Moody’s: Forex risks among lowest for Philippine banks

December 6, 2022 | 12:00am

MANILA, Philippines — The Philippine banking system has one of the lowest foreign exchange risks among emerging markets where currencies have lost value against the US dollar, Moody’s Investors Service said.

In a sector in-depth report titled “Foreign Currency Risk is Acute for Some Banking Systems,” Moody’s said foreign exchange risk is low for banks in the Philippines, Indonesia, Vietnam, Chile, Cote d’Ivoire, and Guatemala.

“These banking systems have low levels of dollars in the system and/or their sovereigns face low risk related to FX repayments and maintain adequate foreign-currency reserves,” the debt watcher said.

Based on its analysis, Moody’s said forex risks are very high for banks in Belarus, El Salvador, Kyrgyz Republic, Nigeria, Tajikistan, Turkey and Ukraine.

“These countries generally have higher dollarization in deposits, high external debt, weak reserves and/or constrained access to FX closed capital accounts,” it added.

The credit rating agency warned that a material exposure to currency fluctuation could expose banks in emerging markets to additional risks to asset quality, liquidity and capital.

“Local currencies in many emerging markets have weakened against the dollar this year amid rising inflation, higher interest rates in the US, and country-specific economic challenges,” Moody’s said.

For one, the Philippine peso slumped by as much as 15.7 percent to hit an all-time low of 59 to $1 due to the hawkish stance of the US Federal Reserve and the strong demand for dollars to pay for soaring imports amid the further reopening of the economy.

The peso has since bounced back to the 55 to $1 handle as the Bangko Sentral ng Pilipinas (BSP) delivered huge rate hikes and intervened in the foreign exchange market to stabilize the local currency and tame inflation.

The central bank’s Monetary Board has so far raised key policy rates by 300 basis points, bringing the overnight reverse repurchase rate to a 14-year high of five percent from an all-time low of two percent.

It is widely expected to deliver another rate increase on Dec. 15 to maintain a 100-basis-point interest rate differential versus that of the US as inflation continued to accelerate.

Inflation averaged 5.4 percent fro January to October, well above the BSP’s two to four percent target range. It accelerated to a 14-year high of 7.7 percent in October from 6.9 percent in September and likely settled at a range of 7.4 to 8.2 percent for November.

According to Moody’s, the fallout from Russia’s invasion of Ukraine disrupted global supply chains and led to a surge in commodity prices that unwound the nascent recovery from the COVID-19 pandemic.

“Globally, countries dependent on imports for their energy and food requirements suddenly faced widening current account deficits. In emerging markets, local currencies have weakened as the dollar strengthened and as domestic interest rates rose to fight inflation,” it said.

It added that many banks in emerging markets hold large volumes of foreign exchange loans and deposits.

“This is because some depositors seek protection against currency depreciation and/or inflation by switching to foreign currency, while foreign currency loans could be more attractive to borrowers because of lower interest rates on FX loans,” Moody’s said.

It explained that multiple factors contribute to foreign exchange risk for banks.

“They include macroeconomic issues such as whether a country’s current account balance is in surplus or deficit, the size of external debt and foreign-currency reserves. These factors play an important role in capturing the FX needs and ability of a country and its banks to service FX obligations,” it said.