FINANCING INDUSTRY LOOKS TO THE ROAD AHEAD

For the past two years since the Duterte administration took over the reins of government, the administration has presented a comprehensive list of things to accomplish within its term in office.

Foremost in the agenda is the Build, Build, Build program, a massive five-year P8- to P9-trillion infrastructure development and rehabilitation initiative involving more than 4,000 infrastructure projects all over the country. These include the Metro Manila Subway, Mindanao Railway from Tagum to Digos, MRT Line 7, LRT 1 South (Cavite) Extension, Subic-Clark Cargo Railway, New Clark City, Panguil Bay Bridge, and Cebu Bus Rapid Transit, among others.

To finance these infrastructure projects, the Duterte administration passed the Tax Reform for Acceleration and Inclusion (TRAIN) Law and sought Overseas Development Assistance (ODAs) from countries such as China, Japan and South Korea as well as partnerships with local private business.

The TRAIN Law, is a comprehensive tax reform program which seeks to address weaknesses in the current taxation system in the Philippines while rationalizing and increasing taxes on certain products and services. The revenue generating impact of the TRAIN Law will be used to fund primarily the Build, Build, Build program.

All these developments will have significant impacts on the different sectors of our economy. One particular sector is the finance and leasing industry, represented by its industry organization, the Philippine Finance Association. The Philippine STAR sat down with the officers and directors of the PFA last March and talked to them about how they are looking into the road ahead.

LOOKING AT KEY PROGRAMS

Since 1962, PFA has been at the forefront of providing financing solutions and leasing key equipment and machinery to various individual and corporate clients from both the public and the private sector. The financing and leasing solutions they provide help clients achieve growth for their respective businesses or endeavors.

According to BDO Leasing and Finance FVP and marketing head and concurrent PFA president Agerico Verzola, the TRAIN Law may have affected their cost of lending due to the increase in certain taxes such as the documentary stamp tax and the increase in the interest rates. Hence, the cost of borrowing has further increased,” Verzola states.

The increase in cost of lending money to customers brought about by the TRAIN Law, among other factors, will increase the costs of borrowing among the clients of the leasing and finance industry.

“An increase in the cost of borrowing will normally have a dampening effect on the demand for credit,” says Arnaldo “Jun” Bacabac, Jr., SVP at Orix Metro Leasing and Finance Corp. and one of the PFA directors.

He adds, “The Build Build Build program of the government is quite laudable. Hopefully, the TRAIN Law will be successful in generating the funds needed to cover for the infrastructure spending. Once the program rolls out fully, this could lead to a resurgence in credit demand especially from sectors supporting these infrastructure projects such as the construction sector.”

Looking at the costs

The industry is also aware of the other significant impacts that the TRAIN Law will have on their businesses particularly the increase in excise taxes on fuel products.

“While the increase in excise taxes for motor vehicles has no direct effect on vehicle units such as buses, trucks, and heavy equipment, indirectly there will be an effect in view of increased excise taxes on fuel. In turn, there will be an effect on the transportation and logistics sectors and that could also have an effect on the prices of basic commodities,” Verzola explains.

Persistent increases in the prices of basic commodities can eventually dampen the businessman’s appetite to avail of financing and leasing solutions from leasing and finance companies. But Verzola is hopeful that the effects of higher inflation could be mitigated by the corresponding increase in the take home pay of employees due to the removal on income taxes from those earning an annual salary of P250,000 and below under the TRAIN Law.

“Inflation will rise in the short term, but it can also be dampened depending on how fast the government can implement the Build Build Build program. Once the infra projects are completed, the cost of production will be reduced because of the increased efficiency and productivity, and that will hopefully pull down inflation. Definitely, there will be projects that can be completed within Duterte’s six-year term,” Verzola says.

For CARD Leasing and Financing Corp. president and CEO Julius Alip, the increasing inflation rate will particularly affect micro, small and medium enterprises that make up the bulk of his company’s client base.

“Most of our clients are coming from the lower B and the CDE market. These can be the agricultural traders, and once prices, of say, crude oil, go up, it will have a domino effect on the prices of agricultural products. For me, the magnitude of the effects are difficult to predict right now, but I think, it will have an effect on the behavior of the borrowings of our clients,” Alip explains.

Verzola agrees with Alip’s observations. “It only means that the uncertainty level in the eyes of our clients has significantly increased. We are not saying this is good or bad. This is just an objective analysis from businessmen and entrepreneurs. They don’t like uncertainties, especially high levels of uncertainty. That means higher risks.”

Looking at the positives

For Toyota Financial Services SVP for business services group and PFA director Bernard Carague, the corresponding effects brought about by the TRAIN Law and the Build Build Build program are necessary. .

“If you look at the projects that the government are planning to build, these are very good projects — railways, highways, and grid connections — all these indicate that it will have a positive impact on the economy. And if the government can sustain its GDP target of as high as eight percent, hopefully, everything will redound to the economy. If you have a healthy economic growth rate, demand will naturally sustain that. ” Carague states.

BPI Century Tokyo Lease and Finance Corp., COO and PFA director Christine Grace Bandol also sees certain positive effects of the TRAIN Law, particularly in the logistics industry.

“The logistics industry outlook is bullish since the increase in fuel prices brought about by the TRAIN Law are forcing logistics companies to shift to more fuel-efficient Euro-4 vehicles, which are excise tax-free. It’s good for the economy as well because we shift into a more environment-friendly mode of transport towards sustainable development. There are also LTFRB regulations that moved in our favor such as the 15-year cap on trucks. We will see less secondhand trucks and more brand-new trucks in our roads. It also drives competitiveness among truck manufacturers,” Bandol says.

Another bullish industry is the jeepney transport sector, stimulated by the Duterte administration’s thrust toward public utility vehicle (PUV) modernization.

“There have been some companies who have borrowed or leased buses for use in P2P services. As for the PUJ companies, there are a few now but we expect more to follow,” Verzola says.

Alip adds, “There can subsidized funds for use in the PUV modernization which financing companies can be tapped into. It’s important to have proper channeling of those funds. We can also tap into those smaller financing institutions that have direct channels or existing relationship with jeepney drivers.”

Looking at Fintech

Aside from the Build Build Build program and the TRAIN Law, the finance and leasing industry is also looking into ongoing trends in Financial Technology (FinTech). As more and more companies are fast adopting FinTech in their financing and leasing activities, PFA thinks it’s high time their members get a better understanding of how the technology works.

“In the issue of efficiency, for tasks in the industry that are being done repetitively, these can now be done through the use of robots and artificial intelligence. These are not things of the future. The technology is here now — it’s just a question of adopting it in a positive way, for the advancement of our industry,” Verzola says.

Metrobank Card Corp. CFO Cesar Nicolasora Jr. shares the same observation. “Even today, your mobile phone behavior can be used to compute your credit score. There is already a company that does that. On the consumer finance side, the growth of FinTech will enable more transactions to be done online and in non-traditional channels.”

“It’s very relevant for smaller companies like us to understand how FinTech helps our process of underwriting. Taxes are rising now, which can mean higher cost of service delivery especially for brick and mortar lending companies, so the question is how do we make ourselves efficient in the years to come. If the buzzword is right that FinTech will help make operations more effective and efficient, then I think it will be a very interesting topic to discuss — what is the proper blend between face-to-face transaction and FinTech application,” Alip says.

Looking to pLay a roLe

To address the key issues affecting the finance and leasing industry, PFA continues to coordinate with the regulatory bodies such as the Bangko Sentral ng Pilipinas (BSP) and the Securities and Exchange Commission (SEC). The organization participates in regular coordination meetings with these agencies to discuss issues and policies that they can work on.

“In the formulation of new policies or changes in existing policies, we are now invited to give our inputs. Our voice is being heard, and we are raising our concerns as representative of the financing and leasing companies. Last year, we took part in the drafting of the bill on centralized registration of mortgage of moveable properties and the revision of the implementing rules of the Financing Company Act. We were invited in the formulation these policies,” says Leonora Alejandro, of World Partners Finance Corp president and PFA Secretary.

PFA also organizes an annual convention that brings together its members, key industry personalities, and representatives from various government agencies to discuss important topics and issues collectively affecting them.

With the theme “The Road Ahead,” this year’s annual convention aims to look into the different key developments and issues affecting the financing and leasing industry, and how the industry can work with the government and with the other industry stakeholders on how to best address these issues.

“As far as the direction is concerned, we are closely tracking all these economic and market trends and developments, particularly on the government’s current priority initiatives. It’s the reason why we took the theme ‘The Road Ahead.’ There are things we want to know where we, as an industry, can play a role to help in the successful implementation of these initiatives,” says Bacabac, who is this year’s National Convention chair.

This year ’s PFA Annual Convention will be held at The Manor in Camp John Hay, Baguio City beginning May 10 until May 11.