Economy 4 MIN READ

Examining inflation at its core 

Core inflation rose to its highest level in over two years in March 2023, despite headline inflation slowing to its lowest clip in six months. Why does this occur, and what are the implications?

April 26, 2023By Anna Isabelle “Bea” Lejano

Core inflation recently climbed to its highest level in over two years, to 8.0% in March 2023, from 7.8% the previous month and 2.2% in the same period last year, despite headline inflation already decelerating to its lowest level in six months.

The highest contributors to core inflation in March were food commodities—particularly milk and other dairy products as well as sugar and desserts—housing, water, electricity, gas, and other fuels, particularly housing rentals, restaurants and accommodation services, and transport (see below).

Core inflation continues to climb

Food commodities and other necessities such as housing, water, electricity, gas, and other fuels continue to contribute the most to inflation.

If headline inflation measures the year-on-year movements in the overall consumer price index (CPI), which is the average price of a basket of goods and services that is commonly consumed by a Filipino household, what does core inflation measure?

Headline vs core

Core inflation also calculates the changes in the average prices of a certain basket, but this basket excludes commodities with volatile prices such as rice, vegetables, meat, and petroleum and fuels for personal use, among others.

A common misconception is that core inflation excludes food and energy commodity prices altogether. But this is not the case, as only certain food and energy commodities are removed from the calculation of core inflation. As seen in the graph above, food commodities and other energy items are still the top contributors to core inflation.

Headline inflation is affected by factors that are historically volatile and are usually beyond the scope of economic policy. Because of this, core inflation is used as a side-by-side measure as it depicts underlying, or long-term, trends of price movements, stripping away the effects of temporary shocks and disturbances, such as a shortage in agricultural inputs or a surge in global oil prices.

Why is core inflation still up?

The still-elevated and still-increasing core inflation in the Philippines is due to broadening price pressures. It is also influenced by the impact of second-round effects. The higher prices of volatile groups have affected and have seeped into other commodity groups.

For example, a shortage in food commodities may elevate the prices of restaurants and accommodation services since the former are used as inputs for the latter.

The effects of higher transport fares and above-average wage adjustments in 2023 (second-round effects) have also started to spill over to other commodity groups, particularly non-volatile groups. Note that transport is usually the fourth-highest contributor to core inflation, while higher wages encompass different commodity groups, ultimately translating to higher prices of various products and services to make up for the higher labor expenses.

Core inflation is still seen to be elevated, given the continued impact of the second-order effects of inflation. Particularly, prices of non-volatile items may remain sticky as inflation becomes more entrenched despite headline inflation slowing.

Nevertheless, core inflation is expected to decelerate as headline inflation is already easing, but at a later time and at a more gradual pace, similar to the behavior of both measures in 2008-2009 and 2018-2019, where core inflation declined at a more muted pace than headline inflation.

Core inflation vs headline inflation

Core inflation eases more gradually than headline inflation.

The Bangko Sentral ng Pilipinas (BSP) looks at core inflation as a complementary measure to headline inflation, as the former represents the more permanent trend in the behavior of consumer prices, while the latter involves short-lived price disturbances in the Philippines.

Thus, monetary policy may help alleviate core inflation, just like it does with headline inflation. However, remember that core inflation is not intended to replace headline inflation. The two should be taken together to assess the overall state of the inflation environment.


Because of the still-high core inflation, rate hikes may still be on the table. The overnight reverse repurchase (RRP) rate may further peak at 6.5% (from 6.25% at present), but headline and core inflation are expected to trend downwards towards year-end, which could give way to rate cuts.

That is to say that the local inflation environment is expected to improve, especially in the second half of this year, barring any further supply shocks and should the interest rate hikes prove to be effective.

Despite faster core inflation still on the cards in the next few months, overall, we expect the RRP rate to end at 6.0% this year in light of lower inflation expectations toward year-end.

ANNA ISABELLE “BEA” LEJANO is a Research & Business Analytics Officer at Metrobank, in charge of the bank’s research on the macroeconomy and the banking industry. She obtained her bachelor’s degree in Business Economics from the University of the Philippines School of Economics and is currently taking up her Master’s in Economics degree at the Ateneo de Manila University. She cannot function without coffee.

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Economy 3 MIN READ

Is the world really ditching the dollar? 

With some central banks looking to minimize their dependence on the king of currencies, is the US dollar likely to be dethroned? This is an old story told anew.

April 25, 2023By Patty Membrebe

A few leaders from the BRICS nations—Brazil, Russia, India, China, and South Africa—are again challenging the status of the US dollar as the world’s most dominant currency. They have been vocal about creating a common currency to settle payments for the bloc’s trade of goods and services.

This clamor for de-dollarization is not new. Countries have been attempting to reduce their dependence on the US dollar for years now. And yet, despite America accounting for only 10% of global trade, 40% of international trade in goods is still invoiced in US dollars, and over 58% of the world’s foreign exchange reserves are in US dollars—the Euro comes as a far second, with a 20% share.

Defense against the dollar

What belies the recent worries on the decreasing use of the dollar is a slate of sanctions imposed on Russia for its invasion of Ukraine, which has necessitated their search for alternative currencies. The latest financial sanctions include freezing Russia’s foreign currency reserves, which, unlike most countries, have actually long been de-dollarized.

In 2014, Russia’s annexation of Crimea prompted the US to lead the imposition of sanctions that would cut off Russia’s access to financial infrastructures. Shortly thereafter, Russia dumped its holdings of US Treasuries and significantly reduced the share of US dollars in its reserves to hedge the damage from further financial sanctions. It has since turned to alternative stores of value such as gold, the yuan, and the euro.

The latest western sanctions have prompted Russia to increase the volume of transactions in yuan, which is now its most traded currency. This is no surprise, given that China is now the top buyer of oil from the sanctioned producer, and it bodes well for China’s long-running campaign to internationalize the yuan.

Elusive alternatives

China has been central to this discussion, with its efforts to speed up de-dollarization and the broader use of the yuan. Contrary to most claims, however, China has not totally rejected the US dollar. According to Bloomberg, only 17% of overall trade was settled in yuan in 2022. The share of crude oil was only 13% of China’s total imports.

Therefore, the decreased use of the petrodollar (and a shift to “petroyuan”) is unlikely to erode the dollar’s overall importance, at least for now. In financial assets, even though China’s holdings of US Treasuries have dwindled significantly, it has reportedly merely shifted to higher yielding securities that are still dollar denominated.

It could really take a while before the yuan comes close to the dollar in terms of market share in global transactions.

Banking on gold

Gold has also gained attention as more central banks have reportedly been stockpiling on the precious metal. But will this lead to the dollar’s eventual demise? Not exactly.

Large amounts of gold purchases can end up being unreported, which sanctioned economies take advantage of, to circumvent the restrictions imposed on them.

While it is likely that some central banks shift to gold to hedge their economies from sanctions, it is also highly likely that the current macroeconomic backdrop has attracted them to diversify their portfolios with more gold.

Our technical analysis of the price of gold, according to Kyle Tan, Metrobank Trust Investment Officer, shows upside momentum to USD 2,300 to 2,800 per ounce, because of broad dollar weakness, negative US real interest rates, growth slowdown concerns, and geopolitical risks.

To the downside, short-term dollar strength could trigger a pull-back to USD 1,950. Whereas sentiment drives demand for gold, the breadth of use and the depth of markets solidify real money demand for the dollar.

Dollar is still king

Assessing how the dollar is so entrenched in global trade and in financial markets, and how no other currency comes close as a viable alternative, a reduction in the use of the dollar may challenge its dominance, but it will take a very long time for it to be trumped.

For the foreseeable future, it is highly unlikely for the US dollar to be dethroned as king of currencies.

PATTY MEMBREBE is a Financial Markets Analyst at Metrobank – Institutional Investors Coverage Division, under the Market Strategy and Advisory Section. She communicates strategies on fixed income, rates, and portfolio solutions for our high-net-worth individual and institutional clients. She holds an AB Economics degree from Ateneo de Manila University and is currently pursuing graduate studies. In her free time, she enjoys watching indie films and attending gigs to support local indie music.

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Economy 3 MIN READ

Bracing for an export slowdown

Until the fight for inflation is won globally, higher interest rates will keep global demand for Philippine exports sluggish.

April 25, 2023By Ina Judith Calabio

The Philippines posted a trade deficit of USD 3.88 billion in February, declining by 2.7% versus the same month in 2022, as both exports and imports contracted.

Exports dropped by USD 1.1 billion, or 18%, year-on-year and are on their third consecutive decline since December 2022. Meanwhile, imports slipped to USD 8.95 billion from USD 10.17 billion in February 2022, not sustaining their rebound from last month following three straight months of negative growth.

Historically, weak global demand partly explains a trade slowdown apart from structural reasons. Here we take a look at the numbers to see whether global demand is indeed softening and is already manifesting itself in our trading activity.

Graph of Philippine export and import growth where the latter dipped in February while exports continued to decline.

Major traded goods are tumbling

Exports of manufactured goods, which capture the largest portion of total exports among major types of goods, have been falling since November 2022 and further dipped in February, pushing overall exports down. Agro-based products have also yet to rebound and have been sustaining negative year-on-year growth since September 2022.

Growth of top PH export and import goods by major type of goods. Mineral exports declined year-on-year, as with imports of mineral fuels, lubricants, and related materials.

Meanwhile, top PH import goods such as capital goods, raw materials, and mineral fuels altogether posted a decline versus the previous year, bringing down overall imports in February.

Less demand from major trading partners

The Philippines’ export activity with advanced economies such as the US (PH’s 2nd largest export destination) has dipped sharply since December 2022 and has yet to recover, even inching further down in February. The growth of total US imports, on the other hand, slowed down in November last year, growing year-on-year by only a modest 2% on average since then, suggesting softening demand from the said major economy (see Figure 3).

The recent data on weaker retail sales and slowing manufacturing output in the US can likewise vouch for its slumping domestic demand, prodding businesses to slow down their inventory purchases.

Comparative chart of US and China’s import growth and the Philippines’ exports to US and China. In both cases, imports from the rest of the world has declined affecting PH exports.

Meanwhile, China – the country’s third largest export destination – posted better-than-expected first quarter GDP (gross domestic product) growth of 4.5%, propelled by increased consumption as the country fully reopened. However, the country’s Q1 imports declined vs the previous year, which could explain why PH exports to China have been in negative growth territory in January and February.

While China’s manufacturing activity is recovering, it does so at a moderate pace as the slowdown in global demand is said to weigh in and dampen the processing demand in China. This then impacts its import of raw materials from other countries like the Philippines.

Not only in the Philippines

Declining exports is not a Philippines-only challenge, as other neighboring Asian countries, such as Singapore, Thailand, and South Korea, among others, are facing this, thus bringing a stronger case of a global slowdown already happening.

What lies ahead?

Apart from the peso strengthening in the first two months of the year, weak global demand has indeed manifested itself already in the Philippines’ trade numbers.

The fight against inflation has not been won yet in the Philippines and globally. Until then, higher interest rates will continue to temper spending, therefore constricting overall demand, which has actually been the goal of monetary policy tightening.

The good news is that global inflation is seen easing this year. Should there be no new supply shocks to detour inflation towards its downward path, global demand and therefore global trade are set to rebound in no time.

Photo courtesy of Alexander Villafania

INA CALABIO is a Research & Business Analytics Officer at Metrobank in charge of the bank’s research on industries. She loves OPM and you’ll occasionally find her at the front row at the gigs of her favorite bands.

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Economy 2 MIN READ

April 2023 Updates: Peak policy rate may come soon

Inflation substantially eased in March and is expected to take a downward path from hereon barring any new supply shocks. The policy rate trajectory will depend on how the inflation numbers hold in the coming months.

April 14, 2023By Metrobank Research

Philippine inflation substantially eased to 7.6% in March 2023, as price movements of food and beverages moderated, and price upticks of transport-related goods and services continued to slow down.

However, core inflation continued to accelerate as prices of non-volatile food items continued to rise, indicating the continued impact of second-round effects. Nonetheless, the March inflation print confirms our earlier outlook that inflation had already peaked in Q1 and is expected to continue going down, barring any new supply shocks.

Should inflation continue to slow down, Philippine policy rate hikes may take a pause in May albeit still dependent on how the April 2023 inflation print turns out. Thus, the overnight rate may peak at around 6.25% to 6.5% and is expected to end the year at the 6.0% level, with rate cuts likely before yearend.

Meanwhile, more hawkish signals from the US Fed given stubborn inflation might have strengthened the dollar as the peso breached PHP 55 per US dollar recently.

Considering these developments, we retain our forecasts for 2023 and 2024 as we continue to monitor new economic developments:

For more information on the performance and outlook for several macroeconomic indicators, as well as local and global macroeconomic news, please download the full report (released April 12, 2023) here.

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Economy 4 MIN READ

So far so good for PH amid overseas banking turmoil

(Last of two parts) In our previous article, we examined how the Philippines managed through the Lehman Brothers debacle. With the recent collapse of Silicon Valley Bank, we now look at possible signs of another “Lehman moment”, if any.

April 5, 2023By Marc Bautista, CFA, Anna Isabelle “Bea” Lejano, and Ina Judith Calabio

We learned previously that the Philippine banking industry was relatively unshaken post-Lehman as certain banking indicators remained steady. This could not be said, however, for the real economy, which took a hit from the impact of the great recession.

Recently, the world witnessed yet another round of banking turmoil sparked by Silicon Valley Bank’s (SVB’s) collapse, which evoked fears of another Lehman moment in the making for the global financial system.

Here, we take a look once more at the recent data and examine whether a similar narrative in 2008 is about the unfold in the Philippine banking sector and the real economy.

PH banking sector: Resilient post-COVID

The Philippine banking sector remains resilient, as evinced by its strong recovery from the COVID pandemic lockdowns. In fact, the COVID pandemic was a much bigger shock to the Philippine banking sector than the Lehman moment of 2008 ever was.

For example, a layman looking at some banking indicators would see the sharp uptick in non-performing loans (NPLs) because of the COVID lockdowns in 2020. However, he would see that this indicator has dramatically come down since then, with the ratio on track to reach pre-pandemic levels.

Additionally, a cursory look at the liquidity coverage ratios from pre-pandemic to post-pandemic periods shows that liquidity has always seemed adequate.

The man on the street would likely conclude that if the Philippine banking sector could recover significantly from a much worse event that was the COVID pandemic, then another Lehman-like moment in 2023 is highly unlikely.

That is, just like in 2008, the banking sector will remain resilient. Now, what about the real economy?

The real economy: Expected to remain strong

Recall that rather than the Philippine banking sector being hit badly, it was the real economy of the Philippines which suffered through the Lehman moment of 2008.

Recently, however, Philippine GDP reached its highest level in over four decades in 2022. Though a slowdown in growth is seen for 2023, the official government forecast is still, at the 6-7% level, satisfactory.

Credit rating agencies, in contrast, have more conservative 2023 PH growth estimates, ranging from 5.7% to 5.9%. Nevertheless, these estimates are still a far cry from the depressed output growth in the post-Lehman period of 2009.

Several signs point to consumption remaining robust. Broadening price pressures were attributed to still vigorous domestic demand. Additionally, credit card debt surged in January, breaching the 30% mark, as well as salary loans, which jumped 67.1%. These are signs that consumption is not slowing down.

Although the latest consumption data is still as of December 2022, the Philippines is still far from the dip experienced in 2009.

Trade is a mixed bag. Export growth is experiencing a slight contraction on account of weaker global demand due to a slowdown of advanced economies because of the Russia-Ukraine conflict.

On the other hand, imports are still expected to grow as the country expands, though possibly at a slower pace.

Given all of these, exports and especially imports are unlikely to go deep into negative territory as in post-Lehman, since the global economy is seen to be tougher than expected.

Several experts expect only a global slowdown as opposed to a recession like before. This will benefit the Philippines due to lower import costs at a time when the domestic economy is expanding, requiring more imports.

Investment spending is likewise healthy despite rate hikes. Though growth was slower towards year-end 2022, it is unlikely that the country will experience year-on-year contractions given that the Bangko Sentral ng Pilipinas (BSP) is signaling a pause in its rate action already, as higher rates are negatively correlated with investment spending.

So far, the macro variables that were hit after the Lehman collapse are still sound at present. In fact, a man on the street would, after seeing the above graphs on the macroeconomy, say that the COVID pandemic was much worse than Lehman.

Wrapping it up: This time it’s different

Putting it all together, it can be said that during the Lehman moment of 2008, the Philippine banking sector was OK while the economy was not.

During the COVID pandemic, both the Philippine banking sector and the economy were severely affected but have recovered significantly since then, demonstrating the resiliency of the local banking sector in particular.

If the SVB collapse morphs into a Lehman moment, we have reason to believe that the Philippine banking sector will remain resilient as before. Additionally, these crises are mainly external to the Philippines, and we don’t think that there will be a difference in the impact domestically.

However, for the economy, the only way the SVB collapse will morph into a Lehman moment is if it causes global trade to collapse, just like what happened in the aftermath of the Lehman fiasco in 2008 and again after COVID struck.

Right now, there appears to be no collapse in global trade, and the failure of SVB (and even that of Credit Suisse) appears to have no spillover effect on global credit and trade.

In this sense, for the man on the street, there’s no reason to worry.

MARC BAUTISTA, CFA is the bank’s Research and Business Analytics Head. ANNA ISABELLE “BEA” LEJANO and INA JUDITH CALABIO  are Research & Business Analytics Officers at Metrobank.  

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Economy 3 MIN READ

March 2023 inflation: Clearly on a downward path 

The March 2023 inflation print confirms our earlier outlook that inflation had already peaked in January 2023 and is on a downward trajectory from hereon, in the absence of supply and price shocks.

April 5, 2023By Metrobank

The inflation print for March 2023 came out at 7.6%, well within the Bangko Sentral ng Pilipinas’ (BSP) forecast of 7.4% to 8.2% and lower than the BusinessWorld’s poll median forecast of 8.1%.

Check out our latest inflation report and outlook for further details.

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Economy 4 MIN READ

SVB debacle: Is this a Lehman moment for the Philippines?

(First of two parts) With the recent Silicon Valley Bank (SVB) collapse that triggered memories of Lehman Brothers’ downfall and the 2008 Great Recession, it would be worth exploring if there might be the parallels today, especially from the point of view of the man on the street.

April 4, 2023By Marc Bautista, CFA, Anna Isabelle “Bea” Lejano, and Ina Judith Calabio
PH-Cityscape (5)

With the recent collapse of Silicon Valley Bank (SVB), talk immediately centered on a possible “Lehman Brothers moment”. What would this mean for the Philippines?

But rather than talk in arcane macroeconomic terms about events in 2008, we simply revisit these crises from the point of view of “the man on the street”, using public data available to casual researchers who just want quick takeaways.

Post-Lehman PH Banking – Business as Usual

The man on the street taking a look at the Philippine banking sector post-Lehman would not notice anything that jumps out of the ordinary when looking at graphs of loans, deposits, non-performing loans (NPLs), and capital adequacy ratios.

To a layman, these numbers say “it’s all good”, which is hardly surprising as the Philippines was not at the center of the storm when the 2008 financial crisis blew up and wrecked the global economy. This is not to say that there was no impact on the domestic economy. After all, Lehman’s demise was a precursor to the Great Recession of 2008.

Post-Lehman Philippine Macroeconomy – A dent in GDP growth

The collapse of Lehman Brothers caused global markets to start fearing which global financial institutions were next given unknown holdings of toxic assets. It came to a point where even Letters of Credit (LCs) were suspect, and global trade ground to a halt. The Philippine economy was affected through trade, consumption, investments, and the fiscal deficit.

Output contracted due to affected sectors, most especially manufacturing and retail and wholesale trade. Manufacturing was hit by the slump in exports because of the global downturn. Imports were not spared.

On the other hand, the lower growth rates of the wholesale and retail trade sector were partly attributed to a slowdown in personal consumption. Note that the financial crisis coincided with the lingering effects of a sharp rise in food and fuel prices which peaked in mid- to late-2008, leading households to reduce their consumption.

Investment spending likewise slowed as businesses saw a decline in the demand for their products.

To offset the contraction in consumption, investments, and exports, the Philippine government increased its expenditures. At that time, the government was reluctant to cut expenditures during a period when the economy was substantially slowing down. This led to a widening of the fiscal deficit, especially in 2009.


In a nutshell, the man on the street would say that the Philippine banking sector post-Lehman was generally okay, and it withstood the financial turmoil triggered by the Lehman downfall and the resulting contraction in global trade.

It was, however, a different story for the real economy, which suffered from the adverse consequences brought on by the great recession.

So with the recent collapse of SVB, is the Philippines about to experience something similar to a post-Lehman Philippine moment? More on this in part 2 of our series.

MARC BAUTISTA, CFA is the bank’s Research and Business Analytics Head. ANNA ISABELLE “BEA” LEJANO and INA JUDITH CALABIO  are Research & Business Analytics Officers at Metrobank.

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Economy 2 MIN READ

Achtung! Deutsche Bank is not Credit Suisse

There is an undercurrent of anxiety among investors surrounding Deutsche Bank, which some believe may meet the same fate as Credit Suisse. Is it justified? Anna Cudia, our Head of Markets Research at Metrobank’s Trust Banking Group, doesn’t think so.

March 31, 2023By Anthony O. Alcantara

Deutsche Bank, one of Europe’s banking behemoths, has, like the doomed Credit Suisse of Switzerland, faced numerous challenges in recent years.

Scandals, including its ties with Jeffrey Epstein, have hobbled the German bank. The US Fed has also warned the bank several times about the insufficiency of its anti-money laundering policies and procedures.

Investors are understandably worried about the possibility of it having liquidity issues amid external shocks.

But are they justified? Is Deutsche Bank like Credit Suisse?

Nein! if you ask Anna Cudia, Head of Markets Research at Metrobank’s Trust Banking Group.

More stable and liquid

“Deutsche Bank is actually not like Credit Suisse. Both of them are global systemically important banks, but the German bank is more stable and liquid,” said Cudia.

“Credit Suisse saw hefty withdrawals, with more than a quarter of where deposits were in 2021, and some units breaching liquidity rules. It also had a qualified opinion on the existence of material weaknesses in internal control over financial reporting. These are not experienced by Deutsche Bank,” she added.

Deutsche Bank is also twice the size of Credit Suisse. And in terms of their bottomline, Credit Suisse recorded a loss last year, while Deutsche Bank had a net profit.

In terms of other factors, however, they are virtually the same. They have healthy CET1, or Common Equity Tier 1, a measure of high-quality regulatory capital. Their NPLs, or non-performing loans, are all within healthy levels.

Idiosyncratic risks

“In terms of liquidity, however, we can see that Credit Suisse was in a bad spot given the recent outflows which started as early as October last year given its idiosyncratic risks. By end-2022, around a quarter of 2021 deposits had already been withdrawn from the Swiss bank. That’s how big the withdrawals were as early as last year,” said Cudia.

So, what’s really the trouble with banks?

“This is not a credit issue like the 2008 Global Financial Crisis. It’s really more of a crisis of confidence that’s putting banks into a liquidity crisis. Even with healthy capital ratios, no matter how strong a bank is, if there are deposit withdrawals all at the same time, a run, then it could be bad news for the banks. It’s so very fragile,” said Cudia.

For now, we have a good idea of what analysts think of the two banks, with a net sell recommendation of 27% for Credit Suisse and a net buy recommendation of 37% for Deutsche Bank.

ANTHONY O. ALCANTARA is the editor-in-chief of Wealth Insights. He has over 20 years of experience in corporate communications and has a master’s degree in technology management from the University of the Philippines. When not at work, he goes out on epic adventures with his family, practices Aikido, and sings in a church choir.

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Economy 3 MIN READ

No worries about external liabilities

The Philippines’ external debt rose to a record high of USD 111.27 trillion as of yearend 2022, up by 4.5% from 2021. But with economic output and foreign currency reserves going up, the Philippines is doing well compared to ASEAN peers.

March 28, 2023By Anna Isabelle “Bea” Lejano

The Philippines’ external debt has reached its highest ever, from USD 106.43 trillion in 2021 (27% of gross domestic product) to USD 111.27 trillion (27.5%) in 2022. On its own, it appears worrisome but one thing about debt is that it must be understood in context. First, what was the debt used for, and second, how do the debt ratios compare versus the past and versus peers? Let’s take a look at these.

The Use

According to Bangko Sentral ng Pilipinas (BSP) Governor Felipe Medalla, the increase in external debt was primarily driven by public and private sector spending on COVID-19 recovery measures, as well as to support economic growth. It’s a no-brainer that this kind of spending had to happen even if foreign debt had to be incurred.

The Past

Over the years, the external debt-to-GDP ratio dramatically shrunk (see figure 1) – it only went up during the pandemic when we needed more external financing to support the economy and fight COVID. Eventually, GDP recovered and just like external debt, nominal GDP has gone to its highest levels ever. These two, GDP and external debt, have to be taken together in context.

Moreover, our capacity to pay for it has improved as depicted in the external debt-to-GIR ratio (see figure 2). Gross international reserves (GIR) are assets held by central banks to back liabilities and help manage external shocks that impact their currencies (e.g., preventing their respective currencies from rapidly devaluing or depreciating). The Philippines’ GIR has been relatively increasing since the mid-2000s, thus improving this ratio.

So, a look at the external debt-to- GIR ratio of the past shows a dramatic shrinking of the debt burden relative to reserves, with the current upward ratio just a blip in the overall scheme of things. It must be remembered that not all external debt is due and demandable right now, with only a small portion due within a year (only around 15% of total external debt is short-term).

Definitely, the GIR is more than adequate at the moment.

The Peers

In comparison with its ASEAN peers, the Philippines’ external debt-to-GDP ratio is clearly the lowest as listed below. Its external debt-to-GIR ratio is also satisfactory and is second-best to Thailand, which means the country is in a better position compared to other ASEAN peers and is less prone to risks that go with foreign-denominated borrowings.

Source: Bloomberg

So, in summary, yes, the external debt grew, but so did the economy, recovering and growing as a direct result of the activities that the external debt helped finance in the first place. That’s the thing about debt – if it’s incurred for productive capacity and the resulting productivity itself pays for that debt, there’s no issue.

So, worried about external debt? Don’t be, things are working as planned.

ANNA ISABELLE “BEA” LEJANO is a Research & Business Analytics Officer at Metrobank, in charge of the bank’s research on the macroeconomy and the banking industry. She obtained her bachelor’s degree in Business Economics from the University of the Philippines School of Economics and is currently taking up her Master’s in Economics degree at the Ateneo de Manila University. She cannot function without coffee. 

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Economy 5 MIN READ

Revisiting the collapse of Lehman Brothers

With what’s happening in the banking sector right now, some fear a Lehman-like fiasco waiting to happen. Here we re-examine what happened in 2008 and what lessons we learned.

March 24, 2023By Ina Calabio, Geraldine Wambangco, and EA Aguirre

In our previous article titled Stay Calm, SVB isn’t another Lehman Brothers, we argued that Silicon Valley Bank’s (SVB) failure does not follow a similar path as Lehman Brothers did back in 2008.

The fall of SVB was an idiosyncratic stress event, driven by aggressive interest rate risk-taking and the mismanagement of this risk by a large but still niche bank. It still pays, however, to be reminded of Lehman Brothers’ cautionary tale that led to the biggest financial crisis since the Great Depression.

Lehman Brothers’ collapse nearly 15 years ago is deemed the biggest bankruptcy in US history that marked the beginning of the 2008 Global Financial Crisis. What foreshadowed the deepening of the great recession?

What went wrong?

Lehman Brothers, which started as a humble dry-goods store in 1844, grew to become a global financial firm that provided investment banking, trading, brokerage, and other services in the US and globally. It was the fourth-largest investment bank in the United States at the time, even deemed “too big to fail”, with record earnings of more than USD 4 billion on revenues of USD 60 billion in 2007 – the year before its demise.

Many reasons point to Lehman falling apart, but the main trigger was its heavy exposure to the US housing market. From 2003 to 2004, the firm invested in mortgage lenders, some of which specialized in sub-prime mortgages or housing loans to individuals with lower credit scores and incomplete documentation, under the guise of greater economic inclusivity.

These lenders provided the underlying housing loans for Lehman’s own mortgage-backed securities (MBS) – bonds that derived interest and principal payments from ordinary Americans’ mortgage payments.

The bonds were popular with high net-worth individuals, institutional investors, and other banks because they offered premium yields and were tied to the US housing market, which continued to appreciate in value. Aggressive lending and MBS structuring activities continued well into 2006, despite the US housing market already peaking.

Lehman Brothers’ stock price peaked in February 2007 and began plummeting in September 2008.

By the end of 2007, Lehman had already acquired USD 111 billion worth of commercial or residential real estate-related assets and securities to which rating agencies and investors expressed concerns over illiquidity.

This left Lehman in a difficult position to bring in cash, hedge risks, or sell assets to reduce leverage in its balance sheet.

Subprime mortgage crisis

While Lehman was aggressively investing in real estate, the subprime mortgage crisis was already brewing. When house prices peaked in 2006, refinancing of mortgages and selling of mortgaged homes became a less feasible means of settling mortgage debt.

Sub-prime mortgages also started to fail in 2007 as borrowers could not keep up with the payments. This led to higher mortgage loss rates for lenders and investors. All of this, coupled with the expansion of mortgages to high-risk borrowers, turned the turmoil into a crisis that ultimately toppled Lehman.

Lehman Brothers invested heavily in high-risk real estate and subprime mortgages and could not raise enough cash when these markets turned south.

No saving by the Fed

Since Lehman Brothers was an investment bank, the US government could not nationalize it like it did with Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation). No regulator like the Federal Deposit Insurance Corporation (FDIC) could take over. The US Federal Reserve also could not guarantee a loan, as it did with Bear Stearns, another beleaguered bank at that time.

US Treasury Secretary Hank Paulson urged then Lehman President Richard Fuld to find a buyer as Bear Stearns had done. Paulson initially rejected Bank of America’s proposal for the government to cover USD 65 billion to USD 70 billion in projected losses.

Federal Reserve of New York President Tim Geithner and the nation’s top bankers spent a weekend trying to find funding for Lehman Brothers. But before they could, Bank of America backed out of the deal. Barclays also announced the following day that its British regulators would not approve a Lehman Brothers deal.

Everyone spent the rest of the day preparing for Lehman’s bankruptcy. Lehman Brothers, with its USD 619 billion in debts, was the largest corporate bankruptcy filing in US history.

Impact of Lehman’s bankruptcy

Lehman’s bankruptcy sent financial markets reeling. The Dow Jones Industrial Average (DJIA) fell by as much as 504.48 points and continued to drop until March 5, 2009. Investors also fled to the relative safety of US Treasury bonds, sending prices up and yields down.

Investors knew that Lehman’s bankruptcy threatened the financial institutions that held its bonds. Investors lost confidence in the money market fund when it announced losses of USD 785 billion in Lehman’s commercial paper.

On September 17, 2008, the chaos spread, and investors withdrew USD 196 billion from their money market accounts. The next day, Paulson and Fed Chair Ben Bernanke asked congressional leaders for USD 700 billion, which would allow the Treasury Department to buy shares of troubled banks and bail them out.

Congress rejected the proposal and the Dow went down by 777.68 points. In October 2008, the US Senate voted in favor of a revised USD 700 billion bailout bill that contained a tax cut and extended federal protection for bank deposits.

Who saved Lehman?

Following the bankruptcy filing, Barclays and Nomura Holdings eventually acquired the bulk of Lehman’s investment banking and trading operations. Barclays additionally picked up Lehman’s New York headquarters building.

Lehman’s collapse was a major contributor to what eventually became the Global Financial Crisis (GFC) of 2008. Many still wonder why Lehman was allowed to fail, rather than being rescued by the US government like so many other banks. One may think of the sheer size of Lehman’s debt and the woeful inadequacy of its assets to cover such debt.

Lessons after Lehman

Greater scrutiny of the financial system followed after the failure of Lehman Brothers and the GFC. In the US, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in order to subject banks to stress tests, particularly those that were “too big to fail.”

Internationally, banks agreed to set up the Basel-III framework, which required banks to meet higher capital buffers to absorb potential losses, before any profits could be redistributed to shareholders.

Banks were also required to build these capital buffers using their own reserves before they were allowed to source external funding. The crisis resulted in 8 million home foreclosures and a 40% average decline in housing prices.

While some form of subprime mortgage lending still exists today, lenders now require higher upfront down payments and interest rates to compensate them for the risk. Structuring and trading of MBS also continues, but with even stricter regulation and transparency requirements than before. The Fed itself is an active participant and provider of liquidity in the MBS market.

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