Checking on corporate leverage in the Philippines

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By Atty. Ignacio R. Bunye

Speaking Out

Sunday, December 8, 2013

THE Bangko Sentral ng Pilipinas (BSP) held its 21st Environmental Scanning Exercise (ESE) last Wednesday (December 3) to look into the impact of rising interest rates on corporate leverage in the Philippines and their implications on our banking system.

The BSP periodically conducts ESEs with invited experts from the business community and the academe, whose well-considered views are taken into account in the formulation of monetary policy.

The topic stemmed from concerns that the low interest rate and ample liquidity that our economy is currently enjoying might soon end, with the anticipated recovery of developed markets.

As these developed economies continue to recover, investors are expected to pull out capital from emerging markets like the Philippines back to the rich economies, where it is traditionally deemed safer and more profitable to invest.

The departure of foreign capital might lead to higher interest rates, which could pose a significant risk to local corporations that borrowed when interest rates were low.

According to a BSP study, there is an increasing trend in debt accumulation by Philippine non-financial corporations (NFCs) since 2007. Most of the borrowings were done through bank loans and issuance of bonds. Until 2012, borrowings were mostly in local currency but in 2013 an increased reliance on foreign currency loans was observed.

An IMF study ranked the Philippines No. 3 among six countries which experienced the largest increases in D/E ratios since 2007. The others are China, Turkey, Brazil, Thailand and Chile.

Though debt levels remain below and far from that recorded post-Asian financial crisis and while NFCs show capability to pay their obligations, continued rise in borrowings could raise the vulnerability of NFCs to interest rate and/or exchange rate shocks.

Let me share with the readers the views and insights of the invited resource persons during the Environmental Scanning Exercise.

Shanaka Jayanath Peiris, Resident Representative of the International Monetary Fund (IMF) in the Philippines, said that while data suggests that debt levels of NFCs indeed increased, companies still have manageable debt levels and measures of the their ability to repay debt continue to be positive.

Peiris cautioned, however, about increasing debts of banks to real estate companies and conglomerates, and suggested that targeted macro-prudential policies could be studied using different growth scenarios.

For Melina Concha, Senior Vice President (SVP) and Head of Commercial Banking at the HSBC Philippines, the recent increase in the borrowing of local companies appears to be currently sustainable as it is supported by strong macroeconomic fundamentals and benign inflation environment. The recent upgrade of the Philippines to investment grade is expected benefit top tier companies, increasing their ability to tap funding from debt and equity markets.

SM Investment Corporations’ Senior Vice President for Investor Relations Corazon P. Guidote gave us a preview of corporate leverage management in practice from the point of view of a large holding company. She revealed that the “retail DNA” built-in across the SM Group has kept them prudent in its actions, especially in borrowing money for operations and expansion.

Guidote proudly said that the retail business of the group remains debt-free, the property arm has very manageable debt, and its two banks – BDO and Chinabank – maintain a healthy level of capitalization which is compliant with international standards.

Augusto D. Bengzon, Vice President and Treasurer of Ayala Land Inc. (ALI) shared the company’s strategy in mitigating the risk of higher rates and capital outflows. He said that through diversifying its businesses and building complementary developments and services, they are able to keep the money flowing within their system, enabling them to manage capital more prudently.

He added they only consider cash flows from its leasing business in determining its capacity to take in (and re-pay) debt, leaving the cash flows from its other businesses untouched.

Dr. Maria Elena B. Herrera, core faculty of the Executive Education and Lifelong Learning Center and Research Director for the AIM Ramon V. Del Rosario, Sr. Center for Corporate Social Responsibility, meanwhile, pointed out that real estate companies today are more willing to venture outside Metro Manila, spurring developments beyond the country’s capital.

She was quick to add, however, that many of large corporations, especially real estate companies, are part of conglomerates. If not properly safeguarded, this could increase the risk of contagion, which will negate the benefits of synergy within a group of companies.

Christian G. Lauron, Partner at Sycip, Gorres Velayo and Company, whose paper was read for him by Dr. Herrera, shared the concept of resilience planning in the banking sector and its implications to the promotion of financial stability.

He proposed that reforms in banking policies must be anchored in a system-wide analysis that covers both financial and non-financial firms.
The goal is to allow the financial sector to achieve resilience while sustaining growth and preventing stagnation.

The views expressed during the Environmental Scanning Exercise are definitely well-taken and will assist the Bangko Sentral as it continues to guard against possible build-up of risks that can undermine banking and financial stability.

Note: My book, Central Banking for Every Juan and Maria is now available in main branches of Fully Booked, Power Books, National Book Store, and University of the Philippines Press.


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