Swimming in debt

Many Philippine companies are swimming in debt that loan defaults are staring them and their creditors in the face, the International Monetary Fund warned this week, following the Financial Stability Conference held in Cebu recently under the auspices of the Bangko Sentral ng Pilipinas.

With borrowings nearing levels where companies may be unable to service their debts, the IMF warned that the problem is so serious that it could have far-reaching consequences not only for the companies involved but for the Philippine economy itself.

In the paper derived by an IMF team from the conference, the Washington-based multilateral lender said that the indebtedness malaise afflicts not only the Philippines but many other Asian countries like Malaysia and Hong Kong.

“While we expect Asia’s growth to hold up — contributing two-thirds of global growth this year — central banks may keep rates higher for longer to tame inflation and financial conditions may tighten further,” the IMF said.

“In particular, industries that rapidly increased leverage while interest rates were low are now a key concern, especially in Asia,” it added.

The IMF pointed out that 3.3 percent of corporate groups in the Philippines have an interest cover ratio, or ICR, of less than one, putting them on the brink of default.

As a measure of how much corporate earnings can cover debt interest payments, an ICR of one or below means that a company may succumb to loan default. Only 21.9 percent of companies in the Philippines have an ICR of 4, which means they can easily meet their loan obligations.

“The Philippines, Malaysia and Hong Kong had large shares of debt in companies with coverage ratios just above one, which could potentially become susceptible to default with rising borrowing costs,” the IMF said.

A number of factors are seen to have contributed to the rise in corporate debt in the Philippines, including the low-interest rates prevailing in past years that made it cheaper for companies to borrow money.

One other factor is the economic growth that the Philippines has experienced — with gross domestic product growing from 5.7 percent in 2021 and 7.6 percent in 2022. Economic growth raises confidence among businessmen, increasing their appetite to borrow money to fund expansion.

The rise in corporate debt is a problem because it makes companies more vulnerable to financial shocks. If interest rates rise or if economic growth slows, companies with high levels of debt may find it difficult to make their debt payments. This could lead to defaults, which could in turn lead to a financial crisis. To stem a looming downturn, the Philippine government and the BSP will have to take steps to help address the corporate debt crisis alarm bell that the IMF has sounded.

As pointed out by the IMF, the BSP may consider raising interest rates that would make it more expensive for companies to borrow money, thereby depressing their taste for more loans.

Probably as a last resort, the government and the BSP may also throw lifelines to companies struggling to make their debt payments, but such an intervention should be judicious as taxpayer money would be involved. The government may well choose to gamble to help companies stave off default if only to avert a financial crisis.

The companies must also do their part by reducing their levels of debt through drastic measures like cutting costs, increasing sales or selling non-performing assets to make payments.

Companies that are able to reduce their debt levels will be less vulnerable to financial shocks and will be better able to weather economic downturns.

The corporate debt crisis is a serious problem, but it is not insurmountable. With the right policies and actions, the Philippine government, the BSP, and the companies can work together to address the problem and prevent a financial crisis.

“The IMF pointed out that 3.3 percent of corporate groups in the Philippines have an interest cover ratio, or ICR, of less than one, putting them on the brink of default.

“With the right policies and actions, the Philippine government, the BSP, and the companies can work together to address the problem and prevent a financial crisis.