Rate cuts to spur loan demand this year — UBS

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THE PHILIPPINE banking industry may likely see double-digit credit growth this year on strong demand for loans amid a robust economy, better asset quality, and expectations of benchmark interest rate cuts, UBS Global Research and Evidence Lab said.

Philippine credit growth may hit above 10% this year, Grace Lim, an economist from UBS, told reporters in a webinar on Wednesday.

“Increasing GDP (gross domestic product) growth as well as solid nominal GDP growth is the reason. We don’t see any evidence of asset quality risk. And as rates come down a little bit, that could spur demand for loan growth,” she said.

Based on the latest Bangko Sentral ng Pilipinas (BSP) data, outstanding loans issued by universal and commercial banks rose by 7% to P11.701 trillion as of December 2023 from P10.931 trillion a year ago.

Credit growth slowed for most of 2023, reflecting the impact of the BSP’s aggressive rate hikes.

Ms. Lim said UBS is also positive on asset quality in the Philippine banking sector.

Banks’ nonperforming loan (NPL) ratio slid to 3.23% as of end-December from 3.41% at end-November. It was the lowest since the 3.16% recorded at end-December 2022.

Soured loans stood at P446.99 billion as of December, rising by 12.09% from a year earlier but down by 1.6% from end-November.

Ms. Lim also said that planned public-private partnership (PPP) projects could also spur demand for loans, likely towards the second half.

“Big-ticket PPPs, if they do come through, could be another source of growth,” she said.

The research firm earlier raised its 2024 Philippine GDP growth forecast to 5.7% from 5.3% previously. It also hiked its 2025 projection to 6% from 5.8%.

However, both forecasts are below the government’s growth targets of 6.5-7.5% for this year and 6.5-8% for 2025.

“We are quite cautiously optimistic,” Ms. Lim said. “We expect robust growth of 5.7% in 2024 with some upside risk to consumption if inflation falls quickly enough.”

She said private consumption is expected to remain resilient this year as the jobs market remains strong and inflation eases.

The unemployment rate fell to a record low of 4.3% in 2023, translating to 2.19 million jobless Filipinos.

Headline inflation also slowed to an over three-year low of 2.8% in January from 3.9% in December and 8.7% a year ago. It marked the second month inflation fell within the central bank’s 2-4% target.

“Right now, the only pockets of price pressures we are seeing from are in terms of rice. Everything else seems to be easing quite nicely,” Ms. Lim said. “The improvement from reduced inflation could be another upside to consumption if this is sustained.”

In January, rice inflation quickened to 22.6%, the highest in nearly 15 years.

“We believe that rice prices are likely to come down from around March onwards, as the next harvest comes through,” Ms. Lim said. “Furthermore, the government is prioritizing imports, which are important interventions to mitigate the price effects of El Niño.”

UBS sees inflation averaging 3.6% this year, same as the baseline forecast of the BSP.

The research firm also sees some room for policy easing once it is more evident that inflation is staying within the 2-4% target band.

“We think that should current trends continue, we expect about 100 basis points (bps) of rate cuts, mostly in the second half of this year,” Ms. Lim said.

The BSP kept its benchmark interest rate unchanged at a near 17-year high of 6.5% at its February meeting. This was after it hiked borrowing costs by 450 bps from May 2022 to October 2023 to tame inflation.

BSP Governor Eli M. Remolona, Jr. earlier said the Monetary Board may consider cutting borrowing costs in the second half, but it intends to keep rates tight in the first semester as risks to inflation still cloud the outlook.

The Monetary Board will have its next policy review on April 4.

UBS also expects the country’s current account deficit to narrow to about -2% of GDP this year, after it will likely hit -3% of GDP in 2023.

“The main reason for that is that commodity prices have come off nicely from the spikes in 2022,” Ms. Lim said.

The forecast is also similar to that issued by the BSP, which projects a $9.5-billion deficit this year, equivalent to -2% of GDP.

The BSP also sees the current account deficit to narrow to $11.2 billion (2.5% of GDP) in 2023 from the $18.1-billion (4.5% of GDP) shortfall in 2022. — Keisha B. Ta-asan