May 25, 2018 / 7:48 AM / 7 months ago

GRAPHIC-Philippine assets to feel more pressure after bank reserve cut

May 25 (Reuters) - Already under pressure from rising inflation and a weakening currency, Philippine bond and stock markets may fall further after this week’s announcement of a cut in banks’ reserve requirements, analysts said.

The peso, one of Asia’s worst performers this year, extended its slide to reach fresh 12-year lows on Friday.

The Philippine central bank reduced the amount of reserves banks must park with it by 1 percentage point on Thursday, which analysts estimate could add around 100 billion pesos ($1.90 billion) in liquidity to the financial system that could fuel inflation and undermine the peso.

While investors viewed the RRR cut as a phased move to market-based monetary policy rather than as monetary easing, the concern it would lead to more inflationary pressure or loosen cash conditions weighed on Philippine markets.

Historically, the fall in the peso has affected corporate earnings as it tends to increase input costs and lower profit margins.

Philippine stocks have been Southeast Asia’s worst performers with a fall of about 11 percent this year, and the market has been hit by higher foreign fund outflows over the past few months.

Overseas investors have sold about $923 million of Philippine equities so far this year, compared with their purchases of $1.1 billion last year.

Philippine bond prices have also declined sharply on concerns of rising inflation due to higher oil prices and taxes on commodities. Consumer prices in April accelerated at their fastest pace in at least five years.

The trade deficit has been widening, due largely to a pick-up in government spending on infrastructure and a surge in imports of capital goods, that has hurt the peso.

The recent declines in remittances from overseas workers, traditionally a big base of support for the currency, pose another threat to the country’s deteriorating external balance.

Foreign remittances in March fell 9.8 percent from a year earlier, the steepest in 15 years, according to recent central bank data.

“The cover for (current account) deficit, which comes mainly from overseas remittance inflows has been drying up,” said Prakash Sakpal, economist at ING.

We expect the peso to underperform in the region for the rest of the year, Sakpal said.

Editing by Vidya Ranganathan and Jacqueline Wong

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