Beware of ‘zombie’ firms, BPI economist warns

A prolonged period of “negative” interest rates in the country can only breed “zombie” firms, referring to businesses that are essentially dead or insolvent and drowning in debt and only living off ultra cheap credit, lead economist of Ayala-led Bank of the Philippine Islands (BPI) said on Tuesday.

This is among the three side affects of having interest rates that are too low, along with the propensity of driving excessive risk-taking and widening social inequality as wages could not cope with the surge in prices of property and other assets, BPI economist Emilio Neri Jr. said in a webinar.

The Philippines has been under a regime of negative real interest rates—where benchmark interest rates are much lower than the inflation rate—for the last 17 months, noted Marco Javier, lead market strategist at BPI’s economic research team. But he said the country was not alone in this situation, noting that Thailand and Malaysia were in the same boat.

“But the Philippines has been the most aggressive … We are of the belief that the BSP (Bangko Sentral ng Pilipinas) may have over-cut its policy rate last year,” Javier said.

To cushion the impact of the COVID-19 pandemic, the BSP has slashed rates by 200 basis points to a record-low 2 percent since last year. Thailand and Malaysia have reduced their rates by just 75 basis points and 100 basis points, respectively.

But while Neri would have wanted the BSP to start adjusting rates back to normal levels sooner, he said it’s unlikely that this would happen before June next year. He noted that in the last three presidential elections, the BSP always refrained from adjusting interest rates higher during the five-month period before every presidential race.

One hardly-talked about side effect of having negative interests rates is the proliferation of “zombie” firms, Neri said.

These are the companies that survive only because interest rates are too low or even negative, citing the case of bankrupt American retailer JC Penney. Even if their business model was now obsolete, Neri said such zombies were usually dependent on government support and were usually the “crony” or “connected” firms with strong political lobbying capability.

If interest rates get any higher, he said such zombies wouldn’t be able to serve their debt.

“I’m not saying we have such firms in the Philippines but we could be breeding them already because we’ve been feeding them with negative interest rates,” he said.

Neri agreed with political economist Joseph Alois Schumpeter, the father of the concept of creative destruction, who argued that such firms should be allowed to pass away and let the young ones in the startup take over in order to encourage innovation and entrepreneurship.

On the widening of inequality, Neri said the pandemic should have been a chance for property prices to decline a bit and become more affordable after being driven higher by demand from Philippine offshore gaming operators (Pogos).

But even during the pandemic, he noted that the Philippine residential property prices still increased. “It did see a decline in some segments this year, but not enough to be able to remove the froth from from the POGO-driven rally over the past five years,” Neri said.