Wednesday, June 27, 2012

Fiscal Irresponsibility 26: On the $1 B Philippine Loan to the IMF

Yesterday, I posted this in my facebook wall.
The $1B PH loan to the IMF for Eurozone reserve fund won't come from tax money but from BSP's international reserves. It is within BSP's mandate and resources to do so. Still, I don't support helping to bail out fiscally irresponsible governments with more loans when those governments have lots of state-owned enterprises, financial instns and assets that can be privatized to raise domestic revenues, instead of endless taxation and borrowings.
I was happy to see some serious exchanges and comments from some friends, below. I am posting these comments without asking the permission of these guys for two reasons. One, my fb wall is a public wall anyway, and  two, many of the points raised here are no-nonsense ideas and would greatly help educate the public on the merits and demerits of this recent move by the central bank/BSP.

Malou Tiquia I just totally do not agree to it...

Butch Arroyo But if you were the BSP what else would you do with the $s? BSP evidently doesn't want to sell the $s to the local economy and make the PHP stronger. So it has to push out the $s. But everything else out there they could put it into is either risky (and wouldn't be allowed to count towards "international reserves"), or safe but very low-yielding. A loan to IMF might be the highest-yielding of the alternatives that are acceptable for designation as international reserves.

The European bailouts are painful and costly result of policy mistakes of the EU in not enforcing the fiscal and public debt requirements of the original Maastricht agreement. I agree that those governments (the borrower govts for sure, but also the Germans, who weakened fiscal discipline in the EU by themselves violating the fiscal pact) deserve the wrath of their constituents. But until they get voted out they are (unfortunately) still the democratically elected leaders of these countries. If the leaders of the center countries (FRA, GER) still favor a bail out of the problem governments rather than allowing an exodus from the monetary union, the IMF will probably have to go along, since the only other countries who could vote it down-- US, UK, and, Japan-- probably support preservation of the monetary union.
From PH perspective, as long as the bailout lenders retain seniority, $1B to IMF is probably a small portfolio risk for the BSP.

Nonoy Oplas Thanks Butch. If I were the BSP, I will use some of my $77 B gross international reserves (GIR) to buy and hoard more gold plus other precious metals. My beef is that by pooling rising amount of bail out money, it will create moral hazards problem for those indebted countries. They have many govt-owned corporations, financial institutions, national parks, military camps and other assets, things that can be privatized to raise local revenues to deal with their spending requirements and debt obligations. I have not encountered much literature that those governments are taking this measure. Rather, they made limited or bogus austerity then issue some warnings that their debt problem can "spiral to the global economy unless the world will send them more money."

By not participating in the creation of more moral hazards problem with that IMF bailout money, the PH government is sending a signal both to itself and the rest of the world, that it is time to really look inwards, there are several options and solutions that can be internally generated, aside from endless borrowings and issuing a blackmail of global fiscal crisis unless they are given more bailout money.

Jules Calagui It is high time that we create a Sovereign Wealth Fund. We can set aside $20 B to start one and still left with over 6 months of GIR to cover 7 months of imports.

Benson Te The Bangko Sentral ng Pilipinas is a creation of the Philippine Congress REPUBLIC ACT No. 7653 and hence every exposure it does exposes Philippine taxpayers.

To give you an example, the liabilities of the old central bank (central bank ng Pilipinas, according to Malcolm Cook valued at over 300 billion were shifted to the newly created, off-budget Central Bank Board of Liquidators. In short, the liabilities of the old central bank was passed on the taxpayers.


Giovanni Rodriguez Agree with you Noy, the financial crisis in Europe and the world is the culmination of a failed experiment - fiat money !

Todd Foster So a country who still has many scratching out subsistence levels of living is loaning to a country, so it's residents can better afford their new "right" of do-overs on their vacations, if they got the sniffles on vacation #1? That's just plain evil.

Malou Tiquia Butch Arroyo, I really do not agree with your "small portfolio risk for BSP line. Point of the matter is we need the money here and not to support a failed system worldwide. Bail outs have proven to be not the right thing to do and really the Phils as lender is just a stunt to project the "breakout nations" status. Why not use the $ locally? BSP has to be creative, instead of FER what Jules Calagui posted is something worth considering. With SWF, it maximizes long term return, with foreign exchange reserves serving short term currency stabilization and liquidity management. There is a way to go than serve the ends of IMF. The world is in search of a new economic order and IMF has been part and parcel of failure of nations to handle responsibly fiscal and monetary policies. I fully share Nonoy Oplas' position here. Its time to go back to the drawing boards and bailouts are not the way to go! That's IMHO.

Casey Phyle The only thing that could possibly justify the Phils lending $1B to save Europe is the hope of not losing an important export market. But that is a vain hope, as lending to people who owe more than they can ever pay back is not the smartest thing to do. Borrowing more only makes their hole deeper. Some say it was intended like that by the money power who, on the way to NWO or One World, wants to force its will on the nations. So far that appears successful. The Philippines should not tie its raft too tightly to a sinking ship that will probably go down this year. On the other hand, the Philippines have been the recipient of western aid for long enough and have improved their situation at least this far. Now that they have a little cash on the side they probably thought it was only right to reciprocate and show some solidarity. Difficult to judge. That 1B would have stayed with the CB anyway and never gone to the people. Now the Phils will have a marker from IMF/Europe for $1B, with gold at $1600/oz.

Jules Calagui Im surprised no one is raising the return to gold standard and an end to what Giovanni Rodriguez aptly pointed out - the culmination of a failed experiment in fiat money ! Governments/politicians love unrestrained spending, and fiat money makes that all possible. $70 trillion in G10 debt or roughly 300% of the world's GDP. Here is an interesting (doomsday scenario) presentation by a highly succesfull and well respected hedge fund manager. Perhaps this is exactly what Malou Tiquia meant when she said 'its time to go back the drawing boards.' He calls it the "The Endgame," the Big Reset .

"The End Game: 2012 And 2013 Will Usher In The End" - The Scariest Presentation Ever? | ZeroHedge
If Raoul Pal was some doomsday spouting windbag, writing in all caps, arbitraril...

Butch Arroyo ‎@Malou Tiquia-- Of course the PH needs and can always use the resources at home. But what exactly does that mean and what would it imply? Forex reserves are financial, and not yet "real" resources for the country until you use them to buy things we can actually use for ourselves. If the BSP exchanges the $s for PHPs with say the banking system there, then: (1) automatically the BSP has less international reserves (this may have some effect on our risk rating internationally, and this affects the interest rates which both our public AND our private sector would have to pay internationally), (2) if the domestic banks end up hold the $s, the PHP just gets stronger (this significantly affects competitiveness of PH exports, though against this the cost domestically of critical industrial imports like oil are lowered), (3) if the local banks take the $s and lend this out to the private or public sector, these sectors in turn get to either spend it on import goods (increasing PH trade deficit) or invest it out financially (in which case, how is this demonstrably better than the BSP doing the investment in safer, higher-yielding instruments than the private sector has access to?) In none of these 3 eventualities has the PH economy increased its "real" capacity to produce and raise living standards-- unless the imports are for investment goods. I have no big problem actually with the peso getting stronger a bit and the trade deficit getting bigger if it's not so excessive that we go all the way back from net lender to net borrower. I also think using BSP reserves to finance imports may be justified if most of it ends up going to real investment (e.g. infrastructure) projects. But you have to ensure this happens-- not impossible, but not easy to achieve whether one works through capital markets (failed, in your view) or through policy (subject to corruption or mistakes). In short, I agree there may be a good alternative use of the reserves (finance infrastructure buildup/replacement) but it's a looong path from the BSP reserves to more and better roads and transport systems. And doing this is not without risk-- in the process the PHP gets stronger and our export sector becomes less competitive at a time when export markets are contracting. So IMHO, it's not as simple as, "let's just spend the reserves at home".

Offhand, an SWF is worth considering and other trade surplus countries have also undertaken this with variable success. BUT it still entails pushing the $s out as investments to the rest of world. That doesn't increase real resources "at home" if that's what you favor. Also, if the SWF just invests the $ reserves in capital markets abroad, how is it that these moneys won't end up supporting the EU bailouts anyway? SWFs of any significant size will diversify their risk by investing some of their assets in EU, US, UK, and Japanese govt securities. But this amounts to the same thing that you accuse the BSP of doing, since buying the securities of the lender govts give them the financial space to fund a bailout fund. If you believe that denying international markets the funds that they would use to fund bailouts is the way to go, then you must rule out all kinds of PH investments not just to IMF, but to all countries that are engaged in bailout financing. In which case, you may as well have the BSP just keep the $s where they are, earning 0.5% while the PH govt pays out 7.4% on its obligations (which does not help the PH govt's fiscal position at all).

Nonoy Oplas Thanks Butch, Malou, Todd, Jules, Casey, Benson, Vanni, for the substantial discussion. I am having a debate too in my UPSEAA yahoogroups, exchanging notes with BSP Dep Gov Diwa Gunigundo, other UPSE alumni. My main argument is that the "solidarity" track being tested by the PH government via the BSP's $1B loan to the IMF is a misplaced policy because for me, the best way to protect ourselves from a potential monster global financial turmoil coming from Europe is not more bail out money for those governments, but to veer away from more public indebtedness itself. Right now, we pay P328 B a year (average for 2010 to 2012) on interest payment alone for the public debt, foreign and domestic. That's real, huge money flying out of our pockets each year, precisely because of heavy debts by the PH government itself. Just one year that the PH govt will learn to live within its means, of not borrowing to finance a year of budget deficit, will go a long way.

I see Butch's point on the alternatives of placing investments for the high BSP international reserves. Putting a portion of it, $1B on IMF fund would earn higher returns at lower risk than putting it elsewhere where the risks are much higher. But I think a better alternative for the BSP is to buy more gold and other precious metals while the national govt (NG) is doing its own share of austerity. But these twin moves are far from happening.

Hi Benson, I understand that the creation of BSP itself is made out of taxpayers' money by passing the old CB's huge liabilities to the DOF as it started a "new" BSP. But I am referring to the $1B loan to IMF which did not directly come from taxpayers' money, these are mostly foreign investments in foreign currencies parked at the BSP.

Malou Tiquia Another creative way is by doing what Mark Cojuangco suggested before, creating a Strategic Materials Reserve, repository of value but unlike gold can be used by industry. I understand what you are driving at Butch, the risk is smaller by investing outside than putting the money in circulation locally BUT and that's where I differ with your view, let's use that money, publicly or privately to build PH econ by increasing spending via infra. My sense is the more liquid we are the better in a landscape of spiraling bailouts and we even do not know where the pendulum is going. Second, being part of a global bailout found is more riskier than just holding on to the money because it is an investment to a failed system if not a faltering one. When talk is ripe for a global tax on Wall Street speculation, which IMHO, is a creative way of trying to reign in greed, creative instruments can be made if we only use our marbles and be creative in using reserves.

Nonoy Oplas Hi Malou, BSP's international reserves are literally, international reserves and cannot be used directly for domestic developmental concerns. Their main purpose is to have a minimum cover for the country's imports, at least 3 months worth of imports, also for other BOP financing. If we want domestic development like more infra, more healthcare, more CCT, etc., these have to come from domestic sources like taxes and mandatory fees.

I agree with you that joining a global bailout program may not sound useful as those countries, the PIGS (Portugal, Italy, Greece, Spain) would need possibly at least a trillion dollars of bailout money, which may even be endangered of not being fully paid. The best bailout program, for me, is to bailout ourselves first -- drastically cut those public debt stock over the M- to L-term, and reduce if not stop additional borrowings in the S-term. How? First, government should learn to live within its means. If projected revenues are only P1.7 trillion, then spending should be limited to P1.7 T, do not aspire for P2 T (the proposed 2013 budget) and make new borrowings for P300 B. Second, privatize certain government corporations (like PAGCOR), financial institutions, other assets (like PMA campus, or Camp Aguinaldo), get the money for special programs (if they want to modernize the AFP, privatize camp Aguinaldo and AFP HQ shd move to some cheaper places like Cavite) so that there will be no need for additional borrowings.

It is huge public or government debts that drag those European economies. The same huge public debt that wobbled the US just recently, the same public debt that eats up 1/5 of the total PH budget for interest payment alone. Controlling this huge govt debt monster is perhaps the single biggest developmental program that any administration can do.

Finally, about global tax on stocks and Wall Street speculation, I don't agree with that. Businesses are all about innovation and speculation. Someone develops an ugly, "God-forsaken" place into a residential subdivision, speculating that the cheap land price, etc. would lure thousands of buyers. The project became successful, thanks to speculation and risk taking by that group of entrepreneurs.

See also:
Fiscal Irresponsibility 19: Rich Countries' Debts, November 24, 2011
Fiscal Irresponsibility 20: Trade and Budget Balances, January 06, 2012
Fiscal Irresponsibility 21: Eurozone Debt, GDP and Unemployment, March 06, 2012
Fiscal Irresponsibility 22: China Borrows, China Lends. April 16, 2012
Fiscal Irresponsibility 23: High Debt and Unemployment and Parliamentarism Hard Sell, May 02, 2012
Fiscal Irresponsibility 24: More on the PIIGS and European Debt, May 16, 2012
Fiscal Irresponsibility 25: Spain Panic, More Eurozone Woes, June 06, 2012

1 comment:

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