S&P says weak peso has limited impact on Phl banks

S&P Global Ratings said the weakening of the peso has limited impact on the banking system in the Philippines unlike in India and Indonesia whose currencies have depreciated the most in the Asian Pacific region.

In its latest Asia Pacific Financial Institutions monitor for Q4 2018 titled “On the lookout for market-induced credit risk,” the debt watcher said market risks across Asia Pacific and other regions characterized by volatile equity markets, skittish bond markets and depreciating currencies have intensified.

“Concerning currency volatility, the Philippines is an exception and has seen the peso steadily devalue due to a ramp-up of imports from the government’s ambitious infrastructure plans,” S&P said.

The government has earmarked at least P8.4 trillion until 2022 for its massive infrastructure buildup under the Build Build Build program.

The peso is the third weakest currency in the region after the Indian rupee and Indonesian rupiah, depreciating more than eight percent since the start of the year.

“This has a limited impact on the country’s banking system, which is heavily domestic focused and has a limited foreign exchange position,” it added.

The international rating agency said it is less concerned regarding the impact of market risks on banks in other markets in Southeast Asia including Malaysia, Thailand and Vietnam,

“The currency devaluation has been comparatively mild and is not country specific. Important lessons have been learned harking back to the Asian financial crisis of 20 years ago,” S&P said.

It added a major factor contributing to corporate and bank sector credit weakness during the Asian financial crisis was corporates borrowing in dollars with no offsetting dollar cash inflows or with ineffective hedging at a time when local currencies depreciated significantly.

Likewise, the debt watcher said regulations and risk management systems in Singapore and Malaysia have since evolved significantly.

“We believe a repeat of a scenario of this magnitude is unlikely,” it said.

Across the Asia-Pacific region, S&P warned the effects of market volatility may manifest sooner and more quickly in the non-bank financial services sector rather than the banking sector.

“This could include the broking and finance company sectors. Tight liquidity in the Indian finance company sector is a current example. For bank ratings across the region, we currently see no immediate effect from market volatility impacting currencies, equities, or other market risks, or from transmission effects on liquidity stemming from corporate or other sectors,” S&P said.