‘Local banks need no bailout’
By Doris Dumlao, Michael Lim Ubac
Philippine Daily Inquirer
First Posted 03:07:00 10/03/2008
MANILA, Philippines—Philippine banks are in much better position to withstand a global financial storm and are in no need of a lifeline similar to the state-funded bailout schemes for troubled financial institutions in the United States and Europe, officials said Thursday.
“The issue there [in the US and Europe] is deterioration in solvency. In the Philippines, we have no solvency issue here as we learned our lesson in 1997,” said Nestor Espenilla Jr., deputy governor for bank supervision and examination of the central bank. Insolvency is a situation in which a company’s liabilities exceed its assets.
Espenilla said the central bank, Bangko Sentral ng Pilipins (BSP), remained committed to providing “liquidity loans” to the financial sector if needed. “These windows are available and continue to be ready for whatever necessity arises for it,” he said.
The country’s foreign currency reserves also remain intact and have not been exposed to any investment banks that have tanked in the United States, Espenilla said. “They are very safe. The BSP has followed an extremely conservative policy with respect to the management of the reserves wherein safety of the principal is the overriding concern,” he said.
Espenilla also said swift government intervention in the United States and Europe would help limit the global fallout of the financial crisis. “This will result in a revival of the banking industry in the US and it’s clearly positive for the Philippines because some of our financial institutions have been affected,” he said.
Following the US Senate’s approval Thursday of a $700-million bailout package for financial institutions, Philippine top economic officials have quickly readjusted their action plan from “worst-case to medium-case scenario,” Finance Secretary Margarito Teves said at a press briefing in Malacañang.
Teves noted that bailout of troubled US banks had a “very important real and psychological effect” on global markets.
He also said that regardless of any scenario, the Philippines should accelerate spending for social services and infrastructure to spur growth. He said the public should also expect more spending in agriculture to boost productivity and contain inflation.
Economic Planning Secretary Ralph Recto in a press statement noted that the Philippines might experience some slowdown in exports in the event of US recession. “We are not taking out the possibility that the US will go into recession,” he said even as he stressed that Philippine macroeconomic fundamentals remained sound.
Recto said the government was now aiming for an economic growth of 4.4-4.9-percent this year and 4.1-5.1 percent in 2009, compared with a target of 5.5-6.4 percent set last month. [Read story] He said these were “more realistic, credible and transparent targets.”
The government had originally forecast 2008 growth in the gross domestic product at 5.7-6.6 percent after exceeding 7.0 percent last year, but officials have since conceded that high food and energy prices made these original targets unrealistic.
Espenilla said Philippine banks were resilient and even those with exposure to distressed foreign institutions such as bankrupt investment bank Lehman Brothers could very well manage the hit.
In the case of Lehman, seven banks in the Philippines had a total exposure of $386 million, equivalent to around one percent of their total assets.
“Since our banks have been strong, we see no problem down the road,” Espenilla said.
Gabriel Singson, who was at the helm of the central bank when the Asian crisis broke out, said reforms instituted over the years would shield the local financial system from the current shock waves.
“It’s not as bad as the debt crisis years (of the 1980s) or the Asian crisis,” Singson said.
He noted that the bad assets of the Philippine banking system had fallen (to a post-Asian crisis low of 3.99 percent of total portfolio) and that stringent regulations on real estate lending had been institutionalized even before the Asian currency turmoil erupted in 1997.
A few months before the Asian crisis broke, Singson had required banks to limit their exposure to the volatile property sector to no more than 20 percent of total loan portfolio.
He also required banks to reduce the amount of real estate loans to 70 percent of collateral value from the 80 percent ceiling.
“The only thing uncertain here is how long this crisis will last,” Singson said, noting that the US turmoil had increased risk aversion among global investors.
He expressed confidence that the bailout package would be passed by the US Congress very soon.
The International Monetary Fund (IMF) said that episodes of financial turmoil characterized by banking sector distress would likely result in “severe” and “protracted” economic downturns.
“The financial turmoil that began in the summer of 2007 has mutated into a full-blown crisis, encompassing broader securities markets and the banking systems of several advanced economies,” the IMF said in a chapter on its world economic outlook.
“The likelihood that financial stress will be followed by a downturn appears to be associated with the extent to which house prices and aggregate credit rise in the period before the financial stress. Moreover, greater reliance on external financing by households and nonfinancial firms is associated with sharper downturns in the aftermath of financial stress,” the IMF said.
The IMF said the United States was thus facing considerable risks of recession, or a series of economic contraction, even though real interest rates in the world’s largest economy were still low by the standards of financial-stress-driven recessions. With a report from Agence France-Presse; edited by INQUIRER.net
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