IMF expects Philippine banks to remain stable in 2012

The International Monetary Fund (IMF) said the Philippine banking sector was expected to remain stable throughout 2012 even under a scenario where the debt crisis in the eurozone persisted and dragged economies outside the region.

Vivek Arora, the multilateral agency’s mission chief for the Philippines, has echoed projections that banks in the Philippines were likely to continue operating smoothly despite uncertainties in the global front given their sufficient capitalization and liquidity.

“The indicators for the country’s banking sector remain quite strong, and capitalization is high,” Arora told reporters last week following an evaluation on the country’s economy conducted by an IMF team that he headed.

There is a consensus among economists that the debt woes in the eurozone will take longer than initially expected to be resolved and that the crisis may have some more spill-over effects to other economies in 2012.

In this case, banks are not expected to be immune given the high correlation of their financial stability with that of an economy.

For instance, the crisis may continue dragging down demand of the eurozone for goods, thus dampening export earnings of exporting countries like the Philippines. Consequently, investment initiatives and demand for loans from export-oriented firms may shrink and their ability to service existing debts may be affected, thus affecting incomes of banks.

In the case of the Philippine banking sector, however, the IMF said adequate capitalization gave banks the ability to absorb losses from the risks brought by the eurozone debt crisis’ adverse impact on exporters.

The IMF sees banks in the Philippines weathering the impact of the crisis in the West through servicing of higher demand for loans and other financial services from firms outside the export sector.

Arora said the worst-case scenario wherein banks would significantly reduce lending to businesses because of the debt crisis in the eurozone was not likely to happen in the Philippines, at least in 2012.

Meantime, Arora said there was no pressure at the moment for the Bangko Sentral ng Pilipinas to adjust its key policy rates.

He said the policy rates, which influence commercial interest rates, were still quite low in the Philippines and this should support efforts to boost economic growth. Meantime, Arora said there was no pressure at the moment for the Bangko Sentral ng Pilipinas to adjust its key policy rates.

He said the policy rates, which influence commercial interest rates, were still quite low in the Philippines and this should support efforts to boost economic growth.