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Much achieved in the Philippines finance sector

Interview - August 4, 2014
The United World team interviewed Mr. Gil S. Beltran, Undersecretary and Chief Economics in the Department of Finance of the Philippines, and discussed with him the achievements of the Aquino administration and the economic roadmap for the future. Usec. Beltran shed light on the key priorities for future investment and the benefits of regional financial integration.
UW was here in the Philippines in 2010 and 2012 when we did an initial assessment of the election of President Aquino, described his long-term vision, touched the topics of good governance, rooting out corruption, and bringing macroeconomic stability. 2012 was a good year to assess the short-term impact of his administration. Now, getting closer to the end of his mandate, I would like to know what is your assessment of the outcome of his administration.

A lot was achieved. We have achieved fiscal strength. We were able to cut out debt ratio as percentage of GDP. It was almost 57.2% in 2009, and it is now 49.2% at the end of 2013. The deficit has been cut down significantly. It used to be 3.9% of GDP in 2009, and last year we were able to cut it down to 1.4% of GDP. At the same time, we were able to increase the percentage of infrastructure spending of GDP from 2.5% during the decade before 2010 to 3% last year. Of course, the plan is to increase it to 5%, which should be attained by 2016. We were also able to increase tax effort from 12.15% in 2010. Last year we were at 13.3%, and in the first 5 months of the year, we should be adding about 0.5% more. That will be about 13.8% by the end of 2014.

Tax collection and infrastructure face several challenges in the Philippines. What have been the short term setbacks of the Supreme Court’s suspension of DAP?

The Supreme Court just tightened some rules.

So outsiders should not see DAP as a short-term obstacle?

Yes, with supplemental budgets, we will be able to get fiscal gains from making the bidding process very transparent, put them together, and move those resources to the next in line.

When it comes to tax collection and broadening the tax base, one of the issues that comes out often in our interviews is the need to invest in financial literacy and the importance of integrating everyone in the tax collection system.

What we are trying to do is to spread financial literacy to all social groups. For overseas Filipino workers or OFWs, before they go abroad and earn, we give them some tips on how to save their money, and where to put them, perhaps, in financial placements, or businesses for their families). In many families, there is always one OFW working abroad and bringing in foreign exchange. Without financial literacy programs, some of these will not be used in appropriate projects that generate income. For the first time, many OFWs are learning how to invest in the stock market.

What are some of the ways in which the financial institutions of the nation can show the people the importance of taxes?

When you pay taxes, you start to become a legitimate member of the community. You can already tap government financial institutions; you can borrow, because you need to have IDs before you start borrowing. These things will enable you to expand your business. If you don’t borrow, you have to rely on your own equity, so your expansion will be limited. By becoming a regular member of society, you will be able to tap government services, and get the assistance of the DTI in doing your feasibility studies for any project you wish to go into. You can also tap DOSD which has a listing of available technologies for small entrepreneurs. For those who don’t want to go directly into operating a business, they can always tap the stock market.

Our outline for the Banking and Financial Sector is divided into intensification, integration, internationalization, and inclusion. Starting with intensification, one number that stands out is that only 25 percent of the people in the Philippines are banked. This represents a 75 percent of opportunities for local and foreign banks. What is the outlook for the growth of banks in the Philippines?

The banking sector is enjoying the liquidity coming from OFW remittances. Last year, their assets rose more than 20 percent. The fastest growing segment is not Banks but micro finance providers. These are mostly Non Governmental Organizations (NGOs), cooperatives and mutual benefit associations which provide loans to their members. These micro finance providers rose to about 10 million last year from only 7 million in 2009. That is about 10% of the population. Also, we had introduced in 2010 a micro insurance development program. We started with only 3 million micro insurance policy holders in 2009, and now, there are 20 million. We need micro insurance because we are prone to typhoons and natural disasters. Recently, the micro insurance providers developed a product called life, house, and livelihood. If any disaster strikes one of the three, you get a benefit of 400 thousand pesos for a premium of P30 per day. For micro insurance, the premium is only about 7.5% of minimum wage. Mirco insurance benefits enable you to rise from a disaster quickly. It helps them rebuild their houses.

Some banks are trying to dive into the micro insurance and micro finance sector. With the proper local knowhow, and the grass root level understanding, can they make it?

What banks do is to tap the NGOs as retailers with the big banks as wholesalers. There is now a sort of coordination between big and small units. Small units market the products, and it is easier for them because they live in the communities, and the big banks provide funds to these micro units.

The rate repayment is 95 percent for microcredits given to woman, and 85-89% when given to men. I see a profitable business and some banks have the leverage to lose some money to tap into the market.

That is true, and interest rates for micro finance are higher, because the risks and administrative costs are higher, so you get a higher margin (as opposed to lending to big corporations). Even big banks are involved in microfinance now. They didn’t do that 20 years ago. They saw that small borrowers can pay.

What is your assessment of the three major rating agencies’ upgrade of the Philippines’ economy? Will cheaper money bring major investments?

There was a big reduction in interest rates. Before the upgrade several years ago, lending rates were as high as 6-7% in 2010. In 2013, that has gone down to 5.3%. That is partly due to the upgrade, plus the fact that there is more liquidity in the system because of OFWs sending money locally.

One topic I included into integration is a debate about Asian banking integration in 2015, and the objectives for 2020. On one side, the Central Bank says it is one of the most important steps that could happen to the Philippines, the Senate has approved a bill for liberalization of the system and they are saying ‘it’s the way to go.’ They argue that banks are solid and ready to compete. On the other side, we have some banks that have been saying it is premature to jump to an Asian integrated framework. What is your intake?

We cut down tariff rates many years ago, even before ASEAN came out with the free trade area. This cut down has made our industries very competitive. Many of our manufacturers now can compete in the regional market very easily. Banks are scared of a bigger market, because they have to invest and do marketing abroad. Some of them don’t have the strength to do it, but I think they can, with a little push from government. We will make them do it.

Do you see a major change in banking after the liberalization law of the financial sector?

Without the foreign ownership restriction, I think many of the foreign banks can find opportunities to set up here. Many of them would also like to partner with local banks. Our banks are relatively small, and there are significant opportunities to increase the size of banks, and go to the countryside to sell loan products. What local banks need is more mergers and acquisitions, and more products to sell to those who are trying to go into business. With the liquidity in the system, we need some push to get them to look for investors in the countryside. Our agricultural sector needs some technology to lower the cost for inputs used in manufacturing. This is a big opportunity still untapped.

What is the benefit the Land Bank can get from a more open economy?

Land Bank conducts financial literacy in the countryside. I think they can organize a team of Banks and do some coordinated marketing of their products in the countryside. Just one farmer improving technology to raise a certain crop would help very much in getting the others to try it. For instance, there are also a lot of uses for coconut, but the processing part is limited to big firms. If you talk with the DOST, they can tell you some uses of coconut that don’t rely on huge machinery. There is some processing that can be done by small entrepreneurs. They should look at the feasibility of introducing packaging and processing to small producers in coconut producing areas. This can be a huge industry because there is a lot of supply there.

We know you are very fond on infrastructural upgrade. Will we see a big change given that borrowing money is becoming cheaper?

Yes. Actually, there are 59 PPPs in the pipeline with investment cost of about 12% of GDP. The increasing interest in investors in funding PPPs will allow us to go into a more investment-oriented type of growth. Every month, there is a list of about 2-3 projects added to the pipeline. There are some sectors developing project designs that will improve the infrastructure network of the country. The national government focuses on rural roads; PPPs have to connect them to the national network.

If we talk about priorities, what are the priorities right now?

The number one priority is power. You have all these new investment and you can’t operate machines because power is not there. We have to get the private sector in, because under the law, government cannot set up power plants. Then, of course, other infrastructure. There is congestion at the ports. There are two ports that are underutilized. We are trying to get shipping lines to move some of their cargos there. Also, our airports are becoming too small for our economy. Most of the
times, planes cannot land on time because they wait for the traffic at the runway to clear up. Even the rural airports are already facing that same problem. There are already PPPs being proposed for airports in rural areas, especially in important cities where tourists go.

Most panelists at the World Economic Forum spoke about the Philippines as a trillion dollar economy in 2030. Looking to 2030, how should the Philippines look like?

We need to improve our ease of doing business, infrastructure (for land, sea, water transport) and to enhance the capital market to make sure it is able to get savings and transform them into investment.

What can you learn from countries that have used export-led growth and savings to finance their development, like Indonesia, Malaysia, Taiwan, Hong Kong, and South Korea?

Get the market to work. Liberalize the market more. We should allow more foreign ownership in certain sectors. The next president should be looking at liberalizing ownership of sectors reserved for Filipinos. We were scared of foreign investors before. That is understandable after independence, but now, we are in a world without borders. We are very competitive in many sectors, and we think we can handle more foreign ownership.

You have been here since 1978. With the recent recreated OCE, and different institutions you are supervising, as one of the strongest voices in the financial sector, and foreign forums: what is the message that you transmit about the Philippines when you have ministers of foreign countries asking about the country?

The Philippines is a country with a lot of opportunities going forward. There are unused resources, like our savings (which are higher than our investment). If savings are transformed into investment, that will push GDP. There is also manpower that could be trained to take over difficult, sensitive jobs. Many of these can be entrepreneurs, and given the appropriate environment, this country could grow faster than its present growth rate of 7%. The potential would be enough to push us to be a trillion dollar economy. We are at the point where the lower income groups are being pushed up to the middle-income plus level, and that would result in demand for more goods which the economy can produce, like cars. But before you can get more cars in the streets, you need more roads.