A shadow hangs over the Philippine economy as a major corruption scandal threatens to dampen growth. Investigations into irregularities surrounding flood-control projects have implicated officials and contractors, stirring public distrust and raising concerns within the banking sector.
Fitch Ratings acknowledges the scandal as a significant downside risk, though currently not enough to alter their overall assessment. They maintain a “BBB-” rating for Philippine banks, with a neutral outlook, but the situation is being closely monitored for potential impact.
The fallout from the exposed corruption has already begun to manifest in economic slowdown. Growth in the third quarter dipped to 4%, the slowest pace in over four years, and the first nine months of the year saw only 5% growth – falling short of the government’s ambitious targets.
Despite these headwinds, Fitch projects the Philippine economy will still expand beyond 5% this year. This modest growth is expected to fuel loan expansion and, consequently, bolster bank profitability, offering a glimmer of hope amidst the uncertainty.
Recent data reveals a deceleration in loan growth, with outstanding loans at major banks increasing by 10.3% year-on-year in November. This pace, while still positive, represents the slowest growth in over a year, signaling a cautious lending environment.
Interestingly, Fitch identifies the primary threat to bank asset quality not as a direct consequence of the scandal, but rather from internal lending practices. Specifically, concerns center around the volume of unsecured lending and the overall risk appetite of financial institutions.
Beyond the financial implications, the scandal carries the potential for broader social unrest, adding another layer of complexity to the economic outlook. This possibility further underscores the need for swift and decisive action to address the corruption allegations.
The central bank, Bangko Sentral ng Pilipinas, has emphasized the continued strength of the banking sector’s assets and deposits as a positive force for the domestic economy. This underlying stability provides a foundation for navigating the current challenges.
