Phl, Indonesia most vulnerable to higher interest rates

MANILA, Philippines - The Philippines is one of two Asian nations which could bear the brunt of rising interest rates, especially on the property sector, an investment bank said.

 â€œIndonesia and the Philippines are the most vulnerable to higher interest rates,” DBS said in its quarterly report on Asia.

For the past weeks, financial markets have been rattled by expectations the US would soon taper off its stimulus measures as the economy showed signs of recovery that may warrant the return to higher interest rates.

In a specific gauge of mortgage rates, DBS said the Philippines, which has seen interest rates hit all-time lows, could see annual housing payments rise by 40 percent once rates return to pre-crisis levels.

The Singapore-based lender said “that might not be a crushing blow” but a raise at that level of housing payments “would not come easily to most households.”

“When economies get over-extended, property is almost always at the center of the trouble,” DBS said. 

The real estate industry has been one of the key drivers of economic growth, which hit a surprising 7.8 percent in the first quarter, the fastest in the region. DBS forecast growth will hit 6.4 percent for the whole of 2013.

The economy is in an “extended sweet spot” with fast growth achieved against the backdrop of low inflation of three percent as of May.  The central bank has a three- to five-percent inflation target this year.

Strong growth, manageable inflation and abundant liquidity have allowed the Bangko Sentral ng Pilipinas (BSP) to keep policy rates at record-lows of 3.5 percent and 5.5 percent last Thursday.

DBS however said the scaling down of the US bond-buying program – which essentially means no more cheap money and rise of interest rates in the US – may reverse this any time soon.

Just like the rest of Asia, historic low rates in the Philippines have allowed consumers to borrow more and banks to give more credit, most of which have found their way to new homes that boosted the property segment.

 â€œLow rates and capital flows are pumping up property sectors in Asia and the eventual return of interest rates to normal levels could reveal some households and countries as having become over-extended,” DBS explained.

The case is worse for Indonesia and the Philippines, whose interest rates, despite being at their record-lows, remain “so much higher” than in other major economies in Europe and the US, it said.

 â€œThis follows partly from a large interest rate differential and partly from the fact that interest rates there (Indonesia and Philippines) are so much higher than in other countries in absolute terms,” DBS pointed out.

 â€œA 50-percent increase in Indonesian interest rates, for example, implies a 460-basis-point rise. That’s a serious move,” it added.

Nevertheless, DBS said a rise in borrowing costs in the region “could be absorbed in most cases.”