BSP: Financial stability risks rising

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) has warned of growing risks to financial stability as global trade pressures, geopolitical tensions and domestic debt concerns continue to weigh on the economy.

In its 2024 Financial Stability Report, the BSP and the Financial Stability Coordination Council (FSCC) identified heightened uncertainties stemming from potential trade wars, evolving monetary policies in major economies and financial deregulation in the United States.

BSP Governor and FSCC chairman Eli Remolona Jr. said these factors, coupled with geopolitical instability in Europe and the Middle East, could disrupt global supply chains and dampen economic growth.

“There is the prospect of trade wars – they may have already begun – and the wide-ranging effects they would have across the global economy. Governments and analysts are already cutting growth forecasts,” he said.

According to the report, global risks arise from cost pressures and changes in trade and monetary policy. The World Uncertainty Index and the Global Economic Policy Uncertainty Index are on an upward trend.

Remolona said these uncertainty indexes are close to their levels at the start of the COVID-19 pandemic and exceed the levels during the global financial crisis.

On the domestic front, the report said that rising corporate and consumer debt levels present a challenge to financial stability. Firms with a “maturity wall” or large amounts of debt nearing repayment could struggle with refinancing, it said.

High household borrowing, particularly in unsecured consumer loans, also raises concerns over non-performing loans and liquidity stress among banks and non-bank financial institutions.

“Concerns include how an economic slowdown could squeeze borrowers. This could harm banks and non-bank financial institutions exposed to non-performing loans, including credit card debt,” Remolona said.

Despite these risks, the Philippine banking sector remains well-capitalized, with corporate earnings reverting to pre-pandemic levels.

However, asset valuation risks and real estate sector vulnerabilities, such as increased leverage and reliance on bank funding, require close monitoring.

To mitigate these threats, the BSP is pushing for capital market development to provide alternative funding sources beyond bank loans. Strengthening macroprudential tools and improving reporting frameworks for banks and non-bank financial institutions are also priorities.

Remolona said capital market development can provide a spare tire if banks have to pull back on the loans that the Philippine economy is overly reliant on.

“Knowing these strengths and vulnerabilities can help us navigate the upcoming turbulence and anxiety, and also identify opportunities for reform and growth,” he said.