More than a year after the US sneezed from its subprime mortgage troubles, the Philippines, unlike other Asian countries, did not catch a cold, local financial experts said.
 
Two factors explain why the twin impact of collapsing real estate and banking sector did not reach our shores: Our overseas workers, and to an extent, the outsourcing companies, kept buying or leasing real estate products no matter what. With the real estate market still vibrant, the local banks, already equipped with lessons during the hubris lending in the nineties, have remained healthy and liquid.
 
In a forum last August 29 entitled "The US subprime meltdown: Will the fallout hit RP?" attended by local financial sector experts, Danilo Antonio, managing director of Credit Rating and Investors Services Philippines Inc., gave assurance that since the subprime blowout, the Philippine property sector as well as capital markets stayed healthy.
 
"The boom is far from over because there's a huge backlog in demand for housing in the country," he said.
 
In mid-2007, fears of the end of the country's property boom began to escalate due to tightening access to mortgage loans not only in the US, then a major market for local real estate developers, but also globally.
 
The seriousness of the US subprime mortgage trouble was realized in June 2007 following the collapse of two hedge funds managed by New York-based Bear Stearns, which at that time, was one of the world's largest investment banks. The rippling effects required the injection of billions of dollars into the system for liquidity.
 
Stable OFW and BPO markets
 
Antonio expounded on reasons why effects of the subprime crisis are hardly felt here. For one, he said the Philippines has reduced dependence on the US and started to diversify markets. The country is now heavily marketing its property products to buyers in Asia, the Middle East and Europe.
 
Antonio further said that rather than building high-end projects catering to the few elite, most property firms have embarked on an aggressive expansion in the middle-income and low-cost housing segments that have wider market reach.
 
He said affordable houses priced from P1 million to P2.5 million and medium- and high-density condominiums that cost between P2.5 million and P5 million are considered as "hot items" today.
 
"Cheap housing has unlimited demand," he said.
 
Antonio emphasized that this buoyant demand particularly comes from more than 10 million overseas Filipino workers (OFWs) who send home at least $1 billion in remittances monthly.
He said majority of customers buy homes for "end use" and not as an investment which they could sell at higher rates.
 
Not even rising loan interest rates could hurt this demand. "These OFWs really want to buy so they save. If in case they need to borrow, a point or so difference in rates doesn't really matter. They'll still take whatever funds are available," Antonio pointed out.
 
Apart from OFWs, he said the burgeoning business process outsourcing industry also has strong appetite for property developments.
 
More capital as RP banks stay liquid
 
The continued growth in the real estate sector is bolstered by ready credit lines provided by the country's highly liquid banks.
 
Antonio said Philippine banks could well weather a global financial turmoil, set off by problems with subprime mortgages in the US.
 
Subprime mortgages are loans granted to homeowners who have poor credit standing. Real estate agents in the US enticed customers to avail of homes through loans from banks that carry adjustable interest rates.
 
These homes also had minimal down payment requirements that spurred more demand, which in turn, led to an increase in housing prices.
 
Banks and other financial institutions repackaged the subprime loans with less risky ones, spawning the so-called collateralized debt obligations, and sold them to investors such as mutual funds and hedge funds worldwide. These high-risk instruments were attractive because they had higher yields.
 
However, when more and more borrowers defaulted, investors started to dump these assets, pushing their prices down. Homes were foreclosed and many mortgage lenders filed for bankruptcies. The backlash was global.
 
Only, here in the Philippines, "there is really no evidence" that any of the financial institutions were exposed to these soured debts, according to Gamaliel Pascual, senior advisor at Regina Capital Development Corp.
 
"Our banks seem to be healthy and liquid," he said.
 
Pascual also said that the Philippine mortgage market is "primitive," meaning banks still need to fully utilize the securitization law, which is still at its infancy. The law allows the transfer or sale of assets and asset-backed securities of banks to a special purpose vehicle.
 
Lastly, Pascual noted that local banks are more cautious with their lending and have stronger capital bases that equip them to withstand massive loan defaults.
 
Indirect effect on stock market
 
Pascual pointed out that the subprime crisis so far affected the domestic equities market only indirectly, in the form of risk aversion.
 
The possibility of a global credit squeeze, leading to an economic recession in the US, Asia's vital trading partner, sent jitters to stock markets in the region including the Philippines.
 
As a result, investors started pulling out, sending the markets to their worst levels. The Philippine Stock Exchange, for one, entered into bear territory as early as January 22, when the key index settled at 2,978.41, down 24 percent from its peak of 3,896.74 last October 8, 2007. A bear market is defined as one that falls by more than the threshold of 20 percent from record high.
 
In the first half, the local bourse lost 32 percent to 2,459.98 due to continuous flight of institutional foreign investors.
 
Pascual said these investors opt to put their money in more appealing investments like commodities.
 
"The thinking of investors is to go out of the Philippines first and speculate in commodities like oil and metals," he said.
 
Pascual added that speculation in oil, which factors in dwindling supply or any threats to production, is partly to be blamed for the sharp spike in crude prices, another whammy for the equities market.
 
"When oil prices are high, inflation gets higher too. This is another thing that investors are scared about in the Philippines."