SPEAKING before members of the Financial Executives Institute (Finex) recently, Bangko Sentral ng Pilipinas (BSP) Governor Armando M. Tetangco Jr. is wary of the economic impact of El Niño, which started in December 2014 and expected to last till the last half of 2015.
The El Niño that results from the warming of the West Pacific area (due to high ocean-surface temperature) causes drought—when a place suffers three consecutive months of below-normal rainfall—as had happened in 23 of the 71 provinces in the country.
Particularly affected are Northern Luzon and some provinces in the Visayas, where parched earth affected staple-food supply, like rice, resulting in losses of about $239 million (about P10 billion), where Isabela, Nueva Ecija and Caraga have, in fact, been declared in a state of calamity.
Fifty-four percent of rice, corn, tobacco and other high-value crops in Northern Luzon have been adversely affected. Increased demand for irrigation pumps and attempts at cloud seeding apparently have not dented the effects of the El Niño.
The fact is that 47 percent of Philippine consumer price index is accounted for by food, of which another 9 percent is accounted for by rice. The impact of weather disruptions on food prices, analysts say, can lead to higher-than-expected inflation of about 4 percent.
One of the tools the BSP uses to manage inflation is an increase in interest rates, which can lead to several basis-points rise in the cost of commodities and goods, as well as the cost borrowing of the sovereign. In more advanced economies, the rise in interest rates significantly alters the mood of the various markets. Debt-financed corporations, meantime, may struggle, as borrowed funds become more expensive.
Agricultural economists are keenly watching whether the El Niño will increase in severity worldwide, since this can affect food prices globally. In some water-deficient areas of the country, water rationing is possible and those provinces dependent on hydroelectric power can face possible outages.
The BSP governor, however, has a more positive take on the upcoming Asean financial integration, as Philippine banks are adequately capitalized, have ample liquidity and have managed their bad-loan ratio quite well. More stringent capitalization of banks under Basel 3 and robust earnings make many Philippine banks’ capital adequacy ratio, a test of solvency, more than adequate today.
Tetangco believes the entry of better technology and competition will result in stronger, better-managed Philippine banks, even if the size of the latter’s balance sheets are not as formidable as some of Asean’s bank behemoths. For instance, the assets of the top 3 Philippine banks are only equal to that of Bangkok Bank and only half of that of Malaysia’s Maybank. The entire capitalization of the Philippine banking system is only slightly higher than that of Singapore’s DBS and Maybank.
The BSP believes the banking integration in Asean will mean greater access for Philippine entities to the bond and equity markets, more facility in trade settlement and transfer of funds. Philippine banks may now branch out into the larger, more prosperous Asean consumer and corporate markets.
Other observers point out that the presence of large foreign banks here as the integration happens can help the government finance big-ticket infrastructure projects and mining-exploration activities. The Philippines can also tap nine other capital markets of the Asean without opening accounts there.
Moreover, while Europe is reeling from the Greek contagion, countries under the Asean with a collective population of some 600 million are not particularly exposed to risk.
All in all, the country’s involvement in the banking-integration process with Cambodia, Brunei, Indonesia, Laos, Malaysia, Myanmar, Singapore, Thailand and Vietnam is expected to bring more opportunities than headaches for most local banks.
Bingo Dejaresco, a former banker, is a financial consultant, media practitioner and political strategist. His views are his personally and do not necessarily reflect those of Finex. He can be reached at email@example.com.