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Cost of Capital in the Philippines Remains Low


Real lending rate in the Philippines has remained relatively low and within the range of lending rates of other Asian countries. Recent estimates of the Bangko Sentral ng Pilipinas (BSP) showed that in a sample of 10 Asian countries, the Philippines’ real lending rate (i.e., lending rate adjusted for inflation) at 5.65 percent was lower than those recorded in Indonesia, Hong Kong, Taiwan and India. However, the country’s real lending rate was higher compared to those of Malaysia, Singapore, South Korea, Thailand and Japan. The highest real lending rates were recorded for Indonesia (10.63 percent) and Hong Kong (8.8 percent).

Country Real Lending Spread of Lending Rates over the Benchmark Rates
Indonesia  10.63 6.38
Hong Kong  8.80 3.84
Taiwan  7.64 6.01
India  6.80 n.a.
Philippines 5.65 2.92
Malaysia  5.19 3.30
Singapore 4.80 4.42
South Korea  3.59 2.85
Thailan 3.30 4.38
Japan 2.05 n.a.
* As of 10 October 2003
**   Source:
The current low interest rate environment has been influenced, in part, by the reduction in the BSP’s policy rates amounting to a cumulative 825 basis points since December 2000. The overnight reverse repurchase (RRP) rate now stands at 6.75 percent from a high of 15 percent prior to the reduction in the BSP’s policy rates in 2000. The generally benign inflation environment has provided adequate scope for the BSP’s accommodative monetary policy stance. Combined with ample liquidity in the system, the benchmark 91-day T-bill rate has also declined along with the banks’ lending rates. The decline in domestic market interest rates also led to the narrowing of the spread of the country’s average lending rate over the benchmark T-bill rate, which was the second lowest (2.92 percent) among the 8 countries in Asia, next to South Korea’s 2.85 percent

This low lending rate implies that the cost of capital for business has declined and   augurs well for the economy.   Together with the benign outlook for inflation, the present level of real interest rates is expected to continue and provide a supportive macroeconomic environment that would help build up the momentum for stronger domestic consumption and investment activities over the near term. Such a prospect would help support the attainment of the government’s GDP growth targets of 4.2-5.2 percent for 2003 and 4.9 to 5.8 percent for 2004.

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