The Philippine banking system is strong and prepared to withstand possible shocks posed by the collapse of some banks in the US, the Bangko Sentral ng Pilipinas (BSP) said yesterday.

Felipe Medalla, BSP Governor, said Philippine banks “have an asset base that significantly differs from that of US banks.”

“The BSP has long implemented structural reforms to ensure the safety and soundness of banks. These include adoption of sound governance and risk management standards which enable banks to assume risks commensurate with their risk-bearing capacity; prudential limits and requirements, including the Basel III reforms on capital and liquidity standards which enable banks to maintain adequate capital and liquidity; and strengthened surveillance mechanisms and coordination efforts which allow the BSP to closely monitor developments that may pose risks to the financial system and proactively respond as warranted,” Medalla said.

Medalla added the BSP  has in place Emergency Loan Facilities which can be tapped by solvent banks experiencing serious liquidity problems.

Lastly, BSP was given enhanced resolution authority through the amendments to the Charter of the Philippine Deposit Insurance Corporation, he said.

In reaction to the collapse of Silicon Valley Bank (SVB) and Signature Bank in the US, Medalla said Philippine banks “do not have material exposure to the failed banks.”

Medalla also said the troubles at Credit Suisse will not have a “significant impact” on the Philippines.

“It does not look like that other Globally Systemically Important Banks (GSIBs) have the same problem, in which case the impact on the global economy (and therefore the Philippines) will not be significant,” Medalla said.

“The BSP will continue to closely monitor developments, assess their impact on the banking system and respond accordingly,” Medalla said.

Medalla explained Philippine banks mostly hold loans “which are less susceptible to changes in fair value whereas, security holdings of SVB was larger in relation to their capital.”

Data from the BSP showed that, as of end-January 2023, total loan portfolio, net of allowance for credit losses, comprised the largest share of the banking system’s total assets at 53.0 percent or P11,917.6 billion followed by investments and cash and due from banks with 29.2 percent share (P6,565.2 billion) and 12.2 percent share (P2,740.6 billion), respectively.

Data from the S&P Capital IQ, meanwhile, showed that SVB had about $118.0 billion debt securities or roughly 56.5 percent of its $209.0 billion total assets as of end-December 2022.

Medalla said only 27.5 percent or P6.329 trillion of the Philippine banking system’s total assets were in portfolio investments for the same period.

The BSP chief also said Philippine banks have lower market risk exposure compared to US banks.

“Losses of Philippine banks, including estimated net unrealized losses on security holdings due to the rising interest rate environment, are expected to be smaller relative to their US counterparts given that the US Fed policy rates rate hikes were larger and came from a lower level than BSP policy rates,” Medalla said.

He added  the Philippine yield curve did not invert similar to the US yield curve.

Also, Medalla said US banks’ bond holdings have longer tenors–as long as 30 years, whereas Philippine banks mostly hold government securities with residual maturity of up to 15 years.

Medalla added Philippine banks “maintain a diversified lending base across counterparties and industry types and their loan quality is manageable,” stressing that the banking system’s non-performing loans ratio stood at 3.3 percent as of end-January 2023 from 4.1 percent a year ago.

“Philippine banks have strong risk governance and risk management systems. Banks maintain sufficient capital to absorb unexpected losses from policy rate increases.  (Our banks) are highly liquid and tend to rely on a wide depositor base compared to US banks,” Medalla said.

The liquidity coverage ratio (LCR) of universal/commercial banks, accrding to the BSP, was at 185.7 percent on solo basis as of end-December 2022, higher than the 100 percent minimum requirement.

Meanwhile, the minimum liquidity ratios of standalone thrift banks, rural banks and cooperative banks were higher than the 20 percent requirement and stood at 29.9 percent, 63.7 percent, and 44.4 percent, respectively, on solo basis.

After five months of accelerating prices,  inflation in February slowed slightly to 8.6 percent from 8.7 the previous month, solely driven by slower price increases in the transport index, the  Philippine Statistics Authority said yesterday.

Among the 13 commodity groups, transport was the sole driver of the downtrend of the overall inflation during the month, recording a 9 percent inflation rate in February from 11.1 percent inflation in January.

Nine commodity groups showed higher inflation rates: food and non-alcoholic beverages, 10.8 percent; alcoholic beverages and tobacco, 11 percent; clothing and footwear, 4.8 percent; furnishings, household equipment and routine household maintenance, 6.2 percent; health, 4 percent; information and communication, 0.8 percent; recreation, sport and culture, 4.4 percent; restaurants and accommodation services, 8.1 percent; and personal care, and miscellaneous goods and services, 5.3 percent.

“The indices of housing, water, electricity, gas and other fuels; and education services moved at their previous month’s annual rates at 8.6 percent and 3.6 percent, respectively.

The financial services index continued to record zero percent annual rate,” National statistician and civil registrar general Dennis Mapa said.

Core inflation, which excludes selected food and energy items in the headline inflation, rose to 7.8 percent in February from 7.4 percent in January.

Felipe Medalla, Bangko Sentral ng Pilipinas (BSP) governor, said inflation is likely to remain above the government’s 2023 target range of between 2 and 4 percent until the end of the year.

“The February 2023 inflation outturn of 8.6 percent is within the BSP’s forecast range of 8.5 to 9.3 percent. Inflation is projected to remain above the target until early Q4 2023 before decelerating close to the low end of the target range by January 2024 due mainly to negative base effects and the likely decline in global oil and non-oil prices,” Medalla said.

He said the inflation path “continues to be driven by supply-side factors as pressures from elevated global and domestic commodity prices broaden.”

“At the same time, the risks to the inflation outlook are tilted to the upside for both 2023 and 2024. The potential impact of uncertainties in the global food market, increased domestic prices of key food items facing supply constraints, additional transport fare hikes due to elevated oil prices, and higher-than-expected wage adjustments in 2023 are the major upside risks to the inflation outlook. The impact of a weaker-than-expected global recovery is the primary downside risk to the outlook,” Medalla added.

Aggressive campaign

Finance Secretary Benjamin Diokno said an aggressive and focused campaign to address food supply and higher utility rates is necessary to tame high inflation.

“I emphasize that in order to tackle inflation, (we must undertake an) all-of-government approach,” Diokno said. “The pressure now is on the fiscal side. We need to focus on commodity prices.”

“We will continue to work with Congress to legislate priority bills for the agriculture sector.

These bills include the New Agrarian Emancipation Act, the National Land Use Act, Livestock Development and Competitiveness Bill, and the Amendments to the Philippine Crop Insurance Charter,” Diokno added.

Arsenio Balisacan, National Economic and Development Authority secretary, stressed the need to recalibrate government strategies to alleviate the impact of higher commodity prices.

“We must rethink our strategies to combat rising food prices. The country’s current high inflation is largely driven by domestic, supply-side constraints. Agricultural imports were ill-timed and food supplies have been inadequate. The solution is to get to the root of the problem, including fixing the bottlenecks along all segments of the agricultural value chain,” Balisacan said.

Safeguard the target

Medalla said the Monetary Board, in-charge of the country’s monetary policy stance, will review its assessment of the inflation outlook in its monetary policy meeting scheduled on March 23.

“The BSP remains prepared to adjust its monetary policy settings as necessary to prevent inflation expectations from becoming disanchored and safeguard the inflation target over the policy horizon. The BSP also continues to call for the timely and effective implementation of non-monetary government measures to mitigate the impact of persistent supply-side pressures on inflation,” Medalla said.

With inflation now possible to average 6 percent this year — a couple of percentage point higher than the government’s top-end of the target — the Monetary Board last month jacked up the key rates of the BSP anew to hit its highest in 15 years.

The interest rate on the BSP’s overnight reverse repurchase facility was raised by another 50 basis points (bps) to 6 percent. The interest rates on the overnight deposit and lending facilities were set to 5.5 percent and 6.5 percent, respectively.

This was the eighth consecutive tightening action by the Monetary Board. Prior to last month’s tweak, the key rates have been raised by a total of 350 bps.

Michael Ricafort, Rizal Commercial Banking Corp. chief economist, said supply-side inflation factors “would be better addressed by non-monetary measures to increase the supply and lower tariffs (though temporarily) and prices of local food products.”

He pointed out that the economy does not need the “still relatively higher inflation,” especially households hit hard by the coronavirus pandemic in terms of lower income, thus the need for intervention preferably through non-monetary measures.

“But (it) would require further monetary tightening at some point, but only if there would be evidence of second-round inflation effects…to prevent inflation from eating further the already reduced budgets of the most vulnerable sectors as the economy is still reeling from the adverse effects of the pandemic,” Ricafort added.

He stressed higher inflation would slow down the economic recovery “amid the reduction in the purchasing power amid more spending for oil and other global commodities and to pay for higher prices of affected goods and services.”

“Further reopening of the economy towards greater normalcy with the easing of the Alert Level to 1, the lowest in Metro Manila and in more areas since March 2022, could help economic recovery prospects and some pickup in demand and potentially some pickup in prices, going forward, though could be offset by the relatively slower pace of economic recovery,” Ricafort said.

Jun Neri, Bank of the Philippine Islands economist, said despite the lower headline print, “risks to inflation remaining elevated and well above BSP’s target are still significant as shown by core inflation.”

“There is a significant chance that headline inflation may have reached the peak already, and succeeding prints will be lower moving forward. The contribution of transport to inflation may continue to shrink in the coming months if oil prices remain stable. The agriculture sector continues to struggle amid structural problems, preventing it from keeping up with the country’s rising population. Importation will help in tempering price pressures, but this is only a short-term solution. Surge in food prices may recur in the future given the structural problems in the agriculture sector. Considering the latest print, we expect full year inflation to settle near 5.8 percent,” Neri said.

Neri noted the need for the BSP to hike rates further in the coming months with core inflation still rising, adding that aside from inflation, the magnitude of the hike will depend on the upcoming data in the United States, the size of the Federal Open Market Committee (FOMC) hike and the behavior of currency markets.

“So far, markets are still expecting a 25- bp hike in the March FOMC meeting, but an upward surprise could be bolstered by upcoming US economic data and policy decision,” Neri added.

Aris Dacanay, HSBC economist for Asean, said although headline consumer price index (CPI) only decelerated by a tenth of a percentage point, “it is still welcome news given how inflation in the Philippines is the highest in Asean today.”

“It’s difficult to conclude whether this was already the peak. Indeed, the momentum of inflation eased significantly in February, but it’s difficult to determine the peak with confidence given the extent to which inflation was spreading to other goods and services,” Dacanay said.

“Last week, (BSP Governor) Medalla stated that if the CPI in February would rise by more than 9percent, the BSP would need ‘to do something’ and he would support another punchy 50 bp hike come the next meeting. Since inflation came in below 9 percent, the case of a 25 bp hike, which is our baseline forecast, increases. In addition, we think the BSP not hiking is highly unlikely given how broad inflation spilled over to other commodity baskets,” Dacanay said.

Rates at 15-yr high; more hikes seen

With inflation now possible to average 6 percent this year–a couple of percentage points higher than the government’s top-end of the target–the policymaking Monetary Board yesterday jacked up the key rates of the Bangko Sentral ng Pilipinas anew to hit its highest in 15 years.

The interest rate on the BSP’s overnight reverse repurchase facility was raised by another 50 basis points to 6.0 percent, effective today.  Accordingly, the interest rates on the overnight deposit and lending facilities was set to 5.5 percent and 6.5 percent, respectively.

Felipe Medalla, BSP Governor and Monetary Board chief, said  in deciding to raise the policy interest rate anew, the Board noted the latest baseline inflation forecast path has shifted higher relative to the previous assessment.

This was the eighth consecutive tightening action by the Monetary Board.  Prior to yesterday’s tweak, the key rates have been raised by a total of 350 bps.

Medalla said while inflation expectations remain elevated for the next few months, more rate hikes are possible.

“(There will be) More rate hikes moving forward.  We cannot rule out anything.  It’s unlikely that we will not raise rates.  Two 25 bps hike(s). Personally, I think we don’t have to resort to 75bps.  If I were to make a choice, I will rule out 0 and 75 bps,” Medalla said.

“The policy rate is still not as restrictive.  A 50 bps hike will just cut 0.04 percent of GDP,” he added.

Medalla said average inflation is projected to breach the upper end of the 2 to 4 percent target range at 6.1 percent in 2023, before returning to within target at 3.1 percent in 2024.

“The forecasts were adjusted upwards following the higher-than-expected inflation outturn in January as well as the continued stronger rebound in domestic demand and gross domestic product (GDP) growth in the fourth quarter of last year,” he said.

Higher food prices and utility rates pushed inflation faster in January, hitting its highest since November of 2008 and breaching the top end of the central bank’s forecast for the month.

The Philippine Statistics Authority said inflation accelerated further to 8.7 percent in January from 8.1 percent in December 2022 and 3 percent a year ago.

Core inflation, which excludes selected food and energy items in the headline inflation, rose to 7.4 percent from 6.9 percent the previous month and 1.8 percent the previous year.

“Both headline and core inflation measures have also continued to increase, indicating a further broadening of price pressures, particularly in services. Meanwhile, inflation expectations have likewise risen further, underscoring the need to preempt the emergence of further second-round effects,” Medalla said.

Medalla noted the balance of risks to inflation now leans toward the upside for both 2023 and 2024, “with pressures emanating from the potential impact of global food market uncertainties, continued domestic shortages in key food items, additional transport fare hikes amid elevated oil prices, and the higher-than-expected wage adjustments in 2023.”

The impact of a weaker-than-expected global economic recovery remains the primary downside risk to the inflation outlook.

Medalla said the Monetary Board also reiterates its encouragement and support for timely and more aggressive whole-of-government actions to mitigate the impact of persistent supply-side pressures on food prices, including trade”‘positive measures and significant progress to boost productivity.

“Given these considerations, the Monetary Board deems a strong follow-through monetary policy response as necessary to reduce the risk of a breach in the inflation target in 2024,” Medalla said.

He explained  an upward adjustment in the policy interest rate would also prevent inflation expectations from drifting further away from the target band.

The Monetary Board also believes that, with domestic growth exceeding expectations in 2022, monetary action can help to dampen potential demand-side pressures and second-round effects without unduly hindering the sustained momentum of economic growth.

“The BSP reassures the public that it stands ready to take all necessary policy action to bring inflation to within the 2 to 4 percent government target over the medium term, in line with its primary mandate of ensuring price stability,” Medalla said.

Michael Ricafort, RCBC chief economist, said local policy rates would still be largely a function of the local inflation trend as well as future rate hikes by the US policymaking body, the Federal Reserve.

“For the coming months, local policy rates could still, at the very least, match any future Fed rate hikes after recent Fed signals and market expectations of about 2 to 3 more Fed rate hikes on the next Fed rate-setting meetings.  As a result, any additional Fed rate hikes of about +0.25 each could be, at least, matched locally on the next local rate-setting meetings on March 23, 2023 and on May 18, 2022 to maintain a more comfortable interest rate differential that help stabilize the peso exchange rate and overall inflation,” Ricafort said.

He said relatively elevated inflation in recent months would also be a consideration on the size of any further local policy rate hike.

Higher food prices and utility rates pushed inflation faster in January, hitting its highest since November 2008 and breaching the top end of the central bank’s forecast for the month.

The Philippine Statistics Authority yesterday said inflation accelerated further to 8.7 percent in January from 8.1 percent in December 2022 and 3 percent a year ago.

Core inflation, which excludes selected food and energy items in the headline inflation, rose to 7.4 percent from 6.9 percent the previous month and 1.8 percent the previous year.

“The main driver in the uptrend of inflation in January 2023 was the higher year-on-year increase in the index of housing, water, electricity, gas and other fuels at 8.5 percent, from 7.0 percent in December 2022.  This was followed by food and non-alcoholic beverages at 10.7 percent, from 10.2 percent the previous month,” Dennis Lapid, national statistician and civil registrar general, said in a statement.

Lapid said price increases for restaurants and accommodation services index also contributed to the increase.

Relative to their annual rates in the previous month, higher annual increases were also observed in the indices of the following commodity groups: Alcoholic beverages and tobacco; clothing and footwear; furnishings, household equipment and routine household maintenance; health; recreation, sport and culture; and personal care and miscellaneous goods and services.

Lower annual increase, however, was observed in the index of transport.  The indices of information and communication, education services, and financial services remained at their previous month’s annual rates.

“Food inflation at the national level climbed to 11.2 percent in January, from 10.6 percent in December 2022. In January 2022, food inflation stood at 1.6 percent,” Lapid said.

The higher food inflation, according to Lapid, was mainly brought about by the increased year-on-year growth in the index of vegetables, tubers, plantains, cooking bananas and pulses.

Higher annual mark-ups were also observed in the indices of the following food groups during the month: flour, bread and other bakery products, pasta products, and other cereals; fish and other seafood; milk, other dairy products and eggs; and fruits and nuts.

Inflation for the National Capital Region (NCR) was at the same level, at 8.6 percent, with the housing, water, electricity, gas and other fuels index posting an increase of 6.9 percent and the food and non-alcoholic beverages index with 12.1 percent.

Inflation in areas outside NCR also went up to 8.7 percent from 8.2 percent the previous month.

“Compared with their respective annual growth rates in December 2022, 10 regions in AONCR (areas outside NCR) showed higher inflation rates in January 2023. Among the regions in AONCR, Region VI (Western Visayas) posted the highest inflation rate of 10.3 percent, while Region VIII (Eastern Visayas) registered the lowest inflation of 6.9 percent,” Lapid added.

Top priority

In a video message yesterday, President Marcos Jr. said he remained bullish about the economy and expects the inflation rate to go down by the second quarter of the year.

Marcos said the government has  implemented several measures to bring down inflation but its impact has yet to take effect as these “have not yet gone through the system.”

He said the country has been fighting inflation head-on with short-term measures such as easing import restrictions, monitoring prices, providing social support, fuel subsidies, and establishing buffer stock for key commodities while for the long term, the government has been pursuing energy, security, agricultural productivity, and disaster preparedness-related measures.

“ We have already taken some measures so that the supply will be greater and so that will bring the prices down but that will take a little time. And as my continuing estimate or forecast is that by — we can see the lowering of inflation by the second quarter of this year,” he said.

The President believes  as prices of fuel and agricultural products continue to go down, its effect on inflation will only be felt “further down the road.”

“I sincerely believe that this is going to be as high as it’s going to get,” the President said.

Benjamin Diokno, finance secretary, said the Marcos administration “has intensified its measures to improve local production and agricultural productivity.”

“The thrust to improve productivity in the agriculture sector and ensure energy security will help stabilize inflation moving forward,” Diokno said.

He said the government is adopting a whole-of-government approach and is continuing the distribution of organic and bio-N fertilizers, quality seeds, seedlings, farm production and post-harvest machinery and equipment.

“Financial assistance has also been extended through credit and direct cash aid to help reduce the input cost of production and increase the production of farmers,” Diokno added.

Arsenio Balisacan, National Economic and Development Authority secretary, said higher agricultural productivity, food supply augmentation, and energy security are top priorities of the government to temper upward price pressures.

“As part of the administration’s 8-point agenda and the Philippine Development Plan (PDP) 2023-2028, the government is implementing measures to ease price pressures and cushion the impact of inflation, especially on basic commodities,” Balisacan said.

He said NEDA has been working closely with agencies to ensure timely and efficient implementation of the strategies and programs laid out in the PDP particularly in modernizing the country’s agriculture and agribusiness and ensuring energy security.

The NEDA chief said short-term measures include augmenting supply such as through temporary easing of import restrictions, price monitoring, and targeted social support. In the medium to long term, the priority consists of ensuring food security through higher agricultural productivity and ensuring energy security by pursuing the energy transition and development program.

“Our measures are meant to balance the interests among local food producers, consumers, and the overall economy,” Balisacan said.

The economic managers expect inflation to moderate for 2023 to 2024, with a slower-than-expected global recovery and waning pent-up domestic demand.

Higher than estimates

Michael Ricafort, RCBC chief economist, inflation for the month of January were “higher than market estimates including the BSP’s estimate of 7.5 percent-8.3 percent for the month.”

“Thus, relatively elevated inflation data locally could support further local policy rate hikes still expected to match any future Fed (US Federal Reserve) rate hikes to maintain comfortable interest rate differentials to help stabilize the peso and overall inflation,” Ricafort said.

“The Fed  recently signaled about two more Fed rate hikes going forward, that could be matched locally, by +0.25 bps each at least for the next two local rate-setting meetings and possible -2 percentage points cut in large banks’ reserve requirement ratio (RRR) especially if inflation stabilizes within the first six months of the year that could infuse a total of about P260 billion into the local financial system,” Ricafort said.

June Neri, BPI lead economist, said most analysts expected a reversal in the inflation trend as shown by the consensus forecast.

“The trend has not changed mostly because of food. Predicting the behavior of this inflation component has become more difficult because of the uncertainties in supply,” he said.

“Inflation in February may stay above 8.5 percent following the unexpected surge in January. A lower inflation print is more likely in March or April if oil prices remain stable.

Inflationary pressures from food may also start to subside in these months as the harvest season begins and as imports arrive,” Neri said.

“The latest inflation figure provides a strong argument for additional rate hikes. Aside from supply problems, pent-up demand has persisted as shown by the latest GDP data. This has also contributed to inflation. Additional rate hikes will help in easing price pressures coming from revenge spending,” he added.

“No one saw it coming,” HSBC Asean Economist Aris Dacanay said.

“In fact, the market expected inflation to go down; the forecasts surveyed by Bloomberg ranged from 5.4 percent to 8 percent, which means all forecasts were below the December 2022 CPI of 8.1 percent and everyone expected inflation to have already peaked,” he added.

He explained inflation rates in most of Asean “have been treading downwards since the fourth quarter of  2022, but inflation in the Philippines has yet to reach the peak.”

“This was the 11th consecutive month of inflation accelerating. And momentum is still relentless.  Core CPI also accelerated to a 23-year high on the back of a broad based increase across commodity baskets.  It seems second-round round effects are still reverberating in the economy, supported by still-high demand,” Dacanay said.

“Given the eye-watering rise in prices, risks are on the upside when it comes to our baseline forecast of a 25bp hike by the BSP (Bangko Sentral ng Pilipinas) next week – more so given the higher-than-expected GDP growth of 7.2 percent in 4Q 2022, which brought full-year growth to 7.6 percent, the highest in the last 46 years,” Dacanay said.

After noting the further uptick in prices of major consumer prices in November, the Monetary Board decided last December to raise the interest rate on the BSP’s overnight reverse repurchase facility by 50 basis points to 5.5 percent,

This is the highest in more than 14 years or since November 2008, when it was at 6.00 percent.

The interest rates on the overnight deposit and lending facilities was also set to 5 percent and 6 percent, respectively.

The policymaking Monetary Board’s next meeting is scheduled on Thursday, February 16.