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The Philippines' Camacho: "Less Contagion Effect"


International investors are exhibiting renewed appetite for emerging-market debt, drawn by what borrowers say are healthier risks than before the Asian financial meltdown of 1997-98. Greater transparency, tighter control by financial regulators, and more prudent borrowing by governments have greatly reduced the probability of contagion spreading the next time an emerging country encounters debt difficulties.

Philippines Finance Secretary Jose Isidro Camacho, who chaired a meeting in August in Manila of Finance Ministers from the Association of South East Asian Nations, spoke recently with Correspondent Frederik Balfour about the improved climate for investing in emerging markets. Edited excerpts of their conversation follow. Note: This is an extended, online-only version of the interview that appears in the September 29, 2003 issue of BusinessWeek's International editions.

Q: How would you compare contagion among emerging markets today with a few years ago?

A: There has been an improvement. There is less contagion effect than we might have seen in the past. I think because there is more and better information available to investors allowing them to make distinctions between different emerging market credits.

This allows a more discriminating ability by investors because of more transparency.

A more important reason there is less contagion is that the economies have learned from their 1997 experience. Many reforms have been undertaken in many economies to strengthen banking sectors and work on nonperforming loans, and also at multilateral institutions. The International Monetary Fund, World Bank, and Asian Development Bank are more enlightened. Credit goes to IMF Managing Director Horst K?hler and the view of the IMF. There's a recognition that different situations require different formulas. The one-size-fits-all theory is not something he subscribes to.

On the Philippines side, one thing we have focused on is greater transparency with information and events. We have very proactive investor-relations functions that we hope will work to our advantage in terms of investor decisions.

I just got back from an international road show in London, Paris, and Singapore. The impression I got from the people there is that they are satisfied with our fiscal numbers, and there's a general feeling of satisfaction with the economic development of the country.

Q: Are emerging markets less dependent on foreign borrowing?

A: In the Philippines [government borrowing] is about 52% domestic, 48% foreign, and next year this will increase to 70% domestic, 30% foreign. That is really a reflection of the massive domestic liquidity we have. I believe that will be the experience of other countries too, though each one has a different level of capital-market development.

Regionally, there was a high reliance on foreign debt in the 1990s. Now there's a general move to create deeper and more liquid domestic capital markets for governments and private companies.

The Philippines originally expected to need $2.4 billion in foreign borrowing for fiscal funding in 2003, which we scaled back to $1.9 billion because of a better fiscal performance and a very successful domestic issuance where we could raise significantly more than we anticipated. We raised over 70 billion pesos, compared with a planned 15 billion peso offering. This is good because it gives us a lot of flexibility in timing of financing.

Q: What examples can you give that show contagion is less severe than before?

A: There have been some crises in emerging markets in the past two and half years. Argentina's problems, as well as Brazil late last year. Normally with events like those occurring, other emerging markets would be shut out from raising money, but we were not shut out. We have continued to have good access to markets. This is because of [better] information available to investors that they can make distinctions between markets. They have higher comfort levels because they feel they're informed if it's good news or bad news.

For example in the Philippines, our spreads have tightened, even compared with the period before the attempted military mutiny [in late July when spreads spiked for a short period] because of improving economic numbers in the Philippines that investors can digest and appreciate.

Q: Have emerging markets managed their debt maturities better?

A: Right after the Asian financial crisis of 1997, maturities shortened because of risk aversion. But since then, as economies have moved beyond the damaging effects of crisis, we have been able to issue longer and longer maturities. In the Philippines, we continue to lengthen our average maturities, which for the public sector is more than 18 years on public debt and more than 10 years for private borrowing. This mitigates the risk of our high level of debt relative to our economy [about 54% at the end of 2002]. We have also made a conscious effort to avoid bunching of maturities in any one year.

Q: What about Asian bond market initiatives?

A: There are several coordinated efforts to create an Asian bond market. It exists but is not as well developed as we want it to be. For example, there are some non-Singaporean companies issuing in Singapore dollars, but things are still immature. That's why there's a big push by international governments and multilaterals to pursue measures to accelerate growth of Asian bond market.

It will provide people more flexibility in terms of financing and investment options. There are really a lot of Asian savings, as reflected in our international reserves, that are being invested in the West. The idea is to have a significant amount of those savings channeled to financing the needs of Asia.


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