FOCUS: Forex Liberalization Boon or bane?

freely in and out of the country. New investors can now look at opportunities without fear of getting locked in.

Local businessmen, on the other hand, may now get cheaper foreign currency loans with more options to get equity capital. In addition, they can retain 100% of their forex earnings compared to the earlier 40%.

The remaining restrictions on forex transactions are on payments which are foreign-related, and on outward investments of $1 million and above. These are still under CB rules which require prior approval.

However, CB Governor Jose L. Cuisia, Jr. said these remaining regulations will continue to be reviewed to see whether such controls can be eventually abolished.

Rafael Buenaventura, president of Philippine Commercial and International Bank (PCIB), notes that “deregulation has made business more interesting.” In one fell swoop, there is no longer any black market, he says.

OPPORTUNE TIME

Francisco Dizon, president and chief executive officer of Asianbank Corp., says that liberalization could not have come at a more opportune time, when foreign investors are taking a serious look at the Philippines following the assumption of a new administration.

From the supply side, there can now be as many players in the market as there are people who earn dollars or maintain forex accounts.

Non- bank illegal intermediaries such as forex dealers can now step out of the shadows and conduct their business with legitimacy.

In such a situation, greater competition arises. As a consequence, pricing can also be more competitive. Bank rates and the prices quoted by non- bank dealers become sensitive to each other.

The Philippine Dealing System ( PDS), which the Bankers Association of the Philippines started in June this year, will also contribute to this free market situation. Under the PDS, banks can trade foreign exchange offfloor among themselves and with the CB for long hours.

Deregulation has thus opened a whole- array of opportunities. Competition between domestic and foreign financial institutions in a wider arena should intensify as offshore managers find a new battleground in the local financial system.

It is not at all farfetched to expect foreign fund managers, with or without local counterparts, knocking at the doors of local companies to offer loans, under-writing, stockbroking and other financial services. It is now up to the corporate treasurers to seize every opportunity.

DIVERSIFICATION

Commercial bankers are positive that forex liberalization holds great possibilities for diversification. The opening up of the forex markets has showed vast potentials for the spinning off of financial instruments such as options and swaps.

More exotic arrangements could surface like multi-currency instruments and combined interest rate and exchange rate swaps, which behave nothing like any previously known financial security.

Financial alchemists of all kinds could be born overnight, brewing a whole new series of currency tools and over-the-counter derivatives. These concoctions would enable investors to get things they never had before — guaranteed returns and enhanced yields as well as protection from stock market declines, currency fluctuations and other financial evils.

Citibank N. A., for instance, recently launched the “US Dollar Ready Credit,” a revolving credit scheme which provides “all- purpose dollar loans” not only to exporters but to anyone who can afford to maintain a foreign currency deposit of at least $10,000.

This new facility was made possible through deregulation since the new rules now allow short- term loans ( one year or less) against accounts under foreign currency deposit units.

OPTIMISTIC

A very optimistic picture of financial market opportunities is now being painted. Exchange risk, however, will always be a factor but the tools for dealing with it could blossom as the financial markets further open up and develop in size and complexity.

The fight for market share among the local and foreign banks is also expected to heat up. In Spain, local banks, for instance, initially lost market share to foreign banks which came in when Spain deregulated its economy. But they began to win market share back as the banks became more competitive.

The free import of foreign currency means that Philippine entrepreneurs could now bypass local banks and borrow abroad. Local banks must now directly compete with international banks for the business. Further, the probable entry of foreign banks through a bill filed in Congress widens the sources of funds.

There are several areas in which Philippine banks need to sharpen their competitive edge. The most important, however, is to bring down costs through rationalizing staffing levels and streamlining operations. Overlaps occur in areas such as economic research, forex dealing, trading in capital market instruments, and leasing.

Perhaps, now is the time to pursue mergers and consolidations although some of the banks still resist these initiatives. It seems that any fundamental realignment within the banking sector is likely to take time given the political nature of local banks and the complex shareholding structure.

As one banker aptly puts it: “Different business groups are unlikely to team up.”