October 4, 2017 / 3:17 AM / a year ago

Philippine central bank governor says tax reforms won't require policy response

MANILA (Reuters) - The Philippines’ plan to overhaul its tax system will only have a modest inflationary impact and will not need a monetary policy response, said the central bank governor, who also brushed off a sharp decline in the peso currency in an upbeat message on the economy.

New Philippine Central Bank governor Nestor Espenilla deliver a speech during a turnover ceremony at the central bank's headquarters in Metro Manila, Philippines July 3, 2017. REUTERS/Romeo Ranoco

“Any moderate, short-lived inflationary impact of (the tax reform) need not be responded to by monetary policy,” Nestor Espenilla told Reuters in an interview on Wednesday for the Global Markets Forum.

The tax reforms are crucial to President Rodrigo Duterte’s ambitious plans to foster higher, sustainable growth through his $180 billion “Build, Build, Build” infrastructure campaign.

The tax measures seek to expand the value-added tax base, raise excise taxes on fuel and automobiles, and slap levies on sugar-sweetened beverages among other changes. They were approved by the lower house of Congress in May, but have yet to be endorsed by the Senate.

If implemented next year, the tax reforms should only lift consumer prices by less than half a percentage point and the impact will diminish from 2019 onwards, Espenilla said.

The Philippines has kept its key interest rates unchanged since raising them by 25 basis points in September 2014 as inflation remained tame despite robust growth making it one of Asia’s strongest performing economies this year.

Espenilla, who took the helm at the central bank in July, also said any cut in banks’ required reserves will be “measured” and “calculated”. Moreover, planned reforms to deepen the bond and capital markets should absorb the extra liquidity that will be released with the reduction in the amount of cash banks need to hold, he said.

The central bank has flagged a plan to eventually reduce the reserve requirement ratio, currently at 20 percent and one of the highest in the region, as it reduces its reliance on this tool to manage liquidity.

Espenilla said the capital market reforms, aimed at deepening domestic markets and establishing a reliable yield curve, would be completed over an 18-month period after the planned launch in November.

“If you are seeking to attract longer term investors...they need liquid markets to be able to manage their exposures, and also enhancements to the foreign exchange markets so they will be able to hedge properly their exposures,” he said.

The government's massive infrastructure-build programme has hit the peso PHP=PDSP, at one point falling to 11-year lows against the U.S. dollar, as capital goods imports have risen sharply.

Espenilla, however, was sanguine on the peso, Asia’s worst performing currency this year, saying there was no need for foreign exchange controls.

“Why do we need to operate foreign exchange controls as if it is a crisis economy, as if it needs to be rationed?”

Reporting by Karen Lema, Martin Petty, Billy Chan and Neil Jerome Morales; Writing by Manolo Serapio Jr.; Editing by Sam Holmes & Shri Navaratnam

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