MONDAY MACRO: Healthy cash flows and sufficient liquidity suggest that aggregate corporate credit risk shouldn’t be much of a concern
Debt has been on the rise over the past couple of years. For Philippine corporations especially, debt has been essential to keep operations running and survive through the pandemic.
With that, should investors and creditors be worried about market-wide defaults and other credit issues that could negatively impact the economy?
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Credit risk and credit availability have always been two important elements to consider when evaluating the financial health of an economy, a business, or even an individual consumer.
Over the past three years, the Philippines’ debt-to-GDP ratio has steadily risen, even climbing to fifteen-year highs in 2021 as the government turned to debt to fund the pandemic recovery.
To further facilitate the recovery process, the government also enacted loose monetary policies—bringing the key interest rate down to just 2%, to be exact—which enabled businesses to cheaply fund their daily operations and other necessary growth measures to avoid bankruptcy.
On the other hand, the growth in non-performing loans (NPL) reached a thirteen-year high of 4.51% just under a year ago in July 2021. This signaled that banks may become more restrictive in their lending, making borrowing more difficult for everyone—including businesses.
However, a rising ratio does not mean a high ratio. Despite the NPL ratio rising to elevated levels over the past decade, this is still far below the double-digit NPL ratio that the country saw during the Asian financial crisis and the years prior.
Currently, the NPL ratio is at stable 4% levels which, combined with the enactment of specialized laws—such as the FIST Act—to control mounting defaults, is still accommodative for an expansion of loans.
The country’s overall debt has clearly been on the rise. But for today, we are focusing specifically on the credit health of Philippine corporations, and evaluating it using Valens’ Credit Cash Flow Prime (CCFP) chart.
The Credit Cash Flow Prime chart (CCFP) provides a snapshot of the aggregated credit health of the companies in the PSE Index.
Using Uniform Accounting numbers, the bars represent the financial obligations that Philippine companies need to service. This “stack” bar includes items like debt maturities, dividends, required reinvestment levels into the business, and rent.
The most flexible obligations would be at the top (blue stripes). These obligations could be delayed until further notice since they are of the least priority. This means that the company may easily push back these payments and continue operating.
The least flexible at the bottom (red stripes) are of utmost priority. This means if the company does not pay these, there could be serious financial repercussions on the company’s ability to operate going forward.
The blue line represents the aggregation of corporate cash earnings available, while the blue circles above represent the liquidity available to the company which includes excess cash on hand.
In the chart above, PSE-listed companies are not expected to have sufficient corporate cash earnings to meet their annual obligations. That said, they should still have a large enough cash buffer to service all their debt obligations comfortably.
Also, the combination of debt maturities and other obligations such as interest and dividends—which investors and creditors are focused on—are still covered by the companies’ earnings alone.
Considering that the PSE-listed companies have healthy cash flows, sufficient liquidity, and enough flexibility to reduce spending on unnecessary expenditures as necessary, it’s clear that Philippine corporates are not facing any significant credit risks and investors shouldn’t be worried about market-wide defaults.
About the Philippine Markets Newsletter
“The Monday Macro Report”
When just about anyone can post just about anything online, it gets increasingly difficult for an individual investor to sift through the plethora of information available.
Investors need a tool that will help them cut through any biased or misleading information and dive straight into reliable and useful data.
Every Monday, we publish an interesting chart on the Philippine economy and stock market. We highlight data that investors would normally look at, but through the lens of Uniform Accounting, a powerful tool that gets investors closer to understanding the economic reality of firms.
Understanding what kind of market we are in, what leading indicators we should be looking at, and what market expectations are, will make investing a less monumental task than finding a needle in a haystack.
Hope you’ve found this week’s macro chart interesting and insightful.
Stay tuned for next week’s Monday Macro report!
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