Malacañang: CHR officials may be ‘replaced’

MALACAÑANG ON Thursday sought to explain the administration’s plan to abolish two government agencies whose key functions run counter to the reputed legacy of the Marcos family who are allies of President Rodrigo R. Duterte.

Mr. Duterte early this week said the Commission on Human Rights (CHR) is “better abolished,” adding that he would not allow the body to investigate possible human rights violations by the military while Mindanao is under martial law.

Meanwhile, Budget Secretary Benjamin E. Diokno said the government was planning to scrap the Presidential Commission on Good Government (PCGG), an agency tasked to recover the ill-gotten wealth of the Marcos family and their cronies. The Marcoses are allies of Mr. Duterte.

Presidential Spokesperson Ernesto C. Abella in a press briefing yesterday said Mr. Duterte was just airing out his “frustrations” toward CHR’s “biases” when he threatened to shut down the CHR.

“Basically, the President was simply expressing his frustrations regarding the apparent biases of the commission,” Mr. Abella said, adding that CHR officials may be “replaced” at Mr. Duterte’s will.

“It (CHR) is a constitutional commission and it cannot be abolished by mere legislation. The chairperson and its members, however, serve at the pleasure of the President,” the spokesperson added.

“We do not talk about empty threats, we talk about concerns.”

Both Defense Secretary Delfin N. Lorenzana and Philippine National Police Chief Director-General Ronald M. Dela Rosa threw support behind the proposed abolition of the CHR, saying security forces can perform their duties without committing abuses.

The CHR was created by the 1987 Constitution, which described the body as an “independent office.” Among its functions is to investigate “on its own or on complaint by any party” all forms of human-rights violations.

The CHR has been on the receiving end of Mr. Duterte’s verbal attacks after it launched an investigation on the alleged extrajudicial killings under the government’s brutal war on drugs.

On the possible termination of the PCGG, Mr. Abella said this is intended to “streamline” government processes and is not politically motivated.

“The Office of the Solicitor General (OSG) actually handles the cases filed to run after the Marcos ill-gotten wealth while the PCGG actually handles the administrative function,” he explained.

“I think it’s a question of streamlining. There’s no politics there.”

Asked if the OSG can handle the recovery of billions of dollars looted from state coffers during the Marcos dictatorship, considering the large number of cases managed by the said office, Mr. Abella said: “Based on the OSG position, apparently they can.”

“Regarding the PCGG, apparently that has been a move sometime back,” he also said.

The PCGG was created three decades ago just after the People Power Revolution that ended Mr. Marcos’s two-decade rule, which was marred by corruption and human rights abuses.

Commenting on Mr. Diokno’s remarks, the PCGG said in a statement yesterday that the agency was “surprised” by recent questions on its “performance, relevance, and efficiency.”

“Aside from the fact that it was awarded as the best...performing agency for three straight years, what other government agency can effectively raise non-tax revenues...?” it said.

Data released by the PCGG showed that it recovered P57.1 billion in 2012, P631 million in 2013, P1.57 billion in 2014, P14.01 billion in 2015 and P481.95 million in 2016.

This compares to the annual budget of the agency -- P93 million in 2012, P102 million in 2013, P106 million in 2014, P101 million in 2015, and P104 million in 2016.

“Why is there a question on its budget and relevance when PCGG’s cost to recovery ratio is exemplary as shown by these numbers? Of all agencies? Figures do not lie,” the PCGG said.

Last May, House Speaker Pantaleon D. Alvarez filed House Bill (HB) 5233 which seeks to “strengthen” the OSG by streamlining government legal services under one agency, thereby effectively abolishing the OGCC as well as the PCGG.

Last year, the Office of the Ombudsman conducted an inquiry on the alleged links of Mr. Duterte to a death squad during his long mayoralty in Davao City based on a 2012 CHR resolution recommending a probe on the killing. Mr. Duterte was later cleared of the allegations.

source:  Business world

Metrobank, 2nd biggest bank

BSP looking into Metrobank ‘internal fraud’

THE Bangko Sentral ng Pilipinas (BSP) is currently looking into internal lapses that led to a reported P900-million fraud case faced by Metropolitan Bank & Trust Co. (Metrobank), alongside criminal raps lodged against the bank official said to have crafted the scheme.

A newspaper report alleged that a vice president of the listed lender has engineered an internal fraud that has costed the bank at least P900 million by using loan proceeds to fake bank accounts which eventually ended up in her own account.

“We are looking into it already,” BSP Governor Nestor A. Espenilla, Jr. told reporters on Friday, noting that the regulator has already deployed a team to investigate the bank.

“We first have to establish facts. Our banks have their natural internal controls precisely to prevent these things from happening, so we will have to look into the adequacy of those controls if in fact a significant crime happened within the bank.”

In the report, Metrobank Assistant Vice President and Corporate Service Management head Maria Victoria S. Lopez is said to have crafted fake loan disbursements using the bank’s long-time client Universal Robina Corp. (URC) in tranches of P30 million.

National Bureau of Investigation (NBI) Director Dante A. Gierran said the Metrobank official has been in custody over charges of qualified theft, falsification, and violation of the General Banking Law.

The bank lodged a complaint before the NBI on July 13 after discovering “irregularities” in letters and checks filed by Ms. Lopez on the client’s behalf, which were later discovered to be fake.

Ms. Lopez, who has been working at the bank for 30 years and earning around P250,000 a month, was nabbed by authorities during an entrapment operation last Monday. She had ordered the debit of P2.25 million from the loan account, but the bank was able to confirm that the client was unaware of the supposed loan, which led to her arrest.

In a press briefing on Friday, NBI spokesman Ferdinand Lavin said the agency is conducting a follow through investigation on the alleged fraud.

“The biggest loss on this is the integrity of the banking system and the internal control system of the bank,” he said.

The NBI presented Ms. Lopez, who wore an orange shirt and covered her face with a scarf, during the briefing but did not make any statement.

METROBANK SHARES FALL
Shares in Metrobank dropped by 5.03% to P86.90 on Friday, coming from P91.50 apiece the previous day.

In a disclosure, Metrobank assured that the bank will continue with its day-to-day operations.

“The Bank is reinforcing its commitment to the highest standards of integrity and upholds the protection of its customers as its main priority. No customer has been affected in this incident,” the George S.K. Ty-owned lender told the local bourse.

“In the context of the Bank’s P1.9 trillion financial resources, rest assured that we continue to operate business as usual for the bank and our customers.”

Metrobank is the Philippines’ second-biggest bank in asset terms and controls P1.9 trillion worth of resources. It raked in P18.1 billion in net income last year, and P5.6 billion during the first three months of 2017.

In a separate statement, URC said it will keep its business deals with Metrobank despite the case, after bank president Fabian S. Dee assured that the conglomerate’s accounts would not be affected.

The Gokongwei-led firm said URC would not incur any losses while active bank accounts will be kept intact.

For its part, the Bankers Association of the Philippines said it is “confident” that Metrobank will be able to resolve the issue: “This appears to be an isolated incident and we are confident the facts will arise from the ongoing investigations being carried out by both Metrobank and the Bangko Sentral ng Pilipinas.”

source:  Businessworld

Debt service payments rise over 207% in May

PAYMENTS to service government debt rose 207.51% year on year in May, driven by an increase in principal settlements on domestic obligations, the Treasury bureau said.

The national government in May made payments of P78.38 billion, against P25.49 billion a year earlier.

Month on month, the debt service bill rose against the P26.29 billion worth of payments made in April.

The surge was driven by principal payments worth P57.42 billion, well over the P6.83 billion recorded in the same month in 2016.

Principal repaid to domestic lenders grew to P50.9 billion, compared to P190 million a year earlier.

Principal repaid to external creditors meanwhile totaled P6.52 billion, little changed from the P6.64 billion in the same period of 2016.

Interest payments totaled P20.96 billion in May, up 12.33% from a year earlier.

Of the total, P18.75 billion went to domestic lenders -- of which P16.46 billion went to interest payments on fixed-rate Treasury bonds, P1.88 billion for retail Treasury bonds, and P378 million for Treasury bills.

Foreign interest payments meanwhile totaled P2.22 billion.

Domestic payments for both principal and interest took up 88.85%, or P69.65 billion, of the debt service bill that month while foreign lenders were paid P8.74 billion.

The total debt service bill for the five months to May was P353.32 billion, down 27.09% from a year earlier.

The government borrows from both local and external sources to finance its intended budget deficit of 3% of gross domestic product, or about P482.1 billion. -- E.J.C. Tubayan

source:  Businessworld

SSS collects over P5 billion in overdue credit payments

STATE-RUN Social Security System (SSS) said it accumulated over P5 billion in overdue credit payments through its one-year payment scheme and is seeking to gain around P9 billion in the next five years.

SSS also reported that over 850,000 of its members have availed themselves of its Loan Restructuring Program (LRP), in which the firm collected a total of P13.83 billion for the one-year period the program was offered.

“We are very much overwhelmed with the huge volume of applicants especially during the last few days before the deadline. We hope that they are more persistent in paying their monthly obligations so they could avail of the condonation of penalties as soon as they have paid in full their outstanding loan. We are expecting P8.6 billion in collection until the end of the five-year installment term,” SSS President and Chief Executive Officer Emmanuel F. Dooc was quoted saying in a statement e-mailed to reporters on Friday.

The bulk of the LRP applications were employee-members, with contributions amounting to P3.23 billion while voluntary members comprised 27%, with initial payment of P1.38 billion.

Meanwhile, 39,000 self-employed SSS members yielded an equivalent collection of P194.37 million and over 46,000 overseas Filipino workers had a total remittance of P412.76 million.

The payment scheme was rolled out last April 28. This aimed at giving delinquent member-borrowers an opportunity to regaining their standing before the SSS and enjoy SSS benefits in the future, like renewing their loans six months after they have fully paid their overdue principal and interest under the LRP.

Borrowers could settle their unpaid SSS loans via flexible payment terms of up to five years, with interest rates of as low as 3% annually.

Meanwhile, those who have availed themselves of the program could also pay in full their overdue loans within 30 days with no additional interest or through installment basis of up to five years with an interest rate of 3% yearly.

“We would like to remind our LRP availees that loan penalties will be completely waived after full payment of total loan principal and interest under the restructured loan. So they are advised to pay their financial obligations on time to prevent an additional penalty of 0.5% per month,” Mr. Dooc said.

The LRP covers short-term SSS loan programs including the Salary Loan, Salary Loan Early Renewal Program (SLERP), Emergency Loan, Calamity Loan, Voc-Tech Loan, Y2K Loan, Investments Incentive Loan, Study Now Pay Later Plan, and the previously offered Educational Loan, which is different from the ongoing Educational Assistance (Educ-Assist) Loan Program.

Excluded from the program are Stock Investment, Privatization Fund, and Educ-Assist loans.

By end-April, the state-run pension fund’s total revenue collection reached P52.18 billion, a 9.6% uptick from the P47.59 billion recorded in the comparable period a year ago.

source:  Businessworld

Indian think tank to Manila: Beware of Beijing-funded projects

NEW DELHI — The Philippines could end up in hock to China if it is not careful about entering into investment and infrastructure deals with Beijing, according to an Indian think tank.

Hardeep Puri, chair of India’s Research and Information System for Developing (RIS) Countries, warned that the Philippines should be wary of China-funded projects to avoid falling into the same debt trap that has bedeviled other countries that have received massive Chinese loans and investments such as Laos and Sri Lanka.

Puri, a former permanent representative of India to the United Nations, said the Philippines should ensure the China-funded projects would be economically viable and would not impinge on the country’s sovereignty.

‘You have to pay it back’
“It has to be viable projects. You have to pay it back. If it will lead to debt and equity then drop it,” Puri told the Inquirer during a visit of Southeast Asian journalists to India on July 4.
“If debt becomes equity, then you’re selling your country. You (the Philippines) might end up selling more than your islands,” he said.

Expanding its economic clout, China has poured massive amounts in loans and investments into a number of Asean countries such as Thailand, Myanmar, Laos and Cambodia.

“Be careful about these schemes, which bring lots of easy money,” Puri said.

$24B for PH
President Rodrigo Duterte visited China in October last year to mend relations soured by a suit brought by the Philippines to the Permanent Court of Arbitration in The Hague challenging China’s claim to almost all of the South China Sea.

He returned with $24 billion in investment and loan pledges from China. Most of the investments would be in infrastructure projects such as railroads and ports.

Puri expressed hope the projects would be economically viable, noting that “in this game there is no such thing as philanthropy or altruism.”

“The consequences are clear — that if you raise the economic stake such that you owe a bank a huge amount of money, the bank will come after you,” he said.

Puri cited the cases of Sri Lanka, which was forced to convert its debts to China into equity to avoid defaulting on payments, and Laos, where China is building a $6-billion high-speed railway the economic viability of which is under question.

China funded an international airport and deep-sea port in Hambantota, Sri Lanka, which have become white elephants and left the country heavily indebted to China.

Costing almost $2 billion, the airport and seaport are losing heavily. The airport receives just one flight a day and the seaport only six ships week.

“If you are an economy which is small and your capacity for revenue generation and capacity for debt repayment is limited, you come to a point where the ability to pay the debt or the amount of debt exceeds the revenue or whatever earnings you have. In that situation, what will happen? It’s not one where you will say, ‘I’ll stop paying,’” Puri said.

Debt-to-equity swap
To avoid defaulting, Sri Lanka agreed to a debt-to-equity swap with China. It agreed to give China Merchants Port Holdings an 80-percent stake in the Hambantota port for 99 years, including 6,000 hectares of land around the port.

In exchange, China wrote off most of Sri Lanka’s debts. But the deal enabled China to gain access to a strategically located outpost in the Indian Ocean region, though not without protests from the locals who slammed what they called China’s “colonization” of Sri Lanka.

The national leadership had no choice. Sri Lanka, 65 percent of whose gross domestic product (GDP) goes to debt servicing, owed China $8 billion in high-interest loans.

“If you have a small economy and 70 percent goes to debts, you cannot run that country efficiently,” Puri said.

“If you (the Philippines) are going down that road, I don’t know whether the Philippines can get away with it since you are a democracy. But I tell you in India we can’t get away with it,” he said.

Puri noted that the disputed islands occupied by China in the West Philippine Sea are heavily fortified.

“Those islands have got force. It’s a $12-trillion economy and in addition to that, China has the capacity to use force,” he said.

In Laos, China began construction of the $6 billion high-speed railway from Kunming in China’s Yunnan province to Vientiane, the Laotian capital, in December last year.

Puri said it would take 11 more years for the railroad to  become economically viable.

85 percent of port
In nearby Myanmar, China built a 770-kilometer oil and gas pipeline from the Kyaukpyu port to Yunnan at a cost of $1.5 billion. Now, China is demanding 85-percent ownership of the port.
“It’s the same story for everybody. You go to Kenya, it’s the same thing,” he said.

To avoid the pitfalls that have left some countries mired in debt to China, Puri said China’s One Belt, One Road initiative, under which the projects come, should be overhauled to consider sovereignty and economic viability.

source:  Philippine Daily Inquirer

National government local debt marginally lower in May

The outstanding debt of the national government (NG) amounted to P6.345 trillion as of end-May this year, a contraction by 0.4 percent, from P6.370 trillion in April. The Bureau of the Treasury (BTr) traced the improvement to the net redemption of government securities, the stronger peso as well as net repayments of NG foreign obligations.

According to the BTr, this was also an expansion by 7.8 percent, from only P5.885 trillion in the same month last year.

Of the total, 35 percent or P2.207 trillion were from overseas creditors, while 65 percent or P4.137 trillion were from domestic-loan entities.

The NG domestic debt for the month amounted to P4.137 trillion, down by 0.5 percent compared to P4.160 trillion the previous April.

“The decrease was primarily due to the net redemption of government securities amounting to P22.70 billion and a stronger peso that reduced the value of onshore dollar bonds,” the BTr said in a statement.

Overall, domestic debt has risen by 5.2 percent, from its end-December 2016 level of P3.934 trillion. Year-on-year, NG domestic debt grew by 9 percent.

NG external debt for the month, on the other hand, amounted to P2.207 trillion, a contraction by 0.1 percent, compared to only P2.210 trillion the previous April.
Debt sourced from offshore accounts also expanded by 5.7 percent, compared to P2.088 trillion in May last year.

“For the month external-debt reduction was attributed to the combined effect of [a] stronger peso and net repayments of foreign obligations amounting to P7.07 billion. These more than offset the upward revaluation in third currency-denominated debt worth P4.78 billion,” officials said.

NG external debt increased by 2.4 percent, compared to end-December 2016 level of P2.156 trillion.

Total government guaranteed obligations contracted month-on-month also by 0.3 percent, amounting to P493.62 billion in May.

“The reduction was principally due to net repayments of domestic guarantees amounting to P2.57 billion alongside the P0.80 billion effect of peso appreciation on foreign guarantees. These more than offset the effect of net availment and third-currency revaluation amounting to P0.38 billion and P1.53 billion, respectively,” the BTr said.
Year-on-year, NG outstanding guaranteed debt contracted by 11 percent, from the May 2016 level of P554.55 billion.

source:  Business Mirror

Gov’t debt may top P7 trillion in 2018 amid infra push

THE GOVERNMENT’S outstanding debt may breach the P7 trillion mark next year, according to the Treasury bureau.

Amid preparations for the Budget Expenditures and Sources of Financing report for next year, National Treasurer Rosalia V. De Leon said that they have given the Budget department a P7.05 trillion debt forecast to be programmed in the general appropriations act.

“For 2018, its P7.05 trillion,” she told reporters late last week when asked for its debt program next year.

The projected rate of increase for the 2018 debt is 8.96% against the downward-adjusted P6.47 trillion outstanding debt in 2017. The growth rate compares to 6.24% between 2016 and 2017.

However in terms of the share of the country’s economy, the projected total is 39.7% of gross domestic product (GDP) from the 40.76% ratio for this year and 42.18% in 2016.

Asked for the economic implications of higher debt, Finance undersecretary Gil S. Beltran said that the growing economy will outpace the rise in debt.

“It’s just a number. Actually it’s nominal so even if the number increases the value of that debt decreases, because over time it’s subject to inflation. So the best measure is actually percentage of GDP because that is the level of resources that a country generates,” he said.

“Payments come out from production -- the goods and services that are produced. It is always measured in terms of percent of GDP. And (the share) is going down,” said Mr. Beltran, who is also the Finance department’s chief economist.

He said that the globally accepted standard of a safe debt ratio is 50%.

Union Bank of the Philippines chief economist Ruben Carlo O. Asuncion said his asessment of the debt will depend on the success of tax reform.

“It is fiscally sound, as long as the government sticks to its targets, particularly that of the needed reforms in taxes and improvements in the general collection of taxes. In all fairness, government has been collecting more and is expected to collect more when the new taxes are in place,” he said.

“Fiscal discipline is important moving forward. If the fiscal reforms are not instituted as expected and planned, there might be difficulty meeting the targets and the overall plan of making lives better for all will be undermined.”

The tax reform program aims to raise government revenue by making the tax system more efficient, by removing some tax exemptions, harmonizing estate and donor taxes, increasing petroleum and automobile excise tax rates while reducing personal income tax rates.

The government had a P6.345 trillion debt as of end-May, growing 7.8% from a year earlier. The outstanding debt was at 98.07% of the P6.47 trillion programmed for this year.

Over 65% or P4.14 trillion of this amount is owed to domestic lenders, while the P2.21 trillion remaining obligation was borrowed from external sources.

The government borrows to plug its fiscal deficit, and to likewise pay down maturing debt. It aims to maintain an 80-20 borrowing mix, in favor of domestic sources.

The government has secured official development assistance (ODA) packages and concessional loans from regional partners such as China, Japan and South Korea, noting their willingness to participate in building up the country’s infrastructure.

“[The debt] has to increase because we are building infra,” said Mr. Beltran. -- Elijah Joseph C. Tubayan

Can we afford to spend more?

UNLESS, like some people, you are only driven by a political agenda—“The administration is always wrong/right”—it is important to try to understand what the government is doing. When we try to comprehend something that is complex, we attempt to bring it down and simplify the situation in terms of our own experience. This is particularly true of government finances, which can be like trying to learn a foreign language.

If we spend more money than we earn, that creates a deficit, a budget deficit. In order to make up that shortfall, we borrow money. Borrowing money from a bank, which will not tolerate any excuses for late or nonpayment, is like the government borrowing from foreign sources. Borrowing money from your relatives is more like a government’s domestic borrowings, which can be paid in local currency that is created through simple accounting “tricks”.

There is concern with the Philippine government’s efforts to ramp up its infrastructure program in that the necessary funding will not be available without increasing its budget deficit, which will be met with borrowings. It is important that the public be aware and knows exactly how much, to whom and at what price any additional debt will be added.

However, perhaps driven by politics, there seems to be an extreme, and maybe unnecessary, concern over the government increasing both its budget deficit and its external borrowings.

When you look around the world, you see two different conditions that are striking in their difference. There are economies like the Philippines that are growing and those that are not. The reason is obvious on closer observation. You cannot have a healthy national economy if the government’s “economy” is unhealthy.

For two decades the Philippine economy was a “basket case” because the government’s finances were in the same basket, depending on debt and handouts. This changed because—in the words of a recent speech at the United Nations by Ambassador Teddy Locsin Jr.—President Gloria Macapagal-Arroyo saved the economy “in the Wall Street global financial crisis”.

In 2008 the government debt as a percentage of GDP was 54.7 percent. It is now 23 percent lower at 42.1 percent. Back then the government budget deficit as a percentage of GDP was 3.7 percent. In 2015 it was 0.9 percent. The Aquino administration took advantage of those facts to increase spending in 2016 as supposedly the Duterte administration will in 2017 to increase the deficit to over 3 percent again. But is that a problem?

Compare this with other nations. Brazil’s debt-to-GDP ratio is now at 17 percent. The US and Japan are both over 4 percent. While a plus 3-percent Philippine deficit will be higher than Canada, Australia, France and the UK, there are two big differences.

The Philippine economy is growing much faster than in those nations and can handle a 4-percent budget deficit much more easily. Further, those countries are using their deficit to support their failing economies while the Philippines will use the money to build infrastructure to increase growth.

We must be vigilant that the government does not borrow and spend foolishly. That is our job. But there is a sound financial foundation to justify more spending to build for our future.

source:  BusinessMirror Editorial

The Asian financial crisis, Part Two. The Philippine response

Let us recall again how the Asian financial crisis started 20 years ago in July 1997, and how it produced a domino effect on Asian countries.

Thailand’s banks and large corporations had been borrowing US dollars at cheaper rates and then turned around, converting them to baht for re-lending to domestic borrowers at higher rates. There was an abundant flow of credit that  encouraged overlending to many ventures of marginal profitability, much of this to property development.  This was the scenario, but what was ignored was the fact that Thailand had overborrowed and its foreign reserves had dwindled fast, exacerbated by a sudden drop in exports and the strengthening of the dollar against the baht (which was pegged to the dollar). In short, Thailand was in a most vulnerable position of being unable to meet its foreign-debt obligations.

The Philippines was not exactly surprised when the Asian financial crisis descended upon the Asian scene. Bangko Sentral ng Pilipinas (BSP) Governor Gabriel Singson would have known that in May 1997, Thailand had poured billions of US dollars from its foreign reserves to defend the Thai baht from the concentrated assaults of currency speculators, and Moody’s, the credit-rating agency, had in April 1997, in fact, downgraded Thailand’s ratings, noting the drastic reduction of the country’s foreign reserves.

Anticipating a possible contagion from the currency speculators, the BSP raised in mid-May 1997 the overnight borrowing rate by 175 bps to 13 percent as a defense measure. The peso-dollar exchange was 26.40 to 1, trading within a 1.5-percent band. On July 2, 1997, the day the baht was devalued, the BSP drastically increased its overnight borrowing rate to 24 percent. There were rife rumors that the Philippines would devalue the peso, and this fueled greater speculation. The BSP further increased its overnight borrowing rate to 30 percent the next week, then higher to 32 percent!

These moves notwithstanding, the peso was being sold for dollars in unusually big amounts. At the Philippine Dealing System Exchange, daily volume of transactions had shot up to over $1 billion, as against the BSP’s foreign-exchange reserves of $12 billion.  This level could easily be dissipated if the BSP used it—i.e., sell dollars—to defend the peso-dollar rate at the 26.40 to 1 level.

On July 11, 1997, a Friday, just nine days after Thailand devalued, the Philippines followed suit and allowed the peso to be traded beyond the limited 1.5 percent band.  The peso depreciated by 11.5 percent that day; the peso hit 29.45 to one US dollar, from the “normal” 24.5. In August 1997 the peso-dollar rate was recorded at 28.98, shooting up to 35.61 in October 1997.

The International Monetary Fund (IMF) was very much involved in rescue operations, and offered a $1-billion loan facility to the Philippines to help it replenish its reserves.  The facility was used, for it was needed.

In further support of the peso, the BSP increased liquidity reserve requirements from 2 percent to 3 percent on July 30, 1997, then quickly to 4 percent a couple of days later.  On August 20, 1997, the BSP closed its lending window to reduce liquidity in the market in further defense of the peso.  On August 28, 1997, liquidity reserve requirements were increased further to 8 percent.

The BSP was closely managing the situation.

It is a peculiar immediate response, when defending a level of foreign-exchange rate, to hike local interest rates. Higher interest rates translate to a higher return on funds, which, because of this, might induce these funds to stay on in the local currency.  The problem is, interest rates also translate to cost of funds for business borrowers, and any sudden increase in interest rates—as in this case of managing the defense of the exchange rate—creates havoc on the profitability, even the viability, of businesses and business projects whose borrowing costs have unexpectedly increased. That is why the BSP has always been sensitive and aware that interest rates have to be as quickly brought down to normal levels after—hopefully—stabilizing the foreign-exchange speculative environment.

Consequently, the benchmark overnight lending rate was brought down to 15 percent in mid-October 1997as the market calmed down a bit.  The consensus was that the BSP performed well and managed the currency volatility properly.

It is easy now to look back and recount how we survived the crisis, but those where harrowing days.  We must continue to review the lessons we need to learn from the experience.

I find the following explanation as providing about the most succinct capsulized broad perspective of the crisis, and I share this with my readers.

“The underlying causes of the Asian crisis have been clearly identified. First, substantial foreign funds became available at relatively low interest rates, as investors in search of new opportunities shifted massive amounts of capital into Asia.  As in all boom cycles, stock and real-estate prices in Asia shot up initially, so the region attracted even more funds.

However, domestic allocation of these borrowed foreign resources was inefficient because of weak banking systems, poor corporate governance and a lack of transparency in the financial sector.

These countries’ limited absorptive capacity also contributed to the inefficient allocation of foreign funds. Second, the countries’ exchange rate regimes—exchange rates were effectively fixed—gave borrowers a false sense of security, encouraging them to take on dollar-denominated debt.  Third, in the countries affected by the crisis, exports were weak in the mid-1990s for a number of reasons, including the appreciation of the US dollar against the yen, China’s devaluation of the yuan in 1994, and the loss of some markets following the establishment of the North American Free Trade Agreement.
“The massive capital inflows and weakening exports were reflected in widening current-account deficits.  To make matters worse, a substantial portion of the capital inflows was in the form of short-term borrowing, leaving the countries vulnerable to external shocks.” (Bijan B. Aghevli, “The Asian Crises. Causes and Remedies” in the IMF quarterly magazine, Finance and Development, June 1999 vol. 36. No.2)

Never should we ever be complacent.

source:  Business Mirror by Santiago F. Dumlao Jr.