Repos

By most estimates, the Philippine economy will continue to pace Southeast Asian growth in the next year. This is impressive, considering our economy is handicapped in many ways.

The most visible handicap is our weak agricultural sector. We are heavily dependent on imports of staple agricultural commodities, particularly rice. This exposes us to the vagaries of the global commodities market that is challenged by severe weather events.

The less visible handicap is the comparatively underdeveloped state of our financial system. Our corporate sector is relatively small compared to, say, Thailand’s. Our capital markets are comparatively inefficient and less nimble.

Reforms are trickling in, however. Some of these reforms are hardly noticeable since the world of finance is hardly the stuff of public debate.

One important area of reform involves how the repurchase agreements (repos) work in our market. Reforms in how the repos market works will have major implications on both foreign and local investments in the country. The ripple effects will eventually contribute to better job creation for Filipinos.

A repo arrangement involves a dealer willing to sell some government bonds it holds to an investor. The dealer would then buy back the bonds sold at a slightly higher price in the short-term, including overnight agreements.

This is a significant instrument for managing corporate finances. A robust repos market allows entities holding government bonds in their balance sheets to quickly trade them for cash to cover short-term liquidity needs.

On the other hand, the repos market allows companies with a short-term cash surplus to invest in an asset (such as government bonds) over a short term to earn a small profit without much risk of financial loss. Government bonds carry the lowest risk.

A robust repos market encourages companies to invest in government bonds since this will nearly be the equivalent of holding on to cash. It allows assets to be quickly traded according to the liquidity needs of companies. Therefore, this will help enlarge the market for government bonds, reducing reliance on direct borrowing.

At the joint initiative of the Bangko Sentral ng Pilipinas (BSP) and the Bankers Association of the Philippines, banks can now more easily trade government bonds to interested investors and even with fellow banks. Heretofore, government bonds could not be easily traded because the BSP “tags” these securities to banks that place cash with it through the BSP’s reverse repo window.

It used to be that only a few entities, such as banks that have placed cash for these securities, could benefit from a repo agreement. With the reforms, everyone engaged with the financial markets could benefit from the repos market.

The benefits from a more flexible repos market are multifold.

First, we may look forward to an increase in trading in our bonds market. More investors will be involved in securing long-term and low-risk growth in their portfolios.

Second, with improved trading in bonds comes better bond prices for everyone. Investors could better maximize opportunities for growth in their bond investments.

Lastly, repos will be widely available as a tool to manage financial risks. With the enhancement of the repos market, investors will be better able to manage their finances. This will encourage investments in our economy, improving our competitiveness in a region of nimble and efficient financial markets. Everyone knows archaic financial policies have been a deterrent to investments in the past.

Allowing greater flexibility for repurchase agreements might seem to be a small step. But, like the first astronaut setting foot on the moon, this will have major repercussions for our economy’s ability to maintain its pace of expansion.

None of our problems with high poverty and unemployment will be solved without investments flowing in. Modernizing our capital markets is indispensable to building a modern economy for our people.

Relaxed

Just as quickly as oil prices spiked last week, they began to relax quite perceptibly over the past few days. The reason for this is a clearer indication from Israel that their counterstrike against Iran will be confined to military targets and avoid hitting the country’s oil infrastructure.

The key to the quirky oil price movement remains the volatile situation in the Middle East.

Several times the past few days, the skies over Iran were cleared of commercial aviation. People expected the Israeli counterstrike to commence soon. That attack could happen any moment now.

Should Israel limit its counterstrike to Iranian military facilities and avoid nuclear and oil facilities, credit will have to go to the intense diplomacy happening mostly beyond public view. Tel Aviv is under great pressure from its allies to contain the conflict and avoid a full-scale regional conflagration.

The Netanyahu government might appear to be stubborn and unrestrained. But several recent events indicate it might be more susceptible to friendly pressure.

For instance, Washington asked Tel Aviv to refrain from further bombing Beirut. The Israeli military apparently complied with the request.

The massive missile exchanges that have been occurring between the Hezbollah and Iran on one hand and Israel on the other exhausted the weapons stockpiles of all parties to the conflict. Tel Aviv has asked for, and will receive from the US, America’s most advanced air defense system along with about 100 troops to operate it. Iran, for its part, has received advanced air defense systems from Russia.

Israel’s and Iran’s need for more advanced weapons opens more room for diplomacy to work.