Fitch Ratings maintains a cautious stance regarding the Philippine banking sector but notes increasing risks stemming from rising global trade conflicts.
In a statement, the credit ratings agency cautioned that although the Philippines has minimal direct involvement relative to other Asia-Pacific economies, the country’s banking sector might still face repercussions due to the extensive tariffs recently imposed by U.S. President Donald Trump.
The Philippines faced a 17-percent reciprocal tariff, which is comparatively modest relative to nearby nations. It was mentioned that the country’s exports to the United States constituted only 2.9 percent of its overall gross domestic product.
Following the downturn in global financial markets after he announced new tariffs, Trump had to impose a 90-day truce. Nonetheless, a basic rate of 10 percent came into play, and the U.S. president stated that additional tariff increases would be implemented soon.
Fitch warned that additional tariff hikes, especially those pending duties aimed at specific industry sectors such as electronics, might lead to a wider economic downturn across the region.
As nations like China, South Korea, Taiwan, and Vietnam anticipate significant impacts because of their substantial exports to the United States, the Philippines could likewise experience pressure from reduced regional demand and shifts in supply chains.
Fitch observed that neutral projections for the banking industry, which encompasses the Philippines, “demonstrate greater resilience under a scenario of increased US tariffs.” This is attributed to these economies typically having minimal direct exports to the United States.
“There remains a risk in these markets that the asset quality of banks in certain sectors might suffer due to additional U.S. tariff increases, or they could experience indirect trade impacts,” it noted.
Among the nations with a neutral stance regarding their banking sectors are India, Indonesia, Malaysia, Mongolia, the Philippines, and Thailand.
For China and Hong Kong, they were updated to “declining” due to anticipated slow loan growth, increasing bad debts, and ongoing weaknesses in the real estate sector.
Vietnam, whose economy is the most export-dependent in the US in the region, was flagged as particularly vulnerable. Fitch said it could revise Vietnam’s “improving” outlook to “neutral” if the full impact of US tariffs materializes.
Fitch has also raised concerns about decreased borrowing requests and sluggish economic expansion in trade partners such as China, which ranks among the foremost destinations for Filipino exports. Should China experience an economic downturn, this might lessen the appetite for products from the Philippines, impacting commercial operations, thus increasing credit hazards and dampening banking profitability.
Fitch stated, “The trade war might accelerate the reduction of policy interest rates by national authorities more quickly than anticipated, leading to decreased net interest margins for the banking sector across most markets.”
Should the trade conflict persist and undermine economic expansion, central banks might feel compelled to sharply reduce their benchmark interest rates, the report noted.
Fitch stated, “There is a possibility that policy interest rates might end up being lower than expected in a high-tariff situation, putting pressure on net interest margins in these regions.”
Any modifications in the outlook of various sectors are unlikely to significantly affect our scoring for the operational environment of the banking system, as these scores continue to stay fairly steady. However, China’s score might experience the greatest downwards shift.