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By Al Labita

Monetary authorities may not admit it, but they appear edgy over how to tame a financial market which has gone awry.

Inflation, which measures the nation’s economic health, has surged to 4.5% in May, the fastest since November 2011.
Inflation, a key component in formulating monetary policy, was seen averaging 4.3 percent this year and by 3.4 percent for next year.

That, in turn, raised a red flag on whether it would trigger a rise in interest rates as they affect business transactions.
And as many expected, the Bangko Sentral Ng Pilipinas (BSP) turned to so-called special drawing rights (SDRs), jacking up the interest rates it pays to depositors from two to 2.25 percent per annum.

As everyone knows, SDRs are where the rich and the famous park their excess funds amounting to billions and get paid for it.

Risks to instability
This was meant to mop up excess liquidity in the system by making the SDRs attractive to depositors.
Usually, funds invested in SDAs are effectively taken out of the system and kept in the vaults of the central bank.

No matter the hefty costs SDAs carry, the BSP was willing to absorb rather than risk instability in an economy that has proven weaker than expected in the first three months.

BSP data showed that total deposits in the special facility, which at their peak were more than P2 trillion early last year, retreated to just P1.2 trillion as of mid-May this year.

At the current level of deposits, the BSP’s interest payables to depositors total around P27 billion, a big number seen to grow even bigger as the central bank endeavors to attract more funds to its vaults.

The BSP has been unprofitable as a government corporation for four consecutive years already, owing to its huge SDA-driven interest expenses, based on records.

In 2012, for instance, the BSP incurred a net loss of P95.38 billion. This improved to a net loss of only P24.26 billion the following year, when it adopted measures that encouraged SDA depositors to make placements elsewhere, reducing the central bank’s interest expenses in the process.

Because the central bank’s mandate to keep prices stable costs a lot of money to pursue, the monetary authorities seek appropriate amendments to its charter that would allow the national government to raise its paid-up capital contribution to Php150 billion.

Analysts lauded the BSP for its decision raising SDA’s rates despite the heavy costs it entails on its finances.
They say the hike was a commendable move, as it sends a clear signal that BSP’s interest expenses, which naturally result from higher policy rates, take a low rank in the hierarchy of the BSP’s policy priorities.

The BSP’s decision to hike the SDA also demonstrated that the below-consensus GDP growth print for the first quarter of 2014 was not going to get in the way of carrying out their price-stability mandate, other pundits say.

While it was important to keep the BSP loss-free and operationally sound, the mandate to keep prices stable throughout the US$250-billion economy always comes out a priority.

While the BSP has raised the rates on SDRs, it has kept steady key policy rates at 3.5 percent for the overnight borrowing or reverse repurchase (RRP) facility and 5.5 percent for the overnight lending or repurchase (RP) facility, ostensibly taking into account the plight of ordinary borrowers.

Ray Refundo: Helping Pinoy Freelancers Go Global

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“The right time to do what is right is always now,” says Ray Edison Refundo, co-founder and CEO of Qwikwire, a company designed to help simplify selling and billing for freelancers and Qwikwire merchants.

As a company specializing in cross-border e-commerce, Qwikwire provides people with no bank accounts or credit cards a solution in accepting payments for online transactions. The company’s goal is help Filipino freelancers participate in global e-commerce.

Refundo knows that being a freelancer in the Philippines can be frustrating. Filipino freelancers often use US-based services like Freelancer and oDesk. Based on his personal experience working on an online project, he had a hard time receiving payment online as he did not have a bank account and a credit card. International payment site PayPal requires those two item in order to receive payments.

Based on recent figures, only around 2.5 million people in the Philippines own either a Visa credit, debit, or prepaid card — under ten percent of the 38 million in the 25 to 54 age range. Seeing an opportunity, Ray called on his friends Scott Yu and Jason Foldi from the US, and together with another friend, Bing Tan, they set out to create a company that would enable more freelancers to reach the global marketplace.

Refundo and his partners envisioned Qwikwire to operate this way: service providers could sign-up in minutes and receive a payment within two hours after it is sent. PayPal takes two weeks in the Philippines to set up. The freelancers bill clients by simply sending a link, and clients then log onto Qwikwire to pay.

The money is then deposited in the freelancer’s bank account. If the freelancer doesn’t have one, an on-location pickup option will be made available. The bank account is optional, although users are still required to present their identification documents and a transaction code generated by Qwikwire, in accordance with local money laundering regulations.

Utilizing search engine data and social media results, Qwikwire’s system validates user identification right away, giving them access to a merchant account in their target market far more quickly than can be done through traditional channels.

Being a financial analyst also helps Refundo determine what works best for users of Qwikwire, whether freelancer or paying client. He holds a degree in Finance and Economics from San Jose State University in California.

His experience in doing finance-related work, such as tax preparation and market research taught him what to do and not to do with his present business ventures.

Refundo looks forward to a time when more options will be open to Filipino freelancers, as he helps develop more technologies to enable faster and more efficient transfer of payment from anywhere in the globe.

In the end, it’s all about empowering Filipino freelancers and giving them more freedom and choices in doing online business. Local professionals who find the typical office job too limiting now have an option to make a livelihood by getting into the global market.

The Travails of MSMEs (part 1)

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by Miriam Tan-Fabian

MSME’s relevant contributions to the economy

MSMEs or micro, small, and medium enterprises often have it hard even if these enterprises are considered the “backbone and the lifeblood of the economy” within ASEAN countries. These enterprises, depending on which ASEAN country you are looking at are firms are generally categorized either by number of employees, asset size, or revenue. In Cambodia, micro enterprises are defined as having less than 11 employees and less than 50,000 riel (Cambodia’s currency) in revenue. In the Philippines, micro enterprises have less than 20 employees and have assets of less than Php 3M versus Indonesia’s 500M and lower and revenues of 300M or lower in rupiah, Indonesia’s local currency.

These MSMEs account for a significant bulk of the GDP. For Indonesia, for example, the contribution of MSMEs lie anywhere from 56.53% to 60% of the country’s total GDP. Gross Domestic Product or GDP is the monetary value of all the finished goods and services produced within a country’s borders in a given time period, and is used as a common metric to measure the health of a country’s economy. Generally, the higher the country’s GDP, the better the economy and the lower the GDP, the weaker the economy.

Aside from a significant share of a country’s GDP, MSMEs also account for majority of the total number of establishments in a country. In Myanmar, a developing country, MSMEs account for 90 percent of the industrial sector and 99 percent of the manufacturing sector. Similarly, in Japan, a developed country and economic powerhouse, 99.4% of manufacturing firms are small and medium-sized firms, which employ three quarters (75.1%) of the manufacturing industry’s employees. Comparably, in the Philippines, the MSME sector accounted for 99.6% of total establishments and contributed 61.2% of the country’s total employment.
Thus, MSMEs contributes significantly to the country’s well-being, and anything to do with MSMEs will be significant.

It isn’t easy being an MSME

Imagine that you wanted to formally put up a small eatery, one example of an MSME. From the get go, you will already be facing many challenges, issues, and concerns just to jumpstart the eatery. There is the paperwork, certifications, and permits; a steady stream of predictable funds, the staff, and the location, among others. It should therefore come to no surprise why, despite the big numbers of MSMEs in all of the ASEAN countries, they die out naturally within the first year they are established, succumbing to these difficulties.

Moreover, despite all the contributions that MSMEs provide the local economy and the presence of government agencies and policies for MSMEs, across the ASEAN, MSMEs continue to be vulnerable to a list of challenges, issues, and concerns that read like a bad case of symptoms of someone really sick, many of these symptoms are repeatedly mentioned across the countries of the ASEAN region.

Several obstacles to hurdle

Financial support
One of the major concerns is the financial support. More often than not, if you want to put up your own business, you will need to raise the initial capital on your own. Most big banks won’t touch you with a ten-foot pole because of a whole slew of reasons. The banks know little about funding MSMEs, MSMEs are considered too risky to provide loans for especially if the bank requires credit information, and the bank’s products are mismatched with the needs and conditions of MSMEs.

On the other hand, on your part, you might not also like dealing with banks because they require some collateral or a good track record, and unfortunately, you have neither of both. I find the track record condition unreasonable. If it is your first time to put up a business, you would naturally have no track record, so this condition alone is discouraging for anyone who’d consider loaning from a bank. Worse, commercial banks charge high interest rates of 10 to 18% per year for top banks. This means that for every Php 100,000 pesos you loan, that’s already Php 10,000 to Php 18,000 for the bank for every year until you finish off paying the bank.

Discrimination and preference by size or sector
There is also some discrimination on the part of banks, they prefer larger enterprises who are given more favorable interest rates, and certain sectors like agriculture (farming) and hospitality enjoy the highest loans. Consequently, if you are a micro or small enterprise that is neither into the agriculture or hospitality sector, while your size already makes you vulnerable compared to larger enterprises, your lower access to funds exacerbates your financial concerns.

Poor capability, skills, and lack of trainings
Another issue was the capabilities of micro and small enterprises. Many micro and small enterprises do not have sufficient know how, technical, and management skills. Thus, MSMEs are hard pressed to produce good business or marketing plans for financing. Most of these enterprises also have poor and sub-standard accounting systems because of self-operated accounting practices, the lack of historical accounting records, and weak financial reporting. While most skills remain poor, the lack of trainings and professional development opportunities further weakens the capabilities of MSMEs, thus lowering competitiveness and productivity.

With limited management and financial capabilities, many MSMEs are unable to quickly respond to both the local and foreign markets. MSMEs have a low ability to meet the threats of local and global competition because of their ignorance of information on market access and business environment; failure to attain scale economies needed to produce quality goods and services; and the sector’s laid-back approach to seeking new markets and responding to market needs.

Poor infrastructure and logistics
Yet another issue which MSMEs have little control over is poor infrastructure. This was one key issue identified by potential investors as a turn off when investing in the Philippines. They specifically identified the dilapidated roads and the horrible traffic in the CALABARZON area where some of the country’s economic zones are located.

Added to these woes is the poor logistics such as the lack of charter flights needed for cargo shipments, lack of direct shipping and air routes or linkages to export processing zones, inadequate cargo hub operations, and the high cost of freight and cargo handling services. These signs of inadequate or poor logistics lead to increased production costs.

The Philippines though is not alone in this issue. Laos, a land-locked country of a mere 6M people have to contend with the country’s largely mountainous terrain, a poor network of market access roads, together with cross-border trade impediments with neighboring countries, has meant high transport costs and fragmented markets. The generally poor condition of the road network results in high rates of damage to both trucks and cargo. (to be continued)

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