A closer look at the BSP’s latest Consumer Expectations Survey.
The Philippines’ fourth-quarter GDP surprised positively, registering a year-on-year increase of 5. 6% (compared to the median estimate of 5. 2%), thanks to a sustained increase in public structure and physically powerful consumption. Household spending is the main driver of growth, with a rate of 5. 3% year-on-year, although so-called revenge spending still manages to grow strongly.
We had anticipated some drop off in expenditure on these discretionary items given stubbornly high inflation and elevated borrowing costs, however Filipino consumers have yet to slow down on these purchases. This study hopes to answer the question how are households able to carry on with this pace “revenge spending” and more importantly, how has this frenzied pace of consumption impacted the Filipino consumer so far.
We took a look at the BSP Consumer Expectations Survey (CES) for answers.
Source: Philippine Statistics Authority
With the reopening of the Philippine economy in mid-2022, Filipinos left (literally), causing a continued double-digit expansion in discretionary spending such as leisure, restaurants, and hotels. The wave of revenge spending has dragged on much longer than expected. Which raises the question of how households sustain this spending in the face of peak inflation and high borrowing costs. Short answer: they borrowed.
In 2022, families racked up a lot of debt, possibly to fund so-called revenge spending. Outstanding customer loans reached PHP 1. 69 billion in November 2023, up from PHP 1. 12 billion at the beginning of 2022.
Even if the overall household debt-to-GDP ratio remains relatively low (10. 1% in June 2023), we would like to determine whether this progression has had an effect on households and their economic prospects.
Source: Bangko Sentral ng Pilipinas
When breaking down customer debt by loan type, we see that the sharp increase is due to the immediate increase in credit card loans (gray). The latest insights show that credit card loans exceed PHP 680 billion, up from PHP 428 billion at the beginning of 2022 and almost double the volume reported in January 2020.
The rise in credit card lending has been so pronounced that it has recently surpassed auto loans (in terms of volume), which used to be the largest segment of customer credit. If customers were willing to go into debt just for their consumption, it would seem that their weapon of choice was their credit card.
Source: Bangko Sentral ng Pilipinas
We’ve noticed how consumers have taken on more and more debt since 2022. But how accurately were the proceeds from those loans used?Have those loans fueled this phenomenon of revenge spending?
According to BSP CES, consumers use the loan funds for all kinds of everyday expenses, but the three most sensible ones are 1) buying basic goods, 2) expanding your business, and 3) education. that more families are now taking out loans to buy essential essentials than before Covid. Before the pandemic, about 35% of families used loans for things like groceries, but now this is more prevalent: 54. 2% now take out loans for those purchases. Education and business progress have also increased, but the most significant increase remains spending on raw materials.
What if the proceeds from the loan are used to fund “revenge spending”?According to the BSP survey, the budget for recreational activities remains virtually unchanged at just 0. 8 per cent. Does this mean that the recent accumulation of customer debt has fueled this revenge spending?frenzy? Maybe.
However, it may also be believable that consumers are now content to reallocate their budgets (in cash) to engage in revenge activities, while their loan proceeds are increasingly going to cover critical goods and services.
Source: Bangko Sentral ng Pilipinas
Meanwhile, with the pace of consumption sustained via increased debt, we had also expected consumers to cut back on savings given re-allocated budgets and the need to service new loans. This appears to be the case, with households now less able to save – only 29.1% are able to save as of the fourth quarter of last year according the latest CES survey. This is lower than the pre-Covid level of 37.8%, although it is an improvement from the 24.7% recorded during the lockdowns of 2020.
When breaking down savings by teams from monthly income sources, we observed that low- and middle-income families report even lower levels of savings than Covid. This suggests that two out of three revenue source teams face abundant difficulties in terms of dividing budgets between spending, debt service, and savings. Households belonging to these income source teams constitute 62. 1 per cent of the total number of families surveyed in the CES survey.
While we can argue that consumers would arguably be more willing to postpone saving (due to increased employment opportunities), we believe that low levels of savings may also make consumers more vulnerable in the event of a potential economic slowdown. In addition, those families’ inability to generate savings can also have an effect on their potential investment decisions, as the lack of savings can also prevent them from getting home or car loans in the future.
Source: Bangko Sentral of the Philippines
The fiscal government remains optimistic about the economy’s expansion prospects, a GDP expansion of 6. 5-7. 5% year-on-year by 2024. At the same time, inflation has moderated, and the BSP’s core inflation forecast points to inflation returning to target (2. 8% in January 2024) after failing to reach target in 2023.
Are Filipino consumers pricing in this positive economic outlook? Are they equally positive about moderating inflation?
While the BSP’s CES survey does not have a specific measure on GDP per se, the survey does ask respondents if they remain optimistic over economic prospects over the next 12 months. As of the fourth quarter of 2023, it appears that consumers are less optimistic – citing faster inflation, lower income, fewer jobs, as well as concerns over the effectiveness of government policies to control inflation, provide public transportation and financial assistance.
In particular, households are concerned about a further acceleration in inflation in 2024. The BSP’s recent emergency interest rate hike in October 2023 was carried out by raising “the need to anchor consumer inflation expectations”.
Back then, it was estimated that households forecast inflation to hit 6.6% in 2024. The latest survey results now have consumers expecting inflation to worsen further, rising to 6.9%, even after BSP’s off-cycle rate increase.
Source: Bangko Sentral ng Pilipinas
Recent trends in client debt would likely have only a modest effect on the exchange rate and local borrowing rates. The accumulation of client debt can also lead to a marginal accumulation of remittances from abroad by Filipinos, such as foreign-founded parents. They are forced to send more foreign currency to cover the accumulation of living expenses or debt service.
However, we do not expect a dramatic increase in remittance flows if this happens, given that the expansion of remittances has not reached 5% in the last five years, which may highlight the constraints faced by farmers’ organizations in increasing remittances even if they seek to.
On the other hand, we do not expect the accumulation of customer debt to have a dramatic effect on local loan prices, given the relatively small percentage of customer loans in the total (11%). In addition, the CES survey shows that despite the accumulation of customer debt, households have largely managed to pay off their debt on time, with only a marginal increase in the delinquency rate. This, coupled with the relatively low volume of loans to customers, may only recommend that any potential stress on local rates coming from this sector be modest.
Bottom line: GDP rose on spending, but consumers appear more vulnerable
Overall, the effects of the BSP CES suggest that households have taken on more debt and are now saving less. It remains to be seen whether this frenzy of borrowing has directly contributed to fueling the wave of revenge spending, although it may still do. indirectly.
Meanwhile, as families are more in debt and able to save less, customers are now less positive about the economy, with inflation their main concern. Consumers’ reduced optimism (or emerging pessimism) may have a prospective effect on their savings and investment decisions over the years. throughout the year. We believe that higher debt levels and lower savings rates may eventually hamper Filipino customers’ ability to maintain this pace of spending over the next year. This possible slowdown in household consumption, given its very important contribution in relation to the general GDP, could limit the general prospects for economic growth. It will be imperative for government officials to combat pricing pressures in 2024 to help boost consumer confidence and ensure sustainable growth.
Source: PSA and ING estimates
Read the original analysis: Filipinos are taking on more debt and saving less.
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