RedBlueThoughts

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.