(Second of three parts)
When President Aquino came into office in mid-2010, borrowing costs in the Philippines and overseas were already at record lows, thanks to the policy of central banks around the world of cutting interest rates to stave off the effects of the global financial crisis.
The overnight borrowing rate of the Bangko Sentral ng Pilipinas—a key benchmark for all bank loans—stood at 4 percent in July 2010. This meant that a bank would earn only 4 percent a year on its funds if it deposited these with BSP (which represented the risk-free credit of the government). The BSP’s parallel borrowing window called the special deposit account paid only slightly higher at 4.06 percent at that time.
These returns were, by no means, profitable for banks, which had to contend with paying taxes and other overhead costs before making any money for themselves. Banks were better off giving out housing and car loans for which clients paid interest rates of at least 10 percent a year.
Yet the money held by banks continued to flow into the central bank’s vaults, even when interest rates were progressively reduced during the next three years. From only P897 billion in July 2010, funds deposited in the BSP’s SDA facility grew each month, hitting a peak of P1.91 trillion in February 2013—an increase of more than 112 percent in just a little over two years.
What was happening? “Investors keep their investment on ‘short-term parking’, so to speak, until the opportunity emerges,” said Jonathan Ravelas, the chief market strategist of the country’s biggest financial institution, BDO Universal Bank. “To me personally, people still stay in the SDA [facility]. I guess as they are still waiting for the PPP to progress faster,” he added, referring to the Public Private Partnership program, the economic centerpiece of the Aquino administration.
But it was not as if banks have not been lending all this time. Data from the central bank showed that the country’s largest financial institutions grew their loan books significantly since President Aquino assumed office. In 2010, the total loan portfolio of universal and commercial banks stood at P2.8 trillion. By the end of 2012, total loans had grown to P3.6 trillion—higher by 28 percent in two years—with the bulk of the lending going to the manufacturing sector, wholesale and retail trade, and the real estate sector.
Significant growth was also observed in consumer lending, which included loans for new automobile purchases.
Clearly, banks have been lending (at interest rates that are the lowest in the nation’s history). But demand from these traditional sectors simply could not keep up with the amount of money that was coming in from would-be foreign investors.
However, the big-ticket projects that foreign investors came here to fund under the PPP program have been slow in materializing. Of the 10 launched with great fanfare by the government in November 2010, only one project— the smallest, worth some P900 million—has been awarded, and work on it has yet to start. (Two other projects awarded under the PPP program were not part of the original list.)
The result? “Money is just parked and earning interest and not being used in businesses that could generate jobs particularly from the private sector,” Ravelas said. He warned: “If not managed properly, the money could go to other outlets such as stocks, real estate and other forms of investment and create a bubble.”
His views jibe with those of BSP Governor Amando Tetangco Jr., who lamented the cost to the central bank of paying billions of pesos—P189 billion over the past three years, to be exact—in interest for unproductive funds kept in its vaults (a necessary activity to prevent the cash from causing more problems by fueling inflation if left to circulate in the financial system).
“The only way to clean it out decisively is to have more investment opportunities,” the central bank chief said of the cash sitting in the BSP’s SDA facility.
Of course, a significant portion of the funds in the BSP’s vault are in the form of portfolio investments or the so-called “hot money” that is usually allocated to buying securities like stocks and bonds—assets that can be dumped at a drop of a hat when fund managers decide to repatriate their money.
Can these funds be productively used to fund the closure of the Philippines’ glaring infrastructure shortcomings? BDO’s Ravelas thinks so.
It would be possible to take advantage of these usually volatile funds and tie them down here, he said, “if the government were to issue long-term bonds that would be used to fund infrastructure, just like the ‘Tulong sa Bayan’ bonds in the early 1990s.”
“Also, listed companies can issue debt or stock for [the funding of] infrastructure projects,” he explained. “This could be done now. But what you need is the faster pace of implementation of the PPP and better prospects and expectations from investors, that is, continuity of government policies and programs for infrastructure.”
These prescriptions echo statements of commitment made by the country’s economic managers. Yet, at present, there is little evidence on the ground to suggest that Ravelas will get his wish.
(To be concluded)