Reduced Liquidity in the Philippines Uncovers Excessive Leverage at the Largest Firms

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The overall financial conditions for coporates in the Philippines have worsened with the key deterioration concentrated in large corporates, while the top 25 firms by asset size have high leverage, low repayment ability and worsening financial health, said Natixis recently.

The smaller ones, though, are only half as leveraged with a lower interest burden, which allows them to maintain nearly double repayment ability, the investment bank noted.

Even though small firms are in a better position, they are way too small to change the overall picture, the firm added.

“When the push comes to shove, the Philippines’ firms are not in the best of circumstances to handle rate hikes,” the firm said. “Externally, the Fed is hiking and the BSP (Bangko Sentral ng Pilipinas) will have to raise rates in the light of higher inflations and to stem off capital outflows.”

“With the high corporate leverage, firms could face a hard time onwards in the rate cycle,” Natixis pointed out.

This is not a good year for the country

According to Natixis, weaker peso, underperforming equities pushed by a vanishing current account surplus and a potentially larger fiscal deficit have made the country looks miserable.

More specifically, the Philippine peso (PHP) depreciated 6.5% and the Philippines Stock Exchange PSEi Index fell 15% in 2018, only better than China, the firm added

In terms of where the expenditure being is heading—consumption or investment, The Philippines’ growth prospects are favorable, thanks to demographics, Natixis pointed out.

“However, the external sector is becoming a constraint due to the increasing dependence on imports,” the firm said. “The key question is whether the government expenditure binge will ease the existing constraints to the production to reduce the country’s dependence on imports.”

In Q2 2018, the contribution of government consumption was a vital part of growth, according to the investment bank.

“However, even though public construction expense picked up, we haven’t seen enough evidence to conclude that investment is driving public expenditure,” the firm pointed out.

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