Asian firms face interest rate risks

MANILA, Philippines - Philippine companies are among those in the region that have increased their borrowings since the Asian financial crisis in 1997, putting them at risk once interest rates rise as a result of US recovery, an investment bank said.

“We have take stock of corporate leverage in Asia. Concerns have been raised about Asia’s leverage and balance sheet, given the risks of a slowdown and rising financing costs on Fed QE (quantitative easing) tapering,” Bank of America-Merrill Lynch (BofA-ML) said in a report.

According to the bank, Asian companies have increased their total borrowings to $12.985 trillion as of the first quarter, equivalent to a little more than the size of the entire region’s economy.

This was a significant improvement from $5.118 trillion in the fourth quarter of 2007, which accounted for 85.5 percent of Asia’s gross domestic product (GDP).

Companies have taken in more bank loans and piled up in corporate and state bonds, BofA-ML said, as Asia sees dramatic economic growth during the time cheap money was flowing from Europe and the US.

For the Philippines, corporate bonds were “crowded out” in lieu of bank borrowings, similar to that happening in Malaysia and Thailand.

“Asia companies are increasingly shifting to and relying on the bond market for financing… Corporate bonds have even ‘substituted’ for bank borrowings in several Asian countries,” BofA-ML explained.

As of the first three months of the year, local firms bought $12.8 billion in corporate bonds, nearly a four-fold increase from $3.5 billion in 2007. This was much higher versus the 59.2-percent rise on loans to $87.4 billion during the same period.

By portion of GDP, loans dwindled its share to just 34.9 percent from 36.5 percent, while that of securities rose to 5.1 percent from 2.3 percent.

Despite the rise in local borrowings, BofA-ML noted that corporate leverage remains “low” in the Philippines, as well as in Indonesia and Thailand.

Bank borrowings, meanwhile, drove leverage in Malaysia and China, where a credit crunch is happening, while in South Korea, corporates have sourced large financing in the bond market.

“Hong Kong and Singapore— the two financial centers— have also seen a sharp increase, possibly for companies from the immediate neighborhood,” the bank explained.

“Near-zero US interest rates have led to low domestic interest rates, which have probably led to a surge in corporate borrowings from both banks and the bond market,” it pointed out. Hong Kong and Singapore rates are pegged or based in their US counterparts.

Going forward, as the US prepares to wind down its $85-billion monthly bond buying program later in the year— which could lead to higher interest rates—, BofA-ML said corporates may take it slow in acquiring new debts.

“Asian companies, particularly in Asean, may take a more cautious approach in raising borrowings given the risk of sharply higher financing costs down the road,” the bank said.