Companies face debt payment problems – BSP

Lawrence Agcaoili – The Filipino Star

November 21, 2022 | 00:00

MANILA, Philippines – A tightening financial environment amid a series of aggressive rate hikes could make it difficult for more companies to pay off their debt immediately, according to the Bangko Sentral ng Pilipinas (BSP).

Based on the results of a stress test conducted by the BSP, more companies in the industrials, services, holdings, real estate and financial sectors could present coverage ratios interest (ICR) below the threshold set by the International Monetary Fund.

The ICR measures the debt service capacity of the corporate sector. It is calculated by dividing the earnings before interest and tax (EBIT) account by the interest expense account.

The BSP said that companies with low ICRs are more likely to experience liquidity and solvency problems, which could lead to default or even reduced investment and employment, posing risks for the company. financial stability as well as overall economic growth.

Given the tightening financial environment, the BSP is conducting a stress test scenario analysis on quarterly corporate performance to assess the potential spillover effects of interest rate and exchange rate movements on the corporate sector philippines.

As part of this exercise, the regulator estimates the impact of lower corporate sector profits, exchange rate depreciation and higher interest rates on corporate ICR.

In an environment of rising interest rates and weakening national currencies, the BSP said that closer monitoring of companies’ financial health in terms of profitability, solvency, debt service capacity and of leverage activities is justified.

According to the central bank, companies in the sectors hardest hit by the pandemic and which have accumulated substantial foreign currency debt could find it difficult to maintain their operations and repay their debts.

The BSP raised policy rates by 300 basis points, taking the benchmark rate to a 14-year high of 5% from a historic low of 2% to control inflation and stabilize the peso.

Despite the difficulty in repaying debt immediately, the BSP said that “risky debt appears to be manageable as these companies hold a relatively small share of debt compared to the total debt of listed companies included in the stress test exercise. resistance”.

He said a depreciation of the peso could also affect business recovery, especially in sectors where companies appear to have no natural hedge against currency risks.

The peso fell 15.7% to an all-time low of 59 at $1 in October before bouncing back to the 57 range amid active BSP intervention in the FX market as well as the series of rises rates to tame inflation.

Based on the assessment of corporate sensitivity to exchange rate movements, the BSP said the bond issuance data reveals limited exposure to corporate sector currency risk, as most bonds issued in 2021 and in the first three quarters of 2022 are denominated in local currency.

For 2021 and 2022, most of the bonds issued come from the holdings, real estate and banking sectors, the majority of which are medium or three to five years long or more than five years.

“Nevertheless, the BSP remains mindful of the inherent risk that vulnerable businesses pose to financial stability, particularly from a system-wide perspective,” the BSP said.

Accordingly, the regulator intends to review the exposure of these companies to the Philippine banking system in order to stop systemic risks from brewing in the financial system.

In the Philippines, surveillance of the corporate sector is strengthened through the BSP Business Financial Trends Survey, a statistical initiative of the BSP that aims to establish granular data on the sources and uses of funds of non-financial corporations , profitability and liquidity, and leverage conditions.

According to BSP, the survey is currently being expanded to include micro, small, and medium enterprises, to provide a broader view of the business sector and enable better statistics on BSP’s business surveillance analysis.

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Elaine R. Knight