Statement by Olivier Bourges at the Board meeting of March 24, 1998

International Bank for Reconstruction and Development 87662 International Development Association International Finance Corporation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY CONFIDENTIAL EDS98-125 March 24, 1998 Board Meeting of March 24, 1998 Statement by Olivier Bourges The Philippines - CAS Progress Report 1 - I welcome this timely progress report which is being presented at a critical juncture for the Philippines. Over the past months, the authorities have swiftly and rightly responded to the regional crisis, building on the progress made through past structural adjustments. But the situation remains fragile, especially in light of the sharp reduction in net inflows. Under these conditions, the Philippines have no other choice but to proceed with an orderly adjustment while protecting the poor against the short-term adverse impact. 2 - The Bank must stand ready to help the Philippines to overcome this difficult period. In this respect, I fully share the proposed revised strategy, which demonstrates the Bank's responsiveness and flexibility. Provided there is a stand-by agreement with the Fund, the new focus placed on fast-disbursing loans in exchange for financial and public sector reforms is appropriate. 3 - This shift in the Bank program should serve as a priority measure to strengthen the resilience of the financial sector which is likely to be affected by growing corporate stress. Preserving confidence in banking soundness and stability is key. On this point, I would appreciate Staff comments on the reasons why the Philippine banking sector has performed so far better than regional counterparts. Has this sector been better managed or has it been better protected against generating asset bubble phenomena which may have been experienced elsewhere, in particular in the real estate sector? Are there lessons which can be drawn for other countries? 4 - I would, however, point to three areas of potential weaknesses in the strategy described in the paper: a - Except through the containment of inflation, strategy to cushion the impact of the regional crisis on the poorest seems to be insufficiently elaborated. This has occurred while the poverty  2 reduction in the Philippines has been less successful than in other countries and while income distribution continues to remain significantly unequal. In particular, since poverty is mainly a rural phenomenon, structural measures to strengthen agriculture -- through demonopolization and tariff decreases-- should have a major positive impact by reinforcing agriculture competitiveness. I therefore encourage the Bank to strongly address this issue through its policy dialogue. b - Credit lines for agriculture and industry should be used with caution. On the supply-side, the distributing banks will have to be carefully chosen, to avoid helping poorly managed institutions. On the demand side, I wonder how the beneficiaries will be chosen, in order to avoid any arbitrary discrimination or any kind of administrative directed credit. Anyway, it will be critical to apply market rates, as IFC is doing through its own program of credit lines. In this respect, I would appreciate Staff comments on the consistency of the Bank's approach with IFC business. c - I am surprised by the lack of any reference to corporate sector governance and the transparency issue. Does this mean that, unlike other countries in the region, these aspects are not worrisome to the Philippines? As a matter of principle, the Bank should pay attention systematically to micro-economic fabrics. 5 - On the whole, risks are severe but can be weathered if the new authorities keep sticking to an ambitious reform program. Provided the Bank increases its risk-bearing capacity (cf. debate over the net income dynamics), and progress is made on further issues, I would even be ready to support a higher fast-disbursing lending program, if needed.