MANILA, Philippines–The Philippines is now at an early stage of a credit boom, Fitch Ratings said, citing the banking sector’s enormous liquidity that has allowed to maintain the robust pace of lending over the medium term.
In its latest report on the Philippines, Fitch noted the substantial resources of banks in the country, which it said would greatly help the public sector in financing costly infrastructure projects.
But the international credit watchdog also warned of adverse consequences if the country’s monetary officials were to fail in strictly monitoring the lending and investment activities of banks.
The pace of credit growth “suggests the Philippines could be in the midst of a nascent credit boom,” Fitch said in the report. “In the near-term, this [robust pace of credit growth] could prove highly favorable… Over the longer term, however, it is likely to test the BSP’s macroeconomic management abilities after so many years of sustained onshore deleveraging.”
Fitch explained that from 1997 to 2010, credit growth in the Philippines could be described as anemic to moderate. As a result, it said, the BSP could be caught off guard by the emerging credit boom over the medium term.
Credit extended by private firms in the country fell from 67 percent of gross domestic product in 1997 to only 28.9 percent in 2007, Fitch said. But the figure sharply bounced to 70 percent by the end of 2011.
Economists define credit boom, as opposed to a healthy level of credit growth, to be a lending spree that can lead to asset price bubbles and overheating of an economy.
Fitch suggested for the Bangko Sentral ng Pilipinas to prepare measures that would prevent a full-blown credit boom in the future.
For instance, it said, the BSP could increase the reserve requirement—the proportion of deposits that banks must keep as reserves and, therefore, must not lend out—to levels that would keep lending growth at a prudent pace. The reserve requirement currently stands at 18 percent.
Since the start of 2011, credit growth has been hitting double-digit levels due to banks’ rising resources. These resources are being driven largely by increasing deposits from the public and partly by bank profits.
Fitch noted that banks in the Philippines are capable of sustaining the double-digit pace of lending growth in the next couple of years given available liquidity. It cited the P1.6 trillion in cash currently parked by banks with the special deposit account facility of the BSP. Fitch said this money could be tapped anytime for lending.
“The potential economic and social positives that may stem from an investment-led boom in the Philippines are substantial. That said, Fitch is wary of the potential consequences a credit boom could engender in light of ample onshore liquidity,” it said.