Rate cuts to spur fundraising in 2nd half

Firms’ fundraising and lending activities are seen to surge in the second half of this year amid the expected easing by the Bangko Sentral ng Pilipinas (BSP).

“The BSP’s possible policy shift signals a positive step towards fostering capital formation within the Philippines. By lowering borrowing costs, the central bank is essentially making it cheaper for businesses to secure funding,” Rafael S. Algarra, Jr., East West Banking Corp. group head for financial markets and wealth management, said in an e-mail. 

First Metro Investment Corp. Head of Research Cristina S. Ulang said that expected rate cuts will “cheapen” credit, which is good for companies looking to borrow.

This will also “encourage expanded capex (capital expenditure) programs of companies (and) enable greater access to fundraising channels and all for the uplift of overall economic activities,” she said in a Viber message.

Markets are widely anticipating the central bank to begin its easing cycle next month. This as BSP Governor Eli M. Remolona, Jr. has repeatedly signaled that they are on track to cut rates on Aug. 15, the Monetary Board’s next policy review and only meeting in the third quarter.

Mr. Remolona has said that the BSP can cut rates by up to 50 basis points (bps) this year, split into 25-bp cuts in the third and fourth quarters. 

For Mr. Algarra, markets have already been “grappling with a prolonged period of high interest rates.”

“This restrictive monetary environment has understandably led businesses to postpone expansion and new projects due to the high cost of borrowing,” he said.

From May 2022 to October 2023, the Monetary Board has raised borrowing costs by a cumulative 450 bps.

This brought the key rate to an over 17-year high of 6.5%.

If the BSP cuts rates in August, this would be the first reduction since the 25-bp cut delivered in November 2020 amid the COVID-19 pandemic.

Mercantile Securities Corp. Head Trader Jeff Radley C. See said these latest signals from the central bank would lead to a higher possibility of fundraising by companies.

“Cutting rates will signal bullish sentiment for the property sector, especially real estate investment trusts (REITs),” Mr. See said in a Viber message.

For his part, D&L Industries, Inc. President and Chief Executive Officer Alvin D. Lao said the impact of lower rates would be felt in terms of lower interest expenses on existing loans.

“I believe that, for firms in general, almost everyone has been expecting rates to drop since last year and (have) been likely holding off taking out big loans in anticipation of lower rates. It is likely that borrowing activity may increase as rates are cut,” he said in an e-mail.

Damosa Land President Ricardo F. Lagdameo said that most firms will be able to ramp up capital spending amid lowered interest rates.

“I think for the most part, many developers have continued their capital spending activities despite elevated rates to take advantage of opportunities today. With rates beginning to come down soon, spending will likely increase,” he said in an e-mail.

This could also possibly bring down costs for consumers, Mr. Lagdameo said.

“Apart from us as developers being able to enjoy lower interest rates soon (hopefully), what will also provide more confidence is that interest rates for borrowers or end users of real estate products will also normalize. I anticipate that this will create more demand for homes,” he added.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said that rate cuts would also boost stock market activity.

“Rate cuts would also help improve market conditions in terms of higher stock market prices that would eventually encourage more share sales in terms of initial public offerings (IPOs), secondary offerings, preferred shares, stock rights offerings, among others,” he said in a Viber message.

The Philippine Stock Exchange (PSE) is targeting six IPOs this year. So far this year, the local bourse has had three IPOs: OceanaGold (Philippines), Inc.; Citicore Renewable Energy Corp.; and NexGen Energy Corp.

On the other hand, Mr. Algarra said that the full impact of the rate cuts may not be felt immediately.

“While we anticipate an uptick in fundraising activities, we believe a more significant acceleration will likely materialize in the early months of next year. This is due to the time it typically takes for businesses to finalize investment plans and secure financing,” he said.

For the coming months, Mr. Algarra said it will be crucial to monitor key indicators such as loan disbursements, investment approvals, and business sentiment.

“These metrics will provide valuable insights into the effectiveness of the BSP’s policy shift and its ultimate impact on the Philippine economy.”

“Overall, the BSP’s decision to cut rates presents an opportunity to break free from the constraints of high borrowing costs and propel the Philippines towards a period of renewed economic growth,” he added. – Luisa Maria Jacinta C. Jocson, Reporter