SUGGESTED SOLUTION TO BANGKO SENTRAL'S CONTINUING FAILURE TO PREVENT INFLATION ON RATES OF PUBLIC SERVICE MONOPOLIES

For: Ms. Belinda Olivares-Cunanan
Members of media
Members of the academe
Members of the economics “profession”
BSP Governor and members of the BSP Monetary Board
Concerned Filipinos who care about what is happening
in our country and economy


Subject: SUGGESTED SOLUTION TO BANGKO SENTRAL’S CONTINUING FAILURE TO PREVENT INFLATION ON RATES OF PUBLIC SERVICE MONOPOLIES: COMPULSORY
HEDGING ON FOREIGN LOANS


While the now Bangko Sentral ng Pilipinas (BSP) Governor AMANDO TETANGCO, JR. stated in his November 24, 2000 letter that BSP would no longer waste its time on me--because it had already spent so much effort answering my letters and it was high time it put its scarce resources to better uses (as disclosed in my 5th email)--I have to continue writing BSP because to this day, it has been SLEEPING on some aspects of its job.

The cited statement of the now BSP Governor was highly revealing and symbolical, on the following grounds:

(1) It showed why BSP grossly mishandled the Asian crisis: it could not immediately fathom--and hence it brushed aside and would not admit to me--the validity of HIGH-INTEREST-RATE FALLACIES and ALTERNATIVES that I put forward to it (as presented in my 3rd and 4th emails), such as the back-breaking SUBSIDY by borrowers to non-borrowers and the less disastrous alternatives--required PROOF OF FOREIGN OBLIGATIONS for non-trade dollar purchases and REDUCTION IN CAP ON BANK DOLLAR HOLDINGS--the efficacy and validity of which were eventually proven when these were successfully but belatedly implemented by BSP in August 2001 and March 2003 (as treated in my 6th email);


(2) As an apparent way of CODDLING favored banks, it was a witting or unwitting effort to stop me from pursuing still unresolved issues with BSP, especially the TWICE ADVERTISED price-fixing BANKING CARTEL (subject of my 7th email), which would die a natural death without any follow up from the public as BSP was doing nothing about it; and


(3) It betrayed BSP officials’ LOW and inadequate PERFORMANCE STANDARDS in being SATISFIED with the limited things that BSP had been doing at the time, which were short of the foregoing recommended less disastrous high-interest-rate ALTERNATIVES that BSP successfully implemented belatedly in August 2001 and March 2003, and short as well of WHAT BSP HAS NOT DONE TO THIS DAY: imposition of badly needed compulsory HEDGING on FOREIGN LOANS--especially those obtained by public service monopolies that cater to the Filipino masses--which loans passed BSP for prior approval under existing regulations.

Without exchange rate hedging on foreign loans, public service monopolies improperly used their Filipino CUSTOMERS as HEDGING MECHANISM, charging them substantial INCREASE in service RATES for the recovery of the monopolies’ staggering ACTUAL exchange losses--a ridiculous, amateurish, and absurd SOLUTION to the exchange-loss PROBLEM tolerated by the government through the PRICING MECHANISM fallaciously formulated and implemented by the Energy Regulatory Commission, the Toll Regulatory Board, and MWSS--and the experts on proper hedging mechanism, who should have known better and should have promptly instituted the crucially needed remedial measure as a matter of their mission and duty--the past and present BSP GOVERNOR and MONETARY BOARD MEMBERS--had appeared and continue to appear soundly SLEEPING ON THE JOB.



BSP’S MISSION ACCORDING TO ITS CHARTER

Under Article I, Section 3 of its charter, RA No. 7653, BSP’s primary objective is to maintain PRICE stability. It shall also promote and maintain MONETARY stability. This means BSP has the twofold mission of maintaining the value of the PESO (through stabilizing the exchange rate) and preventing INFLATION.



TO CONTAIN INFLATION, BSP FORCED THREE MILLION BORROWERS
TO SHOULDER DISASTROUS HIGH INTEREST RATES OF 30% OR MORE
DURING THE ASIAN CRISIS, WITH CONSEQUENT BAD LOANS THAT BREACHED 30%

Preventing inflation was so important to BSP that, in the Asian crisis, it subjected productive entrepreneur-borrowers to catastrophic high interest rates just to attain this mission. BSP saw the carnage from high interest rates of otherwise viable businesses and borrowers, but they had to be sacrificed to attain the paramount goal of protecting Filipinos from inflation.



IF SO, BEFORE THE ASIAN CRISIS, WHY DIDN’T BSP PROMULGATE
COMPULSORY HEDGING ON PUBLIC SERVICE MONOPOLIES’ FOREIGN LOANS?
HAD BSP DONE SO, IT COULD HAVE AVOIDED HEAVY EXCHANGE LOSSES
THAT REQUIRED INCREASES IN UTILITY AND TOLL ROAD RATES
THAT ARE IN EFFECT TO THIS DAY

Since decades ago, the country’s central bank has provided hedging on foreign obligations of companies that sought its protection. For example, the old Central Bank of the Philippines had granted continuing HEDGING or FORWARD COVER to my then employer, the local subsidiary of one of the biggest oil companies in the United States. The hedging fee was at the very affordable rate of THREE-FOURTHS of ONE PERCENT (0.75%). When the central bank suddenly instituted the floating exchange rate on February 21, 1970, the forward cover saved our company from sudden collapse from staggering exchange losses which, without hedging, would have been incurred on dollar-denominated obligations to foreign creditors.

In contrast, Maynilad Water Services, Inc., one of the two concessionaires of the privatized MWSS operations, did not obtain forward cover on its $800-million foreign loan assumed from MWSS. Consequently, it suffered some P20-BILLION EXCHANGE LOSS that required whopping increase in water rates--which was out-of-line and unjustifiable because its counterpart, Manila Water, the other MWSS concessionaire, did not incur such catastrophic exchange loss on its relatively measly $80-million foreign loan similarly assumed from MWSS. Clearly, the need for fantastic rate increase was a product of Maynilad’s MISMANAGEMENT, but it was also the poison fruit of POOR GOVERNANCE or contributory negligence by government offices that have something to do with Maynilad’s foreign loan--first and foremost of which was BANGKO SENTRAL NG PILIPINAS which previously approved the loan, and whose primary function was precisely to prevent foreign loan EXCHANGE LOSSES, the
root of what its primary mission aims to prevent: INFLATION on goods and services.

BSP’s failure to institute mandatory hedging on foreign loans of Maynilad, Manila Water, Meralco, NAPOCOR, skyway and expressway operators, other big electric power producers nationwide, etc. has resulted in permanent increase in their service rates to the public. In effect, this is INFLATION to their countless Filipino customers which could have been PREVENTED or minimized--but was NOT--due merely to the negligence or FAULT of BSP.


FUNDAMENTAL DEFECTS OF THE PRESENT
PUBLIC SERVICE MONOPOLIES’ AUTOMATIC RATE ADJUSTMENT
BASED ON EXCHANGE RATE FLUCTUATIONS

Worse, instead of the Filipino consuming and motoring public being charged, as part of SERVICE RATES, annual fixed HEDGING FEES--they are charged rates that FLUCTUATE according to exchange rate movements. However, while the AUTOMATIC DOWNWARD RATE ADJUSTMENT will prevent FUTURE rate overcharging, IT WILL NOT CORRECT PAST RATE OVERCHARGES because it has prospective but not retroactive effect. Moreover, the automatic downward rate adjustment is implemented on electric power rates but not on skyway and expressway toll rates.

For instance, previous service rates were automatically calculated and charged on the basis of past actual P56:$1 exchange rate. Under the present exchange rate of roughly P47:$1, on still outstanding foreign loans that can now be paid at this lower rate, there was past exchange loss OVERCHARGING of P9 to the dollar (P56 old vs. P47 present peso-to-dollar exchange rate). This past overcharging is not corrected by the downward adjustment in service rates. In the case of Napocor, for years 2005 and 2006 alone, the over-recovery amounted to P65 BILLION and P90 BILLION, respectively, or a total of P155 BILLION! (Conrado R. Banal III, “Your cheating hurts,” Philippine Daily Inquirer, June 26, 2007, page B5).

The LACK of adequate CORRECTION of past service rate OVERCHARGING whenever the local currency APPRECIATES, and, conversely, the disasters from ACTUAL exchange losses on unhedged foreign loans whenever the peso drastically DEPRECIATES--inescapably mean that the present system of AUTOMATIC RATE ADJUSTMENT, the mechanism for addressing the impact of exchange rate fluctuations on public service companies, is INTOLERABLY DEFECTIVE whether the peso value goes up or down. The intolerable defect, however, can be avoided or minimized if BSP will mandate HEDGING on foreign loans. Under it, the cost needed to be recovered through inclusion in service rates will be the fixed and bearable annual HEDGING FEES, not unlimited and unbearable ACTUAL EXCHANGE LOSSES from unhedged foreign loans that in the past already caused the collapse of the old Maynilad--yet it seems BSP could still not learn any lesson from it, and therefore has to be told about it.



RECOMMENDATIONS AND REQUESTS FOR PROPER ACTION

Thus, I reiterate my recommendations under my July 5, 2007 email to BSP and others, to the effect that appropriate government authorities should put an end to monumental POOR GOVERNANCE in the form of gross RISK MISMANAGEMENT. The recommendations include the herein restated BSP's mandating of exchange rate HEDGING on FOREIGN LOANS--to avoid business EXCHANGE LOSSES that breed unwarranted INFLATION to millions upon millions of Filipinos.

As maybe observed from my emails, the then BSP Governors and BSP Monetary Board members treated as TRIVIAL MATTERS the crucial HIGH-INTEREST-RATE FALLACIES and ALTERNATIVES that I repeatedly propounded to them, dismissing my comments and recommendations as run-of-the-mill issues that did not merit their valuable time, attention, and effort--thereby fully delegating the disposition of my letters to lower level BSP officials, including the now BSP GOVERNOR, who, unfortunately, DID NOT DELIVER THE GOODS, so to speak, on the responsibility entrusted to them.

As revealed in my past emails, the result was more than THREE-YEAR DELAY in the IMPLEMENTATION of my repeatedly recommended LESS DISASTROUS ALTERNATIVES (especially BSP's own anti-speculation regulation under its Circular No. 138 dated July 31, 1997)--the badly needed relief that could have saved many borrowers during the Asian crisis, but did not, because the implementation came too late only in August 2001 and March 2003 when BSP finally saw the light--which delay caused PROLONGED UNNECESSARY HIGH INTEREST RATES that massacred borrowers due merely to the fault, negligence, and perhaps INCOMPETENCE of past BSP GOVERNORS and MONETARY BOARD MEMBERS.


Therefore, with all due respect to them, I humbly request and implore the present BSP GOVERNOR and MONETARY BOARD MEMBERS to WORK HARDER--because BSP has not yet done all that it has to do as expounded on in my emails; get to the bottom of PROBLEMS and SOLUTIONS instead of simply relying on one-page summary reports during Monetary Board meetings--to prevent the repetition of BSP's DISGRACEFUL INABILITY to see that what I recommended to it way back in April 1998 was in effect its OWN CIRCULAR No. 138, which it condemned as a CURE WORSE THAN THE DISEASE in its June 30, 1999 letter to me, then belatedly recognized it and successfully implemented starting August 2001 but not when needed most during the Asian crisis (as revealed in my 4th and 5th emails); thoroughly STUDY their JOB and DO it WELL; AVOID the apparently misguided, harmful, and woefully deficient PERFORMANCE of their PREDECESSORS during and immediately after the Asian crisis (as presented
and substantiated in my past emails and published book Puzzlers/Economic Sting); and ACT wisely and decisively on PROBLEMS and SOLUTIONS presented to them, such as through either ACCEPTING or REFUTING the validity and propriety of my herein recommended compulsory HEDGING on foreign loans, which--because of the gravity of its impact on countless Filipinos--deserve the attention of no less than the BSP Governor and Monetary Board Members.


Going the extra mile in their job through doing all of the above requested things, the present BSP Governor and Monetary Board members owe to the roughly 90 MILLION FILIPINOS, who are fed up with the GOVERNMENT's inefficiency in its operations, apathy to the miseries of the people, inability to contain rampant corruption, and LACK OF PROPER ACTION on problems under its jurisdiction--as perfectly exemplified by BSP's INACTION on the following: the twice advertised BANKING CARTEL, the still existing lack of drastically increased PENALTIES to violators of BSP Circular No. 138 and its subsequent amendments (subject of ANNEX B of my 5th email), the still prevailing LACK OF HEDGING on foreign loans of public service monopolies, and perhaps other pending matters that maybe revealed if only the Commission on Audit will conduct a no-nonsense management audit of BSP.



MARCELO L. TECSON

San Miguel, Bulacan
11:00 AM, October 13, 2008


Cc through separate emails:
Selected executive & legislative government officials,
COA Commissioners, Assistant Commissioners, & Directors
Selected BSP management officials,
Selected members of media and academe,
professional & think-tank organizations,
civil society groups, concerned citizens, etc.