The art and science of monetary policy

Posted on January 04, 2015 08:59:00 PM

BUSINESS WORLD

AMANDO M. TETANGCO took over the helm of the Bangko Sentral ng Pilipinas (BSP) in 2005 and was soon thrust into a different world that someone without his 30-year central banking experience, including during the turbulent debt crisis years in the early 1980s and the Asian financial crisis in the late 1990s, would have been ill-prepared for.

This time, he had to deal with the aftershocks of the 2007 global financial crisis where emerging markets like the Philippines were left to fend for themselves as central banks in developed economies pursued unprecedented quantitative easing, and their attempts at forward guidance produced instantaneous market reactions that rippled through financial markets everywhere.

The BSP under Governor Tetangco’s watch oversaw a long period of monetary and financial stability that made recent fiscal consolidation efforts and investment grade ratings for the sovereign credit possible. To date, the country continues to enjoy a combination of steadily higher economic growth and low inflation, high foreign exchange reserves, a well-capitalized banking system, and praises for inroads made in microfinance and financial inclusion.

Governor Tetangco is the only BSP governor to serve two terms, having been reappointed in 2011 by President Benigno Aquino for a second six-year term -- quite a feat considering how the current administration has campaigned aggressively against the previous one. The re-appointment was read by analysts and markets not only as a tribute to his personal qualities but as the coming of age of the Central Bank as a mature independent professional institution.

As the Philippines enters the 2016 presidential elections, market watchers take comfort that Governor Tetangco’s term ends in 2017. These are excerpts from an interview by Christine Tang and GlobalSource, a New York-based network of independent economic and political analysts.

Q&A: Bangko Sentral Governor Amando M. Tetangco

Markets are again bracing themselves for increased volatility. What is your baseline scenario on external economies and markets?

The global economy will continue to grow in 2015, but uncertainties remain. The US economic recovery is seen to gain traction, while the recovery in advanced economies could likely continue to be hindered by financial imbalances, and growth in some emerging market economies (EMEs) may face structural bottlenecks. We expect a continuation of divergent monetary policies between the US on one side and EU and Japan on the other; and we see global investors continuing to take their cues for capital flows from this divergence.

Are you more concerned today about Asian risks -- a Japan recession and a China slowdown -- in terms of their impact on exports than, say, six months ago?

There are certainly developments in China and Japan that bear watching. In China, growth is seen to be slowing “faster than consensus.” Some analysts describe this as a “bumpy landing.” However, the recent surprise monetary policy actions as well as market expectation of “meaningful financial sector reform” from the administration should help to rein in market confidence. These measures are expected to buoy the Chinese economy. As for Japan, its economy has entered a technical recession. And it seems like structural reforms, including new tax measures, will continue to face challenges.

Slower Asian growth could adversely affect the Philippines. However, if the US economic growth does gain traction, this could be positive for the Philippines and serve to even out the trade prospects for us.

How worried are you about contagion risk, given markets’ knee-jerk selling of anything that carries an “emerging markets” tag?

The way we see it for the Philippines, markets will eventually get their bearings back, filter out the “noise” and realize that strong domestic demand will continue to hold up.

Our policy therefore remains geared toward a careful calibration of policy interest rates, the containment of excessive volatilities in the exchange rate, selectively employing macroprudential measures when appropriate. We are also careful to communicate our policy objectives so that we eliminate (to the extent possible) market surprises, so that business planning can be more strategic and long-term.

On the domestic side, what is your baseline view and what are the major downside risks?

Our baseline view is for the economy to grow in a “within-target” inflation environment. The major risks to this view include external factors that could lead to financial market volatility that could, in turn, result in repricing risks to household and corporate debt. Other major risks are fiscal underspending, power shortage, and natural disasters.

What is your outlook on domestic economic growth, inflation and interest rates, and the exchange rate under your baseline scenario?

We see the risks to future inflation as more broadly balanced. Upside risks to inflation include pending petitions for utility rate adjustments and possible power shortage, while downside risks include slower-than-expected global economic activity. Given a manageable inflation outlook, we have room to keep rates low to support economic growth. In addition, the ample liquidity and the national government’s good cash position should keep the yield curve steady.

On the exchange rate, we don’t target a specific level, but we will maintain a presence in the market so that volatilities are kept low. We also will keep a close eye on market conduct. We are watchful of the developing “strong US dollar” scenario.

Which one poses the bigger downside risk in your 2015 outlook: fiscal underspending or disinflation?

I would say fiscal underspending rather than disinflation. I say this because confidence and aggregate demand remain buoyant to ward off disinflation. Private consumption and construction continue to contribute positively to growth.

That said, the national government has not stepped back from its target on infrastructure spending; and we do badly need infrastructure. We’re going to see spending for the improvements in relation to Asia-Pacific Economic Cooperation meetings, plus reconstruction following natural calamities, in addition to the projects that are already in the pipeline.

There is this sentiment among some analysts that monetary policy seems easy and yet inflation is held down by soft commodity prices resulting in a situation of strong growth and negative real rates. Do you agree that current policy settings are loose?

I think policy settings are currently just right. Neither too loose nor too tight. As I said, the risks to the inflation outlook are broadly balanced.

What are the factors or events in the 2015 macro horizon that will likely lead to an interest rate hike? What is your assessment of the risk of actual inflation overshooting your lower inflation target next year?

On the upside, it would be higher prices of food commodities -- due to natural calamities here and abroad, and supply chain disruptions -- that could cause inflation to overshoot the upper end. Food accounts for more than 40% of the basket. But neither this nor sustained lower international prices of oil -- which would be a very strong factor for inflation to fall below the lower end of the target next year since fuel and related items account for about 9% of the basket -- are within BSP control. Hence, we are heightening our surveillance and analytics in order for us to be able to make appropriate adjustments in a timely manner.

What is your assessment of the continuing growth in domestic credits and rising asset prices?

Our assessment remains to be that there are no general or pervasive stretched asset valuations, especially in real estate.

What are your thoughts on the view that stricter financial sector regulations may drive activities outside where excesses may build up unmonitored?

We are rather mindful of the possible perverse result whereby specific macroprudential measures and banking regulations in general encourage yield-seeking in the shadow or unregulated markets. This phenomenon has at times been referred to as the “balloon effect,” -- you squeeze one part and the other parts bulge. So far, however, the macroprudential measures we have in place have been effective in signaling policy intent, and in eliciting the anticipated market behavior.

As they say, monetary policy is an art as much as a science. It requires a healthy balance of analytics and creativity and boldness. Without getting bogged down with analysis, you craft scenarios creatively, calculate the risks of these possible actions, and make the best decision given the information you have. And equally importantly, communicate your decision well.

What is your tolerance for further peso depreciation? Would another 5% depreciation from current levels over a one-year horizon be acceptable?

Under the inflation targeting (IT) framework, there is greater tolerance for exchange rate movements. The exchange rate passthrough has gone down after the adoption of IT compared to the pre-IT period. Even so, we remain mindful of exchange rate movements because these could have balance sheet effects that can have an impact on overall inflation expectations.

We don’t target a specific level, nor do we target a full-year depreciation or appreciation rate. Given what we know of the exchange rate, that it affects different sectors differently, we essentially leave the rate level or trend to the market. What we more closely watch is the speed of the changes, within the period. In other words, volatility, especially when these threaten a potential breach of the inflation target.

Which would you say is the lesser evil for the BSP at this time: excess capital inflows or capital outflows?

At this time? The “lesser evil” would be capital inflows. I think the door for excessive inflows is narrower than it is for outflows, given the uncertainty with Fed normalization. In other words, we are more likely to see capital outflows than inflows.

The BSP is, however, geared for both scenarios. Among other instruments available in our enhanced tool kit, we have macroprudential measures in place for inflows, and we have the flexibility to maintain a strategic presence in the foreign exchange markets to address outflows.

But as we know, monetary policy cannot carry the full burden of adjustment. More fundamentally, we need to amp the absorptive capacity of the economy so that capital inflows would be “captured” and converted into permanent capital for real assets, as opposed to financial assets, that have stronger economic multiplier effects.

This involves, among others, increasing investments in infrastructure and strengthening the country’s institutions. In this way, the risk of capital outflows is minimized. The goal really is to steer inflows toward what the IMF calls “economic risk taking” rather than “financial risk taking.”

Other than the 2016 elections that can change the political/economic agenda, what structural issues would deter investment-driven growth in 2016 and beyond? How would monetary policy respond to such structural issues?

Legal, contract issues. Bidding procedures. Speed of execution. Taxation. All issues that could lead to improvements in the climate/cost of doing business in the country. On the BSP side, we will, as we always do, respond with policies that will create stability, both price and financial, so that market participants can anchor plans on these.

Going to the banking sector, could you share with us the results of your latest stress test of domestic banks? What are the macroeconomic shocks that the system is most sensitive to?

Universal and commercial banks are in a position to withstand extreme but plausible shocks in both credit and market risk. Uncertainty in the speed and extent of normalization of monetary policy in advanced economies remain the key source of risk for the banking system.

The expected rise in global interest rates, coupled with continued credit expansion to the property and consumer sector, render the banking system vulnerable to borrower default. Mindful of this, the BSP has implemented regulatory reforms to strengthen capital buffers and risk management practices.

Other risks?

Risks arising from corporate and household leverage and conglomerated lending are also closely being monitored in collaboration with counterpart regulators from a financial stability perspective.

Regarding current moves toward ASEAN financial integration, what realistically can we expect to see in the next two years?

ASEAN financial integration, particularly the entry of foreign players into our domestic market, should increase competition, help us reap the benefits of transfer of technology in terms of improvements in processes and raising human capacity, as well as broaden markets.

I foresee that there will be good synergy between the existing local banks and the new entrants. Local banks will remain dominant, especially in the growing retail banking space, while foreign banks will find their strength in providing regional and global connectivity through correspondent banking services and access to the international capital markets. Foreign banks will also be able to facilitate the banking needs of the local branches of companies from their home countries. Our local banks should use this opportunity to raise the level of their game, if they are to compete successfully with the bigger banks in the region.

Halfway through your second term, do you have other to-dos are in your worklife bucket list?

Yes, certainly. First, to deepen financial inclusion further to create a more palpable inroad into making economic growth truly inclusive and broad-based. Second, true capital market reform. Even as we speak, the capital market blueprint is being rewritten by global market reform. Third, an even stronger BSP institution.

How do you want people to remember your governorship?

When I took this job on in 2005, I said there was no need to reinvent the wheel. I was going to continue with the reform agenda of my predecessors, which after all I helped craft as an insider, and bring those to fruition.

However, the world we operate in changed dramatically in 2007. The traditional paradigms were shattered, and policy became of the “nonconventional” type. I would like to think that under my stewardship, the BSP has proven itself alert, nimble, responsive, and able to provide the stability necessary to give direction that the market needs at any time.

Part of this column was culled from a recent GlobalSource report written by Christine Tang and Romeo Bernardo. Mr. Bernardo is Philippine GlobalSource advisor and is a board director of IDEA.

romeo.lopez.bernardo@gmail.com

Fourth-quarter GDP rebound: It’s still possible

Introspective
Business World

THERE ARE BETS you’d rather lose. My good friend former socioeconomic planning secretary Ciel Habito and I have a running bet on the GDP growth for this year. His is optimistic at 7% and mine is conservative at just above 6% forecast. With the release of the third-quarter GDP growth at 5.3% last Thursday, it looks like I have a “free” lunch, care of Ciel.

We may disagree on our numbers, but Ciel and I both see that the key to higher growth lies in the government getting its act together. The government has much to do in terms of relieving infrastructure constraints to drive economic growth both in the short and long term. Short-term growth would be propelled by government spending for infrastructure and by construction of public-private partnership projects, long-term growth by the resulting improvement of connectivity and efficiency in the market attracting private investments that would create jobs and generate economic activity.


However, last quarter’s GDP growth dipped anew, dragged down by low government spending especially for infrastructure and by the poor state of road transport and seaports. It seems that the government is not doing enough to straighten out its troubles.

Back in July this year, we at GlobalSource wrote that “the setback caused by the Supreme Court decision on public spending as well as the slowness in decongesting the Port of Manila threatens 3Q14 economic growth” and proceeded to pare our 2014 GDP growth forecast to 5.8%. When August data showed better-than-expected second-quarter growth, we said that “the economy is not yet out of the woods in terms of bearing the costs of port congestion, which will feed into prices and economic activity in 2H14” but conceded a return to our start of the year 6.1% forecast.

And indeed third-quarter growth, reported at 5.3%, is way below the 6%-6.5% figures from journalists’ polls. Apart from government underspending (consumption and construction fell 2.5% and 6.2% respectively) and the seven-month-long gridlock at the main international seaport in Manila (despite its growth-boosting impact via weak imports, it may have also caused lower inventory buildup and on the supply side, an evident slowdown in transport and storage services), a mix of higher inflation and lower peso remittance growth saw household spending slowing down (to 5.2% in the third quarter from a revised 5.7% in the second quarter and 5.9% in the first quarter). At the same time, bad weather led to a 2.7% decline in agriculture, which is about 10% of GDP.

The much lower third quarter performance brought year-to-date GDP growth to 5.8%. With fourth quarter economic activity typically supported by Christmas festivities and upbeat consumer and business sentiments, what is the likelihood of fourth-quarter GDP reaching the 6.8% needed to achieve our latest 2014 forecast?

There is good news. Inflation is decelerating, port cargo movement has reportedly improved with the lifting of the local government’s truck ban, private construction shows momentum (12.7% in the second quarter and 15.7% in the third quarter), and despite the reported recession in Japan and slowdown in China, exports to these two major trade partners show robust growth (20% and 22% in nominal dollars, respectively, from January to September).

On the other hand, we continue to wrestle with the question of whether or not government can deliver on its promised spending. During the pre-DAP (Disbursement Acceleration Program), high growth periods, public sector consumption and construction together contributed anywhere from one to almost three percentage points of quarterly GDP growth. Hence, if government officials are rightly optimistic about rehabilitation spending gaining traction, a high fourth-quarter GDP growth is feasible. But how likely is it?

Part of this column was culled from a recent GlobalSource report written by Christine Tang and Romeo Bernardo. Mr. Bernardo is Philippine GlobalSource advisor and is a board director of IDEA.

The PPP promise, a work in progress

BUSINESS WORLD
Introspective


After a false start and a few years limping along, the Aquino government’s flagship PPP program finally roared to life. In relatively quick succession, the government bid out or awarded four projects worth P125 billion and rolled out six more costing about P170 billion. What was particularly surprising was that the auctions yielded substantial concession fee payments to the government, as against pre-bid financial model results showing that the government would have to provide subsidies to enhance project cash flows.

Encouraged by the successes, the government through the PPP Center has lined up another seven projects worth about P180 billion for approval by the National Economic and Development Authority (NEDA) board, and is preparing feasibility studies for 10 other projects. In all, there are about 50 projects in the PPP Center’s pipeline which the government is also actively marketing to foreign investors through a series of international road shows.

The mood has not always been this upbeat due largely to unmet expectations following the government’s high publicity launch of the program back in 2010. Then, the much-hyped “PPP is the solution to the infrastructure shortage in the country” failed to consider that in the wake of controversies surrounding failed PPPs in the past, both sides of the partnerships had their guard up and were distrustful of each other. In particular in the aftermath of the Asian crisis, the public sector had to grapple with and absorb some of the liabilities in PPP contracts, and for years leading up to 2010 preferred to manage the risks from contingent liabilities by avoiding them altogether. In turn, the private sector was particularly leery of government contract promises that the latter had time and again failed to keep, notably delays in tariff adjustments in most sectors -- power, water, rail, toll roads -- particularly during politically sensitive periods.

Moreover, there were very few market-ready projects in the pipeline at the time and fast-tracking last-mile adjustments to ready projects was constrained by technical limitations in implementing agencies. It was thus a slow process of learning by doing on a per-project basis, tentatively delineating risks among the parties involved, with the government deftly testing what risks the market could bear through actual biddings of smaller projects.

These included (a) a small 4-kilometer (km) toll road in December 2011 that very soon became stuck in right-of-way (ROW) disputes, and (b) a project to build classrooms, awarded in September 2012, that was the first of its kind in that it relied solely on government payments for its cash flows and thus was not able to attract more bidders willing to assume congressional appropriations risk. Critics also pointed out that this project and its second phase the following year lacked features of true PPPs in that the private sector merely handled construction of the schools and were not exposed to market and operating risks.

The first major win for the Aquino government was the P15.5-billion, 7.75-km, four-lane elevated NAIA Expressway project that had been in the drawing board for decades and was finally brought to market with donor technical assistance. Albeit it attracted only two bidders, the auction, won by a consortium led by one of the large domestic conglomerates (SMC) in May 2013, yielded P11 billion in concession fees to the government and by early 2014 had already broken ground. Another win six months later was a five-way bid in November to install a P1.7-billion single-ticketing system for Metro Manila’s rail system, where the winning bid was a P1.1-billion payment to the government.

But it has not become easier. The latest auctions, involving three multibillion-peso transport projects, have been uphill struggles for both the government and the private sector. The challenges that have emerged during the bid stage are reminders of the inherent difficulty and associated time lag of doing PPPs, especially in a developing country like the Philippines where institutions remain weak and bidders take for granted that calling on the courts, Congress or the President to intervene on their behalf is part of the rules of the game. Such politicization of the formal PPP processes tarnishes the program’s image and dulls investors’ appetites. Here are a few of the project holdups:

LRT LINE 1 EXTENSION
The biggest and the most complicated one to date, it has been subjected to repeated feasibility studies. The first bidding in August 2013 failed due to misallocation of risk (shifting to the private sector the uncertainty of real property taxes) and the insufficiency of allowed subsidy. It was rebid in May this year with the lone bidder (out of seven prequalified) winning. The award was delayed to September by a still ongoing legal tussle involving the location of a “common station” shared with another rail line.

MACTAN-CEBU AIRPORT TERMINAL
Seven bidders showed up in November 2013, with the consortium of Megawide Construction Group, which partnered with India’s GMR Infrastructure, winning the bid. Citing conflict of interest, the losing bidder challenged the qualifications of the winning group, which was then subjected to a Senate inquiry. Even with a legal challenge filed before the Supreme Court, the project was awarded in April, delayed by a few months.

CAVITE-LAGUNA EXPRESSWAY
Four groups vied in the June bidding, with the SMC consortium disqualified based on a noncompliant bid bond. Of the three remaining, the Ayala-Aboitiz consortium offered the highest premium, amounting to P11.66 billion. The SMC group claimed that it would have won with a P20 billion had it not been disqualified on a “technicality.” It appealed to the President to overturn its disqualification and the Palace issued an order in late June suspending the awarding of the project. The issue has yet to be resolved.
(Next week: Moving forward)
This piece is based on a GlobalSource report by Christine Tang and Romeo Bernardo
Romeo Bernardo was finance undersecretary during the Cory Aquino and Ramos administrations, and board director of Institute of Development and Econometric Analysis Inc.

========================================================================


(to be published Nov 10)
Moving forward
From where it started in 2010, government has made significant strides in terms of project awards and in building a pipeline of PPP projects using the donor-supported Project Development and Monitoring Fund (PDMF).  The PDMF framework has led to a coherent, solicited and transparent government-led PPP program, a departure from the past where projects originated via the private sector-driven, unsolicited route. Donor assistance has also gone into strengthening technical capacity in government agencies for identifying and implementing projects suited for PPP and to a more limited extent, drawing up sectoral master plans that map out project requirements.

Notwithstanding the above, the PPP program is still a work in progress (with proposed changes to the legal framework pending in Congress) and continues to be at risk of sliding to stall speed.

For starters, success to date has been based on selecting projects that were either relatively simple to do or had ready feasibility studies sourced either from past technical assistance or unsolicited proposals.  The risk now is of exhaustion of feasibility studies for projects that may be undertaken as PPP.  While the PDMF is envisioned to be self-sustaining, seed funds provided by donors are at risk of becoming depleted as there is a gap/ time lag in its replenishment via reimbursement from awarded projects.   Also, while it would be fair to assume that the contract models now in place for each of the sectors awarded would make it easier to do succeeding ones, we think that the challenge of bringing seemingly similar projects to market will remain a slow process due to the many idiosyncratic factors, including political ones and even at the local government levels, that affect different projects’ risk profiles differently.

Moreover, as the program moves away from brownfield projects, where there are existing and predictable revenues streams, to riskier greenfield projects with uncertain demand, the as yet unknown unknowns can be expected to contribute to longer project cycles.  One example is the newly rolled out P123-billion expressway dike project, the biggest one by far, which we understand will have to hurdle challenges from competing tollroad concessions that may see their traffic volume diverted to the new road as well as a skewed cashflow profile with the huge upfront cost to be recovered from revenues too far into the future.

The policy environment
As PPP projects become bigger, riskier and more complex, government will also need to assess its own appetite for taking bolder measures to de-risk projects and provide stronger assurances to investors that it will be able to fulfill contract promises.  So far, the general impression is that due to its unpleasant experience with realized contingent liabilities in the past, government has been overly cautious in assuming risks in PPPs.  Even if government were prepared to assume more risks, its ability to do so in the short-term would be constrained by the lack of a medium-term expenditure framework that would enable it to commit resources to long-gestating PPP projects over successive administrations and protect projects from politicization.  For instance, we expect that two long-term public financial support mechanisms will become more important over time, but both will probably need legislation.

One is an automatic payment mechanism where annual appropriations will be allowed to accumulate and used automatically for payouts in case of government contract breach, similar to the treatment of debt repayments.  This would be a more permanent structure compared with the current setup where a “Contingent Liability Fund“ item is lodged under “unprogrammed funds” in the budget and expires every year and would have to be appropriated anew every year.  Similarly, a separate long-term fund is needed to meet so-called “availability payments” for projects that rely partly or wholly on government payments for financial viability (Examples include the classrooms and hospital projects as well as PPP structures similar to the take-or-pay power contracts in the 1990s). At present, government is relying on an instrument called multi-year obligation authority (MYOA) that commits the executive to include the required payments in the annual budget over the project period; but it is non-binding on the legislature which approves the budget, thus exposing investors to risk of non-appropriation by congress every year.

There is additionally the challenge of sustaining competitive pressures by expanding the pool of potential bidders beyond the current list of mostly large local conglomerates, which will be crucial to safeguarding the bidding process and ensuring that government receives the best price.  So far, the seemingly high concession payments on awarded projects suggest adequate competition but which we think may be more properly traced to extraneous factors – current low interest rate environment and upsides from real estate development that have enhanced forecast revenues beyond a “project only” analysis – that may not be relevant in future projects.  In the event, Constitutional restrictions particularly on public utilities may become binding constraints to ramping up PPP deals.

Postscript
The challenges notwithstanding, we think that the PPP program will continue to be a necessary feature of the country’s infrastructure program not only because of constrained public resources but more importantly because it enables government to tap into private sector technical, financial and managerial expertise.  But even as government is devoting a lot of resources on developing and marketing new deals, it should probably also pay mind to how it treats its private partners in ongoing PPP projects.  Recent reports of backtracking from market-based electricity rate setting, reinterpretation of the concession agreement with water concessionaires on the recoverability of corporate income taxes, and the delays in rate adjustments in mass transport and toll roads put the stability of the country's regulatory environment in a bad light.

At the end of the day, it is the assurance of a predictable legal and regulatory environment during the bidding and award stage and over project life that will kindle private sector interest and achieve value for money for the public sector.

Bangsamoro is a gamechanger

Introspective 
BUSINESS WORLD

http://www.bworldonline.com/content.php?section=Opinion&title=bangsamoro-is-a-gamechanger&id=95160 



THE GOVERNMENT’S herculean effort to put behind us a four-decade old, costly and painful civil strife and gain for us all the benefits of peace deserve our support. This can be a potential game changer in our economic landscape, not just in what is now called the Autonomous Region for Muslim Mindanao, but for the entire country. True, there are risks along the way. But it is well worth giving peace a chance.


The legitimacy of the Moro wars for independence was the basis for the peace negotiations from the time of Marcos to the present. The Bangsamoro claim they are a separate nation with a distinct identity, culture and independent state (sultanates) with a long history of resisting the colonizers. Nations like this have the “right to self-determination” (RSD), according to the United Nations. The Organization of Islamic Conference (OIC) supported Nur Misuari and the Moro National Liberation Front in part because they supported the Bangsamoro fight for independence under the RSD and in part because they believed that the Muslims of Mindanao were under threat of genocide during martial law.

Peace in the South can bring up Mindanao’s contribution to the gross domestic product (GDP). Mindanao has abundant primary resources, perfect agro-climatic conditions, lower wage rates (with the ARMM cost half of average labor cost in Mindanao), still lower power cost, and vast opportunities for growth and diversification through its BIMP-EAGA connection. Investments have stayed away from Mindanao, even more so than the rest of the country, due to security concerns. Remember the Zamboanga siege? The Ampatuan massacre? Killers for tourism and investments, and not just in Muslim Mindanao.

As for opportunities in the ARMM, the region has the biggest areas of untapped natural resources, rich fishing grounds and fertile lands, the best beaches anywhere in the Philippines or anywhere else, and closest cultural and historical links with Brunei, Indonesia and Malaysia which can allow the region to access new capital thru Islamic financing as well as a new export market in the still growing halal industry. Further, the barter trade between Sulu and Malaysia is an economic tie that is centuries old and can be revived, with BIMP-EAGA and the initiatives being mounted as part of ASEAN 2015, fully backed by the national governments and the Asian Development Bank.

The Bangsamoro will have even more powers than the ARMM government to help craft its own destiny. While the region has disadvantages largely due to the four decades of civil strife and neglect, it also has an important advantage -- starting fresh. It can learn from the history of flawed policies that have hurt the flow of investments and creation of needed jobs in the rest of the country -- rigid and costly labor policies, complex bureaucracies and red tape, a distorted fiscal incentive structure, a failed agrarian reform program and misguided environmental policies that choke the development of a responsible mining industry. As explained by Foundation for Economic Freedom President Toti Chikiamco in a workshop organised by the FEF/Philippine Center for Islam and Democracy, it may actually provide a model for the rest of the country, be the tail to wag the dog, the way Hong Kong/Shenzen has shown the way for the rest of China.

Investors may, by adopting their business models and organisational and management styles to the traditional leadership (datus) structures of the area, find that these can be better places to operate than in other places in the country. This is the encouraging lesson of Unifrutti of former Secretary Senen Bacani and the late Datu Paglas which have won international awards.

It would be fair to ask, who are these guys (in the Moro Islamic Liberation Front leadership) and why do we trust them to succeed? Why do we think that leadership won’t revert to the old traditional leaders/warlords after elections take place?

I posed this question to Amina Rasul, lead convenor of the Philippine Center for Islam and Democracy, also our home Bangsamoro expert. This is what she said: “The MILF leadership is better prepared to take on the mantle of leadership of a civilian government (unlike the MNLF after the signing of the 1996 peace agreement). Under Chair Murad, the MILF has succeeded in establishing the Bangsamoro Development Agency (BDA) and the Bangsamoro Leadership Institute (BMLI). The BDA and the BMLI, chaired by civilians, are led by boards consisting of the MILF Central Committee and professionals. The BDA is tasked to prepare the Bangsamoro Development Plan and has been assisted by development partners and government. The BMLI is putting together training programs for the Bangsamoro. Further, the MILF has been sending young Bangsamoro professionals to study, with the help of development partners.

While all development matters are still decided by the MILF Central Committee, it is clear that the MILF has been preparing for civilian government over the last few years. The failure of the MNLF to govern the ARMM, under Misuari, has been in large part due to their lack of preparation to govern under a democratic system. This is not the case with the MILF, which has been working with government and development partners to put in place programs such as the Sajahatra intended to provide services to its communities.

The MILF leadership also has the support of several political and traditional leaders, particularly in Central Mindanao. “

What can business do to help enhance chances of success at this time -- and moving forward after the Bangsamoro entity is set up?

The most urgent is for the business sector to support the passage of the Bangsamoro Basic Law. The MILF leadership under Murad has invested political capital in the peace agreement. Should the Basic Law be watered down or not passed, the pragmatists in the MILF Central Committee will lose out to the fundamentalist faction which is supported by younger (and more aggressive) leaders who already feel that the original demands of the MILF have been greatly undermined during the peace negotiations.

In the short term, before transition to the establishment of the Bangsamoro political entity, the business sector should assist in providing support for education. First, support adult literacy. Over half a million adults of ARMM are illiterate (more than a third of the voting population). When businesses are established in the Bangsamoro, labor will have to be imported from neighbouring non-Bangsamoro provinces if the existing labor force are unskilled and illiterate. This is a condition that will breed more conflicts, as the affected citizens will lose out on job opportunities to those who have not suffered from the armed conflicts. Second, support short management training for professionals who can run public and private sectors. Apprenticeships and internships can be provided by the private sector. Third, engage the BDA, the BMLI and the Bangsamoro private sectors (chambers of commerce and business councils) to identify opportunities for collaboration.

Let us begin.

Grains and Gilas: Geography, genes, dashed dreams

Opinion
BUSINESS WORLD
Posted on September 07, 2014 08:59:00 PM

Introspective
Raul V. Fabella


WE CAME very close to beating Croatia, Puerto Rico and Argentina in FIBA Spain. We beat Senegal by a whisker. All the basketball world marveled at our fighting spirit. The entertainment value was unmatched. But in the end we were eliminated. We tried; we even enlisted Congress to accord citizenship to foreign behemoths to raise our ceiling. This leaves a bad taste in the mouth, for how far can you go with instant citizens without eroding our team identity? Still, a win is a win. It was not quite our dream but it was certainly better than a “zero win “for China and India. Our genes in the end let us down.
 
And yet there is nothing wrong with our genes; the wrong is with our choice of competitive games. Basketball is a game of physical, not mental elevation. That is why a Jewish NBA player always inspires a chuckle like a ghost. And Jews are not insulted. It’s the case again of some Ivy League schools -- when their lowly football teams surprise some nationally ranked teams, a blue moon moment, there follows a groan of self-examination: a sign perhaps that we have lost our academic edge? For there is no free lunch, not even and especially academic edge. Wisdom dictates that we embrace our genetic make-up and choose the contests that enlist our genetic strengths. And for Filipinos, basketball cannot be the repository of lofty dreams. Jews don’t do so badly reposing their dreams in bio-, nano- and other techs. We can too.

As in sports, so in life. But in life, swimming against the tide can be disastrous. Basketball is at least fun and costs the taxpayer no money. Not rice self-sufficiency. In the annals of myths, rice self-sufficiency stands out as the most enduring. Dreams repeatedly get bludgeoned here, but it does not die. The fallacy is that any nation can just engineer it and thus should. In December 2011, Agriculture Secretary Proceso Alcala bragged that by 2014, the Philippines will be a rice exporter because by then the Philippines will have achieved rice self-sufficiency.

So a program of rice import reduction pulled imports down from 860 metric tons in 2011 to 350 metric tons in 2013 in the hope that domestic rice production will fill the void. Well, domestic production did not, despite the huge budget allocation for rice. In the first quarter this year, rice prices spiked. PNoy’s sagging rating had little to do with the Disbursement Acceleration Program (DAP) and everything to do with the price of rice.

Alcala’s was not just a shattered dream; it almost derailed Matuwid na Daan. The besieged Aquino administration quickly reversed course and rushed an import order of 800 metric tons of rice. It also stripped Alcala of four crucial units of the Department of Agriculture. In Japan, where honor is highly regarded, the same chain of events would have triggered a hara-kiri. Here, Alcala is still there.

Why did rice self-sufficiency fail? Rice self-sufficiency is a matter of geography. This is the message of the recent International Rice Research Institute study. Many economists, including Planning Secretary Arsenio Balisacan, have raised the warning. We do not have a comparative advantage in rice production. Our cost per cavan is too high. You can blame lack of infrastructure and farm-to-market roads till you are blue in the face, but if you do not have steady abundant water and a friendly soil, you will be marginal. Which means only limited areas in the Philippines will be competitive and not nearly enough for self-sufficiency. As Adam Smith once observed, Scotland can produce more wine, but if you have to artificially provide the warmth and abundant sunshine freely available in Portugal, you will go bankrupt. Why not produce woolens instead? Producing efficiently if only a fraction of consumption requirement and importing the rest is common sense. Geography is unfair; but it gets bloody if you bang your head against it. As with genes, you choose crops that suit your geography and not the geography that suits your crops.

It is the familiar law of comparative advantage in trade theory once again. If a country specializes according to comparative advantage -- that is, produce crops where it has a cost advantage, say rice for Thailand -- it realizes increases in its welfare. I prefer to emphasize perverse specialization in my class: countries often harvest a nightmare because their governments decide to defy comparative advantage, which for the Philippines is self-sufficiency in rice.

For an epilogue, I always observe that if left to the private sector, this madness does not arise because private business hates to lose money, its own money. Government bureaucrats, though, lose only other people’s money and worse perhaps make a pile for themselves on the side, making perverse specialization common.

Let me end by telling the story of a friend and fellow BusinessWorld contributor, Romy Bernardo, who turned 60 last week. Romy’s singularly successful career is a parable of genetic jujitsu. Had Romy chosen the tennis or basketball court as his Thermopylae, he would be dirt poor and miserable. But he chose as rapiers what the genetic gods dealt him -- abundant IQ and charming wit -- and he and we are all the better for it.

Raul V. Fabella the chairman of the Institute for Development and Econometric Analysis, a professor at the UP School of Economics, and a member of the National Academy of Science and Technology.

http://www.bworldonline.com/content.php?section=Opinion&title=grains-and-gilas:-geography,-genes,-dashed-dreams&id=94092

The life and times of our only Prime Minister

Introspective, Business World


I WAS PRIVILEGED to be Master of Ceremonies at a recent launch at the Yuchengco Museum of the book of Dr. Gerardo Sicat -- Cesar Virata: Life and Times Through Four Decades of Philippine Economic History (University of the Philippines Press). I highly recommend it to students of economics and history and admirers of the only Prime Minister our country ever had.
   
We waited 30 years for this book, and only Gerry Sicat could have written it. Professor, most prolific author of economic researches papers and textbooks, and development consultant, Sicat is also father of three economic-oriented institutions known for their excellence -- the UP School of Economics, the National Economic and Development Authority, and the Philippine Institute for Development Studies. (More recently, he is known as the father of the also excellent PSE President Hans Sicat.)

The hefty 800-plus-page book “stands on its own,” the author joked, making reference to its ability to stay vertical without support. He explains the reasons for its physical gravitas. “I see it as several books. The scope is large. First there is Cesar Virata. Along with him are other running stories: our nation in its young age of independence, and the problems of economic national building, then the Marcos years -- the positive, the controversial, and the crisis years. It is also about the transition afterwards.” You need to read the book to fully appreciate its intellectual heft.

Those present at that book launch had the privilege of listening to three “reviewers” and a beautiful musical number. These were, in the order of the program:

• Victor Macalincag -- I described him as “PM Virata’s right-hand man at the DoF,” “my former boss who was brilliant and hardworking,” and not the least “according to my wife and I heard the First Lady of that time, the handsomest undersecretary in government.”

• Washington Sycip -- “One of the few who can claim the high honor of being a mentor to PM Virata, even when the latter was still a student. Founder of the SGV Group, now a continuing mentor and guru to the nation.”

• Ambassador Alfonso Yuchengco -- “Industrialist, banker, diplomat, taipan, belonging to that breed of post-war nation builders which perhaps comes only once in a country’s history.”

The music in the forum was provided by the same person who provided the music in PM’s life: Mrs. Joy Virata, singing a soulful rendition of “Summertime.”

In the remarks I would have made had my iPad cooperated, I underlined some lessons for the idealistic public servant on a man who is the gold standard for public service, integrity and patriotism.

“This is the humbling story of a man who persevered and shepherded the economy through the Philippines most critical financial and political crisis. A man who sacrificed his own reputation, never abandoning the ship of state through the raging storm.”

Sicat writes of how PM typically shirked the limelight. He writes about a posthumous honouring of the late Finance Secretary Jaime Ongpin in Malacanang, during the Cory Aquino presidency, where Virata was unacknowledged by virtually all of those who spoke. That is, until Maribel Ongpin took the podium to give her response. She acknowledged Virata. According to Sicat’s recounting, “The full house thundered in applause. These were all faithful members of the Department of Finance, the career people who had worked for him for almost 16 years. He was a man they respected, who had performed his job in the department faithfully, and whose work was acknowledged as the most consistent and successful during his time in the post.”

Allow me to end this piece with an excerpt from Vic Macalincag. After elaborating on the roles PM Virata played across a wide front of economic reform -- banking and finance, trade, investment, industry, project development, international economic diplomacy, development of Mindanao, energy diversification, agrarian reform, etc., he ruefully considered:

“Reading his biography, one is tempted to conclude that in a different setting and stable political environment, and despite restrictive provisions in our laws, his economic management and policy prescriptions and strategies could have placed the Philippines not far behind South Korea, Singapore, Taiwan and Hong Kong.”

Why we need a credit information system, and why we need it now

BUSINESS WORLD
Introspective 


A 2007 STUDY by the Asian Development Bank (ADB) on binding constraints in the Philippines identified the lack of financing as a key stumbling block to growth and development. This was at a time when local banks were holding a lot of excess cash, and chasing after a few large corporates which were thus in a position to demand lower-than-treasury-yield interest rates.

The constraint clearly applied to micro-enterprises and small and medium enterprises (SMEs). Micro-enterprises refer to those with assets under P3 million, small enterprises those with P3 million to P15 million, and medium enterprises up to P100 million. SMEs alone make up 98% of firms in the country. It is often harder to lend to such enterprises than big corporations -- they do not have audited financial statements, and owners do not put a bar between their business and their household wallets.

SMEs’ lack of access to financing is of course not new. Together with the agricultural sector, they have been the target of failed government-directed programs since the 1970s.

In fact, even as the Bangko Sentral has been barred from these developmental activities, laws mandating private banks to lend to agri-agra and SMEs continue to be in effect. In many cases, banks had found themselves better off accepting the penalties of non-compliance than to risk capital loss by lending to these sectors. Why?

At the core of the problem is a well-known market failure in economies, information asymmetry: banks and other financiers do not know as well as the borrower the latter’s track record in loan repayment, and would thus have a hard time telling apart good borrowers from bad ones.

In the absence of reliable information to help banks make the right credit decision, SMEs and most especially micro enterprises applying for loans would face a higher probability of getting denied. This is true as well for individuals.

The flip side is that the pool of borrowers is smaller, resulting in high opportunity costs not just for the banks and other credit providers, but most crucially for the nation and public at large.

Although the problem is a well-known one, it was only in 2008 that a law was passed creating the Credit Information Corporation (CIC). The CIC is supposed to aggregate individuals’ and firms’ credit information in a database to help would-be borrowers prove good credit record (thus improving their chances of getting a loan) and financiers make good credit judgements (thus reducing default risk).

Work on this has been gaining traction in the past year with the appointment of a dynamic and charismatic IT entrepreneur, Jaime Garchitorena, as President. He has the solid support of his entire board, led by its ex-officio chairman, Securities and Exchange Commission Chair Teresa Herbosa.

Under Garchitorena’s leadership, key milestones were achieved: First, a meeting of the minds between the CIC and the first batch of data providers, primarily the banks. In addition to the banks, the CIC is also aiming to fill its database with payment records of utility companies such as Meralco, the water concessionaires and the telecoms, as well as those of pension agencies, cooperatives and micro-finance institutions.

Second, the signing of contract between the CIC and the CRIF, a leading international credit bureau services technology provider, after a thorough and transparent competitive procurement process supported by the International Finance Corporation. The target is to be able to offer CIC’s services to the public toward the end of next year even as it continually expands data sources to enrich its database.

A necessary activity to ensure public acceptance and wide usage of the credit information system (CIS), which the CIC law also mandates, is a continuing awareness campaign that educates the public about the benefits of the CIS, the do’s and dont’s of keeping one’s credit history clean, conditions for accessing credit records, and increasing financial literacy in general.

The activities of the CIC are fully supported by the government in light of the benefits generated by a functional CIC to the economy and financial system. In addition to the Bangko Sentral and the SEC, Finance Secretary Cesar Purisima and Trade and Industry Secretary Gregory Domingo have been keen for the Philippines to join soonest the rest of the original ASEAN countries with a functioning credit information system. This is one of the factors in international competitive surveys -- including the IFC’s Ease of Doing Business.

My own small involvement is as a member of the USAID-funded COMPETE project that is assisting the CIC in bringing global best practice knowledge in the design and marketing of the CIS as well as garnering broad-based support from local financial institutions, industry organizations, and the other government and non-government organizations.

International experience with credit information systems (most recently in Japan, Malaysia, Taiwan) shows that the availability of reliable information helps reduce firms’ and individuals’ financial constraints, increases their access to credit, lowers banks’ loan default rates and fosters long-term responsible borrower behavior. The CIS is clearly a win-win solution to a critical binding constraint to our country’s inclusive growth aspirations. Simply put, the CIC will help improve our people’s lives.

http://www.bworldonline.com/content.php?section=Opinion&title=why-we-need-a-credit-information-system-and-why-we-need-it-now&id=92018