the cutting hedge

Hedge funds unlikely to survive crisis
by BY WANFENG ZHOU and VIVIANNE RODRIGUES, Reuters/BWorld/12.11.08

NEW YORK — Even some strong and profitable hedge funds may not survive the ongoing credit crisis due to a lack of funding or credit, some top hedge fund managers said on Tuesday.

"There are going to be some firms that have good strategies that were strong in terms of discipline and their strategy itself, but may not survive this because they don’t have the assets or the funding to be able to survive," Ken Webster, president of the John W. Henry & Co. fund, said at the Reuters Investment Summit in New York.

The hedge fund industry has been hit hard by the worst global financial and economic crisis in decades. The average hedge fund lost 17.70% in the first 11 months of 2008, the worst-ever performance, figures from Hedge Fund Research show.

In October alone, investors withdrew over $40 billion from hedge funds and assets under management in the industry declined to $1.5 trillion at the end of that month, a level last seen at the end of the fourth quarter of 2006.

"There are a lot managers that are going out of business that have underlying positions that are profitable" because they can’t get the financing as a result of the credit crisis, Mr. Webster said.

J.W. Henry, which mainly uses trend-following style, has posted exceptionally strong performance this year. The firm’s Global Analytics program is up more than 80% this year, while its international foreign exchange program has returned about 76%.

Good returns and strong performance may actually increase the risk of higher redemptions, according to John Taylor, chairman and chief investment officer at FX Concepts, the world’s largest currency hedge fund, with $14 billion in assets.

Some of FX Concepts global funds are up more than 30% this year.

"We are liquid and people take the money assets," Mr. Taylor said at the Reuters Summit. "They need the cash. But thankfully we don’t need borrowing."

Cutbacks and shake-ups in the industry have already started, the fund managers noted.

On Monday, US hedge fund giant Citadel Investment Group LLC announced it is closing its Tokyo office and its Asia principal investment operations by the end of this year. The fund, which managed about $18 billion as of a month ago, lost about 13% in November, bringing its full-year loss to 47%, investors told Reuters.

The struggle to hold on to capital may lead hedge funds to become more open to offering lower fees and packages to attract new clients and extend their stay, Mr. Webster of J.W. Henry said.

"I think you’re going to see what we’re all seeing now, which is continued shake-up in the hedge fund industry," he said. "There’ll be a lot of external pressures on strategy that may force people out of the market. Overall, their strategy was working, but not in an environment like this."

the real deal

US: Global deal must be done by end-2009
by Imelda Abaño/BMirror/12.09.08

POZNAN, Poland—The top US delegate at world climate talks here said on Monday they are ready to lead the way toward an international agreement by the end of 2009.

Harlan Watson, the head of the US delegation, told journalists here that the US “is fully committed to reaching an agreement by 2009 that is environmentally effective and economically sustainable.”

He is also optimistic the new administration under President-elect Barack Obama will return the United States to the center of the global debate on climate change.

Looking toward a possible deal in Copenhagen next December to succeed the Kyoto Protocol that will expire in 2012, Watson said the US will figure out what is achievable within one year given the economic realities.

Earlier, Obama had pledged to bring US output of greenhouse-gas emissions back to 1990 levels by 2020. That’s still above the limit that the world’s biggest economy would have been required to meet by 2012 under the Kyoto Protocol, a global-warming treaty the US never ratified. It’s also short of a European Union pledge to cut the gases 20 percent from 1990 levels by 2020.

Watson said Obama’s 2020 emissions goal “is possible,” but warned it would not be “cost-free.” He also warned that the incoming Obama administration would be constrained by the economic crisis in offering incentives to countries such as India and China to commit to action to lower greenhouse-gas emissions.

“Whether or not there can be an agreement at the time of Copenhagen remains to be seen, and that would not be easy, but I think there is broad commitment, certainly on the part of the Bush administration,” Watson said.

President Bush has opposed forcing emissions limits on US companies and has been roundly criticized by environmental groups for not doing enough to tackle global warming.

Kyoto sets targets for 37 nations that expire in 2012. Countries in Poznan are discussing new targets for parties to that treaty, and also what action might be taken by the US and large developing countries such as China and India in a new pact.

Under Kyoto, the US would have been required to cut emissions by an average of 7 percent in the 2008-12 measurement period compared with 1990 levels. China and India, as developing countries, weren’t set targets under Kyoto, and reject goals until the developed world first has led the way.

On the other hand, California Gov. Arnold Schwarzenegger told UN delegates here that the “green rules and regulations that will help save our planet will also revive our economies.”

There is, the governor said, “far more economic risk in the status quo—wasting energy, burning fossil fuels and destroying forests—than there is in fighting climate change by developing clean, renewable energy and saving forests.”

He added, “States and provinces have long been at the forefront of developing green technologies and protecting our economy so that they are setting great examples for our federal counterparts.”

Delegates from 190 nations have gathered in Poznan at the midpoint of a two-year negotiation that aims to produce a treaty to fight global warming in Copenhagen next December.

build me up

Government speeds up infra buildup
by Jun Vallecera/BMirror/12.09.08

THE near certainty of slower-than-anticipated growth next year has forced the government to accelerate within the month its infrastructure-buildup program, the Department of Finance said on Tuesday.

The increased spending for school buildings, roads, ports, bridges and other public structures were to help prime the economy and ensure local output will hit 4.7 percent next year in terms of the gross domestic product, Finance Undersecretary Gil Beltran said in an interview.

Next year’s growth path was seen to range lower than this year’s anticipated expansion of 4.1 percent to 4.7 percent, and will likely range from 3.7 percent up to only 4.7 percent.

“It’s been decided that infrastructure spending will increase in December as part of the pump-priming effort, and ensure next year’s growth,” Beltran said.

He stressed that Budget Secretary Rolando Andaya has kept a list of specific infrastructure programs that will be pursued in earnest under the acceleration program.

Beltran said proceeds from the sale of the government’s remaining stake in Petron Corp. for an estimated P25.7 billion were to fund the accelerated- buildup program.

He said both Finance Secretary Margarito Teves and Budget chief Andaya were hopeful the sale proceeds can be booked under the present fiscal year and disbursed accordingly.

There had been initial apprehension the sale proceeds could not be booked soon enough, denying the government the opportunity to spend for critical public structures needed to ensure continued growth next year.

But Beltran said the optimism is high that the sale proceeds will be booked within the month and disbursed quick enough, and at a level sufficient to keep the budget deficit at or around P75 billion as planned.

The actual 10-month deficit stands at only P62.5 billion—enough fiscal space to undertake heightened public-spending programs, without wrecking the carefully calibrated budgetary numbers.

Beltran said the government is conscious of the impact of probable overspending on credit markets, for instance, and vowed this will not happen.

The government has worked hard to reduce its indebtedness to only around 66 percent of GDP from 95 percent of GDP as recently as four years ago.

Beltran said keeping the year’s deficit within check means ensuring that its level this year should not exceed 0.6 percent of GDP, given that last year this already equaled a full percent of GDP.

Asset sale proceeds this year, meanwhile, were seen to end the year at P34 billion, significantly lower than last year’s P90.6 billion.

The same sale proceeds were seen to reach P10 billion up to P15 billion next year with the planned sale of the Food Terminal Inc. in Taguig City and the government’s so-called Fujimi property in Japan.

foil, spoil

Election-related spending, other factors a foil to crisis
by Cail Ordinario/BMirror/12.09.08

IT’S just good luck—in an economic depression, the usual remedy is to spend, spend, spend; and with the depression from its main trading partner the United States spreading around the world, including the Philippines, the elections just around the corner is what the country needs. This early, those eyeing Mrs. Arroyo’s seat are already spending, spending, spending.

Add to this the expected increased transfer to outsourcing sites—the Philippines being a most preferred one—of more business back-room operations from scrimping businesses in the US, the continued remittances of Filipinos working abroad and tourists seeking cheaper but great destinations, of which the Philippines is at the top or near it, and economists begin to be more sanguine about the near future.

One of them, Dr. Bernardo Villegas of the University of Asia and the Pacific (UA&P), said that while he expects consumer spending in 2009 to slow down, he also expects the growth range will be within 3.8 percent to 4.5 percent, with the higher end being “the more accurate.”

He said the 4.5-percent gross domestic product (GDP) growth projection in 2009 is also the growth rate he expects for 2008, during which the economy grew by 4.6 percent in the first three quarters, but he sees it posting only about 4.3 percent to 4.4 percent in the last.

He predicts the country will feel the effects of the global slowdown until the second quarter of 2010, when he expects the United States economy to start its recovery. But due to several factors, 2009 will not be as difficult for Filipinos.

“The slowdown in the Philippine economy will be primarily due to stagnant exports—we are too dependent on electronics exports to the US consumer market that is contracting massively—and to sluggish foreign direct investments from the US. Fortunately, we have a reasonably large domestic market, thanks to our 90 million population made up of predominantly young people. This internal market, bolstered by some $16 billion inward remittances from overseas Filipino workers [OFWs], can keep personal-consumption expenditures growing still at 3 percent to 4 percent,” Villegas said in a statement.

Villegas noted election spending in the Philippines usually starts to flow a year before the elections, and this would also give a boost to spending. He foresees that “serious candidates” for President would pump in around P15 billion to P20 billion to the domestic economy next year.

“Presidentiables” could spend around P3 billion to P5 billion each in 2009, he added.

In addition, Villegas said the recession in the US and the recent bombings in Mumbai, India, will make the Philippines a more attractive business-process outsourcing (BPO) destination. This will not only secure jobs in the BPO sector but also continue the real-estate boom the country is experiencing.

He said the BPO sector will become even more competitive as the peso continues to depreciate against the dollar. Villegas expects the exchange rate to settle at P47 to a dollar in 2008 and reach up to P50 to a dollar next year.

“The BPO sector may actually benefit from the slowdown of the US economy. We should expect to see more US enterprises, medium-scale and large, who will increasingly make the Philippines the hub for their back-office operations, attracted by the much lower labor costs and less expensive rental of office space.”

Similar to BPOs, the tourism industry may also grow since most of those who will be looking for affordable vacation destinations may start considering the Philippines as the best alternative to high-end
destinations.

Villegas said that while other economists are fearful of the job security of most OFWs due to the recession, most OFWs will not be affected since they work in personal and medical services and are difficult to replace.

death to debt

National government debt rises to P4.1 trillion
by Jun Vallecera/BMirror/12.09.08

MORE than P76 billion worth of foreign and local debts were added to the national government’s (NG) debt burden in September this year, bringing the nine-month total to P4.1 trillion, the Bureau of Treasury reported on Tuesday.

The additional load raised the government’s debt as percentage of local output, or the gross domestic product (GDP) to 53.9 percent of GDP—significantly higher than the previous month’s 52.95 percent of GDP.

Treasury chief Roberto Tan said NG’s total debt outstanding aby JUn Vallecera/BMirrors of end-September stood at P4.1 trillion from only P4.024 trillion in August.

The 1.9 percent or P76-billion increase in NG debts during the month was traced to the continued sale of peso-debt papers on the domestic side, and to the impact of the weak peso and of so-called third currencies on the external side.

“Domestic debt increased by 0.4 percent or by P10 billion from the recorded end-August level arising from net issuances of government securities,” Tan said in a statement.

“The 4-percent increase in foreign debts of P66 billion was due to the P51-billion and P19-billion depreciation of the peso and third currencies against the US dollar, respectively,” Tan added.

Such increases were only partially made up for by net repayments totaling P4 billion, he quickly added.

Domestic debt, which includes the direct sale or assumption of debt notes and loans by government, totaled P2.369 trillion in September, up P10.2 billion or 0.4 percent higher than in August.

Foreign debt directly owed or assumed by the government, on the other hand, went up 4 percent, or the equivalent of P66.3 billion, during the period.

Contingent debt, which become direct NG obligations in the event of default by primary borrowers, retreated by 1.3 percent, or by P6.6 billion, to only P512.8 billion from P519.4 billion previously.

in the face of layoff

RP workers face layoffs in US, but . . .
by Estrella Torres/BMirror/12.11.08

AN official of the Department of Labor and Employment (DOLE) said an estimated 130,000 temporary Filipino workers in the US, mostly in the manufacturing, shipping and domestic services, face job losses due to the global financial crunch.

But Japan is set to open its borders to Filipino nurses and caregivers as the Japan-Philippines Economic Partnership Agreement takes effect on December 11, officials said. The first 500 Filipino health workers to Japan are set to be deployed by April next year, according to a labor attaché.

Labor Assistant Secretary Ma. Teresa Soriano said temporary workers holding seasonal working visas like the H-2B to the United States are the ones likely to be affected by the financial crisis that originated in the US.

Figures from the Philippine Overseas Employment Administration showed there are 128,910 temporary Filipino workers in the US, mostly deployed in factories, shipping as well as in hotels and casinos.

Seafarers in cruise and cargo ships are also set to be affected by the global financial crunch, according to the labor official; there are 47,782 Filipinos in cruise ships and 10,754 in general cargo ships worldwide.

Filipino workers in the manufacturing sector in South Korea, Taiwan and Macau also face threats of job losses due to the global financial crisis. “While some domestic helpers would be safe, those in certain countries may be affected,” said Soriano. She added that Filipino household service workers in Singapore, Macau and Hong Kong, whose employers are active players in the financial industry, may be also be affected.

Philippine Labor Attaché to Japan Danilo Cruz said, meanwhile, that the Japan-Philippines trade deal will benefit the country in terms of providing jobs to nurses and caregivers. But the guidelines in hiring there are yet to be finalized by the two parties.

“We are still discussing it and it may be signed within this month,” said Cruz. He said that Japan is expected to absorb the first 200 Filipino nurses and 300 Filipino caregivers by April 2009.

He said the POEA has yet to issue the guidelines on deployment. “No private recruitment agency will be involved here,” he said.

Cruz said Japan may be one of the rich economies hit by the global recession but with the lingering shortage of medical workers there, Filipino nurses and caregivers are very much needed.

Soriano meanwhile said that new markets like France, Australia, Canada, New Zealand and Guam can be explored by Filipino workers who may lose jobs in the US and other countries. The Philippines is the world’s third largest source of migrant workers, next with India and China. There are around 8.2 million Filipino workers deployed around the world.

higher than high

RP unemployment, poverty higher in 2009–WB
by Cai Ordinario/BMirror/12.11.08

AS the effects of the global economic slowdown in the Philippines and in the world reach their height in 2009, the World Bank (WB) expects more Filipinos will become unemployed or underemployed and fall below the poverty line next year.

In a briefing after the presentation of the results of the latest East Asia and Pacific Update, World Bank senior economist Eric Le Borgne said the Philippines should expect higher unemployment and underemployment rates, as well as poverty-incidence level in 2009.

Unemployment in the July round of the Labor Force Survey periodically released by the National Statistics Office was pegged at 7.4 percent, and underemployment at 21 percent. The 2006 poverty-incidence level in terms of population, according to National Statistical Coordination Board data was pegged at 32.9
percent.

The WB, in an earlier report, said the Philippines’ poverty-incidence level was at 22.6 percent in 2006
at a poverty threshold of $1.25 a day.

However, Le Borgne said due to the “high uncertainty” of the situation next year, he could not give an estimate of how high the country’s unemployment and underemployment or the poverty-incidence level will be.

“Employment prospects are tightening, unemployment and underemployment could rise significantly and the strong flow of remittances will likely be more challenging to sustain,” Le Borgne said. “Escaping poverty will be extremely difficult in 2009.”

Le Borgne said the increase in unemployment and underemployment might be rooted in the expected slowdown of new investments next year and the possibility that more overseas Filipino workers (OFWs) will be laid off from their jobs abroad and be forced to return home in 2009.

With this, World Bank East Asia Region lead economist Ivailo Izvorski said the nominal amount of remittances might decline. But he expects migrant workers, especially OFWs, to struggle to maintain the steady flow of remittances to their families in the Philippines.

Izvorski said that in terms of remittance flows, the Philippine experience is “paradoxical” and goes against the general trend. He said that at a time when remittance should have slowed down, the government announced a 17-percent growth in OFW inflows.

“Remittances will be slow but migrant workers will struggle to maintain [inflows] steady,” Izvorski said in a videoconference with reporters from East Asia.

Vikram Nehru, World Bank Poverty Reduction, Economic Management and Private and Financial Sector Development regional chief economist in the East Asia Region, said the impact of the crisis on the country will be most likely seen in employment, wages and poverty incidence.

However, Nehru said there may be some reprieve for the poor in the Philippines, considering that the government is now extending conditional cash transfers conditional to the poorest families. This can contribute in the efforts to sustain domestic demand in 2009.

He said that despite the volatility of the current economic environment, no multinational firms have pulled out their investments from countries like the Philippines.

This is crucial for the Philippines, considering that a lot of Filipinos depend on multinational firms who outsource some of their business processes to the country through business-process outsourcing firms to earn a living.

Nehru said, however, that the uncertainty in the global economic environment still makes pulling out investments an option for multinationals, especially those who are based in the United States.

“They have every intention to continue [their existing investments. However, there is reluctance for new investments. At the moment, I don’t see multinationals moving out, but I don’t know [how they will react in the near future to the rapidly changing economic environment],” Nehru said.

However, Le Borgne said that despite these challenges, the Philippine economy would be resilient in 2009. The World Bank projected in the East Asia Update that the Philippines will grow by 4.3 percent in 2008 and 3 percent in 2009.

With this, the World Bank is urging the national government to see the crisis also as an opportunity to establish or strengthen its safety nets to protect the poor and boost domestic demand to enhance the country and region’s chances of weathering the global slowdown.

“The report expects the Philippine economy to remain resilient and stresses that the direct impact on the Philippine banking system from the turmoil has been marginal. Overall exposure to structured products is estimated at about 2 percent of banking assets,” the bank said in a statement.

Le Borgne said the country needed to protect the sustainability of its fiscal sector to allow for better and more capital and social expenditures next year. He also said that the appropriate monetary policy to control inflationary pressures may be necessary to be balanced next year to protect the poor.

Overall, the report stated that the risks to East Asia are substantial in the near term but countries will be better positioned to deal with the crisis if they are able to maintain macroeconomic stability, shift exports to faster growing regions in the world, substitute external with domestic demand, and continue with structural reforms to strengthen competitiveness.

Benchmark T-bills sold anew

THE GOVERNMENT yesterday sold benchmark 91-day Treasury bills for the first time in five months, but not after capping the debt yield to align with secondary market rates.

The favorable inflation outlook, meanwhile, allowed the government to borrow at a lower cost for its one-year debt papers.

Banks demanded an average yield of 6.19% for the 91-day T-bill, but the auction committee capped the rate at 6.122%, or 42.3 basis points higher than the 5.699% these securities fetched in a July 7 offer, when they were last sold.

The three-month IOUs, which banks use as basis in pricing loans, made a comeback this quarter through two fortnightly auctions in October. Both auctions, however, failed as banks demanded bids the Bureau of the Treasury deemed "unreasonable."

Since it limited the rise in 91-day T-bill yields at yesterday’s auction, the Treasury was able to sell only P1.3 billion worth of these debt papers, a little over half of the planned P2.5-billion offer.

"We just wanted to follow the market done levels," National Treasurer Roberto B. Tan told reporters.

The Treasury, meanwhile, awarded bids for one-year securities in full, or P2.5 billion. Debt papers of this tenor yesterday fell nearly three-quarters of a percentage point to 6.414%, from 7.111% in a Nov. 24 offer.

The auction results were widely expected as inflation’s return to the single-digit territory in November bolstered beliefs that interest rates would be on a downhill trend, traders said.

The market has already factored in at least a quarter-percentage point cut in the central bank’s key policy rate on Dec. 18, when the Monetary Board convenes to review rates, they added.

"A lot of investors are now gaining confidence in placing their cash in safe securities particularly in government securities," Mr. Tan said."There’s also this positive outlook on domestic inflation as well as on prices of commodities, particularly oil. This is in a way influencing sentiments in financial markets."

The auction was four times oversubscribed at P20.12 billion, with appetite leaning toward one-year debt papers.

"The depth of trading in one-year [T-bills] is a lot better in terms of the liquidity they may be needing," Mr. Tan explained.

Yesterday’s auction puts a lid on the government’s domestic borrowing for the year, the amount of which has already exceeded official targets, Mr. Tan said.

"[Domestic borrowing] was more than programmed for defensive purposes. I think we made the right decision," he said, adding that excess borrowing should give the government a hedge against "any eventuality."

The government’s domestic financing requirement for 2008 was initially set at P260.7 billion. Changes in the budget deficit target, now at P75 billion, however, prompted it to revise the domestic borrowing cap to P332.7 billion.

Official data from the Bureau of the Treasury showed the net borrowings from the local capital market at P371.08 billion as of October, which included an unplanned P60 billion retail bond float.

Gross domestic borrowing as of yesterday, which listed only funds raised from auctions and excluded debts issued over-the-counter and net maturities, meanwhile reached P203.977 billion.

deep low high

Deepwater rig rates jump on lower crude prices
BMirror/12.08.9

CHICAGO—Rental rates for deepwater drilling rigs continue to surge as a worldwide shortage of vessels used to search the oceans for oil outweighs the biggest drop in crude prices in a quarter-century.

Transocean Inc., the world’s largest offshore oil driller, agreed to lease its C. Kirk Rhein Jr. rig to Burgundy Global Exploration Corp. for $550,000 a day, a 52-percent increase from the previous rate, according to a public filing on Friday.

Burgundy’s lease commences in February, after South African energy producer Sasol Ltd.’s current contract to use the rig off the coast of Mozambique expires, Transocean said. Burgundy, based in Makati City, Philippines, plans to search for oil in Filipino waters.

“It is impressive,” Brian Uhlmer, an analyst at Pritchard Capital Partners Llc. in Houston, said over the weekend in a note to clients. The rate makes Uhlmer “more comfortable” about deepwater rig operators’ prospects for maintaining profits despite lower crude prices.

The global credit crunch is a boon for rig operators such as Transocean, because the lack of financing is preventing smaller rivals from following through with plans to build new vessels. As many as one-fifth of the new deepwater rigs on order in shipyards from South Korea to Norway will be canceled or delayed because of capital constraints, Uhlmer said in October.

Demand for vessels that can explore more than 9.7 kilometers below the sea surface and hundreds of miles from shore has risen faster than the world’s supply of the most-sophisticated drill ships, pushing day rates to a record.

Royal Dutch Shell Plc., Anadarko Petroleum Corp. and other energy producers require rigs that can operate year-round in rough seas and shelter more than 100 employees for weeks at a time to find crude in places such as the Atlantic Ocean off the coast of Angola and the Gulf of Mexico.

Offshore exploration yielded the Western Hemisphere’s biggest discovery in three decades when Rio de Janeiro-based Petroleo Brasileiro SA in 2006 found the Tupi field, home to the equivalent of 5 billion to 8 billion barrels of oil.

Transocean also announced higher rental rates on Friday for its GSF Adriatic VI rig off the coast of Gabon and the GSF 103 in Egyptian waters. Each $50,000 increase in daily rig rates adds $3.21 to Transocean’s full-year per-share earnings, according to JPMorgan Securities Inc.

Transocean, which is based in the Cayman Islands and run from Houston, is expected to boost 2008 profit by 47 percent to $4.61 billion,

Transocean had a $41.1-billion backlog of orders as of September 30. The company signed a record $652,000-a-day lease agreement with Italy’s Eni SpA in July for the Deepwater Pathfinder ship, followed by a deal at an identical rate with Exxon Mobil Corp. in October for a vessel yet to be built.

There were 3,448 rigs operating worldwide at the end of November, 9.1 percent more than a year earlier, according to a count by Baker Hughes Inc. The figure includes offshore and onshore drills sites. (Bloomberg)

higher

Bank panel endorses PDIC amendment bill
BMirror/12.05.08

THE Senate’s banks committee approved in principle on Thursday a pending proposal to double to P500,000 the maximum deposit insurance coverage (MDIC) from the existing limit of P250,000 in a bid to shore up depositors’ confidence in the domestic banking system.

“There is almost unanimous endorsement of the measure,” Sen. Edgardo Angara, chairman of the Committee on Banks, Financial Institutions and Currencies, said in concluding a public hearing on separate bills that he and Sens. Francis Escudero and Mar Roxas II filed amending the charter of the Philippine Deposit Insurance Corp. (PDIC).

Angara assigned a technical working group (TWG) that includes representatives from the PDIC, Bangko Sentral ng Pilipinas (BSP), Bankers Association of the Philippines, Chamber of Thrift Banks and the Rural Bankers Association to consolidate the three related bills raising the MDIC to P500,000. They will submit a report by Monday.

“In principle, there seems to be no disagreement on our proposal; it is the coordination part that needs to be harmonized [by the TWG],” Angara added.

PDIC president Jose Nograles informed Angara’s committee at the hearing that the measure is expected to “lead to a stronger and more dependable deposit-insurance system.”

He noted that the measure is “long overdue” and the brewing international financial crisis has made early passage of the PDIC amendment bill “more imperative.”

At the hearing, BSP Deputy Governor Nestor Espenilla Jr. endorsed the measure, also citing “the severity of the financial situation.”

Taking turns addressing the committee, Bankers Association of the Philippines executive director Leonilo Coronel, Chamber of Thrift Banks executive director Suzanne Felix, and Rural Bankers Association of the Philippines president Tomas Gomez IV also assured support for the PDIC bill. They acknowledged the need to adopt such measures in order to strengthen the local banking institutions in the midst of the global financial turmoil.

snap up, smack that

Traders see lower 91-day and one-year T-bill rates, stronger peso
BWorld/12.08.08

BANKS are expected to snap up 91-day Treasury bills, which the government auctions today.

Yields from the three-month debt paper are expected to come off multi-year peaks and should range from a low of 5.75% to a high of 6.25% at today’s auction, the last for the year, traders said.

While higher than the 5.699% these IOUs fetched last July 7, when they were last successfully sold, the projected bids are better than secondary market rates and those demanded by banks in past two 91-day T-bill auctions this quarter, which all failed.

The 91-day paper was last quoted at 5.875% to 6% in the secondary market, although there have not been many done deals on this paper, traders said.

Today’s auction of P5 billion worth of papers caps the government’s domestic borrowing for 2008, as financial markets prepare for a long Christmas holiday that kicks off the week after next.

Of the planned P5 billion offer, half is of one-year T-bills, which will likely fetch between 6.5% to 7%, traders said. The one-year securities were last sold for 7.111% in a Nov. 24 auction.

Better-than-expected inflation in November, which showed the rise in consumer prices easing to the single-digit level at 9.9%, allowed bond prices to rally and interest rates to fall by up to 30 basis points last Friday, traders said.

This bodes well for a rate cut by the policymaking Monetary Board, when it meets on Dec. 18, traders said.

"Secondary market rates fell because of the bullish sentiment due to inflation that is no longer in double-digit territory.

"It gives the BSP [Bangko Sentral ng Pilipinas] reason to cut its overnight rates this month. The monetary policy stance will be from neutral to easing," a trader said.

The same bullish sentiment should spill over to the peso, which will likely appreciate further near the P48-per-dollar territory. The local currency closed at P49.08 per dollar last Friday.

Money sent home by Filipinos working and living abroad, which is expected to surge in the countdown to Christmas day, continue to provide the peso a tailwind, analysts said.

"We’ll still be trading around these levels because we can still feel the effect of inflows from overseas," Asterio L. Favis, Jr., Sterling Bank executive vice president and treasurer, said.

For Marcelo E. Ayes, Rizal Commercial Banking Corp. senior vice president , the peso should trade between P48.75 and P49.30 against the dollar this week. — M. E. I. Calderon

relax, just do it

Relaxed rules boost banks’ income
BWorld/12.08.08

PHILIPPINE BANKS reported better earnings and stronger balance sheets in the third quarter after relaxed accounting rules allowed them to revise their financial statements.

The reclassification, which lapsed last Nov. 30, allowed financial institutions to move their equity and debt investments out of the trading category to the loan or until maturity categories, giving banks reprieve from marking hard-to-value assets down to fire sale prices.

Banco de Oro Unibank, Inc. (BDO), whose balance sheet was hurt after setting aside provisions for its exposure to failed American investment bank Lehman Brothers, benefited from regulators’ move and saw its net income loss narrowed to P804.6 million from a previously reported P1.3 billion in the third quarter, the bank’s amended financial statements showed.

In the nine months to September, the Sy-led bank’s net income attributable to shareholders rose by P500 million to P1.56 billion from the P1.06 billion announced earlier.

Top-tier Metropolitan Bank & Trust Co. (Metrobank) similarly benefited from eased accounting rules, allowing it to raise its bottomline to P1.147 billion in the third quarter from the P1 billion reported earlier, it said in a separate disclosure to the stock exchange last week.

Metrobank, which reclassified at least P1.46 billion worth of financial assets from held-for-trading to the available-for-sale category, saw its net profit in the nine-month period jump to P4.27 billion from P4.2 billion previously announced.

The George SK Ty-led bank also has Lehman-related investments through a P2.4-billion loan it extended to two Philippine-based subsidiaries of the bankrupt US investment bank.

Allied Banking Corp. of tobacco magnate Lucio Tan, meanwhile, said its net profit in the third quarter ending September grew by more than a two-fold to P81.746 million from an earlier reported P31.965 million following the reclassification of financial assets.

The Tan-owned bank said it transferred $192.96 million worth of assets to the held-to-maturity category.

In a separate disclosure, Aboitiz-controlled Union Bank of the Philippines, Inc. said it trimmed its net unrealized loss from its dollar-denominated government bonds to $4.75 million with the asset reclassification.

"The parent company’s year-to-date net unrealized gain/loss from the total dollar Government Bonds Portfolio would have amounted to USD 20,435,773.45 had it not reclassified the above portfolio," the bank said.

The reclassification was an offshoot of a Nov. 14 decision by the Securities and Exchange Commission to amend Philippine Accounting Standard 39: Financial Instruments Recognition and Measurement and Philippine Financial Reporting Standard 7: Financial Instruments Disclosures.

The move followed a similar directive issued by the central bank in October.

The change provides companies relief from the mark-to-market accounting rule, said to be responsible for adding to the global financial turmoil as it trapped distressed financial institutions in a capital-raising spiral. — M. E. I. Calderon

bonding time

Government sells 20-year bonds at 9.5%; awards P4.918 by Jun Vallecera / Reporter

Tuesday, 02 December 2008 21:12

THE government has sold 20-year money at 9.5-percent yield during the auction of Treasury bonds on Tuesday, up 87.5 basis points from 15 months ago, Treasury chief Roberto Tan told reporters after the sale. Fifteen months ago the coupon rate on 20-year Treasury bonds was 8.599 percent, data from the Bureau of Treasury showed. The increase burdens taxpayers with additional interest expense of P43.03 million a year for the next 20 years for this account alone, for a total of P860 million. Tan picked the bond yield the market was willing to give government on Tuesday. He earlier said the national coffers contain sufficient hoard of cash. “We may have reached our reflection point wherein investors think interest rates are getting better,” he told reporters. Insurance companies and pension funds that match long-term funding needs with the government’s long-term borrowings bought the bulk of the P4.918 billion worth of T-bonds the government awarded yesterday. The bureau sold only a part of the P6 billion worth of 20-year bonds it offered the market on account of the high yield rates bidders wanted for their money. Still, Tan believes long-term rates have improved. “A lot of long-term investors are locking-in at the good rates at this time.” He said the long-term outlook was helped by the favorable trend of inflation, which slowed to 11.2 percent in October from a 17-year high of 12.5 percent in August. Government planners earlier projected inflation would range from 9 percent to 11 percent this year, compared with the original target of 3 percent to 5 percent before the mid-year spikes in oil and food prices. “It looks like the outlook on inflation has cleared already,” Tan said. “Investors are flushed with cash so they’re buying,” Tan said. Interest rates investors would like to get “are very acceptable already based on our long-term outlook.” The intent, Tan said, was to lock investments while the rates favor investors. At the same time, the market is also flushed with cash that investors are placing their money now while the rates are good, he added. The bureau last sold 20-year bonds on September 4, 2007 at an average rate of 8.599 percent.

inflated hot air balloon

Inflation keeps BSP from tweaking rates in December
by Erik dela Cruz/BMirror/12.02.08

HEADLINE inflation may be on a downtrend from the 17-year high of 12.5 percent in August but it remains high for the Bangko Sentral ng Pilippines (BSP) to cut policy interest rates this month, according to four financial institutions surveyed by the BusinessMirror.

With core inflation at 7.8 percent as of October, up from the previous month’s 7.5 percent, the BSP is unlikely to follow the lead of other central banks amid the deteriorating global economic outlook.

Core inflation in August was at 7 percent.

The BSP will hold its last policy meeting for the year on December 18. At its last meeting on November 20, the Monetary Board decided to keep the BSP’s key rates at 6 percent for overnight borrowing and 8 percent for overnight lending.

The BSP said in its latest postmeeting statement that “price pressures are retreating and inflation expectations are moderating, the rising readings on core inflation suggest that there are still price pressures in the pipeline.”

“Sources of upside inflation risks remain, including the volatility in the foreign-exchange market,” it added.

The trend in core inflation and the expected upward pressure on consumer prices during the Christmas holidays mean there will be no rate cut this month, said Marcelo Ayes, senior vice president for treasury at Rizal Commercial Banking Corp.

Core inflation tracks prices of goods and services that exclude volatile items such as food and energy.

Core inflation, according to economists, effectively captures price trends by taking out the effects of temporary disturbances or shocks on the consumer prices basket.

Headline inflation, which include prices of all goods and services, tend to be more volatile while core inflation provides a more accurate picture of the long-term trend in price movements.

The BSP expects annual headline inflation in November to range between 10.3 percent and 11.2 percent. It could be lower than October’s 11.2 percent as rice and other food prices continued to decline due to higher supply and favorable weather conditions, according to BSP Governor Amando Tetangco Jr.

“Core inflation at 7.8 percent remains high. Look at the core inflation figures and that would suggest when the BSP would possibly cut policy rates,” said Michael Oliver Manuel, chief investment officer of Sun Life Financial Philippines.

Despite having raised overnight by a total of 100 basis points between June and August to stem the pressure from record prices of rice and oil, central bank policy remains “very accommodative,” Manuel said.

“If you look at T-bill rates, the three-month rate at 6 percent and inflation at 11 percent, we’re still in the negative real interest-rate territory,” he said.

“Money supply growth has gone back to about 13.8 percent, which would suggest that the BSP is allowing money supply or the liquidity to flow into the market again,” he added.

Manuel said the BSP would not cut interest rates this month. It is “content on increasing money supply as a signal to the market that interest rates should remain low.”

Lim Su Sian, an economist at DBS Bank in Singapore, said interbank interest rates in the Philippines remain about 200 basis points below the policy rate, suggesting the country enjoys a high level of liquidity.

“As long as this remains the case, the BSP may feel little urgency in cutting rates. Given the likelihood that seasonal remittance flows could keep the interbank market well-supplied in December, there is some chance that the BSP could continue to dally,” she said.

Thus, it remains difficult to pin-point when rate cuts will happen, Lim added.

United Overseas Bank (UOB), another Singapore-based regional lender, expects the BSP to start cutting interest rates early next year to bring down the cost of money and quicken the economy in the face of an expected slowdown.

“We have factored in a 75-basis-point cut in the benchmark interest rates in the first quarter of 2009, barring sharp rebound in oil and commodity prices,” UOB said in its latest global economic outlook.

grade 1, row 1

'Global Finance' gives Tetangco a 'B' for handling economy
by Jun Vallecera/BMirror/12.02.08

BANGKO Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. did not get an “A” grade this year from the prestigious business magazine Global Finance, a unit of the US business credit information and global rating firm Dun and Bradstreet.

He instead got a “B” rating—a demotion from last year’s top spot—for his handling of the economy beset, like most countries around the world, with rising inflation and slowing growth.

The magazine noted Tetangco and six other members of the policymaking monetary board were on an easing mode in the first half of the year but had to turn around from June onward as headline inflation, pushed higher by rising prices of commodities and food, threatened to upset local output and price stability.

“The bank is hopeful that its rate rises will bring the [inflation] beast back under control by the end of the year but is not so optimistic that it will hit its target of 4 percent,” the magazine reported.

“Tetangco showed he is not afraid of being a little heavy-handed when the situation demands it, with a 50-basis-point rise in July to combat the ‘second round’ effects of rises in oil and commodities prices,” it added.

This pertained to the 0.5-percentage-point rise in the BSP’s policy rates on July 17, intended to tame inflation that in August would climb to a 17-year high of 12.5 percent.

Global Finance said the markets responded positively to the rate hike as the peso—then on a downtrend—gained strength.

“However, with inflation increasing steadily in the seven months prior to June, arguably the BSP could have shown its resolve a little sooner.

“Fortunately for Tetangco, GDP growth is slowing only moderately despite the rate rises and remains above five year-on-year,” the magazine said.

Tetangco’s performance was given the same rating as the central bank governors of Australia, China, Malaysia and South Korea.

They were outperformed by the central banks of Singapore and Taiwan whose heads were each given an “A” rating.

Ben Bernanke of the US Fed, however, was given a “C”, who was seen to have “painted himself into a corner by trying to please Congress and the financial markets instead of getting ahead of the curve and keeping inflation under control.”

“The Federal Reserve has been counting on slower economic growth to bring inflation down as it pumps liquidity into the fragile financial system to avoid a meltdown. The main worry for the US economy, however, is the lack of price stability,” the magazine added.

None from the Americas and from Europe received top grades this year and the central banks of India, Indonesia and Japan were not rated as their central banks reported changeovers.

With Singapore and Taiwan receiving “As”, Asia as a whole performed better than counterparts elsewhere, the magazine said.

work hard for the money

Peso slips back to P49.50:S1 on dim economic outlook
by Erik dela Cruz/BMirror/12.02.08

THE peso fell back to P49 per dollar on Tuesday as the global economic outlook deteriorated and investors to dump assets deemed risky, dealers and analysts said.

The peso opened on a weak note as stock markets around the region slumped on news that the US—a key market for Asian exports—has entered recession in December 2007.

Dollar sales by the Bangko Sentral ng Pilipinas (BSP), however, prevented a sharper fall of the peso, dealers said.

The peso hit a one-week low of P49.51 before closing at P49.50, weaker by 54 centavos than Friday’s close. The local unit lost most of its gains last week, its best weekly performance in four months.

A total of $582 million changed hands compared with Friday’s $616.90 million.

“Investors liquidated higher risk emerging-market investments following heavy losses on Wall Street,” said treasury vice president Lito Biacora of Bank of the Philippine Islands.

US stocks tumbled on Monday after more data suggested further weakening of the US economy and the National Bureau of Economic Research said the economy officially went into recession in December 2007.

“The BSP was in the market selling dollars at around P49.50,” a dealer said.

With the BSP’s continued intervention, the dealer said any weakness of the peso is likely to be “limited at the 49 level” in the coming days.

Jonathan Ravelas, chief market strategist at Banco de Oro Unibank, said he expected the peso’s weakness to be temporary given expectations of more foreign-exchange inflows this month.

“I’m still looking at 48.50 to 49 levels within the week,” he said.

Filipinos abroad are expected to send home more money for the Christmas shopping of their relatives. The surge in supply of dollars is expected to prop up the peso, dealers said.

labor of love

Labor migration to stay strong
Estrella Toress/BMirror/12.02.08

AMID the global financial crunch, the United Nations-attached International Organization for Migration (IOM) appealed to countries to keep their doors open to migrant workers, but also advised labor-sending states to build industries at home and thus generate jobs for their citizens.

The IOM’s 4th World Migration Report, “Managing Labour Mobility in the Evolving Global Economy,” indicated that labor migration will remain strong, human mobility having become a life choice influenced by disparities in demography, income and employment opportunities across regions.

The IOM report noted that half of all the migrant workers, or 49.6 percent of the total 200 million, are women. Their total remittances through official channels have reached $337 billion in 2007, a 99-percent increase from 2002 figures.

The Philippines remains to be the third-largest source of migrant workers with 8.2 million, next to China and India. But the number of Filipino migrant workers is relatively the highest as a ratio of total population—more than 10 percent of the more than 80 million Filipinos, compared with 40 million or 2.9 percent of the Chinese, and 20 million or 1.9 percent of the Indian population.

“The international community made some very important choices in the last century to facilitate the development of the global economy by allowing the free movement of capital, goods and services. The inevitable consequence of that choice is human mobility on an unprecedented global scale. But for all countries, matching the subsequent supply and demand in an international labor market remains a critical challenge,” said Gervais Appave, coeditor of the IOM 2008 report.

It said that in the next 50 years, industrialized countries also competing for highly skilled migrants will also run out of much-needed low- and semiskilled workers, thus prompting the increase in demand for these skilled workers coming from developing countries.

This has been largely due to “an increasing scarcity of local workers available or willing to engage in
low- or semiskilled employment such as in agriculture, construction, hospitality or domestic care,” said the IOM report.

The demographic trends show that without immigration, the working-age population in developed countries is expected to decline by 23 percent by 2050.

By 2050, Africa’s total work force will triple from 408 million in 2005 to 1.1 billion; while China and India are likely to account for 40 percent of the total global work force.

The IOM said too much outmigration should prompt labor-sending economies to create jobs at home to prevent their economies from collapsing.

“What we are witnessing in countries of varying levels of development is a reemergence of low- and semi-skilled temporary labor-migration programs in a bid to square the needs of an economy and a labor market, while minimizing any political backlashes to increases in migration,” says Ryszard Cholewinski, coeditor of the 2008 IOM report. He stressed, however, that “the strategy can only work if there is a complementary vision to develop the human resources of any labor force and to adequately protect the rights of migrant workers participating in such programs.”

The IOM said rich economies should adopt flexible, “front-door” labor-migration policies that meet their own individual labor and skill needs.

“These types of policies are especially important during downturns in the global economy, such as the one we are witnessing today. The Asian financial crisis of the 1990s showed that even in times of economic hardship, there is still a structural need for migrants,” Appave argued.

He stressed that “the world is on the move; there is no turning away from that. If we harness that mobility through policies addressing both human and economic needs, many of the migration anomalies of the past can be overcome, and we would see real progress when we talk about global development.”

The IOM noted that allowing the entry of migrant workers is inevitable for many developed countries, as their population is expected to decline by 23 percent from 741 million to 571 million by 2050.

At the same time, the outward migration policy for many developing countries in Asia is expected to rise by 40 percent from 2.21 billion in 2005 to 3.08 billion in 2050. “ Without emigration, it would rise to 3.12 billion.”

“Over next four decades, the developing world can easily be the source of as many people of working age as are needed in developed countries with decreasing populations of working age,” said the IOM report.

infuse to confuse

Salceda bats for P44-B infusion to rural economy, agriculture
Claudeth Mocon/BMirror/12.02.08

ALBAY governor and presidential adviser Joey Salceda is batting for a P44-billion fund infusion to the rural economy through government investments in the provinces and agricultural sector as a means of easing the impact of the expected global recession.

“This would be the biggest intervention of the government in response to the global economic crisis,” Salceda said in a briefing with media at the Metrowalk facility in Ortigas, Pasig City.

Salceda, who was once the head of a research team for a Swiss bank, said the government’s stimulus in the countryside would be much bigger if the reinvigorated reforestation program pushes through with a P5-billion initiative fund next year to shield the country from global warming.

Salceda said all these initiatives are intended to create wealth and purchasing power in the countryside with assistance to the farmers and the production of cheap and abundant food for all once the effects of the global financial meltdown start to set in during the first quarter of 2009.

Next year, he said, the Department of Agriculture has a budget of P45 billion and the National Food Authority has a contingency provision for a P32-billion yearly loss, which increases the loss coverage from P8 billion with additional P24 billion.

Salceda said the incremental loss provision of P24 billion will go to farmers’ assistance with P8.5 billion and to consumers’ subsidy (for the poor) with P14.5 billion.

He said there would be more aggressive palay procurement next year, of which P17 billion is set aside to buy palay at P17 a kilo.

Salceda said P20 billion of the 2009 agriculture department’s budget is for subsidy to food producers, of which P10 billion is for the so-called FIELDS program, which involves more infrastructure in irrigation, storage and farm-to-market roads, among other things.

Thus, the government will be able to put food on the table in every Filipino household while the economic storm rages around the Philippines, he said.

Salceda also recently espoused the idea at the 150th general assembly of the Foundation for Upgrading the Standard of Education (FUSE) at the Learning Center for Teachers in the Pearl of the Orient Tower Condominium, Roxas Boulevard, Manila.

Salceda said the government has also allocated P2 billion to help Philippine agriculture exports find markets in Japan after the implementation of the Japan-Philippines Economic Partnership Agreement.

oh my gas!

Oil companies roll back LPG prices by P4/kilo
by Paul Anthony Isla/BMirror/12.02.08

HOUSEHOLDS will feel further relief from having to pay for expensive liquefied petroleum gas (LPG) prices, as oil companies announced on Tuesday they cut the price of cooking gas by as much as P4 per kilo, or P44 for an 11-kilo cylinder.

In a stakeholders meeting, oil executives of Petron Corp., Pilipinas Shell Petroleum Corp., and Total (Philippines) Corp. said the LPG-price drop is due to the $153.50 decrease in the international contract price of LPG.

The Department of Energy (DOE) monitoring noeted that LPG has dropped to $336.50 per metric ton in December from $490 per metric ton in November.

Virginia Ruivivar, Petron public affairs manager, said the drop in the international contract price of LPG translates to about P7.50 per kilo. “We expect to reflect on a gradual basis the drop in LPG. We will also try to do it weekly as we can. Since we still have an inventory of high-priced LPG,” she added.

Energy Secretary Angelo Reyes called on oil companies to an industry stakeholders meeting to discuss current world oil prices.

As of December 1, the DOE monitoring said Dubai crude averaged $47 per barrel this month from $50/barrel in November.

It added that Mean of Platts Singapore (MOPS)-based unleaded averaged $45/barrel this month from $48/barrel in November, while MOPS-based diesel averaged $68/barrel from $74/barrel in November.

Most of the time, we follow what the trend of Dubai is. But our cost, since we have an inventory of one-and-a-half to two months, usually have lags,” said Ruivivar.

She added that Petron, for instance, would incur more than P2.3-billion loss for the remainder of the year, which is actually the P4.3-billion inventory loss the company expects to incur due to the rollbacks.

“And effectively the P4.3-billion loss will wipe out the first half income of P2.3 billion. For Petron, we are even actually projecting to end the year with a net loss, as of this time,” Ruivivar said.

Amid all of these consultations, Fernando Martinez, Eastern Petroleum chairman, said there are still claims for more rollbacks and appeals to stagger or hold prices.

“But it seems that there is either a lack in explanation or some just do not want to accept reality. But we can see companies no longer getting good profit margins and that some even incur more losses,” Martinez said. He pointed out that there are lot of people who always seem to be dissatisfied with the price cuts and even showing of financial statements industry stakeholders have done.

“Some must also be reminded that the oil industry is deregulated. And thus, there is also a need to put a stop to threats or challenges for us to open our books,” said Martinez, adding that their financial books are regularly examined by the Bureau of Internal Revenue.

“With this year’s experience, no one in the industry would have ever expected that world oil prices would skyrocket and nosedive as fast as it has,” Toby Nebrida, Chevron’s corporate communications manager, said. He added that losses have been incurred when prices were going up and yet oil companies remained operating to provide quality, safe, reliable and dependable fuel supply.

“In fact, there are still some losses that have to be covered, but we are working to remain in the market,” Martinez said.

Joey Cruz, Flying V spokesman, also warned that Saudi Arabia earlier spoke that international crude prices will hit $75 per barrel. “Saudi Arabia’s pronouncement could result in an increase in local pump prices by early next year amounting to about P40 to P42 per liter,” Cruz said.

recess. break

Gov’ts weigh options; US in recession
BWorld/12.02.08

THE UNITED STATES economy has been in a recession for a year, the nation’s business cycle arbiter declared on Monday.

This development was followed by fresh actions worldwide yesterday to combat the financial crisis, with Australia slashing interest rates, European Union ministers seeking ways to boost investment and consumer spending, and the Bank of Japan moving to ease the plight of Japanese firms squeezed for cash.

Asian stocks tumbled and European markets got off to a shaky start as fear about the economic outlook gripped investors.

Finance ministers from all 27 EU nations gathered in Brussels to discuss a European Commission proposal for governments to spend an extra 1.2% of GDP.

The Reserve Bank of Australia cited the perilous state of the global economy when it cut the benchmark cash rate one percentage point to 4.25%.

Britain, the euro zone and New Zealand will almost certainly cut rates later this week. In addition to more rate cuts, the US Federal Reserve is weighing other responses with its benchmark rate nearing zero.

The Bank of Japan unveiled ¥3 trillion ($32 billion) in new measures to ease the squeeze in corporate funding. The BOJ will accept a wider range of corporate debt as collateral and launch a new scheme to make it easier for banks to make loans.

The global crisis has piled pressure on policymakers to ramp up their response. Fed Chairman Ben Bernanke said on Monday further cuts in the US benchmark rate below 1% were "certainly feasible."

Most of Europe and Japan are already in recession, and the United States has officially joined the club.

The National Bureau of Economic Research declared that the US recession began in December 2007. The current downturn, which many economists expect to persist through the middle of next year, is already the third-longest since the Great Depression.

Hopes that consumers may ride to the rescue appeared to be optimistic.

US post-Thanksgiving sales, which mark the traditional start to the holiday shopping season, looked less dire than feared but that did not stop investors from dumping shares of retailers. Analysts warned that while stores were crowded, the sales growth may have come at the expense of profits and overall demand remained weak. — reports by Reuters

spend, spend, spend

Spending boost not necessary
by Alexis Douglas B. Romero/Bworld/12.03.08

THE GOVERNMENT does not see any need to increase spending beyond current targets, with officials claiming the Philippine economy is unlikely to slip into a recession.

National Economic and Development Authority (NEDA) Deputy Director-General Augusto B. Santos and Budget Secretary Rolando G. Andaya, Jr., reacting to a United Nations proposal that countries spend more to limit a global slowdown, said doing so would mean higher borrowing costs and could affect investments.

In the World Economic Situation and Prospects 2009 report, the UN economists said "fiscal policy stimuli" equivalent to up to 2% of a country’s gross domestic product (GDP) would "prevent the world economy from falling into a much deeper and more prolonged recession."

The NEDA’s Mr. Santos said "In the case of the Philippines, we are ... [already in] deficit spending and that is [equivalent to] 1% of the GDP or P75 billion. If we double this, probably the Philippine economy cannot afford that."

"We can go to higher deficit spending and fiscal stimulus if the Philippine economy is going on (sic) a recession but we are not ... If we go to higher deficit spending, that may hike interest rates and that would dampen productivity and economic growth."

Mr. Andaya agreed, saying: "We have to balance things. That (the UN proposal) would mean we would have to borrow more and that would increase our debts. Besides, interest rates will also go up. We do not need that because we are not in recession."

Albay Governor Jose Ma. "Joey" S. Salceda, a Palace economic adviser, urged caution.

"If we are in a surplus, that (a fiscal stimulus ) would be easy, that will be a no-brainer. But given the financial meltdown and lower global trade, then we need to skillfully calibrate any stimulus package," he told BusinessWorld.

"Interest spike driven by deficit spending ... [will be] short-lived and counterproductive because it will kill private corporations’ outlay ... who would invest if interests (rates) are high?," he added.

Mr. Salceda, a former legislator, market analyst and presidential chief of staff, said "the window for a fiscal stimulus has narrowed" because of the global slowdown.

Finance officials, meanwhile, said the government should not lose sight of maintaining sound fiscal performance.

"Fiscal stimulus is the antidote to recession. That is why we have increased our deficits for next year," Finance director for fiscal policy and planning office Ma. Teresa S. Habitan said.

"[But] It really depends on where you are spending. We should have more quality spending. We are spending more for infrastructure to create more employment and spending for public services to cushion the poor from the negative impact of a slowdown."

The government has targetted a fiscal gap of P102 billion for 2009, equivalent to 1.2% of GDP. This is an increase from an earlier target of P40 billion, or just 0.5% of GDP.

It also expects to balance the budget by 2010.

Filomeno S. Sta. Ana III, coordinator of the Action for Economic Reforms, noted that the main problem was efficient tax collection.

"I am okay with deficit spending, especially considering the economic downturn, to finance human development and infrastructure. But this should be accompanied by a structural improvement in tax collection," he said.

University of Asia and the Pacific economist Victor A. Abola said highly indebted countries cannot afford to spend 2% of their GDP.

"That is a very general rule that does not fit every country. They may fall into a debt spiral, which will constrain future growth. On the other hand, some low-debt nations like China can overspend even more than 2% without serious repercussions.

"As for the Philippines, we still have high debt ratios relative to peer-rated countries. Thus, we should proceed with caution ... [But] I think it is still okay for us to have a deficit of 1.5% to 2% without endangering the improvement of our debt ratios." — with a report from Ruby Anne M. Rubio