Bank lending activity through the foreign currency deposit units (FCDU) of financial institutions in the Philippines saw a slight decline in the second quarter of this year, reflecting a cautious borrowing environment amid global economic uncertainties.
The latest data from the Bangko Sentral ng Pilipinas (BSP) revealed that outstanding FCDU loans stood at US$15.63 billion as of the end of June 2024, marking a 2.7% drop or US$438.58 million from the US$16.07 billion recorded at the end of March.
Despite the quarterly decline, outstanding FCDU loans from banks were still 1.6% higher compared to the same period in 2023, indicating that overall demand for foreign currency loans has remained resilient over the past year.
Earlier this month, the BSP also released preliminary data showing that the outstanding loans of universal and commercial banks (U/KBs) have grown at an accelerated pace in August this year, reflecting stronger demand for credit across various sectors of the economy.
Bank performance and sectoral breakdown of FCDU Loans
The bulk of the FCDU loans from banks were extended to key sectors that drive the country’s economic activity. Merchandise and service exporters accounted for the largest share, borrowing a total of US$2.49 billion, or 26.2% of the total loans.
This highlights the importance of export activities in the Philippines, as companies in these sectors require foreign currency loans to finance their international transactions and manage exchange rate risks.
Power generation companies were the second-largest borrowers in banks, with loans amounting to US$2.12 billion, or 22.4% of the total.
The energy sector remains a critical component of the economy, as it requires substantial capital investments to meet growing electricity demand and develop infrastructure projects that ensure energy security.
Other notable bank borrowers included companies involved in towing, tanker operations, trucking, forwarding, and personal services. These industries collectively borrowed US$1.68 billion, or 17.7% of the total FCDU loans, reflecting their essential role in maintaining the flow of goods and services across the country.
Focus on medium- to long-term loans
The maturity profile of FCDU loans remained predominantly medium- to long-term, meaning that a significant portion of the loans, or 76.7%, are payable over more than one year.
This suggests that bank borrowers are now utilizing foreign currency loans for longer-term investments, such as capital expenditures, infrastructure projects, and business expansions, rather than short-term needs.
This trend is consistent with the nature of the sectors that have taken out the most loans, such as exporters and power generation firms, which typically require longer-term financing to support large-scale operations and investments.
The BSP data also showed that a majority of the FCDU loans were granted to residents of the Philippines. Loans to residents amounted to US$9.48 billion, or 60.7% of the total loans granted in the second quarter. This indicates strong domestic demand for foreign currency loans, particularly from sectors engaged in international trade and energy, which rely on foreign currency to manage their operations.
Meanwhile, the remaining 39.3% of the loans, or US$6.15 billion, were granted to non-residents. These loans were likely taken out by multinational companies with operations in the Philippines or foreign entities engaged in cross-border trade with Philippine businesses.
Outlook for FCDU lending
The 2.7% quarterly decline in outstanding FCDU loans reflects a cautious approach by both lenders and borrowers, as global market volatility and foreign exchange fluctuations continue to impact business decisions.
Despite this, the year-on-year increase of 1.6% suggests that overall demand for foreign currency loans remains healthy, driven by key sectors such as exports and energy, which continue to seek financing to support their operations and growth.
Moving forward, the trajectory of FCDU lending is expected to be influenced by global economic conditions, particularly interest rate movements, exchange rate dynamics, and geopolitical developments.
The BSP’s continued efforts to maintain monetary stability and support the country’s economic recovery will play a crucial role in ensuring that the foreign currency lending market remains stable and accessible to businesses that rely on these loans for their financial needs.
In the meantime, FCDU loans will likely remain concentrated in sectors that are critical to the country’s economic progress, such as exporters and power generation companies, which will continue to require substantial capital to finance their operations and investments.
As the Philippines continues to navigate post-pandemic recovery and global economic shifts, the foreign currency lending market will play a vital role in supporting businesses and ensuring sustained economic growth.