RISING INTEREST RATES will put more pressure on consumers and small businesses in the Philippines, as many are still recovering from the economic shock brought by the coronavirus pandemic, Fitch Ratings said.

In a report “Impact of Rising Interest Rates on APAC Banks,” Fitch Ratings said conglomerate-owned corporate borrowers will have stronger financial buffers to handle the expected rise in interest payments.

“We believe there are lingering impairment risks among consumer and SME (small and medium enterprise) borrowers whose finances have yet to recover from 2020’s severe shock,” it said, referring to the impact of pandemic-related lockdowns on many consumers and businesses.

Fitch Ratings noted that Philippine banks saw the biggest increase in nonperforming loan ratios among major Southeast Asian economies in the last two years, mainly due to higher delinquencies in consumer loans and the early end of loan forebearance.

The Bangko Sentral ng Pilipinas (BSP) last month raised its benchmark interest rates by 75 basis points (bps) in a surprise off-cycle move, as it sought to contain broadening inflationary pressures. It has raised rates by 125 bps since May.

The key overnight borrowing rate is now at 3.25%. The rates for overnight deposit and lending facilities were also hiked by 75 bps to 2.75% and 3.75%, respectively.

Rising interest rates will have a “mildly favorable” net revenue impact on Philippine banks, and “moderate” impact on asset quality, Fitch Ratings said.

It said adjustments in the policy reverse repo rate “have not historically been fully passed through to bank lending rates.”

“The conglomerate-dominated business landscape gives corporates considerable bargaining power, and competition for high-quality assets often means that banks are hesitant to raise rates quickly. Therefore, we expect lending spreads to widen only moderately,” it added.

The Philippines has one of the most liquid banking systems in Asia-Pacific, Fitch Ratings said. It noted that the high proportion of “rate-insensitive CASA (current account/saving account) deposits” allows Philippine banks to better manage deposit costs.

Fitch Ratings said it expects the policy rate to reach 4% by the end of 2023. — KBT