Tuesday, 23 November 2010

Banks: The heroes of the economy

Business Mirror

ONE newspaper headline over the past weekend is symbolic about the Philippines situation in the midst of the global financial crisis. Philippines President Aquino has intervened in the tourism campaign logo controversy.

I am sure that the leaders of Ireland, Portugal, Spain, and many others would like to trade places and trade problems with our president. These other leaders are trying to keep their respective economies from imploding; the Philippines’ national leader is trying to keep the government’s tourism campaign from imploding.

The year 2010 has been very favorable to the country. The Philippine Stock Exchange is actually the best performing market in the world this year, being beaten by only Sri Lanka, Bangladesh, Estonia and Lithuania.

For all the talk of the peso appreciation, remittances are rising substantially, exports are rising, the outsourcing business is growing, and “hot” foreign money inflow is growing as well as foreign direct investment.

Economic growth for 2010 will put the Philippines at least in the top 10 of global economic activity.

There has not been much conversation in the local press and media about why the Philippines is actually prospering during these difficult times.

The conventional wisdom especially from the “know-nothings” in the international financial community (and some of their local followers) is that the stock market in particular only started rising due to the Aquino election. That is totally false. Stock prices went up more between 2008 and 2010 than they have since the election. Please note that part of the reason for this nonsense from the foreign money “experts” is that they missed the largest chuck of the rally, coming into the PSE only after the election.

It is not remittances that have “saved” the Philippines, nor is it outsourcing, exports, or any other specific monetary factor. These have all contributed to the health and well-being of the economy. But it is because the Philippines financial system is stable and sound that the economy has benefited from all of the above; not the other way around. If the basic system had great problems, all the remittance and all the outsourcing would have had little effect.

To use a silly analogy, all the vitamins in the world will not keep you healthy if you smoke excessively, drink too much alcohol, eat the wrong foods, and sit on the couch watching TV all day. The economic system must be healthy in order for the good financial things to work properly.

In my humble opinion, the true heroes of the Philippine economy are the local banks. Yes, those tight-fisted, unmerciful, uncaring and profit-is-everything-oriented banks.

Local banks have kept their own house in order and therefore contributed to the Philippines keeping its national financial house clean and tidy. I know that it does not seem that way some times, but look at the record.

Philippine banks could have easily taken their own investment money and been part of the crisis of the subprime-loan disaster. Virtually none did. The investment losses of the largest and most omnipresent financial institutions on the planet started the global financial meltdown. Banks were not satisfied making money by loaning depositors funds; they expanded into areas of “investment” that are so far from investing that it would embarrass even a local jueteng lord. Children betting on spider fights have more investment sense than the global banks did.

I can just imagine one of the international investment firms trying to sell credit-default swap derivatives or collateralized debt obligations to a local back 10 years ago. The local banker probably ended the conversation with something like this: “We prefer to lend money to Henry Sy. He builds malls, he makes money, he pays back his loan. No thanks.”

The local banks kept to the simple and profitable business model of borrowing from depositors and lending to financially secure individuals and businesses.

Banks in the West created the property bubble that has collapsed economies. Not here in the Philippines. Philippine banks required old- fashioned money on the table, not a piece of paper with a signature, to buy real estate. Yes, this policy slowed economic growth over the years but it kept the system stable and financially sound. Houses and condominiums were built for people who could afford to buy them, not for people who were speculating on a price bubble. That prevented any housing bubble and stopped unrealistic price appreciation. We have the banks to thank for a vibrant and secure property market.

Personal debt was kept in control by bank practices. In the USA, banks used to send out credit cards the way you get spam e-mail. Sign, return the form and you can have a brand-new credit line. All those sign-up fees and annual charges that the banks charge for credit cards in the Philippines are designed, not only to protect them from losses, but work to protect you from taking additional credit that you cannot afford. “Free” credit is never free. It must be paid for eventually. Except that if enough people do not or cannot pay, the economic system suffers a credit collapse as has happened in the West.

There is nothing better for an economy (like in the Philippines) than to see a consumer pull out a handful of cash to buy that new wide-screen television or car. That person’s wealth creation through a job or a business now creates more wealth through their purchases. And all of it is real; not based on a debt/credit illusion.

Philippine banks have played a vital role and have been a very successful component in keeping the Philippine economy secure. We are now able to reap the benefits of decades of prudent financial management by the banking sector.

E-mail comments to mangun@gmail.com. PSE stock-market information and technical analysis tools provided by CitisecOnline.com Inc.

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