Banks’ capital adequacy could fall to 11.7% by 2022 in a baseline scenario, to 9.3% in an adverse scenario and to 4.9% in a severe adverse scenario.

The IMF (International Monetary Fund) said in its latest assessment of the stability of the Philippines’ financial system that the country’s banks could experience “systemic solvency distress” if the economic impact of Covid-19 turns out to be more severe.

Last year, the Philippines’ real GDP contracted 9.5%, a much larger drop than during the Asian financial crisis.

According to the IMF, the Philippine economy still faces risks from Covid-19 and structural risks. On the one hand, the economic shock of the pandemic could weigh on corporate profits and spill over to banks.

“Bank stress could limit the supply of credit, further reducing economic growth,” the report said.

In its baseline scenario, the IMF said the total CAR (capital adequacy ratio) of banks could rise from 15.6% to 11.7% by 2022, although this is still higher. to the minimum requirement of 10%.

In an unfavorable scenario, the CAR would fall to 9.3%; and in a severe adverse scenario, it will drop to 4.9 percent. “The side effects of such distress could reduce the level of real GDP by an additional 4 to 9 percentage points in adverse scenarios,” the IMF said.

However, RACs in banks are expected to start recovering in 2022 as the economy recovers, but this should be interpreted with caution given the heightened uncertainty.

Commenting on the results of the assessment, BSP (Bangko Sentral ng Pilipinas) Governor Benjamin Diokno said the IMF stress tests envision a scenario in which it would take longer to contain the Covid-19 pandemic.

He noted that servicing the debt is a priority at the moment, given that many households and businesses have lost income during the pandemic.

In addition, the deputy governor of the BSP, Chuchi Fonacier, declared Business world that the central bank has carried out stress tests in light of the impact that the assumed scenarios could have on banks’ capital.

She said the industry’s CAR on both individual and consolidated bases remained well above the minimum 10% threshold set by the BSP despite the pressures caused by the pandemic on the performance of banks and the quality of banks. active.

The IMF noted that macroeconomic fundamentals in the Philippines at the start of Covid-19 were stronger than at the end of the 1990s and that the country is indeed recovering from the pandemic.

This year, the country’s GDP is expected to grow 6.5% to 7.5%.

However, the Philippines is also vulnerable due to the increased risk of typhoons from climate change due to its geographic location.

“The physical risks of climate change are relevant to financial stability, although the destruction of infrastructure by the typhoon wind alone is not systemic unless extreme events materialize,” the IMF report said.

The IMF recommends that the authorities limit bank dividend distributions and be prepared to take additional measures to strengthen bank capital if downside risks materialize.

He also suggested that the BSP allow forbearance measures to lapse as planned and avoid introducing new measures as deferred recognition of losses and restructuring of NPLs could limit credit growth.

The report also calls on the authorities to further strengthen the effectiveness of the Philippines’ AML / CFT framework, in particular to amend the country’s bank secrecy laws – which limit the effectiveness of prudential supervision and undermine financial stability, financial integrity and development.

In addition, the IMF said the Philippine authorities should begin “immediately” to streamline the rapid corrective action framework and work on resolvability assessments and resolution planning.

“In the medium term, the authorities should broaden their macroprudential toolbox, strengthen the supervision of financial conglomerates and improve the supervision of risks linked to climate change,” he added.

The full IMF report is available here.