Philippines Reserve Requirement and Risk to Earnings

Indonesia stock info Philippines Reserve Requirement and Risk to Earnings ; The Philippines may refrain from increasing interest rates and instead ask lenders to set aside more reserves as the debt crises in Europe and the U.S. threaten Asian growth while spurring capital flows to the region.

Bangko Sentral ng Pilipinas will maintain the rate it pays lenders for overnight deposits at 4.5 percent, according to 15 of 18 economists surveyed by Bloomberg News ahead of a decision tomorrow. Three say policy makers will lift the benchmark to 4.75 percent, and 12 out of 16 expect a reserve requirement rise.

Asia’s central banks are juggling the need to shield their economies against weaker exports while containing inflation, which accelerated to a 26-month high in the Philippines in June. Malaysia, Indonesia and South Korea kept rates unchanged this month as Thailand and China boosted borrowing costs amid rising commodity prices and capital inflows, while India tightened by a more-than-expected half a percentage point yesterday.

“Central banks are now diverging on monetary policy,” said Radhika Rao, an economist at Forecast Pte in Singapore. “They’re playing on their domestic inflation drivers, avoiding tightening more than required.”

The Philippine Stock Exchange Index surged to a record close last week. The peso reached a three-year high this week and has gained more than 9 percent in the past year as Asia’s rising borrowing costs and faster growth lured funds away from developed markets. Bailouts for Greece, Ireland and Portugal and concerns the U.S. may lose its AAA credit rating have prompted investors to seek alternatives to the U.S. dollar and the euro.

Reserve Requirement

Bangko Sentral ordered lenders to set aside more money as reserves last month while keeping its benchmark rate unchanged after increasing it twice earlier this year. Governor Amando Tetangco boosted the reserve requirement to 20 percent from 19 percent effective June 24.

“The reserve requirement is a more directed approach to the problem of liquidity,” said Rao.

Policy makers are ready to act to prevent asset-price bubbles from forming as the central bank expects overseas funds to continue flowing to emerging markets amid U.S. and European debt woes, Tetangco said this week.

“Bangko Sentral is watching foreign-exchange flows to check if any resulting domestic liquidity would be in excess and translate to upward pressure in real and financial assets,” Tetangco said July 25. “We don’t yet see any bubble-like buildups, but we are ready to put on prudential measures to curb such from forming.”

Risk to Earnings
Consumer prices increased 5.2 percent in June from a year earlier, the biggest gain since April 2009, according to data from the National Statistics Office using 2006 as a base year. Inflation was 4.6 percent using 2000 as a base year. The central bank targets an average annual inflation rate of 3 percent to 5 percent this year and next, using the 2000 series.

Inflation pose a risk to consumer spending and company earnings, threatening President Benigno Aquino’s growth target of as much as 8 percent annually from 2011 to cut poverty.

Manila Electric Co., the Philippines’ biggest power retailer, said it would charge customers higher prices last month after power generation costs increased. Jollibee Foods Corp., the nation’s largest restaurant operator, said in April profit growth in the first half of 2011 may be restrained by higher raw-material prices and operating costs.

Exports, which account for about 30 percent of the $161 billion economy, declined in May from a year earlier. Gross domestic product expanded 4.9 percent in the first quarter, the smallest gain since 2009.

Aquino, in his annual state of the nation address before lawmakers this week, said his efforts to end corruption are helping attract investments that will create jobs and boost growth.


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