Philippines not vulnerable to financial crises for now — report

MANILA, Philippines — The Philippines is not expected to face a financial crisis in the next few years, but possible interest rate shocks and climate change risks could pose a big threat to the country’s financial stability.

Japan-based investment firm Nomura counts the Philippines as among the economies not at risk of a financial meltdown over the next 12 quarters based on its “Cassandra” report released Monday.

Designed as an “early warning model” for financial crises, Nomura’s Cassandra report — named after a priestess of Apollo in Greek mythology who foresaw the destruction of Troy — tracked 40 economies, with a score that exceeds 100 interpreted as a warning that the country is vulnerable to a financial crisis.

The report gave the Philippines a Cassandra score of zero.

“Cassandra correctly signaled two-thirds of the past 53 crises in our sample of 40 countries since the early 1990s,” the report said.

As the pandemic forces central banks to cut rates to historic-lows to save their ailing economies, several monetary authorities decided to maintain their ultra-loose settings despite emerging signs of recovery. In the Philippines, the Bangko Sentral ng Pilipinas vowed to keep its policy rate at record-low for as long as it can to help the economy bounce back.

This, in turn, creates an environment ripe for debt-fueled asset price booms, Nomura said, something that may cause a credit crunch, or worse, a financial crisis once asset bubbles burst. Nomura said it used five indicators to calculate the countries’ Cassandra scores, namely ratio of private credit to GDP, the debt service ratio, real equity prices, real property prices and the real effective exchange rate.

Apart from the Philippines, other countries that received a Cassandra score of zero are China, India, Indonesia, Malaysia and Singapore, among others. On the other side of the spectrum, Nomura’s report warned that six economies – US, Japan, Germany, Sweden and Netherlands – appear vulnerable after their scores breached the 100 threshold. The US is most at risk, with a score of 195.

But if possibilities of interest rate shocks and risks from climate change would be factored in, Nomura said the Philippines’ Cassandra score would surge to 91, near the 100 benchmark. Much of the lift came from the Philippines’ vulnerability to climate change, which has historically been known to disrupt the local economy and cause losses to investors.

“Accurately forecasting the timing of financial crises is likely to remain an elusive goal, but the vast literature now shows that it is possible to build early warning systems that can help assess the build-up of risks of future financial crises,” Nomura said.