debt

The long-term view

 

With experts calling tepid and jobless growth the “new normal” for North Atlantic countries for years to come, it is important for governments to assess how this impacts them in the long-run.

The administration seems to have put two and two together and realized that with weaker growth prospects come weaker revenues and in an environment where any sort of fiscal deterioration could lead to speculative attacks on an economy, it is aiming to shore up its fiscal position through tax reform before the effects of the crisis start washing on our shores.

There certainly is nothing like a crisis to focus the mind on issues that would have slipped under the radar otherwise.

Fixing the areas in our tax system where leaks occur is just as important as trying to avoid wasteful spending. Paying full-market prices for second hand helicopters may create more of a buzz in the media, but the impact of improperly crafted policies on fiscal incentives or sin taxes create much bigger losses for the government on an annual basis.

The uncollected portion of those taxes could easily fill-up the public sector deficit eliminating the need for forced fiscal contraction that prevents us from building the necessary social and economic infrastructure needed for attracting job-producing investments and for improving governance.

The long-term view would allow our leaders to make the tough decisions to undertake necessary reforms that would lift the long-run productivity of the Philippines instead of merely catering to populist sentiment and short-term political payoffs.

Take a look at the following chart which shows various long-term forecasts for average annual incomes per person in the Philippines.

The high-growth scenario comes from the analysis of Dominic Wilson of Goldman Sachs on the Next-11 group of countries with strong growth potential. You can see why all those toxic sub-prime mortgage backed securities could be endorsed by them to Standard and Poor’s for triple A rating.

The rosy positive outlook has our citizens earning $20,000 on average by the year 2050. We should take our cue from those crafty people at GS who bet against the very investment vehicles they packaged and sold to investors, by hedging our bets a little. Let us consider other possibilities.

The low-growth scenario is taken from the Institute of Future Studies online data available via Google’s public data explorer. It shows the country achieving a per capita GDP level of just above $4,000 by 2050. This is quite a low level of growth given that the NEDA projects a $5,000 per capita income by 2020 (assuming we grow by 7% for the next ten years).

The high-growth scenario assumes growth of 6.4% per year on average in the next forty years (net of inflation). The low-growth scenario assumes that it grows by 2.9%. Note that with the population rising, the growth of the overall economy needs to be 7.6% under high-growth and 3.9% under low growth for average incomes to rise as they are forecast here.

I have projected a middle case in between the high and low growth scenarios. This trajectory produces an average growth rate of 4.9% per year. Under this scenario, average incomes are set to rise to close to $10,000 by the end of the forecast period ($9,497 to be exact).

This level of income is important because as the World Values Survey suggests, $10,000 is right around the level at which the minimum material needs of a country are met. Above this level, the reported level of subjective well-being is less dependent on income growth than on other factors.

Based on this survey, the Philippines is punching above its weight in the happiness index (far above its material wealth would imply). Imagine what would happen if Filipinos attained an even higher level of income.

Considerations for the long-term view

The question now becomes, what sort of policy shifts in the next five years would spell the difference between each scenario. Even though its framework produces an overly optimistic case for the Philippines, it is worth looking at the Growth Environment Score of Goldman Sachs to see what kind of policy response is required.

Under the 13 components of the GES, the Philippines was considered at par or above average in four aspects in 2006, namely: inflation, trade openess, education and life expectancy. It was considered below average in three economic indicators: fiscal deficits, external debt and investment; three governance indicators: political stability, rule of law and corruption; and, three infrastructure indicators: computers, phones, and internet penetration.

Tax reform would allow the government to correct the below par performance in debt and deficits. Investments could be addressed through competition policy and an opening up of restricted sectors. Political stability, rule of law and lower corruption results from better fiscal capacity to provide social safety nets and a more professional bureaucracy. Finally, better telecommunications governance results from both better regulatory quality and bureaucratic effectiveness which come about by opening up the economy and compensating public officials better.

The bottom-line is that better fiscal capacity along with sound and rational policy result in better growth prospects for our country. Let us hope that our leaders are able to take heed of this maxim and resist the urge to pander to populist patrimonialism in the short-run. By 2050, there will be between 135 and 145 million Filipinos. It is for the sake of this silent electorate, that I hope our leaders fix their vision on the long-run.

Philippine Credit Cards and the risks involved

MarketMan has started a series of what he’s planning as an educational tool for Filipinos who have or are planning to get credit cards. He has giving ProPinoy.net permission to reprint his post. I decided to post it in full for your convenience.

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The vast majority of the readers of Marketmanila.com have at least one credit card in their wallets. The objectives of the following series of posts on credit cards in the Philippines are simple. To help readers, acquaintances and the public in general understand the local credit card industry a little better. To highlight the unique risks associated with Philippine-issued credit cards. To remind the public of particular safeguards they should consider to reduce the risk of holding their credit cards. To explain some of the salient features of credit cards that people may wish to learn more about. To encourage our legislators to review the laws governing local credit cards to ensure a truly reasonable playing field that protects consumer’s rights, as well as those of banks and credit card companies. To encourage the public to educate themselves and seek fair laws that govern the credit card industry in the country. And to narrate several recent, specific credit card and banking service shortfalls that I have experienced and which are a useful tool to illustrate many of the objectives stated above.

The Philippine Credit Card Industry, a very quick (by my standards) overview.

What is glaringly obvious is the difficulty of obtaining readily available industry statistics for the Philippine credit card market. Industry groups such as credit card associations, local press, studies, central bank reports, etc. seem to have published (particularly on-line) far less than I used to typically see in other global markets when I used to work as a management consultant, several times engaged to study and fix credit card related issues. But here is a basic overview I managed to piece together, and my sources are listed at the bottom of the post. Some of the figures are extrapolated or estimated, but I think the overall general picture is reasonably accurate given the sources used. Corrections from those with better and more reliable information are most welcome.

How many credit cards in the Philippines?

As of December 2010, there were roughly 6.7 million credit cards issued in the Philippines, and several sources suggest those cards are held by roughly 3.6-4.0 million individuals (many folks have more than one card each). If I had to take an educated guess, I would say that roughly 2.5-3.0 million people have one credit card each, while roughly 1.0+ million people have multiple cards.

Who are the biggest players or issuers of credit cards?

This is actually rather difficult to determine, the most concrete data I could find dates back to 2004, so this is my best guess extrapolating out and given news reports.

Citibank
Banco de Oro (BDO)
Bank of the Philippine Islands (BPI)
HSBC
Metrobank
(Standard Chartered or AIG as the other possible top five players.)

Citibank probably has well over 1.3 million cards issued, while the top 5 in total probably account for 2/3 or more of all credit cards issued in the country. For Citibank and HSBC, the vast majority of their credit card customers probably DO NOT have deposit accounts with those banks.

Estimated Industry Growth – Cards Issued

2004: 4.5 Million cards issued
2007: 6.0-6.2 Million cards (roughly 11% annual growth 2004-2007)
2008: 6.5 Million cards
2010: 6.7 Million cards (roughly 3% annual growth 2007-2010)

So industry growth has slowed dramatically to 3% per annum from 2007-2010, from 11% in the previous 7 years, DESPITE robust economic growth during the last three years.

Roughly 4 million people have credit cards, and this represents a huge constituency of citizens, many of whom are gainfully employed, salaried workers and business owners, who are mostly all within the top 10% of the income brackets of the country (see my previous post on Philippine poverty and income levels, here), and who earn incomes and salaries and pay the vast majority of taxes collected by the government. They and their immediate families constitute a serious voting block in this country and should be able to push for positive reforms in credit card laws if necessary. Personally, it is my opinion that the market is close to saturation, not only because of the apparent slowdown in growth of cards, but because of the demographics and average incomes I wrote about in my previous post(s).

Estimated Industry Growth – Credit Card Receivables

2000: PHP40 Billion (estimate)
2001: PHP45 Billion (estimate)
2002: PHP50 Billion (estimate)
2003: PHP53 Billion (estimate)
2004: PHP65 Billion (estimate)
2005: PHP80 Billion (estimate)
2006: PHP99 Billion (estimate)
2007: PHP116 Billion (roughly 16.2% annual growth rate from 2000-2007)
2008: No data found
2009: PHP 128 Billion
2010: PHP 135 Billion (June 2010, roughly 6% annual growth rate 2007-2010)

Loans outstanding or credit card receivables of banks grew at a blistering pace of 16.2% from 2000-2007, but slowed dramatically to roughly 6% per annum 2008 to June 2010.

Average Outstandings Per Card (Estimated)

2004: PHP14,444
2007: PHP19,016
2010: PHP20,149

However, it seems a majority of cards DO NOT CARRY REVOLVING BALANCES. This is consistent with a recent survey I did. So if you assume that only 45% of all cards do revolving balances (based on a quoted figure from the Credit Card Association of the Philippines), then you could adjust the above figures to reflect that 55% of all cards have zero or close to zero balances on average, while the remaining 45% have these extrapolated estimated balances per card:

2004: PHP32,098
2007: PHP42,257
2010: PHP44,776

To me, this is a stunning piece of data. Roughly 3 million cards carry an average of PHP44,776 in revolving balances. And if you assume that some folks have two or more cards, then the average revolving balances for some 2 million folks in the country is roughly PHP60,000 or more per person, and I won’t even hazard a guess per couple/family! I will show later how these folks are paying some PHP25-35,000+ per annum in effective interest, penalties and fees! If that isn’t reason enough for citizens and lawmakers to sit up and at least educate themselves, I don’t know what is!

Past Due Credit Card Receivables (as a percentage of total receivables)

2003: 18.0%
2004: 22.5%
2005: 20.5%
2006: 16.4%
2007: 14.2%
2010: 15.0% (June 2010)

Figures quoted from the press suggest that there are more than PHP18 Billion in past-due credit card receivables, or roughly 15% of total outstandings as of June 2010. Of these, probably more than half are well over 180 days in arrears, or the vast majority eventually going to be written-off the banks books. At least these figures are lower than those racked up in 2004, when nearly 1 out of every 4 pesos of loans were past-due.

All of these loans are probably charged not only the 3-3.5% monthly finance charge, but also another 6-7% late penalty or other similar fees. At roughly 10% per month or more than 210% compound annual interest, the chances of a debtor pulling themselves out of that debt trap are slim indeed. Let me simplify this for you. Let’s say you owe PHP100,000 on your credit card and due to a death in the family, emergency medical operation after being sideswipped by a bus or you were burglarized at home, hog-tied and all your worldly belongings stolen. You would miss your minimum payment for your credit card that month. And the credit card company would impose roughly 10% in interest and late charges. And let’s say you were not able to make several subsequent payments and everything kept compounding at 10% a month. Do you know how much you would owe the credit card company at the end of one year? A whopping PHP313,843 or thereabouts. Doesn’t that seem a bit excessive? Usurious? Absurd?

Technically, banks are supposed to classify debts overdue for more than six months as bad debts and provision against them to write them off, in practice, there may be ways to stretch that rule.

Dictionary definition of usury – “the practice of lending money and charging the borrower an exorbitant, excessive or illegally high interest rate.”

Other Interesting Pieces of the Philippine Credit Card Story

“The rate of consumer credit defaults in the Philippines is almost TRIPLE the average in Asia” (Malaya, 2008)

“The credit card interest rates in the Philippines are currently amongst the HIGHEST in the world…in effect, good borrowers are shouldering a significant portion of the premium on bad debts since, given the lack of credit data that would permit lenders to determine the quality of borrowers, high interest rates are levied on ALL credit card debt.” (Winecito L Tan, BSP in his paper entitled “Consumer Credit in the Philippines”)

Below, a very interesting graph that compares the composition of household debt across 11 Asian countries in 2008. One of the most glaring conclusions is that the Philippines has the highest percentage (@28%) of all household debt in the form of unsecured credit card loans, and lowest percentage of housing loans among all countries in the study. This is probably one reason that the growth in credit card exposure has slowed dramatically in the last 3 years.

Graph is from Household Indebtedness and its implications for financial stability, a paper by Don Narkornthab, Bank of Thailand.

SUMMARY

This is the first of a series of several posts on credit cards in the Philippines. There are 6.7 million cards issued for roughly 4.0 million people. Most of these people fall into the top 10% of the income levels for the Philippine population. There are roughly PHP135 Billion in credit card receivables. I figure that roughly 2 million people could have upwards of PHP60,000 in average revolving balances on their credit cards every month, and are paying upwards of PHP30-40,000 in interest rates, late payment fees, and other fees per capita per annum. Some 15% of all outstandings are past due, down from historical highs above 20% several years ago. Interest rates of 3-3.5% per month are the equivalent of 51+% per year compounded, and when you add in penalties and other fees, could rise to as high as 200+% per year. Credit card fraud and defaults are very high in the Philippines (suggesting banks should choose their clients more wisely), interest rates are amongst the highest in the world, and household debt in the Philippines relies VERY HEAVILY on unsecured credit card debt.

Stay tuned for more in this series in the days ahead. Do me a great big favor and let your friends, colleagues and family know about this series of posts. Over the next month, on a normal basis, this post will get 15-20,000 page views from marketmanila.com regulars and casual visitors. But this is a topic that should interest anyone who holds a Philippine credit card, and thus it would be good if the maximum number of people were aware of this series of posts. If all of you posted this on your facebooks, tweeted about it, copied the posts and added them to your own blogs or websites, then there is a pretty good chance that 150-200,000 people will get to see it. Who knows, they might just learn something useful and avoid getting into credit trouble or know how to better assert their rights as a consumer as a result of reading a few posts. If you know any newspaper columnists, writers, newscasters, broadcasters, who can help to bring further awareness to these issues, I would be more than happy to share as much as I know about the topic with them if that can help the public at large. Thank you.

Sources:

Consumer Credit in the Philippines, 2008 Winecito L. Tan, BSP (A Paper prepared for a speech at the Bank for International Settlements
Issues on Revenue Recognition Practices of Selected Philippine Credit Card Companies, 2004 Erlinda S Echanis, Professor of Accounting & Finance, University of the Philippines
Household Indebtedness and Its Implications for Financial Stability, 2008 Don Nakornthab, Bank of Thailand
BSP Adopts same collection practices for all consumer loans, 2011 Lee C. Chipiongan, Philippine Development Finance
Credit Card Holders Cry Out For Reforms, 2009 Ramon J. Farolan, Philippine Daily Inquirer
Stanchart sees slower credit card growth, 2008 Gerard S dela Pena, Businessworld
Credit card receivables up 4.9% to PHP136 Billion in first half, 2010 Lawrence Agcaoili, The Philippines Star
Card Companies: Use credit wisely, 2010 Jarius Bondoc, The Philippine Star

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If you have questions, clarifications, or additional information for him, comment on his original post at http://www.marketmanila.com/archives/marketmans-credit-card-series-2011-part-i