Underdeveloped financial sector

Despite the recent passage of the Credit Information System and the Personal Equity and Retirement Account (PERA) bills into law, other bills aimed at developing the financial sector remain pending in Congress. This includes the revisions on the corporation code, and the establishment of the pre-need code, among others. The delays in the passage of these bills hamper the further growth of the financial sector. While the financial sector hobbles along, the country fails to maximize the opportunities in mobilizing available savings towards prospective borrowers and worthwhile investments. Although the liberalization of the banking industry and the disposal of its non-performing assets through the Special Purpose Vehicle laws helped improve bank performance, more reforms need to be implemented according to the Institute for the Development and Econometric Analysis, Inc. (IDEA).

Furthermore, IDEA reported that “although the local banking industry was spared from the direct impact of the US financial crisis, the resulting credit squeeze and increasing uncertainty highlight the need for more transparency and effective regulatory oversight. The promotion of long-term household savings and alternatives to savings deposits will attract more funds in the system. The robust remittance inflow in recent years presents a huge potential for the country. Currently, the gains from these remittances are in form of strong personal consumption”.

Because of this, the country has better chances of avoiding the fallout from a global economic slowdown compared to its export-dependent neighbors. This model, however, is unsustainable in the long run because of the brain drain and other social costs that arise from out-migration, among them, the persistent neglect of infrastructure needed to attract investors. The country has a very young population structure which has a broad base and a narrow summit (the population is made up of a large number of children and a relatively small number of elderly). Because of this, the country suffers from a high dependency ratio of 69.01 based on the 2007 Census; that is, 100 workers in the working age group (15 to 64 years) are needed to support 69 dependents. Since there are a large number of young people needing support, consumption rises, and the amount left for saving decreases, per same report.

Overall, it was stated that “policymakers should not take too much comfort with the country’s resource surplus seen recently, simply because it was due to a slower growth in investments compared to savings. Though the country’s savings rate has been increasing steadily (though it remains low by ASEAN standards), the investment rate has been dropping for the same period. With investments largely seen as an engine for sustainable growth, the poor investment rate augurs tougher times for the economy in the long term. Unless the government, together with the help of private sector, crafts ways to reverse the slide, the country will likely fail to unleash its true potential in the global economy”.

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