The Philippines real estate market has recently came into a spotlight in a Bloomberg.com news article published on May 06, 2013 that looks into the issue of unwanted capital inflows in many Asian countries searching for high yields. The headline of the news article “Philippines Mulls Property-Loan Curbs, Rejects Capital Controls” brings out a good point regarding the discussion of monetary policies and how central bank authorities cope with massive inflows of capital in order to avoid the possibility of an overheated economy such as the country of Philippines which have seen its USD 225.0 billion economy expanded at an average rate of 6.6 percent in 2012, and is one of the fastest rates in Asia.
The growth in the Philippines economy is quite reminiscent to what Indonesia has experienced during 2010 and 2011 when it received an upgrade of its debt ratings by Standard & Poor’s and Fitch Ratings early. The demographics in Indonesia are young, and vibrant. However, unlike Indonesia, most of the economic growth in the Philippines in the past has been driven by overseas money transfers from its citizens working abroad, remitting the money back to their respective hometowns in the country, thus generating rural employment, output, and eventually growth in the economy.
The country is embarking on an aggressive expansion of its economy through infrastructure development estimated to be in a tune of approximately USD 17.0 billion, and the focus is expected to be on the tourism sector, which accounts for much of the growth of its economy. The recent spate with Taiwan over the alleged shooting of Taiwanese fishermen by members of the Philippines Coast Guard might impact some of the tourism growth by less than 2.0 percent, but the Philippine government and tourism officials are seeking for other Asian destinations, namely China, Asean, and other parts of the world for visitor arrival opportunities. Recently, the country has embarked on a move towards the development of its casino centre just outside of its capital city, Manila through a project joint venture with Malaysia’s Genting Berhad in building a mini casino strip, rivalling regional countries such as Singapore, and the famous Las Vegas strip in the State of Nevada, USA.
The country’s real estate market has been some buoyancy following a record 18.9 percent incease in property lending and investment to a record of 561.6 billion Philippines Pesos (or approximately USD 13.7 billion) during the first half of 2012. This figure was obtained by Bloomberg.com, and published by the Central Bank in the country. In the May 06, 2013 Bloomberg news article, it was also quoted that the country’s central bank, Bangko Sentral ng Philipinas Governor Amando Tetangco as saying in a May 04 email statement that, “We plan to reference real-estate exposure to adjusted capital of banks”. However, the central bank chief was not considering imposing capital controls for now in an interview at an Asian Development Bank (ADB) meeting in India on the same day. Governor Amando also mentioned that he does not see any signs of bubbles in the low and middle segments of the real estate. However, monetary actions have to be taken to manage the demand/supply equation, and not place a drastic brake onto the overall real estate lending and purchasing, which might cause some unnecessary jitters among investors. If the issue is not resolved soon by the government led by President Benigno Aquino, the impact of a severe global credit crunch might cause the country to lose its standing, competiveness, and the ability to control a potential downward spiral of its real estate market as a result of not taking enough steps in curbing rampant real estate lending.
The May 06, 2013 new ruling by Bangko Sentral ng Philipinas calls for real estate lending by banks to be capped at 20.0 percent of total outstanding loans, with some exclusions. The rise of real estate prices in the past has resulted in real estate companies such as publicly-listed Ayala Land Inc. (ALI) to build more homes, thus creating the conditions for property speculation. With the new real estate lending rules, it is expected to cool down the ‘red hot’ property sector. However, the tide of capital flows is not expected to slow down as the country remains one of the popular destinations for real estate property buyers seeking higher yields in its vast growing regions around the country.
In my view, the recent property curbs issued by the Philippines central bank authorities are quite timely in limiting the amount of property speculation which might harm the country’s debt ratings if it does spiral out of control should there be an unwind in capital flows. In a recent Bloomberg Television interview broadcast in Asia on June 04, 2013, one of the prominent economists, Mr. Rob Subbaraman of Nomura International was quoted as saying that Philippines, along with China and Taiwan are expected to be some of the Asian countries that could withstand an eventual unwinding of the ongoing credit stimulus brought on by global central banks. The property curbs laid out by the Philippines central bank goes a long way in helping to ease the transition towards normalisation, as opposed to huge volatilities that comes with erratic capital flows.