| Yearend Report |
| Securing the financial markets |
| Jennee Grace U. Rubrico | January 7, 2003 |
In 2002, the discovery that the Philippines has links with international terrorist group al Qaeda was reinforced with the introduction of the regional terrorist group Jemaah Islamiah to the country. It was also in 2002 that the New People's Army was included in the United States' list of terrorist organizations.
Last year, the financial markets had to cope with, among others, the continued kidnapping binge of the Abu Sayyaf group and other kidnap-for-ransom gangs early in the year, the spate of bombings in General Santos City, the explosion of a public bus in Balintawak, Quezon City, bomb blasts in Bali, Indonesia and India, and threats of war between Iraq and the United States.
To a much smaller extent, the markets were also exposed to the continued war and bomb blasts in Zamboanga City, and the killing of American Abu Sayyaf hostage Martin Burnham and Ediborah Yap, a Filipina nurse the bandit group also took captive.
Market jitters were aggravated as bomb threats increased, police authorities uncovered and defused bombs all over Metro Manila, and foreign embassies in the city closed for fear of being the next target of terrorist activities.
For the Department of Finance (DoF), grappling with security concerns is something that is best left to other branches of government, like the Department of Defense.
The DoF had to deal with problems of its own, primary of which has been keeping the government's bloated budget deficit in check.
In an interview, Finance Secretary Jose Isidro N. Camacho said the effects of security problems on finance have been indirect.
"If there's an effect, it's really indirect because it's a general concern about the investment climate to the extent that it affects the investment climate. But that's a concern that's diminishing because in fact, we've made headway in terms of our efforts towards security concerns," he said.
For instance, the government has "neutralized" the Abu Sayyaf with the death of its leader Abu Sabaya last June, Mr. Camacho said.
He also said that incidents of criminality have been reduced.
"The criminality incidents have really gone down. The security concerns now are much more generic. It's not specifically to the Philippines, as we've seen, it's a regional and global concern," Mr. Camacho said.
Another Finance official also said that existing security concerns have little impact, if any, on the finance equation, as external threats affect all financial markets in the world and not just the Philippine financial markets.
"If the effect is across all countries, everything will offset," the official said.
Financial market players, however, believe that security concerns had been a big factor in Philippine finance last year.
For instance, bombing incidents were major causes for the peso's fall against the dollar last year.
The peso started the year at 51.75. It hit multi-month highs in May, even breaking the P50 psychological barrier to hit P49.95. By yearend, however, the peso was seen trading at the P53 range.
"When bombings occur, foreign investors pull out. This means that the dollar supply also diminishes. That's a direct effect on the currency market," a currency trader said.
To prepare for the possibility of higher volatility for the peso, corporate players in the currency market have hedged their dollar requirements for this year as early as December. Because corporates hold on to their dollars, the dollar supply in the market has shrunk. This, in turn, has been pushing the peso to weaken further. Intervention from the Bangko Sentral ng Pilipinas, however, prevented the peso from falling drastically.
Another currency trader said that when security problems arise in the Philippines, the bias of the market would be to keep dollars at the expense of the peso.
"Security concerns cannot be disregarded. Foreign participation on the equities market may be affected by this and also some existing investments may be pulled out or hedged given an assumption on future security. Any negative security concern will increase demand (for) US dollars from corporate, individuals and fund managers and reduce supply coming from foreign direct investments," he said.
He also said that security concerns affect market sentiment, which is a major indicator of the direction the financial markets will be taking in an emerging market like the Philippines.
"Local and foreign investors, corporate hedgers and traders consider security as a major concern affecting the market sentiment, a major driver of an emerging market like the Philippines," the trader said.
On the international front, the peso and other regional currencies continue to be hounded by threats of a war between Iraq and the United States.
In the Philippine currency market, the concerns are due to the possible skyrocketing of world crude prices should a war erupt.
Such a concern is understandable as oil companies are major players in the currency market.
Oil companies are now hoarding dollars by "buying in dips" - or purchasing greenbacks whenever the peso strengthens - to prepare for a possible war between the US and Iraq, traders said.
Concerns over the peace and order situation are also felt in the bond market, government securities traders said.
"Security concerns are always at the back of our minds. Peace and order is a major factor because foreign funds look at it," a government securities dealer said.
But the impact of concerns over peace and order is not as apparent or as immediate as its impact on the currency because its effect on the pricing is offset by banks' excess liquidity.
Since banks' deposits have increased and their loan portfolios barely moved, they had excess cash in their vaults.
With lending activity on a slump, the government did not have to compete with the private sector for funds from the banks, enabling it to get cash at lower interest rates.
Between January and May last year, the 91-day Treasury bills rate - which is used for pricing loans - hit successive historical lows.
Although domestic interest rates had risen since then, the uptick has been slight, and at 5.164% as of Dec. 9, the 91-day rate is still well below the government's targets of 7% to 8% for the year.
Market participants believe that the peace and order problem did not end with 2002 and will continue to make itself felt this year.
Because of this, and several other "uncertainties," everyone has opted to be cautious.
"We're really more inclined to wait and see what will happen," a currency trader said.
Even the government has acknowledged that security concerns figure in its plans, as it made accommodations for a possible war between Iraq and the United States when it revised its macroeconomic targets for next year.
In his yearend economic report, Mr. Camacho said that the revisions made by the inter-agency Development Budget Coordination Committee (DBCC) in the macroeconomic targets took into consideration a war scenario that would last for six months, with world crude prices hitting $31 per barrel for a period of three months.
Among others, the DBCC revised its 2003 growth projections for the country's gross domestic product (GDP) - the value of goods and services produced locally - to a range of 4.2% to 5.2% from an original target of 4.5% to 5.5%.
Assumptions for inflation were also revised upward to 4.5%-5.5% from the original 4.0%-5.0%. The growth of the gross national product - the value of goods and services produced in the economy plus income from abroad - was pegged at 4.5%-5.8% , while the foreign exchange rate is seen at P52-P54 to one US dollar this year.
The deficit target for 2003 was likewise revised to 4.7% of GDP, or around P202 billion (US$3.78 billion at P53.436=$1) from the original target of P142 billion.
But peace and order is only one of the factors that contribute to market jitters. Given equal if not higher priority by the markets is the government's bloated budget deficit.
For the January-November period, the government incurred a budget deficit of P200.55 billion due to poor revenue collection for the first half of the year and excess expenditures.
While the figure is still within the government's revised projections of 5.6% of the country's GDP, or around P223 billion, it is still way beyond the original full-year target of P130 billion.
The bloated budget deficit prompted international credit ratings firms Standard and Poor's Ratings Services and Fitch Ratings to revise the country's credit outlook to "negative" from "stable," pushing the market to be more cautious in its investments.
Another factor that the markets are looking at is the lack of investment opportunities. Although the executive branch is pushing for several legislative measures that aim to attract more investments, most of the measures are still pending in Congress.
Still another factor that pushes the markets to be conservative is the uncertainty that the presidential elections in 2004 brings, and as US Ambassador Francis Ricciardone has become famous for pointing out, corruption in the government. The markets are also affected by rumors that Mr. Camacho will be removed from office. The rumors have been constantly denied by the Finance chief.
With all these factors coming into play, it would be difficult to pinpoint just how much a factor security concerns are in Philippine finance.
The bad news is, market players believe that even if the country's fundamentals are good, investments won't come in if security issues are not addressed.
The "good news," - if one could call it such - is that the so-called small security issues, like the bombings and wars in Zamboanga and the Muslim areas in Mindanao, have become so common that they numbed the markets, which believe that these could be negated by strong economic fundamentals.
"Given the current security situation, I think the economic fundamentals can still negate the negative effect related to recent issues on security. Still, depending on the gravity of the security issue, the impact on Philippine finance may be more as compared to positive economic indicators," a market player said.
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