Bad loans threaten Philippine banks amidst steep interest rates

Soured assets held by Philippine banks hit $430m in November 2018.

The Philippines, alongside several emerging markets (EMs), is at heightened risk from growing bad debts as local interest rates have been on a gradual uptrend sinceearly 2018, according to a report by the Oxford Economics cited by the Philippine Star.

Data from the Bangko Sentral ng Pilipinas (BSP) shows that non-performing loans (NPL) of universal and commercial banks climbed 10.5% YoY to $430m (PHP2.26b) in November 2018.

The central bank has already lifted its policy rate by a cumulative 175 bps in 2018 in an effort to fight capital outflow and to rein in inflation at bay before holding in December. As of 13 February, BSP has maintained the key rate at 4.75%.

Also read: Philippine banks' bad loan ratio to hold steady at 3.5% in 2019

Aside from the Philippines, other EMs that could fall prey to such risks include Turkey, Argentina, Pakistan and Indonesia.

“Our analysis suggests that the damage to EM growth from high debt is already visible and risks becoming more so given the financial shocks last year and slowing global growth,” Oxford Economics said in a report. “EM NPLs have already risen significantly since 2015, from less than 4% of the total to around 5% – in sharp contrast to advanced economies, where NPLs have declined.”

The report added that most EMs went through credit booms in the last five years with two-thirds ending in growth slowdowns or financial crises.