MANILA, Philippines — Costlier debt servicing due to rising interest rates and exchange rate volatility is the biggest concern faced by the economy, and financial authorities are now planning to introduce “interventions” to manage risks arising from credit.
“What is clear is that interest rates are rising and emerging market currencies have been depreciating versus the United States dollar,” read the 2017 Financial Stability Report (FSR) released Tuesday by the inter-agency Financial Stability Coordination Council (FSCC).
“These must mean that debt servicing is now at a higher cost than in the past, separate from the issue of having more outstanding debt. This is our central financial stability issue,” the report added.
According to the FSCC, the change in market prices could trigger “negative outcomes” which, if not properly addressed, would amplify into “systemic consequences.”
“While there is no definitive evidence of a looming crisis, it is also clear that shocks that have caused dislocations of crisis proportions have come as a surprise,” the report read in part.
“What is not debatable is that repricing, refinancing and repayment risks are escalated versus last year and this could result in systemic risk if not properly addressed in a timely manner,” it added.
In a bid to fight inflation and capital outflow, the Bangko Sentral ng Pilipinas has raised its policy rates by a cumulative 100 basis points from May to August. Emerging-market central banks have come under pressure amid a stronger US dollar and tightening monetary policy in advanced economies.
Meanwhile, the Duterte administration’s ambitious infrastructure program has been adding pressure on the Philippine peso.
To mitigate debt-related risks, the BSP is in discussion with the market to roll out three measures: Countercyclical Capital Buffer (CCyB), Debt-to-Earnings-of-Borrowers’ Test (DEBT) and Borrowers Interconnectedness Index (BII).
The CCyB seeks to ensure banks have enough capital buffers so they can continue lending money even during a financial crunch. The measure also aims to provide a means to curb credit growth if it is deemed as expanding at “too-strong” a pace.
DEBT is a stress test that evaluates the debt servicing capacity of bank borrowers under the hypothetical scenario of higher interest rates and/or a depreciation of the Philippine peso.
The FSR takes a thematic assessment of the various risks that could pose a challenge to the continued growth of the Philippine economy and its financial system. The FSCC is a voluntary interagency body composed of the BSP, the Department of Finance, the Insurance Commission, the Philippine Deposit Insurance Corporation and the Securities and Exchange Commission.