The offensive-defensive equilibrium

In one of the favorite sports leagues of most Filipinos, the National Basketball Association (NBA), there are many good teams featuring superstars that provide excellent entertainment, win a lot of games, and make deep playoff runs but unfortunately do not end up winning the championship. Although basketball is a very complicated sport with many nuances, an NBA team’s lack of success can largely be simplistically attributed to an overdependence on either one of offense or defense to compensate for the inadequacy of the other. This pattern was proven true in the 2020 NBA Finals where the defensive-minded Miami Heat fell to the well-balanced Los Angeles Lakers due to an inconsistent offense, and again in the 2021 Eastern Conference Semifinals where the Brooklyn Nets, one of the greatest offensive teams ever assembled with scoring juggernauts Kevin Durant, James Harden and Kyrie Irving, were defeated by the more versatile eventual champions, the Milwaukee Bucks, because of an almost inexistent defense.

Bangko Sentral ng Pilipinas (BSP) strategy

The balance between offense and defense is most likely the same guiding principle being employed by the BSP in managing the Philippine economy, as evidenced by its recent monetary policy moves. When the COVID-19 pandemic struck, the BSP immediately went on the offensive and, without hesitation, cut 200 basis points from key policy rates in 2020 to provide relief to a steadily contracting economy. The BSP subsequently played defense with the same vigor, raising key policy rates by a total of 450 bps in 2022 and 2023 in order to arrest skyrocketing commodity prices resulting from Russia’s invasion of Ukraine. The BSP’s response to these past two major economic disruptions, as reflected by their policy moves, has been very commendable and laudable because they have stuck to fundamental economic principles in the management of our economy, which dictate cutting interest rates to spur economic growth and raising interest rates to limit soaring input prices, and they have done both actions convincingly to the hilt to serve as sources of economic and market stability during uncertain times.

Since the last round of interest rate hikes in October 2023, the BSP has understandably erred on the side of caution in its succeeding policy moves, extending its defensive stance and maintaining an elevated interest rate environment given the even more complex global economic situation marred with unpredictable and fluctuating inflation data and unforeseen geopolitical tensions. Staying faithful to the offensive-defensive playbook earlier alluded to, however, the BSP has also begun to cut interest rates, albeit more gradually than expected, already slicing 75 bps from key policy rates since the peak, but has really pivoted more toward aggressively loosening banks’ reserve requirement ratio (RRR) to a mere five percent to inject more liquidity into the financial system for the more efficient use of capital as well as to send dovish and expansionary signals to the market.

The BSP’s RRR cuts have been a welcome development for the growth and expansion of the country’s economy, but they are rationally viewed more as a prelude or an introduction rather than the main move, with the main move ultimately still being larger interest rate cuts. To use basketball parlance further, RRR cuts just serve as the assist component of an alley-oop prior to the slam dunk. As currently structured, even though financial institutions have more funds to lend out due to RRR cuts, some corporations and consumers may still hesitate in borrowing, spending or investing because they might still find borrowing costs too high and would instead wait on the sidelines for further decreases in interest rates. In the grand scheme of things, RRR cuts are still a momentous step towards the right direction of injecting a much-needed stimulus into the economy, but its effects will probably be delayed and most likely be felt at a later time if and when larger interest rate cuts are implemented, with the overabundant real estate sector and broader weakening consumption spending set to benefit the most.

Corporate funding strategy

As a result of the unpredictable economic environment that can potentially vacillate towards either extreme end of the spectrum in an instant, corporations are likewise encouraged to take a page out of the offensive-defensive playbook, balancing a nimble and flexible balance sheet and debt profile while keeping in mind growth and returns objectives. The latest rounds of RRR and interest rate cuts empower more corporations to borrow more to fund their capital expenditures and growth avenues, from which the economy will benefit and receive a boost. Although waiting for interest rate cuts would definitely strengthen their bottom line, corporations might just be waiting for a day that would never come. Sure, corporations can keep waiting for interest rates to lower before borrowing, but at what cost? Before they know it, their growth plans have already been forestalled for an extended period, and interest rates have not gone down any lower. The movement of interest rates can never really be predicted with perfect accuracy anyway, and corporations are not expected to milk interest rate cuts to the last drop.

As things stand, we have already begun to see our clients shifting their borrowings from just refinancing expiring maturities to funding more of their capital expenditure plans, which is a bullish sign for the economy. We expect more corporations to follow suit, especially since nobody wants to get left behind.

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Written by Eduardo Francisco and Andrew Poblete of BDO Capital & Investment Corp. To learn more about SharePHIL, visit https://bit.ly/m/sharephil