CB Review September 1990- Quasi-Banking

8/9/2019 CB Review September 1990- Quasi-Banking

1/48

September 1990 A Monthly Publication of he Central Bank of th e Philippines Vol. XLII, No. 9

ILaying the Groundwork FEATURESfOr Long-Term Growth 13 Government Regulation of the Banking1 System1 Armida S. San JoseTh4 government is implementingpolicies that will sustain economicgrowth and lay the foundation forlong-termgrowth. . . , A , . .4 , . . . I ' ; ;:#,p:.,;t.-+;!.:r: , :---:. . . . . . ?-$;(I--;

18 Investment Trends: Towards FinancingInfrastructureSupport for EconomicGrowthMa. Belinda C. Carandang.I_27 Q u a s i - m n g in tee Philippines =Juan A. Tolentino . -

DEPARTMENTS1 GOVERNOR'S PAGE3 ECONOMIC INDICATORS11 TRADE DEVELOPMENTS32 PROFILE I IRB Calauag Shifts to High Gear I

. . -, - > . - -. - , '%..V '

=a * - , ;. , ,- .*=-&&hi$ MPLE ENGLISHThe Flow of Funds Part 3)

I38 NEWS , .41 QUERIE43 CENTRAL BANK REGULATIONS44 CONGRESS UPDATE45 MONTHLY STATISTICAL INDICATORSP&\, - - - - .4Yiz"~-y=. . ,..:_ I . _ _ _


2/48

CB REVIEW@EDITORIAL BOARDChairmanEdgardoP. ZialcitaMembersVivian M.RemigioRoberto Y. GarciaRamon V. TiaoquiRicardo P. LirioEugcnio Ealdama, Jr.Juan Antonio E. MuiiozPurita F.NeriGaudenciak SantiagoGregorioR SuarezAmandoTetangco, Jr.EditorMncedes B. SuleikAssociateEditorDiwaC. GuinigundoAssistantEditorAngela L.AlzonaStaffersRudencio E. MagpayoRubuena B. Angclesf i tAntonioB.Talmcral).pese-Serlina C RufinBeth D. CoCirculation X b r C h qNonna B. AspirasSecto r Coor&tomJoelV.C DomingoHerminipB. PaulinoIluminada T. ScatCB Re- is published monthly by th e CentralBank of th e Philippines, A. Mabimi S t. Manila,Philippines

htiCl12Sd ther6- f chit p u b l i ~ r hmay be reproduced in whole o r in part, providedproper acltaowlcdgment of source iscitedTh e views expressed in the articles are those ofthe authors an d d o no t reflect those of th e CcnualBank mmagaacnt.Fo r further information, contrct CB R d mEditorid Staff, Room 410, Fourth Floor. F i veStorey Buih%f~~entnl Bank of the Philippines,A. Mabi St., Manila, PhElippines with TelcpboneN or 59-89-88 and 5Cb7051 t o 60, ocats 2826,2627 m d 2698.Entered as seconddursmPil st theM.nilr PostOffice on June 23, 1950 with addidon41 mailingoffice at the CB Post Office.


3/48

fY1,-,,-h -----A --A-'-v r * , . qs La4,. * a - - L- t for Long=TermGrowth2# - -, d - -. , c l - ,., !. c : , < '-3


4/48

TreasuryBills, however, have been on a downtrend, although rates forsecured and unsecured loanshave not declined.The CentralBank rediscount facilities continue to be extended in :.increasingmagnitude to help exporters. The rediscount rate was raisedby one percent effective February 19to align it closer to market ratesIn response to the clamor of commercial banks, the Cennal Bank hasdecentralized its rediscounting operations through its three regionaloffices. However, Gov. Cuisia reported that the commercial banks havenot been actively utilizing the CB rediscount facilities which offerlower rates for exporters.Access to foreignloans by exporters even for peso expenditures, thesimplification of export procedures and documentation,productionand distribution of exportguides and brochure%and the holding ofperiodic meetings with exporters are continuingconcerns of the CentralBank.To provide the proper environment that would sustain the countryin its quest to reach the coveted newly-industrializingcountry (Nlc)status, it is imperative that the gainsmade in the last three years beconsolidated and used as building blocks for long-term growth. What isneeded, Gov. Cuisia said, is a monetary position that would steer theeconomy through a slower but more stablegrowth path in theshort-term and to a sustainablegtowth over the medium term. Thiswas .the general thrust in 1989,when monetary and creditpolicies adhered +to the principles of market orientation,deregulation, competitionandinstitutional efficiency.Specifically, the CB head emphasized the move toward completelyderegulatedinterest rates. Interest rate policy has been important for itsability to respond to the problem of inflation and its effects on savingsand investments, and consequently on ou u t As proven in the history'i!f the Central Bank monetary policy, mar et-determined intercst ratesare less subject to arbitrary manipulation and can help policy-makersachieve their objectivesof stability andgrowth.Gov. Cuisia reported that in response to the rapid expansion inmoney supply and inflationary pressures during the latterhalf of lastyear resulting from increased demand, supply bottlenecks and upwardprice expectations, the Central Bank closely monitored developmentsinthe financial markets and took measures to control the growth ofmonetaryvariablesand relieve the pressure on the werall price level.Policies on the external front alsopursued a market-oriented thrustas the Central Bank refrained from direct intervention in the foreignexchange market and allowed the exchange rate to seek irs lewl.Various promotionalmeasures, like country and product-specificcampaignsand the simplification of procedurd requirements in theprocessing of export documents, were implemented during the year tomaximizeforeign exchangeearn- The simplificationof existingprocedural requirements governingforeign investmentsw2s likewisesteppedup.In sum,.Gov. Cuisia said sound monetary management was pursuedin line with the overall national goals of promoting economic recoveryand setting the country on a higher growth plane. Meanwhile, economicperformance for tfie rest of the year and the next two years isviewedwith hopeful sobriety as the effects of the power crisis on productivity,the impact of the killer quake,#he Middle East conflict and theprojected increase in the consolidated public sector deficit are expectedto influence economicgrowth.

CENTRAL BANK OF THE PHILIPPINES


5/48

' August Inflation Rate on the DowntrendECONOMIC INDICATORS

Prices: The August 1990 annual domestic in-flation rate tapered off at 11.1 percent,lower than the comparable 12.6 per-cent last month add 11.7 percent in thesame period last year. Price growths inthe National Capital Region WCR) andoutlying areas posted 15.4 percent and 10.2 percent,respectively. On a monthly basis, the general priceindex registered a fractional rise of 0.3 percentthroughout the country.Prices of all food items went up by 8.8 percentduringthe month in review primarily dueto the priceincreases of fruits and vegetables (15.6 percent),

corn (14.7 percent), eggs (12.2 percent), cereal (9.8percent) and dairy products (9.7 percent). Thesedevelopments occurred as earthquake damages dis-rupted economicactivity in the Northern part of thecountry. Compared to the previous month's price in-crements, the rates were nevertheless relatively low-er this time, partly attributable to the Southern Phil-

ippines' bumper hamst of corn and rice. Non-foodprices, meanwhile rose by 13.9 percent with Fuel,Light and Water principally contributing the highestprice mark-up at 23.5 percent due to moreexpensivefuel, followed by Services and Housing and Repairswith price mark-ups at 17.6 percent and 13.7 per-cent, respectively.By region, the annuaI rate of price increases in theNCR and outlying areas at 15.4 percent and 10.2percent, respcctivcly, could be traced mainly fromhigher-priced non-food items particularly Fuel,Light and Water and housing and repairs. Compo-nent-wise, fuel shared the biggest price boost at 25.5percent due to oil price hike speculations broughtabout by the recentGulf crisis.Compared to the preceding month, the cost ofliving index decelerated to 0.3 percent from 1.6 per-cent last month stemming from lower pr ia growthsof foodstuffs in the NCR and outlying areas.-R.J. Veron

CONSUMER PRICE INDEX I N TH E PHILIPPINES(1978=1W)All I1.m Food. Bm- mdTab.ero -Food

600

AugunlWlO JulylasO Aupurt1889 A w t l g s O July 1090 Ayun18Bb)904Clothing Housingand Repairs I lkfy=JiCt a d Water

A u g u n 1 9 W July 1- Au0un19119 AuguatlSBO July1900 AugunlgBB AupustlOQO July 1 August188U

CPI in thoPhilippines CPI inAllka,OtmWth.NCRCB REVIEW September 1980


6/48

ECONOMIC INDICATORS/

h a n g e R a t e : P e a s o ~in AugustThe official exchange rate of the pesoto th e US dollar was r e c o r d e d atP25.000 as of end-August, a substantialdepreciation of 4.8 percent over th e Julylevel. Compared to both th e December1989 and year-ago levels, th e peso like-wise weakened by 11.4 percent and 14.3 percent,respectively. During th e month, th e peso showed in-creased volatility which, calculated a t P0.42, was th ehighest deviation around th e monthly average levelsince 1988.The negative price differential between the officialrate and th e comparable parallel market rate increasedsubstantially from P0.465 in July to P2.475 in Aug-ust. This differential was accounted fo r chiefly bythe relatively sharper increase of th e quoted parallelrate (12.9 percent) compared to that of th e officialrate (which only grew by 4.8 percent).The weak peso generally recorded greater deprecia-tions vis-a-vis selected currencies of major industrialand competing countries. Specificdevelopmentsovercertain periods are as follows: 10.2 percent againstth e Swiss franc; 9.0 percent against the Pound ster-ling; 7.5 percent against th e Deutsche mark and th eSingapore dollar; 7.4 percent against the Japaneseyen.and th e French franc; 5.6 percent against theThai baht; 5.3 percent against the Malaysian dollar;4.9 percent against the South Korean won; 4.8 per-

CROSS EXCHANGE RATES OF THE PESO^(Pesos Per Unit of Foreign Currency)As of Dates Indicated; Endof-Period

cent against th e Hongkong dollar; 4.7 percent againstth e Indonesian rupiah; and 4.4 percent against th eNew Taiwan dollar.The peso's average exchange rate against a totaltrade-weighted basket of major industrial countries'currencies, or its nominal effective exchange rate(NEERMIC), depreciated by 4.6 percent in August.On th e other hand, th e peso's NEER adjusted fo rprice differentials, or it s real effective exchange rate(REER-MIC),epreciated by 4.7 percent against themajor industrial countries, improving th e currency'scompetitive position against it s ASEAN competitors.The REER against competing countries depreciatedby 3.7 and 3.4 percent on th e broad and narrowseries, respectively.Bids fo r foreign exchange on th e Bankers Associa-tion of the Philippines (BAP) rading floor remainedunsatisfied as most banks continued to hold on totheir dollars. More active Central Bank selling duringth e last tw o weeks, however, increased the aggregatemonthly volume of t r a ns a c t i ons fo r August toUS$43.05 million, from US$3.45 million in July.The CB registered no purchases, effectively makingit a net seller for th e month.Notwithstanding the CB selling activity on thefloor, th e net availments on the country's tradefacility lines and th e receipt of new money increasedth e level of reserves by US$O. 146billion toUS$2.127billion by end-August.

-M.M.C. de Guzman

Foreign Qrrency

US dollarJapanese yenBritish poundDeutsche markSwiss francFrench francSingapore dollarMalaysian dollarThailand bahtIndonesian rupiahHongkong dollarSouth Korean wonNew Taiwan dollar

August1990

' ~ a s e dan the Bankers Auociation of the Phllippind referencerate.

December1989

22.44000.156238.004913.288914.57923.888811.88428.32950.87290.01252.87450.0334800.8587

August1889

21.88000.151634.504711.195912.99233.323511.14128.1292484670.01232.80080.0330600.8607

CENTRALBANKOF THE PHILIPPINES


7/48

ECONOMICNDICATORInterest Rates: Rates in August

Except for the yields on Treasury bills- and interbank call loans, nominal inter-- -- es t rates on all other borrowing and--- v lending instruments of banks exhibitedgradual declines during the month ofAugust 1990. The downtrend in marketrates mainly reflected the improvement in banks'liquidity position and the slowdown in the annualinflation rate. Despite the decline in nominal marketrates, real interest rates continued to post positivelevels as nominal rates remained above the 11.1p e rcent average inflation rate fo r the month.Nominal interest rates on savings deposits, tradi-tionally viewed as the least responsive to marketdevelopments, slipped fractionally from the previousmonth's average of 5.401 percent to 5.303 percentin August Rates on time deposits with maturitiesof 1 year and below and those of over 2 years simi-larly dropped to 18.596 and 18.475 percent, respec-tively and pulled the weighted average interest ratefo r all maturities down by 0.6 percentage point t o18.587 percent even as th e average rate on place-ments with over 2-year maturities rose by 0.9 per-centage point t o 13.3 97 percentLikewise, the new Manila Reference Rates (MRRs),which are based on banks' transactions on promis-sory notes (PNs) and time deposits (TDs) fo r variousmaturities covering placements of P 100,000 andover, posted lower rates during the period Comparedt o the 20.75 percent average in July, this month'sMRR (d aturities) a t 19.25 percent was lower by1.5 percentage points.

Following the general downtrend in traditionalbank borrowing rates, lending rates on secured loansposted lower levels in August compared to the p r evious month. Rates on secured loans with maturitiesover 2 years and those with shorter maturities d r o pped by 1.663 percentage points and 0.838 percent-age point, respectively which rolled back the weight-ed average interest rate on secured loans acrossmaturities t o 22.693 percent from 23.639 percent inJuly.Compared with the rates registered in August1989, banks' borrowing rates this year were general-ly higher specifically fo r new MRRs an d time depositswhich went u p by 3.75 and 3.26 percentage points,respectively. Similarlyl lending rates on secured loansmoved u p by 2.759 percentage points from the average last year.Meanwhile, the average interbank call loan (IBCL)rate rose markedly to 16.94 percent, up by 6.8 13percentage points from the July average andby 5.5 51percentage points from the comparable period in1989. On a weekly-average-basis, however, the m arate dropped gradually from 20.756 percent during

the first week to 7.556 percent in the third weekbut rose sharply to 35.5 percent in the fourth weekfollowing stepped-up open market operations of theCentral Bank towards the close of the mon th. ,Treasury bills registered higher yields during thereview period reflecting the larger financing re qu ir ement of the government The average rate on T-billsfo r allmaturities rose steadily from 22.63 pe rcent inJuly to 23.082 percent in August. By maturity, thehighest increase was registered by 364-day T-billswhich rose by 0.643 percentage point to 24.673 pe rcen t, followed by 9 1-day issues, 0.519 percentagepoint t o 21.448 pe rcent; and 182-day issues, 0.06percentage point t o 23.157 percent. On a n annualcomparison, this month's average yield on T-bills foral l maturities was 2.959 percentage points higherthan th e 20.123 percent average registered in August1989. -" Y. silsroza

SELECTED INTEREST RATESFor Periods Indicated(RramtPer Annum)

InterbankCall LoansTreasury Bills63 days91 days182days364 daysAll maturities

SavingsDepositsTime Deposits1year and belowOver 1-2yearsAll maturitiesSecured Loans

August July1990 1990

1year and below 22530 23.368 19.857Over 1-2 years 24.114 26.777 2a826All maturities 22.693 23,639 19.934Manila ReferenceRate60 days 19.313 21.000 15.62590 days 18.813 20.313 15.000180days 10.063 2Q063 14.-All maturities 19.250 2Q750 15.500

CB REVIEW September lssO


8/48

of Trade: rade GapPhilippine merchandise trade for theperiod January-August 1990 recordeda deficit of US$2,562 million markinga 50.1 percent increase compared toyear-ago level of US$1,707million. This1 was at t r ibuted to the 15.0 percentgrowth in imports which outpaced the 3.3 percentincrease in exports.Merchandise exports grew slightly by 1.7 percentin August 1990 from the US$666 million registeredin August last year. The cumulative level of exportsfrom January to August 1990amounted to US$5,307million, up by USS172 million from the US$5,135million level recorded for the same period in 1989.Manufactured exports contributed mainly to the in-crease (US$306 million). In contrast, commoditieswhich showed downward trends were fruits andvegetables (USS9 million), agro-based products

(US$52 million), forest products (USS71 million),and mineral products ( U S76 million).Semi-conductordevices continued to be the coun-try's leading export for the first eight months. Otherleading items included consigned children's andinfants' wear, coconut oil, copper metal, and con-signed electrical and electronic machinery and parts,in their respective order.Merchandise imports for August 1990dropped by1.2 percent from the August 1989 level of USS999million. Nevertheless, import arrivals for the periodJanuary to August reached US$7,869 million,indica-ting a US$1,028 million increase from the previousyear's level. All commodity groupsshowedsignificantincreases, led by capital goods which expanded byUS$497 million mainly on account of increased ar-rivals of power generating and specialized machines,and telecommunication equipment and electricalmachinery. Importations of raw materials and inter-mediate goods climbed by USS246 million as a resultof higher purchases of materials and accessories forthe manufacture of eletronic equipment, textileyarns and abrics,non-metallicmineralmanufactures,and corn. Mineral fuels and lubricant imports alsorose by US$89 million owing primarily to hiked vol-ume and unit price of petroleum crude. Finally, con-sumer goods arrivals grew by US$161 million, fol-lowing higher demand for rice, dairy products, andpassenger cars and motorized cycles.

-E. Alarilla

BALANCE OF TRADEJanuary-Augm 1989and 1990(In Thousand US Dollan)

Exports 5,306,628Ten PrincipalExports 2,127,0241. Semi-conductor devices 535,9652. Consigned children's andinfants' wear 248,3213. Coconut oil (crude andrefined) 231,5924. Copper metal 183,4355. Fin. elect and electronicmach. and parts mftd.from materials mptd. onconsignment 169,2666. Consigned women's wear 167,1117. Consigned mens wear 153,6 188. Crocheted garments,

knittedor crocheted, notelastic 149,3929. Electronic microcircuits 146,6 1210. Copper concentrates 141,712Others 3.1 79,604

Imports 7,869,095Ten Principal Imports 2,350,108

1. Petroleum oils, cruds2. Dice of any material,consigned3. Other parts, n.e.s, ofelectronic components4. Other materials andaccessories, consigned5. Fabrics importedonconsignment basis6. Wheat7. Aircraft, mechanicallypropelled exceeding15000 kg8. CKD for assembly ofpassenger cars9. Blooms, slabs and billetsof iron and steel

10. Oilcake and otherresidues of soya beans

'rade Balance (2,562,467)

S b um DER-Inte rnationa l. Central Bank of theph

CE NT RAL BANK OF1 E PHILIPPINES


9/48

ECONOMIC INDICATORS&w= Liquidity: llptrend

, Continues in Julyi Domestic liquidity (M3),which hasbeenconsistently on the uptrend since thestart of the year, registered a monthlyexpansion of P3.4 billion to settle atP266.9 billion at end-July 1990. The

month's increase in M3 followed therise in liquidity multiplier from 2.938 in June to3.006, which more than offset the contractionaryimpact of the drop inRM.Viewed from the asset side of the balance sheet ofthe monetary system, the increase in M3 was largelya result of the continued rise in credits to the privatesector. Public sector credits, on the other hand, de-clined as the National Government increased itsdeposits with CB coming mainly from proceedsfrom sale of auctioned T-bills. Likewise, net foreignassets (NFA) of the monetary system deterioratedbyP5.1 billion which exerted a contractionary impacton M3.Viewed by component, the rise in M3 was tracedto the expansion in the levels of interestearning de-posits, in particular, quasi-money which rose byP3.7billion or 2.0 percent. Quasi-moneywhich aggregatedP194.7 billion accounted for 72.9 percent ofM3,andis composed of savingsdeposits (PI41.8 billion) andtime deposits (P52.8billion). The move of a numberof commercial banks to raise the interest on savingsdeposits could have encouraged depositors to savemore in this form of deposit. Timedepositscontinuedto yield positive returns to depositors, despite theincrease in inflation from 12.2 percent to 12.6.Comprising 27.1 percent of M3, money supply and

Own instrumentOperationsOutstanding government securities ad-ministered by the Central Bank rose toP257.44 billion at end-September,marking a 5 percent increase from lastmonth's P253.77 billion. TheP3.67 bil-lion growth stemmed from securitiestransactions of P37.58 billion issuances and P33.91billion redemptions bringing outstanding levels forthe three major issuers to: National Government -P237.56 billion; government corporations - P2,03billion ; nd the Central Bank -P17.85 billion Weight-ed average interest rate for the outstanding issuesstood at 22.529 percent, up by 63.1 basis pointsfrom last month's 21.898 percentGross issuances for the third quarter amounted to

deposit substitutes continued their declining trendsince June. Currency in circulation fell by P1.S bil-lion which more than offset the P1.2 billion rise indemand deposits. Deposit substitutes dropped byPI8 million.On an annual basis, M3 grew by 23.8 percent fol-lowing the expansion in private sector credits andthe improvement in net foreign assets. Component

wise, the annual expansion in M3 came from the in-creases in quasi-money and money supply by P41.8billion and P9.9 billion, respectively while depositsubstitutes contracted by PO. billion. -M.D. S d

I DOMESTICL IW ID IM(InMillionPesos)1990 1989J U I ~ P June July

3omestic Liquidity 266,921 263,515 215,530MoneySupply 69,467 69,771 59,542Currency inCirculation 43,076 44,625 38,637Peso DeinandDeposits 26,391 25,146 22,905hasi-Money 194,653 190,925 152,889Savings Deposits 141,808 138,807 102,431Time Deposits 52,8U5 52,118 50,458I DepositSubstitutes 2,801 2,819 3,099

P109.84 billion exceeding last quarter's flotationsby 10.4 percent, while total redemption reachedP97.71 billion for net issuances of P12.13 billionversusP8.48 billion in the second quarter.For September, gross issuances of P37.58 billionwere shared by the National Government, account-ing for 61 percent, and the Central Bank for 39 percent.Peso-denominated Treasury Bills decelerated toP197.99 billion as26 percent or P7.67 billion out ofP29.37 billion applications were rejected during thefour auctions (one full acceptance, two partial ac-ceptances and one full rejection) conducted thismonth due to precipitously high bid rates. Weightedaverage interest rates for the three maturities rosefrom 26.193 to 28.386 percent for 91-days;27.026to 29.152 percent for 182-days; and 27.143 to29.132 percent for 364 days. Similarly, compositeweighted average yield rate for all maturities trend-ed upward from 26.876 to 28.858 percent at rnonth-

C 8 REVIEWSeptember 1990


10/48

ECONOMIC INDICATORS

SELECTED OUTSTANDING GO VERNMENT SECURITIESAsof svptrrnbw30,1990(InMi llion Pesos)This LastMonth MonthLptembsr August

3MonthsAgoJuna

6MonthsAgoMarch

A YearAgoSaptombar '89

1. Outstanding Government SecuritiesIssued by and Thnr the Central Bank*a. National Government Issuesb. Government Corporate Issuesc. Central Bank Issues2. Dd lar Denominated T-Bills3. Peso Denominated T-Billsa. RegularR Special Series4. Marketable T-Notesa Negotiated (Special Series)h Auctioned (Regular)c. Negotiated (R w la r)5. PEA Bonds6. Reconstruction Bonds7. NPC Bonds8. MWSS Angat Bonds9. CB Bills, Regular10. CB Bills, Special Series11. CB Notes

end.Marketable Treasury Notes accelerated to P20.26billion, up P0.95 billion or 5 percent from P19.31billion with the initial issuanceof restructuredNotesof 3-5 years' maturity geared to absorb proceeds ofmatured T-Bill holdings of the SSs and the GSK inaccordance with the term transformationagreementwith said institutions.Sales of dollar-denominated Treasury Bills andReconstruction Bonds perked up by 51percent and16 percent, respectively.For guaranted corporate issues, change was ef-fected only 9 t h the mandatory redemption of PEA

Reservemoney for the month ofAugust1990stood at P89.0 billion,P0.2 billion(0.3 percent ) higher than the previousmonth's level. The expansion was dueto the increase in currency issue (P1.8billion). Theother componentofreservemoney, depositmoney banks DMBS) reserve balances,

Bondsworth P5.8 million, while no fresh issueswereauthorizedfor NPC andMwss Angat Bonds. -CB BilIs, Special Series, slipped to P2.69 billion,while CB Notes stood steady at its level last month.During the month, CB Bills, Regular Series, werereintroduced in th e market, asmonetary authoritiesapproved the shift from Treasury issues of the in-strument for liquidity management. As end of Sep-tember, some PI3 billion bills were issued in twomaturities (30 and 60 days) with rates related toTreasury Bills.

-H. B. Paulino

declined bv P1.6billion.~iewed'from he asset side, the increase inRMwastraced to the P6.0 billion increment in the net do-mestic assets WA) f the monetary authorities, theexpansionary impact of whichwas partly dampenedby the P5.8 billion deterioration in net foreign assetsof the monetary authorities (NFA-MA).In particular, the rise in NDA wasdue primarily tothe drawdown in NG deposits with CB amountingto P1.O billion and the unwinding of W.3 billion inCENTRALBANK OFTHEPHILIPPINES


11/48

SOURCES OF RESERVE MONEY MOVEMENTS*As of Dates Indicated(In Million Pews)

I. Reserve Money1.0 Currency lsde l2.0 DM B* Reserve Balances

ECONOMIC INDICATORS

L e v e l s FkwsA U ~ U S ~ ~uly August Aug 90 Aug. 901990 1990 1989 hl.90 Aug, 89 I

II. Net Foreign Assets - Monetary Authorities (MA) -122,426 -116,658 -124,394 -5,768 1,9881.0 Net International Reserves 2,284 -1,186 -13,511 1,098 -11,2271.1 Gross International Reserves 54,634 48,422 33,332 6,212 21,3021.2 Short-Term Foreign Liabilities -52,350 -49,608 - -46,844 -2,742 -5,506

2.0 Medium- and LongTerm Foreign Liabilities -124,710 -115,473 -110,883 -9,237 -13,827I . Net Domestic Assets - M Aof which:

1.0 Ne t Credits to the National Government (MA)of which:National Governm ent Deposits2 0 Assistance to Financial Institutionsofwhich:Overdrafts3.0 Regular Rediscounting4.0 CB Bills5.0 Reverse Repurchase6.0 Forward Cover Differential

*Data reflect the expansion incoverageof DMBs.Netof cash in Treasury VaultPreliminary

CB bills. These ransactions, however,were offset by th e peso-dollar exchange rates, nomithstmding thethe P0.8 billion additional CBborrowings under the improvement in gross international reserves.reverse repurchase facility and, to a lesser extent, On an annual basis, RM expanded by P20.9 bil-by the drop in rediscount credits and assistance to lion or 30.6 percent brought about by the improve-fmancial institutions. ments in both th e domestic and foreign accounts of

On the other hand, the deterioration in NFA-MA th e monetary authorities.stemmed from the increase in medium- and long- -E. P.Martinezterm foreign liabilities, due to th e depreciation in

~WMarket# h i B Bills ReissuedThe onite funds market fo r the ,monthof September 1990 showed a mixedcondition. Tightness was exceptionallyfelt by banks during the fas t week andtoward the last week of the month. In-terbank rates, however, sharply droppedbetween the second.and third weeks as banks became

awash with excess money. Transactionswere effectedwithin the wide range of 4 1/32 percent - 80percentwhile th e average cost of onite borrowing settled at15 118percent, down by about 213 basispoints fromthe past month's average rate of 17114 ercent. Trans-acted volume registered P66.49 billion. On th e aver-age, there were 14 borrowers and 20 lenders thatparticipated in th e IBCL market.As banks scampered fo r funds coupled with theCB's continuous borrowing stance during the firstCB REVIEW September 1990


12/48


13/48

TRAD E DEVELOPMENTS

/ ommercial Policy Developmentsin Selected CountriesTRAD E REGULATIONS/POLICIES

LIBERALIZATION1.United States - Documentation requirement%textile productsEffective 14March 1990, shipments of bolducs (orfabrics consisting of warp without weft assembledby means of an adhesive) under Harmonized TariffSchedule No. 5806.40.0000, Category 229, export-ed from all countries on or after 14 March 1990have been exempted from existing visa and quota re-quirements established under the terms of currentvisa arrangements and bilateral trade agreements.RESTRICTIONS1.Australia - Packaging requirements: pre-packedarticlesThe provisions of the Trade Measurement Act andTrade Measurement (Pre-packed Articles) Regula-tions which will soon be introduced in Australia willcover all pre-packed articles whether for sale bywholesale or retail, unless specifically exempted.The legislation will include the following require-ments:

a all packages containing pre-packed articles, un-less specifically exempted, must be marked with thename and address of the packer or the person onwhose behalf the article was packed. The markingmust be readily visible and legible such as to enablethe person named to be identified and located;all packages containing pre-packed articles,un-less specifically exempted, must be marked with astatement of the measurement of the article. Thestatement must be clear, readily seen and easily readwhen the article is displayed for sale.2. New Zealand -Health requirementsEffective 2 April 1990, an updated list of goodswhich will require a permit from the Department ofHealth prior to release from Customs control willnow include certain items ranging from ceramicware to soups and broths.

3. United Kingdom - Import licensingA new Open General Transhipment License has beenintroduced for stricter monitoring of sensitive goods(mostly military equipment and high technologygoods) transhipped through the United Kingdom.Prior to importation to tranship such goods, an ex -port license must be applied for.OTHERS

1.Australia - Health requirements: food and bever-agesThe Australian Quarantine and Inspection Service(AQIS) has announced that from April 1990, newinspection procedures for imported foods will beprogressively introduced.2. India - Foreign exchangeEffective 1 January 1990, the exchange rate to beused for the conversion of U.S.Dollars to IndianRupees for Customs purposes has been set at US$5.875 per Rs. 100.3. New Zealand - Foreign exchangeThe following exchange rates to the New ZealandDollar relate to imported goods for which a NewZealand Customs Entry has been lodged on or afterthe Date indicated:

Philippine PesoUS Dollar

Entry lodged on Entry lodged onor after or afier23.04.90 07.05.90

CUSTOMSTARIFFSRESTRICTIONS1.Australia - Tsriffpreferences: handicraftsThe following definition will apply with respect to

CB REVIEW September 1990


14/48

TRADE DEVELOPMENTS

traditional handicrafts, in Juding furniture, to beconsidered e b b l e for concessional rates of importduty (handicrafts concession):"For handicrafts to be accepted as having attainedan artistic or decorative character comparable withtraditional handmade products of the country inwhich the goods were made, the following condi-tions must be met:the handicrafts must be traditional of theircountry of origin; andthat tradition must have both its origin in thatsame country and have had an active history datingback a number of centuries.Traditional hand-made furniture is required alsoto have an artistic or decorative character which isto be achieved by inlaid work or by carved designscarried out by hand. The amount of carving or in-laying done must be substantial.

all graded pearls temporarily strung for the con-venience of transport are to be classified under tariffheading 71.01. This means that it is the Govern-ment's intention to render duty free all graded andungraded pearls that have been temporarily strungfor the convenience of transport.Pearls that have been temporarily strung for theconvenience of transport can be easily identified bya knot tied very tightly against each pearl at eachend of the string, and that there is no clasp attached.Pearls that are strung and do not have a clasp areto be classified under heading 71.16 and will havethe following duty rates:from 1 July 1989, 21 percent (developing coun-a y , 16percent);from 1 July 1990, 19 percent (d.c., 14 percent);from 1 July 1991, 17 percent (d.c., 12percent);from 1 July 1992, 15 percent (d.c., 10percent).

OTHERS1.Australia - Tdff chmifica&n: pearlsPending an overall review of the Harmonized System(HS)by the Customs Cooperation Council inJanuary1991, the Australian Government has decided that

S ow c ~ r ISNET-Tradeand InfomationSheet 1 5 March 1990

CE~TRAL ANK OFTHE PHILIPPINES

---


15/48

m - Cof theF......Armida S. San Jose

IntroductionThe financial intermediation proc-ess facilitates the development ofthe country through its functionsof mobilizing resources and effi-ciently directing these into moreproductive uses. Because of thismajor function, a higher degree offinancial intermediation wouldserve to favor a higher level of out-put of the economy as more fundsare translated into investmentsvital for growth. Banks play animportant role in the financial in-termediatibn process. In their p e ~formance of financial intermedia-tion function, they face variousrisks which if not regulated couldgive rise to losses nor only todepositors and to the holders ofequity claims on banks but to theeconomy as a whole It is for thisreason that the government finds

Mrr SonJosem IheActingAsrockteDinctor of dreDcpanancntofEconomic Research-Domestic.

it necessary to regulate the bank-ing system.The next section discusses therole played by banks in the finan-cial intermediation process andthe various types of risks faced bythem in the process. The thirdpart touches on the reasons/argu-ments for government regulationof banks. The fourth section detailsthe existing regulations imposedon banks in the Philippines whilethe fifth section discusses recentmoves toward deregulation of thebanking system The paper is sum-marized with some concluding re-marks in the last section.The Role ofBanksin theEconomyBanks do not produce goods asmanufacturing h s o nor' dothey transport and distributegoodsbut they are an important segmentof the economy. They perform thefunctions of providin transactionaervices and fmanci intermedia-

CB REVIEWSspternber 1

FEATURES I

tion. They offer transaction yrvi-ces by clearing and facilitatingpayments of goods, services andfinancial investments for otherparticipants in the economy. Theyalso intermediate funds by sellingclaims on themselves, i.e., depositsto savers and investing the proceedsby buying claims on borrowers, i.e.,loans. Hence, banks bring saversand ultimate borrowers together.The functions performed bybanks provide great benefit to theeconomy. By collecting funds ofvarious small depositors and lend-ing these to businesses, borrowersand lenders of funds economizeon information and transactioncosts By pooling funds of savers,they also reduce the riskiness oflending for the depositors. Theymake possible the intermediationof long term funds (which is im-portant in economic development)since banks can lend long tennloans to borrowers even thoughthe ultimate lenders of the fundsare only making short term loans.


16/48

EATURES

Since depositors can withdrawtheir money from banks virtuallya t any time they need them, banksalso ensure liquidity to savers.Thus, banks' performance of theirfunctions reduces the degree ofrisks and uncertainty in an econo-mic system.In the process of performingtheir functions, however, banksface and accept different typesof risks such as default or creditrisk, interest rate risk and liquidi-ty risks. Default risk arises whenborrowers simply do no t repay th eloan due either to dishonesty orinability to do so. A bank suffersinterest rate risk when the averagematurity of its liabilities is lessthan the average maturity of itsassets and a sharp rise in interestrates occur tha t would reduce th emarket value o f its assets morethan its liabilities. Moreover, abank incurs liquidity risk when itsliabilities or dep osits are withdrawnmore rapidly than it can convertassets into cash t o meet the w ith-drawal of dep ositsThere are however a number ofsafeguards that can cushion bankdepositors from possible lossesthat may arise from all of theabovementioned risks faced bybanks. These are the banks' equitycapital and their specialized skillor ability to diversify credit port-folio t o minimize if no t avoid risks.In some countries including thePhilippines, the existence of adeposit insurance scheme providesan explicit added protection todepositors. The Central Bank'srole as a lender of last resort tobanks may also be viewed as animplicit form of deposit insuranceto savers.In spite of these safety factors,the government has considered itnecessary t o become involved inthe regulation and supervision ofbanks. To the extent that the costof providing implicit and explicitdeposit insurance would ultimate-ly be absorbed by th e government,it finds it necessary to regulatebanks.

Rationale for GovernmentRegulation of BanksWhile it is generally accepted thatregulations create inefficiencies,the government has increasinglybeen involved in bank regulationssince an unregulated system takesto o m any risks. The difficulty andinability of depositors to distin-guish strongha fe banks from weak-er ones by just looking at th e bal-ance sheet, brochures and financialstatements as well as banks' adver-tisements are major factors behindthe need for government regula-tion s Regulations are also used toavoid great concentration of powerin the banking system. More im-portantly, the government wantsto avoid bank failures through re-gulations since a loss of confidencein one bank can trigger a domino-typ e effect on deposit withdrawalsor bank-run in the general bankingsystem which is disruptive to thepayments mechanism and in theflow of trade and commerce. Sincebanks are important transmissionmechanisms of monetary policies,bank failures also weakeddilute

Bank Regulationsin th e PhilippinesThe supervisory and regulatorypowers over the Philippine bank-ing system are vested in the CentralBank of the Philippines (cB~).nthe pursuit of this responsibility,the CBP formulates, issues and im-plements rules and regulationsaffecting various aspects o f banks'operations, the major ones are pre-sented below. Books of everybank are examined t o ensure com-pliance with these regulations.

a. Minimum Capital Require-ment.Different minimum capital re-quirements as shown below areimposed on different bank catego-ries depending o n th e possible risksthat these banks face in perform-ing the functions which they areauthorized t o undertake. Universalbanks or expanded commercialbanks (EKBs) which enjoy a widerange of functions are required tohave bigger capitalization thanoth er bank types.MINIMUM CAPITALIZATIONthese policies which in turn could c,Mmnadversely affect the attainment ofthe macroeconomic goals of the U n k d B d s EKBs)Commercid Banks (KBs)country. In certain cases, regula- 'Ibrift Bsnks (TBs)tions are utilized by the govern- within MMment to promote o r redirect cred- o u d & mhd anks (RBs)it to particular sectors or geo- w i h b ~ ~.graphic areas of th e coun try. outsideMM

F i t claw "A" citiesother municipalities

Single copration . 30% 30% 3094AggregateCorporateHddi i g s no limit no limit no limitCorp. owned by persons relatedwithin the 3rd degree ofconsanguinityor affinity 2096 20% , 2096IndividuJ person/fmly group 2 W 20% 2096Forrign (with the President'sapproval) 30% (40%) 30% (40%)'lncludet two specializedgovernmentbanks.


17/48

FEATURESc. Net Worth to Risk AssetsRatioThe ne t worth (or combinedcapital accounts) shall not be lessthan an amount equal to 10 p e rcent of its risk assets. If a bank hasa capital of a t least P500million,it may (with Monetary Board's o rMB's approval) maintain a net

worth to risk assets ratio of 8 p e rcent. If it s net worth averages atleast P700million, i t may maintaina t least a networth to risk assetsratio of 6 percent. This regulationis imposed uniformly on all typesof banks.d. Single Borrower's Limit (SBL)Except as the MB may o t h e rwise prescribe, the total liabilitiesof any person, company, corpora-tion or firm to a banking corpora-tion fo r money borrowed shouldnot exceed 15 percent of the un-impaired capital and surpluses ofsuch bank.e. Limits on Loans to Directors,Officers, Stockholders, and Re-lated Interests (oosR~)Loans t o individual DOSRI arelimited t o the amount of depositsheld plus the book value of theirshares in th e bank, and musr be 70percent secured, provided that un -secured credit accommodations toeach of th e bank's DOsRI shall notexceed 30 percent of his totalcredit a c c o m m o d a t i o n s TotaIDOSRI loans are limited to 15 p e rcent of a bank's loan portfolio o r100percent of its c a p i d accounts,whichever is lower.

f: Treatment of Past Due LoansBanks are allowed to write offbad loans u p to P100,OOO. BP a pproval must be s o u g h t beforew r i ing -o f f loans in excess ofP100,000.00.The following shall be consider-ed past du e loans:bills discounted and timeloans, whether o r not representingavailments against a credit line - ifnot paid on respective maturitydates of the promissory notes;bills an d other negotiable in-struments purchased - if dishonor-ed upon presentment fo r accept-

ancelpayment or not paid on ma-turity date, whichever comes ear-lier; out-of-town checks and f o reign checks outstanding for thirtydays and forty-five days, respec-tively, unless earlier dishonored;loanslreceivables payable ininstallments which have exceededth e prescribed minimum numberof installments in arrears;loans fo r which 20 percent ofth e total outstanding balance inarrears; and,all items in litigation.g. Reseme RequirementsBanks are required t o se t aside acertain portion of their depositliabilities as reserves in th e form ofcash in vault, deposits with CBPand government securities.

All types of banks are allowedto invest in allied undertakings butonly universal banks are allowedt o invest in non-a l l ied u n d e rtakings. Allied2 undertakings areactivities related to banking whilenon-allied undertakings3 are thosenot related to banking.The ceilings on equity invest-ments of banks in allied under-takings as percent of the capitaland surpluses of th e bank are asfollows:Total Investments Single Investment

25% 15%50%(for EKBs) 15%(EKBs, for d i e dand non-alliedFor the purpose of determiningcompliance with the limitations

I LEGAL RESERVEREQUIREMENT AGAINST DJlPOSITSAND DEPOSIT SUBSTITUTESOFBANKS(10 Percentp r ) Ih a n d 21 21' 2 0Savings 21 . 17 14 14 -NO W Account 2 1 2 1 18 *Time Deposit

33 0 2 1 17 14 14730 21 21 20 21Dcposit Substitutes730 21 2 1 2173 0 21 2 1 - 21

h. Liquidity Floor on Gooem--on equity holdings by a bank inment Deposits an allied and non-a l l ied under-Authorized depository banks of taking, th e equity holdings of thegovernment funds are required to bank in th e undertaking, whenmaintain a 75 percent liquidityfloor with respect to deposits of,borrowings from, an d all other u n ~ & sreof rwoF/pes, rimliabilities to the Government and cid and non-fmaneirl. AUied financial undergovernment entities. This liquidity f ~ h ~nclude [ e h g cmpmie%b a k s *vestment ~OUM% financing companies, creditfloor requirement is inclusive of ete. Allied nowfi-cipl. un*the existing legal reserves against der&ng include w~rcbousingcompanies,deposits, &d could be coGplied safe d e ~ d tox comp-ie% compmi-grgtd in the provision of computer services,with - .n the form of government cmpmies cngrged in pctiviw imilu to thesecurities mmngunat ofmumd funds, etc.3~oa-alliedundcrtrkiags include eorcrpriscsj. Ceilings on Equity Investment engaged in&culture, manufacturing; energy,of Banks ~sportat ion, ower, deeaification, w h d esale wade, etc



18/48

combined with those of its direc-tors, officers and subs tantial stock-holders, and its wholly-or majori-ty-owned subsidiaries.should notexceed 35 percent of the equity oftha t undertaking.j. EstabZisbment of Bunks andBank BranchesThe existing policy of the MBregarding the licensing of newbanks is embodied in CB CircularNo. 12 00 dated May 16, 1989.The said circular provides that th eestablishment of new banks shallbe allowed, with the Central Bankdetermining the qualifications,both qualitative and quantitative,such as but not limited to com-pliance with all requirements ofexisting laws, capitalization, direction and ad ministration as well as

the integrity and th e responsibilityof the organizers and administra-tors t o reasonably assure the s af ety of the interest which the publicmay entrust them, A new bankmay also be established as a resultof merger or consolidation of weakand marginal banks.With respect to bank branching,there are no restrictions on theopen ing of new branches in priori-ty rural areas. However, in urbanand particularly metropolitan

areas, the CBP shall retain its dis-cretionary policy on branching,but allow a bank to open a newbranch so long as the bank's m a rket share in that area would notcreate any market concentrationproblems. Branches of closed banksare available for purchase by eligi-ble banks desirous to expandk. R ep w ed AUocationforAgra-rian Refornf an d A g ri cu lt u ra lCredit (Agngn-ugraCredit Require-m n t YEach bank is required to setaside a t least 25 percent of its loan-able funds for agricultural creditof which a t least 1 0 percent of theloanable funds should be madeavailable fo r agrarian reform credit.1. Required Loansto-DepositRatio:

4& requiredunder P.D. 717

At least 75 percent of totaldeposits, net of required reserves~ a i n s t eposit l iabil ities and pro-vision for "till money," in a par-ticular regional grouping outsideth e National Capital Region, mustbe invested in the same regionalgrouping. T his requirement is com-plied with if in a particu lar region,the bank's lendings for the fi-nancing of agricultural and exportindustries aggregated 60 percentof its deposits.It may be noted that above re-gulationdrequirements from (a) t o(j)were intended t o m inimize risksfaced by banks and prom ote soundbanking operations for t he protec-tion of th e interest of the deposit-ing public, as well as avoid undueconcentration of economic powerin t he banking system. Meanwhile,the last two requirements (k and 1)partake the nature of allocativemechanisms to channel resourcesto certain preferred sectors andgeographic areas of the country.TheThrust TowardsDeregulationIt is an admitted fact that toomuch regulations inhibit competi-tion and lead to inefficiencies inthe banking system. Regulationsare also not guarantees againstbank failures as shown by th e ex-perience during 1984 to 1987when a number of banks wereclosed. It is in view of these con-siderations that the CBP hasmovedahead with the thrust towardsgreate r deregulation and liberaliza-tion only t o be complimented bya more careful supervision of thebanking system. Important stepshave been taken such as the con-tinued pursuit of a deregulated in-terest rate policy which was ini-tiated in the early 80% he easingof rules regarding the opening ofbanks and establishm entof branch-es including automated tellermachines (AT&), the expansion ofallowable areas for equity invest-ments of banks and the relaxationof functional distinctions among

banks with the granting of addi-tional powers for thrift banks, tomention afew. --It is worthy to note that whenCircular No. 12 00 was issued inMay 198 9 up t o end-1989, 23commercial banks, 18 thrift banksand 13 rural bank branches weFeallowed to be established. Thiscompares with only one thrift andone rural bank branches openedduring the comparable period in1988 and absolutely no branchesin 1987. The conversion of asavings bank into a commercialbank was also approved in Februa-ry 1990 which in effect lifted themoratorium on the establishmentof new banks. The pre-requisiteinvestment in government securi-ties for bank branching was alsoremoved towards the close of1988. The definition of branchservice areas and the criteria forbranching are currently furtherbeing reviewed with the end inview of further liberalizing branch-ing policy.On April 27, 1990, the allow-able areas of equ ity investmen ts innon-allied undertakings of univer-sal banks w,ere expanded to includeinvestments in enterprises engagedin mining and quarrying, con stru etion, wholesale trade and commu-nity and social services in additiont o previously allowed areas such asagriculture, manufacturing andutilities. In th e following mon th,additional equity investments inallied financial undertakings ofcommercial and universal banks,were also do w e d t o include com-panies engaged in stock brokerage/securities deaIers1brokers. Also inMay 1990, thrif t banks were allow-ed to accept foreign currencydeposits (for those with mini-mum paid-in capital of P500mil-lion) or to act as forex-agents (forthose with minimum ca pitalizationbelow P50 million) and to issuenegotiable order 'of withdrawal(NOW). Before the end of June1990, authorized banks includingwholly foreign-owned bankswereauthorized (subject to prior CBP

CENTRALBANKOFTHE PHILIPPINES


19/48

approval) to install ATMs outsidebanks' premises which heretoforewas prohaited. During the samemonth, the single borrower's limit(SBL) was also relaxed by exempt-ing portions of the peso loans co-vered by guarantees of internation-aVrcgional institutions where thePhilippines is a memberlsharehold-er from the computation of theSBL.

With regard to the rules alloca-ting unds/resources to specificareas, it may be pointed out thatthe existing loan to deposit ratiorequirement has also undergonesome relaxation in January 1990with the expansion of the geo-graphic area wherein the requiredloans are to be channelled. Thiswas done to provide banks withgreater flexibility to diversify loanportfolios. The CBP also supportedmoves in Congress to repeal theagri-agra credit requirement.Meanwhile, to strengthen thefoundation for greater competi-tion in the banking industry, mini-mum capital requirements wereraised in November 1989, ie., uni-banks from P500 million to P1 bil-lion and commercial banks fromP300 million to P500 million. Var-ious measures to strengthen banksupervision and regulation werealso formulated and implemented

These measures include the im-provement of: (1) reporting re-quirements for banks, (2) guide-lines for asset valuation and loangross provision to tighten andstandardize criteria uniformly toall.banks, (3 ) guidelines for aeat-ment of trust accounts to preventabuses, and (4) accounting princi-ples governing preparation ofbanks' financial condition andoperating results. The cBP has like-wise initiated legislative measuresto improve the overall regulatoryand supervisory framework withinwhich the CBP will operate.Summary andConclusionThe foregoing has touched on thevital role played by banks in fundintermediation, the benefits thatthey accrue to the economy andthe various risks that they take.The government through the CBPhas taken an active role in the re-gulation of the banking system toprotect depositors, prevent bankfailures, avoid concentration ofeconomic power and to redirectfunds to certain sectors and areasof the country. Government reQation is not al l together desira lesince it has also its own disadvan-tages of limiting competition andpromoting inefficiencies. The fact

that government regulation suffersfrom some inefficiencies however,may not be a sufficient case to r eplace it since the alternative mightbe worse. It is therefore said thatit is much easier to make a casefor some government regulation ofbanks than to decide just howmuch regulation is needed andwhat form it should take.In the Philippines, the CBP hassince the early 80s initiated movestowards deregulation in the bank-ing system. The implementationof deregulation policies were inter-rupted by various crises, i.e., crisisof confidence in the financial sy*tern in 1980, balance of paymentsproblems in 1983-1984 and bankfailures in 1984-87.The csp nevertheless endeavored to push through with the dere-guIation. Such deregulation hasbeen and will continue to be com-plemented by the strengthening ofthe legal and institutional frame-work for supervision and regula-tion. The Philippines has followeda gradual and rather cautious ap-proach towards deregulation inthe last decade but recent policyactions and pronouncements par-ticularly in the first half of 1990indicate that the deregulation hasgained momentum.

CB REVIEWSmtmnber lssO


20/48

EATURES

InyeistmentTrends: owards FinancingIrifrastructure Supportfor Economic GrowthMa. Belinda C. Carandang

InductionCapital accumulation is regardedas h e core of the growth process,and it is viewed as a primary factorwhich facilitates a more rapid rateof economic development. Theamount of productive capitalaccumulated is also a major gaugeof the standard of Living of a na-tion. The striking disparity in in-come and availablesavingsberwecndeveloped and underdevelopedcountries has, in fact, been at-tributed to, among other factors,the scarcity of capital.Thoughinvestment constitutes asmaller part of aggregate demandthan consumption spending, itplays an important role in thefluctuationsofGNPover he courseof the business cycle because itvaries more than consumptionspending. Keynesian economics,

Ms. Curndang ia Senior Economic Dw l -opmyt Specirlirt at the Dcpuemcnt of Rco-mmr Racuch.Intetnat id

in particular, stresses that the rateof fixed investment is a key detcr-rninant of the short-run or cyclicalfluctuations n realnational incomebecause it affects the amount ofproductive capital available per -person employed, and thus, aggre-gate productive potential.The very nature of the economicfunction of investment is the sac-rifice of current consumptionwiththe purpose of increasing the stockof capital goods to realize an ex-pansion in consurnmable outputin the future. From the viewpointof the suppliers of capital, invest-ment serves the economic functionof providing an outlet throughwhich stored wealth may be putto productive use and made to re-turn an income. The payment of afair return under the free enter-rise system is the essential factorthat induces potential investorsto withhold currznt consumption.Moreover, if effectively employed,capital goods can increase pro-ductivity to provide profits for

CENTRAL BANK OF THE PHILIPPINES

their maintenance or full replace-ment.Efficient and maximum utiliza-tion of public investment resourcesfor economic development requirejudicious &cation decisions de-pending on, among other consider-ations, the following criteria: incre-mental capital-output ratio (rco~),national produce test, social mar-ginal productivity (SMP) and thebalance of paymentseffect.The incremental capital-outputratio (IcOR) or capital coefficientis defined as the amount of ad-ditional investment required toproduce an additional unit ofoutput. The criterion asserts thatidedy only projects with a lowincremental capital-output ratioshould be selected. However, it isrestrictive in the sense that it failsto consider the time element andthe supplementary benefits toother economic activities. Table Ishows that the annual ICORS ofthe Philippines compared to theother ASW countries during the


21/48

FEATURES

r* I. MCREMENTAGCAPITALOUTPUTRATIO OFSELECTEDASEAN COUNTRIES(At Constant 1972Ricer)Year Philippines Malaysia Sinp- Indonesia

.1.852.871.651.983.262.274.076.912.91 '2.27N.A.Sourre ofSaricData: The Iaterootiod Fi0aoci.l Stntisties 1989,lnteruatiood Moo-Fun?

seventies andup ao he mideigbticswere relatively higher, (than thoseof the other A~EAN countries)reaching a peak in 1983 due to fheslowdown in outgut which wasprecipitated by the external pay-marts &is. However, it startedto de&e after 1986, signallingthat the Govemmcnthas been suc-cessful in strengthening its invest-ment programming and evaluationmechanisms to come up withmore efficient projects.The national produce (or con-sumption) test, - by J.Tinbergen, is based on the asses-ment of the projw's direct, in-direct and secondary consequencesvalued at accounting prices. Whilethe ICOR test can be used to esti-mate the efficiency of investmeatsfor #the whole economy, the na-tional produce test can only beapplied on a per projectbasis,The socialmaxginalproductivity(SMP) criterion, proposcd by A.E.Kahn, states that the allocation ofinvestment resources should con-sider the total net contributionofthe marginal unit of investmenttonational product and not only thatportion of the contribution whichmay acme to the priwte sector.Based on thiscriterion, the optimalalloation of investment resourcesoccurs when the social marginal

productivity of capital is cqudin all its different uses. Galensonand Leibenstein, on the otherhand,state that investment must be A-located to maxirnize the rate ofsavings and thus of reinvestment.Theyassume that profits are largelysaved for reinvestment and thatwages arc l q d y spent. Hence,available capital should be distrib-uted among the various alternativeuses in such a way that themargi-nal per capita investment quotientof capital is approximately equalin the different uses. However,thiscriterion is not well-suited to thecase of underdcvtlopd economieswhich are generally characterizedby massive underemployment andscarce capital, since these areasge-nerally requirc investment projectsthw are labor-intensive tomobilizethemaximum amount of laborperunit of investment.Lastly, the balance of paymentscriterion advocates that priorityshould be given to projects whichmaximize the balanceof paymentsgains.~ n v e a r a n k rends in thePhgippmaThe accumulation of capitalisun-dertaken by both the private andgovernment (public) sectors. The .

foIIowing sections seek to discussinvestments of both s e w ar-ticuhrly with z* lm-O-t trends 'ch have beenobserveds in e the seventies.The Philippinesagross domdccapital formadon (GDCFI in realterms generallycxhi'biteduptrendsduring the ' ~ O S ,from P9,929 mil-lion in 1970to P25,493 million in1979 (Table2).The highestgrowthrate of 23.5 percent was registeredin 1975 while the lwm (0.1 p wcent) was recorded in 1977.Whilethe private sector has contributeda larger share to total investmentsthan its public sector counterpartin both construction and durableequipment, public invcs tment shave risen quite sigdicantly parti-cularly in the mid-ties untilthe early eighties,m eet he highinfrastructmal needs of a rapidlygrowing economy. The accelera-tion of public investments after1979 could also be attributedp d y o he up-g and expan-sion of faciIitios of the energy seetor, particuhrly in gcothennd,coal andhydropower plants tomi-nimize the heavy dependence inimported petroleum. A major pro-gram of industrialinvestmentswasalso launched in the early eightiesto save foreign exchange throughimport substitution. Howcvet, asthe i n m m t p r o m expanded,many of the investments turnedout to bc less productive than ex-pected partly as a result of theGovernment's weak mechanismfo r evaluating and supervisingpro-jects and tbe concentration ininfrastructure projects with longgestation periods. Many of the in-vestments also had limited impacton foreign exchange savings andthisfurther aggravatedthe externaldebt burden.These, inconjunctionwith other fadtors, led to the eco-nomiccrisiswhich started in 1983.During the 1982-1986 period,CDCP declined steadily,with gov-emmat o$nsa;uction activitiesdropping by 32 percent in 1984as the public infrastructure pro-gram was restricted to majar re-


22/48

' ~ousrsRDl P Projects and PrOjRcIs that will be identified ater on from a Shoppinu List of Projects.includinpContingamy a l ~ ~ n n c sor physkal and finmcial variationr The incremedhue of Others took inmmo un t now wo~ecta hat wl l be identif iud during the Plan periodSam:Medium Term Philippine Deuelqment Plan, 1987-92,NEDA.

pair and maintenance of existingprojects as well as the completionof ongoing projects. Reductionswere particularly severe in trans-portation/communications(80 per-cent), industry (83 percent) andenergy (54 percent). Considerabledelays were likewise experiencedin the completion of ongoing pro-jects. In fact, even private con-

struction suffered declines from1984 to 1986.In about the same period (i.e.,1982 to 1986), the accumulationof durable equipment was also ona downtrend, both in the privateand public sector, reflecting thegeneral recessionary situation andthe austerity measures adopted tocontain the balance of payments

C E N T R A L B A N K OF THE PHILIPPINES

deficit of the country. Decreasesin stocks were.likewise noted dur-ing the same period in markedcontrast to the substantial increasesregistered in the years precedingthe crisis.The economic turnaround in1986, however, was manifested onthe demand side by larger domesticinvest men t s which registered arecord high 34.2 percent growthin 1987 and which continued toincrease although at a slowerpace until 1989. The expansion inGDCF was traced primarily toincreased investments in durableequipment in the private and pub-lic sectors precipitated by theimproving business dimate coupledwith brisk construction activity.Build-ups in stock were also ex-perienced in 1986, with 1987reaching a particularly hefty in-crease as bullish production activi-ty was translated into an accumula-tion of inventories for future sales.Cognizant of the need for asound infrastructure program toprovide firm physical foundationfor economic growth, new. mea-sures have been and continue tobe implemented to effect efficientimplementation and managementof government infrastructure pro-


23/48

FEATURESjects. In 198 7, the Project Facili-tation Com mittee was created andthe implementation of projects atsub-national levels was strength-ened. In 1988, infrastructure pro-jects were identified as one of theeconomic activiees entitled to in-vestment incentives under th e 19 88Investment PrioritiesPlan. Further-more, the Medium Term PhilippineDevelopment Plan for 1987-92 isenvisioned to eradicate impedi-ments to increased industrial andagricultural production and t o pro-vide greater access to basic socialand econom ic services (i.e., w ater,energy, transport, comm unicationsand social infrastructure). In thisregard, priority will be given toongoing and existing social over-head facilities as against new in-frastructure projects. Extensiveengineering surveys and designs,close supervision and quality con-trol and transparency in operationwill also be pursued t o ensu re ef-ficient project implementation.Moreover, discriminate selectionof projects will be undertaken sothat only projects which will helpin the attainment of the Govern-ment's goals of employmen t gene-ration, poverty alleviation and im-proved delivery of support servicesivill be encouraged.Sector-wise, the energy, trans-port and water resources industrieshave the highest investment re-quirements for the medium-term(Table 3 and Figure 6).The coun-try's energy program shall con tinueto pursue fuel diversification, andthe exploration and developmentof potential, indigenous and renew-able energy sources. Efficient aa-bilization of energy and w a t e rresources along with effectiveconservation efforts shall be en-couraged. Transport infrastructure,on the other hand, will beorientedtoward rural areasby strengtheninginter-regional linkages to effectmore effiaen t movements of m od sand services from excess p&luc-tion areas to deficit areas. Thewater resources program shall begeared toward attaining self-suf-

ficiency in food. Irrigation shall ComparativeAnalysis of thebe extended to crops other than Capital FormationExperiences ofrice and the flood program shall ASEAN MemberCountries,be improved to mitigate damageto crops especially during calam- Figures 2-6 show the growth ratesities. of Gross Fixed Capita1 Form ationFigure 2. GROWTH RATES OF REAL GFCF*

Philippines, 1970-88

* G r a Fixad Qpiml Formation nUS$ MillionGDP M a t o r- [email protected]*am: Tho Inwrnmional Flmmbl Stmlnkv 1OBglnnrnatlonrl Man- Fund

Figure 3. GROWTH RATES OF R EAL GFCF*Thailand, 197047

is90 I ish I 1994 I i$e I ~ & a ih l a b I ih ihYear 1971 1973 1975 1877 1979 1Wl 1983 1986

CB REVIEW Septembew 1890

-

'GrossFix d fapita1 Fornution In US8MllllonGDP Deflatora tWSournof&& LR.a: Tho lnter ~t io nl lnmklSWnla 1gBB.lntwnarorulMontmry Fund


24/48

FEATURES(in red terms) for the ASEANmember countries. It can beobserved that the said countriesexperienced drops in GDCF in theearly eighties as a result of theworldwide international recessionwhich was precipitated to someextent by the debt crisis. How-ever, the decline in the GDCF ofthe Philippines was particularlysignificant because it was magni-fied by a crisis in the politicalfront. Nevertheless, it showed arelatively better performance thanIndonesia in the sense that thePhilippines was able to show apositive growth in 1986 whileIndonesia still reflected a negativegrowth. Elements of strength inthe investment picture in thePhilippines appears, therefore, tobe evident in the late eighties. Infact, in 1989 economic growth inthe country was investment-led.Financing of the GovernmentInfrastructure DevelopmentProg;lramThe medium-term public infra-structure investment require-ments totalling P257.6 billionfor 1987-92 are expected to befinanced by domestic (73.5 per-cent) and foreign sources (26.5percent) (Table 4). Of the totaldomestic component, more thanhalf will be sourced from general/continuing appropriations whilethe rest will come from equitycontribution to corporations, netlending, internal cash generationand corporate domestic borrow-ings. On the other hand, about60.0 percent of the foreign costcomponent will be fmanced fromNational Government borrowings.Foreign Investmentin thePhilippinesMany less developing countries(LDCS) possess valuable naturalwealth. However, he basic instru-ments for the efficient and maxi-mum utilization of these re-sources-managerial ability, tech-

FigureA GROWTH RATES OF REAL GFCF*Singapore, 197087

*& F l r dCmplOl FarmnthIn US6MllionGDPm a 1Swtw of&& L*a:Thr InmmtlonJP I n d l l SmbUcs1PBB.Intwn6tio~l nnr~nund

nical personnel, technologicalknowledge, administrative organ-ization and capital-are usuallyscarce. Cognizant of this problem,the LDCS recognik the importantcontribution of foreign invest-ments in augmenting domestic in-vestible resources. In this regard,capital importing countries haveprovided a wide array of incentivesto attract foreign capital, e.g., taxincentives, investment guaranteesand financial assistance to privateinvestors.The most significant conmbu-tion of foreign investment comafrom external economies - the in-flow not only of capital and foreignexchange but also of managerialability, technical knowledge, ad-ministrative organization and in-novations in products and produc-tion techniques - all of which arein short supply in the recipientcountries. Foreign investment thusprovides access to foreign techno-logy that helps to fill th e manager-ial and technological gaps in thesecountries. The entry of foreigninvestments may also serve as a

stimulus to additional domesticinvestments in the recipient coun-PY.However, the inflow of foreigncapital may also imply that ad-ditional costs have to be borneby the host country. These mayarise from special concession of-fered by the host country - suchas the provisionof specialfacilities,additionalpublic services,financialassistance and subsidiesfor inputs.Another serious concern is thebalance of payments which mayweaken with the repatriation ofprofits, royalties and dividends.In addition, there is some appre-hension concerning nonnsidentownership and control of thecountry's resources which mayengender a sense of lack of con-trol wer the domestic economicactivity such that there is s feel-ing of national loss of capabilityfor independentaction.Given the various pros andcons surrounding foreign invest-ments, controversy, therefore,arises as to whether or not for-eign capital should be actively


25/48


26/48

Figure5. GROWTH RATES OF REAL GFCF*Malaysia, 1970-88

'Gross FlxcdCapla1 Fornmtlon nUSSMillionCOPOeflrtor- 1985&urn of- Ika:The Inanutlatd HnrreW Ststkrics 1988.lnarrutlolulMonnvyFund

port of jobs from rich countries,and (e) possibility of currency 'speculation and tax evasion.From the economic mint ofview, oreign capitaI infl04s shouldbe encouraged if the value addedto output by the foreign capitalis greater than the amount ap-propriated by the investor so thatsocial returns exceed private re-t u r n s . As long as foreign invat-ments raise productivity, directbmefits accrue to other incomegroups, namely: domestic laborin the form of high r e d wages,consumers bv wav of lowerprices, g o ~ 6 e n t ugh highertax revenues and indirect gainsthrough realization of e&mdeconomics. The recipient nationshodd, therefore, encourage for-eign capital inflow if it can derivemaximum nationaI economicgainsfrom these resources. Effective

CENTRAL BANKOFTHE PHILIPPINES


27/48

utilization of foreign investmenftherefore, calls for appropriatepolicies that would attract the:inflows as well as the retention ofcapital to the sectors where themare most needed (i.e.. in area^where domestic investments arewanting) and that would minimizethtir deleterious impact if any onthe economic, political and socialstructures of the country.Trendsof Fareign InvestmentsFlows in the Philippines,1970-1989From Table 5, it can be gleanedthat net foreign investments in thecoway were on an uptrend until1977, fterwhich the trend becameunsteady, as a result of the unset-tling effectsof the second oilpricehikeandthe internationalrecessionwhich started in the early eighties.The foreign exchange cnsis aswellas problems in the political frontin 1983-85 ontributed further tothe fluctuations in foreign invest-ment flows. However, foreigninvestments started to surge in1986 reaching a record high ofUSS986 million in 1988 as confi-dence in the Philippine economywas restored with the installationof a new government and the re-turn of democratic institutions aswell as the introduction of thedebt-to-equity conversion schemesin August 1986 which sought totransform part of the country'sexternal debt into investments andhelp ease the debtburden. In 1989,however, the political disturbancetoward the latter part of the yearaswell as the temporary closure ofthe debt conversion of CB debtpapa had a depressing effect onthc growth of foragn capital in-flows to the country.The economic and fiuancialprogram of the Philippines for1990-92 nvisages an increase inforeign investment inflows in-cludingthe reflowsof flightcapital,as the Government will continueto attract foreign idvestments bys~cCan3,binghe regulatory frame-

FEATURES

NET DIRECT INVBSKBNTSIN THE knaLIPklr*ES(In MillionUS$)1970-1969 *

S o uw : DER-intcrrtioaJ, C e n d Bank of he P h l i p p h

Figure6. GROWTH RATES OF REAL GFCF*Indonesia, 1Q70P7

0.6- ... IYear

'Oron F i x d Qptml Forrnsbn inUSfMillionGOPM a t o r- sB6work and the accompanyingadmi- nection, the Philippine Fund,nistrarive machinery governing which was lamched in Novemberforeign investments. In this con- 1989, s expected to mobilize sav-



28/48

ings from overseas Filipinos andother investors so that the fundswill be invested in Philippine com-panies and thus provide a boost t oth e local stock market. Further-more, a joint Congressional Hear-ing Committee on InvestmentsReview is currently studying th epresent investment climate of thecountry with the view of reorient-ing investments toward medium-sized industries for both domesticand export markets. In addition,th e Government is studying rheprospects of raising beyond 40per-cent th e equity participation offoreigners in non-pioneer areasunder th e Investment PrioritiesPlan to allow greater ownershipand control of certain businessand assets. Thie measure aims toaddress th e insufficiency of localrisk capital.Conclusion

country manages its investmentresources. However, the efficientutilization of scarce investmentresources hinges on the develop-ment of a sound public invest-ment program and the establish-of an appropriate macroeconomicpolicy framework. On the otherhand, a sound public investmentprogram is expected to providethe basic social overhead facilitiestha t would enable the smooth andefficient flow of resources amongproductive en tities.An ppropriatemacroeconomic policy framework,on the other hand, consisting ofinterlocking policies-fiscal, mo-netary, foreign exchange, tradeand wages that are supportive ofinvestment decisions is also neces-sary since this would provide theenvironment against which invest-ment decisions could -bemade.

The direction and pace of econo- wc, ct I-t-mic development are determined mmt in A& a d he *PC. ~~oab- Auet o a significant extent by how a d i m National Uni~ tn i t~he^, 1972.

Lund,Philip. trrrrenmmt:Tbe Study of anEconomic Aggrqat6. 55*a Francisco: NorthHolland PublishingCompany, 1971.Meier. Gerald Leading lssvss in EconomicDevelopment, 3rd ed , 1976.

Medium-Tern Philippine DevelopmentPlan 1987-92. NEDA.National Income Accounts of the Phiiip

pines. NEDA.Nurkse. Rlgnar. h b l m s of Capital Formation in W d d m l o p e d Counttics. 3rd ed.Great Britain: A.T. Broome and Son, St . a e -molt's Oxford, 1955.Rcubcr, Grant. m e ommgn mmtmmt

h Dwalopmant. Great Britain: Oxford Univer-sity Ress, 1973.The International P i c i d StaW cs 1989.International Monetary Fund. Wdington,D.C. The Philippines: A Framework for

Economic Recovery, Nwanber 5. 1986, Re-port No. 6350-PH.Zolotss, Xcnophon. Intemarional Mone-taty Issues andDswlopmmt Policies. Athens:Banks of GreeceRiting Worb, 1977.

CENTRAL BANKOF THE PHILIPPINES

--


29/48

Juan A. Tolentino

EvolutiodRPtio~le f .Quasi-BankingThe beginnings of quasi-banking inthe Philippines may be traced tothe Joint IMF-CBP Banking SurveyCommission in 1972which recom-mended, among others, the inclu-sion of non-bank financial intermediaries excepa insurancecompanies within th scope of theCentral Bank's authority. Such in-clusion sought to bring about amore effective monetary and cred-it management and to protect thepublic as a result of fun& lent tothe non-bank institutionsAs defined by the Commission,the function of quasi-banking isthe "borrowing of funds, for theborrower's own account, throughthe issuance, endorsement oracceptance of debt instruments ofany kind other than deposits, orthrough the issuance of participa-tions, ~ e r ~ c a t e sf assignment or

Mr. Tolenth is r Supervision and Exnu+~ o i o n p e w V at fbeSupmisoryRepam.adCorporateAaalydrDepartment(SRCAD).

similar instruments with recourse,or of repurchase agreements, fromtwenty or more lenders at any onetime, for purposes of relending orpurchasing receivables and otherobligations."lLikewise, by defining publicborrowing as consisting of at least

20 lenders, the Commission dis-tinguished such borrowing fromordinary borrowing. The former sallowed by means of a CentralBank-issued certificate of authori-ty to engage in quasi-banking. Thislicense exempts a holder from thecreditor number limit by dowingaccess to sizeable borrowings sub-ject to certain Central Bank rulesand regulations, and permits saidlicensee to turn around by relend-ing the borrowed money resources,an undertaking that is no differentfrom banking.Quasi-banking is however deli-neated from banking practice as

1 1116i-~anking in the r ....,,... -

' l b a Rrcmmnmddon of ba joint IMECBPBan&& afwsy Cornrnirrim ocr &beP b O ~~inoncial y s ~ r r n ~marl I ~ ~ Lf the =nippiam September1972), p. 139.

understood under the CentralBanking Act in the sense that theformer refers to financial inter-mediation of funds by non-bank .financial intermediaries. While Iseemingly similar in deposit-takingactivities, the latter as undertakenby the non-banks is unique iri thesense that funds are gathered inexchange for hlgh-yielding depositsubstitute instruments with colla-teral securities (ie., prime stocks,or postdated checks, or govern-ment securitybas,etc.) which arepayable on maturity dates or pre-terminated anytime, although inthe case of a promissory note,there is no accompanying securitywhen issued This difference not-withstanding, most of the legalparameters of quasi-banking arecommon and at par with commer-cial banking although the latterenjoys a broader scope.Although officially recognizedonly since 1974, quasi-banking hasin fact touched the lives of vastnumber of the populace. The ex-tent of its influence ranges fromthe average income worker in needof a refrigerator or a washing

CB REVIEWSqmmber 1980


30/48

1 FEATURESmachine who has insufficient cashsavings to purchase them, to theindustrial tycoon-millionaire seek-ing an investment outlet at opti-mum yield for his excess funds.The occa,sions a l l concern financialdealings with, either as debtor oras creditor to, non-bank entities'with quasi-banking fbnctions.TheQ u a s i - W i g CycleFinancial intermediation consistsof three aspects: borrowing, re-lending, and repayment.The first, fund solicitation or.borrowing phase, seeks the excessor idle funds. A meeting betweenthe quasi-bank's trader and theidentified prospective investorprogresses into bargaining overspecific yield rate cost, maturityperiod of the prospective placement, type of debt instrument tobe issued as loan guarantee andunderlying collateral security. AUterms of the negotiation must fallwithin the quasi-bank's policyguidelines.The key to fund gathering is theplacement yield or borrowing cost.It features a range otdering on afloor and a ceiling, indicating alatitude of flexibility for the freeinterplay of supply and demand

forces in the financial market.Placement yield varies among the15 quasi-banks from a low 4 per-cent to a high over 17 percent asof December 31, 1989 as shownbelow.

Table 1 shows the relationshipbetween placement yield rate andlevel of borrowings. Except inthree instances (ie., rate level ofover4 percent to 6 percent; over 6percent to 8 percent; and aver 14percent to 17 percent), the amountof borrowings markedly increasewith the increase in the yield rate.This trend indicates that rate qua-lity is the selling point in obtain-ing placements. As to the exeptionsnoted in certain rate level, thiscould be attributed to factors suchas placement volume, p-ingmarket cost of fund for a particu-lar borrowing such as GLF andother government loan programs,and bargaining skill of the fundplacer.Acceptance of the trader's offerby the investor closes the deal.Immediately, the quasi-bankphy-sically delivers to the investor thedeposit substitute instrument asagreed upon (i . ,-promissorynote,or repurchase agreement, or certi-ficate of assignment/participationwith recourse) and duly supported

by underlying shares of blue-chipstocks, or government securitycertificate, or postdated check. Inexchange, the investor issues cashor a check value dated upon issue.In the case of a custodianshipagreement, there is no physicaldelivery of deposit substitute in-strument. Instead, the quasi-bankkeeps the instrument in behdf ofthe lender.Thesecond or turn-aroundphaseis termed "relending," and mustfollow for the simple reason thatborrowed money resources mustbe made to earn to pay off the in-vestor's yield rate cost; contributea share in defraying the operation-aI, administrative and other ex-penditures of the quasi-bank; b esides providing an equitable spreadto compensate for the financial in-termediation services of the entity.A run-down of the financial en-vironment prcpares the ground-work for relending. Projects laggingon percentage completion fromtargetted due rates, temporarywork stoppage resulting fromoverspill of production budget,unstarted business proposals owingto inadequate capital, etc. identifymoney needs of the corporateowners.

rlacernent I relwEarrowing Cost1. Upto4%2 Over 4%to 6%3. Over 6%to 8%4. Over896 to 10%5. Over 10% to 12%6. Over 12%to 14%7. Over 14% to 17%8. Over 17%

Total

(EST RATELRIF S WIT1

mrm tto Total

CENTRALBANK OF THE PHILIPPfNES


31/48

-EATlJRESIn quasi-banking, relending activities do not simply wait forwalk-in clientele, but actively seekout users of the funds gathered.Account officers of quasi-banksmake social contacts and sell p mbuct lines to corporate businessesand individds in need of financingor equity capital. These prospectshowever undergo immediate,speedy and thorough credit in-vestigation.The free interplay of supplyand demand for funds prevail inevery transaction. Income yieldrates are presently deregulated,hence, the parties can openlynegotiate. Fund lending rates aremuch higher than fund borrowingrates for obvious reasons In mostcompanies, the account officerstry to mat& maturities of moneyinflows with maturities of moneyoutflows thereby insuring contin-uing liquidity.The third or repayment phasecovers the liquidation of maturingobligations of the clientele on onehand and the quasi-bank on theother. Accordingly,-all pertinentdocuments are returned to the re-spective ownerslissuers. Fundspaid by the clientele to the quasi-bank are inmm issued to the lend-er in satisfaction of the placement.A rollwm of placement signalsthe start of a new cycle. The fol-lowing is a diagram of the three-phase quasi-banking cycle.

While there are banks which havebeen aurhorized to perform quasi-banking functions, the bulk oftheir transactions are on tradition-al banking lines. Non-b& f i n ecid intermediaries on rhe otherhand identify quasi-banking astheir primary endeavor (this analy-sis therefore excludes this peri-pheral activity of banks).The present participants inquasi-banking activities are specificentities of the investment housesand the fiancing companies whichextensively deal with credit exren-

sioa out of borrowed funds Whilethere are 16 investment housesand 141 financing companiesonly eight head offices of theformer and seven head offtces ofthe Iatter for a total of 15 entitieshold Central Bank-issued certifi-cates of authority to engage inquasi-bank* Of these 15 , 93percent or 14 entities are based inthe Nationd Capital Region. Thelone institution outside MetroManila is situated in CebuBranches of these quasi-bankinstitutionsin the National CapitalRegion account for only 13 percent, or seven units, of the total53 branches in th e entire archipe-lago following regulations thatonly one branch outside of thehead office may be established inMetro Manila Notwithstanding,the head offices synchronize theoperations of al l the branchessuchthat funds held are maximizedthrough transfers

HistoricalDevelopmentIn 1975 there were 51quasbbanksfram four institutional groups ofthe non-bank financial intcrmedi-aries indusqy, namely: investmenthouses, financing companies, secu-rities dealers/brokers and invest-ment companies. By 1978, thesize shrunk to 27 entities To datethere now remain 15 quasi-banksand these are confined to the in-vestment houses and financingcompanies institutional groups.Compared with the 1989yearendaggregate of 2,861 head offices ofthe non-bank financial intermedi-aries industry among which thequasi-banks are classified, the elite15 constitute amere 0.52 percentSuch size is attributed primarily totwo factors, namely: 1)theclosureof the applications window forquasi-banking functions since thelate seventies and 2) the motetion or surrender of privileges of


32/48

FEATURES

12 licensees fo r varied causeswhichincluded reneging on capital build-u p program, dismal performance,merger with a bank/another quasi-bank t o satisfy th e minimum paid-u p capital required of P50 millionand insolvency. The quasi-bankinglicense is a privilege which whenabused is subject to withdrawalanytime by th e issuer.The banking reforms at th e turnof th e eighties made quasi-bankinga very competitive business. Keen-es t rivals fo r credit power are thewell-entrenched traditional institu-tions, such as commercial banks.Thus the staying power of the firstin th e financial scenario revolveson strategies of narrowing th e gapbetween yield rates of borrowingan d relending through a fair an dreasonable sharing of earningswith th e investor or placer of thefundThese changes are reflected inth e following comparative table.Quaai-Banks'FinancialTransactions n 1989Borrowings of quasi-banks, obtain -ed through th e issuance of mainlypromissory notes and interbankcall slips/instruments, registeredan 8.6 percent increase from the

preceding year's figure to residuea t an outstanding P8.0 billion asof December 31, 1989. Theamount equalled 72 percent oftotal assets, disclosing quasi-banks'heavy dependence on debts t oactively mobilize earning assets.On th e other hand, the loanportfolio posted an outstandingbalance of P7.8 billion Comparedwith th e total assets of P11.2 bil-lion, th e loan portfolio togetherwith investments which constituteth e earning assets represented 78.9percent thereof.A matching of levels between

borrowlags and Iaan port'hioex-hibited a 1.02: 1.0 relationship, oran optimized fund utilization ratio.Paid-up capital of P1.O biIlionprovided the creditors' cushionRetained earnings, which balloon-ed a t high 220.7 percent from th epreceding year's level to reachP0.6 billion, indicated a growingprofitable operating results.Table 4 shows that th e year1989 dispIayed increases in allmajor asset accounts, the most sig-nificant on investments and otherassets a t 54.2 percent and 54.0percent, respectively. Likewise,

C E N T R A L B A N K OFTHE PHILIPPINES


33/48

FEATURESA

liquid resources marsedly rose by20 percent o r P0.2 billion. Theiroverall effect expanded total assetsby a moderate P1.1 billion o r 10.6percentOn the liabilities an d networthside, th e increases in borrowings,other liabilities and retained earn-ings pointed to th e sources of as-sets growth. Capital stock, howev-er , shrunk by a hefty 6.8 percentor P73 million.For their borrowings, quasi-banks have to maintain reserves.Yearend aggregates recorded P964million of actual reserves asagainstP994 million of required reserves.Reserves, however, is consideredin terms of their average duringthe week. An average excess freesa quasi-bank from the daily defi-ciencies. Inversely, an average defi-ciency subjects an entity t o a closed that all 15 quasi-banks ex- mark. On the other hand, the totalpenalty charge. ceeded the 10 percent risk assets cash

Documents

CB Review September 1990- Quasi-Banking