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Asia-PacificJune 30 2011

Philippines finance secretary seeks greater Asean co-operation

The finance secretary of the Philippines discusses progress in regional financial co-operation, the changing role of the Asian Development Bank and recent changes in the Philippines' financial environment as Manila prepares to host the 45th ADB Board of Governors meeting next May.
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Philippines finance secretary seeks greater Asean co-operationCesar Purisima, finance secretary, Philippines

Q. What do you see as the major results of the meeting of the finance ministers from the Association of South-east Asian Nations and Japan, China and South Korea (Asean+3) held in tandem with the Asian Development Bank (ADB) meeting in Hanoi? 

A: First, this meeting continued to give us assurance that mechanisms exist in our region for coordination and that, if the situation becomes less benign, we have Asean partners to work with on a coordinated basis.

Second, we discussed problems we all face such as inflation, which is driven by rising commodity prices and climate change. Our region is at the forefront of climate change and we discussed methods to analyse its impact and study mechanisms on how to deal with it, such as carbon caps, insurance and other instruments.

Third, we discussed how we could further reduce the cost of trade. Using our local currencies more instead of the dollar will reduce trade costs and give more impetus to encourage more intra-Asean+3 trade. As the US and the EU are struggling with [economic] issues, an export-led strategy may not be as effective in driving growth within our region. So we need to jumpstart our regional demand and make it easier by allowing local currency trading in addition to continuing to reduce tariffs and promoting other trade liberalisation initiatives.

We also discussed how we will finance investments in infrastructure. The ADB estimates the Asean region will need about $750bn annually up to 2020 to finance such investments.

Q. What will be the role of the ADB or other development banks in meeting these needs?

A. As the world revolves, the ADB, like any other institution, needs to adjust. Now that the region in which it operates has increasing needs for infrastructure, we believe that suggestions that the ADB should do less direct investment or lending and more leveraging should be considered. Obviously, there needs to be due attention to proper risk mechanisms.

For example, the ADB is investing $400m into the Asian Infrastructure Fund, but the capacity of this fund could be enhanced if the ADB extends a guarantee on a certain amount of funds in bonds. Such an action will immediately make the fund an eligible investment for central banks in the region, such as the Philippines, which are legally limited to investing in AA or AAA securities. In this way, we can facilitate the recycling of the burgeoning reserves in the region into infrastructure in a responsible manner.

We live in a world of finite resources and we have to make sure we encourage activities that allow us to use resources more efficiently and be more productive in food. We need to be sustainable and create an environment that can provide opportunities for future generations to maintain or improve living standards. 

We created some financial mechanisms that were somehow out of touch with the real world and we need to connect them with reality again. For example, there have been proposals for the regulation of some option activities related to agriculture, so that prices will not rise unnecessarily due to purely financial interests.

There were discussions in our meeting on how we can manage flows of capital. Flows inward are good, but sudden flows outward can be disruptive. Textbook models about efficient markets do not show the suffering that happens when there are adjustments in the real world.

Q. What other measures are needed to spur such recycling?

A. The public-private partnership [PPP] modality is at the core of our own growth strategy in the Philippines. The lessons we learned from past PPPs, particularly the importance of well-structured contracts, open and transparent bidding processes, untainted by corruption, will enable our country to effectively mobilise increasing capital inflows to productive uses. There are already 10 PPPs in the works.

The Philippines also proposed the establishment of a regional credit rating agency. This is because some international credit rating agencies are perhaps not as aware of the issues within the region, so there may be value in having an Eastern viewpoint to balance Western perspectives. For example, there are a lot of countries in the West that are still rated AA which have ratios of debt to gross domestic product [GDP] or deficits to GDP that are higher than some of the countries in this region. The logic behind this needs to be explained.

There is an urgent need in the Philippines to invest in the credit information infrastructure. This is especially important for small and medium-sized enterprises so that they can be given access to credit markets, as banks often do not have enough reliable information. The financial inclusion programme, which was initiated by Philippines president Benigno Aquino III, is important because giving the very poor access to credit is key to alleviating poverty.

Q. What will be the role of the newly formed Asean+3 Macroeconomic Research Office (AMRO)? 

A. AMRO will be responsible for helping to monitor the monetary and macroeconomic economic situation of Asean countries under the Chiang Mai Initiative Multilateralisation agreement [CMIM]. AMRO staff will be able to reach out to the regional economic units of all the Asean+3 economies and the ADB.

We look forward to AMRO becoming the authority on the macroeconomic situation in the region. In the Philippines, we would like to use AMRO to benchmark where we are and where we can move forward.

Q. How do you evaluate the economic and financial prospects for the Philippines in the coming year?

A. We are very happy with the situation. The lack of credibility in the leadership is no longer there, as President Aquino was elected more than a year ago with a strong mandate and his government is committed to addressing the three factors that have held us back: corruption, the infrastructure gap and wrong policies.

The Philippines is one of very few countries that has had continuous positive economic growth through the crisis, and in fact for 52 quarters in a row. We expect to have real GDP growth of between 7% and 8% this year after 7.3% last year.

We are committed to fiscal sustainability. Last year, analysts forecast that we would have a 4.2% national government budget deficit, but we instead reduced the deficit to 3.7% and expect to reduce it further to 3.2% this year.

In addition, we have dramatically improved our debt-to-GDP ratio from a high of 105% from the end of the Asian financial crisis in 1998 to 57% now. The ratio of our foreign exchange liabilities to GDP has been reduced from about 68% to 32% in the same period and we are now planning to bring this ratio down further to 20%.

The banking situation is also much better. Our average non-performing loan ratio, which reached nearly 19% in the wake of the Asian financial crisis, is now less than 3% and our foreign exchange holdings have risen to a historic high and our total US dollar reserves now exceed our foreign exchange liabilities and we now can be considered a net creditor nation.

Q. What kind of changes are planned in the legal environment?

A. On the banking side, we are continuing our programme on consolidation and increasing capital requirements, and also for insurance. There are now proposals in Congress to have some kind of anti-trust law, to strengthen consumer protection and proposals to improve electronic security and to update the charter of the Insurance Commission and other measures aimed at improving the efficiency of our capital markets.

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