HSBC warns of asset bubble

HSBC warned of asset bubbles developing in the Philippines and other Asian countries due to excess money borne out of interest rate cuts and the current economic slowdown.

In a report, Frederic Neumann, HSBC economist, said Asian central banks have reduced interest rates to historic lows, triggering an expansion in liquidity that may result in higher asset prices.

The Bangko Sentral ng Pilipinas (BSP) early this month cut its interest rates to record lows of 4 percent and 6 percent for the overnight borrowing and lending windows, respectively, making this its sixth reduction since December last year.

The BSP rate cut came on the heels of two decade-low inflation last month owing to falling prices of food and fuel.

Neumann, however, said that policymakers in the current environment should redirect their focus on domestic objectives to prevent bubbles from blowing larger. He expects policy rates among most central banks in Asia to stay low for quite sometime.

The impact of monetary stimulus lasts much longer because of the multiplier process of credit creation, which allows banks to expand lending over time on the back of a growing deposit base.

“There is already evidence that loose monetary and increasingly loose financial conditions are stoking asset prices,” Neumann said.

The seeds of bubbles are laid by excessively loose monetary policy, especially when economic growth fundamentals are weak.

In the Philippines, economic growth nearly stalled at 0.4 percent in the first quarter, after consumer spending, the main driver of expansion, almost collapsed with a mere 0.8-percent uptick.

Economic uncertainty is a precondition for an asset bubble as it ensures that monetary policy remains loose for a certain time, allowing liquidity to gather steam.

“We fear that the current framework is too centered on exchange rate competitiveness and insufficiently focused on risk of domestic asset bubbles,” the HSBC economist said.

Monetary tightening will be decidedly a slow process in Asia, he said, adding that it would be too slow to amount to a sufficient transformation of local monetary conditions.

Besides exchange rate competitiveness, other central banks, including the Philippines, are targeting inflation when they tweak their monetary policy.

But most central banks tend to intervene in foreign exchange markets as well and not purely to manage price pressures in the economy, Neumann said.

While an asset bubble has a positive impact on growth, he said reflation is still required to help Asian economies bridge the shortfall in external demand. Reflation is the act of stimulating the economy by increasing its money supply or by reducing taxes.

RP has ample, not excess, liquidity

Philippine banking players, however, brushed aside the HSBC warning.

“In general, [the risk of asset bubbles] is true. But in the Philippines, we have ample, but not excess liquidity. [The] BSP is also very watchful of any such bubble, or pressure building up, and is always and ever prepared to change gear as and when necessary,” BSP Deputy Governor Diwa Guinigundo said in a text message.

Antonio Moncupa, EastWest Bank president, said an asset bubble is unlikely to happen in the country, citing its loans-to-deposits ratio of below 55 percent.

He said there is no significant trend towards price escalation of any asset class.

“If price is low, people start buying things like real estate and autos. If there are many buyers, the price will increase. That is how the housing bubble in the US happened. It could happen anywhere if excess liquidity is not managed properly over a prolonged period of time. I don’t think though we are near that,” he added.

Pascual Garcia, Philippine Savings Bank president, said asset bubbles would occur in some countries with rapid real estate investment growth, which however doesn’t apply to the Philippines.

“For the Philippines, it’s not likely as the real estate sector has moderate investment growth only. Bubbles would show up in extra ordinary price spike in real estate prices and we haven’t seen that here,” he said. –Maricel E. Burgonio, Senior Reporter, Manila Times