'An island of calm'

There is no denying that the Philippines ended 2008 fairly unscathed by the global financial crisis that hammered the major economies. The country was hailed as a virtual “island of calm” amid what many described as a perfect economic storm brewing across the world.

The local banking system displayed some resilience with bank lending continued to grow at double-digit pace. In October, a month after the global financial crisis exploded, central bank data showed outstanding loans of commercial banks increasing by 24.8 percent from a year ago.

Hit mainly by a drop in gains from trading of currencies and bonds, which slumped due to an extreme risk aversion by investors worldwide, most banks reported lower profits in the third quarter of last year while one major lender even suffered a net loss. But in general, according to the central bank, the whole industry was sound and well-capitalized to withstand the turmoil.

There were more than a dozen rural banks that collapsed last year but their problems, according to regulators, had nothing to do with the global financial crisis.

Mismanagement and unsound banking practices led to the closure of these small institutions which account for a very small fraction of the banking industry’s total assets.

Moderated growth

By the end of September, the banking system had total resources of P5.6 trillion, growing by 11.2 percent from a year-ago level of P5.1 trillion. The number of banking institutions fell to 835 from 852 a year ago, reflecting the continued consolidation of banks as well as the exit of weaker players.

There are 38 universal and commercial banks operating in the country and they continue to account for almost 90 percent of the total resources of the banking system.

The industry’s asset quality continued to improve, with the non-performing loan (NPL) ratio easing further to 4.5 percent as of end-September from 5.7 percent a year ago.

Banks’ level of NPLs dropped 8.6 percent while their combined loan portfolio expanded by 14.7 percent.

Public confidence in the banking system remained strong as indicated by the 13.4-percent rise in total deposits held by banks to P2.9 trillion as of end-September.

Ours is a small banking industry that has yet to fully embrace financial innovation and has remained conservative despite a series of banking reforms put in place by the

Bangko Sentral over the last five years. But because of the inherent conservatism of banks and the regulators’ phased-in approach to embracing financial innovation, the industry’s exposure to troubled international financial institutions has been minimal.

Positive assessment

The latest assessment from credit rating agencies on the Philippines is positive. They agree that the country’s fortified external payments position – as reflected in the build-up in official foreign exchange reserves – is also helping the domestic economy weather the global financial crisis.

The statement was made shortly before the National Government returned to the offshore bond market early this month to raise $1.5 billion. The offer was oversubscribed and what was remarkable was the fact that the government was able to raise money for its heavy infrastructure spending this year at a time when it is supposed to be difficult to borrow.

Curbing deficit thru asset sale

The National Government likely ended 2008 with a budget deficit below the P75-billion ceiling for the year. But it was not because tax collections had significantly improved.

The deficit would have been larger were it not for the sale of the government’s remaining stake in oil refiner Petron Corp. in December, which generated additional revenue of P25.7 billion. Still, we think the government deserves some commendation for its effort to keep the deficit within the ceiling despite having to increase spending, a necessary move to keep local economy moving, albeit painfully slow with the ongoing global financial crisis.

The Arroyo administration has promised to pump-prime the economy by increasing spending in infrastructure and social services this year. But it is sticking to its goal of balancing the budget by next year and remains committed to implementing public-sector fiscal reforms.

What lies ahead?

The question now is what lies ahead for the country’s financial sector in the next 12 months. We have heard optimistic statements from many pundits, and Bangko Sentral Governor Amando M. Tetangco Jr. himself thinks the country is unlikely to plunge into a major financial crisis that may force it to seek support again from the International Monetary Fund.

The figures don’t lie and they certainly point to a financial sector that is safe and sound. But in the back of our minds, we continue to ask how strong our banks, and the local financial sector in general, are to deal with a crisis that may drag on.

More bad news

The latest bad news is that the US recession will probably be the longest since World War II. That is according to a Reuters report which cited the results of a recent Blue Chip Economic Indicators poll of 52 economists employed by some of America’s largest and most respected manufacturers, banks, insurance companies, and brokerage firms.

Most economists expect the recession in the U.S., one of the Philippines’ biggest export and labor markets, to officially end in the third quarter of this year. What this suggests is that financial markets may remain edgy over the next six to nine months.

As the central bank governor himself has warned 2009 is a critical year. No one knows how much deeper or how much longer this downturn will be, he said, so there will continue to be challenges.

But he continues to offer an optimistic view on the Philippine financial sector.

The challenge

The crisis surely won’t go on forever, he pointed out. And we agree with him when he said in a recent speech at the membership meeting of the Rotary Club of Manila that “what we need to do now is to make the best of what we can at this time, try to ease some of the pain currently experienced, build up safeguards, and prepare for the eventual upturn.”

The challenge is for us, individually and collectively, to remain calm as the economic storm passes through and as we parry the inevitable fallout. However, this challenge is now becoming tougher with the escalating noise of local politics creating unnecessary and unproductive tension and distractions.

Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. For a compilation of previous articles, visit www.BizlinksPhilippines.net.