By Karl Angelo N. Vidal
THE PHILIPPINES’ “fairly robust” economic growth — though below official target so far — can be expected to generate profit and expansion opportunities for banks in the country, Fitch Ratings said on Thursday, adding that liquidity conditions will likely ease further due to central bank steps to loosen monetary policy in step with much of the world.
Elaine Koh, director for Financial Institutions at Fitch Ratings, said in an e-mailed response to questions that the global debt watcher’s 2019 Philippine projection of “6.2% is still a fairly robust GDP (gross domestic product) growth rate and we expect this to help sustain growth and profit opportunities for banks.”
The global debt watcher downgraded its 2019 GDP growth forecast for the country to 6.2% in April from the 6.6% projection it pencilled in December, dragged down by a four-month delay in national budget enactment and the lingering impact of significant interest rate rises in 2018.
Fitch further slashed its full-year growth projection for the Philippines to 6.1% in May, but at the same time affirmed the country’s credit rating at “BBB,” a notch above the minimum investment grade, with a “stable” outlook.
State economic managers in March slashed their GDP growth projection for this year to 6-7% from 7-8% originally in the face of a delay in national budget enactment. GDP grew by a four-year-low 5.6% in the first quarter, and both economic officials and private sector analysts now estimate that second-quarter growth would clock in at around six percent when data is reported on Aug. 8, compared to 6.2% a year ago.
“Global pressures are likely to dampen Philippine growth, but we see the Philippines as somewhat more insulated from these external headwinds compared with many of the other Asian emerging markets (EMs),” Ms. Koh said, noting that the Philippine economy is “more domestically driven” and is less export-oriented than other major EMs in Asia.
In its EM Banking System Datawatch report based on end-2018 data, the debt watcher said emerging economies in Asia are “vulnerable, albeit to varying degrees” to a stronger dollar, softening trade and general market volatility.
“Also, several markets in Asia are directly or indirectly exposed to slower growth in China,” read the report sent to reporters on Wednesday via e-mail.
Fitch said liquidity conditions will likely ease further given “loosening measures” done by the Bangko Sentral ng Pilipinas (BSP). The central bank reduced benchmark interest rates by 25 basis points in its May 9 meeting. However, it opted to keep rates steady the following meeting on June 20 to observe and assess the impact of prior monetary policy adjustments including the reduction in reserve requirement ratio (RRR). Also in May, the BSP announced a 200-basis-point cut in RRR which will be completed on July 26.
“[C]redit growth should start to pick up again along with domestic infrastructure spending in the latter part of this year,” Ms. Koh said.
At the same time, Ms. Koh noted that Fitch has viewed the local banking industry’s fairly high credit growth over a number of years with “a degree of caution.”
“[P]rolonged double-digit loan growth has often preceded wider credit deterioration when growth finally slows, in our experience,” the Fitch analyst explained.
Ms. Koh also said that asset quality issues are more likely to emerge in the near term, given rising headwinds to growth and higher debt repayment costs due to the year-on-year increase in interest rates.
“Lending rates are higher now than at the start of last year, because of hikes in the benchmark policy rate by the Philippines central bank in 2018,” Ms. Koh noted.
Over the long term, the large unbanked population as well as growing consumer segment pose opportunities for the local banking sector, particularly banks that serve these markets in a prudent and cost-efficient manner.
“In the longer-term, new entrants will pose another challenge for the industry,” Ms. Koh said of Philippine banking.
“The pace of digital innovation is picking up everywhere, including in banking,” she noted.
“Banks that are unable to keep up and invest wisely in IT may see their franchises and business models eroded.”