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A New Broom Sweeps Philippine Banking...;...As Ramos Takes Aim At The Oligarchy


International Spotlight On The Philippines

A NEW BROOM SWEEPS PHILIPPINE BANKING...;...AS RAMOS TAKES AIM AT THE OLIGARCHY

Romeo Canlas, a mechanic in his late 40s, has discovered the hard way just how strong a cartel dominates the Philippine banking system. Since he started saving to pay his son's tuition bills, the interest rate paid by Bank of the Philippine Islands has amounted to about 4% a year--despite double-digit inflation. "When I started saving, I was sure I'd have enough," recalls Canlas, staring in disbelief at his passbook. "But the tuition went up, and the interest [on my savings] didn't."

For decades, a group of elite families has dominated the Filipino banking system and other industries. They have benefited mightily from government protectionism and political connections, getting rich at the expense of people such as Canlas. Most of the nation's 26 commercial banks were more interested in funding affiliated businesses, such as property development and agriculture, than in paying a decent rate of return to depositors.

"SHOT ACROSS THE BOW." Now those days seem numbered. President Fidel V. Ramos has vowed to break up the family monopolies and end their closed markets. With the approval this summer of banking-reform legislation, government authorities are now considering applications from several major foreign banks to open Philippine operations. Ramos also has attacked monopolies in shipping and telecommunications. His next target is likely to be insurance. "Ramos has put a shot across the bow," says David Bouckley, head of institutional sales for Philippine Asia Equity Inc. in Manila.

If the battle over banking reform is any indication, Ramos may succeed in ending the oligarchy's gravy train. This summer, he was able to push a bill through Congress clearing the way for the entry of up to 10 new foreign banks. Chase Manhattan, Deutsche Bank, Bank of Tokyo, Fuji Bank, American Express Bank International, and Bankers Trust are among the 20 banks that have expressed interest. Winners will have to commit about $8 million and be restricted to three branches. But their presence, however limited, will generate much-needed competition. "This is definitely a step in the right direction," says Scott Latham, vice-president for emerging markets at Bear, Stearns & Co.

Local banks claim they aren't threatened by foreigners. With reforms, though, analysts say spreads will narrow and mergers will increase. Says Topper Coronel, executive director of the Bankers Association of the Philippines: "We view [reforms] with positive ap-

prehension."

The ultimate goal is a system that channels savings toward nation-building. Fed up with banks that offer negative real-savings rates, millions of Filipinos have long spirited their money out of the country or stashed it under their mattresses. The country's savings rate is only 16%, compared with Malaysia's 34% and Thailand's 33%. So it's no coincidence that the Philippines has lagged in economic development, says Alex Magno, political scientist at the University of the Philippines. "Our banking system has failed to accomplish its twin social functions of mobilizing savings and providing loans to the most effective users of capital."

The banking reforms are part of Ramos' attempt to break up the cartels that benefited under former presidents Ferdinand Marcos and Corazon Aquino. Now that the wall around banking has cracked, it seems only a matter of time before other industries follow. Insurance may be the first, as foreigners will soon be allowed to own 100% of local companies. Other Ramos initiatives to perk up the economy also are on track. For instance, nearly a dozen companies have entered the telecommunications business, previously the monopoly of the powerful Cojuangco family. In early September, an initial public offering of Petron Corp., the former state-owned oil company, broke local stock-market records.

While they haven't thrown in the towel, the controlling families aren't likely to mount much of a fight. "They see the writing on the wall," says P.J. Garcia, an economist at the Center for Research & Communication, a Manila think tank. "There is a growing realization that you have to be able to compete in a borderless world."

The families also may be wondering whether it is wise to take on President Ramos. Banking reform passed despite their furious lobbying. The fight has left Ramos politically strong heading into congressional elections next spring. While the opposition once dominated Congress, Ramos has been able to build coalitions that put the legislature under his control. That should allow him to move forward with more reforms.EDITED BY BRUCE EINHORN By Teresa Albor in Manila


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