A great way to obtain some insight into the overall financial conditions of individuals and businesses in the economy is through credit. Credit measures the current financial health of the economy by examining the risk appetite and performance of borrowers.

When consumers and businesses are concerned about the economy, they tend to tighten their spending. In some cases, they miss interest payments on loans, increasing the probability of borrowing to default.

If many borrowers default on their loans due to financial instability, this could ripple through the financial system and could affect the economy.

Today, we will see how financially stable the borrowers are in the Philippine economy.

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Credit can be used to gauge the financial health of the economy because in an expansionary economy and when expectations are optimistic, businesses and consumers tend to have more confidence in their ability to borrow money and pay interest.

On the other hand, when people are concerned about the economy, they tend to become more frugal and avoid taking out credit loans because they do not want to take on the extra financial burden.

Now, when borrowers do take out loans and the economic outlook darkens, some would miss interest payments. Missing periodic payments raises the probability of the borrower defaulting on their loan(s).

If a default on a loan occurs, the bank itself has to cover the loss. In the case where many borrowers default on their loans, this could lead to a series of events that could cause a disruption in the economy – just like what transpired in the great financial crisis in 2008.

Such a scenario is a reason why it is important to monitor the loans where borrowers do not pay their scheduled payments. In other words, non-performing loans in relation to overall loans in the Philippine banking system.

So, what are non-performing loans? Non-performing loans (NPL) are bank loans where the borrower is late in their repayments and becomes questionable in their ability to pay the principal and interest in full. Normal loans become non-performing when borrowers do not pay their scheduled payment for a loan and are unpaid for more than 30 days.

Today, the Philippine NPL month-over-month had improved drastically from when the pandemic started.

When the pandemic induced national lockdowns in the Philippines and constrained the financial ability of borrowers, the non-performing loans relative to overall loans in the banking system increased by more than two-fold.

From a high of 4.51% in July of 2021, it has come down to 3.16% in December of 2022, indicating a quick post-pandemic recession recovery. However, the NPL ratio consecutively rose in the past three months of this year, hitting 3.33% last March.

The plummet of NPL from July 2021 to December 2022 suggests that borrowers are becoming more financially stable. Although the figure has risen this year, it is not alarming.

NPLs are not used to predict a recession, nor is it a leading or lagging indicator. It simply shows the investor the severity of post-crisis recessions.

Should the ratio continue its upward trend, it should concern investors as it indicates that borrowers’ financial health is deteriorating. Nevertheless, the financial health of consumers and businesses is improving as the Philippines is still recovering post-pandemic.

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!

Regards,

Angelica Lim
Research Director
Philippine Markets Newsletter
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