THE WIDELY expected monetary policy easing from the Bangko Sentral ng Pilipinas (BSP) next year will likely spur economic activity especially if inflation is kept in check.
However, the BSP and the banking industry should remain vigilant against risks amid a prolonged period of volatility and uncertainty, analysts said.
Security Bank Corp. Chief Economist and Senior Assistant Vice-President Robert Dan J. Roces said the BSP is expected to start monetary policy easing by mid-2024.
“It’s expected that there might be a shift towards policy easing, potentially starting in mid to late 2024. Such rate cuts could stimulate economic growth by encouraging consumer spending and business investments, provided that inflation is kept under control,” he said in an e-mail.
At its last meeting for the year, the Monetary Board maintained its target reverse repurchase rate at a 16-year high of 6.5%. The BSP has raised borrowing costs by a cumulative 450 basis points from May 2022 to October 2023 to curb inflation.
Bank of America Country Executive for the Philippines Vincent Valdepeñas said he expects the BSP to start rate cuts by the second quarter.
“A moderate acceleration of rate cuts can further increase economic activity and can help boost growth. We view a 100-basis-point (bps) cut in 2024 starting second quarter next year, which will bring down the key policy rate to 5.5%,” he said in an e-mail interview.
Mr. Valdepeñas said Philippine gross domestic product (GDP) will likely expand by 5.5% in 2024, lower than the revised 6.5-7% government target for next year.
Krisjanis Krustins, director for Asia Pacific sovereigns at Fitch Ratings, also see a 100-bp worth of rate cuts from the BSP next year.
“We assume BSP will cut rates to 5.5% by end-2024 and 4.5% by end-2025, under our forecast of consumer price inflation moderating to an average of 3.5% by 2025 on lower commodity prices, base effects and monetary tightening up to 2023,” he said in an e-mail.
Headline inflation slowed to 4.1% in November, which marked the 20th straight month that inflation breached the central bank’s 2-4% target range.
Year to date, inflation averaged 6.2%.
However, Fitch’s Mr. Krustins said risks remain despite the slowdown in November inflation, citing elevated inflation expectations, supply-side price pressures, and potential second- round effects from higher minimum wages and transport fares.
The BSP’s risk-adjusted inflation forecast for 2023 stood at 6% this year, 4.2% for 2024 and 3.4% for 2025.
The BSP also maintained its average inflation baseline forecasts at 6% for 2023, 3.7% for 2024, and 3.2% for 2025.
Mr. Valdepeñas said some of the key risks to the Philippine economy next year would be geopolitical uncertainties, higher interest rates that may lead to sluggish growth, and climate-environment worries.
“A key challenge for the (banking) industry in 2024 would be maintaining profitability with a prolonged higher rates environment and market volatility while navigating through the credit cycle,” he said.
He said the Philippine banking industry has so far done well in an environment of higher interest rates.
Banks have seen increased revenues and profits this year due to higher net interest margins, while also better managing their credit portfolios.
The banking industry’s cumulative net income rose by 10.4% to PHP 270.352 billion as of end-September from PHP 244.876 billion last year, based on the latest central bank data.
As of end-September, banks’ net interest income jumped by 20.4% to PHP 663.24 billion from PHP 550.666 billion last year.
The Philippine banking industry wrote off PHP 457.88 million worth of bad debts in the nine-month period, 80.1% lower than PHP 2.3 billion a year ago.
Banks have also spent a lot of resource on digitization and technology to remain competitive, Mr. Valdepeñas said.
“A competitive landscape is always good as it leads to better outcomes for clients, for the business community and for the broader economy,” he said.
Meanwhile, Mr. Roces said banks had to adapt when the BSP aggressively tightened monetary policy to tame inflation.
“High interest rates typically lead to more expensive loans, dampening borrowing enthusiasm, and slowing down loan growth. However, this also provides an opportunity for banks to achieve higher net interest margins,” he said.
“The industry has had to enhance its risk management practices, with a more prudent credit risk assessment to mitigate the risks. In addition, banks have been adjusting their investment portfolios,” he said.
However, stubborn inflation remains a significant concern as it could prompt the BSP to keep interest rates higher for longer, which could continue to hurt consumer spending and investments.
“The global economic environment also poses a risk, especially if a slowdown affects sectors reliant on exports and foreign investments. Domestic and regional political stability is crucial for maintaining investor confidence and economic stability,” Mr. Roces said.
The increased adoption of digital technology in the banking sector also requires a “substantial investment” in cybersecurity and digital infrastructure.
The BSP has been proactive in promoting digital transformation in the financial sector. The BSP aims to convert 50% of retail payments into digital form and expand financial inclusion.
The BSP has said it is working closely with the industry to introduce new digital payment streams and facilitate the growth of financial technology (fintech) businesses engaged in e-commerce.
“Overall, the banking industry faces evolution in 2024, primarily centered around adapting to the digital revolution. This involves enhancing digital platforms and services, offering innovative products, and focusing on personalized customer services,” Mr. Roces said.
Banks and financial institutions need to manage market volatility and enhance strategies such as asset diversification and strengthened liquidity management, he said.
“The prolonged period of volatility and uncertainty has also changed the competitive landscape, with increased competition from fintech and digital banking platforms. Banks are now more focused than ever on improving customer experience and service efficiency,” he added. — Keisha B. Ta-asan, Reporter