Beware of “zombie” companies, warns BPI economist

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A prolonged period of “negative” interest rates in the country can only breed “zombie” businesses, referring to businesses that are essentially dead or insolvent and are drowning in debt and living off ultra cheap credit. said the chief economist of the Bank of the country headed by Ayala. Philippines (BPI) said Tuesday.

This is one of the three side effects of having interest rates too low, as well as the propensity to lead to excessive risk-taking and widening social inequalities, as wages could not cope with. soaring prices for real estate and other assets, according to BPI economist Emilio Neri. Jr. said in a webinar.

The Philippines has been subjected to a negative real interest rate regime – where benchmark interest rates are well below the rate of inflation – for the past 17 months, noted Marco Javier, senior market strategist at BPI’s economic research team. But he said the country was not alone in this situation, noting that Thailand and Malaysia were in the same boat.

“But the Philippines has been the most aggressive… We think the BSP (Bangko Sentral ng Pilipinas) may have cut its key rate too much last year,” Javier said.

To cushion the impact of the COVID-19 pandemic, the BSP cut rates by 200 basis points to a record 2% since last year. Thailand and Malaysia cut rates by just 75 basis points and 100 basis points, respectively.

But while Neri would have liked the BSP to start adjusting rates to normal levels sooner, he said it was unlikely to happen until June next year. He noted that in the last three presidential elections, the BSP has consistently refrained from adjusting interest rates upward in the five months leading up to each presidential race.

One of the little-talked about side effects of negative interest rates is the proliferation of “zombie” companies, Neri said.

These are the companies that only survive because interest rates are too low or even negative, citing the case of bankrupt US retailer JC Penney. Even though their business model was now obsolete, Neri said these zombies generally relied on government support and were generally “buddy” or “related” businesses with a strong political lobbying capacity.

If interest rates rose, he said these zombies would not be able to service their debt.

“I’m not saying we have such businesses in the Philippines, but we could start them already because we fueled them with negative interest rates,” he said.

Neri agreed with political economist Joseph Alois Schumpeter, the father of the concept of creative destruction, who argued that these companies should be allowed to disappear and let the startup’s young people take over in order to encourage the innovation and entrepreneurship.

And my main takeaway from that is you know the ultra low negative interest rate environment leads to one of the following or poor funding risk assessment, which Michael will explain on his side. in terms of real data, then zombie companies, of course, and of course inequality. So I would like to stop there. Sorry, I was unable to call everyone to join the conference reservation, extension coupon. But from here on, I’d like to pass the mic over to Jesse now so we can introduce our senior strategist.

Regarding worsening inequalities, Neri said the pandemic should have been a chance for house prices to drop a bit and become more affordable after being pushed up by demand from Filipino offshore gambling operators ( Pogos).

But even during the pandemic, he noted that residential property prices in the Philippines continued to rise. “There has been a drop in some segments this year, but not enough to be able to remove the foam from the rally led by POGO over the past five years,” said Neri.

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