IMF Publishes Report on 2018 Article IV Consultation with Philippines
IMF published its staff report under the 2018 Article IV consultation with Philippines. Directors welcomed the recent macro-prudential measures of the Central Bank of Philippines (BSP) to safeguard financial stability against systemic risks. They supported the plan of BSP to introduce a countercyclical buffer (CCyB) for banks and underscored the need to close data gaps on non-bank financial institutions (NBFIs) and conglomerates. Directors also encouraged the approval of amendments to the BSP charter.
The staff report reveals that the financial system appears sound and is dominated by well-capitalized banks. Additionally, stable non-performing loans and low exposure to external and foreign-exchange-denominated financing provide buffer against financial stability risks. Financial intermediation by the less regulated NBFIs is small, but has grown rapidly in recent years. However, available data suggest that corporate leverage has increased. With increasing loans, corporate leverage for listed firms, measured by debt-to-asset ratio, has risen to 21.4% in 2016, surpassing the average in peer countries. The macro-prudential and strong financial surveillance policies of the central bank aim to improve governance practices and the risk management system to support expanded lending activities; these measures include the following:
- Adoption of guidelines on Credit Risk Management Practices and on the conduct of stress testing exercises—that is, the real estate stress test (REST) and the debt-to-earnings-of-borrowers’ test (DEBT)
- Basel III reforms that include adopting a minimum leverage ratio and enhancing the liquidity position of financial institutions
- Supervisory framework for domestic systematically important banks (D-SIBs)
- Imposing the capital conservation buffer as a common equity tier 1 requirement to absorb market shocks
New initiatives have been proposed to address the slow progress in closing the existing data gaps. Data gaps are particularly large for non-financial corporates and NBFIs outside the regulatory perimeter of BSP. An Electronic Information Sharing project launched in May is intended to provide a centralized, web-based system to facilitate the sharing of reports of supervised institutions in the Philippines, which include audited financial statements of the top 1,000 corporations and related key performance indicators. Furthermore, requirements of more granular data in the reporting templates on real estate and project finance are expected to help in surveillance of vulnerabilities from related exposures and policy response to emerging credit concentration risks. The assessment suggests that approval of the proposed amendments to the BSP charter should be a priority. This will grant BSP the authority to obtain data from any person, including the NFCs, for statistical and policy development purposes and for safeguarding the soundness of the banks.
BSP revised its guidelines on liquidity risk management, implemented targeted macro-prudential policies to stem excessive credit growth in specific sectors, and approved the adoption of the net stable funding ratio to enhance banks’ ability to absorb liquidity stress. The REST limit of 25% write-off rates on real estate, to ensure banks have a sufficient capital buffer to withstand potential property price corrections, has been effective in moderating real estate loan growth from its previous high levels. Introduction of CCyB, with the level initially set at zero, has been planned. Against further concerns of credit risk, BSP introduced additional measures, such as the DEBT and the Borrowers Inter-connectedness Index (BII), to assess the debt-servicing capacity of systemic borrowers under stressed market conditions and concentration of the systemic importance of conglomerates in the banking system.
Related Link: Staff Report
Keywords: Asia Pacific, Philippines, Banking, Article IV, Stress Testing, Basel III, Systemic Risk, CCyB, Macro-Prudential Measures, IMF
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