RP banks fast catching up on foreign counterparts

The Philippines was less severely affected by the Asian financial crisis than its neighbors, aided in part by annual remittances of $6-billion to $7-billion from overseas workers, gross domestic product (GDP) growth accelerated to 4.4 percent in 2002 and 4.2 percent in 2003, reflecting the continued resilience of the service sector, gains in industrial output, and improved exports.

The administration’s strategy for the economy includes improving the infrastructure, strengthening tax collection to bolster government revenues, furthering deregulation and privatization of the economy, enhancing the viabiity of the financial system, and increasing trade integration with the region.

Prospects continue to depend on the economic performance of two major trading partners, Japan and the United States, and on the increased confidence on the part of the international investment community.

GDP grew 6.4 percent in the first quarter of 2004, accelerating from the 4.8 percent growth recorded in the same period in 2003 and driven by personal consumption and investments. However, data showed that public sector borrowings, which fuel credit activity in the country, rose by 18 percent in April, growing at a faster pace compared to the 15.5 percent growth of the previous month.

Financial markets overview Philippines financial markets as liquid. Deposits remain the main source of funding, with 64 percent consisting of lower-cost demand and savings deposits. With limited loan demand and attractive investments available, commercial banks tend to place a significant amount of liquidity with the Bangko Sentral ng Pilipinas (BSP), the coountry’s central bank.

Domestic liquidity, the country’s broadest measure of money supply, sums up all assets circulating in the financial system, including cash-at-hand, demand deposits, savings deposits and time deposits. Money supply is rising year on year due to an increase in net foreign assets and an improvement in public and private sector borrowings.

Data from the BSP show that domestic liquidity (or M3) in April 2004 amounted to P1.71 trillion, up from P1.607 trillion in the same period of the previous year. In these circumstances, the monetary authorities will aim to keep a tight watch on money supply to ensure an appropriate level of liquidity to sustain economic growth.

Banking System

All but three banks in the Philippines are majority-owned and controlled by the private sector. Unlike other markets, the Philippine banking system continues to see deposit growth, although it has become increasingly difficult to find uses for the funds deposited.

Foreign banks can operate in the Philippines as a branch or a subsidiary, and are subject to the same regulations as commercial banks. Rural banks primarily provide credit to farmers and rural merchants outside Manila.

The entry of foreign banks into the industry has enhanced the overall banking credit picture, as these banks bring international expertise and risk-management skills gained from the highly rated parent institutions. Foreign banks have become increasingly effective in competing for business with better credit skills, access to low-cost funds and more sophisticated risk-management systems. However, the banking sector is now over-populated, and the trend is towards consolidation.

Central Banking And Regulatory Framework

The BSP is the primary banking regulator, issuing policy guidelines for supervising and regulating banks and improving corporate governance and risk management practices. It also encourages sectoral consolidation, and it is making progress on an anti-money laundering bill.

Its authority is supplemented by the Philippine Deposit Insurance Corp. (PDIC), a government agency that in conjunction can assist troubled financial institutions after considering the impact of a potential failure on the financial system, the interbank exposure and the cost.

Continued coordination between the BSP, PDIC, the Securities and Exchange Commission (SEC), and the Insurance Commission (IC) has helped to improve regulations and banking transparency while creating disclosure standards that have strengthened the financial system, bringing it closer to international standards.

The General Banking Act of 2000 reinforced official entry barriers into the Philippine banking sector in an attempt to thin the sector out and create fewer but stronger banking units. However, within the first seven years of the law, foreign banks are allowed to own up to 100 percent of the voting stock of a bank (they are currently allowed to own 60 percent of the voting stock of a bank).

Cash Management Overview

In addition to the foreign banks that provide structured cash management services in line with their regional and global offerings, a number of large local banks have also introduced similar services. Foreign banks offer cash management services, often integrated into their global and regional operations. They are able to leverage their services through extensive branch networks and electronic banking solutions. Most foreign banks operating in the Philippines use correspondent bank relationships to access such branch networks for collections purposes.

Local treasury practice favors outsourcing as a solution to office-intensive operations such as payables and payroll administration. As demand for cash-management services continues to climb back-office integration with such solutions has become the favored path. Major considerations for a corporate treasurer in search of locally obtainable optimal cash-management solutions include the following:

Resident and non-resident status accounts. Resident status includes SEC registration, which licenses companies to operate both representative and branch offices. Non-resident company accounts must be capitalized only by inward remittance in a foreign currency. Non-resident company accounts are further distinguished by a differently structures withholding tax.

Currency controls. Foreign exchange is extensively managed via exchange controls. An example of such procedures can be found in the requirements for foreign exchange purchases. To initiate a foreign currency purchase above $5,000 and over 20 days, the procedures mandate the presentation of a notarized application to purchase foreign currency and the provision of full documentary support. The purchase of foreign currency for trade purposes, whatever the amount, has to be thoroughly documented. All trade-related foreign currency purchases, regardless of amount, are required to be documented, and peso remittances overseas in excess of P10,000 must be BSP-approved.

Liquidity Structures. Overdrafts are illegal in the Philippines, thus preventing the use of notional cash pooling.treasury offerings and time deposit are available and other solutions for corporations include the cash concentration services offer by some bnaks, such as interest-bearing accounts that are topped up from end-of-day fund transters.

(To be continued)