The long road to economic recovery

The hype that accompanied the passage into law of the Special Purpose Vehicle (SPV) Act last week, including the President’s choice of the Philippine Stock Exchange as the venue for signing, apparently was not all in vain.

At least, local stock prices managed to go up by 2.22 percent compared to the day before, an improvement that is in fact regarded as the highest during the past two months. It seems that everyone, rightly or wrongly, is expecting that the recovery of the heavily burdened, undercapitalized banking industry will finally be on its way.

SPV is no panacea

There is however much debate, whether the SPV measure a law that would enable banks to unload over P600 billion in bad debts, would really work. It seems that before so many delinquent loans can be freed, the proposed Corporate Recovery Act needs to be passed. And for the SPV law to be effective, the Securitization bill also needs to be signed into law.

For the optimist, SPV is a good start. But without the proper framework to make it work, the enthusiasm that met the SPV Act passage will just be a blip on the economy’s declining performance graph.

Thus, some critics say that the SPV measure would only serve the interest of banks because it will rescue them from their own indiscretions instead of delivering the economic recovery that the measure promises. So what else is new?

Unclogging the corporate insolvency gridlock

The problem with our P600-billion bad debts is that most of them are steeped in litigation problems. There is a stumbling block to the quick resolution of these cases. And the basic cause for this stalemate seems to be the inadequacy of the archaic Insolvency Law crafted and passed in the early 1900s.

The proposed Corporate Recovery Act seeks revolutionize this old legislation. Basic to this measure are provisions to modernize and clarify rules on the rehabilitation and insolvency of financially distressed companies.

It is also hoped that the resulting magna carta would clearly define the responsibilities and roles of debtors and creditors as they both engage in formal debt relief proceedings.

The Legislative Economic Development Advisory Council (LEDAC), a group of executive and legislative leaders, has identified the proposed Corporate Recovery Act as another priority in Congress’ agenda for the remainder of the session.

The bill, the last time I heard, is now ready for plenary deliberations in both houses of Congress.

Whether we’ll see its passage right away is also another thing. The Corporate Recovery measure may turn out to be as highly debated as the SPV law. For one, the proposal will grant creditors, secured and unsecured, a more defined set of rights and a clearer process on how to go about their claims.

Both distressed companies and creditor banks would be given choices within which to pursue their various interests with the help and intervention of the court: a set of receivers (for rehabilitation cases), and liquidators for firms that have reached dead end.

Lawmakers will need to take a cautious stance on the issues. Particularly, they should be able to balance the interests of distressed companies that need assistance, and creditor banks who need to be paid whatever is due them.

Paving the way towards liquidity

We are all aware that savings and investment choices in the country are very limited.

So while the SPV law lays down the framework by which big-time investors could buy banks’ bad loans and allow these financial institutions to have more liquidity that could be lent to borrowers, the means by which SPVs may recover their investments and how small-time investors could participate and earn in the process have yet to be laid down.

This is what the securitization bill, still pending in the legislative mill, is about. The proposed Securitization Act has been certified urgent by the Palace and dittoed by the Makati Business Club.

The proposed Securitization Act is expected to lay down the legal and regulatory framework for securitization, a process wherein assets are sold on a without-recourse (walang balikan) basis to a special purpose vehicle (SPV), to be paid in the form of asset-backed securities.

If we are to make an analogy, the Special Purpose Vehicle bill will lay down the framework for the creation of special purpose asset vehicles (SPAVs) that would buy banks’ unwanted assets. The securitization bill, meanwhile, would provide SPAVs the mechanisms on how to go about disposing these assets, and in the process increase liquidity for lending.

Not really a new financing technique, the process will enable small investors to participate in the trading of almost anything from bad loans to properties to whatever that will be securitized. Applied to banks’ loan portfolios, securitization will facilitate disposal of assets and generation of additional funds for lending.

But again, it all boils down to passing the bill. And therein lies the crux.

The slow pace of lawmaking

The three bills (Corporate Recovery, SPV and Securitization) were introduced at the same time, one year and eight months ago, to be exact.

While all of them were certified as urgent, work on the Corporate Recovery and Securitization bills were reportedly delayed by the Money Laundering measure. The legislature promises the passage into law of the two crucial bills during the first half of the year.

That is, if there will be no distractions that could possibly derail deliberations. Already, the Money Laundering Act is once again being thrown back to Congress for retooling after it was deemed unacceptable by Paris-based Financial Action Task Force (FATF). Don’t forget also that the national elections is just around the corner.

The urgency and importance of these three pieces of legislation as engines to push forward the economy cannot be underscored. Let’s just hope that our lawmakers will be gifted with the wisdom of magi as they craft the two remaining bills, and the concentration of a Buddhist monk as they work to deliver their promise.

Understanding our commitments to the WTO

‘Isyung Kalakalan at Iba Pa’ on IBC-13 News (5 p.m. and 10:30 p.m., Monday to Friday) this week attempts to shed light on how the country’s commitment to the WTO may affect various key industries and sectors of the economy. Watch it to understand the issues.

Should you wish to share any insights, write me at Link Edge, 4th Floor, 156 Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. If you wish to view the previous columns or telecasts of ‘Isyung Kalakalan at Iba Pa,’ you may visit my website at http://bizlinks.linkedge.biz.