S&P sees higher corporate credit risk for banks

MANILA, Philippines — The volatility in the foreign exchange market may increase corporate credit risk for the banking system especially for sectors like construction and transportation with dollar inputs and local currency revenues, according to S&P Global Ratings.

In a report, Nikita Anand, primary credit analyst at S&P, said a sustained depreciation of the peso could contribute to increasing inflation and consequently temper real economic growth despite the banking industry’s low foreign currency exposure.

“Peso devaluation was mainly triggered by a ramp-up of imports from the government’s ambitious infrastructure plans before the currency sell down in emerging markets,” she said.

Anand said the non-performing loan (NPL) ratio of Philippine banks would remain steady at 3.5 percent in 2018 and 2019.

“We expect the impact of currency volatility, higher inflation, and slower credit growth to be manageable for the banking system given banks’ good capital buffers and coverage ratios,” Anand said.

The peso has rebounded strongly back to the 52 to $1 level after emerging as the third worst performing currency in the region after piercing the 54 to $1 a few months ago and plunging to its lowest level in almost 14 years.

Anand said the Bangko Sentral ng Pilipinas (BSP) has raised interest rates by 175 basis points so far this year to counter inflationary pressure. “Sharp spikes in interest rates would increase debt-servicing burdens, and could lead to higher nonperforming loans particularly for highly indebted borrowers,” she said.

According to Anand, both household and corporate leverage are at modest levels, and interest rates are rising from a historically low base.

She said the ambiguity of tax reform package under the Tax Reform for Attracting Better and High-quality Opportunities (TRABAHO) bill could weaken inflows of foreign direct investment into the country and more so during times of skittish investor behavior observed recently toward emerging markets.

“Investors have moved to a wait-and-see mode in anticipation of clarity of formal policies,” she said.

S&P expects robust economic growth to remain supportive of the domestic credit environment.

However, Anand said persistent increases in interest rates could begin to affect credit growth as well as the debt repayment capacity of borrowers, particularly those belonging to smaller, low-income groups.

The debt watcher expects corporate and household loan demand to temper to around 14 to 15 percent in 2018 and 2019, from 18.32 percent in 2017.

She said the current administration’s Build, Build, Build scheme could provide further boost to infrastructure spending in the country and aid credit growth via the multiplier effect until the end of the term of President Duterte in 2022.