BANKING SYSTEMS in emerging economies will face three key risks in 2020, including uncertainties from geopolitical and domestic policies, deterioration in asset-quality indicators, and risks coming from volatile investor sentiments, according to S&P Global Ratings.
But the Philippines is likely to weather these headwinds amid continued “relatively high economic growth,” it added.
“One-third of our 15 emerging economies should still experience relatively high economic growth — and they are all in Asia — China, India, Indonesia, the Philippines, and Malaysia,” S&P said in a note sent to reporters on Tuesday.
“However, growth remains below trend for most Asian emerging markets (EMs) due in part to the ongoing downturn in the trade and manufacturing cycle,” it added.
The credit rater said that among key credit drivers for the Philippines in 2020 are the recovery in economic growth on the back of government spending and the possibility of continued monetary easing.
“We expect growth to recover slightly in 2020 thanks to government infrastructure spending and monetary easing after weak sentiment in the private sector in first-half 2019 dragged
down growth,” the firm said, adding that they expect additional rate and reserve requirement ratio reductions during the year.
Meanwhile, S&P projects that bad loans as percentage of domestic loans may inch up to 3.6% in 2020 and 2021 from 3.4% in 2019.
According to analysts, uncertainties that have haunted the rest of the world are coming from the US-China trade war saga, Brexit, as well as geopolitical tensions in the Middle East.
“For the Philippines, S&P may be pertaining to the recent developments in the Middle East between the US and Iran, which has somewhat died down already,” UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said in an e-mailed response.
“The lingering and escalation of the US-China war since July 2018 as well as uncertainties related to Brexit were also major causes of risk aversion that slowed down global economic growth and global trade, also had adverse effects on the global financial markets, especially in EMs,” Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said, noting that risk factors have somehow waned after the phase one deal of Washington and US and the avoidance of the no-deal Brexit.
UnionBank’s Mr. Ricafort added policies that may have impact on the local banking industry are the better signaling of the Bangko Sentral ng Pilipinas (BSP).
“There has been some improvement in signaling monetary policy by the BSP, which pointed out that this will facilitate better planning in view of possible cut in policy rates and/or any cut on banks’ RRR (reserve requirement ratio) in 2020,” he explained.
The BSP cut key policy rates by 75 basis points (bps) in 2019 to 3.5% for the overnight deposit facility, four percent for overnight reverse repurchase and 4.5% for overnight lending.
BSP Governor Benjamin E. Diokno has said the central bank still has a “lot of monetary space” and hinted that another next rate cut could be on the table as early as the first quarter. Meanwhile, he said there is no hurry to cut banks’ reserve ratios as he still has 14 quarters left to fulfill a single-digit reserve requirement by the end of his term in 2023.
When asked about how exposure to Philippine Offshore Gaming Operators (POGOs) could affect banks, the analyst downplayed risks, saying that lenders are safe based on asset-quality indicators.
“Local bank exposure to POGOs are minimal, and this is mandated by the central bank. Asset-quality indicators are rather safe in the Philippines and the banking industry is quite healthy at this point,” Mr. Asuncion said.
“Borrowers that supply POGOs such as property companies and other service providers could be adversely affected in terms of reduced sales that could potentially impair the ability to pay their loans and could lead to some pick up in NPLs (nonperforming loans,” RCBC’s Mr. Ricafort said.
“However, some of the property companies that provide office, residential, and commercial spaces for POGOs belong to and have the financial backing of the country’s biggest companies/conglomerates, as a mitigating factor.”
Meanwhile, volatile investor sentiment, which could be a risk for banks according to S&P, is something a small-open economy country like the Philippines is bound to “resiliently face,” according to UnionBank’s Mr. Asuncion.
“In a global economy where big players abound, small economies are vulnerable to quick changes in investor appetite. This is why a strong external position is a necessity to be resilient in a fickle and unforgiving global economy,” he said, noting that ample dollar reserves will be vital to survive the currents of world trade.
Mr. Asuncion said banks should also look to target strong domestic reserves, just as the central bank is doing for the economy.
“Not only do they [banks] need strong domestic reserves to combat internal uncertainties, but also, just enough foreign volatility exposure to skirt any quick changes in foreign investor perceptions,” he said. — Luz Wendy T. Noble