PH banks facing solvency distress as COVID lingers

The International Monetary Fund warned over the weekend that Philippines banks could face solvency distress if the economy declined further amid the COVID-19 pandemic.

“Stress tests show that while banks can withstand the already severe baseline scenario, they could experience systemic solvency distress if the economic impact of COVID-19 turns out to be severer,” the IMF said in a report following its executive board’s conclusion of the Financial System Stability Assessment with the Philippines on March 5, 2021.

The work of the Financial Sector Assessment Program was conducted during the COVID-19 outbreak, with the virtual missions concluding on Oct. 20, 2020 and incorporating the immediate risks and vulnerabilities brought up by the pandemic.

It said the economic shock “would weigh on corporate earnings and then spill over to banks. Bank stress could limit credit supply, reducing economic growth noticeably even more.”

The IMF said the economy faced both COVID-related and structural risks. Real GDP contracted by 9.5 percent in 2020—a much steeper decline than during the Asian financial crisis and the worst on record since the government started tracking data by the end of World War 2.

The IMF said the economy was showing signs of recovery and that macroeconomic fundamentals at the onset of the COVID-19 were stronger than in the late 1990s.

The Bangko Sentral ng Pilipinas modernized its oversight framework for banks since the 2010 FSAP and they showed reasonably good compliance with the Basel Core Principles. The BSP also plays the central role in macro-prudential policy framework given the dominance of banks in the financial system. The 2019 amendments to the BSP charter further strengthened the financial stability policy framework.

“Nonetheless, material gaps remain on BSP’s legal powers related to conglomerate supervision, and bank secrecy laws are limiting the effectiveness of supervision, but also have wider financial sector implications,” the IMF said.

It said that in the wake of the COVID-19 crisis, the BSP issued time-bound regulatory relief measures, including unusually strong forms of forbearance related to non-performing loan recognition and provisions, subject to prior notification to and approval of the BSP.

The IMF said the Financial Action Task Force may put the country on the so-called grey list in 2021 without significant reforms on the effectiveness of the Anti-Money Laundering and Counter Financing of Terrorism regime.

It noted, however, the significant legislative measures enacted in early 2021 to address some of the FSAP recommendations.

The Financial Sector Assessment Program, established in 1999, is a comprehensive and in-depth assessment of a country’s financial sector. FSAPs provide input for Article IV consultations and thus enhance Fund surveillance.

FSAPs are mandatory for the 29 jurisdictions with systemically important financial sectors and otherwise conducted upon request from member countries. The key findings of an FSAP are summarized in a Financial System Stability Assessment.

The IMF last week raised its 2021 growth forecast for the Philippines to 6.9 percent from its previous estimate of 6.6 percent, taking into account the expected recovery of the global economy.

When asked to elaborate on the raised projection for 2021, IMF resident representative to the Philippines Yongzheng Yang said in an emailed message to Manila Standard that the Philippine economy ended 2020 with stronger-than-expected growth in the fourth quarter.

“This momentum signals a stronger recovery this year. The increased fiscal stimulus in the 2021 budget should also help boost economic activity. Taking into account the unused Bayanihan II funds to be disbursed this year and carry-over funds from the 2020 budget, government spending in 2021 is likely to be higher than anticipated in our January WEO forecasts,” Yang said.

“Nevertheless, the growth forecasts are subject to substantial uncertainty. In particular, recent hikes in virus infections pose a significant downside risk, as tightening quarantine measures could dampen economic activity,” Yang said.

Yang said it would be critical to bring the current spikes of virus infections under control, including by strengthening containment measures and accelerating vaccinations.

Topics: International Monetary Fund , COVID-19 , Financial Sector Assessment Program , Financial Action Task Force , Philippine economy
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