Philippine Financial Account 2007
General Comments
(1) We generally agree with the conclusion of the paper that the country’s international investment position has improved since 2001 due to strong foreign exchange (FX) inflows and improved macroeconomic fundamentals.
(2) The comparison among emerging market economies (EMEs) is a fruitful exercise and provides an overall picture of the country’s relation with respect to other economies. However, the paper fails to provide a more graphic representation of this comparison and does not establish a benchmark where Philippines’ position may be assessed relative to others.
(3) The paper lacks extensive analysis of the country’s low level of foreign direct investments (FDIs) and the policy implications, through rational, does not stem from the description of the country’s financial structure.
Specific Comments
(4) We propose the following revision to first bullet of page 1: “Net foreign direct investment (FDI) flows, which had been slow in previous years, have turned strongly positive since 2005.” We find that the term “very weak” needs a basis for comparison.
(5) On second paragraph of page 5, we request that the paper cites the sources that argued for the relatively small need to attract foreign capital in the Philippines.
(6) We suggest the revision of the last paragraph of page 6 to include efforts that have been made to reverse the slump in investment, such as the implementation of Medium Term Public Investment Program (MTPIP), which guides public sector resource allocation and pipelines public sector programs and projects for official development assistance (ODA), private sector participation and other finance sourcing.
For its part, the BSP continues to foster stable macroeconomic environment by keeping inflation in check and the public’s inflation expectations well-anchored. On the external front, BSP policies have always geared toward: (a) ensuring sustainability of the country’s external debt; (b) maintaining an essentially market-determined exchange rate with scope for occasional official action to smoothen sharp movements in the rate; (c) maintaining a comfortable level of reserves; and (d) further improving the foreign exchange environment through FX deregulation.
The BSP also remains committed to the strengthening the banking system through continued structural reforms and speedier disposition of non-performing assets. The asset clean-up of banks has intended to help spur credit and investments, and contribute in providing the basis for more sustainable economic activity in the medium term.
To further develop the domestic capital market, the BSP continues to work actively with other government agencies and the private sector for the completion of critical market infrastructure to enhance system integrity and overall market confidence.
(7) On the first paragraph of page 8, we suggest the provision of a more detailed discussion on the standards of EMEs to which the paper claims that the Philippines falls short of. In particular, we strongly recommend the identification of the indicators and the benchmarks established on governance, property rights, cost of doing business, competitive market environment and freedom of entry.
On its specific suggestion regarding FDI, we wish to clarify that competition policies are in place, which have been effective in important sectors, such as banking, telecommunications and retail trade.
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Most of the comments were provided by Ms Tets. I just substantiated No. 6 but this provides a good framework in reviewing papers.
Comments on IMF's Access Policy
Review of Access Policy in the Credit Tranches and Under the Extended Fund Facility and the Poverty Reduction and Growth Facility, and Exceptional Access Policy
Background: In exceptional circumstances, a member's access could exceed the above credit tranche/EFF or overall GRA limits. The exceptional access apply in such cases.
Do the Directors consider the existing structure of annual and cumulative access limits in the credit tranches and the under the EFF, as well as the global limit on overall access to GRA resources provides an appropriate dividing line between normal and exceptional access?Wala namang problema dito. Ang problema eh granting exceptional access between capital account and non-capital account cases.We recognize the importance of flexibility in decision-making especially for unique circumstances. We are of the view, however, that existing structure may still need to come up with a clearer dividing line, which may be in the form of general principles, such as providing exceptional access to limit the contagion effect of a potential or actual crisis situation. In view thereof, we suggest that the paper provides a brief description of the bases on granting exceptional access in the past, which may serve as a starting point in developing a criteria in providing exceptional access.
Do Directors agree that the access ceilings and the delining access norms in the PRGF cases remain important to ensure the efficient use of the limited PRGF resources and should continue to be applied?We agree that access ceilings and declining access norms remain important. We cannot rule out the possibility that the availability of IMF funding promotes investor confidence on member economies. As long as the international financial markets are assured that member economies have liquidity support facilities then we expect robust global economic activity.
Commenting on IMF Papers
1. Read the questions/issues for discussion;
2. Read the paper;
3. Underline important parts; and
4. Isama ang e-mail (so there's no way for me to slack on this).
The Paris Club
The Paris Club is an informal group of financial officials from 19 of the world's richest countries, which provides financial services such as debt restructuring, debt relief, and debt cancellation to indebted countries and their creditors. Debtors are often recommended by the
International Monetary Fund after alternative solutions have failed.
It meets every six weeks at the
French Ministry of the Economy, Finance, and Industry in
Paris. It is chaired by a senior official of the French
Treasury, currently the Director General of the Treasury and Economic Policy Department
Xavier Musca .
The club grew out of crisis talks held in Paris in
1956 between the nation of
Argentina and its various creditors. Its principles and procedures were codified at the end of the 1970s in the context of the North-South Dialogue.
In the 1990s, the club began to treat the
HIPC (Highly-Indebted Poor Countries) and non-
HIPCs differently. The club began to grant increasingly larger
debt reductions for the HIPCs. For the non-HIPCs, the club engaged less in debt reductions and moved towards encouraging the absorption of non-HIPCs' financial losses by bondholders and other private creditors.
In
2004, the Club decided to write-off the debts of
Iraq, as the rebuilding of Iraq is incomparable. After the 2004
Indian Ocean earthquake, the Paris Club decided to suspend temporarily some of the repayment obligations of the affected countries.
As of
April 2006,
Nigeria became the first African country to fully pay off its debt (estimated $30 billion) owed to the Paris Club.
The permanent member-nations of the club are:
Australia,
Austria,
Belgium,
Canada,
Denmark,
Finland,
France,
Germany,
Ireland,
Italy,
Japan,
the Netherlands,
Norway,
Russia,
Spain,
Sweden,
Switzerland,
the United Kingdom, and
the United States.
The subprime mortgage financial crisis refers to the sharp rise in
foreclosures in the
subprime mortgage market that began in the United States in 2006 and became a global financial crisis in
July 2007. Rising interest rates increased newly-popular
adjustable rate mortgages and property values suffered declines from the demise of the
housing bubble, leaving home owners unable to meet financial commitments and lenders without a means to recoup their losses. Many observers believe this has resulted in a severe
credit crunch, threatening the
solvency of a number of marginal
private banks and other
financial institutions.
The sharp rise in foreclosures after the housing bubble caused several major
subprime mortgage lenders, such as
New Century Financial Corporation, to shut down or file for bankruptcy, with some accused of actively encouraging fraudulent income inflation on loan applications, leading to the collapse of stock prices for many in the subprime mortgage industry, and drops in stock prices of some large lenders like
Countrywide Financial.
[1]This has been associated with declines in stock markets worldwide, several
hedge funds becoming worthless, coordinated
national bank interventions, contractions of retail profits, and
bankruptcy of several mortgage lenders.
Observers of the meltdown have cast blame widely. Some, like
Senate Banking, Housing, and Urban Affairs Committee chairman
Chris Dodd of
Connecticut, have highlighted the
predatory lending practices of subprime lenders and the lack of effective government oversight.
[2] Others have charged mortgage brokers with steering borrowers to unaffordable loans, appraisers with inflating housing values, and Wall Street investors with backing subprime mortgage securities without verifying the strength of the portfolios. Borrowers have also been criticized for over-stating their incomes on loan applications
[3] and entering into loan agreements they could not meet.
[4]The effects of the meltdown spread beyond housing and disrupted global financial markets (see
financial contagion and
systemic risk) as investors, largely deregulated foreign and domestic
hedge funds, were forced to re-evaluate the risks they were taking and consumers lost the ability to finance further
consumer spending, causing increased volatility in the fixed income, equity, and derivative markets.
Econ Vocabulary: Global Financial Stability Report September 07
1. Procyclic - A condition of positive correlation between the value of a good, a service or an economic indicator and the overall state of the economy. In other words, the value of the good, service or indicator tends to move in the same direction as the economy, growing when the economy grows and declining when the economy declines.
"Financial regulation is inherently procyclical"
2. Moral Hazard - Moral hazard refers to the chance, or hazard, that a party in a transaction with more information about its intentions or actions behaves in a way that a party with less information would consider inappropriate, or in the extreme, "immoral". It arises because an individual or institution in a transaction does not bear the full consequences of its actions, and therefore has a tendency or incentive to act inappropriately, leaving another party in the transaction to take at least some responsibility for the consequences of those actions.
Moral hazard is related to
asymmetric information, a situation in which one party in a transaction has more information than another. A special case of moral hazard is called a
principal-agent problem, where one party, called an agent, acts on behalf of another party, called the principal. The agent may have an incentive or tendency to act inappropriately from the view of the principal, if the interests of the agent and the principal are not aligned. The agent usually has more information about his actions or intentions than the principal does, because the principal usually can not perfectly monitor the agent.
Moral Hazard in Finance Financial bail-outs of lending institutions by governments, central banks or other institutions can encourage risky lending in the future, if those that take the risks come to believe that they will not have to carry the full burden of losses. Lending institutions need to take risks by making loans, and usually the most risky loans have the potential for making the highest return. A moral hazard arises if lending institutions believe that they can make risky loans that will pay handsomely if the investment turns out well but they will not have to fully pay for losses if the investment turns out badly. Taxpayers, depositors, other creditors have often had to shoulder at least part of the burden of risky financial decisions made by lending institutions.
Moral hazard can also occur with borrowers. Borrowers may not act prudently in the view of the lender when they invest or spend funds recklessly due to the belief that they have access to a large line of credit. For example, credit card companies often limit the amount borrowers can spend using their cards, because without such limits those borrowers may spend borrowed funds recklessly, leading to default.
I encountered this when we were discussing about the opt-out provisions. 3. Propitious - Presenting favorable circumstances; auspicious
4. Hedge fund - a private
investment fund charging a
performance fee and typically open to only a very limited range of qualified investors. In the United States, hedge funds are open to
accredited investors only. Because of this restriction, they are usually exempt from any direct regulation by the
SEC,
NASD and other regulatory bodies.
A hedge fund's activities are limited only by the contracts governing the particular fund, so they can follow complex investment strategies, being
long or
short assets and entering into
futures,
swaps and other
derivative contracts. They often
hedge their investments against adverse moves in equity and other markets, because a common objective is to generate returns that are not closely correlated to those of the broader financial markets.
In most countries hedge funds are prohibited from marketing to non-accredited investors, unlike regulated retail investment funds such as
mutual funds and
pension funds. As hedge funds are essentially a private pool of managed assets, and as their public access is commonly restricted by the government, they have little to no incentive to release their private information to the public.
Inarguably private entities, hedge funds have a corresponding reputation for secrecy, and less is known about the methods and activities of hedge funds than about publicly-accessible "retail" funds. However, since hedge fund assets can run into many billions of dollars, and thus their sway over markets—whether they succeed or fail—is substantial, there have been calls for regulation of these private investment funds.
Lotilla perfectly describes how I feel right now
MANILA, Philippines -- After 22 years as a public servant, Energy Secretary Raphael Lotilla is bidding goodbye to government service, wanting to pursue more “intellectual” endeavors. In one of his most candid interviews yet,
Lotilla said that in his more than two decades in government -- particularly during his two years as energy czar -- he had not been able to perform much mental calisthenics.The pressure of having to jump from one issue to another, he said, deprived him of whatever “intellectual depth” government service could afford. “I want to have more time for that kind of thinking. In government, you don’t have the luxury of time to think that deeply,” he said. “I would like to end my vow of poverty and all the ancillary vows that come with it.”
Bachelor
A bachelor, Lotilla’s frugal nature has been a source of both awe and amusement to energy industry players -- and reporters. He is said to have no TV set at home, making him one of Manila Electric Co.’s (Meralco’s) lifeline customers, or those using less than 100 kilowatt-hours of electricity a month.
No surprise
Wednesday’s announcement of President Gloria Macapagal-Arroyo’s acceptance of his resignation actually did not come as a surprise to Lotilla. “I don’t recall when exactly I found out, but I’ve known for some days now,” he said. Speaking before more than 200 people at the League of Corporate Foundation’s CSR Expo 2007, he somehow preempted the Malacañang announcement by hinting at leaving the
Department of Energy.
“I’m sure my successor will do a good job in ensuring that all the reforms that have been put in place will be sustained,” he said during his speech. Shortly after answering some questions from the floor, the organizers announced the arrival of Environment Secretary Angelo Reyes -- Lotilla’s replacement. Neither of the men acknowledged each other’s presence, even if they were within less than a meter of each other. Not even a glance was exchanged.
Vacation and exercise
Talking to reporters later, Lotilla was still in a jovial mood, saying he was ready to take a much needed break. “The first item on my agenda is to go to Palawan. I haven’t gone to Palawan for the last two years, since I became energy secretary,” he said. “And I also haven’t been able to exercise regularly. I’ve actually put on some weight. So that’s what I’m going to do.”
He was silent on what his plans for his professional life, saying only that he was still willing to help the government as best as he could -- and if asked. “It does not mean that I will not assist the government where I can. It’s just full-time government service that I’m taking a break from,” he said.
Long overdue
June 18, the day when heads of government-owned or -controlled corporations were asked to submit courtesy resignations, was not the first time Lotilla attempted to exit from the government. “I’ve been resigning for years. It was only now that it was approved,” he revealed. “I’ve always wanted to take a vacation, as I only intended to stay with the national government for two years. But after President Ramos’ term, I was requested to at least help out the new government.”
More changes
Talk that National Power Corp. (Napocor) president Cyril del Callar would also be replaced surfaced again, following Lotilla’s resignation.
