Long-term time deposits in the Philippine banking industry plummeted 95 percent in recent months, as Filipino depositors may have withdrawn or opted not to renew their placements following the removal of a key tax exemption.

“So the five-years-plus-one-day time deposit product of our member banks, we’ve seen a 95-percent drop in that product. It’s quite dramatic,” veteran banker Michael Angelo Kho Samson, who chairs the Bankers Association of the Philippines’ (BAP) capital markets development committee, said during the Philippine Tax Academy (PTA) Convention on Wednesday, Sept. 24.

“It’s too early to tell where that movement is,” he said, referring to the destination of funds such as shorter-term instruments, equities, or offshore investments. He told reporters that funds withdrawn from time deposits could also be shifted to other investments, such as equities or cryptocurrencies, but their movement is difficult to track.

“When I say capital moves, I actually also include the domestic banks. So I’m not just speaking for foreign banks. We are a very small component of the deposit base of the country,” said Samson, who is the chief executive officer (CEO) of Standard Chartered Bank (StanChart) in the Philippines.

He noted three concerns, such as the loss of a tax exemption on one instrument.

“The first, obviously, is that one instrument, I suppose, enjoyed the tax exemption, but it no longer does. You would expect that behavior, but it’s dramatic and quick,” Samson said.

“That instrument, I guess, the market is saying that their new Tax Code is no longer attractive. So maybe they'll have to find another instrument to invest in,” he added.

It can be recalled that the Capital Markets Efficiency Promotion Act (CMEPA), which was implemented in July, standardized the tax rate on interest income, eliminating the unfair preferential treatment previously enjoyed by the wealthy.

CMEPA removed preferential or lower taxes for wealthy depositors, setting a uniform 20-percent rate on interest income across the board. Deposits maturing in more than five years were previously tax-exempt.

Samson also cited concerns such as the need for long-term funding to support infrastructure projects and develop a bond yield curve, and the risk of capital moving abroad through private banking or other channels.

On the impact of the decline in long-term deposit liabilities on banks’ long-term loans and interest rates, Samson said it remains too early to assess.

He explained that the gap between funding sources and capital investments is lengthy, noting that projects such as solar plants take years to develop due to land acquisition, licensing, and local government requirements.