Is the country ready for higher interest rates?
Three and a half trillion dollars.
That’s how much the US Federal Reserve has spent to help the US economy get back on its feet in the wake of the 2008 global financial crisis.
Through a policy called quantitative easing, the world’s most powerful central bank pump-primed the US financial system by buying government bonds with the cash it printed, flooding the US economy (and by extension, the rest of the world) with cheap money—money that inevitably seeped out to the rest of the world, especially to countries which offered better returns on capital.
The Philippines was one such country.
Having a consumer base of close to 100 million, many of whom are young and upwardly mobile, coupled with the investor confidence brought about by the Aquino administration, the Philippines enjoyed the benefits of ultra loose US monetary policy.
Prompted by record-low US interest rates, local interest rates fell to record lows as well, spurring a boom in the property market, with high-rise condominium buildings and new gated subdivisions mushrooming all over the country.
Low interest rates also encouraged more people to buy big-ticket items previously considered luxuries—like cars and durable goods like appliances. Banks’ housing and car loan rates fell to single digit rates never before seen in the country’s history.
At the macro level, large corporations also benefited from the massive amounts of liquidity in the global and local financial systems.
Firms took advantage of low interest rates to take on cheap debt or refinance their existing ones, retiring old expensive bonds and replacing them with longer-dated obligations at lower cost.
But all good things must come to an end, and the US Federal Reserve had ended its quantitative easing program early this year.
In fact, it is now preparing to raise interest rates for the first time since the onset of the global financial crisis seven years ago.
So is the Philippine economy—having grown accustomed to cheap money for the better part of the last decade—ready for higher interest rates?
The Bangko Sentral ng Pilipinas thinks the country is ready.
BSP Governor Amando M. Tetangco Jr. said the Philippines was in a “good position” to weather the effects of tighter monetary policy, in part because regulators had long prepared for it by implementing prudential measures as early as last year.
“In 2014, we increased reserve requirements and rates,” Tetangco said in a recent interview. “Those preemptive measures were designed in anticipation of the US Fed lift-off. That was one of the things and those haven’t been unwound, and they’re still there.”
Thanks to the BSP’s move of gradually tightening local monetary policy (through levers like its special deposit accounts, reserve requirements and its key overnight borrowing rate), the local financial system has started to be gradually weaned off cheap money.
Tetangco is hoping that by the time the US Fed actually raises its key interest rates—whether late this year or early next year—the Philippine economy will have already factored it into local prices, thus reducing any potential shock.
Nonetheless, the central bank chief noted that any US Fed tightening could still adversely affect the local economy as the flow of capital would likely return to the US and other advanced economies—something that the Philippines’ strong macroeconomic fundamentals would help the country weather.
Even large corporations are preparing for the US Fed’s inevitable move.
Publicly listed Ayala Land Inc. has drawn up measures to mitigate the impact of the looming interest rate hike by the US Federal Reserve, which would lead to higher borrowing costs around the world, including the costs of local bank loans on which the property developer relies for sales.
In a briefing, Ayala Land chief finance officer Jaime Ysmael said the company had been refinancing its liabilities to shift from floating-rate toward fixed-rate loans, as well as lengthening their maturity.
“At present, about 82 percent of (the interest rate on) our loans are already fixed,” he said. “Our target is to have a 90:10 mix in favor of fixed interest rates, even if it means having to pay a little more.”
Ayala Land is the country’s second-most valuable real estate firm. It owed creditors P123 billion as of March 2015.
The official explained that moving Ayala Land’s exposure to slightly more expensive fixed-rate loans would benefit it since it would take out the risk associated with fluctuating funding costs, especially with the cost of money expected to rise over the next few years.
Higher interest rates would mean more expensive borrowing costs for prospective buyers of Ayala Land’s real estate products like high-rise condominium units and house and lot units.
It could also adversely impact mortgage rates for existing buyers, which may lead to defaults—a scenario that remains unlikely at present, Ysmael said.
The Philippine economy, however, is fortunate enough to be buttressed by two strong pillars: consumer spending and dollar remittances from overseas.
Because of these two factors, UBS senior global economist Paul Donovan believes that the impact of the US Fed hike on the local economy would be “relatively limited.”
“I don’t think a Fed tightening policy will create alarm in the Philippine economy and rates. The Philippine economy is still relying on a stable consumer sector,” he said in a recent briefing.
No doubt that, over the next few months, credit will tighten and spending will become slightly muted all throughout the economy.
But with ample warning from players both here and overseas—and enough leeway, in terms of ensuring that any monetary tightening is done gradually instead of suddenly—it is difficult to imagine any responsible investor or consumer being caught flat footed.
Everyone has been warned.
Subscribe to INQUIRER PLUS to get access to The Philippine Daily Inquirer & other 70+ titles, share up to 5 gadgets, listen to the news, download as early as 4am & share articles on social media. Call 896 6000.