Emerging Markets, ADB editions, May 2014
The central bank governor of the Philippines is planning to impose stress tests on the country’s banks in order to head off mounting concerns about asset bubbles in real estate.
Amando Tetangco Jr, governor of Bangko Sentral ng Pilipinas, revealed the plans in an interview with Emerging Markets. The bank already uses macroprudential policies such as loan to value ratios and exposure concentration limits for its banks. “But we also want to explore other possible measures, including stress testing, to see the extent of the impact of a [real estate] downturn on the profitability and balance sheets of the banks.” Asked when this would happen, he said: “It could happen this year.”
The move follows alarm about the pace and scale of real estate development in the Philippines, although Mr Tetangco said concerns were overdone. “There’s no evidence of overstretched valuations in the property sector,” he said, noting that price increases were demand driven, that four million units of low to medium and socialized housing were needed to meet demand, and that the business practices of developers had changed over time. “In ‘97 the model was basically: put up four towers at the same time and hope you can sell them all. This time developers have learned their lesson: they put up one tower first, sell that, and when 80% is sold they start building the next.”
But he said close monitoring would be important. “We have sent a signal that we have to be watchful of any excessive exuberance in the property sector.” Mr Tetnagco said the banking system, with an average consolidated CAR of 18%, was in good shape to deal with the tests.
A potential asset bubble is one of the few areas of concern in the Philippines, which has enjoyed a far more favourable period of growth than many of its Asean peers, with a better fiscal position. GDP growth in 2013, at 7.2%, beat the government’s own forecasts, and the expectation this year is 6.5-7.5%, driven partly by remittances from overseas Filipinos and 20% year-on-year growth in business process outsourcing. The country has a current account surplus, and its budgetary deficit is sufficiently modest – 1.3% last year, against an objective of up to 2% – that there is now greater latitude for much needed infrastructure spending. Last year the infrastructure expenditure relative to GDP was just 2.3% – one of the lowest in the region – and the target is to increase that to 3% this year and 5% by the time the Aquino government steps down in 2016. Tax collection, an eternal bugbear in the Philippines, appears to have improved, and while inflation has been rising it is within target bands.
Mr Tetangco conceded that progress on infrastructure is “long overdue” but said that a PPP programme, commenced in 2010, is finally bearing fruit. “It took some time for it to get off the ground, mainly because of the efforts of the government to make sure that the contracts are well and above board,” he said. Six PPP projects have been bid out so far, and some – including a link between the North and South Luzon Expressways, and a school project – are well into the construction phase. Further progress is vital, he said. “In the short term, infrastructure development increases GDP,” he said. “In the medium to long run, it strengthens the base for sustainable growth in the economy. That is what we are trying to do.”