Sluggish credit growth threatens recovery–Salceda

Without a right stimulus program, the sluggish credit growth of the Philippines can further threaten the country’s economic recovery, House Committee on Ways and Means Chairman Joey Sarte Salceda of Albay said.

Salceda, an economist-lawmaker, issued the statement on Monday in response to a July report by market watcher Capital Economics that pointed out the “extreme weakness of credit growth” in countries like the Philippines and Mexico among peers in emerging markets.

“We can’t afford low growth. That has implications on revenue, socioeconomic programs, job creation and overall quality of life. And credit is always a good indicator of growth expectations,” Salceda said.

According to the lawmaker, the country needs a stimulus program with an attached “credit refinancing and restructuring program” to address this “extreme weakness of credit growth.”

“We still need programs that will lower the costs of borrowing, make debt restructuring easier, and improve business appetite to borrow for expansion or recovery. The level of hesitancy of our financial system to expand its lending operations is now extreme, especially compared with our peers,” Salceda said.

The lawmaker noted he has consistently proposed three key solutions to address this issue.

Proposals

THE proposals include the following: a credit mediation and refinancing system which will assist businesses refinance or restructure their debts; the condonation of agrarian reform debts to release land currently used sub-optimally from liens and other encumbrances; and, an investment portfolio system for micro-scale, small-scale and medium-scale enterprises, or MSMEs, where banks can lend to diverse portfolios invested into small and medium enterprises and startups.”

The Capital Economics report stated that “the extreme weakness of credit growth in other emerging markets such as Mexico and the Philippines threatens to further hold back economic recoveries.”

“The numbers look particularly worrying in countries where credit growth is has fallen precipitously and/or is extremely weak. Mexico and the Philippines stand out,” the report added. “Loan officers’ surveys from both countries suggest that demand and supply are both concerns that are weighing on lending.”

The report further said that “a prolonged period of extremely weak credit growth is likely to result in reduced investment. That will result in slower economic growth.”

It cited a 2011 study by the International Monetary Fund that suggested gross domestic product growth in countries that experience “credit-less” recoveries from recessions “is, on average, a third lower than during ‘normal’ recoveries.”

“And lower investment and a reduced capital stock raises the risk of longer-term damage to the supply potential of these economies,” the report added.

Worryingly low

AMID interest rates already at historic low, Salceda said outstanding loans of large banks collapsed 5 percent year-on-year in April, marking the fifth straight month of decline.

“This is the worst credit decline since the -7.2 percent recorded in June 1999 in the aftermath of the Asian Financial Crisis,” Salceda pointed out.

Also, the lawmaker said the proposed Government Financial Institutions Unified Initiatives to Distressed Enterprises for Economic Recovery, or Guide, bill should be enacted immediately when session resumes on July 26.

“That’s trouble unless we do something. The credit mediation and refinancing scheme is stuck with [the] Guide [bill], still pending in the Senate,” Salceda said. “We need to see that enacted soon.”

The Guide bill seeks to provide financial assistance to distressed enterprises critical to economic recovery through programs and initiatives to be implemented by Land Bank of the Philippines and Development Bank of the Philippines, for purposes of addressing liquidity or solvency problems of MSMEs and strategically important industries, encourage their continued operations, and maintain employment levels.

“The economic managers prefer refinancing over condonation with agrarian reform loans. But I will keep trying to pitch it, as do our friends in the Foundation for Economic Freedom. A fund for bundled MSME investments is probably something we could take up in Bayanihan 3,” Salceda added.

“The point is that these levels are worrisome, and because credit is an indication of future growth prospects, if we don’t do something here, there is a risk that we might see lackluster growth over the next five years,” he warned.