Philippine Markets Newsletter

MONDAY MACRO: Tighter credit activity has yet to dampen the Philippines’ chances for a swift recovery from this recession

November 9, 2020

The current pandemic has changed the way people interact. Students of all year levels have to attend classes online, while employees are trying to find ways to make working at home work. Even meeting people outside is a strange experience, with face masks and face shields on while maintaining sufficient physical distancing.

With unconventionality being the norm in 2020, Uniform Accounting reveals just how important this overlooked indicator for economic activity is going forward.

Philippine Markets Daily:
The Monday Macro Report
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As of November 6, the Philippine Peso (PHP) continues to marginally improve against the US Dollar (USD) with PHP 48.22 traded for USD 1. This has been an improvement of 4.9% since the start of the year when the exchange rate was at PHP 50.66 per USD. Meanwhile, this was also its highest in the past four years, influenced by optimism in stock markets worldwide as Democratic candidate Joe Biden became the likely winner of the US presidential elections.

As we previously mentioned on our October 5th Monday Macro report, currency appreciation can be either good or bad, depending on the state of the economy.

The Philippines’ currency appreciation against the USD is a good thing when the local economy is booming. A stronger domestic currency means local consumers have access to cheaper imported goods and can purchase more for the same amount they are willing to spend. This also helps keep the inflation rate low.

On the other hand, during periods of economic weakness, a higher domestic currency is a negative thing because it makes local goods more expensive in the global market. When exports become expensive, other trading partners are likely to shift to purchasing their goods elsewhere. Local businesses then suffer from lower revenue, leading to lower income available to workers and eventually, to higher unemployment rates.

The Bangko Sentral ng Pilipinas (BSP) has been actively managing the Philippine economy to minimize the damages caused by this recession. However, continued weak domestic economy and muted consumer spending and aggregate demand remain expected as local businesses are still unable to bounce back to pre-pandemic levels.

One of the tools the BSP uses to uphold their mandate to keep prices stable is to adjust interest rates accordingly. Lower interest rates encourage higher borrowing and higher consumer spending while higher interest rates encourage saving.

So far this year, the BSP has reduced the policy rate by 175bps to 2.25%. By reducing rates, the BSP wanted to make it easier for local banks to lend to businesses or individuals during this pandemic. It was a means to spur economic activity.

Unfortunately, this has not yet translated into the outcome that the BSP set out to achieve. Even at lower interest rates, banks continue to tighten their lending as seen in the BSP’s Senior Bank Loan Officers’ Survey (SLOS) for Q3 2020.

As a recap, SLOS is a quarterly survey from the BSP that illustrates banks’ lending behavior, an important indicator of the strength of credit activity in the country. These credit standards were based on enforcement and policies of loans.

The red bars with white dots above indicate that 48% of respondent banks tightened their credit standards of lending to enterprises in Q3 2020, either “somewhat” or “considerably,” based from the previous quarter.

Meanwhile, the blue bars in the middle indicate that 45% of banks decided to maintain their credit standards for the quarter relative to last quarter.

Finally, the striped bars below show that 7% of banks “somewhat eased” their credit standards in lending loans to enterprises compared to to the previous quarter.

The survey revealed an improvement from Q2 2020 where 69% of respondents tightened their credit standards and only 6% eased. With just 48% further tightening their credit standards in Q3 2020, this shows fewer banks are concerned about lending.

Furthermore, 31% of the survey respondents increased their lending for Q3 2020 versus last last quarter.

However, a large percentage of respondents still expect to tighten their loans to enterprises over the next quarter due to the uncertain economic outlook. That said, the BSP is still confident that the easing of pandemic-related government-imposed restrictions around the capital would stimulate economic activity and lead to banks loosening credit standards. As such, the BSP decided to maintain its interest rates.

Apart from managing interest rates to maintain the health of the economy, the BSP adjusts the reserve requirement ratio (RRR). The RRR is a conventional monetary tool used to control the money supply as it measures how much banks must set aside instead of lending out.

The Philippines’ RRR is currently at 12% after the BSP lowered the requirement from 15% in March 2020. This number is still higher than the single-digit reserve ratios in neighboring countries, meaning the BSP has a lot more room to adjust this down to manage the economy.

Furthermore, effective government spending from the Bayanihan laws and the 2021 budget can complement the BSP’s monetary policies. These fiscal tools have the capacity to improve the healthcare system and contain the spread of coronavirus, boosting consumer confidence and infecting inflation as well.

As mentioned in one of our previous Monday Macro reports, Philippine corporations still have enough liquidity to pay their financial obligations without defaulting going forward. With this, combined with a resilient banking sector, and the government’s conventional monetary and fiscal tools, the Philippines still has a large potential for a faster recovery than in credit-driven recessions.

About the Philippine Markets Daily
“The Monday Macro Report”

When just about anyone can post just about anything online, it gets increasingly difficult for an individual investor to sift through the plethora of information available.

Investors need a tool that will help them cut through any biased or misleading information and dive straight into reliable and useful data.

Every Monday, we publish an interesting chart on the Philippine economy and stock market. We highlight data that investors would normally look at, but through the lens of Uniform Accounting, a powerful tool that gets investors closer to understanding the economic reality of firms.

Understanding what kind of market we are in, what leading indicators we should be looking at, and what market expectations are, will make investing a less monumental task than finding a needle in a haystack.

Hope you’ve found this week’s macro chart interesting and insightful.

Stay tuned for next week’s Monday Macro report!


Angelica Lim
Research Director
Philippine Markets Daily
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