INTEREST RATES are expected to stay low this year given the high market liquidity, a dip in the demand for loans and tight competition among lenders.
Rates could go up slightly in the second half, however, once the government launches its public-private partnership (PPP) projects in earnest, resulting in higher demand for financing.

“We expect the low interest rate environment to be maintained for the rest of 2012,” Nestor V. Tan, president of BDO Unibank, Inc., said in a phone interview.

He pointed out that the European and US problems might dampen domestic growth -- and consequently, the demand for loans -- while lenders compete to attract borrowers.

Europe’s debt crisis and the United States’ low growth might “affect the local investment mood,” added EastWest Banking Corp. President Antonio C. Moncupa, Jr.

Eduardo V. Francisco, president of BDO Capital and Investment Corp., said in a separate phone interview “with the market liquidity, I do not see a need for [interest rates] to go up.”

Latest Bangko Sentral ng Pilipinas (BSP) data showed that as of October 2011, banks’ average lending rates ranged from a low of 5.74% to a high of 7.87%. These were comparable to 5.40%-7.45% as of December 2010 but a steep decline from 7.31%-9.25% as of December 2009.

Rates of government debt papers have also fallen, with Philippine Dealing & Exchange Corp. data showing the three-year papers fetching 3.1725% as of Dec. 29, 2011; five-year bonds, 4.2073%; 10-year bonds, 5.08%; and 20-year papers, 6.1035%.

These were lower than the 4.1% for three-year bonds, 4.77% for five-year papers, 5.8881% for 10-year securities and 8.1% for 20-year bonds as of December 30, 2010.

“I think local interest rates are ‘bottomish’ at this point,” Mr. Moncupa observed. “Too much liquidity coming from both higher loan demand and buildup in the country’s foreign exchange reserves have pushed government bond rates very low.”

Mr. Moncupa added that Treasury bill rates are a “bit off or too low at around 1% to 2%.”

BSP rate cuts, which it has hinted, with inflation expected to trek downwards and economic growth to remain, would only push interest rates lower.

Mr. Tan said the launching of more PPP projects would spur domestic economic growth and demand for loans, which would push rates a little higher.

Since the PPP launching in 2010, only the P1.956-billion Daang Hari-South Luzon Expressway link deal has been bidded out.

For Mr. Francisco, risk aversion due to the crises in the advanced economies might push rates higher.

“There is a likelihood that in the middle of the year rates might increase,” Mr. Francisco said, adding that a contagion from advanced economies will result in more risk aversion.

The bank executives said companies or individuals planning to tap banks for funding should act now.

“Now is the best time [to borrow]. It is a low interest rate environment and we’ll see this level for a period of time until the economy starts to pick up,” Mr. Tan said.

“Based on historical records, it may be best to borrow at this point for both corporates and consumers considering what we are seeing are historical low levels,” Mr. Moncupa said.

He added that borrowers should match their funding needs with their cash flows and their projects’ expected returns and not speculate on interest rates. -- Neil Jerome C. Morales

BusinessWorld Online JAN082012