PH economy shows signs of credit boom, says Fitch

Posted at 08/09/2012 6:51 AM

MANILA, Philippines - The speed by which local banks extend loans to private- sector borrowers is quickening, indicating an economy just beginning to show early signs of a credit boom, the global credit watcher Fitch Ratings said in its most recent report on the Philippines.

The Fitch report consequently drew worried comments about another asset price bubble burst, which executives like Alfonso “Yogi” Salcedo Jr., executive vice president and head of corporate banking at the Bank of the Philippine Islands (BPI), dismissed as an unlikely development this early in the economy’s continued expansion.

According to Salcedo, BPI executives had held regular discussions with real-estate developers the past several months and the sense that bankers got was that the feared asset bubble bursting at some point forward was a highly unlikely event.

He said in an interview that the real-estate developers noted that housing supply continues to fall short of demand by a huge number, making it highly unlikely that the housing sector will implode under the weight of unsold inventory unraveling at some point in the near term.

Salcedo added that the housing executives drew up deliberately bloated housing supply aggregating 500,000 units in Metro Manila where some 12 million Filipinos live and pointed out that the number speaks for itself.

He said the number includes middle- and high-end housing units in some of the most affluent residential areas of Metro Manila and some 150,000 new condominium units coming on stream between now and 2016.

The supply of new housing units was on top of existing inventories that are yet to find buyers, Salcedo added.

“While there may be some correction along the way to consider the mismatch between demand and supply, the trend over the next five years is okay. We do not see a bubble,” he said.

Even with prevailing low interest rates persisting for many months to come, mortgage loans were not seen accelerating at an obscene pace of growth down the line, Salcedo added.

“Our mortgage loans-to-GDP (gross domestic product) ratio is low. It is in single digit and compares with other markets in the region where ratios are in the 25 to 35 percent of GDP,” he said.

With mortgage-loan penetration still a long way off critical, activities in the housing sector are not even a major growth contributor, Salcedo added.

Fitch previously noted the pace of private-sector credit surging back to 32 percent of GDP at end-2011 and outpaced nominal GDP during the period.

“The pace of real credit growth in 2011 (10.9 percent), and the continued acceleration of nominal credit growth to 18.7 percent year-on-year in March 2012, suggests the Philippines could be in the midst of a nascent credit boom. Such a boom has the potential to be sustained on a multi-year basis, due to the ample onshore liquidity,” it said.

Bank lending continued to surge in May this year, averaging 14.7 percent to P3.11 trillion based on updated records at the Bangko Sentral ng Pilipinas.

“In the near-term, this could prove highly favorable for the government’s PPP [Public-Private Partnership] program, as it could limit the need to rely on overseas financing. Over the longer term, however, it is likely to test BSP’s macroeconomic management abilities after so many years of sustained onshore deleveraging,” Fitch said.

This pertained to a period during which Philippine banks exhibited a prolonged period of deleveraging after weathering the Asian financial crisis of 1997-1998.

During that period, private-sector credit fell from 67 percent of GDP in 1997 to 28.9 percent in 2007. As a result, the system-wide loan/deposit ratio (LDR) has also fallen--from 86.6 percent in 1998 to 70 percent at end-2011, Fitch said.