The Philippine government may lose the “investment grade” rating it worked so hard to achieve if a debt default by one of the country’s handful of major conglomerates should erode investor confidence.
In a report released Friday, debt watcher Standard & Poor’s (S&P) said that while the Philippines remained one of the strongest markets in the region, the structure of the country’s economy—being dependent on family-owned conglomerates—was a source of vulnerability.
“We may… lower the ratings if problems at one of the large conglomerates impair investor confidence,” S&P said in a supplementary analysis report on the Philippines. S&P rates the Philippine government’s long-term debt at the minimum “investment grade” with a stable outlook, a reflection of the stability of the local economy.
S&P became the second major rating firm to give the Philippines an “investment grade” rating after Fitch Ratings. Moody’s Investor Service still considers Philippine government debt as “junk” investments, although the country is on positive watch for a possible upgrade.
Other risks that threaten the country’s “investment grade” status include the possible spillover of weak global economic conditions that could affect the domestic economy.
S&P’s concerns over banks’ exposure to conglomerates echoed the International Monetary Fund’s own assessment of the structure of the Philippine economy. The IMF said in its April country report that a default by any major, highly leveraged conglomerate could lead to a significant increase in bad assets held by lenders. This, in turn, could lead to banks restricting lending to other sectors of the economy.
The IMF and S&P did not name any specific conglomerate in particular. In contrast, the BSP had said that its period stress tests showed that even if all major conglomerates defaulted on half of their loans, local banks were strong enough to absorb these losses without affecting their operations.
S&P also raised concerns over the Bangko Sentral ng Pilipinas’ (BSP) ability to manage capital flows from abroad that could cause overheating in the economy and create asset price bubbles.
“Low level of bank intermediation and underdeveloped capital markets constrain the effectiveness of monetary policy transmission,” S&P said in its report. It said the BSP’s main focus, given low inflation in the first half of the year, had become managing capital flows to prevent potential bubbles. “Ample domestic liquidity is giving rise to concerns over overheating in the property sector and banks’ exposure to it, in particular via related lending,” S&P said.
The rating firm, however, recognized efforts by the central bank to curb this risk by limiting loans and guarantees between property companies and their parent conglomerates.
Political developments that could throw the Aquino administration off its current course of promoting good governance and fiscal stability could also lead to a downgrade, S&P said.
One of the upside, S&P said the Philippines could earn another upgrade if revenue reforms that facilitate improvements in infrastructure and human capital would be passed.