Low income level makes Philippine economy vulnerable

By Luis Leoncio 

Standard & Poor’s Global Ratings said the low income level in the Philippines, owing to high unemployment (6. 5 percent) and underemployment (21 percent), remains a key constraint to its economic resilience despite a prosperous economy. 

In its “Banking Industry Country Risk Assessment: Philippines,” S&P said that, without the closure of infrastructure gaps and improvements in the business climate through regulatory reforms, the Philippines may not achieve lower-middle-income status in 2017, where per-capita gross domestic product (GDP) exceeds $3,000.

S&P classifies the Philippine banking sector in Group Seven under its Banking Industry Country Risk Assessment (Bicra) criteria, ranked on the level of Indonesia, Portugal, Bahrain, Bulgaria, El Salvador, Jordan, Morocco, and Slovenia.

“The Philippines’s economic trend is stable, in our opinion. We expect the country’s strengthening external profile, moderating inflation, and improved external-debt position to support the economy. Also, we believe the risk of a sharp correction or asset bubbles will remain manageable, given the measures taken by the central bank, Bangko Sentral ng Pilipinas, to curb excessive growth in the property segment,” S&P said.

It added that the credit quality of the banks has been improving over the years.

But S&P said: “We believe poor transparency and inefficient legal infrastructure may limit any material reduction in the credit risk of banks operating in the country.” Still, it noted that the industry risk trend was stable.

“We believe banks’ well-established domestic franchise will continue to help domestic banks to sustain a strong, stable, and diversified customer deposit profile,” it said.

“However, the pace of deposit growth is likely to remain slower than loan growth, leading to a gradual increase in the system’s loan-to-deposit ratio. We expect the banks’ risk appetite to remain manageable because they mainly offer simple and traditional products,” it added.

S&P also said regulatory standards in the country are broadly in line with international standards and, in some instances, more stringent.

“However, inadequate legislation and legal protection for supervisory staff may weaken the regulator’s ability to implement prudential measures. The government’s attempts to amend the legislation have so far been protracted,” it added.

S&P’s Ivan Tan, director of financial institutions rating, said the local banking sector is generally stable supported by strong economic growth.

The Philippine economy will remain the fastest growing in Southeast Asia over the next 12 months and compares favorably with IMF growth forecasts for the entire region of 3.2 percent for 2016, S&P said.

“Private consumption was the main driver of GDP growth, supported by remittance inflows, expanding business process outsourcing and a large, young educated labor force,” Tan said.

The wide nonperforming loans (NPLs) among local banks had declined to 2.15 percent as of Dec. 31, 2015, from 2.4 percent a year earlier, Tan said.

He said that, in contrast, the credit cycles in several neighboring countries have turned, in which the NPLs in Singapore, Indonesia and Thailand, for instance, have been increasing.

He said, however, that the Philippines has limited exposures to credit vulnerabilities in the region, such as the exposure to China’s slowing economy, and capital outflows and currency depreciation.

The Philippines has become an exemption in the region in terms of the improved banking sector, Tang added.

The system-wide loan-to-deposit ratio of 69 percent in the country is low by global and regional standards, he said.

Excess liquidity of banks is deployed in cash and government bonds as liquid assets, accounting for 37 percent of system assets, he added.

He said liquidity levels remained stable throughout the global financial crisis in 2008 to 2009, demonstrating the Philippines banking system’s “considerable resilience” to external shocks.

He added that Philippine banks have the lowest loan-to-deposit ratio in the Association of Southeast Asian Nations (Asean).

Among the inherent strengths of the local banking sector, Tan said, are the moderating credit growth that will reduce pressure on capitalization and wide compliance with Basel 3 that prompted banks to raise core capital to meet 2019 full implementation.

But a weakness of the economy is found in the consumer NPL ratio, which is almost double the overall NPL and also comparatively higher than the ratio in neighboring countries, Tan said.

He said the possible reason for this is the still high level of unemployment, at 6.5 percent, and underemployment, at 21 percent.

He said risk management in consumer lending is also not fully developed in the country, which is partly the result of generally poor availability of consumer data.