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A report released by the Asian Development Bank (ADB) last week cast the support the Philippines provides to its micro, small and medium-sized enterprise (MSMEs) sector in a rather unflattering light: Among the “Asean-5” As the five largest economies in the Association of Southeast Asian Nations, loans to MSMEs are the lowest in the Philippines, by a huge margin.
Following these findings to a logical conclusion reveals a disturbing picture of fundamental weakness in the Philippine economy, which does not appear to improve greatly with conventional policy and policy actions.
In its report titled “Asia Small and Medium Sized Enterprise Monitor 2020”, ADB said that bank loans to the MSME sector in the Philippines in 2019 amounted to $ 11.6 billion (around P568 billion). This was well below the totals for the rest of Asean-5, led by Thailand ($ 218.8 billion) followed by Indonesia ($ 79.9 billion), Malaysia ($ 68.1 billion) and Singapore ( $ 58.5 billion).
ADB further noted that despite the law requiring banks to allocate 10 percent of their loans to MSMEs, Republic Law (RA) 9501, which was in effect between 2008 and 2018, the Philippines has consistently followed to their peers since 2011 (the first year that full data was available and compiled). Since 2013, the proportion of loans to MSMEs in total loan portfolios “has been falling to a single digit percentage,” according to the ADB report.
Mitigating circumstances
There are a couple of qualifying factors to consider when digesting the ADB report. On the one hand, it covers the year 2019. If 2020 were a normal year, the 2019 data would be a much stronger argument, but of course 2020 is what it is. It is not a foregone conclusion that any economic trend established through 2019 will similarly continue from 2020, for a number of reasons that should be quite obvious. ADB analysts are likely to be as aware of this as anyone, if not more so, so it’s probably best to view their findings as something of a benchmark.
Second, the Bangko Sentral ng Pilpinas (BSP) has taken what for a central bank amounts to a radical step in the absence of a clear legislative mandate (RA 9501 expired in 2018) to boost support for MSMEs from the start of the coronavirus pandemic by allowing banks to count loans to MSMEs against their mandatory reserve ratio (RRR), the amount of deposits that banks must keep in reserve to ensure that they are liquid enough or, in no language nerd, they have enough money to cover withdrawals.
In addition to modifying RRR regulations, the BSP cut its benchmark interest rates; eased some time requirements for reporting past due and delinquent loans; reduced the credit risk weights for these loans from 75% to 50%; and assigned a zero credit risk weight to loans that have government guarantees, specifically from the Philippine Guarantee Corporation, the Farm Guarantee Fund and the Farm Credit Policy Council.
All of this has given a significant boost to credit to MSMEs. At the end of August, according to BSP data, loans to MSMEs amounted to around $ 10.8 billion for the year to date, putting them on the way to around $ 16.2 billion for all of 2020, an increase of almost 40 percent over 2019.
On the other hand…
The positive impact on MSME lending from the BSP’s policy actions was probably somewhat mitigated by the inclusion of new lending to large companies as a ‘substitute for RRR’, a measure that the BSP implemented just five days later. that it gave banks the option on MSME loans. There is no doubt that many banks took advantage of this and reduced the amount that they would otherwise have lent to MSMEs in favor of making loans to larger and more secure borrowers.
It is debatable how much more banks could have lent to MSMEs if they did not have the option of making loans to large companies. Realistically, it could have made a difference of a billion dollars or two; If the question is asked, the BSP correctly, albeit a bit defensive, points out that the RRR adjustment is just one of a set of measures aimed at supporting MSMEs, and that whether there could have been more loans or not, the large increase in loans to MSMEs during 2019 speak for themselves.
Therein lies the real problem, the essential failure of the entire economy. The BSP through its actions, which are at the limit and perhaps even a little beyond what it can legally and safely do, can only move the needle so far. Even if lending to MSMEs reached $ 18 billion or $ 19 billion this year, which would be a staggering increase locally, it would still be just a third of Singapore’s (fourth out of the ASEAN 5) . The economies of the Philippines and Singapore are an apples to oranges comparison in many respects, to be sure, but it is worth remembering that the Philippines has roughly 20 times the population of Singapore and other asset bases that are superior in almost every respect.
MSMEs, as we all know, represent about 99.5 percent of all commercial enterprises in the country, about 63 percent of employment, and about 40 percent of total value added to the economy. Failure to provide commensurate access to credit simply delays economic momentum.
However, what can be done about it does not have a simple answer. Banks are hesitant to extend much credit to the MSMEs sector, because the MSMEs sector is objectively risky. In terms of government intervention, the BSP has probably pushed them almost as far as it dares – any more intrusive regulation, and banks are likely to start playing lending altogether.
The other avenue for government intervention – direct loans or an expanded framework for loan guarantees – simply transfers the same credit risks from the private to the public sector. The additional costs would erode the government’s fiscal position, ultimately resulting in costs for everything else the government does; Having survived the years when national budgets have been dampened by servicing debts that exceed 50 percent of gross domestic product, that is not a situation that no one should ever enjoy again.
The sustainable solution, so to speak, is much slower. Developing the capacity of MSMEs to reduce the overall risk of the sector, one company at a time, is the only way to ensure adequate capitalization of MSMEs and promote economic growth without “supporting MSMEs” becoming a zero sum game for someone.
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Twitter: @benkritz
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