PHILIPPI NE INSTITUTE FOR DEVELOPMENT STUDIES Surian sa mga Pag-aaral Pangkaunlaran ng Pilipinas
Vol. XXIII No. 2
Editor's Notes In a regular banking scenario, banks extend credits to businesses to spur economic growth. When the economy enjoys the confidence of investors, there is an influx of foreign capital. However, when disturbances like an economic crisis, a market reform or even a change of government occur, the financial sector becomes affected and may result in a high level of nonperforming loans (NPLs). This makes them unable to maintain the same level of lending thereby affecting interest rates and the investment environment. Asset management companies (AMCs), whether publicly or privately initiated, come into the picture to work on erasing NPLs. Banks unload their NPLs to AMCs, clean up their books and continue with their business. In some countries, AMCs have been successful in bringing down the NPLs of banks. The same cannot be said of the Philippines though. Dr. Gloria Pasadilla and Ms. Akiko Hagiwara give an overview of the situation in this DRN issue. There is hope, however, in dealing with the problem if the Corporate Recovery Act (CRA) will be passed. Intended to modernize the judicial and legal system and speed up NPL disposal, it will also increase the price offered by AMCs for NPLs. Until the passage into law of the CRA, the country’s NPLs will remain a problem. On a brighter side of the news... PIDS has a new president in the person of Dr. Josef T. Yap, a former senior research fellow at the Institute. Dr. Yap embodies the young blood in the Institute and his expertise in econometric modelling and macroeconomic policy is expected to bring PIDS to another level of heights in the policy research area in the years to come. DRN
DEVELOPMENT RESEARCH NEWS March - April 2005
ISSN 0115-9097
Resolution of nonperforming loans: do asset management companies matter?
H
igh nonperforming loans (NPLs) are not the problems of banks alone. Across many countries—from developing to developed economies and from East to West—the occurrence of huge bad loans and assets in the financial sector gets governments involved in a big way. They become actively involved in the resolution process such as the injection of capital to the failing banks, setup of asset management companies (AMCs) or direct purchase of NPLs. This paper discusses the causes and costs of NPLs as well as efforts at curbing their growth, and focuses on the role of AMCs across different countries in Asia. It then draws some policy lessons for the Philippines’ decentralized resolution strategy of letting Special Purpose Vehicles (SPVs) solve the problem of the country's high NPLs.
What's Inside 8 Two tales of perspectives for 2005 9 All about power 10 [Corporate News] Change of reins at PIDS: From Lamberte to Yap
Gloria Pasadilla and Akiko Hagiwara* Broad overview of NPLs Why do banks accumulate NPLs? Several factors contribute to the deterioration of the loan quality of banks. Some point to macroeconomic factors like the Asian crisis; others to policy lending by banks, usually under the behest of the government; still others link the weaknesses in bank regulations and poor bank management. Macroeconomic factors Studies point to financial liberalization, lax monetary policy and capital inflows as factors that contribute to increased liquidity in the economies. Increased liquidity, in turn, affects the lending behavior of banks and encourages them to engage in reckless lending, often leading to asset bubbles, particularly in equity and *
Pasadilla is a Research Fellow at the Philippine Institute for Development Studies and Hagiwara is an economist at the Asian Development Bank.
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DEVELOPMENT RESEARCH NEWS
Figure 1. NPL Ratio peaked around Crisis Time (Peak = 100)
nesia and Thailand in 1998. Likewise, the Russian ruble’s depreciation in August 1998, which affected the exports of transition economies with extensive trade links with Russia, also led to some high profile corporate bankruptcies and huge banking problems. Average NPL ratio in these economies reached 30-50 percent of total loans.
100 90 80 70 60 50 40 30 20 10 0 t-2
t-1
Crisis Time
t+1
South East Asia
t+2
T+3
t+4
March - April 2005
t+5
Central Asia
Source: National sources. South East Asia includes Indonesia, Korea, Malaysia, Philippines and Thailand. Central Asia includes Azerbaijan, Kazakhstan and the Kyrgyz Republic. The crisis time is 1998 for South East Asia and 1999 for Central Asia. Peak NPL ratio is normalized to 100.
real estate prices. This is the experience of countries like Taiwan, Japan and Korea, to cite a few. The situation poses no problem so long as foreign inflows keep coming and there is general confidence in the economy. The moment, however, that something happens that affects market expectations—either due to change in government or revised macroeconomic expectations—the bubble bursts and, with it, the inflated asset picture of banks deflates. Banks are left holding a bag of bad loans, often comprising of unfinished real estate projects or unsold assets that can no longer command the same high price prior to the bursting of the bubble. With huge bank capital tied up to bad loans, banks are not able to maintain the same level of lending that helps improve the economy’s investment picture. The bank’s crucial role of financial intermediation, pooling savings and lending them for some interest rate returns, is hampered. The experiences of the economies affected by the East Asian and the Russian crises are cases in point (Figure 1). During the Asian crisis, along with huge currency depreciations, the NPL ratio of five crisishit countries reached its peak, going as high as 50 percent of bank loans in Indo-
Transition economies and policy lending Policy lending takes place in different forms and in different economic sectors. What is commonly observed, however, is that a large amount of loan is usually directed to socially prioritized sectors without appropriate credit appraisal. In India, for example, the bank obligation to supply credit to priority sectors led borrowers to expect that, like a nonrefundable state subsidy, bank loans need not be repaid. In China, state-owned banks have long acted as if they were fiscal agencies, providing poor follow-ups once a loan was disbursed. In many transition economies that relied on directed lending programs, heavy bank losses have resulted from poor quality of assets. Weak regulation: missing rules Effective prudential regulation and supervision of banks are essential to the financial stability and efficient operation of any economy because the banking system plays a central role in the payments system and in the mobilization and distribution of saving.1 However, until the Asian crisis, many developing countries lacked appropriate prudential regulations. Even where the rule appears adequate, the implementation has often been inconsistent, leading to a "moral hazard" behavior by the banking and corporate sectors. In addition, lack of adequate exit strategy for banks and businesses prolonged the 1
The Basel Committee on Banking Supervision has formulated 25 basic principles that need to be in place for a supervisory system to be effective. The principles include 1) minimum capital adequacy, 2) asset evaluation and adequacy of loan-loss provisions and reserves, 3) prudential limits to restrict bank exposures to single borrowers or groups of related borrowers, 4) limit on connected lending, and 5) independent audit, among others.
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malaise in the financial sector. Lack of efficient and functioning insolvency laws or bankruptcy and foreclosure laws to support asset recovery and to deal with a distressed corporate sector not only accelerated the NPL accumulation but also set a barrier in the efficient and swift disposition of NPLs.
March - April 2005
shows that the total Figure 2. NPL cost on Banks’ intermediation and cost to the budget is credit growth estimated highest for R eal C redit G ro w th China at almost 30 percent of GDP— 30 assuming that 20 20 percent of bad assets 10 are recovered— 0 20 40 60 -10 0 followed by Thailand -20 at 13 percent of its -30 GDP. The other crisis-40 hit countries have an -50 estimated fiscal -60 contingent cost of less N P L R atio , t-1 than 6 percent of their GDPs. Malaysia and Source: National sources, ARIC database, International Korea have pared Financial Statistics. down the contingent liability to a very manageable level of 4 percent after spending five years of effective NPL restructuring (see succeeding discussions). In all, Thailand and China’s individual contingent costs, which do not involve current but rather possible future cash flows, remained
Impact of NPLs Huge nonperforming loans have real effects on the economy through their negative effects on the banks’ intermediation capability. A simple plot of real credit growth with the previous period’s NPLs shows negative association (Figure 2). This negative credit growth was particularly significant during the post-Asian financial crisis period. Indonesia had severe disintermediation in 1999 while Thailand experienced sharp negative credit growth from 1998 until 2001. This suggests that when banks’ balance sheets are burdened with NPLs, their intermediation ability deteriorates. Banks become reluctant to extend credits, often resulting in credit crunch that in turn Table 1. Contingent liabilities from an NPL write-off affects investments and leads to Country Amount to be written off to lower economic growth. Besides the effects on bank intermediation, NPLs also have a significant implication on the fiscal sector through contingent fiscal liabilities. When push comes to shove, the government can, at times, end up in bailing the financial sector through recapitalization. The attempt to estimate the cost of such a scenario is shown in Table 1 with three cost scenarios for a government-led bank recapitalization. The second column shows the amount (in national currencies) that need to be written off if the financial sector (which includes the AMCs) were to achieve a five percent NPL ratio. Different asset recovery scenarios on debts (in banks and AMCs) are assumed in columns 3-5. Computation
Indonesia
maintain 5% NPL ratio
if 0%
(in billion of National
asset
Currency)
recovery
Estimated Cost of Write-Off (in % of GDP) if 20% asset recovery
if 50% asset recovery
130,526.70
8.11
6.49
4.05
Korea
27,147.86
4.55
3.64
2.28
Malaysia
16,292.52
4.52
3.61
2.26
129.68
3.22
2.58
1.61
878.64
16.17
12.94
8.09
1,074.22
2.07
1.66
1.03
Philippines Thailand India Bangladesh
179.30
6.61
5.28
3.30
Pakistan
135.64
3.97
3.18
1.99
of China
3,639.79
35.55
28.44
17.77
Kazakhstan
30.76
0.85
0.68
0.42
1.41
1.87
1.49
0.93
People’s Republic
Kyrgyz Republic Mongolia
43.61
3.54
2.83
1.77
Tajikistan
0.03
1.17
0.94
0.59
135.10
1.39
1.11
0.69
Taipei,China
Source: Authors’ estimate and national sources. Notes: Figures as of 2001 for Korea, Thailand, Pakistan, Tajikistan; the rest of the countries use end-2002 figures; figures include NPLs in AMC for PRC, Indonesia, Malaysia, Thailand, Korea, Kazakhstan, Kyrgyz Rep. and Mongolia while other countries include NPLs in banks only.
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DEVELOPMENT RESEARCH NEWS Figure 3. NPL ratio since the Asian crisis
significant based on their respective GDPs in 2002. These figures can become manageable, however, should the realization of contingent liabilities take place at a period when these economies have greatly expanded.
Efforts at NPL resolution Source: National sources and authors’ calculation. Gross Bank NPL ratio2 in Note: The economies are divided into two groups: Crisis-hit developing market countries (Indonesia, Korea, Malaysia, Philippines economies has generally and Thailand) and Central Asian economies. In this figure, the Philippine ratio is integrated in the solid declined since the late black bar but isolated as well in the white bar for 1990s (Figure 3). Gross comparison. NPL ratio peaked in 1998 in Asian crisis-hit countries while it reached its maximum in 1999 in the Central Asian economies.3 Across all countries, the decreasing trend in NPL has been brought about by a combination of various disposition strategies. In Taiwan, Pakistan and India, loan write-offs by banks have been significant. In Thailand, Korea, Malaysia and Indonesia, transfers of bad loans to government AMCs have helped bring down the NPL figures of banks. However, unlike the other Asian countries, the Philippines’ NPL ratio had an upward trend until 2001, and although it had stopped increasing due partly to the increase in total loans, the ratio remains in double-digit level unlike the other countries (apart from Thailand). Figure 4. NPLs in banks and AMCs (up to end of 2002)
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However, looking at the distressed loan ratio (NPL in banks and in AMCs over total loans), the problem remains significant, particularly in countries like Indonesia, Mongolia, and Kyrgyz Republic. In other countries where the AMCs have efficiently disposed of the transferred bad assets, NPLs have ceased to be a major threat (Figure 4). Evaluating NPL resolution: do AMCs matter? Factors affecting NPL resolution vary considerably across countries. The success or failure of NPL resolution cannot be attributed to only one. There are important institutional factors or political will or inherent business culture that need to be taken into account. This is, however, beyond the scope of this paper. Instead, this paper evaluates the restructuring exercise of each country by looking at the improvement of profitability of the banking sector and nonfinancial corporate sector in relation to the timing of the establishment of AMCs. Thereupon, the performance of AMCs themselves is assessed, in terms of their relative success in disposing transferred assets and in relation to their institutional design. From the experience of various banking crisis, countries have used AMCs to rapidly clean up the books of banks of bad assets. The usual procedure is that banks unload nonperforming assets to an AMC, clean up their books, and continue with its primary role of financial intermediation. The AMCs, either government- or privateowned, then dispose the acquired assets through a variety of means such as public auctions, resale of assets to original borrowers, joint ventures, securitization, or even running the acquired business themselves. Corporate and banking sector profitability The developments of profitability of the
Source: National sources and authors’ calculation. Note: Data are as end of 2002, except for Thailand whose data are as of end of 2001.
2 Net NPL/Total Loan can also be a useful measure. By subtracting any provisions set aside for the NPLs from gross NPL, this ratio would capture ‘real’ risks arising from the distressed assets. The trend of this measure, however, shows a similarity to that of the gross NPL. 3 A rise in NPL ratio in 2002 in Central Asian Region (CAR) economies is driven by the high NPL ratio of Tajikistan.
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banking and corporate sectors in various Asian countries around the time of an AMC establishment in Figures 5a and 5b suggest that the AMC was important for bank profitability, but not for corporate. Bank profits continued to decline until the setting up of an AMC. Subsequently, they stabilized after one or two years. Corporate sector profitability, on the other hand, continued to deteriorate a few years after the AMC establishment. This contrasting result may be due to the fact that most of the bad assets that were transferred to the AMCs came from banks and not from the corporate sector; hence, the negligible impact on corporate profitability. Moreover, the lag in the improvement of bank profits can also be attributed to the learning curve of most of the staff in the AMCs. AMC design and performance In terms of the institutional design of AMCs based on the presence of several factors considered as important for the AMC’s successful operation, six criteria to rate the eleven AMCs in Asia were identified (Table 2). These are: 1) funding availability (whether there are government guarantees or whether the available funds are adequate relative to the level of bad assets to be disposed); 2) management style (whether the AMC is willing to try new strategies such as joint ventures); 3) human resource (whether there is suffi-
March - April 2005
cient expertise); 4) objective (whether it is clear and nonconflicting);4 5) relative portfolio size;5 and 6) political will (whether the AMC has extrajudicial power to accommodate rapid debt resolution). These elements are supposed to capture efficiency, flexibility and transparency of the AMC.
Figure 5a. Profitability of banking sector around AMC establishment
Based on said criteria, the corresponding results were mixed. The AMCs in two countries (Korea and Malaysia) satisfied all
Figure 5b. Profitability of corporate sector around AMC establishment
Standard deviation Profitability
2.5 2 1 .5 1 0.5 0 t-3
t-2
t-1
t
t+1
t+2
t+3
-1 -1 .5 -2
Standard deviation Profitability
10 8 6 4 2
4
Typically, because of corporate restructuring objective as part of asset disposition, the AMC objectives become muddled in transition economies such as PRC and even in Indonesia and Thailand, resulting in slow NPL disposition. 5 Relative portfolio size of AMC intends to capture cases where big-sized bad assets invite political interference, thus affecting AMC performance negatively.
0 t-3
t-2
t-1
t
t+1
t+2
t+3
-4 -6
Source: DataStream Note: t indicates the year AMCs were setup. Profitability was computed as Pre-Tax Profit/Total Assets. Sample includes eight countries: PRC, India, Indonesia, Malaysia, Pakistan, Korea, Taipei,China, and Thailand. Solid lines are of one standard deviation.
AMC Rating 2
NPL Resolution Evaluation 3
Well Designed (5-6)
Unsuccessful/
Poorly Designed(1-2)
Korea (KAMCO,1997),
Indonesia
Malaysia (Danaharta, 1998)
(IBRA, 1997)
Hard to say (3-4)
Kyrgyz Rep. (DEBRA, 1996),
Pakistan (CIRC 2000)
Not yet resolved/
Mongolia (MARA, 1996),
and Thailand (TAMC
Insufficient time
and PRC (4 AMCs, 1999)4
2001)
Inadequate Information
Kazakhstan (Rehabilitation
India (ARCIL 2003) and
Agency, 1994)
Taipei, China (TAMCO,
to evaluate
t+4
-2
Table 2. AMCs and outcome of restructuring1
Successful/Mostly resolved
t+4
-0.5
2001)
Source: National sources and authors’ calculation. Notes: 1 Name of AMC and year of establishment are in parenthesis; 2 AMCs are rated on the basis of six criteria giving the same weight on each factor: a) funding, b) management, c) human resource, d) objective, e) relative portfolio size, and f) political will. 3 NPL resolution evaluation of the AMC was rated on the basis of cumulative cash recovery rate as percent of transferred asset and disposition rate. 4 The AMCs in China are Huarong, Cinda, Orient and Great Wall.
DEVELOPMENT RESEARCH NEWS
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six categories and were rated well-designed while the AMCs in five countries (Indonesia, Kyrgyz Rep., Kazakhstan, Mongolia and PRC) operated on rather shaky ground and were rated as poorly designed. Most of these cases satisfied the funding factor (i.e., existence of government guarantees) and also political will (extra power for AMCs, at least on paper). However, they seem to have been poorly managed (except for PRC where the AMCs are aggressively trying out joint ventures with foreign firms), lacked expert human resource, and suffered from conflicting objectives. There were four countries (India, TaipeiChina, Pakistan and Thailand) that were ambiguously categorized as intermediate based on the criteria. Government AMCs had been established in three of these countries rather recently (after 2001). The AMCs in India and Taipei-China, meanwhile, were private corporations. In other countries, most AMCs were set up as public institutions in the 1990s. As private institutions, the AMCs seemed to satisfy the management style and human resource elements and had no conflicting objectives. They, however, lacked strong political will (lack of extrajudicial powers) and adequate funding (no government guarantees).
...Analysis suggests that AMCs helped expedite the restructuring or resolution of the huge stock of NPLs. They also appear to be instrumental in stopping the deterioration of banking sector profitability. However, the design of the institution significantly affects its performance.
When tabulated against performance—as measured by cumulative cash recovery and disposition rate—the two well-designed AMCs achieved a relatively successful outcome, with a cash recovery rate of about 30 percent and disposition rate of 60 percent (Korea’s Korea Asset Management Company or KAMCO) and 100 percent (Malaysia’s Danaharta) of the transferred assets (as of third quarter 2003). Among the countries that were categorized as poorly designed, Indonesia’s Indonesia Bank Restructuring Agency (IBRA) succeeded in disposing 70 percent of its transferred assets and achieved 31 percent of cash recovery rate. This may be attributed to the fact that IBRA was among the first established AMCs and had a longer time to operate and dispose its assets. It was also given only from 1998 up to 2004 to
March - April 2005
dispose all the assets that it had acquired from Indonesian banks. The other AMCs in the category had shown low cumulative recovery rates during their operation. Pakistan seemed to be moving toward the creation of private AMCs while China was tapping the expertise of foreign investors, the outcome of which is still unfolding. The Thailand Asset Management Company (TAMC) in Thailand has disposed more than 70 percent of the transferred assets. Yet, it has achieved very low cumulative cash recovery due to its heavy reliance on the debt rescheduling strategy as a way of making NPLs graduate from nonperforming status. The TAMC, however, has an expected recovery rate of 48 percent based on a future profit-sharing scheme with the debtors. In sum, the analysis suggests that AMCs helped expedite the restructuring or resolution of the huge stock of NPLs. They also appear to be instrumental in stopping the deterioration of banking sector profitability. However, the design of the institution significantly affects its performance. More recent trend seems to lean toward the establishment of a private, instead of public or government-funded, asset management corporation that is strong in management and human resource but without political support or government funding. In some circumstances like the Asian crisis, however, the latter may be crucial. Implications for Philippine SPVs: some recommendations This paper shows that high NPLs hinder sound banking operation and can lead to real credit crunch. Moreover, they also impose fiscal contingent liabilities on the government, hence the importance of solving the financial sector’s NPL problems before they balloon to unmanageable proportions. Clearly, continuing GDP growth would definitely alleviate this cost, and could possibly make the problem marginal. Thus, one policy recommendation to solve NPLs is proper macroeconomic management that facilitates stability
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DEVELOPMENT RESEARCH NEWS
and growth. More importantly, AMC performance in different countries points to the institution’s significant contribution in expediting the resolution of NPLs. However, the varied performance of AMCs shows that their establishment is not, by itself, a panacea. There are preconditions and ancillary institutional setups in the country that facilitate their operations and render them more effective. They need to have independence from political interference, sufficient financial resources, adequate pool of experts, and well-focused objectives. Significantly, most successful AMCs were endowed with special legal powers to overcome the complex judicial procedures for asset recovery. In some cases, the special powers allowed them to directly foreclose on a property without passing through the courts. In the case of the Philippines, which opted for the private sector route through Special Purpose Vehicles (SPVs),6 there should be less concern about political interference and whether or not the government gave sufficient funding to the institution. Rather, the issue is whether the present institutional setup or legal framework is conducive to a speedy restructuring and resolution of the assets that would be transferred to the SPVs from banks. Sadly, the answer is clearly no. The country’s present judicio-legal framework for insolvency is notorious for being inefficient and time-consuming, with court cases lasting up to 10 years before assets get finally liquidated. If this is so, how useful would SPVs be? For one, they can help banks improve their balance sheet picture, thereby allowing banks to free up capital for lending. Presumably, too, the SPVs have staff with particular expertise at asset resolution and can, therefore, do a better job than banks whose staff expertise may lie elsewhere. Still, despite their presumed expertise, SPVs remain hemmed in by archaic insolvency and rehabilitation laws. Such constraints are definitely incorporated in the low purchase prices that the SPVs are offering the banks, in turn making the
banks reluctant to unload their bad assets. Meanwhile, the passage of the Corporate Recovery Act—which intends to modernize the country’s insolvency procedure and which could help expedite the work of the SPVs and, consequently, increase the offer price for banks’ bad assets—remains up in the air. What can be done? This study on the AMCs shows that a pro-creditor legal system was crucial for the rapid disposition of transferred assets. If the SPVs were to succeed in restructuring NPLs to a high value use, they will need to guard against dissipation of asset values due to delays in bankruptcy proceedings. Two important special procedures for SPVrelated cases, as second-best policy options, are hereby recommended. One , there should be a special bankruptcy court to attend to just SPV-transferred assets cases, and strictly observe time-bound proceedings, even in the appeal process. Two, equity limits for foreign investors should be waived within a limited period for SPVs that seek to rehabilitate soured businesses, in the same way that the Bangko Sentral ng Pilipinas (BSP) waived the limit on 100 percent foreign ownership of banks within a specific window of opportunity at the height of the Asian crisis. These measures can help increase the price offered by SPVs to banks because they help increase the residual value of restructured assets, thereby also encouraging banks to let go of their priced bad loans. Of course, the first-best outcome is for a new Corporate Recovery Act, with a provision for the establishment of a special bankruptcy court, to be passed very soon. An aggressive solution is what the increasing NPL in the Philippines calls for. The experience of many countries is that the problems from NPL do not disappear with time. Without political will aimed at solving them, the NPL problem only grows worse. DRN 6
SPVs are private sector-owned AMCs that normally buy bad assets and dispose of them for profit.
March - April 2005
This study on the AMCs shows that a procreditor legal system was crucial for the rapid disposition of transferred assets. If the SPVs were to succeed in restructuring NPLs to a high value use, they will need to guard against dissipation of asset values due to delays in bankruptcy proceedings.
DEVELOPMENT RESEARCH NEWS
8
Tales of two perspectives for 2005 Speaking before a number of Representatives and their technical staff at the Philippines' Batasan Pambansa, Dr. Josef T. Yap, a senior research fellow at the Philippine Institute for Development Studies (PIDS), predicted a slower gross domestic product (GDP) growth rate at 5.6 percent in 2005 for the Philippines vis-à-vis that in 2004. This is due to the absence of heavy election spending (2004 was a presidential election year in the country), continuing fuel price hike and the effect of higher taxes.
[Yap] urged the government to immediately address certain policy reform issues to ensure that the levels of positive growth rate achieved in 2004 will continue in 2005.
According to Yap, consumption spending will slow down to 5.2 percent from 5.8 percent last year and inflation will average between 5.5 and 6.0 percent in 2005, but there will be a distinct downward trend in the second half. The gross national product (GNP) forecast of 5.4 percent in 2005, on the other hand, is based on the scheduled higher debt service and expected slowdown in remittances of overseas Filipino workers (OFWs), he added. Similar to last year’s scenario, services and telecommunication sectors will be the main drivers of economic growth for the country, with the services sector expected to expand at 7 percent . The tourism sector is also likely to boom—albeit resulting from an unwelcome cause—due to the tsunami disaster that affected some tourist destination parts of Asia in December of last year. Initial investments in the mining sector will also greatly benefit the industrial sector in 2005.
March - April 2005
However, the agriculture sector is expected to drop at 3.5 percent this year because of the El Niño adverse effect in the first quarter of 2005. Manufacturing will also be adversely affected by the downturn not only in agriculture growth but also in the global electronics industry. To add, export growth rate will slow down due to lower growth rates in the US, Japan and China as well as to the negative growth of the global electronics industry. In the same economic outlook forum, Yap also noted that the relatively strong economic performance of the country in 2004 was a welcome help for the Philippines in weathering the prevailing negative global developments. He however urged the government to immediately address certain policy reform issues to ensure that the levels of positive growth rate achieved in 2004 will continue in 2005. One of these is the remaining set of issues in the fiscal reform agenda of the government. Although the legislative bill increasing the excise tax on liquor as well as the attrition law are already in effect, there are a number of fiscal reforms waiting in line such as: tax amnesty, rationalization of fiscal incentives, excise tax increase on petroleum products, franchise tax on telecommunication and the simplified tax system. The other policy reform issues refer to measures aimed at improving the environment for private investments as well as the set measures that are in line with the achievement of the Millennium Development Goals of the United Nations. All these reforms, when given weight, will push the Philippines toward medium-term growth. Also present at the forum was Albay Representative Joey Salceda, chairman of the economic affairs committee of the House of Representatives. According to Rep. Salceda, he sees a five percent growth for the country’s GDP in 2005, lower than last year’s 6.2 percent but which could still be considered as healthy. Consumption spending will also be more restrained this year at 4.9 percent as
DEVELOPMENT RESEARCH NEWS
compared to the 5.5 percent in 2003-2004, the solon added. For the GNP, Salceda said that it would grow by 5.2 percent while inflation will reach 6.8 percent . Government’s fiscal reforms will be the cause of the GDP’s slowdown for 2005 but, according to Salceda, this will lead to investment-led growth in 2006 and for the years to come. And while the fiscal crisis will be substantially resolved in 2005, the solon said downturns in some industries are to be
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March - April 2005
expected due to new taxes, increase in the tariff rates of the National Power Corporation, slowdown of the agriculture sector because of the onset of the El Niño phenomenon, and the low spending of the OFWs. There is however positive news from foreign investment inflows for IT-enabled, mining, infrastructure and energy sectors while the construction and food sectors are seen as the growth drivers for the year 2005. DRN
A PES highlight:
All about power Will there be a power shortage? Yes, there is a possibilty of another power shortage. According to Undersecretary Cyril del Callar of the Department of Energy (DOE), a power shortage is expected to occur between 2008 and 2010 given the existing demand for electricity if the government will not clean its act immediately. Federico Lopez of First Gen Holdings, meanwhile, cautioned that another power shortage is coming because of the vicious cycle of power crisis in the Philippines. Both Callar and Lopez spoke at the symposium titled “All about Power” sponsored by the Philippine Economic Society (PES) at the Development Bank (DBP) Auditorium in Makati City on January 13, 2005, with the PIDS, Corporate Planning Society of the Philippines (CPSP) and the Freidrich Ebert Stiftung as cosponsors. “For the Mindanao grid, there is already a shortage of 150 megawatts in 2005 while Luzon will start to require additional capacity as early as 2008 and would push
the demand to grow at an average annual rate of 6.7percent," Usec. del Callar added. Lopez added that the country would not be able to survive another power crisis since the National Power Corporation (NPC) already has a total of about P700 billion pesos in contingent liabilities from its independent power producers (IPPs). Moreover, Lopez said that the country’s power industry would need US$2-3 billion in the next five years for the construction of plants alone. And while construction and financing of the plants has been ongoing for the last 4-5 years, power shortages are already occurring in many parts of the country. Another panel speaker during the PES symposium, Liam Salter of the Worldwide Fund (WWF) International, however, questioned the accuracy of the projections of the impending power shortage. He said the track record of governments including the Philippines in projecting demand for electricity has not been appropriate and complete.
[A] power shortage is expected to occur between 2008 and 2010 given the existing demand for electricity if the government will not clean its act immeSalter suggested that a need for transparency is crucial. The Depart- ☞ 12 diately.
DEVELOPMENT RESEARCH NEWS
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THE CORPORATE N EWS
The Corporate News section includes brief accounts of inhouse PIDS activities, staff training and workshop results. It is intended to inform both the readers and PIDS staff members of the various activities participated in by the latter. There are stories that document the staff's effort to improve their knowledge and skills through trainings. Other stories highlight the personal interaction among the staff in the process of carrying out their individual tasks. Most of the time, the stories focus on serious matter while on certain occasions, they simply talk about the PIDS staff having fun. Whatever the topic is about, the objective is to show that each activity is meant to help the staff become better persons and performers in their respective fields so that they can contribute more to the attainment of the Institute's overall mandate.
Change of reins at PIDS: From Lamberte to Yap The Philippine Institute for Development Studies (PIDS) has a new president. Dr. Josef T. Yap, a PIDS senior research fellow, replaces Mario B. Lamberte starting April 1, 2005. Dr. Lamberte retires after serving the Institute for 11 years as its vice– president and five and a half years as its president.
Members of the PIDS Management Committee are present to witness the turnover of the PIDS presidency from Dr. Mario Lamberte to Dr. Josef Yap.
Lamberte will be greatly remembered for his visionary leadership and for establishing PIDS as one of the top policy research organizations in the country. He was with the Institute during its difficult years of financial crisis and fiscal instability and helped keep the boat sailing through rough waters. As president, Lamberte initiated countless research projects with both local and international groups that churned out almost 500 publications
March - April 2005
and studies in various formats and almost 400 public affairs activities through the years. On top of these, he spearheaded the launching of the Institute's new strategy for the promotion of research and networking—that of building the infrastructure for research and networking. He was also responsible for the creation of the Institute’s flag, the Filipino translation of PIDS and—his most recent accomplishment—making the Institute the building administrator of the NEDA sa Makati building where PIDS has been housed since 1978. The turnover ceremony held on April 4, 2005 at the Carlos P. Romulo Hall, NEDA sa Makati Bldg. symbolizes the changing of the guards at the Institute. In his remarks, Lamberte introduced Yap as a “young, vibrant, energetic new PIDS president who definitely has the capability to lead the Institute to higher grounds in the years to come.” In his acceptance speech, meanwhile, Yap says he has always considered Lamberte as the leader of the Institute even when he was still holding the vice-president position. Lamberte, he added, brought a sense of stability to the Institute that made them feel that as long as he is around, things would be alright in PIDS. Wellwishers led by Yap’s family—his wife Ermi Amor, daughters Bianca Larisa and Isobel Angelita, son J. Immanuel and mother Erlinda—came in full force in support of Yap’s new undertaking. Also present were the PIDS management committee, senior research fellows and employees who are all one in believing that Yap epitomizes the “young blood” in the Institute with his youth complemented by experience, expertise, dedication and the heart to serve the Institute and the country. Yap quoted an article written by Nobel Laureate Amartya Sen entitled “How to judge globalism” which, he said, is the central issue faced today by many countries in the world, including the Philippines: “The central issue of contention is not globalization itself, nor is it the
DEVELOPMENT RESEARCH NEWS
use of the market as an institution, but the inequity in the overall balance of institutional arrangements—which produces very unequal sharing of the benefits of globalization. The question is not just whether the poor, too, gain something from globalization, but whether they get a fair share and a fair opportunity. There is an urgent need for reforming institutional arrangements—in addition to national ones—in order to overcome both the errors of omission and those of commission that tend to give the poor across the world such limited opportunities. Globalization deserves a reasoned defense, but it also needs reform.”
According to Yap, there are positive developments in the regional institutional arrangements in the past years that are countering the negative impacts of globalism. However, he noted that for the Philippines to take advantage of the coming opportunities, reforms would be necessary for the country. There would be two areas wherein PIDS would be useful in helping the Philippines: a) in contributing to the agenda of regional cooperation and integration; and 2) in promoting domestic policy and institutional reforms that will enable the Philippines to maximize the benefits from the new global order. Over and above these, the Institute will continue its humble role in contributing to the intellectual debate on economic development in the country. Yap is an industrial engineering graduate (cum laude) of the University of the Philippines (UP) Diliman. He also holds a Ph.D. in Economics from the same university and finished his postgraduate studies at the University of Pennsylvania, United States. He became a lecturer, then a senior lecturer at the UP College of Industrial Engineering and had a short stint as a computer programmer before joining PIDS in 1986 as a visiting fellow. Through the years, numerous researches and projects in econometric modeling and macroeconomic policy—his specializa-
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tions—provided him with excellent qualifications to become the next rightful choice to lead the Institute as president. For the past years, Yap has maintained the PIDS Annual Macroeconomic Model and is responsible for preparing the annual outlook for the Philippine economy at the Institute. He is the research manager of the first Southeast Asia Human Development Report and is also a consultant to the National Planning and Policy Staff of the Institute's parent agency, the National Economic and Development Authority (NEDA), in aspects of forecasting techniques as well as a regular consultant in the second phase of the Asian Development Bank (ADB) project on Technical Training and Capacity Building in Support of the ASEAN Surveillance Process. These give further credence to his expertise and capabilities as an economist who is sought out and valued by fellow economists in the local and international scenes. Recently, Yap has been appointed acting member of the Committee on Social and Human Sciences to the UNESCO National Commission (UNACOM) of the Philippines by President Gloria Macapagal-Arroyo effective November 26, 2004. DRN
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[Above] Dr. Josef Yap takes his oath of office before NEDA Director General and PIDS Board Chairman Romulo Neri (center), and PIDS Board Trustees, Dr. William Padolina and Dr. Ledivina Cariño, while his wife Ermi Amor looks on. [Below] By his own assessment, Lamberte considers his most recent accomplishment the turning over of the administration of the NEDA sa Makati building—where PIDS has been housed since 1978—to the Institute. In the photo, NEDA's OIC Deputy Director General Nestor Mijares IV (right) hands over the symbolic key to Dr. Lamberte on April 4, 2005. A week after, Dr. Lamberte gave way to Dr. Yap as the new PIDS president.
STAFF BOX
Editorial Board: Dr. Mario B. Lamberte, President; Dr. Gilberto M. Llanto, Vice-President; Mr. Mario C. Feranil, Director for Project Services and Development; Ms. Jennifer P.T. Liguton, Director for
DEVELOPMENT RESEARCH NEWS is a bimonthly publication of the PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES (PIDS). It highlights the findings and recommendations of PIDS research projects and important policy issues discussed during PIDS seminars. PIDS is a nonstock, nonprofit government research institution engaged in long-term, policy-oriented research. This publication is part of the Institute's program to disseminate information to promote the use of research findings. The views and opinions expressed here are those of the authors and do not necessarily reflect those of the Institute. Inquiries regarding any of the studies contained in this publication, or any of the PIDS papers, as well as suggestions or comments are welcome. Please address all correspondence and inquiries to: DEVELOPMENT RESEARCH NEWS Vol. XXIII No. 2 March - April 2005 ISSN 0115 - 9097
Research Information; Ms. Andrea S. Agcaoili, Director for Operations
Research Information Staff Philippine Institute for Development Studies Room 304, NEDA sa Makati Bldg., 106 Amorsolo Street, Legaspi Village 1229 Makati City, Philippines Telephone numbers 892-4059 and 893-5705 Telefax numbers (632) 893-9589 and 816-1091 E-mail address: publications@pidsnet.pids.gov.ph
and Finance; Atty. Roque A. Sorioso, Legal Consultant. Staff: Jennifer P.T. Liguton, Editorin-Chief; Claudette G. Santos, Issue Editor; Genna J. Estrabon, Sheila V. Siar (on study leave), Jane C. Alcantara, Ma. Gizelle G. Manuel, Edwin S. Martin and Mitzi H. Co,
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Contributing Editors; Valentina V. Tolentino and Rossana P. Cleofas, ○
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Exchange; Delia S. Romero, Galicano A. Godes, Necita Z. Aquino and Alejandro P. Manalili, Circulation and Subscription; Genna J. Estrabon, Layout and Design.
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Power from page 9 ○
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ment of Energy should make all forecasting details available to the public. An independent expert review of the forecasting methodology will also likely help. If and when there will be a power shortage, what then should the government do? Ivana dela Peña of Meralco said that a more stable regulatory environment would help. This could be attained by having performance-based regulation to remove political color in the sector. With the use of the market-driven approach, private investors should be given proper incentives to come in. These may be through contract utilities for new capacity, getting merchant plants that have no contracts and/or having an open–access system. Problems arising from this market-driven approach, however, would include difficulties in funding (because there is no assurance of purchase)and in the level of creditworthiness (because small distribution utilities will encounter difficulties). Nevertheless, the real issue will be—are the building blocks in place for the market
to work effectively and competitively? According to Dr. Epictetus Patalinghug of the University of the Philippines, the way the regulatory environment at present is constructed violates the basic principles of economies of scope and scale. Therefore, accurate studies, accountability and transparency are crucial for the Philippines to attain a market-oriented power industry and a much-improved and relevant regulatory environment. Citing the expansive power crisis in the early 1990s, Development Bank of the Philippines (DBP) President Reynaldo David stressed that the power sector is one of the strategic investment priorities of the DBP for 2005. It has partnered with the DOE, government agencies and the private sector in prioritizing the provision of adequate, affordable and reliable energy services. Specifically, it has allocated P50 billion for the DOE in support of the financing of the power sector. Budget and Management Secretary Emilia Boncodin concluded that “a stable and efficient power supply is paramount to cope with the increasing requirements of a growing economy.” DRN