BSP warns of rising debt-service costs, liquidity drain

FEW funds will be available for spending on infrastructure and social services as the debt service costs of the private and public sectors are likely to rise on a weaker exchange rate and inadequate credit for productive purposes, the Bangko Sentral ng Pilipinas (BSP) warned Thursday.

Addressing members of the Management Association of the Philippines, BSP Governor Amando Tetangco Jr., said these are the possible challenges to the Philippine economy specifically for the financial system and external sector amid the global financial crisis.

The government has programmed higher spending for infrastructure and social services to prop up the domestic economy amid a global slowdown.

Tetangco said the quality of banks’ loan portfolio is expected to deteriorate due to the potential weakening of corporate finances.

Bank lending growth remains robust at present, with the outstanding loans of commercial banks including overnight transactions with the BSP having increased by 18.8 percent year-on-year last January. Excluding these overnight transactions, bank lending grew more rapidly 24.5 percent in the same month.

“Local banks have already responded by tightening their lending standards and boosting their capital reserves. The risk is that this could result in less credit being available for productive purposes, which would add to the pressure on businesses,” Tetangco said.

The BSP chief earlier said that bank lending would grow at 10 percent this year, significantly lower than last year’s 20.5-percent expansion—excluding overnight transactions.

From a peak of 16.9 percent at end-2001, banks’ bad loan ratio has dropped to 3.52 percent at end-December.

On the external front, Tetangco said slower investment inflows may imply a weaker exchange rate and less favorable external financing conditions due to global deleveraging and risk aversion.

“A rise in debt service costs means that fewer funds will be available for spending on key social and infrastructure services,” he said.

The country’s capital and financial account incurred a deficit of $1.914 billion last year, a reversal from the $3.527-billion surplus in 2007.

The foreign portfolio investment account reversed to a net outflow of $2.6 billion from a net inflow of $4.6 billion in 2007, while the foreign direct investment (FDI) account posted net inflows of $1.5 billion last year, lower than the $2.9 billion in 2007.

The BSP is reviewing its assumptions for the country’s capital and financial account for this year. It earlier said FDI inflows would post flat growth this year amid the global financial crisis.

It said that the continued expansion of the business process outsourcing (BPO) and mining sectors would mainly support investment growth for this year. –Maricel E. Burgonio, Senior Reporter, Manila Times