MANILA — The World Bank warned that the global economic recovery may be at risk of "financial fragility," citing rise in non-transparent debt as one of the reasons.
In the newly-released World Development Report 2022, World Bank Group senior vice president and chief economist Carmen Reinhart said "there is reason to expect that many vulnerabilities remain hidden."
"It’s time to prioritize early, tailored action to support a healthy financial system that can provide the credit growth needed to fuel recovery. If we don’t, it is the most vulnerable that would be hit hardest," she said.
The Philippines was cited as an example of countries where bad debt is becoming a problem.
"In some economies, these risks are already becoming apparent. Loan defaults have been on the rise in India, Kenya, the Philippines, and a growing number of other middle-income countries. These emerging credit risks are also reflected in the worsening outlooks of the main international rating agencies for financial institutions as forbearance policies are lifted," the report read.
The World Bank also cited 2021 studies to support its statements on rising debt, including debt in the Philippines, stating "early signs of distress are already visible in some countries."
"For example, in India, bad loans as a share of gross loans surpassed 10 percent in the first half of 2021 (Sanglap 2021). In the Philippines, the nonperforming loan ratio is expected to double to 8.2 percent in 2022 (Villanueva 2021)," it noted.
World Bank Group president David Malpass said “the risk is that the economic crisis of inflation and higher interest rates will spread due to financial fragility."
"Tighter global financial conditions and shallow domestic debt markets in many developing countries are crowding out private investment and dampening the recovery. It is critical to work toward broad-based access to credit and growth-oriented capital allocation. This would enable smaller and more dynamic firms – and sectors with higher growth potential -- to invest and create jobs," he said.
In a press briefing last month, Bangko Sentral ng Pilipinas Governor Benjamin Diokno said the non-performing loan ratio of banks is expected to remain single-digit in the coming years well below during the 1997 Asian financial crisis.
"Based on the BSP simulations, the NPL ratios of the banking sector could range between 5.0 to 6.0 percent by end-December 2021," he said.
He also noted that the NPL ratio stood at 4.3 percent as of end- November 2021, slightly lower than the 4.4 percent in October 2021.
He stressed that the Philippine banking system remains strong and stable.
"As of end-September 2021, the capital adequacy ratio of the universal and commercial bank (U/KB) industry on solo and consolidated bases stood at 16.9 percent and 17.4 percent, respectively — well above the BSP’s minimum requirement of 10 percent and the Bank for International Settlement of 8 percent," he said.
As for credit accessibility and credit for the vulnerable, Diokno said that as of late December 2021, the banking system allocated an average of P244.4 billion loans to micro, small and medium enterprises.
"This is a substantial increase from the P8.7 billion in MSME loans reported in April 2020," he said.
He also noted that bank lending is improving, but lenders remain cautious due to the ongoing pandemic.
"Credit activity continues to show signs of recovery. The banking system’s gross total loan portfolio (TLP) went up year on year by 4.3 percent to P11.1 trillion as of end-November 2021. In terms of the domestic economy, the ratio of TLP to annualized nominal gross domestic product stood at 58.7 percent as of end- November 2021, slightly higher than the 57.1 percent from a year ago. Banks currently remain cautious but project positive business outlook in the next two years," Diokno said.
The Philippine corporate debt is expected to perform better than the rest of the international community, based on World Bank stress tests which assume a 30 percent shock to earnings.
The results show which nations will have more corporate debt ‘at risk’ in terms of their ability to pay for interest. Philippine corporate debt is better positioned than Malaysia, Vietnam, Indonesia, Thailand, and even China in that regard.
Overall, the report recommended that more lending must reach vulnerable households and MSMEs. This must also work in tandem with efforts to manage bad debt so that credit initiatives for the vulnerable are not compromised.
The World Bank suggested a framework for debt restructuring, and it warns bad debt could increase as extraordinary monetary policy measures such as debt payment moratoriums and low or zero interest rates are normalized.
Diokno also had an answer for this in his January briefing.
"The full implementation of the Financial Institutions Strategic Transfer or FIST Act is seen to reinforce banks’ NPL management," he said.
The World Bank also alluded to this in its report.
"The World Bank has supported efforts by client countries to develop secondary markets for distressed assets, including by bolstering in selected countries in Latin America and the Philippines a strong loan servicing ecosystem (specialized companies that for a fee make the collection effort on behalf of the investor in distressed assets)," it said.