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Proposed RP-US FTA may center on telecom and financial sectors

Philippine Institute of Development Studies
Development Research News, July-August 2005

Proposed RP-US FTA may center on telecom and financial sectors

As the world becomes smaller each day because of globalization, trade and business between or among countries have become more intense worldwide. Hence, products that were before appreciated or acquired only by certain nations are now regular commodities elsewhere around the globe.

New generation of free trade agreements (FTAs) have recently evolved. Aside from trade facilitation and liberalization, diverse agenda and other enhanced features of cooperation have been incorporated in the establishment of FTAs.

As early as the late 1980s, the Philippines shifted its strategy from a protectionist regime to a relatively open economy, participating in three occasions of regional cooperation, the Asia-Pacific Economic Cooperation (APEC) in 1989, the ASEAN Free Trade Area (AFTA) in 1992 and the World Trade Organization in 1995. The rise of Asian bilateralism has only prompted the Philippines to jump into the bandwagon.

To date, the Philippines has begun negotiating or preparing to negotiate FTAs with a number of countries. Within the year or early next year, it hopes to conclude one with Japan. It is also preparing for an FTA with the United States (US). The question is: how ready is the Philippines for an FTA with the US? And what are the possible inclusions in this agreement that would prove to be beneficial for the Philippines?

In a recent round table discussion sponsored by the Philippine Institute for Development Studies (PIDS) titled "Preparing for services negotiations for the proposed RP-US FTA,” the service industries - specifically the telecommunication and the finance sectors -were tackled as two of the crucial areas where the Philippines can have the best potential if the FTA agreement with the US pushes through.

Why the US and why the services sectors?

The US is the biggest trading partner and source of technology for the Philippines. In developing countries, the services sector is among the fastestgrowing industries that have already outpaced other traditional industries.

The telecommuting work
For thousands of Filipinos nowadays, work means reporting to a number of contact centers mostly owned by American companies that have decided to put up their local branches in the Philippines. These foreign firms chose the Philippines primarily because of the strength in English of its population and the relatively low labor cost.

Clearly, the above reason spells out a big advantage for the Philippines in the telecommunication sector, something that may be a plus factor when talks for the RPUS FTA finally commence.

However, Virgilio Peña, chairman of the Commission of Information and Communication Technology, says that for the country to be truly successful in its FTA with the US, the Philippines must first address the present digital divide besetting the Philippines. This means providing access to internet connection to 85 million population and, more importantly, making it affordable to all.

As a point of comparison, Peña notes that in Korea, 80 percent of the total population is connected through broadband. He adds that in a few years, the said country is targeting a 100 percent connection, even exceeding Singapore which has an 80 percent internet connection.

In stark contrast to the above figures is the three percent internet connection in the country right now. And these internet connections are not even wholly broadband but mixtures of dial-up, DSL and broadband connection.

Private sector support
Ideally, the connectivity of the more than 41,000 barangays all over the country should be managed and operated by the private sector to give it a revenue-generating component. The private sector taking the lead and the government only in the background would give the industry more capacity for growth and make it attractive to foreign investors. The private sector would then determine the type of technology applicable to the barangays, such as wireless, broadband or satellite, depending on the location and availability of the technology.

Most importantly, these community access points must carry one brand name identical to all barangays in the country. The private sector should also develop the traffic or application and content (or available services) for the community centers to succeed.

Peña cites as example the SMS services offered by cellphone companies and goes on to say that barangay internet centers could offer government services. "There must be e-learning and e-commerce involved in here," he adds.

In the barangays, an e-government service would allow basic government services to be available in a click to even the farthest region in the Philippines without the need for people to personally go to the local or regional offices. The services would be available within the community centers in the barangays, thereby cutting costs and time for everyone.

Bridging the digital divide
"Aim high and go for it," Peña says in response to the challenge of attaining a broad distribution of computers and, finally, internet connection for the entire Philippines.

He makes the following projections:
- By 2010, all the remaining barangays will be provided with computers; and
- By 2015, broadband connections will be available to all barangays in the country.

For the provision of computers to the 45,000 schools in the country- 4,000 of which are high schools and the remaining are elementary schools-Peña makes the following projections:
- By 2008, all high schools will be computerized, and
- By 2010, all grade schools will be computerized.

In order to coordinate all these projections and work to be done, Peña bats for the creation of a specific department for ICT (a bill on this is, in fact, pending in Congress.) He notes that while most countries have created a specific department for their information and communication technology, the Philippines still has only a commission to oversee the work and development of the technology.

At the same time, he emphasizes the importance for the Philippines to develop itself as a worldclass ICT provider in order to take advantage, among others, of the many outsourcing jobs available. Peña adds that they are projecting 100,000 jobs in the next six years from contact centers, animation services and software services requiring the skills of Filipinos.

Telecommunication concerns
Undoubtedly, the US is the largest source of outsource market for the Philippines. Although there may be issues in some sectors in the US which frown upon outsourcing because it keeps the jobs out from the Americans, according to Rainerio Borja, chairman of the contact center association of the Philippines, it would be very hard to take off the outsourcing job from the other countries, which includes the Philippines, because it would mean taking away all the perks and cheaper prices the American people are currently experiencing. The American people will be in the losing end and would stand to suffer in return.

Borja also urges the Philippine government to fully support the development of the human resources needed through trainings and education. As it is, there are more demands than qualified people for the increasing numbers of contact centers in the country.

“We have participated in conventions abroad and have intensely promoted the country. Many are indeed interested but the problem now is that the talent pool is shallow,” he said.

An even primary concern in the industry is the data security and privacy, not only of the individual but the companies as well. The weakness of the country in the aspect of Intellectual Property Rights is a serious issue that should be given immediate and solid action by the government.

Borja adds that they would appreciate the government crafting a law in the near future regarding the matter of data security. In the meantime, however, the private associations tackle the problems as they come. Moreover, the different contact centers practice self-regulation and implement strict and heavy internal audit among their companies. In short, they police themselves.

Constitutional issues in ownership and procurement provisions are again another area of contention in the Philippines. These areas need to be addressed immediately for the outsource opportunities to be truly successful in the Philippines. Since foreign companies are investing huge amounts of money in the business, they tend to want control of the whole establishment. However, Philippine laws still allow only 60 percent ownership for foreign entities, with Filipinos holding the top positions.

Concerns and prospects in the financial services sector
Millions of Filipinos have found work outside of the country and their remittances have undeniably put the country’s economy afloat. Dubbed the Bagong Bayani, overseas Filipino workers (OFWs) regularly send their hard-earned money to their loved ones back home. Aside from the traditional bank transactions, remittances are now being sent through money orders found almost everywhere in the world, and just very recently, also through cellphones.

There are indeed huge potentials existing for banks in the country to come up with new services and products that would handle the increasing demand for remittance transactions of our OFWs in the coming years. However, since the start of the financial services liberalization a few years ago, bank services including those for remittances, have been aggressively contested by foreign banks in the country. There are also a number of money order companies doing said business.

In the last 11 years, a number of major financial reforms have taken place in the country to make it more responsive and adaptable to the changing times. In 1993, the Bangko Sentral ng Pilipinas (BSP) Charter created an independent central monetary authority and shortly a year after, under Republic Act 7721, restrictions on the entry of foreign banks were lifted.

Under RA 8366 enacted in 1997, foreign equity investment in investment houses was also liberalized while RA 8556 enacted in 1999 liberalized foreign equity investment in financing companies. Following a year after in 2000, the Securities Regulation Code (SRC) was enacted and in the same year, banking laws were attuned with global developments.

The Anti-Money Laundering Law was likewise enacted in 2001 and in 2002, the Special Purpose Vehicles Act (SPVA) was established. There were also structural improvements and better prudential regulation that were set for the local banks in the country. A shift from consolidated and risk-based supervision and improved corporate governance and disclosure were also imposed on the local banking sectors.

After the financial liberalization, a number of foreign banks have operated their local branches in the Philippines. This, in turn, has contributed positively to the local financial sector, in terms of, among others, the enhancement of banking products, introduction of new technologies, increase in competition, extension of loans, facilitation of foreign investments and provision of employment in the country.

Just like the telecommunication industry, the financial sector, according to Diwa Guinigundo, assistant governor in charge of research at the BSP, is another area which may be included in a possible FTA with the US.

Guinigundo, however, noted that the Philippines should be prepared when it enters into negotiation on an FTA, whether with the US or any other country. Is the country prepared to undertake binding commitments in an FTA, he asked. While unilateral liberalization efforts in the banking system may allow the BSP to engage in discussions on FTAs, the FTA, he said, should provide authorities with the flexibility to undertake such commitments.

Regulations affecting financial services

A. Regulations Governing Commercial Presence

Limits on entry of Foreign Banks (RA Nos. 8791 and 7721)
• Investment is permitted up to 100% of the voting stock of only 1 existing domestic bank within 7 years of the effectivity of the General Banking Law and subject to the provisions of R.A. No. 7721 liberalizing entry of foreign banks
• Acquisition is allowed up to 60% of the voting stock of a new banking subsidiary incorporated under Philippine laws
• Foreign bank branches with full banking authority may open 6 additional branches in the Philippines
• Must be ranked among top 150 banks in the world; and
• Control of 70% of the resources of the Philippine banking system should at all times be held by banks that are majority-owned by Filipinos

Limits on Entry of Foreign Insurance Companies (DoF Department Order No. 100-94)
• Acceptable companies must be among top 200 in the world or top 10 in the country of origin and must have been in existence for at least 10 years and widely-owned or publicly-listed

Limits on entry of other financial institutions (RA Nos. 8366 and 8556 and PD No. 114)
• Equity participation in other financial institutions are subject to different foreign ownership restrictions:
> Financial institutions
* Investment house - 60 %
* Financing company - 60 %
* Pawnshop
- single proprietorship - Limited to Filipinos only
- partnership/corporation - 30% only
* Lending Investor
- single proprietorship - limited to Filipinos only
- partnership and cooperation - 40 %

B. Restrictions to trade in finacial services
Requirements for securities holdings (RA no. 8799)
• entities proposing to issue bonds must: file registration statement with SEC obtain credit rating on issue from reputable rating agency
• underwriters of securities must seek pre-approval of underwriting agreements

A number of safety provisions included in the GATS can also be included in the FTA framework, he added, such as:
- Liberalization terms must be a mutually advantageous process;
- National policy objective and the level of development of the country must be protected;
- Authorities shall not be prevented from ensuring the integrity and stability of the financial system and external accounts;
- Greater market access should be given to sectors and modes of supply of export interest to developing countries; and
- Technical cooperation and assistance should be in place.

How about an FTA specifically with the US? What can we expect from it?

Undeniably, the expansion in trade will promote growth and development. At the same time, however, Guinigundo cautioned that rapid liberalization can, in a way, also create instability in the financial system, if it is not rendered strong and prepared accordingly, that would result in the undermining of the effectiveness of the monetary policy.

That is why it is important to weigh carefully both the benefits and risks of further opening up the country’s financial services sector in crafting an FTA between the Philippines and the US.

Guinigundo cited some of the benefits in the advent of an FTA between the US and the Philippines, to wit:
- Funds and expertise to purchase and manage/dispose Nonperforming Assets (NPAs) would be made available;
- Pressure will be put on authorities to improve supervisory oversight; and
- Customers would be given better and wider range of products and services.

On the other hand, he also cited some of the risks:
- Threat of systematic risks is present if foreign financial service providers are not monitored and supervised appropriately, and
- Competition could result in decline in profits and lead to financial distress in domestic financial service providers.

To be sure, Guinigundo asserts that with or without an FTA, efforts should be sustained by the Philippine banking officials to ensure the continuous soundness of the Philippine banking system. After all, even without the prospect of an FTA negotiation, the Philippines has to address all the pending problems that still hound the country’s financial sector. For one, the country has a high level of nonperforming loans (NPLs). There is also an inadequate legal and regulatory framework for bank supervision and a poor capital market development.

Guinigundo said that in addressing the problems, the country should implement the SPVA, work for the further development of the capital market and work on the amendment of the charter of the BSP.

The BSP, of course, has already implemented a number of initiatives in support of the strengthening of the Philippine financial sector. It has launched the Philippine Payment System (PhilPASS), supported the establishment of a fixed income exchange and proposed the creation of a credit information bureau.

There are also a number of proposed legislations in support of the financial sector which must seriously be considered:
- Credit reporting bill,
- Revised investment company act,
- Preneed code,
- Corporate recovery act, and
- Personal equity retirement account (PERA) Bill.

Finally, Guinigundo reiteratd that in order for an FTA, especially one with the US, to be fruitful for the country, much preparation needs to be done for it is one crucial economic decision that the country will make and it has to be ready for it. DRN


 source: PIDS