central bank’s plan to trim reserve requirements imposed on banks, even as it acknowledged that unwinding the 20% level over time will help “reduce macrofinancial risks.”
The BSP has kept benchmark borrowing rates at 2.5-3.5% as of its September review, with economists expecting the central bank to keep policy steady in the near term amid manageable inflation and robust domestic economic activity.