KUALA LUMPUR/MANILA -- Corporate regulator
Teresita J. Herbosa, Oakwood hotel heir Jacinto C. Ng, Jr., and the
International Monetary Fund (IMF) perhaps have something in common: a
checkered history.
The regulator, the investor, and the
multilateral organization all came out of the 1997 Asian financial
crisis wiser than they were going in.
Two decades since that painful event, however, they have not lost their mojo.
To Ms. Herbosa, a practicing lawyer in the 1990s and now the chairperson
of the Securities and Exchange Commission (SEC) that approves public
listings, the blow was personal but later reverberated throughout her
career as a corporate regulator.
“I remember I bought property in 1997. A few months after, the value went down so I said, ‘naku, I overpaid…’ I was really regretting it,” Ms. Herbosa said in an interview in Manila.
“But then, I hung on to it,” she said, adding that real estate values eventually recovered.
But the lesson was not to borrow “when you buy something substantial” and, instead, “buy with disposable income.”
But borrowing big-time, Ms. Herbosa understood, would be inevitable for
companies needing private capital -- ideally more from local sources to
discount the risk of foreign investors taking fright under a currency
crisis.
In December last year, the SEC approved rules that allow listed
companies to issue shares quoted, traded, and settled in US dollars to
meet their dollar needs.
Still, the SEC “is looking very much into leveraging -- why some companies have bigger debts,” she added.
That debt paranoia -- not unique to Ms. Herbosa -- says much about the lasting scar the 1997 Asian crisis has left.
From foreign debt-laden Thailand that decided to no longer peg the baht
to the US dollar, the financial crisis moved like a wrecking ball
through the economies of the Philippines, Malaysia and Indonesia,
hurting companies heavy with dollar-denominated loans in their balance
sheets that were serviced in local currencies.
There was a cash squeeze as Philippine banks cut credit lines --
especially for property tycoons -- and they have been picky since.
Twenty years later, the consequence was clear: The property tycoons made
a comeback after finding a more stable groove, and now bank only with
those who didn’t drop them when times were rough.
Oakwood Premier Joy Nostalg boss Jacinto C. Ng, Jr., son of Philippine
billionaire and biscuit magnate Jacinto L. Ng, Sr., remembers which
banks stayed faithful to his group amid the financial malaise.
“Fortunately, we did not experience such (cutting of credit lines).
There was no souring of our relationship with banks,” Jacinto Jr. said
in a July 15 interview, while noting that the liquidity crunch hurt his
industry peers.
“We could not afford for these credit lines, for the integrity, to be
broken. We were just probably fortunate to be stubbornly conservative.”
Conservative the hotel heir remains to this day, with his financing
model for his socialized housing venture -- the low end of the Joy
Nostalg group’s diversified property business -- designed in such a way
that the company’s balance sheet would be shielded from defaults.
Jacinto Jr.’s Extraordinary Development Corp., which caters to the
low-income market, has built 2,000 units at a village in Cavite priced
at P450,000 each -- the benchmark for state-run mortgage lender Pag-IBIG
to fully finance the loan, leaving the builder with clean books.
“We did not get any equity from the buyer, which means you spend everything up front,” Mr. Ng said.
“But we go back to efficiency. Yes, all the cost went out, but the
operation is so efficient that we get our money [back] faster also. It
[cost] doesn’t stay long [in our balance sheet].”
The crisis taught him prudence also in his private life, eschewing golf
and “even my aspirations for building a family was affected,” Jacinto
Jr. said, recalling how he had to wait for another six years for a third
child after his second son was born in July 1997, just when the crisis
was raging.
“He was born eight days after the crisis,” the 48-year old hotel heir
said, referring to his second-born and reckoning July 11, 1997 as the
date when the Philippines joined other Asian currency markets that fell
in step with the devaluation of the Thai baht, making it expensive for
Philippine companies to service their dollar-denominated debt.
The peso, according to Bangko Sentral ng Pilipinas (BSP) data, sank by
10.36% against the dollar that fateful Friday, or by P3.05, to P29.45
per dollar after the central bank “allowed the peso to seek its own
level.”
It’s a transition from a “managed float” exchange rate regime where the
monetary authority has a “certain range for how much the exchange rate
between the peso and the dollar” should be to an “independent float”
system where the central bank is “hands off”, BSP Deputy Governor Diwa
C. Guinigundo explained.
“After July 1997, we allowed the peso to seek its own level. No
intervention. We only come in if there’s speculation in the market and
reduce the sharp volatility,” Mr. Guinigundo said in a July 10 phone
interview.
That change in foreign exchange policy was necessary as the BSP’s
constant intervention to defend the peso from speculative attacks at the
time had been costly -- its gross international reserves shrank by $1
billion in July 1997 alone to about $10 billion.
A flexible exchange rate system was the shock absorber for an economy
faced with balance of payments problems, a pillar for an independent
monetary policy, and is the kind of currency regime that the global
lender of last resort -- the International Monetary Fund (IMF) --
advocates to this day.
The Philippines had to again run to the IMF in the week that followed
that July 11, 1997 decision for a $600-million Extended Fund Facility to
shore up its depleting currency reserves.
ALTERED CALCULUS
But central banks in the Philippines,
Malaysia, Indonesia, and Singapore have since been piling up foreign
exchange reserves -- BSP’s holdings alone are at record-high levels --
owing to a shift in economic fortunes that saw investors returning to
the region at least in the past decade.
Asia’s freedom from the IMF debt yoke has altered the calculus for the
global firefighter, whose lending to all countries by 2015 thinned to
just half of the €30 billion it lent to Greece in 2010 when it helped
Athens ride out a debt crisis, IMF data showed. Sri Lanka and Mongolia
are among the last few Asian countries under the IMF’s supportive
program.
The IMF’s role in a now fiscally healthier Asia has changed from a
friend in crisis to a friend in good times, with the region receiving
the second-largest share of the IMF’s $345-billion budget for technical
assistance and training in fiscal year 2017 next to Africa, according to
IMF data.
Asia can’t entirely cut loose from the IMF after over half a century of
rescue packages as the latter still is a part of the region’s firewalls
like the Chiang Mai Initiative Multilateralization.
That web of currency swap arrangement -- $240 billion in total size --
allows any member economy that needs liquidity support to withdraw up to
30% of its maximum borrowing amount (which is proportional to members’
contribution to the covenant) while the remaining portion is linked to
an IMF program.
There had been proposals among Southeast Asian nations to raise to 40%
that portion that’s not tied to the IMF’s lending conditions. The higher
the IMF-delinked portion, the less the policy pressure is for the
indebted.
“Our perspective is, it’s really up to the countries [how much]
percentage is delinked. And we don’t see an issue if they choose to
raise it or if they choose to keep it, because there’s still an element
of a need and use of the global financial safety net built in there,”
Ranil Salgado, assistant director at the IMF’s Asia and Pacific
Department, told BusinessWorld in a July 23 interview in Kuala Lumpur.
“And if you see, that’s the kind of policy we have globally -- combine resources from the regional safety net with the global.”
The IMF, senior officials told visiting journalists in Kuala Lumpur, is
now trying to shake off the negative connotation associated with its
annual “surveillance” activities, which under its mandate merely meant
checking on the economic health of its 189 member-countries, indebted or
not.
“Over the decades, there have been a lot of lessons learned for the IMF.
You can see the major changes that have occurred over the last couple
of decades in Asia. So you can see that both sides learned a lot from
what happened 20 years ago,” Mr. Salgado said.
And while some central bankers and finance ministers would look back to
the crisis as a source of regret -- spurning IMF’s policy prescriptions
back then like a bitter pill -- the Washington-based lender said it can
still “function as a trusted policy adviser” as rising trade
protectionism poses a fresh threat to the region’s external balance
sheets.
On building up gold and currency holdings, for instance, the IMF said it
would rather see nations put to good use currency reserves in excess of
the gross international reserves “optimal level” -- measured based on
traditional import cover, external debt, as well as portfolio
liabilities and so may vary from economy to economy.
At nearly $81 billion, the Philippines’ reserves pile, according to the IMF, is 200% above the “optimal” reserve adequacy range.
China’s deep cut in its $3-trillion currency buffer late last year
sparked worries of a cycle of currency depreciation and capital
outflows.
So, can the Philippines afford to reduce its stash of forex reserves
even as markets continue to be jittery about more US Federal Reserve
rate hikes?
“If you’re above the range, we tend to say, well, there’s no real need
to build further reserves at that stage,” Mr. Salgado said.
“That even supports further the need to allow the exchange rate to be
flexible as needed. Because exchange rate flexibility gives the domestic
central bank more scope to use monetary policy as needed for domestic
conditions as opposed to necessarily focus on external conditions.”
It’s evergreen advice from a global firefighter that has learned from the crisis too.
source: Businessworld
