By Bienvenido S. Oplas, Jr.

Worsening traffic congestion in Metro Manila and other big cities in the Philippines has led people to believe that this will negatively affect people’s health, temper, and eventually, the economy. Thus, the solution is to decongest heavily urbanized cities and spread out development and modernization to the peripheral cities and provinces.

This subject was partly tackled during the first BusinessWorld Economic Forum last July 12, 2016 during the panel discussion about succession and transition. Among the speakers were Ernesto M. Pernia, Socioeconomic Planning secretary; Kevin L. Tan, senior vice-president & head of Megaworld Lifestyle Malls, Megaworld Corporation; Bienvenido V. Tantoco III, president of Rustans Commercial Corporation; Nina D. Aguas, CEO of Insular Life; and Wilfred Steven Uytengsu, Jr., president and CEO of Alaska Milk Corporation.

 

Although the focus of the discussion was about how companies prepared for smooth corporate succession, the speakers also provided a wider perspective and tackled some national issues and transition. All agreed that Metro Manila is very congested and that developments should be driven to less urban and rural areas. Mr. Tan in particular highlighted that many real estate developers are going out of Metro Manila because there are more developments in several provinces and big cities, more BPOs, other businesses.

If we look around the world, each country has one or more political and/or financial capital and these places experience congestion where the demand for certain services outpaces the supply. This happens because congestion is natural and part of human nature’s demand for socialization and interaction. It is faster and easier if the office, the kids’ school, the bank, grocery store, car repair shop, etc. are just a few kilometers away instead of dozens or hundreds of kilometers.

Let us check the degree of congestion of the Philippines compared to other ASEAN nations, and from two small, highly congested neighbors. A 50-year gap, 1964 to 2014, table is constructed. The per capita income in purchasing power parity (PPP) valuation over a 30-years gap is also shown.

What the above table shows are the following:

1. Highly-congested Singapore, Macau, and Hong Kong also have very high per capita income. There are many explanations for this and the efficiency gains of having almost everything nearby is definitely one of them. Brunei is a different case, small population but relatively big land area rich with energy resources for export, like natural gas.

2. Less-congested Cambodia, Myanmar, and Laos also have low per capita income of only $5,100 or less. Again, there are many reasons for this and the inefficiencies and inconvenience of being far from various economic units like big banks, big grocery stores, etc. should be one of those reasons.

3. The Philippines is second most congested country in the ASEAN after Singapore. Its population has more than tripled over the past 50 years.

Let us check the numbers for Metro Manila. From 636 square kilometers originally, the megacity now has a land area of 644 square kilometers (owing to reclaimed areas at the CCP-SM MOA) and a population of 12.877 million, as of the August 2015 census. Based on these numbers, its population density is 19,995 persons/sq. kms., comparable to that of Macau.

But one report says World Bank data shows that Metro Manila has a 1,300 square-kilometer land area as of 2010. Or a population density of 9,906 people per sq. km. in 2015, still higher than those in Singapore and Hong Kong.

So if congestion is natural for people, how can we optimize and benefit from the presence of many people per square kilometer of land?

1. More land reclamation. The 800 or so hectares in the CCP-SM MOA-Entertainment City have created lots of businesses and jobs for Filipinos. The planned additional reclamation projects in Manila Bay should proceed, and at a fast rate.

Aside from creating new lands in the sea, there is also a need to remove huge volume of silt, mud, and solid wastes in river beds of the Pasig, Las Piñas, and Marilao rivers that drain into Manila Bay. These smelly solid wastes cannot be brought to dumpsites where most LGUs declare a “not in my backyard” (NIMBY) policy.

2. More skyways, elevated interchanges and U-turns, tunnels. Traffic congestion is an engineering problem with engineering solutions. Such solutions should veer away from hiring more traffic officers and officials, avoid having more stoplights. Instead, officials should build more hard infrastructure that can provide service to the public and motorists 24/7 for decades to come.

3. More trains, LRT/MRT, running along C5 and C6, above ground and underground, extending north and sound, east and west, of Metro Manila. In Tokyo, Seoul, and Singapore, it is common to see multi-level train stations and shops underground. Public Private Partnership (PPP) schemes are already existing to encourage more private funding and construction of these projects.

4. More low-cost medium- and high-rise residential condos. This immediately frees up space for more urban forestry and public parks, unlike in horizontal low-cost housing. Multiple regulations and taxation by both national and local governments should also decline. These are costs that are ultimately passed on to condo unit buyers and renters, that make vertical housing less affordable to the poor and lower middle class.

People and businesses respond to incentives and disincentives. If there are many disincentives and inconvenience in taking (often multi-ride) public transportation, then more people will drive their cars or motorcycles, which contribute to heavy traffic congestion. Government taxation and regulations that distort the market for urban transportation, housing, and other services should be reduced.

Bienvenido S. Oplas, Jr. (@noysky on Twitter) is a Fellow of SEANET and President of Minimal Government Thinkers. minimalgovernment@gmail.com

By Krista Angela M. Montealegre, National Correspondent

President Rodrigo R. Duterte has so far been saying the right things: accelerating infrastructure spending, cutting red tape, and reforming the tax system. The tough-talking leader has made believers out of the business elite, but more work must be done to achieve his goal of reinvigorating the countryside to spread benefits of rapid economic growth.

Speaking before some of the country’s biggest names in business, Finance Secretary Carlos G. Dominguez III said the government aims to accelerate infrastructure development in the rural areas, lining up “quite a number” of projects for implementation either through the public-private partnership (PPP) or government budget methods.

This sentiment was also expressed by Socioeconomic Planning Secretary Ernesto M. Pernia during the BusinessWorld Economic Forum on July 12 at the Shangri-La at The Fort in Taguig City.

“We’ll continue the good macroeconomic policies, but we want to make a big push toward regional and rural development, which was not given too much emphasis in the previous administration,” Mr. Pernia said.

The next big thing: Mindanao

Under former President Benigno S.C. Aquino III’s watch, the Philippine gross domestic product expanded by an average of 6.2% — the fastest pace since the 1970s — but his failure to make the economic gains felt by majority of the Filipinos has tainted that legacy.

Mr. Duterte — who transformed Davao once notorious for crime into a gold mine for corporates during his 22 years as mayor — plans to lure businesses to far-flung provinces in an effort to lift a fourth of the population out of poverty.

The “big story” within the next six years will be Mindanao, which is envisioned to become the country’s “major food basket,” Mr. Dominguez said.

Decades of under-investment, corruption, and violence have plagued the major southernmost island in the Philippines, leaving most parts of it impoverished.

Developing the necessary power, water, communications and transport infrastructure will be crucial to realize the government’s goal, with the Asian Development Bank (ADB) projecting that the Philippines must invest up to $127 billion in infrastructure from 2010 to 2020.

The Duterte administration intends to continue projects under the public-private partnership program — the cornerstone strategy of his predecessor to boost spending on major infrastructure that would spur economic activity nationwide.

The PPP Center — the central coordinating and monitoring agency for big-ticket infrastructure projects the government is undertaking with private companies — has 53 infrastructure projects in its pipeline, 12 of which cumulatively worth some P217.4 billion have been awarded so far.

First Pacific Co. Ltd. Managing Director Manuel V. Pangilinan said the gaping deficits in the economy such as infrastructure present investment opportunities for local and foreign companies.

Metro Pacific Investments Corp., which has interests in power generation, toll roads, water utility, and hospitals,  is one of three Philippine subsidiaries of Hong Kong-based First Pacific Co. Ltd., the others being PLDT, Inc. and Philex Mining Corp. Hastings Holdings, Inc. — a unit of PLDT Beneficial Trust Fund subsidiary MediaQuest Holdings, Inc. — maintains interest in BusinessWorld through the Philippine Star Group, which it controls.

“We all know there is poverty standing in the way so addressing it must be the business of business, not only of government’s. The optimum approach to poverty is creating jobs,” Mr. Pangilinan said, during the same event.

Decongesting Metro Manila

Infrastructure woes have come in the way of the Philippines reaching its economic growth potential and the improvement of quality of life, AC Energy Holdings, Inc. President and Chief Executive Officer John Eric T. Francia, who led the Ayala group’s foray into the transport infrastructure and energy sectors.

“We believe this is solvable with the help of the private sector,” Mr. Francia said.

Property developer Megaworld Corp. Senior Vice-President Kevin L. Tan said an expansion to the countryside will provide growth opportunities for the tourism and the business process outsourcing (BPO) industries. The real estate firm plans to unveil two more townships in Mindanao.

“We believe in the vision of the President…The key to decongest Metro Manila is to drive development to rural areas,” Mr. Tan said.

But bringing the private sector out of the lucrative capital may come with several challenges. Companies are chasing returns and the government must provide incentives for businesses to cater to the communities offering lower average revenue per user versus those in urban centers.

“The challenge is basically that there are densities for projects to be viable in these places. Clearly, there is a need for a lot of basic infrastructure such as electricity, water, fixed telephone, and mobile telephone and the only way they are going to develop is for these infrastructure to reach these areas,” said Aboitiz Equity Ventures, Inc. President and Chief Executive Officer Erramon I. Aboitiz.

Globe Telecom, Inc. President Ernest L. Cu said the government must help the private sector build the infrastructure in the marginalized areas to make it viable for businesses to operate there.

Mr. Cu recommended the construction of a fiber optic network in areas such as the Autonomous Region in Muslim Mindanao (ARMM) that telecommunication companies can rent from the government.

“If government builds roads, they should also be building the information highway. It’s as vital as farm to market roads,” Mr. Cu said.

“Our returns are predicated on a much shorter return in terms of time, but the government has a very long period of return and their basis case is not only predicated on the particular fiber optic it will rent [out] but also on the benefits of the community that will be sustained,” he added.

Even the President’s dream project — a major railway in Mindanao that will be linked to Luzon — may face some issues if he decides to undertake it through a PPP.

“It’s going to be missionary in nature. Rail, in itself, is already non-economic on a standalone basis for a private sector investment let alone in Mindanao,” Mr. Francia said.

Red tape, high taxes, and foreign ownership

The government’s focus on streamlining the bureaucracy and reducing the tax burden on companies and individuals will make the Philippines more competitive versus its neighbors in the region, said Rustans Supercenters, Inc. President Bienvenido V. Tantoco III.

“If taxes are more competitive and more efficient, corporations will invest more and consumers will also spend more. There may be a period where things might get worse but on a medium term that will be beneficial for corporations and businesses,” Mr. Tantoco said.

Red tape and high taxes — not the Constitutional limits to foreign ownership — have been the main deterrent for foreign companies to invest here, said Sun Life of Canada (Philippines), Inc. President Rizalina G. Mantaring.

“If you are a company and you want to build a strong industry and strong capabilities for manufacturing, why will you locate in the Philippines when you can operate much more cheaply and efficiently elsewhere?” Ms. Mantaring said.

“Those are the things we need to address because once markets open up, consumers, revenues and investments flow to where it is most efficient,” she added.

At a time of lingering global uncertainty, the Philippines must take advantage of its robust growth momentum to attract more job-generating foreign direct investments — one of the lowest in the region.

“If we’re able to simplify processes, make it easier to do business in the Philippines, then we are setting ourselves up for success,” said Alaska Milk Corp. President Wilfred Steven Uytengsu, Jr.

Vice-President Maria Leonor “Leni” G. Robredo said companies must embrace “business unusual” where shared value — not profit — is the driver of growth.

“As the private sector redefines products and pricing models to turn the swaths of population that have been left out as their new target market, shared value is created. Growth and progress happen at the same time,” Ms. Robredo said.

Citing data from the Organization for Economic Cooperation and Development, Ms. Robredo said rising inequality took away 10 percentage points of growth rates in Mexico and New Zealand, while cumulative growth rates in Italy, the United Kingdom and the United States would have been 6-9 percentage points higher had income disparities not widened.

“We need growth for all, not just for a select few. Progress that benefits only the elite is no progress at all,” she said.

Krista Angela M. Montealegre (@_kmontealegre on Twitter) has been writing about the corporate scene for nearly a decade, the last year or so for BusinessWorld.

By Imee Charlee C. Delavin, Reporter

The next few years will be more challenging for Philippine banks amid headwinds from overseas, but the country’s sound macroeconomic fundamentals are seen fueling the local financial sector’s expansion, drawing in more foreign banks that want a piece of Asia’s rising star.

Since the start of the year, local financial markets have been buffeted by the divergence in the fortunes of the world’s biggest economies. In recent weeks, Britain’s decision to pull out of the European Union added to this uncertainty.

“With the exit of Britain from the European Union, investors right now are on a wait-and-see mode, assessing the repercussions of Britain’s decision on the health of the world economy,” Land Bank of the Philippines market economist Guian Angelo S. Dumalagan said.

“Britain could potentially undermine global growth by dampening consumer and business sentiment. Although another worldwide recession is unlikely given the steady pace of the US economy, the separation of Britain could definitely aggravate global economic divergence, resulting in increased volatility in financial markets,” he said.

The divergence among the world’s advanced economies has the US on the one hand raising interest rates to sustain its recovery from the Global Financial Crisis of 2008-2009. Japan and the Eurozone on the other hand are easing monetary policy to prevent their economies from sliding back.

Add to the mix China, which has slowed down in recent years, pulling along with it some emerging economies in Asia that rode on the export boom of the world’s second largest economy.

“Added stimulus would mean that interest rates may remain low, but very volatile, in the next few years,” Mr. Dumalagan said.

“Amid this global economic environment, Philippine banks might find themselves frequently adjusting their portfolios in response to mixed signals from abroad. Volatility offers profit opportunities, although market timing is critical. This could also mean that loan growth might remain strong, as relatively low interest rates could entice firms and households to borrow more,” he added.

Local lenders remain well-capitalized

Despite the external headwinds, Philippine banks remained well-capitalized, with a 14.91% capital adequacy ratio (CAR) at the end of last year, or well above 10% minimum set by the Bangko Sentral ng Pilipinas’ (BSP) and the 8% floor under Basel III.

Capital buffers also were of high quality, mainly composed of common equity tier 1 (CET1) instruments, which represented 12.37% and 13.33% of risk-weighted assets on solo and consolidated bases, or more than double the minimum 6% share set by the BSP. The share of Tier 1 capital — composed of common equity and qualified capital instruments — also stood at 12.55% and 13.48% at end-2015, higher than the 7.5% requirement.

The banking sector’s total resources stood at P12.52 trillion at end-March 2016, up from the year-ago level of P11.37 trillion, as the public continued to place their savings in banks, thus supporting the industry’s expansion.

Universal and commercial banks’ total resources stood at P11.25 trillion, up from the P10.24 trillion at end-March 2015. Thrift banks had P1.05 trillion at end-December, while rural banks held P213 billion.

This was despite a drop in the number of banks operating in the country. At end-December, the number of lenders declined to 632 from 648 in 2014. However, total bank branches rose to 10,124 from just 9,713the previous year.

Big banks remained profitable in 2015, posting a combined net income of P120.275 billion.

According to the BSP’s assessment, “the Philippine banking system remains resilient as it continued to support long-term economic growth, [adding that] banks’ balance sheets were marked by sustained growth in assets and deposits.”

International credit raters have said the Philippine banking system remains sound and stable, as banks remained well-capitalized against any financial shocks, having been supported by the country’s strong fundamentals and rapid economic growth.

Positive economic outlook

BSP Governor Amando M. Tetangco, Jr. agrees that the country’s solid macroeconomic fundamentals underpin the banking industry’s strength, adding that the positive outlook for the Philippine economy lends support to lenders’ resilience in the near- to medium-term.

“The projection is that the Philippine economy will continue to grow at a rate above trend over the next few years, which would indicate that there would be a need for funding increased economic activity during that period. That would augur well for the banking system,” Mr. Tetangco said.

Despite the global uncertainty, the Philippines’ gross domestic product (GDP) growth has averaged 6.3% annually since 2010. At 1.8 percentage points more than in the previous six years, the recent growth record is a bigger improvement than in any other country in the region, Capital Economics Ltd. earlier said.

Last year, GDP grew by 5.8% on the back of robust domestic demand and private investments, albeit missing a 7-8% target for 2015.

GDP grew by 6.9% in the first quarter of 2016, driven by an uptick in public disbursements, a surge in investments, and robust household consumption, which historically has contributed up to 70% of GDP. This year, the country is seen expanding by 6-7%, down from the initial target of 6.8-7.8%, but still above trend.

Boost infrastructure spending

Seen boosting economic growth in the medium term is increased infrastructure spending — by at least 5% of GDP, going by what President Rodrigo R. Duterte’s economic managers have been saying. This in turn will be a boon to the banking industry.

“It helps that the new economic team has announced that they will ratchet up infrastructure spending. This would create the conditions for more future growth,” EastWest Banking Corp. President and CEO Antonio C. Moncupa, Jr. said.

“And if the campaign against criminality starts to bear fruits and the peace processes take off, these could unleash more upbeat mood and eventually investments and hopefully translate to more job opportunities for our workers,” he said.

Ildemarc C. Bautista, assistant vice-president and head of research at Metropolitan Bank & Trust Co., described as “unprecedented” the Duterte administration’s plan to ramp up infrastructure spending to as much as 7% of GDP.

“[C]onsumer and business loans should pick up on the back of these government stimulus programs and strong consumer spending,” he said, adding that, coupled with low global inflation and high domestic liquidity, “this should prove positive for the demand side.”

Maybank ATR Kim Eng banking sector analyst Katherine Tan said the government’s emphasis on infrastructure, particularly public-private partnership (PPP) projects can address banks’ compressing margins.

“[T]hey are term loans… they are considered as project financing and project financing usually gives you higher rates so more PPPs then that should also help the banks’ margin in the long-term,” Ms. Tan said. “There would be more room for growth for the banking sector in the next six years [as] more PPPs, more project-financing type of loans then that would probably help improve your margins.”

Back to basics

Patrick D. Cheng, first vice-president at China Banking Corp., said banks “should do reasonably well” during the next few years.

The government’s PPP projects will boost the expansion of banks as “more conglomerates team up and share the risks and rewards” of such projects, giving local lenders “more capital market deals to attend to,” he said.

“If the country continues to grow by around 6% to 7% per year for the duration of the Duterte administration, then we should expect bank earnings to gain somewhere between 1 and 1.50 times GDP growth,” Mr. Cheng said.

“With interest rates much lower, bank’s trading gains will definitely be muted compared to where they were four to five years ago. It will really be a back to basics for banking. Making good loans… keeping within their respective bank’s risk appetite and generating a good balance of fee income,” he said.

Branch expansion “may be tapering off as banks and clients adapt better to technology and digital banking — non-branch banking — channels,” Mr. Cheng said, adding that this should give banks “some breathing space on operating expenses.”

“These actions if properly executed should allow banks to generate and rebuild net income levels to offset the generally lower trading gains environment,” he added.

Entry of more foreign banks

And as success attracts rivals, the Philippine banking industry will be witness to more players from abroad, aided in no small way by the government’s move to liberalize foreign ownership, and by the envisioned ASEAN Banking Integration come 2020.

“An expanding economy is always positive for the banking system,” Mr. Tetangco said, adding that the country’s “strong macroeconomic fundamentals and good economic performance” is luring more foreign banks into the system.

“Given the positive prospects of continued growth and manageable inflation, the entry of foreign investments is expected to increase further, including investments in the banking sector which has actually been liberalized through the passage of RA [Republic Act] 10641 and also the passage of the law allowing higher foreign participation in rural banks,” Mr. Tetangco said.

The BSP has approved the entry of eight foreign banks since the passage of the Act Allowing the Full Entry of Foreign Banks in July 2014. The foreign lenders that got the BSP’s green light to operate in the Philippines are Japan’s Sumitomo Mitsui Banking Corp., South Korea’s Industrial Bank of Korea and Shinhan Bank, Taiwan’s Cathay United Bank and Yuanta Commercial Bank Co. Ltd and the Singapore’s United Overseas Bank Ltd.

This year, Korea’s Woori Bank entered the local market by partnering with Gaisano-led Wealth Development Bank Corp., a thrift lender which targets to serve both Korean tourists and expats. In June, Taiwan’s First Commercial Bank also got the central bank’s approval to set up a branch in Manila.

“There are more applications that are being evaluated right now,” Mr. Tetangco said.

EastWest’s Mr. Moncupa said the outlook for the local banking industry in the next three to six years is “definitely bright,” notwithstanding greater competition.

“[M]ore intense competition… normally happens when the mood is upbeat. Everybody will try to get a piece of the action. While that puts some pressure on bank spreads, it will be good for households and businesses in terms of access to credit, better services, and more competitive pricing,” he said.

Mr. Moncupa said the lower spreads and intense competition would put pressure on mergers and acquisitions, which would create higher efficiencies and economies of scale.

“Overall, the industry will turn positive results although it could be tough for some banks.  We expect to see more interest from foreign banks to get into the country. In general, in the next few years we see retail banking to continue to be the realm of local banks.  Foreign banks will be mostly in corporate and wholesale banking. Foreign banks may try to get minority stakes in local banks,” he said.

Metrobank’s Mr. Bautista sees tighter competition playing out this way: “The big local banks will continue to leverage their national presence and create economies of scale while the smaller banks will focus on niche markets and consumer segments.”

“Although it looks like new entrants are more amenable to partnerships with local banks instead of going in solo… these foreign entrants will continue to seek partnerships with the mid-tier banks as they focus on niche markets and using technology solutions as a competitive tool,” he said.

Choice of next BSP chief

Lastly, any orderly adjustment by the banking industry to the new realities of broader competition and external volatility would require the steady hand of a central bank. Crucial to the financial sector, if not the entire economy’s mid-term prospects, is the appointment of a new BSP chief by next year when Mr. Tetangco steps down.

Nicholas Antonio T. Mapa, associate economist at Bank of the Philippine Islands (BPI) said one of Mr. Duterte’s most crucial appointees will be his choice for BSP Governor in 2017.

“President [Benigno S.C.] Aquino [III] did well in re-appointing the ace Governor who has earned international acclaim for his astute stewardship of the country’s financial system,” Mr. Mapa said.

“No doubt [Mr.] Tetangco helped keep the economy afloat in rough waters and ensured smooth and safe sailing in the times that the winds were full in our sails. Duterte would need to find a worthy successor to the outgoing Tetangco,” Mr. Mapa said.

The Philippine financial system is “one of the most resilient in the region, if not the world” as it “adheres to stringent standards of risk management to ensure that the business of public trust remains whole and viable for all stakeholders involved,” he said.

One of Mr. Tetangco’s legacies to the Philippine banking system is the implementation of an interest rate corridor system, “which is precisely the framework that can stave off financial market volatility,” Mr. Mapa said.

“Given how quickly global markets can turn from tempest to tranquil and back, the BSP’s investment in such a system affords them the flexibility to deal with rapid changes in market sentiment and to calm the waters when they do get roiled,” he said.

“Their ability to better get hold of liquidity will go a long way to deterring financial stress from the eventual [United Kingdom’s] exit from the European Union, imminent, albeit delayed Fed rate hike cycle and possible renewed concerns about crude oil prices and China’s economy,” Mr. Mapa added.

Imee Charlee C. Delavin (@charleedelavin on Twitter) covers private banks for BusinessWorld. She loves to travel.

The Duterte administration’s push to develop agriculture and areas outside Metro Manila has cast a ray of hope on smaller lenders wanting to regain their footing, if not expand.

Even while campaigning for the Presidency, then Davao City Mayor Rodrigo R. Duterte has capitalized on the disparity in economic development between what he called “Imperial Manila” and the rest of the country, especially the rural areas.

Rural banks have mirrored the countryside’s neglect, with a growing number of the industry’s members driven to bankruptcy. This forced the Bangko Sentral ng Pilipinas (BSP) and the Philippine Deposit Insurance Corp. (PDIC) to launch a rescue package that includes tax and other incentives for third-party investors willing to avert closures, if not revive forlorn rural lenders.

Despite two extensions of the program, rural banks continue to fall by the wayside, erasing the little amount depositors had earned on their accounts, if not their trust in banks altogether.

Rural Bankers Association of the Philippines (RBAP) President Antonio O. Pasia said rural banks are hoping to participate in the financial inclusion thrust of the new government.

“We’re hopeful, we definitely would like to participate in the programs of the new administration, we would be offering the rural banks to take part in the countryside development,” said Mr. Pasia, who is also president of Batangas-based Malarayat Rural Bank Inc..

“We think the new administration is more receptive towards the needs of the farmers and fisherfolks that’s why we’re offering the services of the rural banks in those areas,” he said.

Rural banks are front liners in countryside development and in financing the needs of farmers, fisher folks and micro, small and medium enterprises (MSMEs).

These lenders serve as the platform for bigger banks to fulfill their required 25% credit quota to the farming sector, as mandated by the Agri-Agra Reform Credit Act of 2009.

The small lenders could also serve as the platform for small and medium-scale enterprises to secure funding for their business expansions through microfinance.

With stiffer competition in the banking space, rural banks would like to strengthen [their] position in [their] own areas and “hopefully compete in the delivery of credit to the countryside” by merging to build stronger lenders, upgrading technology and forging partnerships, Mr. Pasia said.

“Eventually, there will be lesser number of rural banks because of consolidations and mergers but stronger players. I think for those that will stay on, there future will be better,” he said.

Economists have welcomed the Duterte administration’s plan to hasten growth in the agriculture and fisheries sectors, which account for roughly 10% of gross domestic product (GDP) but employs almost a third of the country’s workforce.

The World Bank and the Asian Development Bank have said in previous reports that poverty can be addressed by improving the agriculture sector. Business leaders have also included in their recommendations to the administration the delivery of support services like financing, technology, and logistics to farmers and the adoption of value-chain development for rural-based enterprises.

In line with the new government’s thrust to develop the countryside, business leaders also recommended the development of regional industries.

“The Philippines’ growing middle class and the Duterte administration’s focus on promoting rural development could broaden the reach of the banking system, potentially resulting in more revenue streams,” said Land Bank of the Philippines market economist Guian Angelo S. Dumalagan.

Chamber of Thrift Banks President Rommel S. Latinazo said the sector remains “very optimistic” given the new administration’s thrust.

“I think we continue to push for inclusive growth that means when there is development in the countryside, it means more opportunities for lending activities and there’s a need for financing, credit facilities as well as consumer financing — these are the two main businesses of thrift banks,” Mr. Latinazo, who is also RCBC Savings Bank President and CEO, said.

“Of course there’s also that pronouncement from the administration that they’d like to push for the agricultural side and that’s where many thrift banks are positioned… [A]griculture means it’s not going to happen in Metro Manila, it will happen outside Metro Manila, in the provinces and that’s where most of us are positioned like the stand-alone thrift banks, so that’s also an opportunity that makes us positive,” he added.

Mr. Latinazo said consolidations among smaller banks will become more sensible amid stiffer competition in the near term.

“Consolidation remains to be the thrust of government. The BSP has been putting up incentives to encourage more integration, consolidation. That is happening [to] all sectors — rural banks, thrift banks and we see that continuing. Indications are there. A lot of foreign banks are looking at us, either by way of putting up their own or via investment in an existing bank,” Mr. Latinazo said.

Maybank ATR Kim Eng banking sector analyst Katherine Tan said mergers and acquisition “has been quite attractive because there’s a lot of growth potential, as we’re very underserved and the banking space remains underpenetrated.”

“We’ve already seen a lot of big banks acquiring rural banks for the past years and there’s been a lot and it’s still going to continue. We have over 600 bank in the Philippines and the consolidation would continue,” she said. — Imee Charlee C. Delavin

By Roy Stephen C. Canivel

The Philippines’ car industry remains in a sweet spot.

Apart from sales rising yearly, the sector also recently received government support — a multibillion dollar financial incentive to help transform the country into a regional auto manufacturing hub.

Understandably, the challenge is daunting, ambitious even.

After all, other countries such as Thailand seem to be a better choice than the Philippines as far as car manufacturing is concerned.

This much is admitted by Rommel R. Gutierrez, first vice-president for Government Affairs at Toyota Motor Philippines.

Take Toyota’s Vios and Innova models, Mr. Gutierrez said.

While both vehicles are made locally and in Thailand, “it’s cheaper to import vehicles than to produce locally,” he said.

This is because Toyota’s local unit has no choice but buy more components from abroad, unlike Toyota’s Thai assembler which sources car parts locally.

“Thailand’s localization is very high, more than 80% while ours are only at 40%,” the Toyota executive said, adding that the industry will become more competitive if it sources its parts locally.

Program seeks to make cars have more local content

Starting 2010, the Philippines found it more difficult to compete when import barriers were pulled down in member countries of the ASEAN Free Trade Area (AFTA).

Under the AFTA’s Common Effective Preferential Tariff (CEPT), taxes on imports — including those previously imposed on vehicles and components — were virtually removed.

As a result, several auto parts suppliers and some car manufacturers left the country since it was no longer competitive, Mr. Gutierrez explained.

After all, it was cheaper to import cars assembled abroad than it was to build them here.

But now, the government — through its Comprehensive Automotive Resurgence Strategy (CARS) program — plans to turn the situation around by increasing localized content to 60% from 40% by 2022.

With locally-built cars containing more parts sourced domestically, companies such as Toyota Philippines “can benefit,” Mr. Gutierrez said.

The CARS program, established by Executive Order 182 that was signed by President Benigno S. C. Aquino III on May 29 last year, provides incentives to three car makers to locally produce three car models with a production volume of at least 200,000 units respectively for up to six years, or an average of 33,333 vehicles per year.

The program also provides auto manufacturers and parts makers operating in the Philippines P4.5 billion in annual support for six years, or P27 billion in total, as well as other non-fiscal measures.

For its part, Toyota Motor Corp. plans to invest P3.22 billion ($70 million) in its Philippine division to increase local output and qualify for a new tax incentive. The Japanese automaker will build 230,000 Vios subcompact sedans.

This would help “close the cost gap” between importing and local production, he said, adding that the domestic sector needs to achieve economies of scale, bringing down cost of localization and resulting in more competitive production.

“You need to produce a lot because you need to spread the cost,” he said. “It’s not easy, but we are more than willing to take the challenge kasi (because) that’s the requirement.”

The Toyota executive, who is also president of Chamber of Automotive Manufacturers of the Philippines, Inc. (CAMPI), said that it has been a year since the “start of motorization,” which he said signaled a spike in total industry car sales reflecting the stronger purchasing power of the local market.

Toyota, Mitsubishi qualify for car program

Toyota has consistently reported the biggest sales in the Philippines, taking 45.12% of market share as of June this year alone, according to a monthly report issued by CAMPI together with the Truck Manufacturers Association.

By 2020, total market sales is expected to reach 500,000 units. However, this may be reached earlier than anticipated since 320,000 units were delivered last year, meeting the 2018 target of 300,000 way ahead of schedule.

As of this writing, only two companies qualified for the program: Toyota and Mitsubishi Motors Philippines. They received their certificates of recognition last June.

The fate of the third player that would help reach the program’s goal of producing 600,000 units is still unknown.

“We still don’t know if we’re going to open it up,” Trade Undersecretary Ceferino S. Rodolfo told reporters last June while at the sidelines of Mitsubishi’s groundbreaking ceremony of its Laguna stamping facility.

Manufacturers need to meet “the production volume that is needed for the Philippines to surmount the economies of scale and be regionally competitive,” he said.

“If they are accepted into the program, that does not mean that they will be already receiving the incentives. It depends on their performance,” he told reporters. Incentives would only be enjoyed by the manufacturers after they produce their first 100,000 units.

Meanwhile, as the country’s consistent top-selling car maker, Mr. Gutierrez says that the growing traffic does not necessarily post a harm on Toyota’s performance, citing increasing industry growth on the back of solid consumer demand.

“Traffic doesn’t seem to have an effect on our sales,” he said. “In fact, people would rather buy a car than suffer through our public transportation. That’s the irony of it.”

He also pointed out that car sales in the provinces — where roads are not as congested — remain substantial.

A lot of dealerships are now being put in the provinces and, as a result, sales are being dispersed across the region, he said. Sixty percent of its sales are in Metro Manila while the rest are divided among the rest of the areas.

Roy Stephen C. Canivel (@roycanivel on Twitter) covers telecommunications and trade for BusinessWorld. He likes reading a good book and occasionally checks their summaries on several Web sites.