Local firms face tighter credit

While Philippine banks appeared to have managed their exposures well, corporations with direct exposures to troubled financial institutions in Europe and the US are facing tightening credit conditions.

The Bangko Sentral ng Pilipinas (BSP) has been carefully releasing liquidity in calibrated increments to even out the distribution of money supply in the system but officials admitted there was no way to find out how bad it could be for non-bank corporations.

Unlike banks which regularly disclose their investments, there is no systematic way to generate the same kind of information on non-bank corporations.

BSP Governor Amando M. Tetangco Jr. said the only thing the BSP could do is make sure that there is enough liquidity, with distribution moving smoothly so that companies would have access to funds if they need it.

“As long as the banks are lending, funding requirements would be addressed,” Tetangco said. “Corporates will have access to credit.”

Tetangco said there might be enough liquidity in the system but if these funds are not being moved, Philippine companies could be facing the same crunch that was wrecking havoc in the US where banks have refused to lend for fear of ultimately losing their money.

Tetangco said the US credit market has started to thaw with funds flowing slowly after the US government started injecting liquidity into the system. But this was undertaken at great cost in terms of public funding.

The BSP has reduced its reserve requirement on bank deposits by two percentage points and doubled its peso rediscounting budget, moves that officials said would pre-empt tightness in credit and money supply.

The BSP has been making a series of moves but officials hinted this was not to be the last, saying that the Monetary Board would “act as warranted” to shield the financial system from the global financial crisis.

Effective last week, the regular reserve requirement on bank deposits and deposit substitutes would be reduced by two percentage points. At the same time, the MB also increased the BSP’s peso rediscounting budget from P20 billion to P40 billion.

“The two measures are aimed at pre-emptively ensuring the proper functioning of the interbank market and guarding against a possible liquidity or credit tightness arising from the global rise in risk aversion,” Tetangco said.

Major eocnomies have been struggling to jumpstart interbank lending which has been frozen solid because banks are too nervous to lend to each other until the dust had settled on the financial meltdown.

Sooner or later, monetary officials said this freeze would extend to the real sector, with banks too scared to lend to anybody at all. Tetangco said this would cause economic activities to grind down to a halt unless liquidity was flushed into the system.

According to Tetangco, the reduction in reserve requirement has been in the BSP’s medium-term policy objective anyway since this would lower banks’ intermediation costs.

“The Monetary Board believes that present conditions provide room for a calibrated reduction,” Tetangco said.