THE FINANCIAL EXECUTIVE
Business World
Should government fund and run credit programs targeted at underdeveloped sectors that have difficulty accessing credit? In 1999, after decades of failed experiments with various types and modes of directing subsidized credit to individuals or groups in the agricultural and microenterprise sectors, government, through Executive Order No. 138, finally said no and stopped its nonfinancial agencies from continuing to grant loans to target sectors.
Instead, under EO 138, government was to focus on putting in place a policy environment conducive to private sector participation through the adoption of market-oriented financial policies. Even government financial institutions were supposed to concentrate more on wholesale lending, leaving retail lending to private financial institutions.
The lessons - huge and hidden fiscal costs from subsidized interest rates, poor repayment rates given beneficiaries' dole-out mentality, high administrative costs, unsatisfactory outreach with the poor continuing to lack access to credit despite the proliferation of government credit programs, distortive impact on financial markets given subsidized interest rates offered under the programs - had finally hit home.
Or so everybody thought.
Two days before the seventh anniversary of EO 138, President Arroyo signed EO 558 repealing EO 138. The move caught everyone, including officials in the Department of Finance, by surprise. The timing was ominous. With just nine months to go before the 2007 local elections, EO 558 gave government back an off-budget, high visibility tool that can easily be used to win votes. It demonstrated once again this administration's readiness to sacrifice long-term development goals to secure its hold on power.
Indeed, there is no rationale for repealing EO 138. EO 558 certainly does not provide one and the Palace's defense - to enable government agencies to supply credit in poor areas not reached by financial institutions - has been shown time and again to be ineffective in combating poverty (better for government to focus on support and capability building services to help the poor become bankable). Thus, in one stroke of a pen, the President simply undid all the work that successive administrations since the time of President Aquino had put into the effort - the Aquino administration made it a policy to abolish direct lending by government nonfinancial agencies; the Ramos administration created the National Credit Council to rationalize all directed credit programs; the Estrada administration articulated in EO 138 government's policy on directed credit programs.
In fact, EO 138 was part of a package of measures that included the Social Reform and Poverty Alleviation Act, Agriculture and Fisheries Modernization Act, the General Banking Law of 2000 and the Barangay Micro Business Enterprise Act, to help improve the policy environment for microfinance.
And EO 138 was working, too. More and more, private financial institutions were extending credit to microentrepreneurs. In recent speeches, BSP Gov. Say Tetangco noted that from about 55 banks claiming to do microfinance before 2000, there are 193 private financial institutions, with a portfolio of P3.3 billion and an outreach of over 600,000 beneficiaries, engaged in microfinance operations today.
Thus, by repealing EO 138 and paving the way for government to reenter the financial market as direct subsidized credit providers, the President is not only risking its hard-won fiscal battle, it is telling private financial institutions to get out of the microfinance business, since after all, they are constrained by market realities and will not be able to compete with the subsidized interest rates that government charges.
However, government does not have that much money to meet the huge demand for micro-credit. Moreover, with its limited funding and poor track record in microfinance, it will likely take only a few loan cycles for its funds to dry up. Sadly, without the clear policy rules provided under EO 138, private sector players cannot be expected to jump right back in knowing that government can anytime render their business models unviable. In the end, small entrepreneurs' lack of access to credit will come back to haunt the economy.
President Arroyo needs to do what is right and withdraw EO 558.
Tuesday, September 12, 2006
Friday, January 20, 2006
Musings on the year of the (she) dog
THE FINANCIAL EXECUTIVE
Business World
Going into the new year last year, one of the foremost concerns of analysts in business and academic circles was the prospect of a debt crisis as continued poor revenue effort constrained government's ability to rein in its rising debt ratio. While there remained a lot of hope given remittance-driven domestic economic growth, the fear then was of an event-triggered fiscal blowup, with government unable to refinance its maturing obligations and forced to default on its foreign currency-denominated debt, a large chunk of which was held by domestic banks.
2005 came and went and thanks to excellent fiscal, debt and monetary management and the passage at last of the EVAT law, there was no debt crisis; but as expected, the economy just muddled through. A welcome development was that despite the "Hello Garci" political storm and "Hyatt 10" resignations, yields on government dollar debt papers, a.k.a. RoPs, remained steady. In fact, even before the EVAT was finally implemented in November, some investment houses were giving an "overweight" recommendation on Philippine government credit.
A lot of the interest in RoPs (and other emerging market debt for that matter) was attributed to "liquidity" in global financial markets. What was not evident, however, was who these investors were. Apparently, as discussed in the latest issue of the IMF's Global Financial Stability Report and reported in a recent issue of The Economist, there has been an increase in the size and importance of institutional investors such as pension funds (according to The Economist, these institutional investors invested some $7.3 billion in emerging markets in the first half of 2005, 74% more than the comparable period in 2004).
As pointed out in the IMF report, what is significant about this development is that given these funds' long-term orientation, they are less likely to just up and leave on market noise and thus, may have a stabilizing effect on the market. Moreover, with a more sophisticated investor base able to distinguish between idiosyncratic and systemic events, there is less risk of contagion similar to the 1997 Asian crisis. This development, coupled with the earlier observation that domestic investors, who have greater appetite for Philippine risk, hold some two-fifths of Philippine government securities through the banking system, makes the prospect of an abrupt market shutdown unlikely over the short-term.
Still, there is nothing to stop these institutional investors from gradually reducing their exposure to the Philippines if economic fundamentals fail to improve materially over time and especially when compared with progress in other emerging markets.
Entering 2006, the fact that global financial markets remain liquid, or that government is expecting to improve its tax collection with EVAT, or that local financial markets appear bullish as seen in the gains in local stock and bond markets and the strengthening of the peso, should not be taken to mean that "the runway is clear and takeoff is at hand." Behind these headlines are stories of doctors turning to nursing to better provide for their families, of weak dollar demand because of declining fixed investments (due in turn to the political problems and high oil prices), of the rise in portfolio investments (encouraged by the passage of the EVAT) which, nonetheless can flow the other way any time.
In the end, all we're seeing may just be a break from the endless battles that this presidency has had to engage in and will likely continue to have to face if it is not able to get its act together and plan out steps to quickly revive investments. In this regard, well thought-out pro-poor spending - say on education, water and key infrastructure - would certainly make more sense than doling out government "savings" in food subsidies similar to the short-lived Kadiwa program in the '80s.
After all, risks to global growth remain (e.g., from oil prices, interest rate hikes) and the Philippines needs to work on strengthening its economic fundamentals to have enough cushion against any negative shocks.
The year of the dog is expected to bring good fortune. Lady Fortune, however, is known for her fickle moods.
Business World
Going into the new year last year, one of the foremost concerns of analysts in business and academic circles was the prospect of a debt crisis as continued poor revenue effort constrained government's ability to rein in its rising debt ratio. While there remained a lot of hope given remittance-driven domestic economic growth, the fear then was of an event-triggered fiscal blowup, with government unable to refinance its maturing obligations and forced to default on its foreign currency-denominated debt, a large chunk of which was held by domestic banks.
2005 came and went and thanks to excellent fiscal, debt and monetary management and the passage at last of the EVAT law, there was no debt crisis; but as expected, the economy just muddled through. A welcome development was that despite the "Hello Garci" political storm and "Hyatt 10" resignations, yields on government dollar debt papers, a.k.a. RoPs, remained steady. In fact, even before the EVAT was finally implemented in November, some investment houses were giving an "overweight" recommendation on Philippine government credit.
A lot of the interest in RoPs (and other emerging market debt for that matter) was attributed to "liquidity" in global financial markets. What was not evident, however, was who these investors were. Apparently, as discussed in the latest issue of the IMF's Global Financial Stability Report and reported in a recent issue of The Economist, there has been an increase in the size and importance of institutional investors such as pension funds (according to The Economist, these institutional investors invested some $7.3 billion in emerging markets in the first half of 2005, 74% more than the comparable period in 2004).
As pointed out in the IMF report, what is significant about this development is that given these funds' long-term orientation, they are less likely to just up and leave on market noise and thus, may have a stabilizing effect on the market. Moreover, with a more sophisticated investor base able to distinguish between idiosyncratic and systemic events, there is less risk of contagion similar to the 1997 Asian crisis. This development, coupled with the earlier observation that domestic investors, who have greater appetite for Philippine risk, hold some two-fifths of Philippine government securities through the banking system, makes the prospect of an abrupt market shutdown unlikely over the short-term.
Still, there is nothing to stop these institutional investors from gradually reducing their exposure to the Philippines if economic fundamentals fail to improve materially over time and especially when compared with progress in other emerging markets.
Entering 2006, the fact that global financial markets remain liquid, or that government is expecting to improve its tax collection with EVAT, or that local financial markets appear bullish as seen in the gains in local stock and bond markets and the strengthening of the peso, should not be taken to mean that "the runway is clear and takeoff is at hand." Behind these headlines are stories of doctors turning to nursing to better provide for their families, of weak dollar demand because of declining fixed investments (due in turn to the political problems and high oil prices), of the rise in portfolio investments (encouraged by the passage of the EVAT) which, nonetheless can flow the other way any time.
In the end, all we're seeing may just be a break from the endless battles that this presidency has had to engage in and will likely continue to have to face if it is not able to get its act together and plan out steps to quickly revive investments. In this regard, well thought-out pro-poor spending - say on education, water and key infrastructure - would certainly make more sense than doling out government "savings" in food subsidies similar to the short-lived Kadiwa program in the '80s.
After all, risks to global growth remain (e.g., from oil prices, interest rate hikes) and the Philippines needs to work on strengthening its economic fundamentals to have enough cushion against any negative shocks.
The year of the dog is expected to bring good fortune. Lady Fortune, however, is known for her fickle moods.
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