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Philippines: Selected Issues

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
February 2020
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Evolution of Bank Credit Growth in the Philippines1

After several years of rapid expansion, bank credit growth has recently slowed. Risks of reacceleration remain a concern against the backdrop of empirical analyses suggesting that early warning signals for a credit boom emerged in 2014–18. Residential real estate loans appear to warrant close monitoring, given the large banking system exposure to the sector and its recent important contribution to rapid loan growth.

A. Introduction

1. Credit growth has slowed recently after several years of rapid expansion. Growth in bank credit decelerated from a peak of 21.1 percent in September 2017 to 10.5 percent in September 2019. The slowing is partly due to the recent tightening of monetary policy and lending standards and partly due to weaker aggregate demand. The cooling in credit growth since mid-2018 has been especially pronounced in utilities, wholesale and retail trade, transportation and real estate sectors.

Bank Credit Growth and Credit-to-GDP Ratio 1/

Sources: CEIC Data Company Ltd; and IMF staff estimates.

1/ Loans by universal and commercial banks, net of reverse repos.

Contribution to Bank Credit Growth

(In percentage points, year-on-year)

Sources: Bangko Sentral ng Pilipinas; and IMF staff estimates.

2. This paper evaluates whether the recent rapid credit expansion qualifies as an aggregate credit boom and examines credit developments and vulnerabilities in real estate sector and consumer loans. Despite the double-digit growth in credit in 2010–2018, the credit-to-GDP ratio in the Philippines remains relatively low at about 50 percent. While the rapid credit expansion in recent years partly reflects the financial deepening accompanying economic development (Box 1), it has also raised financial stability concerns, especially in sectors where credit growth was relatively higher for a sustained period, such as real estate and consumer loans. This paper uses several methodologies developed by earlier studies in the literature to gauge the risk of a credit boom in the Philippines and examines the underlying vulnerabilities in real estate and consumer loans.

Change in Share of Sectoral Loans to Credit, 2001–2019:H1

(In percent)

Sources: Bangko Sentral ng Pilipinas; and IMF staff estimates.

Bank Credit—Sectoral Share, 2019:H1

(In percent)

Sources: Bangko Sentral ng Pilipinas; and IMF staff estimates.

B. Recent Credit Growth in Perspective

3. The findings from complementary methodologies show that credit reached near-credit boom levels between 2014 and 2018 but has moderated to trend more recently. This is especially remarkable considering that there was no other episode of credit boom since the 1990s.

  • The methodology proposed in the IMF’s April 2011 Global Financial Stability Report does not detect a credit boom after 2000. Nevertheless, some early warning signs emerged at the end of 2014 and again from 2016 to early 2018. In this approach, early signs of a credit boom are defined as increases in the credit-to-GDP ratio above 3 percent (y/y) and a severe credit boom is present if the increase is above 5 percent. With the moderation in credit growth since the end of 2018, the change in the credit-to-GDP ratio now is well below the 3 percent threshold.
  • The methodology proposed by Dell’Aricia and others (2012) suggests that credit booms were present in 1993 and in 1995–96 but not afterwards. The methodology identifies a credit boom if one of two conditions is satisfied: (i) the growth differential between credit and nominal GDP exceeds 20 percent or (ii) the growth differential between credit and nominal GDP exceeds 10 percent and the deviation from trend is greater than 1.5 times its standard deviation. In 1993 and 1995–96, credit growth exceeded nominal GDP growth by more than 20 percentage points, while growth of credit exceeded that of GDP by 10 percent (left chart) and the deviation from trend was above the threshold boom in 1996–1997 (right chart). No signal of a credit boom has been observed since, except for some early warning signals in 2011, 2014, and 2017, when the growth differential between credit and nominal GDP reached the 10 percent threshold and credit-to-GDP ratios were above their long-term trend.
  • Based on the approach of Mendoza and Terrones (2008), which identifies credit booms when the real credit per capita deviates from its Hodrick-Prescott trend by 1.75 times of its standard deviation, no sign of credit boom is detected since the last boom in 1997–1998. However, there were positive real credit per capita gaps during 2014–2018 when the real credit per capita was above its long-term trend.

Change in Credit-to-GDP Ratio

(In percent of GDP, 4-quarter rolling GDP and year-on-year change)

Sources: Bangko Sentral ng Pilipinas; and IMF staff estimates.

Growth Differential Between Credit and Nominal GDP

(In percent)

Sources: Bangko Sentral ng Pilipinas; and IMF staff estimates.

Credit-to-GDP Ratio

(In percent)

Sources: Bangko Sentral ng Pilipinas; and IMF staff estimates.

Log Real Credit Per Capita

(In percent)

Sources: Bangko Sentral ng Pilipinas; and IMF staff estimates.

C. Is Real Estate Credit a Concern?

4. The near-boom credit episodes detected between 2014 and early 2018 coincided with strong lending growth in the real estate sector. The latter contributed importantly to the strong overall lending growth of close to 20 percent during this period. Notwithstanding some moderation recently, credit to real estate has continued to outpace that in manufacturing and other sectors. It now accounts for the largest share in total loans outstanding (18 percent).

5. Strong property demand from a few key players drove the real estate credit growth. The recent rise of Chinese online gaming companies operating in the Philippines (Philippines Offshore Gaming Operators—POGO) has led to a large inflow of Chinese workers and increased demand for residential and office properties. The dynamic business process outsourcing (BPO) industry has been another important driver of property demand, while demand for residential housing has also remained strong. Property prices have risen in this environment, translating into higher credit needs for many buyers.

6. The quality of real estate loans remains sound, despite a recent uptick in NPLs. As of end-2018:Q2, NPL ratios for real estate loans were at record low levels after a steady decline. The relatively stable NPL ratio for residential loans has not followed the continuous decrease in the NPL ratio of commercial real estate loans. This could partly reflect the fact that the 20 percent limit on the share of total bank loans to commercial real estate is binding, which could be keeping bank lending focused on high-quality projects.

Share of NP in Real Estate Loan by Sector

(In percent)

Sources: Bangko Sentral ng Pilipinas; and IMF staff estimates.

7. Continued strong real house price increases amid the cooling in residential real estate lending suggests a need for close monitoring of related market risks. House price increases in 2018 were broadly similar to those in 2017 despite the slowdown in real estate credit growth.2 The latter could have partly reflected the tighter lending requirements to the real estate sector in effect since mid-2018.3 Meanwhile, the increase in real house prices could be associated with high real estate demand from POGO companies and workers, which typically does not involve credit from the domestic banking system, or, possibly, increased shadow-banking activities by real estate developers, with increased indirect exposure by domestic banks.4

Residential Real Estate Loan and House Price

(In percentage points, year-on-year)

Sources; Global Property Guide, Bankgo Sentral ng Pilipinas and IMF staff estimates

Residential RE loan under CL and Real House Price Index

(In percentage point, y-o-y growth)

Sources: Global Property Guide, Bangko Sentral ng Pilipinas. and IMF staff estimates

8. BSP has introduced several macroprudential measures to identify and prevent the buildup of financial stability risks. These include Basel III Liquidity and Net Stable Funding Ratios, and a countercyclical capital buffer (CCyB), which has not yet been activated, as well as the Real Estate Stress Test (REST), real estate sectoral exposure limits, and mortgage collateral value limits. The Philippines’ Macroprudential Policy Measures (Box 2) discusses in greater detail the prudential measures introduced by the BSP since 2007, including newly-introduced measures on the real estate sector credit.

D. Do Other Sectors Deserve Close Monitoring? The Case of Consumer Loans

9. The rapidly increasing credit card receivables, which have relatively high NPLs, might also warrant closer monitoring by regulators. Banks’ credit card receivables (CCRs) used to grow at a rate far below that of consumer loans (CL) or the total loan portfolio (TLP) until the end of 2016. Since then, credit card lending has gradually gained momentum, with growth rates peaking at 26.1 percent (y/y) in 2019:Q2. In contrast, growth in consumer loans and total bank loans has slowed, to rates close to 10 percent. Noticeably, the rapid growth in CCRs has also led to deterioration in their loan quality, with related NPLs increasing by 21.4 percent in 2019:Q2, relatively higher than those in CLs and TLPs, and higher than the 18.2 percent increase recorded in the previous quarter.

Bank Loan, Consumer Loan and Credit Card Receivable

(In percentage change, y-o-y growth)

Sources: Bangko Sentral ng Pilipinas; and IMF staff estimates.

NPL of Credit Card Receivable, Consumer Loan and Bank Loan

(In percentage points, Y-o-Y growth)

Sources: Bangko Sentral ng Pilipinas; and IMF staff estimates.

E. Conclusions

10. Systemic financial stability risks related to bank credit are currently contained, although credit risks with higher risk sectors, including real estate, warrant close attention. Credit growth has recently cooled, and the credit-to-GDP ratio remains relatively low in the ASEAN context. No credit booms have been detected after 1990s, but some early warning signals were found between 2014 and early 2018. Data gaps between official data and actual lending from both formal and informal financial institutions, including with regards to corporate interlinkages, prevent broader systemic financial stability assessments.

11. The risks of high credit growth resuming call for preparing a strategy for proactive macroprudential intervention. Credit could reaccelerate, as key demand drivers behind the recent slowing have reversed or are expected to reverse, including the fiscal and, partially, the monetary policy stance. Timely activation of the CCyB should be considered once risks of broad-based rapid credit growth reemerge, while targeted measures such as loan-to-value and debt-to-income caps as complementary instruments would be preferable if such risks are more sector-specific. They would provide for a more macroprudential approach that directly and more timely targets the demand for housing-related loans. Such an approach addresses systemic financial stability risks more effectively by better capturing the market impact of individual financial institutions and the interactions with the real economy.

Box 1.Financial and Market Development in the Philippines

A recent IMF study (2015) indicates that there is a significant, bell-shaped relationship between financial development (FD) and economic growth. Based on a sample of 128 countries including AEs, EMs, and LIDCs over 1980–2013, the study finds that financial development increases growth, but the effects weaken at higher levels of FD and eventually become negative.

To overcome the shortcomings of the credit to GDP ratio as a proxy for FD, the study uses a new comprehensive FD index that captures both financial institutions (FI) and markets (FM). The overall FD index and sub-indices cover 183 countries from 1980. Financial institutions include banks, insurance companies, mutual funds and pension funds. Financial markets include stock and bond markets. FD is defined as a combination of market depth (size and liquidity), financial access (ability of individuals and companies to access financial services), and efficiency (ability of institutions to provide financial services at low cost and with sustainable revenues and the level of activity of capital markets).

The Philippines has already benefited from substantial progress in the development of domestic capital market. Additional reforms aim to provide a stable and reliable yield curve, increase long-term savings and finance, and diversify domestic bond market participation, including through the launch of an Expanded Primary Dealer System, re-introduction of a repurchase market in the Philippines based on the international standard Global Master Repurchase Agreement, and improvements in the operation of the over-the-counter government bond market. the BSP, Securities and Exchange Commission (SEC), the Department of Finance (DOF) and the Bureau of the Treasury (BTr) are also supporting other innovations to enhance market liquidity and lower price volatility, and to promote security issuance by the private sector. The launch of BTr’s Retail Treasury Bond online ordering platform in February this year, for example, promotes financial inclusion and taps unserved segment of society, as it allows for direct participation by retail customers, including Overseas Filipinos. Also, package 4 of the government’s Comprehensive Tax Reform Program supports the capital market development through fairer, simpler and more efficient taxation of financial instruments.

Inserted efforts by the authorities in the next four years have been applauded, and bolder reform initiatives in achieving deeper capital market development are even more encouraged. The Capital Market Development Council (CMDC), which is co-chaired by the Financial Executives Institute of the Philippines (FINEX), along with other regulatory agencies and market participants, has agreed to measures further promoting depth and liquidity in the Philippine capital markets, to support the financing of growth and development.

The Philippines could benefit from further financial development, capital market development and financial institutions depth improvement. Although financial sector in the Philippines is more advanced than it is in Indonesia, Brunei and Vietnam, the value of the IMF’s FD index is still below the value at which financial development has the largest positive growth effects. Further financial development will thus be important to support growth.

Construction of the Financial Development Index
Financial InstitutionsFinancial Markets
Depth1. Private-sector credit (% of GDP)

2. Pension fund asset (% of GDP)

3. Mutual fund asset (% of GDP)

4. Insurance premiums, life and non-life (% of GDP)
1. Stock market capitalization to GDP

2. Stocks traded to GDP

3. International Debt securities government (% of GDP)

4. Total debt securities of nonfinancial corporations (% of GDP)

5. Total debt securities of financial corporation (% of GDP)
Access1. Branches (commercial banks) per 100,000 adults

2. ATMs per 100,000 adults
1. Percent of market capitalization outside of top 10 largest companies

2. Total number of issuers of debt (domestic and external, nonfinancial corporations, and financial corporations)
Efficiency1. Net interest margin

2. Lending-deposits spread

3. Non-interest income to total income

4. Overhead costs to total assets

5. Return on assets

6. Return on equity
1. Stock market turnover ratio (stocks traded/capitalization)1

Financial Development Effect on Growth

(In percent)

Source: IMF staff estimates.

Financial Market Development Effect on Growth

(In percent)

Source: IMF staff estimates.

Box 2.Macroprudential Policy Measures in the Philippines

MeasuresStatusDescription
Broad-based tools 1/
Countercyclical capital bufferYesThe CCyB is was adopted on December 6, 2018, but it was set initially at a buffer of zero percent subject to upward adjustment to a rate determined by the Monetary Board when systemic conditions warrant but not to exceed two and a half percent (2.5%). Any increase in the CCyB rate shall be effective 12 months after its announcement. Decreases shall be effective immediately. The mechanism to operationalize the CCyB, including the decision-making framework, is not yet in place.

BSP Circular No. 1024 of December 06, 2019
Capital conservation bufferYesA capital conservation buffer (CCB) of 2.5% composed of Common Equity Tier 1 (CET1) capital has been effective since January 1, 2014.

BSP Circular No. 781 of January 15, 2013
Limit on leverage ratioYesA 5.0% minimum leverage ratio was implemented starting from July 1, 2018. The Basel III Leverage Ratio monitoring period was extended to June 30, 2018, and migration from monitoring to a Pillar 1 minimum requirement starting July 1, 2018.

BSP Circular No. 990 of January 22, 2018
Cap on Credit GrowthNo
Other broad-based measures to increase resilience or address risks from broad-based credit boomsYes-A Real Estate Loan limit of 20% of a bank’s total loan portfolio, with certain exclusions, is in place since February 4, 2008.

-Real Estate Stress Test Limit (REST) limits are 10% of the CAR and 6% of CET1 after adjusting for a stress scenario resulting in a 25% write-off rate on real estate exposures and real and other properties acquired. REST limits took effect in July 2014.

-The bank uniform stress testing program started end-June 2014.

-Report granular information on their real estate loans to mid- and high-end housing units; residential real estate price index; commercial real estate loans and a new Report on Project Finance Exposures including type of infrastructure project and project phase. The new report was implemented on June 30, 2018.

BSP Circular No. 600 of February 04, 2008. The Circular took effect February 24, 2008 BSP Circular No. 839 of June 27, 2014; Memorandum No. M-2012–046

September 21, 2012 Memorandum No. M-2014–032 of August 11, 2014 and Circular No. 976 of October 10, 2017
Household sector tools
Household sector capital requirementNo
Cap on loan-to-value ratioNo
Cap on debt-service to income ratioNo
Cap on household credit growthNo
Fiscal measures to contain systemic risksNo
Corporate sector tools
Corporate sector capital requirementNo
Loans/eligibility restrictionsNo
Exposure caps on corporate creditYesReal estate loans for commercial properties cannot exceed 20% of total loan portfolio.

BSP Circular No. 600 of February 04, 2008. The Circular took effect February 24, 2008.
Liquidity tools (banking sector)
Liquidity Coverage RatioYesStarting in January 1, 2019, universal and commercial banks are required to maintain LCR on solo and consolidated basis of at least 90% and 100%. The subsidiary banks and QBs will be subject to a minimum LCR of 100% from January 01, 2020 onwards (70% during observation period). The stand-alone TBs, RBs, CBs, and QBs, on the other hand, will be subject to a Minimum Liquidity Ratio (MLR) of 20% by January 1, 2019.

BSP Circular No. 905 of March 10, 2016 and BSP Circular No. 996 of February 08, 2018 BSP Circular No. 1035 of March 15, 2019
Net Stable Funding Ratio (NSFR)YesUniversal and commercial banks, including their subsidiary banks and quasi banks, are required to comply with an NSFR of 100% on an ongoing basis from January 1, 2019 (70% during the observation period).

BSP Circular No. 1007 of June 6, 2018 BSP Circular No. 1034 of March 15, 2019
Net open foreign exchange positionsYesSince March 8, 2007, bank’s allowable Net Open Foreign Exchange Position (either overbought or oversold) shall be the lower of 20% of their unimpaired capital or US$50 million. Banks shall submit a report on the daily consolidated foreign exchange position.

Circular No. 561 of March 8, 2007.
Foreign exchange swaps or derivative positionsYesLimits and higher risk weights on Non-Deliverable Forward (NDF) were imposed in 2011–13 to curb speculative attacks on the Philippine Peso by raising capital charge from 10% to 15% and limits of 20% and 100% of unimpaired capital for domestic banks and foreign bank branches on a bank’s gross exposures to peso NDF transactions.

BSP Circular No. 740 of November 16, 2011 and BSP Circular No. 790 of March 06, 2013
Other measures to mitigate systemic liquidity risksYesThe BSP issued Circular No. 1014 (published on 27 September 2018, effective 12 October 2018) on the Currency Rate Risk Protection Program (CRPP) and Circular No. 1015 (published on 9 October 2018, effective 24 October 2018) on the implementation guidelines of the CRPP. The CRPP Facility was enhanced to ease the demand pressures in the foreign exchange spot market.

BSP Circular 1014 of September 24, 2018 BSP Circular 1015 of October 05, 2018
Tools for systemic liquidity risk and nonbank sector
Asset management industryNo
Pension fundsNo
Insurance companiesNo
Tools for SIIs and Interconnectedness
Capital surcharges for systemically important institutions (SIIs)YesHigher loss absorbency (HLA) requirement (additional CET1 requirement ranging from 1.5% to 2.5%) for identified D-SIBs. The requirements shall be phased-in from January 1, 2017 with full implementation by January 1, 2019.

BSP Circular No. 856 of October 29, 2014 and Circular No. 904 of March 19, 2016

These broad-based tools are only applicable to the banking sector and in some cases to investment firms.

Circular No 855 (9 October 2014) amended the regulations by providing a real estate mortgage (REM) collateral value of 60 percent of appraised value. The cap on REM collateral value differs from a loan to value limit. The collateral cap is relevant in determining whether a loan is secured or unsecured as well as the corresponding provisioning requirements.

Note: In addition to these MPMs, the Philippines has extensive capital flow management (CFM) measures on FX transactions and borrowings—mostly to banks. For instance, banks have to obtain a separate license to handle FX transactions, and their access to non-deliverable forwards (NDFs) are constrained. However, many of the CFM measures do not apply for NBFIs and nonfinancial corporations as well as transactions in cash or in foreign soil (that are not repatriated), which led to developing substantial and efficient informal FX and derivatives markets that are even larger than formal markets.

These broad-based tools are only applicable to the banking sector and in some cases to investment firms.

Circular No 855 (9 October 2014) amended the regulations by providing a real estate mortgage (REM) collateral value of 60 percent of appraised value. The cap on REM collateral value differs from a loan to value limit. The collateral cap is relevant in determining whether a loan is secured or unsecured as well as the corresponding provisioning requirements.

Note: In addition to these MPMs, the Philippines has extensive capital flow management (CFM) measures on FX transactions and borrowings—mostly to banks. For instance, banks have to obtain a separate license to handle FX transactions, and their access to non-deliverable forwards (NDFs) are constrained. However, many of the CFM measures do not apply for NBFIs and nonfinancial corporations as well as transactions in cash or in foreign soil (that are not repatriated), which led to developing substantial and efficient informal FX and derivatives markets that are even larger than formal markets.
1

Prepared by Narin Kruy (APD).

2

The IMF Research Department house price series used is based on Global Property Guide data and it is not yet available for 2019. An alternative price series, Residential Real Estate Price Index (RREPI), which starts only in 2015 but is available through 2019:H1, indicates a very small variation on aggregate house prices (just 0.4 percent y/y in 2019:Q2), but with some heterogeneity across type of properties. The prices of duplexes, condominium units and townhouses grew y/y by 12.5 percent, 9.6 percent and 4.3 percent, respectively in 2019:Q2. By contrast, the price of single detached/attached houses declined by 4.2 percent.

3

Prudential measure of submitting a new Report on Project Finance Exposures of real estate loans was implemented in June 2018, on top of real estate lending cap at 20 percent of TLP.

4

In the Philippines, presale funding is common practice. Buyers often make advances for properties still under development. These advances are trade receivables from the perspective of real estate developers, who keep ownership of the property until buyers cancel their total balance at the time of the delivery of the property. Buyers often use bank mortgage credit to pay the developers the full amount, but some developers also directly or indirectly might finance the final purchase of the property. The findings from a recent IMF study (IMF Country Report, 15/247), however, suggest that such activities are likely concentrated in a small set of firms.

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