opinion

Did we overpay on our interest payments?

March 28, 2014

Recently, we read a rosy  report about the country’s external debt. As of 2013, total external debt, both public sector  and private sector  obligations, totaled 58.5 billion dollars. For those obligations, we paid last year  6.86 billion dollars  in principal and interest.   While in absolute amounts, the total foreign debts have gone up over the years, the debt ratio  has  gone down considerably vis a vis our gross national product. Also, compared to our international reserves of around 83 billion dollars, our public sector debt of 40.5 billion dollars is  at a very comfortable level.   In sum, from the point of view of   liability management, every thing looked just fine.   My enthusiasm, however, was somewhat dampened by lingering questions especially after reading  the latest news on the  LIBOR fixing scandal  which rocked the financial world  in 2012.   Is it possible that over the years,  we have been  over-paying on our interest payments?   If we go by the claims of the Federal Deposit Insurance Corporation (FDIC) and various US cities, states and local agencies, the answer is  definitely YES!   Just this month,   the Federal Deposit Insurance Corporation (FDIC)  sued 16 of the biggest names in banking.  Among the banks named as defendants were Bank of America Corp, Barclays PLC, Citigroup Inc, Credit Suisse Group AG, Deutsche Bank AG, HSBC Holdings PLC, JP Morgan Chase and Co, The Royal Bank of Scotland and UBS AG.   The lawsuit, filed in the federal district court in New York, alleged that the defendants’ conduct of conspiring to manipulate LIBOR caused substantial losses to 38 banks that the U.S regulator had taken into receivership since 2008.   The City of Baltimore as well as other US  cities ,   states and municipal agencies  also feel short-changed and have likewise filed suits against a dozen banks.   FDIC has not yet quantified   the full extent of the  38 bank’s losses.  On the other hand, according to early estimates, the rate manipulation scandal  cost US states, counties and local governments at least 6 Billion dollars in fraudulent interest payments.     Coincidentally, this is the exact  amount  of fines that regulators in the United States, United Kingdom , and the European Union have already  slapped on  banks  for participating in rigging interest rates. UBS topped the list when it paid a whooping 1.5 billion dollars, an amount which authorities said reflected the severity and extent of the LIBOR scandal. The others which have been heavily  fined in varying amounts  include  UBS, RBS, Deutsche Bank, JP Morgan,   and Citigroup.   An investment bank estimates that the banks being investigated for LIBOR manipulation could end up paying an approximate 35 billion dollars, separately from any payment to regulators. The same investment bank concedes, however,  that “(r)elative to the size of the 16 banks ….. 35 billion dollars is chump change.”   Meanwhile, a top US law firm has stepped into the largest class action lawsuit filed against Barclays.   Barclays’ name was the first to crop up  in the scandal in 2012 – causing its Chief Executive Officer to resign and to forfeit a substantial portion of his benefits.  Barclays is  now being  sued by Guardian Care Homes over claims Barclays mis-sold Guardian Care interest rate hedging products.   The London Interbank Offered Rate, or  LIBOR, is one of the most important numbers in the financial world.  And until 2012, LIBOR was something that borrowers just accepted without any question.     Essentially, LIBOR is one of the main rates used to determine the borrowing costs for trillions of dollars in loans. These loans include not only sovereign loans, corporate loans as well as  consumer loans such  as mortgages, student loans and credit card accounts. LIBOR has also been used to price derivatives.   Interest rates on aforesaid transactions rise or fall when LIBOR moves.   It was  only in 2012  that an international investigation revealed a widespread plot by multiple banks to leverage LIBOR for profit.  Investigators have uncovered that the rate rigging may have started as early as 2001 and continued all the way to 2009.   The FDIC and the other aggrieved parties surely face many hurdles in proving damages. For one, it may be difficult to unbundle the rates  used between 2001 and 2009. For another, the rate riggers maneuvered  the rates upward or downward (not just one way)  depending on the traders’ positions.   But one thing is sure. The rate riggers made tons of money.  And as in any  financial transaction, for every winner,  there is a loser.

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Retired, but not tired

March 21, 2014

At 86,  Concerned Senior Citizen  Fidel V. Ramos, describes himself as :  “Retired, but not tired. Ex, but not excess. “   Indeed, the  former President is very much around, taking advantage of every opportunity to  exhort  Filipinos to “Care, Dare and Share” and to be  competitive as a nation  through  UST – “Unity, Solidarity and Team Work”.     He does this through his “Sermons”, a multi-volume compilation of his speeches and writings,  and through his  public speaking engagements, here and abroad.   FVR is now acknowledged as  an Eminent Person of Asia, if not of the world. But we, from Muntinlupa City, would like to remember FVR as Muntinlupa’s Favorite Son.   A long time resident of Muntinlupa,  FVR loves to recount how  early in his military career,  he  patrolled the Muntinlupa- Cavite  boundary area to catch cattle rustlers. When Ayala developed Ayala Alabang in the early 80s, FVR  became one of its first residents.   Many remember FVR as the quiet next door neighbor.  He moved around the village unobtrusively.  If he had any close-in security at all, they were practically invisible.   When FVR decided to join JPE at  EDSA, concerned neighbors organized their own   People Power to form a  protective ring around  Mrs. Ming Ramos and FVR’s daughters.  This event has come to be commemorated as “EDSA sa Alabang”.   A physical fitness buff, FVR frequented the Alabang Country Club  gym and its  swimming pool. A strong swimmer, FVR could swim backstroke the length of the pool, cigar in his  mouth, without the cigar ever getting wet!   At the height of  the nine coup attempts by Gringo Honasan against President Cory,  Alabang resident Elo Javier  could accurately predict  whether we would have a quiet day or not  just by observing FVR’s demeanor.   “There would be no coup attempt today,”  Elo Javier would confidently say.  “Look at FVR. He  is so relaxed reading  the newspapers by the pool side. Vintage Steady Eddie.”   (Elo and his elder brother Ted Javier served as  my volunteer security advisers when I was  Mayor of Muntinlupa.)   Wearing his famous  verrry short shorts,  FVR would be up early at the Alabang Country Club  to play a round of golf with his foursome. But it was not all golf. FVR would jog from one hole to another (instead of walking or using the golf cart).     Recently, I asked FVR about his  golf handicap. He shooked his head: “Tumaas na, Toting.”  Ask why, he replied: “When I was President, isang dipa pa ang bola sa butas, give na. Now, I always have to putt through.”   FVR is rightly given credit for many reforms which took place during his Presidency.  Three  of them  impacted me directly.   His efforts to de-monopolize telecommunication are  benefitting every Juan and Maria who now have easy access to telephone land lines and cell phones. Compare that to the time when one had to wait years to get a line.   For Muntinlupenos, FVR signed into law the Muntinlupa City Charter.    For BSPers, FVR  signed into law the New Central Bank Act which refocused the central monetary authority’s mandate to that of  keeping inflation low and stable.   Once, FVR visited Muntinlupa  City Hall to proclaim his official candidates for the 1995 local elections.  Over coffee, and his trademark unlighted cigar, FVR gave his anointed  candidates precious tips on how to campaign.   “I call this  4K,”  FVR started.    “First K. Kawayan. Wave at the people. By waving you immediately establish contact with them even from afar. “Second K. Kamayan. Up close,  shake their hands.  Your hand shake must be firm. While shaking  hands, don’t forget the eye contact. “Third K. Kumustahan. While shaking hands, ask a general question about the family. Everybody   appreciates being asked about his/her loved ones. “And don’t forget the last K. Kodakan. Filipinos are very fond of picture-taking.”   “4K is a sure-fire formula,” FVR said with a wink and a ‘thumbs up’.   One does not  need to  be a politician to profit from FVR’s advice.    Belated Happy Birthday, Mr. President!

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Less dirty, but improving?

March 14, 2014

Recent news reports that particularly caught my attention were about the two most polluted cities in the world. I am relieved that Metro Manila was not one of them – yet.   The news pertained to Beijing and New Delhi.   Here are news bits on the two cities as gathered from various online reports:   Beijing   The state-owned China News Service (as reported by the South China Morning Post) has acknowledged that “Beijing’s severe pollution is much worse than the average level… and the environment is far from meeting the (safety) standards.   The report added that pollution in the Chinese capital is “close to extreme” and makes the city of 20 million “barely suitable” for living.   The Associated Press, for its part,  reported:  A period of pollution in January saw density readings of PM 2.5 particles exceeding 500 micrograms per cubic meter… That density is about 20 times as high as the 25 micrograms considered safe by the World Health Organization.   Other reports stated:   -Beijing authorities have issued an “orange” alert – the second-highest in the four levels of urgency. “Orange” prompts health advisories and bans on barbecue, fireworks and demolition.   -Hospitals were overrun by the young and old, suffering from respiratory problems.   -People have been warned to stay indoors. Those who venture outside were asked to wear protective marks as they navigate the smog-filled streets.   -Sales of air purifiers for homes – as well as face masks – rocketed and some stores simply ran out.   But not is all bad as far as a high-ranking Chinese military officer is concerned.   He made the brilliant observation that the heavy smog provides a shield against US satellite surveillance!?*   New Delhi   A report carried by the Hindustan Times, an Indian Daily, claimed that New Delhi had “earned the dubious tag of being the world’s most polluted city. The Hindustan Times was quoting the Environmental Performance Index (EPI), a report put out by Yale and Columbia Universities.   In its own investigation, the New York Times indicated that “the Indian capital’s fine particulate matter has, on average, been worse than Beijing in the first two weeks of the year.”   Technicalities aside, here is how a man-on-the-street describes the situation in New Delhi: “….a city blanketed by an indistinguishable mix of fog, dust and toxic heavy particles. Parents may not be sending their kids to school in gas masks, yet, but it is not a fine day to jog.”   Having said that, what is the current situation in Metro Manila?   The Environmental Management Bureau uses two measures to gauge the air pollution level – 1) Total Suspended Particulates or TSP and 2) Particulate Matter 10 or PM 10.   TSP measures solid pollutants such as dust and soot in the air. PM 10 measures  smaller particles, small enough that they can be inhaled.   Using both measures, the EMB reports that air pollutants continue to EXCEED the reference values of 90 micrograms per normal cubic meter for TSP, and 60 micrograms per normal cubic meter for PM 10.   EMB emphasizes, however,  that present levels are down from 1995 levels  prior to the enactment of the Clean Air Law.   Translation for every Juan and Maria: Compared to 1995 levels, the air in Metro Manila is now Less Dirty.   But the law was not entitled Less Dirty Air Law. We are supposed to have Clean Air.   We refuse to believe that we can not have Clean Air.     And therein lies the continuing challenge for the national government, the local government units, the private sector, the environmentalists, the ordinary Juans and Marias – all of us.  

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Why Ukraine matters to the ordinary Filipino

March 7, 2014

Until recently, my knowledge of Ukraine (Crimea in particular)  was limited to what I picked up in high school. My English teacher, who also happened to be my mother, Sofia Rivera Bunye,  asked her class to memorize "Charge of the Light Brigade" by Alfred Lord Tennyson. At about the same time, we also got to learn  about Florence Nightingale. The "Charge of the Light Brigade" was about one of the most famous battles of the Crimean War. The battle took place in Balaclava in the Crimean Peninsula,  the southeastern part of present-day Ukraine. Florence Nightingale,  universally acknowledged as the founder of modern nursing,  distinguished herself while nursing the wounded British soldiers who came back from the Crimean War. The Crimean War (1853-1856) was originally fought between Russia and the Ottoman Empire. Later, England, France and the Kingdom of Sardinia, fearful of the growing influence of Russia, joined the war on the side of the Ottoman Empire.  Russia lost to the coalition. Historians now rank  the "Charge of the Light Brigade" as one of  the worst military debacles. Because of miscommunications, the  British Light Brigade consisting of  around 670  officers and men frontally attacked a well fortified position defended by a superior force of Russians and Cossacks. As a result of a murderous barrage of  "cannon to right of them, cannon to left of them, cannon in front of them", nearly half of the attackers were either killed or wounded. Thanks to  Tennyson, however, the military  blunder, which nearly annihilated the  "noble 600"  as they  "rode into the valley of death",  is now immortalized. In the Philippines, the surviving commanding officers of the ill-fated unit would have  been raked over the coal in endless Congressional investigations. Fast forward to the present. Ukraine used to be part of the Soviet Union. When the USSR disintegrated, Ukraine declared its independence from the Soviets in 1991. But Russia considers Ukraine very strategic.  Russia pays a huge sum yearly to Ukraine to base   the Russian Black Sea Fleet  in the port of Sevastopol which is  located in  the Crimean Peninsula. Ironically, the Ukrainian population  is sharply  divided among those who are  pro-West (Western Ukraine) and those who are  pro-Russia. (Eastern and Southern Ukraine) Until recently, Ukraine was ruled by a pro-Russia government under Viktor Yanukovych. The political crisis commenced in  November when the pro-Russia government  rejected a trade deal with the European Union only to enter into a similar  agreement with Russia. Thousands of  angry Western-leaning protesters took to the streets and eventually deposed the pro-Moscow Yanukovych. On the pretext of protecting ethnic Russians, who comprise the majority of the population in  Crimea,  Russian President Vladimir Putin sent in troops to the Crimean Peninsula. Putin's  incursion drew immediate condemnation from the US, Canada, France, Germany, Italy, Japan and the United Kingdom.  While military hostilities  between the West and Russia may not be an  immediate possibility,   diplomatic and  trade sanctions are now being readied against Russia by the Group of Seven. How does the current instability in Ukraine concern us? Because of globalization , it is now a given that   any instability in other parts of the world will somehow someway  affect the Philippines. The impact on the Philippines, of course,  will be a function of  the extent, duration and timeliness of the resolution of the crisis. On the positive side, the ongoing crisis could spur gold prices higher as investors seek a safe-haven asset. I say   positive because  the Philippines  maintains a substantial portion of its international reserves in gold. Expected to exert negative impact are a  possible spike in oil prices and possible holdback of foreign portfolio investments from the local stock market due to risk aversion. A possible further weakening of the peso against the dollar  will be neutral over-all. Depreciation will be bad for importers and borrowers in foreign currency.  On the other hand, peso depreciation will be good for dollar earners such as OFWs and the BPO sector. It will also be good for the BSP when it revalues its dollar-denominated assets.  

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Global Pinoys

February 28, 2014

Two more names have been recently added to a growing list of Filipinos who have distinguished themselves in the international stage.   Michael Christian Martinez, 17, a long time resident of Muntinlupa City,  did not win a medal in the recent Sochi Winter Olympics. But he won the hearts of millions.   Truth is Michael did not need any medal to make his mark.   Just making it to the Winter Olympics -  after overcoming severe handicap -  was victory enough.   Who would have thought that this erstwhile asthmatic lad from the tropics would be competing with the world’s best  in an ice skating event?   To be able to compete in Sochi,   Michael had to train for almost four and a half years with none of the usual logistical support enjoyed by  international athletes.  He donned a competition attire which was donated by a kind-hearted designer who read his Facebook appeal for a presentable Olympic costume.  Moreover,  his training  leading up to the Olympics was marred by injuries.   In 2011, he tore two ligaments in his ankle. In April 2012, Martinez tore a medial ligament in his knee. He suffered a  fractured ankle in 2013. Each time, Michael needed at least  three months to recover. A bad fall almost prevented Michael from competing in Sochi. Doctors had to perform several x-rays on Michael’s hips before he was given clearance to compete. The effects of these injuries, however,  did not show at all  as  Michael - for two minutes and fifty seconds - dazzled the international crowd with his agility and grace. The rest, as they say, is history. Rose “Osang” Fostanes, 48, a native of Taguig City,  had been a caregiver for most of her life. During the last six years, she took care of a middle-aged woman  in Tel Aviv. Until X Factor Israel, Osang had no social life. When interviewed by an X Factor host, why  she was all alone at the park while waiting to be auditioned, she replied: “You are the very first one to talk to me.” At 47, under-height and overweight, Osang was hardly the type who would make it in an international singing competition. But it took only two lines of Shirley Bassey’s “This is  My  Life” for Osang to catch the attention of the judges. All four gave her a resounding “Yes” vote. As if to  forebode the outcome of the competition, all her fellow contestants gave Osang a standing ovation during the second qualifying round. Osang wowed her competitors  with her rendition of Lady Gaga’s “You and I”. After a brief visit in the Philippines, where he  received a hero’s welcome, Michael has  resumed his quest for an Olympic medal. He left for Sofia, Bulgaria, to compete in the World Junior Figure Skating Championships starting Mar. 13.   Osang, who flew in last week for a brief visit, is now recording her debut album.  Also in the works for Osang is a concert tour in Israel, Australia and Las Vegas. Michael Christian Martinez and Rose “Osang” Fostanes – who both fought against all odds and prevailed. Two more names which make us proud to be Filipinos.  

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The BSP as the Philippine government’s financial advisor

September 7, 2013

Ask an ordinary person about what the Bangko Sentral ng Pilipinas (BSP) does, and the usual reply is that it produces, issues, and regulates the country’s currency.   Those who know more may also mention that it supervises  banks and other financial institutions with quasi-banking functions, and that it is the bank of banks and also the official depository of the national government.   Still others will say that the BSP maintains an efficient payment and settlement system so that transactions between financial institutions are recorded in real time.   The BSP actually does more as the Philippines’ monetary authority.   It also plays a role  as the government’s financial advisor.   Just like individuals, governments may also need to borrow money at some point. The main source of income of the government comes from the people’s taxes. When the revenue collections  are not enough, it may have to look elsewhere to get money to finance its operations, to fund economic activities, to spend at times of crisis or emergency, and also to pay for maturing obligations.   The national government can borrow domestically and/ or internationally. Government corporations  can do likewise. However,  local government units are limited to tapping the domestic market.   In any event, put together, these borrowings can be very substantial.   As of  May 2013,  total outstanding debt of the national government amounted to P5.3 Trillion.  Of that, P3.45Trillion was sourced domestically while P1.9 Trillion was foreign-financed. Add to those loans,  the several billions of debt owed by government corporations and local government units.   They can affect monetary aggregates and our balance of payments. They can affect monetary and price stability.   Since the Bangko Sentral is mandated by law to maintain monetary and price stability, (translation: to keep the inflation rate low and stable; to preserve the purchasing power of the peso)  the national government and other government instrumentalities must seek at least the advice of the Bangko Sentral before borrowing.   In the case of foreign borrowings by the national government, the concurrence (not just the advice) of the Monetary Board must be obtained.   Just to be clear, the BSP’s opinion is limited to the monetary and balance of payment implications of  any proposed loan.    The BSP does not rule on the intrinsic merit of the project or program to be financed. That is left to the sound judgment of the borrower concerned, be it the national government, the government corporation or the local government unit.   The BSP has advised the national government on the borrowing mix which should be adopted by the NG and the NG has heeded BSP advice.     For 2013, at least, the NG has decided to source its financial requirements mostly domestically, through the auction of treasury bills and treasury bonds.   According to National Treasurer Rosalia de Leon, foreign borrowing by the NG for this year will be  limited only to tapping official development assistance (ODA) loans, which provide for very concessional terms to the government.   What happens, for instance,  when a local government unit borrows without seeking BSP opinion on the proposed borrowing?   One of two things can happen: 1.) No financial institution will entertain  such request to borrow by the local government unit. Or 2.) If a financial institution lends to the LGU, such institution will be facing strong sanctions from the BSP.   Note: My book “Central Banking for Every Juan and Maria” is now available in major branches of  Fully Booked, Power Books, National Book Store and the UP University Press.  

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