July 12th, 2021
Salceda says sluggish credit rebound a “pull” on economic recovery; House tax chair points to report citing PH lending weakness among peer countries
House Ways and Means Chair Joey Sarte Salceda (Albay, 2nd district) reiterated the need for a stimulus program with an attached “credit refinancing and restructuring program” in response to a July report by the market watcher Capital Economics that pointed out “extreme weakness of credit growth” in countries like the Philippines and Mexico among peers in emerging markets.
“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.
“I have consistently proposed three key solutions to this: 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 suboptimally from liens and other encumbrances, and an MSME investment portfolio system, where banks can lend to diverse portfolios invested into small and medium enterprises and startups.” Salceda said.
“This last option was done in India as a COVID-19 stimulus measure, something like a fund of funds, except it’s a bundle of small businesses, so the risk is well-diversified.” Salceda said.
Salceda pointed to a Capital Economics report which stated that “the extreme weakness of credit growth in other EMs 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. Loan officers’ surveys from both countries suggest that demand and supply are both concerns that are weighing on lending,” the report indicated.
“A prolonged period of extremely weak credit growth is likely to result in reduced investment. That will result in slower economic growth – an IMF study from 2011 suggests that GDP 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.
Credit levels worryingly low
“Amid interest rates already at historic low, outstanding loans of large banks collapsed 5% year-on-year in April, marking the fifth straight month of decline. This is the worst credit decline since the -7.2% recorded in June 1999 in the aftermath of the Asian Financial Crisis,” Salceda pointed out.
“That’s trouble unless we do something. The Credit mediation and refinancing scheme is stuck with GUIDE, still pending in the Senate. We need to see that enacted soon,” Salceda said.
“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,” Salceda warned.
“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 concluded.