Like any grizzled veteran watching from the sidelines, Gabriel Singson loves telling “war stories,” chuckling as he shares inside jokes and anecdotes from his long years in government service.
But his tone quickly turns serious when discussing the financial crisis that defined his stewardship of the Bangko Sentral ng Pilipinas (BSP) in the 1990s.
“It was a very different time,” he said. “We have it so much better now. So much money is coming in that we don’t know where to put it.”
Indeed, the kind of funds that have swamped the Philippines over the last two years are, for the most part, portfolio investments. Derisively known in the financial community as “hot money,” these are funds invested in the stock market, Philippine-issued bonds or the central bank’s high-yielding special deposit accounts.
These funds can leave the country as quickly as they enter, sometimes needing only a trader sitting in New York to push a button on his terminal to execute a sale and repatriate the investments.
On the other hand, foreign direct investment (FDI)—capital from abroad that stays in the country almost permanently, and is used to build factories and critical infrastructure—remains in short supply.
“Hot money makes up the bulk of inflows nowadays,” Singson said. “What we need is more FDIs.”
This year, the government expects the Philippines to receive $1.3 billion in FDIs (comparable to that of Cambodia) and about a tenth of the $12.7 billion that entered economically troubled Vietnam in the same period.
Singson also complains that not a day goes by without him receiving text messages on his mobile phone from unrecognized numbers—all offering him condominium units at “affordable” prices and “attractive” financing terms.
“Do you receive those messages, too?” he asked, looking at his phone. “Ang dami. Minsan nakakainis eh (There’s a lot of them. Sometimes it’s irritating).”
Which is not to say that the property sector is overheating.
“In 1997, condo buildings were empty, and the units were mostly bought with debt,” said COL Financial Group president Conrado Bate, citing a key difference between today and the crisis of 15 years ago. “Nowadays, some condos are also empty… but they were bought with cash.”
‘We knew what was coming’
On the morning of July 11, 1997, the supervisor of the BSP’s treasury department, came to work earlier than usual.
An hour before the 9 a.m. he girded himself for battle by reading real-time news reports of one country after another being overwhelmed by a massive wave of currency speculation sweeping the region.
“Naturally, I was scared,” the BSP official said. “We knew that other countries, starting with Thailand, were falling like dominoes since the week before.”
That official was an up-and-coming managing director named Amando Tetangco Jr.—the man who now heads the BSP.
His recollections give the impression of a man on a beach, holding a pail of water, and tasked with stopping the financial tsunami looming on the horizon.
“We knew what was coming,” Tetangco said, describing the tension in the trading room that morning. “At kakaunti ang bala namin (We didn’t have enough ammunition).”
And it didn’t take long before the inevitable came to pass.
Within 30 minutes from the start of trading, relentless speculative attacks pushed the peso from 26 to a dollar to 29. In the ensuing market panic, bankers completely forgot about “stop trading” limits imposed by regulators and continued dumping the local currency long after the threshold was breached. (Trading stopped mid-morning after someone remembered it.)
Four days later, with the peso already weakened way past the 30:$1 mark—and with the BSP running low on precious dollar reserves—authorities decided to stop intervening and allow the currency to free-fall.
The results were catastrophic. Companies which borrowed in dollars (because it was cheaper to borrow in foreign currency) suddenly found their peso-equivalent debt doubling almost overnight. Hard pressed to pay their loans, most firms cut costs, laying off millions of workers. Many went bankrupt.
Nature of the beast
In an interview, Tetangco said the most devastating financial crises in recent history had elements in common.
“If you noticed, many of them have roots in the property sector,” he said. “Whether it was the East Asian financial crisis in 1997 or the US subprime mortgage crisis in 2007-2008 or Japan in the 1990s.”
After the property sector, the contagion then moves to the financial sector, particularly the exchange rate and equities markets, as massive selling ensues to satisfy the need of foreign and local investors for capital flight.
But what could possible threaten the Philippines now that its growth rate, in terms of gross domestic product, is the envy of its neighbors?
“A sudden reversal of capital flows is one,” the BSP chief said, explaining that such a shift—like the tide suddenly receding from the shoreline—is what financial crises are made of. “Identifying what causes it … that’s the challenge.”
He conceded that, in some ways, the devastation caused by crises helped strengthen the economy for future generations, as lessons were learned and safeguards were put in place to buttress the financial system.
“Pain can be good sometimes,” he said, but rued its cost on the lives of ordinary Filipinos. “Personally, I prefer that kind of pain be avoided, as much as possible.”
He looked over at a paper pile on his table, and picked up a graph showing differences between peak property prices in Makati in 1997 and today, and another detailing the historical performance of local stocks.
“That’s why we always have to be vigilant.”