UA&P economist calls for faster GIR hike, downplays overheating fears

THE PHILIPPINES needs to amass bigger foreign currency reserves to keep up with rising demand for dollars, an economist of the University of Asia & the Pacific (UA&P) said, even as he maintained that the economy is far from overheating.

In a 12-page paper, UA&P associate professor Victor A. Abola dismissed concerns that the Philippine economy is near overheating, but flagged the need to boost the central bank’s gross international reserves (GIR) to meet greater liquidity requirements.

In his Recent Economic Indicators study, Mr. Abola compared current indicators in the external sector to levels that triggered the Asian Financial Crisis in 1997, particularly: short-term external debt (or those maturing within the next 12 months) to GIR, the peso-dollar and yen-dollar exchange rates, the share of the current account balance to gross domestic investments and GIR versus money supply.

The study showed that the first four indicators remained “very far” from levels observed 20 years ago, and are also unlikely to breach such thresholds anytime soon.

“[ W]e do not see any early warning signals that the Philippine economy is overheating and facing a currency crisis, however that may be defined in the literature,” the UA&P economist said.

Some analysts have recently flagged overheating risks in the face of rapid growth in bank lending, intensifying

inflation and fears that key state implementing agencies may not be able to carry out more aggressive spending plans — especially on infrastructure — which would otherwise support economic expansion.

Central bank officials, however, have said the rapid increase in credit simply reflects bigger funding needs for robust domestic economic activity and have assured that inflation should normalize towards yearend.

‘CRISIS AFTER A FEW YEARS’

At the same time, Mr. Abola noted that rising money supply — currency in circulation and bank deposits — could mean stronger demand for dollars that could eventually outpace growth of GIR, which cushions the country from external financial shocks.

“Nevertheless, at least one indicator is strongly telling our policy makers that unless we renew the buildup of our GIR at a pace as fast as (or better yet, faster than) M2 growth, we will end up in a crisis after a few years,” the report read.

“We can readily understand that more money in the economy would translate into more demand for foreign exchange (for capital goods, raw materials, and consumer goods imports). Thus, if M2 rises too fast, leaving GIR far behind, the ratio will rise,” he explained.

“This situation may continue until the ratio reaches a critical level or the country may keep losing GIR to meet the additional demand, in which case the ratio also rises.”

Dollar reserves totalled $80.128 billion in March, marking a third straight month of decline, even as they could still cover 7.8 months worth of import payments — well above the threemonth global standard — according to latest central bank data.

STILL ‘VERY COMFORTABLE’

Sought for comment, BSP Deputy Governor Diwa C. Guinigundo maintained that the current GIR stash remains “very comfortable” in terms of import servicing.

“We are no longer in a gold or FX ( foreign exchange) reserve regime in which we support our money supply with either gold or FX,” Mr. Guinigundo explained in a mobile phone message.

“The more fundamental issue is whether our liquidity is excessive or not. We argue that it is not excessive — its level is consistent with our price stability objectives.”

He added that the recent cut in required bank reserves already supported liquidity.

“If we buy more FX to increase our reserves level, that means increasing money supply and — all things being equal — could exert additional inflation pressure.”

International reserves consist of gold, the BSP’s assets expressed in foreign currencies, the country’s quota with the International Monetary Fund, and foreign currency deposits held by government and state-run firms. These stand as buffers against external financial shocks and are considered by credit raters as a source of strength for the local economy. —