Major impediment to industrialization in the Philippines

7
MIKE WOOTTON

MIKE WOOTTON

PROJECT finance is relatively a new technology for the Philippines. Bank lending for business purposes tends to focus on lending to organizations associated with the owners of the banks—which is why, I guess, it’s a handy thing to own one of the hundreds of banks around here.

Add to this the protectionist provisions of the Constitution and the conservatism of the BSP (Bangko Sentral ng Pilipinas) rules, serious investment tends to be restricted to those who control monopolies and who can exercise some form of regulatory capture, i.e., local big business, or just individuals with loads of money and, of course, “connections” who can defy the system.

Most enterprising people outside the powerful groups will, at some point, need to borrow money in order to develop some form of business that will create employment opportunities for other people and may even produce things that will have a good export market, or at least will reduce the need for importation, and which will make a bit of profit for themselves.

The established steps for financing business—own resources, friends and relatives, angel investors, venture capital and banks, in that order—just doesn’t work anymore. The gap between the angel investors [for those lucky enough to find them], the venture capital people who are beginning to look more and more like commercial banks, and the banks themselves is becoming wider and wider and in the Philippines, the banks just don’t want to lend to those who are not their owners, or the friends and relatives of the owners.


The banks will happily provide consumer finance—credit cards, car loans, low-limit personal loans and housing loans—particularly loans to buy houses and condos built by the banks’ associates. There was trumpeting in the news over the weekend that car sales increased by over 22 percent in the year. Just what we need: 22 percent more cars on the inadequate and appallingly badly managed roads.

But this growth in traffic problems is largely caused by the ease by which car loans can be obtained within the restricted range of euphemistically named “loan products” of the banks. What appears to be gross overbuilding of apartments, on inspection, gives an odd and counter-intuitive picture of reasonably high levels of sales, but then it’s easy to borrow for those as it is in the interest of the banks’ associates to make sure that they are sold.

“Live for today because tomorrow will look after itself” is exemplified by the car dealers who almost always just advertise the amount of the deposit, or even the “cash out” required to get a new vehicle. Rarely do you see the full purchase price advertised, for fear of putting people off no doubt! Advertising of similarly ethical questionability is used for apartment sales.

Entice the punter to buy an apartment built by the oligarch’s construction company on land owned by the oligarch and financed by a bank also owned by the oligarch, and then sign him up to boost the share price, and if he can’t pay later, just repossess or evict—there will always be another punter, at least in the short term!

So to me, at least, it looks as if it is fairly easy to get money with which to buy things from the oligarch’s businesses but excruciatingly difficult to get money to do anything which might risk stepping on their toes. It’s an excellent setup if you happen to be an oligarch. But alas, most people are not.

The question is, what does it take to break this vicious cycle? It can only be strong government, one which is strong enough not to be hostage to regulatory capture and which has the absolute resolve to open the economy for the benefit of all. Tinkering around the edges will not make a difference. Banks must be forced to open up and adopt project financing, for example, as a norm, to support long-term, job-creating industrial developments by new entrants. For multilaterals to tell people that they will only be able to get their support if they are in bed with somebody involved in Philippine big business introduces a very damaging naivety to what is already an almost impossible new start financing environment.

In 2013, Asia accounted for 46.5 percent of global manufacturing output but, of course, the Philippines did not contribute very much to that. But it could have done so if only there were some appetite and opportunity for those old-fashioned people called industrialists, rather than just land developers.

There is no progress without risk and, as Philippine banks look like they may be amongst the most risk averse in the world, then clearly there will be no progress unless there is some radical change in bank lending practices.

Mike can be contacted at mawootton@gmail.com.

Share.
.
Loading...

Please follow our commenting guidelines.

7 Comments

  1. Toyota, Nissan and Honda spends at least one billion USD each for research and development alone so I don’t see serious industrialization happening in the Philippines any time soon. If industrialization were to take place in the country, capitalization will have to come from an outside source partnering with our local manufacturing.

    You are right on your take regarding local banking lending practices, but it is not the reason why industrialization has not taken roots. I think industrialization is simply too big even the Philippines three wealthiest billionaires would be scared to venture into. While real estate development seem to have peaked nationwide, I think the time to breakaway from it is now and perhaps consider small scale industrialization.

    • One way to possibly test the banking policies is for someone to attempt to borrow money from a bank associated with a building company, get approved, and then go back to the bank to try to get a loan for a house (of the same value) in a housing development owned by a competing company. If not approved for the second scenario, then enlist the help of a major, connected to neither company, law firm to bring the matter to a visible head in the media.

  2. Amnata Pundit on

    1. Nationalize the banks. If this is too extreme for now, put up a government-owned “Philippine Industrialization Bank” that will entice all OFWs to park all their remittances with it and use these funds to fuel industrialization. Impose a punitive tax on banks that refuse to lend to industrial projects ( or hit them with a Kim Henares-like blitzkrieg assault where it hurts, thats their tax deficiencies, real or imagined) 2. Stop import liberalization, either with increased duties and taxes or by deliberately cheapening the Peso against the dollar( that is what ALL countries including the US and Japan are doing today with their so called currency war) to dampen imports (especially smuggling where all of some $20Billion in OFW remittances go) which in turn will spur self reliance, another term for industrialization). 3. As a vital strategic move in this currency war, restore the printing presses of the Central Bank which I suspect is being deliberately mothballed by the yellows not only because they were acquired by Marcos but to diminish our own sovereignty over our own currency, the rationale for which is too long to detail here but definitely a Central Bank that has to have its currency printed abroad is not in our national interest. Of course all these measures will hurt in the short term, so that the first step is to install a government that will bring back the people’s faith in themselves, and that can only be a government of the people, by the people and for the people. Since as you rightfully stated, the oligarchy is to blame for the situation, bear in mind that it was the yellows that restored them in that oligarchy’s revolt called EDSA 1. THERE CAN BE NO REAL REFORMS AS LONG AS THE YELLOWS ARE IN POWER ! !

  3. Ruben Garzon on

    Here’s an idea, instead of making tools that makes cars and truck parts, let’s make tools that makes the tools to build cars and trucks. Give the Philippines access to the US super computers and markets that we may be able to complete with Japan and Korea. After all, we have the resources, brains and materials.

    • I would tend to support your idea except you have neither the brains, nor the education to do what you say. You also do not have the work ethic required to bring manufacturing here.

      Also, no responsible business is going to relocate here where you have the highest cost and least dependable electricity in Asia. You also have a rogue mayor who with the stroke of a pen paralyzed the transportation of goods to and from the docks because he did not think about the consequences of banning trucks from city streets in the city with the port.

  4. Government is the problem, not the solution.

    Free and open markets are key to industrialization. . Not government. Not regulations.