Three faces of the Asian crisis: a regulator, an investor and a global financial firefighter

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