POGO Ban to Aid Philippines' Exit from Financial Gray List

President Ferdinand R. Marcos, Jr. has mandated a comprehensive ban on all offshore gaming operations in the Philippines due to their connections to various illicit activities. 

The recent prohibition of Philippine offshore gaming operators (POGO) is expected to accelerate the country's removal from a global financial watchdog's "gray list" of jurisdictions with increased money laundering risks, according to the central bank governor.

“With the POGO ban, we anticipate a reduction in money laundering activities, which should help us exit the gray list,” stated Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona, Jr. in a text message to BusinessWorld.

Last week, President Ferdinand R. Marcos, Jr. ordered a total ban on all offshore gaming operations due to their associations with financial scams, money laundering, prostitution, and human trafficking. He instructed the Philippine Amusement and Gaming Corp. (PAGCOR) to close all POGO facilities by the end of the year.

This directive follows the Financial Action Task Force's (FATF) decision in June to keep the Philippines on its gray list for the third consecutive year. The FATF cited the need for the country to address three remaining issues, including demonstrating the use of anti-money laundering and counter-financing of terrorism (AML/CFT) controls to mitigate risks associated with casino junkets.

Governor Remolona previously mentioned that the Philippines could likely exit the gray list by next year once the remaining deficiencies are resolved. Data from Moody's highlighted that from 2018 to 2023, the Philippines was among the top five Southeast Asian countries with significant money laundering activities, with a 45% increase in such events from 2022 to 2023.

Chester B. Cabalza, founding president of the Manila-based International Development and Security Cooperation, believes that the POGO ban will attract more legitimate investments to the country. “With the ban, the Philippines can re-strategize to attract legal and moral entertainment investments, contributing to inclusive growth,” he commented via Facebook Messenger.

Bienvenido S. Oplas, Jr., president of Minimal Government Thinkers, noted that the POGO ban could significantly boost tourism. “Without POGOs, gamblers from China might travel to the Philippines to gamble in large casinos,” he said. However, he cautioned against rushing the ban due to its potential impact on the property market.

Filomeno S. Sta. Ana III, coordinator of Action for Economic Reforms, emphasized that POGOs are not the sole source of money laundering in the Philippines. “POGOs might not even be the main vehicle for money laundering. We must also consider online gambling within the Philippines and the proliferation of physical casinos,” he said.

Sta. Ana highlighted other vulnerable sectors to money laundering, such as real estate, mineral extraction, shell companies, low-key businesses, artworks, jewelry, and luxury automobiles. He suggested lifting strict bank secrecy rules as a major step to exiting the gray list.

Impact on Banks

In a separate report, Fitch Ratings assessed that the Philippine financial system is resilient enough to withstand the effects of the POGO ban. “While the ban may affect asset quality and performance of Fitch-rated banks, their loss-absorption buffers are sufficient to manage associated losses,” Fitch stated.

The Philippine banking industry's net income rose by 2.95% to P92.107 billion as of the end of March, and bank lending grew by 10.1% in May to P12 trillion, the fastest in 14 months.

Fitch noted that POGOs' influence on the property market has decreased due to stricter regulations and travel restrictions affecting Chinese workers. Currently, POGOs occupy 3.5% of Metro Manila's office space, down from 10% in 2019.

Real estate developers have been minimizing their exposure to POGOs, and expected vacancies from the ban could pressure rental yields, impacting real estate firms. However, Fitch believes these effects could be mitigated by better residential sales if interest rates fall in the latter half of 2024 and 2025.

Fitch also reported that the residential mortgage nonperforming loan (NPL) ratio improved to 7% in the first quarter of 2024 from 9.6% in the third quarter of 2021, although still higher than pre-pandemic levels. This improvement partly reflects a shift from speculative activities and lax housing loan standards during the POGO boom years of 2016-2019.

Banks have become more cautious in lending to POGO workers due to high policy risks, and property-related losses from the ban are not expected to be significant for banks.

“Even if the impact is greater than anticipated, regulations ensure banks maintain sufficient loss-absorption buffers to manage their exposure to the sector,” Fitch concluded.