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Going green and sustainable

By Lourdes O. Pilar, Researcher

SUSTAINABLE FINANCE or green finance has been gaining traction across the financial value chain due to its economic benefits with environmental, social and governance considerations. Due to its appeal of bringing both sustainability-positive outcomes and investible returns, it is perceived as one of the tools mobilizing capital from the private sector, thereby, filling financing gaps that government funds and development assistance may not be able to fully provide.

“Funds can be mobilized towards projects in the areas of renewable energy, energy efficiency, pollution prevention and control, environmentally sustainable management of living natural resources and land use, clean transportation, climate change adaptation, or green buildings that meet the national or international standards or certifications,” said Bangko Sentral ng Pilipinas (BSP) Deputy Governor Chuchi G. Fonancier in an e-mail to BusinessWorld.

Ms. Fonacier likened green financial products to traditional ones in terms of structuring and pricing, noting the growing interest of corporations and individuals to invest in environment-friendly financial products would likely affect their competitiveness.

Moreover, Ms. Fonacier said these products intend to address some of the deficiencies in the market. Citing the Asian Development Bank’s “Development Asia” series, the BSP official noted these deficiencies include the costs and benefits of economic activities that are not accounted for in the pricing system such as environment-related externalities, the lack of willingness of some lenders to grant long-term loans for sustainable infrastructure projects, the lack of information regarding sustainable investment opportunities, and the lack of tools necessary to assess green investments on the part of the investor.

Green financing is seen to bridge the gap between desired environment-related outcomes by traditional or innovative financing. Despite these benefits, investors were initially skeptical.

“BDO’s green financing has been practiced since 2010 and is considered one of the pioneers to have catalyzed sustainable finance in banking industry in the Philippines. Ten years ago, green financing faced various challenges. At that time, few people were aware or understood the concept of green projects, saying it is fancy and can be risky. Corporations often considered it as more of a Corporate Social Responsibility (CSR) and that it has no much economic value. However, BDO would like to explore newly coming green industry and its business opportunities,” BDO Unibank, Inc.’s (BDO) Chief Advisor and Head of Sustainable Finance and Multilaterals/ Export Credit Agencies (ECA) Desk Eunjoo Park-Minc told BusinessWorld.

“In most green projects, 70% of the project cost is financed by the bank because most of green projects financed by bank is structured as project finance. This means bank’s success of green financing is highly affected by the projects’ viability. Thus, before financing, the bank should thoroughly understand the project and its technology very well. Full understanding of the project technology is critical for the success of green financing of BDO,” she said.

By partnering with World Bank’s private sector investment arm International Finance Corp. (IFC), BDO marked its first venture in green financing through the establishment of its Sustainable Energy Finance Project (SEFP) in December 2010. SEFP was a joint loan program tailored specifically to firms undertaking energy efficiency projects.

In the same year, BDO came out with its Social, Environmental and Management policy to provide green financing parameters in its lending operations. This include an exclusion list, which identifies projects that goes against environmental benefits, she added.

“[While the bank] mobilized its own capital to finance the projects under SEFP…IFC provided us the technical advisory services on green projects,” said Ms. Park-Minc.

Ms. Park-Minc noted that capacity building became one of the key factors in growing the demand in BDO’s green financing, recounting that they started working with smaller projects to strengthen its confidence level and have a track record in green financing.

“To understand green projects, the bank must establish internal capacity building, from top management who approves the loan to its staff who processes the credit. Therefore…the bank established its [bank-wide] SEF desk…a centralized team in charge of assessing green projects, as well as training its personnel and clients (borrowers),” she said.

Since then, BDO and IFC’s partnership developed in three stages. In 2010 -2013, the bank and IFC focused on capacity building to understand green financing fully. In 2013-2015, BDO was already able to confidently finance various renewable energy projects. In 2016-2018, BDO focused on the promotion and acceleration of projects involved in solar farm as well as rooftop and green building.

After these three partnerships, BDO has heightened its confidence level to finance green projects and proudly operates its SEF desk on its own.

In addition to SEFP, BDO has partnered with Japan Bank for International Cooperation to relend the latter’s $50 million green facility to environment-related projects focusing on renewable energy in the Philippines in August 2016. This has provided the bank an additional financial product that can support their clients’ prospective green projects.

BDO’s ten years of green financing practice has become its “solid” platform to establish its Sustainable Finance Framework, which provides parameters and guidelines of green and social impact financing.

Green financing is not limited to energy projects, which can extend in different industries such as agriculture or manufacturing. “Any kind of financing which has positive environmental and social impact can be considered as green financing. [So long as] these projects are verified as eligible green projects under the BDO’s Sustainable Finance Framework,” Ms. Park-Minc said.

Currently, BDO’s green loans account for more than 15% of its total loan portfolio, according to Ms. Park-Minc.

“BDO has contributed significantly to the nation’s clean energy generation by financing 45 renewable energy projects with a total installed capacity of 2.1 gigawatts, including various type of technology such as biomass, geothermal, wind, solar and hydro projects since 2010,” she said.

For government-owned Development Bank of the Philippines (DBP), key to its green financing business is its credibility as a sustainable development advocate, starting from the bank to its clients.

“In 1997, DBP came out with its Environmental Policy Statement which stipulated DBP’s commitment to environmental protection and sustainable development. DBP likewise operationalized its Environmental Management System, earning the Bank the distinction of being the first Philippine Bank to be ISO 14001 certified in 2002,” DBP President and Chief Executive Officer Emmanuel G. Herbosa said in an e-mail.

Mr. Herbosa noted DBP has focused on playing a catalytic role in financing projects for the environment under its Green Financing Program, the Bank’s umbrella program that caters to green investments.

“Through the Bank’s environmental lending programs, local government units and private enterprises were able to comply with environmental laws, regulations and standards,” he said.

DBP’s green credit assistance not only produced environmental benefits, but also social advantages. For instance, its Energy Efficiency Savings (E2SAVE) Financing Program would enable investors to tap new technologies that would reduce their greenhouse gas emissions. Moreover, its Financing Utilities for Sustainable Energy Development (FUSED) Program aimed to support projects that would develop, distribute and transmit renewable energy while another program, PASADA (Program Assistance to Support Alternative Driving) aids public transporters to replace their old vehicles to new, energy-efficient vehicles.

The BSP has already signaled to the industry its plan to mainstream green finance, Ms. Fonacier said.

“Cognizant that embracing sustainability principles will not happen overnight, we will require banks to adopt an action plan with specific timelines and milestones towards this end. We expect that careful study of trade-offs are considered by banks in their action plans,” she said.

“Nonetheless, banks do agree that sustainable finance is ultimately a public good. When done right, this could translate into profitable investments and, at the same time, achieve environmental and social objectives,” she added.

Banks said that achieving both environment and financial returns is possible by ensuring the projects’ adherence to ESG (environment, social and governance) standards.

“First, we check the project viability. We study the feasibility as well as the documents (certifications) pertaining to ESG. Project viability does not only mean assessment of risks on cashflow or default risk, but also that of ESG,” BDO’s Ms. Park-Minc said.

“Since these projects are usually financed long-term, we check our clients yearly if they consistently comply and/or encounter ESG concerns to manage risks and to avoid issues before they arise,” she added.

A technical engineer is also present to do plant visits and detailed checks, as well as recommend improvements.

“This way, capacity building is collaborative, not just with our personnel but also our clients,” BDO Relationship Manager at the Multilateral/ECAs Desk Katrina G. De Castro said in the same interview.

“For the past 10 years, there has been no default from the green projects [we financed],” Ms. De Castro said.

Similarly, DBP’s Mr. Herbosa said potential projects undergo screening “to determine project environmental risk category, potential environmental and social impacts and corresponding mitigation measures, required environmental and social-related permits/ clearances, safeguards and appropriate project performance monitoring indicators.”

Green loans can be riskier compared to other financial instruments, since banks need to offer longer tenors as these projects usually take time to develop, Mr. Herbosa added.

However, beyond financial viability, investors look into the environmental and social impact of a project.

“I think investors are looking into whether the bank is truly walking his talk. Does it really support green projects? What are these projects and do these contribute to the environmental protection of the country? Investors now are also embracing ESG approaches when it comes to project investments” he said.

Aside from ESG-related credit policies, DBP has implemented a strictly no coal-fired power plants financing. “It may have lost the bank some financing opportunities, however, the advancement of environmental protection is one of the responsibilities that DBP takes seriously,” Mr. Herbosa said.

“GREEN BONDS”
In pursuit of alternative sources of funds, financial regulators and banks have recognized that capital markets would be effective in channeling funds from willing investors to institutions like companies or local government units in need. Another form of green financing is through the issuance of green bonds.

Citibank, N.A. Director for Debt Capital Markets Celine Pastor said in an email that the international and domestic markets for green bonds was active in 2019.

“Green, social and sustainability bonds from Philippine issuers (banks and other corporations) totaled over $3.6 billion equivalent in 2019… while on a global level, it totaled over $282 billion or over 1.5 times the prior year’s volume,” Ms. Pastor said.

“Such instruments are now viewed as a liquid and viable asset class across a wide remit of uses of proceeds, including environmental and social projects…green bonds finance projects with environmental benefit while social bonds finance projects that benefit a target population,” she explained.

“Many investors in debt or equity traditionally have medium- to long-term investment horizons. Green financing promotes sustainable activity and demonstrates overall commitment to sustainability. Many market participants now view this sustainability commitment as being indicative of a more robust investment over time,” she added.

Philippine banks’ green bonds have been “well-accepted,” reflecting increased investor appetite for green investments globally, Ms. Fonacier said.

“For instance, RCBC’s (Rizal Commercial Banking Corp.) foreign-issued sustainable bond was five times oversubscribed while the BPI (Bank of the Philippine Islands) ASEAN green bonds was four times oversubscribed,” she said.

In December 2018, BDO took a bold step by issuing its first green bond. With IFC as its sole investor, BDO was able to raise $150 million. The financing is expected to curb 93,000 tons of carbon emissions per year by 2022 and contribute to the country’s target of reducing carbon emissions of about 70% by 2030.

In the case of DBP’s three-year P50-billion sustainability bond program, the first tranche of issuance made in November last year was also oversubscribed. DBP was able to raise P18.125 billion, compared to the initial P5 billion target.

“The bank expects to fully utilize/earmark these proceeds before the end of this year,” Mr. Herbosa said.

Financial regulators have provided an enabling policy and regulatory environment to make green assets more attractive to investors, particularly, fixed-income securities.

“On the part of the BSP, we have enhanced our regulations on market conduct, price discovery and transparency, and operational efficiency in support of the significant contribution of banks in the capital market,” BSP’s Ms. Fonacier said.

Particular to bond markets, the BSP has solidified banks’ standards on treasury activities, as well as aligned its rules on valuation of financial instruments with the international accounting standards.

An issuing-bank must meet the BSP’s prudential criteria under the Supervisory Policy on Granting of Additional License/Authority and should only trade its bonds in an organized market.

Along with these, the Securities and Exchange Commission has adopted the ASEAN Green Bonds Standards in August 2018, allowing member and non-member issuers to introduce bonds whose proceeds will be used to fund eligible green projects in Southeast Asia.

Despite increased interest on green bonds, Ms. Fonacier cautioned that some investors remained concerned on the viability or feasibility of the projects to be financed.

“Nonetheless, there are controls in place that are unique to green or sustainability bonds issuance. In particular, the green bond issuer has to undergo a third-party certification process wherein part of the conditions is the strict monitoring that the bonds proceeds are utilized only for eligible green projects,” she added.

OUTLOOK
“The demand for green, social and sustainability bonds is at about $30-$45 trillion… Issuers have seen attractive execution in these markets largely because of the supply-demand imbalance, which we expect to persist in the near to medium term,” Citi’s Ms. Pastor said.

For BSP’s Ms. Fonacier: “The oversubscriptions on the green or sustainability bonds issued by banks reflect successful adoption of green finance in the country. Aside from issuing bonds, banks are likely to increase their allocation of funds to green or sustainable projects commensurate to their risk appetite.”

To promote sustainable and green financing, the BSP will be issuing related regulations in phases.

“The first phase will provide high level principles and broad expectations on the integration of sustainability principles including those covering environmental and social risk areas, in the corporate and risk governance frameworks as well as in the business strategies and operations of banks,” Ms. Fonacier said.

“The second phase will provide more granular expectations in managing climate change and other environment-related risks in relation to other key risk areas such as credit, market, liquidity, and operational risks. The third phase may look into potential regulatory incentives to be granted to banks,” she added.

Banking on MSMEs: Making business loans easy

By Marissa Mae M. Ramos, Researcher

“WE HAD A MOTHER and son team who have been managing a gas service station in the Visayas. They would often use their credit cards for their fuel purchases and would regularly pay every two months. They never went to a bank for financing because they did not want to be bothered by too many documentary requirements and continuous negotiations,” shared Bank of the Philippine Islands (BPI) Business Banking Head Eric Luchangco in an e-mail interview with BusinessWorld regarding one of their clients’ experience.

“The second visit of our sales officer was to deliver the news of an approved business loan with an advice of how the lowered interest rate and longer term will transition their business to the right operating cycle. The son is already thinking of a second gas station as soon as the loan is fully paid,” Mr. Luchangco added.

This is among the many micro-, small-, and medium-sized enterprises (MSMEs) in the country that are leveraging on bank loans. However, these cases are few and far between as the sector still sees lack of readily available credit. For instance, the World Bank’s Enterprise Survey in 2015 listed access to finance as the third biggest obstacle of MSMEs in the country.

“The MSMEs are hesitant to approach formal lending institutions in availing business loans primarily due to lack of acceptable collateral, credit knowledge and credit history. Moreover, MSMEs may also get intimidated by the documentary requirements in applying for business loans,” Bangko Sentral ng Pilipinas (BSP) Deputy Governor Chuchi G. Fonacier said in an e-mail interview.

The government recognized early on the potential of the sector in promoting sustainable development.

The Philippine Statistics Authority’s 2018 List of Establishments showed there were over one million business enterprises operating in the Philippines during the period, of which 99.52% or 998,342 firms are categorized as MSMEs. Of these, MSMEs account for 63.19% of the country’s total employed population, but only contribute 35.7% of gross value added.

As early as 1991, a Magna Carta for MSMEs was enacted by Congress. It was later amended by RA 8289 in 1997, and further amended by RA 9501 in 2008.

In the 2008 amendment, it prescribed that for a period of ten years from June 17, 2008 to June 16, 2018, banks must set aside 8% of their loanable funds for micro- and small enterprises (MSEs), while 2% should be allotted for medium-sized firms in order to provide them the credit needed for their operations and expansion.

Rather than lend to this segment, lenders chose to evade this provision and pay penalties instead.

“The difficulty in compliance may be attributed to several factors such as incompatibility to individual bank’s business model and target market, as well as difficulties in on-boarding of MSEs particularly in establishing their creditworthiness,” said BSP’s Ms. Fonacier.

Latest estimates showed the banking system lent P551 billion to MSMEs in the first nine months of 2019, lower than the P564 billion shelled out the previous year.

Moreover, exposure of banks to medium enterprises were well-above the required two-percent requirement. However, loans to MSEs were only at 2.8% versus the mandated eight-percent.

Ms. Fonacier said the BSP has undertaken a three-pronged approach to improve MSMEs’ access to finance. First, the central bank has put in place “needed financial and digital infrastructure to mitigate risk and lower cost of financing.”

Among these market-enabling infrastructures include the national ID through the Philippine Identification System Act or the PhilSys Law (RA 11055); a national credit information system from the Credit Information Corp. (CIC) which is tasked to develop and maintain a “comprehensive and centralized credit information system”; and, a credit risk database (CRD) through a technical cooperation program of the BSP with Japan International Cooperation Agency.

“The CRD is a tool from Japan which uses financial statements and default-related data to build statistical models predicting the creditworthiness of SMEs (small and medium enterprises). It is expected to increase access to finance among SMEs through risk-based lending and lessen the dependence of banks on collateral,” said Ms. Fonacier.

Second, the BSP is also promoting “innovative approaches in MSME financing.” Ms. Fonacier cited BSP’s partnership with the Asian Development Bank in developing the pilot program of Agricultural Value Chain Finance with select banks that will gauge creditworthiness of agri-entrepreneurs through their entire value chain.

Furthermore, the BSP also has an ongoing partnership with the Department of Trade and Industry and key industry players such as the Microfinance Council of the Philippines and Alliance of Philippine Partners in Enterprise Development in developing a financing ecosystem for MSMEs through Negosyo Centers.

Third, Ms. Fonacier said the BSP has undertaken several initiatives to bridge the “information gap” to understand the needs of MSMEs such as regular financial learning seminars for microfinance clients and the central bank’s participation in global discussions on MSME issues.

“The BSP is exploring the possible conduct of a demand-side survey for MSMEs, which will be an in-depth and dedicated data collection methodology that could facilitate deeper analysis of the financial needs of the MSME sector, and guide the formulation of evidence-based policies for MSME finance,” Ms. Fonacier said.

Recently passed laws that are aimed to foster the development of MSMEs in the country were the Innovative Startup Act (RA 11337) which aims to create initiatives that will provide benefits and incentives to start-ups and start-up “enablers”; the Philippine Innovation Act (RA 11293), which promotes the “internationalization” of MSMEs through participation in local and global value chains; and the Personal Property Security Act (RA 11057), which aims to provide access to “least cost credit” and establish a “unified and modern legal framework for securing obligations with personal property.”

Likewise, the passage of the RA 10744 or the Credit Surety Fund (CSF) Cooperative Act of 2015 enabled a credit enhancement scheme that strengthens the credit worthiness of the MSMEs by pooling contributions of the public and private sector in a fund, with the fund acting as a security for the loan applied by the MSMEs.

“The number of CSFs increased from 45 as of end-December 2015 to 55 as of end-December 2019. Meanwhile, the prevalence of CSFs has enticed banks to lend to MSMEs as total loans increased since the CSF program was institutionalized in 2015,” Ms. Fonacier said.

“Based on the latest available data, these loans have been distributed to approximately 17,500 beneficiaries in 33 provinces and 21 cities,” she added.

WHAT DO BANKS HAVE TO OFFER FOR MSMES?
For Development Bank of the Philippines (DBP) President and Chief Executive Officer Emmanuel G. Herbosa, lending to MSMEs “does have its quirks.”

“It requires more assistance and handholding, especially in the aspects of risk management and cash management, as the entrepreneur is establishing himself and his business operations,” Mr. Herbosa said in an e-mail.

The promotion of MSMEs is one of DBP’s four main thrusts, Mr. Herbosa said. The bank’s umbrella program, Sustainable Enterprises for Economic Development (SEED), has a number of sub-programs with distinctive features targeted to a specific market.

Among these programs include the Inclusive Lending for Aspiring Women (ILAW) program, which caters to “women-owned and managed enterprises”; the DBP Enhancement for SETUP Technopreneurs (DBP-BEST), which provides loans to businesses already assisted by the Department of Science and Technology through its Small Enterprise Technology Upgrading Program (SETUP); and the OFW Reintegration Program (OFW-RP), which aims to provide viable income-generating activities for overseas Filipino workers.

According to Mr. Herbosa, the DBP lent P25.2 billion to the MSME sector as of Oct. 31 last year. The repayment terms depend on the business’ development period and cash cycle, ranging from 30 days to 15 years.

For its part, BDO Unibank, Inc. offers the “Kabuhayan” loan designed for MSMEs. According to BDO, loans can amount from P30,000 to P500,000, depending on borrowers’ capacity to pay. The program’s installment scheme can likewise stretch up to 36 months.

“In two years, we have lent to over 25,000 borrowers nationwide,” BDO said in a separate e-mail.

“To ensure payments, we do regular customer reminders and provide multiple payment channels, e.g. agency banking. MSMEs’ repayment behavior can be shaped by how we are able to service loan payments,” BDO said.

Meanwhile, Security Bank Corp. has the non-collateralized SME Business Express Loan (BEL) and Business Mortgage Loan (BML).

“BEL… is perfect for businesses looking to finance short-term needs whether it’s equipment, office spaces, or cash for day-to-day operations,” said Security Bank Vice-President and Head for Small Business Lending Division Remeliza Bontogon.

“Meanwhile…, BML is perfect for larger SMEs who are looking to make big purchases or investments to scale their business.”

Ms. Bontogon said that for SMEs, Security Bank can lend up to 80% of the property’s collateral value.

“BEL is a term loan facility with term options of 12, 18, 24 and 36 months. Its interest rates range from 1.4% to 1.95% monthly add-on, which translate to annual effective rate of 30% to 40%…BML is also a term loan facility, but with longer term options from five years (for permanent working capital requirement) to 10 years (for capital or asset acquisition). Interest rates range from 8% to 8.5% one-year price fixing to 9.25% 10-year price fixing,” Ms. Bontogon said.

Ms. Bontogon noted BEL’s “stronger traction,” indicating that not many of these firms have acceptable collateral to offer, but have businesses that are going concerns and have cash flow that help justify providing non-collateralized loans.

For BPI, Mr. Luchangco said the Bank reaches out to the SME market through their Business Banking segment.

“Recently, we developed various off-the-shelf loan offers and no-collateral loans with easy monthly payments. These parameter-based programs allow for an approval notice within two-days. Credit of loan proceeds take any time from 5 to 11 days,” he said, adding these are usually loan amounts of less than P5 million stretching up to five years without collateral.

Mr. Luchangco considered credit behavior to be a “critical factor” when considering whether to grant or reject business loan applications.

“Sometimes people think that a credit card which they did not pay five years ago will no longer affect them. This becomes part of an individual’s payment record and can weaken credit score. An applicant with a strong credit score may enjoy better interest rates, higher loan amount or even longer terms,” Mr. Luchangco added.

MarCoPay: Making money transfers smooth sailing

By Jobo E. Hernandez and
Carmina Angelica V. Olano, Researcher

USUALLY, seafarers would have to wait for their ship to dock and go to a bank or a remittance center when they want to send money to their loved ones. With money transfers being made easier thanks to money transfer apps, the same convenience will be extended to seafarers that would enable them to make transactions anywhere in the world, even while at sea.

Japanese shipping firm Nippon Yusen Kaisha (NYK), along with local business group Transnational Diversified Group (TDG), looks to tap this market of over 200,000 Filipino seafarers through a QR (Quick Response) code-based app. This app, dubbed MarCoPay (Maritime Community Pay), system development started 2nd quarter of 2019 and as of this printing is in trial stages with 3 test vessels. In December, MarCoPay, Inc. was granted a license from the Bangko Sentral ng Pilipinas to operate as an e-money issuer (EMI).

To successfully execute a digital platform and highly secured payment system, MarCoPay tapped the expertise of Accenture to develop its system and Citibank as its reserved bank.

The MarCoPay app services will be available to all shipping companies and seafarers of any nationality starting May 1.

With this in mind, BusinessWorld sought out MarCoPay President Toshiaki Fujioka and Chief Operating Officer Areson Rhonar I. Cuevas, to discuss the electronic money service, how it started, and how Filipinos seafarers will benefit from it. Below are excerpts of the interview:

FIRST OFF, HOW DOES MARCOPAY WORK? WHAT IS THE MAIN ISSUE THAT TDG AND NYK LOOK TO SOLVE THROUGH THE APP?

Mr. Fujioka: There are two phases. The first one, which will be available soon, is the settlement service. We replace the cash on board to digital money to reduce any cost, burden and risk of having cash on hand for both the vessel master and the crew. Having cash while at sea, they will have to take care of their money for a long time. There are also the risks of miscalculation, as well as exposure to piracy. So, our solution is digital currency.

For the second phase, we are focusing on the digital platform that will benefit the seafarers. Through the app, we will be able to bring additional services like financing, loans, insurance, and other financial products on top of the settlement.

Mr. Cuevas: For the business side, we are offering this product first to the ship management companies (SMCs) or to the companies that are in charge of making sure a vessel runs in layman’s terms. We aim to solve their pain point, which is having a lot of cash on board. Bringing actual cash from the shore to the vessel is very expensive as they will pay for that as well as the agency fee and insurance. This is also the reason why there are pirates. They know that there’s cash in the vessels.

So, we are minimizing the need to have tons and tons of cash on board by introducing the use of e-money to the SMCs to pay the salaries of the seafarers while on the vessel. Twenty percent of seafarers’ salaries plus overtime pay, risk premium, etc. are paid on board.

For the consumer side, directing their salaries to a digital platform is also a value added for the seafarers. If their family at home would need additional funds, they can transfer money anytime, anywhere. Recipients, on the other hand, can receive and cash out the e-money into a shared bank account with the seafarer.

When we enter phase two, we aim to improve their access to different financial products like loans. We know our seafarers. Sometimes Philippine banks overlook their economic potential because of the contractual nature of their work. We know that seafarers have usually been employed for a long time. If they shift careers, they could not earn as much as a seafarer would usually get. So, they tend to stick to this profession.

HOW DID THE IDEA OF ESTABLISHING MARCOPAY COME ABOUT? WHAT WERE THE MOTIVATIONS BEHIND THE TIE UP WITH NYK LINE, AS WELL AS CHOOSING ACCENTURE AND CITIBANK AS COLLABORATORS FOR THE E-MONEY PLATFORM?

Mr. Cuevas: TDG and NYK, the two shareholders of MarCoPay, have been in the maritime industry business for years. In 1976, TDG and NYK formed a joint venture company — the first one — wherein TDG crews NYK’s fleet vessels. We always look at the welfare of our seafarers because they are running our vessels. With this in mind, as well as the digital world right now and the improvements in fintech, we see that MarCoPay is a necessary move to be able to support the requirements of our seafarers.

For Accenture, we believe that they have the expertise in doing this type of system.

Mr. Fujioka: Recently, Accenture was tapped by Sweden’s central bank to develop their pilot project e-krona digital currency. Considering that this project is a cashless payment using mobile phones, we believe they can help us.

With Citibank as our partner custodian, the seafarers are assured that we have set aside an actual amount for their salaries, always ensuring full liquidity of the e-money within the system. It also helps to work with a bank that is trusted by many international corporations.

HOW DID THE BSP RECEIVE THE IDEA OF YOUR APP? WHAT WERE THEIR CONSIDERATIONS BEFORE GRANTING THE EMI LICENSE?

Mr. Cuevas: We have been closely coordinating with the BSP because they are the primary regulator. They have been very positive with the project because it is solving a pain point for shipping firms and it targets a market of more than 200,000 Filipino seafarers. MarCoPay aims to solve seafarers’ financial needs and make it easier for them to access financial products.

HOW DOES MARCOPAY COMPARE WITH SERVICES OFFERED BY OTHER REMITTANCE CHANNELS OR E-MONEY APPS? WHAT DO YOU THINK IS ITS EDGE?

Mr. Fujioka: The unique thing about MarCoPay is it uses a cloud-based ledger connected to a satellite network. In case the internet or data connection suddenly becomes unavailable or unstable, the seafarers are guaranteed their transaction will still be recorded properly. In the vessel, internet or data connection can be weak or none at all, depending on your location.

Mr. Cuevas: Business-wise, we have a market access advantage. Basically, TDG and NYK know their seafarers: their needs and who they are. This way, MarCoPay, has access to market information of their end users and can offer more suitable and much better products and services for seafarers. Other e-money service providers might be targeting the entire Philippine demographics or overseas Filipino workers, in general. For MarCoPay, we further segmented to seafarers.

WHAT WERE THE VITAL PREPARATIONS THAT YOUR COMPANY HAS MADE TO ENSURE THE APP’S SUCCESSFUL LAUNCH AND OPERATIONS?

Mr. Cuevas: The app development has been a very long and tedious process because this is very special. In a low internet access and connectivity, we have to make sure that the system works in this type of environment. In the vessels there are only two types of internet connectivity, either through VSAT (very small aperture terminal) or FBB (fleet broadband). Their speed-levels are not very fast unlike onshore. So, we have to make sure that each transaction will be recorded offline or in a low internet speed condition. This is why it took us a long time to finalize the system.

HOW DO YOU SEE MARCOPAY CONTRIBUTE TO YOUR BUSINESS? DOES THIS ALSO OPEN OTHER BUSINESS OPPORTUNITIES FOR YOUR COMPANY? IF SO, WHAT ARE THESE?

Mr. Cuevas: Yes, of course. By operating in an e-money platform, this will allow us to incorporate a lot of financial products. We understand that it is important for our seafarers to have better access to different financial products, but for now, we are focusing on the loans and the B2B (business-to-business) segment. Then we’ll see where it will bring us.

HOW DO YOU SEE USER TRACTION FOR MARCOPAY?

Mr. Cuevas: In a sense, we have guaranteed users. Since we are partnering with the SMCs, their policy will designate which portion of their seafarers’ salary (distributed on board) will be given in cash and e-money. This is still being discussed with our seafarers because they still want to receive actual cash, especially for spending when they dock. Also, being on the vessel for a long time, some would make it a hobby to count their money.

Based on the interviews that we conducted, most of the seafarers are open to the idea of receiving their shipboard pay in e-money. Most of them are already familiar with it and have been using other e-money services, such as GCash and Paymaya. This is most apparent with younger officers and seafarers.

WHAT ARE THE COSTS ASSOCIATED WITH USING THE APP?

Mr. Cuevas: Since other aspects are still being finalized, the basic principle is we will not make it more difficult for the seafarers compared to receiving their salaries in cash. So if they get their monthly cash on board for free, they will also receive it through e-money for free.

Similarly, transferring funds within the MarCoPay ecosystem — for example, transferring into another seafarer or to their wife or kids — will have a zero transaction fee. However, the charges on transferring from the app to a bank account is still being discussed, but we’re looking for the optimal way for them to enjoy zero fees.

WHAT ARE THE MEASURES THAT WERE PUT IN PLACE TO ENSURE SECURITY WHEN USING THE APP? ARE THERE SECURITY RISKS IN USING THE APP TO BEGIN WITH?

Mr. Fujioka: We’re really keen on security. We keep an eye for new technology solutions.

Currently, we require a one-time passcode (OTP) to make transfers using the app. Also, a user can only connect through one device.

In case a user loses his or her phone, he or she should contact our service centers, answer some security questions, and nominate a new one so he or she could install again. An OTP will be asked when logging in.

WHAT OTHER PRODUCTS OR SERVICES FROM YOUR COMPANY SHOULD WE LOOK FORWARD TO? ARE THERE OTHER FEATURES THAT WE SHOULD LOOK FORWARD TO FOR THIS APP?

Mr. Fujioka: Whatever we will launch in the first and second quarter this year would be specifically targeted to the B2B segment, on how SMCs will allocate their seafarers’ salaries on board.

For future functionality, what’s more exciting is how the seafarers can use that e-money.

Mr. Cuevas: On the second development phase of MarCoPay, we are [looking at offering] loan services… by partnering with financing companies. Since we know the credit standing of our seafarers, we know the risks. Hopefully, we can offer them better interest rates compared to how much they will get from the market.

Outlook positive for bank stocks amid bets of policy easing

By Edwin C. Aruta, Jr. and
Carmina Angelica V. Olano, Researchers

ANALYSTS are generally bullish on bank stocks this year amid expectations of the central bank to ease monetary policy further in order to support economic growth.

The barometer Philippine Stock Exchange index (PSEi) gained 0.5% in the fourth quarter of last year, a reversal from the 2.8% decline in the third quarter and slower than the 2.6% in the fourth quarter of 2018.

However, the period saw nine of the 14 listed banks posted quarter-on-quarter losses on their share prices. The Philippine National Bank (ticker symbol: PNB) saw the biggest drop at 20.9%, followed by Philippine Savings Bank (PSB, -15%), Rizal Commercial Banking Corp. (RCB, -13.2%), Bank of the Philippine Islands (BPI, -5.5%), Asia United Bank (AUB, -5.2%), UnionBank of the Philippines (UBP, -2.4%), Philippine Business Bank (PBB, -2.3%), Philippine Bank of Communications (PBC, -1.4%), and Security Bank Corp. (SECB, -1%).

On the other hand, BDO Unibank, Inc. (BDO) saw its share price rally the most with 10.5%. Other gainers during the period include Metropolitan Bank & Trust Co. (MBT, 9.5%), East West Banking Corp. (EW, 1%), Philippine Trust Co. (PTC, 0.8%), and China Banking Corp. (CHIB, 0.2%).

Despite this, analysts said bank stocks are among the best bets coming into this year.

In an e-mail, PNB Securities, Inc. Senior Equity Research Analyst Wendy B. Estacio and Junior Equity Research Analyst Marco R. Mauleon noted the financials subindex — which included the banks — outperformed the PSEi for the most part of November following the release of third-quarter gross domestic product (GDP) results.

“Further reduction of the universal and commercial banks’ (U/KBs) reserve requirement ratio (RRR) to 14% [effective December 2019] also contributed to positive investor sentiment. We believe investors have digested upbeat results from banks under the Financials Index in the first nine months of 2019 with an average parent net income growth of 28.3% year on year,” they said.

Likewise, Unicapital Securities, Inc. Research Head Justin Lawrence J. Tembrevilla said the Bangko Sentral ng Pilipinas’ (BSP) move to reduce the RRR for local bonds issued by banks and quasi-banks to 3% from 6% previously made bond issuances “more conducive for banks” to beef up their funding base, compared to normal deposits that have a reserve requirement of 14%.

The fourth quarter saw rates for overnight reverse repurchase, as well as overnight deposit and lending unchanged at four percent, 3.5%, and 4.5%, respectively. On the other hand, it recorded a 200-basis point (bp) reduction in cumulative RRRs that took effect in November and December.

The BSP has also reduced the RRR for bonds issued by banks and quasi-banks by 300 bps to three percent from six percent previously. The central bank said this move, which took effect last November, complemented its streamlining of rules and requirements for banks’ and quasi-banks’ issuance of debt instruments,

Meanwhile, the country’s U/KBs booked a cumulative P211.57-billion net income last quarter, 32.3% higher than the P159.93 billion posted in the fourth quarter of 2018, BSP data showed.

Net interest margin (NIM), the ratio that measures banks’ efficiency in investing their funds by dividing annualized net interest income to average earning assets, improved to 3.44% in the fourth quarter from 3.43% in the third quarter and 3.17% posted a year ago.

“We are reiterating our recommendation to overweight selected banking stocks as valuations continue to be attractive and the low interest rate environment should support the improvement in net interest margins with the cheaper funding costs,” said First Resources Management and Securities Corp. Officer-in-Charge of Trading and Research Charlene Ericka P. Reyes.

Ms. Reyes said that BDO stood out among listed banks: “BDO remained resilient for this quarter [with its stock price] gaining by 10.5% despite the weakness in the overall market performance supported by the bank’s net interest margin expansion,” she said.

Latest financials show BDO’s net earnings jump by 49.6% to P32.1 billion in the nine months to September from P21.5 billion reported in the same period in 2018.

The lender’s NIM improved to 4.12% in the first nine months of 2019, from the 3.58% during the same period of 2018. At end-September, its net interest income reached P88.46 billion, where P31.54 billion was earned during the third quarter, up 23.53% from P25.53 billion in the same period last year.

Unicapital’s Mr. Tembrevilla gave “buy” recommendations for MBT, BPI, and EW.

“Valuations remain attractive [for MBT], trading at the lowest price-to-book ratio among the big three (along with BDO and BPI). The slower growth in total deposits, however, could dampen its push for higher CASA (current account and savings account) ratio, as MBT currently trails behind BDO and BPI,” Mr. Tembrevilla said.

Mr. Tembrevilla said EW will look to sustain its “consumer-driven model,” while BPI is set to benefit from its deal with Philam Asset Management, Inc. where the former’s subsidiary BPI Investment Management, Inc. assumed management of the latter’s funds.

On the other hand, Mr. Tembrevilla is neutral on BDO and SECB stocks. “BDO’s cost-to-income ratio continues to exceed U/KB average, mainly brought by the upkeep costs of its extensive branch network. As such, BDO might focus on expanding BDO Network Bank given the cheaper license fees for thrift and rural banks,” he said.

While SECB’s “build-up of low-cost CASA should bring funding costs down, [as well as its] increased penetration in the consumer segment (mortgage, credit cards, personal) translate to better NIMs,” he added.

Mandarin Securities Corp. Research Analyst Zoren Philip A. Musngi said BDO was the most notable among the listed banks last quarter as its stock price “remained relatively stable” throughout the quarter despite the sell-off in Philippine equities.

Nevertheless, he maintains his positive outlook for both large-cap and mid-to-small cap bank stocks.

“Even though loan growth has been tempered for the most of 2019 and various risks emerged, bank profits are expected to benefit from the rate & RRR cuts,” he said.

OUTLOOK
Mr. Musngi said the release of fourth-quarter and full-year earnings will drive the price movements of listed banks in the first quarter.

“Investors will also look into net income guidance from bank management to see if recent events (coronavirus, Taal eruption, regulatory crackdown on onerous deals) will have any adverse impact on profitability,” he said.

Mr. Musngi expects profits of these lenders to be driven by gains on loan growth and margins from the BSP rate cuts, but would be slightly offset by lower trading gains due to uncertainties in the global economy.

PNB’s Securities’ Ms. Estacio and Mr. Mauleon were likewise optimistic: “We expect banks to sustain positive earnings trajectory driven primarily by net interest income growth, as we see margins expanding as a result of lower funding costs,” they said.

“Trading gains, however, will be relatively softer in 2020, in our view, as benchmark yields have already corrected so far this year. Nonetheless, GDP growth acceleration should translate to higher loan volumes, which clearly benefits banks in general.”

Philstocks Financial, Inc. Client Engagement Officer and Research Associate Piper Chaucer E. Tan cited “regulatory risks” this year arising from the government’s move to revoke the extension of its agreement with the country’s largest water concessionaires Manila Water Co., Inc. and Maynilad Water Services, Inc. as among factors that would adversely affect listed banks, especially those dealing with companies affected by the said risk.

For Regina Capital Development Corp. Equity Analyst Rens V. Cruz II: “Expect the first three months of 2020 to be a period of re-positioning into cheaper bank stocks, since prices pulled back significantly since December 2019. Participants will be monitoring for these firms to establish a clear bottom support before re-entering, influenced by the mid-term prospects of continued healthy earnings & regular dividend pay-outs,” he said.

“Banks are still the top sector to look out for in 2020, and most are now undervalued,” he added.

For China Bank Securities Corp. Senior Research Associate Rastine Mackie D. Mercado: “We are generally bullish on the sector’s earnings as we begin to realize the trickle-down effects of the BSP’s round of RRR cuts… Moreover, the expected pick-up in government and private spending…may help contribute to an increase in banks’ loan books, buoying net interest income.”

Financial markets take breather in Q4, but headwinds remain

By Mark T. Amoguis, Assistant Research Head

THE FOURTH QUARTER of 2019 saw local financial markets performing relatively sideways with positive factors at home such as the inflation slowdown and catch-up government spending partly cushioning the impact brought by developments abroad.

In the fourth quarter, the peso average P51.03 against the dollar, appreciating 1.39% from the previous quarter’s average of P51.74:$1, BSP data showed. Likewise, the local unit appreciated by 4.38% compared to the P53.26-to-a-dollar average seen in the fourth quarter of 2018.

Meanwhile, at home, the debt paper auctions conducted in the fourth quarter indicated strong demand. Treasury-bill (T-bill) auctions conducted in October to December saw total subscription for the quarter amounting to around P234.503 billion, which is around 2.3 times the P100-billion aggregate offered amount.

Similarly, Treasury-bond (T-bond) auctions during the period had a total subscription amount of P287.848 billion, 2.4 times more than the offered amount of P120 billion.

In the secondary bond market, domestic yields were lower by a range of 2.1 bps for the 182-day T-bill to 42 bps for the 5-year T-bonds compared to end-September 2019 levels. On the other hand, yields rose for the 91-day (10.2 bps), 20-year (13.7 bps), and 25-year (22.8 bps) debt papers. On average, yields were lower by 18.72 bps during the reference period, according to the PHP Bloomberg Valuation Service Reference Rates published on the Philippine Dealing System’s website.

For equities, the bellwether Philippine Stock Exchange index closed the fourth quarter at 7,815.26, up by 0.5% compared to the third quarter’s 2.8% decline.

“On the external front, performance of Philippine financial markets were weighed down largely by negative sentiment stemming from the following: (1) the pro-democracy unrest in Hong Kong; (2) conflicting signals about the US-China trade talks; (3) fears that China’s economic slowdown will spillover to its neighboring countries; and (4) the impeachment case of President [Donald J.] Trump,” the Bangko Sentral ng Pilipinas’ (BSP) Deputy Governor Francisco G. Dakila, Jr. said in an e-mail.

Back home, domestic factors such as the “favorable” inflation print and the uptick in economic growth in the final three months last year “partly tempered the external headwinds,” Mr. Dakila added.

Much of the talk regarding a “phase one” trade deal between the US and China began on October last year. The deal, which was signed on Jan. 15, took effect on Feb. 14, marking the first time of easing sanctions following the nearly-two years of trade war between the world’s two economic superpowers. The deal involved the halving of tariffs on goods imposed by the US and China as well as addressing some US complaints about intellectual property practices.

The phase two of the trade deal is still under negotiations.

The quarter also saw central banks implementing cuts on their key policy rates, including the US Federal Reserve, which slashed its federal funds rate by 25 bps on end-October.

The BSP decided to maintain key interest rates during the quarter, but implemented a 200-bp reduction in cumulative reserve requirement ratios that took effect in November and December.

INFLATION TO EDGE HIGHER IN 2020
(BUT WITHIN EXPECTATIONS)
Last year saw headline inflation clocking in at a three-year-low of 2.5%, within the central bank’s 2–4% target band for the year. Economists, however, noted that this would pick up this year.

“While inflation has started to pick up after bottoming out in October 2019, latest baseline forecasts indicate that inflation could settle firmly within the government’s target range of [2–4%] and is expected to settle close to the midpoint of the target by 2020–2021,” BSP’s Mr. Dakila said.

“Inflation is projected to gradually approach the midpoint of the target range in [the first quarter of 2020] as base effects from lower food prices during the same period in 2019 start to dissipate,” the official added.

ING Bank NV Manila Senior Economist Nicholas Antonio T. Mapa shared this assessment, as inflation “has nowhere to go but up.”

“With reverse base effects kicking in after the abnormally low inflation path in 2019, we can expect inflation to be nudged higher on average. The first quarter could see inflation experience an uptick due to supply disruptions caused by the Taal Volcano eruption before seeing only marginal increases in inflation for the second quarter. The third quarter, however, will see inflation trend higher on reverse base effects (third quarter 2019 was the low point in last year’s path) kick in before fourth-quarter inflation settles down to bring full year average to about 3.2%,” he said in an e-mail.

For Sun Life Financial Economist Patrick M. Ella: “We expect inflation for first quarter to be within the upper 2% to lower 3% range while our full-year 2020 view is at present 3%, but this can change as we approach the first half of 2020,” he said.

Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. said inflation “may climb back to the 3-4% level” in 2020.

“We continue to see favorable base effects from rice, still a result of rice tariffication. However, most of this may disappear in the second quarter and rice prices may normalize. The ongoing drought and rice supply problems in Thailand and Vietnam may lead to higher rice prices in the coming months. Meanwhile, global oil prices declined recently as markets considered the potential impact of the coronavirus on global oil demand. However, oil prices may bounce back quickly once the coronavirus crisis is resolved. Hence, our average inflation forecast for 2020 is 3.4%,” Mr. Neri said.

Meanwhile, UnionBank of the Philippines, Inc. Economic Research Officer Katrina Joy C. Javier said inflation is expected to remain within 2-4% in the first three months of the year.

“Upward pressure in January was brought by the US-Iran tension on global oil prices, Taal Volcano eruption and African Swine Flu, but these events will likely dissipate. Moreover, aggressive government spending for the extended 2019 budget will also be an upward pressure in inflation for the rest of the year, but this will be eased by the decline in global oil prices and Meralco rates,” said Ms. Javier.

OUTLOOK
At home, analysts point to the contribution of government and private investment spending as key drivers to the domestic growth this year as the Philippine economy finished strong last year.

To recall, the country’s gross domestic product (GDP) expanded by 6.4% in the final three months of 2019 after it grew by 5.8% in the first three quarters. Much of the drag was due to the disappointing growth rates of 5.6% and 5.5% in the first two quarters of last year with analysts blaming the nearly four-month delay in the approval of the 2019 national budget which left new projects unfunded and stymied government spending.

Despite an 18.7% growth in government spending in the fourth quarter, the economy failed to hit the already-trimmed 6-6.5% target as it posted an eight-year low of 5.8%. Dragging growth was capital formation, which recorded a 0.4% growth rate in the fourth quarter and a 0.6% decline in 2019 — a turnaround from its expansion of 13% in 2018.

The government sought to address this by swiftly passing the P4.1-trillion national budget for 2020 as well as extending the validity of the P3.6-trillion 2019 budget by a year.

“This sort-of ‘dual stimulus’ may act as double insulation from the continuing and anticipated global economic and trade growth uncertainties,” said UnionBank’s Ms. Javier.

For Sun Life’s Mr. Ella: “We want to see how government spending will impact on growth as the current budget and the unused portion of last year’s budget should (as market expects) deliver a rather strong showing,” he said.

“Another is if private investments will do a rebound this year as the proposed CITIRA (Corporate Income Tax and Incentives Rationalization Act) bill will likely be passed within the first quarter… which takes off a lot of uncertainty to the investment framework in the country,” he added.

The CITIRA bill proposes to gradually cut corporate income tax to 20% from 30% over 10 years, while removing redundant fiscal incentives.

BPI’s Mr. Neri said that investment spending may recover on the back of low interest rates and the recovery in the public spending.

“The fundamentals of the economy still provide the necessary conditions for investment spending as corporates need to expand their operations through the build-up of fixed assets to meet the rising demand from consumers. However, achieving higher growth in 2020 mostly depends on the ability of the government to spend on infrastructure,” Mr. Neri explained.

For ING’s Mr. Mapa, the COVID-19 will likely dictate much of the sentiment early this year as the impact to the global economy will likely be felt later in the year: “The importance of China cannot be stressed more in this regard and losing one of the biggest cogs in the global value chain for an extended period of time will weigh on global growth and tourism,” Mr. Mapa said.

The coronavirus outbreak was first reported in Wuhan province, China. As of Feb. 11, it recorded more than 44,000+ cases and killed more than a thousand people in China alone. The virus has spread to more than 20 countries including the Philippines.

This led several institutions to trim their growth forecasts this year amid disruptions in global supply chains. For the Philippines, government estimates pointed to an economic impact ranging from 0.06% to as much as 0.7% off GDP growth.

“With the country’s substantial exposure to China, the virus may also exert economic pain on the Philippines. In particular, exports to China/Hong Kong and tourism may struggle in the coming months,” Mr. Neri said.

With these developments, below are the analysts’ outlooks for each of the key markets:

FIXED INCOME
BSP’s Mr. Dakila: “Philippine bond market activity will be influenced mainly by national government issuance of government securities as part of its borrowing plan… Meanwhile, corporate bond issuances are expected to continue to expand, fueled by the revised rules for bond issuance implemented since 2018 and the improved liquidity conditions and benign inflation environment.”

BPI’s Mr. Neri: “The yield curve may steepen this year, as upward pressure on the long end of the curve could come from higher inflation and greater supply of private and public sector issued bonds.”

Sun Life’s Mr. Ella: “We are bullish on rates, we expect another policy rate cut (of 25 bps) by mid-year and 200 bps cut in RRR (reserve requirement ratio) this year.”

ING’s Mr. Mapa: “Rally early on before reversing as government crowding out kicks in.”

UnionBank’s Ms. Javier: “Lower interest rates tend to discourage investors to invest them in fixed-income securities like bonds. Yields might continue to move downward due to the RRP (overnight reverse repurchase benchmark interest rate) and RRR cuts.”

EQUITIES
BSP’s Mr. Dakila: “Investors expect the equities markets to perform better in the first quarter of 2020 as a result of positive sentiment due mainly to the country’s sound macroeconomic fundamentals. However, uncertainty over the extension of Manila Water and Maynilad’s water concession from 2022 to 2037 could also weigh down on sentiment. Moreover, geopolitical tensions abroad (i.e. conflict between US and Iran) could negatively affect the local bourse…”

BPI’s Mr. Neri: “The possibility of higher economic growth in 2020 may provide the support that equities need to advance. However, uncertainties from several issues like the coronavirus outbreak may temper gains.”

Sun Life’s Mr. Ella: “[Equities] could advance this year but still hampered by sentiment.”

ING’s Mr. Mapa: “[Equities] still weighed down early but reverse into rally as government negotiations yield fruitful with concessionaries and with CITIRA clarity attracting foreign inflows.”

UnionBank’s Ms. Javier: “As the inflation continues to be stable, a recovery in equities market is expected. The market will be advanced by the strong earnings of domestic companies and the strength of foreign corporations.”

FOREIGN EXCHANGE
BSP’s Mr. Dakila: “The peso’s movement in the near term will continue to reflect fundamental (long term) factors alongside temporary or short-term factors that may affect local market sentiment…”

BPI’s Mr. Neri: “With the possibility of a wider current account deficit from the recovery in public sector capital spending, the fundamentals still point to a depreciation trend for the peso in the medium term. While USD/PHP market is closer to the 51 level at present, we expect a return to the 52–53 level in 2020, reflecting the recovery of public sector spending.”

Sun Life’s Mr. Ella: “Our view is 50–51 by year-end.”

ING’s Mr. Mapa: “Gradual depreciation trend on import demand but foreign investment flows to slow depreciation trend.”

UnionBank’s Ms. Javier: “The peso will continue to depreciate as the markets expects more positive signs from the US. Seasonal and intermittent strengthening periods are anticipated due to the inflows of imports and personal remittances from overseas Filipinos, and service sectors (BPO and Tourism).”

Gov’t may hike duty on imported cars

By Jenina P. Ibañez
Reporter

THE government should consider raising the duty on imported cars to protect local assemblers, according to Trade Secretary Ramon M. Lopez.

This comes after Honda Cars Philippines, Inc. announced over the weekend that it was shutting down its production facility starting next month.

“We really have to study the need to impose a safeguard duty and other measures to provide at least a level of support to the local assemblers,” Mr. Lopez told reporters in a group message on Sunday.

The car maker, no. 6 in the Philippines in terms of market share, said it had considered “optimization efforts” in production operations in Asia and the Oceania region.

The company, whose Sta. Rosa, Laguna plant produces Honda City and BR-V models, said it would continue selling cars in the Philippines through its regional network.

Mr. Lopez said Honda might have been facing challenges in keeping costs down.

“The cost structure of their local car assembly, which has about 380 workers, is basically challenged,” he said. “There’s no tariff protection, thus making imports of vehicles as a cheaper alternative.”

George N. Manzano, University of Asia and the Pacific economist and a former Tariff commissioner, noted that “depending on the share of imports, one can make a case for safeguards.”

But it would be better to boost the competitiveness of local manufacturing through a program that develops the local car part sector, among other things, he said in a mobile phone message.

Honda might have chosen to export automobiles from some countries that enjoy zero tariffs in the Philippines, according Michael L. Ricafort, an economist at Rizal Commercial Banking Corp.

The Philippines does not impose tariffs on vehicle imports from Thailand and Indonesia.

Safeguard duties on imported vehicles could be justified to convince car makers to continue their local assemblies, he said in a mobile phone message.

He added that the country has a program to narrow the cost gap of importing vehicles.

The Comprehensive Automotive Resurgence Strategy (CARS) program offers fiscal support to car companies that invest in local production for six years.

Only Toyota Motors Philippines Corp. and Mitsubishi Motors Philippines Corp. have availed themselves of the state support.

Mr. Manzano said the Honda closure could have been a matter of economies of scale.

“It’s cheaper to produce in one country in huge amounts and export the whole car to another country,” he said.

Some economists said the closure could have been driven by a novel coronavirus outbreak that has killed about 2,400 people and sickened about 77,000 more, mostly in China.

Ateneo de Manila University economist Ser Percival K. Peña-Reyes cited the effects of the coronavirus disease 2019 (COVID-19) outbreak on economic growth.

“Greatly affected are the tourism and manufacturing sectors in China, and there are spillover effects on other countries,” he said in a mobile phone message. “Manufacturing has global value chains that have been disrupted by recent events in China,” he added.

As the world grapples with the economic impact of the epidemic and a probable escalation to a pandemic, “this optimization decision of Honda signals the challenges of the manufacturing sector in the midst of external environment uncertainties,” said Ruben Carlo O. Asuncion, chief economist at UnionBank of the Philippines.

Honda had a 5.5% market share in the Philippines last year, with sales falling 12.7% to 20,338 vehicles.

Total vehicle sales rose by 3.5% to 369,941 units last year, according to the Chamber of Automotive Manufacturers of the Philippines, Inc. (CAMPI) and Truck Manufacturers Association (TMA).

Imported vehicle sales dropped by 0.5% to 87,984 units last year, according to the Association of Vehicle Importers and Distributors, Inc.

The Trade department notified the World Trade Organization on Feb. 18 that it was investigating possible safeguard restrictions on automotive imports based on a petition by the Philippine Metalworkers’ Association (PMA).

PMA said increased car imports hurt the domestic industry. Trade Undersecretary Ceferino S. Rodolfo last year said imports had surged to 207,000 units in 2018 from 153,000 in 2014.

More firms eye bidding for Manila subway contracts

By Arjay L. Balinbin
Reporter

MORE Japanese and local companies have shown their interest in two contracts under the first phase of the Metro Manila Subway Project which will be bid out in mid-March.

BusinessWorld learned last week that as of Feb. 13, four Japanese firms, namely: Sumitomo Corp., Mitsubishi Corp., Mitsui & Co. Ltd., and Marubeni Corp., have purchased bidding documents for the contract to provide electrical and mechanical (E&M) systems and track works as part of the first phase of the Metro Manila Subway Project.

Two Philippine-based firms — construction giant D.M. Consunji, Inc. and KDDI Philippines Corp. — also bought bidding documents for the E&M systems and track works contract package.

The Transportation department said Hitachi Ltd., along with Sumitomo and Mitsubishi, bought bid documents “for the design, execution and completion of 30 train sets consisting of eight electric multiple units” or a total of 240 train cars.

Sumitomo is one of the maintenance service providers of Metro Rail Transit Line 3 (MRT-3), along with Mitsubishi Heavy Industries Engineering, Ltd. and TES Philippines, Inc.

D.M. Consunji has been involved in various railway projects in the country, which include the Light Rail Transit (LRT) Line 1 North Extension, North-South Commuter Railway (NSCR), and LRT Line 2 East Extension with Marubeni.

Marubeni’s other projects in the country include the improvement and modernization of Commuter Line South Project and the first and second phases of the LRT-1 capacity expansion project.

The contracts for the E&M systems, track works and rolling stock for the Metro Manila subway will go through international competitive bidding in accordance with bidding procedures of the Japan International Cooperation Agency.

Citing the Special Terms for Economic Partnership (STEP) of Japanese ODA Loans, the Transportation department said the primary contractor should be from Japan while sub-contractors can be from other countries.

“If the prime contractor is a joint venture, such joint venture will be eligible provided that the lead partner is Japan,” it added.

The subway is one of the administration’s flagship developments funded by Japan official development assistance (ODA).

According to a bulletin published in newspapers on Dec. 24, 2019, the DoTr said bids for the train sets should be submitted on March 17, 2020 along with a ¥600-million bid security at the Procurement Service of the Department of Budget and Management (DBM-PS) in Manila.

For E&M systems and track works, the DoTr set a March 24, 2020 deadline for submission of bids, along with an ¥800-million bid security.

Transportation Undersecretary for Railways Timothy John R. Batan previously said the trains and electro-mechanical systems contracts will be awarded to the winning bidders “by the middle of this year.”

The first phase of the subway project covers three packages, namely: rolling stock; E&M system and track works; as well as the first three underground stations (Quirino Highway, Tandang Sora, North Avenue), tunnels and depot construction, depot equipment and buildings.

In March 2018, the Philippines and Japan signed the first tranche of the P355.6-billion loan for the subway project.

While the public will have to wait until 2025 for full operations of the 36-kilometer subway, the government targets partial operations — covering the first three stations — by 2021. The government broke ground for the first three stations in February 2019.

The completed subway system will have 15 stations between Mindanao Avenue in Quezon City and the Ninoy Aquino International Airport in Pasay City. It will also link up with Metro Manila’s other railways at the common station being built along North Avenue in Quezon City.

Combined assets of the Philippines’ largest banks reach P17.93 trillion in 2019

THE COUNTRY’s biggest banks saw their capacity to absorb risky assets improve in the last three months of 2019, even as aggregate profitability dipped and growth in assets and loans eased. Read the full story.

Combined assets of the Philippines’ largest banks reach P17.93 trillion in 2019

Banks post bigger capital buffers, but see slower growth of assets, loans

By Carmina Angelica V. Olano
Researcher

THE COUNTRY’s biggest banks saw their capacity to absorb risky assets improve in the last three months of 2019, even as aggregate profitability dipped and growth in assets and loans eased.

BusinessWorld’s 4th Quarter Banking Report shows the combined assets of the country’s 46 universal and commercial banks (U/KBs) grew 8.16% to P17.93 trillion from P16.58 trillion in 2018’s comparable three months.

Combined assets of the Philippines’ largest banks reach P17.93 trillion in 2019

The fourth-quarter asset growth was slower than the third quarter’s 9.89% and the 11.44% clocked in 2018’s final three months. The latest reading also marked the slowest growth in U/KBs’ assets since the fourth quarter of 2015’s 5.88% growth.

Bank loans, which make up around half of U/KB assets, grew 9.3% to P9.98 trillion during the quarter from P9.13 trillion the previous year. This is slower than the 15.1% loan growth observed in 2018’s fourth quarter.

In terms of profitability, the 6.75% median return on equity (RoE) was less than the 6.95% in the third quarter. RoE — the ratio of net profit to average capital — measures the amount shareholders make for every peso invested in a company.

In terms of asset size, BDO Unibank, Inc. (BDO) topped the list at P3.15 trillion, followed by Metropolitan Bank & Trust Co. (Metrobank) at P2.47 trillion and the Bank of the Philippine Islands (BPI) at P2.19 trillion.

BDO also issued the most loans at P2.16 trillion, followed by BPI’s P1.47 trillion and Metrobank’s P1.45 trillion.

Among banks with assets of at least P100 billion, Rizal Commercial Banking Corp. posted the fastest asset growth of 18.38% year-on-year. It was followed by Philippine National Bank’s (PNB) 15.99% and UnionBank of the Philippines, Inc.’s 15.64%.

The same three months saw Development Bank of the Philippines (DBP) as the most aggressive lender with a year-on-year loan growth of 32.99%, followed by the Robinsons Bank Corp. with 18.44% and UnionBank with 17.17%.

BDO remained on top in terms of deposits with P2.48 trillion. Land Bank of the Philippines came in second at P1.79 trillion, followed by Metrobank’s P1.72 trillion.

ASSET QUALITY
Despite the decline in profitability, U/KBs managed to build up their ability to absorb losses from risk-weighted assets, as their median capital adequacy ratio (CAR) improved to 21.53% in the fourth quarter from 20.03% in the third quarter.

A measure of a bank’s solvency, CAR indicates its ability to absorb losses without having to imperil the funds entrusted by depositors. The ratio remains well above the regulatory minimum of 10% set by the Bangko Sentral ng Pilipinas as well as the international standard of eight percent.

Nonperforming asset ratio — nonperforming loans and foreclosed properties in proportion to total assets — improved to 0.73% from 0.75% in the preceding quarter.

On the other hand, the banks’ nonperforming loan (NPL) ratio worsened to 1.88% in the fourth quarter from 1.66% in the preceding three months.

As a percent of total assets, foreclosed real and other properties steadied at 0.30% in the fourth quarter.

Banks’ coverage ratio — which is the ratio of the total loan loss reserves to gross NPL — improved to 108.89% during the quarter from 107.97% in the third quarter, enough to cover the entire value of bad loans held by U/KBs as loan loss reserves totaled some P170.45 billion.

Since 1987, BusinessWorld has been tracking the quarterly performance of the country’s largest lenders based on their published statements of condition.

The report ranks these lenders in terms of the size of their balance sheet and presents other key ratios used in measuring bank performance, such as capital adequacy, earnings and liquidity.

More Filipino women in senior business roles

THE Philippines has topped the list of 32 countries in a global survey on the role of women in senior management. Read the full story.

More Filipino women in senior business roles

PHL seeks way to increase garments exports to EU

THE Trade department’s export marketing bureau (EMB) wants to request the European Union (EU) to allow the Philippines to export garments that use imported textiles under its preferential trade scheme, EMB Director Senen M. Perlada said.

Under the Generalized Scheme of Preferences (GSP+), up to 6,274 Philippine products can enjoy zero-tariff entry to the EU as long as the product originates from the Philippines.

Mr. Perlada wants to include in this scheme Philippine garment exports that use materials imported from other GSP+ beneficiary countries.

“Our exporters have difficulty in complying with proof of origin,” Mr. Perlada said in a phone interview on Friday.

“Garments are actually covered (by GSP+), but because we have to import our garment materials, sometimes or most of the time, hindi tayo nakaka-comply sa (we don’t get to comply with) proof of origin requirement.”

He said that the EMB will be requesting the Trade department’s Bureau of International Trade Relations to bring this issue to the attention of the EU.

“We’re planning to bring this to their attention, the possibility for cumulation or derogation to allow the Philippines to import textiles from other GSP eligible countries,” Mr. Perlada said.

A recent GSP+ monitoring report showed that the Philippines slowly increased its use of GSP+ preferences to 26% of its total exports to the EU in 2018.

In comparison, Bangladesh led GSP+ beneficiaries by placing 96.4% of its exports to the EU under GSP+, followed by Cambodia at 94.9%.

The Philippines’ use of GSP+ compared with all eligible exports was 73.1%.

Mr. Perlada said that while this move will not make up for the remaining 26.9% utilization, the “principle” will bode well for other exports.

“That means we can apply it to other products and hopefully beyond garments, there will be others where we will be able to have a better opportunity to meet the rules of origin requirement.”

Mr. Perlada said the EMB, in partnership with the Bureau of Customs, will also be conducting roadshows to Region 3, Region 4A, Cebu, Davao, and General Santos City throughout 2020 to promote self-certification of origin among exporters.

The Bureau of Customs (BoC) in December released guidelines that would simplify export processes to the EU where exporters can certify preferential origin through a Statement of Origin under the Registered Exporter (REX) system.

The REX system replaces the previous system, where the BoC certifies high-value exporters while low-value exporters submit invoice declaration. — Jenina P. Ibañez

Remember the torn body

YOGYAKARTA, INDONESIA — An art conference brought together sundry activists from several generations, who have been fighting against forgetting. The memory they hope to literally exhume has focus dates: the 1965–66 slaughter of millions when General Suharto took the country’s presidency, the horror of which has been kept buried and un-discussed by his successors, including today’s Jokowi.

The Philippines’s Ferdinand Marcos came to power in the same annus horribilis, 1965. He, too, was savage.

The killings under Marcos’s regime began in 1968–69. The Luzon and Visayas attacks on the thus far modest force of the Communist Party of the Philippines — New People’s Army (CPP-NPA) had yet to escalate to 1970s levels. But in Mindanao, the ethnocidal killings of Muslims by Christian militias, who were Philippine Constabulary “force multipliers,” were playing out in full force before and during the end of the 1960s. These mass murders remain buried and un-discussed.

But the 1960s and the escalation of its brutal energies into the 1970s shaped the region’s erratic relation to democracy. In the Philippines, those decades mangled the democratic project, and may in truth have made the emergence of a President Duterte inevitable.

Island Southeast Asia came under the barbarous logic of the Cold War in this mid-century decade, as the hot war burned into nearly everything on mainland Southeast Asia. The Vietnam War gave us to understand that hot or cold, war penetrates flesh. This may be the essential definition of a war: a war takes place on brutalized human bodies. The distinction between hot and cold is misleading in this sense.

As much was clear in the conference, which was occasioned by the publication of a three-volume anthology of writings on nearly half a century of work by the esteemed sculptor Dolorosa Sinaga. Born to a Christian, Toba Batak family in Central Sumatra, and educated in England, she has become quite the iconic figure for her iconic figures representing bodies imprisoned, tormented, and alienated. Also, bodies dancing, arrested in mid-motion.

She remembers the bodies. In her expressionist remembering — in cast bronze and other materials typically giving the symbolic solidity to monumental, nationalist sculpture everywhere — Sinaga gives back body to memory. Specifically, she insists on the very opposite of monumental, nationalist sculpture in a body of work memorializing victims of extreme repression.

Too, Sinaga’s home has been open to activists, intellectuals, and revolutionaries of different religious affiliations and theoretical commitments, from the 1960s until today. It is in her home where otherwise whispered recollections of, so to speak, where the bodies are buried, become part of current political and aesthetic strategies. Often the motley assemblies probe 1965–66.

The mass murder Suharto unleashed in the 1960s may have taken as many as 5 million lives. It seems impossible now for Indonesians to achieve an accurate accounting of loss — especially for a period during which Vietnam, Laos, and Cambodia likewise lost lives in the many millions, on both sides of the ideological divide. The locations of the mass graves of Indonesia are only partially known.

There is no comparing numbers to venture that Marcos killed “only” by the thousands. It would also be sick arrogance to offer that Philippine civil society and victim families have at least managed to exact reparation, however inadequate and incomplete, from the unrepentant Marcoses. These deaths under horrific circumstances, across the region, piled up as long as the dictators stayed in power — and then some, even after they were deposed.

The murders visited on Muslim communities by the ilaga, self-named in the Ilonggo word for “rat,” included body mutilation and cannibalism. They occurred in barangays all over Central Mindanao: Pikit, Buldon, Barira, Wao, Alamada, Manili (Carmen), Palimbang, and others in a long list. The massacre in Palimbang alone may have taken as many as a thousand lives. Many ilaga were paramilitary troops, armed by the government through official military channels.

Amulet-bearing killers who believed themselves impervious to bullets and blades, the loose bands thought themselves protectors of settler entitlement to land in Mindanao. In fact, they were a machinery for terror, operated by specific individuals in local government, working with specific military actors. The Philippine Constabulary specifically, but the Armed Forces of the Philippines in general, were abreast of ilaga depredations. Survivors assert that military elements directed and joined the ilaga raids.

Muslim Filipino disaffection with the Christian majority center of Philippine life, discourse, and political organization built up incessantly in the greater part of the 20th century. Nevertheless, these 1960s massacres, notably including the shadowy affair on Corregidor Island in 1968 known as the Jabidah Massacre, were the thresholds into war.

The Moro National Liberation Front, formed after the short-lived Muslim Independence Movement of erstwhile Congressman Udtog Matalam, waged a war of secession from the Republic, starting in 1969. The Philippines is only emerging from a half century of consequent warfare. The outcome of the peace process is by no means certain.

What is certain is that this war-scarred Mindanao produced the present president, whose vocabulary is limited to violent words.

It is also certain that the two pretexts Marcos used to justify Martial Law in 1972 — the Muslim Filipino war for secession and the Communist insurgency — were both developments he himself had a hand in producing.

In Indonesia, Suharto’s hold on power until 1998 has been idealized as productive of the glory decades of modernization inaugurated by necessary blood-letting. Marcos’s reign (yes, reign) over the Philippines has similarly been fetishized. But in both cases, this picture is only tenable if the murders and the scale of violence at the beginning and during the regimes are buried.

The politics of memory of Indonesia and the Philippines, made conjoint by the Cold War, is more than a contest between historical revisionism and historical accuracy. In fact, the forces-that-be in Indonesia have not found need to engage in actual campaigns to falsify the historical record. Silence is the preferred method of the Indonesian powerful.

Rather, the democratic projects of either country will only begin to be inclusive if dominant power can be reconstructed in ways that vest the highest value in a full account of horrors inflicted on any segment of society in the name of democracy; and why. The re membering of the sundered bodies will have to be the new bones of institutions.

In truth, the EDSA People Power celebration can only have measurable liberating outcomes if it can galvanize Filipinos to demand that power is built on an accurate record. The outcome of forgetting is what is on-going. It is hardly a happy place.

 

Marian Pastor Roces is an independent curator and critic whose research interests include international art events, museums, identity politics, cities, and clothing. She is the founder and principal of TAO, Inc., a museum and exhibition development corporation. More of her critical texts can be found in Gathering: Political Writing on Art and Culture, the first collection of Roces’ essays co-published in 2019 by the Museum of Contemporary Art and Design and ArtAsiaPacific Foundation.

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