‘Tighter bank credit adds to Philippines growth pressures’

MANILA, Philippines — Tighter lending conditions for both households and businesses could emerge as another drag on Philippine economic growth in the second half, as banks turn more cautious and higher interest rates increasingly filter through to borrowers, a global bank economist said.

Standard Chartered Bank Asia economist Jonathan Koh said business and consumer credit growth are already showing signs of losing momentum, adding to pressures from weak investment, elevated inflation and softer household spending.

“So banks are basically tightening credit conditions. And that’s not just for the consumer segment, but for the businesses as well, where we see a tightening of credit conditions,” Koh said during a virtual media briefing.

He said the tightening is evident across top corporations, large and middle-market companies and small and medium enterprises based on the Bangko Sentral ng Pilipinas (BSP)’s Senior Bank Loan Officers’ Survey.

He partly attributed the more restrictive lending environment to mark-to-market losses on banks’ holdings of government securities, which have put pressure on balance sheets and reduced their flexibility to extend credit.

“Even though banks at the moment have adequate capital buffer, these losses do, in a way, reduce a bit of that flexibility,” Koh said. “Given concerns about the growth outlook, confidence is not strong, so banks have tightened credit conditions.”

The tighter credit environment comes as the Philippine economy is already grappling with a sharp loss of momentum. Gross domestic product growth slowed to 2.3 percent in the second quarter from 2.8 percent in the first quarter, bringing first-half growth to 2.6 percent.

Standard Chartered lowered its full-year GDP growth forecast to 3.5 percent, placing it at the lower end of the government’s 3.5 to 4.5 percent target.

Financing conditions could become an increasingly important constraint in the coming months as the BSP’s previous rate hikes are transmitted to lending rates.

“Business loan growth has started to slow a little bit, and I think it’s going to slow in the coming months as interest rate hikes that we see from the BSP actually filter through to the economy and transmit into a higher interest loan rates,” Koh said.

Households are facing similar pressures. Koh said credit card and salary loan growth have begun to moderate, with tighter credit conditions expected to slow consumer borrowing further.

Citi likewise sees weak domestic demand constraining the economy. Still, it expects economic growth to rebound to the low-three percent range in the third quarter as easing inflation could support household incomes and consumption.

It maintained its full-year GDP growth forecast at 3.2 percent, below Standard Chartered’s projection and the government’s target.

The weaker growth outlook and tighter financial conditions are also feeding into the debate over whether the BSP needs to raise rates again this month.

Standard Chartered has dropped its previous call for an Aug. 27 hike, with Koh saying soft economic growth and tentative signs of easing underlying inflation give the central bank room to wait.

Citi, however, continues to expect a 25-basis-point hike in August and another in October, arguing that the current 4.75-percent policy rate remains only slightly above the BSP’s 4.5-percent inflation forecast for 2027.

Citi said the possibility of an October pause could increase if the BSP lowers its inflation forecast after its August meeting or if incoming third-quarter indicators point to continued economic weakness.