The Philippine Economy: Back on track
As the regional economic turmoil in East Asia bottoms out, the Philippines is the first to make a full economic recovery among the affected countries. The Philippines has been able to mitigate the effects of the crisis because of the right economic policy decisions by President Joseph Estrada's administration. At the center of these are reforms in banking, financial and fiscal sectors. As indicated by economic statistics in the first quarter of 1999, the Philippines can look forward to an encouraging economic performance this year and in succeeding years.
In the first three months of 1999, the Philippine economy posted a 2 percent GNP growth. GDP grew by 1.2 percent, after three successive quarters of negative growth. A 3 percent growth of the services sector, 2.5 percent rebound of the agriculture sector and 19.2 percent growth of net factor income, including an estimated US$6 billion annual remittances of overseas Filipino workers, contributed greatly in the strong economic performance during this period.
The cost of doing business in the Philippines has already stabilized. The peso-dollar exchange rate is now between PhP37 and Php39 per dollar, whereas in January 1998 the peso was trading at Php45 per dollar. Interest rate on 91-day Treasury Bill, the Philippine domestic market benchmark, is below 10 percent, as against a high of 15.2 percent in April 1998.
Philippine exports continue to perform well. In the first four months of 1999, export earnings grew by 12.1 percent to $10.98 billion from $9.10 in the same period last year. The stock market has seen renewed trading activities, with its composite index breaching the 2,500-level, a significant improvement over the composite index of 1,082 in September 1998. Gross international reserves (GIR) as of April 19 reached $13.4 billion, enough to cover more than three months of imports.
Investors' confidence in the Philippines has returned, as manifested by a strong interest of international capital markets on the bonds issued by the Philippines so far. In April 1998 the Philippines became the first Asian country since the onset of the crisis to successfully issue a $500 million global bond offerings. This was followed by similarly successful issuance of $1.2 billion global bond offerings and euro 350 million ($378 million) eurobond issues in 1999.
The Philippines is on course to achieving its 1999 economic targets. These include a full-year average of 3 percent to 3.7 percent GNP growth, a 2.6 percent to 3.2 percent GDP growth, an inflation rate between 8 percent and 9 percent, a current account surplus of $444 billion and GIR of $12.9 billion.
Stronger macroeconomic fundamentals and adopting preventive measures to discourage the banking system from committing lending excesses, in the face of large capital flows in the mid-1990s, helped the Philippines weather the regional financial turmoil.
As the crisis unfolded, the country's central bank, Bangko Sentral ng Pilipinas (BSP), adopted a monetary policy geared toward containing inflation and restoring stability in the foreign exchange market. The BSP's monetary measures included: a) timely adjustment of BSP's key interest rates; b) raising required liquidity reserves; c) lowering the statutory reserve ratio and increasing the proportion of interest-earning reserves; d) opening of a 30-day lending window; e) opening of a swap window for banks without government securities (GS) holdings; and f) outright purchase by the BSP of GS at market rates.
The BSP also strengthened its prudential framework over domestic banks as the banking system came under severe stress after a growing number of banks' corporate clients experienced financial distress. Specifically, the BSP undertook the following measures: a) placing a cap on loans to the real estate sector b) prescribing a 30 percent liquid cover on all foreign exchange liabilities of Foreign Currency Deposit Units; c) initiating improvement in the quality of bank management; d) redefining the criteria for past due loans; e) requiring general loan-loss provision; f) increasing the minimum bank capitalization requirement; g) improving transparency in the banking system; h) imposing stricter rules to establish new banks; i) encouraging mergers and consolidation; j) imposing sanctions on financial institutions that fail to comply with Year 2000 BSP directives; k) implementing stricter monetary and nonmonetary sanctions for noncompliance with minimum bank capitalization requirement; l) imposing stiffer sanctions on banks and quasi-banks failing to set up allowance for probable losses; m) strengthening regulatory oversight; n) issuing policy guidelines for banks failing to comply with minimum bank capitalization requirement; o) issuing stricter criteria for new bank branches; and p) proposing amendments to the General Banking Act and other legislative measures.
The Philippines also made fiscal adjustments to undertake a number of revenue-enhancement and expenditure-rationalization measures, and adopted an expansionary stance to spur economic activities. Specifically, the government implemented the following: a) pump-primed the economy; b) rationalized government expenditures; c) enhanced revenue; d) availed of cheaper sources of funding; e) continued the privatization program; f) improved tax administration; g) rationalized fiscal incentives; and h) introduced new legislative measures.
The Philippines monitored foreign exchange movements by: a) requiring prior clearance on the sale of nondeliverable forward contracts; b) adjusting and redefining the rules in the computation of overbought/oversold foreign exchange position of banks; c) lowering the ceiling on over-the-counter dollar sales; and d) consolidating banks' accounts with subsidiaries and affiliates.
The Philippines will continue to give high priority to the restoration of financial stability, involving the moderation of interest rates, ensuring greater exchange rate stability and strengthening the banking system. Interest rates will be lowered by reducing banks' intermediation cost. Exchange rate management will continue to support a floating rate system. Within the banking sector, there will be improvement in the regulatory oversight methods and prudential supervision of banks.
The Philippines aims to maintain a current account surplus, which will be driven by a strong export performance led by electronics and machinery and transportation equipment. It will continue to spur economic growth by continuing an expansionary fiscal policy, with additional government expenditures in infrastructure, basic education, health, social welfare and agriculture.
With important policy reforms already institutionalized and the future policy adjustments already identified, the Philippines is confident of its ability to sustain its economic recovery.