BIG BUSINESSES in the Philippines could have a hard time coping with rising interest rates, an economic research group said, as this would mean higher costs and a growing debt stock.
Analysts at Natixis Research said that tighter financial conditions in the country do not bode well for local conglomerates, since these add pressure to “excessive” debt they may have accumulated.
The Bangko Sentral ng Pilipinas (BSP) fired off three rate hikes in a row this year in the face of surging inflation. Benchmark yields have risen by a cumulative 100 basis points from May to August as policy makers sought to rein in inflation expectations in an attempt to temper price increases for basic goods.
Inflation surged to a fresh multiyear high at 5.7% in July, with the central bank seeing the year-on-year increase even bigger this August.
Prices have risen by an average of 4.5% in the first seven months, well above the central bank’s 2-4% full-year target for 2018.
Natixis economists Alicia Herrero and Gary Ng said overall financial conditions have “worsened” especially for large companies and could signal deteriorating fiscal health for these firms.
“All in all, when push comes to shove, the Philippines’ firms are not in the best of circumstances to handle rate hikes. Externally, the Fed is hiking and the BSP will have to increase rates in the light of higher inflation and to stem off capital outflows,” the economists said in a report published last week.
“With the high corporate leverage, firms could face a hard time onwards in the rate cycle.”
Natixis said segments of the economy have been under pressure from a weaker peso, an “underperforming” stock market, a growing trade gap and a potentially bigger budget deficit as the government spends more on infrastructure.
“The top 25 firms by asset size have high leverage, low repayment ability and worsening financial health,” the France-based research group said, noting that the peso’s depreciation has also driven up business costs as they absorb rising prices.
“As a consequence, profit margin is down even though they are divesting. On the basis of structurally low revenue stream, a lack of capex and much higher leverage in a higher interest rate period, their prospects are poorer.”
The 25 biggest companies in the country had an average leverage ratio — or debt against equity — of 228% in 2017, against a 114% average of smaller counterparts, according to Natixis.
BSP Governor Nestor A. Espenilla, Jr. has kept the door open for further increases in benchmark interest rates, saying that monetary authorities are ready to “take all necessary policy actions to address the threat of high inflation” following their Aug. 9 policy meeting. — Melissa Luz T. Lopez