FIRST PERSON - Alex Magno (The Philippine Star) - August 13, 2020 - 12:00am

The road to Hell, as the saying goes, is paved with good intentions.

There is a provision in the House version of the Bayanihan Act II that will do our economy more harm than good. It will very likely stall rather than help our economic recovery.

The House version proposes a 365-day moratorium on loans by all borrowers. If that happens, it will freeze our banking system and produce an economic calamity.

We can understand what the proponents of this provision are up to. They think a moratorium will reduce pressure on enterprises.

But that is only half the equation. The other half is that there will be no financing available for enterprises that desperately need them to rise from the ruins.

Banking is a fairly simple business. Banks take in deposits or borrow cheaper money in bulk and then lend out the money to enterprises to use as capital. The challenge in banking is basically how to operate this simple business model in a manner that will allow thinner and thinner margins. An efficient banking system is able to provide capital to the most efficient end-users at the lowest interest rates possible.

Banking may operate on a fairly simple business model, but is a tenuous enterprise as well. Should the percentage of non-performing loans rise, the opportunity costs will overwhelm the thin financing gains. Bankruptcy looms.

Think of the lowly taho vendor whose entire capital is invested in a tub of the product he must retail during the day. If he spills that tub, or if the product spoils, or if he gives the product away to make his neighbors happy, his whole business is gone. He will not have the capital the next day to replenish his taho.

That seemingly innocuous moratorium provision in the Bayanihan II bill will make the entire portfolio of all our banks non-performing. The banks will be left only with their overhead costs and no replenishment of their most vital product: capital. They will be left only with their liabilities to depositors but no inflows from the money they lent.

This is the worst of times to attempt a reinvention of the banking business model. As our economy slips into recession, loan growth slowed to just 9.6 percent in July. If there is less borrowing, this is a signal there will be less business activity down the road.

Our banking industry is expected to play a lead role in the recovery we hope will happen soon. Among the reform legislation government is asking Congress to urgently pass are those that will enhance the ability of banks to finance resurgent businesses. Government is asking for more capital for the state financing institutions, the Agri-Agra Reform Credit Act to enhance lending that will capitalize our farming sector and the recalibrated Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act that extends net operating loss carryover for enterprises hit by the pandemic to lessen their tax burden.

The across-the-board moratorium on loans contained in the House version of Bayanihan II will negate all of these. It will diminish the ability of our banking system to finance viable enterprises by freezing their capital. That will cause a whole lot more damage to the domestic economy.

There is absolutely no need for this moratorium. It is a blunt and useless instrument. The banks and their borrowers necessarily work out restructuring of debt and refinancing of loans at their own initiative. Each arrangement is tailor-fit to suit both banks and borrowers.

It is never in the interest of banks to kill the business of their borrowers. That will only produce a mountain of bad debt that will in turn kill the banks.

So badly conceived is this proposed moratorium, we are nearly sure it will be trashed at the Senate. But we should not bet the health of our economy on that.

Many years ago, our legislators thought they would be calming public outrage over the increased VAT rate by raising the corporate income tax rate as well. It was a politically induced tax rate that wrought so much devastation on small and medium business employing 97 percent of our workforce.

This episode teaches us never to take the economic sanity of politicians as a given.


It is easy to crow about the Philippine peso becoming Asia’s strongest currency – until we look at the underlying facts.

In the first days of this trading week, while the heavens seem falling on the global economy, the peso climbed up to the $1:P48 level. The first victims of this revaluation are the families dependent on remitted income from our overseas workers. They will now have less pesos to spend.

The peso is rising in exchange value because we are not importing as much as we should be. This is a signal that our enterprises are not preparing for a surge in consumer demand in the coming period. That is bad news.

When our enterprises are not preparing for growth in market activity, this indicates the national economy is not priming for strong recovery. We could be caught in the doldrums for a while.

The weak demand for dollars will only bloat our gross international reserves (GIR). We have more money in that account than we need to have. Our GIR now equals more than eight months worth of imports. That is way above benchmark.

Therefore, the rising peso is no cause for celebration. It will only make imported luxury goods more affordable for the rich or make imported foodstuff cheaper to the detriment of our farmers.

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