The Philippine central bank plans to require the nation’s largest business groups to disclose their foreign-debt levels due to concern their exposure may be bigger than currently estimated.

The monetary authority aims to send out requests in the next three to six months as it seeks to head off any potential risk to the Southeast Asian nation’s economy, according to Bangko Sentral ng Pilipinas Governor Felipe Medalla.

“I don’t think we are fully informed about the external exposure of our conglomerates,” Medalla said in an interview this week. “When we look, for instance, at other data it seems to us that their exposure may be larger than we think it is. It’s about understanding the economy and being vigilant.”

Cheap Capital

Philippine-listed companies have been increasing their reliance on cheap borrowed capital, according to S&P Global Ratings. Pressure though will mount on the firms to service or refinance that debt due to rising global interest rates, and with the peso weakening 4.5% against the dollar over the past 12 months.

The changing macro environment may be one reason why the central bank is now exercising the amended New Central Bank Act enacted in February 2019, which gives it the right to require local firms to disclose their debt exposure. “We will be writing letters to the important companies and say, can you please fill up this form. Now, will they tell us? I think they will,” Medalla said.

At present, the central bank’s prior approval is required for private-sector foreign borrowings only if they are government guaranteed. Companies taking out loans without a state guarantee only have to notify the central bank, and register if they plan to buy foreign currency from the banking system to service the loan.

Project Losses

Medalla said some of the projects funded by overseas loans may lead to losses that weaken the conglomerates and affect their banking businesses.

“Our worry is if the conglomerates get weaker regardless of whether their investments are here or abroad, it may have an effect on the Philippine economy given their large size,” he said.

The most heavily indebted Philippine company is food-to-power conglomerate San Miguel Corp., which had total outstanding debt of 1.35 trillion pesos ($24.1 billion) at the end of March, according to data compiled by Bloomberg. The next most indebted are fellow conglomerates Ayala Corp. and SM Investments Corp.

The nation’s largest 25 listed companies, excluding financial firms, each have at least 100 billion pesos of total debt, data compiled by Bloomberg show.

Healthy Position

“Growth strategies remained ambitious even in the depths of Covid shutdowns — and were often funded with cheap debt,” S&P credit analyst Xavier Jean in Singapore wrote in a report last month.

San Miguel’s current debt level is a result of a strategic decision to undertake a range of projects, the company said in a statement. The firm’s “financial position remains healthy, allowing us to support our expansion and honor our commitments,” it said. San Miguel said 40%-45% of its total debt is in foreign currency.

Ayala Corp. said borrowings at the parent level supported the financing requirements of its health-care and logistics businesses and securities buyback initiatives. “While we did see an increase in our total borrowings, our low cost and long duration of debt is a competitive advantage in a high interest rate environment,” it said in a statement. The company said 62.7% of its total debt is in local currency.

Corporate debt in the Philippines, along with that in Malaysia and Hong Kong, is concentrated in companies that had earnings-to-interest payment ratio of just above one, “which could potentially become susceptible to default with rising borrowing costs,” the International Monetary Fund said in a report last month.

Strong Earnings

Not everyone sees current debt levels as a major concern.

Philippine companies are generally strong, supported by an economy that’s outpacing the growth of its neighbors including Indonesia and Vietnam so they can comfortably handle their current debt levels, according to Vince Valdepenas, Philippine country head at Bank of America in Manila.

“Their (higher) debt levels are probably justified in terms of their earnings,” he said. “As long as the earnings remain strong, they can continue to support the debt.”

--With assistance from Jeffrey Hernandez.

(Updates with comment from Ayala Corp. in 13th paragraph)

Author: Ditas Lopez and Manolo Serapio Jr.