Business World
Introspective
The Philippines witnessed surprisingly roaring growth in 2010 befitting a tiger year, but may see a tamer economy this year, now supposedly belonging to the rabbit. That is what believers in Chinese astrology would probably say about 2011. But from our point of view, entering the New Year may also be like going down the rabbit hole, not entirely sure if one would run into a lot of good surprises or be hit by more of the very bad ones.
The best state of course would be if the global economy beats expectations yet still runs at a pace that doesn't put too much pressure on commodities prices and if the current political uprising in Egypt (which has now spread elsewhere in the region), which could be the much-feared black swan event, would find swift resolution and thus prevent further volatility in the world oil markets. This way, with macroeconomic conditions remaining benign, remittances from overseas workers and hence consumption would still find room to grow while exports and private investment could continue to expand.
The worst state would be the opposite - that is, the remote case of global growth especially in advanced economies again slumping even as financial and political turmoil erupts in the Middle East because of contagion and leads to a rocketing of oil prices, raising costs, and impeding growth elsewhere in the world. With this backdrop, the strategy of holding back on spending to reduce the national deficit would seem like an inadequate approach while a strong effort for fiscal reform would be that much harder to launch. Such a scenario would also mean a hard fight against inflation and a deterioration of financial conditions.
Forecast Summary
Global Source
2011 2012
GDP annual change % 5.3 5.5
CPI inflation % 4.3 4.2
Benchmark interest rate % 4.8 4.8
Exchange rate PHP/USD 43.0 42.2
Fiscal balance/GDP Unit -3.3 -3.0
Current account/GDP Unit 4.0 4.4
International reserves USD bn 64.0 68.0
External debt/GDP % 30.0 27.5
Fortunately, the base case, while holding some uncertainty, would be a bit easier to face. As discussed in sections below, we see the economy growing at a softer yet still quite robust pace with price risks likely to be contained.
A SOFT YEAR AHEAD?
We had already adjusted our projections for 2011 upward to 5%-5.5% in a previous report in light of then quite high business confidence, robust remittances, strong corporate earnings, and quite benign macro environment. While the economy roared in 2010, growing by 7.3%, and there may still be some momentum left from last quarter's 3% quarter-on-quarter growth, there does not seem to be strong drivers in the horizon. Thus, our forecast range should hold for the meantime.
INFLATION FEARS
Factoring in the latest developments in global commodity markets, our own simulations place average inflation at about 4.3% this year and 4.2% the next, though with substantial upside risk. While oil markets have suffered some volatility and food price indexes have surged, the world price of rice, the more important food commodity in the Philippines (with 9.4% weight in the CPI) and thus closely watched because of its capacity to unhinge inflation expectations, seems fairly stable for now at half of peak levels scaled in 2008. With the US Fed on hold, we continue to look for policy rate hikes around the second half of 2011, the earliest being June when headline inflation starts to climb to the upper edge of the targeted range with a possible breach around the fourth quarter before falling back into the band. Tightening will likely be in the order of 75 to 100 bps (in 25 to 50 bps increments) for the year.
THE PUBLIC SECTOR
The government is hoping to cut the deficit to 3.2% this year (to about P290 billion) and further down to 2% by 2013. But because of the effect of several revenue-eroding laws. the likelihood remains that targets will again be met by expenditure compression despite some bright spots on the privatization front, meaning increasingly less funds for needed social services and infrastructure going forward. Looking ahead, we expect fairly good results for the country's debt ratio, which should remain on a downward trajectory over the next couple of years despite possibly higher domestic interest rates and low primary surplus owing to continued growth and peso appreciation.
NO REPEAT OF BOP HIGH
We are less sure that the substantial external surplus in 2010 can be repeated this year. Remittance growth, while remaining robust, will likely edge a bit lower this year owing to lower deployment of overseas workers over the past year. The export recovery may have already lost steam, with electronics exports, which account for about two-thirds of the total, rising by just 8% annually in November after growing at high double-digit pace since December 2009. Also, while the emerging market story may still be a convincing one for global investors given still comparatively high prospects for growth, tremors in the world commodities markets, particularly oil, may increase risk aversion and weaken or even reverse positive sentiment with many developing economies highly sensitive to changes in food and fuel prices.
POLITICS: STILL ON HONEYMOON
Judging from what the pundits have been saying, one would think the political honeymoon for Benigno Noynoy Aquino six months into the presidency is nearing its end. Not so if one bases conclusions on the recently released survey of the Social Weather Stations, a non-profit social research organization, which still saw the fairly new administration receiving historically high (very good) net satisfaction ratings. Mr Aquino will eventually be forced to take a more active approach to governing as every honeymoon has its expiration date. On economic affairs, an issue he would need to handle would relate to growing concerns over food and fuel inflation, an area where he got a neutral score - already his lowest - in the recently released net satisfaction survey.
This is a summary of the Feb. 8 Global Source Quarterly Report written by Margarita Gonzales, and this columnist. Global Source is a New York- based network of independent analysts whose subscriber base are mostly fund managers and research units of banks.
Monday, February 28, 2011
Monday, January 31, 2011
Renewable energy - reality check
Business World
Introspective
The Philippine Renewable Energy Law passed in 2008 has been applauded by environmental groups, renewable energy firms, and official donor institutions keen to play a role in addressing global warming. We who pay taxes and high energy bills need to be a little more wary.
My attention was caught by a news article reporting a billion-dollar renewable energy (RE) loan program being negotiated between the Asian Development Bank, other official co-financiers, and the Philippine government. The news item said that most of the $1-billion loan will be focused on supporting solar, wind and biomass power projects. I hope this is inaccurate, and that most of the funding goes to sound components of the program like raising consumer awareness on energy efficiency and regulation for energy-efficient equipment and appliances, instead of subsidizing inefficient technologies.
The hard reality is that the technology for these three sources is far from mature as seen in their exceedingly high price: solar costs P25 per kilowatt-hour (kWh), biomass and wind around P10. This compares very poorly with the current grid rate of P4.50 per kWh - anywhere from two to five times true cost now.
So who will carry the high cost of these immature technologies? Answer: Feed In Tariffs (FIT). An add-on, a tax if you will, to the average cost of power in the grid for everybody. The law obliges the power industry participants to source electricity from generation at a guaranteed price applicable for a given period of time but no less than 12 years, supposedly to accelerate the development specifically of emerging RE resources. This cost to the public is on top of the tax gives the Renewable Energy Law provides developers, including income tax holidays for seven years, duty- free importation of renewable energy machinery, equipment, material for 10 years, special realty tax rates, etc.
The FIT provisions seem to have been adopted from laws in developed European countries, meant to subsidize emerging technologies by burying it in the general public's power bill. The FIT number floating around in discussions for the Philippines is 15 centavos add-on per kWh used by each consumer. This amount may seem small, until one considers that this is an add-on to one of the highest per-kWh costs of power in the region, arising from our archipelagic geography and legacy/stranded costs.
Moreover, this 15 centavos translates into a P10-billion ANNUAL subsidy, hardly the best use of money for a country that has huge social and basic infrastructure requirements. For perspective, the World Bank/ADB- supported conditional cash transfer program for this year which will bring millions and generations of people out of poverty by keeping children in school, only adds P20 billion to the budget. (It is as if a poor minimum wage earner in 1990 became early buyer of first-generation mobile phone for P50,000 and signed up a P5,000/month contract for a dozen years.)
The direction discussions seem to be headed is to define a guaranteed FIT and quota for each particular RE resource, or worse, for each particular RE supplier. As the FIT can be as high as five times current per-kWh power cost, such customized arrangements for each resource or supplier will clearly be prone to rent-seeking. To prevent this, ERC should set a single low FIT open for all RE, one only slightly higher than the current average cost of power. If they price too high, the mistake hounds us for 20 years or however long the subsidy lasts. On the other hand, the only consequence of pricing low is that there won't be enough takers. That should not be a problem at all as the ERC can fine-tune the pricing the following year. Since RE is not expected to be part of baseload, the lack of takers should have no consequence on power supply. Besides, the cost of these technologies will surely decline over time and more efficient technologies will still emerge - so no advantage in rushing.
These solar and wind technologies are already being subsidized by those who can afford them - taxpayers and consumers in developed countries helping their firms in these emergent technologies - in many cases, though, with deep regret. Spain, in a fiscal and financial bind, is reportedly taking steps to nullify uneconomic long-term contracts with solar power providers. Australia too is shifting spending from RE to more pressing flood damage rehabilitation. (There is an important lesson here for the business and government in doing PPPs - in the long run, sound economics is the best, arguably, the only, guarantee for contract compliance.)
If we don't support solar, wind, and biomass, are we failing to do our proper share in carbon emission reduction? No we are not. The Philippines contributes a miniscule of carbon emission given our low income and level of industrialization. Moreover, we can hold our head high on our current RE resource mix. In contrast to the global average of under 10%, fully 42% of our generated power already comes from green, RE sources: geothermal and hydro. Our Department of Energy is right to focus on the basic problem of ensuring affordable and secure supply of electricity - and calling for caution in embracing these fashionable, but for now, costly, distractions.
Romeo Bernardo was Finance undersecretary in the Aquino 1 and Ramos administrations. He is a board director of the Institute for Development and Econometric Analysis.
Introspective
The Philippine Renewable Energy Law passed in 2008 has been applauded by environmental groups, renewable energy firms, and official donor institutions keen to play a role in addressing global warming. We who pay taxes and high energy bills need to be a little more wary.
My attention was caught by a news article reporting a billion-dollar renewable energy (RE) loan program being negotiated between the Asian Development Bank, other official co-financiers, and the Philippine government. The news item said that most of the $1-billion loan will be focused on supporting solar, wind and biomass power projects. I hope this is inaccurate, and that most of the funding goes to sound components of the program like raising consumer awareness on energy efficiency and regulation for energy-efficient equipment and appliances, instead of subsidizing inefficient technologies.
The hard reality is that the technology for these three sources is far from mature as seen in their exceedingly high price: solar costs P25 per kilowatt-hour (kWh), biomass and wind around P10. This compares very poorly with the current grid rate of P4.50 per kWh - anywhere from two to five times true cost now.
So who will carry the high cost of these immature technologies? Answer: Feed In Tariffs (FIT). An add-on, a tax if you will, to the average cost of power in the grid for everybody. The law obliges the power industry participants to source electricity from generation at a guaranteed price applicable for a given period of time but no less than 12 years, supposedly to accelerate the development specifically of emerging RE resources. This cost to the public is on top of the tax gives the Renewable Energy Law provides developers, including income tax holidays for seven years, duty- free importation of renewable energy machinery, equipment, material for 10 years, special realty tax rates, etc.
The FIT provisions seem to have been adopted from laws in developed European countries, meant to subsidize emerging technologies by burying it in the general public's power bill. The FIT number floating around in discussions for the Philippines is 15 centavos add-on per kWh used by each consumer. This amount may seem small, until one considers that this is an add-on to one of the highest per-kWh costs of power in the region, arising from our archipelagic geography and legacy/stranded costs.
Moreover, this 15 centavos translates into a P10-billion ANNUAL subsidy, hardly the best use of money for a country that has huge social and basic infrastructure requirements. For perspective, the World Bank/ADB- supported conditional cash transfer program for this year which will bring millions and generations of people out of poverty by keeping children in school, only adds P20 billion to the budget. (It is as if a poor minimum wage earner in 1990 became early buyer of first-generation mobile phone for P50,000 and signed up a P5,000/month contract for a dozen years.)
The direction discussions seem to be headed is to define a guaranteed FIT and quota for each particular RE resource, or worse, for each particular RE supplier. As the FIT can be as high as five times current per-kWh power cost, such customized arrangements for each resource or supplier will clearly be prone to rent-seeking. To prevent this, ERC should set a single low FIT open for all RE, one only slightly higher than the current average cost of power. If they price too high, the mistake hounds us for 20 years or however long the subsidy lasts. On the other hand, the only consequence of pricing low is that there won't be enough takers. That should not be a problem at all as the ERC can fine-tune the pricing the following year. Since RE is not expected to be part of baseload, the lack of takers should have no consequence on power supply. Besides, the cost of these technologies will surely decline over time and more efficient technologies will still emerge - so no advantage in rushing.
These solar and wind technologies are already being subsidized by those who can afford them - taxpayers and consumers in developed countries helping their firms in these emergent technologies - in many cases, though, with deep regret. Spain, in a fiscal and financial bind, is reportedly taking steps to nullify uneconomic long-term contracts with solar power providers. Australia too is shifting spending from RE to more pressing flood damage rehabilitation. (There is an important lesson here for the business and government in doing PPPs - in the long run, sound economics is the best, arguably, the only, guarantee for contract compliance.)
If we don't support solar, wind, and biomass, are we failing to do our proper share in carbon emission reduction? No we are not. The Philippines contributes a miniscule of carbon emission given our low income and level of industrialization. Moreover, we can hold our head high on our current RE resource mix. In contrast to the global average of under 10%, fully 42% of our generated power already comes from green, RE sources: geothermal and hydro. Our Department of Energy is right to focus on the basic problem of ensuring affordable and secure supply of electricity - and calling for caution in embracing these fashionable, but for now, costly, distractions.
Romeo Bernardo was Finance undersecretary in the Aquino 1 and Ramos administrations. He is a board director of the Institute for Development and Econometric Analysis.
Monday, January 10, 2011
A PPP success story
Business World
Introspective
Public Private Partnership (PPP) has been launched recently as a key ingredient in the administration's program to address infrastructure needs, raise investment levels, and build a broader base for sustainable growth, while attending to the country's fiscal constraints.
Earlier called BOT (and its variants), PPP was used effectively by President Ramos and his team to address in record time the power and water crises in the 1990s, demonstrating political will and effective management. As a Finance undersecretary at the time, I was privileged to have worked with Energy Secretary Del Lazaro, drafted from a distinguished career in the private sector to put the lights back on, as well as with MWSS Administrator Lito Lazaro, a Princeton PhD civil engineer and coincidentally Del's brother, to bring water to the people.
During the succeeding two administrations, interest in PPP waned markedly. The decline in the number of PPP projects, as well as the amounts invested in them, mirrored the decline in the investment to GDP ratio - from an average of 25% during the Ramos administration to only 15% during Arroyo's. The 1997 Asian financial crisis and controversies that hounded a few high profile projects (e.g., PIATCO) contributed to this steep drop, but I think the real binding constraint has been the well- documented deterioration in indicators of governance and regulatory environment over the past decade. Hopes are therefore high that the P-Noy administration, having been elected on a good governance platform, enjoying an unprecedented trust rating, and possessing a strong economic team, can relieve this constraint, and reinvigorate investor interest in PPP.
As encouragement for the way forward, let me share the success story of the MWSS PPP. This is a story I am familiar with as I was Finance Secretary de Ocampo's representative in the MWSS board to track the privatization. I also wrote a paper on it for the World Bank, and later on, was an occasional adviser to one of the concessionaires.
What prompted the MWSS privatization in the mid 1990s? Very poor service delivery seen as a water crisis. Only two thirds of Metro Manila were connected to MWSS water pipes. Most customers were subject to water rationing with less than 3 out of 10 having 24-hour supply, and worse, occasional outbreaks of cholera cases were a growing concern. Moreover, MWSS had become a major fiscal burden with debt in excess of a billion dollars. It found itself in a Catch-22: no resources to expand the system and improve its very poor service delivery, but unable to politically justify raising water rates needed to raise resources. Moreover, it was encumbered by government bureaucratic inertia, processes, and vested interests, both within and without. Privatization, which had worked well elsewhere, was seen as a logical way out.
Through the exercise of political will and judicious haste, the complex preparatory technical, economic, legal, and political management process from conception to final award of the largest privatization anywhere was completed in less than two years. It was done in a most transparent competitive bidding process overseen by the World Bank/IFC and participated in by four established Philippine conglomerates in joint venture with international utilities firms.
This process and the long story up to the present is told in a paper on the Political Economy of Reform During the Ramos Administration
(http://www.growthcommission.org/storage/cgdev/documents/gcwp039web.pdf ) which Christine Tang and I wrote for the World Bank's Growth Commission. This story is punctuated by the financial failure of the Maynilad west zone concession after the Asian financial crisis, and transfer of the Maynilad concession to the Metro Pacific group in 2007 following a competitive bidding process. This was an event which analysts saw as proof of the robustness of the privatization design and the political will of the government to persevere with the PPP path.
Notwithstanding the hiccups and the regulatory learning along the way, and based primarily on the record of Manila Water, this PPP story can be judged an outstanding success. The success of Manila Water, moreover, provides an easy road map for the new Maynilad to replicate for the west zone in good time.
What is the success record of Manila Water? The numbers tell all. Non- revenue water was reduced from 63% in 1997 to just 12.5% at present. As a result, without taxpayer money being spent for new water sources, the amount of delivered water to customers grew threefold from 440 million liters per day to 1,140 million. From serving only 3 million customers, it now serves 6 million, practically all of whom get 24-hour service, from just 30% before privatization. Most notably, through an innovative community service scheme, it now provides continuous piped water to 1.7 million people in marginalized communities at a cost of less than P75 per month, when in the past they would have had to buy vended water at P 150- 200 per cubic meter.
All this was achieved by the investment of over a billion dollars in the system, sourced not from the public purse as would have been the case pre-privatization, but from investors, commercial lenders and official development loan providers who believed in the company. Manila Water, a profitable listed company with 45% of its shares in public hands, has received numerous global awards for operating efficiently and bringing water to the urban poor.
Manila Water's ability to improve and expand service, and access funding efficiently without any government guarantees is likewise testament to a functioning regulation by contract framework.
Save for a few months in 2009, when the contractually agreed upon automatic adjustment in tariffs was suspended for what seemed like political reasons, regulation by contract has worked rather well.
This framework includes a regular rate rebasing exercise once every five years, subject to wide and intense public scrutiny and hearings. During an early rebasing, key performance indicators and business efficiency measures were introduced to mimic a competitive market.
Credit for effective regulation is owed to an independent Regulatory Office of MWSS and the technical assistance it has been able to access, notably from UP professors led by Dr. Philip Medalla.
The oversight agencies, the Department of Finance and NEDA, have likewise played important roles in maintaining the integrity of the concession agreement.
Finally, it has helped that there was never any interference from politicians in the rate setting, and that there is a dispute settlement process incorporated in the concession agreement involving international arbitration, a safeguard that has been tested successfully twice.
There are key lessons from this PPP success story: the importance of political will and judicious haste, the value of competitive award processes and good use of expert technical assistance, the need to uphold the integrity of concession contracts, ensure their proper implementation and insulate PPPs from toxic politics.
For the P-Noy administration, keeping to such a course for its PPP program should help it deliver on its promise to bring our country to a higher growth path and improve peoples' lives.
Mr. Romeo Bernardo is managing director of Lazaro Bernardo Tiu & Associates, Inc. (a consultancy firm), board member of The Institute for Development and Econometric Analysis, Inc, and was undersecretary of Finance during the Aquino1 and Ramos administrations.For comments and inquiries, please e-mail us at idea.introspective@gmail.com.
Introspective
Public Private Partnership (PPP) has been launched recently as a key ingredient in the administration's program to address infrastructure needs, raise investment levels, and build a broader base for sustainable growth, while attending to the country's fiscal constraints.
Earlier called BOT (and its variants), PPP was used effectively by President Ramos and his team to address in record time the power and water crises in the 1990s, demonstrating political will and effective management. As a Finance undersecretary at the time, I was privileged to have worked with Energy Secretary Del Lazaro, drafted from a distinguished career in the private sector to put the lights back on, as well as with MWSS Administrator Lito Lazaro, a Princeton PhD civil engineer and coincidentally Del's brother, to bring water to the people.
During the succeeding two administrations, interest in PPP waned markedly. The decline in the number of PPP projects, as well as the amounts invested in them, mirrored the decline in the investment to GDP ratio - from an average of 25% during the Ramos administration to only 15% during Arroyo's. The 1997 Asian financial crisis and controversies that hounded a few high profile projects (e.g., PIATCO) contributed to this steep drop, but I think the real binding constraint has been the well- documented deterioration in indicators of governance and regulatory environment over the past decade. Hopes are therefore high that the P-Noy administration, having been elected on a good governance platform, enjoying an unprecedented trust rating, and possessing a strong economic team, can relieve this constraint, and reinvigorate investor interest in PPP.
As encouragement for the way forward, let me share the success story of the MWSS PPP. This is a story I am familiar with as I was Finance Secretary de Ocampo's representative in the MWSS board to track the privatization. I also wrote a paper on it for the World Bank, and later on, was an occasional adviser to one of the concessionaires.
What prompted the MWSS privatization in the mid 1990s? Very poor service delivery seen as a water crisis. Only two thirds of Metro Manila were connected to MWSS water pipes. Most customers were subject to water rationing with less than 3 out of 10 having 24-hour supply, and worse, occasional outbreaks of cholera cases were a growing concern. Moreover, MWSS had become a major fiscal burden with debt in excess of a billion dollars. It found itself in a Catch-22: no resources to expand the system and improve its very poor service delivery, but unable to politically justify raising water rates needed to raise resources. Moreover, it was encumbered by government bureaucratic inertia, processes, and vested interests, both within and without. Privatization, which had worked well elsewhere, was seen as a logical way out.
Through the exercise of political will and judicious haste, the complex preparatory technical, economic, legal, and political management process from conception to final award of the largest privatization anywhere was completed in less than two years. It was done in a most transparent competitive bidding process overseen by the World Bank/IFC and participated in by four established Philippine conglomerates in joint venture with international utilities firms.
This process and the long story up to the present is told in a paper on the Political Economy of Reform During the Ramos Administration
(http://www.growthcommission.org/storage/cgdev/documents/gcwp039web.pdf ) which Christine Tang and I wrote for the World Bank's Growth Commission. This story is punctuated by the financial failure of the Maynilad west zone concession after the Asian financial crisis, and transfer of the Maynilad concession to the Metro Pacific group in 2007 following a competitive bidding process. This was an event which analysts saw as proof of the robustness of the privatization design and the political will of the government to persevere with the PPP path.
Notwithstanding the hiccups and the regulatory learning along the way, and based primarily on the record of Manila Water, this PPP story can be judged an outstanding success. The success of Manila Water, moreover, provides an easy road map for the new Maynilad to replicate for the west zone in good time.
What is the success record of Manila Water? The numbers tell all. Non- revenue water was reduced from 63% in 1997 to just 12.5% at present. As a result, without taxpayer money being spent for new water sources, the amount of delivered water to customers grew threefold from 440 million liters per day to 1,140 million. From serving only 3 million customers, it now serves 6 million, practically all of whom get 24-hour service, from just 30% before privatization. Most notably, through an innovative community service scheme, it now provides continuous piped water to 1.7 million people in marginalized communities at a cost of less than P75 per month, when in the past they would have had to buy vended water at P 150- 200 per cubic meter.
All this was achieved by the investment of over a billion dollars in the system, sourced not from the public purse as would have been the case pre-privatization, but from investors, commercial lenders and official development loan providers who believed in the company. Manila Water, a profitable listed company with 45% of its shares in public hands, has received numerous global awards for operating efficiently and bringing water to the urban poor.
Manila Water's ability to improve and expand service, and access funding efficiently without any government guarantees is likewise testament to a functioning regulation by contract framework.
Save for a few months in 2009, when the contractually agreed upon automatic adjustment in tariffs was suspended for what seemed like political reasons, regulation by contract has worked rather well.
This framework includes a regular rate rebasing exercise once every five years, subject to wide and intense public scrutiny and hearings. During an early rebasing, key performance indicators and business efficiency measures were introduced to mimic a competitive market.
Credit for effective regulation is owed to an independent Regulatory Office of MWSS and the technical assistance it has been able to access, notably from UP professors led by Dr. Philip Medalla.
The oversight agencies, the Department of Finance and NEDA, have likewise played important roles in maintaining the integrity of the concession agreement.
Finally, it has helped that there was never any interference from politicians in the rate setting, and that there is a dispute settlement process incorporated in the concession agreement involving international arbitration, a safeguard that has been tested successfully twice.
There are key lessons from this PPP success story: the importance of political will and judicious haste, the value of competitive award processes and good use of expert technical assistance, the need to uphold the integrity of concession contracts, ensure their proper implementation and insulate PPPs from toxic politics.
For the P-Noy administration, keeping to such a course for its PPP program should help it deliver on its promise to bring our country to a higher growth path and improve peoples' lives.
Mr. Romeo Bernardo is managing director of Lazaro Bernardo Tiu & Associates, Inc. (a consultancy firm), board member of The Institute for Development and Econometric Analysis, Inc, and was undersecretary of Finance during the Aquino1 and Ramos administrations.For comments and inquiries, please e-mail us at idea.introspective@gmail.com.
Sunday, January 9, 2011
"A PPP success story"
Business World, Introspective
Public Private Partnership (PPP) has been
launched recently as a key ingredient in the administration's program to
address infrastructure needs, raise investment levels, and build a broader base
for sustainable growth, while attending to the country's fiscal constraints.
Earlier called BOT (and its variants), PPP was
used effectively by President Ramos and his team to address in record time the
power and water crises in the 1990s, demonstrating political will and effective
management. As a Finance undersecretary at the time, I was privileged to have
worked with Energy Secretary Del Lazaro, drafted from a distinguished career in
the private sector to put the lights back on, as well as with MWSS
Administrator Lito Lazaro, a Princeton PhD civil engineer and coincidentally
Del's brother, to bring water to the people.
During the succeeding two administrations,
interest in PPP waned markedly. The decline in the number of PPP projects, as
well as the amounts invested in them, mirrored the decline in the investment to
GDP ratio - from an average of 25% during the Ramos administration to only 15%
during Arroyo's. The 1997 Asian financial crisis and controversies that hounded
a few high profile projects (e.g., PIATCO) contributed to this steep drop, but
I think the real binding constraint has been the well- documented deterioration
in indicators of governance and regulatory environment over the past decade.
Hopes are therefore high that the P-Noy administration, having been elected on
a good governance platform, enjoying an unprecedented trust rating, and
possessing a strong economic team, can relieve this constraint, and
reinvigorate investor interest in PPP.
As encouragement for the way forward, let me
share the success story of the MWSS PPP. This is a story I am familiar with as
I was Finance Secretary de Ocampo's representative in the MWSS board to track
the privatization. I also wrote a paper on it for the World Bank, and later on,
was an occasional adviser to one of the concessionaires.
What prompted the MWSS privatization in the mid
1990s? Very poor service delivery seen as a water crisis. Only two thirds of
Metro Manila were connected to MWSS water pipes. Most customers were subject to
water rationing with less than 3 out of 10 having 24-hour supply, and worse,
occasional outbreaks of cholera cases were a growing concern. Moreover, MWSS
had become a major fiscal burden with debt in excess of a billion dollars. It
found itself in a Catch-22: no resources to expand the system and improve its
very poor service delivery, but unable to politically justify raising water
rates needed to raise resources. Moreover, it was encumbered by government
bureaucratic inertia, processes, and vested interests, both within and without.
Privatization, which had worked well elsewhere, was seen as a logical way out.
Through the exercise of political will and
judicious haste, the complex preparatory technical, economic, legal, and
political management process from conception to final award of the largest
privatization anywhere was completed in less than two years. It was done in a
most transparent competitive bidding process overseen by the World Bank/IFC and
participated in by four established Philippine conglomerates in joint venture
with international utilities firms.
This process and the long story up to the
present is told in a paper on the Political Economy of Reform During the Ramos
Administration
(http://www.growthcommission.org/storage/cgdev/documents/gcwp039web.pdf ) which
Christine Tang and I wrote for the World Bank's Growth Commission. This story
is punctuated by the financial failure of the Maynilad west zone concession
after the Asian financial crisis, and transfer of the Maynilad concession to
the Metro Pacific group in 2007 following a competitive bidding process. This
was an event which analysts saw as proof of the robustness of the privatization
design and the political will of the government to persevere with the PPP path.
Notwithstanding the hiccups and the regulatory
learning along the way, and based primarily on the record of Manila Water, this
PPP story can be judged an outstanding success. The success of Manila Water,
moreover, provides an easy road map for the new Maynilad to replicate for the
west zone in good time.
What is the success record of Manila Water? The
numbers tell all. Non- revenue water was reduced from 63% in 1997 to just 12.5%
at present. As a result, without taxpayer money being spent for new water
sources, the amount of delivered water to customers grew threefold from 440
million liters per day to 1,140 million. From serving only 3 million customers,
it now serves 6 million, practically all of whom get 24-hour service, from just
30% before privatization. Most notably, through an innovative community service
scheme, it now provides continuous piped water to 1.7 million people in
marginalized communities at a cost of less than P75 per month, when in the past
they would have had to buy vended water at P 150- 200 per cubic meter.
All this was achieved by the investment of over
a billion dollars in the system, sourced not from the public purse as would
have been the case pre-privatization, but from investors, commercial lenders
and official development loan providers who believed in the company. Manila
Water, a profitable listed company with 45% of its shares in public hands, has
received numerous global awards for operating efficiently and bringing water to
the urban poor.
Manila Water's ability to improve and expand
service, and access funding efficiently without any government guarantees is
likewise testament to a functioning regulation by contract framework.
Save for a few months in 2009, when the
contractually agreed upon automatic adjustment in tariffs was suspended for
what seemed like political reasons, regulation by contract has worked rather
well.
This framework includes a regular rate rebasing
exercise once every five years, subject to wide and intense public scrutiny and
hearings. During an early rebasing, key performance indicators and business
efficiency measures were introduced to mimic a competitive market.
Credit for effective regulation is owed to an
independent Regulatory Office of MWSS and the technical assistance it has been
able to access, notably from UP professors led by Dr. Philip Medalla.
The oversight agencies, the Department of
Finance and NEDA, have likewise played important roles in maintaining the
integrity of the concession agreement.
Finally, it has helped that there was never any
interference from politicians in the rate setting, and that there is a dispute
settlement process incorporated in the concession agreement involving
international arbitration, a safeguard that has been tested successfully twice.
There are key lessons from this PPP success
story: the importance of political will and judicious haste, the value of
competitive award processes and good use of expert technical assistance, the
need to uphold the integrity of concession contracts, ensure their proper
implementation and insulate PPPs from toxic politics.
For the P-Noy administration, keeping to such a
course for its PPP program should help it deliver on its promise to bring our
country to a higher growth path and improve peoples' lives.
Monday, December 20, 2010
Taxing matters
Business World
Introspective
The Bureau of Internal Revenue has posted in its Web page the list of its top 500 individual taxpayers. It is unclear to me what public purpose is achieved by posting such a list. What is clear is that it may have caused unfair and unnecessary unease for both those on and out of the list.
For those on the list, continuing public Web page access to the information is cause for worry that this provides easy reference for every donation seeker, scam artist, or even worse.
Those affluent but absent were not spared, for most undeservedly, as the list provided fodder for gratuitous speculation. One broadsheet asked provocatively in its front page why this or that prominent top executive or businessman was not on the large taxpayer list; as did at least one priest's Sunday sermon I heard about.
There can be several reasons why one who is rich or earning well may not appear on the list, none having anything to do with lack of fidelity in paying one's taxes. For many top executives, the company withholds and pays their individual income taxes directly to the BIR under a procedure known as substituted filing.
Provided the individual has only that single source of still taxable income, he does not need to file an income tax return. These substituted filings were likely not captured by the BIR's top 500 list.
Then there are cases of individuals who have incorporated their business, such that the income is earned by the corporation, which then pays the appropriate corporate income taxes. Additionally, the dividend income the individual derives from the corporation is levied a final tax collected at source. There is no requirement that this be subject of an individual income tax filing. This is true as well for those whose income is passive, i.e., derived primarily from interest and dividends, which are imposed final taxes withheld at source. These are not captured in BIR's top 500.
These limitations in the data were not adequately explained by the BIR, either in their post or in public pronouncements. Thus rather than shaming tax evaders which may have been the object of the top 500 exercise, the issuance of such a list without qualification may have just provoked people to unfairly rail against those prominently known but absent from the list but who are already in BIR's tax net and faithfully paying their taxes.
One has to question the wisdom of continuing with such a list, which achieves no apparent public purpose, but just puts listed large individual taxpayers at risk from criminal elements, and unlisted law- abiding ones at risk of unfair shaming by the uninformed. If the BIR insists on continuing with this practice, the least it can do is to remove the amount of taxes paid in the interest of safety of the taxpayer and his family. For my part, I truly doubt that the large tax evaders and smugglers, who are completely outside the tax agencies' data base as they do not issue receipts or file returns, can be shamed into paying proper taxes. The current leadership truly needs to break away from the past practice of simply hunting in the zoo and go after voracious wildlife - not an easy tax at all.
To be fair, the new leadership in the DoF and the BIR is demonstrating amazingly admirable determination to raise revenue collections through various programs. I applaud them vigorously. Their work is made difficult by structural erosion in the revenue base due to non-indexation of excise taxes, as well as the passage of tax-eroding laws in the last two years, by one estimate costing over 1 % of GDP annually (P80 billion).
Administrative measures, however, can only do so much, based on both our own and international experience. It does not help that the new administration came in under a campaign promise of no new or increase in taxes even as it is under pressure to do catch-up infrastructure and social spending.
Perhaps in an effort to help increase revenues while staying faithful to the administration campaign promise, Rep. Dodong Mandanas, chairman of the House Ways and Means Committee is pushing hard for a Value Simplified Tax ( VAST) at 6% to replace the 12% VAT. Despite opposition from the Department of Finance and known experts in the field, this has recently passed his committee. I share the reservations of critics of VAST, a multi-stage turnover tax that cascades, i.e., imposed on a product several times depending on the number of stages involved throughout the production and distribution chain. As the DoF position paper states: adopting a lower rate of 6 % for VAST can be deceiving and the poor who is largely limited to purchasing goods from a retail store could end up paying more than the rich. The paper also argues persuasively that in addition to being not transparent (which could actually be its major selling point) it distorts production and resource allocation, as well as impacting unfavorably on exports. (The public can derive comfort from the pronouncements of Senate Ways and Means Committee Chairman Sen. Ralph Recto that he does not favor the VAST for the reasons cited. )
If not VAST, what then to improve the fiscal picture and finance needed development spending? UP Professors Canlas, Diokno, and Medalla, in a fiscal road map, they drew up before the presidential elections, put forward the following measures: a) reform of fiscal incentives, b) reform of excise taxes on cigarettes and liquor, c) increase in VAT to 15 % while lowering personal and corporate income taxes to 25%, d) a higher taxes on fuel products. (See my column, Fiscal imperative for next administration, Oct 5, 2009)
Even as the fiscal leadership perseveres in trying to collect more from the existing tax base, it should perhaps quietly constitute an experts study group to do a comprehensive review of our tax system and recommend reforms adapted to changing complexion of the Philippine economy and its financing needs.
Mr. Romeo Bernardo is managing director of Lazaro Bernardo Tiu & Associates, Inc. (a consultancy firm), board member of The Institute for Development and Econometric Analysis, Inc, and was undersecretary of Finance during the Aquino1 and Ramos administrations.
Monday, December 6, 2010
Did peace bonds disadvantage gov't?
Business World
Introspective
The Peace Bonds have become a live issue again with the 10-year bonds maturing early next year. The analysis (below) of the Foundation for Economic Freedom in 2002 came to the conclusion that taxpayers were not disadvantaged. This paper is an abridged version of what was drafted by former FEF President Francis Varela, FEF Chairman Philip Medalla, and myself.
Critics have alleged that there was an anomaly involved in the sale of the P1.4-billion Peace Bonds, allowing CODE-NGO to generate a fantastic windfall and leading to significant losses on the part of government. To our mind, the key question toward developing a dispassionate and rational perspective on the whole issue is:
What was the appropriate value of these bonds when they were issued in October last year?
First, the pertinent facts:
The Bureau of Treasury sold (through a bidding process) 10-year zero- coupon bonds with a face value of P35 billion to a bank (RCBC) which acted on behalf of CODE-NGO. The bonds were sold at a total price of P10.2 billion, thus implying a yield of 12.75% per annum. The bonds are effectively tax exempt and eligible as liquidity reserves for banks and quasi-banking institutions. Simultaneously, or within a very short period of time, CODE-NGO sold the bonds to RCBC Capital at a gross profit of P1.8 billion or a total consideration of P12.0 billion. At this price, the implied yield of the bonds to the end-buyer (RCBC Capital) goes down from 12.75% to only 11 percent.
Was the appropriate value of the bonds upon issuance P10.2 billion or P12.0 billion? Or, alternatively, was the appropriate yield of the bonds 12.75% or 11%?
We have to note that the difference between the two yields is very significant and non-trivial in a reasonably efficient financial market. Thus, if this wide a yield movement takes place without the occurrence of a major market-shaking event, then the conclusion is that either the issuer paid too high a yield or the final buyer overpaid for the bond and is now suffering below-market yields. As the Philippine financial market was relatively calm when the Peace Bonds were auctioned, clearly, therefore, one of the yields was wrong.
If 11% was indeed the appropriate yield for the bonds, then the Department of Finance/Bureau of Treasury committed a serious mistake in the sale of the bonds and were remiss in their duty to protect the interests of government. Notwithstanding the openness of the auction and without having to allege that it was rigged, one could nevertheless argue that they should have devoted more time and effort explaining the features of the bond to more market participants in order to achieve the lower yield. If this were the case, then the critics are right and we, as taxpayers, should all join in condemning the issue as a major anomaly.
On the other hand, if the appropriate yield of the bonds was 12.75%, then clearly there could have been no anomaly involving government funds and the only logical conclusion is that RCBC overpaid for the bonds, and the extraordinary profit enjoyed by CODE-NGO could not have come from government.
We now proceed to analyze the features of the bond to determine its appropriate value. First, we would like to note that the main features that enhanced the value of the bond were the tax exemption and the liquidity reserve eligibility. Second, we also wish to note that the zero-coupon feature did not add any value to the bond. Normally, a zero-coupon bond issued by the same issuer and with the same tenor would trade at a slightly higher yield than an ordinary coupon-bearing bond.
Thus, conservatively (from the issuer's standpoint) we can compare the Peace Bonds with the regular 10-year Treasury note. At the time of the auction, the regular 10-year T-notes were trading in the secondary market at a yield of 16.9%. Since the regular 10-year T-note is subject to the 20% final withholding tax, the after-tax yield of the 10- year T-note was 13.5%. Thus, if the Peace Bonds had no other enhancement aside from the tax exemption, then it should have traded at around 13.5% or higher, not 12.75% and DEFINITELY NOT 11%. On the other hand, considering that the difference between the regular T-bills and the reserve eligible ones is only 0.5%, then the fair yield of the Peace Bonds was approximately 13%.
Based on the foregoing, it is our conclusion that the 12.75% original yield of the Peace Bonds was favorable to government and that it was RCBC, not government, that bore the cost of the P1.8-billion windfall that was enjoyed by CODE-NGO by suffering an inordinately low yield on this instrument when they bought the bonds on a secondary basis from CODE-NGO. Whether this resulted from philanthropy and social spirit, miscalculation or contractual constraints that required RCBC to provide fees to CODE-NGO even in a transparently bid auction where they would have been entitled to participate anyhow, or a combination of the above, is a private matter.
Now, looking at this issue in its entirety, we believe that it was inappropriate, if not outright wrong, for CODE-NGO to have attempted to conduct this transaction on a negotiated basis, as they themselves have admitted. We believe it is fair to surmise that, if there was no auction, the government would have ended having to bear the cost of the CODE-NGO windfall. Thus, instead of being pilloried and maligned, the DOF and the BTr deserve our congratulations and commendation for having resisted the strong overtures of CODE-NGO to conduct a negotiated sale. In particular, we have to thank Treasurer Sergio Edeza for having been so clear and unswerving in his position on the matter, and for taking only the highest interest of the Republic into account in his actions. Clearly, the government did not lose a single centavo in the transaction, thanks to their efforts.
Mr. Romeo Bernardo is Global Source Philippine advisor and board member of The Institute for Development and Econometric Analysis, Inc. He was formerly undersecretary of Finance during the Aquino and Ramos administrations.
Introspective
The Peace Bonds have become a live issue again with the 10-year bonds maturing early next year. The analysis (below) of the Foundation for Economic Freedom in 2002 came to the conclusion that taxpayers were not disadvantaged. This paper is an abridged version of what was drafted by former FEF President Francis Varela, FEF Chairman Philip Medalla, and myself.
Critics have alleged that there was an anomaly involved in the sale of the P1.4-billion Peace Bonds, allowing CODE-NGO to generate a fantastic windfall and leading to significant losses on the part of government. To our mind, the key question toward developing a dispassionate and rational perspective on the whole issue is:
What was the appropriate value of these bonds when they were issued in October last year?
First, the pertinent facts:
The Bureau of Treasury sold (through a bidding process) 10-year zero- coupon bonds with a face value of P35 billion to a bank (RCBC) which acted on behalf of CODE-NGO. The bonds were sold at a total price of P10.2 billion, thus implying a yield of 12.75% per annum. The bonds are effectively tax exempt and eligible as liquidity reserves for banks and quasi-banking institutions. Simultaneously, or within a very short period of time, CODE-NGO sold the bonds to RCBC Capital at a gross profit of P1.8 billion or a total consideration of P12.0 billion. At this price, the implied yield of the bonds to the end-buyer (RCBC Capital) goes down from 12.75% to only 11 percent.
Was the appropriate value of the bonds upon issuance P10.2 billion or P12.0 billion? Or, alternatively, was the appropriate yield of the bonds 12.75% or 11%?
We have to note that the difference between the two yields is very significant and non-trivial in a reasonably efficient financial market. Thus, if this wide a yield movement takes place without the occurrence of a major market-shaking event, then the conclusion is that either the issuer paid too high a yield or the final buyer overpaid for the bond and is now suffering below-market yields. As the Philippine financial market was relatively calm when the Peace Bonds were auctioned, clearly, therefore, one of the yields was wrong.
If 11% was indeed the appropriate yield for the bonds, then the Department of Finance/Bureau of Treasury committed a serious mistake in the sale of the bonds and were remiss in their duty to protect the interests of government. Notwithstanding the openness of the auction and without having to allege that it was rigged, one could nevertheless argue that they should have devoted more time and effort explaining the features of the bond to more market participants in order to achieve the lower yield. If this were the case, then the critics are right and we, as taxpayers, should all join in condemning the issue as a major anomaly.
On the other hand, if the appropriate yield of the bonds was 12.75%, then clearly there could have been no anomaly involving government funds and the only logical conclusion is that RCBC overpaid for the bonds, and the extraordinary profit enjoyed by CODE-NGO could not have come from government.
We now proceed to analyze the features of the bond to determine its appropriate value. First, we would like to note that the main features that enhanced the value of the bond were the tax exemption and the liquidity reserve eligibility. Second, we also wish to note that the zero-coupon feature did not add any value to the bond. Normally, a zero-coupon bond issued by the same issuer and with the same tenor would trade at a slightly higher yield than an ordinary coupon-bearing bond.
Thus, conservatively (from the issuer's standpoint) we can compare the Peace Bonds with the regular 10-year Treasury note. At the time of the auction, the regular 10-year T-notes were trading in the secondary market at a yield of 16.9%. Since the regular 10-year T-note is subject to the 20% final withholding tax, the after-tax yield of the 10- year T-note was 13.5%. Thus, if the Peace Bonds had no other enhancement aside from the tax exemption, then it should have traded at around 13.5% or higher, not 12.75% and DEFINITELY NOT 11%. On the other hand, considering that the difference between the regular T-bills and the reserve eligible ones is only 0.5%, then the fair yield of the Peace Bonds was approximately 13%.
Based on the foregoing, it is our conclusion that the 12.75% original yield of the Peace Bonds was favorable to government and that it was RCBC, not government, that bore the cost of the P1.8-billion windfall that was enjoyed by CODE-NGO by suffering an inordinately low yield on this instrument when they bought the bonds on a secondary basis from CODE-NGO. Whether this resulted from philanthropy and social spirit, miscalculation or contractual constraints that required RCBC to provide fees to CODE-NGO even in a transparently bid auction where they would have been entitled to participate anyhow, or a combination of the above, is a private matter.
Now, looking at this issue in its entirety, we believe that it was inappropriate, if not outright wrong, for CODE-NGO to have attempted to conduct this transaction on a negotiated basis, as they themselves have admitted. We believe it is fair to surmise that, if there was no auction, the government would have ended having to bear the cost of the CODE-NGO windfall. Thus, instead of being pilloried and maligned, the DOF and the BTr deserve our congratulations and commendation for having resisted the strong overtures of CODE-NGO to conduct a negotiated sale. In particular, we have to thank Treasurer Sergio Edeza for having been so clear and unswerving in his position on the matter, and for taking only the highest interest of the Republic into account in his actions. Clearly, the government did not lose a single centavo in the transaction, thanks to their efforts.
Mr. Romeo Bernardo is Global Source Philippine advisor and board member of The Institute for Development and Econometric Analysis, Inc. He was formerly undersecretary of Finance during the Aquino and Ramos administrations.
Monday, October 25, 2010
Coping with surges: Unlikely controls
Business World
Introspective
In the current scenario, with low forecast inflation, we are more convinced that monetary authorities will refrain from hiking policy rates until the end of the year because this could encourage further speculative flows. We believe, however, that it is highly unlikely that they will turn to capital controls despite Asian neighbors doing so except as a last resort.
There are several reasons behind the latter view. One is the BSP's consistent behavior in recent history as it allowed the exchange rate to appreciate sharply in the face of strong dollar flows. The last such episode had only been a couple of years ago when the peso was allowed to rise in value dramatically from near P50/$ in 2007 to about P40/$ by early 2008 citing a mandate to limit exchange rate volatility but not dictate trend.
Another is the belief of monetary authorities as reflected in a recently updated primer that such measures are costly to implement and likely ineffective in the long run as ways to circumvent them can be found. Past experience of the country with controls had not been pleasant (i.e., on FX, for most periods between the 1950s until 1992), as these had been difficult to administer and prone to abuse.
An aversion to capital controls remains, with the central bank fearing that re-imposition of barriers would discourage investors, weaken access to international capital markets, and hinder the ability to attract foreign investments. Not too long ago, in December 2006, fellow inflation targeter Thailand effectively taxed foreign portfolio investors by requiring unremunerated reserves, a policy move that led to a surge in stock volatility and a 15% fall in Thai equities in a single day. (N.B. This was reimposed a couple of days ago.)
Monetary policy makers typically argue that remittances and export receipts dominate foreign exchange inflows such that peso movements had fundamental basis, voiding the issue of currency overvaluation. While it is known that even fundamentally sound flows can precipitate asset booms and busts in certain sectors, they aver that peaks seen today in the local equities market hardly constitute a bubble. In the real estate sector, there is also no rapid escalation of prices so far with demand coming mostly from end-users, mainly overseas workers' families; with transactions involving contracts to sell rather than contracts of sale, meaning the property remains in the name of the seller until fully paid; and with the institutional financing setup discouraging excessive risk taking.
Other solutions to prevent the collateral impact of large capital flows are being offered by the BSP such as the use of macro-prudential regulations to prevent bubbles and administrative measures to encourage FX outflows. In addition, Mr. Guinigundo said the BSP can carefully calibrate monetary policy, balancing the need to tighten liquidity and reduce risk appetite to short an otherwise full bubble situation against the possibility of higher interest rates further attracting hot money.
To appease dollar earners who were hurting from a strong peso in 2007, steps then taken by the central bank included retiring external debt, encouraging national government to alter its financing mix or prepay debt, and liberalizing the foreign exchange system (e.g., allowing banks to take a larger overbought position) apart from some accumulation of reserves, including FX swaps. Such measures will likely be again pushed if peso strength persists.
This column was taken from the Oct. 1 report of the author and Margarita D. Gonzales. Both are advisors of GlobalSource, a New York-based network of independent analysts. Mr. Bernardo is also a board director of IDEA, the Institute for Development and Econometric Analysis.
Introspective
In the current scenario, with low forecast inflation, we are more convinced that monetary authorities will refrain from hiking policy rates until the end of the year because this could encourage further speculative flows. We believe, however, that it is highly unlikely that they will turn to capital controls despite Asian neighbors doing so except as a last resort.
There are several reasons behind the latter view. One is the BSP's consistent behavior in recent history as it allowed the exchange rate to appreciate sharply in the face of strong dollar flows. The last such episode had only been a couple of years ago when the peso was allowed to rise in value dramatically from near P50/$ in 2007 to about P40/$ by early 2008 citing a mandate to limit exchange rate volatility but not dictate trend.
Another is the belief of monetary authorities as reflected in a recently updated primer that such measures are costly to implement and likely ineffective in the long run as ways to circumvent them can be found. Past experience of the country with controls had not been pleasant (i.e., on FX, for most periods between the 1950s until 1992), as these had been difficult to administer and prone to abuse.
An aversion to capital controls remains, with the central bank fearing that re-imposition of barriers would discourage investors, weaken access to international capital markets, and hinder the ability to attract foreign investments. Not too long ago, in December 2006, fellow inflation targeter Thailand effectively taxed foreign portfolio investors by requiring unremunerated reserves, a policy move that led to a surge in stock volatility and a 15% fall in Thai equities in a single day. (N.B. This was reimposed a couple of days ago.)
Monetary policy makers typically argue that remittances and export receipts dominate foreign exchange inflows such that peso movements had fundamental basis, voiding the issue of currency overvaluation. While it is known that even fundamentally sound flows can precipitate asset booms and busts in certain sectors, they aver that peaks seen today in the local equities market hardly constitute a bubble. In the real estate sector, there is also no rapid escalation of prices so far with demand coming mostly from end-users, mainly overseas workers' families; with transactions involving contracts to sell rather than contracts of sale, meaning the property remains in the name of the seller until fully paid; and with the institutional financing setup discouraging excessive risk taking.
Other solutions to prevent the collateral impact of large capital flows are being offered by the BSP such as the use of macro-prudential regulations to prevent bubbles and administrative measures to encourage FX outflows. In addition, Mr. Guinigundo said the BSP can carefully calibrate monetary policy, balancing the need to tighten liquidity and reduce risk appetite to short an otherwise full bubble situation against the possibility of higher interest rates further attracting hot money.
To appease dollar earners who were hurting from a strong peso in 2007, steps then taken by the central bank included retiring external debt, encouraging national government to alter its financing mix or prepay debt, and liberalizing the foreign exchange system (e.g., allowing banks to take a larger overbought position) apart from some accumulation of reserves, including FX swaps. Such measures will likely be again pushed if peso strength persists.
This column was taken from the Oct. 1 report of the author and Margarita D. Gonzales. Both are advisors of GlobalSource, a New York-based network of independent analysts. Mr. Bernardo is also a board director of IDEA, the Institute for Development and Econometric Analysis.
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