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Monday, October 23, 2017 | MANILA, PHILIPPINES
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   banking report
Date posted: Sunday, February 26, 2017 | Manila, Philippines

4th Quarter Banking Report (2016)

Can consumers keep on borrowing?

THE PHILIPPINE economy has been characterized as consumption-driven with remittances said to be supporting household consumption, which accounts for around 60% of the country’s gross domestic product (GDP).

Fueling this desire to spend are consumer loans -- funding that enables the individual to have the immediate use or enjoyment of consumer assets. Since 2010, consumer loans have been growing by double-digits, with the total breaching the P1-trillion mark in 2015 given a surge in borrowings to acquire cars and homes.

As of September 2016, consumer loans have risen to P1.202 trillion, 20.61% more than the P997.153 billion posted in the same period in 2015. The bulk comprised loans secured to buy residential lots, which rose by 18.02% to P496.787 billion; followed by auto loans, which increased by 28.46% to P364.269 billion; and credit card receivables, which grew by 9.28% to P183.123 billion.

The matter of granting consumer loans to individuals is based on the client’s future income-generating capacity as well as their ability to pay their debt. The people’s propensity to purchase durable goods such as residential properties, vehicles and gadgets provides a good incentive for banks to aggressively venture into consumer lending.

And why not? In terms of macroeconomic performance, the Philippine economy grew at a three-year high last year at 6.8% -- putting the figure in the upper-end of the government’s 6-7% target. The figure was higher than the revised 5.9% growth seen in 2015. While renewed increase in government spending and capital formation are credited for the robust growth figures in recent years, it had always been the “C” in the GDP equation (C+G+I+X-M) that performed consistently -- growing 6.9% on average for the year.

For 2017, however, the Philippines might be in for a greater degree of volatility compared to the previous years with an environment of rising interest rates, normalizing world oil prices, depreciating peso and political noise.

As developed economies such as the US and the UK begin to look inward, the rest of the world is left to figure out which way to go.

The US Federal Reserve, for one, has signaled more rate hikes, as upbeat inflation and jobs data seem to lend support to Fed Chair Janet Yellen’s assessment of the US economy requiring gradual interest rate hikes this year “in order to avoid financial risks ahead.” This as US President Donald J. Trump promised a “phenomenal” tax reform plan.

Across the Atlantic, Europe will host elections in France, Germany and the Netherlands, putting investors on edge, as the polls are likely to test these key EU members’ resolve to keep the union intact.

Another risk to the Philippine economic growth trajectory would be normalizing oil prices. The world enjoyed cheap oil beginning 2014 as the Organization of the Petroleum Exporting Countries (OPEC) kept output steady in spite of falling prices driven in part by the US’ shale production. This resulted in oil prices plummeting to as low as $30 per barrel -- a level not seen since end-2003.

However, the decision of OPEC and non-OPEC members to limit production for the first half of this year could push domestic oil prices higher as these countries account for 80% of the Philippine crude oil imports.

Climbing fuel prices comes at an inopportune time, as the strengthening US dollar has weighed on the peso, which depreciated against the greenback for much of 2016. The depreciation is, in part, caused by speculation of Fed rate hikes this year. While a “weak” peso might boost Philippine export earnings, it could also be detrimental by way of inflationary pressures on food and utilities given the country’s net importer status and its over-reliance on household consumption.

With all these risks, the question arises: how is consumer spending likely to hold up?

Based on data, household consumption growth remained robust throughout various episodes of economic growth.

On the issue of whether Fed pronouncements of rising interest rate have an effect on household consumption growth, no clear pattern has emerged. The same case applies to consumer loans.

Ildemarc C. Bautista, assistant vice-president and head of research at Metropolitan Bank & Trust Co., said the impact of rate hikes is seen on financial markets by way of increased volatility, “but this hasn’t really affected consumer lender per se for peso loans.”

Diwa C. Guinigundo, Deputy Governor of the Bangko Sentral ng Pilipinas (BSP), however, noted that “there appears to be a negative relationship between movements in international crude oil prices vis-à-vis growth of auto loans.”

“Periods of rising Dubai crude oil prices, which translated to a rise in domestic petroleum products, led to a general decline in the growth of consumer auto loans during the same period. Meanwhile, periods of declining crude oil prices resulted in an increased growth of auto loans.”

Mr. Guinigundo also cautioned that subsequent rate hikes by the Fed “could trigger further portfolio rebalancing, resulting in tighter financial market conditions, and exchange rate pressures in emerging markets, including the Philippines.”

According to BSP data, about $972.8 million of capital outflows were recorded in the last two months of 2016 with most of the outflows coming from the country’s equities market at $614.42 million and government securities at $358.39 million.

“The capital outflows consequently resulted in a sustained weakening of the peso in 2016. The depreciating trend started in September which continued until the end of the year… [T]he peso dropped to P49.73 against the US dollar, the day the US Fed hiked its policy rate,” Mr. Guinigundo said.

“By end-2016, the peso depreciated by 5.35% to P49.72/$1 from its 2015 closing rate of P47.06/$1.”

For Angelo B. Taningco, economist at Security Bank Corp., consumer loans in general have not been significantly influenced by changes in the aforementioned indicators: “In fact, consumer loans have continually risen on an aggregate basis…,” he said.

While the Philippines continues to enjoy robust economic growth, uncertainties -- both political and economic -- continue to persist.

“Growing protectionist sentiments (such as in the UK and the USA), fragile global economic environment (particularly in Japan, China as well as in the UK and the European Union, following the Brexit vote), asynchronous monetary policies, subsequent federal funds rate hikes, geopolitical tensions, and maritime dispute in the West Philippine Sea could pose as external risks to the Philippine economy,” Mr. Guinigundo said.

Natural hazards, delays in infrastructure projects, logistics bottlenecks and mine closures make up the domestic risks.

“It is apparent that the Philippines still catches a cold when the US sneezes,” said Paul Michael M. Paraguya, executive director at the Institute for Development and Econometric Analysis, Inc. (IDEA).

“The Philippines will need to monitor the Fed rates given that the Trump administration may hike up interest rates which may cause a net capital outflow from our country. This outflow of capital will have repercussions in our foreign exchange and interest rates,” he added.

According to Raul Fabella, economist at the University of the Philippines, “policy rate sensitive purchases” and “elastic and discretionary consumer products” such as cars, housing and durable equipment “may experience a slowdown.”

“How much depends on the Fed rate increase and the BSP’s response,” he said.

Forecasts seem to point toward a mild slowdown in economic growth, but the narrative of the Philippines being a rising star among nations will likely continue.

“The consumption driven economy of the Philippines will have a bright outlook in 2017 in light of the above factors. Household consumption is anticipated to be one of the main drivers and foreign remittances is expected to increase consumer purchasing power as a result of the depreciation of the peso,” IDEA’s Mr. Paraguya said.

“Nonetheless, even if the Fed rates would go up, banks will still tailor fit their consumer loans to attract borrowers. This has happened in the past and this may be the same strategy that banks will adapt,” he added.

BSP’s Mr. Guinigundo shared a similar outlook, with the economy expected to remain “relatively resilient even amid various external risks.”

“Despite heightened uncertainty and risks in the global economic environment, the Philippine economy is expected to remain resilient and sustain its economic growth momentum due to its strong macroeconomic fundamentals including broad-based GDP growth, low and stable inflation, favorable external position, and solid fiscal position.”

Mr. Guinigundo also cited the latest results of the BSP’s Senior Bank Loan Officers’ Survey, in which respondent bank managers expected loan demand from households to remain unchanged while a larger proportion of the respondents expect overall demand for consumer loans to increase further during the period on expectations of higher consumer spending and more attractive financing of banks.

“Consumer bank lending is seen to continue to grow in the short- to medium-term as household consumption is expected to remain buoyant together with the attractive loan financing terms of banks. Moreover, according to NEDA (National Economic and Development Authority), increased employment prospects and favorable income conditions will continue to support the growth in household consumption.”

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