The International Monetary Fund (IMF) said the Bangko Sentral ng Pilipinas (BSP) should consider expanding access to its facilities to non-banks, securities firms and even non-financial corporations to address possible liquidity shortages.
The IMF also said that while there was room for monetary easing, BSP authorities should be careful about “excessive intervention” in the exchange rate.
The IMF said the currency should be allowed to adjust to help absorb market pressures and reduce the drain on reserves.
The IMF released its Regional Economic Outlook (REO) yesterday where it analysed the impact of the global financial crisis on Asia and the policy options that economic officials should consider.
The BSP has been easing its monetary policy and even opened a new dollar repurchase facility to ensure that banks would have access to liquidity.
But the IMF said the BSP should also consider contingency plans to expand access to its facilities not just to banks but non-bank corporations that might have direct exposure to troubled institutions abroad or just having liquidity problems.
“Central banks should also consider reviewing the range of available liquidity instruments, including in foreign currency,” the IMF said. “Expanding the range of acceptable collateral and shifting to a regular auction-type facility for discount lending may help minimize the market stigma attached to emergency funding,” the IMF added.
The IMF’s proposal came on the heels of reports that while Philippine banks were easily able to manage their exposures to the financial crisis, non-bank corporations might not have the same flexibility and would soon need to raise funds.
With banks generally avoiding exposing themselves to further risks, non-bank corporations would have few options for raising funds especially at a time that the securities market was harder hit by risk-aversion.
However, the IMF said the BSP would also need to ensure that banks have proper regulatory standards for liquidity risk management, such as through avoiding maturity mismatches, more extreme stress testing, and contingency planning in the event of an extended cut-off in external financing.
With the balance of risks having shifted towards slowing growth, the IMF said most central banks in Asia have ended their tightening cycle and, in many cases, have started to ease while providing exceptional liquidity to stabilize market conditions.
“In most countries, where domestic demand is weakening, financial conditions are tightening, and second-round price effects are modest, further monetary policy easing would be appropriate to address downside risks to growth,” the IMF said.
But the Fund also warned that excessive intervention would create the risk of one-way bets on the exchange rate and greater volatility. Countries like the Philippines where exchange rates have weakened in response to negative terms-of-trade shocks and capital outflows faced the added challenge of containing the pass-through of the depreciation on domestic inflation.