Manila central bank says ready to guard against financial excesses

MANILA (Reuters) - The Philippine central bank is ready to guard against excesses in the financial system such as a possible increase in investment flows after last week's credit rating upgrade from Standard & Poor's, its governor said.

S&P hiked on Thursday the Philippines' credit score to BBB, or two notches above investment grade, citing improvements in structural, administrative, institutional and governance reforms that are likely to remain beyond President Benigno Aquino's term.

It was the first time for the country to reach a debt rating of two notches above investment grade.

"Our policy will continue to be geared towards ensuring that inflows do not generate financial stability concerns," Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco told reporters in an email. "This is consistent with what we have done in the last two meetings," he added.

The central bank kept key interest rates steady last Thursday, but it hiked banks' required reserves by another 1 percentage point to mop up excess funds in the financial system.

"We can expect new inflows as a result of the upgrade," Tetangco said, adding that the inflows would help support the peso. The BSP's latest policy move "was timely" and will help mitigate liquidity growth, he also said.

Foreign portfolio inflows are forecast to reach US$2.1 billion (S$2.6 billion), and foreign direct investments to US$2.6 billion in 2014. The projections are up for review by the central bank this month.

Manila's benchmark stock index has climbed about 1.3 per cent since the Thursday announcement of the S&P upgrade while the peso has gained nearly 1 per cent. The local currency is now hovering at five-month highs.

"We will maintain presence in the market as appropriate, while keeping the exchange rate broadly determined by market forces," Tetangco said.

Tetangco said the monetary authorities believe an upgrade from Fitch Ratings and Moody's Investor Service "would happen sooner than later," recognising recent gains on the reform front.

Last year, the three major debt watchers lifted the Philippines away from junk status for the first time ever.