The country’s banking system is strong enough to absorb “significant” write-downs from major conglomerates without causing any contagion that could restrict others’ access to finance and, in the process, choke economic activity.
The Bangko Sentral ng Pilipinas (BSP) on Wednesday tried to calm markets after reports citing a warning from the International Monetary Fund (IMF) regarding the possibility of defaults by “highly leveraged” conglomerates, which could destabilize the country’s growing economy.
“We continuously monitor risks. In doing so, we look out for possible stress points where risks can emanate,” BSP Governor Amando M. Tetangco Jr. told reporters. “Even our stress tests show that even with significant write-downs, the banks would still be able to absorb it and remain well above the minimum (capital adequacy ratio) requirement.”
A bank’s capital adequacy measures the amount of capital it has set aside to cover potential losses coming from defaults. Latest data from the BSP showed the country’s major large banks had an average capital adequacy ratio of 17.28 percent—well above the minimum 10 percent required by regulators.
Tetangco’s statement followed reports citing an April 2013 document from the IMF warning of possible defaults by local conglomerates that could lead to a sharp rise in bad loans held by banks.
This possible rise in bad loans could prompt local banks to either raise more capital to offset the deterioration in asset quality or lend less to the businesses and households.
The IMF said that while the risk of defaults by major conglomerates was “low,” the BSP should still consider restricting access to credit for companies facing a wider range of risk due to the nature of their diversified operations.
In a statement on Wednesday, the IMF pointed out that the risks for conglomerates was clearly classified as “low” and should not distract market players from the Philippines’ “solid macroeconomic fundamentals.”
The IMF warning that was originally published in April, but reported in local media only this week, spurred a selloff of shares in San Miguel Corp., which has interests in the food and beverage, oil, infrastructure, transportation and telecommunications sectors.
From P93 at the end of last week, San Miguel’s share price fell to a low of P76.40 on Wednesday before closing at P85 each.
Amid the sell-off of San Miguel shares, Tetangco said the IMF’s warning was “generic in nature.” “It was not referring to any specific conglomerate,” he said.