THE strength of Philippine banks may have helped the country fight off the lingering effects of the lockdown on economic growth, according to the Bangko Sentral ng Pilipinas (BSP).
While BSP Governor Eli Remolona did not elaborate on this point in a recent economic briefing in Canada, he noted that Philippine bank’s capital adequacy ratio and liquidity ratio have been above international standards.
Remolona said the capital adequacy ratio of local banks was at 16 percent, above the 10 percent regulatory floor established by the Basel Committee on Banking Supervision.
The liquidity ratio of Philippine banks, meanwhile, was at 188 percent, above the 100 percent standard globally.
“We’re now looking at 6.5 to 8 percent growth in the coming year. How did we pull it off? I would say that the banking system had something to do with it. Our banks have remained very strong,” Remolona said.
“That’s how I think they supported the recovery after the lockdown. Unlike in previous crises, the banks have been part of the solution this time, rather than part of the problem,” he added.
Recovering from the pandemic and the subsequent ills brought by the longest lockdown in the world is one of three main challenges faced by the BSP, according to Remolona.
Fertilizer
He said the other challenges are battling inflation and the third is climate change. Remolona said inflation is a concern not only because of what has already been reported on in the media.
Remolona noted that fertilizer prices have been elevated and this has a significant impact on the country’s ability to attain food security and keep prices low.
Based on data from the Philippine Statistics Authority (PSA), the value of the country’s imports in January 2023, when inflation peaked at 8.7 percent, grew 43.2 percent. The value of urea imports alone surged 233.9 percent in January 2023.
“[Because of] sanctions on Belarus, in Russia, the price of fertilizer went through the roof. This is a very important import for the Philippines, especially urea, which comes from nitrogen,” Remolona said. “That spiked and it led to the second-round effects of food prices, for example.”
However, inflation has since cooled. By May, the inflation averaged 6.1 percent and food inflation slowed to 7.5 percent while fertilizer imports contracted 40.8 percent and the value of urea imports declined 48.6 percent.
Remolona noted that the BSP maintains that inflation will be within target range of 2-4 percent by the fourth quarter of 2023. He said the BSP expects that the country will “overshoot on the low side” of the inflation target by the first quarter of next year and settle within target by the rest of 2024.
“Now, 2-4 percent is not an arbitrary range. That’s the range that we think, based on our analysis, that is ideal for an economy like the Philippines growing at full capacity. So while we’re not in the forefront of pushing for growth, I think we’re laying the environment for the growth that is being planned,” Remolona said.
Kahiyaan
On the challenge of Climate Change, Remolona said the BSP is committed to contributing to the country’s efforts to achieve net zero through its 11 sustainability strategies.
One of these is to mandate banks to make climate-related disclosures. He explained that banks will be tasked to report which of their loans and assets are good, bad, or worse for the climate.
The taxonomy to be used for this disclosure system, Remolona said, is being crafted together with climate scientists. Some of the questions that will be asked include whether bank’s loans or assets slow down or accelerate climate change and promote carbon emissions or absorb carbon emissions.
Each metric, Remolona explained, will be weighted, allowing the BSP to give each bank an overall rating in terms of its role in climate change.
“We hope this disclosure alone will do the trick. In the Philippines, we call it kahiyaan but if it doesn’t do the trick, then we have other tools that can [sort of] persuade the banks to help out with climate change,” Remolona said.
The 11 sustainability strategies of BSP include vulnerability assessments; enhanced disclosures; climate stress testing; environmental and sustainability risk in prudential policy; and climate change in monetary policy.
The strategies also include incentives for green lending; sustainability in BSP’s portfolio and risk management; task force for inclusive green finance; sustainability in BSP’s operations; and capacity building.
Foreign borrowings
Meanwhile, the Monetary Board (MB) approved a total of $2.73 billion of public sector foreign borrowings in the second quarter of 2023, which is $0.81 billion or 23 percent lower than the $3.54-billion approval in the same period in 2022.
These are all borrowings by the Republic of the Philippines (RP), BSP said, and consist of three project loans from the Japan International Cooperation Agency. These borrowings will fund various railway projects of the National Government (NG).
“The BSP promotes the judicious use of the resources and ensures that external debt requirements are at manageable levels, to support external debt sustainability,” BSP said.
Under Section 20, Article VII of the 1987 Constitution of the RP, prior approval of the Bangko Sentral ng Pilipinas (BSP), through its MB, is required for all foreign loans to be contracted or guaranteed by RP.
Similarly, Letter of Instructions No. 158 dated 21 January 1974 also requires all foreign borrowing proposals by the NG, government agencies and government financial institutions to be submitted for approval-in-principle by the MB before commencement of actual negotiations.