on corporate leverage in the Philippines
Atty. Ignacio R. Bunye
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
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,
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
Let me share with
the readers the views and insights
of the invited resource persons during
the Environmental Scanning Exercise.
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.
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
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 companys
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
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 countrys 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.
My book Central Banking for
Every Juan and Maria is now
available in major branches of Fully
Booked, Power Books, National Bookstore
and UP University Press.
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