The increase in these dollar-denominated loans — taken out by local borrowers usually to avoid the higher interest rates charged for peso loans — were made during the first quarter when the peso had appreciated from the P56.60-to-a-dollar level in mid-January to the P55.30 level by mid-March.
The peso’s weakness, which began toward the end of the first quarter, resulted in the local currency depreciating by over 6% since then.
This means a borrower who took out a loan in mid-March would today be carrying 6% more debt in peso terms, likely offsetting the interest rate savings he was hoping to gain by taking on nominally cheaper dollar-denominated loans — a phenomenon in banking called “foreign exchange risk”
Foreign exchange risk highlights the dangers of taking out loans in foreign currencies, especially when the borrower’s income stream that will be used to pay off the loan is in a local currency. A sudden exchange rate depreciation may result in the value of the loan and the cost of servicing it increasing beyond what the borrower expected.
According to the central bank, this $911-million increase in dollar loans recorded in the first quarter is attributed to higher disbursements outpacing principal repayments.
On a year-on-year basis, FCDU loans grew by 4%, up by $614 million from $15.5 billion in March 2023.
Mitigating this increase is the fact that the majority of these loans — about 79.1% — have medium- to long-term maturities, meaning they’re payable over a longer period and the heavier burden can be spread out over time.
The central bank said loans to residents totaled $9.7 billion, with significant portions going to merchandise and service exporters, power generation companies, and transportation industries.
Gross disbursements in the first quarter of 2024 rose to $19.2 billion, driven by foreign bank affiliate funding needs, while repayments slightly dipped to $18.2 billion.
Meanwhile, dollar deposits during the period soared to a record $58.6 billion, largely due to increased time deposits and remittances from overseas Filipinos, bolstering the country's international reserves, the central bank said.
This rise in banks’ holdings of dollar deposits — which are booked as liabilities since they are owed to depositors — partially explains the increase in dollar loans granted during this period, as banks earn by lending out these deposits to borrowers.
Senior Reporter
