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November 10, 2017

IMF published its staff report and selected issues report in the context of the 2017 Article IV consultation with Philippines. The Executive Directors notes the strong performance of the economy has continued, with rapid economic growth and low inflation. They also noted that the main systemic risks to financial stability are high credit growth and concentration. In addition, some conglomerates and real estate developers have leveraged significantly, while shadow-banking activities have expanded.

The staff report reveals that the banking sector in the country appears sound based on financial soundness indicators (FSIs), with ample liquidity, high capital, and low nonperforming loans (NPLs), although high credit growth needs to be closely monitored. This is because high credit growth and concentration are the key systemic risks to financial stability. Capital market development can help reduce bank loan concentration by diversifying the sources of funding for large conglomerates. FSIs also indicate pockets of vulnerability in the non-financial corporate sector. Although the share of non-financial corporate sector debt at risk is among the lowest in emerging market economies, some real estate developers have leveraged significantly, while expanding shadow banking activities through their acceptance of advances from households. Furthermore, the authorities are tightening anti-money laundering (AML) legislation, in line with the Financial Action Task Force standards.

Staff recommends the use of macro-prudential policies to address the systemic risks to financial stability. Targeted macro-prudential policies should be used in case of excessive credit growth to some sectors. Additionally, staff welcomes the early adoption of Basel III guidelines and the role of the new financial stability department at BSP, which is the central bank of Philippines. BSP is entrusted with mainstreaming macro-financial surveillance and strengthening the macro-prudential framework. The authorities broadly agreed with the assessment of systemic risks and policies to address them. Stress test results show that banks are resilient to a 20% write-off on their exposure to the top 20 conglomerates. Moreover, staff encouraged the authorities to consider introducing stress tests on debt-to-earnings ratios for corporates and developing a borrowers’ interconnectedness index. 

The selected issues report analyzes the spillover effects from US policy shifts and lower growth in China. The report also discusses the fiscal responsibility law and how Philippines would benefit from it, enshrining explicit fiscal rules with countercyclical elements and an independent fiscal council to improve accountability and transparency. 


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Keywords: Asia Pacific, Philippines, Banking, Article IV, Systemic Risk, Shadow Banking, Stress Testing, FSI, IMF

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