Philippine banks to declare bank holidays?

Two banks, the Philippine Countryside Development Bank and the Philippine Rural Banks all based in Cebu have collapsed and declared a bank holiday today. Sources inside the banking industry says, expect other small and medium-sized banks especially those based in Southern Luzon and some parts of the North to collapse as well. Bangko Sentral ng Pilipinas (BSP) reportedly had an advance information about this that's why yesterday, the Philippine Deposit Insurance Corporation decided to raise the insurance of bank deposits to as high as 500,000 pesos.

As I wrote some months ago, the weakest link in the Philippine banking industry is the rural banks. As the economy slows, with weak demands from both Metro Manila and foreign countries, expect the death of export industries based in the provinces. Local demands cannot support huge production of export and agri industrial products from the rural areas. Low demands lead to low production. With slower economic activity, definitely companies and entrepreneurs will find it very hard to pay off debts and loans.

Another bad news---the government failed to "liquify" or "monetize" 30 billion pesos worth of bad housing mortgages. Sources say, government has absorbed more than 66 billion pesos worth of bad housing mortgages and last November, has failed to attract bidders or buyers. Apparently, what we are seeing is the first embers of a smoldering Philippine sub-prime mortgage crisis. And government, it seems, is quite helpless.

Does this concern us? Yes, because the National Housing MOrtgage Finance Corporation will need to get more money from Pag-Ibig, GSIS and SSS to plug the financial hemorrhage. Since funds from these governing financial institutions will be redirected to support NHMFC, this means longer loan processing times and possibly disapproval for loan applications from SSS, GSIS and PAGIBIG members.

If this government agency collapses, this will affect all real estate projects in the country. A collapse will mean a domino effect on almost all critical sectors in the economy, leading to a very abrupt recession. Market analysts have not factored this issue in, obviously because they are afraid to create panic. But, I tell you now, this issue is really very very serious to warrant immediate planning and plugging holes by Malacanang. Otherwise, our financial and economic situation might worsen leading to negative growth.

Another issue---sources say the BSP is injecting more and more dollars into the Forex market to stabilize the peso. The local currency is under extreme attack from speculators. Sources say the peso-dollar exchange will reach 56 by 2009.

Net of discussion--there seems to be no government plan to at least mitigate the full effects of a bank run or bank holidays in the coming months. Analysts say, it's expected, since government cannot really insulate the banking sector from the creeping global financial crisis. The question I pose is--will government reserves be enough to pump prime the banking sector? The World Bank advised the BSP to at least expand its credit facilities and lower interest rates. Will the BSP follow suit? Latest talk says BSP's Tetangco is adverse to the idea. So, my friends, expect a further tightening of credit markets and veritable bank runs and holidays in the coming weeks.

Rural banks are vulnerable in an RP sub-prime crisis

Gloria pictured a stable financial environment for the Philippines yesterday (there was a Philippine economic briefing yesterday at Shangri-La Makati), even saying that the government is on top of the situation. Bangko Sentral ng Pilipinas backed her up, saying that we have enough reserves to help ailing banks and financial institutions in the event of a full-blown financial crisis. Former senatoriable and now NEDA Chief Ralph Recto was quick on his feet, saying that the reason why the government remains confident is the fact that it has collected billions of billions of revenue from VAT, which is being cursed right now by consumers.

What we failed to recognize is this---Recto failed to say that we are just experiencing the beginning of woes, so to speak, and we're still not out of the woods, no, not yet. He failed to say that the economic slowdown would affect government revenues and yes, even the dollar reserves. Up to what extent will government extend its hand to help ailing banks, insurance firms and financial institutions? 

A slowdown would surely affect VAT collections and taxes. Firms have to raise their commodities prices more to cope up but what will the impact be for the people? Hey, consumers have been experiencing the effects of the global financial crisis since the start of the year and it's not true to say that we are really insulated.

What I fear the most are the rural banks. Rural banks have billions of pesos worth of mortgages that are still in their books. How would they possibly free these mortgages is anybody's guess at this point. The sheer enormity of these mortgages could eventually paralyze the entire rural economy and would definitely affect even the national economy.

The BSP should look into the rural banking sector and try to implement measures that would keep these banks afloat. Bear in mind that thousands of home mortgages have been absorbed by these rural banks which eventually would be affected by an economic slowdown. If these rural banks fail to transform these mortgages into financial instruments, what would happen to our economy? It would surely impact on the entire economic superstructure!

That explains why Speaker Nograles is really hell-bent on allowing foreigners to buy Philippine real estate because the Speaker knows that we have a ticking time bomb, what with these billions pesos worth of bad mortgage accounts being mismanaged by some rural banks.

The BSP should look into this immediately and avert a possible crisis in the provinces. Billions worth of investments are exposed and it would not be fair if government would absorb these losses via the PDIC (Philippine Deposit Insurance Corporation).