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         Somber Amber from Paeng

    (Article published in the Sep 28,2005 issue of Manila Standard Today)

       The title of former Bangko Sentral Governor, Rafael Buenaventura’s talk before the joint membership meeting last Thursday (22 Sept) of the Makati Business Club, Management Association of the Philippines and FINEX—“The Amber Light: Where we stand regarding foreign debt levels and our financial markets”—is clearly atypical of Paeng. 

           More Paeng is a lens that almost always sees a two-tone world of black or white, a way of looking that pre-dated Dinky Soliman’s crying spiel, and very seldom gray.  “Amber” is obviously attributable to Paeng’s painter-wife, Marivic, to whose loving care Dick Romulo, who gave the meeting’s the welcome remarks, credited the glow of health on Paeng’s cheeks more than the wonders of modern medicine.

           The former BSP governor’s talk comprised of three parts, his years at the then De La Salle College unable to uproot Caesar’s Gaelic Wars’ “Galia est divisa en tres partes”, drilled into him by his Latin teachers at the Ateneo of Jose Rizal:  first, he explained why he thought the current landscape had a touch of green; then, he mentioned factors that raise red flags at the horizon; finally, like one turning over the wheel to a new captain, he pointed to the direction where he deems the ship of state ought to head. 

       Right now, Paeng observes, “we have the good fortune to be in a globally  benign financial environment where we have low interest rates, low inflation and face a tsunami of liquidity seeking good yields”.  Indeed, investors still find our debt paper, because of its relatively higher rate, attractive.

         Investors know that several present factors mitigate their risks.  There is no bunching of the maturities of our foreign borrowings, which are well spread out over an average of 17.7 years, giving our money managers sufficient elbow room to refinance.

Our ability to pay our debts is buttressed by a strong balance of payments position, steady exports growth, increasing remittances from our many “bagong bayani” abroad, inflows from direct and portfolio investments. 

 Hence, the situation is as hopeful green as the mountains in June and July after the first rains of May had wiped out the brown of summer. But then, Paeng warns, it is not time to be complacent.  Streaks of red are visible from afar.

 The unexpected developments global financial markets like squalls in the open sea could quickly throw us into turbulence.  Who could have in June 1997 foreseen the initially Thai, then shortly thereafter, Asian crisis of the following August?  Speaking of August, who could have predicted how different politically the country would be on August 22, 1983 after a shot was fired at the tarmac of the Manila International Airport? 

 Moving to a less unpredictable plane, “we continue to run budget deficits and our cost of borrowing keeps creeping up”, warns Buenaventura.  The spreads that investors are asking for our paper over treasuries are increasing, although not, at the moment every evident since the increases in the premium are cancelled out by the decline in treasuries.   The treasuries go up, as they did recently, we are certain to be doubly hit.

 So what does the Philippines’ Alan Greenspan, advise to prevent the amber from turning blazing red?

 First, he echoes a universal refrain:  “we have to close our fiscal gap and stop running budget deficits over the next few years. Our enormous financial needs and refinancing requirements require us to continue our foreign borrowings, but if we can limit them to refinancings and for capital development (new infrastructure) we should be fine.”

Then, we should, he suggests, continue working for “more banking reforms and broader financial reforms.”  In banking, these include Phase 2 of the Asset Clean up of the banks, the strengthening of legal protection to the Bangko Sentral and other regulators, implementation of a comprehensive credit information system, and pushing forward the further consolidation in the banking sector. 

On the broader landscape,  Buenaventura cites the need to push local capital market development for both equity and debt.  The secondary market yield curve of our debt papers, as of the 15th of this month, starts at 6.37% for a tenor of 3 months and reaches almost 13%, at 12.985% for 20 years.  In contrast, our peers, such as Indonesia, Malaysia, Thailand and Mexico have theirs relatively flat, showing that we pay much more for the longer tenors than our peers.

 Recognizing how major reforms for capital market development are presently “being stalled by entrenched interests who have long benefited from shallow, illiquid, and opaque financial markets that make the investing public very vulnerable”, he regretted he was not  able to do more (but not for the lack of his trying) and wished his successor, Governor Say Tetangco better luck. 

          Buenaventura has ever since been convinced that "full development of the domestic capital market is key to achieving a more resilient financial system, more stability in the exchange rate, and better public sector financial management." But he points out, unless investors, domestic and foreign, institutional and retail, see it as inherently fair and efficient, the domestic capital market will not develop, and nowhere is this more critical than in the trading of government securities.


 Thus, the secondary trading of securities, particularly government issues, was a major focus of the Buenaventura’s efforts during his term. He prodded the private banks to establish the Fixed Income Exchange (“jawboned” is the more accurate term since many banks were initially reluctant to give up profits raked from an opaque desk-to-desk, telephone based money “market”). He insisted on proper delivery of the traded securities to the investors and eliminated the inherent conflict when dealers acted as custodians of the instruments they trade for their clients.  The Bancap scam, we recall, was rooted precisely on traders acting (more precisely, pretending) as safekeepers of T-bills.  Hence, the contentious rule on third party custodians.  And he ferreted out the whole slew undocumented repurchase arrangements, from side letters to trusts with tenors, that, because they do not disclose the true stock of debt of the borrowing institutions, imperil the health of the system. 

           A lot more remains to be done by those who man the ramparts post-Buenaventura.  Government securities investors continue to have to rely on a wall of accredited government dealers to gain access to the National Treasury, the main issuer of debt in the country.  Likewise,  bills on critical areas, such as the PERA, the Pre-Need Code, the RICA, on bankruptcy reform and on legal protection to regulators, have yet to be approved both houses of Congress and signed into law.

           Developing the domestic capital market, Buenaventura is sure, is “a very specific and doable agenda that is achievable in our lifetime”.  He points to Mexico which in just twenty years so cleaned up its house that foreign investors now flock to it happily taking Mexican debt in local currency.

           Buenaventura appears hoping to be around to see that that happens, though now as a private citizen who must eventually “fade away to yield to the next generation of reform champions”, leave where the action is and ride into the crimson sunset does not seem to be in his agenda. 

      Much as BSP Governor he had done with shafts of work and wit to keep the ground green.  Now, as a private citizen, with the classics of his youth and art of his love beneath his wings, he is raring to make his rounds in the wide blue yonder.