"We believe the root of the problem is the ongoing political crisis, which has resulted in greatly reduced confidence in the country’s leadership," ING Barings said in report on the Philippine economy .
The situation has weakened the peso versus the dollar and other currencies despite forecasts that the dollar will weaken in the first quarter of the year. This has forced government to push interest rates to nearly double those of the first half of 2000.
ING Barings noted that the government attempted to save the peso and the economy, by raising interest rates, a move that was described as misdirected. ING Barings pointed out that from October to December last year the peso depreciated by 6.6 percent despite overnight rates being raised by 400 basis points (bp).
"In our opinion, the only way we see interest rates returning to their former levels (below 10 percent) is a resolution of the political crisis that would hopefully restore confidence," the report said.
Another factor that has been influencing high interest rates is the deteriorating asset quality of banks based on non-performing loan (NPL) ratios last year, the ING Barings report continued.
The report said some banks have attributed the increase in NPLs to the stricter loan restructuring guidelines of the Bangko Sentral ng Pilipinas (BSP). Nonetheless, there was real deterioration in the NPLs of most banks, which had been able to conceal the real status of their NPLs, the report stated.
That situation has allowed the current high interest rate cycle to be concealed thus disallowing regulatory agencies to put a reign on NPLs, the report said. "The rise in NPLs may still be attributable to the previous high interest rate environment of 1997-1998, and generally weak demand for certain types of businesses," it added.