BSP chief says fallout from US credit crunch ‘far from over’

Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said yesterday the fallout from the crisis in the US credit market was far from over, warning that risk aversion would linger until the market had a clearer view of how bad it would affect the US economy.

Tetangco told the Edsa Shangri-La Tuesday Club where he was the special guest, that even the largest global financial institutions were still uncertain over how much they would ultimately have to write-off in 2007 and even 2008.

“Everyone knows that the major players will have to take bigger hits than they originally expected but it’s still unclear how much bigger,” Tetangco said. “Until that clears up, investors will be avoiding as much risk as they could.”

In the wake of the panic over the US’ subprime credit market, Tetangco reiterated that the BSP has examined the exposure of banks in similar instruments and found only insignificant amounts in collateralized debt obligations (CDOs) as a whole.

Tetangco said the banking industry’s minimal exposure in CDOs accounted for only 0.2 percent of its total assets. He said the banking industry’s CDO portfolio consisted only of senior and mezzanine tranches and no subprime assets.

“We didn’t find any exposure in subprime assets,” Tetangco said. “The CDO assets currently held by banks are A-rated and higher, indicating no risk of a direct impact on the banking sector.”

He admitted, however, that investments into the country could be affected as the US economy reels from the impact of the collapse in the housing market and the impact of huge losses suffered by its major financial institutions.

“We really have to see how it will ultimately turn out,” he said.

However, Tetangco expressed optimism that as investors become more risk-averse, they would also become more discerning about where to place their investments.

Tetangco explained that decision-making would make investors differentiate among emerging markets which were largely perceived as riskier than developed market.

According to him, the central bank was not so worried about a repeat of the 1997 financial crisis that led to serious problems in the financial sector even should investors decide to stay in the sidelines.

Tetangco said the robust growth in the economy has put the country in a better position to survive the fallout, buffered by a strong reserve position that was not present in 1997.

“More losses could be announced by key investments banks and this is something that could affect risk aversion of foreign investors in their investments in emerging markets,” he said. “But I believe that our fundamentals will allow us to ride it out.”

The reluctance of investors to put their money in emerging markets would mean a slowdown in foreign exchange inflows since investors would be wanting to put their money in safer investments.

Nevertheless, Tetangco said an edgy market would do less harm to the country’s financial sector now than it did in 1997 when the stock market all but crashed as investors pulled out.

“The financial sector is much stronger today than it was years ago,” he said. “Rules are also better on structured products and that means our regulatory environment has contemplated more possibilities than it used to in the past.”