The Philippines has plenty of room to expand its private-sector leverage to boost domestic consumption and sustain growth, according to a report released by an international banking institution.
In its latest report titled “Asia leverage uncovered,” Standard Chartered Bank said that it places the Philippines in the low-risk category and sees room for further leverage.
Leverage is the use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.
“We place the Philippines in the low-risk category and see room for further leverage. We expect credit growth to remain healthy and well managed in the next few years,” Standard Chartered economist Jeff Ng said in the report.
He added that the bank’s view on the risk of over-leveraging in the Philippine economy is modest, although loan growth has picked up since 2011. Over-leveraging means incurring a huge debt by borrowing funds at a lower rate of interest, and using the excess funds in high-risk investments in order to maximize returns.
“Robust economic activity is likely to continue to support loan growth in the medium term, particularly for the corporate sector,” he said.
Furthermore, Standard Chartered expressed optimism on the country’s economic growth, which expanded 7.8 percent in the first quarter of the year.
“We are optimistic that the Philippines’ economic growth will outperform the region over the next couple of years,” Ng said.
Increased household leverage would also help to sustain the recent strength in consumer demand, a significant contributor to gross domestic product (GDP) growth.
Meanwhile, the report continued that with the low level of leverage in the economy, there is room to finance the government’s ambitious public-private partnership (PPP) infrastructure investment plans.
The economist said that corporate loan growth will be driven by investment growth, the PPP model, sovereign credit-rating upgrades to investment grade and bullish sentiment on the ground, noting that low domestic interest rates and flush liquidity will provide a supportive setting for economic activity.
“With credit growth having a hard floor and ceiling, we believe leverage is in the ‘Goldilocks’ zone that is conducive to economic activity—growth is not too hot and not too cold,” he added.
Low investment-to-gdp ratio
Ng also stated that the Philippines needs leverage to cover the shortfall in growth capacity caused by a sluggish investment climate and low per-capita GDP relative to neighbors like Thailand and Indonesia.
“A reasonable level of loan growth with the proceeds used for productive investment builds productive capacity for the future,” he added.
“We believe the marginal benefits of current loan growth levels are high, given that the Philippines’ investment-to-GDP ratio lags the region,” he said.
However, the economist warned that a sustained increase from current loan growth rates over the medium term could drastically increase the risk of over-leveraging in the country.
“It is important that higher loan growth translate into investment in productive economic capacity, which we have not seen in the Philippines in the past decade. Hence, government efforts to combat excessive liquidity in the system are particularly important,” he added.