Expansion of firms at risk due to higher rates

MANILA, Philippines — Higher interest rates may address the monster inflation in the country but may soon constrict Philippine companies’ capacity to expand as borrowing costs rise, according to industry players.

“Companies will further be saddled by the additional burden of borrowing and overhead costs. It’s a major domino effect. Almost all segments will be affected. And there may be another 50 basis points rate hike and effects will result in exaggeration of other costs,” said a director of a listed conglomerate who declined to be named.

“If you’re an importer of raw materials, your cost of imports – because of the peso depreciation – has automatically become more costly or prohibitive. If you’re accessing banks to support your imports, you will be saddled with the additional costs of the resulting 50 bps interest rate hike,” the source said.

The Bangko Sentral ng Pilipinas (BSP) raised interest rates last week by another 50 basis points to tame inflation, the second in two months and the fourth hike since May, bringing the central bank’s policy rate to 4.5 percent.

On the other hand, some players concede it’s a positive step taken by the BSP given the conditions in the global environment.

“The 50 bps will make it more expensive to borrow, but it’s a good move  by the BSP in light of rising interest rates,” JG Summit Holdings Inc. president and CEO Lance Gokongwei told The STAR over the weekend.

And while higher interest rates would also increase borrowing costs, Gokongwei said that in the case of JG Summit, most of its loans are fixed-term borrowings.

“Most big companies like JG Summit have strong balance sheets though, with most of our loans already fixed long term,” he said.

But investment bankers said borrowing costs would increase and this would translate to lower returns for companies.

“Borrowing would be more expensive, hence the returns are lower. Also, the cost of equity of companies would also rise as risk-free rates such as government bonds are also rising,” said a banker from a foreign firm.

The result is that expansions and acquisitions would be more costly and this in turn, may dampen growth.

Christopher Mangun, head of research of Eagle Equities said corporate growth depends on borrowing from the banks.

“But because of the interest rate increase, companies are borrowing less. Investors have been selling bank stocks since the BSP started raising interest rates because investors know that the banks will make less. BSP is raising rates because to them corporate/economic growth is a long term concern and they are trying to deal with a short-term problem which is inflation,” Mangun said.

In the end, consumers will then be affected substantially.

“Additional costs will have to be recaptured eventually via sales. Sugar for example has affected almost all costs – soft drinks, bread, other staples. Another sector that would be affected is real estate,” said another source, also a director of a listed company.

But Reggie Cariaso, president of Ayala-owned BPI Capital Corp. said that while borrowing costs may increase, it’s not necessarily more difficult.

“It does make borrowing more expensive but not necessarily more difficult. It should also make corporate borrowers more disciplined about making investment decisions,” Cariaso said.

Emilio Neri Jr., lead economist at BPI said the BSP hikes would raise the cost of borrowing for both companies and households but at the same time, he said the current levels are still manageable.

“I still do not see the hikes and even forthcoming hikes having a meaningful dent on the economy’s growth potential,” he said.

Ed Francisco, president of BDO Capital said clients should be able to bear the higher financing costs because rates are still relatively low compared to a decade ago.