Espenilla gets nod from debt watchdog

Newly-installed Bangko Sentral ng Pilipinas (BSP) Gov. Nestor Espenilla Jr. received a strong endorsement from credit watchdog Moody’s Investors Service which said Espenilla’s posting assured investors of continuity in the policies of his predecessor Amando Tetangco Jr.

“We do not expect the change in leadership at the BSP to affect the ability or willingness of the central bank to maintain macroeconomic stability,” Moody’s said in its recent assessment on the Philippines.

It added the BSP’s supervision of the banking system has bolstered financial soundness and market discipline.

“In particular, the central bank has closed a number of banks it deemed insolvent. The absence of an implicit or explicit guarantee of support mitigates contingent risks to the government balance sheet from the banking sector,” Moody’s said.

It noted the appointment of a BSP deputy governor last July as the new head of the central bank indicates continuity of policy.

“In addition, fiscal authorities have established a track record of debt consolidation through a combination of administrative revenue reform, expenditure control, and proactive debt management,” it said.

The Moody’s report said the Philippine banking system as a whole is well-capitalized, profitable, competently managed and very liquid, thus posing limited contingent risks to the government.

“The average intrinsic financial strength for rated banks, which together comprised 73 percent of system loans as of the end of 2016, rose to investment grade in 2015,” Moody’s added.

High credit growth in excess of nominal gross domestic product (GDP) growth since 2014 exposes the banking system to unseasoned risk, but the formation of non-performing loans has so far remained low and associated risks are manageable, the report said.

It added that regulatory measures by the BSP have been successful in containing the pace of property-related loan growth and property price appreciation as housing prices have been stable over the past eight quarters.

Peso depreciation is not likely to lead to direct pressures on asset quality because the corporate sector has only a limited exposure to dollar-denominated financing, it added.

Moody’s cited figures in 2016 that showed total banking system assets were worth about 94 percent of GDP, with total loans amounting to around half that amount.

“The banking system is largely deposit funded, aided by the steady flow of remittances, and has little exposure to external funding,” it said.

Moody’s said even foreign currency lending is fully backed by onshore sources of foreign currency financing, primarily deposits.

“Stringent oversight by the BSP supports financial stability, as evidenced by the adoption of international regulatory standards,” it noted.

The BSP required all the country’s universal and commercial banks to comply with Basel III capital adequacy standards by the beginning of 2014, without a phase-in period.

It also set more conservative capital ratios than required by international standards, even calling for an additional capital conservation buffer above the regulatory minimum.

As such, the loss-absorbing buffers against risks from high credit growth remain high, further aided by capital raising and declining nonperforming loan ratios, Moody’s said.

Th banking system also provides a stable source of financing for government debt, it said.

As of March 2017, bank holdings of government debt were about P1.6 trillion, or 37.8 percent of local-currency government debt.

The banks also held another P2.7 trillion in deposits at the central bank, reflecting ample systemic liquidity.

A healthy external payments position, as indicated by low external debt and high reserve adequacy, provides some resilience to shifts in global capital flows, particularly as the US Federal Reserve tightens monetary policy, Moody’s added.

“While the current account has deteriorated because of a widening trade deficit, the overall balance of payments is stable and the central bank’s international reserves remain higher than external debt,” it noted.

Last year, the current account recorded its smallest surplus since 2008, driven by a combination of higher imports from robust domestic demand, and weak exports. “Growth in services exports, mainly business process outsourcing, provided some offset, while remittances from overseas Filipinos benefited from the recovery and stabilization of growth in key source markets in the US and Asia,” it said. RIZA LOZADA