Global debt watcher Moody’s Investors Service said the economic reforms being implemented by the government are credit positive because they will promote greater macroeconomic stability.
Moody’s said in a report Monday the Rice Tariffication law and the amendments to the charter of Bangko Sentral ng Pilipinas would support the economic stability in the country. President Rodrigo Duterte signed the two new laws on Feb. 15.
“These measures will enhance macroeconomic and financial stability”•a credit positive for the sovereign,” Moody’s said
Moody’s affirmed the government’s long-term local currency and foreign currency issuer and senior unsecured debt ratings at Baa2 (investment grade) with a stable outlook in July 2018.
The rice tariffication scheme will become effective March 5, eliminating the quantitative restriction on rice imports and replacing them with tariffs.
“We expect the expected increase in the volume of rice imports will diminish the price volatility of rice, helping to insulate Filipino households’ consumption to adverse agricultural shocks,” Moody’s said.
Moody’s said the amendment to the BSP’s charter would expand its supervisory oversight over non-bank financial institutions such as money service businesses, credit granting businesses and payment system operators. It said this would enhance the financial stability given the linkages between the banking system and these entities.
“In addition, the revised charter allows the central bank to issue its own debt securities, providing another tool to fine tune liquidity management and improve the effectiveness of monetary policy,” it said.
Other notable changes include the official removal of money supply and credit levels as a basis to determine monetary policy; the prohibition of any injunction or restraining order on the BSP, except by the Philippines’ two highest courts; an increase in BSP’s capitalization to P200 billion from P50 billion; and the exemption of the bulk of its activities from taxation.
Moody’s said that over the past decade, the Philippines became one of the fastest-growing economies in Asia Pacific, with accelerating credit growth contributing to a decline in domestic liquidity which contributed to rising domestic interest rates last year.
Excess liquidity, as reflected in BSP’s overnight deposit and term deposit facilities, declined to P120 billion (0.7 percent of 2018 GDP) as of November 2018 from as high as P1 trillion in mid-2016 (7.6 percent of GDP).
Moody’s said the issuance of its own debt would enhance the BSP’s ability to better calibrate liquidity condition through open market operations allowing it to rely less on its deposit facilities and reserve requirements, which at 18 percent is one of the highest globally.
“When the central bank last reduced its reserve requirement by two percentage points in May 2018, an additional P200 billion [1.1 percent of GDP] of liquidity was unleashed. The BSP’s intention to gradually reduce the reserve requirement will further ease liquidity constraints notwithstanding policy rate tightening since May 2018,” it said.
