Is the Bangko Sentral in Trouble? 2 of 3

What can the people do if the government itself violates the law? Not much especially if no harm is felt. And even if the violation ultimately leads to a bust that hurts the people, much less so, it seems.

The violation of the law I am speaking about is the successive administrations’ neglect in funding the $40 billion capital for the Bankgo Sentral ng Pilipinas (BSP) mandated by R.A 7653 – the CB Act 7653 was passed into law in 1993 and this capitalization is mandated in Art. I, Sec. 2 of the law. At the same time, the old Central Bank passed into the books as a bad bank holding the behest loans from the Marcos era (to be liquidated by dividends from subsequent profits of the BSP. We, the taxpayers, did pay for all those loans.).

From RA 7653, the new BSP has authorized capital of P50B with P10 billion paid up. The same law says the balance of P40B should have been paid up in 1995. Succeeding administrations have violated this law by not paying up on the subscription until today.

Unfortunately, the effects of such violation, while pernicious to all citizens in terms of the coming bust, are not felt immediately. From today, I think, we are condemned to suffer again especially after the 2010 election when deficit spending for the campaign (as well as the present crisis) and a severely weak BSP will leave the country again vulnerable to that economic bust.

For most banks, one test of a credit client’s strength or weakness is its ability to deliver financial statements on time. The latest Balance Sheet published by the BSP on its website is as of March 31, 2008. The schedule of release is mandated by Art V of RA 7653 and the BSP is way behind on the schedule. Somebody on the phone told me that these financial statements can only be released after audit by the Commission on Audit. By any standard, one year of delay is too long. I suspect that these financial statements when released will show some surprises.

From the statements published on its website (see selected Balance Sheet items above and detailed BSP.proforma.xlsx.pdf.), as of March 31, 2008, its capital of P148.5B is only 7% of total assets. If the BSP had been a regular bank, the shareholders would have been pressured to ante up on capital to say 12% or more.

The BSP capital was healthy until it lost P102.9 B slowing down the peso appreciation in 2007 in what may have been a political rather than technical decision catering to BPOs, exporters and OFWs. Again, we pay for these things. (Please click on topmost image to enlarge analysis).

The unaudited CB general balance sheet as of March 31, 2008 published on the CB website still showed a loss (debit) balance of P15.1 billion but this was still the peak of peso strength at P41.4 per USD and has since declined to today’s 47–48 range.

Today, we probably have the best BSP officers in a long time led by career professionals like Governor Armando Tetangco. They are often buffeted by political pressure and need our support to stay the course and keep the peso value stable. The latest pressure from some sectors is for the CB to lower bank reserve levels, ie release money into the economy, that the Governor has thus far been able to turn down. The BSP is still building up its credibility in inflation-fighting and favoring loose policy at this time will convince speculators of a one way street to devaluation is still open.

The Governor already has a difficult job meeting his double mandate of growth and price stability. Given how RA 7653 is written, the BSP is not independent from the Office of the President (OP). The OP fills up the Monetary Board, the BSPs policy-making body. Salaries and other emoluments of BSP employees’ are set by the OP. The public statements of the BSP indicates some independence. The numbers do seem to indicate otherwise. The reality is probably the BSP officers being objective at first with the public statements then eventually bowing to the political masters.

Of course, the BSP is not a typical bank. It will not go belly up; only the peso will devalue as speculators see the vulnerability. That is bad for savers, fixed income and salary-earners, pensioners and innovators.

(Click here for Part 1 of 3 and here for Part 3 of 3.)

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