There’s money in this country!

Believe it or not, this country's awash with cash. The problem is the absence of a good investment outlet. The stock market's dead and until corporate governance and transparency improves, no one wants to have anything to do with commercial papers. What is a cash rich investor to do?

Over the past two weeks, government had an offering for what was supposed to have been three-year retail treasury bonds with an effective yield of over 15 percent. They were hoping to raise P5 billion but when they closed the offering, they had subscriptions of over P20 billion.

This was supposed to be designed for the small investor, which is why anyone could buy as little as P5,000. But I heard they opened it up to all comers and the big boys gobbled up as much as they could. In the absence of other viable options for your money and given the dim medium term scenario, it is logical to think that this is as good as it gets.

This means government is the only action in town for all that liquidity. Given the yawning budget deficit, government is expected to have a voracious appetite for cash. Technically, government will never go bankrupt so there is this fiction that buying government bonds and treasury bills is 100 percent safe. I might add, hopefully, because heaven help us, otherwise.

Because the banks and other big investors have nowhere to go, it is not surprising that they joined the mad rush to get some of these supposedly retail bonds. I think that sort of defeats the avowed purpose of giving middle income Filipinos an opportunity to earn more than the 2-3 percent banks pay for savings deposits. The National Treasury should do another one but this time, have a limit on the amount any one individual can buy.

There's money in this country… but no interesting investment outlets. The problem with entrusting all that money to government is, they are likely to waste it.

Tax on dollar deposits

The Department of Finance wants to raise the tax slapped on interest earnings of dollar deposits to 10 percent from the current 7.5 percent. I wonder if this is the right thing to do at this time when the peso is in danger of falling to depths unknown. During the last crisis, these dollar deposits served as some kind of secondary reserves. Even BSP Governor Paeng Buenaventura was very thankful we had this cushion. Dollar placements in banks stand at about $12 billion or about as much as the BSP reserves.

Now the DOF apparently couldn't care less. Supposedly, the DOF is following a recommendation of the International Monetary Fund (IMF) to equalize the tax on peso and dollar deposits. While that looks neat on paper, peso and dollar deposits are two different things. We can do what we want (up to a point) with peso deposits because mostly, those holding pesos have no other choice. But with dollars, there are too many options available in Hong Kong and Singapore or even the United States at the click of a computer mouse.

As usual, the IMF economists are being bookishly theoretical. Given IMF's horrible mistakes in their prescriptions in the region, it is a mystery why our DOF bureaucrats sheepishly follow them.

Actually the IMF wanted to raise the tax on dollar deposits to 20 percent. I suspect the IMF just wants the foreign offshore banks to grab all those dollar deposits from us. It is no secret that their painful but often ineffective remedies in the Third World are designed to protect foreign banks from suffering the just rewards of the banks' own stupidity and often enough, scandalous brushes with what they call moral hazard in the granting of loans.

IFC

Speaking of the IMF and the World Bank, I got a reaction from an alumni of that World Bank subsidiary, IFC, which I wrote about last week. Here is that comment.

I was interested to read your remarks about International Finance Corp., because I worked there in the 80s. During that era, IFC was a small, very tightly-knit organization with (if I may say so) the cream of the crop from the entire World Bank group. It had only 200 officers, all of them smart and business-savvy; it was a congenial and stimulating place to work in (and personally I learned many skills there which have been very useful in my later business endeavors).

IFC played an important role in the development of strong private-sector economies in South Korea, Malaysia, Singapore, and Thailand, among others. Around the world, former IFC staff have been influential in their respective countries (developed countries included) as financiers, entrepreneurs, and captains of industry.

Unfortunately, IFC started getting politicized in the early 90s, and slowly became over-run with bureaucrats and academicians. IFC alumni of earlier years can only shake their heads at what has happened. The World Bank itself (IFC and the World Bank are sister organizations, though the latter is much larger) seems even more removed from reality.

About a year ago, I participated in a World Bank-sponsored "community building" conference for LapuLapu City (Cebu). First the World Bank people invited the city stakeholders to develop a vision of how they wanted it to be in 20 years. This took a week of arguing over wording and phraseology, and came back with predictable pie-in-the-sky ideas. Like… in 20 years LapuLapu wanted to be a leading tourism destination, a financial center, and a light manufacturing giant, but also wanted a vibrant downtown business center, a highly-educated and healthy populace, and world-class infrastructure and facilities. In brief, the vision for LapuLapu was that it would combine the best of Hong Kong, Aspen, and Los Angeles in one small island.

The World Bank did not seem at all concerned that some of these goals were in practical terms self-contradictory, given the limited resources and space available. No effort went into encouraging the participants to make any hard decisions about what must be prioritized and by default what must be sacrificed in order to achieve their vision. Most egregiously, no link was ever made between idealized vision and practical action, i.e., what specific measures must be done stage by stage to realize the ultimate goal.

What the World Bank wanted to teach community members was how to "visualize goals." What it in fact taught was how to daydream. That little LapuLapu City conference was an excellent example of the other-worldly thinking that now pervades the World Bank. As an institution, it has become an irrelevance, except as a source of easy money tied to meaningless policy concessions.

PS - I have even more acerbic remarks about the IMF, but that’s another matter.

Useless

Here's something from the ever reliable Dr. Ernie Espiritu.

Son: "Dad, did you go to church when you were little?"

Dad: "Yes, son, every single Sunday."

Son: "I thought so. Bet it won’t do me any good either."

(Boo Chanco's e-mail address is [email protected])