Fixing Financial Priorities

What should you put first when your resources are limited?

 MAKE A LIST. Are your financial priorities in order? Graphic by Nico Villarete

MANILA, Philippines – Unless you are the latest internet billionaire, chances are, your needs every month are greater than the resources to meet them. Often, what gets prioritized is whatever expense is in front of you at the moment. Taking a little time to step back and list down what you want to focus on will help you handle your personal finances better. There are many things that will pull at your money and all of them will seem urgent, but it is good to recognize that not all of them are important.

It’s easy to get caught in a cycle of trying to catch up with all of the expenses coming in, but just a little mindset change can help break you out of this trap. Consider rearranging your priorities in this way:

1. Savings / Investment
2. Needs
3. Wants

Saving and Investing

Many people believe that you can only save if you have a big income. This is a fallacy. The truth is that many high-income earners also have zero savings. This is because as their salary increases, so does their spending. What you need to do to get ahead, even while your income is still small, is to make saving your first priority. A good amount to begin with is to set aside 10% of your earnings as soon as it comes in. As you get better at saving, you can even increase this amount later on.

There are many instruments you can use to save and invest like bank accounts, government bonds, the stock market and even insurance. Insurance companies actually offer many different products that will act as “forced savings” since you have to pay the premium regularly. You not only get coverage, but after a fixed period of time, your money comes back to you bigger.

Whatever is left after you set aside your savings/investment money, you can now allot for your needs. Here is a simple equation you can use:

Income – Savings = Needs

Meeting the Needs

After you have set aside your savings/investment, it’s time to take care of your needs. Expenses differ from person to person and can be especially crucial for those who are breadwinners. A breadwinner supporting their parents would be looking at rent, utilities, groceries, transportation, debt repayment and other operational expenses in order to survive. A breadwinner supporting children would likely have to add tuition, health care, and allowances to that list.

What is key in being able to meet needs is living within your means. That means adjusting your standard of living to the amount of resources available. This is not easy to do, but it is necessary in order to get out or stay out of debt.

For those who are already spending a lot on certain needs, you will have to be creative and willing to change the way you do things. If owning a car proves too expensive, then you may have to sell it for now and start using public transportation, or even walk to nearby places (this will benefit your health also).

It may involve having to live in a smaller space, eating less expensive food, or buying non-designer clothing. You could also drink coffee at home or bring some in a thermos instead of going to expensive coffee places. These sacrifices are for the present, but if you are disciplined in saving and investing, then you will be able to afford better things in the future.

Defining Wants

A big challenge in making priorities comes from the inability to differentiate between needs and wants. There are a lot of things we spend on thinking they are needs, when in reality they are just wants. Consider the following statements:

We need to eat. We want to eat out.

Eating is necessary for survival, but eating in a restaurant is not. Wearing clothes is necessary, but wearing designer labels is not. Spending on wants is not a bad thing, but spending on them ahead of your savings and your needs is. It is all right to budget for things like entertainment, travel, and dining out, but they are not the top priorities.

Once you establish a culture of saving and investing, and properly differentiating needs from wants, you will be able to organize and make better use of your resources. Think of yourself as a farmer. When the harvest comes in, you don’t eat all of your seedlings. You set aside some so you can plant, and harvest, the next crop. – Rappler.com

Options for the middle-class investor-saver

WHEN ANNA, a widow, reaches 60 in December, she will be retired compulsorily, according to company policy. She would then receive a lump-sum separation pay of one month’s latest basic salary of P120,000 times 20 years’ service, tax-free. Her P2.4 million retirement combined with previous cash savings of P7 million would be close to a P10-million kitty.

Anna has a 30-year-old single daughter gainfully employed, living with her, but not adding to living expenses. No need to worry about home purchase or payments -- their house and lot was bought with her late husband, as with a condo in Makati now rented out for P50,000 per month. At least the P34,000 net after tax from the condo rental would lighten the monthly P100,000 needed for sustenance and maintenance of a middle-class lifestyle in Makati City. As she grows older, though, the P100,000 per month might have to be P150,000 to include the additional health costs and other needs. And they say 3% average annual inflation doubles the costs of goods and services every 20 years -- by the time Anna reaches 80, survival costs might be P300,000 per month!

Economists warn that if inflation should start to rise above the interest rate being earned on savings, the real value of the investment begins to erode as the money loses value faster than the interest rate compounds it. The rule of thumb has always been that the inflation rate should be at least equalled or preferably bettered by the after-tax yield from savings and investment products within the corresponding time-frame of placement.

But inflation is hard to predict in the long term and difficult to measure in the short term. Long-term inflation is suffered post facto of government monetary intervention in the economic necessities of the short term. Short-term inflation is usually sparked by food prices and medium-term inflation is usually driven by severe fluctuations in the supply or demand of some key commodity, like the steep increases in the price of oil in the 1970s and 2000s.

The Bangko Sentral ng Pilipinas (BSP) reported that inflation increased to 4.9% in July this year from 4.4% in June, mostly due to the 8.2% rise in food prices in July. Inflation has frothed dangerously to the upper rim of the BSP target range of 3%-5% annual inflation, a constraint to the targeted gross domestic product (GDP) of 6.5% to 7.5% for 2014.

Panic! To stay even, you must invest at rates of return that at least match inflation rates. Keeping your money under the mattress is a non-option, even Anna knows that. But even just being aware of the indissoluble bond between investment and inflation immediately brands one as risk-averse, else why add additional layers of unforeseeable events or external human intervention to impact yields on an investment?

Speculative stocks and corporate bonds, even blue-chip equities with dividend streams, could be low-priority for a risk-averse investor like Anna, who would have liquidity as an added requirement to security of capital. The financial products to address her needs would be government securities, bank deposit products, trust funds or similar investment management pooled investments, but probably not the discredited managed mutual funds and other equities-loaded funds.

But the banks’ one-year time deposits earn only 1.275% to 1.375% per annum or a net after tax of 1.02% to 1.10%, well under the 4.9% inflation, or an erosion of -3.80% to -3.88%. And the ultimate risk-free investment would be government securities, but do they beat inflation?

According to the Bureau of Treasury website, “Government securities (GS) are unconditional obligations of the State, and backed by its full taxing power, making them practically free from default.” Treasury Bonds (T-Bonds) mature in two, five, seven, 10 and 20 years, paying coupon interest quarterly on a per annum basis. Treasury Bills (T-Bills) mature in 91 days, 182 days or 364 days. These do not have coupons. Instead, they are sold at a discount from their face value, earning “interest” through the difference of the discount price and the face value paid at the maturity date.

Yet T-bills and T-bonds are the basic reflection of the BSP’s reading of domestic factors and unfavorable external developments which can bring down or raise the Philippine government’s costs of short-term borrowing. Last year in October, T-Bill rates fell to new record lows -- with the yield for the 91-day GS dropping to a mere 0.001% -- as the latest investment grade for the Philippines and the shutdown of the US government drove demand for the debt paper. In the interplay of supply and demand, the rate for the 182-day bills fell by 83 basis points to only 0.09%. The rate for the 364-day bills dropped to just 0.19% with P34.61 billion bids for the P10 billion being sold. Although the record-low rates made it tempting for the government to borrow more than its immediate requirements, the Treasury did not find the need to sell more bills than what was stated in the borrowing schedule. The government had sufficient liquidity, it was explained. The drop in the GS rates came after Moody’s Investors Service last week upgraded the credit rating of the Philippines by a notch, or from speculative to the minimum investment grade of BAA3.

That is well and good for government, and the common good of the Filipinos. But looking at the yields on GS going down to 0.001% versus inflation of 3%-4% would not be good for Anna. Even the BSP special deposit accounts (SDAs) now allowed to be retailed through banks and financial institutions yield only 1.8%. Anna would have to invest in fixed assets like real estate to hedge against inflation, but those are not easily liquefiable, and will starve day-to-day cash flows. And there’s the fear of a possible bubble burst, in the wake of investors rushing to real estate.

Can the BSP possibly explore inflation-indexed bonds, like the US Treasury’s Inflation Protected Securities (TIPS)? These savings bonds use a formula adding the rate of inflation to the interest rate, with regular re-computations to determine new interest rates. Their value is “guaranteed” against medium- and long-term inflationary cycles.

Give Anna and the middle-class investor-saver an option -- in the rough and tumble of today’s personal economics.

Amelia H.C. Ylagan is a Doctor of Business Administration from the University of the Philippines.

ahcylagan@yahoo.com

source:  Businessworld

Economic growth not actually jobless -- PIDS

DISAGGREGATED data show that the country may not actually be experiencing jobless economic growth, a report from the Philippine Institute for Development Studies (PIDS) said.

A PIDS policy note by Senior Research Fellow Jose Ramon G. Albert disaggregated employment data and gross domestic product (GDP) growth rates and showed that high economic growth rates in recent years were accompanied by increases in full-time employment. Part-time employment, meanwhile, went down with economic growth.

“Thus, the economy is not really having jobless growth!” the report noted. “In recent times, the small net changes in the unemployment rates are the result of full-time jobs being created in the industry and services sectors, and part-time jobs lost in the agriculture sector,” it added.

In recent years, the country has seen a resurgence in economic growth, posting a 6.6% full-year growth rate in 2012 and 7.2% in 2013. The government is targeting a economic growth of 6.5-7.5% this year.

The economy expanded by 5.6% in the first quarter and 6.4% in the second quarter, bringing the first-half average to 6%. Although this is lower than the 7.2% growth in the same period in 2013, Socioeconomic Planning chief Arsenio M. Balisacan is optimistic that the country will meet its growth target.

In his study, Mr. Albert likewise noted that for net unemployment rates to drop significantly in the short term, employment growth must occur in the agriculture sector. 

“In the long run, employment should start shifting from agriculture to industry, the same path taken by many neighboring economies that are in better development conditions,” he added.

The report also noted that poverty incidence among the unemployed in the country is lower than the poverty incidence among the employed. “Unemployment is more of a middle-class issue. Many of the poor are not unemployed because they cannot afford not to engage in economic activities.”

“The majority of the unemployed in 2012 (81%) are not poor. They may be unemployed by choice or they may just be choosy in finding jobs,” the report said.

The report likewise showed that educational attainments of the unemployed are quite high.

It recommends that the government focus its efforts on further accelerating reforms to achieve inclusive and sustained growth. It adds, however, that the private sector is the main driver of the economy.

“Our taipans should practice employment policies that favor the hiring of more permanent workers rather than temporary ones,” it said. 

“Wealthy businessmen should put their money into long-term productive investments... as the world starts crafting a post-2015 agenda that will ensure that no one -- poor or non-poor, male or female, Christian or Muslim, employed or unemployed -- is left behind in development.” -- B.C.P. Balaoing

source:  Businessworld

Consumer spending trending up

Macroeconomic indicators showed growth in government spending, manufacturing output and overseas Filipino workers’ (OFW) remittances in the second quarter of 2014, likely boosting consumer spending which must have added fuel to the economy during the period, the central bank said.

“There was growth in manufacturing in the second quarter and a pickup in government spending in June. The remittances continue to be positive in terms of growth rate, which is more than 5 percent on average. So, these would provide a boost to consumer spending,” Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. said in an e-mail to reporters.

The latest government data pointed to a continued surge in production in the printing industry, resulting in double-digit growth in the manufacturing sector both by volume and value.

In June, the Volume of Production index recorded year-on-year growth of 13.3 percent, while the Value of Production Index registered growth in manufacturing output of 10.1 percent. Both indices were measured in the Monthly Integrated Survey of Selected Industries conducted by the Philippine Statistics Authority.

At the same time, total government disbursements reached P987.7 billion in the first six months of 2014, higher by P97.0 billion or 10.9 percent than the P890.8 billion recorded for the year-earlier period. In June alone, expenditures for the month rose by 44.1 percent year-on-year.

“Government accelerated spending in June and I think they are still trying to continue that acceleration in the third quarter,” Tetangco said.

Meanwhile, personal remittances by OFWs hit a six-month high in June, with $2.3 billion, rising 7 percent from a year earlier. Six months to June remittances reached $12.7 billion, up 6.2 percent over the comparative period in 2013.

All of these indicators, according to Tetangco, point to the continued strength of the economy as supported by consumers’ purchasing power.

“We believe that consumer spending will be robust,” he said, adding that the central bank expects the gross domestic product (GDP) growth rate to be sustained this year.

Coming from a lower than expected 5.7-percent GDP growth in the first quarter, the government remains optimistic that final data would show a recovery in the economy during the second quarter.

Second-quarter GDP results are scheduled for official release on August 28.

source:  Manila Times

Philippines to settle more in interest on debt, less in principal next year

THE GOVERNMENT is allotting P763.25 billion to service its debts next year, data from the Budget department showed, lower than the amount earmarked this year.

The amount set for next year is 6.82% less than the P819.19 billion programmed for this year. It includes P593.15 billion for domestic liabilities and P170.1 billion for foreign debt.

Interest payments are programmed to reach P372.86 billion, up 5.73% from the P352.65 billion earmarked for this year. Broken down, the amount includes P95.3 billion to pay off interest on the country’s foreign debts, while the remaining P277.57 billion will be used for domestic liabilities.

Principal payments, on the other hand, are programmed at P390.39 billion, down 12.58% from the P466.542 billion set for 2014.

It includes P315.59 billion for domestic payments and P74.80 billion for foreign debt.

A significant portion of the national budget is earmarked for interest payments on debt. Principal payments, on the other hand, are off-budget items covered by debt refinancing.

Last year, debt payments fell by over a fifth to P559.017 billion from P729.774 billion in 2012, well below the P767.394-billion debt service program for 2013.

As of June, the country’s debt payments totaled P227.508 billion.

This is just 27.77% of this year’s P819.19-billion program.

The national government’s outstanding debt grew by 3.7% to P5.65 trillion at end-June from the P5.45 trillion recorded as of the same month a year ago as its domestic liabilities increased, data from the Bureau of the Treasury showed.

TAX CODE REVIEW BACKED
Meanwhile, a lawmaker has backed the proposal of the Department of Finance (DoF) to conduct a review of the country’s tax code.

Rep. Romero S. Quimbo (Marikina, 2nd district), chairman of the House Committee on Ways and Means, said a review of Republic Act No. 8424 or the National Internal Revenue Code (NIRC) of 1997 is actually “long overdue.” “We’ve been telling them to do so some time ago,” he said

Bills proposing amendments to the Tax Code are pending at the House of Representatives, with several measures seeking to grant additional exemptions for individual taxpayers by raising income ceilings and increasing the provision for qualified dependents.

Last week, DoF Secretary Cesar V. Purisima called for a “holistic” approach to reviewing the NIRC and not to focus on adjusting income tax rates alone.

Mr. Quimbo said such bills are already being tackled at the House of Representatives. --M.F.E. Flores and M.L.T. Lopez

source:  Businessworld

DOST earmarks P2.6-B budget for teachers’ funds, laptops

After a year of delay, the government should be ready to distribute next year over 96,000 laptops and desktops through an allocation of P2.6-billion in the 2015 General Appropriations Act (GAA).

The Department of Science and Technology (DOST) said the P2.6-billion fund is for the 96,000 computers (P1.8 billion) supposed to be distributed March this year and additional units (P800 million) for 2015.

DOST’s Information and Communications Technology Office (ICTO) is implementing the project under the Digital Empowerment Fund (DEF).

As the 2014 distribution was not done, because the allocation of P1.8 billion was from the Disbursement Acceleration Program (DAP), the implementation would be done both for the 2014 and 2015 target dates.

ICTO Director Ali Asum, DEF project director, told the Manila Bulletin the DEF project will continue.

“Government workers do not have to worry,” it will push through in 2015,” he said of DEF’s implementation.

The DEF is a three-year project from 2014 to 2016 that aims to provide laptops to those with Salary Grade 4, including teachers, so they can use the gadget in their teaching.

source:  Manila Bulletin

Beachfront hotels: Phl ranks 5th

BANGKOK – The Philippines ranked fifth in having the most number of beachfront hotels, according to a survey of more than 11,000 hotels in 109 countries released Friday.

Thailand ranked first with more than 1,250 beachfront properties, followed by the US with 1,016, Mexico with 943 and Spain with 736.

In sixth place is Greece, followed by Italy, Turkey, Egypt and Sri Lanka, said the survey by the Beachfront Club, a website that maps and details seaside hotels around the world.

The Bangkok-based website defines true beachfront hotels as those directly on the beach or oceanfront with no road or traffic between the rooms and water.

The Philippines, famed for its beautiful beaches, has noted a steady increase in its tourism arrivals over the past few years.

According to the government, total international tourist arrivals reached 4.7 million in 2013, surpassing the 4.3 million arrival recorded in 2012 by 9.56 percent. The government said it aims to increase foreign visitors to 10 million by 2016.

Meanwhile, Thailand also ranked first for total beachfront accommodations within a single beach destination. Its Samui Island has 270, ahead of Riviera Maya in Mexico with 250, Crete with 194 and Mallorca with 187.

Despite recent political violence, tourist arrivals in Thailand have soared by 88 percent over the past five years to nearly 27 million in 2013, ranking it among the top 10 most visited countries in the world. Its shores face both the Pacific and Indian oceans, with hundreds of islands in each.

source:  Philippine Star

Remittances peak in June

MONEY sent home by Filipinos abroad hit a fresh peak for the year in June, making the year-to-date tally top the level of the first half of 2013, the Bangko Sentral ng Pilipinas (BSP) reported on Friday.

Cash remittances which Filipinos sent home through banks went up 5.9% to $2.050 billion in June from the $1.935 billion registered a year earlier. It was the highest monthly volume recorded since December 2013’s $2.173 billion.

"Remittances remained robust on the back of stable demand for skilled Filipinos abroad," the central bank said in a statement.

June’s inflows drove the first-semester tally to $11.422 billion, up 5.8% from the $10.800 billion seen in the comparable 2013 period -- already past the target this year of 5% growth over 2013’s $22.968 billion.

Remittances from land-based workers made up the bulk in the first half at $8.7 billion, up 4.8% annually, while those from sea-borne workers grew 8.8% year-on-year to $2.7 billion.

Major sources of cash remittances were the United States, Saudi Arabia, the United Arab Emirates, the United Kingdom, Singapore, Japan, Canada, and Hong Kong.

The BSP noted continued efforts of banks and non-bank remittance service providers to expand reach through partnerships and establishment of remittance centers abroad. "As of end-June 2014, commercial banks’ established tie-ups, remittance centers, correspondent banks, and branches or representative offices abroad rose by 6% to 4,675 from 4,409 in the same period last year," the central bank said.

Remittances, equivalent to around 10% of gross domestic product, support growth by boosting private consumption. -- DEDS

source:  Businessworld

Reaching out to the unbanked

INDIAN PRIME Minister Narendra Modi made headlines last week when he announced a program to reduce his country’s “unbanked” population, offering bank accounts with debit cards that also come with accident insurance and a 5,000-rupee overdraft facility guaranteed by the government.

This being a political initiative, announced during the PM’s high-profile independence day speech, questions were immediately raised about who ultimately pays for defaults on the overdrafts. Another sticking point was the record of previous Indian outreach programs to the unbanked, many of whose accounts went dormant shortly after they were opened, imposing additional costs on banks and fellow depositors. 

Whatever the flaws in the execution of India’s program, very few people disagree with the idea that people need bank accounts. They are instrumental in establishing a credit history and access to loans, which steers people away from more predatory forms of lending. Many effective poverty-reduction tools like microcredit and conditional cash transfers work best with bank accounts.

Because private-sector banks deem the poor to be less-desirable customers, governments often need to intervene, offering bank accounts through government agencies with a presence in most communities, like post offices. In India’s case the process involves compensating middlemen in remote towns who form the last link between the bank and many account-holders. The private sector, for its part, has experimented with mobile banking to remove the need to travel to a bricks-and-mortar bank branch.

According to World Bank data, the unbanked are more likely to be women living in rural areas, where the barriers to banking are greatest because of the costs of visiting town centers where banks are likely to be located. Some 59% of adults in the developing world are estimated not to have an account at a formal financial institution, and 55% or borrowers in these countries use only informal sources of credit. 

As the Philippines dabbles with microcredit schemes and CCT, it’s a good time to take stock of where the country stands in providing the banking infrastructure that makes such programs possible.

Metro Manila still focus of state spending in 2013

THE NATIONAL Capital Region (NCR), or Metro Manila, cornered bulk of state spending last year, according to a statement posted Wednesday on the Philippine Statistics Authority-National Statistical Coordination Board (PSA-NSCB) Web site.

PSA-NSCB said NCR got the biggest share of 49.1% of Government Final Consumption Expenditure (GFCE) last year among the country’s 17 regions.

It was followed by the Cavite-Laguna-Batangas-Rizal-Quezon (Calabarzon), Central Luzon and Western Visayas regions that accounted for 5.9%, 5.7% and 4.5%, respectively.

GFCE rose 11.99% to P1.282 trillion last year from P1.145 trillion in 2012, according to separate PSA-NSCB data.

Regions with the lowest shares were the Autonomous Region in Muslim Mindanao (ARMM), Caraga and Cordillera Administrative Region with 1.7%, 1.8% and 1.9%, respectively.

A chart that accompanied the statement showed GFCE growth rates slowing across all regions last year from 2012.

The South Cotabato-Cotabato-Sultan Kudarat-Sarangani-General Santos City (Soccsksargen) region grew the fastest last year at 14%, followed by Calabarzon (13.5%) and Central Luzon (13%), while NCR bared the slowest growth of 3.6%, followed by ARMM’s 5.9%.

Metro Manila got the biggest share of state spending since "economic and business activities are heavily concentrated in the NCR", according to both PSA-NSCB Expenditure Accounts Division Chief Vivian R. Ilarina and University of Asia and the Pacific economist Cid L. Terosa in separate phone interviews on Friday.

source:  Businessworld

The one that got away

THE non-narcotic drug Prialt (generic name Ziconotide) helps cancer and AIDS patients manage chronic pain, with fewer known side-effects and a fraction of the addictiveness of morphine.

Derived from the venom of the fish-eating Conus magnus snail, which is found in the Philippines, Prialt would have been the poster child for the potential of Philippine flora and fauna to produce valuable medicines.

Instead, foreign researchers ended up being awarded the drug patent in 2004, building on the pioneering work of the University of Utah’s Dr. Baldomero Olivera, a distinguished graduate of the University of the Philippines.

Dr. Olivera is said to have been first driven into snail research by childhood memories of their venomous properties. His work in the field dates back to the 1960s. His name does not appear on the Prialt patent application.

“Prialt is the one that got away,” according to Ricardo R. Blancaflor, director-general of the Intellectual Property Office of the Philippines, who spoke to BusinessWorld over lunch last week as part of a broader effort to spread the word on the need for universities and corporations to protect their intellectual property.

Mr. Blancaflor, a lawyer who has held positions in various government departments, believes the Philippines is uniquely positioned to be a force in biotechnology by virtue of its biodiversity -- if only local researchers could put a little more effort in safeguarding their IP.

“The Philippines is one of the regional leaders when it comes to biotechnological research because of its innate pool of natural specimens,” he said -- an advantage that is wasted when foreign researchers claim first rights to drugs derived from Philippine discoveries.

The statistics on pharmaceutical and biotechnology patents (see chart) suggest a highly competitive ecosystem of researchers combing the oceans, forests and jungles of the world for new drugs -- a situation that demands a greater consciousness of IP rights than ever before for researchers in Philippine universities.

Perhaps Prialt might be the mistake the Philippines can afford to make, serving a purpose as a cautionary tale. While a useful drug, it is too specialized to be a blockbuster in the multi-billion dollar global market for pain treatment, posting US sales of $20 million in 2009. It’s a tidy enough sum for a small drug company and ought to produce decent royalties for a university research lab.

But the stakes could be much higher if the next discovery out of the Philippines isn’t so modest. -- Agbayani P. Pingol II and Virgil S. Villanueva