PHL resilient but vulnerable to domestic and external shocks

THE PHILIPPINE ECONOMY and financial sector remain resilient, but tighter institutional interconnectedness has heightened the risk of domestic and external shocks spreading more quickly across the system, according to a report by the Financial Stability Coordination Council (FSCC).

At the same time, the FSCC flagged potential foreign exchange (FX) risks from conglomerates that are facing around P1.6-trillion debt maturing between 2027 and 2029.

In its Financial Stability Report for 2025 released on Monday, the FSCC said Philippine banks have been shielded from risks by strong capital positions, prudent regulation, sufficient loan loss provisions and an effective payment system.

The economy likewise “maintained positive growth momentum” in 2025. The country’s gross domestic product (GDP) growth slowed to 4.4% last year from 5.7% in 2024.

The FSCC report said the well-capitalized financial system helped the country weather global shocks, with its external position “broadly stable” last year due to robust remittances inflows and better current account dynamics.

However, the report flagged potential systemic threats stemming from valuation pressures, rising leverage in the nonfinancial sector, growing ties between banks and nonbanks, as well as funding and liquidity risks.

“Vulnerabilities are being monitored — particularly in property valuations, unsecured household credit, and corporate leverage — and tighter linkages across institutions mean that shocks, if they materialize, can transmit more rapidly and broadly than in the past,” the report said. “This calls for deliberate and forward-looking policy action.”

FX RISKS
Meanwhile, the FSCC noted that nonfinancial corporations’ (NFCs) leveraged exposures continued to expand, with heavier exposure seen among big companies from key sectors like real estate, power, energy and oil as well as information, communication and technology.

Leveraged exposures refer to listed NFCs’ aggregate amount of debt exhibiting heightened leverage coupled with debt-servicing or liquidity vulnerabilities.

“Large conglomerates face a sizeable wall of upcoming maturities and FX obligations. About P1.6 trillion — or 22.7% of conglomerate debt — is scheduled to mature between 2027 and 2029, alongside sizable foreign-currency exposures, with US dollar-denominated debt averaging 37.6% of conglomerate debt over the next five years,” the report said.

While corporations have so far met its financing needs, the report said that FX-related risks and refinancing “warrant close monitoring given the scale and currency composition of upcoming maturities.”

MIDDLE EAST WAR
At the same time, the FSCC noted that cyberthreats and geopolitical tensions, such as the Middle East war, could likewise imperil the sector’s stability.

“While these risks are assessed to be manageable under current conditions, they could potentially intensify if shocks materialize,” it said.

“Global developments, shifts in market sentiment, and emerging risks — such as cybersecurity threats and Middle East tensions — are expected to influence domestic conditions, underscoring the need for ongoing monitoring and coordinated oversight,” it added.

According to the report, risk-off sentiment due to uncertainties over the Middle East war could take a toll on the Philippine financial system, with risks increasing as the conflict drags on.

It noted that the country is mainly vulnerable to risks of higher crude prices driving up imported inflation and currency pressures further widening its current account deficit.

“The key uncertainty for financial stability is how macro financial pressures — compressed real incomes, tighter external balances, and heightened uncertainty — ultimately transmit to the balance sheets of banks, corporates, and households,” the FSCC said.

The report likewise noted that domestic firms in the utilities, industrials, information technology, consumer staples, and financial sectors may face operational risks if their Middle Eastern counterparts are disrupted by the regional conflict.

“If these firms experience prolonged financial stress, their loan obligations become a transmission channel to the banking system,” the report said.

Still, the FSCC said Philippine banks still have insignificant direct financial exposure to the Middle East, with the conflict posing “a material but manageable risk to Philippine financial stability.”

In a separate statement, FSCC Chair and Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona, Jr. said financial regulators will further tighten their coordination to address emerging risks.

“We will sharpen our coordination by defining when to escalate issues and by clearly communicating our assessment of our respective regulated entities,” he said.

Based on the report, the interagency body is likewise implementing stricter measures to mitigate these threats and ensure economic stability. 

These include shifting to a positive neutral Countercyclical Capital Buffer, where banks must now set aside extra capital during stable periods; strengthening supervision of nonfinancial firms, particularly complex conglomerates; broadening data coverage for nonbanks; and creating a crisis management framework.

The FSCC is composed of the BSP, Department of Finance, Securities and Exchange Commission, Insurance Commission, and Philippine Deposit Insurance Corp. — Katherine K. Chan