The Philippine Peso in the Context of the 1997 Asian Financial Crises*
THE PHILIPPINE PESO IN THE CONTEXT OF THE 1997 ASIAN FINANCIAL CRISES*
by
Regina Tabayoyong Yu1
* Paper presented at the First Summer Symposium for Central Bank Researchers, Study Center Gerzensee, Switzerland, 24-28 June 2002.
1 Bank Officer II, Flow Of Funds Accounts Division, Department of Economic Research, Bangko Sentral ng Pilipinas, Manila, PHILIPPINES. THE PHILIPPINE PESO IN THE CONTEXT OF THE 1997 ASIAN FINANCIAL CRISES
by Regina Tabayoyong Yu
Chapter 1 INTRODUCTION
The Philippine exchange rate policy supports a freely floating exchange rate system. Under this system, the Bangko Sentral ng Pilipinas (BSP) leaves to market forces the determination of the exchange rates, with some scope for occasional BSP action to dampen sharp fluctuations in the exchange rates. For such occasional cases, the BSP does enter the market, largely to provide indicative guidance to the market. (BSP Publication, Oct. 1997)
The Philippines experienced an upsurge in capital inflows beginning 1994. This experience allowed the exchange rates to appreciate continuously during that year to reach P24.42 per US $ by end-1994 from P27.70 per US $ at end-1993. Towards the end of 1994 and the beginning of 1995, the stability of the peso was subjected to a major stress test arising from the contagion effect of the Mexican crisis. Consequently, the peso fell to P26 per US $ in April 1995. By May 1995, normalcy was restored as foreign capital inflows resumed. Since then, the peso-dollar exchange rate has remained generally stable and this state of affairs continued until the onset of the currency turmoil in July 1997. (BSP Publication: February 1998, p. 4)
This currency turmoil, which was experienced by the country from July 1997 up to December 1998 with lingering effects up to 1999, has been dubbed as the Asian Financial Crises and is the topic of this research study. The impact of the Asian Financial Crises on public administration could be traced to analyzing the effects of the peso devaluations on the country’s economy, and evaluating the country’s monetary, banking, and fiscal policies in relation to the government efforts of restoring economic normalcy to the nation.
Setting and Background
The currency turmoil experienced by the Philippines starting July 1997 was quite different from those experienced in the past in that it has a regional dimension. The whole Asian region, particularly the ASEAN countries, are badly affected, hence, the use of the terminology “Asian Financial Crises” to refer to it. There are even
1 indications that the crises have spread to the European, Russian, and other continents. So pervading is its effects that it is worth the subject of an extensive research.
Statement of the Problem
This research aims to assess the impact of the Asian Financial Crises on the Philippine Peso-US Dollar exchange rates, and to evaluate the BSP policies on foreign exchange rates in its efforts to weather out the negative effects of the Asian Financial Crises.
This study intends to answer the following specific questions:
1. What events in the Asian region precipitated the outbreak of the so- called “Asian Financial Crises?”
2. How did the Asian Financial Crises affect the Philippines in terms of its peso-dollar exchange rates?
3. How did the Philippines compare with the other ASEAN countries in coping up with the Asian Financial Crises?
4. What exchange rate policies were adopted by the Bangko Sentral ng Pilipinas after the depreciation of the peso?
5. What monetary and financial measures were implemented by the Bangko Sentral ng Pilipinas to address the Asian Financial Crises?
6. Is the Asian Financial Crises over? How would you describe the Asian Financial Post-Crises period?
Importance of the Study
The Bangko Sentral ng Pilipinas, wherein the researcher is employed at present as Bank Officer II of the Department of Economic Research, is at the forefront of the Asian Financial Crises. Since her duties and responsibilities at the Flow-of- Funds Division include the daily monitoring of economic indicators, among them, the foreign exchange rates, she has been quite aware of the movements of the Philippine peso vis-a-vis the U.S. dollar since the inception of the Asian Financial Crises.
In one of its resolutions, the Monetary Board of the Bangko Sentral ng Pilipinas, which is the highest policy-making body of the country on money and banking matters, has instructed the Department of Economic Research to monitor closely the foreign exchange rates of the Philippine peso on a regular basis. Her division which is in-charge of monitoring statistical and economic indicators has 2 come up with a Daily News Release, a Weekly Peso Watch, and a Monthly Selected Philippine Economic Indicators, which include a historical series of data, one of them being the peso-dollar exchange rates. One reason why the researcher chose to do research on this topic, besides her personal curiosity and interest on the subject matter, is her easy access to the data on foreign exchange rates which are readily available at her workplace.
The importance of this study can be fully appreciated, if and when, because of the extensive study done by the researcher, the public (which includes the academe, the private businessmen, the bankers, the overseas contract workers and other dollar earners, the public administrators, and the ordinary citizen), can benefit from accurate, timely, and responsive information which could become the basis of further research, policy formulation, or valuable day-to-day decision making of everyone concerned.
Scope and Delimitation
As previously stated, the Asian Financial Crises affected the whole ASEAN region, some parts of Asia, and lately has spread to other continents. In tracing the outbreak of the Asian Financial Crises, the researcher tried to limit her study to events within the Southeast Asian Region insofar as the Philippines is a member of the ASEAN.
Secondly, the author limited the presentation and treatment of historical data only to exchange rates of the Philippine peso vis-a-vis the U.S. dollar even though the readers are aware that the pervasive effects of the Asian Currency Turmoil or its broader context which is the Asian Financial Crises cover such other areas like interest rates, inflation, GNP, investments, balance of payments, and other so- called macroeconomic fundamentals.
Thirdly, only cross rates of the Philippine peso vis-a-vis other selected ASEAN currencies were presented and studied in this paper. Because of the limited time frame and the difficulty of obtaining complete data, cross rates for other Asian currencies were not included in the preparation of this paper.
Fourthly, the time frame of this study mainly revolved around the duration of the Asian Financial Crises, i.e., shortly before its inception starting January 1997 up to December 1998. The year 1999 up to the month of June 2000 was presented and studied also if only to show that there are positive indications that the peso-dollar exchange rates have already somewhat stabilized. Please note that starting the last week of July 2000 up to the end of 2000, the Philippines as well as other countries are once more experiencing another round of currency crisis which is tied up to the growing strength of the US dollar and the recent increase in crude oil prices worldwide. The author did not discuss this matter anymore since it is outside the time frame of the research study.
3 Lastly, the author limited the scope of her research of the Philippine government’s policy response to the problem of Asian Financial Crises solely to the foreign exchange rate, monetary, and financial policies and measures implemented by the Bangko Sentral ng Pilipinas, although in reality, the other agencies of the Philippine government as well as the other sectors of society likewise responded to the issue and had their contributions of policy measures and interventions in helping to contain the adverse impact of the Asian Financial Crises.
4 Chapter 2 HISTORICAL PERSPECTIVE OF THE ASIAN FINANCIAL CRISES
The following blow-by-blow account of the history of the Asian Financial Crises or how it came about, will be presented in this section.
The series of narration was lifted verbatim from the publication of the Bangko Sentral ng Pilipinas (Jan. 1999, pp. 1-5) which was properly quoted and credited for its very extensive discussion of the topic.
First Semester 1997: The Tell-Tale Signs
“As early as the 1st quarter of 1997, a number of tell-tale events were evident prior to the outbreak of a regional financial crisis. In Korea, corporate debt problems were evident with the failure of two chaebols (Hanbo and Sammi). In Thailand, Somprasong, a major land developer, defaulted on foreign debt repayments as concerns continued to brew over the financial health of Finance One, a leading finance company. Thailand, where the crisis broke out in full force, experienced exchange market pressures and intense speculative activities in May and June and the Bangkok SET index trended down steadily through most of the 2nd quarter. In the Philippines, tell-tale signs manifested as early as February when the stock market went through a series of consolidations due to unfavorable developments (poor corporate earnings, anticipated increase in the US FED Fund Rates, etc.) that precipitated a series of speculative attacks on the peso and a surge on the average daily turnover of foreign exchange transactions in the Philippine Dealing System (PDS) beyond normal levels.”
Third Quarter 1997: The Bubble Bursts
“After several weeks of speculative attacks, the Bank of Thailand announced on 2 July its decision to shift to a managed float of the baht and called on the International Monetary Fund for technical assistance. The announcement caused several regional currencies to experience pressure, prompting regional authorities of affected countries to take remedial actions. In Manila, the Bangko Sentral ng Pilipinas (BSP) was forced to intensify its dollar sales and raise its key policy rates to stave off the speculative attacks on the peso. As the effectiveness of this policy stance diminished, the BSP allowed the peso to float freely against the US dollar on 11 July. On the same day 5 in Indonesia, Bank Indonesia widened its intervention band. In Malaysia, the defense of the ringgit was abandoned on 14 July. Pushed by market pressure, the rupiah was allowed to float beginning on 14 August. Continued mounting market pressure in Korea caused another major chaebol, Kia Motors, to suffer financial distress. Likewise, intense speculative attacks were experienced by Hongkong in mid- August. On 20 August, an IMF-led financial support package of $17.2 billion was extended to Thailand.”
Fourth Quarter 1997: The Crisis Deepens and Widens
“During the 4th quarter, the crisis intensified in the region and spread northwards. In Taiwan, the local currency, battered by months of selling pressure, devalued on 14 October. In Hongkong, the HK dollar held steady against market pressures but proved otherwise in the equities market as the Han Seng index shed nearly a quarter of its value in four days. The crisis shifted next to South Korea where market pressures successfully broke the defense of the won at the psychologically important 1,000 mark on 17 November.
In Southeast Asia, the situation worsened, particularly in Indonesia, South Korea, and Thailand which were marred by widespread bank closures and sharp contractions in liquidity that prompted international rating agencies to downgrade their respective currency ratings.
In Manila, the continued uncertainties in Thailand, Indonesia and Korea and growing fears of the country taking a similar path caused the peso and the PHISIX to fall sharply particularly towards the closing of the year.”
“First Quarter 1998: The Contagion Sustains Itself
The 1st quarter of 1998 saw the wrath of the contagion sustained. Contributing to the bleak outlook on the region was the financial collapse of Peregrine Investment, a major investment bank based in Hongkong on 12 January and the corporate scandal involving top bank officials in Japan. In Indonesia, the underlying social impact of the financial crisis led to widespread riots and civil unrest over rising food prices.
Second Quarter 1998: Of Casualties and Near Casualties
The 2nd quarter of 1998 was characterized by a deepening of the crisis in Asia as corporate confidence in Japan fell to a dramatic 6 low and the presence of social unrest in Indonesia. In Manila, the PHISIX traced a steady decline amid uncertainties over the May Presidential elections, the continued depreciation of the Japanese yen, economic recession in Hongkong, and the possible devaluation of the Chinese yuan. The Philippine peso-dollar rate, however, stood its ground as it continued to stay within the P40 per US$ average during the quarter.
Third Quarter 1998: An Anniversary of Crisis
In Manila, the equities and exchange markets were battered by a series of negative developments that included the protracted labor- management dispute in its flag carrier, the Philippine Airlines, causing the PHISIX to drop to record lows in August and September, thus, towing in the peso to slide further.
Fourth Quarter 1998: The IMF Cries for Global Action
Amplifying its call for concerted measures to address the global crisis, the IMF called on the world’s central banks to cut interest rates to avert any possible global recession. The period likewise revealed signs of recovery and improving market sentiments in the region. In Manila, the peso strengthened gradually against the dollar to a peak of P36.68 as of 10 December, precipitating a re-flow of foreign capital and a surge in foreign exchange remittances of overseas contract workers during most of the period.”
7 Chapter 3 PRESENTATION, ANALYSES & INTERPRETATION OF STATISTICAL DATA
A. The Effects of the Asian Financial Crises on the Philippine Peso - US Dollar Exchange Rates
1. Presentation of Primary Statistical Data
Appendices A, B, and C present the Daily Peso-Dollar Exchange Rates from January 1 to December 31 of the years 1997, 1998, and 1999, respectively, whereas Appendix D presents the Daily Peso-Dollar Exchange Rates from January 1 up to June 30, 2000. The cut-off period for the primary data on Daily Peso-Dollar Exchange Rates is reckoned at June 30, 2000. Weekends, holidays, and Holy Week days are exceptions to availability of data since there are no transactions at the PDS during these days.
Table 1 gives a summary of the Monthly Average Peso-Dollar Exchange Rates for the years 1997 to 2000 based on the statistical “mean” and the “standard deviation.” For the sake of accuracy and convenience, these statistical means and standard deviations were estimated based on computer software using Microsoft Excel. The standard deviation, which is simply the square root of the variance, is a good indicator of the spread or variability of daily observations of the foreign exchange rates. In economic parlance, the standard deviation of the foreign exchange rates measures the volatility of the currency vis-a-vis another currency standard.
Chart 1 provides a graphic presentation of data from Table 1 regarding the Monthly Average Peso-Dollar Exchange Rates based on the statistical mean. Noteworthy is the abrupt increase in the movements of average exchange rates during the period July 1997 to January 1998 and the exceptionally high levels attained for the rest of 1998, reaching its peak in September 1998.
Chart 2 also gives another graphic presentation of data based on the standard deviations or the Monthly Peso-Dollar Exchange Rate Volatility from January 1997 to June 2000. From an almost nil volatility from January to June 1997, the peso- dollar exchange rates experienced highly visible volatility movements starting July 1997, which coincides with the inception of the Asian Financial Crises, and reaching a high-time peak during the month of December 1997.
2. Presentation of Results of Statistical Tests
Statistical tests comparing two population means with different variances were 8 conducted on data based on Table 1. The null hypothesis and the alternative hypothesis were formulated as above-cited. A series of tests were done progressively for every two consecutive quarters from 1st quarter 1997 to 2nd quarter 2000, to isolate the effects of time series seasonal behavior, if present. Rejection of the null hypothesis simply means that there is strong evidence that the Philippine forex has been affected by the Asian Financial Crises. It would also determine the onset of the Asian Financial Crises as it affected the Philippines, when the currency turmoil has started to subside, and when the economy has stabilized.
Based on the summary computations of the statistical tests conducted, there is strong evidence at 99% level of confidence that the Asian Financial Crises began to be felt in the Philippines starting 3rd quarter 1997 to 1st quarter 1998. Its negative effects have somewhat subsided even though the peso-dollar volatility remained at relatively high levels during the period 3rd quarter 1998 to 4th quarter 1998. The Philippine economy again felt the lingering negative effects of the Asian Financial Crises starting 2nd quarter 1999 up to 4th quarter 1999, and then again during the 2nd quarter 2000. The rest of the summary results of the statistical computations are found in Table 2.
3. Evaluation & Analyses of Data
The current behavior of the peso-dollar exchange rates was driven more by speculation rather than by economic fundamentals. This is attested by the following observations:
“For most of the 2nd half of 1997, after the 11 July 1997 depreciation, the depreciation of the peso against the U. S. dollar was relatively moderate. From P27.67 per U. S. dollar in July 1997, the peso steadily weakened to P35.13 per U. S. dollar during the 1st half of December 1997. However, the rate of the peso depreciation reached crisis proportions in late December 1997 as the peso jumped to an average of P39.44 per U. S. dollar during the 2nd half of December 1997. The sharp movement in the peso-dollar rate occurred in the absence of significant changes in the economic fundamentals. In fact, the current account registered a surplus of US $126 million in December 1997, with exports growing year-on-year at 22.8 percent. Inflation was also moderate at 6.1 percent and was even lower than the 6.5 percent achieved in November 1997.” (BSP Publication: July 1998, p. 18)
During the 2nd semester 1997, the exchange rate volatility sharply rose to P3.45 with the peso plummeting steadily from around P26.00 to a U. S. dollar before the crisis to P33.87 by end of September 1997 and further to P40.63 during the end of December 1997. Thus, while the peso continued to depreciate in 1998 amidst a
9 Table 1
MONTHLY AVERAGE PESO-DOLLAR EXCHANGE RATES January 1997 to June 2000
Mean Std. Deviation Mo\Year 1997 1998 1999 2000 1997 1998 1999 2000
Jan 26.3173 42.6610 38.4043 40.4266 0.02020 1.51969 0.32435 0.22636 Feb 26.3411 40.4143 38.7799 40.5717 0.00504 0.87384 0.29246 0.12413 Mar 26.3319 39.0040 38.9108 40.9381 0.01187 1.13123 0.14015 0.05072 Apr 26.3642 38.4422 38.2417 41.1884 0.00417 0.60417 0.25464 0.07998 May 26.3721 39.2971 37.8385 41.8063 0.00339 0.54504 0.13419 0.62369 Jun 26.3761 40.3991 37.8993 42.6489 0.00518 1.08492 0.08818 0.24519 Jul 27.6679 41.7805 38.2798 1.16275 0.30424 0.14978 Aug 29.3305 43.0375 39.2610 0.64497 0.62244 0.43102 Sep 32.3945 43.7759 40.1738 1.05404 0.35145 0.42242 Oct 34.4639 42.8882 40.3160 0.70752 0.96476 0.22895 Nov 34.5178 39.9435 40.3409 0.48380 0.42090 0.24356 Dec 37.1706 39.0733 40.6232 2.27154 0.23123 0.21551
Annual Ave. 29.4765 40.9459 39.0854 41.2698 0.53121 0.72116 0.24377 0.20452
Source of Basic Data: Reference Exchange Rate Bulletin, Treasury Department, BSP
c:\table1.xls 9-Jul-2000 10 Chart 1
J97 TitleMo. Mo.Average Average Peso-Dollar Peso-Dollar ExchangeMo. ExchangeAverage Rates Peso-Dollar RatesTitle Exchange Rates F January1997 1997& 1998 to June January2000 1997 to June 2000 50 M 5050 A 40 3% 3% 2% 2% 2% 3% 2% 2% M 4545 3% 2% 2% 30 3% 2% 3% 2% J 4040 Data A 2% 20 3% Y-Axis 3535 3% 2% J 35 3% 2% 3010 3% A 3030 250 S 2525 O 2020 J97 A J O J98 A J O J99 A J O J00 A 20 N 1515 X-Axis 15 3% D 1010 3% 3% InPesos per U.S. Dollar InPesos Per U.S. Dollar 10 2% InPesos per U.S. Dollar 2% J98 55 2% 5 2% 0 2% 3% F 0 2% 3% 0 J97 F M A M J J A S O2% N D J98 F M A M J J A S3% O N D M J97 M M J S N J98 M M2% J2% S N J99 M M3% J S3% N J00 M M J97 M M J S N J98 M M3% J3% S3% N J99 M M J S N J00 M M A Month/YearMonth/Year Month/Year M J
c:\chart1.xls 9-Jul-2000
11 Chart 2
Mo. Peso-Dollar Exchange Rate Volatility Peso-Dollar Exchange RateJanuary Volatility 1997 to June 2000 January 1997 - December 1998
2.50 2.50
2.00 2.00
1.50
1.00
0.50 Standard Deviation(In P/US$) Standard Deviation (InP/US$) 0.50
0.00 0.00 J97 F M A M J J A S O N D J98 F M A M J J A S O N D J97 M M J S N J98Month/Year M M J S N J99 M M J S N J00 M M Month/Year
c:\chart2.xls 9-Jul-2000 12 Table 2
RESULTS OF STATISTICAL TESTS
SUMMARY COMPUTATIONS OF STATISTICAL TESTS (COMPARING TWO POPULATION MEANS WITH UNEQUAL VARIANCES)
Period x1 x2 s1 s2 n1 n2 v or d.f. t computed critical region Decision
1Q'97 to 2Q'97 26.3301 26.3708 0.0124 0.0043 3 3 3 5.3553 5.8410 Accept Ho. 2Q'97 to 3Q'97 26.3708 29.7976 0.0043 0.9539 3 3 2 6.2220 9.9250 Accept Ho. 3Q'97 to 4Q'97 29.7976 35.3841 0.9539 1.1543 3 3 4 6.4617 4.6040 Reject Ho. 4Q'97 to 1Q'98 35.3841 40.6931 1.1543 1.1749 3 3 4 5.5829 4.6040 Reject Ho. 1Q'98 to 2Q'98 40.6931 39.3795 1.1749 0.7447 3 3 5 1.6356 4.0320 Accept Ho. 2Q'98 to 3Q'98 39.3795 42.8646 0.7447 0.4260 3 3 2 7.0357 9.9250 Accept Ho. 3Q'98 to 4Q'98 42.8646 40.6350 0.4260 0.5390 3 3 4 5.6211 4.6040 Reject Ho. 4Q'98 to 1Q'99 40.6350 38.6983 0.5390 0.2523 3 3 3 5.6368 5.8410 Accept Ho. 1Q'99 to 2Q'99 38.6983 37.9932 0.2523 0.1590 3 3 3 4.0949 5.8410 Accept Ho. 2Q'99 to 3Q'99 37.9932 39.2382 0.1590 0.3344 3 3 3 5.8436 5.8410 Reject Ho. 3Q'99 to 4Q'99 39.2382 40.4267 0.3344 0.2293 3 3 4 5.0766 4.6040 Reject Ho. 4Q'99 to 1Q'00 40.4267 40.6455 0.2293 0.1337 3 3 3 1.4275 5.8410 Accept Ho. 1Q'00 to 2Q'00 40.6455 41.8812 0.1337 0.3163 3 3 3 6.2327 5.8410 Reject Ho.
c:\table2.xls 31-Jul-00 13 persistent regional currency instability, the daily volatility of the peso-dollar rate declined to P1.96 during the year. (BSP Publication: Jan. 1999, pp. 34-35)
The sharp fall of the peso was due to a combination of external and domestic factors. On the external front, there was a growing concern among investors on the state of other Asian countries. Indonesia and Thailand were perceived to be half- hearted in undertaking necessary reforms while in South Korea there was uncertainty in the approval of a financial assistance package by the IMF. As a result, the peso suffered contagion effects. (BSP Publication: July 1998)
The peso was generally stable in 1999 despite the observed occasional downward pressure during the third quarter due to regional concerns prompted by the retreat of the Thai baht. In 1999, the peso averaged at P39.09 to the US dollar, appreciating by 4.6 percent from the 1998 average. The appreciation was due mainly to foreign exchange inflows through the equities market, particularly during the first half of 1999, as well as the slack corporate dollar demand from subdued industrial activity. However, compared to pre-crises levels (2 July 1997), the peso’s end-1999 level of P40.313/US$1 represented a depreciation of 34.6 percent. This was comparable with the rate of depreciation of other ASEAN currencies: the Thai baht at 34.9 percent, the Malaysian ringgit at 33.6 percent, and the Indonesian rupiah at 65.2 percent. (BSP Publication: Jan. 2000, p. 12)
The peso also exhibited greater stability in 1999, trading in a narrower range against the dollar compared to the previous year. This is shown by the decline in the standard deviation for the peso-dollar rate. The average monthly standard deviation declined from P0.72 in 1998 to only P0.24 in 1999. This developed despite the removal in March 1998 of the volatility band established by the Bankers’ Association of the Philippines (BAP). (BSP Publication: Jan. 2000)
The peso showed the most volatility during 1999 in the third quarter, with a standard deviation of P0.34 compared to P0.16 in the second quarter. This subsequently settled back down to P0.23 in the fourth quarter as instability in the regional currency market subsided. (BSP Publication: Jan. 2000, p. 13)
B. How the Philippines Compared with other ASEAN Countries in Coping with the Asian Financial Crises
Appendix E presents the Monthly Period-Average Exchange Rates (in US$ per foreign currency) of five selected ASEAN countries (i.e., Philippines, Malaysia, Indonesia, Thailand, and Singapore) for the years 1997 to 2000. The cut-off for these ASEAN foreign exchange rate data is reckoned at June 2000. The major sources of these monthly data are the CEIC and the International Financial Statistics Yearbook, published by the International Monetary Fund.
14 Table 3 which is the Quarterly Volatility of Exchange Rates of ASEAN Currencies is derived from Appendix E monthly data, computed by averaging the monthly data and taking its quarterly standard deviations using Microsoft Excel computer software.
Chart 3 shows the fluctuations of foreign exchange rates of selected ASEAN countries through their volatility as measured by their standard deviations for the period, 1st quarter 1997 up to 2nd quarter 2000, based on data from Table 3. This graphic presentation enables one to determine the onset and termination of the Asian Financial Crises for each of the five ASEAN countries studied, as well as the gravity or seriousness inflicted by said crises on each respective country. Indonesia’s exchange rate volatility is segregated from the other four ASEAN countries and presented separately in Chart 4, particularly, because of its very high fluctuations which would upset the y-axis graphic presentation of the other four ASEAN countries previously presented in Chart 3.
As early as April 1997, the peso was subjected to mounting pressures as fears of a Thailand-style crisis plagued the Philippines. However, these fears proved to be unfounded and the peso regained stability. Some speculation resurfaced on 2 July 1997 as a reaction to the decision of the Bank of Thailand to shift from the daily setting of the baht in reference to a weighted basket of currencies to a managed floating system. A concerted and determined speculative attack against the Philippine peso ensued. This event precipitated the depreciation of the Philippine peso by a significant value which triggered the onset of the currency crisis in the Philippines. (BSP Publication: Feb. 1998, p. 6)
Prior to 2 July 1997, Thailand was essentially under a fixed exchange rate system where a daily setting of the baht in reference to a weighted-basket of currencies is implemented. Both Malaysia and Indonesia are under a managed floating exchange rate system, but of different sub-types. The Philippines, on the other hand, has been adopting a relatively more flexible exchange rate regime. The exchange rate is market-determined with the BSP occasionally intervening to maintain orderly market conditions. (BSP Publication: Oct. 1997, p. 22)
Relative to the 2 July 1997 level, the Philippine peso has depreciated by 32.5 percent, comparable with that of the Korean won which depreciated by 26.7 percent. Other Asian currencies weakened as well, with the Indonesian rupiah depreciating by 69.1 percent, the Thai baht by 33.4 percent, and the Malaysian ringgit by 33.7 percent.” (BSP Publication: Jan. 1999, p. 37)
Countries affected by the July 1997 financial crises have undertaken reforms needed to get their economies back on track. In line with these efforts, South Korea, Thailand and Indonesia sought the assistance of the IMF in restructuring their financial sectors. On the other hand, the Philippines requested for a precautionary stand-by facility while Malaysia opted to carry out its economic adjustment on its 15 Table 3
QUARTERLY VOLATILITY (STD. DEVIATIONS) OF EXCHANGE RATES OF ASEAN CURRENCIES 1st Quarter 1997 to 2nd Quarter 2000
Period Philippines Malaysia Indonesia Thailand Singapore
1997 0.81 0.26 489.44 3.38 0.09 Q1 0.01 0.01 8.49 0.11 0.01 Q2 0.00 0.01 8.12 0.11 0.01 Q3 1.96 0.18 219.32 2.47 0.03 Q4 1.26 0.84 1,721.82 10.82 0.31
1998 1.19 0.15 1,054.28 1.98 0.03 Q1 1.51 0.30 341.95 5.14 0.06 Q2 0.80 0.11 2,314.62 1.44 0.04 Q3 0.82 0.17 1,291.00 0.48 0.02 Q4 1.63 0.00 269.54 0.84 0.01
1999 0.33 0.00 333.86 0.58 0.01 Q1 0.21 0.00 78.70 0.36 0.02 Q2 0.18 0.00 542.03 0.30 0.00 Q3 0.77 0.00 598.69 1.14 0.01 Q4 0.14 0.00 116.02 0.53 0.00
2000 0.41 0.00 220.97 0.36 0.02 Q1 0.22 0.00 83.48 0.23 0.02 Q2 0.60 0.00 358.45 0.49 0.01
Source of Basic Data: International Financial Statistics, IMF; and CEIC c:\table3.xls 31-Jul-00
16 Chart 3
QuarterlyQuarterly Volatility Volatility of of ASEAN ASEAN Currencies' Currencies FOREXFOREX Rates 1st Quarter1st Qtr. 1997 1997 to 2nd - 1st Quarter Qtr. 2000 2000
12.002500
10.00 2000 Period 8.00 PhilippinesPhilippines 1500 MalaysiaMalaysia 6.00 SingaporeIndonesia 1000 ThailandThailand 4.00 (Currency/US$) Singapore Standard Deviation 500 2.00
Standard Deviation (Currency/US$) Deviation Standard 0.000 '97Q11234567891011121314 Q2 Q3 Q4 '98Q1 Q2 Q3 Q4 '99Q1 Q2 Q3 Q4 '00Q1 Q2 Quarter/YearQuarter/Year
c:\chart3.xls 31-Jul-00
17 Chart 4
Quarterly Volatility of Indonesian Rupiah 1st Quarter 1997 to 2nd Quarter 2000
2,500
2,000
1,500
Indonesia
1,000
Standard Deviation (Rupiah/US$) Deviation Standard 500
0 '97Q1 Q2 Q3 Q4 '98Q1 Q2 Q3 Q4 '99Q1 Q2 Q3 Q4 '00Q1 Q2 Quarter/Year
c:\chart4.xls 31-Jul-2000 18 own. Initiatives taken by Asian governments helped mitigate the growing apprehension in the region. Improving investor sentiment over the economic changes being carried out stabilized the regional currency markets in early 1998. In the case of Indonesia, however, its initial stand-off with the IMF and the political upheaval in May 1998 plunged the country into a deeper crisis. (BSP Publication: July 1998, p. 50) In determining how the Philippines fared in coping up with the Asian Financial Crises compared to its ASEAN neighbors, we have to examine the scenario during the critical years 1997 and 1998.
For the first quarter 1998, the Philippines’ GDP, albeit registering a low real growth of 1.7 percent, remained respectable compared to the negative growths of South Korea (-3.8 percent), Malaysia (-1.8 percent), and Indonesia (-8.0 percent) for the same period. (BSP Publication: July 1998)
In terms of inflation performance, the Philippines’ 9.2 percent average for May 1998 was still comparable to Thailand’s 10.2 percent, South Korea’s 8.2 percent, and Malaysia’s 5.1 percent but markedly lower than Indonesia’s average which surged to 49.7 percent. (BSP Publication: July 1998)
In the fiscal sector, the Philippines incurred a deficit of US$ 386.9 million due to lower collections resulting from the decline in imports and the slowdown in the economy. Other countries in the region such as Thailand and South Korea, on the other hand, managed to keep their fiscal position in surplus in the early part of 1998. (BSP Publication: July 1998, p. 52)
Growth in Philippine merchandise exports of 22.8 percent was posted in 1997 and sustained during the first five months of 1998 at 20.3 percent. Compared to other ASEAN countries’ export growth, that of the Philippines outpaced those of Indonesia’s 8.1 percent and South Korea’s 5.0 percent expansions in 1997. Exports of Malaysia and Thailand likewise registered comparatively lower growths in the same period. The sustained growth of exports of electronic products has kept the Philippines’ export growth one of the highest in Asia. (BSP Publication: July 1998)
Due to rapid export growth, the Philippines’ ability to pay its external debt has been greatly enhanced. The debt-service-ratio (DSR) stood at 11.3 percent of exports of goods and services in 1997 from 36.9 percent in 1985, reflecting the judicious employment of foreign borrowings for productive uses. The Philippines’ DSR is comparable with Malaysia and South Korea but below those of Thailand and Indonesia. The Philippines’ DSR decreased to 9.4 percent by end-March 1998. (BSP Publication: July 1998)
In the banking sector, the adverse effects of the financial storm in the region has been contained due to pre-emptive moves by the BSP to strengthen the banking system. The Philippines’ non-performing loans (NPL) ratio reached 5.4 percent as of end-1997, much lower compared with Thailand’s 19.7 percent. The NPL of financial 19 companies of Indonesia was higher at 22.0 percent in the same period. As of end- April 1998, the Philippines’ NPL ratio rose to 9.5 percent, comparable with Malaysia’s 8.6 percent (end-February 1998). Despite its relatively lower NPL ratio, Philippine banks, like other banks in the region, will have to contain their mounting bad debts, upgrade their capitalization and conform with stiffer banking standards to remain on solid footing. (BSP Publication: July 1998, pp. 52-53)
Herein quoted is the testimony of Chase Securities, Inc., a foreign observer, among many others, which predicted that the Philippines is one of the countries that is likely to be most able to bounce back from the Asian Financial Crises. (as cited in BSP Publication)
“... two countries appear to be weathering the recent storm more successfully than the others: South Korea and the Philippines. The two have shown significant improvement in their external accounts, and the adroit government economic policy has limited the downside impact from the regional crisis. Both governments have adhered to their government programs (although the Philippine program is only a “standby” facility) and the investor interest in the two countries remain strong.”
Chase Securities, Inc. International Fixed Income Research, 22 May 1998
20 Chapter 4 FOREIGN EXCHANGE, MONETARY, AND FINANCIAL MEASURES IMPLEMENTED BY THE BANGKO SENTRAL NG PILIPINAS TO WEATHER THE ASIAN FINANCIAL CRISES
A. Exchange Rate Policies Adopted by the Bangko Sentral ng Pilipinas After the Depreciation of the Peso
The country’s broad policy response to the prolonged region-wide crises involved the sustained pursuit of firm monetary stance, flexible and market-oriented foreign exchange policy, stronger fiscal position and a relatively sound financial system. (BSP Publication: July 1998, p. xi)
The immediate policy stance taken by the BSP authorities in response to the start of the Asian Financial Crises was a combination of intensified dollar sales and several upward adjustments of its key overnight interest rates. As the effectiveness of this policy stance diminished, the BSP allowed the peso to float within a wider range on 11 July 1997. (BSP Publication: July 1998, p. 9)
It is evident that the country’s top economic, financial, and banking managers did their share of formulating and implementing policies in response to the Asian Financial Crises. However, this paper hoped to discuss only the policies adopted by the Bangko Sentral ng Pilipinas after the depreciation of the peso relative to the Asian Financial Crises. Discussions would deal primarily on the foreign exchange rate policies since this is the focus of the study. To be mentioned also in the next section of this paper are the monetary and financial measures implemented by the Bangko Sentral ng Pilipinas to address the currency crisis and to help contain the adverse impact of the Asian Financial Crises.
The Bangko Sentral ng Pilipinas publication (Feb. 1998) was the main source of information for this paper on the policy responses of this office with respect to weathering out the negative effects of the Asian Financial Crises and steering the country back to recovery after the peso setback brought about by the currency turmoil. The following exchange rate policies were adopted by the BSP after the depreciation of the peso relative to the Asian Financial Crises:
1. Required prior clearance on the sale of non-deliverable forward (NDF) contracts. During the height of speculation, NDFs, which were believed to have been used by speculators, had the effect of artificially increasing the demand for dollars and, in turn, exerting downward pressure on the peso. Subsequently, the BSP, through Circular No. 135 dated 22 July 1997, required banks to obtain prior 21 clearance for their sales of NDF contracts to non-residents (including offshore banking units).
2. Adjusted overbought/oversold foreign exchange position of banks. To prevent banks from using their dollar resources for speculation, the BSP, through Circular No. 137 dated 31 July 1997, tightened banks’ allowable overbought foreign exchange position from 20 percent to 10 percent initially and then further to 5 percent of unimpaired capital or US$ 10 million, whichever is lower. At the same time, the oversold position was increased from 10 percent to 20 percent to allow banks to sell more of their dollar holdings and increase the supply of foreign exchange in the market.
3. Redefined rules in the computation of overbought/oversold foreign exchange position of banks. Circular letter dated 24 October 1997 required banks to include only forward sales contracts that have been delivered or consummated to be deducted from the computation of the daily foreign exchange position of banks. This is to prevent banks from using these transactions to accumulate dollars without violating overbought position limits since the amount of forward contracts are normally deducted from banks’ overbought position.
4. Consolidated banks’ accounts with subsidiaries and affiliates. The BSP required the consolidation of banks’ accounts with their subsidiaries and affiliates when computing their net foreign exchange positions (under Circular Letters dated 5 September 1997, 17 September 1997 and 2 October 1997). This will prevent the possible circumvention of BSP regulations by coursing dollar transactions through its subsidiaries and affiliates.
5. Lowered the ceiling on OTC dollar sales. Under Circular No. 138 dated 31 July 1997, the BSP adjusted the maximum amount of dollars that banks can sell over the counter, without need for documents, to US$ 25,000 from US$ 100,000 to moderate the demand for dollars. The maximum amount was further reduced to US$ 10,000 on 7 April 1998 through Circular No. 162.
6. Introduced the CRPP. The currency risk protection program (CRPP), also known as the NDF facility, is a hedging facility offered by the BSP through commercial banks to cover or limit the risk of eligible borrowers with existing unhedged foreign exchange liabilities to FCDUs (Circular No. 149 dated 22 December 1997). The facility was also designed to ease the strain on the spot market due to demand pressure from borrowers wanting to cover unmatured foreign currency obligations because of fears of a further peso depreciation. Under the scheme, the parties agree that on the maturity of the forward contract, only the net 22 difference between the contracted forward rate and the market rate shall be settled and paid in pesos at the close of the contract.
In assessing the effectiveness of CRPP, the following observations were noted: First, the actual opening of the CRPP on 7 January 1998 helped greatly in stabilizing the movements of the peso. From a range of P44 - P45 per US dollar at the beginning of January 1998, the exchange rate gradually appreciated to a range of between P38 - P39 per US dollar in May 1998. Secondly, total availments under the CRPP for the period 7 January 1998 to 29 May 1998 stood at US$ 131.1 million. The implication of this on the BSP’s profitability is that, for the same period, the BSP realized a net gain of P423.8 million from the CRPP as a result of the appreciation of the peso. (BSP Publication: July 1998, p. 12)
In evaluating the above-cited BSP policies on foreign exchange rates, it has been observed that they have been effective in averting the abrupt slides of the peso mainly due to speculation. Speculation means the buying, hoarding, or possession of dollars for the sake of keeping it with the hope of selling or exchanging it for a higher value in the near future. Speculators are mainly businessmen, bankers, or even private individuals. Speculation is not good because it causes panic-buying of dollars, and when the demand for dollars is too high while the supply is too low, the overall effect is the abrupt depreciation or devaluation of the peso against the dollar. Initially, the role of the BSP was to dip from its dollar reserves so that it can offer them for sale in the currency market with the purpose of dampening the demand for the dollar and bringing the market equilibrium exchange rates to relatively normal levels. During crisis situations, the BSP still plays the role of a major seller of dollars. Aside from this, the other BSP foreign exchange rates policies have the major objective of curbing speculation which is bad for the country because it fuels inflation and economic instability.
The peso-dollar exchange rates attained relatively stable levels during 1999 and the early months of 2000. As mentioned before, the BSP’s policies were not solely confined to foreign exchange rates policies but covered other areas of monetary and fiscal policies such as those on interest rates, bank reserve requirements, money liquidity, bank solvency, foreign loans and investments, external debt, etc.
B. Monetary Measures Implemented by the Bangko Sentral ng Pilipinas to Address the Asian Financial Crises
The following monetary measures were implemented by the Bangko Sentral ng Pilipinas to address the currency crisis:
1. Adjusted BSP’s key interest rates. From 15 percent at end-June 1997,
23 BSP’s overnight borrowing rate reached a high of 32 percent during the speculative episode while its overnight lending rate, at 17 percent as of end-June, was raised to as high as 34 percent in mid-July. Furthermore, on 20 August 1997, the BSP temporarily suspended its overnight lending facility to have a firmer grip on liquidity. The overnight borrowing rate has subsequently been lowered and the repurchase window reopened as market conditions continued to show improvement.
2. Raised required liquidity reserves. To tighten liquidity in the system in order to control any inflation momentum that can develop after the depreciation of the peso, the BSP gradually raised banks’ liquidity reserves from 2 percent to 8 percent through the issuance of various circulars. Liquidity reserves were imposed on top of the statutory reserve requirement and may be kept in the form of short-term market-yielding government securities purchased directly from the BSP. Hence, the impact on financial intermediation cost was minimal. Nonetheless, as market conditions improved, a progressive reduction in the liquidity reserves was undertaken. On 20 March 1998, the Monetary Board issued Circular No. 158 to amend the composition of reserve requirement. The circular reduced the banks’ statutory reserves by 3 percentage points to 10 percent while liquidity reserves were raised by an equal amount to 7 percent. The move was intended to help bring down domestic interest rates by lowering intermediation costs of banks.
3. Lowered the statutory reserve ratio and increased the proportion of interest-earning reserves. After cutting the statutory reserve requirement on 20 March 1998 by three percentage points, the BSP reduced further the required ratio by two percentage points to 8 percent effective 29 May 1998 to help bring down the cost of money and make more funds available for lending. At the same time, the proportion of interest-earning reserves kept with the BSP was raised from 25 percent to 40 percent.
4. Other measures. As the foreign exchange market stabilized, the BSP approved measures to effect a reduction in bank lending rates to avoid potential corporate bankruptcies. In its 21 January 1998 meeting, the Monetary Board approved the following measures to increase liquidity: (a) opening of a 30-day lending window; (b) opening of a swap window for banks without government securities (GS) holdings; and (c) outright purchase by the BSP of government securities at market rates.
24 C. Financial Measures Implemented by the Bangko Sentral ng Pilipinas to Address the Asian Financial Crises
The following financial measures were implemented by the Bangko Sentral ng Pilipinas to address the currency crisis:
1. Placed a cap on loans to real estate sector. The BSP issued Circular Letter dated 5 June 1997 that prescribed a regulatory limit on banks’ loans to the real estate sector to not more than 20 percent of a bank’s total loan portfolio, exclusive of loans to finance the acquisition or improvement of residential units amounting to not more than P3.5 million. However, aggregate real estate loans, inclusive of such loans, should not exceed 30 percent of the banks’ total loan portfolio. Furthermore, the BSP directed commercial banks to reduce the loan value of the real estate used as collateral for bank loans to not more than 60 percent of the appraised value of the real estate property, exclusive of individual loans not exceeding P3.5 million. Housing loans extended or guaranteed under the government’s National Shelter Program (NSP), being non-risk assets, are exempted from these ceilings on the real estate loans.
2. Prescribed a 30 percent liquid cover on all foreign exchange liabilities of FCDUs. To guard against adverse consequences of rapid growth of foreign exchange intermediation by the banking sector, the BSP issued Circular Letter dated 6 June 1997 requiring that 30 percent of the 100 percent cover for all foreign exchange liabilities of FCDUs of banks should be kept in liquid assets.
3. Initiated improvement in the quality of bank management. The BSP issued Circular No. 130 dated 6 June 1997 which contains the guidelines governing the responsibilities and duties of the board of directors of banks.
4. Redefined the criteria for past due loans. The guidelines in determining past due loans were amended to reduce the number of installments in arrears from six and two to three and one in cases of loans payable in monthly and quarterly installments, respectively, before they are considered past due through Circular No. 143 dated 1 October 1997. In a related development, the Monetary Board revised the guidelines on the treatment of restructured loans (including capitalized interest of restructured loans) of banks and non-banks with quasi-banking function through Circular No. 169 dated 13 July 1998. Under the released guidelines, such loans shall be treated as performing loans or interest income thereon shall be accrued, provided that these are: a) in current status; and b) fully secured by real estate with loan value up to 60 percent of the appraised value of the real estate
25 security and the insured improvements thereon, and such other first class collateral as may be deemed appropriate by the Monetary Board.
5. Required general loan-loss provision. A general loan-loss provision over and above the provision for probable losses linked to individually- identified bad accounts has been required under Circular No. 143 dated 1 October 1997. On top of the existing specific provisioning requirements, banks are now required to put up two percent of their gross loan portfolio --- less interbank loans, certain guaranteed loans which are not past due, and those which are considered non-risk under existing laws/rules/regulations --- as allowance for probable losses. The timetable for full compliance was accelerated to October 1999 instead of October 2000. Through Circular No. 164 dated 13 April 1998, the BSP further tightened the provisioning requirement to include “loans especially mentioned”, regardless of collateral (5 percent), and secured loans classified as “substandard” (25 percent) among specified loans subject for loan-loss provision. Banks are given until April 1999 to comply fully with these new provisioning requirements.
6. Increased the minimum bank capitalization requirement. To further strengthen the banking system to withstand possible shocks and to reduce moral hazard, the BSP directed another round of increase in the banks’ minimum capitalization. The new directive increases the minimum capitalization of new banks by 20 percent for universal banks, 40 percent for regular commercial banks and 60 percent for rural and thrift banks from the mandated banks’ capitalization requirement for 1998. Existing banks are given two years (up to year 2000) within which to comply with the minimum capital build-up.
7. Improved transparency in the banking system. To increase transparency and promote market discipline, the BSP required banks to post information on interest rates on their loans including manner of interest payment and other fees and charges. Moreover, all banks listed in the Philippine Stock Exchange are required to disclose in their quarterly published statement of condition the amount of non-performing loans and ratio to total portfolio, amount of classified loans, general loan-loss reserve and specific loan-loss reserve effective December 1998. Banks have likewise been required to include in their Consolidated Statement of Condition the following information: a) current level of restructured loans both with and without uncollected capitalized interest; and b) total allowance for probable losses which includes the 2 percent general provisioning and the provisioning for losses on loan accounts and other risk assets.
26 8. Proposed amendments to the General Banking Act (GBA). A proposed bill to amend the General Banking Act has been submitted by the BSP to Congress for deliberation. Proposed amendments include provisions enabling the Monetary Board to adopt internationally accepted standards relating to risk-based capital requirements and defining clearly unsound practices. The amended GBA is expected to provide the appropriate legal and regulatory framework for the changing financial environment.
27 Chapter 5 POLICY DIRECTIONS: “WHAT IS TO BE DONE?”
A. Monetary Sector
The Bangko Sentral ng Pilipinas continues to prioritize the maintenance of stable monetary and financial conditions to support economic growth. Towards this goal, the BSP will maintain its pursuit of a balanced monetary policy stance --- i.e., promotion of a decline in inflation rates and stabilization of exchange rate while ensuring the availability of sufficient credit necessary to support an intensification of economic activities. In particular, this will entail adjusting monetary stance to induce a further decline in domestic interest rates without compromising the objective of price and exchange rate stability.
B. External Sector
Exchange rate management will continue to support a floating rate system. Intervention will be limited to smoothening out fluctuations and to what is necessary to meet the program targets for building up net international reserves. The BSP will take the opportunity provided by the ongoing rapid external adjustment to further increase international reserves and reduce the Philippines’ vulnerability against external shocks.
C. Banking Sector
The authorities have tightened prudential standards in various areas to bring the Philippines broadly in line with international norms. Steps have been taken to monitor more closely individual problem banks, ensuring that prompt corrective action is taken to redress any slippage from regulatory standards. Future efforts in the area of banking reform will continue along these lines to ensure that the system can better withstand potential shocks in the face of remaining uncertainties in the regional and global environment. Banking supervision is also being further strengthened through adoption of consolidated supervision. Legislative measures are in the pipeline to amend the General Banking Act and the New Central Bank Act to, among others, enhance supervisory and enforcement powers of the BSP as well as strengthen further its independence.
Since the onset of the Asian Financial Crises, the BSP has pursued a wide array of policy measures to mitigate the impact of the crisis and facilitate the return to a sustainable and strong growth path.
28 Chapter 6 THE ASIAN FINANCIAL POST-CRISES PERIOD
The Philippine economy has made notable gains despite the twin effects of the regional and global financial crises and the weather-related disturbances. Although economic activity slowed down in 1998, GNP growth remained positive. The Philippine economy staged a strong recovery in 1999 as real GNP grew by 3.6 percent from the 0.1 percent growth in 1998. The peso has appreciated and stabilized in recent months; inflation has been successfully contained; and growth has started to recover during the first quarter of 1999 on the strength of the rebound in agriculture and the continued resilience of the services sector. These strong gains have brought forth greater confidence for a sustained recovery and have placed the Philippines at the forefront of the new race in post-crises Asia. Notwithstanding the early signs of economic recovery, a number of challenges have emerged, underscoring the need to sustain the efforts in ensuring a more durable and long lasting recovery. (BSP Publication: July 1999, p. 36)
There are a number of issues which have caused some concerns among market watchers. These issues include the potential adverse impact of the recent rounds of oil price adjustments and the reported pull-out by some multinational companies (MNCs). The authorities, however, remain confident that these developments will not adversely affect the Philippine government’s recovery efforts. (BSP Publication: July 1999, p. 37)
Notwithstanding inflationary pressures emanating from the series of oil price increases and the wage and transport fare hikes, inflation exhibited a steady downtrend during 1999. From a high of 11.5 percent in January 1999, the inflation rate fell to 4.3 percent in December, bringing the full-year average for 1999 to 6.6 percent. This was lower than the 1998 average inflation rate of 9.8 percent and the Philippine government’s inflation target of 7.0-8.0 percent in 1999 under the IMF- supported standby-arrangement. The decline in inflation was brought about mainly by more favorable weather conditions which caused average prices of food items to fall. (BSP Publication: Jan. 2000, p. 3)
The Philippine Stock Exchange also regained and increased its activity in 1999 after two consecutive years of lethargic market activity. Positive news of benign inflation and the series of cuts by the BSP in liquidity reserves during the year provided the right signal to equity investors. (BSP Publication: Jan. 2000, p. 14)
Favorable developments characterized also the external sector in 1999: a stronger external position due to sustained inflows from exports; increased foreign exchange reserves due to the strong inflows; a more stable exchange rate; and a manageable external debt level. (BSP Publication: Jan. 2000, p. 8)
29 Chapter 7 SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
Summary
The Asian Financial Crises is for real. It is different from the other minor currency disturbances in that it has a regional dimension which is far-reaching even to other continents. The behavior of the peso-dollar exchange rates was driven more by speculation rather than by economic fundamentals. Although the country’s balance of payments, unemployment rates, investments, exports / imports, and industries have been affected by the said Asian Financial Crises, the Philippines has been pronounced by international financial agencies and organizations, such as the IMF, as having a good prognosis in coping up with the crises. This is mainly because of our country’s sound macroeconomic fundamentals wherein the Philippines has reached its GNP targets and inflation rates have been trimmed down to tolerable limits.
The Bangko Sentral ng Pilipinas played a major role in cushioning the negative impacts of the Asian Financial Crises on the Philippine economy. The BSP’s policy responses involved the sustained pursuit of firm monetary stance, flexible and market-oriented foreign exchange policy, stronger fiscal position, and a relatively sound financial system.
The major blows of the Asian Financial Crises were greatly felt by the Philippine economy during the 3rd quarter 1997 up to 1st quarter 1998. The peso- dollar volatility as measured by the standard deviation has see-sawed to a lesser extent from the 2nd quarter 1998 up to 4th quarter 1998. The lingering effects of the Asian Financial Crises again manifested itself during the 3rd quarter 1999 up to 4th quarter 1999 when its volatility again shot up expectedly due to local economic problems like the oil price hikes, transport fare hikes, and minimum wage adjustments. Overall, the economy has recovered from the Asian Financial Crises although this monster seemed to have left its enormous shadow throughout the region.
Conclusion
In conclusion, these are the lessons learned from the Asian Financial Crises. The key solution to every crisis, of whatever nature, is to restore confidence. In this case, it is to restore investor confidence. In times of crisis, investment flows into the country would strengthen the economy and stabilize the country’s currency exchange rates. In the specific case of the Asian Financial Crises as it affected the Philippines, our country’s financial managers were able to respond effectively to the crises by following the three principles, namely: (1) prompt action; (2) determined policy response; and (3) international financial support.
30 Recommendations
Despite the lingering effects of the Asian Financial Crises and other disturbances, the Philippine financial system remains stable and is poised to support moderate economic recovery. Improving macroeconomic fundamentals --- as evident in the rebound in domestic demand, declining inflation, rising exports, declining interest rates, and a generally stable peso --- all point to better prospects for the resumption of lending activity. Ultimately, the key to a stronger financial system is a robust and sustained economic growth. (BSP Publication: Jan. 2000, p. 22)
The favorable performance of the Philippines in coping with the Asian Financial Crises was not achieved by chance but is the fruit of a policy reform process to which the Philippine government and the Bangko Sentral ng Pilipinas, in particular, are deeply committed. The challenge is to ensure that the recovery is sustainable and that all income classes share in the fruits of growth. To this end, there are three major areas where the BSP can contribute to the achievement of a balanced and sustainable economic development: firstly, through price stability; secondly, through reasonable cost of credit; and thirdly, through the maintenance of confidence in the financial system. (BSP Publication: Jan. 2000, p. 26)
31 REFERENCES
Books
Asian Development Bank (1998). “The Financial Crisis in Asia,” Asian Development Outlook, Oxford: Oxford University Press.
Bangko Sentral ng Pilipinas. The Philippines: Staying on Course, October 1997.
---. The Philippines: Staying on Course, February 1998.
---. The Philippines: Onward to Recovery, July 1998.
---. The Philippines: Sustaining the Recovery, January 1999.
---. The Philippines: Sustaining the Recovery, July 1999.
---. The Philippines: Consolidating Economic Growth, January 2000.
Department of Economic Research, Bangko Sentral ng Pilipinas (April 1999). Selected Philippine Economic Indicators.
International Monetary Fund (Jan. 1997 - Jul. 2000). International Financial Statistics, Washington, D.C.: IMF.
Japan External Trade Organization (1999). Strengthening Cooperation Among Asian Economies in Crisis, Japan: Aiko Printing Co. Ltd.
Stiegeler, S. E. , ed. (1985). Dictionary of Economics and Business, 2nd ed., England: Gower Publishing Co. Ltd.
Computer Information Utilities
Dow-Jones Telerate on Daily Peso-Dollar Exchange Rates
CEIC on ASEAN Currency-Dollar Exchange Rates
Journals
International Monetary Fund (May 1998). “Financial Crises: Causes and Indicators,” World Economic Outlook, Washington, DC: IMF.
32 ---. October 1998.
Martinez, G. O. (June 1998). “What Lessons Does the Mexican Crisis Hold for Recovery in Asia?” Finance and Development, Washington, DC: IMF.
McDonald, I. S. (ed.) (June 1998). “The Asian Crisis: Causes and Cures,” Finance and Development, Washington, DC: IMF.
Nunnenkamp, P. (1998). “Dealing with the Asian Crisis: IMF Conditionality and Implications in Asia and Beyond,” Economics (A Biannual Collection of Recent German Studies), vol. 57, Tubingen: Institute for Scientific Coopera- tion.
Speech
Montes, M. F. (1998). “Diagnosis of the Asian Crisis - Implications for Currency Arrangements” Paper Presented to the International Symposium on the Asian Economic Crisis and Its Impact on Trade and Investment held on November 6, 1998 in Tokyo, Japan.
33 Appendix A
DAILY PESOS PER U.S. DOLLAR RATE January to December 1997
DATE JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
1 26.364 26.376 29.000 30.352 34.295 34.763 2 26.293 26.364 26.373 26.375 26.376 30.267 34.926 35.019 3 26.288 26.347 26.331 26.368 26.374 26.378 30.688 34.233 35.275 35.127 4 26.343 26.323 26.367 26.371 26.403 28.978 31.617 35.144 35.184 5 26.332 26.324 26.374 26.364 28.886 32.309 34.785 35.069 6 26.285 26.339 26.323 26.367 26.370 28.704 34.494 34.698 7 26.287 26.339 26.321 26.367 26.362 26.399 28.512 34.926 34.927 8 26.297 26.365 26.365 26.400 28.494 32.191 35.537 35.136 9 26.318 26.370 26.389 26.398 32.080 35.565 35.123 10 26.338 26.346 26.320 26.368 26.379 26.400 31.247 34.852 34.868 35.071 11 26.349 26.326 26.365 26.375 26.400 28.487 31.947 34.533 35.132 12 26.347 26.323 28.548 32.375 33.907 35.687 13 26.340 26.347 26.321 26.373 26.376 28.630 33.156 33.467 14 26.328 26.343 26.321 26.364 26.372 26.400 28.966 32.883 33.620 15 26.315 26.361 26.374 28.772 29.440 32.287 33.308 36.987 16 26.302 26.360 26.374 26.382 29.674 32.278 34.239 38.347 17 26.293 26.344 26.331 26.353 26.376 29.352 32.360 33.952 33.922 39.990 18 26.345 26.339 26.355 26.375 28.574 29.762 32.807 34.051 40.024 19 26.342 26.338 26.374 26.377 33.852 34.547 39.534 20 26.304 26.340 26.333 26.373 26.378 30.073 33.851 34.997 21 26.311 26.338 26.334 26.364 26.373 28.142 30.036 33.922 34.826 22 26.325 26.362 26.374 28.231 29.979 33.491 34.223 39.589 23 26.325 26.362 26.374 26.381 28.398 32.817 34.646 39.859 24 26.332 26.341 26.339 26.367 26.374 28.403 33.726 34.519 34.569 40.626 25 26.338 26.342 26.369 26.374 28.478 29.850 33.214 34.241 26 26.336 26.351 26.375 26.374 29.896 33.452 34.678 27 26.341 26.332 26.375 26.374 29.970 34.834 34.645 28 26.333 26.333 26.366 26.373 28.475 30.234 35.293 34.655 29 26.335 26.368 26.373 28.479 30.165 33.449 35.319 39.975 30 26.347 26.369 26.374 26.384 28.486 33.873 34.758 31 26.344 26.367 28.968 34.938
Std Dev (Mo.) 0.0202 0.0050 0.0119 0.0042 0.0034 0.0052 1.1628 0.6450 1.0540 0.7075 0.4838 2.2715 Std Dev ('97) 3.9264 AVERAGE 26.3173 26.3411 26.3319 26.3642 26.3721 26.3761 27.6679 29.3305 32.3945 34.4639 34.5178 37.1706 (Mean) AVERAGE 26.3173 26.3286 26.3297 26.3385 26.3451 26.3502 26.5592 26.8951 27.5421 28.3002 28.8409 29.4765 (Cumulative)
Source: Reference Exchange Rate Bulletin, Treasury Department, BSP
c:\appendix-a.xls 30-Jun-2000
34 Appendix B
DAILY PESOS PER U.S. DOLLAR RATE JANUARY TO DECEMBER 1998
DATE JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
1 37.817 39.127 42.036 43.923 44.027 39.512 2 40.116 42.687 39.907 38.230 39.072 41.528 43.532 43.974 39.342 3 41.924 39.691 38.750 39.396 41.310 42.080 43.067 40.398 39.101 4 40.133 39.578 40.178 38.942 42.082 43.506 39.907 38.795 5 41.078 40.117 39.963 39.989 39.098 42.128 43.876 39.380 6 41.738 40.614 40.015 39.078 39.074 41.306 42.127 43.906 39.585 7 44.894 38.488 39.387 41.410 42.343 43.489 43.778 38.880 8 45.420 37.770 40.425 39.154 41.370 43.350 43.643 39.313 9 44.982 40.901 40.505 39.649 41.397 43.395 43.406 40.047 38.983 10 40.125 40.200 39.470 41.685 42.916 43.538 39.845 38.682 11 39.369 39.933 39.775 44.135 43.935 40.492 38.724 12 44.558 38.290 39.824 39.561 43.968 43.056 40.744 13 44.073 39.805 39.890 38.171 38.673 42.119 43.393 43.018 40.362 14 43.611 37.607 39.446 42.218 43.456 43.728 43.133 39.004 15 42.622 38.106 39.553 40.319 41.862 43.724 43.288 38.956 16 41.571 41.032 39.782 38.148 41.566 41.702 43.616 43.230 40.641 38.983 17 40.860 39.355 38.249 41.772 41.662 43.199 43.746 40.286 39.240 18 40.655 39.327 39.538 41.717 43.243 43.780 39.857 39.510 19 41.352 40.244 39.270 39.819 40.425 43.028 42.987 39.947 20 41.000 39.730 38.719 38.278 39.626 41.392 42.845 42.761 39.869 21 40.954 38.157 39.009 41.718 42.691 43.891 42.923 39.352 22 41.223 38.103 38.687 40.898 41.778 44.154 38.985 23 42.160 40.336 37.730 38.192 41.235 42.051 44.395 42.754 39.567 39.084 24 40.643 37.748 38.387 41.329 42.045 42.654 44.566 39.551 38.989 25 40.398 37.351 38.751 41.443 43.173 44.367 39.606 26 43.960 40.059 36.989 38.658 41.503 43.239 42.245 39.381 27 43.574 40.364 37.444 38.633 38.747 42.124 43.632 41.806 39.462 28 42.758 38.817 38.626 42.178 43.582 43.669 41.220 38.972 29 41.827 39.883 38.898 42.091 42.100 43.890 40.790 39.059 30 42.410 37.787 39.979 41.945 43.809 40.831 31 37.081 42.016 43.874
Std Dev (Mo) 1.5197 0.8738 1.1312 0.6042 0.5450 1.0849 0.3042 0.6224 0.3514 0.9648 0.4209 0.2312 AVERAGE 42.6610 40.4143 39.0040 38.4422 39.2971 40.3991 41.7805 43.0375 43.7759 42.8882 39.9435 39.0733 (Mean) AVERAGE 42.6610 41.5650 40.6707 40.1337 39.9779 40.0469 40.3219 40.6655 41.0294 41.2162 41.1101 40.9459 (Cumulative)
Source: Reference Exchange Rate Bulletin, Treasury Department, BSP c:\appendix-b.xls 30-Jun-00
35 Appendix C
DAILY PESOS PER U.S. DOLLAR RATE JANUARY TO DECEMBER 1999
DATE JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
1 38.536 38.995 38.004 38.022 39.705 40.858 40.920 2 38.497 39.006 38.001 37.988 38.443 39.655 40.875 3 38.481 39.034 37.961 37.969 38.580 39.770 40.250 40.830 4 39.145 38.459 39.071 37.875 38.013 38.580 40.746 40.142 5 38.686 38.498 39.126 38.819 37.762 38.052 38.842 40.628 40.123 6 38.207 38.702 37.755 38.149 38.818 39.766 40.394 40.817 7 38.104 38.544 37.819 38.027 38.116 39.755 39.952 40.839 8 38.261 38.592 39.225 38.442 37.991 38.256 39.748 40.247 40.024 40.747 9 38.928 39.065 37.872 38.429 38.812 40.062 40.095 40.712 10 39.460 38.945 37.940 37.776 39.206 40.327 40.071 40.723 11 38.180 39.214 39.034 37.736 37.815 38.991 40.507 40.237 12 37.832 38.841 38.942 38.506 37.566 38.600 38.978 40.412 40.297 13 37.811 38.466 37.581 38.361 39.335 40.032 40.117 40.695 14 38.207 38.315 37.708 37.878 38.342 39.828 40.321 40.732 15 38.669 38.460 38.942 38.148 37.933 38.295 40.078 40.410 40.253 40.707 16 38.599 38.898 38.131 37.834 38.144 39.178 39.935 40.149 40.666 17 38.671 38.821 37.771 37.805 39.315 40.081 40.172 40.643 18 38.694 38.532 38.883 37.949 37.757 39.589 40.236 40.354 19 38.308 38.648 38.890 38.150 37.828 38.343 39.680 40.259 40.321 20 38.336 38.062 37.790 38.402 39.499 40.262 40.450 40.595 21 38.294 37.946 37.879 37.795 38.319 40.148 40.295 40.609 22 38.240 38.899 38.755 38.123 37.916 38.432 40.197 40.262 40.453 40.572 23 39.119 38.726 38.170 37.861 38.435 39.592 40.257 40.634 40.434 24 39.073 38.791 37.858 37.775 39.543 40.488 40.715 40.310 25 38.502 38.993 38.707 37.820 37.857 39.735 40.135 40.612 26 38.869 39.098 38.721 38.013 37.833 38.421 39.812 40.104 40.789 27 38.558 37.988 38.061 38.300 39.758 40.922 40.117 40.198 28 38.465 38.045 38.021 37.967 38.273 40.713 40.008 40.151 29 38.717 38.761 38.005 37.920 38.232 40.983 40.158 40.787 40.313 30 38.844 38.018 38.019 38.245 39.784 41.112 31 38.766 38.095 39.671
Std Dev (Mo) 0.3244 0.2925 0.1401 0.2546 0.1342 0.0882 0.1498 0.4310 0.4224 0.2269 0.2436 0.2155 AVERAGE 38.4043 38.7799 38.9108 38.2417 37.8385 37.8993 38.2798 39.2610 40.1738 40.3150 40.3409 40.6232 (Mean) AVERAGE 38.4043 38.5921 38.7084 38.6003 38.4450 38.3489 38.3386 38.4587 38.6562 38.8205 38.9456 39.0854 (Cumulative)
Source: Reference Exchange Rate Bulletin, Treasury Department, BSP c:\appendix-c.xls 30-Jun-00
36 Appendix D
DAILY PESOS PER U.S. DOLLAR RATE JANUARY TO JUNE 2000
DATE JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
1 40.556 40.972 42.649 2 40.568 40.906 41.279 42.633 3 40.298 40.601 40.952 41.086 41.275 4 40.021 40.650 41.147 41.269 5 39.830 41.174 41.265 42.465 6 40.010 40.896 41.172 42.421 7 40.376 40.567 40.854 41.129 42.233 8 40.537 40.923 41.279 42.417 9 40.547 41.042 41.274 42.475 10 40.472 40.463 40.957 41.093 41.279 11 40.226 40.403 41.115 41.353 12 40.477 41.104 41.398 13 40.627 40.923 41.157 42.521 14 40.509 40.432 40.859 41.166 42.400 15 40.396 40.907 41.474 42.415 16 40.387 40.937 41.589 42.465 17 40.600 40.459 40.954 41.157 41.613 18 40.529 40.560 41.228 41.662 19 40.612 41.189 41.727 42.611 20 40.634 40.932 42.649 21 40.682 40.629 40.957 42.672 22 40.684 40.961 41.682 42.693 23 40.717 40.915 41.801 42.907 24 40.637 40.654 40.867 41.218 42.158 25 40.607 41.258 42.749 26 40.436 41.342 43.159 42.879 27 40.514 40.897 41.378 42.890 28 40.472 40.779 40.951 41.278 42.963 29 40.845 40.943 42.976 43.115 30 41.008 42.649 43.154 31 40.390 41.063 42.829
Std Dev (Mo) 0.2264 0.1241 0.0507 0.0800 0.6237 0.2452 AVERAGE 40.4266 40.5717 40.9381 41.1884 41.8063 42.6489 (Mean) AVERAGE 40.4266 40.4974 40.6558 40.7727 40.9913 41.2698 (Cumulative)
Source: Reference Exchange Rate Bulletin, Treasury Department, BSP
c:\appendix-d.xls 9-Jul-2000
37 Appendix E
EXCHANGE RATES OF ASEAN CURRENCIES PERIOD AVERAGES (US$/FOREIGN CURRENCY) Jan 1997 to Jun 2000
Period Philippines Malaysia Indonesia Thailand Singapore
1997 29.4707 2.9225 3,100.7 32.693 1.5332 Jan 26.3173 2.4915 2,393.0 25.708 1.4061 Feb 26.3411 2.4873 2,403.0 25.928 1.4193 Mar 26.3319 2.4769 2,413.8 25.948 1.4359 Apr 26.3642 2.4994 2,426.8 26.051 1.4413 May 26.3721 2.5070 2,438.3 25.869 1.4361 Jun 26.3761 2.5158 2,446.6 25.779 1.4271 Jul 27.6679 2.5764 2,518.3 30.320 1.4498 Aug 29.3305 2.7476 2,800.4 32.481 1.4966 Sep 32.3945 3.0188 3,055.3 36.302 1.5177 Oct 34.4639 3.2784 3,616.3 37.395 1.5577 Nov 34.5178 3.3659 3,492.0 39.302 1.5822 Dec 37.1706 5.1044 7,205.1 61.234 2.2289
1998 40.8931 3.9244 10,013.6 41.359 1.6736 Jan 42.6610 4.4141 9,662.5 53.810 1.7533 Feb 40.4143 3.8290 8,950.0 46.140 1.6579 Mar 39.0040 3.7450 9,687.6 41.332 1.6171 Apr 38.4422 3.7288 7,950.0 39.476 1.6011 May 39.2971 3.8174 9,897.3 39.152 1.6382 Jun 40.3991 3.9891 13,535.0 42.364 1.6953 Jul 41.7805 4.1577 13,962.5 41.190 1.7077 Aug 43.0375 4.1990 11,950.0 41.576 1.7538 Sep 43.7759 3.8144 10,843.8 40.410 1.7263 Oct 42.8882 3.8015 8,287.5 38.141 1.6405 Nov 39.9435 3.7965 7,685.3 36.464 1.6389 Dec 39.0733 3.8000 7,752.0 36.258 1.6530 c:\appendix-e.xls 31-Jul-00
38 Appendix E (cont.)
EXCHANGE RATES OF ASEAN CURRENCIES PERIOD AVERAGES (US$/FOREIGN CURRENCY) Jan 1997 to Jun 2000
Period Philippines Malaysia Indonesia Thailand Singapore
1999 39.0890 3.8000 7,855.2 37.840 1.6957 Jan 38.4043 3.8000 8,714.3 36.624 1.6871 Feb 38.7799 3.8000 8,726.0 37.059 1.7005 Mar 38.9108 3.8000 8,886.8 37.510 1.7294 Apr 38.2417 3.8000 8,547.8 37.601 1.7134 May 37.8385 3.8000 7,990.3 37.024 1.7123 Jun 37.8993 3.8000 7,225.5 36.914 1.7121 Jul 38.2798 3.8000 6,808.8 37.109 1.6965 Aug 39.2610 3.8000 7,509.5 37.983 1.6797 Sep 40.1738 3.8000 8,274.8 39.838 1.6960 Oct 40.3150 3.8000 7,349.5 39.474 1.6765 Nov 40.3409 3.8000 7,072.5 38.768 1.6704 Dec 40.6232 3.8000 7,156.0 38.180 1.6746
2000 41.2633 3.8000 7,834.9 38.104 1.7091 Jan 40.4266 3.8000 7,278.8 37.290 1.6733 Feb 40.5717 3.8000 7,415.0 37.650 1.7005 Mar 40.9381 3.8000 7,479.0 37.854 1.7152 Apr 41.1884 3.8000 7,790.0 37.920 1.7097 May 41.8060 3.8000 8,407.5 38.890 1.7281 Jun 42.6490 3.8000 8,639.3 39.021 1.7278
Source of Basic Data: International Financial Statistics, IMF; and CEIC c:\appendix-e.xls 31-Jul-00
39