Economic Crisis... Once More
Economic Crisis... Once More edited by Mario B. Lamberte
Caesar Cororaton Margarita Guerrero Generoso de Guzman Ponciano intal Jr. Mario Lamberte Rosario Erlinda
Manasan Medalla
Melanie Milo Aniceto Orbeta Jr. Virginia Pineda Celia Reyes Josef Yap
pls Philippine Institute for Development Studies Surian sotogaPag-aaral Pangkaunlaran ngPi/ipinas
:
Copyright
2001 by
Philippine Institute for Development 4/F NEDA sa Makati Building 106 Amorsolo St., Legaspi Village Makati City 1229, Philippines
Printed
in the Philippines.
Studies (PIDS)
All rights reserved.
The findings, interpretations and conclusions in this volume are those of the authors and do not necessarily reflect those of PIDS.
Please address all inquiries
to:
PHILIPPINE INSTITUTE FOR DEVELOPMENT NEDA sa Makati Building 106 Amorsolo St., Legaspi Village 1229 Makati City, Philippines Telephone: (63-2) 8924059, 89357051 Fax: (63-2) 8939589, 8161091 E_mail: publications@pidsnet.pids.gov.ph URL: http://www, pids.gov.ph
iSBN 971-564-033-8 RP 12-01_500
STUDIES
Table ofContents Foreword
Chapter 1
Introduction - Mario B. Lamberte
1
Part 1:
The Philippine Economy before the East Asian Financial Crisis
Chapter 2
Philippine Economic Performance Before the East Asian Financial Crisis - Melanie R.S. Milo
Part I1:
Impact of the East Asian Financial Crisis
Chapter 3
Overview of the Economic and Social Impact of the East Asian Financial Crisis - Melanie R.S. Milo
53
Chapter 4
The EastAsian Financial Crisis and Philippine Sustainable Development - Ponciano S. Intal, Jr. and Erlinda M. Medalla
75
Chapter 5
Impact of the East Asian Financial Crisis on the Philippine Manufacturing Sector - Mario B. Lamberte, Caesar B. Cororaton, Aniceto C. Orbeta, Jr. and Margarita Guerrero
109
Chapter 6
Impact of the East Asian Financial Crisis on Households - Celia M. Reyes, Rosario G. Manasan, Aniceto C. Orbeta, Jr. and Generoso de Guzrnan
145
Chapter 7
Fiscal Impact of the East Asian Financial Crisis - Rosario G. Manasan, Celia M. Reyes, Aniceto C. Orbeta, Jr. and Generoso de Guzman
199
23
Chapter 8
Impact of the East AsiaJnFinancial Crisis on Social Services Financing and Delivery - Virginia S. Pineda
Part III
Government's Response to the East Asian Financial Crisis
Chapter 9
Economic Policies and Measures in Response to the East Asian Financial Crisis - Mario B. Lamberte an_l Josef T. Yap
Chapter 10 _ Social Safety Net Programs in the Philippines - Melanie R.S. Milo Part IV Chapter11
223
263
335
Special Issues -
Currency Crisis: Where Do We Go from Here? - Mario B. Lamberte
353
Chapter 12 -
A Second Look at the Credit Crunch - Mario B. Lamberte
382
Chapter 13 -
Recent Developments in Corporate Governance in the Philippines - Mario B_Lamberte
403
Part V
Monitoring
Chapter 14 -
Developing an Early Warning System to Help Understand and Monitor Economic Crises - Josef T_Yap
423
Chapter 15 -
Assesment of Existing Monitoring Systems - Celia M. Reyes, RosariD G. Manasan, Aniceto C. Orbeta, Jr. _andGcneroso de Guzman
447
Systems
Foreword
here were many questions regarding the impact of the East Asian financial crisis on various Philippine sectors. The foremost being just how deeply affected the Philippine economy was by the crisis, especially by the sharp depreciation of the peso. In response, the Institute implemented a number of studies since 1997to understand the nature and causes of the crisis, examine its impact on the domestic economy, and recommend some measures to mitigate the negative impact on these sectors in the short-run and reduce the vulnerability of the economy to another currency crisis in the long-run. The result of the undertaking is a collection of exhaustive studies on the recent East Asian financial crisis, a modest achievement which the Institute is only too enthusiastic to share with its readers and clients. The book has five sections which deal separately on the following concerns, namely, the Philippine economy before the crisis, the socioeconomic impacts of the crisis, the government's response to the crisis, an assessment of the early warning and monitoring systems, as well as other important economic issues such as capital controls, credit crunch and corporate governance, that emerged as the crisis unfolded. Although no two crises are exactly similar, the lessons learned from the various chapters of this book can certainly be useful to policymakers in formulating policies and instituting measures to prevent the occurrence of another currency crisis, reduce its adverse effects should one occur, and better manage risks that may emerge as the country's economy deepens its integration with the rest of the world. Lastly, the Institute is grateful to the following organizations that provided support to some of the studies in this book, namely, the Institute of Southeast Asian Studies (ISEAS), the World Bank, Japan
Bank for International Cooperation (formerly the Overseas Economic Cooperation Fund, Japan) and the Asian Development Bank. Thanks are also due to a number of individuals who, in one way or another, had contributed to the completion of the studies in this book.
_tO
t
Mario ]_.Lamberte, LPresident
Ph.D.
Introduction Mario
B. Lamberte
he last quarter of the 20 t" century saw the Philippine economy experiencing three major crises, which amazingly occurred at regular intervals--every 7 years (Figure 1). The first and the worst among the three crises occurred in 1984 when the gross domestic product (GDP) shrank by 7.3 percent. It further contracted by another 7.3 percent the following year. The second crisis occurred in 1991 when GDP contracted by 0.6 percent. The third and latest crisis struck in 1998 when GDP shrank by 0.6 percent.
Figure 1. Real GDP growth rates (In percent).
[0 1
ml0
Year
Source:National StatisticalCoordination Board.
2
Economic
crisis... Once more
Indeed, the boom-bust cycle appropriately characterizes the Philippine economy in the last 25 years. Because of this, the economy grew only by an average of 3.2 percent annually during this period. For a population growth rate of more than 2 percent per year, this is precariously low that a small decline in economic activity can have a significant, negative impact on employment and poverty in the country. As Figure 2 shows, the country has not yet returned to the highest real per capita income attained in 1982. Figure 2. Real per capita income
1.3,500 13,000 12,500
_ jr'--
11,000
KJ
10,000
.
10,500
(In pesos).
_RGNP/Pop. -
"_
_RGDP/Pop,
,
_.L_
j
' Year i
Source: National
Statistical
Coordination
Board,
As yet it cannot be explained why economic crises in the Philippines occurred at regular intervals. However, their causes can be explained and their effects on the economy can be analyzed. This is what the PIDS has been doing over the years to enrich the quality of policy debates in the country and to reduce, if not avoid, policy mistakes in the future. This volume focuses on the third crisis. 1 It puts together the Institute's studies on the causes, effects, and policy responses
of the Philippine
authorities
to the East Asian financial
crisis.
It is hoped that lessons drawn from the rece_ crisis can be used by policymakers in shaping policies that would shepherd the Philippine economy out of the boom-bust cycle as well as to students of business and economics who will become
important
players in the economy
The East Asian Financial
in the future.
Crisis
Unlike the two previous crises experienced by the Philippines, the recent crisis is unique in that several countries in East Asia encountered a similar crisis almost at the same time, suggesting that these economies became vulnerable, 1For the Institute's studies (1989), Philippine Institute Yap (1994).
dealing with the first two Crises, see Lamberte et al. (1985), Lamberte for Development Studies (1986), Montes (1987), and Lamberte and
Chapter 1: Lamberte
3
albeit in different degrees, at about the same time. It would be worthwhile, therefore, to view this crisis from a regional perspective. What follows is a brief review of the East Asian financial crisis and a presentation of views attempting to explain it. 2 Just as many people were beginning to appreciate the so-called "East Asian Miracle, "3 a currency crisis occurred in the East Asian region. 4 It started in Thailand in July 1997 when the Thai central bank, after assessing that it could no longer changed exchange vis-a-vis
withstand the massive speculative attack on the Thai baht, suddenly its exchange rate policy from an implicit dollar peg to a floating rate system. In a week's time, the Thai baht lost 15 percent of its value the US dollar. The free fall of the Thai baht continued unabated in
subsequent weeks. The currency crisis then quickly spread to neighboring countries in the region, notably Indonesia, Malaysia, the Philippines, and South Korea, which like Thailand had been pegging their currencies to the dollar prior to the crisis. The sudden loss of investor confidence in these countries prompted private capital, which came in droves before the crisis, to flee at a staggering pace? As Radelet and Sachs (1998) pointed out, the US$109 billion net capital outflow that occurred in the second half of 1997 represented a sizable shock to the region, accounting crisis-hit countries.
for 10 percent of the combined
precrisis GDP of the five
The effects of the huge capital outflows immediately became evident in the currency and stock markets of crisis-hit countries. From June 1997 to December 1997, currencies of these countries depreciated by 29-50 percent in nominal terms and stock price indices plunged by 28-47 percent (Table 1). The following year, the economies of these countries shrank precipitously, reversing a substantial portion of the gains realized in the preceding 10 years. Imports were cut substantially, inducing a sharp reversal in the current account balance from substantial deficits in previous years to large surpluses in 1998 and 1999 (Table 2). The severity and speed with which the crisis spread in the region and later to other countries outside the Asian region went beyond everyone's 2There is no attempt to discuss at length these issues here since they were thoroughly discussed in several papers (e.g., Krugman 1998, Radelet and Sachs 1998, Furman and Stigfitz 1998, Mishkin 1999). The World Bank (1993) coined this term to refer to the rapid growth with equity experienced by 8 East Asian economies, excluding the Philippines, from 1965 to 1990. 4According to Ito (1999), "[A] currency crisis is usually understood to be a collapse of the domestic monetary system together with the drying up of foreign reserves in a country adopting a fixed exchange rate. Moreover, sizable fluctuations of the exchange rate beyond the theoretically appropriate range under a floating rate may constitute a currency crisis in a broader sense. Furthermore, even ff t_here_are.no currency fluctuations, a substantial decline of the foreign reserves to fend off speculation may be described as a currency crisis in the sense that the country's monetary system is subject to a speculative attack." 5The aggregate capital inflows of the five crisis-hit countries averaged US$40 billion annually in the 1990s, reaching a peak of about US$70 billion in 1996 (Dornbusch et al. 2000).
4
Economic
expectations monitoring
including economic
East Asian
financial
given
emphasis
certainly
crisis
It is, therefore,
Table
1. Market Asian
has raised
important
indicators countries
important
discussions
to the shaping
come.
Once
more
those of multilateral institutions, which have been closely developments in the region for a long time. Indeed, the
in previous
contribute
crisis...
of the international to understand
have
economy
performance
not yet been
These
issues
will
in the years
to
of this crisis.
of crisis-hit
East
change).
Noulina] exchange rate
1. Indonesia 2. South Korea 3. Malaysia 4. Philippines 5.ThaJlartd
that crises.
the nature
and economic (percent
June-December Co,retry
issues
on currency
1997 Stock price index
-50.16 -40.06 -34.21 -29.03 -29.03
-44.41 -45.08 -47.24 -33.94 -27.61
GDP. 1.998 -13.70 -5.80 -7.50 -0.60 -10.40
Source: ADB, Asia Recovery Information Center.
Table
2. Current
Year
account
Indonesia
1990 1991 1992 1_,_)3 1994 1995 1996 1997 1998 1999
-2.6 -3.3 -2.0 -1.3 -1.6 -3.2 -3.4 -2.2 4.0 4.0
balance
as % of GDP.
Rep- of Korea
MMaysia
Philippines
Thailand
-0.8 -2.8 -7.3 0.3 -1.0 -1.7 -4.4 -1.7 12.7 6.1
-2.0 8.5 3.7 4.5 , 6.1 9.5 4.6 4.7 13.0 15.8
-6.1 -2.3 -1.9 -5.5 -4.6 -2.7 -4.8 -5.3 2.4 10.3
-8.5 -7.7 -5.7 -5.1 -5.6 -8.1 -8.1 -1.9 1Z5 8.9
Source: ADB, Asia Recovery Information Center.
The Asian
Policy
Forum
(2000)
describes
as a "capital account crisis, the origin of which capital relative to the underlying current account term nature,
followed
by a sudden
and massive
the East Asian
financial
crisis
was large inflows of private deficit and of a largely shortreversal
of capital
flows."6
The
6 The Asian Policy Forum (APF) consists of 17 policy-oriented research institutes including PIDS representing 14 Asian economies. Earliel; Reisen (19_8) and Yoshitomi and Ohno (1999), among others, pointed out that the East Asian financial crisi_ was basically a capital account crisis, not the conventional current account crisis.
Chapter 1: Lamberte
5
large capital inflows created a "double mismatch," that is, mismatches in both maturity and currency, which made balance sheets of local financial institutions and nonfinancial enterprises extremely vulnerable to both currency devaluation and bank runs. The sudden and massive reversal of capital flows led to the "twin crises", i.e., currency and banking crises7 Several economists had put forward their views to explain the causes of the East Asian financial crisis? Ito (1999) identified three common causes: (1) the foreign exchange system, i.e., crisis-hit Asian countries adopted the dollar peg system; (2) vulnerable financial system, i.e., prudential regulations and supervision of financial institutions in crisis-hit countries were inadequate to deal with the double mismatch; and (3) excessive short-term foreign debts of the private sector in the wake of capital account liberalization. These countries' effort to simultaneously attain the three objectives--dollar peg system, capital liberalization, and independent monetary policy otherwise known as the impossible trinity--inevitably led to the crisis (Fig. 3). As the crisis quickly deepened, crisis-affected countries abandoned one of the three objectives (Table
3). Figure 3. The impossible
trinity. Fun capit_ controls
Monetary
Pure float
_
Exd._ .angerate
Full final_cialintegration
Monetary union
Source: Frankel (1999).
7interestingly, Kaminsky and Reinhart (1999)found that the link between banking and currency crisis has strengthened since the 1980swhen emerging market economies started to liberalize their financial sector. sFor example,see Radeletand Sachs (1998,1999),Krugman (1998),World Bank (1998),Hill (1999), Asian Development Bank (1999),and Sachs and Woo (1999).
6
Economic
Table 3. Policy objectives Dollar peg
Capital l_beralization
met by crisis-hit Independent monetary policy
crisis... Once more
Asian countries.
Resul.ts
Yes
Yes
Yes
Crisis
No
Yes
Yes
Adop_on flexible exchange system
Asian examples
Asian countries before 1997 of rate
Postcurrency crisis in Thailand, h_donesia, Philippines, Taiwan, South Korea and Singapore
Yes
No
Yes
Capital control
Cl_il_ and postcrisis Malaysia
Yes
Yes
No
Currency board
Hong Kong
Source:Ito (1999). Prior to the East Asian financial developed to explain the underlying that occurred in Western Europe common
features,
crisis, several theoretical
models were
causes of currency crises, specifically those and Mexico. Because some of them had
they were then categorized
into two groups of models: first-
generation or exogenous policy models, which view a currency crisis as the unavoidable outcome of unsustainable pohcy stances or structural imbalances (e.g., chronic budget deficits, huge current account deficit); and secondgeneration interaction
or endogenous policy models, which emphasize the point that the between investors' expectations and actual policy outcomes can lead
to self-fulfilling crises and the possibility of multiple outcomes or equilibria (Krugman 1998). They are also called fundamental and self-fulfilling views, respectively, of the currency crisis. However, these models have overlooked important features of the East Asian financial crisis, notably the role of the banking and financial sector and the strength of the contagion effect. 9 This has prompted several economists to develop new models, such as, the moral hazard/ asset bubble model, the liquidity crisis model, the banking crisis approach, the contagion approach, the panic model approach, and the credit cycle approach to explain the East Asian financial crisis. 1° Still, not one of these models offers satisfactory explanations of the events that unfolded in crisis-hit East Asian countries. Pesenti and Tille (2000), therefore, have proposed a synthesized view, which stresses the point that the role of the banking and finance sectors and the international transmission of crises or contagion encompass both fundamental and self-fulfilling
views. In this synthesized
financial sector, overborrowing
syndrome,
view, the health and stability of the common shocks, or displaying
similar
Dornbusch et al. (2000)define contagionas a "significant increasein cross-marketlinkages after a shock to an individual country (orgroup of countries),as measured by the degree to which asset prices or financial flows move together across markets relative to this comovement in tranquil times," 1. These are elaborated
on in Ito (1999).
•
Chapter 1: Lamberte
7
elements of domestic vulnerability such as high reliance on foreign-denominated debt and relatively stable exchange rate against the US dollar, trade and financial linkages, and common creditors all fall under the fundamental view. On the other hand, international liquidity-driven crisis and information asymmetries fall under the self-fulfilling view. Table 4 gives a summary of this synthesized view, which also captures the main issues addressed by other newly developed models mentioned earlier. Pesenti and Tille assert that: ",4 synthesized view approach combines the strengths of each view and stresses how they complement one another, Fundamental wealcnesses leave countries at the mercy of sudden shifts in market sentiment, and cont_dence crises have devastating implications when they act as catalysts o/ongoing processes. Indeed, advocates of both the fundamental and self[ultiTling views agree in principle that a deterioratlng economic outlook increases an economy's vulnerability to a crisis. Whether or not the plunges in assetprices after the eruption of the event are driven by self-fulf_71ingexpectations and investor panic, weak economic fundamentals are a crucial element the genesis and spread of a crisis. " Table 4. Synthesized view. Key aspects of the East Asian crisis View
Fundamental
Self-fulfilling
view
view
Role of banking and finm_cial sector
Contagion
Health and stability of the financial sector;
Common shocks; transmission through
overborrowing
trade and _lmlcial channels; con_non c_editors
International driven crisis
syndrome
liquidity-
In/ormation asymmetries (imperfect information, herding behavior)
Indeed, fundamental imbalances, such as large current account deficits, real currency appreciation (except in the case of Korea) resulting from the dollar peg system, and exposed position of the banking and corporate sectors in an environment of weak prudential supervision, that were present, albeit atvarying degrees, in the five crisis-hit economies prior to the onset of the crisis were absent in less-affected Asian economies, such as Singapore, Taiwan, and Hong Kong.
8 Overview
Economic
crisis... Once more
of issues and findings
The studies included in this volume were written at different periods as the East Asian financial crisis unfolded. It was, therefore, unavoidable to have some overlaps. Nonetheless, each one offers a unique contribution to the issues raised during the East Asian financial crisis. To highlight this point, the studies are organized into five thematic areas. Part I discusses the performance of the Philippine economy before the onset of the East Asian financial crisis. Milo's paper (Chapter 2) reviewed the reforms in the financial and real sectors of the economy initiated by the government in the second half of the 1980s. These reforms were broadened and deepened in the first half of the 1990s to reduce macroeconomic imbalances and liberalize a once extremely protected economy. She noted that the economy, aided by favorable external economic and stable domestic political environment, responded well to these reforms. After contracting in 1991, GDP growth rate steadily rose in succeeding years, reaching 5_8percent in 1996. Economic growth was also accompanied by improvements inI some social indicators, as gleaned from the rise in the Philippines' human development index during the period 1992-95. Because weak banks were weeded out in the wake of the 1984-85 crisis and prudential regulations and supervisio n of banks were strengthened, the banking system came into the 1990s with a relatively strong balance sheet. However, the country's vulnerabilities to a currency crisis had been gradually building up. More specifically, trade deficits had widened in the 1990s. Although its fiscal position had improved, however, it was highly dependent on privatization proceeds, which are nonrecurring income. The dominance of shortterm capital flows and the significant rise in Commercial banks' foreign liabilities that facilitated the lending boom in the 1990s had made the economy ".increasingly vulnerable to sudden shifts in market sentiments. Part II includes studies that examined the impact of the crisis on various sectors of the economy. Milo's paper (Chapter 3) provides an overview of the economic and social impact of the crisis in the Philippines. The immediate response of the Bangko Sentral ng Pilipinas (BSP), the Philippines' central bank, to the unfolding currency crisis in the region was to raise the interest rate to as high as 32 percent per annum in mid-July 19'97 and, at the same time, to heavily intervene in the foreign exchange market to keep the exchange rate stable at around P26 per US$1. After spending around US$1.5 billion of its reserves without achieving its objective, the BSP allowed the exchange rate to float freely, and the peso immediately reached record lows against the US dollar. Stock market prices plunged sharply as foreign investors divested of their holdings and headed for the exit door. The effects of the crisis, which were magnified by the E1 Nifio weather phenomenon that devastated the agricultural sector, were •fully felt in 1998. The number of firms affected by the crisis more than doubled
Chapter 1: Lamberte between
9
1997 and 1998 and unemployment
rate rose to 9.6 percent in the third
quarter of 1998. The decline in family income fell heavily on poor families and income distribution worsened. Unlike other crisis-hit countries in the region, the Philippines did not experience a widespread Nonetheless, the commercial banking systems'
failure of financial institutions. nonperforming loans rose to as
high as 14.4 percent in the third quarter of 1999. The sharp rise in interest payments caused by the surge in domestic interest rates and peso depreciation and the decline in government revenues as imports and corporate profits shrank had impaired the government's fiscal position. intal and Medalla (Chapter 4) studied the impact of the East Asian financial crisis on sustainable development concerns, that is, social development and natural resources and environmental regeneration, through four channels: employment, income and poverty channel; interest rate and inflation channel; real exchange rate channel; and fiscal contraction and expenditure realignment. The East Asian financial crisis aggravated the aggregate unemployment situation and poverty because the industrial sector could not provide better employment prospects for both urban and rural workers who were affected by the E1 Nifio weather phenomenon. The authors pointed out that the mandatory 25 percent reserves imposed on the 1998 budget aimed at arresting the ballooning budget deficit could constrain the capability of the government to provide social services and safety nets. n For the natural resource and environment sector, the program of the Department of Environment and Natural Resource (DENR) that could be most adversely affected was environment management, followed by forest management. Indeed, it made the 1998 budget for DENR's maintenance and other operating expenditures the lowest in real terms during the 1990s. High interest rates are expected to discourage investments in reforestation and modernization of wood processing plants, unless the government continues with its subsidization of reforestation activities. Interestingly, in their simulation analysis, Intal and Medalla found that trade reforms accompanied by exchange rate adjustment exhibited higher potential improvement in pollution intensity than reforms without exchange rate adjustment. Lamberte et al. (Chapter 5) examined the impact of the East Asian financial crisis on the Philippine manufacturing sector and its response to the crisis, using secondary and primary data specifically gathered for the purposes of this study. The classification of sample firms into five subsectors, size, and export orientation enabled them to assess the differential impact of the crisis on various types of firms. They found that capacity utilization of firms already declined even before the East Asian financial crisis occurred, indicating that the observed capacity
underutilization
rate of firms could be attributed
to both structural
u Editor_aote: This paper was written before the government decided to exempt the social services sec_r from the mandatory 25 percent reserves.
10
Economic
crisis... Once more
and cyclical factors. As a result, the average profit rate of sample firms dropped dramatically from 12.1 percent in 1996 to 3.5 percent in 1997, and to 2.1 percent during the first half of 1998. As expected, the capacity underutilization of nonexporters dropped much more significantly than that of exporters during the crisis. The significant drop in capacity utilization of firms would have required a large labor lay-off. However, firms resorted to certain means, such as reducing workweek or days, applying forced vacation leave, and freezing salary increases to minimize labor layoffs. Another significant finding was that firms reduced their debts as they began to feel the effects of the crisis. However, the adjustment made by small and nonexporting firms in their leverage ratio was much bigger than that made by large and exporting firms. Although the percentage of those who were denied loans from financial institutions doubled during the crisis, it was smaller than generally expected considering the economic uncertainty. Also, most firms surveyed claimed to have continued access to suppliers'
credit during
the crisis period.
Reyes et al. (Chapter 6) analyzed crisis on households and their response
the Iimpact of the East Asian financial to the crisis using recently published
secondary data and primary data gathered specifically for this study. As unemployment rate rose due to the crisis and the E1Nifio weather phenomenon, per capita income declined in real terms. What made it worse was that the average family income of all decries, except for the richest decile, decreased in 1998, worsening income inequality. Survey results showed an increase in selfrated poverty during the crisis. The vulnerable groups affected by the crisis were farming communities, which also had to absorb the adverse effects of the E1 Nifio phenomenon; fishing communities, which had to deal with rising operating costs; children, who had to stop schooling to take care of younger siblings so that their parents could work or to become additional income earners of the family; and women, who had to take on additional jobs to raise family income. Households adopted some measures to cope with the crisis, such as reduction and reallocation of expenditures, borrowing, and selling of assets to compensate for reduced income, among others. Although households protected their budget for food, however, they made some changes in consumption patterns, such as having only one viand per meal, doing away with nonessential food commodities, and substituting more expensive food with cheaper food. Some households postponed the entrance of their children into the elementary and secondary levels so that their children who were already in school could continue their studies. Others transferred their children from private to public schools and asked them to walk to school to save on transportation expenses. Adjustments matte by households during the crisis will certainly term implications on human development and labor productivity.
have long-
Chapter 1: Lamberte Manasan
11
et al. (Chapter 7) examined
the impact of the crisis on the fiscal
position of the government. Tax effort dropped from 16.4 percent of GNP in 1996 to 16.3 percent and 14.9 percent in 1997 and 1998, respectively. For 1998, the Bureau of Internal Revenue and the Bureau of Customs missed their revenue targets by a wide margin. On the other hand, the national government's budget for 1997 was expansive. Although this expansive mood was carried over in 1998, however, the government, after making a downward adjustment in the revenue program in the early part of 1998, imposed a 25 percent reserve on total maintenance and operating appropriations of all national government agencies. In July 1998, the government decided to exempt government agencies engaged in the delivery of basic social services, which unfortunately was implemented only toward the latter part of the year. Local government units (LGUs) were also affected by the budget crunch as the government imposed a 10 percent reserve on their internal revenue allotments, which have been their most important source of revenue. Thus, a revenue gap was observed in most of the sample LGUs. Since LGUs were not allowed to incur a budget deficit due to recurrent expenditures, the revenue gap immediately resulted in lower levels of LGU expenditures. Pineda (Chapter 8) focused on the impact of the crisis on the government's financing and provision of social services through the Department of Health (DOH), Department of Education, Culture and Sports (DECS), and the Department of Social Welfare and Development (DSWD). She observed that the government accorded the highest priority to the social services sector by providing it the biggest budget allocation. Thus, social services sector expenditures, after cutbacks were restored, increased in real terms in 1998, while those of other sectors declined. Among the social services subsectors, education and social welfare appeared to be the most protected subsectors, while housing was the most adversely affected subsector by the budget crunch. In 1999, however, the appropriation for the social services sector declined in real terms. In view of this financial constraint, the social sector agencies adopted some remedial measures. For instance, the DOH, among others, adopted focused targeting and reallocated inputs in favor of vulnerable groups. DECS, among others, increased the maximum number of pupils per class to deal with classroom shortage, ordered the return of teachers holding administrative positions back to the classrooms to address the shortage of teachers, and declared a 2-year moratorium on acquiring supplementary reference materials so that it could use the savings to buy more textbooks. For its part, the DSWD, among others, encouraged LGUs to give priority in allocating funds for its services and intensified social marketing business sector.
and advocacy to encourage
support from the private
12
Economic
crisis.,. Once more
Part III puts together two studies that examined the government's response to the East Asian financial crisis. Lamberte and Yap (Chapter 9) discussed the economic policies and measures adopted by the Philippine government in response to the crisis. The BSP instituted several measures to stabilize the exchange rate and mitigate the effects of the currency crisis on the banking system. These measures included, among others, the prohibition of banks from entering into nondeliverable forwards (NDF) with nonresidents, including offshore banking units without BSP prior approval; adjustment in the overbought/oversold position of banks to discourage them from speculating in the foreign exchange market; establishment of the Currency Rate Protection •Program, which is a BSP-sponsored NDF facility; increase in overnight borrowing rate; rise in liquidity reserves of_banks; revision in the treatment of past due loans; tightening of specific loan-loss provisioning and imposition of a general loan-loss provisioning; increase in the minimum capital requirement of banks; tightening of rules on insider borrowings; and issuance of policy guidelines on resolving issues related to problem banks. In contrast to the previous 4 years, the national government ran a budget deficit in 1998 to pumpprime the economy and funded it mainly by borrowing abroad to reduce pressure on domestic interest rates. • The authors also discussed the future direction of economic recovery and development given domestic and international environments. They identified downside risks, such as the possibility of a second round of sharp currency depreciation and slowdown in global growth, that can undermine the recovery as well as positive developments, such as decline in US interest rates, passage of key reform measures in Japan, and favorable weather condition, that can support the recovery of the domestic economy. The authors outlined some short-term and medium- and long-term action plans that may be adopted by the government to stage a rapid economic recovery in the short run and sustainable growth in the long run. Short-term action plans are confidencebuilding measures that the government must immediately initiate and complete within 2 years. They include pump-priming measures for 1999 that will highly focus on key sectors of the economy and resource mobilization measures, such as renegotiating the short-terra bridge financing, privatization, and acceleration of financial sector reforms. Medium- to long-term action plans are aimed at restructuring the economy or specific sectors of the economy, and must be immediately initiated but may not be completed in 2 years. They include consistent monetary and exchange rate policies, improvement on information system on capital flows, development o 4 a coherent competition policy framework, establishment of competitive irlfrastructure sector, improvement in tax collection, rationalization of taxes on the financial sector, pension fund system reform, industrial restructuring, and agricultural development.
Chapter 1: Lamberte
13
Milo (Chapter 10) discussed the existing as well as the newly installed safety net programs in the Philippines to alleviate the social impact of the East Asian financial crisis. The major safety net programs are food subsidy, public employment, and credit-based livelihood programs. Of the three, credit livelihood programs were the most developed and extensive. Overall, she concluded that these programs were inadequate both quantitatively and qualitatively, and pointed out the need for better targeting and improvement in efficiency in the delivery of social safety net programs. Part IV includes studies dealing with three special issues that emerged during the East Asian financial crisis. Lamberte (Chapter 11) tackled the issue of whether the Philippines should re-impose currency controls, in general, and caPital controls, in particular, in the light of the currency crisis affecting the region. To put this issue in proper perspective, he reviewed the different views on sequencing of economic liberalization, including full capital account convertibility, and selective capital controls and contrasted Malaysia's capital control program, which was imposed to eliminate speculative flows that had battered the ringgit, with Chile's capital control program, which was aimed at changing the composition of capital inflows. Although the Philippines has already substantially liberalized its economy, its capital account, however, is still not fully convertible. Lamberte concluded that imposing additional capital controls similar to that of Chile or Malaysia to the Philippine economy during the crisis is inappropriate. Instead, he recommended the continued adoption of a flexible exchange rate, improvement in corporate governance, and strengthening of the banking system through improved prudential regulations to accelerate the recovery and make the country less vulnerable to another currency crisis. Another issue that cropped up during the East Asian financial crisis was the possibility that the crisis-hit countries in the region were experiencing a credit crunch. Lamberte (Chapter 12) reviewed the literature on credit crunch, which is part of a larger literature on monetary transmission mechanisms and business cycle, and emphasized the need for differentiating credit slowdown, which refers to the combined effects of both supply factors and demand considerations on the quantity of credit, from credit crunch, which refers only to a reduction in the available supply of credit. The results of the empirical analysis suggested that the Philippines has not been experiencing a credit crunch since the onset of the East Asian financial crisis. On the contrary, they showed that the slowdown in bank loans merely reflected depressed economic activity. Thus, loosening up prudential regulations to encourage banks to lend to the business sector was not deemed advisable. One of the issues that figured prominently during the crisis was weak corporate governance, which accordingly made countries in the region more vulnerable to external shocks. Lamberte (Chapter 13) highlighted this in his
14 paper. Most banks, especially
Economic those that survived
crisis... Once more
the 1984-85 crisis, came into
the Asian crisis with much stronger balance sheets than those of neighboring crisis-hit countries. Also, Philippine nonfinancial corporations were less indebted compared with corporations of other crisis*hit countries. This does not mean, however, that they were not adversely affected by the crisis. Several corporations had gone bankrupt, affecting the balance sheets of banks that heavily lent to them. Lamberte reviewed recent efforts m_de by the government to improve corporate 'governance of financial and nonfinancial firms. He noted some progress, particularly in existing laws governing distressed corporations because they have encouraged weak governance in the past. For instance, corporations can be more aggressive in borrowing because they know that they can easily get a suspension of payment once they suffer financial difficulties. Part V includes studies that proposed the development of monitoring systems: one, to anticipate future crises; and the other, to quickly assess the social impact of the crisis. Since crises have now become more frequent and their effects more devastating to affected economies, it is therefore necessary to develop a system that will help policymakers detect symptoms of an imminent crisis. Admittedly, no two crises are exactly the same. However, they may have some common elements that can signal their beginning. Yap (Chapter 14) attempted to capture these common elements in the early warning system he applied for understanding and monitoring economic crises in the country. The results he derived from using a slightly modified Kaminsky-Reinhart signals approach suggested that the huge, sudden reversal of capital flows explain the magnitude of the crisis in the Philippines, not the macroeconomic fundamentals. However, the latter served as the trigger in Thailand, exacerbated the crisis. He extended the same methodology and found similar results.
while the contagion to 11 other countries
Among the three crises in the last 25 years, the last one has raised greater concerns about its social impact. The lack of an adequate monitoring system, however, has hampered the ability of various stakeholders to quickly analyze and make appropriate responses to amy adverse social impact of a macroeconomic crisis. Data on different dimensions of welfare are collected by various government agencies and published separately with a considerably long time lag. Reyes et al., (Chapter
15). _herefore,
proposed
that a social
monitoring system be developed and a focal Iagency be designated to maintain it? This agency shall obtain data from administrative reports being collected by national and local government agencies, cenguses, and surveys of the National Statistics Office as well as from community-based monitoring systems.
Chapter
1: Lamberte
Economic
crisis..,
once
The gloom quickly
15
that pervaded
disappeared
recovery
more... East Asia
in 1999 (Fig. 4). These
countries
rates, interest rates, and short-term gross international (Table external crisis
reserves
5). The swift
underpirmed
environment.
Their relatively
it possible
which
Cooperation
Figure
4. GDP
successfully
brought
good
of East Asia's
Development
growth
fiscal
rates
(OECD)
levels
countries
policies
was
and favorable
at the onset
expansionary
countries,
inflation and raised
than precrisis
position
rapid recovery
by robust growth
levels
of crisis-hit
macroeconomic
to have
a "V-shaped" down
debts to manageable
for them to conduct
was supported
and
1998 seemed
exhibited
of the economies
expansionary
and 1999, One of the drivers growth,
foreign
and
countries
to levels much more comfortable
recovery
by domestic
made
in 1997
as the five crisis-hit
of the
fiscal policy
in 1998
was the strong
export
of Organization
for Economic
particularly
the US.
(In percent).
10
Indonesia Rep. of Korea
5
_
o
_'_
-_'_
&
....
........ "%// .....
- 10 -15
MMaysia
-i- Ph ippine _
Thailand
Source: ADB, Asia Recovery Information Center.
Table
5. Inflation rates, lending term external debt.
Country
h_donesia Korea Malaysia Philippines Thailand
h_flation rate (in percent) 1998 58.4 7.5 5.3 9.7 8.1
1999 20.5 0.8 2.7 6.7 0.3
rates,
Lending rate (in percent) 1998 Q4 1999 Q4 35.2 21.7 11.9 8.7 8.2 6.8 14.4 10.9 12.3 8.3
international
reserves
International reserves (-US$billion) 1997 16.6 20.4 20.8 7.3 26.2
1999 26.4 74.0 30.6 13.2 34.1
and
short-
Sh0rt-termexternaldebt (US$ billion) 1997 38.5 66.3 16.7 13.7 42.4
1999 21.0 45.8 9.1 9.1 16.5
Source: ADB, Asia Recovery Information Center, Bangko Sentral ng Pilipinas, and BIS-IMF-OECDWorld Bank Statistics on External Debt.
16
Economic All this, however,
crisis... Once more
does not mean that the five crisis-hit
countries
have
already gone over the hump. Nonperforming loans of banks in these countries, particularly, Indonesia, Thailand, and the Philippines, have remained high and the problems of many distressed corporations have yet to be resolved decisively. It is to be noted that the expansionary fiscal policy adopted by crisis-hit countries in the wake of the crisis has caused fiscal deficits to rise sharply (Table 6). This certainly cannot be extended for a long period as it will cause domestic price instability. Also, the robust growth of the US economy, which has now run for almost 10 consecutive years, cannot be expected to last long. In fact, the US Federal Reserve Bank has been trying to engineer a soft landing or gradual slowdown of the US economy by raising interest rates in several steps for a total of 175 basis points since November 1998_Thus, while the economic recovery of crisis-hit countries is swift, it is still essel_tially fragile. Table 6. Fiscal balances Year 1995 1996 1997 1998 1999
Indonesia 2.2 1.2 -02 -2.3 no data
as % of GDF. Rep. of Korea 0.3 0.1 -1.3 -3.8 -4.6
Malhysia 0.8 0.7 2.4 -i .8 -3_2
Philippines 0.6 0.3 0.1 -1.9 -3.7
Thailand 3.2 O.9 -0.3 -2.8 -3.3
Source:ADB,Asia RecoveryInformation Center.
This fragility has been demonstrate d by the turbulence that recently rocked the financial markets of the five crisis-hit countries. In particular, currencies inthe region have remained volatile, except for the Malaysian ringgit, which has been fixed to the US dollar since 1998 (Table 7). Stock market indices plunged by 18 percent to 39 percent during the same period. Investors view East Asia's recovery to have been affected by external factors, such as rising US interest rates and international oil prices, and internal factors, such as rising fiscal deficits, slow progress with corporate and banking restructuring and other reforms, and political instability in the case of Indonesia and the Philippines. A hard landing or rapid decline of the US economy cannot be underestimated. As The Economist (2000) pointed out, "history shows that soft landings are hard to pull off." A hard landing of the US economy can significantly hinder, if not reverse, the progress of economic recovery of crisis-hit countries, which export a sizable countries
proportion of their GDPs to the US, and make it harder for these to attract foreign funds as panicky investors seek safer havens. With
Japan's economic recovery uncertain in the next few years, a simultaneous slowdown of European economies can easily aggravate the situation.
Chapter 1: Lamberte
17
Table 7. Movement
of exchange
rates and stock prices indices January - November
Country
(In percent).
2000
Nomilml exchange rate
Stock price index
1. Indonesia 2. South Korea
-22.2 -2,3
-37.0 -43.4
3. Malaysia 4. Philippines 5. Thailand
0.0 -18.7 -14.6
-18.3 -29.5 -39.0
Note: Computations
are based
Source: ADB, Asian Recovery
on average
monthly
Information
Center.
values.
If another crisis strikes the region soon after the 1997 crisis, then such a crisis will easily dwarf any of the crises in the past and will likely extract more painful adjustments on the part of recovering East Asian countries for several reasons. One is that the fiscal position of crisis-hit countries, including the Philippines, is no longer as strong as before the onset of the crisis. The national governments of these countries, therefore, will be constrained from absorbing the additional costs of cleaning up the balance sheets of failing corporations and banks as they did in 1998 and 1999. Another reason is that the banking systems of the five East Asian economies are still saddled with a sizable amount of nonperforming loans, and another crisis will inevitably cause more corporate bankruptcies, and hence, further impair the balance sheets of banks. This can delay the recovery Still another reason is that a large chunk of the International Monetary Fund's (IMF) resources is still locked up in rescue packages it installed in Indonesia, Thailand, Korea, Brazil, Russia, Turkey, and more recently, Argentina. It would be extremely difficult for capital-rich countries to quickly mobilize relatively huge financial resources to complement IMF rescue packages as they did for crisis-hit countries in the region especially since they may need to pumpprime their economies in the event a worldwide economic slowdown OCCURS.
The biggest challenge facing the Philippines as well as other crisis-hit countries is how it can reduce its vulnerability to currency and banking crises and make the economy more nesilient. Taking a cue from the Pesenti-Tille synthesized view that "the Asian crisis resulted from the interaction between structural weaknesses Philippine authorities regional, and global.
and the volatility of the international capital markets," must approach the challenge from three levels: national,
At the national level, the various papers in this volume have offered several recommendations to strengthen the fundamentals of the economy. These
18
Economic
crisis... Once more
include, among others, the adoption of appropriate exchange rate and monetary policies as well as prudent fiscal policy, improvement in the supervision and prudential regulation of financial intermediaries to strengthen the health and stability of the financial sector, refinement in the country's bankruptcy law, development of the domestic bond market, and strengthening of corporate governance. The reforms envisioned in the new General Banking Act and the Securities Regulation Code can certainly strengthen corporate governance in financial and nonfinancial firms in the country. Structural and institutional reforms aimed at improving the efficiency of key sectors of the economy must continue. It is not enough to put these measures in place. Equally important is the need to constantly monitor not only macroeconomic indicators but also microeconomic indicators (e.g., leverage ratios of nonfinancial firms, maturity mismatches on banks' foreign assets and liabilities) so that the country's policymakers can immediately institute appropriate measures to prevent the buildup of vulnerabilities and reduce the risk of a currency crisis. Should a crisis occur, the government must exert efforts to minimize its social impact. In this regard, well-designed social safety netl programs must be in place even prior to the occurrence of any crisis. At the regional level, the Philippines should continue its active participation in the establishment of a regional financial arrangement and other regional cooperative efforts to reduce the region's vulnerability to currency and banking crises. At the global level, the Philippines must actively participate in discussions aimed at reforming the international financial architecture. Fischer (1998) pointed out the two most important reasons I for revamping the international financial architecture. First, the internationalicapital flows to emerging markets are too volatile and that volatility subjects recipient countries to shocks and crises that are both excessively frequent and lexcessively large. Second, there is too much contagion in the system. Although some efforts have already been made to reform the international financial a_chitecture since 1997 (e.g., private sector involvement in crisis resolution, lender of last resort facility at IMF), many issues remain unresolved (e.g., rules cov!ering cross-border transactions, governance structure of the Bretton Woods institutions). It is to be noted that developing economies including East Asian economies and industrialized economies represented by the G-7 still hold divergent views on many of these unresolved issues (Lamberte 2000).
Chapter 1: Lamberte
19
References Asian
Development Bank. 1999. Asian Oxford University Press.
Development
Outlook.
Hong
Kong:
Asian
Policy Forum. 2000. Policy recommendations for preventing another capital account crisis. Tokyo: Asian Development Bank Institute. Dornbusch, R., Y.C. Park, and S. Claessens. 2000. Contagion: understanding how it spreads. The World Bank Research Observer, 15(2). Washington D.C.: The World Bank. Fischer, S. 1998. Reforming the international monetary David Finch Lecture, Melbourne, 9 November Frankel,
Furman,
system. Presented at the 1998. Available at http:/
/wwwimf.org. J. 1999. No single currency regime is right for all countries or at all times. Working Paper No. 7338. Cambridge: National Bureau of Economic Research. J. and J. Stiglitz. 1998. Economic crises: evidence and. insights from East Asia. Brookings Papers on Economic Activity 2. Washington D.C.:
The Brookings Institution. Hill, H. 1999. An overview of the issues. In: H.W. Arndt and H. Hill (eds.), Southeast Asia's economic crisis: origins, lessons, and the way forward. Singapore: Institute of Southeast Asian Studies. Ito, T. 1999. Asian currency crisis: its origin and backgrounds. Development Fund.
Assistance,
5(1). Tokyo: Overseas
Journal
of
Economic Cooperation
Kaminsky, G. and C. Reinhart. 1999. The twin crises: the causes of banking and balance-of-payments problems. American Economic Review, 89(3). Krugman, P. 1998. What happened to Asia? Unpublished paper. Massachusetts Institute of Technology. Lamberte, M.B. 1989. Assessment of the problems of the financial system: the Philippine case. Working Paper Series No. 89-18. Makati City: Philippine Institute for Development Studies. Lamberte, M.B. 2000. Reforming the international financial architecture: the East Asian view. Discussion Paper Series No. 2000-37. Makati City: Philippine Institute for Development Studies. Lamberte, M.B. and J.T. Yap. 1994. The Philippines. In N. Hamid and S.N. Zahid (eds.), External shocks and policy adjustments: lessons from the Gulf crises. Manila: Asian Development Bank. Lamberte, M.B., R.G. Manasan, R.S. Mariano, E.M. Medalla, M.F. Montes, and C.M. Reyes. 1985. A review and appraisal of the government response to the 1983-84 balance-of-payments crisis. Monograph Series No. 8. Makati City: Philippine Institute for Development Studies.
20
Economic
crisis... Once more
Mishkin,
F. 1999. Lessons from the Asian crisis. Working Paper No. 7102. Cambridge: National Bureau of Economic Research. Montes, M.E 1987. Financing development: the political economy of fiscal policy in the Philippines. Philippine Institute for Development Studies Monograph Series No. 13. Pesenti, E and C. Tllle. 2000. The economics of currency crises and contagion: an introduction. Economic Policy l'_eview. New York: Federal Reserve Bank of New York. Philippine Institute for Development Studies; 1986. Economic recovery and longnan growth: agenda for reforms. Volume I, Main Report. Radelet, S. and J. Sachs. 1998. The onset of the,East Asian financial crisis. Working Paper Series Research.
No. 6680. Cambridge:
National
Bureau of Economic
Reisen, H. 1998. Domestic causes of currency crises: policy lessons for crisis avoidance. Technical Papers No. 136. Paris: Organization for Economic Cooperation and Development (OECD) Development Centre. Sachs, J.D. and W.T. Wool 1999. The Asian financial crisis: what happened, and what is to be done. Unpublished. The Economist. 2000. America's economy: slowing down, to what. London: The Economist Newspaper Limited, 9 December. World Bank. 1993. The East Asian miracle: economic growth and public policy. New York: Oxford University Press, Inc. World Bank. 1998. East Asia: the road to recovery. Washington, D.C.: The World Bank. Yoshitomi, M. and K. Ono. 1999. Capital account crisis and credit contraction. Working Paper, No. 2. Tokyo: Asian Development Bank Institute.
Part I:
The Philippine Economy Before the East Asian Financial Crisis
2 Philippine Economic Performance Before the East Asian Financial Ma. Melanie
Crisis
R.S. Milo
his paper describes the state and performance
of the Philippine
economy
before the East Asian crisis. It is divided into four sections. The first section discusses the major macroeconomic developments in the 1990s. The following section gives an overview of developments in the financial sector from 1980 to 1997. Social sector developments are reviewed in the third section, while the last section presents some conclusions and continuing policy issues. Macroeconomic
developments
The challenge faced by policymakers in the 1990s was to turn the illusion of the 1980s-- the transformation of the Philippines into an outward-oriented, export-led economy_into a reality. Only by painful structural adjustment could the Philippine economy hope to achieve sustained growth. And this had to be accomplished while the macroeconomic environment needed break the pattern of growth, overheating, balance-of-payments
stabilizing, to (BOP) crisis,
restrictive policies, and economic slowdown, which had consistently characterized the postwar Philippine economy (Fabella 1994, World Bank 1992). In May 1992, President Ramos was elected into office. His vision was to • transform the Philippines into a newly industrialized
economy (NIE). The tasks
involved in this transformation included: (1) the restoration of political stability; (2) implementation of economic reforms to level the playing field and democratize the economy to make it more competitive; (3) infrastructure and energy development; (4) environmental protection and preservation; and (5) bureaucratic reforms (Ramos 1994). In line with the second objective, the government implemented policy reforms in critical areas of the econom)_ which served to reinforce the reforms of the 1980s. In particular, further tariff reforms
24
Economic
crisis...
Once more
were implemented to achieve a more neutral tariff policy. In the fiscal sector, various tax reforms were initiated, such as the expanded coverage of the valueadded tax in 1995. Also, the government's privatization program was accelerated, and private sector participation was encouraged especially in various energy and infrastructure projects through the Build-Operate-Transfer (BOT) scheme. The Foreign Investments Act of 1991 expanded the number of sectors open to full foreign ownership, streamlined approval procedures, and made the remaining restrictions and prohibitions more transparent. The government further liberalized foreign investments _ October 1994. Foreign exchange transactions were also significantly liberalized and upgraded. Beginning in January 1992, there was full deregulation of remaining restrictions on current account transactions. The full lifting of mandatory surrender requirements on foreign exchange
receipts, foreign
exchange transactions
outside the banking
system, deposits in foreign currency deposit units (FCDUs), and full and immediate remittance privileges for investment purposes were some of the measures put in place to support the policy thrust of open trading and investments. Rules covering foreign investments in Central Bank-approved securities were also relaxed. Finally, entry barriers in key industries such as telecommunications, transport (land, air, and sea), banking, and other key commodities, such as cement were dismantled or relaxed. Following
near-zero
growths
in 1991-92, the economy
again began to
post modest growth rates in 1993 (Table 1). This was attributed to improvements in infrastructure,
'particularly
in power g_neration
which eased supply-side
constraints; continued liberalization Imeasures which increased the competitiveness of several sectors and encouraged the inflow of foreign investment; a stable macroeconomic and political environment which buoyed investor confidence; and the economic recOvery of the country's major trading partners. All these helped to create a more conducive business environment. Furthermore, the Philippines was deemed as finally being on the path towards more stable and sustainable growth after decades of boom-bust cycles, and a decade of structural reforms that considerably reduced macroeconomic distortions
and liberalized
a once extremely
protected
economy.
On the supply side, the industrial sector, which accounted for around 35 •percent of GDP, was a major contributor to the country's growth performance. Construction, in particular, performed strongly. Manufacturing, which accounted for around 25 percent of GDP, also performed fairly well. There was also strong growth in the services sector, wtlich constituted more than 40 percent of GDP, particularly transportation and communication, and financial services. The latter was due to efforts to liberalize these subsectors.
Chapter 2: Milo Table 1. Growth
25 of real GDP by industry, 1990
1_91 0,3 •
1990-97 (In percent).
1992
]993
1994
1995
1996
1997
GNP
5.0
1.7
2.1
5,3
5.0
7.2
5,3
GDP
.3,2
-0,6
0.4
2,1
4,4
4.8
5,S
5.2
AgriCUlttu_
0.5
1,0
0`1
2.0
3,4
4.3
2,8
lndusn_
0.8
3.0
-2,7
,0.3
1,6
5,8
7,0
6,2
6,2
Manufacttaing Construction
2,7 12,1
-0,5 -15,9
-1.7 6.1
0.7 5.7
S,0 9.4
6,8 6.6
5.6 10,9
4,2 16.4
Ufi/ities
-0,3
4,7
0,7
2,8
13.9
13
7.6
4,8
S_rvice
49
0,2
1,0
2.5
4.3
5.0
6.4
5.5
"lYanspoctafi on -and tY2_lTll_tLrficat_On
2.2
0,5
1.4
2.5
4,2
5,8
7.4
8.2
Finatrfal. lv-al estate
10,1
-2,7
0.4
2.4
5.5
7,3
13,7
13,0
Source:
ADB,
National
Statistical
Coordination
Board.
Philippine economic growth in the 1990s was also qualitatively different in that it was truly propelled by exports and investments. Manufactured goods constituted the bulk of exports, thus reducing the country's traditional reliance on volatile commodity earnings. External debt and debt service payments were also significantly lower in real terms relative to the late 1980s. As a result of restructuring and the rapid growth of exports, the country's debt servicing burden in 1997 was at a more comfortable level of 10.4 percent of exports, compared with around 35 percent in the mid-1980s. Moreover, international investors' confidence in the economy was stronger than ever, as evidenced by the substantial inflow of foreign investments. The country's growth performance was also mirrored in employment trends, although not as strongly. The October unemployment rate, which is deemed as the least affected by seasonal factors, fell from 8.6 percent in 1992 to 7.4 percent in 1996. The underemployment rate, on the other hand, fell from 21.4 percent in 1993 to 19.4 percent in 1996. In actual numbers, the number of unemployed persons declined from 2.3 million in 1992 to 2.2 million in 1996. However, the number of underemployed persons rose from 5.1 million to 5.3 million over the same period. Also, in terms of sectoral growth of employment, most of the increase was recorded in the services sector and construction with their percentage shares in total employment increasing in the 1990s (Table 2). In contrast, the share of manufacturing in total employment fell slightly from 1992 to 1997.
26
Economic
crisis... Once more
In terms of labor productivity, however, the trend was reversed in the 1990s relative to previous periods. In particular, gross value added per worker in all sectors, except mining and quarryin+, increased between 1991 and 1997. Medalla (1998) attributed the seeming incoi_sistency between improvements in efficiency measures in the manufacturing sector and continuing structural problems to a period of adjustment to a more open trade regime, an overvalued currency, and a shift in protection from manufacturing to agriculture. Table 2. Distribution
of total employment
by major industry
group,
1990-97 (In percent). Industry
To_I
1990
fin thousands)
Agriculture,
22,532_0
fishery,
and
1991
1992
1993
1994
1995
22,979.0
23,917.0
24,443.0
25,166.0
Z5,696.0
1996
1997
27,442.0
27,888.0
45.2
4.5.3
45.4
45.8
44.7
44.1
41.7
40.4
16,6
16.7
fores_y
h',d us v,3."
1KO
16,0
16,0
15.5
15-8
15.6
Minir_g and quarrying
0,6
0,7
0.6
0,5
0-4
0,4
Mamffactufing
9,7
10.4
10,6
10.0
10.3
10.0
10.0
9-9
Electricity,
04
0.4
0,4
0.4
0-4
0,4
" 0.4
0.5
4.3
4.6
4.3
415
4.7
4,8
5.7
5,9
39.7
38.7
38.5
38.6
39,5
40.3
41,6
42,9
14,0
13,8
13,7
14.0
14.2
14.6
14,8
1.5.1
5,0
5,0
5.1
5.6
5.6
5.8
6.0
6.3
2.0
2.0
1-9
Z0
2,0
2.1
2.5
2.4
18,7
17,9
17.8
17.1
17,8
17.7
18.3
19,0
gas, and water
Collsl:l-uct jol_
Services Whotesale
and _'etalt
Transl-_or tation, ¢ommunlcatlon, Financial
0_4
0,4
and storage
real estate,
ond
business Comrnullj,
ty, sndai,
and
personal
Source:October Rounds of the Labor ForceSurve_ National StatisticsOffice. L Concerns
over the sustainability
of the country's
economic
growth had
been expressed. Of particular concern was the widening gap in the trade balance (Fig. 1). Although export growth overtook impor t growth in 1995, most Philippine manufacture exports had very high import contents so that their growth contributed much less to foreign exchange earnings than the numbers suggest (Krugrnan et al. 1992). In particular, _lectronics accounted for over half of total exports m 1997. On the other hand, the increase in merchandise imports was accounted
for by capital
formation
goods
necessary
for production
Chapter 2: Milo
27
expansion. Also, unlike in previous periods, fiscal expansionism was not to blame for the large deficit and it was mostly financed by nondebt capital inflows. Furthermore, some improvements in the efficiency and competitiveness of the manufacturing sector following various reforms had been reported (Medalla et al. 1995, Tecson et al. 1996). The country's merchandise trade deficit was significantly offset by the surplus in nonmerchandise trade, which was largely due to remittances of overseas Filipino workers (OFWs). Thus, the current account deficit remained fairly stable at around 5 percent of GDE
Figure 1. Trade balance of GDP).
and current account balance,
0 -2
_
-4 -6
/
-8
,,__._"_"'"
_.....,_
__
1990-97 (In percent ---.
Trade balance
--
Current
account
balance
.,...,_. %
-10 -].2
%_,.,,,.
"-_._ _.,_..,_.
-14
"_'"
--'-"
-16 1990 Source: National
1991
1992
Statistics
1993
1994
Coordination
1995
1996
1997
Board (1998).
On the other hand, the country registered BOP surpluses from 1994 to 1996 as a result of strong inflow of foreign investment. The net inflow of foreign investment to the Philippines from 1970 to 1987 was negligible, averaging just 0.3 percent of GDE Fairly significant inflows were recorded beginning only in 1988 due to the government's debt-for-equity program, and foreign investment and foreign exchange market reforms in the 1990s. Thus, net foreign investments reached around 4.2 percent of GDP in 1996. In terms of composition, the surge in portfolio investment inflows began in 1993 and significantly out-paced foreign direct investment inflows. For instance, in 1996, total inflow of portfolio investments amounted to almost US$6.9 billion, while total foreign direct investment inflows amounted to around US$1.5 billion. In net terms, however, foreign direct investments
were still dominant
because portfolio
investment
outflows were also substantial (Fig. 2). This indicated the short-term and speculative nature of foreign portfolio investments. A more significant recent source of foreign exchange inflows were changes in net foreign assets of commercial banks, which rose from around US$40 million in 1991 to more than US$4.2 billion in 1996, or around 5 perc ant of GDE
28
Economic
Figure
2.
Main components GDP).
investment,
Once
more
1970-76
(In percent
2.5 -
7.5 _
Direct, outflow
2.0 -
6.0 __ Portfolio, inflow
1,5 -
4.5
"-
of foreign
crisis...
of
Portfolio, outflow
IH
o.0._..... __ _ 0,0 -1.5 -3.0 4_5
- •
• 11.975
1970
, 19_0
1985
, 1995
-6.0
Note: Inflow and outflow of foreign direct investment are plotted on the left scale, while in flow and outflow of portfolio investment are plotted on the right scale. Source: Bangko Sentral ng Pilipinas; National Statistical Coordination Board.
Another For the
first
area of concern time
was
in the postwar
the management period,
of government
the national
government
finances. posted
a
budgetary surplus of less than 1 percent of GNP from 1994 to 1997 (Fig. 3). The consolidated public sector fiscal position 1 (CPSFP) also improved, falling to a deficit of about 0.5 percent of GNP This was due partly to an extensive past
decade,
in 1975-85
which
in 1994 and restructuring
led to the rise in tax effort 2 from
to 16.2 percent
in 1996. However,
CPSFP
and t2 24.9 billion,
still registered
deficits
These meant
2.5 percent
and
respectively. Also, there was a deterioration in the buoyancy in relation to GNP. The tax buoyancy coefficient _ fell from 1.15 in 1993-97, 1994, 1998).
which
implied
in 1996. over the
of 11.3 percent in fiscal position
proceeds, which are nonrecurring in 1994 and 1995 amounted to more
respectively.
of around
an average
the improvement
was also highly dependent on privatization' income. For instance, privatization proceeds than ia34 billion
registering a surplus of the tax system
a deterioratiOn
that the underlying 1.5 percent
of GNP,
of the tax system 1.41 in 1987-92, to
in tax administration
(Manasan
LThe consolidated public sector fiscal position (CPSFP) include the combined balance sheets of the national government, monitored government-owned or controlled corporations, local government units aM govelTtrnent financial institutions. 2 I.e., the ratio of total tax revenue to GNP (Manasan 1_)98). -_The tax buoyancy coefficient measures the percentage change in tax yield given a percentage change in the tax base (Manasan 1998).
Chapter 2: Milo
29
Figure 3. Consolidated government's 6 4
public sector (CPSFP) and the national fiscal positions, 1985-97 (In percent of GNP).
0_ _
2
I
i
4- ....
---
CPSFP
--
National
"_" ------
"_-__...f_
-- -- Primary 0
/
/....-
-2 ..,d 4:.,
,
1985
..
!.,
T
1987
Source: Department
Thus, while especially remained
Gov't balance
1989
1991
of Budget
significant
1993
Management,
1995 National
gains had been
1997 Statistical
achieved
Coordination
Board.
in tax mobilization
in the last 6 years, the fiscal position remained tenuous, to be done. Efforts to broaden the tax base and improve
and more collection
efficiency had so far been insufficient to ensure the stability of public sector finances in the long run (Manasan 1994, 1998). Compared with fiscal excesses of the past, however, fiscal policy in the 1990s was considerably more prudent. Furthermore, the CPSFP had been posting surpluses in its primary balance 4 since 1987, which averaged around 4.5 percent from 1991 to 1996. Thus, total national government expenditure net of debt service was fairly stable. The rapid growth in debt service, however, was at the expense of capital outlays, and maintenance and other operating expenditures (MOOE), which suffered major cutbacks. The cutbacks were not restored even with improvements in fiscal position in the 1990s. Hence, capital expenditures of the national government consistently fell from 4.6 percent of GNP in 1975-85, to 2.9 percent in 1986-91, and 2.7 percent in 1992-96 (Manasan 1998). The low level of public investment in infrastructure would necessarily impair the economy's growth prospects. Monetary policy in the 1990s was also tighter compared with previous periods. Thus, while high inflation in the past was attributed primarily to the growth of money supply, this was not the case in the 1990s. Although inflation had been brought under control from the mid-1980s, it reemerged as an immediate concern towards the end of the 1980s and early into the 1990s. This was due to the growth of the fiscal deficit and its monetization; cost push effects from the nominal depreciation of the exchange rate; sharp oil price increase due to the Gulf war; and supply bottlenecks that resulted from adverse weather
4 The primary balance is equal present a more accurate picture
to the overall balance less interest payments, and is deemed of the government's fiscal stance (Manasan 1998).
to
30
Economic
crisis... Once more
conditions. The monetary authorities' contractionary stance reduced the growth of money supply from 28 percent in 1989 to just 11 percent in 1992. Inflation consequently went down to single-digit levels, averaging around 8.5 percent from 1992 to 1996 (Fig. 4), and even falling to 4.6 percent in the first half of 1997.
Figure 4. Inflation 1990-96.
rate, 91-day Treasury bill rate, and exchange
30
rate,
-- - inflation rate (%)
25 20
_
--
15
**
--
-- - 91 _day Tbillrate (%) Exchange rate (P/US$)
"-- _'_ "
'I0
"" k
....... -......--''''--..,
.....
5 0 1990
1991
1992
1993
1994
1.995 1996
Source:Bangko Sentral ng Pilipinas.
The conduct of monetary policy was complicated by the liberalization of the capital account in 1993. The surge in foreign exchange inflows put strong pressure on the Philippine peso to appreciate. Because of the potential adverse effect of such appreciation on the export sector, monetary authorities sought to minimize it by intervening in the foreign exchange market, among other measures. The rapid increase in the Philippine central bank's net foreign assets accelerated the growth of money supply to an average of 25 percent from 1993 to 1995. Higher liquidity contributed to the decline in interest rates, although it also fueled inflation. To meet monetary and inflation targets set under the country's IMF stabilization program, the BSP sterilized the monetary effects of its foreign exchange purchases. However, the appreciation of the peso was not arrested as the substantial differential between domestic and foreign interest rates induced further capital inflows. The fiscal surplus eased the pressure on domestic interest rates, but tight monetary policy prevented domestic interest rates from going down further to reduce the differential (Lamberte 1994). Although sterilized intervention enabled the BSP to build up its gross international reserves, it also proved to be very costly because the BSP incurred huge quasi-fiscal losses on the interest-bearing securities it issued to sterilize excess monetary growth (Cororaton 1995). Thus, the combination of still relatively high inflation rates, stable interest Fates, and a strong peso prevailed in 1993-96. The appreciation of the peso, Which experienced the largest real currency appreciation during the 1990s relative to other Southeast Asian
Chapter 2: Milo
31
currencies, exacerbated the country's trade deficit. Also, the peso appreciation coupled with high interest rates led to the growth of the nontradable sector, with investments going into real estate and the stock market, and encouraged foreign borrowing. Overall, the Philippines' macroeconomy was marked by significant improvements in the 1990s. There was some cause for concern, particularly on the widening trade deficit and fiscal position. However, these were not considered "critical" and were expected to improve as the economy continued to grow and restructure. More importantly, with the exchange rate becoming more responsive to financial flows relative to real flows, and the dominance of short-term capital flows, the economy was becoming more vulnerable to shocks in the international capital markets. Hence, the importance of fine-tuning monetary, fiscal, and exchange rate policies to maintain astable macroeconomy was emphasized (Yapand Reyes 1994). Financial sector developments The period from 1980to 1997was marked by substantial financial reforms. There was a snowballing effect, in that the reform process set the motion for further reforms. The Philippines formally embarked on a financial liberalization program in 1980as part of an overall structural adjustment program. Itincluded the gradual liberalization of interest ratesfrom 1981to 1983;easing of restrictions on the range of operations financial institutions were allowed to conduct in domestic markets, such as the introduction of universal banking in 1980; and rationalization of financial market regulations, including higher capital requirements for banks and nonbank quasi-banks (NBQBs) (Remolona and Lamberte 1986). But soon after the start of financial liberalization, the financial system underwent a crisis of confidence, which was triggered by defaults of a prominent businessman who fled the country in 1981, and compounded by a series of investment frauds and stockbroker failures (Laya 1982). The financial crisis deepened as a result of the political and economic crises in 1983-85, which led to significant financial shallowing (World Bank 1986). Financial reforms were resumed in 1986, which specifically addressed problems endemic to the system since the 1960s, and further highlighted by the reform effort and financial crisis during the early 1980s. These included the interlinked problems of fraud or insider abuse by bank owners or officers and inadequate/ineffective prudential supervision and regulation of banks. Policies effecting prudentialbank management were instituted. These included increased minimum capitalization requirements; compliance with the minimum risk asset ratio; the single borrower's limit; limit on loans to directors, officers, stockholders, and related interests (DOSRt);allowable interlocking directorships and officerships; provisions for loan loss or doubtful accounts; audit and
32
Economic
reporting
requirements;
crisis,,. Once more
and stricter bailout policy of problematic
banks (Bautista
1992). The government also rehabilitated ailing financial institutions, notably government-owned banks and rural banks. However, the problem was not just the lack of prudential rules, but a weakened Central Bank of the Philippines (CBP)---both financially and politically, a3 well. And a strong central bank, which effectively carries out its role of supervising financial institutions, is a prerequisite for a stable financial system (World Bank 1988). Thus, the CBP was rehabilitated in 1993, with the creation of a new, independent called the Bangko Sentral ng Pilipinas (BSP). Other reforms
implemented
central monetary
in the 1990s included
authority
the deregulation
of
the entry of new domestic banks and bank branching in 1993, which was further rationalized in 1995, and easing of restrictionsI on the entry of foreign banks in 1994. Ten foreign banks were initially allowed to open up to six branches, while others could buy up to 60 percent of an existing local bank or subsidiary. Reforms in other sectors of the financial system included the liberalization of the private insurance industry in 1995, and efforts to develop equity markets such as the unification of the Manila and Makati Stock Exchanges to form the Philippine Stock Exchange in 1994. In particular, liberalizing foreign investments and foreign exchange transactions had a significant impact on the growth of the capital market. The Philippine financial system consists of banks and nonbank financial institutions (NBFIs). Banks are classified .as commercial banks (including expanded commercial or universal banks), thrift banks (savings and private development banks, and stock savings and loan associations), rural banks, and specialized government banks, although the latter had all been upgraded to commercial bank status by 1996. NBFIs include insurance companies, investment houses, financing companies, securities dealers and brokers, fund managers, lending investor s, pension funds, pawnshops, and nonstock savings and loan associations. Figure 5 shows the total assets of the Philippine
financial
system from
1980 to 1997. The system has been consistently dominated by banks in general, and commercial banks in particular. The growth of commercial bank assets was significantly higher in the 1990s as a result Of the entry of new domestic and foreign banks, and further increases in minimum capital requirements. On the other hand, the share of NBFIs in total assetsifell from 24 percent in 1980 to just 15 percent in 1997. Government-owned social security institutions, in particular, accounted for over half of the total assets of this subsector.
Chapter 2: Milo Figure
33
5. Assets of the Philippine 1980-97 (In P billion).
financial
system,
by type of institution,
3000 2500
[] Con_mercial banks • Other banks
2000
I NBFIs
1500
1.,
,ooo 0 1980
...... 1985
1990
"l! |
1995
Source: BangkoSentral ng Pilipinas.
Despite the rapid growth of the banking sector in terms of assets and number of offices, financial deepening from 1980 to 1997 was fairly modest. After stagnating for decades around the 20 percent level prior to financial liberalization, the ratio of M2 to GDP rose to around 26 percent in 1983. There was considerable financial shallowing during the crisis period from 1984 to 1985, and a substitution away from deposits into secure, higher yielding government securities. Significant financial deepening occurred beginning only in 1993, with the M2 to GDP ratio reaching 43 percent in 1997. But this should be interpreted with caution. In a comparative study of financial liberalization in Asian and Southern Cone countries, Cho and Khatkhate (1989) found that to the extent that short-term inflow of foreign savings is incorporated into this ratio, an increase in this ratio cannot automatically be interpreted to mean enhanced efficiency in mobilizing resources by drawing them away from less productive uses. Also, the Philippines' M2 to GDP ratio was still fairly low compared with other countries in the region, and considering the robust state of the financial sector and the economy as a whole. This was partly due to the tight liquidity management pursued by the BSP to meet inflation targets set with the IMF. Also, high reserve requirements and the 20 percent withholding tax on interest income resulted in low rates of return to deposits. Thus, there was a sharp increase in off-balance sheet activities of commercial banks, which was facilitated by the easing of banking regulations. These included the use of foreign currency (FCDU) deposits to extend foreign currency loans, and trust accounts for securities investment, especially in the 1990s (Table 3). For instance, the trust fund operations of banks increased significantly from P13.5 billion in 1980
34
Economic
crisis... Once more
to almost P320 billion in 1996, or an almost 200 percent growth in real terms. Since trust accounts were not subject to various intermediation taxes until 1993, they were able to offer higher yields relative to traditional bank deposits. Thus, if the trust operations of banks were included in measuring financial deepening, since banks were effectively using them in the same way and for the same purpose as deposits and deposit substitutes, the ratio would reach 55 percent. While the development of trust accounts enabled banks to tap additional sources of funds, they also drew a significant portion of funds from deposit substitutes, and catered particularly to large depositors (Lamberte 1993). Foreign currency deposits, on the other hand, amounted to around 28 percent of traditional deposits in 1996. Table 3. Selected
liabilities
of domestic
Traditional deposits Total (billion P)
Distribution by type (%) Demand Savings
Time
:ommercial
banks, 1980-96.
Deposit
Tiltst
FCDU
substitutes
accounts
deposits
(% of total deposits)
(billion us$)
1980
72.63
19
32
50
17
19
1985
143,02
10
39
50
6
18
1.86
1990
310.74
10
58
31
1
25
2.56
1991
365.61
11
58
31
1
37
3.16
1992
426.58
10
62
27
1
42
4.37
1993
556,80
10
65
25
0
33
1994
693.08
9
68
23
1
34
7.72
1995
873,83
9
67
24
1
30
9.12
1996
1,119.56
9
61
29
1
29
14.52
5.61
Source:Bangko Sentral ng Pilipinas. One of the criticisms leveled against the Philippine banking system was its poor performance in savings mobilization. This was partly attributed to the fixity of interest rates especially on savings deposits. Tan (1989) cited the existence of market segmentation: small savers who receive low, even negative, real deposit rates, and big savers who have access to the money market, and whose deposits banks compete for. Thus, the large pool of low cost savings deposits contributed to commercial banks' high profit margins. The danger with persistently large negative real deposit rates is that they misdirect savings (Dombusch 1991). The problem of low domestic savings needs to be addressed because the sustainability of economic growth is closely linked to this. The major determinant of savings is income, and income growth depends on growth of
Chapter 2: Milo investments.
35
On the other hand, low savings mobilization
hinder investment
growth, particularly in the private sector. Thus, a policy gridlock could ensue (Yap and Reyes 1994). The savings-investment gap (Fig. 6) that resulted from low domestic savings and high investment requirements was filled by private capital inflows in the 1990s, as opposed to official flows in previous periods. Figure 6. Gross domestic of GDP).
savings and investment
rates, 1990-96 (In percent
30 .... 25, 20 , 15 10 5 0
Grossdomestic _
_
_ "'" .....
. ......
__
savings Gross domestic investment
"".........
1990 1.991 1992 1993 1994 1995 1996 1997 Source:ADB (1998). Another trend that was observed in the 1990s was the significant increase in foreign liabilities of commercial banks, as reforms resulted in easier access to foreign funds. The total foreign exchange liabilities of private commercial banks increased from around US$0.52 billion in 1993, prior to the deregulation of foreign exchange transactions, to more than US$7 billion by the third quarter of 1997. When expressed as a percentage of total foreign exchange liabilities of the country, it rose from around 1.5 percent to around 15.2 percent for the same periods. Figure 7 shows the foreign assets and foreign liabilities of commercial banks expressed as a percentage of GDE The gap between the two steadily increased from 1992 onwards, but what is striking is the substantial increase in foreign liabilities of private commercial GDP. Figure
banks in 1996 to almost 32 percent of
7. Foreign assets, foreign liabilities, and total loan commercial banks, 1990-96 (In percent of GDP).
60 50
."
40
.."
30 .o
20
.o
-..
Loanportfolio
--
Foreignliabilities
- -- Foreignassets
. .---''
..............
o 1990
1991
1992
1993
1994
1995
portfolio
1996
Source:Bangko Sentralng Pilipinas;National StatisticsCoordinationBoard.
of
36
Economic
crisis... Once more
This rapid increase in commercial banks' foreign liabilities facilitated the lending boom in recent years. For instance, the contribution of foreign currency loans to domestic lending of eight commercial banks that resorted to international capital markets was estimated at 12 percent in 1993, rising to 40 percent in the first quarter of 1997. The increase in foreign liabilities is not necessarily a problem. What ultimately matters is how the funds were used, and this was the source of concern in the Philippines. The distribution of FCDU loans, for instance, showed that while at least 50 percent went to exporters, the share of nonexporters increased from 4 percent at the start of 1994 to 30 percent by the third quarter of 1997. The distribution of loans outstanding iby commercial banks according to industry (Table 4) shows that there was a significant drop in the share of agriculture (sector 1). The share of manufacturing (sector 3), on the other hand, increased during the recovery years of the 1980s, but its share has since consistently fallen as well. In fact, the share of manufacturing to total loans outstanding of commercial banks in 1996 reverted to its prereform level. In contrast, sectors that increased their share were those in the services sector (sectors 6-10). communication
The increase in the share, of transportation, storage, and was due to the liberalization of these sectors. The increase in
the share of consumer loans such as housing credit cards (sector 10) was also notable. Table 4.
Distribution by industry,
of loans outstanding 1986-97.
Total Year
(billion P)
loans (sector 9), and car loans and
Distribution 1
2
3
4
of commercial
banks
by industry (In percent) 5
6
7
8
9
10
1986
88.3
15.9
8.4
25.0
2.1
4.2
15.7
3.5
17.7
2.5
5.0
1987
101.1
12.3
7.0
39.9
1.1
3.1
14.2
3.5
10.7
2.6
5.5
1988
126.6
10.7
5.4
42.2
0.8
1.7
17.7
3.8
8.9
2.8
5.8
1989
165.9
8.4
7.5
42.7
0.7
L4
16.0
4.9
8.7
3.3
6.3
1990
].99.6
8.2
8.4
42.8
0.5
2.2
17.7
3.8
7.9
4.0
4.5
1991
144.3
9.5
1.8
40.3
0.6
3.8
17.6
3.2
11.1
4.3
7.7
1992
256.3
9.6
5.6
37.3
0.9
2.4
20.3
3.8
10.6
3.7
5.8
1.993
235.3
5.4
3.3
38.0
1.1
2.3
14.4
4.2
17.9
5.5
7.7
1996
1,203.7
4.1
0.9
26.5
2.2
3,8
16,3
5.2
23.8
8.0
9.1
1997
1,542.3
3.9
0.8
27.2
2.1
3.6
16.8
7.1
17.2
10.4
10.7
i Note: 1 -- Agriculture, fishery and forestry; 2 -_ Mining and quarrying; 3 = Manufacturing; 4 -Electricity, gas, and water; 5 = Construction; 6 = Wholesale and retail trade; 7 = Transport, storage, and communication; 8 =- Financing, insurance, business services; 9 = Real estate; and 10 -Community, social, and personal activities. No data was available for 1994-95. Source: Bangko Sentral ng Pilipinas.
Chapter 2: Milo
37
More dramatic
trends
are revealed
by the distribution
of loans granted
by commercial banks according to industry from 1981 to 1997 (Table 5). The downward trend in the shares of manufacturing and mining was also evident. On the other hand, the downward trend in agriculture's share from 1984 to 1993 was reversed in 1996. The share of construction, in addition to the services sector, substantially increased. The growth in the amount of loanable funds that went to construction and real estate between 1993 and 1996 led to the imposition of a 30 percent cap on commercial banks' total exposure to the property sector in June 1997 by the BSP. The dominant share of financing, insurance, and business services, on the other hand, was largely accounted for by interbank loans. If this sector were excluded, the same trends would still be evident. The overall trend in the loan portfolio of commercial banks was thus worrisome because it had serious repercussions on the viability and stability of the financial sector, and the sustainability
of the country's
growth performance.
Finally, although there had been some lengthening of loan maturities, loans outstanding of commercial banks were still predominantly short term (Fig. 8).
Table 5. Distribution 1986-97.
of loans granted
Year 1986
(billion Total P) . 325.9
1
2
6.5
2.0
25.7
3 Distribution 4 2.3
1987
368.8
5.9
1.5
26.2
1.0
1988
421.9
6.2
1.9
30.2
1989
385.9
6.0
2.1
36.8
1990
512.4
6.2
1.4
1991
844.0
4.5
1992
1,094.1
3.7
1993
3,459.6
1996
10,253.7
1997
9,653.2
by commercial
banks by industry,
5 industry6 (In percent) 7 8 by 1.2 14.7 1.6 42.4
9
10
0.6
3.0
1.1
15.0
1.3
41.7
1.0
5.3
0.7
1.3
14.2
1.6
36.1
1.5
6.3
0.9
1.5
18.3
1.9
20.7
2.6
9.1
32.3
0.7
1.8
17.0
2.1
28.0
2.6
7.9
1.3
26.8
0.7
1.3
12.0
1.7
412
1.8
8.1
2-2
23.4
0.7
1.1
10.4
1.6
48.1
1.4
7.4
1.1
0.7
8.1
0.4
0.8
4.9
0.7
74.8
0.6
7.9
5.7
0.4
6.3
0.5
6.0
13.2
7.8
43.5
6.0
10.6
3.9
0.6
6.7
0.8
2.5
13.3
3.9
51.0
6.6
11.0
Note: 1 =- Agricultttre, fishery, and forestry; 2 = Mining and quarrying; 3 -- Manufacturing; 4 -Electricity, gas, and water; 5 = Construction; 6 = Wholesale and retail trade; 7 = Transport, storage, and communication; 8 = Financing, insurance, business services; 9 -- Real estate; and 10 -Community, social, and personal activities. No data was available for 1994-95. Source: Bangko Sentral ng Pilipinas.
38
Economic
Figure
8.
Distribution maturity,
of 1990-96
loans outstanding (In P billion).
of
crisis...
Once
commercial
more
banks
by
1200 1000
[] Long-term • Intermediate
800 600
400
1
1991
Source: Bangko
On the source
other
of trading
the
of four from
than
in the
rapidly
in
region 1975
to 1997.
copper
mining
was
a speculative and
boom
economic
Trading
volume
economy
recorded
returned
in 1989
Philippine P41
9. Philippine
billion
due
in
gradually
increased
following
the
country
fundS.
market,
to more
Thus, than
billion
the
beginning
In
As
a
market in 1986
in government. and
the launching
capitalization
grew
in 1989,
or a four-
1975-97.
800 "r 600 700 + +
market
P261
1970s.
1992).
1980s,
change swaps
market
to the Bank
early
the even
the volume
securities
prior
(World
the
base, and
9 shows
private
stocks
to the debt-equity
in 1986
stock
The
important
small years
Figure
in oil stocks
turmoil
a more
a very recent
in 1994.
and
closed-end more
Figure
was
very
became
from
from
in the
An increase
grew
market
starting
of gold
contracted.
as confidence
stock
Albeit
market
political
significantly
Philippine
years.
markets
stock
[] Short-term
I
mostly
there
of the
the
market
in the
1970s,
result
hand,
all other
composed
I!!
ng Pilipinas.
in recent
stock
outperformed
was
Sentral
of funds
Philippine
1
@
250
_
Tradfi'tg value
200
_
No. of listed
500 + 4O0 +
150
300 +
100
I
companies 200 + 100 +
_
50
0 l.-V-t. : '._: : _; ; .... 1975
1980
1985
L 1990
_._
0
1995
Note: Trading value is plotted on the left axis, while number the right axis. Source: Philippine Stock Exchange.
of listed companies
is plotted
on
Chapter 2: Milo
39
fold increase in real terms. As a ratio of GDE it increased
from less than 7 percent
in 1986 to more than 28 percent in 1989. However, market capitalization, was almost halved in 1990 as a result of various crises. Dramatic increases in trading volumes were recorded beginning in 1993 with the liberalization of the capital account and the recovery of the economy. The privatization program of the government also continued apace. Thus, total market capitalization rose to 97 percent of GDP in 1996. There were 216 companies listed in the Philippine Stock Exchange at the end of 1996, compared with 138 a decade ago. However, only about 75 of these are actively traded, and the market is concentrated in several shares. For instance, of the total market capitalization of P1,355 billion in 1994, around 40 percent was accounted for by six companies. The largest component is the property sector, with residential and property developers accounting for 23.1 percent of market capitalization at the end of 1995. The consumer sector accounted for around 17.4 percent, although it was largely dominated by the beverage corporation giant San Miguel, the single largest stock on the equity market (with a capitalization of P122 billion at the end of 1995). It alone made up 8.5 percent of the entire stock market's value. Conglomerates accounted for 15.4 percent of the market, banking for 14.0 percent, and utilities for 12.8 percent (BMI 1996). As in the real sector, the Philippine financial sector was a lot stronger in the 1990s compared with the 1980s. Several worrying trends, however, were also beginning to emerge. In particular, the years of significant net capital inflows were associated with rapid expansion in the banking sector's foreign currency liabilities, deposits, and domestic lending. As a result of the rising proportion of external debt intermediated through commercialbanks, a significant portion of which went into the nontradable sector, commercial banks became vulnerable to sudden movements
in the exchange
rate.
Social development Ultimately, the goal of economic policy is to maximize some social welfare function. Thus, in assessing the growth episode of the 1990s, its social impact needs to be considered as well. Along with various economic reforms that were necessary in transforming the Philippine economy to make it more competitive and efficient, goals for human development and poverty alleviation were also integrated in the Ramos administration's development plan. Proposed policies to achieve the latter included: (a) promotion of sustained income and employment growth among the poor; (b) provision of safety nets for displacements due to structural adjustments; (c) effective response to natural and man-made calamities and disasters; and (d) public resources and efforts directed toward basic social services, disadvantaged regions, and specific groups of the poor. Employment
40
Economic
crisis... Once more
generation was seen as the key to increasing incomes and alleviating poverty. The Social Reform Agenda (SRA) 5 was launched in 1994 as the government's poverty sectors.
alleviation
and safety net program
for specific geographical
areas and
The SRA represented a government attempt to streamline all direct antipoverty programs under one package. It operationalized the human development goals that were embodied in the government's development plan. Its macro poverty reduction target was to bring absolute poverty down from 40 percent in 1991 to 30 percent in 1998, when a new president would have been elected. The SRA centered on three major strategic interventions: (a) access to basic social services as an imperative for survival; (b) asset reform and access to economic opportunities for employment and_income generation; and (c) people's effective participation in governance toward self-reliance and empowerment. The SRA was initially formulated to address the minimum basic needs of priority provinces, which were identified in a series of consultations between representatives from different government Offices and community members in 1993-94. Priority provinces were chosen based on poverty incidence, existence of armed conflict, isolation, and special development needs. Specific target beneficiaries included farmers and landles_ agricultural workers in agrarian reform communities; fisherfolk in coastal communities in priority bays and lakes; urban poor; workers in the informal sector; and other disadvantaged groups such as women, children, youth, persons w_th disabilities, senior citizens, and victims of disasters and natural calamities. _ key factor in drawing up the SRA was the participation of disadvantaged groups and nongovernment organizations (NGOs) in formulating specific goals and projects. Components of the SRA began to be installed in priority provinces in 1995, and its implementation began in 1996. Acknowledging the different needs of marginalized sectors, the SRA constituted nine flagship programs that were to serve as its core commitment to these sectors: (1) agricultural development; (2) fisheries and aquatic management; (3) ancestral domains; (4) socialized housing; (5) comprehensive and integrated delivery of social services (CIDSS); (6) workers' welfare and protection; (7) livelihood; (8) credit; and (9) institution-building and effective participation in governance. Thus, poverty alleviation was not the sole concern of the SRA. Convergence,
or focusing
and synchronizing
the delivery
of
programs and resources to priority areas and target groups, was the major strategy for localizing the SRA. The ins,titutional structure designed to operationalize municipal,
the SRA thus cut across
and barangaylevels,
the national,
regional,
with basic sector counterpart
provincial,
structures
at each
The discussionon poverty alleviation and the SRAdraws heavily on Reyes and del Valle(1998).
Chapter 2: Milo
41
level. It also involved establishing interorganizational interfaces to facilitate convergence. The overall governing body for the SRA is the Social Reform Council (SRC). To fund the SRA, the 1996 national budget was subjected to a disaggregation process to identify public sector investments for the SRA. That is, agency budgets were tested for their sensitivity to antipoverty and other social reform efforts. Of the total budget of P394.9 billion, P86.7 billion or 22 percent was found to be "SRA-enrolled," or focused on specific commitments made to basic sectors under the SRA. Whether these investments actually benefited the poor is another issue. The amount allocated for SRA-directed activities in the 1997 national budget was lower both in absolute and relative termsmP85.6 billion or 19.7 percent of the total budget. Thus, it was ironic that the 1997 budget was hailed as an antipoverty budget. In general, there were minimal increases in budget allocation for social services, which accounted for around 25 percent of total allocation from 1993 to 1997. In addition to the national budget allocation, SPA programs were funded by a special purpose fund called the Poverty Alleviation PAF amounting to P4 billion was intended for priority
Fund (PAF). The 1996 areas where standard
government programs were inadequate, particularly in agricultural development, CIDSS, and workers' welfare. Specific projects funded by the PAF in 1996 included communal irrigation, scholarship programs, hiring of teachers and purchase of school desks, and reintegration assistance for returning overseas Filipino workers (OFWs). The 1997 PAF appropriation was specifically intended for poverty alleviation programs in the two lowest municipal classes in priority provinces, and amounted to P2 billion. Overall, economic growth was accompanied by improvements in some social indicators. The Philippines' Human Development Index 6 improved from 0.621 in 1992 to 0.677 in 1995 (UNDP 1998). More specifically, gains were made in health, nutrition, and education as evidenced by increasing life expectancy and literacy rates, and declining mortality and malnutrition rates. Overall there was wider access to health, nutrition, and family planning services. Thus, the general health condition of the population improved, with life expectancy at birth increasing from 66.6 years in 1993 to 68 years in 1997. The infant mortality rate declined from 52 per 1,000 live births in 1993 to 45.8 in 1997, while the crude death rate decreased from 6.9 per 1,000 population in 1993 to 6.1 in 1997. The total fertility rate likewise declined from 4.2 percent in 1990 to 3.6 percent in 1997. The nutrition status also improved, with the prevalence of underweight preschool and school children declining from 10.0 percent and 9.4 percent in The Human Development Index measures a country's overall achievements in three basic dimensions of human development - longevity,knowledge, and a decent standard of living.It is based on life expectancy at birth, educational attainment, and real GDP per capita.
42
Economic
crisis... Once more
1992, to 8.4 percent and 7.4 percent in 1996,irespectively. The basic literacy rate likewise improved from 89.9 percent in 1989 to 93.9 percent in 1994, while the functional literacy rate 7 rose from 75.2 percent to 83.8 percent. The participation rate for both elementary and secondary levels also improved from 1993 to 1997. There was also some improvement in access {o safe water, sanitary toilet facilities, and electricity of the bottom 30 percent of families. The proportion of households with safe water supply increased from 80 percent in 1992 to 86 percent in 1996, while those with sanitary toilet facilities ro._e from 69.5 percent to 74.4 percent. As for poverty alleviation, poverty incidence declined from 39.9 percent of families in 1991 to 32.1 percent in 1997. In terms of percentage of the population, poverty incidence went down from 45.3 percent to 37.5 percent during the same period. However, the decline primarily took place in Metro Manila, while the situation in rural areas in particular only marginally improved (Table 6). The subsistence incidence likewise Went down from 20.4 to 16.5 percent of families, or from 24.3 to 20.4 percent ofi the total population from 1991 to 1997. Again, subsistence levels were sigrlificantly higher outside of Metro Manila, or in rural areas in general. The latter measure refers to the proportion of families or individuals who were unable tOmeet their basic food requirements, or the core poor. In terms of magnitude, however, the downward trend in number of poor families from 1991 to 1994 was reversed in 1997 (Table 7). The number of subsistence families also increased from almost 2.30 million families in 1994 to 2.34 million in 1997.
Table 6. Poverty incidence 1985
1988
and subsistende 1991
1994
Pover!y incidence of families
incidence,
199_ _
1985
1985-97 (In percent). 1988
1991
1994
1997
Poverty incidence of population
Philippines
44.2
40.2
39,9
35.5
32.1
49.3
45.5
45.3
40.6
37.5
NCR Outside of NCR
23.0 47.5
21.6 43.1
13.2 44.2
8,0 39,9
7.1 36.2
27.2 52.8
25.2 48.7
16.7 49.9
10.5 45.5
9,6 42,1
Urban Rural
33.6 50.7
30.1 46.3
31.1 48.6
24.0 47.0
18.5 44._
37.9 56,4
34.3 52.3
35,6 55.1
28.0 53,1
22.5 51.2
Philippines
Subsistence incidence of families 24.4 20.3 20.4 18.1 16,_
NCR Outside of NCR
6.0 27,2
5.0 22.7
2.1 23.3
0.7 20.8
0.8 19.0
7.1 31.9
6.3 27.2
2.8 27.8
1.0 25.1
1.0 23.5
Urban Rural
15.2 30.0
12.1 25.3
14.3 26,4
10.4 25.6
7.2 24.8
17.8 35.2
14.4 30,4
17.0 31.7
12.8 30.8
9.3 30.4
I
Subsistence incidence of population 28.5 24,3 24.3 21.8 20.4
Note: NCR stands for National Capital Region or Metro Manila, Source: National Statistical Coordination Board,
7 Basic literacy refers to the ability to write a simple message in any language functional literacy also includes numeracy and problem-solving skills.
or dialect,
while
Chapter 2: Milo
43
Table 7. Magnitude
of poor families, 1985
1985-97.
1988
1991
4,355,052
4,230,484
4,780,865
301,973
310,284
217,602
4,053,079
3,920,200
4,563,263
4,389,499
4,412,594
Urban
1,250,398
1,198,555
1,847,579
1,521,882
1,246,173
Rural
3,104,655
3,031,929
2,933,286
3,009,288
3,307,215
Philippines NCR Outside
Source:
of NCR
National
Statistical
Coordination
1994
1997
4,531,170
4,553,387
141,671
140,793
Board.
There was also a downward trend in the poverty gap ratio, which measures the inadequacy of family income relative to the poverty threshold, from 13 percent in 1991 and 11.2 percent in 1994, to 10 percent in 1997. Thus, on average, poor families were better off in 1997 compared with previous years. But again, the decline was more pronounced in the NCR (from 2.9 to 1.2%) and urban areas (from 10 to 5%), compared with the rural areas (from 16.0 to 15.2%). Furthermore, income distribution worsened from 1991 to 1997, although it improved from 1991 to 1994 as the average annual family income of the wealthiest decile declined while the rest increased (Table 8). The widening gap between the poorest and richest deciles is stark. The lack of improvement in income distribution becomes even more evident over a longer time frame (Fig. 10). The richest 20 percent of families consistently accounted for over half of total income from 1985 to 1997, with the Gini coefficient at its worst in 1997.
Table 8.
Distribution of total family by income decile, 1991-97.
income
and average
income
Decile
hlcome share of families (%) 1991
1994
1997
1991
1994
1997
(%)
Philippines
100.0
100.0
100.0
42,886
42,800
51,790
3.2
First
1.8
1.9
1.7
7,853
8,040
8,621
1.6
Second
2.9
3.0
2.7
12.618
13.002
13,801
1.5
Third
3.8
3.9
3.4
!6.251
16,839
17.783
1.5
Fourth
4.7
4.9
4.3
20.911
22.187
1.7
Fifth
5,7
6.0
5.3
27,676
2.1
Sixth
7,0
7.4
6,7
30,108
34,751
2.4
Seventh
8.8
9.1
8.6
37,555
39,062
44,715
3.0
Eighth
11.4
11,8
11.4
48,832
50.558
59,149
3.2
Ninth
16,1
16.4
16.1
69,041
70,363
83,648
3.3
35,5
39.7
162.081
152,106
205,543
4.0
Tenth '_urce:
37,8 Family
Income
and
Expenditure
Average annual family income (P, in constant 1988 prices)
family
20,033 24.481
Survey,
National
25,630 31,478
Statistics
Office.
Ave. annual gn'owth rate, 1991-97
44
Economic
crisis... Once more
Figure 10. Distribution of total family income by income quintile Gini coefficient, 1985-97.
and the
i
0.5 T 0.49 * 0.481-
..... /? /
0.47 J"
_
/
_=_
__
°4st _-0.44_
0.42 x 0"46T 0-41
_
i ..... L__
1.985
11.988
,
1991
100% 90% 80%
_ Ffffl'_ _ Fourth mrrnThird
70%
_
Second
50% N
_ J 1994 1997
40o 3O%
_Gini
10% 60% 0%
--First
Note: The bar chart is plotted on the right axis, while the Gini coefficient Js plotted on the left axis. Source: Family Income and Expenditure Sttrve}_ National Statistics Office.
Clearly, the Ramos administration's adoption of a comprehensive and consolidated antipoverty program midway into its term was both timely and necessary. Some improvements in key social indicators were observed. However, such improvements were evidently not happening fast or deep enough, and there remained large discrepancies within and between geographical areas. That the magnitude of the poor continued to increase suggested that the program has not had a positive impact yet. Reyes and del Valle (1998) attributed this to the following factors, among others: •
°
The SRA was still in its infancy. And because it largely took an institutional approach to address identified social problems, it would therefore take some time for its intended effects to be fully _ealized; Although the SRA appeared to correctly identify
the problems
of the poor,
funding for specific projects remained inadequate and was inefficiently used in some cases. Furthermore, notwithstanding the government's claim of an antipoverty budget, there had been no visible increase in the share of social services expenditures in the national budget from 1993 to 1997; and °
Poverty is also a function of factors other than direct intervention programs. Economy-wide and sectoral policies have a greater impact on the situation of the poor. Thus, it was difficult to say to what degree poverty reduction could be accounted for by direct interventions vis-a-vis indirect programs. Despite
the government's
good intentions,
the amount
allocated
for
poverty alleviation would seem to belie its true importance. In fact, PAF allocations were consistently halved from P4 billion in 1996 to P2 billion in 1997. The original allocation for 1998 was P1 billion, although this was later
Chapter 2: Milo increased
to P2.5 billion. It was estimated
45 that, for the government
to have
achieved its poverty incidence reduction target of 30 percent of families by 1998, it needed to have additionally spent an average of P9.6 billion annually from 1994 to 1998. As it was, the P6 billion total allocation for 1996-97 was estimated to help reduce poverty incidence by only 1.1 percent in each year (cited in Reyes and del Valle 1998). Hence, the government needs to ensure that future PAFs are substantial enough to have a strong impact, especially given the magnitude of the problem. One estimate of the amount needed to eradicate poverty completely was P86.2 billion annually, which represented the value of insufficiency of poor families. The enormity of this amount indicated that direct income transfer was not a feasible option for the government. Instead, this suggested that the government still needed to focus on programs that would enable the poor to earn income on a sustained basis. In particular, the focus should still be on broad-based economic growth to generate gainful employment and livelihood opportunities. There should also be continued and much-improved provision of basic social services, which had proven effective in alleviating poverty in the past. Programs that improve the poor's access to quality education and primary health care, in particular, were effective towards equalizing human capital. Finally, there was still the need for social safety nets to assist the poor during the transition period. However, these should be targeted programs appropriately designed to minimize leakages (Reyes and del Valle 1998). In a comprehensive study of poverty in the Philippines up to early 1990, de Dios (1993) cited the following reasons for poverty: (a) failure of growth and lack of employment opportunities; (b) declining productivity; (c) high population growth; (d) inequality of incomes; and (e) inadequate provision of social services. Clearly, these reasons continued to hold all throughout the 1990s. Simply put, poverty remained high in the Philippines because of the economy's failure to grow rapidly enough, sustain that growth, and generate employment. Growth was also lopsided, which consequently resulted in significantly higher poverty reduction in urban/capital cities than in rural areas. The failure of past growth was attributed to the failure, in the long run, to restructure the economy to make it externally more competitive and allow broader participation by the people. That is, the quality of growth is just as important as its magnitude (de Dios 1993). Reforms instituted in the 1990s were precisely directed toward those objectives. Adjustments in the right direction were being made, such as improvements in efficiency and competitiveness of the manufacturing sector as a result of trade reforms. But overall, the structure of the trade sector was slow to change. Medalla (1998) noted that relatively more investments were going into nontradable sectors than in exportable sectors, which could have serious repercussions in the medium term, especially in the
46
context of a growing
Economic
trade deficit. Overall, production
crisis... Once more
and investment
patterns
were still not optimal for growth, and qn e source of distortion was the overvalued currency prior to the currency c_isis in 1997 (Medalla 1998). There was also a continuous decline ha productivity, particularly in the agricultural sector, which remains the primary source of income for most of the poor. Another reason for poverty that continued to hold in the 1990s was the inequality of incomes. Rapid and sustained economic growth would significantly contribute to poverty alleviation. The speedl at which it does, however, would depend on whether the benefits from growfla are equally distributed (de Dios 1993). But this was not so in the Philippines even in the 1990s. Thus, poverty incidence remained high, not only because growth was not sustained, but also because of the uneven distribution of benefits that were generated. Finally, there was the inadequate provision of social services, which directly contributes to the poor's low productivity and are important tools for income redistribution (de Dios 1993). The fiscal crises in the past put severe pressure on budgets for social services. BUt with the government's surplus positions in the 1990s, this should have bean less of a problem. In fact, there was no appreciable increase in budgetary allocations for social services. This was compounded by low levels of capital expenditures, which constrained the economy's overall growth capacity. In principle, the government's poverty alleviation strategy involved raising both the poor's private income (i.e., income from productive assets they own, including from employment) and public income (i.e., income derived from the state via social production of free or subsidized goods and services, and income transfers). In practice, it relied heaVily on the former. However, the quality of growth overall was not socially Optimizing, in terms of providing sustained employment and improving income distribution across regions and income groups. Ultimately, the means ch0sen to alleviate poverty proved inadequate. Also, despite the comprehensiv e approach to poverty alleviation, the social impact of macroeconomic and se_toral policies were still not fully understood and accounted for. Although various social safety nets were in place to help mitigate any adverse impact of policy on specific sectors of the population, overall, they were poorly designed and implemented. Conclusions The outlook for the Philippines for 1997 was quite bullish, and with good reason. Following a recession towards late 1990, the economy began to recover in 1993 and further strengthened in 1994-96. More than that, the Philippines was deemed as finally on the path towards more stable and sustainable growth after decades of lackluster economic performance characterized by boom-bust cycles and unsustained
growth
momentum.
This was attributed
to prudent
Chapter 2: Milo
47
macroeconomic management, continued structural reforms, and political stability, which resulted in a more liberalized investment setting and a more conducive business environment. The Philippine economy's strong performance was thus expected to continue. As in the real sector, the Philippine financial sector was also a lot stronger in the 1990s compared with the 1980s, and adjustments in the right direction were being made. Nevertheless, the Philippines is still mending its economy and further strengthening its economic fundamentals. A truly solid foundation toward sustained and robust economic growth is still being laid. Thus, the fairly stable macroeconomic conditions remain fragile, and some macroeconomic vulnerabilities still exist (Intal et al. 1998). Similarly, financial development in the 1990s was accompanied by some trends, particularly the significant increase in commercial banks' foreign liabilities and lending to the nontradeable sector. The latter could become problematic if they are not managed well or if they persist (Intal et al. 1998). While the concerns raised were not considered "critical" and were expected to improve as the economy continued to grow and restructure, they made the macroeconomy and financial sector vulnerable, especially to sudden shifts in the external environment. Vigilance, policy consistency, and continued reform efforts are thus crucial to preserve and deepen the growth momentum, and improvements in poverty alleviation and other social indicators. A more progressive approach to poverty alleviation, and the provision of social services and social safety nets is also necessary to cushion the impact of necessary structural adjustments on the more vulnerable sectors of society. While some improvements in poverty alleviation and key sociai indicators were observed, they were evidently not happening fast enough or deep enough. There also remained large discrepancies within and between geographical areas. Thus, the government needs to do more and to do so more efficiently, to make a truly sizable impact on poverty. Growth per se may not lead to socially optimizing outcomes. What matters is not just the level of economic growth, but its overall quality in providing sustained employment and improving income distribution across regions and income groups. Ultimately, "Poverty is an unacceptable human condition. It is not immutable; public policy and action can, and must, eliminate poverty. This is what development is all about" (ADB 1999).
48
Economic
crisis... Once more
References Asian Development Bank. 1998. Asian Development Oxford University Press. Asian Development
Bank. 1999, Fighting poverty
Outlook 1998. New York: in Asia and the Pacific: the
poverty reduction strategy of the Asian Development Bank, draft. Bautista, E.D. 1992. A study of Philippine monetary and banking policies. PIDS Working Paper Series No., 9211. Makati City: Philippine Institute for Development Studies. Business Monitor Ltd.
International
Cho, YJ. and D. Khatkhate.
Ltd. 1996. Philippines
1996-98. London:
1989. Lessons of financial liberalization
comparative study. World Bank Discussion D.C.: World Bank.
BMI
in Asia: a
Paper No. 50. Washington,
Cororaton, C.B. 1995. Surge in capital inflows, response of the government and effects on the economy: the Philippine case. Discussion Paper Series No. 95-24. Makati City: Philippine Institute for Development Studies. De Dios, E.S., E. Medalla, S. Gochoco, E. Tan, G. Jurado, C. David, E. Ponce, R Intal, A. Sanchez, B. Balagot, and F. Alburo. 1993. Poverty, growth, and the fiscal crisis. Makati City: Philippine Institute for Development Studies. Dornbusch, R. 1991. Policies to move from stabilization to growth, in Proceedings of the World Bank Annual Conference on Development Economics 1990. Washington, D.C.: World Bank. p 1%48. Fabella, R.V. 1994. Investment and the allocation of resources under macroeconomic instabihty, in Fabella R.V. and H. Sakai. (eds.) Resource mobilization and resource use in the Philippines. Tokyo: IDE. Intal, R, M. Milo, C. Reyes and L. Basilio. 1998. Case study: the Philippines, in MacCleod, R.H. and R. Garnaut (eds.). East Asia in crisis: from being a miracle to needing one? Routledge, London. Krugman, P., J. Alm, S. Collins, and E. Remolana. 1991. Transforming the Philippine economy. Quezon City: NEDA-APO Production Unit. Lamberte, M.B. 1993. Assessment of the financial market reforms in the Philippines, 59.
1980-1992. Journal
of P1)ilippine Development. /
20(2):231-
Lamberte, M.B. 1994. Managing surges in capital infows: the Philippine case. PIDS Discussion Paper Series No. 94-20. Makati City: Philippine Institute of Development Studies. Laya, J.C. 1982. A crisis of confidence of the Philippines.
and other papers.
Manila: Central Bank
Chapter 2: Milo Manasan,
49
R.G. 1994 Breaking
away from the fiscal bind: reforming
the fiscal
system. Makati City: Philippine Institute of Development Studies. Manasan, R.G. 1998. Fiscal adjustment in the context of growth and equity, 19861996. Discussion Paper Series No. 98-11. Makati City: Philippine Institute of Development Studies. Medalla, E.M. 1998. Trade and industrial policy. Discussion Paper series No. 98-05. Makati City: Philippine Institute of Development Studies. Medalla, E.M., G. Tecson, R. Bautista, J. Power and Associates, E. Tan, R. Aldaba, and L. de Dios. 1995. Philippine trade and industrial policies: catching up with Asia's tigers. Vol. 1. Makati City: Philippine Institute of Development Studies. Ramos, EV. 1994. Towards Philippines 2000: a resurgence of optimism and growth. Manaila: Office of the Press Secretary. Remolona, E.M. and M.B. Lamberte. 1986. Financial reforms and balance-ofpayment
crisis:
the case of the Philippines.
Philippine
Review
of
Economics and Bus/iae_, 23(1 & 2): 101-141. Reyes, C.M. and E.A. del V_ille. 199_. Poverty alleviation and equity promotion. Discussion Paper Series N 0. 98-06. Makati City: Philippine Institute of Development Studies. Tan, E. A. 1989. Bank concentration apd the structure of interest. UPSE Discussion paper No. 89-15. Quezon City: School of Economics, University of the Philippines. Tecson, G., M. Austria, V. Pineda, L. de Dios, D. Lapid, C. Medilo, C. Banzon, F. Trabajo, and E. Mendoza. 1996. Philippine trade and industrial policies: catching up with Asia's tigers. Vol. 2. Makati City: Philippine Institute of Development Studies. United Nations Development Programme. 1998. Human development report 1998. New York: Oxford University Press. World Bank. 1986. The Philippines a framework for economic recovery. Washington, D.C. World Bank. World Bank. 1988. Philippines financial sector study (in three volumes). Washington, D.C. World Bank. World Bank. 1992. Philippines capital market study (in 2 volumes, Vol. 1: Main Report; Vol. 2: Contractual Savings Sector). Washington, D.C. World Bank. Yap, J.T. and C.M. Reyes. 1994. Country report on the Philippines. presented at the 7th Workshop on Asian Economic Outlook, Development Bank, Manila, 26-28 October.
Paper Asian
3 Overview of the Economic and Social Impact of the East Asian Financial Crisis Ma. Melanie R.S. Milo
his paper discusses both the immediate contagion effects and the indirect longer-term impacts of the East Asian financial crisis on the Philippines, together with the government's policy responses to contain them. The first section discusSes direct effects and policy responses, while the second section explores the immediate and longer-term impacts of the crisis on the Philippine financial sector. Income and employment effects are discussed in the third section, which is followed by a discussion of their eventual impact on the poor. Following the implementation of fire-fighting measures, the policies that the government implemented to bring about economic recovery are discussed in the fifth section. The sixth section places these policies in the bigger context of the interrelationship between macroeconomics and poverty, and the underlying relationship between the government's choice of policies and the evolution of the crisis. Some conclusions are presented in the final section. Immediate impact and policy responses Thailand's property and financial crises broke out in April 1997, which led to the pullout of foreign investments from the stock market. This, coupled with the country's widening current account deficit, put tremendous pressure on the baht. The Bank of Thailand finally devalued the baht in July, its first devaluation in 14years. Speculators then began to prey on the other currencies in the region initially, the Malaysian ringgit, the Philippine peso, the indonesian rupiah, and the Singaporean dollar, and later the Hong Kong dollar and the Korean won. In general, the combination of contagion effects from Thailand, overvalued currencies, vulnerable capital inflows, and increased uncertainty fomented the regional currency crisis (Magdaluyo 1998). The Philippine Central Bank (Bangko SentralngPihpinas) or BSP's initial response to the speculative attack on the peso was to raise its key overnight
52
Economic
crisis... Once more
borrowing rate from 11.25 percent in May tO 20 percent in June and 32 percent in mid-July, to penalize speculators and discourage the conversion of peso holdings into US dollars. The BSP then began to heavily intervene in the foreign exchange market in early July to keep the exchange rate stable around the P26/ US$1 mark. Finally, the BSP allowed the peso to depreciate in mid-Julj6 after spending around US$1.5 billion in its defense. The exchange rate subsequently breached the P30/US$1 mark in August, reaching more than P45/US$1 in early 1998. The BSP then successively lowered its overnight borrowing rate to 20 percent
at the end of July to 14 percent in August, In addition
to widening
the trading
band
and 12 percent in October. of the peso,
the BSP also
tightened some foreign exchange controls.lit placed a cap of US$100,000 on over-the-counter sales of foreign exchange (or nontrade purposes, which was further lowered to US$25,000 at the end of J_ly. This ceiling was partially lifted I for residents in September. BSP also imposed a limit on commercial banks oversold position of 10 percent of unimpaired capital, while their overbought position was set at 20 percent, with penalties and sanctions imposed on banks that exceed the allowable positions. The limits were later reversed, and the overbought position of banks was even lowered to 5 percent, US$10 million, to force commercial banks to off-load their holdings. To further stabilize the foreign exchange market, Bankers Association of the Philippines (BAP) entered into
but not to exceed foreign exchange the BSP and the an agreement in
December to set daily quotas for the supply of dollars to be sold at an agreed rate, and for the BSP to provide forward cover to banks that had nondeliverable forward contracts with unhedged dollar borrowers. Finally, the BSP increased reserve requirements on deposits, deposit substitutes, common trust funds, and other trust and fiduciary accounts of banks. In addition to a 13 percent statutory reservel the BSP imposed an additional 3 percent liquidity reserve, that is, hands required to be placed in short-term market yielding instruments. This was raised consecutively until it reached 8 percent in August, to siphon off excess peso liquidity in the system and to limit banks' dollar purchases. The BSP's tight monetary policy to defend the exchange rate led to a sharp increase in domestic interest rates (Fig. 1). From a low of 10 percent in April 1997, the bellwether 91-day Treasury bill rate rose to 19 percent in January 1998, while the average lending rate went upito more than 20 percent in the last quarter of 1997 from less than 13 percent in April 1997. Overall, however, the tight monetary policy failed to arrest the depreciation of the peso. But in contrast to previous
episodes
of peso devaluations,
the inflation
rate was fairly steady
during the first 6 months of the crisis. This _as due to the relative stability of food prices. Also, domestic manufacturers ci3ose to run down their inventories and deferred price increases to compete with cheap imports, whose entry was facilitated by the more liberalized trade environment.
Chapter 3: Milo
53
Figure 1. Trends in exchange rate, interest rates, and inflation 1997-October 1999. 50
m
45
_
35 3O 40 25
_...-%
/_
rate, January
Ave exchange
rate
(pesos / US$)
... Tbill rate (%) -Ave lending rate (%) -- -- h_flation rate (%)
_
15 10
--
_ ....
5
Source: Bangko
Sentral
ng Pilipinas.
Impact on the financial sector Figure 2 shows the monthly movement of the Philippine stock exchange's composite price index (Phisix) and total value turnover from 1987-99. It indicates increased volatility in the stock market from 1993 as a result of the opening up of the capital account. As in other bourses plunged as the domestic currency reached and foreign investors divested themselves 3,171 points at the end of 1996, the Phisix 1997, which was just slightly higher than
in the region, stock market prices record lows against the US dollar of their holdings. From a high of fell to 1,772 points by November its preboom level. Banking and
property stocks were the worst hit. The thinness of the stock market and the surge in portfolio capital inflows made the stock market highly vulnerable to shifts in international capital, as well as the domestic and international environments. Figure 2. Philippine stock market composite price index (Phisix) and total volume turnover, January 1987-October 1999. 4,000 -
700,000 _
-- Phisix
3,5°° •
600,000 _
-- Total
,-,2500 • '_ 2"000
400,000 _. 300,000
115001 1,000
200,000
3,000. _ 500. 0
............
1987
1989
Source: Philippine
500,000 _ 0100,000 _,_ 1991
1993
Stock Exchange.
1995
1997
1999
ttmlover
54
Economic
crisis... Once more
In contrast to Thailand, Indonesia, and Korea, there was no systemic failure of financial institutions in the Philippines. Only one fairly small, newly upgraded commercial bank--Orient Bank--failed in the immediate aftermath of the currency crisis. As in previous cases of bank failures, insider abuse was the ultimate cause of the bank's failure. Of its reported P6.1 billion worth of nonperforming loans, around P5.7 billion directly or indirectly benefited its owner. In particular, there was excessive lending to the real estate sector, primarily to companies associated with the bank owner, who also tapped other commercial banks and the stock market to finance his property acquisitions. He reportedly amassed more than P22 billion in loans from a total of 30 creditor banks. The currency depreciation, the stock market crash, soaring domestic interest rates, and the property sector bust _ledto the collapse of his real estate ventures, In addition to Orient Bank, 6 thrift banks and 15 rural banks closed in 1998. The adverse effect of the crisis on banks became evident in the volume of nonperforming loans, or loans that missed debt payments for 3 consecutive months, relative to total loans of commercial banks. Prior to the crisis, commercial banks'
nonperforming
loans accounted
for just less than 3.4 percent
of total
loans. The sudden depreciation of the peso plus the uptick in interest rates, and the weakening of the economy with the characteristic drop in levels of production and consumer demand, rising 'unemployment, and low business confidence, impaired the ability of both corporate and individual borrowers to service their debts. As a result, nonperforming loans rose to 4.7 percent of total loans at the end of 1997, to 10.4 percent at the end of 1998, and climbed even further to 14.4 percent in the third quarter of 1999. The ratio appears to have peaked or to be nearing its peak. Companies, that borrowed in dollars were hard hit when their debts nearly doubled as the peso fell steeply against the dollar. On the other hand, businesses with peso-denominated loans suffered as interest rates shot up to as high as 30 percent. Commercial banks' total loans, and consequently total assets, fell following the write-offs and provisioning for bad loans (Table 1). The alarming growth of past due loans and loan loss provisions caused banks to be overly cautious in their lending in 1998o99. The contraction in outstanding loans of commercial banks until the first quarter of 11999was a dramatic reversal of the 41 percent loan growth seen in 1996. Loan growth significantly slowed down to 4.9 percent in 1997, and contracted by 2.2 p_rcent in 1998. While the increase in nonperforming loans has slowed down in recent months, other components of commercial banks' nonperforming assets continued to grow. In particular, commercial banks' exposure to the property sector was reflected in the increase in their real and other properties owned or
Chapter 3: Milo
55
Table 1. Selected Year
data on commercial
Total assets
Total loans
(billion pesos)
(billion pesos)
banks,
1997-99.
Nonperforming
loans
Loan loss provision
(% of total loans)
(% of total loans)
1997 Mar
2,005.00
1,284.59
3.3
1.3
Jun
2,085.60
1,418.95
3.4
1.3
Sep Dec 1998
2,310.70 2,513.00
1,499.25 1,573.15
4.0 4.7
1.4 2.2
Mar
2,417.00
1,517.63
7.4
2.6
Jun
2,535.90
1,595.37
9.0
2.7
Sep Dec 1999
2,529.00 2,528.00
1,586.25 1,542.49
11.0 10.4
3.1 4.0
Mar
2,508.30
1,484.46
13.2
4.6
Jun
2,583.10
1,505.60
13.1
4.8
Aug
2,546.90_
1,504.44
14.4
5.1
Source: Bangko Sentral ng Pilipinas.
acquired (ROPOA). ROPOA assets increased from around P14.6 billion prior to the crisis to more than P82.9 billion at the end of the third quarter of 1999. The decline in lending, in turn, inevitably became a drag on commercial banks' profitability, which went down although it remained positive. Return on equity fell from 16.3 percent in 1996 to 12.4 percent in 1997, and 6.6 percent in 1998. With lending activities down, banks were forced to concentrate on other sources of income such as fees and charges, foreign exchange trading, and other investments. The 1998 data show that bank investments grew by 47.6 percent to P1.2 trillion from 1997 figures, as banks shifted to holding government securities such as Treasury bills instead. Thus, much of the money that fueled the 1999 first quarter's 2 percent growth in real GNP came from pump priming and remittances. To mitigate the impact of the sharp depreciation of the peso and the deterioration in bank assets, the BSP mandated increases in minimum capital requirements for banks over the period 1998-2000. For instance, the required minimum capital for universal banks was raised from P3.5 billion prior to the crisis, to P4.5 billion in 1998, P4.9 billion in 1999 and P5.4 billion pesos in 2000. For commercial banks, the increase in minimum capital requirement was from P1.6 billion to P2.8 billion in 2000, while minimum capital requirement for thrift banks located in Metro Manila doubled from P200 million to P400 million. The BSP likewise instituted stiff penalties for failure to comply with the new minimum capital requirements. As a result, there has been a rise in merger and
56
Economic
crisis.,. Once more
acquisition activities especially in 1999, which could lead to a restructuring of the banking system (Lamberte and Yap 1999). Despite the crisis' negative impact, the Philippine banking sector still fared relatively well compared with the crisis economies, particularly of Thailand and Indonesia. This was attributed to reforms that had been implemented, and the adjustment period in the 1980s that saw weak banks weeded out and stronger prudential regulations instituted. The implication is that the expected benefits of financial sector reforms were actualized. This was true to a certain extent. In particular, banks were better capitalized, with capital adequacy ratio ranging between 17 percent and 20 percent from 1992 to June 1997. However, the emergence of similar trends in lending behavior and foreign liabilities of commercial banks raises the question of whether efficiency gains from financial liberalization in particular were realized. Overall, the answer would seem to be no, and this could be attributed both to commercial bank behavior and monetary authorities' policy stance (Milo 1998). Doubtless the banks' imprudence contributed to their problems, as they became lenient in their lending activities. The rapid buildup in resources and the increasing number of players fostered a more competitive lending environment. Thus, banks tended to relax credit evaluation procedures. There was also the emphasis on collateral as the basis for granting a loan, instead of cash flows, for instance. Hence, the penchant for real estate, which was traditionally seen as a sound investment and collateral. On the other hand, there was the policy stance of the BSP, which reinforced the banks' false sense of security. In particular, prior to the crisis, monetary authorities in the Philippines gave a strong signal that the exchange rate level was not only appropriate, but would be maintained for an extended period. This stance led to the underpricing of foreign exchange risk, which encouraged foreign borrowing and dollar-denominated lending, and discouraged the development of a forward market. The underpricing of risk plus the BSP's implicit policy of ensuring that no commercial banks would fail, would necessarily be allocationally inefficient since it would lead the financial system towards excessive exposure to high-risk activities, such as the property sector and the stock market. Fortunately, such worrying trends were fairly recent and had not yet reached the same proportions as those in the crisis economies. Hence, the muted effect of the regional Income
crisis on the Philippine
financial sector.
and employment effects The growth momentum from 1994 to. 1996 was sustained
during the first
6 months of the Asian crisis, although there was a deceleration in GDP growth (Table 2). Growth of gross capital formation even accelerated, as ongoing and planned investment activities were completed. Exports also continued to
Chapter 3: Milo
57
perform well. On the other hand, the slowdown in construction became evident in the last quarter of 1997. The impact of the crisis on the economy became more evident in 1998, particularly in the construction and manufacturing sectors. This was compounded by the poor performance of agriculture as a result of adverse weather conditions. The latter also resulted in higher inflation rates, which again reached
Table 2.
double-digit
levels by the end of 1998.
Growth of real GDP by expenditure share and industrial origin, and other macroeconomic indicators, 1994-99 (In percent). 1994 1995 1996
Growth Growth
of realGNP of realGDP
Growth by industrial origin Agticul_re, fishery & forestry Industry Manufacturing Construction Services Inflation rate Trade balance (% of GDP) National govertunent deficit (% of GDP) Source:
National
Statistical
1998
1999
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
7.3 5,9
5.4 5,5
5.3 5,6
5,1 4,9
5,1 4.7
1,5 1.1
-0.5 -1.0
0.7 -0,1
-1.2 -2.0
2.1 1.2
3.8 3,6
3.3 3,1
3.7 6,1 9,0 15.2 15,6
3.8 4.6 5,6 4.1 3,7 13.3 16.2 9.6 16,0 16,9
5.0 4.5 14.9 8.6 3,0
5,1 5.0 4.9 7.3 6.2 0.4 7-1 9.3 15,0 15.2 15.0 14_8 2_7 10.2 15,0
4,5 3,9 2,9 2,6 -5,4 -2,4 -1.3 0.6 -6,0 -18.2 -19.1 -22,3 10.6 -1.4 3.9-14,4 -2,3-12,1-13,1-33.9
2.5 7,6 -9.7 0,7 -16,7
2.6 6.2 6,2 3,0 2,4
2.6 3.7 -5,3 8,0 1,9
3.4 5.8 5.0 9.4 4,3
1.2 3.9 6.8 6,4 6.8 5.6 6,6 10.9 5.0 6.4
4.9 5,1 2.3 21,3 6.2
1.8 0.4 7,6 6.4 5.3 4.3 18.5 18,1 5.8 5,5
2,9 11,1 -2,2 -0.7 _1.0 0.9 -6.0 -5.3 3,0 4.0
5,6 0,2 2,2 -5,9 4,4
4,6 4.4
Growth by expenditure share Personal consumption Government consumption Gross capital formation Merchandise exports Merchandise impor_
1997 Q1
4.9 4,7
8.3 8.0 9.1 -12.2 -12,1 -13.7 1,0 0,6 0.3
Coordination
4,1 5,6 4.7 7.6 4,4
5.3 5.3 5.9 7,3 -13,7 -12,6 -15.5 -12.2 -0.1 0,8 0,1 -0,4
-3.8 -11,5 0,2 -0,7 2.0 -0.9 -12.8 -5.1 4,5 3,6 7,9 -7.2 -1.9
9,9 -1.6 -1,9
-3.1 -2,0 -1,5 -7.5 2,8
-7,8 _4.7 -3.5 -8.5 3,2
10,4 10,6 3.3 4.3 -0.3 -3.2
10,0 3,1 4,9
6.8 0.8 -2.6
5.6 _4_
Board.
On the demand side, gross capital formation declined as high interest rates, tight financing, and the uncertain economic environment discouraged investment spending. Merchandise exports continued to grow, albeit at a substantially decelerated rate in 1998, while merchandise imports significantly declined. However, total exports declined as exports of nonfactor services such as tourism fell. The nominal peso depreciation led to a significant adjustment in the real effective exchange rate, which depreciated by 30 percent from June 1997 to February 1998. The real depreciation effectively wiped out the real appreciation international
of the peso during the 1990s, and thereby helped improve the competitiveness of Philippine exports especially of labor-intensive
manufactures (Intal et al. 1998). Contraction in domestic output was tempered by the inflow of overseas workers" remittances, although the latter also declined from US$5.7 billion in 1997 to US$4.1 billion in 1998.
58
Economic
The
slowdown
in
the
unemployment rate, which 7.4 percent 2 years earlier unemployed with almost directly 1997
economy
was
crisis...
strongly
Once
reflected
more
in
the
rose to 9.6 percent in the third quarter of 1998, from (Fig. 3). This translated to more than 3 million
persons out of a labor force of almost 31.3 million in 1998, compared 2.2 million unemployed in 1996. The number of firms and workers
affected to 1998
by worsening (Table
economic
3). Again,
worst
conditions hit
were
more those
than in the
doubled
from
construction,
manufacturing, and services sectors (Table 4), which spearheaded growth the 1990s. In addition to lost jobs as a result of the crisis, the slowdown
in in
economic activity the labor force.
to
Figure
prevented
3. Unemployment
the creation
of new jobs to absorb
rate, first quarter
14 13
1997-third
quarter
new entrants
1999 (In
mrcen0.
....
1997
--..-.
1998
_
1999
.IL t
12
t
*
.
•.
t
10 9
_,
11 8
"_-_..
4
' " • ' m il
_
_
! ii ": _
I
,
_.
7 6 Q1
Q2
Q3 • :
Q4
Source: National Statistics Office.
Table
3.
Number
of firms
reasons
and number Firms reporting
Year
1996
Total
Closure
that
(no.)
Retrenchment
closed
or retrenched
of workers
affected,
. RotatlOn,
etc.
due
to economic
1996-99. Workers
affected (no.)
Total
Permanent layoff
Temporary layoff
i
Rota_iom, etc.
1,(/79
347
724
39
80,70_.
47.008
29,487
4,206
1"t aem
614
146
455
20
,t0,323
22,631
15,915
1,777
2''d s_m
599
21]
372
23
40,378
24,377
]3_572
2,429
1,155
•
i
338
804
48
62,724
•39,176
19,843
3,705
1_tsere
580
'180
381
26
33,115
21,463
9,773
1,879
2"a sere
683
163
_J8
25
29,609
17,713
10,070
1,826
1998
3,072
642
2,310
293
155,198
76,726
50,744
27,728
y,t sere
1,936
403
1,420
172
83,852
39,923
29,442
14A87
2'_'tsere
] ,725
254
1,378
169
71,346
36,803
21,302
13,24]
_,ug-99
2,107
257
1,341
S21 _
45,238
34,167
28,833
1997
:
108,_8
Note: Permanent layoff means complete and total separation from employment; temporary layoff means separation of workers for not more than 6 moflths; rotation, etc. means rotation of work, reduced working time. Numbers may not add up due ito multiple reporting. aIncludes fh-ms that reported temporary layoffs. Source: Bureau of Labor and Employment Statistics, Department of Labor.
Chapter 3: Milo Table 4.
59
Number
of firms
that closed
reasons
by industry,
1996-99.
or retrenched
due to economic
Industry
1996
1997
1998
Aug-99
All industries
1,077
1,155
3,072
1,586_
97
70
95
44
Industry Mining and quarrying
545 14
568 23
1,254 48
565 7
Manufacturing Construction
508 21
505 31
1,025 173
479 72
2
9
8
7
Services
435
517
1,723
977
Transportation, commrmication, and storage Wholesale and retail trade
68 134
91 167
257 600
142 339
Financing, insurance, and business services Community, social, and personal services
93 140
130 129
491 375
306 95
Firms located in National Capital Region (NCR) Firms located outside of NCR
610 467
575 580
1,708 1,364
1,284 823
Agriculture, fishery, and forestry
Electricity, gas, and water
Excludes 521 firms that reported temporary layoffs, rotation, etc. Source: Bureau of Labor and Employment Statistics, Department of Labor.
Table 5.
Change in average current prices).
family income
decile,
1997-98 (in
Income decile
1997 FIES
1998 APIS
Philippines
123_000
121,438
-1.3
100.0
100.0
20,659
]4,644
-29.1
1.7
1.2
Second
33,064
26,852
-18.8
2.7
2.2
Third
42,611
36,689
-13.9
3.5
3.0
Fourth
53,101
47,211
-11.1
4.3
3.9
Fifth
66,291
60,176
-9.2
5.4
5.0
Sixth
83,224
76,641
-7.9
6.8
6.3
Seventh
106,919
100,170
-6.3
8.7
8.2
Eighth
141,394
135,051
-4.5
11.5
11.1
Ninth
199,891
196,018
-1.9
16.3
16.1
Tenth
482,927
520,928
7.9
39.3
42.9
First
% change
by income
% distribution of total family income 1997 FIES 1998 APIS
Note: FIES stands for Family Income and Expenditure Survey; APIS stands for Annual Poverty Indicator Survey. These two surveys are comparable since they had the same household samples, although the former is more extensive. APIS was started only in 1998. Source: National Statistics Office.
60
Economic
crisis...
Once more
With the economic slowdown and rise in unemployment, average family incomes, except those from the richest decile, expectedly declined (Table 5). The poor performance of the agricultural sector due to adverse weather •conditions further worsened the poor's situation, who live predominantly in rural areas. The rate of decline in average family income was regressive, with families belonging to the poorest decile suffering the highest decline of 29 percent. Income distribution consequently worsened in 1998. The increase in average family income of the richest decile could be due to windfalls from the crisis. Only the top three deciles increased their savings from 1994 to 1997 in real terms, with the richest decile registering the highest growth and share (Fig. 4). This decile also had access to a wider range of saving instruments, such as peso and dollar deposits, trust accounts, and Treasury bills. Thus, families belonging to the top decile were well placed to benefit from increases in interest rates and the peso depreciation as a result of the financial crisis. In contrast, savings deposit, which carried low and static interest rates, was practically
the only financial asset available to small savers.
Figure 4. Average family income and savings 1997 (In constant 1988 prices). 250000 200000
!
150000
/,
100000
-50000
decile,
1994 and
125000
_
1.994 Savings
100000
_
1997Savings
.......
1994 Income
--
1997 Income
.75000 .50000
50000 0
by income
25000 __ ...........
0
Is[ 2nd 3rd 4th 5th 6th 7fl_ 8th 9thl0ft:
Source: Family Income
and Expenditure
-25000
Survey, s gtatistics
Office.
Impact on the poor In considering
the social impact of theicontagion
effects of the Asian crisis
on the poor, one has to consider that the crisis took place simultaneously the weakening of the agriculture sector due to adverse weather patterns. sector accounts for more than 40 percent of total employment.
with This
Thus, the decline
in this sector would have reinforced• the adverse impact of the Asian crisis on production, employment, and income, an d contributed significantly to the increase in inflation rates. In October
1998, the National
Statistics
Office conducted
an Annual
Poverty Indicator Survey (APIS) to supplement its triennial Family Income and Expenditure Survey (FIES). Results on the impact of the financial crisis on Filipino families showed that, of the projected 13.5 million families, 96.6 percent
Chapter 3: Milo
61
were affected by higher prices of food and other basic commodities as a result of the financial crisis; this was also due to adverse weather conditions. More than 20 percent reported losing jobs within the country, while around 17 percent reported reduction in wages. Less than 5 percent of total families reported job loss of a migrant worker. In addition to the financial crisis, more than 76 percent of families belonging to the poorest 40 percent cited the drought or the E1 Nifio effect as their second most serious problem (Table 6). Table 6. Impact of the financial
crisis on Filipino
Projectedno.
families.
Pmventage of families affected by:
Income sWata
of families
Higher prices
Job loss (local)
Job loss Reduced (migrm_t) wages
Drought
Philippines
13,487,569
96.6
20.3
4.9
17.0
62.9
la'_west40%
5,495,298
95.7
17,9
3.7
15.2
76.0
Highest 60%
7,992,270
97.0
22.0
5.9
18.4
,54.0
Source:Annual Poverty Indicator Survey 1999,National StatisticsOffice. Table 7 shows the various ways Filipino families coped with problems brought about by the financial crisis. Almost 50 percent reported a change in their eating pattern; around 29 percent increased their working hours; almost 7 percent took their children out of school; more than 5 percent reported a family member migrating to the city or another country, more than 16 percent received assistance from relatives or friends, while only less than 7 percent received assistance from the government. Figures for the lowest 40 percent income brackets were a few percentage to the poorest income brackets attendance
rates, further
Table 7. Filipino
points higher. Considering that those belonghng already have lower nutrition status and school
declines would have grave consequences.
families'
responses
to problems
due to the financial
crisis
Percentage of families reporting: income
Change
Took
Member
Received
Received
Increased
Other
strata
in eating pattern
children out of school
migrated to city/another country
assistance from family/friends
assistance from gov't
working hours
steps taken
Philippines
47.9
6.9
5,2
16,2
6.9
28.8
9.9
Lowest 40%
51.4
7.5
6.1
18,5
9.7
31,5
10.0
Highest 60%
45.5
6.4
4.6
14.7
5.0
27.0
9.9
Som'ce:Annual Poverty Indicator Survey 1999,National StatisticsOffice.
62
Economic
crisis... Once more
Minimum daily wage earners were among the hardest hit, since the minimum daily wage rate only rose slightly. In Metro Manila, it increased from P185 prior to the crisis to P198 in February 1999, which is less than half of the estimated daily cost of living of P441 for a family of six. Thus, it is almost certain that the small gains made in alleviating poverty in the 1990s have been nullified as a result of the Asian crisis. The Asian Development Bank (ADB), for instance, foresees that poverty incidence in the Philippines will grow by 5 percentage points from 32.3 in 1997. The various human development indicators are thus expected to take a turn for the worse (Reye_ 1998). The surge in interest rates adversely affected the government's fiscal position as it significantly raised interest' payments. Furthermore, import declines and the slowdown in economic activity led to shortfalls in revenue collection. Thus, from a minimal surplus in the first half of 1997, the government posted a deficit of P2.3 billion in the second half of 1997. This further grew to P50 billion in 1998. To contain the deficit, the government imposed a mandatory 25 percent reserve requirement on all expenditures other than personnel and debt service and a 10 percent deferment in internal revenue allotment for local government units, in addition to suspending all tax subsidies of all government agencies and corporations. The social services subsectors were eventually exempted from mandatory reserves in July 1998. Expenditures on social services fell by around 10 percent relative to programmed levels in 1998 in contrast to economic services, for instance, which fellby B0percent. Although this reduction was less than that in other sectors, it has Serious repercussions on the poor, especially given the government's historicalunderinvestment in the health and education sectors. Decreases in capital outlays, and maintenance and other operating expenditures will also have a direct negative the quality of capital stock (Pineda 1999). Policies toward economic recovery To date, the worst of the crisis seems
impact on growth
and
to be over, and even the crisis
economies are deemed to be on the (long) road to recovery. True to earlier predictions, the Philippines was among thel first to recover, posting a positive growth rate in the first quarter of 1999 along with Singapore and South Korea. However, first quarter growth was attributed primarily to the recovery of agriculture, which in turn was due to improved weather conditions, and government pump priming. But how far carl the economy's recovery go, with the continued weak performance of the in_tustrial sector? The latter, in turn, was attributed to continued weak consumer demand, tight credit conditions, and the uncertain economic and political environment. To avert economic slowdown, the government in 1999 to take up the slack in private sector spending.
shifted to pump priming The government resorted
Chapter 3: Milo
63
to foreign borrowings to finance its pump-priming strategy and the resulting deficit, which was programmed at P68.4 billion. It secured US$3 billion worth of external financing to cover its programmed 1999 budget deficit. The amount consisted of borrowings from official development assistance (ODA) facilities, as well as bond flotations in the international capital market. It began the year with a US$1 billion two-part global fund, which was further increased by US$200 million. This was followed in March 1999 by a 350-million Euro bond, which was Asia's first overseas bond venture in the single European currency. By shifting the government's financing source from local to foreign creditors, the government sought to lower domestic interest rates and avoid crowding out the private sector. Thus, the benchmark 91-day Treasury bill rate followed a declining trend from a peak of more than 19 percent at the start of 1998 to reach a 5-year low of less than 9 percent in October 1999, which was even lower than its precrisis level of 10.5 percent. The government's foreign borrowings also beefed up the country's gross international reserves, which rose from a low of US$8.5 billion dollars at the start of 1998 (equivalent to less than 2 months' worth of imports) to almost US$14.5 billion as of end-September 1999 or more than 4 months' worth of imports. Thus, the exchange rate has appreciated and stabilized around the P38-39 per US dollar. Resumption of foreign investment inflows also contributed to the strengthening of the peso and the stock market. But while foreign borrowing helped stabilize the peso and lower domestic interest rates, the government was also criticized for allowing the country's foreign debt to surge. Monetary policy was likewise eased, with the successive lowering of the BSP's overnight borrowing and lending rates to 8.8 percent and 11.0 percent, respectively, as of November 1999, compared with 13.4 percent and 15.4 percent at the start of the year. The sustained reduction in interest rates was made possible by the downward trend in inflation rates, which began to decelerate from 11.5 percent in January to 5.4 percent in October 1999. The BSP also cited its overperformance relative to monetary ceilings set with the International Monetary Fund (IMF). In addition to interest rate cuts, the BSP reduced total reserve requirements on banks from 17 to 15 percent. However, the reduction was on liquid reserves, that is, funds that can be placed in government securities and can carry market rates, rather than the statutory reserve requirement that stood at 10 percent. The BSP pays only 4 percent on 40 percent of the funds placed in its vault. Bank lending rates likewise followed a declining trend. As noted in the previous section, however, commercial bank lending continued to contract in the first quarter of 1999. This was due to weak private sector demand, and the banks' cautious stance. The easing of monetary policy, particularly the reduction in liquid reserve requirement, had little impact on bank lending behavior since
64
Economic
crisis... Once more
they opted to increase their holdings of government securities instead. This explains why recent bids during weekly auctions of treasury bills have reached as high as P12 to P18 billion, compared with offerings of about P5 to P5.5 billion. Thus, it has been argued that, since private sector demand for funds was still weak and interest rates had already gone down to precrisis levels, it would have been cheaper for the government to fund its 1999 pump-priming activities from the domestic credit market (Lamber_e et al. 1999). Strong demand for government securities works to the government's advantage because it incurs lower financing costs for the securities it issues. The economy, however, may not gain anything or may not gain as much when banks invest in government securities instead of releasing fresh funds _at can be used more productively by the private sector. Also, further declines in the treasury bill rate may not be followed by equivalent their profits.
drops
in lending rates as banks struggle
to maintain
While the government is doing its best to bring down the cost of funds, cutting key rates and bringing down liquidity reserve requirements do little to address the credit environment bankers currently find themselves in. The issue of risk then becomes an issue of confidence, both in emerging positive economic trends and the sustainability of the government's policy stance, in the context of possible shifts in the international environment. Political issues, such as the proposed constitutional amendment, also add to the uncertainty. If the banking sector is to play a more significant role in the economy's recovery, stronger positive trends in the real sector need to emerge. Thus, the role of fiscal policy in stimulating aggregate demand is crucial. Banks are set to become more liquid as bad debt portfolios are removed from their balance sheets. Any premature tightening of policy, however, could derail the economy's still nascent recovery. Macroeconomics and poverty Stabilization policy in the Philippines typically relied on tight fiscal and monetary policies. The social impact of this policy stance was unmistakable. The reduction in social sector expenditures, which were already deemed inadequate, came at a time when demand for basic social services was expected to increase as economic conditions deteriorated. The crisis also exposed the i underlying weakness of the government's fiscal position, which relied primarily on privatization proceeds and expenditure! cuts to post a surplus. A budget deficit ceiling of P68.4 billion was originally set with the IMF for 1999. This was raised to P85 billion when it became apparent that the original ceiling would be breached due to poor revenue collection. But the actual amount was a much higher Pl13.6 billion, or around 3.6 percent Of GNP. The real concern is not the deficit per se, but the weak revenue performance government's intertemporal budget constraint.
and its implications on the Although the government
Chapter 3: Milo
65
attributed the revenue shortfall due to weak tax administration.
to the economic
downturn,
ultimately
it was
The government's fiscal framework envisages a steady improvement in its fiscal position beginning with a lower deficit of P62.5 billion in 2000, toward a small surplus over the medium term. But the improvement must be derived from an enhanced revenue effort. Otherwise, expenditures on priority areas, such as infrastructure, the social sector, and antipoverty programs, may again be sacrificed. The latter's adverse effect on economic growth and social development is well established. Furthermore, without a sustainable revenue base, the government will not be able to manage its foreign debt burden, which again grew significantly as the government shifted to foreign financing. If this is the case, the brunt of the adjustment will again fall on monetary policy, and monetary authorities may again be constrained to manage the exchange rate very conservatively via a high interest rate policy. This was one of the factors that made the Philippines vulnerable to the contagion effects of the Thai crisis. In fact, the BSP governor had broached the idea of increasing its key overnight rates if the recent weakening of the peso, which was in turn due to the government's higher fiscal deficit and some political concerns, continues. The linkage between the conduct of monetary policy and the poor has to do with the former's influence on economic prices that affect the latter, both directly and indirectly. In particular, monetary policy influences inflation rate, interest rates, and exchange rate (Gochoco 1993). Monetary policy in the Philippines has typically been used to defend the exchange rate. In the past, this was due to the Philippine central bank's limited foreign exchange reserves, which constrained its ability to directly intervene in the foreign exchange market. The exchange rate, in turn, was linked to the foreign debt service of the government (Lim 1992). In particular, high interest rates were used to prompt a switch to peso-denominated assets, when an excess demand for foreign exchange was evident. Domestic interest rates had to carry a premium to compensate for the perceived risk of devaluation, which reflected the concern that the peso was overvalued. This accounted for the large differentials between domestic and foreign interest rates (Krugman 1991). Monetary authorities' penchant for a strong peso was also because of its positive impact on inflation, given the economy's dependence on imports. But the linking of the exchange rate to financial flows was detrimental in that it brought about a dichotomy between exchange rate policy and trade and industrial policies (Lira 1992). In contrast to the 1980s, the BSP became a net buyer of foreign exchange in the 1990s because
of the surge
in capital
inflows
and
the consequent
appreciation of the peso. However, monetary ceilings set with the IMF resulted in the BSP sterilizing its foreign exchange purchases. Thus, domestic interest rates remained high, which in turn encouraged more capital inflows. Ultimately,
66
Economic
crisis... Once more
monetary authorities' continued conservative management of the exchange rate gave rise to some perverse results: In particular, the very stable and strong peso, which was considered overvalued, itself became a source of instability. Because the policy target was exchange rate misalignment, the peso was subjected culminated in the mid-1997 currency successful in defending the peso from
stability at the cost of a currency to several speculative attacks, which crisis. Although the BSP was fairly speculative attacks prior to the 1997
currency crisis, there were economic costs. IAllowing interest rates to increase fended off speculators, but only temporarily. And it had adverse, longer-term effects on the banking system, the pat!ern of investment, production, employment, growth, and ultimately the poor. That is why the BSP's use of high-interest rate policy to defend the peso at the outbreak of the crisis was highly criticized for its failure to stem the fall of the peso and its adverse effect on the economy. The BSP was urged to loosen up on its defense of the local currency and to focus instead on bringing, down interest rates, which had a stronger impact on the economy than the peso depreciation. The adjustment lag, especially in the response of banks, underscores the importance of maintaining the current low interest rate policy stance. One major outcome of financial liberalization in a regime of floating exchange rates was to increase the influence of financial markets in exchange rate determination, with financial flows vastly exceeding the value of international trade in goods and service s .Financial markets clear or adjust faster than real markets, hence the overshooting of nominal (and real) exchange rates in the short run (Dornbusch 1976), in response to surges in capital inflows. Over time, as the impact of trade and industrial reforms become more fully realized, underlying structural changes should exert a greater influence on the real exchange rate, moving it to a more realistic level. In the interim, however, macroeconomic policies--fiscal and monetary policies, external borrowing, and exchange rate management--also play an important role because of their impact on aggregate demand and price levels, including the nominal exchange rate. Thus, they can either reinforce, neutralize, or even temporarily reverse the effects of structural changes on the real exchange rate (World Bank 1987). The choice of exchange rate regime depends on several economic and political factors, including the nature of disturbances, structure of the economy, information available to agents, and policyrnakers' preferences. And central bank intervention in the foreign exchange market will have 'different objectives at different times. Given the changing environment, the alternative is no longer between fixed versus floating exchange rates. On the one hand, there is the difficulty and cost of maintaining a fixed exchange rate in a deregulated, globalized environment. On the other hand, leaving exchange rates to be
Chapter 3: Milo
67
determined exclusively in a market _ that does not always behave as an "efficient financial market" is also not tenable since the costs of ignoring speculative swings could be very high (Cutler et al 1990, Macfarlane and Tease 1989, Miller and Weller 1991). Thus, there is a body of theoretical literature that suggests that a purely fixed or flexible exchange rate would not generally be optimal, given the diverse nature of shocks facing an economy (Dornbusch 1993, Turnovsky 1994). Rather, some intermediate degree of flexibility is seen as generally best able to stabilize the economy in response to economic disturbances. As Krugman (1989) pointed out, exchange rate volatility, that is, high frequency fluctuation around the "true" fundamental value, is not necessarily an acceptable or even inevitable cost of allowing the foreign exchange market to operate freely. Efforts to stabilize the exchange rate, however, must also guard against inducing a currency misalignment, or a persistent deviation from fundamentals. Compared with the impact of persistent deviations of the exchange rate from its long-run equilibrium value, the welfare costs of exchange rate volatility seem to be rather small. For instance, firms' investment decisions may be distorted, even if they are perfectly aware that a particular value for the exchange rate may be u_nsustainable (Dixit 1989a, 1989b). Also, international portfolio investment that takes place when exchange rates are misaligned can lead to large welfare losses resulting from resource misallocation. These suggest that welfare costs of exchange rate misalignments are likely to be substantial (Miller and Weller 1991). Although excessive fluctuations in the exchange rate would also need to be avoided in a still shallow and inefficient foreign exchange market, greater exchange rate flexibility would also encourage the development of forward markets, which would lead to improved management of exchange rate risks. Then currency speculators would bear the exchange rate risks, while hedgers (usually traders and arbitrageurs) would be able to cover their foreign exchange exposures in the forward market. Simply put, a poor exchange rate policy risks misrepresenting true opportunities, and thus misallocating resources. Ultimately, the goal should be a competitive, stable, real exchange rate (Dornbusch 1993). Only then will the Philippines undergo a structural experience in export development. What the events of the past two years show is that the Philippines
has
yet to escape the grip of a boom-bust cycle that had characterized its economy for decades. But the Philippine economy is als0 one of the more open, transparent, deregulated, and democratic economies in the region. Thus, it is well poised to adapt to the changing external environment, and to take advantage of the opportunities in a more liberal environment. The importance i A market is said to be efficient ff all available information is fully reflected in current market prices. Miller and Weller(1991)discuss some important arguments that have been forwarded to explain the divergencefrom market efficiency.
68
Economic
crisis... Once more
of maintaining sound and consistent policies cannot be overemphasized. Furthermore, care has to be taken that the reforms are not reversed but deepened further, both in the financial and the real sectors. The financial sector is crucial because it serves as the mechanism through which monetary policy is transmitted to the rest of the economy. The financial system also plays a very important role in facilitating economic growth andprosperity by channeling funds from savers to investors. The more competitive and efficient is this intermediation process, the more likely it iS that funds will be made available and allocated according to their most productive uses. However, the financial system does not operate in a vacuum, and inefficiencies and distortions in the real sector will be reflected in the financial sector as well. Conclusions In discussing the impact of the Asian crisis on the Philippines, three key points need to be made. First, the impact of the Asian crisis on the Philippine economy and financial sector has been quite moderate, especially when compared with the crisis economies of Thailand, Indonesia, and South Korea. The Philippine economy contracted from the 2nd to the 4th quarter of 1998. But true to earlier predictions, it was among the first to post positive growth rates, from 1.2 percent in the 1st quarter of 1999 'to around 3.1 percent in the third quarter. While there has been a significant weakening of the commercial banking sector in particular, again, it was still very moderate. Second, the social impact has also been less severe. This was borne out by a microeconomic study, which conducted focus group discussions and household surveys to determine the social impact of the crisis on the more vulnerable members and sectors of Philippine society (Reyes et al. 1999). Finally and most importantly, as it has been frequently noted in the literature, the Philippines was a laggard in the region both in economic growth performance and human development. Thus, even a slight deterioration in economic and social conditions will have severe implications, especially on the poor. It is almost certain that the crisis has nullified the gains that have been made on poverty alleviation and other human development indicators. Furthermore, while the direct impact of the Asian crisis may have been fairly moderate, the disruption that it caused in the Philippines' growth and adjustment process could prove to be more significant and costly. The positive reports about the Philippines clearly need to be kept in perspective. The fundamental restructuring of the Philippine economy toward greater efficiency and competitiveness will necessarily hurt certain sectors during the adjustment period, especially in the short to medium run. Thus, policies need to be designed such that they will hurt the poor the least, or distribute the burden of the adjustment
in the fairest manner possible (de Dios 1993). Clearly, properly
Chapter 3: Milo
69
designed and targeted social safety nets still have an important role to play in alleviating the effects of stabilization and structural adjustment measures. In particular, the globalization of financial markets has resulted in labor bearing the brunt of adjustments to external shocks, as increased capital mobility narrows the range of variation of returns to capital within a country to match "world" rates (Rodrik 1997). The UNDP's Human Development Report (UNDP 1998) even said that globalization has been bad for the poor. Thus, the importance an adequate system of social protection cannot be overly emphasized.
of
70
Economic
crisis... Once more
References Cutler, D.M., J.A. Poterba, and L.H. Summers. 1990. Speculative dynamics and the role of feedback traders. NBER Working Paper No. 3243. New York: National Bureau of Economic Research. De Dios, E.S. 1.993. Poverty, growth, and the fiscal crisis, in de Dios and associates. Poverty, growth, and the fiscal crisis. Makati City: Philippine of Development Studies. Dixit, A. 1989a. Entry and exit decisions under uncertainty. Economy 97:620-39. Dixit, A. 1989b. Hysteresis, import penetration, Quarterly Journal of Economics.
Journal of Political
and exchange rate pass-through.
Dornbusch, R. 1976. Expectations and exchange Political Economy 84:1161-1176. '
rate dynamics.
Dornbusch, R. 1993. Policymaking University Press.
in the open economy.
Gochoco,
for banking
M.S. 1993. Policy options
Institute
Journal
of
New York: Oxford
and financial reforms,
in: de
Dios and associates. Poverty, growth, and the fiscal crisis. Makati City: Philippine Institute of Development Studies. Krugman P.R. 1989. The case for stabilising exchange rates. Oxford Review of Economic Policy 5(3):61-72. Krugman, P.R. 1991. Transforming APO Production Unit.
the Philippine economy. Quezon City: NEDA-
Lamberte, M.B. and J.T. Yap. 1999. Scenarios for economic recovery: the Philippines. Discussion Paper Series No. 99-05. Makati City: Philippine Institute of Development Studies. Lamberte,
M.B., C.B. Cororaton,
M.F. Guerrero,
and A.C. Orbeta. 1999. Impact
of the Southeast Asian financial crisis on the Philippine manufacturing sector. Discussion Paper Series No. 99-09. Makati City: Philippine institute of Development Studies. Lira, J.M. 1992. A study on Philippine exchange rate policies. PIDS Working Paper Series No. 9209. Makati City: Philippine Institute of Development Studies. Macfarlane, I.J. and W.J. Tease. 1989. Capital flows and exchange rate determination. Research Discussion Paper No. 8908. Sydney: Economic Research Department, Reserve Bank of Australia. Magdaluyo, R.E. 1998. Southeast Asian currency flu: a look at the fundamentals. A.I.M. Policy Forum Briefing PaperS. No. 2 (January):2-14. Miller, M. and P. Weller. 1991. Financial liberalization, asset prices and exchange rates. Working Papers No. 95. PariS: Department of Economics and •Statistics,
Organization
for Economic
Cooperation
and Development.
Chapter 3: Milo
71
Milo, M.M.R.S. 1998. Financial liberalization in the Philippines: retrospect and prospect. Unpublished dissertation. Canberra: Australian National University. Pineda, V.S. 1999. Impact of the financial crisis on social services financing and delivery. Discussion Paper Series No. 99-30. Makati City: Philippine Institute of Development Studies. Reyes, C.M. 1998. The social impact of the regional crisis in the Philippines. MIMAP Research Paper. Micro Impacts of Macroeconomic Policies (MIMAP) Project. Makati City: Philippines Development Studies. Reyes, C.M., R.G. Manasan, A.C. Orbeta, and G.G. de Guzman.
Adjustment Institute of 1999. Social
impact of the regional financial crisis in the Philippines. Discussion Paper Series No. 99-14. Makati City: Philippine Institute of Development Studies. R0drik, D. 1997. Has liberalization International Economics. Turnovsky,
D.J. 1994. Exchange
gone too far? Washington, rate management:
D.C.: Institute for
a partial review, in Glick, R.
and M.M. Hutchison. (eds.) 1995. Exchange rate interdependence: perspectives from the Pacific Basin. Cambridge University Press.
policy and Cambridge:
United Nations Development Programme 1998. Human Development 1998. New York: Oxford University Press. World Bank. 1987. The Philippines: issues and policies in the industrial
Report sector.
Part I1:
Impact of the East Asian Financial Crisis
4 The East Asian Financial Crisis and Philippine Sustainable Development Ponciano
Intal, Jr and Erlinda Medalla
ustainable discussions
development on the East
issues Asian
a
have so far been overlooked in financial crisis. To some extent
this is not surprising because, as Paul Krugman (1998) stated, "...nobody anticipated anything like the current crisis in (East) Asia." Thus, the first order of business is to understand why the crisis happened, why it involved several countries, and why a few countries were particularly hard hit. In the process, appropriate policy and adjustment measures can be proposed and undertaken to address underlying problems and thus minimize the adverse social and economic effects of the crisis and point to a faster resolution. Asia is the most polluted and environmentally degraded region in the world. Moreover, it has the largest number of poor households in the world. Thus, because of its magnitude, the current economic and financial crisis of East Asia is expected to impact on the region's sustainable development prospects and challenges. Whether or not the impact is large or small, temporary or permanent, and short term or long term in each of the affected countries is likely to be determined by the state of the environment and social development before the crisis. Impact is also affected by the magnitude, length, and nature of the adjustment and policies that each country undertakes in response to the crisis .3
This paper was presented during the Meeting on the Asian CurrencyCrisis and Sustainable Development, Sixth Session of the United Nations Commission on SustainableDevelopment, New York,21-24April 1998. 2The authorsacknowledge the assistance of the other membersof the Philippine StudyTeam, namely,Cielito Habito,MariandelosAngeles,RaphaelLotilla,andEllaAntonio,and theexcellent researchassistance of LeilanieBasilioand RonaldYacat. 3Thesocial impact of the EastAsian financialcrisisis discussedin Chapter 6 of thisbook.
76
Economic
crisis... Once more
This paper presents an analysis• of the impact of East Asia's financial crisis on sustainable development challenges facing the Philippines. It is exploratory, given the paucity of data and information on hand. Nevertheless, we hope that analyses and and •economic It must
the paper would contribute, even modestly, to more in-depth discussions in the future on the impact of East Asia's financial crisis •on the region's sustainable development. be noted that the crisis occurred at the same time that the E1 Nifio
phenomenon took its toll on the country. Thus, both the crisis and E1 Nifio significantly shaped the country's economic performance and affected its sustainable development concernsmsocial development, and natural resources and environmental regeneration. This paper has four major sections. Section one provides an overview of the East Asian economic and financial crisis. Section two looks at the Philippine •economic performance and prospects in the light of the crisis. Section three explores the actual or potential impact of the crisis on Philippine social development and the environment and natural resources sector. The last section discusses the implications of the crisis and E1 Nifio on• a number of policy and institutional challenges facing the country especially in the areas of water resources, upland and coastal areas, and the urban environment. Overview
of the East Asian financial
crisis
The suddenness and severity of the East Asian currency and financial turmoil has spawned a burgeoning body of literature that helps us understand what went wrong and what needs to be undertaken to minimize the havoc, and at the same time hasten the recovery of affected East Asian economies. The crisis arose as a result of both microeconomic and macroeconomic factors, especially microeconomic and regulatory infirmities in the financial arena and macroeconomic vulnerabilities, particularly to the contagion and lossof investor confidence (for example, see Krugman 1998, Radelet and.Sachs 1998, Stiglitz 1998, Garnaut 1998, Nasution 1998, and Nidhiprabh a 1998). In addition, Radelet and Sachs (1998) assert that the initial, policy response to .the crisis, drawn with the International Monetary Fund (IMF) .and the donor community, appears to have been inappropriate, thereby causing :financial panic and deepening the crisis unnecessarily, especiallyin IndonesiA. I " There is a growing consensus that the financial and capital markets played a big role on why the crisis occurred, in the number of countries affected, and in ,
.
I
ii
its unexpected severity. On hmdmght ther_ appears to have been irrational exuberance" among foreign and local inve_tors and bankers before the crisis, which was probably caused partly by severe moral hazard problems, arising from perceptions of implicit government gtiarantees on liabilities of local banks .(Krugman 1998). The inherent imperfections of the financial market arising
Chapter 4: Intal and Medalla
77
partly from asymmetric information (Stiglitz 1989) puta premium on prudential banking rules and regulations, which have been inadequate in several East Asian countries affected by the crisis. There appears to have been some "herd behavior" on the part of foreign portfolio investors, facilitated partly by a revolution in telecommunications .that allowsthe international transfer of massive funds in seconds, The apparent "irrational exuberance" before the crisis turned into an apparent "irrational pessimism" which led to massive capital outflows as macroeconomic uncertainty deepened partly because of, as Radelet and Sachs (1998) emphasize, inappropriate While the crisis is rooted
initial bailout packages.. in the financial sector, there were nonetheless
macroeconomic
in the affected
vulnerabilities
where the crisis .started', was particularly
countries
vulnerable
(Table 1). Thailand,
to currency
speculation
and loss of investor confidence because of the high share of short-term debt to total foreign debt (about a third), an excess of short-term debt to international reserves, and a high ratio of current account deficit to gross domestic product (GDP). The failure of financial institutions (as the real estate market softened markedly) and the stagnation Ofexports in 1996 pointed further to the need for a currency correction. The rapid spread of the Thai contagion to other countries can also be attributed partly to macroeconomic vulnerabilities in these countries. Although the Philippines had a much smaller share of short-term debt to total debt and its external debt service burden has declined significantly during the 1990s, it experienced the largest real currency appreciation and the highest ratio of merchandise trade deficit to GDP during the 1990s among the Association of Southeast Asian Nations (ASEAN) countries. Hence, the country was vulnerable to a major Thailand. handicapped short-term compared
currency depreciation of an important competitor country like Indonesia, despite manageable current account deficits, was by a heavy external debt service burden and a higher ratio of debt (primarily of the private sector) to international reserves with Thailand. As such, Indonesia's corporate sector became
particularly vulnerable to sharp depreciations of the rupiah and to a sharp rise in interest rates. South Korea's ra_o of short-term external debt to international reserves was even higher tb _ those of Thailand and Indonesia (Table 1). As a result, South Korea, particv_rly the private banking and nonbanking sectors that were the borrowers, also became vulnerable to the increased skittishness of foreign lenders and investors of the Thai financial collapse:
toward
countries
in the region in the aftermath
The return of foreign portfolio Capital into the region, together with the slowdown in import payt. ents, has triggered the ongoing recovery of currencies and stock markets, and the reduction in interest rates, especially in South Korea, Thailand, and the Philippines. Ironically, Indonesia, which before the crisis had
78
Economic
relatively
manageable
current
account
crisis... Once more
deficits and fiscal situation,
and one of
the least overvalued currencies in the region, became the hardest-hit economy. Radelet and Sachs (1998) attribute this to policy missteps contained in the initial IMF adjustment program and the attendant serious erosion of international credibility of the Indonesian government when it balked at fully implementing the initial package of reforms. As a result, the initial contagion turned into financial panic with dire socioeconomic effects. The severity of socioeconomic effects has fueled greater political uncertainty to slow down the full recovery
in the country, which is expected
of the Indor_esian economy. i
Table 1.
Selected
ASEAN
(Averages,
countries:
macroeconomic
vulnerabilities
in percent of GDP Unless other_iseindicated).
Item
Indonesia "1991-95 1996
Export growth rata (value in US $)
Malaysia 1901-95 1996
Pl'dlip pine_" 1991-95 1996
Thailand 1991-95 1996
11.4
10,3
20.3
5.8
16,6
17,8
19.7
1,3
-3,3
-5.'1
-7,8
-4.2
-36.9
-5,9
4.7
-5,2
Excha nf_ rate Real effective exchange
ra te [percent chtlnge
over the period; appracia Balance of payments
lion (_)jr,
Current
accottnt deficit
-2.4
-3,6
-6.5
-5.2
-3,6
-4.1
-6,7
-8,0
Capltal Debt
inflows (net) ¢
4.0
5,2
11,5
7.7
5,8
8,9
10.4
9,2
191,5
178.5
43.8
40,3
168.2
103.6
105,5
118.6
7.7
8.5
18,2
_,7
15).
13.8
44.4
43.6
32.4
32.8
6,7
25.4
I5,4
10.9
11,4
EXtum_I debt (% of exports of goods and selvlces) Shot tqerm debt (% of ext_rl_a[ debt) Debt-service
ratio (% of exports
of g0_xts and _rvlces)
5.7
Financial st-ability Central government
balance
Publlc debt
Interne tiona[ claims held by/oceigcl Short-termReserves
-0.2
1.0
0.1
0,7
-1.6
-0.4
2,8
37.2
27,7
21.8
15.9
113,0
88.0
17.2
1995-96
M/d- 97
"19cJ5-96
1.9
1,7
Mid- 97
1995_96
M_d-97
1995-96
0.6
0.6
0.8
1.2
2.3 103
Mid-97
bal_k__
(ratio) '1
Memo item International claims held by foreign banks Short-term/Reserves (ratio)
0.4
1,5
Mexico End 94 5,2
End 95 1,5
°Allratios are in percent of GNP,unless otherwise indicated. bFor 1996,December 1996over December 1995. ¢Includes errors and omissions. dAverageo£December 1995and 1996. Sources: Hicklin,Robinson, and Singh (1997);Short-term/Reserves estimates from Radelet and Sachs (1998).
The East Asian financial crisis appear s to be stabilizing as currencies and stock markets have started recovering and ii_terest rates have likewise started declining. Nevertheless, with asset deflation, reduced capitalization of banks, higher debt service and interest rates, and sltlggish domestic demand, the crisis
Chapter 4: Intal and Medalla
79
can be expected to further run through the real and corporate sectors of affected economies for perhaps another year or two. Most analysts agree that several fundamentals that have contributed to the rapid growth in East Asian countries during the late 1980s and early 1990s remain (e.g., comparatively high saving rate, demographic transition, and export orientation). Moreover, real exchange rate adjustments, institutional reforms toward greater transparency and better prudential regulations, and the ongoing restructuring of corporate sectors can be expected to strengthen the growth prospects of affected countries. Hence, East Asian countries are likely to recover and resume robust economic growth rates in the near future, although probably not at sizzling rates of past years. The crisis brought out the need for prudence and "less exuberance" in both corporate and macroeconomic arenas domestically and among foreign investors and lenders. The East Asian financial
crisis and the Philippine
economy
The Philippines is one of the Southeast Asian countries that have not been hit very hard by the crisis so far. A decade-long process of financial reform and rebuilding is a major factor behind the country's greater resiliency during the crisis. At the same time, the Philippine financial institutions' foray into the intemational capital market came later than those of Thailand, Indonesia, and South Korea. in addition, the peso depreciation, in conjunction with the crisis, is in fact the unexpected marketqed and depoliticized exchange rate adjustment needed to cushion the domestic industry from a significant peso appreciation in the face of tariff reduction during the 1990s. However, the country's macroeconomic condition remains fragile primarily because the government's fiscal situation is particularly vulnerable to high interest rates. The country has the highest ratio of public debt to GDP among the Southeast Asian countries. Thus, an unwarrantedlong and high interest rate regime could lead to a "doubledeflationary whammy" on the Philippine economy, namely, an adverse impact on investments and operations of large and small businesses and sharp cutbacks on noninterest payment government expenditures. Thus, it is critical for the Philippines that the regional currency situation stabilizes so that monetary policy and interest rates could ease up appreciably. At the same time, the crisis points to the need to strengthen further the fiscal situation of the country primarily through an increase in tax and overall revenue effort as well as through further streamlining of government operations. Exchange rate and [iaaace The East Asian financial
crisis had an immediate
effect on the foreign
exchange and financial arena in the Philippines. When Thailand devalued its currency in early July 1997, the Philippines eventually had to let the peso
80 depreciate
Economic
crisis... Once more
in mid-July when the Bangko Sentral ng Pilipinas (BSP) intervention
in the foreign exchange market, amounting to about US$1.5 billion sales, proved useless because of the heavy speculative attack on the peso. The exchange rate rose to more than P30 per dollar in August, hitting P45 per dollar in early 1998 before appreciating to around P38 per dollar by mid-April 1998. The Philippine policy response to the crisis centered on monetary policy and balance-of-payments management. The BSP tightened monetary policy as it raised overnight lending rates, increased liquidity reserves on banks on top of the required reserves, momentarily closed the overnight lending window, and imposed tighter rules on oversold and overbought positions of banks on foreign exchange. The result was a sharp rise in domestic interest rates. For example, the banks' average lending rate rose from 12.9 percent in February 1997 to 20.9 percent in October 1997; the bellwether 91-day Treasury bill rate increased from 10 percent in April 1997 to 19 percent in January 1998, while the average high prime lending rate of banks was 26.8 percent in January 1998. Interest rates, however, have been dropping in response to the easing of reserve requirements (both liquidity and required) and the increased stability of foreign exchange markets in the regioN. Thus, the 91-day T-bill rate had declined to 15.5 percent, whereas the average high prime lending rate had dropped to 22 percent in April 1998. Nevertheless, interest rates remained high and the gap between deposit and lending rates remained substantial; as a result, businessmen in southern Philippines demonstrated against the high interest rate regime. Portfolio flows, as expected, turned negative as a result of the crisis. Indeed, foreign portfolio investments turned from net inflow during the first four months of 1997 to net withdrawals beginning in May up to November, except surprisingly in August. Predictably, the high interest rate and the flight of foreign portfolio capital led to a sharp dro p in the stock market, with the Philippine Stock Exchange composite index iplunging from 3171 points at the end of 1996 to 1772 in November 1997. Foreign portfolio investments have gradually trickled in, resulting in the uptick in the composite index (2185 in mid-April 1998). The Philippines' financial institutions did not fail as a result of the crisis. Only one bank a fairly small and newly upgraded
commercial
bank failed due
primarily to DOSRI (directors, officers, stockholders and related interests) loans mainly to the real estate companies of the maior owner. Behind the resiliency of the Philippine financial system to the East Asian crisis are the decade-long reforms that have been undertaken in response to its own financial crisis in the early 1980s. Most of the reforms are prudential in nature, including increased capitalization requirements, compliance wit h the minimum asset ratio, limits on single borrowers and on DOSRI loans; stricter audit and reporting requirements, and stricter policies on bail-outs of problematic banks (Bautista 1992).
Chapter 4: Intal and MedaUa The series of increases
81 in bank capitalization
requirements,
together with
the further opening up of the financial sector to a limited number of foreign banks, have proved to be important stabilization factors in the financial turmoil in tbe region. The average capital adequacy ratio in the country hovers around 16 percent, significantly higher than the Bank for International Settlement (BIS) requirement of 8 percent. It is likely that this ratio is not fully risk-adiuSted. The ratio of nonperforming loans to total loans of commercial banks has remained manageable at 4 percent 3 months after the crisis compared with 3 percent before the crisis. These rates are much lower than in the mid-1980s, reaching more than 20 percent during the economic crisis. While the Philippine financial sector has largely weathered the regional crisis, the government's fiscal situation has turned precarious because of the high interest rates and slowdown in the economy. For example, the national government budget deficit more than doubled during the first quarter of 1998 compared with the same period in 1997 (i.e., P12.4 billion vs. P5.7 billion), arising from the shortfall in customs duties as dutiable imports declined. In addition, public debt service payments increased significantly because of the Philippines' higher ratio of public debt to GDP compared with other Southeast Asian countries (Table 1). The precariousness of the fiscal situation arises from internal dynamics--the larger the deficit, the greater is the need of the government to borrow domestically, and therefor interest rates to remain high.
e the greater
is the pressure
for domestic
The Philippine government has realized the precariousness of its fiscal position. Among the more important measures undertaken and promised under the Memorandum of Economic and" Financial Policies with the IMF are the 25 percent mandatory reserve on all expenditures other than personnel and debt service; a 10 percent deferment in the internal revenue allotment (IRA) for local government units (LGUs), suspension of all tax subsidies to national government agencies, corporations, and LGUs; suspension through presidential veto of a specified amount of new programs and proiects in the 1998 budget; and renewed effort to strengthen tax administration. In addition, the Philippines is tapping foreign long-term loans to help finance the budget to reduce pressure on the domestic debt market, thereby allowing for the softening of domestic interest rates. The fiscal belt tightening, while important for macroeConomic purposes, means cutting government expenditures for social development, and environment and natural resources protection and rehabilitation two central concepts in sustainable development. This is discussed in another section.
Output and trade Wl_ile the crisis had an immediate and significant impact on the country's financial sector, its impact on the country's output and trade had been much
82
Economic
crisis... Once more
more muted. On the surface, the East Asian crisis appeared to have had a significant impact on the country's national output (Table 2). The growth of GDP decelerated from 6.1 percent and 5.4 percent in the third and fourth quarters of 1996 to 4.9 percent and 4.7 percent in the third and fourth quarters of 1997, respectively. However, a closer look at the quarterly growth figures gives a less clear picture. For example, growth rates decelerated even during the first and second quarters of 1997 relative to the first two quarters of 1996. It is clear that the crisis did not precipitate the deceleration in growth of the Philippine economy. Table
2.
Philippines: macroeconomic otherwise indicated).
indicators
Annual [11d.J,cato1
19_)6
growth
ra_;s
unless
Quarterly
1997
1996 Q]
ReaJ GDP
(In percent
1997
Q2
Q3
Q4
Q1
Q2
Q3
Q4
5.7
53
5,1
6,1
6,1
5,4
5
5.8
4,9
4,7
6,9
5,8
6,!)
8,1
6.9
6.7
5.8
6,4
5.7
5,2
Ab_-iculture
3.1
2,8
1,9
5,9
3,6
1,6
3.7
2.9
0.7
3,4
Mat_ufacturing Sarvices
6,3 (_,5
5,7 5,6
6,1 63
6,4 5,9
6,8 6,7
6 7.1
4 6.4
6.9 6.2
6-2 5,6
5,8 4,5
25,7 11,6
23,2 10,5
23,9 7,]
24.8 4,8
27.9 4.7
23.9 4.5
24.1 4.9
25,6 6,1
10,9 7,4
7.5 h.3
7.4 1.4
7.7 2.5
10,4 -3.4
8,7 -4,8
7.9 -10,4
-4.8 -5.1
-2,3 -3.3
-7,1 -8,2
-6,9 -8.4
-3.3 -4.7
Real. GNP growth rates Growth ('at cor_stant pric._,s) in:
]'I/"ves {flleo t I'_{_ (GI3CI _ as % oIGPCP; in real temls) hfflatiol_ ra t'es
24.4 8.5
25.4 53
Unemp/0ymen{ rate (period average) Overall ba[_.ce of payi_._el_.ts Positlon (% oICNP)
8,6 .1,7
_,7 -3,9
Current account balance (% of GNP) Trade balance (% of GNP)
-4.5 -5.2
-4.9 -62
-3.8 4,6
-9.4 -10.l
4).2 -l.1
Growth in eoltm set-rictus
24.3
21,5
30.5
18.3
20.6
19
32
24.3
15,4
17
17.7
22.8
25.8
13,9
I1,8
20,9
17.5
26.5
24.7
22.2
22,5
21,2
26,3
18,5
23.4
22.8
26.9
18
28.7
12.9
20,8
14.0
31,0
,23,4
16.9
14,2
14.2
12.9
33.3
29.3
8.3 r, ,_.8
20.9
11.3
29
76.1
Change in net foleignl investments Change, in direct in vc_stm¢_lts
118.6 -1,7
-78.2 -16,5
7,5 10.6
-I28,2 -10.6
-101.5 -46.5
Change il7 portto/ioinvestlnel7tS (_,_ral t_ su p us/defici (-) (";, of GNP) Ratio cd debt _rvice bul'dell
778,6 0,3
-ll6,1 0,1
3.8
-170,3
-147.7
12.7
11.3
5.8
6.2
Growth
exports
in meccl_anclise
Growtln h-t dollar serv),ces
imports
Growth
in me;chandise
Change
in _'orkers'
to expores
of goods
and
exports of goods
aid
impocts
rem.itrances
of G & S (%')
[_.,:Ltioof cl,_bt 'aax'k.'i¢_burdell
_o (_N.Ip (%)
8,3 -.t,4
-98.2 -2"1.1 -115.2
Note: Growth rates for quarters are on year-on-year basis. Sources: PIDS Data and Information Resource Program; BSP Selected Philippine Economic Indicators, Yearbook1996and March 1998;NSCBNational Income Accounts,various years. It is more likely that the crisis aggravated
the deceleration
in growth of
the economy. Thus, for example, net reduction in inventories in the third quarter and only a small increase in inventories in the fourth quarter of 1997 partly reflect the cautious attitude of manufacturers with the onset ofthe crisis. The inventory drawdown contributed to the deceleration output during the second half of 1997.
in growth of manufacturing
Chapter 4: Intal and Medalla
83
Other factors which are not strongly linked to the crisis contributed to the deceleration in economic growth. For example, the more important cause of economic slowdown during the third quarter of 1997 was the sharp deceleration in the growth of agriculture relative to the previous year's corresponding quarter, arising primarily from sharp declines in rice and sugarcane output. This was linked to the E1 Nifio phenomenon, which had affected the farming timetable. Another sector that was also badly hit by E1 Nifio was the water utilities industry, which declined during the fourth quarter of 1997 as a result of the worsening drought problem. Finally, government services also grew only marginally during the last quarter of 1997. Another factor was the slowdown in granting of salary adjustments in the public sector in 1997 compared with the previous year. However, this may have resulted from the crisis. In sum, the national account estimates did not indicate that the East Asian crisis exacted a heavy price on Philippine months of the crisis.
output during
the first 6
Similarly, the crisis did not have a significant impact on Philippine foreign trade so far. The growth of imports in real terms was higher in the third and fourth quarters of 1997 than during the first two quarters of the year. Aggregate merchandise exports had been growing at a robust pace in 1997 and at an even faster pace during the first 2 months of 1998. 4 Indeed, given the substantial real appreciation of the peso during the early 1990s, the depreciation of the peso arising from the crisis should in principle be conducive to the growth of exports. During the early 1990s, the appreciation of the peso, reduction in tariff, and rise in wage rates reduced the international competitiveness of some labor-intensive manufactures and forced them to restructure due to greater competition. The textile industry is a good example of industrial restructuring to enable it to face a more open at the same developing accelerated
economy. The sector's output had been declining for several years; time textile exports had been growing as some firms succeeded in export niches. It is not yet known if industrial restructuring had or slowed down because of the crisis.
The robust growth of merchandise exports in 1997 and 1998 was fueled largely by electronics exports, including computer parts. The surge in electronics exports is likely not caused by exchange rate adjustments but rather by the increase in investments in export-oriented electronics and computer parts during the past 3 years. About 75 percent of all investments in the Philippine Export Zone Authority's (PEZA) sanctioned industrial estates and special economic zones during 1995-97 were in the electronics and semiconductor industry. It is likely that the depreciation of the peso would be beneficial to the export sector in the medium term. Of course, what matters is the real 4 Estimatesof services exports in the national income accounts are not very reliable because of problems related to the attribution of peso conversions of foreigncurrency deposits (FCDs).
84 depreciation
Economic of th e peso, not nominal
depreciation.
crisis... Once more
In this regard,
one of the
significant impacts of the crisis is that the substantial nominal depreciation of the peso has been translated into a significant real depreciation, thus possibly making the output and trade effects of the depreciation positive in the future. In contrast to past decades, the substantial depreciation of the peso during the crisis has not translated so far into significantly higher inflation rates. This can be attributed to (a) the relatively tight monetary and fiscal policy adopted, (b) high protection rate in food crops like rice before the crisis, coupled with the large duty-free importation of rice and cornby the government whicheffectively dampened upward price adjustments in such politically sensitive items like rice; (c) responsible and relatively noninflationary wage adjustments during the crisis, and (d) reduction in the world price of oil, an important imported input. Real exchange employment
rate
adjustment
and
trade
re[orms
on output
and
Over the medium term, the real depreciation of the peso is expected to serve as the much-needed complementary measure, which the government failed to take advantage of when it started to implement ongoing trade reforms in the 1980s. Basically, the currency adjustment would further reduce price distortions, which in the long run would benefit the economy. In particular, the real depreciation of the currency is expected to improve the relative price of tradables (especially export-oriented sectorslwith relatively high value-added) compared with nontradabJ.es. ! A recent study by the Philippine Institute for Development Studies simulated the impact of ongoing trade reforms implemented by Executive Order (EO) 264 (together with more recent amendments) on output and income. Using the same model this paper attempts to analyze the impact of the Asian currency crisis by comparing estimated potential effects of ongoing trade reforms with and without exchange rate adjustment. Scenarios with exchange rate adjustment provide some indication of the possible impact in the medium term of the peso depreciation in the aftermath of the East Asian crisis. The model is partial equilibrium in nature in that it assumes zero crossprice elasticities and could not incorporate other factors such as investment and monetary variables. These shortcomings limit the analysis to comparative statics. The advantage of the model, however, is its multisectoral, input-output framework, highlighting best the variation in effective rates of protection and the varying effects of trade reforms across s6ctors, and incorporating to some extent linkages among them. Basically, the model works as follows. Changes in tariffs (or tariff equivalents in the case of removing quanfitaiive restrictions) brought about by
86
Economic
crisis... Once more
with or without exchange rate adjustment. Without exchange rate adjustment, however, output growth would increase by only about 0.40 to 0.75 percentage point (for low and high elasticity assumptions, respectively) due to trade reforms under EO 264. Income growth would even decline slightly by around 0.03 to 0.06 percentage point. This is attributed mainly to a decline in the growth in manufacturing value-added. This also implies a reallocation of resources to sectors with relatively lower value-added ratio, which characterizes the Philippine manufacturing sector including its major exports. The effects on the growth in both output and value-added for agriculture are positive. This is mainly because EO 264 maintains protection for agriculture while lowering industrial tariffs substantially to 10 percent and below. The exportable sector benefits most, which could grow by around 4-8 percent. This is brought about mainly by improved relative prices due to trade reforms.
Table 3. Simulation
of the impact of trade reforms (E.O. 264). l W/o
Sector Output Importables Exportables
exchange rate adjustments A B
With 10% exchange rate adjustments A B
With 20% exchange rate adjustments A B
0,75 -2,09 7,85
0.40 -1.16 4.27
7,81 11.07 21.45
4.27 6.02 11.77
14.85 24.22 34.96
8.13 13.20 19.22
Agriculture Importables Exportables
0.82 0.74 2.03
0.51 0.46 1.27
5.87 8.82 9.18
3.67 5.51 5.74
10,93 16.89 16.33
6.83 10.56 10,20
Mant_facturing lmportables Exportabtes
1.92 -2.08 10.33
1.03 -1,11 5.51
17.08 12.72 26.51
9.11 6.78 14.14
17.16 14.67 22.70
32,18 27.51 42.56
-0,06 -4.02 6.20
-0.30 -2,21 3.40
6.29 8,24 19.15
3.48 4,57 10.61
12.61 20.50 32,02
6.99 11,34 17.77
Agriculture Importables Exportables
0.92 0.77 2.01
0.58 0,48 1.26
6.42 8.85 9.16
4.02 5,53 5.72
11.93 16.93 16.30
7.46 10.58 10.19
Manufacturing Jmportables Exportables
-0.12 -4.97 8.49
-0.06 -2.65 4.53
14.88 9.53 24,51
7,94 5.09 13.07
29.83 24.04 40.37
15,91 12,82 21.53
Income lmportables Exportables
A : Effects of E,O, 264 using high supply elasticities. B : Effects of EIO, 264 using low supply elasticities.
With real exchange rate adjustment, growth in both output and income increases much nlore. Output growth could increase by as much as 4.3-7.8 percentage points with a 10 percent real exchange rate adjustment, and by much
Chapter 4: Intal and Medalla
87
higher rates (8.1-14.8 percentage points) with a 20 percent real exchange rate adjustment. The corresponding effect on income is slightly less at around 3.56.3 percentage points for 10 percent adjustment and 7-12.6 percentage points for 20 percent adjustment. This implies an increase in GNP of up to 1-2 percentage points per year. These results are drawn from a model subject to constraints and limitations,
and the magnitudes
are not absolute. Nonetheless,
results highlight
the complementary role of the exchange rate in trade reforms. It is likely that the output and export impact of the peso depreciation will take time to be felt. To some extent, this depends on the state of the real interest rate and the availability of credit, considering that investments and financing are important means of seizing opportunities offered by the real depreciation of the peso. As the interest rate declines further, it is likely that the output and trade effects of the real peso depreciation willbecome more apparent and appreciable. Impact of the East Asian and environment
financial
crisis on Philippine
The two key pillars of sustainable
development
social development are social development
and poverty alleviation, and natural resources and environment regeneration and protection. The East Asian crisis impacts on these two pillars through several mutually interacting channels, both direct and indirect. One is the employment, income, and poverty channel arising from the general slowdown of the economy. Another is the interest rate and inflation channel, because investments in both human resource development and natural resource regeneration are long gestating. The third is the real exchange rate channel that impacts on the relative profitability of production of industries, especially export-oriented, importcompeting, and nontraded industries. The fourth channel is fiscal contraction and expenditure realignment, which directly affects government provision of social services, and natural resources and environment management. The eventual
impact of the crisis through
these and other channels
would depend
partly on the institutional, political, and policy factors affecting the behavior and welfare of the various participants in the sectors and industries. •Employment, income, andpoverty The Philippines has the highest poverty incidence and unemployment rate in Southeast Asia, with more than a third of all Philippine households poor in 1994 (Table 4). Thus, other things being equal, even a small decline in output and income will have a potentially significant impact on poverty in the country. In addition, most of the poor in the country are in the rural sector, primarily farmers. Hence, the state of Philippine agriculture has a particularly important
88
Economic
effect on poverty. an important (Intal 1994),
Finally,
outside
of Metro
share of the income of households indicating that industrialization
employment outside in the country.
Table
in regions
4. Poverty
of Metro
indicators,
Economy
Manila
crisis...
Manila,
Once
wage
income
in the higher income and nonagricultural
is an important
means
more
is
brackets wage
of reducing
poverty
1985-95. Head-count
index
Poverty
1985
(percent) 1993
1995
Malaysia Thailand
10.8 10.0
<1.0 <1,0
Indonesia
32.2
Philippines
32.4
China Papua New Guinea
gap
1985
(percent) 1993
1995
<1.0 <1.0
2.5 1.5
<1,0 <1.0
<1,0 <1,0
" 17.0
11.4
8.5
2.6
1.7
27.5
25.5
9.2
7.3
6.5
37.9
29.7
22,2
1,0.9
9.3
7.0
[5,7
n.,a,
21.7 t_
32
t_.,a.
5.6 b
Leo PDR c
61.1.
46,7
41,4
18.0
H,5
9.5
Vietnam
74,0 a
52.7
42.2
â&#x20AC;˘ 28.0'_
17.0
11.9
Mongolia East Asia"
. .â&#x20AC;˘
East Asia excluding
China
Merno item
85,0
n,a.
81.4
42.5
n,a.
38.6
37,3
27.9
21.2
â&#x20AC;˘I0,9
8.4
6.4
35,6
22.Y
18.2
11,1
6-0
4.6
1985
1988
1991
I994
Subsistence
24,4
20.3
20.4
18.1
Total basic expeoditure
44.2
40.2
39.9
35.5
Philippines (in % of families below poverty
line)
I n.a. = not available Note: All ntunbers in this table (except for Lao PDR) am based on the international poverty line of $1 per person per day at 1985 prices. Figures in italics ihdicate specific data sources different from all the figures and follow some methodological exemptions. " Includes only those economies presented in the table. b Data are for 1996. Available data on purchasing power parity (PPP) exchange rates and various.price deflators for Lao PDR are not very reliable and lead to anomalous results. Poverty estimates for Lao PDR are based on the national poverty line, which is based on the level of food consumption that yields an energy level of 2,100 calories a person per day and a nonfood .component equivalent to the value of nonfo,_d spending by households who are just capable of meeting their food requirements. While the. $1 dollar a day poverty line is based on characteristic poverty lines in low-income countries that have comparable food and nonfood consumption needs, this is a different methodological approach than that used for the rest.of the economies in the table. Thus the poverty estimates for Lao PDR are not strictly comparable with those for other economies. a Preliminary estimate from Dollar and Litvack forthcoming. Sources: Ahuja et al. (1997); Memo item for the Philippines is from Gerson (1998).
Chapter 4: Intal and Medalla
89
Aggregate employment and unemployment estimates show that the reduction in total number of unemployed in 1996 and the first half of 1997 reversed starting from the third quarter of 1997 until the quarterly labor force survey in January 1998 (Table 5). Thus, the slowdown in the economy during the second half of 1997 and the first quarter of 1998 had resulted in increased unemployment. The unemployment rate had risen from 7.7 percent in January 1997 to 8.4 percent in January 1998). Table 5. Employment
indicators
(Numbers
Jai_uary 199b 1997
Selected variables
in thousands;
April
rates in percent).
July
1996
1997
1996
1997
October 1996 1997
Labor force participation rate
65,5
65.4
69.1
68,8
66,3
65.7
65.8
65.5
Employment rate
91,7
92.3
89.1
89,6
92.6
9] .3
92,6
92,1
Total employed persona By class of worker
26527
27M6
27358
28105
27419
27531
27442
27888
Wage and _lary Own accouter
12171 10246
12974 10332
12395 10367
13386 10416
12934 10395
13917 10016
13096 10297
13565 10647
4110
4040
4595
4302
4090
3598
4049
3675
11485 2645
11428 2686
11975 2627
11601 2791
11668 2754
10987 2697
11451 2756
11260 2785
8.3 -28
7,7 -101
10,9 -180
10,4 -92
7,5 -278
8.7 385
7.4 -147
7,9 182
2I,0
21.1
22.2
23.4
2].5
" 23,1
19,4
20.8
Unpaid family worker By indust D' Agricul_are Manufacturing Unemployment rate Change in the number of _a_employed Undererl_ploymerlt rat_: Note:
Numbers
may
not add
up to total
due
to rounding.
Sources:PIDSData and InformationResourceProgram;NSOSectoralStatistics, onlineedition; BLESLabstatUpdates, Vol.2, No. 1. The low aggregate employment stemmed largely from a sharp decline in employment in agriculture and a sharp reduction in increase in industrial employment especially in manufacturing. Low agricultural employment was largely caused by the drought in many parts of the country arising from E1 Nifto. (For example, the Philippine government estimated that rice production declined by 12.7% during the first quarter of 1998 and by 25% during the second quarter compared with 1997.) The marked slowdown in manufacturing growth partly caused by the East Asian crisis has meant, however, that the dislocation in the rural sector arising from the El Nifio phenomenon could not be absorbed by the industrial sector. The January 1998 employment estimates showed that unemployment rate greatly increased in Metro Manila and urban areas, whereas it remained constant in the rural areas compared with January 1997. This suggested that the drought situation in the countryside encouraged migration into urban areas especially Metro Manila.
90
Economic
crisis... Once more
The migration pattern during the recent crisis differed from that during the crisis in the 1980s. In the early 1980s, migration to uplands accounted for more than half of interregional migration (Cruz and Repetto 1992), resulting in increased population in the uplands. Upland migration in the early 1980s was affected by the sharp fall in industrial production due to the economic crisis. But at that time, relatively better agroclimatic conditions allowed increases in agricultural output. In contrast, the E1 Niflo phenomenon hit the uplands, with its heavy reliance on rainfall for agricultural production, hard? Thus, the poverty and sustainable development problem after the East Asian crisis and the E1 Nifto phenomenon is less about upland migration and soil erosion and is more about rural distress and rising urban unemployment. The substantial reduction in agricultural output together with the large peso depreciation has not translated into significant price increases though. There are two major reasons for this. First, the rate of protection in the two major grains, rice and corn, was very high around 65 percent in the mid-1990s. In effect, rice has become a largely nontradable commodity, and as such its domestic price is not affected as much by peso adjustments as by the interplay of domestic demand and supply. Second, because of the adverse effect of E1 Nifio on imports. farmers' the bulk challenge the rural
domestic production, domestic rice supply was stabilized by large Given that domestic prices of grains have not risen substantially, incomes will likely suffer significant declines due to poor harvest. With of the poverty problem among farmers, it is apparent that the major facing the government in terms of poverty alleviation efforts will be sector.
In the nonagriculture sectors, the longer the high real interest rate regime remains, the greater are the dangers of growing pressures toward economic recession and larger numbers of corporate retrenchments or closures and worker layoffs. The number of firms that reported retrenchments ballooned during the fourth quarter of 1997 spilling into the first two months of 1998. Interestingly, the number of firm closures declined substantially during the last quarter of 1997 compared to the first three quarters of the year. The number of workers affected by the firm closures or retrenchments increased significantly in January and February of 1998 compared to the previous year. To minimize the adverse impact of the crisis on employees and firms, employers, labor unions and the government signed a social compact during an economic summit in February 1998 to work together to prevent strikes and layoffs. This social compact
is a positive
development
given the historically
s The reported deaths of around 40 starved tribal people or ]umads in severely drought-stricken parts of Mindanao due to eating wild yams,which are poisonous unless prepared well, indicates that the uplands had alsobeen badly hit by the E1Nlftophenomenon and therefore cannot be an important migration destination at this tirneunlike in the early 1980s.
Chapter 4: Intal and Medalla
91
adversarial relationships between management and labor in the Philippines. The improved industrial relations environment is seen in the more cooperative arrangements that have been worked out at the firm level both within and outside the collective bargaining agreements (CBA), such as, subcontracting to displaced employees, greater financial assistance to affected workers than is stipulated in CBA provisions, training of affected workers, transfer to sister companies, greater focus on working conditions, among others. Indeed, wage adjustments that were agreed upon in the regional wage and productivity boards last December 1997 to February 1998 were remarkably restrained, which contributed to the modest inflationary impact of the crisis on the country. The government has been monitoring the labor situation partly because of the social compact. It is apparent, however, that the government monitoring system is geared primarily to the formal sector and establishments. Monitoring of the rural labor market is particularly inadequate. As a result, public discussion and proposed policy measures have focused on the formal sector, while the rural sector, which was actually the hardest hit because of the E1 Nifio phenomenon, has been relatively neglected. The East Asian financial crisis has caused the hobbling of the industrial sector, preventing it from providing better employment opportunities for the distressed rural populace. The employment (and poverty) problem during late 1997 and early 1998 was an E1 Nifio problem aggravated by the East Asian crisis. The longer the crisis and the E1 Nifio problem dragged on, the greater were the adverse effects on the employment and poverty situation in the country. At the same time, the employment problem became less tractable for the government because stresses in the labor market were in the informal sector. For example, the January 1998 labor force survey showed that the percentage of unpaid workers increased. Similarly, there had been anecdotal reports that children were being "bumped off" in the queue in informal labor markets by older men. Since the working children likely came from very poor families, their being bumped off may have meant greater financial distress. The overseas employment market has been a major safety valve for the Philippines especially since the 1980s. The East Asian financial crisis sparked worries over Filipino overseas workers in the region being forced to go back home due to economic difficulties. So far, this initial fear has not been realized, however. While a few may have been sent home, the number of overseas workers in East Asia actually rose in 1997 compared with the level the year before. Perhaps the deterioration in domestic employment during the economic slowdown may have been a factor in the rise in overseas employment. However, a more compelling reason was the substantial depreciation of the peso, which made foreign employment more financially rewarding. The higher overseas deployment (by 13.3%) and the significant increase in remittances (76% in the
92
Economic
crisis... Once more
4th quarter) from Filipino overseas workers in 1997 (Table 2) provided an important safety net during the economic slowdown and with the devastation wrought by E1 Nifio in the countryside. Budget High interest rates and the peso depreciation immediately affected the government's budget. The peso depreciation increased the 1998 government expenditure budget by about 3.9 percent, while the increase in T-bill rate raised total budgeted expenditures by 5 percent. The total projected increase in budgetary expenditures arising from the peso depreciation, interest rate hike, and increase in inflation was estimated by the Department of Budget and Management at around P50 billion. With the slowdown of the economy and the significant deceleration in import growth resulting in lower growth of tax revenues, substantial increase in expenditures arising from the peso depreciation, and hike in interest rates effectively threatened an upsurge in the government's public sector deficit. In response, the Philippine government adopted several emergency measures, including a 25 percent mandatory reserve on all expenditures other than personnel and debt service, a 10 percent deferment in the IRA for LGUs, suspension of all tax subsidies of government units, continuation of the selective ban on creation of new civil service positions, suspension of about P14.4 billion worth of new programs and projects, and renewed effort to strengthen tax administration (GOP 1998). The imposition of the 25 percent mandatory reserve impacts on the capability of the government to provide social services and safety nets during the economic slowdown and the E1 Nifio phenomenon. For example, with 8090 percent of the government budget for primary and secondary education allocated to personnel costs, the 25 percent mandatory reserve has to be charged against regular programs. The negative impact will be evident on the printing of instructional materials; conduct of special education, school health, and teacher training programs; and construction of school buildings. For the Department of Health, the peso depreciation and the 25 percent mandatory reserve will likely mean less supply of drugs; reduced laboratory and diagnostic services, lower case finding and treatment, higher caseload of government facilities, and probable widening of service gaps particularly for vulnerable groups with limited access to health care (NEDA 1998). The budget of the Department of EnVironment and Natural Resources (DENR) is shown in Tables 6 and 7. Both tables show the impact of the 25 percent mandatory reserve. DENR's major operations bore the brunt of the budget cuts (Table 6). The program that was most adversely affected was environment management and forest management. The 1998 budget for protected areas and
Chapter 4: Intal and Medalla wildlife management
93
dropped
slightly from the 1997 level, but is nonetheless
significantlY higher than the 1996 budget. Although budget appropriations tend to be somewhat bloated and can be further trimmed, large drops in operational budgets are expected to impact negatively on the quality of services provided by the Department. Indeed, with adjustments for inflation, DENR's 1998 budget for maintenance and other operatIng expenses (MOOE), adjusted for the 25 percent mandatory reserve, is the lowest during the 1990s (Table 7). The 25
Table 6.
New appropriations, by program/project, of Environment and Natural Resources.
1996-98,
Depaz_ment
1996
1997
1998
645,636,000
656,765,000
832,746,000
I. Office of the Secretary A, Programs 1. General
administrative
a. General
b. Productivity Subtotal, 2, Support
and support
administrative incentive
services
and support
services
benefits
Gen. ad_rdnistrative
and support
services
38,478,000
38,146,000
645.636.000
695_243.000
870,892.000
86,236,000
100,657,000
118,368,000
57,078,000
63,541,000
70,852,000
37,943,000
58,071,000
19,715,000
11,633,000
13'572,000
14,674,000
92,909,000 45,486,000
41,633"000 51,197,000
44,900,000 63,469,000
27,000,000
28,000,000
55'520,000
3,957,000
4,077,000
3,507,000
to operations
a. Coordination,
formulation
and integratictn
of ENR sectoral plans and policies b. Coordination, monitoring and evaluation of ENR programs those devolved c, Information
and projects
system
development
d, Statistical services e. Production ea_d dissen'dnafion and popular
materials
and develop_ent
in support
,'rod environmental h. Adjudication i. Provision resources including
of technical
resources
education
of special studies,
development
designs
of forestry,
u|anagement
of pollution
payment
of rewards
and seizure
as amended
mining
operations illegal forest activities, to informers
of illegally
tr,'trtspor ted forest products of violatol_
and
cases
for operations against extraction/utilization
the discovery
Units and maintenance
ha the conservation
of natural
including envirmtn_ntal f, Legal services g. Conduct
inck_ding
to Local Government
in
collected/
and apprehension
of Section 68 (b) of P.D. No. 705, by E.O. No. 277, the hauling
of confiscated representation
fees
logs, space rentals, guards, expenses
ha the disposal/selling
and other expenses of confiscated
logs, subject to Special Budget by the President j. Laboratory services Subtotal, Support to operations
illegally
cut
and approval 8,100,000
10,500,000
8,460,000
25,159,000 395,501,000
40,702,000 411.950,000
33,445,000 432,910,000
94
Economic
crisis... Once more
Table 6. continued... 1996
1997
1998
3. Operations a. Forest mea_agenrea_t b. Land management c. Protected
. .
areas and wildl.ife management
d. Mh_es and geosciences e. Enviromnental
developn_ent
1,655,358,000
2,025,587,000
1,569,430,000
555,784,000
628,663,000
689,061,000
149,700,000
300,136,000
268,760,000
115,408,000
m_magement
f. Ecosystenxs resetn'ch and development Subtotal, Operations
Total, Progr_ns
......
295,461,000
305,403,000
144,287,000
11.1,765,000 2,883.476,000
146,068,000 3,405.8572300
255,043,000 2,926.581,000
3.924,613,000
4,513.050,000
4.230.383,000
B- Projects 1. Locally funded
project (s)
a. Construction
of Region_
b, Lon-oy Watershed
Office V building
Development
10,000,000
Project
J.n,Region I c. Maasin Watershed Project in Region VI d. Rehabilita tion of Riverbanks _'md Lakeshore Project--National Capital Region e. Eawironmental and_att_ral resource f. Water resources
developnrent
11,838,000 6,266,000
1,090,000 accoun_ag
69,750,000
,urd mmmgement
100,000,000
Subtotal Locally funded project(s) 2. Foreigp_a-assisted projects(s) a. Indus _rial Pollution
Control
10,000.000
19,194.000
169,750.000
9,807,000
16,516,000
36,124,000
357,639,000
187,553,000
162,754,000
5,050,000
4,305,000
8,500,000
15,915,000
18,300,000
16,273,000
392,031,000
228,840,000
235.121,000
402.031,000
248,034,000
404,871,000
i 4,326,644,000
4,761,084,000
4,635,254,000
36,568,000
40,908,000
45,819,000
Project
3,620,000
b. Natural Resources M,magement Progrmn c. Environment and Natural Resources--Sector Adjustment
Lotto Project
d. Pasig l_tver Rehabilitation e. Conservation f. Integrated
of Priority
Protected
Environmental
Sustainable g. National
Proiect .Areas Project
Management
for
Development lnt%n'ated
Protected
Progranr
(E'U Grant)
Subtotal,
Foreibm-assisted
Areas System 11,470,000
project(s)
Total, Projects Total, New appropriations II. National
Mapping
A. Pro_'ams 1. General
aa_d Resw.lrce Inforu'tation
achninistrative
a. Gener_
adnm_strative
b. Prod.uc6vity
services
m_d support
services
1,412,000
1,420,000
36.568.000
42,320,000
47,239,000
a. Water, coastal, and land surveys
45,294,000
91,87G000
141,184,000
b. Mapping
36,330,000
43,097,000
52,552,000
].1.,789,000
20,982,000
1.8,863,000
93,413,000
155.955.000
212.599.000
129,981.,000
198,275,000
259,838,000
Subtotal,
i_centtve
and support
Authority
benefits
Gen. administration
and support
2. Operations
c. Irdormation Subtotal, Total, Programs
and remote
sensing
maa_ageanent
and statistic_
services
Operations , i
Chapter 4: Intal and Medalla
95
Table 6. continued... 1996
1997
1998
B. P_:ojects 1, Foreign-assisted
project
a, Acquisition of two hydrographic/oceanographic vessekq (Iru_fituto de Credlto of the Kingdom
of
Spah_ and B_co Santander) Subtotal, Foreign-assisted project
B17.922.000 317.922,000
Total, Projects
317_92Z000
Tot,'fl, New ,_ppropriations
129.981,000
IlL Mines mrd Geosdences
198,275,000
57Z760.f100
16,136,000
57,683,000
Bureau
A. Programs 1. Gener_
admil"dstrsfive
a. General
admimstrative
b. Human
resource
¢. Productivity Subtotal, 2. Support
and support
services
development
hlcentive
General
servk:es
t_d support benefits
administration
and support
c. Research Subtotal, 3. Operations a. Mineral
m_d ptthlications
m_d development Support
to operations
lands adminis_ation
b. Geoscience development Subtotal Operations
and services
Total, Programs Total, New appropriations
Source:
tot_,
446,000
1,696,000
1,874,000
18,269,000
60.003.000
5,401,000 9,346,000
5,491,000 8,254,000
21,499,000
29,110,000
36,246,000
42,855.000
116,085,000
195,279,000
29,584,000 145,669.000
66,073,000 26L3522_
200,184_(100
364.210.000
200.184.000
364,210.000
5,159,543,000
5,577,224,000
to operations
a. Plara'th'tg and policy fonnulation b. Mh_eral eco_omics, fl'fformation
Grand
437,000
New appropriations
General
Appropriation
4,456,625,000 Act,
1996-1998,
percent mandatory reserve dramatically in real terms since 1996.
DBM.
accelerated
the drop in MOOE budget
Budget cuts are likely to be temporary and therefore their negative impact would also probably be short term. The Memorandum of Economic and Financial Policies submitted by the Philippine government to the IMF explicitly gives preference to social programs, especially on poverty alleviation for the 21 poorest provinces and 5th- and 6th-class municipalities. These programs are protected from the 25 percent mandatory reserve and are given top priority for budget restoration if the situation improves during the year. No such priority is accorded to budgets for natural regeneration programs.
resource
and environmental
protection
and
96
Economic
Table 7.
Budget,
Department
(In thousand
pesos
Particulars
of Enviranment at constant
crisis...
and Natural
Once more
Resources
1985 prices). I
1990
1991
1992
1,874,548
1_423,262
1,330,428
1,281,141
1,443,250
1,029,934
858,720
873,239
761,802
741,011
844,613
564,542
457,189
519,339
702,238
B. Capital outlays
1,373,919
828,829
524,611
559,650
572,985
Total
3,248,467
2,252,091
1,855,039
1,840,791
2,016,235
1995
1996
1997
A. Ct_rrent operating
expenses
1. Personal services 2. Maintenance and other operating Expenses
Particulars
1993
1994
1998 approved
A. Current
operating
expenses
1. Personal services 2. Maintenance and other operathlg expenses B. Capital outlays Total "_Approved
budget
b
1,252,010
1,410,734
1,462,821
1,656,252
1,525,439
765,861
855,721
914,062
1,132,998
1,132,998
486,148
555,013
548,758
523,254
392,441
189,935
341,376
466,872
342,420
239,446
1,441,944
1,752,110
1,929,693
1,998,672
1,764,885
(R.A. No. 8250).
b Approved budget less 25% of authorized regular appropriation (Administrative Order no. 372). Source: General Appropriations Act, 1990-98, DBM.
Impact
a adjusted
on the natural
resources
for nonpersonal
service
items
sector and the environment
Environmental indicators for the Philippines up to 1993 are shown in Table 8. The data indicate the seriousness of the environmental problem in the country. For example, total forest cover in 1993 declined to nearly half of the 1985 forest cover. Metro Manila's particulat e matter in 1993 was almost twice the national ambient standards, starkly in_ticating the serious air problem in the capital city. Dissolved oxygen in Laguna de Bay, the largest freshwater lake straddling Metro Manila and the provinces of Laguna, was 50 percent higher than the national ambient standard.
pollution country's Rizal and Rivers in
the Metro Manila area are even much more polluted or almost biologically dead. The country's coastal resources are also in serious trouble, with a substantial decimation of mangroves and serious overfishing in several major municipal or coastal fishery areas. Padilla and de Guzman (1994) estimate that actual fishing effort in small, surface-dwelling fishery has been twice that needed for maximum economic yield; as a result, actual fish catch is lower than the optimal yield despite twice the fishing effort. It is useful to examine whether or not the crisis would
further
exacerbate
the country's
environmental
problems.
For
Chapter
4: Intal
example, fisheries
and Medalla
there are indications intensified
during
97
that population the crisis
years
pressure
on coastal
of the early
and artisanal
1980s (Cruz
and Repetto
1992). It is not possible to assess this issue in relation to the East Asian crisis because of lack of data. Nevertheless, it appeared that this time, increased population
pressure
may be less pressing
because
of the apparent
migration of the population during the crisis. Another concern was the impact of the high depreciation
on private
environmental
Table
protection.
8. Environmental
Year
Forest cover (thousand ha)
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
15,898.90 15,875.01 15,671.10 13s893.96 13,690.06 13,476.04 13,272.14 13,068.23 12,864.33 12,661.00 12,456.52 12,252.61 11,963.41 11,759.50 11,555.60 10,368.03 9,180.47 6,789.64 6,460.60 6,307.40 6,158,80 6,015.40 5,900.20 5,787.46
investments
in natural
For example,
indicators Particulate matter a (rag/Ncm) ........ ........ ........ ......... .......... 70.75 73.00 79.00 73.60 67.20 88.00 81 _50 86.25 93.00 84.00 ...... ...... 159.13 151.57 188.56 172.50 173.38 176.63 142.17
interest
resources
reforestation
urban-bound
regime
and peso
regeneration
programs
and
offer the most
in the Philippines. Sulfur dioxide a (ppm)
Carbon Dissolved monoxide b oxygen b (mg/Ncm) (rag/l)
0.040 0.025 0.024 0.026 0.028 0.018 0.022 0.016 0.027 0.014
4.70 4.70 4.18 4.40 3.75 3.83 4.43 3.98 4.00 8.10
0.007 0.013 0.011 0.011 0.013 0.008 0.012
------
Suspended solids b (rag/l)
-----_ 8.67 8.14 8.51 8.38 7.62 7.53 8.13 7.90 7.42 8.00 7.80 7.85 7.73 7.50
"Annual averages are only for Metro Manila. Annual averages are only for Laguna Lake. Notes: Ambient standards (source: Philippine Environmental Quality Report 1990-95). Particulate matter 90 mg/Ncm Sulfur dioxide 0.03 ppm Suspended solids - not available Dissolved oxygen 5 mg/L Carbon monoxide - not available Source: Rufo and delos Angeles (1996).
43.10 39.73 38.89 32.13 23.45 44.77 47.26 37.26 47.03 71.35 47.78 38.63 56.30 --
98
Economic
crisis... Once more
realistic way of increasing the country's depleted domestic supply (Niskanen and Saastamoinen 1996). Niskanen and Saastamoinen (1996) show that tree plantations, withvarious alternative management options including community forestry and intercropping, have substantially higher economic profitability (including environmental effects) than financial profitability In addition, improving the efficiency of wood processing
in the Philippines. in the Philippines
would likely improve the economic and financial profitability of mahogany tree plantations, similar to Thailand's experience in establishing teak plantations. High interest rates are expected to discourage private investments in reforestation government
and modernization continues subsidizing
of wood processing reforestation activities.
plants,
unless
the
In the medium term, exchange raty changes impact on the natural resources sector and the environment by influencing relative profitability of natural resource-based industries and the production structure of industries, which have different pollution intensities. To analyze the corresponding potential impact on the environment, this paper combines the results of the exchange rate and trade reform simulation discussed earlier with the ENRAP (Environment and Natural Resource Accounting Project) estimates of pollution abatement costs by industry. The different output structures implied by the different scenarios yield different average pollution intensities for the whole economy. The potential impact of the currency devaluation the difference in average pollution intensity associated scenarios.
is then indicated by with the different
To provide an indicator of environmental protection costs across activities, Table 9 presents estimates of pollution intensity (abatement cost per unit value of output) by sector derived from ENRAP results. In general, pollution (air and water) abatement costs areestimated using the valuation of waste disposal services needed to reduce pollution to a nondamaging level. Full installation and operation of pollution control devices are costed and an effective emission reduction
rate of 90 percent is applied. In agriculture
and forestry, environmental
protection costs pertain to costs of shifting upland agriculture to soil conservation technologies. The average abatement cost per unit of output for all activities is estimated at around
1.62 percent
using output
in domestic
prices as weights;
a lower
average of around 1.57 percent is obtained using output in border prices as weights. The higher average using domestic prices indicates that sectors with higher nominal protection tend to have higher pollution intensity. As such, trade reforms are expected economy.
to lead to a lower average
pollution
intensity
for the
Among the industries, "other metallic activities" had the highest pollution intensity at 32.9 percent followed by forestry activities with 28.8 percent (this included incremental costs of upland agriculture in forest lands shifting to less
Chapter
Table
4: Intal
9.
and
Pollution
PSIC
Medalla
intensity,
99
by sector
(In percent).
Industry and process
Agriculture, forestry, and fishery 11-13 11 Agricultural crops produclion 111 Palay production 112 Corn production 113 Vegetable production 114 Fruits and nuts (excluding coconut) production 115 Coconut production incl. copra-making 116 Sugarcane production 117 Tobacco production 118 Fiber cops production 119 Agricultural crops production 12 Livestock, poultry and other animal prod. 121 Livestock and livestock products 122 Poultry and poultry products 13 Agricultural services 14 Fishery 15 Forestry Mining and quarrying 21 Metallic ore mining 211-212 Gold ore mining 213 Copper ore mining 214 Nickel ore mining 215 Chromite ore mining 219 Other base metal ore mining 214-219 22 Nonmetallic mining and quarrying 221 Coal mining 222 Crude petroleum and natural gas exploration and production 223 Stone, quarrying, clay and sand pits 229 Other nonmetallic mining and quarrying 221,222,229 Manufacturing 31 311-312 313 314 32 321 322 323-324 33 331 332 34 341 342
Manufacturer od food, beverage, and tobacco Food manufacturing Beverage manufacturing Tobacco manufacturing Textile, wearing apparel and leather industries Textile manufacturing Wearing apparel Manufacturer of leather and leather products Manufacturer of wood and wood products including furniture and fixtures Manufacturer of wood and wood products Manufacturer and repair of furniture Manufacturer ofpaper and paper products: Printing and pub lishin g Manufacturer of paper and allied products Printing, publishing and allied industries
Pi 1.585 2.343 2.343 2.343 2.343 2.343 2.343 2.343 2.343 2.343 2.343 0.524 0,524 0.524 0.036 0.102 8.790
5,521 0,272 1.940 5.920 7.981 2.939 48.818 3.286 2.030 1.645 1.063 0.149 5.349
0.253 0.240 0.552 0.087 0.235 0,347 0.099 0.416 0.983 1.289 0,238 0.462 0.564 0.304
100
Economic
Table
crisis...
Once
more
9. continued...
PSIC
Industry and Process
35
Manufacturer of chemical and chemical products, petroleum, coal rubber and plastic products Manufacturer of chemicals and plastic products Petroleum refinery and manufacturer of miscellaneous products petroleum and coal Rubber products Manu/actut_r oFnon-metallic mh_eral products Manufacturer of pottery, china and earthenware Manufacturer of glass and glass products Manufacturer of cement
351,352,356 353-354 355 36 361 362 363 369 37 371 372 38
Pi
0.134 0.240 0.039 0.181 0.775 0.877 0.580 0.609
Manufacturer of other nonmetaU_c mineral prod. Basic metal industries Iron and steel basic industries Non-ferrous metal basic industries Manufacturer of fabricated metal products, machineries and equipment. Manufacturer of fabricated metalproducts Manufacturer of machinery except electrical Manufacturer of electrical machinery, etc. Manufacturer of transport equipment Manufacturer of professional and scientific and measuring and controlling equipment Manufacturer and repair of metal furnish, and fixtures
381 382 383 384 385 386 385,390 39 390
1.360 0.394 0.335 0.210 O.15_ 0,186 0.643 0.088 0.213 0.120 0.361 0.105 O.104 0.104
Other manufacturing industries Other manufacturing industries
Using domestic output (Qd) as weights. * Using border output (Qb) as weights.
erosive
technologies).
for gold
Other
and 11.9 percent
the average
with
low abatement
mining
activities
for copper.
1.6 percent.
cost ratios,
Manufacturing
with
were
Agriculture
all except
also high
with 10.3 percent
was only slightly industries
fo_ wood
registered
products
being
lower
than
relatively lower
than
I percent. These
estimates
production/output
of pollution structures
intensity
resulting
by sector
fro m earlier
are used
together
simulations.
with
Specifically,
the simulation results of the three scenarios Itogether with pollution intensity estimates, yield simulations of pollution intensity associated with four different cases: (a) pre-EO 264, (b) post-EO 264 under fixed exchange rate, (c) post-EO 264 with 10 percent exchange rate adjustment, and (d) post-EO 264 with 20 percent
exchange
rate adjustment.
Table 10 summarizes is associated
with
appears
trade
that
the results
the highest reforms
of thelexercise.
pollution under
intensity
EO 264
with
The pre-reform at around or without
scenario
1.57 percent. exchange
It rate
Chapter 4: Intal and Medalla
101
adjustment potentially reduces the average pollution intensity of the economy. The average pollution intensity decreases to around 1.53 percent without exchange rate adjustment, 1.49 percent with 10 percent adjustment, and around 1.45 percent with 20 percent adjustment in real exchange rate. The potential pollution intensity differs in scenarios with and without exchange rate adjustment. Table 5 indicates that the potential improvement in pollution intensity is higher with exchange rate adjustment. The pollution intensity associated with 10 percent real devaluation (at 1.49) is about 3 percent lower than that without devaluation. The reduction in pollution intensity with 20 percent devaluation Table 10.
I-O
is even higher at more than 5 percent.
Impact on average (In percent).
PSIC
pollution
28-37
15 Forestry 21-22 Miningand quarrying
38-169 31-39 Manufacturing 1-169
11-39 All sectors
by major grouping
Post-EO264 Pre-EO264 W/o exchange rate adjustment
Description
1-26 11-14 Agricultureand fishery 27
intensity,
Withexchangerate adjustment 10% 20%
1.359
1.374
1.388
1.388
28+790
28.790
28.790
28.790
9.299
9.377
9.379
9.379
0.269
0.270
0.270
0.270
1.567
1.535
1.4861i¢1
1.486
Note:Using high trade elasticities,based on 1988input-output structure.
Improvements as a result of trade
in production structure toward less pollutive industries reforms and real peso depreciation have increased the
production level of most sectors because of the favorable income and demand effects of the trade liberalization-cum-real exchange rate adjustment. Thus, pressure on the environment continues even if growth industries can invest in pollution abatement facilities. (The best example of growth industries with better capacity to invest in environmental protection is the electronics industry. In the Philippines, the industry comprises mostly multinationals, with plants/factories located mainly in industrial estates with waste treatment facilities.) For industries with large environmental impacts like mining and forestry and traditional manufacturing industries composed mostly of old firms or smalland medium-scale firms, real peso depreciation improves producer incentives, but at the same time increases
potential
adverse
effects on the environment.
The challenge is in instituting nonprice regulations and schemes that can maximize the potential benefits from the real peso depreciation and at the same
102
Economic
crisis... Once more
time minimize adverse impacts on the environment. For example, for forestry, the government may pursue increased taxation on logging outside of privately or community owned reforested areas, thereby encouraging investments in reforestation and discouraging the government may initiate
logging on Iprimary growth forests. Similarly, incentives for providing common treatment
facilities surrounding traditional industr!es Bulacan), in tandem with stricter enforcement
(e.g., tannery in Meycauayan, of pollution control rules, so that
increased domestic tannery, for instance w_uld not worsen further the quality of the environment (e.g., river in Meycauayan). Without complementary policies specifically addressing the pollution problem, the real exchange rate depreciation arising from the crisis could result in further environmental degradation. The East Asian financial sustainable development
crisis, E1 Nifio, and the challenge
of Philippine
There are three major broad challenges facing the Philippines in its drive towards sustainable development. The first is the reform of the industrial protection system and improvement of th e macroeconomic environment for sustainable development, in the Philippines, ireducing the pressure of population and poverty on agricultural land and natural resources requires that nonagriculture sectors, especially the industrial sector, take a larger role in employment creation. It is important therefore that the industrial protection system and the macroeconomic employment creation?
environment
encourage higher investments
and
The second is pricing and investing ior the future. Proper valuation of resources and the social cost of resource extraction, and clear delineation of property rights are essential for minimizing the trade-off between economic growth, social equity, and environmental/resource protection. This is easier said than done, however, because this involves a complex set of issues related to the design of implementing policies to encourage appropriate pricing, fair and effective property rights delineation, and private investments in resource regeneration and agriculture. As the Philippine experience shows, the political economy of pricing and property rights reforms is particularly difficult. Considering that the sustainability of rural development and poverty reduction requires appropriate resource pricing and prosperous agriculture, among the policy challenges needed for sustainabl E development are redirection of government expenditures and public investment toward providing infrastructure and technological requirements of sustainable agriculture rural roads, integrated pest management).
6 This paragraph
and the next two paragraphs
are largely taken from Intal (1992).
the (e.g.,
Chapter 4: Intal and Medalla
103
The third sustainable development institutions, and governance structures,
challenge is investing in people, and mechanisms for sustainable
development. This involves improving policies and government programs to support investments in human capital formation especially of the rural poor, strengthening national and local linkages in natural resource management in tandem with increased reliance on local communities and organizations in monitoring and maintaining the natural resources stock, and the integration of environmental and equity considerations in decision making at the national and local levels. The East Asian
crisis
is related
primarily
to the first sustainable
development challenge. In this regard, the crisis does not only present problems but also offers opportunities. While there are short-term costs and problems arising from the macroeconomic adjustment process, the real exchange rate correction that the crisis engendered for the Philippines is an important complement to he redesign of industrial protection policies being pursued by the government during the past decade. With trade and investment liberalization and real exchange rate adjustment, the overall incentive structure is more conducive to greater allocative efficiency and export orientation. This is also consistent with the country's comparative advantage, especially in semiskilled labor. As a result, the country's nonagriculture sectors in general and the industrial sector in particular will likely be more important generators of employment in the future. The East Asian crisis brought
out the importance
of strengthening
the
prudential, transparency, and corporate governance environments in concerned countries. Improvements in such areas will contribute to a more sustainable and robust economic growth in the region in the future. As the Philippines becomes more economically integrated with the rest of the region, it is clear that improved policy and institutional regimes in its partner countries also augur well for its economic prospects. Similarly, as the country further pursues internal reforms in the fiscal and monetary sectors in response to the crisis, the Philippines also strengthens its macroeconomic environment for sustainable development. And as the economy grows steadily and the country's demographic transition accelerates (i.e., lower fertility rate), the country's domestic savings rate will likely rise, further strengthening the macroeconomic fundamentals for sustainable development. 7 The E1 Nifio phenomenon has brought out inadequacies in the country's poverty monitoring and emergency food mechanism. 8 It also pointed to the importance of improving policy and institutional regimes on water use and 7The Philippines has the lowest East Asian "miracle' is fotmded economies. This is discussed
in chapter
savings rate among major East Asian developing countries. The partly on high domestic savings rates among high-performing
15 of this book.
104
Economic
crisis... Once more
investments. The tragic death of several starving tribal people indicated that they, especially those in the uplands, had been left out in the poverty monitoring and social safety net mechanisms; they are in a sense the "great neglected." The E1 Nifio phenomenon, while largely outside the control of the government and populace, shows the importance of addressing issues related to water pricing and water resources development. The water shortage in Metro Manila since 1997, while immediately attributable to the E1Nifio phenomenon, is fundamentally linked to the lack of appropriate pricing for raw water. As a result, the development of appropriate dams has rested on the public sector and has depended on governmen t budgetary largesse and official development assistance. The net result is that water supply has been erratic and inadequate for the growing industrial, commercial, household, and agricultural needs. Similarly, investments in irrigation facilities, especially small-scale systems relying on groundwater, have been inadeqOate. Water resources development has also been neglected because institutional arrangements within the bureaucracy have been weak and diffused. The Presidential Task Force on Water Resources Management has been studying i_sues and concerns and is finalizing recommendations to address institutional, informational, and incentive inadequacies in the water resources sector. The current E1 Nifio phenomenon may have some international dimension.
Its severity may be related to th_ unusual
global warming
in 1998.
Preventing its severe effects in the future thus calls for addressing the global warming problem. Since developed countrie s mainly contribute to this problem, it is important that they undertake more ambitious measures to reduce their contributions to greenhouse gas production and global warming. There is also some international dimension to the restructuring of the industrial protection system and improvement of macroeconomic management for sustainable development in developing Countries like the Philippines. This includes improving trade and sector policies of developed countries to be more supportive of reform efforts of developing countries. This will help them make their economic development more consistent with their evolving comparative advantages. Two specific areas for reform lin developed countries are worth highlighting here, namely, agricultural trade and subsidy policies, and protection policies on labor-intensive manufacturing. Also, there may be a need to address the potentially destabilizing effects of international capital flows under a regime of imperfect information and inadequate regulatory institutions, as brought out in the East Asian crisis.
Chapter 4: Intal and Medalla
105
Conclusions Sustainable
development
has turned
out to be the overarching
and
unifying framework for sound development policy and equity-oriented institutional arrangements. The fundamental issue, however, is whether there is sufficient political will, both domestically and internationally, to effect reforms in policies and institutions consistent with the demands of sustainable development (Intal 1992). Finally, it is apparent that the path to sustainable development is long, difficult, and multifaceted. Despite efforts by the government to address sustainable development challenges, much remains to be done in the future to ensure that Philippine development is indeed sustainable.
106
Economic
crisis.,. Once more
Bibliography Bautista, E. 1992. A study on Philippine mor_etary and banking policies. Working Paper Series No. 92-11. Makati City: Philippine Institute for Development Studies. Bidani, B., F. Ferreira, M. Walton and V. Ahuja. 1997. Everyone's miracles? Revisiting poverty and inequality in East Asia. Washington, D.C.: World Bank. Cruz, W.D. and R. Repetto. 1992. The environmental effects of stabilization and structural adjustment programs: the Philippine case. Washington, D.C.: World Resources Institute. Cruz, M.C., C_Mayer, R. Repettor and R. Woodward. 1992. Population growth, poverty, and environmental stress: frontier migration in the Philippines and Costa Rica. World Resources Institute. I
Garnaut,
R. 1998. The financial crisis: a watershed in economic thought about East Asia. Mimeo (to be published in Asian-Pacific Economic Literature).
Gerson,
P. 1998. Poverty, income distriblttion, and economic policy in the Philippines. IMF Working Paper 91_/20. Government of the Philippines (GOP). 19_,8. Memorandum of economic and financial policies of the Philippine Government., Mimeo. Hicklin, J., D. Robinson, and A. Singh. 1 797. Macroeconomic issues facing ASEAN countries. IME 18 July. Intal, P, 1992. Sustainable development: international perspective. In Brownsey, K.L, J.W. Langford, H.E McKenna, and J.R. Nethercote (eds.). 1992, Sustainable economic growth and development: implications for governance in the Asia-Pacific Region. Canberra Bulletin of Public Administration, No. 69. Intal, P. 1994. The state of poverty in the Philippines: an overview. In Intal, P. and Bantillan, M.C. (eds,). Understanding poverty and inequality in the Philippines. Manila: NEDA/UNDP. Krugman, P. 1998. What happened to Asia? Online edition in Roubini N. The Asia Crisis Homepage. i Nasution, A. 1998. Improved management Of the financial sector: a case study of Indonesia. Paper presented at the ESCAP Seminar on Improved Management of the Financial Sector, Bangkok, 20-22 May. National
Economic and Development Authority (NEDA). 1998. Social impact of the currency crisis. Discussion points for the Director-General,
Donors' Meeting, Asia Development Forum, 6 March. Nidhiprabha, B. 1998. Improved management of the financial sector: a case study of Thailand. Paper presented at the ESCAP Seminar on Improved Management
of the Financial Sector, Bangkok,
20-22 May.
Chapter 4: Intal and Medalla
107
Niskanen, A. and O. Saastamoinen. 1996. Tree plantations in the Philippines and Thailand: economic, social and environmental evaluation. Research for Action Research.
30, UNU/World
Institute
for Development
Economics
Padilla,
J.E. and F. de Guzman. 1994. Fishery resources accounting in the Philippines: applications to small pelagics fishery. In: IRG and Edgevale Associates. ENRAP III: Technical Appendices. Radelet, S. and J. Sachs. 1998. The onset of the East Asian financial crisis. Online edition in Roubini N. The Asia Crisis Homepage. Stiglitz, J. 1989. Financial markets and development. Oxford Review of Economic Policy 5(4)59-68. Stiglitz, J. 1998. Sound finance and sustainable development address at the Asian Development Forum, Manila.
in Asia. Keynote
5 The Impact of the East Asian Financial Crisis on the Philippine Manufacturing Sector* Maffo B. Lamberte, Margarita
A
Caesar B. Cororaton,
E Guerrero,
plethora
and Aniceto
C. Orbeta, It.
of studies already exists
on
the poor performance
of the Phil-
M ippine economy in the wake of the East Asian currency crisis. 1 Most, if m nmnot all, of these studies, however, examined the impact of the crisis from a macroeconomic perspective. Certainly, the crisis will have differential impacts on various economic sectors or sizes of firms, which, in turn, will have different responses to the crisis. Fairly detailed and accurate knowledge of these issues can greatly help in fine-tuning government policies and programs designed for staging a rapid economic recovery in the short term. This, however, requires good, firm-level survey data. This study, therefore, tries to fill this gap. It attempts to analyze the impact of the East Asian financial crisis on the Philippine manufacturing sector and study its initial response to the crisis to survive
using firm-level survey data collected from a sample of firms. The next section gives a brief description of the survey of Philippine industry and key characteristics of sample firms. The third section examines issues pertaining to the impact of the crisis on firms surveyed and their views on the causes of the crisis. The fourth section discusses issues related to the firms' main sources of funding, debt structure, transparency, and policy environment, while the fifth section briefly discusses the firms' assessment of the prospects of their business in the short term. The last section presents some concluding statements and suggests some policies.
*The survey of sample firms conducted by the National StatisticsOffice (NSO)and this report prepared by the Philippine Institute for Development Studies (PIDS)were funded by the World Bank.The authors are grateful to Ms.Ofelia M.Templo,assistant director general of the National Economicand Development Authority,for providing direction to the research team. The authors thank Ms. Ma. Chelo V. Manlagfiit and Ms. Hope A. Gerochi for research assistance and Ms. Juanita E. Tolentino for secretarial assistance. For example, see Virtucio(1998)and Chapter 11 of this book.
110
Economic
Description of the survey The Survey of Philippine
Industry
(SPIndAFC) covered establishments industries:
crisis... Once more
and the Asian
engage d in the following
Sector code
Financial
Crisis
manufacturing
Description
1
Food products
2
Textiles
3
Wearing apparel and footwear
4
Chemical and rubber products
5
Electrical machinery
More detailed descriptions of each sector in terms of the 1994 Philippine Standard 7ndustrial Classih'cation are given in Annex A. These particular manufacturing sectors are among the top 10 contributors to manufacturing output. In addition, the electrical machinery sector, which includes semiconductors and electronics, and the food products sector rank high among both import-dependent and export-oriented industries. Standard sampling methodology for Philippine establishment surveys uses a List of Establishments (LE)compiled and updated by the National Statistics Office (NSO). The sampling frame of the SPIndAFC was the 1997 updated version of the LE, which included about 3,800 establishments belonging to five sectors covered by the survey. Food products (32%) and wearing apparel and footwear (29%) comprised 61 percent of the total number of relevant establishments. In terms of employment size_ 68 percent is listed as having less than 100 workers. Over half of sample establishments are located in the National Capital Region (NCR). Based on the list, an approximately equal number of establishments were independently selected for each sector. The number of engaged workers (NEW) was used as a stratification variable, wRh more samples selected from establishments with more than 100 workers. A simple random sample was drawn from each stratum. Annex B shows the percentage distribution of establishments by sector and NEW classes _n the frame and in the resulting sample. The SPIndAFC questionnaire consisted of two separate forms. Form 1 was designed to elicit responses from interviews with chief executive officers (CEOs) of enterprises who own the establishments. Form 2 was designed as a self-accomplishing schedule for personnel officers, production managers, and/
Chapter 5: Lamberte et al.
111
or financial managers. Questionnaires were fielded from September 1998 to January 1999 by the NSO. This report is based on the responses of 541 establishments out of a targeted 750. Food products, wearing apparel and footwear, and electrical machinery sectors are about equally represented in this set of respondents, with textiles and chemical products having half that number (Table 1). This was because most establishments in these two sectors were contacted much later and retrieval rate was thus lower. Table 1. Profile of responding By Size
firms.
By Export Orientation
By Volume of ExportS
Large Small Exporters Non export. Small Medium
High
By Foreign Control None Some Total
Aver. No Employees Total
SECTOR l- Ft_od 2- Textiles
59 28
78 49
51 39
82 37
24 14
8 4
19 21
113 58
13 8
11 11
384 242
137 77
3_ Wearing al._pam[ 4- Chemicals 5- Elet_tricalreachilvery
61 47 59
62 40 58
78 38 70
42 49 46
30 19 17
4 7 3
44 12 50
78 62 62
16 8 9
29 17 46
331 250 643
123 87 117
AGE New Old
71 183
105 182
98 178
77 179
39 65
2 24
57 89
96 277
19 35
61 53
330 413
176 365
LOCATION NCR Others
113 141
125 162
105 171
131 125
34 70
19 7
52 94
188 185
22 32
28 86
429 342
238 303
Total
254
287
276
256
104
26
146
373
54
114
388
Source:
Survey
Philippine
Industry
and
the Financial
Crisis,
1998.
Responding firms had an average of 388 employees in 1996. Small establishments (defined as having less than 150 employees) dominated the food products and textiles sectors with 57 and 64 percent, respectively. Wearing apparel and footwear, and electrical machinery sectors were both equally represented in terms of size. Sixty-seven percent of the firms were located outside the NCR. More than half (65%)of respondent firms were "old" or were established before 1990. Establishments in the electrical machinery/electronics sector employed more workers than any other sector, averaging about 643. "Older" firms had more employees than new ones; establishments located outside the NCR had more employees than those in the NCR. Exporters comprised 51.9 percent of sample respondents. For "new" firms and those located outside the NCR, there were more exporters (56%and 58%, respectively) than nonexporters, but both groups were evenly represented in "older" firms. Among the manufacturing sectors, food products and chemicals had more nonexporters; the reverse is true for wearing apparel and footwear, and the electrical machinery sectors.
112
Economic crisis... Once more
About 53 percent may be considered as high-volume exporters, with exports comprising more than 50 percent of sales. Except for the food products and chemicals sectors where more firms_ were small- or medium-volume exporters (with exports comprising less _than 50% of sales), high-volume exporters dominated in all sectors. This' is most evident in the electrical machinery sector, which includes the electronics sector with 71 percent highvolume exporters. A firm has "no foreign control" if its foreign equity comprises less than 10 percent; if foreign equity accounts for at least 50 percent, the firm is said to be under "total foreign control." About 21 percent of responding firms were under total foreign control. For all sectors, a larger proportion of firms had "no foreign control." Only 8 percent of the food products sector but a higher 39.3 percent of the electrical machinery sector were under total foreign control. A larger proportion of new firms compared with old firms had large foreign equity. Because most industrial estates and technoparks are located outside the NCR, it is therefore understandable that there were more firms outside the NCR with large foreign equity. Analysis of the impact of the crisis on finns Changes in capacity utilization and proFitability before and alter the crisis Capacity utilization The period 1996 to the first hal5 of 1998 saw a continuous decline in capacity utilization rate in all sectors covered by the survey. From an average high of 78 percent for all sectors in 1996, capacity utilization rate declined to an average of 69 percent in the first half of 1998 (Fig. la). Performance varied across sectors. Of the five manufacturing sectors, the wearing apparel sector attained the highest capacity utilization rate of 82 percent in 1996, whereas the food and textile sectors registered the lowest at 75 percent. In the first half of 1998, the capacity utilization rates of all sectors dropped. From a high of 82percent in 1996, the highest capacity utilization rate declined to only 71 percent (chemical sector) in the first half of 1998. Similarly, the lowest capacity utilization rate dropped from 75percent in 1996to 66percent (food sector) in the same period. The same figure also shows the umeasonalized percentage changes in capacity utilization of the different sectors. Capacity utilization rate significantly declined (-3.4% relative to 1996 average for!all sectors) during the first half of 1997, with wearing apparel and leather as t_e worst performer experiencing a -5.5 percent change. Food products also did poorly, reducing its capacity utilization rate by 5.1 percent during the first half of 1997. Although the decline in capacity utilization rate continued in the second half of 1997, it was not as deep as in the first half. On the average, capacity
Chapter
5: Lamberte
et al.
Figure
la. Capacity
113
utilization
by sector.
90
zo
6O
} 50 4O
Sector 1
Sector 2
'm1996 Io-T'_" 1st half I
75 71
75 73
82 77
1[319981st half
71 66
72 69
75 70
73 71 _
79 79
75
76 68
73 69
Percent Change
I
utilization year.
2
3
4
5
6
0.00 -6.81 -5.12 -3.98
-2.16 -3.71 -2.11 -2.66
-3.55 -5.73 -4.94 -5.54
-3.06 -3.26 -2.09 -2,80
-3.41 -10.83 -4.75 0.00
-2.30 -6.49 -3.37 -4.05
rate dropped
Results on
1
seemed
the Philippine
utilization
by only 2.3 percent*gelative to suggest
industrial
rate declined
to the first half of the same
that the recessionary
sector
on the average
during
by 6.5 percent
period. The worst performer was the electrical utilization rate shrank by 10.8 percent.
effect had taken its toll
the first half maghi_ry
of 1998.
relative I_ctor
Capacity
to the previous whose
capacity
116
Economic crisis... Once more
Profi"tability The financial crisis has indeed generated substantial negative impact on firms' net pl"ofitability. From a high of 12.1 percent in 1996, net profitability of sample firms dropped dramatically to 3.5 percent in 1997 and to 2.1 percent in the first half of 1998 (Fig. 2). The average profitability of firms classified according to export orientation and size showed a consistently declining trend for the last 2 1/2 years. Differences in net profitability between large and small firms and between exporters and nonexporters, however, are evident. In particular, large firms and exporters appeared to have higher profitability than small firms and nonexporters throughout the period indicated. Of the five sectors, the food and electrical machinery sectors exhibited a consistently declining net profitability in the last 2 1/2 years, while that of the textile, wearing apparel, and chemical sectors fluctuated. The food sector appeared to be the most profitable among the five sectors; still it was not spared by the recent financial crisis. Sectoral performance versus broader sector performance Table 2 presents indicators of the general macroeconomic environment in the Philippines during the period of analysis. Real GNP growth reached a peak of 7.8 percent in the third quarter of 1996, then decelerated thereafter until it started to contract in the second quarter of 1998. In the fourth quarter of 1998, real GNP contracted by 1.2 percent. The overall output of the manufacturing sector started to contract in the second quarter of 1998. By the fourth quarter of 1998, it declined by 3.4 percent. In terms of sectors covered by the study, only wearing apparel registered an improvement in real growth in gross value added. In particular, this sector peaked at 18.2 percent in the second quarter of 1998. The other sectors slowed down considerably. The electronics sector reached a peak of 43.6 percent in the fourth quarter of 1997. Since then its growth decelerated considerably, although it did not contract. Based on these indicators, survey results confirmed the general slowdown in the manufacturing sector during the crisis period. Perceived causes of slowdow_ The survey identified 10 major causes of output decline: (1) decline in domestic demand; (2) decline in foreign demand; (3) insufficient credit extended by suppliers; (4) insufficient credit for working capital from banks; (5) insufficient credit for expansion from banks; (6) high interest rates; (7) high cost of raw materials due to the peso depreciation; (8) increases in labor cost; (9) shortages in raw materials; and (10) nondelivery of goods by suppliers hurt by the crisis. If reduced capacity utilization implies reduced output level, then these reasons could also be the cause for the drop in capacity utilization rate discussed earlier.
Chapter
Figure
5: Lamberte
2. Net
et al.
117
profitability
overtime.
Net profitability
over time, All
12.07
15
[]1996 U1997 [] Firs t half of 1998
10 3.53 5
0
] Net profitability
over time by Sector
5O 45 40 35 3O 25 20 15 10 5 0 [] 1996 [] 1997 half of 1998
Sector 1
Sector _
44.65 10.74 6.17
0.79 1.82 0.20 Net profitability
Sector 3 4.22 0.69 2.19
Sector 4 0.39 0.91 0.19
over time by Size
25 2O 15 10 5 0 [] 1.996 ,,,1997
half of 1998 Net profitability
Small
Large
2.01 0.84 0.46
19.99. 5.91 3.51
over time by Export Orientation
10. 0, []1996 []1997 DHrst half of 1998
Exp
Non-Eﾃ用
19.64 5.16 3.18
2.47 1.51 0.59
Sector 5 4.17 2.63 0.77
118
,Economic
Table 2. Macroeconomic
indicators, Q1
I
Q4
Q1
Q2
Q3
Q4
National
Product
7.3
8.7
7.8
5.1
5._
5-3
5.2
5-3
2.0
(0.3)
(0.0)
(1.2)
Gross
Dornestic
Product
5.3
6.1
6,9
4.9
5,_
5,6
4.9
4.8
1_6
(0.85
(0.7)
(1.9)
2.9
6-8
7,9
(055
4.9
1,8
0.4
4.1
(3.85
(11.5)
(3.1)
(7,8)
5,8
5.5
7.0
6.5
5,1
7,6
6,4
5,6
1.6
(0.2)
(3_5)
(3.3)
3,1
(13.1)
(1.01
1-8
23,9
17.5
5,7
0-3
Agriculture Industry
Fishery
and Fo1_astry
Sector and Quanying
Mioing
4.6
Manufacturing
Chemicals, Electronics
plastic I
Export
6.3
4,9
2,_
5-3
4,3
4,7
2.0
(0.9)
(1.5)
5,2
7,8
3-4
2,7
(0,65
(1.9)
5,7
(3-9
1.5
(3.1)
(6,1)
7.4
(8,0)
(14.1)
(6.8)
(0-1)
4,6
(4,1)
(8,5)
(8,8)
4-3
(417)
(4,5)
(23.3)
(14,0)
4.3
6.2
719
513
18.2
9.1
(2,1) 14,9
6.5 17.9
11,0 14,3
6.6 12.3
10,2 21.8
2.7 20,6
10.0 33.7
6,1 46,3
(5.6) 2L9
(2.1) 7,3
(0.3) 7.9
7.6
9.3
12,8
13.8
21-3
18.5
18.1
7,6
(5,0)
(1,8)
(15,65
6.1
6.3
6,5
6,7
6.1
5.7
5,6
4.6
4,5
3.6
2.7
5.3
8.7
8,6
15.2
17.6
14,5
13,4
3.7
3-7
8-5
(8.2)
Sector _
12,9
ll.3
Garments
11.6
(12,9)
(6,4)
(13.9)
Semiconductors
25.4
14,3
(2.55
3.5
3.6
21.1
43.6
'11.6
10,5
7,0
4.8
4.8
4.5
4.8
13-i)
12,8
11,5
11.5
10.1 b
10,5
15.3
lnl:latio_
Rate
91- Tl-easut'y
Sill Rate "_
Q1
6.2
Construction Service
Q4
10.1
l,_ather
nlbber,
Q3
3.3
Textiles apparel,
Q2
4.9
Food
Wearing
(19.25
Q3
growth rates (In percent).
Gloss
i iffr
Q2
crisis... Once more
(7,2)
(5,8)
9.9
(9-6) 413
(0,15
(4.4) (16,0) (3,4) .
(10.0) 3.3
25.4
15,1
1,6
6.0
7.0
8.0
10,4
10,6
17,7
16.6
14.0
13.8
13.4
Chemicals only In Real Peso Value Note: Details for Mfg: 1985constant prices 91-TBillsiEnd of period was used. Inflation rate was computed using the average consumer price _ndex. 3Level of T-bills
Figure 3 shows how exporters and nonexporters perceive the possible causes of output decline. In the survey, I means no contribution, while 5 means major contribution. Thus the higher the number, the bigger the contribution to the decline in output and capacity utilization. For both exporters and nonexporters, the biggest contributor to the slowdown in output was the increase in input costs due to the peso depreciation. The effect of the currency depreciation was slightly bigger for nonexpot:ters (3.88) than for exporters (3.66). While a peso depreciation would be favorable to all exporters, nonetheless it would adversely affect some of them because of the relatively high import content of their pro ducts. For exporters, rates. On the other decline in domestic factor perceived by was the third factor
the second major cause Iof the slowdown
was high interest
hand, for nonexporters! the second major factor was the demand. Changes in foreign demand were the third major exporters to cause the slowdown, while high interest rates for nonexporters.
For both exporters
and nonexporterS,
the fourth
and fifth factors were
the same, that is, labor cost and access to cap!ta!, respectively. For exporters, the sixth and last factors in the list were locall demand and access to credit for
Chapter 5: Lamberte
et al.
119
Figure 3. Perceived
causes of current output decline. Perceived
Causes of Current Output Decline
I Exporters + Non-exporters
M
Local demand Perceived
Foreign demand
r
Accessto capital
Depmciatloninput costs
[
.......
Laborcost
High interest rates
Rawreaterials shortage
Ca uses of Current Slowdown
Peso DepreCiation - Input Costs Higher Interest Rates Foreign Demand Labor Cost Acess to Capital Local Demand Access to credit for Expansion
Exporters
Rank
3.66 3.26 3.21 3,08 2.68 2,49 2.40
1 2 3 4 5 6 7
Nonexpor
ters
Rank
Paso Depreciation - Input Costs Local Demand Higher Interest Rates Labor Cost
3,88 3.72 323 3,11
1 2 3 4
AcesS to Capital Raw Material Shortage Access to credit from suppliers
253 2.50 2,33
5 6 7
expansion. For nonexporters, the sixth factor was raw material shortage, while the last in the list was access to credit from suppliers? From the point of view of a firm facing a perfectly competitive market, these results may suggest that the simultaneous drop in demand and increase in average cost during the crisis period squeezed the firm's profit. Results also seem to suggest that firms did not have much problem in accessing credit, although they had to pay a higher interest on it. 3 2 The detail 3 This
issue regarding below. issue
will
the impact
be discussed
of the crisis
in greater
detail
on the firms" in succeeding
access pages.
to capital
is discussed
in greater
120
Economiccrisis...
ComFetJtor's
Once more
grodHe
Figure 4 shows that the biggest and major competitors of firms selling in the domestic market were other local inveStors/owners or producers, jointventure companies and multinationals were considered far less of a threat in the domesti¢ market, iI Figure
4. Competitor's
profile. Domestically 6O 4O 20
i¢
0_,. r
ic it
"lDomesticproducers , _ i Do_lesticjoint venturea _
, 1996
1.997
1.998
50.35 9.01
44.14 10.87
40,10 11.41
.:/t1_
Internationally 15 ... .10
..... _ u,. t i Low C_)stPr_xt_I_ers. i Nei -hborin Co_tl'lt_is '
1996 9.89 12.37
D NI,.Cs _ _ []OECD Countrie,s ' ,_ J
8.83 6.54
1
1997 :' 11_88 14.43 i ,_
8.66 6.96
1998 13.00 13.95 %51 8.40
4
Note: Low Cost Producers = f'.l_ in Vietnam,China, _ambodia, Laos,Myanmar Neighboring Countries = firm¢ia Malaysia,Indonesia,_hailand NICs = firms in Korea, TaiWa__Ong, Singapore ' OECDCountries = firms"!n"Id_,_, .Europe
Chapter 5: Lamberte et al.
121
In the international market, the biggest competitors of local exporters were firms from neighboring countries, such as, Malaysia, Indonesia, and Thailand. Not too far from the first group were firms in low-cost producing countries like Vietnam, China, Cambodia, Lao PDR, and Myanmar. The third group of firms Which posed competition in the international market were those in newly industrialized countries or NICs (South Korea, Taiwan, Hong Kong, and Singapore). The last group of firms considered as competitors were from Organization for Economic Cooperation and Development (OECD) countries. Level of employment before and after the crisis Share of h'rms with fewer workers About two-fifths of sample firms reported operating with fewer workers after the crisis struck in July 1997 (Fig. 5). Firms in the wearing apparel and leather sector had the highest (49%) proportion that reduced the number of workers in the wake of the crisis, followed by the electrical machinery sector (44%). Nonexporters had ahigher proportion of firms (46%)with fewer workers after the crisis than exporters (38%).More large firms (44%)operated with fewer workers after the crisis than small firms (39%).Finally, more firms (43%)with no foreign control had fewer workers after the crisisthan firms with some foreign control (41%) and those controlled by foreigners (35%).
Figure 5. Percent of firms with fewer workers.
I :ta _
i
.
â&#x20AC;˘
41 38
' "
m
1(_
40 7
......
%_
Profile ofjobs Survey newer (Table capital. Also, appointments
37.7
43.4
'_
38.7
4L4 [
_
./;/V/ "
,
,
lost results showed that workers who left firms were younger and 3). This was expected because firms invested little on human many newly hired workers may not have had permanent yet.
122 Table 3. Profile
Economic of workers
leaving
crisis... Once more
the plant.
Average age (years) 30 or less 31-50 above 50 % % i % By Sector Food products Textiles Wearing apparel, leather Chemicals,rubber, plastic Electricalmachinery Total
43 51 59 49 7:l 55
42 38 36 42 26 37
15 10 5 9 3 9
By ExportOrientation Exporters Non exporters Total
58 51 55
34 40 37
8 8 8
By Size Small Large Total
58 52 55
35 38 37
7 10 9
Average tenure (years) 3 or less 4-10 above 10 % % %
"â&#x20AC;˘
40 41. 50 44 53 46
31 35 29 31 36 32
30 24 21 25 11 22
49 43 .46
30 35 32
21. 22 21
51 41 46
31 33 32
18 26 22
Source:Survey of Philippine Industry and the Financial Crisis,1998.
More than half (55%) of workers who left were 30 years old or below. About 37 percent was between 31-50 years old. Many of the younger and newer workers who left were from the electrical machinery sector, exporting firms, or small firms. Almost half of the employees had been with their companies for 3 years or less, whereas about one-third had been With the company for 4-10 years. Share ol:[irms retrenching workers or uMng other methods of reducing labor Some 39 percent of sample firms filled their vacancies as workers left (Table 4). Twenty-nine percent of sample firms, however, laid off workers as a result of the crisis. Sixty-one percent gave severance pay or benefits to workers who were separated, from work. While the wearing apparel sector (42%) and chemicals sector (43%) had more firms that filled their vacancies, they also had more firms (34% and 37%, respectively) that laid off workers as a resu!t of the crisis compared with the other sectors. More firms from the electrical machinery sector (48%), textile sector (54%), and wearing apparel sector (55%) gave severance pay or benefits. More exporting firms than nonexporters filled their vacancies, whereas more nonexporting
firms laid off workers.
Both exporters
and nonexporters
Chapter 5: Lamberte
et al.
123
Table 4. Responses
to crisis: labor.
Are fi]ingup vacancies
Laying-off workers
Pay severance
%
%
%
By S_c|or Food prc)d ucta Textiles
39 31
21 29
68 65
Wearing apparel, Jeather Chemicals, r_lbbe_,plastic Electrical machinery "]_tal
42 43 38 39
34 37 29 29
St-, 7(} 47 61
By Export Orientation Exporters Non exporters Total
47 30 39
29 3'1 30
By 51ze Small
33
Large Total
45 39
Cutdown ot_hours
Compressed workweek
Forced vacation
Flx-_ze salary:
F_ze salary:
Salary ¢tlt:
Salary etlt
%
%
r,_k & file %
mgt. %
rank & file %
mgt. %
35 3,5
16 17
26 20
27 29
32 37
2 1
4 9
43. 33 40 38
20 Ig 22 19
23 23 25 24
27 33. 28 28
29 29 27 31
6 4 3 3
7 2 4 5
59 62 60.
34 43 38
20 18 19
26 22 24
25 32 28
29 33 3"1
3 4 3
5 5 5
27
59
37
17
16
29
31
4
5
32 29
62 61
39 38
20 19
32 24
27 28
31 31
2 3
4 3
%
Source:Survey of PhilippineIndustry and the FinancialCrisis, 1998,
had almost the same proportion off workers.
of firms that gave severance
benefits
More large firms than small firms filled their vacancies
to laid-
and laid off
workers. Large and small firms, however, had almost the same proportion gave severance benefits to laid-off workers.
that
Aside from laying off workers, firms resorted to other measures to cope with the economic crisis, including: (1) cutting down on hours/days of hourly/ daily paid workers; (2) compressing workweek for monthly paid workers; (3) applying forced vacation leaves; (4) freezing salary increases of rank and file workers and/or management; and (5) cutting salary of rank and file workers and/or management. Almost two-fifths of sample firms cut down on work hours/days, about one-fifth implemented a compressed work week, about onefourth used forced vacation, and close to one-third froze salary increases of rank and file employees and management. Only a small proportion of sample firms implemented salary cuts for rank and file (3%) and management personnel (5%) (Table 4). More firms belonging to the wearing apparel/leather sector cut down on working hours in response to the crisis, whereas the electrical machinery sector had the most firms that compressed the workweek for employees. Forced vacation, on the other hand, was enforced by more firms in the food and electrical machinery sectors than in other sectors. More firms in the textile and electrical machinery
sectors froze salary increases
of rank and file employees
than other
sectors. Freezing salary increases of management personnel was employed more firms in the food and textile sectors than in other sectors.
by
The proportion of firms resorting to compressed workweek and forced vacation was higher for exporters than for nonexporters. On the other hand,
124
Economic
crisis... Once more
the proportion of firms that cut down on work hours/days, and froze salary increases of both rank and file and management personnel was higher for nonexporters than for exporters. More large firms cut down on work hours/days, compressed workweek, and resorted to forced vacation than small firms in response to the crisis. On the other hand, more small firms froze salary increases of rank and file workers than large firms. Membership of workers in unions was mentioned by 41 percent of sample firms (Table 5). Compared with other sectors, the electrical machinery sector had the lowest proportion (23%) of workers who were union members. Most workers from exporting firms (43%) and large firms (53%) were union members. Fifty-two percent of sample firms claimed to have formal training activities for their workers (Table 5). More than half of the firms in the food, chemical, and electrical machinery sectors reported having training activities. More exporting firms (61%) and large firms (67%) had training activities for workers than nonexporting and small firms.
Table 5. Human
resources
and training. Memberworkers of union %
With formal training %
Decreased amount of training %
By Sector Food products Textiles
45 43
51 44
26 21
Wearing apparel,, leather
48
44
38
Chemicals, r ubbel, plastic
49
59
24
Electrical machinery Total
23 41
62 52
18 25
Exporters
45
61
22
Non exporters
37
42
31
Total
41
52
25
Small
27
38
25
Large
55
67
25
Total
41
52
25
By Export Orientation
By Size
I
Source: Su,:vey of Philippine
Industry
and
the Fmanoali
Crisis, 1998.
Chapter 5: Lamberte et al.
125
Of the number of firms with training activities for workers, one-fourth reported that they were planning to reduce the amount of training for workers due to the crisis. The wearing apparel and leather sector had the most firms that planned to reduce training activities. Nonexporters had a higher proportion of firms that intended to reduce training activities. One-fourth of the large and small firms planned to decrease their training activities. Financial position of firms before and after the crisis Sources of [unds Firms raised short- and long-term funds from internal and external sources. Income from sales, which is an internal source of funds, and loans from local banks, which is an external source of funds, were the two main sources of short-term and long-term funds for sample firms before (i.e.,January to June 1997) and during the crisis period (Fig. 6). The structure of sources of shortand long-term funds of sample firms hardly changed at all since the onset of the East Asian financial crisis. Firms" reliance on debt The long-term stability of a firm can be gauged from various indicators, one of which is the debt-equity ratio, which measures the relative amounts provided by creditors and owners of the firm. Highly leveraged firms are bound to be more vulnerable to sudden negative changes in conditions of financial markets than less leveraged firms. The average debt-equity ratio of sample firms in 1996 stood at 2.274(Fig. 7). It inched up to 2.46 in 1997but dropped to 2.04 in the first half of 1998. This pattern was true for large and small firms, for exporting and nonexporting firms, and for all but the electrical machinery sector, whose debt-equity ratio already started to decline in 1997. These results seem to suggest that firms reduced their debt as they began to feel the effects of the East Asian financial crisis in 1998.s However, the degree of adjustment in the debt-equity ratio, varied by type of firm. More specifically, the decline in the debt-equity ratio in the first half of 1998 was much larger for nonexporting firms than for exporting firms.Small firms made more adjustments in their debt-equity ratio than large firms during the same period. Among the five sectors, the food and chemicals sectors experienced a much larger decline in the debt-equity ratio compared with the other three sectors. On the other hand, the textile sector made the smallest adjustment in the debt-equity ratio in the first haft of 1998. In 1996, the electrical machinery sector obtained the highest debt-equity ratio, followed by the wearing apparel and leather sector. This ranking was reversed in the first half of 1998. 4 This is based on the median. s See below for a discussion on the credit crunch.
126
Economic
crisis...
Once more
The shares of short-term and long-term debt in total financing could serve as a good indicator of the vulnerability of firms to sudden tightness in the credit market. Short-term debt comprised almost one-third of the total financing of firms (Fig. 8). The share of or degree of reliance of firms on short-term debt changed very little from 1996 to the first half of 1998. Large firms showed much larger changes in the share of their short-term debt than small firms during the indicated period. In the first half of 1998, large firms' share of short-term debt stood at 33 percent compared with 31 percent for small firms. various
Some differences in the pattern of the share of short-term debt among sectors can also be discerned. The food, chemicals, and electrical
machinery sectors exhibited an inverted U-shaped pattern of share in shortterm debt between 1996 and the first half of 1998. On the other hand, the textile and wearing apparel sectors showed a rising share in their short-term debt. The wearing apparel sector stood out prominently among the five sectors with its short-term debt accounting for 44 percent of total financing. When firms were classified according to export orientation, the share of short-term debt of nonexporting firms declined to 29 percent in the first half of 1998 from 33 percent in 1997, whereas that of exporting firms remained the same at 34 percent. The share of long-term debt to total financing of sample firms declined from 23 percent in 1996 to 21 percent in 1997, and stayed at that level in the first half of 1998 (Fig. 9). Large and small firms have almost the same level and pattern of share in their long-term debt during the indicated period. Exporters and nonexporters showed a similar pattern, but the former's share of longterm debt was lower. Among the five sectors, the textile and wearing apparel sectors experienced a significant decline in the share of their long-term debt to total financing from 1996 to the first half of 1998, while the other three sectors experienced
very little change. In the first half of 1998, the textile and chemicals
sectors showed sectors,
a much
higher
share in lopg-term i
debt than the other three
i
Results suggested that the decline _ the debt-equity ratio experienced by firms in the first half of 1998 can be attributed to the drop in both their shortand long-term debt during that period. AwHabillty
of crvdft
Almost half of total sample firms pointed
out that domestic
banks were
renewing or extending new loans to them (T_ble 6). A larger proportion of large firms (60%) and exporters (55%) made thi_claim than small firms (37%) and nonexporters (42%). Among the five sectols , the electrical machinery sector had the lowest proportion of firms that made the same claim. Only 9 percent of total respondents mentioned that foreign b_nks were renewing or extending new loans to them. This was because only! a handful of sample firms (18%) availed of services of foreign banks.
Chapter 5: Lamberte Table 6. Denied
et al.
of bank
131 loans
(In percent).
June 30, 1997 January1-
Category
[
December 31, 1997 July1-
1
in 1998 so far
By Sector Food products Textiles
6.31 6.15
16.22 9.23
11.71 15.15
Wearing apparel, leather Chemicals, rubber, plastic Electrical machinery Total
7.48 6.49 5.61 6.42
15.89 10.26 7.55 12.21.
17.59 15.38 6.54 12.98
By export orientation Exporters
6.61
11.98
14.34
Non exporters Total
6.28 6.45
12.56 12.26
11.61 13.03
By Size Small
5.24
8.66
11.16
Large Total
7.56 6.42
15.68 12.21
14.77 12.98
Source: Survey
of Philippine
Respondents
Industry on the Financial
were asked
whether
Crisis, 1998.
banks
or finance
companies
had
declined to grant them a loan before and during the crisis. Only 6 percent answered positively to this question before the East Asian financial crisis, that occurred from January to June 1997 (Table 6). During the crisis, the proportion of firms denied bank loans had doubled. This proportion was slightly higher for exporters (14%) than for nonexporters (12%), and for large firms (15%) than small firms (12%) in the first half of 1998. The electrical machinery sector was the least affected by the crisis when it came to access to bank credit. Only 6 percent of the electrical machinery firms were denied bank credits in the first half of 1998. On the other hand, 18 percent of the wearing apparel firms were denied bank loans in the first half of 1998, up from only 7 percent in 1996. Although the percentage of firms that were denied loans by a bank or finance company doubled during the crisis period, it is still much smaller than what was generally expected considering the economic uncertainty as a result of the East Asian currency meltdown. A great majority of sample firms had continued access to credit from a bank or finance company during the crisis period. Firms typically buy inputs on credit. Seventy-four percent of sample firms confirmed this practice (Table 7). The proportion of firms engaging in this practice did not significantly differ among the different categories. Results suggested that access of firms to suppliers' credit during the crisis seemed not to have diminished. Eighty-one percent of sample respondents said that their input suppliers
still extended
credit after July 1997 (Table 7). The proportion
of
132
Economic
Table 7. Access to suppliers' Category
crisis... Once more
credit (In percent).
Buying inputs on credit
Suppliers still extending ,credit (after July ,1997)
Selling products on credit
Still extending credit to buyers (after July 1997)
By Sector Food proditcts Textiles
71,43 72.73
82.30 84,06
80.45 83.12
84.96 "81+16
Wearing apparel, leather Chelrticals, rubber, plastic
69.42 7558
75,45 82.72
55.37 86.05
59.63 90.00
Electrical, mac}finery Total
80.00 73.68
8333 81 29
80.00 75,94
79.25 78.20
By export orientation Exporters Non exporters Total
72.89 75.10 73-95
84.34 77.92 81.25
77,.79 80.63 76,05
74.39 82.17 78.15
69.96 77.91 73.68
75,31 87.19 81.29
75.27 76.71 75,94
76.37 80.00 78.20
By Size
"
Small Lazge Total
i
Source:
Survey
of Philippine
Industry
and
the Financial
i
Crisis,
1998
firms which maintained this view did not significantly differ among the various categories. Firms also typically sell their products to customers on credit. About three-fourths of sample firms were doing this before the crisis. During the crisis, a little over three-fourths of sample firms claimed to have continued selling their products on credit to their customers. The proportion of firms that extended credit to their customers appeared to be higher for nonexporters than for exporters. More big firms extended credit to their customers than small firms. Among the five sectors, the chemicals sector had the most firms selling products on credit, while the wearing apparel and leather sector had the lowest proportion. Firms were asked which loan or credit sources had become more restrictive in granting credits since the onset of the regional financial crisis in July 1997 (Fig. 10). Domestic banks were the !most frequently mentioned credit source by respondents, followed by input suppliers. Thirty-six percent mentioned that availability of credit from their usual source had remained the same. The same response patterns were observed when respondents /
were broken
down by size and export orientation. When sample firms were classified according to sector, however, the electrical Imachinery sector had a different pattern of responses from the rest of the sectors. Half the firms in this sector claimed that their access to credit had not changed at all during the crisis period. Only a little over one-fifth said that their access to bank credit had become more restrictive.
Chapter 5: Lamberte et aL
133
Sample firms were also asked whether they currently had adequate liquidity to finance their production. About fi'tree-fourths of the total sample claimed to have no liquidity problem during the interview (Table 8). The proportion of large firms that made the same claim did not significantly differ from that of small firms. The same can be said of exporters and nonexporters. The textile sector had the lowest proportion of firms with no liquidity problem. Among those who said that they had inadequate liquidity to run their operations, a little over half singled out low revenue as the major reason (Table 9). A little over one-third mentioned low collection rate and insufficient loans as the major reason for encountering a liquidity problem during the interview. Table 8. Adequate liquidity to finance production (In percent). Category
Yes
By Sector Food products Textiles Wearing apparel, leather Chemichls)_ubber, plastic Electrical maclmxery Total
75.00 67.57 73.28 80.95 82.88 76.22
By export orientation Exporters Non exporters Tot_
79_77 72.18 76.08
By Size Small ' Large Total
74.36 78.33 76.22
Source: Survey
of Philippine
Industry
and
the Financial
Crisis, 1998
Transparency Financial statements, collaterals, and guarantees â&#x20AC;˘ The problem of asymmetric information, wherein lenders know less about borrowers and their prospects for repayment than borrowers, is pervasive in the finance process and prevents lenders from lending freely. This problem can be reduced if lenders have adequate informationabout the business performance of borrowing firms and if they have a strong and effective recourse in case of default, such that loans are adequately covered by collateral and lenders can quickly seize the collateral when borrowers default. Accounting information, such as, balance sheets and income statements, is one instrument that can make firms transparent to lenders. The value of this accounting information can be enhanced if it is certified by an independent auditing firm. Coming out with audited accounting reports regularly can greatly facilitate the job of lenders in monitoring borrowers to minimize the moral hazard problem.
134
Economic
Table 9. Causes of inadequate Category
liquidity
Low revenue
crisis... Once more
(In percent).
Insufficient loans
Insufficient credit from suppliers
Low collection rate
Others
By Sector Food products Textiles
44.83 50-00
32.26 28.57
24-14 20.00
37,93 33.33
13,33 6,67
Wearing apparel, leather Chemicals, _lbbel_ plastic Electrical machinery Total
60.71 40.00 66.67 52.63
60.71 14.29 14.29 34.26
25.00 1538 6.67 20.00
30.77 50,00 28.57 35.58
28.57 40.00 22.22 21.43
By export orientation Exporters Non exporters To td
52.08 53.03 52.63
32.61 35.48 34.26
16.28 22.58 20.00
19.05 46.77 35.58
29,63 16-28 21.43
By Size SmaU Large "Ibtal
59.09 43.75 52.63
35.48 32.61 34.26
25.00 13.33 20.00
38.33 31.82 35.58
22.73 19.23 21.43
Source:
Survey
of Philippine
Philippine
Industry
and
the Financial
firms and banks are required
Crisis,
1998.
to maintain
appropriate
financial
records that observe standard and generally accepted accounting and auditing principles and procedures. In practice, however, some firms, especially small ones, do not regularly prepare balance sheets and income statements, and if they do, financial statements are not audited by an auditing firm, Of the total sample firms, 88 percent claimed to have financial statements audited by an independent auditing firm. As expected, the proportion of firms with audited financial statements was lower for small and nonexporting firms (both 82%) than for large and exporting firms (93%). The rigor involved in competing in the international market is perhaps one of the compelling reasons for exporters to have audited financial statements. Of the five sectors, the textile sector had the lowest proportion by food-producing percent. In general,
of firms with audited financial statements firms (83%). The rest had: proportions
Philippine
banks require 10an applicants,
(80%), followed
ranging
from 89 to 92
especially
business
enterprises, to submit financial statements ias part of documents needed to evaluate the credit worthiness of their borrowers. Whether they accept audited or unaudited financial statements is a different matter. Results showed that despite the fact that 88 percent of total sample irespondents
for this study claimed
that their financial statements were auditedlby independent auditors, only 65 percent said that they typically needed audlted, financial statements to apply for and receive a bank loan (Table 10). As expected, large firms reported a higher proportion (71%) than small firms (60%) that were required to submit audited
Chapter 5: Lamberte
et al.
135
financial statements when applying for a loan. The difference was less significant between exporters (68%) and nonexporters (63%). Among the five sectors, the electrical machinery sector reported the lowest proportion (56%) of firms that were required to submit audited financial statements when they applied for and received a loan. Usually, the longer the maturity of the loan, the more the banks require collaterals from their borrowers. Survey results supported this observation. Almost half of total respondents said that they typically provided a collateral when borrowing for 12 months or longer, whereas only 24 percent and 27 percent said that they provided a collateral when they borrow for less than 6 months, or 6 months or longer, respectively (Table 11). There was not much difference when respondents were grouped by export orientation or by size. When classified by sector, the textile sector had the highest proportion of respondents who claimed that they were required to present a collateral for loans with less than 6 months' maturity period. On the other hand, the electrical machinery sector showed the lowest proportion of firms that were required to present a collateral for long-term loans. Of those who said that they were required by their banks to present collateral, 87 percent mentioned land and buildings, while 65 percent reported machineries and equipment. Only 24 percent mentioned stocks being used as collaterals for their loans. In some cases, banks required borrowers to have guarantors for their loans, especially if borrowers could not present an acceptable or adequate collateral. Twenty-nine percent of total respondents mentioned getting guarantees on their financing. More large firms and exporters obtained guarantees for their loans than small and nonexporting firms. A large proportion (60%) mentioned stockholders as their usual guarantors (Table 12). One-fourth mentioned other banks as guarantors. Short-run
prospects
Sample firms were not optimistic about the economy, in general and their situation, in particular, in the next 6 months. Almost half thought that their capacity utilization rate, which already significantly dropped to a certain level since the onset of the East Asian financial crisis, would remain the same, while one-fourth expected a further decline (Fig. 11). Only 27 percent were optimistic, expecting a rebound in their capacity utilization rate in the next 6 months. In terms of export orientation, results showed that nonexporters were more pessimistic than exporters; they expected capacity utilization rate to decline further or remain the same in the next 6 months. Small firms were more pessimistic than large firms. The wearing apparel sector was the least pessimistic, whereas the textile sector was the most pessimistic about prospects of business in the short term.
136
Economic
Table
10.
Submission (In
of audited
]
Required
By Sector Food products Textiles
66.67 63.08
Wearing apparel leather Chemicals, rubber, plastic Electrical machinery Total
64.81 78.48 55.96 65.25
By export orientation Exporters Non exporters Total
67.48 62.95 65.32
By Size Small
59.48
Large Total
70.83 65.25
Source: Survey
11.
statement
to apply
Once
for
of Philippine
Requirement
Industry
and
of a collateral
the Financial
for
loan
Category
loan
Crisis, 1998
(In percent). L O A N
Less than
6 months
12 months
6 months
or longer
or longer
By Sector Food products Textiles
22.77 37.29
25.77 41..38
50.00 55.00
Wearing
25.25
29.90
50.49
18.67
19.18
56.41.
17.65 23.39
21.00 26.59
35.64 48.65
Exporters
21.97,
25.00
45.6i
Non exporters Total
24.641 23.27!
28.02 26_48
51.87 48_64
Small
23.561
25.49
46.98
Large Total
23.25! 23.39
27.60 26.59
50.22 48.65
Chemicals,
more
percent). Category
Table
financial
crisis...
apparel., leather rubber, plastic
Electrical Total
machinery
By export
orientation
By Size
Source: SurVey of Philippine
Industry
and
the Financial
Crisis, 1998
Chapter 5: Lamberte
et al.
Table 12. Guarantor
137
(In percent).
Category
Other Banks
Affiliated Films
By Sector Food products Textiles Wearing apparel, leather Chemicals, rubber, plastic Electrical machinery Total
20.83 20.00 10.00 50.00 16.67 24.24
12.50 21.43 20.00 25.00 38.10 23.23
0.00 7,14 10.00 10.53 11.76 7.53
66.67 66.67 69.57 45.83 50.00 60.00
0.00 23.08 0.00 0.00 0.00 3.30
39.13 23_08 16.67 11.11 13.33 21.84
By export orientation Exporters Nc_n exporters Total
23,64 25.58 24.49
23.64 20_93 22.45
8.00 4.76 6.52
62.71 58.00 60.55
4.08 Z44 3.33
17.02 27.50 21.84
By Size Small Large Total
28.57 21.05 24.24
22.73 23.64 23.23
10.00 5.66 7,53
51.11 66.15 60.00
5.13 1.92 3.30
36.36 12.96 21.84
Source: Survey
Conclusions
of Philippine
Industry
and
Finance Cornpanies
the Financial
Stockholder
Government
Others
Crisis, 1998
and recommendations
This study examined the impacts of the East Asian financial crisis on Philippine manufacturing industries and their responses to such a crisis. Data were collected from a sample of 541 establishments representing five sectors, namely: food products; textiles; wearing apparel and leather; chemicals, rubber, and plastic products; and electrical machinery. Survey results clearly showed that the capacity utilization rate of manufacturing firms started to decline even before the crisis struck in July 1997, and that it continued to drop as the crisis worsened. The recent drop in capacity utilization rate can be attributed to the slowdown in both domestic and foreign demand for goods and the sudden rise in input costs, especially imported inputs, and interest rate, which squeezed the firms' profits. The earlier drop in capacity utilization rate was probably due to overinvestment in building additional capacity under a more liberal and cheaper access to external fund sources. Thus, the current low capacity utilization rate may be attributed to both cyclical and structural factors, which call for demand management and industrial restructuring policy measures. As the crisis deepened,
there seemed to have emerged
a consensus
that
firms were facing a credit crunch, that is, institutional lenders had stopped lending to them due to the highly volatile economic situation. Study results did not provide a clear evidence of the existence of a supply-side credit crunch
Chapter 5: Lamberte
et al.
139
during the crisis period. Majority of fir,_,s still had continued access to institutional loans, albeit at a much higher interest rate. While banks are now much more discriminating in lending to the business sector, the decline in total loan growth in 1998 could also be attributed to the lower demand for credit brought about by the sharp reduction in demand for goods produced by firms during the crisis period. The significant drop in capacity utilization rate and output of firms during the crisis period would have required a large labor layoff. To minimize labor layoffs, however, firms resorted to means, such as reducing workweek or days, applying forced vacation leave, and freezing salary increases, to save some jobs. Although this study generally confirmed the adverse impact of the financial crisis on the manufacturing sector, it also yielded some positive signs which the government can use as a platform for formulating policies and programs to stage a rapid economic recovery. First, most of the firms surveyed were still earning profits, although these declined in the last 2-1/2 months. If the worst of the crisis had already passed, then these firms can quickly rebound, partly using their profits to finance their growth. Second, most of the firms still had access to credit, although at a relatively higher price. Reduced interest rates will surely help during the recovery period. Third, although firms resorted to some cost-cutting measures, most of them still preferred to preserve jobs, a strategy they think would pay off once the crisis fades away. With most core staff intact and excess capacity readily available, a resurgence in demand will certainly be welcomed by them. The most appropriate policy the government could adopt would be an expansionary one to stimulate aggregate demand. Both monetary and fiscal policies are required to support such an expansionary policy. There is still some room for relaxing monetary policy. First of all, inflation rate already started to come down in February 1999. The agricultural sector, particularly the crop subsector, which suffered a large decline in 1998 as a result of E1 Nifio, was expected to rebound in 1999. In fact, the price of rice, which constitutes a large component in the consumer price index, already softened in the last few weeks. Second, the reserve money level during the February 1999 test period was P30 billion below the level agreed upon by the government and IMF under the existing standby arrangement program. Relaxing monetary policy, which will push interest rate down, can accomplish four things. One is that it will lighten the debt-service burden of enterprises, freeing some resources that can be used to meet increased demand for goods. It can also reduce the cost of debt restructuring, whenever resorted to by both enterprises and banks. Still another benefit is that it can stimulate consumer spending and revive the sagging consumer durable sector. Finally, it
140
Economic
crisis... Once more
can help arrest the appreciation of the peso vis-a-vis the US dollar and improve the competitiveness of the export sector, which has been pulling the economy up during this crisis period. There is a limit as to how much monetary policy can accomplish the task above. Pushing the interest rate further down and exhorting banks to lend to private enterprises would not be sufficient to stimulate growth unless demand for goods is pulled upward with the helpl of fiscal policy. Thus, on the fiscal side, pump-priming measures should continue in 1999, focusing on critical sectors of the economy, specifically agriculture, which has the most extensive linkages
with the rest of the economy, and the social sectors, such as health,
education, and housing. There are, however, two important programs the governmen t could launch to directly help the labor and manufacturing sectors. One is to provide skills training programs for those who have been laid off as a result of retrenchments
in the wake of the crisis. These programs
can be offered
in various regions to spread the benefits. Those who were laid off were usually younger, most probably less experienced, and less skilled, but highly trainable. The government can give incentives to those firms that had resorted to reducing work hours/days to encourage them to offer unused facilities and slack time of senior staff for training. The other is for the government
to stimulate
the housing
sector, which
has direct short-term economic and social impact. There is still a huge backlog of housing units in the country today, especially for the lower middle class and poor households. One way to meet this shortage is to beef up the resources of the Home Insurance Guarantee Corp. (HIGC) so that it will have additional resources to provide guarantees to bonds issued by local government units (LGUs) for financing mass housing projects in their respective localities. Of course, the government housing finance system has to be reformed quickly so that it can efficiently provide services for the public. To support its pump-priming measures in 1998, the government tapped foreign fund sources to avoid crowding out the private sector and also to secure foreign exchange to beef up the country's international reserves. Since private sector demand for funds is still down and interest rate has already come down to the precrisis level, it would be worthwhile for the government to secure funding for its pump-priming measure_ for! 1999 from the local market, which now stands cheaper than foreign loans. ! Finally, the recent crisis has underscored
the importance
of keeping
a
flexible exchange rate policy. However, evefi if a flexible exchange rate policy is pursued and corporate governance is improved, the level of foreign capital inflows experienced by the country before the East Asian crisis is unlikely to be attained in the near term unless additional measures are put in place. One way is to liberalize further the entry of foreign banks into the country, preferably
Chapter 5: Lamberte
et aL
141
allowing foreign banks to wholly own domestic banks either by establishing new subsidiaries or buying existing ones, especially those that are not well capitalized. The presence of more foreign banks in the country can certainly breathe new life into the banking system and make additional capital available to Philippine industries.
142
Economic
crisis... Once more
Annex A. I Sector
Industry
Codes
Description I
1
2
3
Food products 1512 1513
Production, Processing seafoods
1514 1515 152 154 156 157 158, 1593, 1594
Processitag and preserving of fruits and vegetables Manufacture of vegetable and animal oils and fats Manufacture of dairy products Manufacture of starches and starch products Manufacture of bakery produc_ Manufacture of sugar Manufacture of coconubbased products
1591 1592
Manufacture Manufacture
1.595
farinaceous products Coffee roasting and processing
1599
Manufacture
of other food products,
171 172
Spin_lilag, weaving add fhaishing Mare.fracture of other textiles
173, 174
Manufacture Manufactufe
Wearing
apparel
nec (eg, soup, vhaegar,
nuts)
Ready-lrtade Manufacture Manufacture
Chemical
of textiles
of haitted and crocheted of elrtbroidered fabrics
fabrics
and artides;
& footwear
products,
garments manufacturing of wearing apparel, r_ec of fodi_wear
rubber
241.1
Manufacture compounds
2412 242_3
Manufacture of plastics in primary forms ,and of synthetic rubber Manufacture of pah'_ts, varnishes and. similar coatings, . printing ink mad mastics Manufacture of pharmaceuticals, medicinal chemicals mad botanical products
2424 2425
'
of basic chemicals
except fertilizers
mad ni_ogen
243
Manufacture of soap and detergea_ts, clemaing and polishing preparatiors, perfumes and toter preparatior_s Manufacture of other Chemical products, nec (eg, matcb_s, ink, glues and adhesives) Martu facture of man-made fibers
251 252
Manufacture Mannfacture
of rubber products of pl_tic products
311
Mm'tufacture
of electric
312, 313 321,322
Manufacture Mm'tufacture Manufacture
of electricit_ distribution and control apparatus; of insulatedwire mrd cables of electronic valves artd tubes; Mmrufacture of
323, 324
semiconductor Mm_ufacture
devices and other electronic components of t¢:16vision and radio transmitters and apparatus
2429
5
of cocoa, chocolate and sugar confectionery of macaroni, noodles, couscous and similar
Textiles
181 189 192 4
proce ._/ng and preserving of meat and meat products and preserving of fish and fish products and other
Electrical
machinery motors,
generators
and tralasformers
for
line telephony mad line t61egraphy; Manufacture of television and radio receivers, so,.md or'video recording or reproducing apparatus, and associated goods
Chapter 5: Lamberte et al.
143
Annex B. ATE Class
Ir_dustry Stratum/Sector TOTAL
Food products
Textiles
20-49
50-99
Frame
46.9%
Sample
19.3%
% frame % sample
>=200
21.1%o
15.7%
16,4%
100,0%
17.2%
18.0o/o
45.5%
100,0%
54_1%
21.0%
11.5%
13.3%
32.0%
18-1%
17.4%.
19.6%
44.9%o
22.0O/,,
40.1%
24.1%
16.3%
19.5%
10.0%
21,3%
23.2%
18.5%
37.0%
18.0%
% frame
46,8%
19.7%
15.8%
17.7%
20.0%
% sample
15.6%
12.5%
13.7O/o
58.2%
22.0o/o
% frame
46.3%,
22.1%
19-4%
12,2%
23.0%
% sample
20.3%
15.2%
16,9%
47,6%
20.0o/o
% frame
21.8%
19.0%
21.8%
37.5%
6.0%
% sample
21.8%o
19.0%
21.8%,
37,5%
18.0%
% frame % sample
Wearing apparel & footwear
Chemical products, rubber
Electrical machinery
% of total
100-199
"
144
Economic
crisis... Once more
References Lamberte, M.B. and J.T. Yap. 1999. Scenarios for economic recovery: the Philippines. Discussion Paper Series No. 99-05. Makati City: Philippine Institute for Development Studies, March. Lamberte, M.B. and G.M. Ltanto. 1995. A study of financial sector policies: the Philippine case, in: Shahid N. Zahid (ed.). Financial sector development in Asia. Manila: Asian Development Bank. Virtucio, EK. 1998. Social implications of the Asian financial crisis: the Philippine case, in EDAP Joint Policy Studies No. 9: Social Implications of the Asian Financial Crisis. Seoul: Korea Development Institute.
6 Impact of the East Asian Financial Crisis on Households Celia M. Reyes, Rosario G. Manasan, and Genero$o de Guzman
Aniceto
C. Orbeta, Jr.
years of the financial turmoil continue to linger. The crisis, together with the after the phenomenon, financial crisis had hit East Asia economic in July 1997, the effects E1 Nifio weather caused contraction, increased unemployment, and higher prices. These have had adverse social Three
consequences and forced many affected families and individuals to make adjustments especially in their consumption and spending patterns. The government, faced with huge revenue shortfalls, adopted austere measures that caused reductions in spending in several economic and social services. While this helped in minimizing the deficit, it aggravated the situation as it tended to weaken rather than strengthen the government's capability to provide assistance to those adversely affected by the crisis. This study in general takes a closer look at the impact of the East Asian financial crisis on households in the Philippines. More specifically, it aims to identify the various groups affected by the crisis, assess the differential impact on them at the microlevel, and document their responses or coping mechanisms. Unlike similar studies done earlier, this study benefits from being able to use official statistics that were made available only recently and from data gathered specifically for the purposes of this study. A participatory assessment approach was the primary tool used in determining the social impact of the financial and economic crisis specifically on vulnerable groups and in identifying coping mechanisms adopted by households in response to the crisis. Focus group discussions (FGDs) were conducted in January 1999. This timing was deemed appropriate as it provided a more complete picture of the impact of the crisis on Philippine households. The FGD covered 57 communities (barangays or villages) all over the country representing fishing, farming (upland, earners.
sustenance,
and commercial),
urban poor, and middle income/wage
146
Economic
crisis... Once more
In addition, a key informant survey and a household survey were conducted to provide supplementary data. The key informant survey covered 31 out of the 57 FGD communities and tried to elicit views from communitybased leaders regarding the impact of the crisis on the community. Key informants included the barangay chair, health worker, nutrition scholar, principal or head teacher, and social worker. Additional respondents, such as the municipal accountant, budget officer, health officer, and social welfare officer, were also interviewed The household
in municipalities where these barangays are situated. survey consisted of 430 households in the same 31
communities. Sample househoids were selected based on spatial and sectoral dimensions. The spatial grouping considered four broad divisions: Metro Manila, Luzon, Visayas, and Mindanao while the sectoral divisions were based on the dominant economic characteristics of the community. Secondary data were also obtained from1 the following: (1) administrative reports of various government agencie ; (2) budget data of national and local governments; and (3) surveys done by the National Statistics Office (NSO). Administrative reports of the Department of Education, Culture and Sports (DECS), Department of Health (DOH), and :Department of Social Welfare and Development (DSWD) were used. Budget and expenditure data from the Department of Budget and Management (DBM), Commission on Audit (COA), and selected local government units (LGUs) provided data on national and local government spending. The NSO data included those obtained from the quarterly Labor Force Surveys (LFS), triennial Family Income and Expenditures Surveys (FIES), and the 1998 Annual Poverty Indicators Survey (APIS): Impact on households This section examines
the impact
of the East Asian financial
employment; household income; household purchasing distribution; poverty; health, nutrition and population; vulnerable groups. !
crisis on
power; income education; and
Employment The regional financial crisis and the abnormal weather pattern adversely affected the employment situation in the Philippines. Firms resorted to retrenchments, temporary lay-offs, and reduced working hours as demand slackened and production costs increased. Workers in the agricultural sector, meanwhile, had to contend with higher underemployment due to drought. Although massive lay-offs were not noted, the crisis and the drought prevented the economy from absorbing neW entrants to the labor force. This contributed to a higher unemployment rate_ which was already considerable even before the crisis.
Chapter 6: Reyes et al.
147
The labor force participation rate (LFPR) declined from 65.7 percent in July 1997 to 64.9 percent in July 1998. However, starting October 1998, the labor force participation rate increased slightly relative to the same quarter of the preceding year. The decline in the LFPRs was more pronounced in the 15-19 and 20-24 age groups, which could be attributed mainly to the increase in number of individuals in these age brackets opting to go to school rather than joining the labor force. This could be because of the belief that there was no work available for them. When the regional financial crisis struck in July 1997, the unemployment rate stood at 8.7 percent. Since then, the unemployment rate for the next six quarters rose higher than the corresponding quarters of the previous year. The largest percentage increase in the unemployment rate was observed in April 1998 when it rose to 13.3 percent from 10.4 percent a year ago, due to the combined effect of the financial crisis and the E1 Nifio weather phenomenon. The unemployment rate rose to 8.9 percent in July 1998, 9.6 percent in October 1998, and 9 percent in January 1999 (Table 1). This translates to a pool of 2.8 million unemployed Filipinos in 1999. Based on the October rounds of the LFS, the underemployment rate rose from 19.4 percent in 1996 to 20.8 percent in 1997 and to 23.7 percent in 1998. Workers had to settle for less working ti.-Le than be laid off. Moreover, displaced workers and the rest of the population, particularly the poor, tried to find some form of employment, even part-time work, to generate some income. The financial crisis and E1 Nifio exacted tolls on both the urban and rural labor markets. The unemployment rate in the urban areas rose to 12.1 percent in the fourth quarter of 1998, representing 1.8 million unemployed, while that for rural areas rose to 7.4 percent in the same quarter, which translates to 1.2 million jobless persons. The underemployment rate surged to 20.6 percent in urban areas and 26.3 percent in rural areas in the same period. The older and presumably more skilled workers were better able to hold on to their jobs. The proportion of employed persons who were in the 15-19, 2024, and 25-34 age groups fell while the proportion of employed persons in the older age groups increased. In July 1997, the proportion of workers who were in the 15-34 age bracket was 46.5 percent; this declined to 45.5 percent in July 1998, and went down further to 45.1 percent 3 months later. The regional
financial
crisis had adversely
affected
the deployment
of
overseas Filipino workers (OFWs). Th Knumber of OFWs deployed increased slightly by 1 percent from 747,696 workers in 1997 to 755,684 in 1998, which was much lower than the 13 percent growth registered in 1997. The number sea-based OFWs grew by 2.6 percent. On the other hand, the total number land-based OFWs increased by 0.6 percent.
of of
q_ oo
Table
1. Labor
force,
status,
urban-rural,
1995-98.
Q2 1995Q3
Q4
Q1
Q2 1995Q3
Q4
(_1
(_2 1995(_Y3
(_4
(_1
_)2 1995_3
Q4
t_)q
27619 13530 14089
29259 14209 15051
28602 14027 14574
28040 13542 14497
28924 14129 14795
30713 14975 15738
29657 13841 15816
29637 13826 15811
29631 13738 15893
31368 14596 16772
30154 14145 16009
30265 14180 16084
30240 14212 16027
32111 15112 16998
30593 14363 I6230
31278 14733 16545
31168 14720 I6448
25194 11964 13230
25724 12103 13621
26090 12379 13710
25698 12045 13652
26527 12637 13890
27358 12883 14475
27419 12478 14941
27442 12505 14937
27335 12423 14912
28105 12748 15357
27531 12523 15008
27888 12688 15200
27689 12658 15031
27837 12790 15046
27856 12680 15176
28262 12947 15315
28368 12963 15405
2425 1566 859
3535 2106 1430
2512 2342 1648 1497 8(::L4 845
2397 1492 9_k5
3355 2238 2092 1363 1'2,6._ 875
2195 1321 874
2296 1315 981
3263 1848 1415
2623 1622 100_
2377 1492 88_
2551 1554 996
4274 2322 1952
2737 1683 1054
3016 1786 1230
2800 1757 1(143
8.8 11.6
t2.1 14.8
8.8 11.7
8.4 11.1
8.3 10.6
10.9 14.0
7.5 9.8
7.4 9.6
7.7 9.6
10.4 •12.7
8.7 11.5
7.9 10.5
8.4 10.9
13.3 15.4
8.9 11,7
9.6 12.1
9.0 I1.9
6.i
9.5
5.9
5,8
6.1
8.0
5.5
5.5
6.2
8.4
6.3
5.5
6.2
11.5
6,5
7.4
6.3
18.6 14.6 22.2
20.3 17.3 23.0
21.3 19.1 23.3
19.8 17.3 22.0
21.0 18.5 23.2
22.2 19.9 24.3
21.5 18.1 24.4
19.4 14.4 23.6
21.1 16.9 24.5
23.4 20_2 26.1
23.1 19.1 26_3
20.8 16.9 24.1
21.6 17.7 24.9
21.0 17.1 24.3
20.8 17.3 23.8
23.7 20.6 26.3
22.1 18.6 25.1
rate
Rural Underemp[oyment Philippines Urban Rural Source: National
employment
[ Q1
Labor force Philippines Urban • Rural Employed Philippines Urban Rural Unemployed Philippines • Urban Rural Unemployment Philippines Urban
by
rate
Statistics
Office.
_" _. "_
C3
Chapter 6: Reyes et al.
149
The marginal increase in land-based OFWs could be traced to fewer job opportunities in Asia. Deployment to Asia dropped by 6percent in 1998. Crisishit countries such as Hong Kong, Singapore, and Malaysia, which are among the top destinations of OFWs, were forced to cut back on the hiring of new workers as a result of the regional financial crisis. More specifically, the number of Filipino workers sent to Hong Kong fell by 18.3 percent, Singapore by 16.7 percent, and Malaysia, 65.7 percent. Meanwhile, deployment to the Middle East, which regained its position as the top destination, grew by 2.6 percent. Although deployment to America, Europe, and Africa increased, still these were not enough to compensate for the decline in deployment experienced in Asia. Although remittances of OFWs declined by 13.4percent from $5.15billion â&#x20AC;˘in January-November 1997 to $4.46 billion during the same period in 1998, the peso value, however, went up by 20 percent. Although massive layoffs were not observed, loss of gainful employment was noted among many communities as reflected in the FGD results. Construction, real estate, manufacturing, and agriculture seemed to be among the hardest hit sectors. Loss of jobs was felt largely in fishing communities, and urban poor and middle-income communities. FGD participants reported that the crisis and the E1 Nifio weather phenomenon forced many farmers and fisherfolk to abandon their jobs (whether temporarily or permanently) for more viable sources of livelihood. Two major reasons were cited. One was the lack of control over prices at which they sold their produce to traders. The other was the crisis-driven increases in costs of basic inputs. The diminished use of farm/fishing inputs resulting from price increases (along with such elements as poor irrigation facilities, competition with commercial fishing vessels, and weather disturbances) contributed to lower farm yield/fish catch. In Kalanganan, Cotabato, for instance, serious flooding destroyed fishponds, which were the main source of income of most residents. Repairing the damage became difficult for many because of high input prices. As a result, many small fishpond owners had to sell their fishponds to big fishpond owners. Daily wage laborers especially FGD participants in Baguio and Benguet were among the hardest hit. With the onset of the crisis, opportunities to work, which from the start were already irregular, became even scarcer and more difficult to access. Communities that were largely dependent on employment were directly hit by the retrenchment program initiated by the business sector. Of this, 39 percent came from the middle-income, 43 percent from the urban poor, 23 percent from farming, and 50percent from fishing communities. Factory closures affected 31 percent of middle-income communities. Forty-three percent of urban
150
Economic
crisis... Once more
poor communities complained of huge unemployment problems due to the slowdown in real estate and construction industries which resulted in slack demand for construction workers and other semiskilled and unskilled laborers (Table 2).
Table 2.
Impact of the crisis and E1 Nifio on employment (Percent of communities). Impact
No effect Retrenchment Closure
Middle income 15 39 31
'
and labor market
I I Urban poor
Fishing
I
Farming
43 14
50 13
18 23 9
Large-scale unemplyment Slack demand for laborers
8 15
29 43
13
9 5
(esp. construction workers) Longer working hours Job rotation Contractualization
8 31 8
57 14 57
13 25 13
9 5 5
15
14
13
8
29
13
Below minimum wage employment Reduced business operation
Sources:SocialImpact of the Regional FinancialCrisis, 1999,and Focus Group Discussionsl Household
incomes
Incomes declined for many households during the Asian financial crisis. More households seemed to have been adversely affected compared with those who benefited from the crisis. Available data also suggest that the poor suffered more. Simulations done by Reyes (1998) using the Micro Impact of Macroeconomic Adjustment Policies (MIMAP) models show that the economic slowdown due to the financial would have resulted in declines The percentage declines ranged and a high of 7.3 percent for the Results
crisis and the E1 N_o weather phenomenon in the average income for the different deciles. from a low:of 4.6 percent for the richest decile poorest deCile (Table 3).
of the 1998 APIS and the 1997 FIES tended
to support
the
simulation results obtained by Reyes, except for the richest decile. The data show that per capita income declined by 3._ percent in nominal terms and by 12.1 percent in real terms (Table 4). Moreover, the average family income of all deciles except for the richest decile decreased (Table 5). The percentage decline is greatest for the lowest income decile at 29 percent.
Chapter 6: Reyes et al.
151
The 1998 APIS also revealed that 17 percent of families experienced reduced wages. The richest 60 percent seemed to have been more affected as 18 percent of the families in this group had reduced wages compared with 15 percent of families in the poorest 40 percent. Household survey results indicated that 53 percent of households did not experience a change in income during the crisis. Thirty percent suffered reduction in incomes, while 17 percent had higher incomes during the crisis period. Half of the households in upland communities and 40 percent of households in subsistence farming communities had lower incomes. On the other hand, less than 20 percent of households in middle-income communities â&#x20AC;˘ experienced a decline in incomes. The major reasons cited for the decline in incomes were poor harvest mainly due to bad weather (38%), lower price for their produce (18%), reduced number of earning members (12%), reduced financial support from relatives (8%), and retrenchment from work (6%). Farming and fishing communities ranked poor harvest (52%) as the number one cause for the decrease in their Table 3.
Impact 1998.
of the financial
crisis on income
of households,
Decile
Percent change in income
1 2 3
-7.28 -7.08 -6,82
4 5 6 7
-6.65 -6.30 -5.87 -5,50
8 9 10
-5,06 -4.88 -4.64
by decile,
Sources: 1998Annual Poverty Indicator Survey,National StatisticsOffice. Table 4. Per capita income using
_orainal Real Sources: National StatisticsOffice.
the 1997 FIES and 1998 APIS. 1997 FIES 24,840 19,909
1998 APIS 23,949 17,494
Growth rate (3.6) (12.1)
152
Economic
Table 5.
crisis... Once more
Comparative annual income per family using the 1998 APIS and 1997 FIES, by income decile.
Income decile
I
1997Family Income
I and ExpenditureSurvey
Phihppines
123,008
Firstdecile Second decile Thirddecile Fourthdecile Fifth decile Sixthdecile Seventhdecile Eightdecile Ninth decile Tenthdecile
20,659 33,064 42,611 53,101 66,291 83,224 106,919 141,394 199,891 482,927
1998Annual Poverty Percentagechange Indicator Survey _] 121,438 14,644 26,852 36,689 47,211 60,176 76,641 100,170 135,051 196,018 520,928
1997-98 (1.28) (29.12) (18.79) (13.90) (11.09) (9.22) (7.91) (6.31) (4.49) (1.94) 7.87
Sources: 1997FIESand 1998APIS,National StatisticsOffice. income.
Households
from middle-income
communities,
on the other hand,
considered the reduction in number of earning members (61%) as the principal factor that contributed to the deterioration in their income. Among urban poor communities, reduction in financial support from relatives (35%) and retrenchment experiencing
from work (26%) were reduction in income.
the two most important
reasons
for
Seventeen percent of households claimed that during the period under review, their income had in fact increased. Among households in middle-income communities, 23 percent claimed an increase in household income. The major reasons that contributed to the increase in household income were job promotion (22%), increased number of earning members (14%), new or additional work (12%), favorable prices for their outputs (6%), and increased harvest coupled with good weather condition (3%). About 25 percent of households from upland communities claimed that part of their additional income was derived from winnings in gambling. A few households from the middle-income (6%) and urban poor (7%) communities, on the other hand, said that they availed of some credit to augment their income. In the middle-income community, over 60 percent of households said that their additional income came
primarily
from job promotion.
NeW or additional
work
(29%) and
increased financial support from relatives i36%) were the two most important factors that contributed to improvements in income of households from urban poor communities. Household
purchasing
power
Prices of goods and services increased significantly due to the drought and the financial crisis. Many FGD participants lamented that such sharp
Chapter 6: Reyes et al.
153
increases in prices were not matched by corresponding increases in incomes. Thus, the net result was a weakened purchasing power and a decrease in households' access to basic necessities. The focus group discussions and the household survey provided the following more detailed information on how households were affected by the increase in prices: a. There was a widespread spiraling of prices; some households were forced to forego buying/consuming some goods. The crisis forced more than 42 percent of households to refrain from buying certain goods they used to enjoy before. Ninety-three percent cited high prices as the single major reason that prevented them from buying these item_ (Table 6). b. In general, households maintained three full meals a day. Despite the hard times, 98 percent of households was able to maintain three regular meals daily. The decrease in the number of meals taken was in fact, more of an exception (Table 6). No one from the farming and fishing communities reduced the number of meals taken. Meals were reduced to two in 4 percent of urban poor communities and 2 percent of middle-income communities. Two percent now have irregular meals (Table 7). More than half of those who reported reducing the frequency of regular meals said that they were forced to do it since over a year ago. Thirty percent had been doing it for about a year. The rest were equally divided between those who were forced into it 6 months ago and those who went into it only a month ago (Table 6). c. There were major alterations in the household budget (Tables 6 and 7). tYome-larepared load. Forty percent said that the cost of preparing food for the household had increased. Sixty percent of the households from subsistence farming and 32 percent from middleincome communities shared this opinion. Majority said that the increase in food price in the market caused a 25 percent rise in household food budget. About a fifth believed that it was much higher. Half of commercial farming communities said that it increased by 10 percent. About 48 percent of upland communities thought it went up by 25 percent. Thirty percent said that it did not go beyond 10 percent. Others noted a 50 percent increase. In subsistence farming communities, 36 percent noted a 10 percent increase. However, an equal number said that it increased by up to 50 percent. On the other hand, 18 percent said that their food budget actually decreased. Most had 25 percent reductions. Many households from middle-income communities cut their food budget by 50 percent.
154
Economic
Table
6. Changes in household consumption communities, January 1999.
Item Stopped consuming some goods due.to High prices Not available Lost interest Others When reduced All times Sincelast monflx About 6 monflls ago About a year Over a year , Changes in number of full meals One in 1997 and now Two in 1997 One now Two now Three now Tkree In 1997 Two now Thzee now Irregular now Irregular in 1997 and now No reply Changes in household expenditures Dining out Not aware No d_ange hlcreased at most 10% up to 25% up to 50% Decreased at most 10% up to 25% up to 50% up to 75% over 75% No reply Food prepared at home Not aware No change Increased at most 10% up to 25% up to 50% over 50% Decreased
I Percent respondents of Total 41,6 93.3 2.2 0.6. 3.9
100,0 6.7 6.7 33.3 53.3
0,2 3.7 6.3 75,0 18,8 93.5 1.2 98.3 0.5 0.2 2.3
100.0 23.0 37.2 9.3 52,5 25.0 â&#x20AC;˘ 22.5 17,7 14.5 19.7 30.3 1415 21.1 12.8
crisis... Once more
and expenditures,
Item
I
Percent respondents of Total
at most 10% up to 25% up to 50% No reply
27.6 40,8 31,6 4.0
Children's clothing Not aware
100,0 6,0
No change Increased at most 5% up to 10% up to 25% up to 50% Decreased at most 10% up to 25% up to 50% over 50% No reply
35,1 28.8 23.4 40,3 22.6 13,7 18,6 23.g 20,0 38.8 17.5 11.4
Adults"dothing Not aware No dmnge Increased at most 5"/0 up to 10% up to 25% up to 50% Decreased at most 10% up to 25% up to 50% over 50% No reply children's transportation Not aware No change Increased at most 5% up to 10% up to 25% over 25% Decreased at most 10%
100,0 4.4 44,9 22.3 28.1 43.8 17.7 10.4 20.5 23,9 15.9 35.2 25,0 7.9 100.0 12.6 29.5 34.0 20.5 28.8 38.4 12,3 3.3 35.7
100.0 1.2
up to 25% over 25%
14.3 50.0
34.9 42.3 39,0 33.5 22.5 4,9 17.7
No reply
20,7
Others' transportation Not aware No change Increased at most 5%
all
100.0 9,3 23,0 29,5 21.3
Chapter
Table
6: Reyes
et al.
155
6. continued... Item
I Percent of Total respondents
Item
I
up to 10% up to 25% over 25% Decreased at most 10% up to 25% over 25% No reply
33.1 37,8 7.9 3,5 46.7 13.3 40.0 34,7
School fees and related expenses Not aware No change Increased at most 10% up to 25% up to 50% over 50%
100.0 12,1 6.3 48.1 38.6 42.5 16.4 2.4
Decreased at most 20%
3.0 61,5
over 20% No reply
38.5 20.5
Medical expenses Not aware No change Increased at most 10% up to 25% up to 50% over 50% Decreased at most 10% up to 50% over 50째/,, No reply
100.0 5,6 25,3 55.1 38.8 39.7 17,3 4.2 6.0 50.0 38.5 11.5 7.9
House rent, repair, and maintenance Not aware No change increased at most 10% up to 25% up to 50% over 50% Decreased at most 10% over 10% No reply
100.0 11.2 47.2 25.1 41.7 30.6 20.4 7.4 1.4 66.7 33,3 15.1
Utilities Not aware No change Increased at most5% up to 10%
100.0 3,5 24.0 62.1 15.0 40.8
Source : Social Impact of the Regional
Financial
I Percent of Total I rcspondents
up to 25% up to 50o/째 over 50% Decreased at most 10% over 10% No reply
27.7 11.6 4,9 2.8 58.3 41.7 7,7
Leisure Not aware No change Inc_ased at most 10% up to 25% up to 50% over 50% Decreased at most 10%
100.0 17.9 39,8 11,2 45.8 33,3 12,5 8,3 13.7 20.3
up to 50% over 50% No reply
47,5 32.2 17.4
Gambling Not aware No change Inc_ased at most 20% over 20% Decreased at most 10% up to 50% over 50% No reply
100.0 38.1 23.7 4.4 57.9 42.1 7.4 40.6 18.8 40.6 26.3
Food Education Medical Clothing TranSportation Housing Leisure
1997 1998 46,3 47.3 10.0 10.3 7,9 8,1 7.0 5.9 7.2 7.3 5.0 5.2 2.8 2.1
Crisis, Household
Survey.
156
Economic
crisis... Once more
Table 7. Changes in household consumption and expenditures, by type of community, January 1999 (Percent of total household respondents). Item
Commercial
" Upland
Subsis_nce
Pishing
Middle
.... Stopped conauming High prices Not available Lost interest
some goods due to
Others Changes
25,0 95`3
40,0 95.8
48,3 _3 10.3
45.8 88,9 3,7 ,3.7
6.7
4.2
10,3
3.7
100,0
100,0 1,7
100.0
100,0
38.6 100.0
II poo, 50.0 97.8
2,2
in number of full meals
All meals One in 1997 and now
100.0
100,0
Two in 1997 One now
5.0
8.3
3.4
1.0
4,5
Two now
33,3
lot20
50.0
100.0
100.0
Three now Throe in 1997
66,7 90,0
83.3
50.0 94,9
99-0
93,3
100.0
2.0 96,0
$.6 96.4
Two now Three now
100.0
100.0
98,3 100.0
Irregular now Irregular ill 1997 and now No reply
20 1.1 5,0
6.7
1.7
1.7
100,0 23,3
100.0 31.7
100,0 26,7
100,0 37-3
100,0 14,9
100,0 14,4
no change Increased at most 10%
35.0 15,0 66,7
33,3 8,3 40,0
28,3 16,7 60,0
39,0 1.7
39.6 8.9 44,4
45,3 6.7 30.0
tip to 25% up to 50% Decreased
22,2 11,1 5.0
40,0 20,0 10,0
20,0 20.0 18.3
100.0 10,2
22,2 33.3 30,7
16,7 35,3 21.1
182 #5.5
16.7 50,0
19.4 22.6
_3
16.7
32.3
21,1
15.7
19.4 6,3
1_8 57..9
Changes
in household
Dining out Not aware
expenditures
at most 10% tip to 25%
33.3
up to 50%
33.3
66,7
273 9.1
33,3
16.7 16.7
up to 75% over 75% No reply
1,1
21.7
16.7
10.0
11,9
5,9
14.4
100,0 1.7 33.3
100.0 5.0 25.0
100,0
]00,0
100.0
20.0
25,4
53,5
100,0 1.1 37,8
40.0 .qO.O
45.0 29,6
60,0 36.1
47.5 35,7
31.7 43.8
38,9 40.0
Lip to 25% LIp to 50% over 50%
33,3 167
48. 2 14.8 Z4
22.2 36.1 5,6
32,1 14,3 1Z9
3Z5 18.8
31,4 28.6
Decreased at most 10%
20,0 58,3
18,3 18.2
18,3 182
27.1 " 18,8
11.9 16,7
15,6 35.7
up to 25% up to 50%
16.7 25,0
45.5 36.4
63,6 18,2
50.0 31,3
33,3 5.0,0
35,7 28,6
Food prepared at home Not aware No change Increased at most 10%
5-0
6,7
1.7
3,0
6.7
Children's clothing Not aware
No reply
100,0 5,0
100,0 13.3
100.0 8.3
100.0 3,4
100,0 5.0
100,0 3,3
No change Increased at most 5%
33,3 33,3 30.0
26,7 23.3 35.7
30.0 31.7 21.1
37.3 30.5 22-2
41,6 26,7 18,5
36.7 28,9 19.2
up to 10%
2$0
50.0
36.8
33,3
40.7
5.3.8
up to 25%
25.0
I4.3
36.8
11,I
29.6
l,q..4
up to 50% Decreased
20.0 13.3
26,7
5.3 25.0
3t3 25,4
11,1 13,9
11.5. 13.5
at most 10%
25.0
25.0
20.0
20.0
14.3
41,7
up to 25% tip to 50% over 50%
5(7.0 125 12.5
18,8 37.5 1g.8
26.7 533
66.7 13,3
28.6 28.6 28.6
8.3 167 33,3
15.0
10.0
5.0
3.4
12.9
17.8
No reply
Chapter 6: Reyes et al.
157
Table 7. continued...
Transportation/or Not aware No change Increased at most 5%
children
up to t{_Yo up to 23% over 235% Decrea_nd at most 10%
100.0 11.7 30.0 30.0 33.3
1C0.0 183 33,3 23.3 11-8
100,0 21.7 13.3 45.0 2Z2
100.0 8:5 44,1 40,7 42
100.0 11.9 23.8 3"_7 21.2
3._3 33,3
11.8 _.
_.6 _7 Z4 10,0 50.0
3Z5 41.7 16,7 5,1 33,3
2Z3 27.3 2,1.2 2-0 S_0
13
up to 25% over25% No reply
1C0.0 6.7 34.4 30,0 _.6 2_,6 _._P $4,8 2.2
233
100.0 18,3
l&7 3G,3 10.0
_.7 1.7
_0 -29,7
I00,0 26.7
100.0 3.0
100.0 11-7
100.0 18.3
100.0 5.1
100.0 6,9
100.0 10.0
No change Increa_i at most 5%
31.7 23.3 3,q7
31.7 21.7 2.,tl
21.7 40.0 16.7
30.5 30.5 33.3
11.9 333 11.8
23.0 26.7 20.8
up to 10% up to25% over 25% Decrear_d at m_t 10%
28,6 2& 6 ZI 1.7
IS# 482 1_4 5,0 _7
¢,_8 37.5
278 389
2_S .1,4,1 a"_6 3,0 6d-_'
5_0 29..2
Transportatlon for others Not aware
up to 23%
-
or.,23% School fees end related expen_r. Not aware
5,1
33 C_-2'
_
._0
33,3
_
._s
._.3
38,3
30-0
16.7
285
44.6
40.0
100,0 10.0
100.0 10.2
100.0 13.9
100,0 8.9
7.9 47,5 27-I
14.4 47.8 &¢8
41,7 2_0 63 2.0
27,,9 1_0 23 1,1
lOO, o
No reply
33 ,_,0
100.0 133
100.0 16.7
No change Increased at most 10%
23.3 40.0 333
23.3 35.0 _i
20.0 51,7 29,0
13,3 67,8 3_0
up to 25% up to 50% over 50% Decreased at most 20% over 20%
,15.8 2_8 3,3 ,_0 _7.0
,?_6 1_3
,.¢_1 12,9
83 _.0 _,0
1,7 100,0
52.5 1_0 23 3,4 100,0
No reply
233
_0.0
10.0
3,4
282
27-8
100.0 5.0
100,0 16,7
100.0 3.3
100.0 6.8
100,0 2.0
1C0.0 33
No change Increased at most 10%
21.7 53,3 3Z5
20,0 45,0 37.0
18.3 61.7 4_6
27.1 57.6 3_2
35.6 $35 31._
233 58.9 41,$
up to 25% up to 50% over 50% Decreased at most 10%
375 1_6 9.4 6.7 ._0
2_6 I_ 14lB 83 400
32.4 1.89
_1 I_" 317 2.0 7000
41.5 17.0
15-0 W.d
41.3 176 _,,9 5-1 33-3
2_0 .
60,0 .
33.3 2Z2
M.3 33.3
13.3
10.0
12
3A
100.0 10.0 46,7 15.0 _2
IOID.O 23.3 433 183 27_
1[_1.0 6.7 60.0 233 3_7
3&4 36.4
_0 14.3
1.7 11_0.0
33 $0.0 _").0
Medical expends Not aware
Including medicine
up to 50% over 50% No reply Houserent, repair, and maintel_n_ Not aware NOchange lnc_a_ed at mo_t 10% up to 25% up k_5if'A., over50% Decrea_d at m(_t 10% over10%
ILl 44.4 22-2
100.0
100.0 153 49,2 273 4_8 4_8 12=¢
85
l_l_O
33 333 66,7
. 6.9
11.1
100.0 5.0 42,6 38.6 _2
100.0 11.1 4_,6 21-1 _-K
2,._6 IZ9 10.3 1,0 100.0
No reply
283
13.3
6.7
Utilities Not aware
100.0 33
100.0 5.7
100,0 1.7
1410,0 3,4
100,0 3,0
12.9
21,1 I,E8 10-5 2,2 _0.0 319.0 20.0 1_,0 33
No change In=:rea'_i at mo_t _%
20,0 (_3.3 13,2
40-0 40.0 ,2"9.2
23.3 71.7 2.3.3
27,1 66.1 1(L3
175 67.3 .K_
2111 61.1 l&2
up Io 10% up to 23% up to 50%
34.2 ,_L3 1_8
2._0 2_0 1_;
34,9 2._6 I¢0
53.8 23.1 Z7
4ZI 30,9 103
,R_0 3_9 RI
158
Economic crisis... Once more
Table 7. continued...
Decreased at mo_t 10% over 10% No reply
1.7 ]O/).O 11,7
3.3 100.0 10.0
Leisure Not aware No change Increased at most 10% up to 25% up to 50% over50% D_cr_ased at most 10% up to 50% over_l_, No reply
100.0 18-3 36,7 5,0 66.7 33.3
10,0 16.7 66,7 1_ 30.0
100.0
Gambling Not aware No change
100.0 38.3 23,3 1,7
Increased at mo_t 20% over _'Y,, Deo_a_ed at most 10% up to 50% over ..=0% No reply
100.0 1.7
100.0 28,3 43.0 6.7
1,7 100.0
3.4
I00.0 32.2 38.6 3.4 100.0
18.3
15,0 22_2 44.4 333 510
22.0 1_ 4 46,2 31iS 6.8
100.0 40.0 23.0
100.0 40.0 41,7
100.0 5Z5 23.7
3,3 ._0 ._0 6.7 7.,i0
5,0 _7. M,3 3.3 100.0
3.4 1(]0.0
2,_0 1.7
100,0
-2.$,0
35,0
25,0
8,9
3.3 66,7 33,3 11,1
100,0 7.9 343 19.8 450 3aO 1_0 10,0 18,8 26,3 47.4 2_3 18,8
100.0 13,6 36.7 13.3 SaO 1_7 2._0 8_ 12.2 1_2 3¢L4 _$ 22,2
180,0 36,6 14.9
100,0 2%8 21.1
3.0 80.0 20.0 3,0 2_.3
6.7 33.3 E_7. 17.8 3Z5
6a.7.
125 50,0 26,7
1,7 100.0 13.3 55,0 11.7 42.9 57.1
7ÂŁ0
3-0 100.0
100.0
10.0
10.2 1_7 1_7 65,,7 10.2
40,6
Source: SocialImpactoftheRegiortalFinancialCrisis,HouseholdSurvey. Over 50 percent of households from middle-income communities reported that despite the crisis, they were able to maintain their usual food budget. About 30 percent of the rest of the communities concurred with this view. Dining out. There were big cuts in dining-out expenses. About 18percent claimed that they decreased their budget for dining out. A fifth in this group reduced their budget by as much as 75 percent. Over 30 percent of households from middle-income communities and 21 percent from urban communities reported significant cuts in their budget for dining out. About a third said that reductions were up to 50 percent, while over a fifth claimed a more than 50-percent cut. Fifty-eight percent of urban poor communities cut their dining out expenses by more than 75 percent, Clothing. While over 30 percent of households said that they were able to maintain the same level of budget for clothing, some .29 percent averred that the budget for children's clothing increased. About 40 percent thought that the increase was between 5-10 percent. Over a third felt that the budget _creased by more than 10 percent. Meanwhile, about 19 percent of the households reported a decrease in their budgets for clothing. Thirty-nine percent reduced clothing expenditure budget by as much as 50 percent.
Chapter 6: Reyes et al.
159
Schoo//ees. Forty-eight percent had to shell out more for their children's education. Some 42 percent of the total households made 25-percent increases. Sixty-eight percent of fishing households allotted â&#x20AC;˘ more money. Of this, 53 percent increased budget for education by 25 percent. Fifty-six percent of urban poor households only made up to 10percent adjustment. Very few reported reducing their expenditures for this. Transportation. As much as 45 percent of households from â&#x20AC;˘ sustenance farm communities said that they had to increase the allocation for transportation of their children. Forty-one percent in this group and 33 percent from the middle-income group claimed to have increased their budget for their children's transportation by more than 25 percent of their precrisis budget. Medical expenses. Fifty-five percent of households had to increase their budget for health care to cope with increased costs of medicine and medical fees. About 40 percent increased their health care budget by up to 25 percent. Another 39 percent claimed a 10percent increase. Housing. At least 47 percent of all households had to appropriate additional money for housing expenses including monthly rental fees. Forty-two percent in this group said that they made up to 10 percent adjustment, while 30 percent claimed that they had to add up to 25 percent. Ut21ities.Among all expenditures, that for utilities was adjusted by the highest proportion of households. Sixty-two percent of all households said that they had to increase their budget for this expense item; 41percent claimed up to 10percent adjustment, while 28percent reported an increase of up to 25 percent. Among farming communities, at least. 15 percent provided up to 50 percent more than what they used to set aside before the crisis to pay for electricity, water, and fuel. Income distribution The combined effects of the financial crisis and E1Nifio reduced household incomes and contributed to a further worsening of the income distribution. Income inequality had increased as shown by the increase in the GINI ratio from 0.451 in 1994 to 0.496 in 1997based on the 1994 and 1997 FIES. The share of the poorest quintile to total income declined from 4.9 Percent to 4.4 percent during the same period. Meanwhile, the share of the richest quintile rose from 51.9 percent to 55.8 percent. The ratio of the richest quintile to the poorest quintile went up from 10.6 in 1994 to 12.7 in 1997.
160
Economic Simulations
crisis... Once more
done by Reyes (1998) show that the financial
crisis and the
E1Nifio weather phenomenon would have resulted in declines in average income for the different deciles but the percentage declines were greater for the lower income groups (Table 3). The lowest four decries experienced contractions in income ranging from 6.7 percent to 7.3 percent, with the poorest decile obtaining the biggest percentage reduction. The higher income groups were not spared either, although the richest decile suffered the lowest contraction of 4.6 percent. Consequently, the GINI coefficient increased, indicating greater income inequality. This pattern was also supported by!data from NSO. Notwithstanding differences in methodology, the 1998 APIB and the 1997 FIES showed that incomes of all deciles declined between 1997 and 1998 (Table 5). Furthermore, the share to total income of the lowest 90 percent decreased, while the share of the richest decile increased. The share of the poorest quintile went down from 4.4 percent to 3.4 percent, while the share of the richest quintile rose from 55.6 percent to 59.0 percent (Table 8). In 1998, the ratio of the richest quintile to the poorest quintile increased further to 16.4. Table 8.
Income
Comparative average monthly 1997 FIES, by income decile.
decile
1997 Family Income Value
and Expenditure Percent
(in P1,000)
iSurvey
using the 1998 APIS and 1998 Annual Poverty Value
Indicator Survey Percent
(in P1,000)
Philippines
145,482,668
100_0
145,429,030
100.0
First decile
2,443,310
1.7
1,753,661
1.2
Second
3,910,487
2.7
3,215,663
2.2
Third decile
5,039,661
3.5
4,393,773
3.0
Fourth
6,280,286
4.3
5,653,844
3.9
Fifth decile
7,840,237
5.4
7,206,445
5.0
Sixth decile
9,843,010
6.8
9,178,194
6.3
12,645,437
8.7
11,995,918
8.2
Eight decile
16,722,746
11.5
16,173,106
11.1
Ninth
decile
23,641,295
16.3
23,474,261
16.1
Tenth decile
57,116,200
39.3
62,384,166
42.9
decfle
decile
Seventh
Source:
Po
income
decile
National
Statistics
Office.
vel_
Income reduction and price increase i were expected to worsen further the poverty situation. While there had beeft a reduction in poverty incidence from 35.5 percent in 1994 to 32.1 percent in ]1997, the absolute number of poor _: families increased by 22,217 to 4.6 million fainilies. More than 70 percent of the poor or 3.3 million families lived in the rural areas.
Chapter 6: Reyes et al.
161
The household survey conducted as part of this study revealed an increase in self-rated poverty from 40 percent just before the crisis to 43 percent in January 1999. Some households sank below the poverty threshold while others moved above the threshold. Of those households who considered themselves poor in January 1999, about 10.3 percent were not poor before the onset of the crisis. Of those who were not poor after the crisis, 2.5 percent were poor before the crisis. More than half of households in fishing and upland communities rated themselves poor. Forty-eight percent of households in urban poor communities considered themselves poor. Only 21 percent of households in middle-income communities considered themselves poor in 1999. Thirty-eight percent of households indicated that their well being improved since June 1997; 30 percent said that there was no change; and 31 percent claimed that they were worse off. Sixty-two percent of households in upland communities said that they were worse off now. The corresponding figure for households in fishing communities was 53 percent and in urban poor households, 43 percent. The least adversely affected were the middle-income communities where only 20 percent were worse off. The surveys of the Social Weather Stations (SWS) also indicated an upward trend in self-rated poverty between 1997 and 1998. In the April, June, and September 1997 rounds, 58 percent of respondents considered themselves poor. In December 1997, the proportion rose to 63 percent and went up further to 64 percent in March 1998. In September 1998, self-rated poverty was 62 percent. While the increase in self-rated poverty incidence seemed small (3 percentage points based on the household survey for this study and 4 percentage points based on the SWS survey), it is still a cause for concern since poverty incidence was already high to begin with. Health,
nutrition, and population Expenditures in health are motivated by both consumption and investment motives. The consumption motive is driven by the fact that good health is necessary to enjoy other goods and services. Better health and nutrition are known to raise labor productivity as well as improve the performance of students (Behrman 1990). These considerations underlie the investment motive. Essentially, for almost identical reasons that people invest on education, people also invest in their health and that of their children. Fertility, on the other hand, has a direct impact on the health of the child and the mother, and is likewise affected by the health and nutrition status of the mother. In times of a crisis, people tend to become shortsighted and are prone to foregoing expenditures when benefits accrue only over the longer term. For instance, preventive care and expenditures on public health is often sacrificed in favor of curative care.
162
Economic
crisis... Once more
Using macroqevel data, Lira (1998) pointed out that infant mortality is positively correlated with inflation rate and negatively correlated with GNP per capita. General mortality rate, on the other hand, is positively correlated with unemployment rate and negatively correlated with a 4-year moving average of GNP. These imply, Lim pointed out, that the crisis, which is characterized by decline or stagnation in GNP and higher unemployment, higher infant and overall mortality rates.
meant
Using household data, Orbeta and Alba (t999) have computed larger income and price elasticities of demand for outpatient care for poorer households compared with richer ones. This means that a price increase (one of the primary effects of the financial crisis) will adversely affect the demand of the poor for outpatient care more than the rich households. In addition, home care and public clinics have income elasticities that are negative, which means that households consider these sources of care as inferior. Thus, a decrease in income Clue to the crisis clinic. crisis home crisis.
is expected to increase dependenc e on home care and in public/charity Using this model, Reyes and Mandap (1999), simulated the impact of the on the choice of outpatient care: The study ,pointed out fhat demand .for care and health care public/charity clinics will increase because of the This meant that more resources are needed in public clinics to meet this
increased demand. Using a similar model for food demand in Orbeta and A1ba (1999), Reyes and Mandap (1999) simulated the impact of the crisis On nutrition. They found that the crisis had a negative impact on macronutrient availability. Hence, prevalence of.mah3utrition is expected to increase because of the crisis. FGD results showed that participants believed that in response to the crisis, households had given less priority to health care. In particular, participants had observed the following: (1) an increase in malnutrition or a decrease in "nutritional status" among children, (2) a trend of decreasing weight among children, and (3) an increase in illness and a general weakening of resistance and vulnerability
to illnes s. It was also mentioned
that parents often left children
to fend for themselves because of the pressing need to work. Other participants, however pointed out that children were often times shielded from adjustments that households
needed
to make, particular!y, in terms of food intake.
The FGD also pointed out deterioration in health services as one of the key effects of the crisis. One of the primary iaspects of this was the absence of medicine that used to be more abundant land free at local health centers. Accordingly, this had rendered these institUtions virtually useless except for prescribing pain relievers and referring patients to hospitals that they could illafford. In addition, facilities became even more poorly maintained, feeding programs were suspended, longer free.
and some serviqes (e.g., pregnancy
tests) were no
Chapter 6:Reyes et al.
163
Household survey results, on the other hand, indicated that health centers continued to be accessible. Only 3 percent of all households believed that health services had worsened while 26percent reported improvement in service. More households in poorer communities stated that government health services had improved: 33 percent, 27percent, and 26 percent,respectively, among subsistence farming, fishing, and urban poor communities compared with 18 percent in middle-income communities. In addition, households reported that health workers continued to be available and even increased in some areas.Households, however, agreed that prices of medicine and medical fees had increased. Respondents estimated that the price of medicine increased by 20 percent on the average. For medical fees, they estimated some 50 percent increase in hospital and private clinics. Key informant interview results showed that the number of immunized children and pregnant women given tetanus toxoid vaccination did not decline on the average. If ever there were any declines, these were experienced mostly in depressed communities such as upland, subsistence farming, fishing, and urban poor communities. The number of health facilities and personnel were mostly not affected. The observation in the FGDs that more people were getting sick was also shared by key informant interviews although they differed in their assessment of the availability of health facilities and personnel. Finally, the key informant interview confirmed that cost of medicine and medical services had increased. In terms of nutrition, key informant interviews showed a couple of surprises. First,the number of malnourished children declined contrary to the impression highlighted in the FGDs. This was true in urban poor and upland. communities, but not in subsistence farming and fishing communities. This was surprising because food-producing areas were expected to have less malnutrition. Second, the number of baranga.y scholars supported by communities increased rather than decreased in all communities. Again, this was contrary to the observations made in the FGDs. To give a broader view of the problems highlighted by primary data sources, monitoring data using the DOH Field Health Services and Information System (FHSIS) were also gathered for regions covered by the FGDs. Many of the regions, however, were not able to submit complete data for the whole 1998. For the immunization program, six of the 12 regions covered by the FGDs were able to complete their 1998 report. Five of the six regions reported a decline in immunization coverage even if three of these five reported increases in the number of immunized children (Annex A). The crisis may have affected the ability of the system to respond adequately to increasing demand for immunization even if some were able to increase the number of fully immunized
164
Economic
crisis... Once more
children. These were insufficient to improve on previous immunization coverage records. This failure to push forward the immunization coverage could be a sign of the decline in health services due to the crisis highlighted in the FGDs. For the nutrition program, the FHSIS 1998 data was complete for six of the 12 regions covered by the FGDs. Of these six, only two regions (CAR and Region 7) reported increases in both number and proportion of moderately and severely malnourished among children 6-59 months old (Annex B). This corroborated results of the household survey and key informant interviews and did not support the common impression given in the FGDs that malnutrition among children has increased. The effects of the crisis on family planning
practices
were not discussed
in the FGDs nor were these covered in the key informant interviews or household surveys. The only information source that can give an indication on what happened to family planning practices during the crisis were the National Demographic Surveys (NDS) done by NSO and Macro International in 1993 and 1998 and the Family Planning Surveys (FPS) done by NSO in 1996 and 1997. Table 9 shows a declining trend in contraceptive prevalence rate (CPR) from 1996 to 1998. It is therefore difficult to attribute the decline in CPR between 1997 to 1998 to the crisis. However, it is clear from Table 9 that while the overall
Table 9. Contraceptive prevalent rate for currently married women, years old, 1993, 1996-98 (In preCent). Overall
By type
1993
40.0
Modern 24.9
1996 1997 1998
48.1 47.0 46.5
30.2 30.9 28.2
I
Traditibnal L 1511 17i9 1611 18.3
I
15-49
By locality Urban 43.0
Rural 36.8
50.7 50.0 50.7
45.5 44.1 42.2
I
Sources:
1993National DemographicSurvey,NSOand MacroInternational; 1996,1997FamilyPlanningSurvey,NSO_and 1998 NationalDemographicand Health Survey,NSOand MacroInternational.
CPR was declining from 1996 to 1998, the proportion using modem methods was rising until 1997 before it declined in 3998. On the other hand, while the proportion of those using traditional methods was declining between 1996 and 1997, it increased in 1998. In terms of locality, while the CPR in urban areas was stable at around 50 percent, it declined slightly in rural areas between 1996 and 1997 and sharply between 1997 and 1998, IAlthough some of the differences may be due to methodological difference._ in the two surveys, these results
Chapter 6: Reyes et al.
165
pointed to two possible impacts of the crisis. One, the crisis had prevented households from using modem methods of contraception. ] Two, there was a drastic decline in contraceptive use in rural areas. For the family planning program, the FHSIS data for 1998 was complete for four of the 12 regions covered by the FGD. Of these four regions, three reported either a decline in current users or new acceptors or both (Annex C). This generally corroborated the results of the NDS and FPS, which showed that contraceptive prevalence rates had declined. In spite of conflicting data from various sources, the effects of the crisis on the health, nutrition, and population sector can be summarized as follows: (1) immunization coverage was adversely affected; (2) even if household eating pattern was affected, this did not result in a universal increase in malnutrition rate, particularly among children; (3) the use of modem family planning method had been adversely affected and contraceptive prevalence in rural areas had declined. Education The role of education in development has not been questioned. It is well known that education improves both the market and home productivity of individuals. Investment in education is also critical in poverty alleviation (Behrman 1990). Besides these private benefits, there are also large public benefits (particularly for basic education) in having an educated populace. However, these returns are evident only over longer time horizons. In times of economic crisis people tend to become more shortsighted and put less weight on those activities whose benefits only accrue after longer periods. This is exemplified by parents who ask their children to quit school and help augment sagging family incomes. Not only are households oftentimes shortsighted, policymakers likewise frequently fail to see beyond the short term. Several studies have related schooling indicators with variables that are affected by the crisis. For instance, based on regression estimates using aggregate data, Lim (1998) pointed out that enrollment rate in all levels is positively correlated with GNP per capita. In addition, elementary enrollment is positively correlated with real education expenditure of the government. Finally, college enrollment is positively correlated with unemployment rate. The crisis is expected to reduce income per capita and increase unemployment. Therefore, the crisis is expected to reduce enrollment in elementary and secondary levels. The impact on college enrollment, on the other hand, will depend on the relative magnitude of the effect of GNP per capita and unemployment rate. Based on 'The 1998 National Demographic and Health Survey reports that as much as 26.3 percent of respondents get theirmodern contraceptivemethod supplies fromprivate medicalsources,notably private hospitals/clinics (15.4%)and pharmacies (8.1%).
166
Economic
crisis... Once more
the larger share of elementary and secondary enrollment to total enrollment, Lim (1998) expects that the net effect of the crisis on human capital accumulation will be negative. Using household survey data, Orbeta and Alba (1999) also found a significant, albeit small, impact of income on enrollment rates of children 7q4 years old even among those belonging to the bottom 30 percent Ofthe population. In addition, the study also found that enrollment of this group is highly responsive to pupil-teacher ratio that is obviously dependent on government expenditure on education. Using the Orbeta and Alba (1999) model to simulate the impact of the crisis on enrollment, Reyes and Mandap (1999) pointed out that the negative effect of the crisis on income had a detrimental effect on school attendance. This result was validated by a special survey of schools in Metro Manila by DECS which revealed an increasing number of students dropping out of school and DSWD's observation of an_increasing number of street children. Of course, this study will later point out that this is not only true for Metro Manila but for the whole country as well, particularly at the secondary level. In the FGDs, participants identified decline in enrollment, higher dropout rates, increased absenteeism, and decreases in student participation in special school activities as negative impacts of the Crisis. Many families were reported to have difficulty coping with increases in tuition fees and other school expenses (school materials, uniforms, food, and trans )ortation money). The reasons cited for increases in absenteeism included: (1) he need for children to help out in farm work to save on labor costs; (2) need For children to watch over younger siblings while parents were at work; and 3) lack of basic school supplies and money for allowances, transportation, an lodging. Absences were noted to have resulted in poor grades and poor qual: ty education. Attendance in special school activities, such as scouting, also declined because it meant additional expenses. Finally, the decline in food and transportation money resulted in skipping of breakfast and sometimes children walking to school. All of these, participants added, contributed to the decline in children's interest in school. The household survey showed that the proportion of those quitting school due to financial reasons was 60 percent. This proportion ranged from 8.3 percent for commercial farm communities to 55.6 percent for urban poor communities (Table 10). Those who quit school to 1oo14for employment ranged from 4.8 percent for middle-income communities t6, 13.6 percent for commercial farm communities. Other reasons such as helping in the farm or helping in household chores were mentioned by less than 10 percent of households. Thus, financial difficulties had forced many households postpone schooling.
tO ask their children to either quit or
Chapter 6: Reyes et el.
167
Table 10. Reasons for changing school, by type of community, (In percent). Commercial
-
Financial Graduation
I to higher grade
8.3 75,0
Change of residence Source:
Social
Impact
Upland
Subsistence
40,0 60.0
40.0 60.0
I I
[
16.7 of the Regional
The household
Fishing
40,0 50.0
I
Middle income
10,0
Financial
Crisis,
Household
January 1999
25.0 10,0 65.0
Urban poor
I
55.6 33.3 11.1
Survey.
survey also revealed that more households
expected that
enrollment in public schools would increase and that in private schools would decrease. Many survey participants also expected that there would be more school dropouts although more than half had no opinion about this issue. Among the primary reasons cited in the FGDs as the cause of higher dropout was the high out-of-pocket costs. Substantial proportions of these outof-pocket expenses were for transportation costs and school projects. This observation was confirmed by estimates from a 1995 FAPE survey cited in Maglen and Manasan (1998). percent of total expenditure per respectively. FGD participants were inaccessible. For instance,
Transport costs comprised 16 percent and 27 student in private and public secondary schools, also mentioned that public secondary schools it was mentioned that students had to walk as
far as 7 kilometers to reach the highway and paid P20 for a round-trip fare to go to school. While FGD participants volunteered to give estimates on the extent of decline in enrollment and dropout, these were deemed less reliable so data on enrollment and dropout _ in the locality were taken via key informant interviews and administrative reports of the city, provincial, regional, and national offices of DECS. Key informant interviews covered schools in the locality where FGDs were conducted. Key informant interviews showed that total elementary school enrollment rate increased in all but one community between school year (SY) 1997 and SY 1998. Total elementary enrollment even grew faster than the growth in Grade 1 enrollment (4.7% vs. 3.4%) indicating that households postponed entrance of children to the school system for better times. Even if there was almost an even growth in number of boys (3.1%) and girls (3.6%) entering Grade 1, still the growth in enrollment rates for boys (6.4%) was higher than those for girls (2.9%) for the total elementary grades. Declines in enrollment rate were observed in urban poor communities (-10.0%), whereas middle-income communities showed positive enrollment growth (15.4%). At the high school level, the total enrollment rate increased by less than 1 percent, with girl's Because of the small magnitude, dropout rates gathered reliable. Hence, these were not included in the discussions.
at the
school
level
were
deemed
less
168
Economic
crisis... Once more
enrollment even declining by 1.6 percent. Again, localities showing declines in enrollment growth in secondary schools were depressed ones such as fishing (-10.6%) and upland (-11.9%) communities. The 1998 APIS asked households about their responses to the crisis. Survey results showed that a small proportion (6.9%) of households had taken their children out of school. This proportion Was higher for the bottom 40 percent (7.5%) compared with the upper 60 percen_ (6.4%). Based on administrative reports from DECS, total enrollment in elementary schools continued to increase by 2.0 percent between SY 1997-98 to SY 1998-99 (Table 11). This was lower than the growth rate of enrollment, which was usually about the same as population growth. Growth in enrollment in Grade 1, however, declined by 2.0 percent indicating that families had postponed the entrance of their children into the school:system. This was true in all regions except for Region 4. Only total enrollment in public schools increased, with private school enrollment declining. At the secondary level, while enrollment growth between SY 1997-98 and SY 1998-99 was positive and higher than the growth between SY 1996-97 and SY 1997-98, this was lower than its historical average.
Only enrollments
in public secondary
schools increased
while total
enrollment in private secondary schools declined by an average of 5.4 percent. Positive growth in private secondary school enrollment was seen in only two regions (CAR and APaMM). However, considering that enrollment in private secondary schools had been declining since the enactment of the Free Secondary Education Act in 1988, it was difficult to att]:ibute this decline in enrollment in private secondary schools to the financial cycle, there was a decline in enrollment indicated that households were also secondary enrollment while postponing
crisis. Again, similar to the elementary growth in first year high school. This allo_ing older children to continue the enrollment of new entrants.
Dropout 3 data showed that the crisis!may have affected only the public secondary grades (Tables 12 and 13). Elementary grade dropout rates declined for both public and private schools. For secOndary level, dropout rate declined for private schools but increased by 15.6 percent for public secondary schools. Even if figures from different data Sources did not match, still it was clear that the crisis had the following effects! (1) enrollment in both elementary and secondary school levels had increase d at a lower than usual rate, (2) households had allowed older children already in the system to continue, but postponed the enrollment of new entrants both at the elementary and secondary levels, (3) dropout rate of those already i_ school was not affected in the elementary and private secondary school but increased in public secondary i schools, and (4) children
had smaller food _nd transportation allowances. i 3This consists of the proportion of enrolled students Who did not continue to finish the school year,
Table 11. Percentage change in elementary enrollment, by region, 1996-99. Percentage change Public Region I II III IV V VI VII VIII IX X XI XII XIII NCR CAR ARMM Total
1996-97 to 1997-98 Private
Total
Grade 1 Total (1-6)
Grade I Total(1-6)
.ox 1997-98 to 1998-99â&#x20AC;˘ Private
Public
Grade I
Total (1-6)
-3-3 -3.0 0.0 0.8 0.6 -2.2 -3.5 3.6 0.4 -0.9 12.2 -21.6 2.1 1.2 -125 2.1
0.8 2.4 2.8 4.9 1.6 4.2 0.5 2.1 2.7 4.7 15.6 -19.9 4.1 325 225 45
4.0 -2.3 5.4 5.9 -2.6 11.7 -1.3 -2.1 325 -7.3 7.0 1025 16.8 0.4 -6.0 94.8
4.0 3.0 6.9 7.2 0.1 11.5 3.2 1.0 525 -1.6 9.5 14.6 6.1 1.9 -7.9 3Z6
-3.0 -3.0 0.4 1"2 025 -1.7 -3.4 3.5 0.5 -1.2 11.9 -20.5 2.5 1.0 -1.9 2A
1.0 2.4 3.2 5.1 I25 45 0.7 2.I 2.8 4.4 15.2 -l&4 4.1 3.1 1.6 4.7
-1.7 -1.5 -1.7 -0.1 -0.2 -2-3 -2.6 -4-3 -4.4 -2.4 -1.6 0.2 -5.6 -0.4 -4.0 -2.4
0.9 1.6 225 2.8 2.7 025 2_q 1.9 -0-3 2.9 2.0 2.7 1.5 3.4 1.6 6.2
-3.2 -1A 1.8 325 1.8 3.8 -17.9 4.9 8.1 -3.8 -1.4 -11.9 -23.0 -10.7 -1.9 -30.9
-0.2
3.1
3.3
4.6
0.0
3"2
-1.8
2.2
-425
_prelim/nary, as of 3 June 1999. Source: Department of Education, Culture and Sports.
Grade 1
Total (1-6)
Grade 1 Total (1-6)
_.r_
Total Grade I
Total (1-6)
2.6 43 3.7 7-3 2.4 2.4 -4.9 11.7 9-3 -0.6 1.9 -16.4 -8.1 -5.4 1.4 3.0
-1.8 -125 -I.4 03 -0.1 -2.0 -3.4 -4"2 -4.1 -225 -1.6 -0.4 -6.1 -2.7 -3.9 -2.7
1.0 1.7 2.6 3_3 2.6 0.6 1.9 2.1 0.0 2.7 2.0 125 1"2 1,3 1.6 6.1
-0.I
-2.0
2.0
Table
12. Percentage
change
in high
school
enrollment
by region,
1996-99.
Percentage change 1996-97 to 1997-98 Public
1997-98 to 1998-99"
Private
Total
Public lstyear
Private
Total(I-IV)
lstyear
Total
Region
lstyear
Total(I-IV)
lstyear
Total(I-IV )
lstyear
Total(I-IV)
Total(I-IV)
!styear
Total(I-IV)
I lI IU IV V VI VII XllU IX X XI XII XIU
-014 1.5 3.1 4.1 1.6â&#x20AC;˘ -0.1 6.3 4.4 -6.4 10.2 13.8 -15.6 12.8
1.6 3.7 4.1 Z9 -1.9 0.4 7.7 &3 -83 6.6 1Z I -l&l 11.4
-4,8 -9.9 4.9 -2.8 4Z2 -53 -1.1 -6.6 11.6 -11.0 8.6 -2&9 -2.1
-3.7 -6.0 -4.8 -1.5 -10.2 -3.7 -0.5 -4-4 20.3 -7.1 14.4 -18.1 1.6
-1,2 -1.1 0.5 1.9 -1.1 -1.0 4-2 2.7 -3.8 3.6 12,7 -19.2 9.5
0.5 1.2 0.8 1.3 -3.8 4).4 5.0 -0-6 -3.5 1.8 12,7 -1&1 8.9
2.1 1.4 2.4 4,5 4.6 -82 5.0 4)_2 -1,2 1.1 4,7 Z9 12,4
1.6 1.6 3.8 6.2 6.2 -6.3 8.4 3.4 0.2 4.3 7.3 2.9 15.0
-1.6 -4.7 -2.8 -5.9 -6.0 -2&4 -2.5 -5.1 -24.8 -2.5 -4.8 -11.4 -5.3
-2.8 -6.2 -3.1 -4.8 -7.1 -16.7 -2.4 -6.6 -22_3 -2.8 -11.9 -11.0 -5.1
1.4 0.2 0.8 1,3 2.7 -10.3 3.0 -0.9 -5.2 0.1 2.8 -0.5 8.9
0.7 -03 1.4 23 33 -8.3 5.1 1.7 -4.5 2.0 2.4 -1.1 10.3
NCR CAR ARMM
-0.1 -1.8 21.2
0.2 -2.8 13.7
-4.4 -1t.3 5.7
-3.I -7.3 -0.1
-1.5 -4.7 18.3
-0.9 -4.3 10.9
-1,0 7.7 -1.4
1.1 9.6 0.7
-9.6 3.5 -5.4
-2.0 5.8 7.8
-1.8 6.5 -2.1
0.0 8.4 2.0
2.6
1.9
-4.9
-2.6
0.7
0.6
1.7
3.4
-5.8
-5.4
-0.1
0.9
_ _. _"
_. Total
*preliminary, as of 3 June 1999. Source: Source: Department of Education, Culture and Sports.
: O
.e,. Table 13. Elementary
dropout
rate, by region,
1995-1998
(In percent).
Q
Level 1995 -96
1996 -97
Region
Public
private
Total
Public
[ I] IlI IV V VI VII VIII
3,26 7.10 4.22 4.72 7.08 10.20 7.52 9.25
4.50 7.07 3.39 7_25 10.94 3,22 4.03 7.56
3.18 7.09 4.15 4-50 7.19 9,92 7,35 9,7.2
10.82 6.66 8.72 11.29 11.70 4.11 7.77 22.96
5.35 14.95 3.13 3.55 12,27 0.43 6.93 3.54
7.66
2.90
IX -X XI XII XIII NCR CAR ARMM Total ,Source:
Source:
Department
Percentage 1997-98
1995-96 to 1996-97
change 1996-97 to 1997-98
Total
Public
Private
Total
Public
Private
Total
Public
4.77 7.42 4.99 6.91 8.26 10,16 5.75 11,50
4.59 0,07 2.76 3,44 :3,84 2.77 9.42 3.96
4.76 7.20 4.79 6.59 8.14 9.87 5,96 11.38
4.71 6,83 5,24 4,39 7.00 7,39 9,32 10.65
4.48 5.64 1.90 1.80 5.29 6.25 6,98 8,37
4.70 6.79 4.95 4.15 6.96 7.34 9.19 10.61
46.32 4,51 18.25 46.40 16`67 43,39 -23.54 24,32
2.00 -99,01 -18.58 52,89 --64.90 -13,98 133_75 47,62
49.69 1,55 15.42 46.44 13.21 -0,50 -18.91 23,43
-1.26 -7.95 5.01 -36.47 -15.25 -27.26 62.09 -7.39
-2.40 7957.14 -91.16 -47.67 37,76 125,63 -25.90 111,36
10,68 7,10 8.37 10,97 11.72 3,17 7.69 22.80
13,2I 9.92 9.85 12"40 7.51 4.6t 6.98 21,10
1.57 4.20 8,88 6.87 5.05 3,81 2.24 7,48
12.96 9.65 9.79 12.17 7.44 4.41 6.58 20.98
12.69 8.03 10.33 9.60 8.15 4.51 7.64 19.79
4.61 8,04 1.58 1.50 6.09 3,90 12.72 23.69
12.51 8.03 9.78 9.26 8.09 4.36 8,07 19.82
22.09 48.95 12,96 9.83 -35.81 12.17 -10.17 -8.10
-70.65 -71.91 183_71 93.52 -58.84 786.05 -67.68 111 ._0
21,35 35.92 16.97 10.94 -36.52 39.12 -14.43 -7.98
-3,94 -19,05 4.87 -22.58 8.52 -2.17 9.46 -6.21
193.63 91.45 -82,21 -78.17 20.59 2.36 467.86 216.71
-3.47 -16.79 -0.10 -23.91 8.74 -1,13 22.64 -5.53
7,31
8.37
4,22
8,06
7.70
3.93
7.42
9,27
45.52
10.26
-8.(_
-6.87
-7.94
of Education,
Culture
Private
_"
Private
Total
-_
-1.261 -5.69 9.34 -37.03 -14.50 -25,63 54.19 -6.77
and Sports.
,,q
172
Economic
crisis... Once more
Vulnerable groups Farming comm unf ties Farming communities
had to absorb 'the impact of two crises: the Asian
financial crisis and the E1Nilio weather phenomenon. Farmers largely attributed the significant reduction in the volume of their output to the E1 Nffio weather phenomenon. Although the upland and rain-dependent farmers were the hardest hit, even irrigated farms were not! spared. Many irrigation facilities failed to deliver water to farms due to the 10w level of water supply. A coconut community like Bogo, Tomas Oppus in Southern Leyte, observed that before the E1 Nifio, 150 kilograms of copra from 500 nuts was normally produced. Because of El Nifio, their 500 nuts could only give them 6070 kilograms of copra. Thus, they missed the opportunity to benefit from the very attractive copra price of P17 per kilogram compared with the P7 a kilogram in June 1997. The crisis had the following effects on the participating barangays,: 1. Prices of farm inputs increased--fertilizers, pesticides, animal feeds, farm labor, and equipment rental. The FGDs reported that price increases varied from 15 percent to 100 percent, with animal feeds and farm labor registering close to 100 percent increases. The cost of fertilizer during the last year and a half reportedly increased anywhere between 30 percent to as much as 60 percent. Farmers also observed an increase in transportation costs. Palay farmers from Bantol, Marilog, Davao City noted that because of poor road conditions, hauling a 50-kilogram sack of palay from the farm to the poblacion, which is less than 10 kilometers awa)_ was costly. The rate was P20 for transportation plus P10 for labor. To save money, some of these people made their wives and children do the work. Con sequentl_ school-aged children were forced to either absent themselves from classes or completely drop out from school. 2.
Price increases, coupled with the lack of sufficient capital (raised through savings or credit), led to the decline in the use of farm inputs, which contributed to the decrease in agricultural production. The increase in cOsts of farm inputs forced farmers to reduce the use of these inputs in their fie_ds. Some FGD communities even reported that farmers did not apply fertilizer at all. This might have caused the significant drop in agricultural output. In Sorsogon, for example, percent.
barangays
claimed
their production
went down
by 40
Chapter 6: Reyes et al. 3.
4.
5.
6.
173
Many families chose to temporarily abandon their fishing/farming activities to engage in odd jobs thatcould provide alternative sources of income, as reported by at least 20 percent of the upland and subsistence farming communities. Therewas selling of farmlands and other household assets, although others said this was not widespread. Insome FGDcommtmities close to urbancenters, there was an observed increase in land conversion or sale of farmlands. For example, in Barangay Opol, Malanang, Misamis Oriental, participants expressed their concern over the 1,897 hectares of timberland in their barang'ay which may soon be converted to agricultural land because the lease contract made by the government with farmers already expired last year. Residents had heard that the Department of Environment and Natural Resources was planning to award this land to some farmers. They said that once the area is declared alienable and disposable, the ecological balance in the area would most likely be adversely affected. Almost all farmers claimed that they could not sell their produce at good prices. FGD participants reported that the very unfavorable prices for farmers' produce further compounded their problems. As is the practice, landowners and/or traders were the ones dictating selling prices. The regional financial crisis further weakened the farmers' power to dictate prices for their produce. The government's decision to import huge volumes of rice and corn had been identified in many FGDs as the main reason for the very low buying price of palay and corn in 1998. Corn farmers, for example, said that before the importation, traders bought corn for at least P5.30a kilogram. During the last major harvest in September, however, corn was priced at only P4-4.50 a kilogram. Ev.en some big wholesale buyers in Mindanao stopped purchasing corn altogether. In Davao Cit_ palay prices went down from P6 per kilogram in 1997 to P4.30 per kilogram in 1998. Farmers also suffered from poor marketing strategies. At least 23 percent of all FGD farming communities said that their main problem in increasing farm income was either the absence of the market that would absorb their produce or the lack of information on efficient marketing systems. Most farming communities relied solely on their su/_'or traditional traders as their main market.
174
Economic
crisis... Once more
l_'slu'ng communities The recent financial crisis had a larger impact on the input and operating costs of fisherfolks. This was exacerbated by the already depleted traditional fishing grounds and the consolidation of resources in favor of the elite in the fishing industry. 1. Fisherfolks benefited from better market prices but this was more than offset by higher maintenance costs. For the positive effect, fisherfolks participating in the FGDs said that with the increase in prices came the increase in the market price for fish. This meant added income for the same level of output they used to get from their traditional fishing grounds. The negative effect, however, was that while the price for a kilogram of fish had increased, the cost of maintaining fishing vessels and gears also increased. The costs of oil and other intermediate inputs had increased accordingly. Most fishing communities said that the
2.
3.
increase in price offish could not compensate for the increase in cost of inputs. The higher cost of oil and gasoline prevented fisherfolks from expanding into new fishing grounds. Fisherfolks could no longer catch the same volume because the fish stock in traditional fishing grounds had been depleted. And, because of the increase in oil price, they could not venture into new fishing grounds. In some cases, the crisis also contributed various
economic
resources
to the consolidation
of
at the hands of the elite---endowed,
as
they were, with the financial capability to maintain such resources in productive use. Forty percent of small fishpond owners in Barangay Kalanganan, Cotabato City, sold ttleir fishponds to big pond owners. With the high prices of labor and fishing inputs brought about by the crisis, small fishpond owners found it impossible to repair fishponds destroyed by floods in 7998 and were consequently forced to sell out to.bigger fishpond owners. This widespread selling of ponds virtually altered the pattern production within the industry.
of ownership
of the means
of
Children and youth The efforts of poor families to cope with the crisis had serious effects on the welfare of children and the youth, compromising not only the health, education and over-all development of these young individuals, compromising the country's "social capital," the next generation the future of the country depends.
but possibly upon which
Chapter 6: Reyes et al.
175
Unhealthy changes in the diet caused malnutrition and weakened resistance among children. About three-fourths of the depressed FGD communities reported that their children, high school and college, left school either to look after younger siblings while parents worked or to become additional income earners. Young girls would work as salesladies or domestic helpers often in cities like Manila or Cebu. Young men would work as farm hands, or migrate to the cities to look for odd jobs. In the Bicol region, many of these children were recruited as household helpers in Manila and other urban areas. FGD participants expressed apprehension over the physical dangers that such young income-earners were exposed to. WoI'11 e_l
The crisis appeared to have reinforced women's proverbial "multiple burdens" forcing more women to take on, in addition to the role of wife/ mother/homemaker, the role of secondary income-earner doing odd jobs. Women were also additionally saddled with the need to stretch meager household budgets, tap various sources of credit, and find money to pay past loans. Trying to make both ends meet had also put tremendous strain on husband-wife relationships. Two FGD groups reported cases of domestic violence resulting from fierce disagreements or not.
as to whether the wife should work
Households' responses and mechanisms for coping withthe crisis This section discusses the responses of households to the East Asian financial crisis. Employment In general, workers affected by the crisis took two major courses of action: got government jobs perceived to provide a more stable employment, or struck on their own through formal and informal business ventures. A big shift in favor of government work was noted in farming communities. Before the crisis, only 4 percent of respondents were in government service. At the time of the surve_ close to 12 percent were already working in government offices. Increases of about 4 percentage pointswere also observed for those who entered household-operated activities, transport and utility industries, and factories (Table 14). Government and factory workers from fishing communities surged from zero during the precrisis period to 9 percent of the respondents after the crisis. An increase of 18 percentage points in the number of employed persons was also noted in the informal sector. Similarly, those engaged in business and personal services increased from 9 percent to 36 percent.
"-4 Ox
Table 14. Distribution of persons, 15 years and over, who changed work in the past work and type of community, as of January 1999 (In percent).
Place of work All sector Government Private office, bank Factory Informal sector Owner, household-operated Transport, utilities Store, business and personal service Commun/ty services (school, hospital) Others, rLe.c.
[
Former
Farming
Present
[
Former
100.0 3.8 7.7 3.8 7.7 7.7 7.7 23.1
I00.0 11.5 7.7 7.7 7.7 11.5 11.5 26.9
100.0
9.1
3.8 34.6
15.4
63.6
9.1 18.2
F_shing
Present
[
2 years, distribution by place of
Former Present Middle income 100.0 4.3 8.7
[
Former Present Urban poor
100.0 9.1
100.0 4.3
9.1 27.3
_
17.6 5.9 17.6 5.9
36.4
17.4 21.7 4,3 8.7 17.4
8.7 21.7
11.8
23.5 5.9 23.5
13.0 13.0
21.7
18.2
41.2
17.6
8.7
100.0
100.0 17.6 ll.8
{5 Source: Social
Impact of the Regional Fdnandal
Crisis, Household
Survey
_.
0
Chapter 6: Reyes et al.
177
In the urban poor communities, before the crisis nobody worked in government offices. During the crisis period, 18percent of the employed labor force had government jobs. There was also a 12-percentage point increase in business and personal service industries and a 6-percentage point addition to the informal sector. Affected workers in the middle-income communities took entrepreneurship as a survival route. Table 14 shows a 22-percentage point increase in the number of persons engaged in household-operated activities. Others moved to community service and business and personal service industries. FGD participants claimed that businesses like motor repair shops, appliance repair, and personal services (beauty and barbershops), felt a slump in business operations. Some entrepreneurs who used to operate in town or in business centers were forced to close shop because of the escalation in rent, increase in transport, and other operating costs. Some decided to conduct their businesses in their residences to cut down on overhead costs. About 25 percent of all household survey respondents cited the desire to change work as the majorreason for job shifting. Twenty percent cited the search for better pay and job stabilit_ Fifteen percent said that they changed work because they were either retrenched, dismissed, or their factory or place of work closed shop. Twelve percent said that their change of residence triggered the change of work. On the other hand, 10percent said that the irregularity of their former work compelled them to look for other jobs (Table 15).
Table 15. Reasons for leaving last job, all communities, January 1999. Reason Retrenched/dismissed/closure Seasonal Desire to change work Change of residence For better pay/job stability Others
[
Percent 15.1 9.6 24.7 12.3 20.5 17.8
Households with relatives working elsewhere received large financial support. About 28 percent of these households derived at least 50 percent of their income from relatives' remittances. Another 26 percent received anywhere from 25 percent to 50 percent of their income from these remittances. In upland communities, some 38 percent of households with relatives abroad said that at
178
Economic
crisis... Once more
least 75 percent of their income regularly came from relatives abroad (Table 16). Although remittances of these OFWs had remained the same, however, FGD participants had observed remarkable improvements in their lifestyles due to the peso devaluation. Extra money was usually spent for the home, either for the renovation of current residences or for the purchase of new ones. It was also observed that while most households had problems in supporting children's education, families of OFWs even sent their _children to better-known schools. In many instances, invested
these families
started
their own small businesses.
Some
their money i n real estate.
Table 16. Distribution of households getting financial support from migrant family members by percent share to total household income, all communities, January 1999. Share in household income
iI
i
Total
Percent 100.0
at most 5%
12.2
over over over over
18.4 15.3 26.5 13.3
6-10% 11-25% 26-50% 51-75%
over 75%
14.3
Source: Social Impact of the Regional
Financial
Crisis, Household
Surve)_
The increase in prices of consumer goods, and--in the case of farming/ fishing familiesmthe increase in prices of farm/fishing inputs, combined with low harvest and fish yield, and low selling prices, forced families to look for other sources of income by letting children or housewives work for a fee (Table
17).
Table 17. Household response to employment and labor market problems, January 1999 (Percent of commullities). Response
Middle income
'Urban poor
Fishing
Farming
Increased child labor
31,
71
75
59
Working housewives Seek employm_mt elsewhere Shift to home-based operations
46 15 8
29 14 14
50 25 1,3
18 18 9
l lri
Source: Social Impact
of the Regional
Financial
Crisis, Household
Stu'vey.
Chapter 6: Reyes et al.
179
tYousehold expenditures FGD participants reported various ways in which people coped with the crisis, particularly with the increase in prices of consumer items and other basic necessities. Some of the coping mechanisms included reduction and reaUocation of expenditures, borrowing, and selling of assets to compensate for reduced income. As a result of the financial crisis, household respondents were forced to make some adjustments in their budget (Table 18). Adjustments reflected the priority attached to a specific item of expenditure. Food received the largest upward adjustment to catch up with price increases of basic food items such as meat, vegetables, cooking oil, sugar, and other processed food items. Households also made upward adjustments in the budget for education, medical/health, transportation, and housing expenses. They sacrificed clothing and leisure in the process. In spite of the bigger allocation for food, households still had to adopt some changes in food consumption patterns. Many households did away with nonessentials such as softdrinks, ice cream, meat, coffee, etc. Others resorted to having only one viand per meal, and generaU)_ less meat and more of the cheaper food items such as dried fish and vegetables. Some resorted to backyard food production to augment food supply. Apparently because of poor harvest and unattractive prices for agricultural products, upland farm communities had to make the largest adjustment in food budgets. Respondents from these areas reported a 4-percent increase in the food budget. Fishing and middle-income communities made a 2-percent increase. Sustenance farm and urban poor households managed to keep their budget. Commercial farming communities reduced their food budget by 2 percent. To cope with the increased cost of schooling, majority of households in all communities increased the allocation for education. Subsistence farming communities made the largest adjustment of 0.6 percent. Fishing and upland communities had 0.5 percent. Commercial farming communities made a 0.2percent adjustment. Urban poor and middle-income households registered the lowest adjustment of 0.1 percent. The surge in medicine and medical fee costs also resulted in budget changes. Middle-income communities made a 0.6-percent upward adjustment in the budget for medicine. Urban poor communities made a 0.5-percent increase. Upland and fishing communities made a 0.4-percent upward adjustment. Two communities reduced their budget for medicine. Commercial farm community households scaled down their budget by 1 percent, while subsistence farming community
households
managed to shave off 0.4 percent.
180
Economic crisis... Once more
Table 18. Percent changes in household budgeting and poverty and wellbeing assessment, by type of communist, 1997-98. Item Household budget Food
[ Commercial
[ Upland
1997 1998 Education
48.0 46,3
49.5 53.3
50,7 50.4
49.9 52.0
38.5 40.4
46.4 46.7
1997 1998 Medical
11.6 11.8
9,8 10.3
13.1 13,7
10.9 11.4
9.4 9.5
7.1 7,2
1997 1998 Housing
8.8 7.8
8.1 8.5
8.8 8_4
8.7 9A
7.3 7.9
6.9 7.4
1997 J998 Clothing
2.9 2.9
2.9 3.1
2.9 2_8
5.1 5_3
9.1 9.5
4.5 4.6
1997 1998 'l'ranspca'tation
6,9 6.3
7.5 6.0
8.1 6.7
5.1 4.1
6.8 6.4
7,5 5.9
1997 1998 LeLsut'e
6.3 5.7
6.6 6.9
7,9 8.1
6.7 7.1
7.6 8.3
7.4 7.1
1997 1998
1.3 1.4
0.S 0,6
3,2 2.0
3.1 1.6
4.3 3- I
3.4 2.8
31.7 94.7 5.3
60.0 83-3 16,7
41.7 100.0
69.5 87.8 12,2
47,8 95.3 4.7
65.0
36.7
56.7
27.1
20.8 76,2 19.0 4.8 76.2
100.0
12.5 87.5
2.2 97.8
3.4
1.3 98.7 1.0 2_0
Poverty
amessment
Poor now Poor in 1997 Middle income in 1997 Rich in 1997 Middle income now Poor in 1997 Middle income in 1997 Rich now arid 1,997 No reply self rating Worst Worse Bad Neutral Go_M
of change
5.1 94.9
Social
Impact
3.3
3,3 i
8.3 11,7 10.0 41.7 23.3
20.01 20_0! 21.7 23.3 H,-7
1.7 11.7 20.0 51.7 10,0
5.1 11_9 35.6 22.0 16.9
4.0 4.0 11.9 25_7 30.7
12.2 12,2 18.9 2¢.4 24.4
5.0
3.31
1.7 3,3
8.5
16.8 6.9
7.8 -
in well-being
Bette_Much hnpr oved _ource:
100.0
of the
Regional
1_7
50.0
2.2
i
Financial
CrisisJ
Household
Survey.
For housing, four commtmities (urban poor, middle income, upland, and fishing) made upward adjustments from 0.1 _ercent in urban poor communities to 0.4 percent in middle-income communities. Commercial farm households kept the precrisis proportion of housing expenditure, while sustenance farm communities reduced their budget by 0.4 percent.
Chapter 6: Reyes et al.
181
Increased transportation budget was largest among households in middle-income communities at 0.7 percent. Fishing, upland, and subsistence farm households effected increments not exceeding 0.4 percent. Decreases were 0.6 percent for commercial farm and 0.4 percent for urban poor communities. The larger allocation on transportation was noted in spite of efforts to reduce transportation expenses. People resorted to more walking instead of riding vehicles; riding jeepneys instead of tricycles and taxis; segregating errands that entailed transportation expenses; and requesting neighbors going into town to buy whatever was needed. All households reported reducing their budget for clothing from 0.4 percent in middle-income communities to 1.6 percent in urban poor communities. Second-hand clothes were bought instead of new ones and use of hand-me-downs was resorted to. Ready-to-wear clothes were bought instead of having custom-made dresses. School children either had to use the old uniform or buy just one set. Budget for leisure was significantly reduced in urban poor (1.6%) and fishing (1.5%) communities. Households from middle-income and subsistence farm communities likewise made a 1.2-percent reduction. Sixty-three percent of households availed of credit during the past 18 months prior to the survey and credit was used as an additional resource, for variouas reasons. Of those who borrowed, 32 percent used the money to augment their household income. Twenty-seven percent went to support school expenses of children; 21 percent went to pay for medical expenses of sick household member(s); 19 percent used the money to buy household capital goods (mostly appliances); 16percent repaired their houses; another 16percent used the money to support household productive activities. At least 30 percent of borrowers from farming communities used the credit principally to support farm production. It is apparent from the pattern of credit use that at least 84 percent of the credit obtained by households (except for farming communities) was used for consumption purposes. It would not be surprising if many of these households would not be able to repay their loans later. The amount of credit availed is a clear indication of the financial difficulties brought about by the current crisis. Forty-four percent of those who availed of credit said that they borrowed more than what they used to borrow before the onset of the crisis. Informal lenders were the main loan sources. Of those who borrowed, only 26 percent obtained loans from banks. According to FGD participants, formal lending institutions were reported to have become more inaccessible during the crisis because of stricter lending guidelines, increased collateral requirements, and voluminous paper work.
182
Economic crisis... Once mare
When credit was not accessible or available, people resorted to selling assets to raise cash. About 17 percent of households surveyed reportedly sold some assets in the last 18 months. About 20 percent of them sold real property specifically land. Appliances and jewelry (18% each) were the two other properties often sold. Only about 3 percent sold their houses, most of them from fishing communities. The rest sold other household assets. In farming communities, 77 percent sold animals such as carabao, cattle, hogs, and goats, while 43 percent of the urban poor sold their jewelry. The most compel!ing reason cited for the disposition of properties was to augment household income (52%).Additional reasons were payment of school fees (11%),payment of health service fees including medicine (8%),and payment for loan (4%). Only 3 percent claimed to have sold some asset to provide capital for productive activities. Health and nutn?ion The FGD gathered information on household coping mechanisms. There was a general tendency to deprioritize health in household budgeting. Other coping schemes included reliance on free or cheaper sources of health services such as government facilities, traditional healers, self-medication, seeking assistance from barangay official.s and politicians, nongovernmental organizations operating in the area, and prayers. Health care from private practitioners or hospitalization had become aluxury. However, as mentioned earlier, the lack of medicine had often hindered access to public health care facilities. The 1998 APIS asked households about their response to the crisis_The survey revealed that 47 percent altered their eating pattern. This proportion was higher for the bottom 40 percent (51.4%) compared with the upper 60 percent (45.5%). As to the effect of this adjustment on nutrition, however, no indication was given. Educaa'on FGD participants pointed out thatl families resorted to several costminimizing measures just to keep their children in school. These include: (1) letting their children stay in public schools; (2) transferring their children from private to public schools; (3) asking younger children to postpone schooling to allow older children to finish a cycle so that they can in turn help younger ones to go back to school; (4) sacrificing basic necessities like sugar to save for tuition; (5) setting school allowance to minimum levels or letting children go to school without allowance and supplies; (6)letting children go to class without uniforms or with untidy clothes to save on soap; and (7) asking children t¢ walk to school to save on transportation expenses.
Chapter 6: Reyes et al.
183
Asking students to do part-time work was another coping mechanism used by some families. Students tended stores, worked as sales ladies or house help, or sell bottles and plastic bags. Conclusions The financial crisis, together with the El Nifio weather phenomenon, has affected vulnerable groups through reduced employment and higher prices, which resulted in lower real incomes. This in turn forced affected households to cope by attempting to look for other income opportunities, mostly in the informal sector, and to make adjustments in their spending and consumption patterns. Because of financial difficulties, their need for public social services, particularly health and education services increased. Unfortunatel)_ because of the fiscal crunch, social services especially in health suffered. Available data suggest that the impact of the crisis on households did not seem to be very serious. However, the social effects of the crisis are still just unfolding. Moreover, given that prior to the crisis, the country's human development situation was already less favorable than that in the other ASEAN countries, any further slippage, no matter how small, is a cause for concern.
Annex A. continued .... msrda pal_tlnd m',
_.:mt_d popu]alJun
et_t_ pOOh.
4,_11 .'_ gOl 46,883 44,861 6,08/ 10.545
7,_4 35,']_, 36,0_ 40,_07 4,847 8,8_,
158.9 9L9 77.0 91.2 _.7 _-'L5
1S,8_ 4L6-_ ,_.,611 7,4,39 6,520 2,785 5,443 5,500 4.144 5,b47 919 _ 308.,9_ 251,444
'_?_0 34,7131 36,539 6_840 6,543 1,_0 1,375 4,395 3.1_ 4,97_ _ 16@ _4,'g5? 2] 7,g6
_431 13,464 37,336 6,165 [9,gr37 18,1"75 ?,,572. 4,376 3,87_ 1_2,.,"_
mg_ue pq_
_ l_opula_an
_ _o_L
m_n_e I_
_ I_
e]_r_ l_
1996-1997
1997-L99_
1996-1997
i_r7-i998
o,.
Re_4 A_rcz-a _m'_m_ Cavi_ Lahore _e_hxLIJqUe •ac_d.sro 0o_ide_.lal Pa_aWs_ Quezcm Rb_ Rm_nthlun 1_n_ O1ty Cavl_ CRy ClW Lure-he (_¢)' _ Ch'y Sm Pab]o('I¢3' C_y • TramM_'th'_O._ !Regain4 _ _max:lk
5,036 _9.?Y/" 49,917 46D51 6,168 10,914
4,512 3&,9_' 44_¢P_ 43,554 5.132 10,2_
89.6 92.9 _3J 94.0 832 93.-.8
5,164 4_.6Y_ 53,146 47,890 6,255 ] 1.296
4_ 36,933 ,¢'/,220 44,90_ 4,546 9,307
83.0 90.9 8_.,9 93.8 7__? $2.4
-42.2 3-_ 24.6 65 59 !&3
-5.0 QO 5_0 3A -LI..4 @.l
A3.6 L1 17.0 3.1 4.4 [2.3
79.2 &_ _3 91_9 l_ ._.6 _ ;'9.9 _"_4 88.1 24.5 Z6_2 833 8635
16,473 41473 43.9"/57,541 6,689 2,?90 5,551 5,6_4 4,417 5,7B4 956 b_ 32_10,S _,[,J 59
12,7113 _ 41.910 5.2_9 6,341 3,001 5.599 5,342 5,755 5.._0q 942 865 2_0,_1. 243,0_,5
77.1 _3. 95.3 879 94_, I_YL_ 100.9 _42 _5.0 952. _ 123.6 90_ 9_.C_
17.07_ 43,335 46,472 7,64_ 6,_! P._W_ 5.662 5,_2 4,710_ 5,9_ _ 7J2 _1,740 271_
9,_ 11.7.24 _6,44! 4,428 6,532 7"_Y-_ 5,6_ 4,748 3,919 5,L41 1,_7 9Y:. 25_,28t 23_Q21
_ _.9 78.4 5"79 95.2 105.£ 1_2 81.1 83.2 _ 106.2 L:X3_ 779 87.7
09 0.4 14.7 -8_6 -3J _0_ 3071 _ 3 _l I0.7 3J8.7 4U..8 9.7 11.7
-13.0 -29.1 3.0 -L4 1.3 -11.1 4`4 .-6.7 112 9.9 -t 1.1 -ll
-17 -i.7 83 _.8 -5.5 80.4 _8._ I?.9 117 8.1 ._ZO 3_7.0 S3 7.5
_T._8 11,,,_07 _L2_6 5,147 !8,773 L_,7&5 |,gg'/ 4,755 4,356 119.594
9_2 _ 83.7 83.5 94.2 86,7 79.1 1_lg? 11.23 90.4
_.,9_. 13,_[ -'/,990 6..l_ 20,3b_. 18.602 .?,.5"? _ 4.,_0"/ 3549 136,_fi5
19.4_, LT,3_ 33._T3 6_4"7 15.6_. L_,JS. _. 2,121 5_ 4,7"_ 11),00_
72.3 _3 g'73 1_ .4 77,0 85.1 82-4 _ I19.7 833
17,_O 2,7'_9 14/:i_,B _ L_¢_60 1l._J.4 <_ 2,120 _!3_3 66,462
64`5 19.5 37,5. _P5.2 _i 603 YL7 'g=..7 59.3 48.3
-349 53 53 _ -169 0.4 6.2 -3J.,2 85 -53
16,170 11,818 1_.5 37,178 4_353 3,742 12.422
129A _.2 _ 86.7 973 97.4 L'_
1Z_,71 15,._4_ 15.557 412,47 4,7"0_ 3_D4 12_"_
g,.O_ 11,071 12,489 3_r'_ 5@,[_ 3,2_ 1_,4_0
6._,9 83.6 80_ 76.0 1403 _ 99.4
4,_,0 5,064 5j04 12;_22 16,444 1407 B/A7
353 37,6 33.7 27_o 586 35.? 67.5
-50.0 ,.,153 33 -11/, 463 -1_ 02
420_
3.729
91A
-7.4 -Z2 1.4 -0_ -12_6 -[2._
%_
-17.7 -30.2 0.4 -! .6 -0.7 -13.9 -2J. 7_ 4.6 -14`2 -5.7
seg_,,s ATh_y Ce_nmr'i_?qo_e _ Calm_.,Im_s Sam,._g'cm. ]_l_zCIT/ l.egaspl_ Chy ]l_km 5
27_0_ 14,06) _ 6.351 20,_'g// 19,03P 2,631 4,6_.1 4,Q21 13"/,4_.
-_,.4
-_.4 4.2 4__ 21,4 -183 -13 4.2 -_3.2 6.6 .7.3
.54.,_
_gtm_ A_em. An_l_us C_l_z _llo _ l:_n.'mlh.d O._" _
12.4_r2 13,0_ 15,364 47.896 4_',4_86 3,_,4 12,297 4,_6
4,114
10_.
%2,J_ 13,3_9 L%'Pr_ 43,6_ _ 3_5 12,764 4,1_
LS"_
453
_'.4
qS?L9
-50.6 -73 -9.7 -!Z3 44.7 -14.9 -1.6 -10.6
_33
O0 L_
Annex A. continued
....
oo o,, 1996
I5o_ceJ
No. or
CiP/ pc,2uial[o_
Cadiz CAty ]_(,Ro C_'ty
f{o. of
%,:¢ po 1.on.
_,>p_a_o_
5_444 9,531
142_7 93.7
3_50 10,333
3,656 3,043 3,$19 171.714
19Z_ 2.944 A049 • 164,_4
8;0.2 96_8 79_8 96.0
Bohoi Cel-ml Negros Ori_t_d _cluijt_r B_is City C_¢-/aoml _ly C_ 6il3, Oma_o City
2_08_ $1,687 25,319 2.213 1,923 1265 29,175 _37
24,664 3_685 2_4fi2 L510 1,589 904 19,299 2.655
D _%_ k_'_¢ City I_pu-Lat>u Ci_ •_an_.awe C_r_ T_ _la_ City. Tob._o City •_ 7
_ 5,384 5,5_ 2,065 3fl62 152"g_2
74649 5r61_ 6.6_a 1_3 972. 127,538
R_.w2.s Ci:_ ._a_C._ _o_ City. Sd_y City _egay Ci ._'2 • ,=g_aa 6 _ion
3_14 10.1 _4
popuh_n
199g
poput_0t_
199a f_o.o$
% c_ po_
l_pula_o_
poptd_an
3,712 9,883
96_4 9_ 9
3_7 1_,4_5
3,(_i[_ 3,769
3,753 3,043 3_962 3_ 177, _fi0
• 3.19_ 2,776 2,&IS 3,0_ 169,976
_.0 91.2 71.4 77.2 95.5
3._3 3._43 4.109 4,0_ 1_0,331
1.633 1,449 1_96 2,335 3O,_F/
_7._ 7L0 _K7 60.2 _17 71-5 95_7 109.0
28,_30 52_726 2"5_t I 2.2[_ 1,945 I,_g_ 2%486 2,476
23,_ I 44, _16 _,236 1_471 1_65i 1,0_7 16.967 _69_
_15 K_.7 8E2 663 _¢.9 a?-7 _ZIt I CgJ0
28,$82 53,[_6 26,311 22/3 1,_67 1.316 2@_0! 21516
22,704 45 2a%_ !1,193 1._7 122_9 i._517_,Oj 2,684
'918 104.4 1118 _.3 26.6 a5-4
_932 5_¢61 6,014 2;131 3_61 155,576
2,713 6,'1220 6,523 1,722 _.679 134,144
%._ pol_'_-
% c/rang ¢, mEnb_ 19S¢_-l_q
% c/m_
1997-1_
1996
1997
77.4 35-9
-31.a 28
-314 I__
424 47.6 48.6 58.2. 39.1
&? -5-7 -7. 2
6.0 -_ - 105
3.1
-00_
e, _,'-_pordo_ 1997- ] 9_
7
925 111.9 I_.5 8_ I_L_ 8&2
_._2 5_74_ 6A_2 2,199 _ 15_1,219
3127 6,133 6_5 1,9_9 _ 134.580
79.4 a4.2 _L5 66_3 65.5 TLg _4. ! 1_i7
E4 20-3 - 1.0 - 2_6 &9 l&[_ -121 L6
-1.6 16 -4.7 -0.3
-7.2 17.9 -2a_
-5.9 3.1 -005
LiT - 135_ 0-0
-_6 _6 - E6 - 003 -_9 -5-_ 1.6 -00 1
103& 106.g 1113 _&2 VZ2 85.1
_4 10.7 15 - 6.6 _&_. 5.2
15.3 -1.4 5.i 116 -_0 8_3
-0J 7.2 -3.8 -_ 27/_ 14
17.2 -4.6 3"5 g.2 -_ -L3
Region 8 _]k-an Le'_e De/_-x_on e L_y_e:De[ S/r _ast_ .Ssgmsr
49052 36.679 9,527 li ,065
3.a69 32.602 t 1,332 10,209
95,5 _19 I 1E9 92-3
4,139 37,/72 9,5_ 11,26_
3,717 30_%_ _,213 IO,7a2
Northex_ Samar Westcma Salm_ Ci_ _'y,::_ CSty City
14fi63 14.064 3,95_'9 4,akq7
10,917 13_195 4.562 #,515
77.6 9&8 115.2 1014
14,515 14,_ 4.044 _.496
9,810 12,516 3,209 4,554
3,326 94,5"17
63.8 91.7
5_411 I_,[]97
9717 94ll _6 9.t.0
T*_loh_nCi_y _z_h*n _
5,212 1_,02_
_o_ C.zra_ h_, /_fisa_d s Oceid emta]. /dll_c_ Odem=d
28.7'9¢ 2,063 7,763 15,319
28.116 1,9,;1 $_173 14,_7
Catmy_t De Oro City GLggoog City
13,420 2,655
t3,645 2,684
Oz,_t_ Ozam6s City
1,701 3,121
1,767 1,562
tOL7 lOLL 103.9 ._lO
4,22_ 38.07_ 9,5"27 ii,467
i,gl 3 7,415 3,$0_ 4,_6
4!9 19,5 36._ 42.1
-3.9 -5.4 -27.5 5.6
-&0 -71 -275_ 3.7
67.6 87J .'_'.3 1_l _
14,9_1 14,59_ 4,131 4,S_7
6,823 6,009 1,339 2,299
4"5.5 41.2 32.4 50.1
- 10.1 -5. l -29.7 I].9
-1__9 -6.9 -311 - LI
5,2_ g8./147
96.2 84"5
log5,618 _.215
• 33.4 3119
56_6 -6.1}
508 -7,9
29,3al 2._186 7,_ 15.643
26,_59 1,7_ 5_87 14,370
9/5 /L3.2 76.0 • 91,9
2.9,982. 2,1_ 7,_95 LT,975
27,520 1,914 1_5_ I4,56_
91.8 _.;g l&2 91.2
-44 -II16 15.7 0-9
14 103
14,016 2.684
_2,063 2,387
_16_ $_L9
14,613 _714
13.649 Lg_
_9.1 "/3.3
111.6 -11.1
8.2 -1&7
1,743 3,_i0
1,556 3,74/t
• 1153 8912
1115 99.0
ll_
1222 3.185
1,52._ 3,11_
_9_ _ ,g6=2 95.7
8&_ 97.6
1,737 35_767
114
_'_ • (_ ('_ _
-&3 -IL6 14.1 -L2
-G8
-153 lZl
005 -17.5
-14_ 9512
003 9ll ("1
006
•
+,
Annex A. continued .... 1996 No. st lmmmmaz_d l_ptd_daa
_city
Te_s_b_ ]_ 10 ,_ _mqpk,_ei_ _
%aL eli_"Ne p_
t_'sjp'Ne pop--on
11_/" No. Of t_mmteed p_d_
9_of el_ble l_i
I_p'ble p_a_tlan
1998 No+of inmmntzed p_th_m
%of clone pop_
% change, rarer,test
%c_mtge,_ _e_
199_1_T
1997-1998 21.9 -2.9 3.1
1996-1997
1997-1998
-11_ 4.0
20-5 -51 0.6
L_ 76_30
1,121 _,25_
_ 92.2
1,417 7_011 66,949
1,_ 69,952 59,95"/
70.9 895 89.6
1,435 _,_40 68,59d
1.27.5 67,018 61._.17
85.4 83.9 _-1
-I_3 -13
19,134 12312 3¢_5_
17e_93 11,519 29,739
_.5 9.21 $1.+
19,_47 IZ_23 +7,392
1(:_2/_. 11_ 3Z1_9
_ 89.7 86.1
20,173 17+731 _18,244
8.194 4_8_ 6,656
4{)+6 33.7 17.4
_.7 -1.7 S.2
-12D -2_ 5+q
87.0 92+6 893 _J
11
Cc_lo D_ _ DevaoDe,]NoNe De.-+ +"Oe.l _ O_y Genlmlmtl Sm-_tmCJty L1
20572 31,178 10_17 141,8_P
l_/:rKl 24,7,64 8,197 t 2g,065
89.8 79.4 79.5 _,+7
_063_ ]2, t,B2 10,_ 14_,661
18,[3_ _-'_J,+IB_ 9_83 127,141
LemmoDe] _r_ _m-<hCo41aba_ SlhanKudmm Co_ 'City
t_ _b,475 1_1_ 4_.2'4
9,$27 2),75B 12+815 4,666
_3 69.7 79.1 103.1
t3,877 2?,064 I8,762 4,848
9,9_3 _,10_ L3,203 5+2237
72.,80"7
$9,.211
Sl-_
74,880
63_9'_
"m_a_ m._ c++1`) ._ + -_+,_
8.._ +_+ +._os+'
+',+.so 1_+ m.m.s
m,.+. _z
e,zm +.T_ 1_o_
7,+.,_ 7..4;,4 lO.O+,
?1.7 9+--7 78_ IIZ7
.m.+ ++.+ 84..9 .m,._
2_J02 ._I_.L8 11,489 t49,_5
3.T_ L4,.W_ 4.782 46r897
17.7 433 419 _i.3
-1.9 20.0 L&9 SI9
-3._ t6.9 1L._ 3.1
14_15 Z_,707 17339 4,775-
4.7_4 11,192 9•762 1.,891
_t3.7 40.4 S_3 39.0
4-_ 5_ 3.0 12.2
2[ 33 _.4 9.2,
77,C14
+2,429
_,m+ +,ml lZ_
.+_,t 8 +at4 4.m_,
m..7 +3.+ 4Z_. 3+.2
6,+, m..o 7.4 _,.+,
-._ +._ -s"_.
4+.0
+.o m+.4 4.4 1+..+
-m..4 -.m..++ -mA -m.+,
Source: Department of Health.
O0 "-4
_
_ou0 ""s_.s.uo o_.u_ouoo._
,
N
_,_
_._
e_
!._
!,&'_
_
88[
Z
6gI
"Iv1_sa,¢_1:9 _ldvvlO
a_u, oou0 ...s_.s._o o_.vuouooH
06
_6I
-...-
_ _ sa_%_t:9 a_clvztD
J
ii
_. ___'_ooo_._o_o ,._o_ __,____ o_._ _o. _ r__o_.__o__o__
Annex B. continued...
'_ t',o I_D"
1¢x96 Mot_bj _t Provhh__fCJty CaF_z nm!.o . Me_o_ Ocddenial Gulmaras Bam]od C_ _O CRy Ca&_City ]lo_.oCity L_Carlota City "Ra_s City SanC*.dos City f:,_.yc_ Sagay City R_ion 6
Elig_l_ population
No.
_dy emderw,_ f,h! %
M_at_y, emd _-¢_ely _xc1_cwei_ht No. %
%
No.
62,4P9 174,445 168,711 _,_ 5_&_ 16_3"7l 15,511 2,414_ 14,1869 12,374 ]5.-53_
9,090 76,273 9,_24 2576 3,846 L._0 6,7"_, 5,7-:)3 _,455 L___2 2,312 908
14-5 43.7 5_ !6,5 7.7 9.3 43,6 _.9 2I .1 _A 1_-7 5.g
1,931 8,1_9 2_66t 244 417 70 495 _ 423 154 178 54
3.1 4_7 [.6 1.6 0-_. 0.4 3.2 0.9 0.6 1.0 IA 0.3
698,3[}2
137,983
19.g
16_542
2.4-
9,4_ 12_436
_ -59
l_lg2 ;3_104
!.0 1.6
10,L_67 15_740
856 431 34_27 57U 406 1,222
9_5 19-9 8.4 426 $.8 3_ 5.6
74 2_ 63 1,970 78 15 994
0._ _7 1.2 2-4 0-8 _1 4.5
9'32 1,213 494 06_97 648 42_ 2,216
169
2.(I
1141 84,462 11,705 _ 4,263 1590 Y,253 6,.!.20 1,4_ 1,406 2,490 9fi2 154,525
17.6 4&4 6.9 l&0 _5 9.7 46.8 14-8 _1_ 9.5 20-1 6.2 27.1
M,xi,_u_ly _der_e E_'bl e poyuhiltm _,26V _ 17_972 _6 50,949 16_00 15,_, _ _ 15,26-4 12,574 16_f,4 16,11D 723,7_
No,
Sev,_dy u_'_ et'_d _nt %
No.
No.
%
7,698 50,3_ I_,904 1_1 11_318 I_F57 _ 2,.29(1 71__1 _)_2 508 1,J_7 3_94113,914
12.2 28,6 ILl 7.7 29.2 1116 14-6 5.4 10._ 5_ 4- I 6.8 15.7
0.g 1.1
9,186 1(1_95
_,0 5.0
24 61 :31 5_6 375 15 111 48
0_ 88 0.6 _-6 3,7 El 0.5 _
:_$_ 572 _'r4 11,974 2,11.5 273 1,0s.3 1,690 372
9.1 7.2 5_2 14-4 21.0 ?-3 4-6 6-9 _.7
6.2
_3
_6
Lfl_3
E7
_.
zlT.1 19.._ 2._.4 25.9 10.7 29._ 2.L6
4_ 6,4_ 1_6 3,220 _3_ 4-_fi_ _
2.8 4_ 2.7 Y.O 5.6 7.3 $_
49.9 23_5 28,1 _.9 16.4 _6.4 _6.9
_"
11,9 5-2
6_4 _
_.6 15
21..2
20,_'_.
4-8
6.,_S 45017 17,084 _.1 ll_8_t_ 1,646 2189 2,098 _7U4 707 4_ _ 3,114 I_3_L_
10.8 25.5 10.0 5.6 2[.2 9.9 3_ 4-9 1Ct2 4-6 3.8 _ 19.4 14.3
86_ 5,._15 I,$2_ 343 515 111 I?'5 .?.]2 7 _5 43 _ 4_0 10,761
g_t2 _
7.2 _.9
924 2.073
8.6 fh5 4-6 13.7 17_5 2.2 4-1 6._ 3.7
%
Modemtdy ant se_dy unde_'_li
L4 3.0 L1 2_ L(1 0.F 1.1 0.5 0.1_6 0-3 30{).2 15
Ik-gio_ 7 Bo]_ Cebu
114_194 210,194
S/_¢¢ Hah_Ci_ Cardaon _ty Cebu C._, Dame C_y Du.mag_ ereC.ity Lapa-Lal_ Ci_ Ma._,z..,,_City Ta8b_,-an City
_9_ 7.818 5,144 _ 9,910 11,6_9 21,894
Toledo _
142L_0
199
1_
2_
0.2
16,476 149,_ _43 44_999 57,]91 $7_D5 16,1_2
3,160 37,061 12,11(1 11,5_ 1_q51 19_1_ 3,1_I
_8,9 24-8 _ _5.2 _2.1 3_.4 19._
4_ 1_,4_ 2.611 £.7_t 3...431 5,949 5]9
2.7 5.7 6-7 10.45 _(1 10.4 3-2
1./_8 _
9.1 6.6
Bilizam I-3'le Del 1Voxte I_ De_ S_a EaatmaSam_r 9mn_ Weal_t'nSeam_ C_]bay_ City Omloc _ty Tadoha_ _ I_imx _,
_,_6
17,92_ 21,_4 41_$1
_
4,64_ 7,q_ $16,874
17923.(1 37.6 2_.9
29,2_
7.0
9_ 7.5
1t5,2_0 _.4A19
10.4 I5_5 9.6 45.0 65 3.6 1R1
8.99_ Y,9_. 5_"47 _,3[]_ 1_1_ 11,925 _._614 _ _
IS9
2.0
._
L_
3,5_9 45_a0 14_21 16,123 21_"K2 _,057 3_7_0 6,26S 9,072 146_13_2
21_6 _ _ ._ ,38,1 43.(1 _LO _5.(1 44.2 34.9
- 14JCg7
1_831 151,9_ 3f_4_ 45,8_ 59,{I_ _ _ 18,2_ 22J_ 427"_)4
_n94 511 243 1£.44g 1_40 _ 9"32 1..642 _ _
7,923 _,_ 9,625 11,1_ _ lfi_92Y _ _ 1_14_ 90._04
_ _.,,746 10,879 15_36_ 9,f_6g 2LLO2 4b_8 4J_6 1/t_ 111_"
_q.7 6.7 26.1
<_
(_ f_
Chapter 6: Reyes et al,
193
',O 4_
Annex B. continued... 1996 Mod_l _]y T:'._ov_,u_/C:i_, _,_
_1,]e p_on
No.
le,_7 ._vet_y
% .
Moderaidy
No.
Y*
',.md,uwdghi No, %
Modcax4dy Eli_Ide _/mlmi_
No.
S_dy %
N_
_r76 5g f_1_ 6;.'a5 243 417 433 _3 124 4.102 2,959
Mod_ah_y %
nJ'_de_g, ht No. %
10
BI_aO_ Camlg_dn _arJ s O0_id_ln_a] h_asam/sO_fi_r.la] Cagayan De OroCA_y Gf_,o og City C'_o,_ela Ozamil C_c_ TeZZbo_b _ Re_ o,n10 wt _om.vle_ _ec_da Ik-_.on -11 Soa_ Cc4ahio ¢3._-__1 Oavao Dd Notre Da_raoDd Su_ I_va oCiey C_._a] Sa_hn_CPcy r_on ll
117,081 SgOD _ 1 62,_'6 . 54_4 10,7_6 6,917 1_6_2 ..... _4.316
L9_552 _ Yg0_ 8_'2_. _9_2 2_ 6_0 298
11.6 34_4 _ 14_ 5.3 2¢9 9.1 _
1,4_D ;311 1,4_ 974 294 6_ 71 18
1.2 3.7 4,6 1.6 55 5_ 1.6D.l
14,961 3,194 $,4_ 9,g'_ 3,196 3._5 701 316
l_L8 38.1 24_6 1.5.9 5.9 a0._. 10.1 2_
38,931
12.l
5,157
.1.7
_
14_
5_3 421 856 _
6-0 _ 0.6 L1
_ _
O_ Jig
6132 _ 9_6 6,(_4 _615 9_948 41,_4
7.9 _'.6 6.60.0 7.6 Y0. 7_
119,481 _,1 _ 6_._i17 56_98 10,915 7,001 12,952 5,760 317,244 2_,2_.
I__._O 1,406 6,252 _ 5)14 _ _1 416 787 36,,2_2 _,9_aO
10.6 16,6 195 9_! i0.4 2_5 47 3.2 1L8 11.4 105
79,!O7 _ 152,060 84__'31 130_7'/ 44_1_1 _
106 t f'-_" 4,L_4 99 g417 0._6 17_
_1 8tO 3.2 6-1 6.4 _0 _9
24 186 474 12 1,2t3 174 _.171
6-f2 0.4 " 0.3 O.01 0.£_ 0.4 t3.4
130 _..._/_ 5.315 111 9,630 1_0 19,2W
3,5 6-1 7.4 .24 _.2
10.4 17.7 -_1.9 6_
1,1_ 3_741 _4 282
2-0 3.4 0.3 1.5
_,9_ 23_238 17..1_ 1_569
124 21.1 25.2 K9
__ _', _'_
9.9 _4 15--2
4.54 676 f_?l_
1.3 5.$ Z9
3,981 2,149 _,1_13
1L1 14.2 I&l
_ * N. r_
77_8t2 S0,_82 14ft.,_683,66_7 19fi,790 41.¢_6 576,774
5_39 _ $,£_i) 5,_vO
7..1 _ 5.8 6.9
29506 37_5
_.2 _.5
LaxtaoI_] Ne_e NimLhC otahato S_han Kudaxat C6_ab_ Cil_j
_5_8 1_,6_6 fi_8 18,_98
9,1_ .18.265 10,0M 1,975
16.6 17.0 15.3 1_8
1_ 3_7_ 3_R 548
a_6 _O 5.0 $_
11_ 21,477 13_56 _
_2 19._' _3 1_7
5_,432 1li_.142 fi_26_ _
5_ 19fligq 1_9S6 I_L_
il;_ C/ty M_mw'_C_ ReOcm 12
34_2 14_41t) 2¢_o,062
_ _35 42,649
5.7 5.2 14.4
113 _ 9,_7
O_ 4g ,33
_4_' 1,6fl5 5_
7.0 1L0 _17
_._ 15,1/_ 304_ 11
3_-%,_ r .1_3 46"$9B
D.$ [17 3.6 1.1 0.4 3.$ 6.2 [_ 22 1._ 1.0
I3f_.5 .I,464 7_95 6,938 6,157 2,551 764 449 _61 AO,a3A _
33.4 17.3 23.1 lC_9 16-$ 10.9 _.5 149 127 11.5
0.2
r_si,,- 12
;_ •
t'_
c_
Annex B. continued... I_8 Modc_/tty
poFuhHc, n
No.
Sev_cly
%.
No.
M_emtdy
%
V_°_mF _ L_mb'__ a_der_te_ z_d .eye.ely
%clu_eln mode_ely
i_97
I_7-98
199@97
1997-9S
-15.? -45_
-I0.6 _4.F .0._ _IA 845
-17.4 -46.1
No.
%
03 0._ 15 9.6 0.2
11_IF Y@_ _420 _299 I,_2_
_.4 _ 75 0.0 $5
-8_ -54_ -12_ -29_ ¢z2_
41 1_9 14 2,629 2,157
0.6 1.4 O_ 9.S 0.7
4_7 _59 237 24,3_t _:_, __r
_._ i9.4 4.1 _.1 _._.
9.0 47-i
_ 51
0._ 0.1
1,_0 641
_2 1_
443 _5
_,_ _S.4
S_
-00.1 -5_
ln_P_ °_ _cl lcv_ely
R_gion l0
_
B_ddn_m Camigum Mi_r_. Ooc_tai /d_ar_. C_iental Ca_,_y_m D_ O_o C_
_21_951 _75 _,51_ 04,965 59,$28
I_,621 F24 1,954 3,$89 1,717
C_oqui_ta OzaamuCity T_=_C_ /'_o _t1[} w/_cmf, l_ [ec_ds
7,087 15,_18 5_836 329,6_4 292.,17_
45_ 2,370 223 25,682 2i,728
Oa_o O_! No_e l_vao D_! _u_
19_,527 ._1,_¢_
LOgO _90
_.7 1,!
4_92 00_,_
_0 _,2_E
0.7 1._
_
9_ 0.1
_ _.1_
_._ 1_
_4A -g4._
6.9 103 _,0 _
999 J_? 1_$_ 21_
1.0 15 2_ 9.l
9_5 1_017 7_4_ _
7_ 11.0 10._ 6_
_7-_ _ 2_1 _7_
._4 _ _.0 ._55 -21.7
-_$.7 '..9 29.4 -_9._
-_6A -_ 375 -_.9"
216
1.0 1_
9_ _,771
5_ 95
3_ _._
30_ -00.0
_9,_ 2.0
-_6.5 _7,_
]_n
_tos 11
O_ . .
C_
].a_ D_]Nor_ N_lh Cotabito S,_m Kud_r_ Cotaba_ C_ty
$_,_¢ 11_ 70_1_ 19,020
_,_6l _1_90 0,0S, _ 1•01_
Mam_ C_ I_on 92
I_S4 _1_,190
6_ 2_,_4
S.F 8.4 6.0 0.0 2_ 0_ 17_ _._7.3 7.4
4.0 B.0
89E F4 4_ _99 111
_
a__
_9:7 -70.4 ._7.6 '[_9.9 -7_3 ._4-5 -_5
7.7 o_'.2 -12.2
-_95 -71.0 _Sr_ 45_ -_.0 -36_ -_
Notes: # - no data
* - 1st quarter report only Source:Department of Health. oa
196
Economic
Annex C. Family
Planning
Program performance,
crisis... Once more
1996-98. l_m_
d_u_e
2g_,4 -16.4 28.1
-7.0 -14,8 -9.7
41.2 17.7 16.2
-20.15 -4'6,6 41.1
1OZ7r[ 29.544 21_87 49,567 17,()47
16.7 42fl,5 4)2 343 -2.9
q,l -34,0 1.8 -10,11 -13,7
11.8 22.8 -14.9 34.11 2,6
22 -6,7 14.._ 19,8 _._
310,687
14,7
_15.3
_.4
4,8
5,221 39119 13.557 32.73 3,686 2,997 5,348 37.291
1.2 113 -]2,1 _),9 38.3 19.6 19.4 1,6
6,3 -12.5 7.8 -&7 -3/).5 -15.'t _._,M -3.5
4_.7 -148.6 -64.1 -5,1 ,,226,2 -7,0 6,7 -7&2
4),8 -77!,I ll_,d _O.'i 12..1 -17.7 13.4 -14.5
NCR
] _ I)i_;t. M¢._. MaJ61.. _[ _t. MLfft. Ck,u:._ln Cir_ 3,L_ Disc Mum. Cal_alI_ C,b 4th D_,t Mw_. P_L_ayCity Maka tl City NCR
17,846 9_,?T'61 J5,8'94
212491 32'_33 33,774
22,551 24,fl_9 211,__12
37,Z18 59,1_ _),_4
47_405 5,256 16,I.r_. 16,&%9 8.38_ 15242 _71,648
88/336 24.444 2'1,171 27.302 17,175
._._322 27,777 1 $.99,_ 22,6_D 8,1't8
HKt.467 31,651 18,424 .IL385 17,636
266,628
196,817
326,283
211,LA59 _11,49';' 18,-_7
29,55-1 _1,918 411,2'12
44,760 18,3211 _6.22_ 11245 7,(135 18b,6/19
CAR
Abra Apnyat_ _ktet f&_gao Kalin_a M_, P_ovince [_gaio City CAR
2J 4U 1,5._i 6,6_ 5138 2,1182 IJ_[9 1,673 2f),f142
5,719 __.366 10,676 .g,744 10.706 3_96 4A03 77,5_0
2, [ 66 1,7111 5,762 4,718 2,879 1,936 1,997 21,1(_
5,2Z_1 14,6__1 6,_)4 8,&67 3,282 3,642 4,7]7 43,_14
4,_71 6,621 7,,128 29,287 1,[)48 I,'R)9 2J3_9 5"_,423
21.181 22,271 23A28 78,477 ¢_,I7_ 5,5_ 3;302 I _%%603
._,320 11,(,_ 7.21_ 31,264 1,107 1,422 3,32.5 0],733
18.q81 _., £¢J8 _),156 85,_94 17,168 4,_5 3,&_ .%42,_42
_,3_B 1,499 6,214 4_q08 2,(_01 1.643 2.453 20,421
[_,*gioo 1 IIt,c_ Notre [k_-'_ Sur 1_ Unlca_ l_n_h_ D4gut_:_ City lmoag City San Cal'Ii_ Oty ReStart 1
_370 _344 _,439 1_,9()5 487 _es58 1,_2 29.&,'_3
36,673 19.165 26,698 76,111 4,659 4,699 3,382 17] ,_87
'
16.4 67.5 -_.0 6.8 6,6 0,9 61.5 19.9
-15,1 73,0 223 8,5 7&7 -21 ,.q 9,_ ."4.6
]_-'glon 3 &ltdaa Bulacmn NL,Wa Eclia I'ampmW_ Ta rlac Z.Im 6.1h,,t; ,\ng_i_ Ci_ Catx_tam_ City Olonga po C[ly Polaym_City Sa n Jo_ C'l ty _h_glon 3
7,197
24_124
5,98J
2._._N
1,619
31.9&_
q6,9
22,77'[] 16,[_)6 16.K_ 17,00_ 6,2"18 7,2(')t4
83,942 36,526 26_30 52,192 "[7,482 13B_
26,344 1.q,676 20,ff26 17,18.5 4,8,"%1 l.&_
65,1X]6 31,846 28,_.N 35.279 17,7114 8,172
13,4._3
56,78_
11,324 8.o12 '),7N9 .1,_(10
27,05 i _8.982 16,9GI 7J.)_18
15.7 -2.1 18.9 .4,5 -21.._ -7#.6
1.6 -14.7 7.9 ,_.b 1,4 4"0.0
6.362 4Agl] 3,705 249.432
1,9(Y, 4.64218 458 485 99,378
_7 1,!_8 "174 q67 45,673
8,848 4,6_ "1,439 5,8"12 209,8.%
33 312 27,9 .t_.7 -1 ,l
53.9 8.8
1,_5 3,._15 3,_8 _37 I00,4_
_,622 4,92._ 706 5174 __92,fall
3,9
_1.4 13
Rsgion 4 Aurora
6,347
6,643
3,9_i
8,439
3,834
Batangas Cavi_ l_gurla MaHnduquu
"I9,_17 18,101 25,976 2,-_37
37,772 3_,745 172259 21289
4,78.'I 25.05d 436A 2,28_3
101.939 ] 98,$44 _9,9C_ 7_89
Mh_,ln i Occid(_ntoj Mind_._roOrim_ml 1>o1_w,,._ _ (.%.te_,_
11),365 8,883 9,194 '17,760
16,5_ 24_342 '[3,q82 84,077
1,62_ 12,._46 2.449 11,941
46,196 29,616 -18,936 71"3) 5
_,313 "1_ 1,985 _914
RiT._l la,Dtt0._Lon Ihtang;6 C5ty Cavlte CI_ Upa Gty [_<m_a City Pu_rtn I'r b_ce:;aCity _n Pab]o City
24d_2 1,9_, 2,321 1246 J.,45"1 4,769 868 ] ,-574
432_8 9,594 4,167 1,827 l,fx3 I1,7,t2 7,&_7 5,115
_3,618 1_ 2,804 t78 267 3,3_-5 2r_ .365
42,065 34,196 4_'_8 6,6_43 7,176 22,454 39.848 22,947
16,477 I_241 3_457 197 149 13_62 1_(_,_1 _)7
Tagaytay City Trc,_ M,wfiru_ (3r/, R_gio. 4 w/ complete regor6n
461 730 15_,579 131,_6
1,182 L,,N-'L ,ITL247 4415,188
97 131 100.433 P_%,1)43
5,1(_4 6,953 _1,3711 751,(111_
7,736 0,25"1 1.1_99 2,J 18 851_. lS,(K_g 717 2_01 3jY72 63,540 58_87
35J.144 22,893 22,2G1 3,N)5 24,004 _1,098 8105 3,_5 23,782 1732184 14_ff67
] 5,1_r_4 5,,r4)2 14,(_6 8,879 32,$93 6,191 1,107 1,68_
87,_;53 17A_I 139,(_12 i 3,991. 36,974 59,987 24.4(_ 11,4_#'_
8._,150 &3.4fi2
391,019 379,[_:_1
3,694 27,171 18.7_5 [,739
122 15b 111),34!1 I(H+_)
'
8.128
-38.0
-2,6
21.5
56,674 237.328 Ik3_2 4,._4
-75._ Og.4 4]4.0 -10,0
.Z2,8 8.4 3FO.4 -23.8
80.3 81,2 -115,6 -188,1
16/R)_ 57,844 43,5_11 36_41
-84.3 412 -73,3 -32.8
42.4 -15.8
64.6 18.4 76,3 24.2
4_4.5 _6.9
5.5,9_3 11,111 5,£i[6 l,&_. 2,175 3.[47 4157 7A1_
4.0 a_5,1 112 4_4.5 4_1.6 -._g)_3 -76.0 -76.8
-_).2 86.9 ?33 111.7 _14.2 298,9 414,4 -'16.6
-2.7 T[.9 5.7 72,7 72,6 47.7 81.1 77,7
-12.2 -67,5 15.9 -75.3 _.7 -86.0 _9,6 _7,7
25.8 193 K9 21.4
W,1 7_1.2 48,._ 463
.57.0 -50.7 -342 -_.5
1,_6 2,108 58Q,II06 4c_
-79.0 -82.1 -36,7 -_.6
29,.85"1 1&78_ 36,(L1_8 3d'L_) 1"1,331 15,340 5,4/49 5,802
(J5,'[ -39.7 -2,7 3192 263.9 -5&9 54.4 - 2.5_'_
149.8 122,9 524.4 316.2 /'_l,0 99,3 201.1 225.6
34.0 4_3,2
125.9 160.4
R_h_ha_5 r/Iba'," Ca mal'hl_u_Nork, C,m_al'hl_ 5u¢ (_lt_uam,_; Masbate £_,i'_'_c_. h'i_,l C;t)' ] _gasp; Ci_ Nasa Cky Regis- 5 w/ complete recol%1s
7,910 1,454 6,616 1,527 4,_22 5,_63 373 )'71 _,045
124,506
-3.7 -_.5 21.4 -20.8 _18,2
Chapter 6: Reyes et al.
197
Annex C. continued... £'mv_-_:e/C_ty Newa_aepto_
1990 Cueeentu_ts
I<_J7 New____',_ph_l's Cm,rent._es
Nc, caCCeL_rs
199H Currw_tu_
N_v _ 19¢_-07
14.915 19_.17 17,6_J 38,152
53.5 14.7 4].t_ 4.2
1_¢7a_4
Ctu_t 19_-_7
u_m_S 1_774_
Region 6 Aklm_ An_quc, Capi_ IIn41o
4+106 8,056 7,_)3 17,108
11,27a lfi,3_'#_ 211,g(k2 57_6_
6_¼ q,244 7+74_, 17,8.'!4
13,170 IK,2&_ 19,96_ 52,."O.. t
Neglx_ Ckx:lde.tal G_dJv-ll_,_
24,370 3,386
56,_2 5_38
40,749 3,124
52,562 6,21_)
R._ol(x[ City B%.._Ci L 3, Cadi_ CiL_ I [tJ h; Ci Ly L_ Ca,.tata C_IV
3)¢'¢? 1,_Y4 1341 2, [t'_ 38v
• ,_ c_,, f4ml C.u'h_ CLty Sllay City
LLK_ 1,471; 755
ge_¢_ 6 Regim
7_,_51
21,11.! 5,151 5,74] I 1.5141 I ,'J53
4,507 3`62_ 2,231 2,ff26 5_9
2ll,Tl 4 7,2¢0 %164 13,339 2D_
22_5 L.73a 4 _Y2Lt
51_ L,878 131O
2,._1 2..%'_ 7 4,170
222,470
3.1143 3.NB 3293 7.301 11.349 _U
_,6 11_ _13 a).6
55,750 3.221
85..q -12.9
-7.6 11.0
4,h5.i 1-1¼3 2-1117 1.327 191
2t)_f15 6.34,_ 3,437 13,618 2_30
13.fl !_1.0 _(_.4 _7,4 36.O
-1.9 40`6 7A 154 20,7
210 a4 _ 1,403
1,849 2,_"_) 4_b49
-3Z4 273. 47.8
0.3 63,1 3.7
32,7
4,6
1{14J1117
_2 J_.
_2.M_
18.55 i 29,:_{_
48,354 203.,_3
216.169
7
[Iraqi Cubu
15,7_9 ]9,[_
49 `6_35 5fi,_}_
N_¢_ Oriental Siqui_r R_b Ci_ Cm_lm_n City
16,1241 1,{143 2,015 _
372.75 4A43 'U_)6 1,9,_
19,1_4 2h_(I]
3_.301 _2.1157
l8. I 5(_,0
2.q -11,5
21,] 21 LI-r_ 2,146 7l_
49,_4 '4 4,_6 4,437 2/)18
18,349 /46_ 1.2_1 g26
61,1}33 5,_ 5.1_ 2,674
31.0 10.9 6.5 ,g,_
-13.i -25.4 .40.3 13.9
Cebu CRy [_u_l (_ty
q'_'4 I,_7
11-,772 6Lx_
7,2"16 1,457
78,_ :_5_,110
3,875 l,lql)
21.94'_ 8,447
-21,8 6.6
[_apu-I ._pu t_ty Ma,xtawc CSt_ Tah_iiaron Cily
2,*i_ 3,131 466
4,_0 13,612 1,_
3,t_J7 3,470 573
6.iT/0 5,_1 I_44
4.2_'N 2,&'ff 698
8.965 7_381 2,2(11
383 10.8 12,7
Tohal¢_ City Regk_n 7
227 72+650
3_57 2_5,871
919 92,043
3,_ 498.flq3
Billl"_n Leyte Del NorSe I ryt¢ rX, I 5u,' Lxstem _.mu_r Noethcm _,i W_._teei_ -_t_lal" Catboyog CIity C_,n_ Ci_ Tocloban City Region 8
._,411 18LF_ _*,6M 314_0 3,285 3,H_ 2-11_ 2,98_ I,t_:5 43,(g_18
]2,.471 .0 _,26_ 37,158 6264 7,764 h,924 Ll'_2 l'l i07_ _ltl 131^3"18
3_131 17,782 5,78U _,55_+ 2,74fl 2_5LI 1 i975 2'_03 ql7 42.1447
7,285 31.33,4 11,493 10,_7 ._,933 6_77, 8.73," _3_ 2,1(_ 112,732
Bukldntm C_31i"_oln Misanli_ Ck'_idvn ml
1_,37<_ _ 2,701
_222,743 4,9-37 3/,_ 1:_
19,650 l,Llh 3,081
Mis,'a_lis Orie£_tal 12_yml U_._C)t¢_City (._tE_,_ L'i_y C_x_uk.ta City CVm.I_ City 'rangub City Region 10 w/ complete records
%795 4,926 1143'9 11485 nll "[F(J _lJ.37h 37.675
_I,t_I 19_TI 15,279 5.7(k) 11),(_,4 31432 -%33.-362 332.757
9,c123 3,747 1,3__ i 1,444 2,783 170 -13.452 -_11.31-1
R_gi_a
Regi.n
,
633 85,601
2_'O0 2.30,812
1,4_ 3_.1 2.3_ 2.223 2-1M2 2.3u9 _1 1,110 21_ ]b3.37
]5,896 42.2_3 11_77 ¢L967 4.'P_ ) 6,743 n,_33 _,_'_) I._09 I t 0.09_
72,383 3,.,_70 I 1.714
21,844 I_ 876
2_J,211 %40) 17,476
32.g74 14,3_ 15,6_1 3,107 6,712 3,_7 I _'_14 I_,_J
9.776 4,4_1 3,113 1,1;_ 2,691 4_ 45,972 45_16
_ 2_),213 4,739 5,425 7,153 3,233 _'483,853 36b_'_'.
i3,79_ 11,197 24.2./E
iR),2(k_ 22,t_ 7g,395
6it,r2_ 4,1195 31441
_M,157 7._64 26,ggfi
."_t 8 26.7
-2.6 366,1]
4/) -7"Z_
32.9 3.4 8_1 33
23.2 -19A 15.1 _.5
-18,0 -lg.3
342`6 290.4
-72,1 -67,6
] )-,4 -18,2 33,[1
_1,8 -37,5 -I .2
-31.1 -9.2
-1,7 142.3
X'L7 -1,7 -I 2.8 592 -1_6 -6.1 -5.3 -26.2 -13.9 _J.b
47.)Z7,7 19A -29,4 2*93
41.6 18,7 _,1 542. -23.6 41.7 79.0 -24.4 131.4 -14.1
10 M.tl 583 14,1
10,0 412
-67,5 -21,4 _317
.'_r2,6 I3A
1.4 4_3.9 -712 -2-8 243.4 13_ 7,6 7.2
-I .5 18`8 1_3iI) -21.9 -3.4 101,8 5.8 H.7
-35.1 -27,_ 2,6 -10,4 4¢3.4 3.3 -_4iI} -33.5
12,6 4(I.4 419,8 62 6,6 "_,4 121},8 137/)
21.1 13.3 118.7
-19.M -(0.4 -_7.-a;
-_.2 -Z_.I __`6
]3.1 -(_.7 41_2
8.6 (L7
_k3.4 -78`8
-3.(] 1.3
6.1 -_M/)
-._(]`8 -55.7 0.4
7.3 -._.6 -').0
4)._ -11_ -41)_
11
_._11_ Ct_taba t[i E_W_*_,C_'i_tal Day,,. D_t P_i'k,
II.3_ v,_ 11.{kC
31,8_g9 _hl73 56,577,
-_¢an_mi [_W_l_ [_[ _lr
7,7Lt_ 19,06_
:5,,167 48,457
H_'_8_ Iq2(_
54,a95 49,11E
_,745 4,0-_
26.195 2,_7
_,,'_ CLty Ge+_raL Sm_x_ City RegiOn 11
16,221 8-1_17 83,444
47_3,_3 _,_:K_ 276.4_g4
24_732 11,126 4_%917
50,857 15,132 2TI ]_l(I
12, I'_,.% 4,925 42,404
_r'/,)_2 13,_3 161;474
_.6 37.4 ,.47.4
I ._a_, I_,1 r_)rh, North t_-o_ _ _._ 5ultal_ Kud,l/at
fi,476 15,56_ 10,61 I
15,512 43,756 21 _'_
7,1 _ I ] g,(kl5 13,2X4
I1 ,_ 4_,355 28,@12
3,22.5 12._",(I !1,422
14,9_'_i 42_8"2 _,299
C'o_ab, ltn City llig_x City Ma ra'.¢i C3ty Region 12
3,353 982 104 37,(U0
6 kF._l 12276 222 99,346
2,4)-5 1726 3_3 43,'_t7
2,/'13_ J 17,49a A%_ "1 ( k5,9'47
],272 _22 135 27-1gk'_
10.6 _4 i 24.8 -27.2
-Z33 5.9 29_ -53.5
75.g 2111.6 18I_
42_ 65,8 7._
2,573 17_1 135 1[11,474
Source: DOH, Field Health Services and Information Systems (FI-ISIS),Manila.
198
Economic
crisis... Once more
References Reyes,
C.M. 1998. Impact of macroeconomic crisis on the poor. Philippines Research Paper Series (February).
Reyes, C.M. and A.B.E. Mandap. 1999. The socialimpact crisis in the Philippines. MIMAP-Philippines (February). Behrman,
J. 1990. The action of human resources
MIMAP-
of the regional financial Research Paper Series
and poverty
on one another.
Living Standards Measurement Survey (LSMS) Working Paper no. 74. Lim, J. 1998. The social impact of and responses to the current East Asian economic and financial crisis: the Philippine case. Manila: United Nations Development Programme. Maglen, L. and Manasan, R. 1998. Education finance in the Philippines. Manila: Asian Development Bank/international bank for Reconstruction and Development. Orberta, A. Jr. and R. Alba. 1998. Simulating teh impact of microeconomic policy changes on macronutrient availability in households. MIMAPPhilippines Research Paper Series no. 21 (February).
7 Fiscal .Impact of the East Asian Financial Crisis Rosario (7,. Manasan, Celia M. and Generoso de Guzman National ReveTt
government
Reyes, Aniceto C. Orbeta, ft.
revenues
and expenditures
lge$
ignificant progress in tax revenue performance has been achieved, _articularly in the late 1980s. Although some gains are still apparent in mid-1990s, tax effort appears to have tapered off. Tax effort rose by a total of 3 percentage points of gross national product (GNP) in the 4-year period between 1986 and 1990. In contrast, it only increased by 1 percentage point of GNP in the period 1992 to 1996. The slowdown in the upward trend in tax effort, however, was masked by the large inflow of privatization proceeds (1.7% of GNP in 1994 and 1.2% of GNP in 1995) (Table 1).
Table 1. National government
revenues
as a proportion
of GNP, 1986-1999
(In percent).
1.
2.
1978-85
1986-91
1992-97
1986
1990
1992
1994
1996
1997
1998
TOTAL REVENUES
12,90
15,97
18,34
13.29
16.71
17.52
19.36
18.26
18.67
16.59
TAX REVENUES
11.26
13,12
15,86
10.98
14,01
15.06
15.62
] 6.3,8
16.31
14.94
a, Bureau of hlternM Revenue
6,72
8.86
11.04
7.85
9.61
9.66
10,80
11,64
12.44
12.09
b, Bureau of Custt_ms
4,04
4,08
4,70
2,93
4.24
5.26
4.70
4.62
3.77
2.72
¢, Other Offices
0.51
0.20
0.13
0.20
0.16
0-14
0.13
0.11
0.11
0.12
1.64
2.84
2.48
2.31
Z70
2,45
3,74
1,88
2,36
1.65
NON-TAX REVENUES
Source of basic data: Bureau of Treasury.
Thus, the national
government
posted a surplus in its fiscal position for
the first time in more than 20 years in 1994. This feat was replicated 1996 (Table 2).
in 1995 and
200
Economic
Table 2. National government (In percent). 1975-85
Revenues
xpenditures [SURPLUS/DEFICIT
'1986-91
deficit
1992-97
1986
as a proportion
I
crisis... Once more of GNP, 1986-1999
1990
1992
1994
1996
"1997
1998.
12.90
Average 15.97
18.34
13.29
16.71
17.52
19.36
18.26
18.67
16.59 II
15.15
18.87
18.34
18.53
20.15
18.67
18.42
17.87
18.61
18.37
(2.25)
(2,90)
(0.00)
(5.24)
0,94
0,39
0,06
(3,44)
(1.15)
(1.79!
Sourceof basic data: Bureau of Treasury. National
government
revenues
started
to falter in the last haft of 1997
following the start of the East financial crisis. Tax revenues slipped from 16.4 percent of GNP in 1996 to 16.3 percent in 1997. The primary cause was the dramatic shortfall in import duties which was P34.7 billion short of the year's target. In contrast, the deficiency in collections of the Bureau of Internal Revenue (BIR) was smaller at P3.1 billion (Table 3).
Table 3. 1997-1998
Revenue "I997BESF 1/ Progran't Target
1.
program 1997
(In million
Devialaon
1998BF_qF
pesos).
'1998GOP_/-IMF
1998
1998
Target 2/24/98
Targt_t 6/16/98
Acutal Collection
(6)
(7)
(8)
488,037 ' 17.0%
462,616
-78,304
49B,354 18.5%
453,661 15,8%
416,585
796,503
389,087
378,688
367,303
337378
-51,912
"12],205
116,9"18
83,611
2,748
2,748
32,948
34,376
Ac/al,_l Collection
(2]-(1)
(1)
(2)
(3)
(4)
(3)
TOTAL REVENUES % of GNP
485,1"10
471,843 18,4%
-'13,267
7-,40,920
531,302 19.7%
TAX REVENUES % of GNP
450,595
412,165 16.1%
-38,430
5"13,088
a. Bureau of Internal Revenue
317,786
314,697
-3,0_9
b. Btll"Ual.1 0 f C1.1_k11115
]29,486
-34,686
c. Other Offices NON-TAX
REVENUES
34,515
94,8(X] 2,668
2,668
59,678
25,163
Program Target
27,832
76,005 3,40,_ 45,930
Deviation (7)-(4)
-45,200 3,405 18,098
Notes : _BESF- Budgeof ExpenditureandSourcesOfFinance 2GOP - Governmentof the Philippines Source:Departmentof Budgetand Managemer_t
The 1998 tax initially from P513.1 billion in June 1998. not meet the target. the original
revenue target of the national government was reduced billion to P498.4 billion fin February 1998 and then to P453.7 In spite of these adjustments, total tax collections still did Total tax take reached P416.6 billion, P96.5 billion short of
target. Of this amount,
P51.9 billion was accounted
and P45.2 billion by the Bureau of Customs from 16.3 percent
for by the BIR
(BOC). In toto, tax effort dropped
of GNP in 1997 to 14.9 percent in 1998.
Chapter 7: Manasan et al.
201
Expenditures At the time of the preparation of the 1997national government budget in the early part of 1996, the national government's fiscal position had been positive for 2 consecutive years, the first time in more than 2 decades. The picture was rosy, maybe at its rosiest in recent history. Thus, the 1997 budget of the national government (net of debt service) was expansive. It grew by 21.2 percent compared with the previous year's growth rate of 13.5 percent and the 18.5 percent average in 1993-97 (Table 4). As a proportion of GNP,it rose to 16.4 percent from 15.0 percent in 1996 (Table 5).
Table 4. Growth rate of national government expeditures, by sectoral classification, 1975-1999 (In percent). 1975-85
1986-92 AVERAGE
1993-97
1995-96
1996-97
1997-98
GRAND TOTAL
16.06
19.08
13.48
4,76
17.95
12.59
9,72
Tot,'fl Economic Services
14.05
8,03
15.12
1.20
27,66
-25.85
20.07
Agriculture Agrarian Reform Natural Resources Industry Trade Tourism Power & Energy Water Resources Devt. Tremsp. & Comm. Other Econ, Services
9.84 3-72 10.83 18.90 2,76 8.54 -3.02 35,48 9.02 38.95
13.51 29.22 19.11 3.98 -5.16 21.10 22.67 5.18 16.98 -36.60
20.24 18-89 23.20 11.89 14,14 23.24 1.08 4,37 11.95 59.24
23.07 12,42 14,41 9.61 33.66 47,45 -78.19 25.87 3.59 -16,20
52.64 44,92 65.98 2.04 3.83 28,48 120.59 18,57 19.48 -15.59
-38.73 63.75 -37A9 -31.54 -17,07 -37.21 -50.62 -86.12 -17,39 -89.07
31.13 2739 2.99 21.98 35.83 9,75 -55.66 48.17 20.69 -69.19
15,60
19.52
19.29
25.49
11,28
7,52
16.02 14.45 7.63 25.75
21.29 20,64 22.34 -18.50
20.21 6.48 30,24 47,61
20.45 34.56 42.95 55.23
2728 26.17 10.97 -47.24
11.39 -6.03 31.33 -10.81
632 2.11 11.49 62,89
5.81
15.25
17,33
13.02
20.22
2.91
-2.39
17.28
22.66
15,50
22.63
14.62
7.37
3.78
13.89 30.73
23.89 20.01
15,37 15,83
21,.52 25,34
14.99 13.74
7.22 7.73
-1.98 17.45
Others
17.90
22.33
28.69
6,43
22.32
46.73
8.81
Debt Service
34.68
28.63
2.84
-14.29
6,72
33,65
12.63
13.77
15_25
18.46
13.50
21,&_
6,20
8.60
I
Total Social Services Education Health Social Welfare and Employment Housing & Com. Devt, National
Defense
Total Public Services Public Administration Peace m_d Order
21,73.;
]
1998-99
MEMO ITEM:
Grand Total Less Debt Service Source:
Mini
Budget,
Department
of Budget
and
Management.
202
Economic
Table 5. National government sectoral classification,
expenditt_res 1975-1999.
crisis... O_,_cemore
as a ploportion
of GNP, by
m
1975-85
1986-92
1993-97
1996
1997
1998P
1999 GAA*
15.67
21,57
21,17
20.23
21.35
21.78
21.28
6.20
4,51
4,08
3.77
4,31
2.90
3,10
AgricLdtttte
0,79
0,75
0,69
0.67
0.92
0,51
0,60
Agrarian Reform Natural Resources
0-08 0.25
0.27 0.29
0.15 0.28
0.14 0.25
0.18 0.37
0.26 0.21
0.29 0.19
Industry Trade Tourism
0.31 0.04 0-03
0,16 0,01 0.02
0,12 0,01 0,03
0.12 0.01 0.03
0.1]. 0.01 0.04
0.07 0.01 0,02
0.07 0.01 0.02
Power & Energy Water 'Resources Devt.
0,77 0.14
0.31 0.08
0.21 0.05
0,05 0,04
0.10 0.05
0.04 0,01
0.02 0,01
Transp, & Comm. Other Econ. Services
2.71 1,08
2.14 0.48
2.29 0,27
2.19 0.27
2,34 0.21
1.75 0,02
1.88 0,01
3,16
3.94
4,13
4.46
4.85
4.89
4.69
GRAND
TOTAL
Total Economic Services
Total Social Services
"
i Education Health
1.87 0.57
Z74 0.67
3,12 0.45
3.25 0,46
3.71 0.52
3.74 0.44
3.54 0,40
SocJa] Welfare and Emplo?,Tnent Housing and Con_munity Developn'met
0.24 0,47
0,23 0.30
0.44 0.13
0,54 0,21
0.53 0.10
0.64 0,08
0,K_ 0,11
1.78
1.31
1.38
1.37
1.48
1.38
1.20
1,70
2.53
2.73
2,82
2.90
2.82
2.60
1.1,6 0.54
1,94 0,59
1.94 0,79
1.98 0,84
2.04 0,86
1.98 0.83
1.73 0.87
Others
0,82
0.90
2.70
2,59
2.84
3,77
3,65
Debt Service
2,01
8.38
6.14
5.21
4,97
6,02
6.04
13.66
13,19
_5.03 I,
15.02
16.38
15.75
15,24
National
Defense
Total Public Services Public Administration Peace and Order
MEMO ITEM: Grand Total Less Debt Service
" GAA- General Appropriations Act. Source: Mini Budget, Department of Budget and Management. This expansive mood was carried !over when the Executive branch formulated the 1998 budget in the first Semester of 1997 as , the national . [ government continued to post a surplus in 1996 and as the consohdated pubhc I sector itself posted a surplus for the first tim e in 20 years. Given this perspective, the President's Budget (net of debt service)ifor 1998 was projected to grow by 12.4 percent, climbing to 16.7 percent of GNP (Table 6). National government budget in 1998 Despite the onset of the East Asian financial crisis in July 1997, the 1998 President's Budget was not downscaled when it was presented to Congress. Moreover, Congressional initiatives led to art even larger budget appropriation.
Chapter 7: Manasan Table 6. Evolution
GRAND
et al.
203
of 1998 national
TOTAL
government
1997
1998
1998
Actual
President's
GAA
budget (in million pesos). 1998
Preliminary
98 Prelim/
98 Prelim/
1998 GAA
98 PRESIDENT'S
539,461
590,702
641,674
607,377
0,9466
] ,0282
73,165
83.509
86,692
78,559
0,9062
0,9407
Public Administration
51,554
59,423
62,368
55,278
0.8863
0.9302
Peace & Order
2'1,611
24,086
24,324
23,282
0.9572
0.9666
37,366
45,487
46,492
38,454
0.82T1
0.8454
122,668
144,954
152,,301
137,106
0.9002
0.9459
Education
93,639
107,144
109,130
104,301
0.9558
0.9735
Health
13,062
13,770
14,506
12,274
0.8462
0,8914
13,493
20,113
23,418
17,720
0.7567
0.8810
2,474
3,126
4,447
2,207
0.4962
0,7059.
108,952
101,918
115,159
80,786
0,7015
0.7927
4,426 23,225
8,371 17,22]
8,426 18,372
7,247 14,229
0.8601 0.7745
0.8657 0.8263
Total Public Administration
National
Defense
Total Social Services
Sc,zial Welhre Housing
& Employment
& Community
Total Economic
Development
Services
Agrarian Reform Agrlculhlre Natural
9,336
6,687
6,626
5,836
0.8808
0.8727
Industry
Resource
2,766
2.031
2,288
1,894
0.8276
0.9325
Trade T0orism
215 940
213 677
213 810
178 590
0,8364 0,7284
0,8364 0.8715
Power
2,541
3,968
1,495
1,255
0.8392
0.3161
Water
1,1 75
362
422
163
0.3864
0.4505
59,101
62,057
76,164
48,823
0.6410
0.7867
5227
330
343
572
1,6678
1.7310
125,649
"125,450
125,459
167,927
"1.3385
1.3385
71,661
90,175
116,371
105,147
0.9036
1,1660
413,812
465,243
516,215
439,450
0.8513
0.9446
16-38
16.68
18.51
15-75
Transportation Other
Economic
Services
Debt Service Others MEMO ITEM: Grand Total Less Debt Service Pet_2er_t of GNP
Source: Mini Budget, Department
Whereas the expenditure
of Budget
and Management.
obligation program net of debt service under the 1998
President's Budget was equal to only 16.7 percent of GNP, it was equal to 18.5 percent of GNP under the General Appropriations Act (GAA) of 1998 (Table 6). Concomitant with the downward adjustment in the revenue program in the early part of 1998, the national government expenditure program was similarly modified. Administrative Order 372 was issued in February 1998 imposing a 25 percent reserve on total maintenance and operating appropriations of all national government agencies. At the same time, it imposed a 10 percent reserve on the IRA share of local government units (LGUs). Total national 14.9 percent relative
government expenditures net of debt service was cut by to the programmed level under the 1998 GAA and by 5.5
percent relative to the programmed national government expenditures
level under the President's Budget. Although net of debt service grew by 6.2 percent in
204
Economic
crisis... Once more
nominal terms (Table 4), they actually declined by 3.5 percent in real terms in 1998. Thus, national government expenditures net of debt service contracted from 16.4 percent of GNP in 1997 to 15.8 percent in 1998. Of the major expenditure items, those on economic services and national defense were the most adversely affected. Preliminary estimates of actual expenditure obligations indicate that national government expenditures in these sectors were cut by 30 percent and 17 percent, respectively, relative to their programmed levels in the 1998 GAA. Among the economic service sectors, water resource services and transportation/communication services suffered the deepest cuts relative to the 1998 GAA expenditure program. Actual national government expenditures in water resource development and transportation and communication for 1998 only reached 38.6 percent and 64.1 percent of levels under the GAA expenditure program. Moreover, national government expenditures in all economic service sectors, except agrarian reform, posted negative growth rates relative to their 1997 levels. National government expenditures on infrastructure services (combined power/energy, water resources development, and transportation and communication service sectors) also decreased from 2.5 percent of GNP in 1997 to 1.8 percent of GNP in 1998. On the other hand, expenditures on social services and general public services were relatively protected. On the average, the reduction in aggregate expenditures in these sectors was equal to only 10 percent of the GAA program levels. This came about as the reserves earlier imposed on social service sectors were selectively lifted. Among the social service sectors, housing/community services and social welfare/employment services were the hardest hit by fiscal austerity measures enforced in 1998. Preliminary estimates of actual national government expenditure obligations in housing/community services and social welfare/ employment services show that national government expenditures in these sectors were cut by 50.4 percent and 24.3 percent, respectively, relative to their GAA levels. Thus, expenditures on housing/community services declined in nominal terms during the year. Although allocations for the education and health service sectors in 1998 were not reduced aS much as those Of the other sectors relative to the 1998 GAA levels, per capita expenditures real terms during the year (Table 7). These developments are largely consistent with the crisis years of 1983-85 when a reallocation of national from economic services and national defense to debt services, and social services was evident.
on these sectors slid in the experience during government resources service, general public
In July 1998, the government announced the exemption of major departments engaged in the delivery of basic social services from mandatory reserves (equivalent to 25% of nonpersonnel expenditures) earlier imposed on
Chapter 7: Manasan
et al.
205
Table 7. Per capita national 1996-1999.
government
expenditure
in 1985 prices,
1975-85
1986-92
1993-97
1996
1997
1901.00
2408.04
2561.33
2517.49
2733.04
2736.47
2700.25
775.87
51Z23
492,07
"469.76
551.98
363.97
371,36
104.09 12.26 33.57
90.28 29.75 31.80
81,24 17.51 32.55
83.75 16.81 30.96
117.66 22.42 4730
64,11 32.65 26.29
69.63 37.51 24.58
34,98 6,84 4,39
19,73 0.92 2.49
14,06 1-12 3.57
14,92 1.14 4.03
14,01 1.09 4.76
8-53 0,80 2.66
9.45 1,02 2.69
Power & Energy Water Resource,_ Devt,
107,14 18.02
34.35 9,43
27.35 6.27
6.34 5,46
12.87 5.95
5,65 0,73
Z81 0.98
Transp. & Comm. Other ECOn.Services
359,84 94,75
228.06 65.43
275.35 33.05
272.27 34.09
299.42 20,48
219.97 2.58
219,42 3.27
388.49
444.16
490.16
554.70
621,47
61Z72
605.38
229.39 70,45 32.26 56.19
305.50 74.32 23.92 40,41
370.01 53.84 51.31 15.01
404.97 56.98 66.93 25.82
474,40 66A7 68.36 12.54
469,92 55,30 79.84 12.66
447,81 50,92 89.77 16.88
National Defense
249.83
148.66
166.21
171.09
189,31
173.25
152.62
Total Public Servio-_
206.34
281.05
327.95
351.36
370,67
*_3.94
332,44
144.14 62.20
214.83 66.22
233.01 94,93
246.77 104.59
261.18 109.49
249.05 104.89
222.10 110.34
96,73
94,98
325.25
322,48
363-05
471.01
470.18
18.3.75
926.96
759.69
648.10
636_7
756.58
768,28
72.19 1717.25
84.03 1481,08
317,58 1801,64
311,52 1869,39
359.95 2096,47
328.4] 1979,89
393,12 1931.98
GRAND TOTAL Total Econom]c Services Agriculture Agrarian Reform Natural Resources I_d_stry Trade Tourism
Total Social Services Education Health Social Welfare and Employfftent Housing and Conxmtmity Development
Public Administration Peace and Order Others Debt Service
1998
1999F
MEMO ITEM: IRA Grand Total Less Debt Service Source:
Department
of Budget
and
Management.
all government agencies. The lifting of reserves, however, was not implemented immediately. 1 Moreover, a slowdown in the release of Notices of Cash Allocation (NCAs) effectively restricted the spending of government agencies. Given this situation, government agencies naturally gave the payment of wages and salaries the highest priority. Thus, many agencies suffered delays in implementing their expenditure obligation program as they postponed contracting for the supply of goods and services even if the allotment authority (i.e., the authority to obligate) was available in anticipation of inadequate cash availability. In cases where procurement was not intentionally put on hold, existing suppliers and t In the Department ofHealth, for instance, it was not until the last quarter of 1998that the [lifting of the]
25%
mandatory
reserve
was
actually
lifted.
206
Economic
crisis... Once more
contractors paced their delivery of goods and services with their perception of the government's ability to pay for its obligations) It is also important to emphasize that government agencies/departments were given the discretion to decide which programs/activities will be given funding priority so that the impact of the fiscal austerity measures on actual expenditure obligations on various programs is largely uneven. Department of Health (DOll). In the health sector, procurement of drugs and medicine was most harshly affected by the financial crisis. The allotment authority for acquiring drugs and medicine that was actually released at the end of September 1998 was equal to only; I 23.6 percent of the appropriation cover (Table 8). In the last quarter of 1998, allotment authority for another 63.1 I percent of the appropriation cover was issued, bringing the allotment-toappropriation ratio up to 86.7 percent (Table 9). Undoubtedly, the delay in the release of allotments for drugs and medicine contributed to the slowdown in their procurement. As of the end of December 1998, actual obligation for drugs and medicine represented a low 49.2 percent of allotments and 42.7 percent of appropriations. In regional assistance for drugs and medicine, there is no slack between obligation and allotment. But just the same, only 75 percent of its appropriation was supported by an allotment authority. The dramatic cutback in the expenditure obligation for drugs and medicine coupled with the 25-30 percent increase in drug prices following the depreciation of the peso in mid-1997 implies a critical contraction in the supply of drugs and medicine in the public health sector. What makes this situation worse is that this comes at a time when households themselves have little resources to supplement what the public health care system is able to provide. The delay in the restoration of 25 percent mandatory reserves is an oftrepeated tale in the DOH. Only 72.8 percen i of appropriations in public health services were supported by allotment authority as of the end of September 1998. Within this subsector, the most badly hit activities were family health program with allotment cover equal to 50.1 percent of appropriations, the MOOE portion of physicians for doctorless commumtles (54.7%), Community health program (56.2%), STD/AIDS control program (59.9%), noncommunicable disease control program (62.5%), expanded immunization program (68.7%), primary health care (70.0%), dengue control (75.0%), rabies control (75%), and tuberculosis last quarter
control (75.8%). Additional allotmen t authority of 1998 such that the allotmentqo-appropriation
was issued in the ratio for most of
2 The accounts payable of the government piled up towau'ds the end of 1997, amounting to P108 billion (The World Bank. 1998. Philippines Social Expenditure Priorities. Draft. Pasig City: the World Bank).
Table 8. Department office
of Health, 1998 appropriations,
only), as of September
Railo of Aliotments
A. PROGRAMS
and obligations,
Office ofthe
Secretary
(central
PS
MOE
0370_
0-7500
1.0000
0.v066
to Apl_ropriali_ CO
Ratio of Obligations TOTAL
PS
MOF
to Appropriaficras CO
Ratio of Obligations
TOTAL
PS
MOE
0.1895
0.4368
0.4977
to Alloime_xts CO
TOTAL
AND ACt W[TIES
I. General Adminisirado_ II. Support
allotments
30, 1998 (Current).
and _apport
to Operatltxts
IIL Operations a, Public Health Services
e.. 0.4].90
01623
(]3_33
0.4S24
0.75@0
03770
0.4678
0.q269
&0000
0.3569
0.4678
0.4646
@JBfl00
0.4593
1.0000
02011
1.0000
0-728._
0.6469
02-209
0.@391
02_69
0_69
0.3151
0.0591
035Z7
1, Family Health Ntzizitim_ and Welfare a. Materrml and C_d Health Serv_e
1 _0O 121000
02327 0_@15
1.0000 1.0000
02485 09109
0.6._6 0.6_7
0.2003 0.1_
0_91 0J0391
0.2211 0.2370
0_6 @fJO@7
&2_o4 0.21_9
0J0@91 0.O09q-
f1.7._54 0.2602
b. Nt_trltio_ Service indudh_ 8 Sz@ Iodizaticm Program c. Family Plarmmg Service d. Dental Health Servic_ e. Comff_ctlof ERarrheal Diseases
1.0000
0_6960
02248
0,6952
0A281
0.4_8
0.6952
0_6134
0.6234
1.0000 1.000(]
0-750@ 0.7500 1J0000
0.7836 0_462 1.0000
0.70_ 0.6335
0L22_2 0.1419 0.0@21
@.29_3 0.8312 8.CO21
0.7068 0_xq38
0_q056 0.1892 0J0021
0.3743 0-3918 0.0@21
0_866 1.0000
0J6866 1_O00
0.12.59 0.5627
0.12-_9 0.5627
0.183@ 0.5627
_0_3 0._627
0._013 0_862 0-7268 0-7_@2 0-7500 0-7500
03@13 0.71.30 0.7348 0_'575 0.7584 0_763
&0q@3 0_2279 &IW0 0.4709 _1@13 &4@29
0.0_8 0_6 0.29.53 0_.77 01217 03125
0.1861 02021 0.2435 0.6Z77 0.1391 0.5_7"2
_1861 @3697 0_@4 0_._5 &1604 0L5849
0.7500 0-7500 0._614 0.7500 8.75@0 O.Y_O
0.7_00 0.7500 0_ 0_111 0.73(]0 0.90_
0.83:30 IX@220 _5_47 _6438 _0401 8.2988
0_3 0_@220 03288 0.6447 0.0401 036_1
0-7_00 0.7495 0.7500 @_:d]_3 02378 0.5656
025(]0 0.74_v_ @.7500 O_q3@ 0_ 0.5656
8.90,8,3 01.2019 @36@2 @_136 @.2979 0_3_
0.9383 0,2@19 0.3_2 0.$506 0.4_1 0.80@8
f. [mmtmizaiion Program g. Cor_ol of Acute Respiratory Infection/ Integrated Child C_re Management h. Family Health Program 2. Nat_orml Utsease Ccmtr ol Program a. Co_ammica ble Disease Centrol Proszam 1. Communicable Disease Cen@rot Service 2. Tuber culo,4s Cenbrol a. Tub_ Control Set vice_ b. _pine T_erculo_s S_dety c. National Tuberculosis Contr_ Program 3. b_'D/A1DS C(m/_of Program 4, Malaria Cem_oi Program 5. Rabies Cor_rol Program 6. Schlstoaon_r_ Con_ol Service 7. Dengue Contzol Program 8. Fi]ada Control Program 9. Naticmal Lepz o_'y _tioa Frog*am b. N_ommu_d_ble DL_s_ Contr_ Program 1. Nonoommtmicahle IXsea se_ Service 2. Cardiovascul_ Disease Ccmtrol 3. ,_anokir_ Ce_lion
Program
1.000@ 1.0000 1.0000 1.0000 1.0000
1.0000 1.0000 1.0009
1.0000 1 -riO0@
0_45_ 0_ 0,6598 0J6198 0J6198
0.4_35 0_M66 02047
0_325 0_25
" _6_0 0,0165 0300"2 " 0.4828 0.0300 0_40
0_25_ 0_165 0.3167 0.52_9 0,0301 052_8
0.7(B7 0,1_i.q 02912 03_0 0.2198 0_t346
0-v_37 0.IS13 02912 02,441 0A232 0.4546
0.6454 0.6484 0.6_98 0.6198 0.6198
0.4_5 _6466 &7047
0.6325 &6325
0-75@0
02500
@31S8
0_q158
0.4210
0.4210
4. Caucer Co_re_ Program 5. m/rides* Pre_mti_m Progrmm
0,1766 0.7500
0A7_6 0.7500
0.1237 0.45_r7
0.1237 0_t577
0.7.595 0_610@
0.259S 0.6103
6. Preventive Nephr ology 7. Na_icmalPreven_ve Mental Health Pr o_r _m
0.5923 0_04
0.5923 09001
0.2947 0.7780
02947 0.7780
0.4975 0J8362
0.4975 (X8362
.
_e_ _,]
Table 8. continued... O0 Ratio o_ All_mevas PS 8. Occupational Health prc_am 9, National Diabetes Program 3. En_ir caxtnent_ Health Program a. Enx4r cmm_ta 1He_l Ih Service b. Opera tio*t of Lrde_-Agency CommiRee o_ En%Honm_tal Healflx c.HospRal Waste Managemem 4. C ommLmily Health Program a, Cgmamamlty Health Service b. TradRicmal Medicine Prog_m c. Health Developmot Program d. _LaxiOz-based Rehala_-t afion Program e. Imdigenous P._ople 5. Provision fo* a pool of efgJaty (80) R_ral Health Physidans for Ooctoatess Communities b. Primary- Health Care Prog_m c, Health Fad_ti_ l_{aimenamc_ and Operati_ms d. H_ltk F ao3h'y StandaxcLs, P,_htlons and T.icensmg e. Drugs and Medicines j. Wctmer_ and Cl'.fldren protec_oix Program k. Re#onalAsslsianoe Fund fc_ Drugs & Miczc_tulfienls Subtotal, llI TOTALA
1.00_ I.C4@4 1.00(]0
1.0O(g) 1.0000
1._00 [#.CO00 0.S912 1.0000 [#S_388
0.9877 0_64-
MOE
to Appropriations CO
Ratio of Obligations to App_opria tions
TOTAL
0_500 05400 0.7_=g10 0_500 0,7497
0._'WJO 0_00 0.818t 0..83_(]d'_uR5
0YS00 05241 0`7_00 0.6175 4}.40(17 4}`7500 0.7500 03470
0.7_0 • 0.5618 0.8811 0.6175 0.4(]07 0.7500 0,7_30 0.8441
0.7488 0.7891 4}.7500 02174 011491 0.7_ 0.6885 _=,_919
0.7014 0,8532 0.85_4 0.2365 0.0491 0.7500 0.7Z71 0.6_17
0.990[# 0.750[#
0.9716 0.9617
PS
0.7852 0_'_88 _0.6893
0.6069 0.6069
[#_78 0_0_0 [#fa224 [#_o,'_ 0.4672
0,6343 O_
MOE
CO
TOTAL
0.6039 0.0747 0.4621 0.5419 0.441[#
0.6099 0.0747 0._i02 0.6209 0AT&5
0.0802 0.2831 0.1 T57 0.1040 0.So_. 0.`7'330 [#,0000 0_24_
0.0802 0.3086 0AO19 0.1044} 0.389_ 0.7330 0.0000 [#.4747
0.2496 0.6134 0L450_ 0.4}199 0.04_ 0.750_ 0D_39 0.2907
0.2338 _LS_(_ 0,47c23 0,0_17 0.0000 0.7500 0.3101 0.2._"
0.0762 0LIFO0
0.0662 0.068_
Ratio o_ Obligations PS
0578_. 0,7882 4.689[#
0,(O69 0.6069
0.597_
[#.6279 0.66_ 0.4976
0.6t22 G_o"i
MOE
to Allotments CO
TOTAL
0.8132 [#.1¢94 0.6162 0J2Z5 O_g2
0.8132 0.1494 0J6W'*.5 [#.7479 [#J60_'1
0.1009 0.5898 02543 4}.I68g 0_480 0.9773 0/11000 0.43 Y2
[#1069 0.5492 0.4561 O1684 0.8480 4}9773 0.0004] 4}.8624
02_q_ 0.7773o 0.6011 0/]915 0.0000 ]_000 0A123 0._O1
0.0682 6_8
fl3_3[# 0.6106 4}5604 0,1342 O.OK]40 1.4_]40 0.4266 0Xe3_
IJO000
1_0000
0,0769 [#,0000
B. PROJECTS L Locally-FundedProjeci_s) a. C4mstlucd m'_ Improvement, Rep_Lkand Rehabflit a tion / Renovatlmx indud_g _e Purchase o/Equ_ment of 8pedaI Hos_italg Medical Cer_ers, Sat_tazi_ R_caxa 1 Hosl_t als, C,_a_r al Off, e% Re_onal Held Office and Other P-_Iat ed Fatalities on a PfiorRy Basls as may tie Detmunlned by the Se_etary c_ Health b.Health St aius S4_x_ey f. Coast_mt/mx and Expan_on H_pital, Bag.Mo C/_h. Assistm_ce to Man_luy_t$ Mandahr),ong City L Proo.zrement j. _
_-_. 0.750[#
c_ the Bagu._ ,G_.eral Medkal
Ce_t_,
4}.0267
of Medidn_ and Heallh Ktis of Deop lqo_.s for NaRcaxal Mmatal Heal_
0_86_
0,7500
i_000
011400
0.0018
0.0.371
4_0000
0.0041
10000
8.16G_6
4},0230 $.75_
1_000 1_]0
1_000
1,0000 1.8000
0__0
0.412
o_s_s
0.4222
0127_
4}AL3b'I
[# _ 5;01)
4}.0658
0.0(300
0.0011
0.0267
0/]230
TOTALS GRAND TOTAL
0.7500 4}.0168
0.0230 3"`7_0
0.0230
3.1676
0.18S0
O.OSn
Om_S
4}.I0_8 4}.0200 0.C_2_
0.6673
02"295
0.6015
Source: Department of Health, Office of the Secretary.
031_8
0.2817
0.0292
0261.7
0._51
1.0K](lO 0,0000
0£o--76 1_000
_o " _,,. "
Table 6. Department office
of Health,
only) as of December
1998 appropriations,
and Suppolff
to Opera Hoos
IlL O_ra_ons a, public Hea_
Office of the Secretary
(centr_
_o Ap_opria_o_s
PS
MOE
CO
0_700
0.7500
1.0000
0.70_6
09500
1._00
0.9(_75
1.00(gl ]._
0.969£ 0,9427
1.0(_0 1.01_ 1.0()00
Ratio o_ Ohligaii_s
lo Appr oI_alio_s
TOTAL
PS
MOE
CO
0.4190
0.2537
0.5786
02770
0_9888
fl.5432
02500
1J0000
0.9159
0.99_0
0.4402
1.0000 1.0300
0.9716 0.9569
0.99_ 1.000(}
0,;3_68 0.2_69
0.9637
0.9669
0,99_
0.8802 0,9113 1.0000
0_263 0.9454 1.0_0
l_0000 1.00{)0
1,0000 1_00
1.00_0 1.0_0
06833 0.8632 0.9139 0.9063 0.9609 0._9_9
0.6_3 0.8749 0.9228 0.9841 0.96_2 0.9475
0.75_
0.7500
0_05 0,8654 0.9790 0.8568
0.6621 0_8_ 0.9790 0.9476
0.9732 0_245 _
0.973'2, 0._45 (Lq0_
TOTAL
-q ' •
gatio of Obligali(ms to _ PS
MOE
CO
TOTAL
0.29.=6
0.6_7
02715
0A55_
0.98_3
0.7720
1B0(10
0£4.?5
0_91
0.4865
0.9980
0.4851
0_91
0.5_12
0.0_91 0.0391
03851 0_q675
0.9999 1.0000
036'_ 0.?d)4_
0.0391 0.0391
0,,.-q6_ 0,3841
0.54_
0~_
0.99_
0_06
0.6100
0,4945 0. _'_19a3 0. 00"_
0.5625 0.5"190 0.007_I
1.0000 1.0000
03618 024_ 0,(]070
0.6_6 0.5498 0._g0
0.3109 0.562Y
031_ 0.5627
03109 0.5622
0-3109 0.5627
0.2614 0.5424 0.5826 0.7268 0.6021 0.5646
02614 0.5812 0.6248 0.9431 0.61b'! 0-77_
03825 0.6284 0_374 0._97 0.6267 • 0f_15
0.3825 0.6642 0.679'1 0 _L_84 0fao392 0_13
0.75_
03_00
1.0000
1_00
0-3629 _13 _ _
0.4174 0_3"71 0.7050 0-_6
0_-o6 0_023 02204 O-.q_8
0_q04 0_2 0.7"204 0_94
0.7182 0.6399 021.71
0.7182 0A._99 0.71TI
0-_0 0-7161 02639
0.7"380 0_761 02639
ACTIVITIES
[. Genc_r_1 AdmlnlSbrati_ [I, Suppo_
and obligations,
30, 1998 (current). Ralio _ Allo_enls
A, pROGF, AMS AND
allotments
0-71155
._ Services
1. Fa ma'ly HealtlxNulfiliorL and Wd_'are a. Mat_'n_l and O'a3d Heallh S_'¢ice b. lXhll_tio_ Servi_e Lr_l_ Salt [odizalio_ Program _ Family Plarmmg ,servic_ d. Dental H_allh S_¢ice e. C_.(m_r ol of lY_arrheal [3gseases f. In_o_alion Program g. Co_r ol of Acute Raspir a_ca'y lrJe,c'doa/ lnte_ated _ _ ..Manag_t h. t;amily Heallh Program 2. Na_d Disease C.on_o_ Program a. Comm'ard_ble [Xseas_ Cam_ol Program L Commum_cab_e Disease Control Service 2_T_beroalo_s C._rt_ol a l Tuberc_dosis Control S_vic_ b. Fl'a2ippi_e T_erculo_s
Society
3, STD/AIDS Control Prc_m 4. Mala Ka ConhroI P_ogr _an 5_Rabies Control Prosr _a 6. Schis_om_mia._is _ Se_c_ 7. I_o_ _ Pro_r_ar_ 8. _ Cobol Program 9. National L_?r(_sy _agnatio_
1.0000 1.0000 I.O0(D 1.0_0 1.00_
1.00_0 1.0(_0 1.00_0
Pr ogzam
0._9_0 0.(3943 0.9878 0._72 0.987"2
1.0000 0.99_h72 I._000
0.99_ 0.9943 0._78 0_72 0_2
1_0000 0.99_ 1.0000
bO qb xO
t_
Table 9. continued... Ratio _f ALtotmenl_ toA_ol_atlon_
b. N(mcc_tmicable Disease Control Progxam 1, Noncomir, un_hle IX_ea se C_trof Service 2, Cardlovascular DS_ease C_Irot 3. Smoking Ce_alicm P_ogram 4. Cancer Coned Prog_m 5. _Jz_ess th'e'v,en6m_.Program 6, Prevenllve Ne_olog)-
7. National Prev_ve Mer[_l Health Program $. OCC_lOalio_ HeaJt_ Program 9. Nalkmal Diabeles Program 3. En',Ar_:m,e_la 1Health Program a.Ertv_anaental Health Ser_ b. Operation of Inter-Agency Commi_lee on E,n:v_ ,..'a',am.en'_ alHealth
PS
MOE
1.0000 1.00(_
• 0,7624 0_674 0J(_2 09572 0,5_-7 0.7964 0_9,4
1.0000 1.0(]00 L CE](10
c. Ho_Jt al Waste Management 4.
Comn-amity Health Program a. Co_m_mity H_alth Servi_ b, Tra dd_iortal Med/cine Program c. _rmaIth Developmenl Pr o_rmn d. Commtmity-based
Rdm bflitzti_t
1.01_0 I.CY'J(30
Phy_iclams t_r Dodorless Cc_nmum_li_ b. Frimary Health Care Prosr am c. Health Fao3itles Main_c_ and Opezations d. Health Fad]JtyStandards, ReguIatimas artd Lic_.nsing e. Dru_s and Mediates j.Women and_ChildrenProt_ffion Program l_ 1/_ional Assi_no_ F_rtcl fc_ Dru_ & Micr onul_i_ts Subtotal, Ill i
TOTAL A
Ratio of Obligatio_ TOTAL 02742 0.9327 0ffGI32 095_2 0579_7 0.7'964 0_TcJ_i
1_ 0921B 0_9357 0.._,_" 0£_322 05977
1_)_0 0.9218 0._357 05_85 0._0 09112
059_
05936
0.7104 09q29 037382 0_145
02332 0.9,.586 02382 0.6145
PS 0.9995 0S995
0,99_ 12_0 09471
l_fl@0 1_4_0
MOE
to A_ropriali_s CO
Ralio of G_ligatlc_s TOTAL
0.46_ 0.44_ 0.5130 0.7121 0.2273 0.587] 0.5L'_95
00894 0.7155 0_730 027121 02_"3 0.5_71 0..qJ3f__
0 5Z51 0.662.4 0.]if00 0.5514 0.6a_Y] 0.5738
0.6251 0.6624 (I.1700 0.'&'v32 _ 0.67_.7
0.1068
03066
0.4286 0_27 0-5052 0_]45
0.4736 0_51 " 0.5052 0.3448
to A/lotmer_s
PS
I_OE
0.9_5 0SO95
0,6069 0__$6 0.7295 02439 0,4348 02372 0_q794
0-6o_21 0,7704 0,7295 0.7439 0.4348 0.73o72 O.b-"._c_
0_ 7-_I 07185 0.1816 0551_ 0_76_ 0.6o'91
0.B251 0.7185 03816 (]37578
0.1195
0,1195
05_3 03699 0.6844 0S_611
0,6459 0,7147 0.6844 0,5611
0,_,4 I f_l 0.9471
1.0000 1.0(]00
CO
TOTAL
O.&'vG5
094_
0,9470
0ff329
0.7329
0-7739
0.77"_9
1.O300
I..00£_ 0.7154
1,0000 09_2-0
1_
0,6755 0.2o407
O.6Tm-J5 0.7356
1,0000
0,6'755 03365
0.6755 0.81_8
(k0000 O,_912 1.6000
0.7488 05500 02._0
0.99_0 0.7500
0.701-4 0.8947 08,_1
020000 0-q_I 1 09961
0,4040 0,7498 0,5504
0J0762 0_Jl_
0.37E4 0.6670 0.6659
0_ 0.9:)61
0.5395 05822 02339
0.9585
0_Y/6
0.8675 0.0491 0.7500 0_946
0_[F_3
0._77
056_ 0.0491 0.7500 0.8812
09857
0.4140 0.0050 0.7_0 0.4_79
0_1675
0,47.71 0,0050 0_00 0_-t4
0.5864
0 J_6L3
0,9617
0.7929
0.5002
0._,._8
O_q9
0,4_89
Program
e.Ic'a:ligenous Peo_e 5. Pro_i,_on for a pool of e_ghty (80) Rural Health
CO
0.0_769 0.0204
0._95 0.7455 0_7_4
_9979
0A7-'_ 02024 I_000 05,507
0_94
0.4924 0.1024 1,0000 0_828
0.8684
05756
0,1018
0.6166
0.9_5
_1_
_" _. _.
(_ [
f_
.'9. Table 9. continued... Ratio of Alla_'nent s to Appropriations PS
B.PROJECTS I. LooOy-Funaea pm_(s) a. Cor.__trudior., Improvement,
MOE
CO
Ratio of Obligalic_s
TOTAL
PS
MOE
to ApproF.riaiians CO
TOTAL.
Rat_. of Obligations PS
MOE
Repair and. Rehabilitation/
to A1]ofme_B
_r_
CO
TOTAL
0,4895
0.4895
0.9_15
L0000 0,3210
Renova fion iv.dutding _he Put close of Equ_pmeB! of _c_p e,c_l Hospitals, bf_:_ cal CJ_r_s, Sar,itarla, Red,real Hospitals, Cen_al Offiee, Re_al Field _ and Other gdat sd Families c_t aPriority Basis _ maybe Detemdned by lhe ,Seorelary c_ Heall.h b. Health Stak2s Sua'vey f, _o_t and Eacpansk_ of the Baguio Gene_a] Hospital, Bag_Ao Oly h- Assistat'_ to Mandaluyong Medical Center, Mandaluy_ng City i. Pro OLJS,eu,.ent of MedJdnes and Health KI_s j. _on
_ Deep Wd]s fc_ Na_mal TOTAL B TOTAL
0,71500
0._67
03"500 0_6_K3
0.7500
0.0l_ 0.0(100
0.0041
0,001_
0,0230
OLO00iO
0,0230
Merttal Health 0_864
0,1883 0 J_.B5
3.1676 0.04 ,r'4 0:2406
3.7500 0.084S 02097
0.5092
0.08째_ 0.4760
0.0152
0-7500 0.0210
1.000(3 0,1186
0.0000
0.000(]
0.fl000
O,OOO0
O.OIXIO
33.676 0D465 0.4_69
0.8684
0.000D 0.4749 0_,_745
0,4991
0,9_32 1,0000 0.6376 0.9857 0.9055
0,9662 09662 0-5754
3,16_76 0.(B01 0.0446
0.0000 O.ODO0 l .(X)00 0.6637 0.1852
0,8447 0.,r_480 0,6156
0.1_52
0,_2 1J_0 0.88_" 0._ 0.64_8
Sub-allotmenL A_t_m_afic Appr(_i_t (LiFe & Retlreme_t) Prodt_ivity lncen_ve Boreas M_scel.laneo_ Per soBnel B enefits TOTAL SUB-ALLOTMENT GRAND TOTAL
0.8o-76
0,8305
0.2406
0.7729
0.7765
0.4 _P_
0.0446
Source:Departmentof Health
N_
212
Economic
these programs
surged to 95 percent. The rati0 for STD/AIDS
portion for physicians for doctor less communities, however, remained at about 75 percent, i
crisis... Once more control, the MOOE
and primary
health care,
Moreover, actual delivery of services appears to be adversely affected as the obligation-to-allotment ratio reached aia average of only 53.1 percent for public health services at the end of December 1998. In particular, the ratio for maternal and child health services, nutritior_ services, expanded immunization program, family health program, and the !MOOE portion of physicians for doctorless hospitals were all below 50 percent. For immunization, there is some data, albeit incomplete, that shows immunized children in 1998.
a decline
in the proportion
of fully
Department og Education, Culture and Sports (DECS). With over 80 percent of its total budget earmarked for personal services, the DECS has very little room to maneuver in times of fiscal restraint. Thus, in 1998, it found itself having to reduce the allocation for key educational inputs like textbooks, desks, school buildings, and teacher training. In particular, obligation authority (or allotment) for desks, chairs, textbooks, and instructional materials amounted to only 37.7 percent
of total appropriation
cover (Table 10). To make matters
worse, no expenditure obligations were actually made for this expenditure item as of the end of December 1998. This situation aggravates the existing textbook shortfall, with the current textbook-pupil ratio of 1:8. In a similar vein, the allotment-to-appropriation ratio for land and land improvement was a low 19.6 percent whereas those for teacher training and Government Assistance for Students an a Teachers in Private Education (GASTPE) were 63.4 percent and 75.0 perce_t, respectivel)_ The gap between I allotments and obligations for these items, however, was nil. Enrollment figures in both elementary and secondary levels were lower than normal in 1998. This may be attributable to households' inability to provide out-of-pocket costs 3 of education even in public schools which have been estimated to amount to 27.8 percent of total unit cost (or P1,830) at the elementary level and 41.2 percent of total unit cost (or P3,030) at the secondary level. This result indicates the need to reexamine and rationalize the government'_ scholarship program (particularly the GASTPE) in terms of both coverage and support level. 4
Out-of-pocket uniform.
costs include
expenditures
on transportation,
textbooks,
and supplies
but not
4 It has been shown that the support level of the Education Service Contracting (ESC) and the Tuition Fee Supplements (TFS) is low such that only families which are relatively better off are able to leverage then" own resources and enjoy the benefits of these schemes.
Table 10. Department
of Education,
of the Secretary
Culture and Sports,
1998 appropriations,
alllotments
(central office only), for the period ending December Ratioo_AlloementstoAppropriations
and obligations,
Office
31, 1998.
Rat_oofOb_ga_ons toApI_Ol_na4ions
Ratioo[Obligatiore toAHol_esds
PS
MOE
CO
TOTAL
PS
MOE
CO
TOTAL
PS
MOE
CO
TOTAL
1.00000
0L_5479
050000
0.88745
1.000_0
0.TS479
0,50000
0L8_745
1.00000
1.00000
1.00000
1.00000
L00000
0Lg0165 0,61543
0.91704 0.63447
L00000
0.9¢3t65 0.51545
1.00000
0.91704 0,63447
1.00000
L00000
1.00000 ].00000
1.00000
1.00_00 1.00000
'_ *•
A. PROGRAMS AN*D ACTIVIT]ES I. Gemeral AdmlnL_atlon snd Support a. Genexal Adm_n at_l Support Services _- General Mat'_g_nept and S_p_'v_ion 1. Get_esal a_ti_e _cvices b, Operation and _ of C_ c _an R_s Trah_ a_d Develol_met_t tnd_di_ _n amount of P15 Million [cor Teacher's Tr_in d. Contr_t_tio0_ to Vinous A clivilie s
b_
.
Ottt-o_-School Ad,ah Edu_ tlonFx.'_g_ am Subtol al, [ IL Support
to OperMions
.
g _00584
0.80_64
0.808_4
0.008_1
1.00000
1-_000
0750{)0
0.75000
035000
0.75000
1.00000
1.00000
1.000q)0
0.76_,58
0.86300
1.00000
0.76858
0.86309
1.0000 0
1.00_00
1.00000
0.60302
0.66667
0.88246
1.00000
0.68302
0.66667
0.88246
1.00000
Lt]0080
1.00000
1.00000 LS00(]_
0._1128 0,81818
8_004_
0_24074 0.81518 0.75{)000
0.2412b 0.81818
8.00080 0.7-0000
0.24074 0.81518 0,75000
1,00008 1.0{)04100
0.75000
1.00008
1.0_80 1.00000 1.00000
L00000
1,00000
1.00{)00
1.00000
0._O00
0.75000
0.{)0{)00
0.00000
IU. Ope_aRor_ e.RegionalOpera_._ 16. NATIONWK3E Requiremez_ o_ N mcly-C..reated Pos_b0ms 34 Re_ fmr th_ioll_rmg Pcsi_o_.s AuSu_zed in 1996 8_c_ _oAc_l I_l_yme_t by Mm_i_IRies a. Te_he_ I Po_tiot_ (_800 Items) b_ Public I'#.md_t Ntu'sePos_5o_s (2,240 _e_DnS) b. Gov_r_mera Assistat_ce to Students and Teadlers inpnva_ Education(GASTPE) c Lump-sum _ Re_l_i_fion of Posli_ts
1.0_000
e,Pre-SchoolEducation £ Secondary Educaeon 1. O_.rat_onal Expenses o_ Newty-Le_e_d/ Fmtabllshed High Schools b.Putchasec_Desk_ Chahs, T_tbook_ Insiz.action_ Matenalr_ Tc.ols, "_ar_.t_e. Ext,_,_ Comptaers end other _l_/n_sa m_ I.Au_ps_tmforLand at'_l Uaml Imp _ovemm-aOutley Sul_o_tl, IH To_[
Source:
DECS,
Office
of the
Secretaiy.
0_782
0_0000_ 0.512_
0.47949 0.00000
0..3":7714
8_5_2
0.{)0{)08 0.000043
0.47949
1.00000 0.800{)0
R000@8
i.{)0{)00
0.0{)0{)0 0.0000_
1.0000_ 0.00flO0
000000
0,19595
0.19595
0,IT380
0.17"3{)0
0,88697
0_8697
0_1
_66390
0.03403
0.58369
0.5_351
0,46453
0.0_18
0.46676
].00000
0.69970
0.80697
0,_967
0.68070
t167_01
0_4449
0.63371
0.68070
051052
0,04_70
0._3732
1.0{)000
0..'_296
8,91497
8_4Y90
t'O _,
214
Economic
crisis... Once more
Appropriations for two items (new teacher positions and newly legislated high schools) were largely left unfunded. The allotment-to-appropriation ratio for new teacher positions was 24.1 percent, whereas that for new high schools was 47.9 percent in 1998. While these items may not be that critical given efficiency considerations, it cannot be denied that funding shortfalls may cause short-term problems? Department
of Social
Weffare and Development
(DSWD).
The most
severely reduced programs of the DSWD were the assistance to persons with disability (with an allotment-to-appropriation ratio of 41.8 percent as of end of September 1998) and calamity relief operations (45.7%).6 All of its locally funded projects, including the Comprehensive and Integrated Delivery of Social Services (CIDSS), had ratios equal to 75 percent (Table 11). It is notable, however, that the absorptive capacity of the DSWD is rather high. The obligation-to-allotment
ratio in most activities is close to unity.
Nationalgovernment budgetin 1999 With the government's fiscal difficulties continuing in 1999, aggregate national government expenditures net of debt service (based on 1999 GAA) further declined from 15.8 percent of GNP in 1998 to 15.2 percent. National government expenditures on economic service sectors posted some recoverjg Aggregate expenditures on economic services were the fastest growing major expenditure item in 1999. Thus, infrastructure expenditures inched upward from 1.8 percent of GNP in 1998 to 1.9 percent of GNP in 1999. Also, expenditures on both agrarian reform and agricultural serviaes registered substantial growth. In spite of this, agriculture expenditures in 1999 stood at 0.6 percent of GNP, 25 percent lower than the 0.8 percent average in 1975-92. This appeared to be rather inconsistent with policy pronouncements giving priority to the agriculture sector. On the other hand, it is worrisome that national government per capita expenditures on education and health services declined again in real terms in 1999. This was the second year in a row that this occurred. LGU revenues Revenues
and expenditures
Fiscal austerity measures undertaken the East Asian financial crisis have adversely
by the government in the light of affected local government finances.
It has been pointed out that the high pupil-teacher ratio in public schools is traceable not so much to a real shortage in the rmmber of teachers in the DECSpayl"ol!but to problems with deployment of teachers. 6Data for end of December was not available as of wl_ting.
Chapter 7: Manasan Table 11.
215
aL
et
Department
of Social
appropriations, Cecretary
Welfare
allotments
Development,
(central office only) as of September Ratio of AIIotrm.'nts to Appropriations TOTAL
A. pROGRAMS
and
and obligations,
1998
Office
of the
30, 1998.
Ratio of Obligations
Ratio of Obligations
to Appropriations TOTAL
to AUotme_l_ TCfrAL
AND ACTIVFTIES
1.Gvn_ral Adll_inistrafion and Support a, C__.rteralAdministrath'_l and Support _¢karvioas I, C_neral Manal_ement and Supervision b, l'r_×'iucfivlry M_.x, ntix,e I_,nus
0,87231 1,1_X)00
0.772._ 1.0(Y_(_l
0.88569 l.fl(I)(_
I, Family and Comnmnity Welfare 2. Child arid Youth Wel fare 3 Woraan's Welfme 4, Disabled Per_m's Welfare
0,86T34 0.67152 0.63824 0,8887B
0,82510 0.(K6774 t).631EO 0,87694
0,95131 0.99438 0,98945 0,98667
5, Ewargtn_y
O._'_/(I
0,48729
0,99873
0.45737
0.44"158
0,96546
0,41824
0,41824
1,00000
0.63173 0.79948
0.5406_9, 0,79818
0.85579 0,99837
0,75391
0,72,185
0,96145
0.7,_O86 0,75000 fl.7_(ll0 O,750fYO 0,7-_IX)
0.74976 0,74867 0.75(1/) 0.66787 0,74_}
0.998,53 0,99822 L00fK3fl 0,89050 0,994_)
II. Support to Ol._rarions a, Policy forrnulaliort, Stand_lrd Setting. Progran-_ t3avt, .tk_ial R_earch, Inmrnational and Local Networkin B, and TeaahnicaI A_ista_'_c-e
Asis tance
Ill Ol._n_ tions a. A_$1st,illl_-_Pl,Ogl'all_for Distressed al_d Disadvantage Population "l.Natiowvide Emergency A._sistatlce\Czlamity Relief Opera t ion.%e_. 2. AssislanCe to Persons with Disability i_tch.tdJa_g P15,000,t"(]O for F-_nior Citizens 3. Protective Services for Childrt._x and Yolltlx Especially Difficult Circttillst_lnces c, Mahal_'tance _d Operatit_aas of Cea-_ters and Inst TOTAL B. PROJECTS l, i.ocany-Runded Proj,_,ct(s) a, CID_ in the MOStDepressed Provs ul_der SRA b. Suhmg Dunong Pare sa Kabataan c, Ttd_W 2fl(I) d. Special Proiect for I'overty Mappin_ e. SEA-Katu!laran [1 f. _amily Welfare Ftmd
0.7_00
0.1¢-,667
0,22222
Tt.YrAL
0,75(_)
0.74510
0.99241
GRAND TO-I'A L
0.75268
0.7328-9,
0.97362
Source:Department of SocialWelfareand Development,Officeof the Secretary.
Early in 1998, the national government announced that it will withhold 10 percent of the IRA share of LGUs. Although 50 percent of the total amount withheld was eventually released to LGUs, unfreezing of mandatory reserves was made very late in the last quarter of the year such that LGUs operated within the more restricted fiscal framework for the most part of the year. In fact, approximately half of the LGUs in our sample reported that partial lifting of reserves was only operationalized in January 1999. Imposing a 10 percent reserve on the IRA share of LGUs was equated to a measly 2.6 percent growth in the IRA level in 1998, whereas a 5 percent reserve
216
Economic
crisis... Once more
meant that, on the average, the 1998 IRA Was 8.3 percent higher than its' 1997 value. These figures are way below the projected 14.0 percent growth in IRA in 1998. Many LGUs likewise registered a decline in locally generated revenues over and above the reduction in their IRA shares. This situation is true in 7 of 20 LGUs in the sample (Table 12). In these LGUs, total locally generated decreased by 0.9 percent to 49.8 percent in 1998.
revenues
The shortfall in LGU revenue inflows from local sources appears to be largely driven by significant reductions in nominal real property tax (RPT) collections. The RPT collections of rural LGUs appear to be more adversely affected than those of urban LGUs. Thus, 7 out of 11 municipal local government units (MLGUs), 2 out of 4 provincial local government units (PLGUs), and 2 out of 5 city local government units (CLGUs) in the sample had lower RPT revenues in 1998 relative to 1997. The reduction in RPT collections ranged from a low of 1.1 percent to a high of 29.5 percent. In contrast, non-RPT tax revenue collections of CLGUs exhibited a greater tendency to decline in 1998 compared with those of MLGUs and PLGUs. Note that non-RPT tax revenues in 2 of 5 CLGUs decreased MLGUs had a similar problem. Table 12. Percentage
chance in locally RPT '
Province Bulaean Iloilo Misamis Oriental Southern Leyte
sourced
GROWTH RATE (%) Other Tax ' Nontax
in 1998 while only 2 of 11
revenue,
1997-1998.
Total LSR 2
Ra rio of Actual LSR to Estimated LSR
0.26 23.25 (1.70) (0.02)
(0,29) 2.46 3.21 (0.04)
0.26 5.30 (20,27) (0.10)
0.14 16,70 (19.01) (0.05)
100,00 125.61 71.43 8G50
(1.06) .(5.31) 8.74
12,88 (5.02) 6.47
(58.93) (8.28_ 12,37
(18.34) . (5.50) 8.18 '
91.70 76.23 100.00
Cities Antipolo Q_lezon lloilo Cagayan Dovao
de Oro
Municipalities San Jose del Monte, l_ulacan Bauan, Batangas B_na re, IIoilo Leon, Iloilo San Miguel, lloilo Libagon, S. I_yte Padre Burgos, S. Leyte Tomes Oppua, S. Leyte Gitagum, Misamis Oriental Libertad, Misamis Or[erttal Opal, Misamis Oriental
8.23 25.78
15,95 (12,47)
(14,24) (27.68) (7,99) 1,97 26.01 13,38 69.88 (6,97) (29,49) (22,39) (20.42)
11.70 5.58 (64 20) 25,41 15.43 25.09 9.95 (6.24) 8-56 29,00 30.38
Notes : ' RI_ - Real Property Tax 2Locally SourcedRevenue Source:Local Government Units.
8.42 26.56
(23,05) 19,92 (49.51) (8.70) 18.98 (7.23) (3.17) 37.96 25.75 , 29.25 19.70
11.86 4.22
84.57 68.99
(9.11) 11.84 (49.75) (1.22) 20.64 2.11 6,00 10.30 (0.91) 22.63 16.39
119.77 98.00 23.65 106.49 _12.93 94,09 49.95 68.14 93,36 45,16 47.98
Chapter 7: Manasan et al.
217
But what perhaps caused greater dislocation in local government finances in 1998 was the overall shortfall in LGU revenues relative to projected or programmed levels. Actual local source revenues in 15 out of 20 LGUs in our sample were lower than target levels in 1998.The revenue gap (i.e., the difference between actual collections and target levels) was substantial in most LGUs, ranging from 4.5 percent to 92.4 percent of actual collections. Expenditures Because projected revenues were generally higher than their actual receipts in 1998, LGUs had to adjust their actual expenditure obligations and disbursements accordingl)a The expenditure response of LGUs to the fiscal crunch was similar to that of the national government with one exception. LGUs in the Philippines are not allowed to incur a fiscal deficit due to recurrent expenditures. This means that when LGUs suffer a revenue shortfall, they simply cut back on their expenditures. Thus, the revenue gap is not reflected in terms of a higher fiscal deficit, but rather in lower levels of expenditures. Many LGUs imposed an across-the-board 25-30 percent cut on nonpersonnel recurrent expenditures (or maintenance and other operating expenditures, MOOE, in Philippine parlance). A few responded on a more targeted basis by securing expenditures in programs and projects that are high on the priority list of local chief executives while implementing greater cuts on other items. But on the whole, most LGUs reduced their overall expenditure levels. Thus, per capita total LGU expenditure fell in real terms in 13 out of 20 LGUs in our sample in 1998 (Table13).7 Specificall)_ this was the situation in 2 out of 4 provinces, 4 out of 5 cities, and 7 out of 11 municipalities. When programmed/appropriated expenditure levels were compared with actual obligations, LGU expenditures on economic services and other purposes were the most severely affected by the fiscal cutback in 1998 (Table 14). In particular, the expenditure share of economic services in total actual obligations in 10 out of 20 LGUs in our sample declined relative to the sector's share in total appropriations. In other LGUs, the share of other purpose expenditures in total obligations was reduced relative to their share in total appropriations. In contrast, LGU expenditures on general public services (consisting of general administration and police services) were the most resilient to the financial crisis. The share of the general public service sector in actual total obligations was considerably higher than its share in total appropriations in 16
7Some LGUs, however, were able to inca'ease their expenditures despite revenue current year by oh'awing down on their cash surpluses in previous years.
shortfalls
in the
Table 13. Real per capita LGU spending, Px_vince of fi=l_-an
I_ov/n_ _1_
oI
1997-1998,
P_o_-_ of MJsamis G_ental
current general funds
I_ovince d Son &m-aLeyte
Qu_zon CRy
An_po]e G_,
Ilo/le G_
(In 1997 prices).
Ca_y_m de (_o City
Dsva o Ciiy
OO
SanJc¢-_DM_ 8u]a_
3Cq'AL 1997 1998
285_8 260-_3
• 1_2.3_ 1_6_
1997 199_
11Z7_ 129.67
_7_ _3_14
1999" I998
145.13 1_7.40
_.09 _0.06
4_94 45_- 1_
451,9_g 45_
1,574.93 1,5"70.35"
333,09 445._
1,07l, E6 986. g4
1_935,90 1_0_.87
1,_L75 1,2_-01
359_,23 307".07
332.73 y24_ {_1
32K76 330.65
541.50 4___
1_336 14-_ _5
571.&_ 5_5_5
66_.20 636.95
42_08 378.9_
1_5._1 15-ti_3
II_'37 . t_'L85
8_._2 119_2
$14__3 697.33
1&9_8 1_25
430,71 415.M
38&31 389-09
_'_7,.41 780-74
122.{!_ 97.26
24.14 _._6
78.89 _
21960 1_50
_'gL5 113-37
182.4_ 1_i_64
1_&26 8_
84.39 _.19
111D._ 101.62
_25.11 594.97
_47.3_ 1K_60
5_.57 481.47
4_1.g5 _7_..89
680.59 57&_9.
243.20 190_X-2
44-96 70.12
L51.01 1_._
1_I_ 1fl_96
_-_f/$ 342.19
76.50 50.1"!9
5_[} _.[_
1_.40 125.L_4
_.42 245.4g
_-_26 160-64
43.17 _
Y_ta] l°S
Tv tsl MOCE
_otal CAtLVX 1997 1998
23".52 3.76
28_'-'q _9._$
1997 199_
SL29 97-T7
59_ _3_7
3.997 199g
32_3_ 09.25
I#.£7 1_._
1997 1998
60.91 5L_5
4.5_65 3_7
_9_7 1998
24.70 _3.18
fi&TD 9.45
To*a1_S 1[_t54 114.93 I_.57 l&O0
9.45 10,32
_ _67_
1"oraI Ecoa',omicSe_'ice 18554 191.44
17_26 l"f_ 8_
84-11 8_6
3_67 43.30
30.09 2_k_
9.56 _
41._6 _
34.71 _
11L&l _19_
25.76 1_..97
40.5.00 45_D.86
Ill.86 111.17
_24.22 ZW._
_15.00 _81
_24.18 :244.64
" 54_73 61 09
190-_ 190.19
5_86 37.54
14Z_ 151.80
_9_90 1_.65
153.73 14_1
15.54 15.56
I_.61 I74.66
_74 61.6_
3_.4_ 36.65
124.4,5 199_
19_69 1_5.$1
95.4_ 95.26
39.21 41.49
Economic Servic_ MOOE 9.89 395
28_5,5 17.59
To_] Se6a/S_r 1997 1998
125.96 109-4{I
20_ 29_"_
123.47 139.4-_
17L59 19_3.1_
1997 199_.
_"3._5 _ 42.6_.
._00 1.11
19.56 10.95
15.[_3 1636
1997 1998
_.._, _.70
730 950
1997 1996
21_ 11.70
_52 0.19
"l&l$ " 7,92
17.01 IE20
1[_$1 15.12
1.5.60 14_6
a_ 45,5g
5_L84 45.59
56.24 _9.35
6.,_' 7._0
1997 1998
25._ 21,94
532 5_
06.98 _5.,li
7&88 _l.'J_l
64.94 6_C_
9._5 2_._7
91._ 90.73
98,90 93.25
72_84 68.06.
30.88 36.66
_ _,_
1997
9_9
0.52
.7.16
652
1_81
_
_61
I_42
5.44
_'_
19_
_39
0.19
1._"1
7.29
15.05
11.85
1___7
24.97
?_.fi5
5+71
1997
5.76
0_
3,52
_
_
5Zfl_
19.4_
Z?._
3._'
¢._ I_
19_.
6.85
O:_
9.5"2
.7.93
_.4._
5.95
4_45
_xgo
_5.51
5.99
:_
1997 1998
1.71 144
_ O_
Z76 2_6
1-02 _
_-0g 1_
3_0_ 24.56
_L_5 12.._"
I&34 1_29
2.46 2.82
_'
Tol_l Hea]lh S_v/_ lll_ 1_.47
Health 8et'vlo__
Total Basic Health
-._ r_. k.;
Basic Head_hMO(_
"fotai $o<ial Welf_e S0oa_ W_J_a_et_$OOE
10.14
4_ 4.51
9.61
Table
13. continued...
_ Bz_ Bataa_as
Bar_te, fle/lo
Leon, I1o/1o
San b_ffue] _m3a
Libagm% Pa_e B_o., S. Leyte S. Ley_
Tma_l Oppe_ S. Izyte
_tasun_ Mmm_ Oz.
h'_ea_aul, Mi.a_d. OL
O_d, l_m6_ L'_.
1_61._ 1_g80_I
57]_93 _L_8
544_1 424.51
595.51 ._L95
648,33 84_K5
953.06 _
_35 73033
717-21 739.79
_.6J 5_-_
5_,4_ G33.36
4_72
324_8
4_625
6_.91
_59_
43_.43
51_.4_
68_62
429.55
66.46
1_.6_
1L7,45
1,_0.N
L96.72
197J_"
76.95
1._9,4._
140-69 _9._
1-52
104.L5 52.21
75.48 19._
17-78 4_59
39._2 10.2_
2_z_. 5.87
12.71 19,95
_ 56_.95
,t_2.6_ 46_72
426.52 427.45
_._7
73.46
$5.69
_ "_I
TOTAL
Tc4alPS 61_19
1,.L._,9'_
L10._6
217.54 L3fi43
234
Tc4alG_x3.
" 5_._. _
._,_
+
_09.,,q6 _Ofi4_
,,-_75._ 2_2_9
_4.64 242-87
_.q_31 _9-_
5895
59.58
39.92
41A3
43-20
82.16
Lq'_ll
1_.42
2_12.76
15454
29J0
64._
.37._
_.69
L?.L84 136.94
95.76 124.51
91.38 _.0'7
33a_ ,_._
9"_44 ._L_ 50.74 _52
_ _11
._SJD
24.06
5___7
Lql6.94
t51.70
9.17
95.4_i
L_-5.OI L%_kl0
200,39 117.58
1_9._9 61.23
7.63 4.95
f_lA2 80-q6
M.39 4.7.55
s_.0_ 14.95
7551 6_78
71_ $7.0_
11_5A6 56.6_
81.52 5_19
4_1 2.91 "
11.96 21.97
31._g 3._
5q.51 " 3._36
6.$._7. 68._
_75.86 5_
8L52 5& 19
Total Econm_'_c8ewioe 12Y7._
7_-/4
$[_19
10.74
31824 36_._
61_ 51._
_ 7L4_
111.10 97-4_
7Z48 100.61
16.52 14.54
23.86 15.62
_.85 17._
_14.fi6 22251
46.68 _._7
b_.._4 54,4.3
59.99 4_97
5_39 7L_)
I'Ll9 10.0_
1_ 7,47
10.,._7 _
45.41 _
46.(:$ "_.67
40.69 4Y.84
_ gr,_2
_6-76 76.69
5_..74 70_
7_..51 6_78
5.46
llA_
L74
071
2.23
2.44
4._I
5-18 9.46
14.8'/ 16.12
1L_ lO._n_
20.1_ "1_,.'/4
.._4.7_ 60.05
4'/._ 53.3_
1.5.86 14J0
_Lll 4.17
0.2_ 4_0
0.60 _
0310 048
_ 1._
20.(_ _._q5
"J5-5-36
E_ra_c_nac Sea.ricesMOOE â&#x20AC;˘ _
_i.g8
Tolal Soda] Sedo_
$e_d Sectoz MOOE
Tmal Heahh Servicer ,[6.76 76_
Heal_ Serv/o_ MgX_ 2.23 249
___44 0.54
Total Batic H_lth
Baai_ Hedlh MOOE _
_
3L51
:_19.44 _
._,.99 4_.19
13,4_ 10.93
26.64 1_'_2
31-76 26.26
5.q_. 1.76
To_I So,_d Welfaze
So_l WeFare MOOE
Source: Local Government Units.
_2 _
[_
_O
t,O bO
Table 14. Expenditure
Share by sector, appropriations C_neral Services Appr oFdali_
Oblig a tio_ts
versus
Eo3nO_LiCServices Appr opHaff (ms
Obliga ticats
obligations
general
fund, 1998 (Current account
Social Services Approlxia
ti_ms
He_d{h
Ohlig alions
Appr opal _tions
only).
Social Welfar,2 ObH ga Eior_
Appr opcia fio¢_
O Miga tions
tk ovince Bula can
19.65
19.65
9926
25.19
40.70 22-23 20.54
,3527
46_1 Z335 22_.2
26.95 83.31 50.47
29-39 _$8.9_ 26,81
15.34 28,64 55.71
t6.z-9 28,34 38.f15
5 97 20 "22 _4.95
7.01 22 .0G 38.11
0.54 1.97 0.63
0.64 1.93 0.64
38.33 46.97 _.3B 29.97 41.76
40.96 43.42 48-_9 31.28 46.56
17.42 " 5.15 21.72 21_'3 19.70
17.42 6.0 ! 12-67 20,09 18.42
24.86 2g.5_ 29.29 3728 lg.46
24_1 31.44 28.10 37.92 19.70
8.09 4,58 9.64 I_._4 728
8.22 4_0 12.39 14.63. 7._7
1O5 • t.85 3.88 1.91 Z(_
I,_3 1.7")" 4_1 2,19 Z05
$at_ Jos e _M o_t_ Bt_Ol_ l_umx l_alalxgas Ban,ate, Ilo0o Leon, Ilc_o
64_9 16.91 51,70 54.38
_ 1699 56,91 5721
10.56 63.35 19.3g 18.11
tt,7.9 64,52 18-62 19-36
10_i3 18.24 11,94 16.21
20.09 18.36 13_L6 16_&2
12,16 11._3 7.95 1121
13_'1 11.24 9.13 12_62
I._ 0.48 5.98 2.18
1.72 OA8 4.18 2,86
San l_figue], hollo Libagon_ S. _ Padre Bt_r8o*, S. Leyie
49.97 56.37 _.87
84.41 6Zff2 61,14
27.73 24.12 28.48
z3,92 20.95 2524
17.35 14.20 11,10
16.26 16.17 I_A$
8_7 7.86 6.24
8.61 9,0_ 7.65
2.77 6."_1 4_-_
3_9 7.00 5._
Tomas OFpus , S. L_-te
63.22
63.08
21.44
21.16
10.47
11.38
8.70
9.42
1.77
1,96
GitagumL Misamis O_en_ Lib_d_ Mi_amis Ori¢m lal
_.7 43.95
b-7,78 49.87
21.59 21 `70
20.73 25.47
20.47 273.4
21.37 21.83
10.47 12.09
11.27 10.54
8.57 7._
8.59 7.88
_.
42-31
_1_3
2_,82
28.98
1_
lZSS
z_
z_6
_.
Ocdlo Misamis Orienhal Southern Leyle
_5.57
,39.26
"
25.19
2.62
Z62
Ci_ies Antipolo Qu.ez_x't 11c_o C_gavan de Oro EMvao R&micipalit[es
o_a,_ Source:
oa_ LocM
Government
Units.
•
9,9_
8_7
_'_-
._-
Q 0b
Chapter 7: Manasan et al.
221
out of 20 LGUs in our sample. This may be explained by the fact that LGU expenditures on general public services were largely composed of wages and salaries which remained untouched even in times of fiscal crises. In like manner, the share of social service sectors in total actual LGU spending is slightly higher (or, at the very least, just about equal) to their share in total LGU appropriations in 15 of 20 sample LGUs. In this sense, LGUs accorded some degree of protection to social sectors (Table 14). The picture, however, is not that rosy when one looks at the level of real per capita LGU spending. Although LGUs appeared to have been partly successful in putting up a firewaU around social sector budgets by maintaining the expenditure shares of the sector, actual levels of LGU expenditures in real per capita terms posted some deterioration in 1998. Thus, real per capita total social service expenditures declined in 10 LGUs in the sample (1 province, 3 cities, and 6 municipalities). Moreover, per capita real expenditures on basic health services declined in 12 of 20 LGUs under study. Although per capita LGU expenditure on personal services declined in only 9 of the sample LGUs, real per capita MOOE and capital outlays were reduced in 12 LGUs in 1998. One of the areas that was badly hit by the fiscal bind was MOOE in total social service sectors where 15 sample LGUs had lower per capita MOOE expenditures in 1998 compared with 1997. In particular, per capita MOOE spending in basic health services declined in 13 out of 20 LGUs for which we have data. This situation severely affected the availability of drugs and medicine in barangayhealth stations, rural health centers, and devolved hospitals and was consistently noted by FGD participants in most areas. With the greater devolution in delivery of basic social services to LGUs under the Local Government Code of 1991, the experience of 1998 suggests that cutting the IRA during times when the fiscal situation is tight is extremely destabilizing for LGUs. This policy needs to be revisited and reviewed. If the national government indeed has no recourse but to implement reductions in the IRA during times when fiscal restraint is critical, then it is imperative that a safety net mechanism be designed to ensure that all LGUs are able to provide the minimum level of basic social services despite the IRA cutback. Such a mechanism should specifically address the inequities in the IRA distribution formula which are further exacerbated when the IRA is cut. In turn, such a scheme would require the presence of a strong monitoring System at the LGU level so that better targeting of scarce government resources is achieved.
8 Impact of the East Asian Financial Crisis on Social Services Financing and Delivery VLWL,da S. Pi_eda
the government, through Administrative Order No. 372 (dated 27 ue to the economic difficulties arising fromdirected the Asian financial crisis, December 1997, effective 1 January1998), all its departments and agencies to reduce total expenditures for 1998 by at least 25 percent of authorized regular appropriations for nonpersonal service items. It also withheld 10 percent of the internal revenue allotment (IRA) to local governments. Eventually, budgetary reserves imposed on the appropriation for maintenance and other operating expenditures (MOOE) for critical basic health and social services programs amounting to P1.5 billion were lifted on 10 July 1998. This is to mitigate the adverse impact of the financial crisis on the disadvantaged sectors of societ_ The crisis has raised many concerns for the social sector. Shortly after the crisis, several studies were undertaken to assess its impact (e.g., World Bank 1998, Lira 1998, and Reyes 1998). In the absence of actual trends, these studies presented the likely or projected impact of the crisis on the social sector. The most recent study by Reyes et al. (1999) used focus group discussions, key informant survey, and household survey in addition to secondary data to determine the social impact of the financial crisis on the populace, particularly vulnerable groups. This paper focuses on the effects of the crisis on the government's financing and provision of social services through the Department of Health (DOH), Department of Education, Culture and Sports (DECS), and the Department of Social Welfare and Development (DSWD). It seeks to address the following questions: 1. What were the effects of the crisis in 1998 on the following: a. financing of the social sector relative to other sectors;
224
Economic
crisis... Once more
b. financing among the social subsectors; and c. financing and performance of social services programs. 2.
3. 4.
What was the impact of the crisis on 1999 appropriations among the social subsectors, economic category of expenditures, and specific programs and projects? What were the remedial measures taken by the social sector agencies to cope with the fiscal constraint? How far has the government progressed identified budget-related issues?
The impact of the financial crisis on financing analyzed in terms of the following: 1.
2.
in addressing
long-
of social programs
was
How much the agency actually spent relative to the appropriated amount. This was indicated by calculating the ratio of obligations incurred to current or new appropriations for the year. Obligations are liabilities legally incurred and committed to be paid for by the government. Current appropriation pertains to the amount allocated by the government for each agency, programs, projects, and activities for the current year as contained in the General Appropriations Act (GAA). How much the government released relative to appropriations. This was computed using the current allotment/current appropriation ratio. Allotment refers to the authorization issued by the Department of Budget and Management (DBM) to an agency which allows it to incur obligations or enter into contracts for specified amounts. Based on the Advice of Allotment, DBM releases the corresponding Notice of Cash Allocation (NCA) which specifies the maximum amount of withc_rawal an agency can make from a government servicing bank.
To indicate the absorptive capacity of a particular agency_ that is, how much it was able to use from allotment releases, the obligation/allotment ratio was also computed. The impact on delivery of services was evaluated based on the programs' percentage of accomplishments to targets as measured by performance indicators.
Chapter 8: Pineda Effects
225
on 1998 financing
and performance
Comparison between social and other sectors The government accorded the highest priority to the social services sector by providing it the biggest budget allocation. In 1998, the sector received about 30 percent of the GAA (Table 1). It was likewise relatively protected from cutback in expenditures as imposed reserves on social services were selectively lifted. Accordingly, expenditures on social services were reduced by 10 percent of the GAA program level, in contrast with economic services which fellby 30 percent, and national defense, by 17 percent2
Table 1.
General national
Appropriations Act (GAA) appropriations government expenditures, by sector. GAA (P million)
Sector
Actual expenditures (P million)
1998
and actual
Share in GAA (%)
Actual/GAA (%)
1997
1998 a
1998
1998
Social services
152,301
122,668
137,106
29.5
-10.0
Economic services National defense
115,159 46,492
108,952 37,366
80,786 38,454
22.3 9.0
-29.8 -17.3
Public services Others
86,692 116,371
73,165 71,661
78,559 105,147
16.8 22.5
516,215
413,812
439,450
100.0
=9.4 -9.6
Total national government expenditure
b
preliminary. excluding debt service. Sources: Department of Budget
and Management,
-14.9
Reyes et al (1999).
Compared with the 1997 level, expenditures on social services increased not only in nominal terms but also in real terms, although only slightly, by about 2 percent (Table 2). On the other hand, the other sectors increased in nominal terms but declined in real terms. The hardest hit was economic services which fell by 33 in favor of the percent in 1997 1998 relative to
percent in real terms. As the limited funds in 1998 were allocated social services sector, its percentage share increased from 30 to 31 percent in 1998, while those of other sectors were lower in 1997.
In terms of per capita, however, social services expenditures declined in real terms, from P621 in 1997 to P618 in 1998 (Table 3). Nevertheless, it has the least reduction
of only 0.6 percent. Again, economic services suffered the greatest
-reduction as per capita expenditure declined by 34 percent. even lower than the 1996 level by 22.5 percent. Financing adjustments
The 1998 level was
and performance of social services programs may have also been related to the transition from the Ramos to the Estrada administration.
affected
by
226
Economic
Table 2.
National 1997-98.
government
expenditure
changes and shares, by sector,
Percent change Sector
Nominal
Social services Economic services National defense Public services Others Total national government expenditures ;' tl
crisis.., Once more
Percent share
Real :'
1997
1998
11,8
1.7
29.6
31.2
-25.8 2.9 7.4 46.7
-32.6 -6.4 -2.3 33.5
26.3 9.0 17.7 17.3
18.4 8,8 17.9 23.9
6.2
-3.4
100.0
100.0
i .ll
based on 1996 prices. b excluding debt service. Sources: Department of Budget
Table 3.
National 1996-98.
and Management,
government
Reyes et al (1999).
expenditures,
per capita, by sector,
Amo_u_t (P) Sector
1996
(in 1985 pr!ces) 1997
1998
Percent change 1996-97 1997-9
Economic services Social services National defense Public services
470 555 171 351
552 621 189 371
364 618 173 354
17.5 12.0 10.6 5.5
-34.1 -0.6 -8.5 -4.5
Others
322
363
471
12.6
29.7
3,869
2,096
1,980
12.2
-5.6
Total national government expenditures
'_
excluding debt service. Sources: Department of Budget and Management,
Reyes et al (1999).
Comparison among social services subse_tors Among the social services subsectors, leducation and social welfare were the most protected sectors. Education had the highest appropriation--about 72 percent of the total for social sectors in 19981 Its actual expenditures were also cut the least, by 4 percent, relative to the GAA level. Compared with the 1997 level, actual expenditures in education increased by I percent in 1998. Moreover, its share in total social expenditures remained high at 76 percent in 1998. Per capita expenditure, however, decreased from P474 in 1997 to P470 in 1998 or by about I percent. Social welfare and employment sector expenditures declined by 24 percent as a percentage of GAA (Table 4). Rea! expenditures, however, increased by 19 percent from 1997 to 1998. The percent share of social welfare and
Chapter 8: Pineda
227
employment in total social expenditures likewise increased from 11 percent in 1997 to 13 percent in 1998 (Table 5). More significantly, real expenditures per capita increased by 17 percent. In the health sector, actual expenditures were 15 percent lower than the GAA level. Similarly, expenditures in real terms declined by 15 percent, unlike those of education and social welfare which increased. The health sector's share in total social expenditures also shrunk from 11 percent in 1997 to 9 percent in 1998. Moreover, per capita health expenditures decreased the most in 1998, by 16 percent (Table 6). In addition, in 1996 (P57). Table 4.
GAA and actual subsectors.
the 1998 level (P55) was even lower than that
national GAA (P million)
government
expenditures
Actual expenditures (P million)
Subsector
Education Health Social welfare and employment Housing and community development Total social services â&#x20AC;˘ preliminary. Sources: Department
Table 5.
1998
1997
1998 a
109,130 14,506 23,418 4,447
93,639 13,062 3,493 2,474
104,301 12,274 17,720 2,207
71.6 9.5 15.4 2.9
152,301
122,668
137,108
100.0
of Budget and Management,
National government subsector, 1997-98. Subsector
Department
changes
Percent change Nominal Real
1998 -4.4 -15.4 -24.3 °50.4 -10.00
and shares by social Percent share 1997 1998
11..4
1.3
-6
-14.5
10.6
9
31_3 -10-8 11.8
19.5 -18.8 1.7
11 2 100
12.9 1.6 100
Health Social welfare and employment Housing and community development Total sodal services
Actual/GAA (%)
Reyes et al (1999).
expenditure
Education
Sources:
% share in social expenditures 1998
on social
of Budget and Management,
Reyes et al (1999),
76.3 "
76.1
228
Table
Economic
6. National subsector,
government 1996-98.
Education Health Socialwelfareandemployment Housfiagand community development Totalsocialservices Department
per
Amountper capita(P) (in 1985prices) 1996 1997 1998
Subsector
Sources:
expenditures
of Budget
crisis... Once more
capita
by social
Percentchange 1996@7 1997-98
404,97 56.98 66.93 25.82
474.4 66.17 68.36 12.54
469.92 55.3 79.84 12,66
17,1 16.1 2.1 -51.4
4).9 -16.4 16.8 1.0
554,7
621.47
617.72
12.0
-0.6
and Management,
Reyes et al (1999).
Housing was the most adversely affected sector. Its actual expenditures were only 50 percent of its 1998 appropriation. Actual expenditures in 1998 declined by 19 percent in real terms over that of 1997, the biggest reduction among social subsectors. Its low share of 2 percent in social expenditures in 1998 further dwindled to 1.6 percent in 1998. Furthermore, per capita real expenditure on housing of P13 in 1998 was only half of that in 1996. DOH programs:
Financing
and performance
Actual expenditures vs. appropria_on Public health services programs
were more severely affected by the fiscal
crunch relative to health facilities maintenance and operations. The percentage of expenditures to total appropriation was only 49 percent for public health services compared with 67 percent for health facilities maintenance and operations (Table 7). The procurement of drugs and medicines was likewise adversely affected as the obligations incurred were only 43 percent of appropriations. The lowest obligation/appropriation ratio was for the women and children protection program (women and children protection units in selected hospitals), which i was below 1 percent. I Among the public health services, the ratio of obligations to appropriation was below 50 percent in some programs. These include control of diarrheal diseases (1%), national diabetes program (17%), cancer control program (23%), immunization program (31%), and sexually transmitted diseases (STD)/ acquired immunodeficiency syndrome (AIDS) control program (42%). Those with relatively higher obligations to appropriation include rabies control program and smoking cessation program (both at 71%)), leprosy elimination program and dengue control program (both at 72%), schistosomiasis control service (76%), and national preventive mental health program (83%).
Chapter
8: Pineda
Table7.
DOH
229
(Office
of
Appropriations,
the
Secretary,
Allotments
]P_ogrm_,(O[:n_llQns)
Central
& Obligations
(H ol[_k_31)
(in of 1_-31)
Office),
1998
(Current).
(u o[ Sq_.30)
(a) _ 1_¢.$11
a, Public Health Servit_s
0.49
0,50
0.73
0.92
b. Primary Health Care Program c, Health Fadlities Maintenance and Operalion_
0-,_ 0.67
0.54 0.75
0.70 0,80
0,70 0,69
d,Health Fa dllty Standards, Regula ttoixs and Licensing e. Dr'ug$ and MedJ.c_es [. WoDl&rt _d Cl_dEel_ Protec[loll Program
0.67 0,43 0.01
0.70 0A9 0.10
0,86 0.24 0.(_
0,86 0,87 0.80
g. Regional Assist ance Fund for Drugs &Micr tmutdenta
0,75
1.00
0,75
0,75
029 0.37
0.40 028
0,75 0,91
0.97 0.96
0_59
0.61
0.72
0.97
0.56 0,52
0.63 0,_
0,78 0.80
0.90 0.95
0,01
0-01
1.00
1.00 "
0.31 0.56
0,31 0.56
0,69 1.00
1.00 1,00
0.26 0.58
0_36 0.66
0,_1 0.71
0.68 0.87
Public Health
Services
1. Family Health Nula'iflon and Wdfam a, Mat_ltal sad Child He,-dth Service h. NtaJrltion Service including Iodizatltm Program c. Fmxtily Hanning SerVice d, Dental Health SeTvice e, ContrO_C_Diarrheal
Salt
Diseases
f. [mmmaiza liorL Pr0,gr am g, Contzol of Acute Respiratory Ia feclion/ Integrated Child Care Management h, Family Health Program 2, Nailc_al Disease Conlrol Program a. Cc¢/mnu_icable Disease Coat_ol Program I, Ctmununic_ble Disease Conlrol Service
0.62 0.94
0.68 0,96
0.75 0.96
0.92 0.96
2, Tuberculosis Cot_trol a, Tuberculc_is COnITOI5_vices
0.62 0.78
0.64 0.62
0.76 0.88
0,96 0,95
b. Phllipph_ TuberculoUs Society c. National TuberCulosis Contiol Prog_ _ 3. STD/AIDS Control Program
0.75 0.58 0,42
1.00 0.59 0.6_
0.75 0.75 0.60
0.75 0.99 0.66
4. Malaria Control Program 5.Rabies Conlzol Program 6. Schistosomiasis Con_ol Service
0.64 0.71 096
0.71 09"2 0.80
0.81 0.75 0.91
0.90 0.98 0.95
7. Dengue C_trol Progrim 8. Fllarla Ctmtrd Program
0.72 0,64
0.74 0,78
0,75 0-75
0.97 0,62
0.72 0,49 0.72 0.53.
0.76 0.63 0.77 0,73
095 0,62 0.87 0.57
0,94 0.77 0._1 0.70
0.71 0.23 0,_9 0.51
0.74 OA3 0.74 0.58
0.75 0,46 0.75 0.59
0.96 0m 0.80 0.88
0,83 0.66 0.17 0.67 0.76
0.83 0,72 0-16 0,76 0,80
0.90 0-75 0._0 0.82 0,83
1.00 0.92 0,94 0.89 0,89
0,62
0,66
0,78
0.91
c,Hc_pital Waste Maxaagemeat 4._u_ltyHealth Program • i.Community Health Service b, Traditional Medidne Program c. Health Development Program
0.11 0,47 0,69 0,51 0.34
0,12 0.65 0.71 0,68 0..%
095 0.56 0.86 0,62 0.40
0.89 0.7_ 0.96 0,74 0,6"I
d, Community-based Rehabilitallc_ Program e. IndtgonOU_ People 5, Pr 0vi_40n for a p0ol of 80 Rural Health
0.73 0.68 034
0.77 0.68 0,82
095 0.75 0,_4
0,95 1.00 0.90
9. Natimxal Leprosy El/minatic¢_ Program b. Nat_-communicable Disease C_'x_ol Program 1. Non-¢ommunlcaHe DiseaseConi_ol _tvice 2. Cardlowa_cttlar Disease Control 3, 4. 5. 6,
Smo_ Cer_sation Program Cancer C_,xtrol Program BllndeSS Prevenilcm Program Prevenliw N_phrolosy
7, Na_ic_l Preventtw Mental Health Pro_am 6. Oompationat Health Program 9. Natic_aal Diabetes Program 3. Environmental Health Program a, Environmental Health Service b.Operation c_fInter-Agency Environmental Health
Phyddar_
for Doctorle_
CO_lttee
On
Communll:[es
Source Ofbasic data: Department of Health.
230
Economic crisis... Once more
Government allotment releases as against appropriations One reason for the low obligations/appropriations rati o is low allotment •releases. In several DOH programs, however, the proportion of allotment to releases has been high, even 100 percent in some cases; but the amount obligated constituted a small percentage of allotment.i In such instances, where allotment is high but use is low, the problem may be traced to delays in fund releases and low absorptive capacity due to administrative constraints. The slower releases of allotment in public health serviceS, to some extent, caused the low level of expenditures in publichealth services relative to health facilities maintenance and operations. At the end of 1998, allotment releases for public health services reached 92 percent 0f appropriations, higher than that for health facilities at 89 percent. As of the third quarter of 1998, however, the amount released for public health services Was lower at 73 percent relative to health facilities at 83 percent. The earlier releases for health facilities enabled a higher allotment use rate of 67percent, whereas the public health services' ratio of obligation to allotment was lower (49%). Government allotment releases for drugs and medicine amounted to 87 percent of appropriations as of December 1998 but only 42 •percent of the allotment was obligated for the year. The allotment releases have been much delayed--as of September 1998, only 24 percent of the appropriation has been released, which constrained fund obligation and slowed down procurement. For the women's health protection program, the government provided a low allotment of 5 percent of appropriation and the DOH obligated only 10 percent of this allotment, indicating tha t this is not a high priority program. Among• the public health services programs, for immunization, the government has provided i00 percent of the appropriation at the end of 1998. AS of 30 September, however, only 69percen_ has been released. This contributed to the low obligation allotment ratio of 31percent. Similarly, the national diabetes control program has a high allotmen[/appr0priation ratio?94 percent as of December. But as of September, only 50 percentof the appropriation has been released. Such•delays partly caused low allbtment use; only 18 percent of the allotment was obligated for 1998•. In the case of the program on control of acute diarrheal diseases, the allotment has already been released 100 percent as early as 30 September, but the amount obligated as of 31 December was quite low (1%). Such low use of funds was attributed to the holding of drug procurement due to some allegations of anomalies. For cancer control and STD/AIDS _ontrol, allotments released were relatively low--only 52 percent and 66 percent, respectively, of appropriation as of 31December. Obligated amounts were likewise low: 43 percent of allotment for cancer control and 63 Percent for STD/AIDS Control.
Chapter 8: Pineda
231
Although delays in releases contributed to the low allotment use in some programs, such as the provision of drugs and medicine, there are real problems with DOH administrative capacities. Based on Commission on Audit (COA) data, allotments released for capital outlay in 1996 totaling P257.2 million intended for purchasing equipment and constructing new buildings were not used and thus considered lapsed after 2 years (as provided for by National Budget Circular 406 dated 28 April 1989). The budget officer obligated the releases in favor of DOH but no purchase orders were prepared by the supply officer and approved by the agency head. There have also been allegations of anomalies in DOH procurement such that decentralization of procurement has been initiated. According to DOH Secretary Alberto Romualdez (1999), not enough is being spent on developing administrative capacities leading to low absorptive capacities especially of public health programs. Performance by program Table 8 shows DOH performance by program from 1996 to 1998. For consistency, DOH data were adjusted to exclude areas with incomplete reports in any of the years covered. The adjusted data are almost the same as DOH's reported data. Both showed a generally declining percent coverage of eligible population from 1996 to 1998. As adjusted full immunization coverage fell from 89 percent in 1997 to 85 percent in 1998. For the same period, under the nutrition program, the proportion of moderately and severely underweight children supported with new food supplementation decreased by about 6 percentage points. Only 4 percent of the eligible population was given iodized oil capsules in 1998 compared with 17 percent in 1997. Similarly, DOH was able to provide oral rehydration solutions (ORS) to only 19 percent of diarrhea cases in 1998 relative to 32 percent in 1997. The ratio of pneumonia cases to the eligible population was also lower in 1998 (55%) than that in 1997 (71%). Under the National Tuberculosis Control Program, DOH reported that the ratio of TB cases given treatment to the target population decreased from 76 percent in 1997 to 63 percent in 1998. Likewise, of the diagnosed cases for the same years, the proportion provided treatment fell from 88 percent to 51 percent for malaria and from 68 percent to 29 percent for filariasis. These coverage reductions could increase incidence of diseases and permanently impair the physical and mental health of the affected population. DECS programs." financing
and performance
The government provided the lowest allotment releases relative to appropriations for Teacher I positions (24%), purchase of desks/chairs,
232
Economic
Table 8. DOH performance Program
by program,
and Coverage
1996
Expanded Program of Imlnunization Cowarage of eligible population:
crisis... Once more
]996-1998. I
AS _vorted I " 997 I
1998
1996
Adjusted 1997
1998
(EPI)
% given full irnn_unizatior_
89.8
88.9
81,3
89.6
89.2
85.0
% given 3rd dose of Hepa B % of pregnant women given TF2 Plus
62.2 49.0
36.7 52.2
34.3 50.2
61.9 49.0
37.5 52.2
37,1 50,3
Food. supplementation
among
children
Numberofmoderataiyunderwaightchildren
1,145,936
% given food supplementation (new) % receiving food supplementation (follow-up) % rel_abilitated Number
of _verely
Lmderweight
% given food supplementation
chnd ran (new)
16.2 23,7 9,0 333,170
861,556 14,8 15.9 103 143,967
665,227 10,5 9.0 9.5 I09,486
993,711 16.1 23.6 8.9 309,268
752,047 15.2 16.4 10,7 122,350
612,203 10,8 9.4 9.9 104,589
28,6
21.2
15.2
28,0
21.5
15.5
71,3 34,0
21.5 17.t
10.0 9,5
75,8 32.7
22.7 15.0
10.2 9.8
% of lactating mothers % of children (9-11 mos)
52.0 66.7
49.8 71.6
49.2 72.9
51.9 66,4
50.4 71.5
50.7 73.4
% of children
94.0
93,2
89.7
93.7
93.8
91.0
â&#x20AC;˘
39.7 36.4
46,9 42.2
41.4 38.5
39.3 36.4
46.9 42,2
41,6 38.7
Given Iodized Oil Capsule % of women (1_-49 years old)
21.3
173
4.0
21.6
17.3
4,0
33-8
33.9
34.6
34.9
34.5
35,8
164.3
156.4
185.9
165,1
158.3
192.0
6.3
5,3
5.5
6.4
5.5
5.6
% receMng food supplementation % rehabilitated
(follow-up)
Micmnutrlent supplementation Coverage of el'igible population: Given Vitamin A
(12-59 mos)
Given Iron % of pregnant women '!4,of post-partum mothers
Dental
Health
Coverage of eligible Preschoolers:
population:
% given curative Schoolers:
tseatrnent
% given preventive % given curative Pregnant wortlen:
treatment treatment
60.6
60.1
60,5
62.2
60.0
61.1
% given curative Other Adults;
% given preventive
treatment
44.4
45,3
47.2
49,8
39-1
47,5
% given curative
treatment
48.3
47.8
49.6
49.3
48.6
50.0
35.5
3I.6
28.4
35.2
31.7
19.2
76.9
69,9
55,0
75.4
70.6
55-3
88.9
91.3
94.7
90-7
91.2
94,7
91.5
76.0
63-3
323,139 40.5
'282,804 88.1
326,887 50,8
15,293
13,625
J.3,679
Control
of diarrheal
% of diarrhea Pneut_oni_
treatment
diseases
cases given ORS
Control
% of pneumonia
cases seen out of eligible pap'n.
% given treatment Nationa_ I"l"ubareulosis Given Treatr_aot Malaria
Control
Number of diagnosed % given treatsnent Schistosomiasis Number
Number
cases
Control
of cases
% of ca_s Filariasis
Progra rn
as % of Target
glver_ treatment
83.7
97.4
95.5
Control of cases
% of cases given treatment
1,504 44.7
2,35'1 . 67.8
4,754 28,7
Chapter 8: Pineda
233
Table 8. continued... Program Schistosomiasis Number
and Coverage
of case.'_
15,293
13,625
13,679
83,7
of cases
1,_04
"to of cases given treatment
Animal
1998
1996
Adiusted 1997
1998
97.4
95.5
Control
Number
Rabies
AS Reported 1997
Con _'oi
% of cases given treaur.arlt Filariasis
1996
44.7
2,351
4,754
67.8
28.7
Control bite cases seen
% given post-eﾃ用,:_ure
35,790 imm_.miza fion
29-8
60,788
63,325
39.0
47.1
Source:Field Health Service Information System (FHSIS).
textbooks/instructional materials, tools, furniture, fixtures, Computers, and other equipment (37%), and land and land improvement (20%) (Table 9). Consistent with such low allotment releases, the obligations/ appropriations ratios were also low for the same items: teacher I positions (24%), and land and land improvement (17%), while no amount was obligated for purchase of desks/chairs, textbooks/instructional materials, tools, furniture, fixtures, computers, and other equipment. In contrast to DOH, however, DECS had high use rate for the amount released: 89 percent for land and land improvement, and 100 percent for most of the specified programs. education. Also severely
Exceptions
affected
are the purchase
by the fiscal constraint
of desks and preschool was the DECS school
building program. The program is administered by the Department of Public Works and Highways based on the work program submitted by DECK Its programmed amount for 1998 was cut by 52 percent from the 1997 level. This was aggravated by the very low disbursement in 1998 as it covered only 46 percent of obligations for the same year (Table 10). The number of school building projects (construction, rehabilitation, replacement, completion, repair) declined substantially from 12,147 in 1997 to 4,903 in 1998 or by 60 percent. Furthermore, the proportion of completed projects to the programmed target was much lower in 1998 (76%) compared with those of 1996 and 1997 which were almost 100 percent (Table 11a). This will further worsen the classroom backlog which was estimated to be 10,942 in 1997 (NEDA 1998). The percentage of projects completed varied widely across regions. Central Mindanao had the lowest ratio of 29 percent, followed by Western Mindanao with 49 percent, and Caraga with 52 percent. In contrast, Ilocos had the highest proportion of projects completed (99%). Southern Tagalog and Central Luzon had 93 percent and 91 percent completed
projects, respectively.
234
Economic
Tabble 9. DECS (Office 1998o
crisis... Once more
of the Secretary, Central Office) financing Allotments/ Appropriations
Obligations/ Appropriations
ratios,
Obligations/ Allotments
A. PROGRAMS AND ACTIVITIEs I. General Administration and Support a. General Administration and Support Services a, General Management and Supervision 1. General Adrrtinistrative ,Services
0.89
0.89
1.00
b, Opera tion and Maintenance of Centers c. Human Resources Training and Development including an amount of P15 Million for Teacher's Training d, Contributions to Various Activities
0.92 0.63
0.92 0,63
1.00 1,00
0,81
0,81
1.00
e, Out-of-School Adult Education Program Subtotal, I
0.75 0.86
0,75 0,86
1,00 1,00
0.88
0,88
1,00
0.24 0.82
0.24 0.82
1.00 1.00
0.75 1,00 1.0fl 0.75
0.75 1,00 LOII I).00
1,00 1.00 1.00 0.00
0,48 0,38
0,48 0,00
1,00 0,00
0,20 0,58
0.17 0.47
0,89 0,80
0,63
0.54
0,85
i1. Support to Operatioos Ill. Operations Regional Operations (Nationwkle) a. Requirements of Newly-Created Positions Teacher I Positions (2,000 Items) Public Health Nurse Positions (2,240 Items) b. Govemn'_ent Assistance to Students and Teachers in Private Education (GASTPE) c, Lump-sum for Reclassification of Positions d. Lump-sum for Subsistence and Laundry Allowance e. Pre-School Education f. Secondary Education 1, Operational Expenses of Newly-Legislated/ Established High Schools g, Purdxase of Desks, Chairs, Textbooks, Instructional Materials, Tools, Furniture, Fixtures, Computers and Other Equipment h. Lump-sum for Land and Land Improvement Subtotal, III
Outlay
Total I Source
of basic
data:
Department
of Education,
Table 10. DECS school building Amount Year
programmed (P '000)
Culture
and
Sports.
program: I financing.
Allotment/ programmed (%)
Obligation/
i
allotment (%)
Disbursement/ obligation (%)
1996
4,051,275
99.6
97.4
93.3
1997
4,508,083
96.2
93.1
83.3
1998
2,163,058
97.9
86.0
46.0
I
Source:Departmentof PublicWorksand Highways (DPWH).
Chapter 8: Pineda
235
Table 11a. DECS school building program: completed projects. Projects Year
(no.)
Programmed
Completed/ Completed
programmed
(%)
1996
11,221
11,217
99.9
1997
12,147
11,962
98.5
1998
4,903
3,738
76.2
Source: Department
of Public Works and Highways
(DPWI-I).
When percentage completion of projects was related with poverty incidence, Central Mindanao, which had the lowest completion rate, had the second highest poverty incidence (Table llb). In contrast, Central Luzon and Southern Tagalog, with high completion rates, had the second and third lowest poverty incidence. There, however, seemed to be no strong linkage between percentage completion and poverty status of regions since some poorer regions like Bicol and Northern Mindanao also had high completion rates.
Table 11b. DECS school building program: regional level. 1998 Region
12 9
Region
Projects (no.) Programmed Completed
1997 Percent completed
Poverty incidence (%)
Central Mindanao Western Mindanao
293 227
85 112
29.0 49.3
49.1 39.8
13 6 CAR
Caraga Western Visayas Cordillera
197 477 96
102 274 57
51.8 57.4 59.4
41.6 42.3
7
Central Visayas
309
207
67.0
34.2
8 2 10 NCR
Eastern Visayas Cagayan Valley Not'them Mindanao Metro Manila
353 243 260 160
264 189 210 130
74.8 77.8 80.8 81.2
40.7 31.6 46.8 7.1
5 11
Bicol Southern Mindanao
394 248
335 227
85.0 91.5
50.1 37.9
3
Central Luzon
411
379
92.2
16.8
4 1
Southern Tagalog Ilocos
980 255
914 253
93.3 99.2
25.7 37.6
CAR = Cordillera Autonomous Region, Sources: DECS (1999), NEDA (1999).
NCR -- National
Capital Region.
236
Economic crisis... Once more
Concerning the provision of textbooks, as of 30 June 1999, all째trnents released for purchase of textbooks for 1998 were only 78 percent of appropriations (Table 12). Delays in releases of NCAs slowed down procurement. For Regions 2, 4, 5, 13, and CAR with data on both actual and planned purchases, the proportion of actual (P1.8 million) to planned (P3.7 million) purchases was quite low at 50 percent as of June 1999. Table 12. DECS' purchase of textbooks for fiscal year 1998 (as of 30 June 1999). Item
Amount
Appropriations Allotments Obligations incurred
(P)
_15,149,000 399,228,320 349,135,363 Ratio (%)
Allotments/Appropriations Obligations/Allotments Obligations / Appropriations Source:
Department
of Education,
Culture
77.5 875 67.8 and Sports.
DSWD programs: financing and performance Financing Of the appropriated amount, only 42 percent was released for asslstance to persons with disabilities and senior citizens, 46 percent for nationwide emergency assistance/calamity relief operations, and 63 percent for protective services for children and youth in especially difficult circumstances (Table 13). Greater priority was given to maintenance and operations of centers and institutions. Allotment for this item reached 80 percent of appropriation. This covered reception and study centers for children, Lingap centers for street children, regional rehabilitation centers for the youth, women centers, and centers for persons with disabilities. For obligations/appropriations ratios, the same ranking as above applies. For locally funded projects, allotment released was 75 percent of appropriation and the obligated amount was 99 percent of allotments. Similar to DECS, DSWD had high absorptive capacity. Except for the family welfare fund, which had an obligation/allotment ratio of 22 percent, the obligation/allotment ratios of other items ranged from86 percent to 100percent. Perdormance: accomplishments vs. targe_ DSWD fell short of its targets in som e activities, particularly the Sulong Dunong Para sa Kabataan and the Self-Empl0yment Assistance Kaunlalran (SEA-
Chapter 8: Pineda
237
Table 13. DSWD
(Office of the Secretary)
financing
Allotments/ Appropriations
ratios, 1998. Obligations/ Appropriations
Obligations/ Allolraents
A. PROGRAMS AND ACTIVITIES I, General Administration
and Support
0.88
0.78
0.89
0.73
0_72
0,99
II. Support to Operations HI, Operations a. Assistance Program for Distressed and Disadvantage Population 1. Nationwide Emergency Assistence\CalarMty R_llef Operations, etc. 2, Assistance to Persons with Disability including P15,000,000 for Senior Citizens
0.46
0.44
0.97
0.42
0.42
1.00
3. Protective Services for Children and Youth in Especially Difficult Ciro.tmstances b. Technical Assistance to LGUs
0.63
0.54 .
0.86
¢, Maintenar_e
0.80
0,80
1.00
0,75
0.72
0,96
0.75 0,75 0.75 0.75 0.75
0.75 0.75 0.75 0,67 0.75
1.00 1,00 1,00 0,89 0.99
0,75
0.17
0.22
TOTAL PROJECIS
0.75
0_75
0_99
GILAND TOTAL
0.75
0.73
0.97
and Operations
of Centers and Inst
TOTAL PROGRAMS AND ACTIVITIES B, PROJECT_" I, Locally-Funded Project(s) 4. CIDS5 in the Most Depressed Provs trader SRA b. Sulong.Dv, nong Pare sa Kabataan ¢. Tulay-200O d- Special Project for Poverty Mapping e. SEA-_raB 11 f. Family Welfare F_md
Source
of bas!c
data:
Department
of Social
Welfare
and
Development.
K) projects (Table 14). Sulong Dunong provides relevant skills training for outof-school youth. For 1998, DSWD achieved only 15 percent and 17 percent of its targets for number of youth associations to be organized and involved in community projects and activities, respectively. The SEA-K, which is a Social Reform Agenda (SPA) _ program, is a livelihood assistance program that involves the provision of an integrated package of social welfare services to needy family heads, disadvantaged women, out-of-school youth, and persons with disabilities. The program includes capital assistance; social preparation/capability building, technical assistance, and other Support services aimed at enhancing the capability of community-based credit 2 The
SPA is the government
sectors and
like farmers,
youth,
it involves vulnerable
persons
centerpiece
fisherfolk, with
the implementation groups.
program
overseas
disabilities,
Filipino disaster
of flagship
that workers
victims,
programs
addresses (OFWs), and
the needs senior
indigenous
by na tional
of marginalized
citizens, people.
government
women, Launched
agencies
basic children in 1994,
targeted
at
238
Economic
Table 14. DSWD targets and accomplishment,
1998.
Target
A. Prodt_ctivity Skirls Capability Building for Disadvantaged women 1. No. of women trained on PSCB
crisis... Once more
Accomplishment
Percenl Achieve_
44,918
38,023
85
2. No. of trained women gainfully employed
28,911
29,861
103
B. Comprehensive and Integrated Delivery of Sodal Services (CIDSS) 1. No. of poor families benefited by CIDSS projects/activities 2. No: of depressed barangays served 3. No. of commtmity projects ilnplemented 4. No. of coalmunity structureso_gardzed 5. No. of leaders/vohmteers trained/mobilized
171,216 1,259 2,189 3,399 25,423
268,861 1,323 4,047 6_152 78,072
157 105 185 187 307
'1,089
192
18
14,918
2,307
15
946 668 225
834 789 138
88 118 61
3,987
2,235
56
1,489
2,170
146
388
194
50
85
117
138
245
82
33
1,357 : 1,222 1,472
2,135 934 3,225
157 76 219
845
43
C. Sulong Dunong 1. No. of PYA organized 2. No. of PYA involved in corrm_tmJ.ty projects/activiges 3. No. of Out-of-_hool Youth (OS짜) served with: a. educational support services b. practical skills development c. livelihood D. Social Mobilization of Permns with Disabilities and Senior Citizens _%nd Their Families 1. Early Deteclion, Prevention and Interven_on of Disabilities No. of 0-6 years old children provided. wifll .intervention 2. Self-Help Group (SHG) of Persons with Disabilities (PWDs) a. No. of PWDs assessed and provided with intervention b. No. of SHGs strengthened, organized and mobilized c. No. of SHGs involved in income generating projects d. No. of PWDs involved in. inc_m_e generating projects 3- Sel_ior Citizens (SCs) as Vohmteer Resource a. No. of SCs assessed and provided with intervention b. No. of SCs trained on volunteerism c. No. of SCs mobilized as volunteers
I
E..Assistance to Disadvantaged Transnationals No. of transnational "children served (repatriated, educational/support/legal assistance)
11,946 I,
Chapter 8: Pineda
239
Table 14. continued... Target
Accomplishment
Percent Achieved
570
655
115
91
279
307
194
286
147
104
79
76
1. Revolving Settlement FLmd (RSF) a.No. of individual projects established b. No, of SKAs assisted C.NO. of SKA members served 2. PSCB
2,650 833 6,647
2,843 535 12,867
107 64 194
No. of women provided with SEA 3. CIDSS
2,602
1,407
54
415 2,384
1,971 368
475 15
75 15
82 13
109 87
21
5
24
3
16
533
886
673
76
692
444
64
414
147
36
F. Community-Based Rehabilitation Services for Children i_ Conflict with the Law No. of YouthOffender_ (YOs) served (income-generating projects, educational/support services, practical skills training, job placement) No. of YOs supervised by volunteers G. Local Adoption and other Alternative Family Care 1. No of adoption forum and advocacy activities conducted 2. No. of foster families provided with subsidies H. SIIA-K
a. No. of individual projects b. No. of SKAs assisted 4. Sulong Dunong a. No. of OSYs provided with SEA b. No. of OSY families provided with SEA 5. Transnational No. of transnational children families provided with SEA 6. CBRS No. of YO families provided with SEA 7. Abused Children No, of abused children families provided 8. Level II: Kabayans a. No. of families provided with assistance for micro-enterprise b. No. of families provided with assistance for home improvement c. No. of families provided with assistance for housing construction [. CPC-IV - Women in Development 1. No. of women provided transportation assistance 2. No. of women referred for medical assistance 3. NO. of women Ixained at PSCB 4. No. of women volunteers _ained/mobilized
350
864
247
88 2,089 1,790
356 4,968 1,161
405 238 65
5. No, of women provided sessions on modular packages
5,514
10,192
185
Source:DSWD.
240
Economic
crisis.,. Once more
associations to self-administer a socialized credit scheme for income-generating projects. For 1998, the actual number of SEA-K associations assisted was only 15 percent of the target. Likewise, the DSWD was able to provide selfemployment assistance to only 5 of its targeted 21 families (24%). For other projects, however, DSWD surpassed its targets. Most notable was the Comprehensive and Integrated Delivery of Social Services (CIDSS), which is an SRA flagship project. The CIDSS specifically addresses the lack of access to basic services. It is a two-pronged approach aimed at building the capabilities of disadvantaged families and communities to analyze their conditions as basis for collectively accessing resources that will address their problems and at the same time build capabilities for social services delivery. Local government units (LGUs) are likewise provided with technical and other forms of assistance towards providing minimum basic needs (MBN). For the CIDSS program, DSWD accomplishment/target ratios ranged from 105 percent to 307 percent. Performance indicators include number of beneficiary families, barangays served, community projects implemented, community associations organized, and leaders/volunteers trained and mobilized. The DSWD likewise exceeded its targets in Community-Based Rehabilitation Services (CBRS). The program aims to rehabilitate youth offenders with suspended sentences and to assist them and their families in reintegration into mainstream society. Their families are also provided with support services, such as capital assistance for income*generating projects, and parent and child counseling to strengthen parents' capability to supervise their children. Impact on 1999 appropriations By department The 1999 GAA explicitly states that no budgetary reserves shall be imposed for DECS, DOH, and DSWD. Despite this, financing was tighter in 1999 relative to 1998. New appropriations in11999 were lower in real terms by 22 percent
for DSWD, 20 percent for DOH, a_d 4.5 percent for DECS compared
with their 1998 levels (Table 15). The 1999 appropriations lower than the 1996 level (by about 4%). By economic In terms
category
for DOH were even
o[ expenditures
of economic
category,
capital
outlay
suffered
the greatest
reduction and personal services the smalles_ shrinkage in 1999 appropriation (Table 16). (For comparison purposes, appropriations were valued in 1996 prices.) The decrease in capital outlay was particularly severe for DSWD (76%), followed by DOH (66%). For DECS, the d6cline was relatively lower at 25 percent. Thus, the share of capital outlay dropped from 5.2 percent in 1998 to
Chapter 8: Pineda
241
Table 15. New appropriations" Agency DECS DOH DSWD
under
the GAA (P million).
Nominal (P million) 1997 1998
1999
48,418
56,271
78,813
81,665
16.2
40.1
3.6
9,302 1,184
11,370 1,594
13,085 1,827
11,340 1_55
22.2 34.6
15.1 14.7
-13.3 -14.9
64,445 8,949
9.4 15
27_4 4.7
-4.5 -20.1
1,227
26.7
4.3
-21.6
1996
Real (in 1996 prices, P million) 48,418 52,965 67,482 9,302 10,702 11,204
DECS DOH DSWO
1,184
1,500
for the whole department adjustment measures. Sources: GAA (1996-99).
inclusive
Table 16. GAA appropriations Amount Category
1,565
of bureaus/agencies
by economic
(P million)
1998
1999
Percent chan_e 1997-98 1998-99
1996-97
and
category
Change
funds
under
GATr-related
(In 1996 prices).
(%)
Share (%)
1998-99
1998
1999
DECS IX3
59,117
57,184
-3.3
87.6
88.7
MOOE
7,345
6,497
-11.6
10.9
10.1
CO
1,020
765
-25
1.5
1.2
67,482
64,445
-4.5
100
100
PS
4,292
4,001
-6.8
38.3
44.7
MOOE
4,736
4,219
-10.9
42.3
47.2
CO
2,176
728
-66.5
19.4
8.1
11,204
8,949
-20.1
100
100
Total DOH
Total DSWD PS MOOE CO Total
387
372
-3.8
24.7
30_3
1,096
836
-23-7
70
68.1
82
19
-76.5
5.2
1.6
1,565
1,227
-21.6
100
100
PS = personal services, MOOE outlay. Sources: GAA (1996-99).
= maintenance
and other operating
1.6 percent in 1999 for DSWD, from 19.4 percent from 1.5 percent to 1.2 percent for DECS.
expenditures,
to 8.4 percent
CO = capital
for DOH, and
With the decline in capital outlay, the share of personal services increased by 6 percentage points for DOH and DSWD. Although MOOE also decreased, this item continued to account for the greatest share in appropriations for DOH
242
Economic crisis... Once mote
and DSWD. In contrast, about 89 percent of appropriations of DECS went to personal services. Decreases in capital outlay and MOOE had negative implications on growth and quality of the capital stock. DOH programs Health facilities maintenance and operations had the least reduction of 2.5 percent (Table 17a). It accounted for 60.8 percent of DOH (Office of the Secretary) appropriation in 1999. In contrast, budget for public health services suffered a bigger cut of 15 percent. It constituted 11.5 percent of the 1999 appropriation. Thus, health facilities maintenance and operations continued to be favored in 1999. The provision of drugs was accorded high priority in 1999 as its appropriation increased by 27 percent. It was the only item with a positive percent change. Under public health services, appropriations for most of the programs decreased by 17percent (Table17b). Within family health and welfare, nutrition services, and maternal and child health service had the biggest reduction of 26 percent and 24 percent, respectively. In contrast, family planning services had the least reduction of 13 percent. For immunization program, appropriations fell by 17 percent. Within the disease control program, the greatest reduction was for smoking cessation (56%),cancer control (33%),blindness prevention (27%),and STD/AIDS control (26%). For dengue control, the decrease in appropriation was moderate at 17 percent. Appropriation declined most for locally funded projects (94%).Although lower, the reduction in appropriations for foreign-assisted projects was also severe (68%).DOH only had two foreign-assisted projects in 1999 compared with six in 1998. To cope with financial constraints, DOH adopted the following remedial measures: t. 2.
3.
focused targeting, redirection of program strategies,and reallocation of inputs in favor of vulnerable groups; intensification of program imple_nentation in financially burdened LGUs which are generally 5thand 6thclass municipalities populated by predominantly low-incone families, particularly the improvement of hospital and prir _ary health care (PHC) outlets such as rural health units (RHUs) and barangay health stations (BHSs); provision of grants to support/augment community-based/ managed health projects in SRA convergent areas, indigenous communities, and in 4th- 6 th class municipalities;
Table 17a. DOH GAA Appropriations (P'000, in 1996 prices), 1998-1999.
OPERATIONS a. Public Health Services b. Primary Health Care Program ¢ Health Facilities Maintenance and Operations d. Health Faolity S_tards, Regulations & Licensing e. Provision of Drugs and Medicines, Medical and Dental Supplies & Materials, Vaccines, Reagents & Biological Supplies f. Implementation of the Regional Licensing & Standards Enforcement, Malaria, Fdariasis and Schistosomiasis Programs and Other Health-related Retained Activities g. Local Healih Board Liaison and Coordination h Regional Funds to Assist Primary Health Care Prograw_ of _ Government Units L Centers of Wellness Program for Special and Regional Hospilals, Medical Centers, Sanitaria & other hospitals j. Women and Children Protection Program k. Regional Assistance Fund for Drugs, & Micronutrients for the Devolved Prov. And District Hospitals LNafl Govt Subsidy for the Premium Contribs of Indigent House_holds Enrolled under h'_ NHIP
_ROIECrS Locally-Funded
.
GATT-Related Adjustment Prcr_ Foreign-Assisted Source of basic data: GAA, 1998-1999.
1998
I999
1,212,635 22,969 5,538,942 319,(_a0
1,025,498 19,186 5,400,434 264,179
-15.43 -16.47 -2.50 -1Z36
64,715
82.247
27.09
52,132
45_.02
-13.29
13,328
11,330
-14.99
122,964
95,930
-21.99
18,316 10,695
15,3_ 8,441
-16.20 -21.08
55,727
46,225 7,891
-17.ff5
44,192
-o_08
746_ (Locally Ftmded)
16,664 1,400,221
14,437 448,729
i998-1999
-13.36 -67.95
._. _.. _.
244
Economic
Table 17b째 DOH GAA appropriations 1996 pdces), 1998-1999.
crisis... Once more
for public health services Appropriations 1998 1999
l. f_amilyH_alth Nutrition and Welfare a. Maternal and Child Health Service b. Nutrition Service incl. Salt Iodizatlon Program c. Family Planning Service d. Dental Health Service e. Control of Diarrheal Diseases f. Immutxization Program g. Control of Acute Respiratory Infection h. Family Flealfl_ Program i. R_productive Health Prograca j. Early Childhood Devt. Program k. Natl Family Planning Program I.Anemia Control and Prevention Program 2. Nail Disease Control Program _LCommunicable Disease Control Program 1. Communicable Disea_ Control Service 2. Tuberculosis Control 3. AIDS and STD Ct_ltrol Program 4. Malaria Control Program 5. Rabies Control Program 6. SchistosomiaSis Control Pro__am 7. Dengue Control Program 8, Filaria Control Program 9. National Leprosy Elimination 10.Soil-transmitted Helminthlasis Prewntion anti Control Program b. Noo-comr_uolcable Diseases control program 1. Non-communicable Disea_ Control Service 2. Cardiovascular Disease Cor_trol 3. Smoking Cessation Program 4. Cancer Control 5, Bllndnea_ Prevoxtion 6. Preventive Nephrology 7. National Preventive Mental Healflx ProgTam 8. Occupational Health Program 9. National Diabetes Control Program 10,Asthma Prevention and Cor_trol 1l. Iniury Prevention and Control 12.Drug Abu_ Prevention and Col_lrol 3. Environmenbal Health Program a. Environmental Heal flaService b. Operation of Inter-Agency Committee on Environmental Health c. Hospital Waste Management d. Local Public Health Systems Development Program 4. Commtulity Health Program a- Community Health Service b. Traditional Medicine Program I c. Health Development Program d. Disability Prevention & Community-Based Rehabilltatk_n Prograh_ e. hadtgenous People's Health f.Sttpport to the Prlority Province_ i 5. Provision for a Pool of 80 Rural Health Physicians for Doclorless Communities i
-
6.Health and Nutrition of Special Populations a. Women's Health and Development Program b. Urban Ftaalth uod Nutrition Program
Source of basic data: GAA, 1998-1999.
[ : i
(P'000, in % Change 1998-1999
559,580 55,871 75,028 46,607 16,112 16,326 300,713 32,229 16,695
483,095 42,388 55,133 52,719 19,628 1K542 249,435 26,734 13,848 3,157 789 3,157 2_67
-13.67 -23.77 -26.52 13.11 21.82 -17.05 -17.05 -17.05 -17.05
492,733 338,884 8,058 '193,918 3%018 24,845 38,455 17,456 13,334 793 3,097
397,853 277,340 7,536 156,062 28,742 20,604 31,898 15,876 11,053 706 2,494 2,367
-19.26 -18,16 -6.47 -19,_._ -26.34 -17,07 q7.05 -9.0,5 -17.10 -10.92 ' -17.(k_
153,850 15,546 37,604 7,995 30,641 15,726 27,142 3,785 6,850 8,562
120,513 13,789 28,035 3,512 20,539 11,465 22,514 3,139 5,682 7,102 1,578 789 2,367
-21.87 -1L30 -25.4S -56.07 -32.9'7 -27.09 -17.05 -17.05 -17.(LB -17.(Z_
24,633 20,300 1,528 2,808
22,064 16,873 1,286 2,326 1,578
-10.43 -16.88 -15.84 -17.06
105,055 8,583 13,571 28,887 4,053 2.098 47,863
90,248 7,644 11,257 23,962 3_(_ 1,740 42,282
-14.09 -10.93 -17.05 -17.fk_ -17,04 -17.05 -ll.(kq
30,634
27,5913
-10.22
4,735 2,367 2,367
Chapter 8: Pineda 4. 5. 6.
245
hiring and deployment of doctors to 5'hand 6_ class communities; expansion of the subsidy given to private hospitals for the medical care of indigent patients; and augmentation of budget of priority programs that specifically cater to vulnerable groups from the Poverty Alleviation Funds (PAFs) or the Structural Adjustment Loan from the World Bank, such as Expanded Program of Immunization, Nutrition Program, Tuberculosis Control Program, SRA-Related Program, and all hospitals (Capones 1998).
In selected CIDSS areas, the government implemented a rice subsidy program wherein priority was given to families with at least five members and with moderately and severely malnourished children. It also distributed ironfortified rice in Surigao and Sorsogon, areas with a significant degree of iron deficiency (Reyes et al. 1999). DECS programs Among operations, the greatest reduction in appropriations in real terms was in the requirement of teacher I positions (98%), followed by buildings and structures (61%), and land and land improvement (40%) (Table 18). The smallest reductions were for preschool (2%), elementary education (4%), purchase of desks (5%), Government Assistance to Students and Teachers in Private Education or GASTPE (8%), and purchase of textbooks (10%). Only secondary education posted an increase in appropriation of 6 percent. The appropriation for locally funded projects declined by 14 percent. Construction of school buildings and other facilities was prioritized as the appropriation for these projects rose by 38 percent. For foreign-assisted projects, appropriations more than doubled in 1999relative to 1998. The most substantial increase was for the Third Elementary Education Project (TEEP) at 139percent. TEEP seeks to provide classrooms for schoolchildren in the 6-12 age bracket in 26poor provinces with the highest dropout rate for elementary school children. ForDECS projects under the GATT-Related Adjustment Measures Fund,which are also foreign-assisted, appropriations declined by 34 percent on the whole. Appropriations for the DECS school building program also fell by 26 percent in real terms in 1999. The secondary level was most severely affected as appropriations lowered by 51 percent. To ease the classroom Shortage, DECS adopted the following measures: 1. Coordination with LGUs, Parents-Teachers Associations (PTAs), civic organizations, and private firms in mobilizing additional funds for classroom construction, renting private buildings to be used as
246
Table
Economic
18. DECS
GAA
appropriations
(P'000,
crisis...
in 1996 prices),
Once
more
1998 and 1999.
1 AppropHatioor. [
1.998
% Chang_ , 1999
1998-1999
Or°ERATIONS a. Non-formal Education b. R_._arch & Pronlotion
of School Health & Nutrition
C- Medical/Dantal Health Serv]ces d. Palarong Pambansa Program e. Regitmal Operations 1. Pre-school Education 2. Elementary
Education
3. Secondary Education 4. I_quimment of Teacher
I Positions
5. Govt. Assistance TO St_dor_ts and Teachers 6. Purchase of Desks 7. Purchase of Textbooks 8. Requirement,a of Newly Created 9. Lump
Sum for Reclassification
10, Lump-suln
for Subsistence
11. Lump-sum 12. Lump-sum
for Furniture, for Buildings
in Private
Education
(GASTPE)
Positions
of Positinr_ and L_undry
Allowance
Fixtures, Eqpt. and Books Outlay and StructuresOutlay
13. Lump-sum for Land and Land Improvement Outlay 14. Lump-Sum for the Conduct of NEAT and NSAT "15. Ponchase of Dosks, Chairs, Textbooks, Instructional Materials,
Pay
]9, Financial
A_istance
30,098 50,154
-7.84 _29.58
30,953 82,009
28,527 59,800
-7.84 -27.08
62,376,038 115,509
59,713,934 112,872
2,.27 -2.28
44.,041,_39
42_303,114
-3.95
14,165,724 805,007
14,976,430 18,033
5.72 -97.76
649,557 243,934
598,662 232,739
-7.84 -4.59
441,086 992,335
398,175 778,871
-9.73 -21.51
5,994
5,120
-14.58
27,399
17,213
-37.18
115,526 109,909
86f_10 43,4(B
-25.09 -60.51
26,542 25,687
]5,783
-40.54
Tools,
Furnitxlce, Fix_res, Computers & r,_MherEqpt. 16. Scholarship Program . 17.Maimt_naoca of Computer Eqpt. For Schools in NCR 18. Hardship
32,657 71,222
477,776 131,859 856 57,015
to ARMM
3,946
20- Early Child Development Program 2L Mass Production of Science Eqpt, and Purcha_ of Sets of Accessories for Computer Aidad Experimen_ 22. Lump-sxlm
for Purchase
of instructional
31,566 26,56.3
Materials
7,89]
PROIECI_ l. Lt_ally-Ftmded
Pr_ects
a. DECS Comput'erization
Program
d. Cork_truction of School Bldgs, Claasr trams amd Othar Facilities b. Purchase of Computers, Instructional Printed Materials and Electrorfics Video Hardwava as wall as the Prod_icfon and Di_eminatlon of Materialg for the Information Campaign c. Ti tling of School Si tes e. Prcn2urement Sub-total,
for Climate
-7.84
76,152
37.68
-14.29
District of lsabela
R. Magsay_ly
H.S., Manila
171
Projec_
180,921
155,066
a. Engineering and Science Education Project (IBRD) b. 13xilippine-Australia Project in Basic F.dtication (PROBE)
Foreigxx-A_sisted
Funded
in the Fourth
78,914
55,312 38,102
1,712
of Mxasical Irtstruments,
Locally
Chang_
85,623
Projects %081 42,640
43,900
2.95
c. Educatior_al Facilities Improvement 1 reject ]Vi JICA Ch'an t d. Third Elementary Educ. Program (IBRD)
Z3,254 301,793
35,776 720,072
53.8.5 138.60
_¢_ab-total, Foreign-ar_isted
376,768
799,748
112.27
ATT Pro)_c_ (Forelgn-A_'_isted) a. Agricultural Education Program
- EEC grant
b. PhiL-Australia Agricultural Technology c, Non-formal Educational Project- ADB Sub-total,
Educ. Pro
-NAES-AusAid
grant
GATT Projects
3ECS SCHOOL. BLDG. PRCK_,,RAM (35 Bldgs & Structures Elementary Secondary Total
Source of basic data: GAA, 1998-1999.
8,939
1,301
-85.45
16,970 224,918
12,339 150,801
-27.29 -32.95
250,826
164,440
-34.44
1,689,014
1,491,475
-11.70
991,961 2,680,975
481,376 1,972,851
-51.47 -26.41
outlay)
I
Chapter 8: Pineda
2.
3.
247
classrooms, and maximizing the use of nonacademic classrooms like gymnasiums, laboratories as well as chapels, barangayhalls, and other government buildings (Manila Bulletin, 6 June 1999). Consideration of a sort of Build-Operate-Transfer (BOT) scheme where private contractors will build initially 10,000 classrooms. DECS will use the classrooms, estimated to cost P8 billion under a lease-purchase agreement under which the rental will be considered amortization for interest and principal over a 10-year period (Manila Bulletin, 12 April 1999). Obtaining funding support from foreign institutions for the construction and repair of classrooms, particularly in far-flung areas.
According to DECS Secretary Andrew Gonzalez, he will also push for a new legislation that would give the department a special appropriation----on top of its regular national budget--to wipe out the present shortage of classrooms (Manila Bulletin, 6 June 1999). To alleviate the shortage of teachers, DECS has ordered the return of teachers holding administrative positions back to the classrooms. These included 400 of the 1,400personnel in the main DECSoffices in Pasig City (Manila Bulletin, 12 April 1999). DECS also directed principals and special teachers such as guidance counselors, librarians, canteen teachers, clinic teachers and coordinators, among others, to teach two subjects each and for field officials to identify vacant positions in their respective areas and immediately fill them up in time for school opening (Manila Bulletin, 6 June 1999). Other emergency steps taken when there were not enough teachers included: 1. increasing the maximum number of pupils in a class from the ideal 40 to 55 or even 60; 2. adopting the double-single class program where a teacher handles one class in the morning and another class in the afternoon to come out with a two-in-one setup; 3. organization of a multigrade class which is made up of a group of pupils belonging to several grade levels (like Grades I, II, and III or Grades IV,V, and VI) and handled by only one teacher; and 4. using double shifting in densely populated secondary schools where one group of students (e.g., 1st year and 2nd year) report to class from 6 a.m. to 12noon, and another group of students (e.g., 3rd year and 4th year) attend classes from 12 noon to 6 p.m. with both groups of students handled by the same mentors (Rimando 1999).
248
Economic
crisis... Once more
DECS also had to contend with textbook shortage. The pupil to textbook ratio is 1:6 in elementary and 1:8 in the secondary level. The textbook shortage was particularly severe in 1998. According to DECS Secretary Gonzalez, although P550 million was allotted for new books in 1998, no corresponding cash was provided (Manila Bulletin, 12 April 1999). The government should thus make sure that funds needed are available at the start of any given calendar year so that books could be printed and delivered before the start of a new school year. To remedy the textbook shortage, DECS is restudying the book requirements in accordance with available meager funds, so that noncore subjects will use only mimeographed materials instead of books. Secretary Gonzalez has also declared a 2-year moratorium on acquiring supplementary reference materials so the Department can use the savings to buy more textbooks. DECS is also tapping other countries and international financial institutions to provide funds for new books, as well as training for teachers. With funds lost to overpricing, short deliveries, and ghost deliveries (such as the publicized desk and armchair scare, and textbook scare), DECS is undertaking new measures to avoid irregularities. These include the use of inventory checks in field offices to curb ghost deliveries or underdeliveries, devolution of bidding to regional and local offices, and inclusion of at least two private sector representatives in the Pre/Post Qualification, Bids and Awards Committee (PBAC). Committee members will serve for 6 months to 1 year, without anyone knowing when he or she will be replaced. To prevent collusion with agents and suppliers, PBAC members will be chosen by drawing of lots just before the start of every bidding (Manila BuUetin, 12 April 1999 and Philippine
Daily Inquirer, 23 April 1999).
DS WD programs Among DSWD operations, the assistance program for the distressed and disadvantaged population has the most reduced appropriation of 43 percent (Table 19). Within this program, the appropriation for assistance to persons with disabilities and senior citizens was slashed by 52 percent, and that for assistance to victims of disasters and calamities by 47 percent. For other programs such as technical assistance to LGUs, nongovernmental organizations (NGOs), and people's organizations (POs) and maintenance and operation of centers and institutions, reduction in appropriation was lesser at 16 percent. In contrast to 19 locally funded projects in 1998, DSWD only had 3 locally funded projects in 1999. These included the CIDSS, SEA-Kaunlaran II, and Mt. Pinatubo Assistance, Resettlement and Development Project. The appropriation for Mr. Pinatubo was severely cut by 74 percent. CIDSS remained the top priority project, with appropriations rising by 5 percent.
Chapter 8: Pineda Table 19. DSWD
249 GAA Appropriations
(P'000, in 1996 prices),
1998-1999.
Appropriations 1998 1999 OPERATIONS a. Assistance Program for Distressed & Disadvantaged Population 1, Nationwide Emergency Assistance/Calamity Relief Operations/AssistalKe to Victims of Di_sters & Natural Calamities 2, Assistance to Persons with Di_bility and S_nior Citizens 3, Protective Services for Cl_ildren & Youth in Especially Difficult Circumstances inc[, A,qe_iStance to Indigent Patients in Hospitals as well as Assib_ance for Burial and Transportation Expanses b. Technical Assistance to LGUs, NGOs, & PO's Including Disaster R_ponse & Monitoring Capability Building c. Maintenar.ce & Operation of Canters & hxstitntlons Sub4otsl, Operations
r,ROlECrs l. Locally-Funded Projects a. Comprehensive & Integrated Delivery of Servicc--s in the Mnst Depr_sed Provh_es under the Social Reform Agenda b. SEA-Kaunlaran I1 (Livelihood Development Project) c, Mr, Pinatobo Assistance, Resettlement & Dovelopment Projoct d. Other: Sulong-Dunong Pare Sa Kabataan 2(100 'Fulay 20(X) Spe,.hal Project for Poverty Mapping Family Welfare Fund Assistance to Setlior Citizens at Welfareville, Mandaluyong Purchase of Utility Van for Senior Citizens being served by the Offictxof .c_ani.orCitizens, Mandaluyong Asshstanoe to Central Day Care Center, Welfareville, Mend. Construction of Tuloy Street Children Tralni ng Center, Tuloy Foundation, Inc. Constru___ionof Day Care Centers Financial Assistance to Community-based Tnformation & Educational Program and Livellh,xx_iPrc_ects for Women Crisis Intervention and Temporary Shelter/A_istance for Abandoned, N_lected, Abused, Surrenderedlnfants & Exploited/Disadvantaged Women and Famili,_s Assistanceto Ugnayan Pag-Asa Conter (DSWD-NCR) Finat_ial Assistanc_ to Summon to Serve Foundation Fh't.u'a.-ialAssistance to Indiger_ts, Victims of Disasmss and Calamiti,v,_,Distres_ & Disadvantaged Population, Persnns with Disabilities, Elderlles & their Famili_ Cor'nmunity Projects for Persons with Disabiliti_ Construction of Family Resom'ce Ctn,tters ,¢yub-total,Locaily-Fund_| Projects
il, Foreign-Assisted Project Productivity Skills Capability Building for Women
%Change 1998-1999
101,367
58,205
-42.58
54,863 19,357 27,148
29,014 9,360 19,8,'30
-47.11 -51.64 -26.95
7,042
5,937
-15.68
311,019 419,428
262,089 326,231
-15.73 -22,22
376.137 8,562 59,936 156,880
394"570 7,891 15,7&_
4,90 -7.84 -73,67
601,516
418,244
-30,47
53,086
21,066
-60,32
Source ofbasic data: GAA, 1998-1999.
DSWD's only foreign-assisted project, Productivity Skills Capability Building for Women, also got a substantially reduced appropriation in 1999, which was 60 percent lower than the 1998 level. This program aimed to provide women with training and job opportunities.
250
Economic
crisis... Once more
DSWD's coping mechanisms for fiscal constraints included the following: 1. encouraging LGUs to give priority in allocating funds for DSWD services; 2.
intensifying social marketing and advocacy to encourage support/ assistance from the private business sectors; strengthening linkages with NGOs and other stakeholders to police their ranks in compliance with approved DSWD standards and
3.
regulations. This would facilitate provision of quality services to the target clientele, thereby minimizing travel costs regulation enforcement activities; and 4.
maximizing volunteeers, for DSWD programs.
Budget-related This addressing services. It to indicate Health
NGOs, media, and community
issues in the social services
support
sectors _
section examines how the government has been progressing in long-identified weaknesses in financing education and health compares previous expenditure patterns with those of recent years improvement or deterioration.
sector
UnderinvesOnent
in the health sector
In 1993, general government expenditure (national government and local government units) on health per capita at P95.10 ($3.51) was not enough to cover the price of a minimum package of basic health interventions estimated to cost $12.61 in 1993 (based on a World Bank estimate of $12 per capita in 1990 adjusted for inflation)i For 1998, national government and local government expenditures on health amounted to P13.7 billion and P12.9 billion, respectively, or a total of P26.6 billion. This was about $8.65 per capita (based on the 1998 population of 75.2 milfion and exchange rate of P40.89/$1).4 Adjusted for inflation, the World Bank-estimated price of a minimum package of basic health interventions was equivalent to $18.45 in 1998. Thus, the shortfall between such price and the general government expenditure onhealth further widened from $9.1 in 1993 to $9.8 in 1998. Overallocation
for curative care
It is widely estimates
indicated
accepted
that prevention
is cheaper than cure. World Bank
that cost per life save_/ was much higher
(at least two to
I
_TThis
section draws largely from Manasan et al. (1996). 4 Data were sourced from the 1999 Asian Development Bank Key Indicators countries and the Commission on Audit Report on I_GU Operations.
for Asian and Pacific
Chapter 8: Hneda
251
five times as much) in curative care than in preventive care. The government, however, had been 0verinvesting in curative care services and underinvesting in preventive care services. This was indicated by the very high share of curative care services relative to preventive care services in total government expenditures. On the average, from 1986 to 1993, about 70 percent of DOH expenditures was spent on curative and only 21 percent on preventive health services. In recent years, the proportion of curative services was lower at 55 percent in 1997, but it rose to 60 percent in 1999 (Table 20). On the other hand, the share of preventive health services in health expenditures declined further to 11percent in 1997 and 10percent in 1999. This indicated that curative care is still increasingly given priority over preventive health care. Table 20.
Comparison of preventive and curative health expenditures.
Services Preventive Curative Others Total health expenditures Source: NEDA (1999).
Nominal (in million pesos) 1997 1998 1999 (Actual) (Adjusted) (Proposed) 1,530 1,414 1,465 7,756 7,540 8,414 â&#x20AC;˘ 4,868 4,790 4,229 14,154
13,743
14,108
1997
Percent share 1998 1999
10.8 54.8 34.4
10.3 54.9 34.8
10.4 59.6 30.0
100.0
100.0
100.0
Given limited funds, one recommendation to augment resources for public health programs was through cost recovery, such as charging users of public hospital facilities. For itspart, the DOH had a revenue enhancement and â&#x20AC;˘cost recovery project, which aimed to increase hospital income through improved pricing, billing, collection and revenue retention, and cost recovery in hospitals. This was undertaken in several hospitals such as Rizal Medical Center, Ilocos Regional Hospital, Cotabato Provincial Hospital, Quezon Memorial Hospital, and Palawan Provincial Hospital. Restrictions on retention of income generated by DOH hospitals severely limit the incentive of hospital personnel to charge and collect user fees (Manasan 1994). Recognizing this, DOH Secretary Romualdez proposed fiscal autonomy-allowing hospitals to collect, retain, and allocate revenues from socialized user fees. At present, hospitals are still highly subsidized. About 61 percent of the 1999 DOH appropriation was for health facilities maintenance and operations (Table 21). This limits funds for public health services. Overallocation for administrative services DOH outlays for administrative services have not been reduced in proportion to the devolution of a substantial number of its personnel (45,000
252
Economic
Table 21. Appropriations Percent Year
for health facilities
Health facili.ties and
and public health services. Percent change in appropriation (based on 1996 prices)
share in DOH GAA
maintenance
crisis... Once more
Public health
Health facilities
services
maintenance
operations
Public health
and
services
opera tions
1996
46.7
13.5
1997
51.2
11.7
26.1
-0.3
1998 1999
49.9 60.8
103 11.5
1.8 -2.5
-2.2 -15.4
Sources: GAA (1996-99).
out of 75,000) and budget
(P3.9 billion out of P10 billion). The allocation
for
general administrative services in 1993 was estimated to be P382 million higher than what its reduced personnel and bludget warranted. The share of administrative
services in DOH expenditures
even went up from 6.2 percent in
1992 to 12.1 percent in 1993. in 1999, the proportion of general administration and support services to DOH new appropriations remained high at 13 percent (Table 22). Local officials noted with resentment the continuing high DOH budget despite the devolution of majority of its employees. They complained that while service delivery responsibilities had been transferred to local governments, funds remained at the national level (ARD 1999). s Table 22. Share of administrative appropriations (%).
services
in DOH
expenditures
Year
Share in expenditures
1991 1992 1993
6.3 6.2 12.1 Share in appropriations 13.3 11.3 11.0 13.0
1996 1997 1998 1999
and
.I
Sources: Manasan
et al. (1996), GAA (1996-99).
5 Other devolution issues that remain to be resolved are the mismatch in costs and revenues transferred from national government agencies to LGUs und6r the Local Government Code and p_edevolution backlogs. Solon (1999) revealed that investments earmarked for local health facilities were never carried through. Thus, facilities were already dilapidated when the LGUs took over,
To solve predevolution backlogs and to encourage LGUs to allocate more resources for health services,the recommendation was for DOH to set aside adequate resourcesthat will be provided as grants to LGUs.Such grants will be used to leverag_ forbetter performance from LGUs.
Chapter 8: Pineda
253
The ongoing streamlining in the central office that includes reduction of staff, resources, and functions is expected to decrease general administration expenditures. Underfunding of maintenance and operating expenditures Low allocation for MOOE resulted in shortage of complementary inputs such as drugs, medicine, supplies, fuel, and building and vehicle maintenance. This reduced the effectiveness of the health staff. There had been a marked increase in the ratio of DOH personal services expenditure to MOOE?from an average of 0.63 in 1980-82 to 1.02 in 1989-91. In recent years, based on GAA appropriations, the ratio fell to 0.82 in 1996but had been increasing to 0.86 in 1997, 0.91 in 1998, and 0.95 in 1999. Education Underfunding of education Providing adequate and quality educational inputs and facilities for the growing student population requires resources. Compared with other members of the Association of Southeast Asian Nations (ASEAN), education in the Philippines is underfi.mded. The country has the second lowest ratio of education expenditures to GDP in 1990(Table23). This ratio was higher in 1996-99 (around 4%)6but it was still below those of ASEAN members in 1990. Low allocation for MOOE The allocation for maintenance of existing facilities and other operating expenditures was very low compared with personal services. In 1990,16 percent of DECS' new appropriation was for MOOE, while 71 percent was for personal services. In 1999, the share of MOOE decreased further to 10 percent while personal services rose to 89 percent. Thus, the sector continued to experience chronic shortages in textbooks, desks, and other facilities. Inequity in regional allocation The inequitable allocation of resources among regions showed in the wide disparity in educational performance across regions. Less developed regions had lower educational performance. To enable poorer regions to have abigger share of the budget, including poverty incidence in the allocation criteria had been recommended. This was also expected to help reduce dropout rates and improve survival and completion rates. The government had now recognized the weaknesses of the current Fair and Equitable Access to Education Act (RA 7880 of 1995) in allocating Computed based on data from Key Indicators ofAsian andPacific Countn'es, Asian Development â&#x20AC;˘ Bank, 1999.
254
Economic
Table 23. Comparison of education countries, 1990.
expenditures
Country
crisis... Once more
among ASEAN member
Ratio to GDP (%)
Indonesia Malaysia Philippines Singapore Thailand
1.7 5.7' 3.1 4.4 19.5
1988. Source:Manasan et al. (1996).
educational
resources. It noted that the scheme (allocation of capital outlay based
on student population and classroom shortages ) did not address small areas that were equally disadvantaged educationally; and it did not close the gap between the well-endowed and less-endowed areas (NEDA 1999). As such; a review of RA 7880 was included
among the priority legislative
agenda.
The need to ratzonalize terffary education To provide lower income groups with access to higher education, state universities and colleges (SUCs) were created_ Studies (Tullao 1993 and Manasan et al. 1996), however, indicate that SUCs in general were not as cost effective as private schools and that they were also not efficient providers of quality education. The cost of instruction per student in SUCs was much higher than the average tuition fee per student in high-priced private schools. Financing of SUCs (numbering 107 as of 1998) had also strained limited public resources available which could have been used for basic education. The consensus among the studies was that it was better for the government to subsidize the student's education directly, for example, through well-targeted and well-defined scholarship universities
schemes for poor but deserving students, rather than operate and colleges (NEDA 1999). In July 1999, President Estrada had
ordered a moratorium (Confreres 1999).
on the creation
of state
universities
and
colleges
At present, DECS helps needy students through GASTPE7 Its low support level, however, enables only relatively better-off families to benefit from the scheme. Conclusions The financial crisis has raised much concern for the social services sector. Compared with other sectors, the social services sector is relatively more protected from the effects of the financial cflsis. The subsectors have a lower cut in expenditure relative to GAA and to th_ 1997 level.
Chapter 8: Pineda
255
While no reserves were imposed on DOH, DECS, and DSWD for 1999, the situation was tighter as appropriations in real terms were lower than 1998 levels. In particular, the 1999 DOH appropriation was even lower than 1997 and 1996 levels. After adjusting for inflation, the proposed new appropriations for DECS and DOH for 2000 were 3 percent and 8 percent below their respective levels in 1999. The adverse social impact of the financial crisis could be long term and irreversible since human capital formation is affected. Delayed or foregone health care and dropping of students from school reduce the health and education status of the population. Thus, there is a need for the government to undertake specific measures on health and education to cope with the shortterm impact of the crisis, to assist those that have already been severely affected (e.g., special programs may be implemented for dropouts), and to address longidentified structural weaknesses. The government
could consider
carrying
out measures
which studies
(Reyes etal. 1999, Knowles et aL 1999) had identified for dealing with shortrun effects of the crisis as well as for minimizing costs and promoting better use of resources. These include the following: 1. stabilizing food prices and expandingâ&#x20AC;˘well-targeted feeding 2. 3.
programs; reducing the number of textbooks to cover only core subjects, and requiring better-off families to pay for their children's textbooks; exploring other more cost-effective options with the objective of "an elementary school in every barangayand a high school in every municipality" such as provision of (a) bus services in areas where there are good roads, (b) dormitory housing for students from farflung areas (if bus services are not feasible), and (c) incentives for teachers to locate in areas where schools can be cost effectively
â&#x20AC;˘4.
provided; increasing the support covering out-of-pocket benefit;
value of subsidy under GASTPE and costs so that more poor families could
7GASTPEhas the followingcomponents: 1. Educationservice contracting(ESC)scheme:provides financial assistance for tuitionand other school fees ofoverflow studentsfrompublichigh schoolsenrofledin qualifiedprivate schools; 2. Tuitionfee supplement(TFS):given to high school students enrofled in low-tuitionprivate schoolsand forstudentsenrolledin prioritycoursesin bothdegree andnondegreeprograms in tertiary institutions; 3. Private education student financialassistance (PESFA):made available to underprivileged but deserving high schoolgraduates who would liketo pursue collegeor technicaleducation in private collegesand universities; 4. Study-now-pay-laterplan; and 5. Collegefaculty developmentfund: intended for training and development ofcollegeteachers.
256
Economic
5.
6.
crisis... Once more
facilitating the rapid expansion of training facilities (e.g., by temporarily employing the educated unemployed like teachers, and by temporarily renting unused space for training facilities) to help youth acquire additional skills during the crisis; and establishing a strong monitoring system on crisis impact for identifying those that should be targeted for assistance and for providing feedback on effectiveness of policies.
Some long-identified structural weaknesses in resource allocation have persisted and even worsened. These include the rising share of curative relative to preventive â&#x20AC;˘health care services in the health budget, the declining share of MOOE in DOH and DECS appropriations, and the continuing high proportion of general administration and support services in DOH appropriations despite the devolution of its many personnel. In some of these areas, there may be possible future improvements. In the health sector, DOH is streamlining its central office structure and operations. In education, the priority legislative agenda include a review of the Fair Access to Education Act and the Omnibus Education Bill. Among the provisions of the bill are as follows: the budget allocation basic education and shall be provided
should meet the full requirement annually in the GAA; the share
of of
education in the total budget for the year shall not diminish from the previous year; and shall, in fact, be increased in proportion to enrolment; and setting up a voucher system for educational financial assistance. In comparing yearly budget levels, it is advisable to make adjustments for inflation rather than just consider nominal values. Another positive development for the three agencies covered in the study is the current project under the Social Expenditure Management (SEM) loan from the World Bank, which aims to improve their core management capacity, including financial procurement systems, i Other specific ways to address structural weaknesses have already been identified in previous studies. Hence, what needs to be done is implement these measures which include the following: _1 1.
Promotion of cost recovery in publichospitals, providing them fiscal autonomy, and stopping renationalization of devolved hospitals. I This will free resources
for preventive
health care and MOOE.
2.
Provision of support to Philipp_e Health Insurance to improve its coverage of indigents and fund use.
Corporation
3.
Integration of uneconomic-sized SUCs to achieve economies of scale, implementation of full-cost pricing, and privatization. These will free resources for basic education and MOOE.
Chapter 8: Pineda 4.
Inclusion of poverty incidence among the budget to minimize inequity in regional allocation.
257 allocation criteria
The adoption of these measures can certainly help the social services sector to weather the financial crisis and become structurally strong to face challenges of the new millennium.
258
Economic crisis... Once more
ReferenCes Anonymous. 1999. DECS seeks aid of LGUs. Manila Bulletin. 6 June. Anonymous. 1999. Gonzalez bares DECS problems and reforms. Manila BuUetin. 12 April. Anonymous. 1999. TEEP seeks to upgrade basic education in 26 of the country's poorest provinces. Manila Bulletin. 27 June. Anonymous. 1999. Educators speak. Manila Bulletin. 31 October. Asian Development Bank. 1999. Key indicators of Asian and Pacific countries. Manila: ADB. Associates in Rural Development. 1999. 8ta Rapid Field Appraisal (RFA). Governance and Local Democracy (GOLD) Project. Capones, E. 1998. Impact of the Asian currency crisis on the Philippine health sector. Paper delivered during the International Symposium on Health Initiatives in Asian Economic Crisis-HumanCentered Approach, United Nations University, Tokyo, Japan, 27 April 1998. Contreras, V. 1999. Erap stops creation of new state colleges. Philippine Daily Inquirer. 10 July. Lira, J. 1998.The social impact and responses to the current East Asian economic and financial crisis: the Philippine case. Manila: United Nations Development Program. Knowles, J., E. Pernia, and M. Racelis. 1999. Social consequences of the financial crisis in Asia. Asian Development Bank Economic Staff Paper No. 60. November. Manasan, R., G. Llanto, and W. Nuqui. 1996. Financing social programs in the Philippines: public policy and budget restructuring. Makati: Philippine Institute for Development Studies (PIDS). Manasan, R. 1995. Fiscal Decentralization: The early years of code implementation. PIDS Development Research News. Vol. XIII, No. 4. July-August 1995. Manasan, R. 1994. Breaking away from the fiscal bind: reforming the fiscal system. Makati: Philippine Institute for Development Studies (PIDS). Manhit, V.1999. Gonzalez's vision for DECS. Philippine Daffy Inquirer. 23 April. National Economic and Development Authority. 1998. The President's 1997 socioeconomic report. Manila: NEDA. June. National Economic and Development Authority. 1999. Medium-term Philippine development plan, 1999-2004. Manila: NEDA. Reyes, C., R. Manasan, A. Orbeta, and G. de Guzman. 1999. Social impact of the regional financial crisis in the Philippines. Paper presented during the
Chapter 8: Pineda
259
Finalization Conference: Assessing the Social Impact of the Financial Crisis in Selected Asian Developing Economies, ADB, Manila, 17-18 June 1999. Rimando, T. 1999. No new teachers. Manila Bulletin. 6 June. Romualdez, A. 1999. An agenda for health financing reforms. Paper presented during the DOH-PIDS Roundtable Discussion on Health Care Financing, Makati, 8 April 1999. Solon, O. 1999. Inter-LGU cooperation: the key to the issues of a devolved health care system. Policy Notes No. 99-01. Makati: Philippine Institute for Development Studies (PIDS). World Bank. 1998. The socioeconomic impact of the financial crisis in the Philippines:
a mission report. 11 June.
Part II1:
Government's
Response
to the East Asian Financial Crisis
9 Economic Policies and Measures in Response to the East Asian Financial Crisis Mario B. Lamberte
and lose[ T. Yap
General background The Philippine economy
in the 1990s
improvement in terms of macroeconomic stability (Table 11. Inflation was trend and the current account showed deficit was under uringon athedownward period 1992-97, Philippines marked control. Added to this was a rising M3/GNP
ratio (Fig. 1) which indicated a
greater amount of savings flowing into the formal financial sector and the economy's increased ability to absorb credit into the system without generating inflationary pressure.
Table 1. Selected
economic
indicators,
1990-98.
1990
1991
1992
1993
1994
1995
1996
1997
1998
GNF growth rate
5.4
0,2
1.5
1,3
5,3
5
7,2
9.3
0.30
GDP growth rate Inflation
3.2 14,2
-0,6 18.7
0.4 8.9
2.1 7.6
4.4 9,1
4,8 8.1
5.8 8,5
5.2 SA
0" 9,7 b
-4.7
-2,1
-1,9
-1.7
-0,5
-0.2
0.3
-0.9
-3,5
-2.1
-1.2
-I.5
0.9
0.6
0,3
0.1
lrLterest rate
23.7
21.5
16
12.4
12.7
11.8
12.3
13.1
13.5c
Export growth
4.67
7.99
11,13
15.79
18,53
29-4
17,75
22.81
19.16d
Import growth
CPSD/GNP
(%1
NG fiscal positionlGNP
(%}
-1.44"
'17.15
-1.27
20,48
21.2
21.23
23,71
20.82
14.02
-14.16 a
GDCF/GDP (ratio)
0.24
0,2
0.2]
0.23
0,24
0,23
O.25
0.26
0.22 a
Total trade/GDP (ratio)
0,68
0.69
0,74
0.79'
0,88
0,96
1.06
] .16
'1,06_
lst-3rd quarter average January-November average ' October dJanuary - July total " forecast SouKes:National Statistics Coordinator Board(NSCB) Bangko Sentral ng Pilipinas (BSP).
264
Economic
Figure
1. Ratio of M3/GNP
crisis... Once more
(1980-1997)i
45
째
35
20" 15" 10" 5'
198(I
1981
11982 1,983 '1984 1.985 1986
1987 3.988 "1989 .[_JO 1.991 "1992 '1993 1_)4
1995
1996 1997
Ye_ Sources:
National
Statistics
Coordinator
Fiscal policy was aimed
Board
(NSCB),
at prudently
Bangko
Sentral
managing
ng Pilipinas
(BSP).
the government
fiscal
position to support strong economic recovery and sustainable growth. Thus, reforms were made to broaden the revenue base, minimize, if not eliminate, fiscal distortions, and simplify the tax system to facilitate compliance. This fiscal stance had produced positive results, Tax yield increased from 15.3 percent in 1993 to 16.3 percent in 1997 despite the substantial drop in customs revenue as a result of tariff reforms. The national government had been running budget surpluses from 1994 to 1997. In 1996, the consolidated public sector account recorded a surplus for the first time in two decades. The strategy adopted by the government to manage external debt had generated some desirable results. The ratios of debt service burden to export shipments, exports of goods and services, current account receipts, and GNP had been declining during the period 1992-96 (Table 2). The ratio of foreign exchange liabilitie_s to GNP had also been declining, while the ratio of gross international reserves to debt service burden had been increasing during the same period. At the microeconomic level, firms realized comfortable profit margins, which were reinvested to expand productive capacities. Some firms found the domestic capital market an attractive form of financing, creating a stock market boom. The stock market price index soared from 1256 in 1992 to 3170 in 1996. A few large corporations issued bonds in the international capital market at reasonable rates. Before the liberalization of the financial sector, the financial system was highly segmented with subs ectors focusing on a few financial services. Competition across types of banks was very minimal due to regulations. Only
Chapter 9: Lamberte and Yap
265
Table 2. Selected external debt,_1990-98 (In US $million, ratios in percent). item [, Debt service burden Total
(I_B
1990
1991
1992
1993
1994
]995
19°_
1997
3,547
2,828
2,942
3_229
4,188
5,032
5,026
5,440
1,712 1,835
LI40 I,b88
1,607 12_35
1,791 1,438
2,647 1,541
2,&53 2,179
2,820 2,206
2,921 2,519
B
PHndpal Intere_t Expor t shipcaar_ts
8,840
9,824
11,375
13,483
17,447
20,,543
25,228
Exlxtr ts of goods and services Current accoun t retail0 ts Gross national prod_ct
13,028 13,745 44.073
8,186
14,464 15,292 45.(x_
17267 18,093 5_'4_19
18,87"2 19,618 55,321
24_83 25,074 65.742
31,_1 32,968 76,180
39_49 40,734 87,084
48JYo3 49,733 85,742
Foreign exchange liabilities (end-of-period) Gross internatk_al reserves (end-of-period)
2fl.549 2,048
29,956 4_26
30,934 5,3_.1
.M._.82 5.922
37,079 7,122
37,778 7,762
41,875 11,745
45.433 8,768
DSB to export shiprr,_n LS
43.33
31.99
29.95
28.39
31.06
28.84
24.47
21.56
DSB to expor_ of goods _'mdse rvic'a_ DSB to ctn'_n t accot]n t receipt_
27.23 25.81
19.55 18.49
17.04 16.26
17.11 16.46
17.43 16.7
15.81 15.26
12.71 12.34
11.32 10.94
8.05
6.19
5A6
5.84
6.37
6.61
5.77
6.34
57.4 181.44
61.97 183,4
56.4 170.06
49.59 154.25
48.09 233.68
52.99 161.1g
[l. _ttos
DSB to gross national pr¢_uCt Foreign exchaxage liabilities to gr_s national productc Gt¢_ toternaticalal reserv_ 'at d_bt serx4ce burde_
64.78 57.74
6,_.61 160.04
Based on the revised methodology. bDebt service burden represents principal and interest payment after recheduling Source: SPEI, Bangko Sentra] ng Pilipinas,
four branches of foreign banks were allowed to participate in the domestic banking system. Banks were prohibited from owning other types of banks. The liberalization of the financial sector started in the early 1980s with the introduction of universal banking and the blurring of distinction among different types of banks to improve competition. More measures to liberalize the financial sector were introduced in the second half of the 1980s and the early 1990s (see Appendix A - Table 1). Indeed, the liberalization of the financial sector had substantially changed the structure of the banking system. As of December 1997,there were 20domestic universal banks, 16ordinary domestic commercial banks, I branch of a foreign bank with a universal bank license, 13 branches of foreign banks, 4 subsidiaries of foreign banks, 117 thrift banks, 832 rural banks, 12 nonbank financial institutions with quasi-banking license, and 6,935 nonbank financial institutions without quasi-banking functions. The banking system had a total of 6,947 branches/other offices and nonbank financial institutions numbered 3,021.Some universal and commercial banks had thrift banks to make their presence felt both in the wholesale and retail market. Many of them were active in both investment and commercial banking. The economic growth realized by the Philippines in the 1990s, albeit modest compared with that of neighboring Asian countries, increased labor absorption and led to reduced unemployment rate from 10.5 percent in 1991 to 8.6 percent in 1996. Poverty incidence decreased from 39.9 percent in 1991 to 32.1 percent in 1997.
266
Economic
crisis... Once more
It was in this period, however, that economic managers faced new threats to macroeconomic stability and at the same time contended with old ones. The liberalization of the capital account in 1992 and the surge in global capital flows significantly changed the parameters of macroeconomic policyrnaking and financial regulations in the Philippines. Table 3 shows the composition of foreign exchange flows of the country from 1990 to 1997 focusing on the capital account. Medium- and long-term (MLT) loans had been greater sources of financing than foreign direct investments (FDIs), similar to the extemalborrowing episode in the mid- to late 1970s. Unlike that period, however, MLT loans in recent times have been primarily private sector debt. FDI flows were dominated by debt conversions during the early 1990s and privatization proceeds especially in 1994 and 1995. This indicated that the Philippines still lags in terms of attracting export-oriented FDI. Contrary to popular perception, portfolio capital on a net basis was relatively low although the level of gross flows rose sharply in recent years. The breakdown of portfolio capital, however, revealed that nonresident portfolio investment had been positive and was increasing since 1991. The accumulated nonresident portfolio investment for the 1991-96 period was slightly over US$5 billion. Given that the foreign exchange reserves of the Bangko Sentral ng PilipJnas (BSP) hover around the US$10 billion level, large and sudden movements in nonresident portfolio capital can have microeconomic variables.
a tremendous
impact
on macroeconomic
and
In several Southeast Asian countries and Korea, periods of large net capital inflows were associated with rapid expansion in the banking sector, in their foreign liabilities, deposits, and domestic lending. The Philippine experience in the past 3 years indicated a similar trend. The sharp rise in foreign liabilities of commercial banks contributed to the rapid increase in loans and advances to the private sector and overall level of foreign debt (Tables 3 and 4). The rising proportion of the external debt intermediated through the private commercial banking system had increased the vulnerability of the banking system to adverse movements in the exchange rate. The proportion of shortterm external debt to total external debt rose substantially in 1996 to 17 percent as against 14-15 percent in previous years, making the country more vulnerable to sudden changes in sentiments of foreign creditors. Foreign-denominated loans, meanwhile, were distributed almost equally between exporters and nonexporters (Table 5). The lack of a natural hedge against foreign exchange risk for the latter contributed a great deal to the spread of the crisis. The real estate sector was one of the beneficiaries of economic growth in the 1990s. The stock market price index of the property
sector rose by 290 percent
during the 1992-96 period, higher than the 150 percent stock market price index for the same period.
increase
of the overall
Chapter 9: Lamberte Table 3. Foreign
and Yap
exchange
267
flows (In US $million).
Levels
1990
1991
1992
1993
1994
Trade balance
-4020 -3211
Ctu'rentaccount
-2567
1995
1996
1997
-10708
-4695
-6222
-7850
-8944 -11342
-869
-858
-3016
-2950
-3297
-3914
19
349
660
-148
1002
-56
540
495
MLT loans, net
674
835
633
2455
1313
1276
2690
4688
FDI, net
528
529
675
864
1289
1361
1338
1117
-56
125
62
-52
269
248
-170
-461
-52
125
155
897
901
1485
2101
-55
603
40
289
-299
674
1574
4211
1191
-1Z25
-12,06
-13.54
-12,87
-4,60
-4,45
-4,67
-5.17
Short -term capital, net
Portfolio, net Nonresidents,
net
KBs
-4303
Share to GDP (In percent) Tradebahxnce
-9,07
-7.07
-8,86
Current account
-5,79
-1,91
-1,62
-5.55
Short -term capital, net
0.04
0.77
1.25
-0.27
1,56
-0,08
0.64
0,59
MLT loans, net
1.52
1.84
1.19
4.52
2,05
1.72
3.21
5,63
FDL net Portfolio, net Nonresidents,
net
KBs Source: BSP, Selected
Philippine
-1144
1,19
1,16
1-27
1.59
2,01
1,84
1.60
1.34
-0.13
0.28
0.12
-0.10
0,42
0,33
-0,20
-0,55
-0,12
0.28
0.29
1.65
1,41
2.00
2.51
-0.07
1.36
0.09
0_55
-0.55
1,05
2,12
5.03
1.43
Economic
Indicators.
The greatest challenge to macroeconomic managers is to minimize asset price volatility in the face of these capital flows. Figure 2 shows that among the ASEAN countries and China, the Philippines had the highest appreciation of real effective exchange rate (REER) between 1991 and 1996. Because of its sharp devaluation in 1994, China had a real exchange rate depreciation. The extent of the appreciation may have been higher if BSP had not bought dollars in the market to increase demand for foreign exchange. This intervention, however, had limited effects because of International Monetary Fund (IMF)imposed ceilings on monetary aggregates. The BSP had to sterilize the monetary effects of its dollar purchases in the market and this put upward pressure on domestic interest rates. This, in turn, attracted more capital inflows which partly offset sterilization measures. Lamberte (1995) estimates the offset coefficient at 0.88 for the Philippines, 1996). Sterilization
which is higher than estimates for other countries (Leung
measures
also carried a quasi-fiscal
cost because
of the
interest differential between domestic and international interest rates. High interest rates also have a dampening influence on investment spending.
t_o oo
Table 4. Foreign
exchange
liabilities,
1990
as of dates
I991 %Share
1992 % Share
to to_
Amount
to to_
Amo_
28549
100
29956
100
3(]934
Medium and Ioug-term b IMF
24173 997
84,67 3.49
25129 1Z65
83_9 _
2.5678 1183
Others
23_4
80
(In US $million).
$993 % Sb.are
Amount By debt
indicated
to to_ 100
1_" % _are
Arr_unt
to Lore]
34282
100
83_l 3_2
29247 1312
85.51 3_83
1995" % Share
Amounl 3_9
to total
i995 %_are
Amotm_
to total
1997 %Share
Arno_rtt
to total
% Share Amount
to to_
11_
57778
100
41875
100
45433
31882 1139
8_9_ 8.O7
32499 814
86.03 2.15
34668 405
82.79 0.97
36994 889
81.43 1_96
1GO
31685
83,87
34263
81,82
36105
79.47
13,97
7207
23176
81,18
24495
79.]8
27935
81.49
307-13
82._
Short-_rm
4376
1533
4827
16.n
_56
16.99
5(B5
14J69
_97
14.02
Trade
4099
1436
4_fl9
15.32
4937
15.96
3495
10.19
3401
9.17
2674
7.08
4C96
9.78
4fl82
8_87
0_7
238
0.79
319
1_3
1540
4_49
17_
4_84
2605
6_9
3111
7.43
4407
9.7
28549
100
29956
1(30
30934
100
3,1282
100
370"_
I00
377"_
1_
41875
I00
45433
20744 16958
72/06 59.4
22491 184_
75_0_ 61_
26720 21745
86.38 70.29
53879 26_3
92_99 77_
3_O52 27193
9_4 _.34
33591 26340
88_92 69.72
33244 24132
79_9 57_63
34768 22271
76.5_ _9.82
24969
72_3
25_6
68.84
24886
6_87
22943
54_
21393
47_9
3786
13_26
4_8
1_48
4975
16_08
1_14 5296
4.71 1_.45
i667 685_
4,5 18.5
1454 7251
3_5 19.19
lIB9 91]2
2.84 2I .76
.87_ 12497
1.93 27_1
_ 5A_]
Z7_4 I9_
7465 _
24._ 17._
4214 _
13a_2 7.44
2403
7.01
302?
8.16
4187
11_0_
8632
2_61
10664
23.47
blon_ade
2_
By borrDw_ NIonbanklng Public Public _G
and _th_s)
Central Bank- BOL Private Banking -Cenl_al _k
o| the Phil.
Bang_ko Several ng Pilipinas Banks
_
172l
8439
18_
iflO
12,88
3.76
855
2-31
1212
3=2]
1415
3_
2499
5,5
2324
8_14
2140
7.14
1911
6.18
1115
3.25
2172
5_6
2975
7,87
7217
17.23
816_
17.97
28549 11491
1(10 4035
.29956 11007
100 36.74
30934 9407
lOg 30.41
34282 5985
1_0 17.46
37079 55_9
l_g 14.91
37778 634_
100 20
45433 10176
lgO _,4
9.58
3185
9.29
3549
9_
6.18
2359
7949
23_]9
8216
22-16
80_8
13369 5794
39 ]1.97
1_33 4_
40.54 12.82
14393 6426
__
o By ¢_edltor Banks and other flrmnclal insto. Suppliers
2.312
28_2
9.35
2963
Mu_ato_al
6005
21_03
_1
6499
21.7
7368
BBal0er a_ O_hers
8547 194
29.94 [X68
9ff'_2 76
31.95 0.?5
H3_.8 68
2_17 36_62 0.22
_
100 16_8
41B75 8373
_85
2588
21.25
8634
38.1 17.01
13439 8841
_0_ 3_._1)_ 2] .11
_1?
8638
19_1
13307 109_
2_.29 24.1|
"As adjusted; excludes "Due to Head Office/Branches Abroad" accounts amounting to $519 million for end-1994 and $861 million for end-1995. Includes cumulative toreign exchange revaluation on US$ denominated multicurrency loans irom World Bank and the ADB of $817 million for end-J996, $417million for March 1997 and $587 million for June 1997. Source: Bangko Sentral ng Pilipinas (BSP).
C_ _.
-_
Chapter 9: Lamberte
and Yap
269
Table 5. Foreign currency deposit Levels
unit loans (In US SmiUion).
1993
1994
1995
1996
1997
Commodity exporter Service exporter Producers/manufacturer Oil companies Public utilities Others Total
1108.9 44.1 18,5 492.4 335.0 16,1 2015.0
1715.8 56.3 14.6 538.7 448.6 320.5 3094.5
2985.8 107.5 56,6 400.3 869.6 614.0 5033.8
5868.0 285.6 89.3 448.7 1484.5 2400.8 10577.0
5171.20 351.09 150.47 402.13 1614.60 2713.50 10403.00
Share to total (In percent) Commodity exporter Service exporter Producers/manufacturer Oil companies Public utilities Others Total
55,03 2.19 0.92 24.44 16.63 0.80 100.00
55.45 1.82 0.47 17.41 14.5 10.36 100.00
59.32 2.14 1.12 7.95 17.28 1,2.20 100.00
55.48 2.7 0.84 4.24 14.04 22.70 100.00
49.71 3.37 1,45 3.87 15.52 26.08 100.00
Source:Bangko Seni_alng Pilipinas.
The most effective response to large foreign exchange
flows is sustained
prudent fiscal policy. It makes monetary policy more flexible and reduces pressure on domestic interest rate by reducing public sector borrowing requirements. The challenge is how to maintain a tight fiscal policy without sacrificing much-needed public sector expenditures particularly in infrastructure. In her review of fiscal policy for the period 1986-96, Manasan (1998) commends the depth of fiscal adjustment during the last decade. From 6.6 percent of GNP in 1986, consolidated public sector deficit reached a surplus in 1996, equal to 0.2 percent of GNE She notes, however, that the bulk of fiscal adjustment in recent years was due to the large inflow of privatization proceeds. Capital outlays and government expenditures on maintenance and other operating expenditures (MOOE), which suffered major cutbacks during the adjustment period, have not been restored to their normal levels. With the impending sharp fall in tariff revenue following the tariff reduction program, it remains to be seen whether the fiscal position is sustainable. Table 6 shows the revenue performance
over the past 10 years and projections until the year 2004.
The national government seems confident that it would be able to compensate for the reduction in revenues from privatization and customs collections.
270
Economic
Figure 2. REER of selected
asian countries
crisis... Once more
1975-1996
2 _0 â&#x20AC;˘_ -6-
Philippines PROC Thailand
_
Malaysla
1, ;0
-
_
=
=
_-
Year
A cause for concern is the deterioration in the overall tax buoyancy coefficient from 1.41 in 1987-92 to 1.15 in 1993-96 (Table 7). Buoyancy measures the percentage change in tax yield given a percentage change in the tax base. The decrease is a reflection of less effectiveness in tax administration. The decline in buoyancy and economic slowdown are the primary reasons why tax revenue dropped sharply in 1997 and 1998. On the expenditure side, the unabated decline in MOOE and capital spending does not augur well for sustainable economic growth. Aggregate capital outlays of the national government shrank from 4.6 percent of GNP in 1975-85 to 2.9 percent in 1986-91 before settling at 2.7 percent for the period 1992-96. Total public sector investment, however--incorporating the national government, government corporations, and !local government units (LGUs)-increased from 4.3 percent of GNP in 1986-911to 5.2 percent in 1992-96. With the decision to reduce spending levels following the crisis, capital outlays necessary to improve infrastructure will fall further below the optimal rate. A more detailed analysis of the structure of the Consolidated Public Sector Deficit (CPSD) revealed, however, that the government overadjusted its fiscal position. Manasan shows that the actual primary surplus was consistently higher than a computed sustainable primary surplus. This condition held even if transitory adjustments which included temporary revenue measures,
C3 =3
Table
6. National
government 1986
1987
revenues 1988
1989
1990
Reverazes
79245 103214
TaxReve_ues BumuoflnternalRevenue Domestic-based Net Income & Profits ExciaeTax Sa]esTaxes&Licenses O@terDomestic taxes Internal Travel Tax Forex Tax
65491 46804 46454 19148 16383 9245 1675 350 324 26
85923 58600 58322 21799 22641 12132 1750 278 278
90"352 63721 63155 27409 19597 12356 3793 566 566
17496 16859 637 119I
25992 25977 15 1331
25014 25011 3 1617
3837_5 45948 38375 45948 2086
13754 1961 5182
17291 5751 5369 1253
22509 9211 5322 6006
29948 14190 5114 4176
BtmeuofCus_oms [mpor_ of Duties & Taxes Export Ta>_es O_her Offices Ncm-TaxRevenues B'l'RIrm0cne Fees and other charges Sale of_a_ets of whid_ BCDA CARP Com_romi_ Settle_ment Economic Support Ftmd Grants Foreign Domestic O_hera Sourc_
Actual
figures
112861
(In P million). 1991
ACTUAL 1992
152410 180902 220787 242714 122462 82001 81464 37592 24857 15687 30"28 537 537
1993
1994
260405 336160
151700 182275 200705 230170 271_ 103985 116256 133904 145927 187445 103368 115682 133207 145207 186738 49366 61053 70123 74795 91885 28075 25411 27629 30259 39596 20266 24204 27794 33458 36450 4861 5014 7661 6695 10807 617 574 697 720 707 617 574 697 720 707
1995
1996
1997
1998
I999
PROJECTIONS 2001 2002
"_2003
471841
310517 210195 209915 109353 41115 53259 16186 282 282
412163 416585 507200 563200 62800(] 701900 800700 904_00 514695 337175 408100 457600 511700 575900 649900 7261(]_ 31430_ na 164170 na 63049 na 67671 na 19416 na 387 na 387 na
64391 64391
72870 72_0
81971 81971
81610 81618
9'7601 104566 97601 104566
1767
1628
1931
22T2
2250
2721
29202 14217 5726 4181
38o'12 22049 7215 4119
34009 20069 5889 1877
3Q235 19414 6917 1677
64855 21495 12714 29914
50703 15885 11001 22Y76 15486
601500 666700 740800 841500
2004
361228 410449 367094 260774 260490 156356 48309 59300 16445 284 284
462.515 550500
2000
945200
94800 9_800
76005 76005
93200
2554
2668
3405
5900
11100
120{]0
12900
13900
15000
42555 24593 11733 5660 4113
59678 35352 13160 9428 4170
45930 22535 21046 1717
43300 15200 17500 10400
38300 18300 18800 1000
38800 17800 19700 1000
38600 16900 20700 1000
40700 17800 21700 1000
404-00 16300 22800 1000
200
200
200
200
300
_g_
94500 104300 113100 136900 163700
236 53 6150 199 199 262 are from
5116 â&#x20AC;˘ 195 1393 1775 t393 1404 371 409 the Bureau
4767 1701 1357 344
2044 2380 2262 118 654
1659 3072 3009 63 400
1704 2144 1744 400 2326
481 1551 1515 36 1_3
732 732
988 988
569 569
1738 1738
396 596
300
of Treasury. _o "4
272
Economic
Table 7. Overall
buoyancy
coefficients
Total tax revenue
crisis... Once more
ot major tax groups,
1976- 96.
1976-86
1987-96
1987-92
1993-96
0.93
1.31
1.41
1.15
h_dividual income tax
0.62 _
1.62
1.67
1.53
Corporate income tax Sale Tax/VAT and licen e Exci e taxe
0.90 _ 0.95 1.22
1.6 1.52 0.8
1.57 1.43 0.6
1.67 1.67 1.14
0.71
1.25
1.88
0.29
Import dutie orefers to average for 1980-1986 Source:Estimates by Manasan (1998).
underspending on MOOE and capital outlays, and one-shot privatization receipts were accounted for. The overadjustment actually reflected the prudent stance of the government following the debt crisis in 1984-85 and its continuation should help in riding out the present crisis. The overadjustment of the fiscal position also implies that the public sector cannot be relied upon to contribute substantially to an increase in the saving rate of the economy in the future. Apart from fiscal prudence, the impact of foreign exchange flows can be mitigated by capital market deepening which will allow capital surges without resorting to raising domestic interest rates to temper the inflationary pressure. Capital market deepening, however, has to be supported by an increase in the level of domestic savings. Two important implications arise from the previous discussion. First, that achieving a sustained fiscal surplus and increasing the domestic saving rate are medium- to long-term issues. They cannot be relied upon if another surge in foreign capital inflows occurs within the next few years. This puts a great deal of pressure on sound monetary policy. Second, that despite the underspending over the past decade, the new government has to grapple with a widening fiscal deficit. Emphasis, therefore, must be placed on the revenue side particularly on tax administration. i Export growth and industrial structure The Philippines was pointedly left out by the World Bank in its list of high-powered Asian economies (HPAEs) largely because of its erratic economic growth path, which has been punctuated by boom-bust cycles. The performance of the Philippine economy during the postwar period has been directly linked to the fortunes of its industrial sector. The various studies on this sector came up with the following
major conclusions
(Medalla et al. 1995):
Chapter 9: Lamberte and Yap 1.
2.
273
That the more than three decades of protection had been very costly in terms of its inherent penalty on exports, its serious adverse impact on resource allocation, and dynamic efficiency losses arising from lack of competition; That a reform toward a more liberal and neutral trade policy is necessary to propel the economy to a higher level of industrialization.
The antiprotectionist-neoclassical view became dominant among government technocrats starting in the late 1970s. As a result a major trade reform program was implemented in 1980. The objective was to make the Philippines more outward oriented by opening up its economy. After the trade reform process was disrupted duringthe external debt crisis in 1984-85, major import liberalization programs were implemented from 1986 to 1988. During this period, imports for more than 1,400 items were liberalized bringing down the percentage of import-restricted items to less than 10 percent. This was followed by the second phase of the Tariff Reform Program which narrowed down the tariff range to mostly within 30 percent. This was implemented by the Aquino administration under Executive Order (EO) 470 which covered the period 1991 to 1995. Tariff reform was accelerated during the third phase of the program, this time under the Ramos administration. EO 264 called for a tariff range from 3 percent to 10 percent by 2000 and a uniform 5 percent tariffby 2004. Despite calls to reverse the policy direction because of the crisis, President Estrada's administration has declared that it would continue with the programs initiated by the two previous administrations. One reason for this was that based on empirical studies, the impact of trade reforms is rather encouraging. Medalla (1998) shows that the average effective protection rate (EPR) across all sectors declined from 44.2 in 1983 to 29.4 in 1990 to 24.1 in 1995. The gap in EPRs especiaUy between agriculture and industry and between the exporting sector and the import substituting sector had been significantly reduced. Moreover, although exports remain penalized by the protection structure, the degree of the penalty had declined. Partly because of reforms in the trade sector, both total exports and the share of manufactured exports increased substantially. From only US$4.8 billion in 1986,total exports surged to US$25.2billion in 1997(Table8). This represented an increase in the share of Philippine exports in the world market from 0.24 percent in 1986 to 0.40 percent in 1996, although it was lower than the share of developing__HPAE_s:The share of manufactured exports increased from 55 percent to 83 percent. Exports, however, were still concentrated in electronics and garments (at least up to 1993for the latter) revealing aslow pace of change in the structure of the trade sector.
-q 4_
Table 8. Value of exports by commodity group" (In US $million). Electronic Year
Total exports
1986
4842
1987
5720
1988
7074
1989
7821
1990
8186
1991
8840
1992
9824
1993
11375
1994
13483
1995
17447
1996
20584
1997
25228
Forest products
Philippine
Peixoleum products
Manufact-_es b
equips/ parts
Garments
Special txansactions
Reexports
201 4.15 243 4.25 261 3.69 197 2.52 94 1.15 73 0.83 57 0.58 45 0.4 26 0.19
589 11.13 462 8.08 764 10.8 829 10.6 723 8.83 610 6 _9 633 6:43 686 6.03 780 5.63
94 1.94 133 233 162 Z29 95 1.21 155 1.89 I75 1.98 150 1.52 136 1.2 132 0.95
2672 55,18 3430 59.97 4338 61 32 5192 66.39 5707 69.72 6403 72.43 7298 74.15 8729 76.74 10615 76.68
919 18.98 1119 19.56 1476 20.87 1751 22.39 1964 23.99 2293 25. 94 2758 27.97 3551 31.22 4996 36.09
751 15.51 1098 19.2 1317 18.62 1575 20,14 1776 21.7 186I 21.05 2140 21.74 2272 19.97 2375 17,16
8 0.17 7 0.12 27 0r38 10 0.13 19 023 17 0.19 32 0_3 38 0.33 74 0.53
112 2,31 149 2.6 80 1.13 71 0.91 95 1.16 82 0.93 98 1 165 1.45 181 1.31
-38 0.22 42
893 5.12 772
171 0.98 273
13868 79.49 17106
7413 42.49 9990
2570 14.73 2423
108 0.62 157
273 1.56 323
_. e_
0,2 45 0.18
3.76 764 3.03
1.33 257 1.02
83_31 21488 85.18
48.65 13052 51.74
11.8 2349 9.31
0.76 263 1.04
1.57 512 2.03
_. _. :
=Shares to totals, b Breakdown of major manufactures Source: BSP, Selected
Mineral products
(Garments
economic
and Electronics
inclicator_.
Parts/Equipment)
follow.
_1 ;_
Chapter 9: Lamberte and Yap
275
The deceptive export configuration explains why despite the increasing share of manufacturing in exports, the share of value added of this sector in total out-put had remained stagnant for the past 20 years and was even lower than the value in 1980 (Table 9). The year-on-year growth of value added in the manufacturing sector in real terms had actually declined for 11 consecutive quarters from 1995Q4 to 1998Q2 (Table 10). Medalla attributes the conflicting trends--a rise in efficiency measures in the manufacturing sector and continuing structural problems--to three factors: (1) adjustment, oftentimes a painful one, to a more open trade regime, (2) a persistently overvalued currency, and (3) the switch in relative protection between agriculture and manufacturing, this time in favor of the former. We could add to this list a relatively low investment rate in the Philippines and poor infrastructure. An inevitable outcome of a more open trade regime is that inefficient local firms are weeded out almost immediately because of the deluge of imports. It will take some time before resources are reinvested in more efficient sectors which are usually export oriented. The restructuring process is akin to the "Jcurve" effect of a currency devaluation. In this case, the manufacturing sector contracts because of the closure of noncompetitive firms, but it should start to grow rapidly once resources are used more efficiently. The restructuring process would have been smoother ffthe currency were allowed to depreciate in real terms following the increase in demand for imports. The lower value of the peso would have acted as a cover for import-competing industries. Because of the overvaluation of the peso, import-competing firms were hit with a double-whammy: lower tariffs and an artificially strong peso, both of which made imports cheap. An overvalued currency could also explain why exports are heavily concentrated in commodities that are importdependent. Because it is relatively cheap to import, exporters focus on products whose inputs can be sourced from abroad making labor the primary source of value added. Overall, the Philippines has taken great strides to enhance its outward orientation and is bordering on being a completely open economy by 2004. This progression is dovetailed to globalization. Despite policy reforms, however, manufacturing has not grown according to expectations. Macro and microeconomic impacts of the crisis 1 Since June 1997, the peso has depreciated by about 50 percent vis-a-vis the US dollar and seemed to have stabilized at around P40/US$1. The Philippines was one of the countries that was spared the harshest effects of the These are discussed in detail in the previous chapters of this book.
276
Economic
Table 9. Production
structure
tt Industry
of the economy, percent
crisis... Once more distribution
1975
1980
1983
19K'$
1988
1990
1993
1996
1997
1. Agrlflah_ry, forest_/
24.74
23,55
22,04
25.28
23,8
22.19
22,37
20.21
19,62
a. Agriculture b. Forestry
21,06 3.68
20,54 3
20 2.05
23,66 1,62
22.07 1.73
21.18 1.01
21.9 0.47
20,1 0,1
19.56 0.08
2. Industry sector a. MiJli_g and quanying
38.48 1.27
40.59 1.3
41.01 1.41
36,06 2.14
:_._,56 L79
35.28 1.53
33.67 1,55
34.3 ]-19
34.27 1.09
b. Manufactttdng c, Con#_cfion
28.39 7.01
27.65 9.41
26,49 10.7
_5.87 5.22
25.95 5.09
25.39 5.78
24,27 3,13
24,34 5,6
23.91 6.15
],82
2.04
2.41
2.84
2.73
2.58
2,71
3.18
3,12
37,04 4,77
36.05 4,79
38.44 4.97
41.5 5,69
41.56 5,81
42.02 5.67
42,26 5,75
41,56 5.77
41.63 5,88
d, Electricltv
tndustl'y
gas and water
3. Service sector ,L Transportations,
commui_icafion,
and storage b. Tn_de
12,35
[3.04
13.68
14,9
14,59
14,83
15.06
14.77
14.54
c, Fi nonce
3.36
3.94
3,8
3.08
3.65
4,14
4
4,37
4.64
d. Own dwelJings and real estat_
6,49
5.2
5.29
8,78
5,62
5.54
5.55
5.17
5.07
e, Prlw_te servlc_s
5.18
4,91
6,45
7.04
6.94
6.81
6.83
6,61
6.56
f, Government so!trices
4.69
4.17
4,24
5.02
4,95
5-03
5,1
4.87
4.94
100,26 -0,26
100.19 4),] 9
101.49 -1,49
10_,84 -_'.84
100.92 -0.92
99.49 0,31
98,29 1.71
96.06 3.94
95.53 4.47
100
100
100
100
100
Gross domestic product Net factor income from abroad Gross nationalrltproduct
Source: The National
100
Accounts
11)(I
100
of the Philippines,
i100
National
Statistics Office.
I
I
Table 10. Growth rate for the manufacturing
sector, quarter data: 1994-98.
(In percent). 94Q4
6.5
95Q4
6.0
95Q1
6.6
96Q1
4.9
95Q2
8.3
96Q2
6.2
95Q3
6.4
96Q3
6.3
95Q4
6
96Q4
4.9
96Q1
4.9
97Q1
2.3
96Q2
6.2
97Q2
5.3
96Q3
6.3
97Q3
4.3
96Q4
4.9
97Q4
3.8
97Q1
2.3
98Q1
1.3
Source: National
Income Accounts,
National
Statistical
Coordination
Board.
crisis. GDP growth rate was expected to be fiat in 1998 but it would have been positive
if not for the impact of the E1 Nifi0 weather
phenomenon.
Inflation
should be about 10 percent on average, a far cry from the 15-20 percent experienced as early as the Gulf War crisis iia 1990-91. Interest rates measured by the benchmark
91-day T-bill rate did not climb much higher than the 1996
Chapter 9: Lamberte
and Yap
277
and 1997 averages. Export growth has remained strong, which partly explaind the current account surplus. Weak import growth, as a result of low demand during this crisis period, however, is still the main reason for the current account surplus. On a sectoral basis, both industry and agriculture contracted for the first three quarters of 1998 (Table 11). Since the agriculture sector performance was affected by weather disturbances, it was the industry sector that bore the brunt of the financial crisis. This was quite obvious for the construction sector. The manufacturing sector, however, was already experiencing trouble 2 years before the crisis. The Asian financial crisis merely exacerbated the situation.
Table li11. Sectoral growth m in i gross domestic " Gross domestic Agriculture,
product
fishery, and forestry
Industry
product, 1991-1998 (In percent).
1991
1992
1993
1994
1995
1996
1997
-0.63
0,38
2.10
4.38
4.78
5.80
5.20
1998a 0,23
0.98
0.10
2.00
335
0.83
4.28
2.80
-6.13
-2._
-0,28
1.58
5.75
6,98
6,20
6.18
-0.10
-15,93
6.08
5.73
9,35
6.60
10.88
16.38
-7.27
Manufact_tring
-0.48
-1.65
0,68
5.00
6.83
5,58
4.15
0.67
Food manufactures
-1.,54
-2,86
-1.55
5.47
2,78
6.58
0.76
2.87
Construction
0,77
*2,30
-6.66
6,05
6.05
7.79
8.54
-0.18
Tobacco mano factxares
Beverage industries
-1-41
1.35
-3,61
3.77
-0.73
8.01
5.86
-2.89
Textile manufactures
-2,92
-12.02
-0.73
-7,39
6.33
-2.01
-3-24
-6.28
6,99
0.60
7.07
5.49
8-11
-8.83
2.66
5.24
Wood and cork prod,
-3,62
-17.91
6.68
-19,42
2.48
-3.67
6.72
-10.87
Furniture
Footwear and wearing
apparel
and fixtures
-5,21
-11.20
-3,79
6.87
11.28
1,98
11.76
15.56
Paper and paper prod,
0.83
-11,65
-8,40
4.27
19,36
-2,53
-5.52
6,07
Publishing and printing
-0.17
-0.40
-6,24
4.59
6.25
1.27
3.82
8.70
Leather and leather prod,
6.76
-5,70
_2.68
138
14.97
13,02
12.57
9.40
Rubber prodtmts
0,46
-5,37
-13,70
-4.15
11.78
-8,16 '
-8.22
-11.49
Chemical and chemical prod,
5,79
-8,31
3.27
1.32
8,06
5.78
7.27
-9,62
-3.77
11.55
-0,66
4,72
7.76
8.79
1.18
-8.03
9,93
-5.72
9,83
10.71
14.14
7,51
12.57
-6.93
0.88
-20.81
7.21
3.89
26.80
-3.91
-1.55
-4.18
Metal industries
-7,41
4,99
1.57
-1.07
4.99
10,77
-4.35
-7.43
Machinery excl, electrical
Petroleum and coal prod. Nonmetallic
mineral prod,
Basic metal industries
-0.14
5,02
4.05
7,00
17.29
15.30
13.51
0,34
Electrical machinery
3,35
2.97
14.95
22.69
13.47
14.74
31.10
14,65
Trar_sport equipment
-7.90
15.18
21.83
7.76
16,55
1.45
-11.08
-30.39
Misc, manufactures
6.16
-19,22
8.86
13-26
2,17
6.40
13.16
14.36
,Service sector
4,90
0.18
1.00
2,48
4.25
5,00
6,40
5.50
2.20
0,45
1,40
2.53
4,23
5.80
7,40
8.23
4.58
0,58
1,63
2.43
3,95
5,55
5.53
4,00
10.08
-2,65
0,35
2.38
5.45
7,33
13,73
13.0_
Transport, communication,
and storage
Trade Finance Ownership
2,75
0.Z_
0,73
1.80
2.90
3.05
4.15
3,80
Private services
of dwellings
3.&_
-0.18
0.60
2.88
4.28
4.33
4,98
4.85
Government
9.00
1.53
0.23
2,&_
5,53
3.75
5.93
2.90
services
1st * 3rd quarter Source: National
and real estate
1998 except for breakdown of manufacturing Statistics Coordination Board.
sector
(1st
half
1998
only).
278
Economic
crisis... Once more
Among the manufacturing subsectors that experienced the largest Contractions were: transport equipment, rubber products, wood and cork products, textile manufactures, and metal industries. Electrical machinery and furniture and fixtures experienced robust growth, an indicator that the export sector was instrumental in keeping the economy afloat. Food manufactures, which constituted about 45 percent of valued added in manufacturing, recovered from low growth in 1997. The major concern for policymakers, however, is fiscal deficit. From a surplus position for four consecutive years (1993-97), the national government was projected to record a deficit in 1998. This reflected the sharp decline in revenue performance mentioned earlier. There are no short-term remedies for this situation except to temporarily reduce expenditures. Once the economy starts to recover, revenues are expected to rise; but to sustain this momentum, reforms in tax administration should be implemented. The slowdown in demand coupled with the sudden increase in the cost of money due to high interest rate and sharp depreciation of the peso had adversely affected several firms. From 1 January to 30 September 1998, 2,402 enterprises resorted to closure/retrenchment (Table 12). The overall stock market price index and the stock market price index for the property sector were reduced by half in recent months. The leverage ratio of the top 1,000 corporations, however, perceptively rose in 1997, suggesting that a significant number had foreign exchange liabilities (Table 13). The plight of the corporate sector had adversely affected the balance sheets of banks. The nonperforming loans (NPLs) of the banking system rose from 4 percent 1998.
of total loans outstanding
The unemployment
in June 1997 to 9.7 percent
rate rose to 8.4 percent
in January
in June
1998 compared
with 7.7 percent of the same month in 1997. As the crisis deepened, the unemployment rate rose further to 13.3 percent in April 1998 compared with 10.4 percent of the same month in 1997. The Department of Labor and Employment (DOLE) reported that for the first three quarters of 1998, the number of workers affected by establishment closure/retrenchment due to economic reasons already reached 115,478. Given this situation, poverty ncidence could have already risen above the 1997 level. Policies and measures currency crisis
adopted
in response
to the East Asian financial
The immediate concern of policymakers after the crisis erupted in Thailand was to ensure that the economit" situation would not go out of hand I
and plunge the country into a downward! spiral. Thus, pohcymakers sought to stabilize the exchange rate and protect the soundness of the banking sector.
Chapter 9: Lamberte Table 12.
and Yap
279
Establishments resorting to closure/retrenchment due to economic reasons and workers affected, 1 January to 30 September 1998 (Actual and expected/planned).*
Region
[
Number of establishments
[
Number of workers affected
ITotal _
Actual
Total
Actual
Planned b
Philippines
2,402
2,276
190
120,359
115,478
4,881
National Capital Region
1,450
1,337
174
69318
64,652
4,666
Cordillera Administrative Region
12
12
0
555
555
0
Region I- llocos Region
30
30
0
447
447
0
Region II -Cagayan Valley
18
18
0
270
270
0
Region III - Central Luzon
134
128
9
15,289
15,110
179
Region IV - $. Tagalog
132
132
0
10626
10,826
0
20
20
0
771
771
0
Region VI -W. Vi_yas
152
148
4
3,598
3,590
8
RegiOn VII - C. Visayas
198
198
0
10,142
10,142
0
Region VIII- E. Visayas
28
26
2
236
222
14
Region IX- W. Mind,'uaao
18
18
0
1,961
1,961
0
Region X - N. Mindanao
45
45
0
1677
1,877
0
Region XI- S. Mindanao
136
135
1
3,362
3,348
14
Region XII -C. Mindanao
10
10
0
267
267
0
Caraga
19
19
0
1,440
1,440
0
Region V - Bicol Region
Planned b [
" Details (actual and planned) may not add up to total due to multiple reporting. bExpected/planned retrenchment of workers for October, November and December. * Preliminary Source: Bureau
of Labor and Employment
Statistics.
Fiscal measures were adopted to reign in the budget deficit that started to widen because of the drop in revenue collection. These were also designed to support the prudent monetary policy at that time. Complementary measures in trade and industry and the social sector were implemented to prevent any policy reversal but at the same time protect the most vulnerable groups. Measures to accomplish these objectives are discussed in detail below. The ultimate objective was to restore investor confidence in the economy. Foreign
exchange
policy
and measures
2
When the Bank of Thailand announced on 2 July 1997 a managed float of Me baht and called on the IMF for "technical assistance," pressure on the peso started to mount. At the Philippine Dealing System (PDS), the average daily turnover increased to US$255.8 million from an average daily turnover of US$174 million before the onset of the Asian currency crisis9 The BSP intervened 2Most of these measul_s are presented in BSP,The Philippines:Onward to Recovery,July1998. 3On 8 and 11 July 1997, the volume and US$619 million, respectively.
of foreign exchange
traded
at the PDS rose to US$633 million
280
Economic
Table
13.
Average
debt-equity
Philippines,
ratio
of
total/average
by
the
top
crisis...
1000
Once
more
corporations
in
the
sector. L
Sector 1
Agriculture,
2
Fishing
3
Mining
hLm_g
3.2378
0.4409
0.7239
Manufacturing
1.2381
1.6124
2.3791
3.1262
6
Construction
1.7279
2.2961
7
Wholesale
2.2953
2.7589
8
Hotels
0.7628
1.0447
9
Transport,
10
Financial
11
Real estate,
12
Public
gas and water
and retail trade
and restaurants storage,
and con-m_unication
intermediation renting
and business
administration
activities
and defense;
1.7208
2.885
2.7735
2.9234
0.7065
0,8708
0,2827
0.1898
social security
13
Education
0.3435
0.2408
14
Health
0.6025
0.7071
1.5
Ofl_er commtmity,
0.8429
1.1038
in
dollar
sales
billion
or
the
and social work
17
the gross US$11.2
Sensing exchange
foreign
of which
from
the
rate,
announced band.
P26.4/US$1 continued
m_d personal
Top 1000 Corporations
about
1997,
social
activities
exchange
at the PDS.
proportion
peso
1.7116
2.4864
Electricity,
heavily
wider
1.6404
5
Source: BusinessWorld
and
1997
4
service
billion
and forestry
and quarrying
comptilsory
July
1996
from
percent
of
occurred
during
international
on
a month
end
the
volume
that
As and
peso
1997, of
week
(GIR)
the
by
the
increasing
BSP sold
transactions,
of July
of the
a sizable
1997. 4 By the
BSP
its
US$5.05
dropped
end
of
to US$9.7
month.
of
1997,
4In April 1997, the BSP increased
the first
th_se
its dollar
1997
to depreciate
total
reserves
of July
earlier.
defend to 11 July
the previous
reduced
11 July
to
2 January
ineffectiveness
the BSP
By the
market
Thus,
billion
1997-98.
interventions
sales
it would the
pressure reached
peso
foreign
let the
exchange
depreciated
mounted a low
in stabilizing
in the
exchange
move
to P29/US$1
on all Asian of P43.9/US$1
[ its dollar sales when strong pressure
rate
the market in a from
currencies, in August
the 1998.
on the peso was felt.
Chapter 9: Lamberte
and Yap
281
After 11 July 1997, BSP's intervention in the foreign exchange market had been minimal, signaling to the market that it was adopting a new exchange rate policy. While the exchange rate was left to the determination of the market, BSP adopted some measures to discourage market players, especially banks, from currency speculation in the foreign exchange market and maintain the financial health of the banking system. These measures are discussed below. Nondeliverable
forward
contracts
When the peso sharply depreciated in July 1997, the BSP became aware of the impact of nondeliverable forwards (NDFs) on the exchange rate. In particular, several players in the market had used NDFs to speculate on the exchange rate, which added pressure on the peso since the Asian currency crisis struck. To deal with this problem, the BSP issued a circular prohibiting banks from entering into NDFs with nonresidents including offshore banking units without its prior approval. The same circular also made it clear that only banks with expanded derivatives license can engage in NDFs. Overbough t/Oversold position of banks In the aftermath of the Asian currency crisis, the BSP tightened the overbought position of banks while it relaxed the oversold position to discourage banks from speculating in the foreign exchange market and flush out dollars kept by banks. The overbought position was reduced from 20 percent to 5 percent â&#x20AC;˘of the bank's capital or US$10 million, whichever was lower. On the other hand, the oversold position of banks was increased from 10 percent to 20 percent of the bank's capital. To prevent banks from circumventing this regulation by conducting foreign exchange transactions through their subsidiaries and affiliates, the BSP required the consolidation of banks" accounts with their subsidiaries and affiliates, s The BSP increased penalties on banks, which fared allowable overbought/oversold position of banks.
to comply with the
Over-the-counter sales of foreign exchange To prevent individuals and corporations from speculating in the foreign exchange market during the crisis period, the BSP reduced the over-the-counter sale of dollars without need of any documentation from US$100,000 to U5525,000 in July 1997 and finally to US$10,000 in April 1998. Those who want to purchase
_â&#x20AC;˘ Most domestic banks have foreign exchange (forex) corporationswhich are registeredwith the Securitiesand ExchangeCommission (SEC)but not regulated by the BSP.These unregulated forex corporations buy and sell foreign exchange.
282
Economic
crisis... Once more
dollars from the banking system in excess of this amount will have to show documents spelling out legitimate uses for such currency. Alternatively, they may purchase the same from the unregulated parallel market. BSP's lVDF facility Encouraged by the recent, relative stability of the exchange rate, especially in 1996, several corporations borrowed in foreign currency either from the international financial market or from the foreign currency denomination unit (FCDUs) of domestic banks without covering their foreign exchange exposure through some hedging instruments. When the peso depreciated sharply in July 1997, most of the unhedged corporations rushed to the spot market to buy dollars even if their foreign exchange obligations had not yet matured because of fears of additional depreciation. This situation put unnecessary pressure on the spot rate. Some corporations borrowed pesos from domestic banks to finance their dollar purchases, which exerted additional pressure on the domestic interest rate. To protect corporations with foreign exchange liabilities against currency fluctuation risk, the BSP created in December 1997 the Currency Rate Protection Program (CRPP), which, essentially, is an NDF facility. Settlement of the difference between the contracted rate and the market rate is done in pesos. Eligible foreign exchange liabilities include unsecured registered foreign currency loans, foreign currency trust receipts, and customer liabilities booked locally before 19 December 1997 that are unhedged. Later on, exporters' loans were made eligible to the CRPP. Since the CRPP can spread the demand for dollars between the spot and forward markets, therefore, it can also ease the demand pressure in both the spot market caused by corporate borrowers wanting to cover their foreign exchange exposure and the domestic interest rate. The BSP could lose a lot of money in this program, especially if the peso sharply depreciates when many of the contracts mature. Losses from this program can undermine BSP's ability to manage the liquidity of the system. 6 A few months after the introduction of the CRPP, however, the peso started to appreciate vis-a-vis the dollar, which many analysts attributed partly to the success of the program. The demand for the CRPP facility subsequently died down. When the peso and other currencies in the Asian region sharply depreciated again in August 1997 followirig Russia's call for a moratorium on its external debts, the BSP reactivated the CRPP.
This is reminiscent
of the old central bank's
operations
in the early 1980s.
Chapter 9: Lamberte and Yap
283
Monetary and Credit Policies In conducting monetary policy, the BSP has been gradually reducing its reliance on traditional monetary tools, such as the reserve requirement ratio and the rediscount window, and has increased its reliance on open market operations. Inview of the huge inflationary impacts produced by previous sharp devaluations of the peso, especially in the mid-1980s, the BSP quickly put in place some measures to control liquidity growth of the system. These are: Open market opera_ons The BSP adjusted its overnight borrowing rate to as high as 32 percent per annum on 11 July 1997. In the following month, the BSP temporarily suspended its overnight lending facility to prevent banks from using BSPloans to speculate in the foreign exchange market. As the financial system began to stabilize, the BSPgradually reduced its overnight borrowing rate and reopened its overnight lending facility. As of end-September 1998,the overnight borrowing rate of the BSP posted at 16 percent per annum and the overnight lending rate at 18 percent per annum. Required reserve and liquidity requirements The BSP had been gradually reducing the statutory reserve on bank deposits from a high of 25 percent in 1990 to 14 percent in January 1997.Twentyfive percent of the statutory reserves was supposed to be kept in the form of below-market, interest-bearing deposit at the BSP and the rest in the bank's vault. The BSP has maintained its policy of gradually reducing the statutory reserve, which now stands at 8 percent. In view of the need to control liquidity growth and at the same time reduce the bank's intermediation cost during the crisis period, however, the BSPmade a series of increases in liquidity reserves, which reached a high of 8 percent in August 1998.7 This was brought down to 4 percent in November 1997, but was raised again to 7 percent in March 1998 in exchange for the reduction in statutory reserves from 13percent to 10 percent. Since October 1998, the statutory and liquidity reserves stand at 10 percent and 7 percent, respectively. To reduce further the bank intermediation cost, the BSP increased the proportion of interest-bearing statutory reserves from 25 percent to 40 percent in May 1988.
T The BSP started in December 1993 to impose a 2 percent liquidity reserve on deposits, which banks cart keep in the form of short-term, market-yielding government securities purchased from the BSP.
284
Economic
crisis... Once more
Table 14 shows the liquidity and credit growth rates from 1990 to June 1998. Liquidity growth rate drifted upward during the second semester of 1997 as the BSP accommodated loans to some banks, which encountered liquidity problems. It was, however, brought down in the first semester of 1998. The growth in bank loans was flat for 1998, notwithstanding the continued decline in the domestic interest rate. Observers attributed this to both demand and supply factors. On the demand side, the corporate sector had slowed down their production activities due to the decline in demand for their products during the crisis period and resorted to running down their inventories to meet sales orders. On the supply side, banks had been extra cautious in making new loans due to the lingering uncertainty in the financial market. Banks had reduced the amount of loans made available even to some of their long-time clients because of the deterioration in the quality of the collateral being offered. Thus, banks had plenty of cash and nowhere to place them but in foreign exchange or in risk-free government securities. Auction results since July 1998 (Table 15) showed that dealers' tenders for government securities had always exceeded the volume accepted by the Bureau of Treasury by a wide margin. 8 Bankin 8 sector restructuring The Philippine financial system entered the July 1997 Asian financial crisis on a much firmer ground than its Asian neighbors. This was because it had undergone a massive restructuring in the 1980s and 1990s partly as a result of changes in banking policies and regulations (e.g., creation of universal banks, liberalization of bank entry and branching, removal of interest rate ceilings, etc.). This was also partly a result of the severe crises it had experienced in the midq980s which led to the weeding out of badly managed banks, investment houses, and finance corporations. The NPLs of the banking system soared to 23 percent of total loans outstanding in 1985 (Table 16). The following year, loanloss provisions of banks went up to 20.6 percent. From 1981 to 1987, the central bank closed 173 banks including 6 medium-sized banks, leaving strong banks to continue operation. Since then, banks have been cleaning their balance sheets. Thus, in June 1997, the banking system's NPLs stood at 4 percent only and loan-loss provisions were at 1.4 percent. The cost of the closure of several financial institutions in the midq980s fell heavily on the government as it absorbed a sizable amount of the liabilities of failed banks, investment, houses and finance corporations and paid depositors the insured deposits (Lamberte 1989). Some banks were nationalized, and it took the government some time to reprivatize them. The proceeds from the privatization of some financial institutions lwere significantly less than the cost s Most government
securities
dealers are also banks 0r their affiliates/subsidiaries.
;x* Table
14. Growth
of credit
of the banking system, Total loans
Y ear
KBs _
Share
TBs
1990
270.76
89.10
1991
306.17
1992
366.81
1993
1980-98
(Levels
in P billion,
share
in percent). Domestic liquidity
Share
RBs
Share
Total
Growflq
Amount
Growth
23.38
7.69
9.74
3.20
303.87
28.08
300.54
18.36
88.63
28.52
8.26
10.74
3.11
345.44
13.68
347.08
15.49
88.58
34.64
8.36
12.67
â&#x20AC;˘3.06
414.12
19.88
385.39
11.04
506.43
89.31
45.06
7.95
15-54
2.74
567.02
36.92
480.02
24.55
1994 1995
637.18 866.33
88.25 88.37
65.69 89.16
9.10 9.09
19.14 24.88
2.65 2.54
722.00 980.36
27.33 35.78
607.61 761.43
26_58 25.32
1996
1221.76
88.71
122.11
8.87
33.40
2.43
1377.27
40.49
881.40
15.76
Mar
1284.59
88.50
13Z58
9.I3
3432
2.36
1451.49
901.79
17.25
Jun
1418.95
88.59
145.81
9. I 0
36.90
2.30
1601.66
923.61
18.92
Sep Dec
1499.25 1573.15
88.89 89.79
147.99 139.61
8.77 7.97
39.35 40.80
2.33 2.33
1686.58 1752.12
27.22
987.68 1066.02
23.53 20.9.5
MarP
1517.63
89.82
131.16
7.76
40.80
2.42
1689.60
16.40
1057.42
17.26
Apr P
1528.55
89.85
131.78
7. 75
40.80
2.40
1701.13
1065.31 e
18.04
May F
1517.64
89.72
i33.15
7.87
40.80
2.41
1691.60
1063.60 a
16-51 (
Jun P
1595.37
90.06
135.20
7.63
40.80
2.30
1771.38
t_
ffa
_.,
1997
1998
10.60
Inclusive ot specialized government banks, b As ofend December 1997. *Partial figure as of July 1998. a Partial figure as of August 1998. _Growth rate: Apr 1997 - Apr 1998. _Growth rate: May 1997 - May 1998. P Preliminary Source: BangkoSent_al ng Pilipinas.
oo
t,o Oo
Table 15. Treasury Da t e
bill auction results, 91-a_y
Week
VolLcne Tendered Accepted
July to latest available 182-d_r Rate
Rejected
Tendered. Act'epted
l 2 3 4
&Jul-g8 18-Ju_-9_ 20-Jul-9_ 27-Jul-9_
3,156 S,7S0 3,530 2,350
1,311 1,500 1,500 635
1,845 2,2-50 2,0_0 1,715
14.921 14.756 14.193 14.18'9
7,845 12,220 8,640 5,105
1,820 2,000 2`0f_3 2,000
August
1 2 $ 4 5
3-Aug-98 10-Au8-93 17-Au_-98 24-Au8-93 3t -A_g-98
7.,225 1,180 3,212. 3,822 2,475
810
1,415
14.178
1,500 1,500 1,500
1,717 2,322 975
14.14 13.9"_9 13.91_
2A80 1,465 S,7g5 4,414 2,320
Septe mb_
1 2 3 4
7-Sep-ht8 14-Sep-_ 2t-Se_9_ ?.._-Sep-_
3,415 2,525 2,275 750
1,500 1,500 742 380
1,..°15 1,02J 1,533 _O
1_q._ 13.754 1S.754 L3.795
October
1 2 3 4
5-Oc_-98 t2-Oct-90 49-Oct-90 26-Oci-9_
4,805 4,225 2,285 1,785
750 1,500 1,_00 1,_0O
4,_5 2,7"Z_ 785 285
1 2 3
2-Nov-_ 9-Nov-9_ 16-Nov-98
1,780 815 2,83
800 420 1,_0
4 5
23-Nov-98 30-Nov-98
2,505 . 2,389
t 2
7-_c-96 14-Dec-98
3.230 1,610
Decemb_
Source:Bureauof Treasur_
[
Volume
J u 1y
November
(Volume
in P million). 3_4-a_r
Ra_e j Reje_led
I
Volume
I Tendered Acort,ted
T_l
Rate R_e_tecl
Tendered
Acc_ed
1C_od
6,¢,'25 10,220 6,640 3,105
17.198 16._2 15.495 15.296
19-,280 10,560 5,265 5,415
1,420 2,t_0 2,000 800
10,66_ 8,5@3 fi,2_ 4,615
L$.585 17344 16_37 16._
23,281 26_ 17,435 12,870
4,751 5,_0 5,500 3,435
18,530 2I,fl_0 11,S'35 9,4_
160
2,C¢20
15:24
250
2310
16_29
S,545
2,285 2,91-4 8_.0
15.194 14.924 14.965
2,000 2,000 2,000
1,165 1,446 1,075
16_27 162m_I 16.769
6,765 4,445 10,167 11,682 7,870
1,220
1,500 1.500 1,500
2,360 1,800 3,165 3,446 3,075
5,0(_ 5,_ S,IK'_
5,1_7 6,682 2,870
fl_2_ 1,9_0 1,840 Lf_O
17_00 1.300 13_ 92O
1,7"50 680 1,710 72.0
14.79 14.788 14.785 14.9_
4,510 3,935 2,4_ _
2,000 . 2_f100 $50 _0
2_'10 1,935 1,9S0 1,100
16_34 16.484 16Ao_ 16-599
11,175 8,440 6,595 4,080
5,000 4,800 1,422 _,8_
6,1_5 3,640 5,17"3 2,_
13.7R3 1S.489 1_.4$9 13.475
1,8o_ 2,513 3,079 4,459
l_(l_ 1,500 1,503
1,013 1,579 2,959
I4.759 14.615 14.442
S,949 8,496 _,810 7,850
1,776 _00_ 2,000 2,000
2,173 6,496 3,61(_ 5,850
16_599 15_26 15522 15.136
10,5_:_ 15,234 10,974 14,094
2,57.6 5,000 5,000 5,000
6,228 10,234 5,974 %0°,4
980 _95 1,005
1S.474 13.5(_ 13.473
5,165 4,465 5,725
920 2,C_ 2,00(3
4,245 2,465 1,7"25
14.4,_ 14.271 14388
5,350 5,891 5,939
2,000 2,000
5.350 3.391 3,9'39
15.186 I5_n3 14_53
12,295 10,671 12,169
1,7"20 4,420 5,500
10,_S 6,2_1 6,669
_ • _'3
1,500 1,500
1,005 889
15.401 13.4(0-
1,_t5 5,275
1,84_ 2,003
0 3,275
14.(_6
7,153 4,500
2,000 2,(]00
5,153 _
14344 14273
11,503 12,164
5,345 5_0_
6,15_ 6,664
_ • _,.
650 300
2,5_0 1,310
13.405 13.406
2,680 1,851
500
1,3_1
13.863
3.684 3,100
505
2,595
14.22
9,_94 6,_61
6_ 13_
5,7._6
_'_
Chapter 9: Lamberte and Yap
287
Table 16. Nonperforming loans, total loans, and loan loss provisions of the banking system, 1980- latest available (Ratios in percent). NPL / Total loans
Loan loss provisions
/ Total loans
Year KBs _
TBs
RBs
Total
KBs '_
TBs
RBs
Total
1980
10.966
5,623
26_976
11.288
2,062
0,168
1,783
1.950
1981
13.440
16.530
26.290
14.106
0.933
0.358
2.516
0.964
1982 1983
15.352 12.072
7.281 7.961
20,204 22.215
15.203 12,232
1.270 1.327
0.475 0.472
1.954 2.301
1.265 1.319
1984
21.013
15.070
36.272
21.245
2.537
0_667
2,905
2.465
1985
22.637
15.478
42.752
23.057
3.452
1.137
3.315
3.345
1986
20.442
14,358
41.811
20.879
22.228
1.115
3.638
20.591
1987 1988
13,714 10.797
9.895 8.030
37.295 34,906
14.492 11.618
8-035 5,966
0.837 0.854
3.990 4.078
7.308 5.483
1989
8.236
6.684
31.239
8.941
5.424
0.691
4.181
4.968
1990
7,175
7.238
28.502
7,863
4,683
1.403
4.252
4.417
1991
6.612
7.605
26.331
7.308
4.008
1.792
4.160
3.829
1992 1993
6.132 4.708
7,870 6.017
24.426 21.327
6.837 5,267
3.395 2,628
1.724 1.365
3.765 3.281
3.266 2.546
1994
3,931
8.359
18.166
4.711
1,883
3.077
3.219
2.027
1995
3.233
Z894
16.068
3.983
1.591
2.665
2.758
1.718
1996 1997
2.799
7.741
1,4.139
3-513
1.240
2.685
2.036
1_387
Mar
3.294
7.434
14.858
3.946
1.319
2.271
2,022
1,422
,lun
3,373
7.742
14.633
4.030
1.305
2.106
1,941
1,393
Sep Dec 1998
3.962 4.688
10.091 10.633
14.950 16.177
4.756 5.433
1.435 2.211
2.166 3.119
1.847 1.953
L509 2,275
Mar P
7.420
14.321
16.177
8.167
2.590
3.564
1.953
2.651
Apr P
8,595
16,263
16.177
9.371
2.678
3.658
1.953
2.737
May p June P
9.441 8,947
16,090 1&760
16.177 16.177
10.127 9.710
2,744 2.744
3.492 3,949
1.953 1.953
2.784 2.818
_preliminary; â&#x20AC;˘inclusive of specialized Source: Bangko Sen tral ng Pilipinas.
government
banker.
the government incurred when it absorbed the liabilities of failed financial institutions. Because of its sad experience in assisting ailing banks in the 1980s, the government has been very cautious in intervening and providing financial support to ailing banks. This also prompted the government to strengthen its prudential rules and regulations and improve the technical capabilities of bank examiners. The financial crises in the mid-1980s had taught Philippine financial institutions the value of prudent financial management. Liberalization of bank entry and branching of domestic banks in the late 1980s and liberalization of
288
Economic
crisis... Once more
the entry and scope of operations of foreign banks, however, saw increased competition in the financial system. The economic recovery in the 1990s provided banks with many profitable opportunities. Bank loans grew by 32 percent on average during the 1992-96 period, peaking at 40.5 percent in 1996. For commercialbanks alone, the share of its loans to total assets increased from 42 percent in 1990 to 58 percent in 1996 (Table 17). What was worth noting though was that the ratio of foreign currency loans of the commercial banking system to the total assets of its foreign currency deposit system rose from 20 percent in 1990 to 55 percent in 1996. Clearly, bank exposure to credit and currency risk had increased during the last 6 years. A sharp downturn in the economy could surely weaken the balance sheets of many banks. Because of this, the central bank introduced some prudential measures to maintain the financial health of individual banks. These measures could also lead to a restructuring of the financial system. These will be discussed in this section. Cap on real estate loans The vulnerability economy 1997.
of the real estate sector to sudden
was amply demonstrated
by the halving
downtums
of its market
in the
price index in
A few months before the Asian currency crisis struck, the BSP had already been closely monitoring banks' exposure to the real estate sector. In June 1997, it finally placed a cap on banks' loans to the real estate sector equivalent 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. This was aimed at moderating the growth in banks' financing of the construction of high-rise buildings, some of which were built by developers and purchased by investors for speculative purposes. Banks' aggregate loans to the real estate sector inclusive of loans to finance the acquisition or improvement of residential units, however, are not to exceed 30 percent of their total loan portfolio. In addition, the BSP reduced 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. The banking system's exposure to the real estate sector turned out to be much less than the cap imposed by the BSP (Table 18). Nonetheless, some banks, especially thrift banks, which had heavy iexposure to the real estate sector encountered some financial difficulties during the Asian currency crisis. Thrift banks are quite different from commercia 1 and universal banks in that they tend to specialize in housing and small and medium enterprises (SME) loans-the two sectors that are highly vulnerable
to _udden downturns
in the economy.
Table 17. Structure of loans of the commercial banking system (In P million).
1. Total loans, net a % total assets b
1990
1991
1992
1993
1994
1995
215,631.9
230,783.6
278,04,0.3
376,176.7
483,937.9
678,680.0
1997
1,117,966.3
April 1998
1,400,081.7
42.0
41.6
44.5
48.7
4,266.0
4,920.5
8,433.6
9,252.7
% total loans
2.0
2.1
3. ROPOA, net
2,992.2
3,323.0
% total loans
1.4
1.4
879.0
741.0
1,697.0
2,344.0
3,478.0
5,323.0
10,811.0
10,547.0
20.5
16.4
29.4
33.0
35.6
43.2
54.7
46.3
2. Restructured
loans, net
4. FCDU loans (M US$) % total FCDU assets
Excluding Interbank Loans. b 1994,1997 and 1998 were based on unadjusted Source: Bangko Sentral ng Pilipinas.
3.0 4,317.5 1.6
2.5 7,860.5 Z1
49.6
1996
8,386.5 1.7 8,913.1 1.8
53.3
58.1
54.6
5,289.1
13,258.0
14,271.4
0.8 8,762.1 1.3
1.2 10,898.4 1.0
1.0 18,406.9 1.3
t_
1,378,635.3 55.6 I5,624.7 1.1 23,019.0 1.7 9,317.0 45.8
total assets.
b,j t_
t,o
Table 18. Commercial banks' loans outstanding in P million, share in percent). Jun Total loans outstanding (CSOC) â&#x20AC;˘ Purpose of loans to the industry
to the real estate sector, by purpose,
Slxare
1267180,8
Acquisition of residentiat prop_ty Land Individual units
Sept 1997 Share 1354011.6
34980.9 6904.5 21901.6
21,9 4,3 19.7
3tM45.4 4705.2 25940.3
Acquisition of comnxercial property
17644.4
ll.O
Developme_at of subd_ for housing
26629.1
16.7
Development of industrial park Development of commercial property
2774,9 26096.8
Development of recreatiorm!and amusement park Development of memorial park Construction of office condominium Construction. of residential condo0minium Construction of infrastructure Project Other purposes Total Ratio of real estate loans to total Loans outstanding â&#x20AC;˘ Exclude
interbank
loan receivables,
Source:Bangko Sentral ng I'ilipinas.
Share I
1405521.0 32447.5 6952.6 25494.9
16470.5
8.9
18685.5
9.2
42755.3
23.1
&_519.1
22-4
1.7 16..3
41.77.0 27308.0
2_3 l&7
5947,8 30166A
2.9 14.8 .
4060.2 823.0 6958.9
2.5 0.5 4.4
4338,0 922.5 9839.4
2_3 0.5 5.3
3814.6 1020.8 9629.6
9758.7 3373.2
6,t Z1
11782.1 4761.1
6.4 2_6
26774.0
16,7
32459.9
159874.1
100.0
185453.2
real estate transactions
13.7
Mar
Share1998
1367483.0
16.5 2.5 14.0
12_6 banks without
Dec
as of dates indicated
15.9 3.4 12,5
(Amount
Jurt
Share
1402470.4 16.5 5.2 13.2
33226.2 6826.6 26399.6
17510.9
9.0
16869.8
8.9
46420.5
23.7
36945.5
19.4
5879.1 27857.7
3.0 14.2
4977,5 28123,9
2.6 14.8
1.9 0.5 4.7
3643.8 910.2 10276.6
1.9 0.5 5.3
4040.5 862.2 11728_3
2.1 0.5 6.2
14073.0 5175.2
6.9 2_5
15008.7 5009.4
7,7 2.6
12626.2 7110.1
6.6 3.7
17.5
37054.2
18.2
30857.2
15.8
33882.0
17,8
i00.0
203532.9
100.0
195553.5
I00_0
190392.2
1O0.0
14.5
and real estate loans
of Banks' trust
32179.4 6354.5 25824.9
16.3
13.6
17.5 3,6 13_9
_[_
D _. _"
departments. O_
Chapter 9: Lamberte and Yap
291
Thirtypercent liquid cover on all foreign exchange liabilities of FCDUs As pointed out earlier, the banking system's foreign exchange intermediation increased significantly during the 1990s. The relative attractiveness of foreign exchange deposits and loans of foreign currency deposit units (FCDUs) over peso deposits of banks can be attributed to the relative stability of the exchange rate in the 1990s and tax advantages. More specifically, the interest income of banks from foreign exchange loans of their FCDUs was not subject to the 5 percent gross receipts tax imposed on interest income from peso loans. Likewise, interest income on foreign exchange deposits was not subject to the 20percent withholding tax until 1997when the government started to impose a 7.5 percent tax on such income as part of its comprehensive tax reform. Although banks are fully hedged when they lend in foreign currency from their FCDUs because they also expect payment in the same currency, their borrowers may be exposed to currency risk and may default on their loans if the exchange rate unexpectedly moves the other way. Due to pressure on the exchange rate experienced by the Philippines during the second quarter of 1997, the BSP in June 1997 required that 30 percent of the 100 percent cover on all foreign exchange liabilities of FCDUs of banks be kept in liquid assets. As a result of this regulation, the general slowdown in the demand for loans and the shift towards peso-denominated loans made by the corporate sector due to increased exchange risk, the share of FCDU loans in the total assets of FCDUs dropped significantly from 55 percent in 1996 to 46 percent in 1997 and remained at this level until April 1998 (Table 16). Treatment o[past due loans The BSP has tightened thedefinition of past due loans. Before thelatest revision in the definition of past due loans, loans were treated as past due if the number of installments in arrears reached six in loans payable monthly and two in loans payable quarterly.Starting October 1997, the number of installment in arrears was reduced to three and one, respectively (Table 19). The other provision that banks must consider is that when total arrearages reach 20 percent or more of the outstanding balance of the loan, the outstanding balance is already considered past due regardless of the number of unpaid installments. This should prompt banks to immediately take remedial actions on problem loans before they become worse and irrecoverable. Indeed, part of the rise in NPLs of banks since October 1997 can be attributed to the change in the definition of banks.
292
Economic Table 19. Treatment
crisis... Once more
of past due loans. Installment in arrears
Mode of payment
1987
Pre-1997
Current
Monthly
10 or more
6
3
Quarterly
4 or more
2
1
Semiannually
3 or more
1
1
Annually
2 or more
1
1
Source: Infonotes,BAPPolicy ResearchGroup. General and specific loan-ioss provisions As a ratio to total loans, loan-loss provisions of the banking system started to creep up since the onset of the Asian currency crisis in tandem with the rise in NPLs. Such provisions already reached 2.8 percent of total loans in June 1998. In the past, the BSP had only specific loan-loss provisions. Since October 1997, the BSP is requiring banks to put up a 2 percent general loan-loss provision, which is over and above the specific loan-loss provision. Table 20 shows the schedule of compliance of the general loan-loss provision. As regards specific loan-loss provisions, only "substandard loans that are unsecured," "doubtful loans," and loans classified as "loss" had specific provisions, in April 1998, the BSP started to tighten specific loan-loss provisioning. It prescribed a 5 percent loan-loss provision for "loans especially mentioned" regardless of collateral. These are loans that are potentially weak because of some technical defects or collateral exceptions, such as inadequate documentation. The BSP also prescribed a 25 ipercent provision for secured loans classified as "substandard loans." Thus, theie was no more distinction between substandard loans that were secured and those that were unsecured. Table 21 shows the schedule
of compliance
Table 20. Schedule provision
for the new specific loan-loss provisioning.
of complianc_ general loan-loss (In percent Of loan amount).
1 October 1998
1.0
1 April 1999 1 October 1999
1.5 2.0
Som'ce:BangkoSentralng Piliplr_as.
Chapter 9: Lamberte Table 21.
and Yap
293
Schedule of compliance allowance (In percent of loan amount). Classification
[
for probable
Existing [ 12/31/981
4/15/99
Loans especially mentioned Substandard
0
2.5
5
Collateralized
0
12,5
25
25
25
25
50 100
50 100
50 100
Uncollateralized Doubtful Loss
losses
Source:Bangko Sentral ng Pilipinas. With these new regulations on loan-loss provisioning, bank loan-loss provisions are expected to increase further both in absolute terms and as a ratio to total loans outstanding, affecting the profitability of banks. One of the biggest issues here is the giving of the same weight to coUateralized and uncoUateralized substandard loans. Both are essentially given equal probability of default when in fact the moral hazard problem of a collateralized loan is much less than that of an uncoUateralized loan. Increase in minimum bank capitalization requirement The BSP had been intermittently increasing the minimum capitalization requirement of banks. Because of the sharp depreciation of the peso and possible deterioration in the assets of banks as the Asian currency crisis proceeded, the BSP decided in March 1998 to increase the minimum capitalization of new banks by 20 percent for universal banks (or expanded commercial banks), 40 percent for regular commercial banks, and 60 percent for rural banks. Existing banks were given 2 years to build up their capital to comply with this new requirement (Table 22). The BSP issued a circular imposing strict penalties on banks for failure to comply with this new minimum capital requirement. In particular, a universal or commercial bank unable to comply with the new minimum capital requirement will be slapped with penalties as high as P10,000 per day, computed from the time it is notified by the BSP to the time the program has been submitted. Thrift banks will be fined P5,000 per day and rural banks P1,000 per day. In addition, the BSP shall impose graduated sanctions on banks for noncompliance of the new minimum capital requirement. prompt corrective action on banks that are undercapitalized
The BSP will take up to 20 percent;
another set of prompt corrective actions on banks that are significantly undercapitalized up to 60 percent; and still another set of prompt corrective actions on banks that are critically undercapitalized by more than 60 percent.
294
Economic
Table 22. Minimum
capital requirement
crisis... Once more
(In P million).
Existing
Compliance
requiremc_lt
period
12/24/98
12/31/99
12/31/00
3,500
4,500
4,950
5,400
1,625
2,000
2,400
2,800
200
250
325
400
40
40
52
64
Within Metro M_'mila _
20 '
20
26
32
Cities of Cebu and Davao _'
10
10
13
16
5
5
65
8
3
3
3.9
4.8
2
2
2.6
3.2
Expanded
conm_ercia]
Commerdal
bal_ks
banks
Thrift banks Within
Metro Mm_ila
Outside
Metro ManJ.la
Rural ballkS
lst/2nd/3rd
class cities & 1_tclass
municipalities 4th/5th/6th
class munidpalitJes
class cities & 2nd/3rd/4th
class municipalities 5fl_/6th
class mtmicipalities
"For existing banks only. No new banks Source: Bangko Sentral ng Pilipinas.
are presently
allowed.
Banks have several options to choose from to comply with the new minimum capital requirement. One is to raise more capital either by asking contributions from stockholders or inviting new stockholders or partners. Another option is to merge with other banks. Still another option is to apply for a reclassification, i.e., change to another type of bank that has lower minimum capital requirement. This new minimum
capital requirement
could lead to a restructuring
of
the banking system. There will be mergers and/or consolidations among banks, which could result in the reduction in number of banks in the system. The sharp depreciation of the peso had made it very attractive for foreign banks or investors to invest or increase their equity participation in domestic banks. Of the 24 domestic universal banks, 5 had capital below the new minimum requirement that took effect on 24 December 1998 (Table 23). On the other hand, half of the 16 domestic commercial banks still needed to build up their capital to meet the new minimum
capital requirement.
All four subsidiaries
of foreign
banks needed to raise capital to hurdle the new minimum capital requirement. The Chamber of Thrift banks reported that more than 50 percent of their members are already in conformity with the new minimum capital requirement. It is likely that most of them are affiliates or subsidiaries of universal or commercial banks.
Chapter 9: Lamberte
and Yap
Table 23 . Selected balance sheet accounts quarter 1998 (In P billion).
295 f commercial
banks,
third
fl
Assets
Capital accounts
Expanded commercial banks (EKBs) Domestic banks 1 Allied Banking Corporation 2 AsianBank Corporation 3 Banco de Oro Universal Bank 4 Bank of the Philippine Islands 5 China Banking Corporation 6 Development Bank of the Philippines 7 Equitable Banking Corporation 8 Far East Bank & Trust Company 9 Land Bank of the Philippines 10 Metropolitan Bank & Trust Company 11 Philippine Bank of Communications 12 Phil. Commercial International Bank 13 Philippine National Bank 14 Prudential Bank 15 Rizal Commercial Banking Corp. 16 Security Bank Corporation 17 Solidbank Corporation 18 Union Bank of the Philippines 19 United Coconut Planters Bank 20 Urban Bank, Incorporated Branch of a foreign bank 1 ING Bank N.V. Nonexpanded
88.663 33.496 33.407 212.388 59.822 110.125 107.428 140.393 170.939 269.661 32.648 145.448 225.080 26.696 115.672 52.900 53.370 40.021 111.647 11.667
8.983 3.765 3.987 27.688 9.934 13.927 15.763 18.738 15.184 41.208 4.230 23.407 23.075 3.193 12.153 7.222 5.497 9.622 14.072 2.501
91.399
0.894
2.585 11.960
1.746 2.002
9.279 5.196 5.606 27.416
1.689 1.692 2.240 3.169
Commercial Banks (NEKBs)
Domestic banks 1 A1-Amanah Islamic Inv't. Bank of the Phil. 2 Asia United Bank Corporation 3 Bank of Commerce 4 Bank of Southeast Asia, Incorporated 5 East West B_inking Corporation 6 Export & Industry Bank 7 Global Business Bank 8 International Exchange Bank 9 Orient Commercial Banking Corporation
i
296
Economic
crisis... Once more
Table 23. continued... Assets
Capital accouters
10 Philippine Banking Corporation 11 Philippine Trust Company 12 Philippine Veterans Bank 13 Pilipinas Bank 14 TA Bank of the Philippines 15 Traders Royal Bank 16 Westmont Bank
16.004 20.006 14.915 13.493 2.133 11.680 20.771
1.975 2.436 3.704 1..756 1.391 1.425 1.937
6.751 6.874 5.172 5.470
1.729 1.827 1.789 1.635
10.161 4.016 11.411 147.802 14.833
0.250 0.266 0.210 2.547 0.625
43.377
1.000
6.082 29.487
0.257 0.900
9 The Bank of Tokyo-Mitsubishi, Ltd. 10 The Chase Manhattan Bank
19.1.96 13.320
0.720 0.217
11 The Development Bank of Singapore 12 The Fuji Bank, Ltd. 13 The International Commercial Bank of China
14.146 9.077 10.434
2.139 0.202 0.440
Subsidiaries of foreign banks 1 Banco Santander Philippines, Incorporated 2 Chinatrust (Phils.) Commercial Bank Corp. 3 Dao Heng Bank, incorporated 4 Maybank Philippines, Incorporated Branches of foreign banks 1 ANZ Banking Group, Ltd. 2 Bangkok Bank Public Co., Ltd. 3 Bank of America, NT & SA 4 Citibank, N.A. 5 Deutsche Bank AG 6 Hongkong & Shanghai Banking Corporation 7 Korea Exchange Bank 8 Standard Chartered Bank
Source: Bangko
Sentral
ng Pilipinas.
Some domestic
banks have already
intensified
their campaign
to raise
more capital from their stockholders and/or by inviting foreign banks or investors. Others have been contemplating merging or consolidating with other banks. So far, two banks, one a universal bank and the other an ordinary commercial
bank, have formally
secured
a merger and have sought approval have formally
agreed
approval
from their stockholders
from the BSP. Two other universal
to merge and will secure approval i
from the BSE
for
banks
Chapter 9: Lamberte
and Yap
297
Other banks have so far been unsuccessful in raising capital from existing stockholders or new foreign investors. Existing stockholders and foreign investors are still cautious in investing in banks because of the lingering effects of the Asian currency crisis. Other optimistic investors are constrained from investing because they want more shares than local stockholders are willing to sell. Recently, one universal bank decided not to pursue its capital build-up program anymore and instead reverted to a regular commercial bank. It, however, had to reduce its equity in an investment firm because commercial banks are allowed only up to 40 percent equity participation in such allied undertakings. This was not easy to do with investors' low interest in such undertakings because of continued economic uncertainty. Other universal banks may follow suit if they cannot find a way of raising more capital. On the other hand, one branch of a foreign bank with a regular commercial bank license has applied for a universal banking license. It has signified its intention to raise capital to meet the new minimum capital requirement for universal banks. Some thrift banks that are facing difficulties in complying with the new minimum capital requirement contemplated converting into rural banks. Others offered themselves for sale to commercial banks. Lessons from recent experience, however, suggest that size, that is, sufficiently capitalized banks, is important in dealing with the financial crisis. Thus, as a result of the ongoing restructuring of the banking system, a much leaner system with less banks but with much stronger balance sheets will likely emerge. Rules on disclosure In March 1998, the BSP tightened rules on disclosure to improve bank transparency to the public in general, and to their stockholders in particular. Beginning in the last quarter of 1998, banks listed in the stock exchange are required to disclose in their quarterly published statement of conditions the amount of nonperforming loans and ratio to total loan portfolio, amount of classified loans, general loan-loss provisions, and specific loan-loss provisions. The BSP will determine later if such a rule needs to be extended to nonlisted banks. Another directive issued by the BSP in June 1998 required banks to include in their consolidated statement of conditions the following information: current level of restructured loans both with and without uncollected capitalized interest, and total loan-loss reserves which include the 2 percent general provisioning and provisioning for losses on loan accounts and other risk assets. Some banks opposed these new disclosure rules for fear that their depositors and the general public might misunderstand the figures, particularly on NPLs, which were seen to be rising since the onset of the Asian currency crisis, and might cause bank runs. The new disclosure rules could also place
298
Economic
crisis... Once more
thrift and rural banks at a disadvantageous position because they historically have higher NPLs than commercial banks, and thus may have been perceived by the public as generally unsafe and unsound. Terms on emergency
loan facility
Under existing law, the conditionalities for emergency loans include maintaining the total volume of loans or investments of the borrower; making the Monetary Board ascertain that the bank is not insolvent and has the assets to secure advances; and that loans are only up to 50 percent of the bank's deposits which will be released in two tranches. ,Since July 1997, several banks, mostly thrift banks, have tapped the emergency loan facility of the BSP to tidy up their liquidity problems. Thus, the outstanding emergency loans, excluding overdraft, provided by the BSP to banks ballooned to P13.4 billion in September 1998 from only PI.1 billion in June 1997. Since October 1998, the BSP has tightened the terms of the emergency loan by adding to existing conditionalities the following requirements?the emergency loan should be used only to service withdrawals of deposits; bank directors, officers, shareholders, and related interests (DOSRI) should submit written agreements not to withdraw their deposits from the bank; and a BSP comptroller will be assigned to the bank to See to it that all conditions are met. To ensure compliance with these rules, the BSP required bank owners to waive their rights to the deposit secrecy law. These new requirements were intended to ensure that bank owners will not abandon itheir bank once it gets into financial trouble. Insider borrowings Unpaid loans of directors, officers, Stockholders, and related interests were often the cause of bank failures. Bank supervisors found it hard to detect abuses on DOSRI loan limits due to the deposit secrecy act? Some of the DOSRI loans were made through dummies. To address this problem without changing the deposit secrecy law, the BSP issued a circular in August 1998 stipulating that all directors, officers, shareholders, and related interests who borrow from their banks shall be required by the lending bank to waive the secrecy of their deposits of whatever nature in all banks in the Philippines. Any information obtained from an examination of the deposits, however, will be held strictly confidential. This measure is expected to aid in exposing dummy borrowers of banks.
Aggregate DOSRIloans should not exceed 15 percent of the total loan portfolio of the bank or 100percent of the net worth of the bank. There is also a single borrower's limit of 25 percent of a bank's tmimpaired capital.
Chapter 9: Lamberte and Yap
299
Some bankers had pointed out that requiring an examination of all of the borrower's accounts in other banks could affect the banking sector's ability to attract deposits. As a compromise, they suggested that the BSP limit examination of the borrower's account only in the bank where he/she is borrowing from to discourage abuse of DOSRI loan limits. Temporary suspension of giving derivatives license In the Philippines, banks need to secure authorization from the BSP to engage in derivatives activities. Since the issuance in 1995 of the conditions for banks to obtain a license for derivative activities, 11banks obtained authorization to conduct expanded derivatives activities and 1 regular derivatives activity. 1째 The last license given by the BSP to a bank was in March 1998. Since then, the BSP has suspended the granting of expanded derivatives licenses to banks to give applicant banks more time to prepare themselves for trading derivatives. Since the derivatives market in the Philippines is still in its infancy, this BSP policy will have no perceptible impact on the market. BSP,however, will give itself ample time to review the performance of banks in the derivatives market and to determine which ones should be retained before allowing new players in this market. Mark-to-market reporting. The BSP issued a circular stipulating that effective 30 September 1998, banks are required to mark-to-market their trading portfolio in line with existing market conditions, and any unrealized or realized gains and losses thus shall be recognized and reflected in their books. While the mark-to-market scheme is a standard practice among foreign banks, it is new to local banks. Thus, the latter will have to set guidelines for their traders on limits on positions to carry. After 2 months of implementation, the mark-to-market scheme has already significantly affected funding strategies of banks. One of the domestic universal banks recently admitted incurring losses amounting to about half a billion pesos due partly to complying with this new regulation. Policy guidelines in resolving problem bank issues Due to some criticisms lobbied against the BSP by some quarters for lack of clarity in dealing with problem banks as amply exemplified by the case of one commercial bank that had been allowed to declare a bank holiday for 8 months before finally being closed, the BSP issued in August 1998 a circular 10According to the BSP circular on derivatives, derivatives include forward foreign exchange transactions. A regular derivatives license authorizes a bank to deal in currency swaps and forwards, while an expanded derivatives license authorizes a bank to deal in all types of derivatives.
300
Economic
spelling out its policy in resolving may explore alternatives to bank based on its judgment, the closure a systemic crisis. In making such
crisis... Once more
problem bank issues. In closure within the limits of a particular bank will a judgment, the BSP shall
particular, the BSP aUowed by law if, most likely lead to take into account,
among other things, the size of the bank land its relative importance to the banking community such that its closure could undermine confidence in the system. A possible solution includes rehabilitation of the troubled bank and a merger or consolidation with another financial institution. If there are strong indications that the bank failure may have been caused by wrongdoings of management, the BSP may impose conditions that will operate vis-a-vis the troubled bank and/or its owners and management, including but not necessarily limited to the following: 1. 2. 3.
4.
The principal stockholder(s) in tt,e bank shallbe totally divested of equity interest with the purchase of the share by a new investor; Not a single centavo shallbe given to the present stockholders from the proceeds from the sale of shares; Proceeds of the sale including premiums shall be applied to raise the capitalization of the bank to the minimum required level and to reduce outstanding loans, if any, to the bank's stockholders and their related interests; The bank's stockholders shall not be elected as members of the board of directors bank; and
5.
Criminal â&#x20AC;˘imposed
or be involved
in the management
and administrative
sanctions,
upon erring stockholders,
of the rehabilitated
if warranted,
directors,
shall be
and officers.
If no viable options can be found, the option of placing banks under receivership by the Philippine Deposit Insurance Corporation (PDIC) shall be considered subject to existing laws. In 1997, the BSP closed a total of 14 small banks including I thrift bank. Five of them were closed after July 19971 In 1998, the BSP closed 1 small commercial bank, 6 thrift banks, and 17 rural banks. The deterioration in financial conditions
of these closed banks could not_be mainly attributed
to the recent
downturn in the economy but rather to imprudent management practices. With or without the crisis, these banks could have 'suffered the same fate. Admittedly, however, there were at least three medium-sized thrift banks whose loans were concentrated in the real estate sector that experienced difficulty when the real estate sector plunged following the Asian currency crisis. With BSP's assistance, they were quickly bought out by other banks.i
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Fiscal policy The slowdown in the economy following the Asian currency crisis was expected to adversely affect government revenues, threatening the fiscal position of the government. Thus, the government slapped a 25 percent mandatory reserve on 1998 budgets of all government agencies and a 10 percent cut in the internal revenue allotment (IRA) of LGUs to contain the budget deficit. As the crisis deepened and a recession became imminent, the government changed its stance to that of pump-priming the economy. It targeted a P40 billion deficit in 1998, which was equivalent to 2 percent of the GNP, although the IMF allowed a much higher deficit of P49 billion under the standby loan arrangement. The Estrada administration appeared to be quite slow in disbursing funds in its first few months in office, making many people doubt its seriousness in pump-priming the economy. The last 2 months in 1998, however, saw the budget deficit nearing its target level, indicating that the government had already released funds to finance its pump-priming activities. External
debt management
policy
The ratios of debt service burden and foreign exchange liabilities to GNP deteriorated in 1997 as a result of the sharp depreciation of the peso and slowdown of the economy starting in the second semester of the same year (Table 2). The ratio of gross international reserves to debt service burden, which had been increasing up until 1996, sharply declined in 1997 as a result of the substantial reduction in gross international reserves, which had been used by the BSP partly to defend the peso. In view of its policy to keep domestic interest rate low and, at the same time, finance a higher budget deficit to pump prime the economy, the government had announced that it would intensify its borrowings from official development assistance (ODA) facilities, which are long-term loans carrying highly preferential rates. Before the onset of the financial crisis, the government wrapped up a US$1.44-billion standby loan agreement with the IMF which enabled it to draw down US$280 million in November 1998 and US$135 million in December 1998. The government also secured a US$1-billion pledge from the World Bank, of which a US$600-million loan package was approved in December 1998. The government planned to float bonds in the international capital market, but it temporarily shelved this idea because of the widening spread on Philippine debt papers. It intended to push through with the plan during the first quarter of 1999. In the meantime, the government secured in September 1998 a 1-year US$610-million bridge financing from the FCDUs of domestic banks for budget support. This, however, raised two problems. One was that FCDU deposits, which are typically short-term funds, made the extension of
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Economic crisis... Once more
such loans at the same interest rate of 8.75 percent difficult to arrange especially during periods of economic instability. The other was the possibility that the government will later on use ODA funds to pay the short-term bridge financing when the loan matures in the next year, leaving a smaller amount of ODA funds to support the rehabilitation and restructuring of the economy. Industrial and trade policy 1 In general, the government is maintaining its policy of moving towards a uniform 5 percent tariff rate by 2004 despite the financial and economic crisis affecting the Asian region. New developments in trade and industrial policies in the country have occurred since July 1997. EO 465 was issued on 13January 1998 modifying the nomenclature and tariff structure of 22 industries identified as "Philippine winners." These are industries which have proven to be competitive or have the potential to become competitive. EO 465 was the result of the review of the pace of tariff reduction under EO 264 in consideration of recent developments in domestic and international economic environments. The review aimed to correct the remaining distortions in the tariff structure and to smoothen the pace of schedule of tariff reduction in deserving industries. The recalibration of the tariff structure was ....... based on the pace of liberalization in other ASEAN countries and on whether or not an industry has potential or has proven to be competitive. The "Philippine winners" include electronics, garments and textiles, metal products, processed foods, marine products, furniture, jewelry, holiday decors, seaweeds and carageenan, ceramics, marble products, basketwork, footwear, leather goods, fresh fruits, oleochemical products, fertilizer, copper products, petrochemical products, motor vehicle parts and components, iron and steel products, and industrial tree plantation products including rubber products. Duty rates for certain tariff lines were either raised or reduced under EO 465. Other tariff lines had the same rate set under EO 264. Table 24 shows the number of tariff lines affected in each category. EO 465, however, was not designed to delay the attainment of a uniform tariff rateby 2004. While it resulted in a small increase in the overall averagen0minai tariff rate from the pre-EO 465 level (Table 25), the overall effective protection rate (EPR) sill went down (Table 26). The government issued on 7December 1998 the implementing rules and regulations (IRR) of Republic Act No.8435 or the Agriculture and Fisheries Modernization Act (AFMA) of 1997. The law provides for the duty-free importation for 5 years from the date of its effectivity of farm and fishery commodities, machinery, and equipment to modernize the agriculture and fisheries sector and enhance the incomes of ifarmers and fishermen. 11Myma Austria, PIDS Research Fellow, provided this section.
Chapter 9: Lamberte â&#x20AC;˘Table 24. Number
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303
of tariff lines affected
Increase in tariff Decrease in tariff Same rate as set under EO 264 Total
by EO 465, 1998
1999
2000
990
466
694
287 589 1866
485 915 1866
718 454 1866
Source:TariffCommission
The agriculture and fisheries inputs, machinery, and equipment eligible for tariff exemptions are classified into two groups. The tirstgroup, covering 118 product lines, is exempted from the rules on application/certification and monitoring procedures provided for by the IRR. Some of these products include purebred breeding animals such as cows and buffaloes, swine, goats, chickens, â&#x20AC;˘ turkeys and other live animals; bovine semen or sperm; farm tools ranging from knives and cutting blades to tractors and parts, conveyors, refrigerated vans, and hay-making machinery. The second group, the list of which was issued within 30 days from the effectivity of the IRR, covers products that are subject to application and certification procedures, like the certificate of eligibility from the Department of Agriculture (DA) or its deputized agencies.
Table 25. Average
nominal
tariff rates, by sector, 1998--2000 (In percent).
Sector
1998
1999
2000
10.74
10.28
9.00
20.70 3.91
19.01 3.91
18.06 3.13
9.05
8.82
7.45
Overall
11.24
10.21
9.08
Agriculture, fishery, and forestry Mining Manufacturing
19.82 3.89 9.87
17.96 3,84 8.97
16.56 3.21 7.88
Pre-EO 465 Overall Agriculture, fishery, and forestry Mining Manufacturing EO 465
Source:TariffCommission.
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Economic
Table 26. Estimated
average
crisis... Once more
EPR, by sector, 1998 - 2000 (In percent). I
Sector
1998
1999
2000
! Pre-EO 465 Overall
18.01
17.38
Agriculture, fishery, and forestry Mining Manufacturing EO 465 Overali
17.35 0.5 21.25
16.96 0.53 19.44
16.55 0.25 18.73
14.1
13.24
12.48
Agriculture, fishery, and forestry Mining
1.2.64 0.55
12.36 0.58
1.1.72 -0.07
15.48
14.34
13.52
Manufacturing Source:TariffCommission.
19.27
The list under each group will be reviewed at least once per semester until 31 December 2002 by the DA in consultation with concerned private and government institutions. The IRR also provides for the need tr) monitor the domestic market to guard against diversion of imports for resale in the domestic market. Social safety net The 25 percent budget cut on the 1998 budget meant, among others, a reduction in new classrooms by 2,567 affecting 158,265 elementary and secondary public school students; new desks would be reduced by 59,353 affecting 118,706 students; 1,428 classes would not be provided with instructional materials; the malaria control program will cover 27.5 percent less than targeted; the tuberculosis program will cover only about 2/3 of its original targets; and the coverage of the Nutrition Program wopld be reduced by 436,090 target children for vitamin A, 749,893 women for iodine, and 166,667 pregnant women for iron (Virtucio 1998). To mitigate the social impact of the Asian currency on the Philippines, the Estrada administration lifted in July 1998 the 25 percent budgetary reserve imposed on the appropriation for MOOE for critical basic health and social services programs totaling P1.5 billion. This was followed by the lifting and release of the budgetary reserve imposed on national government subsidy for additional operational requirements for four' specialty hospitals, as well as the reserve imposed on their 1998 corporate operating budget. It also partially lifted the reserves imposed on the IRA of LGUs.
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As regards labor relations, DOLE together with the employers' and labor hammered out a social compact called Social Accord for industrial
Harmony and Stability, which commits employers to exercise utmost restraint in laying off, terminating, or rotating employees, and labor to exercise utmost restraint in declaring or going on strikes, slowdown of work, and other forms of Concerted work stoppages. Without this social compact, the number of laidoff workers would have been much higher and there would have been more disturbing labor strikes, making it doubly difficult for firms to make the necessary Political
adjustments
during the crisis period.
stability
The Aquino administration restored the democratic system of government and the democratic institutions in the country to support a predominantly market-oriented, private sector-driven economy. The Ramos administration consolidated these gains and pushed for major and radical reforms, such as squarely dealing with various rebel groups using the Social Reform Agenda (SRA) as an instrument of peace and dismantling monopolies which had great control over the economy and the political system. President Ramos succeeded in arranging a political settlement with right-wing rebel soldiers and the Moro National Liberation Front (MNLF). Moreover, political and economic reforms had virtually reduced cronyism to a minimum. The Estrada administration has been announcing the same basic line. President Estrada's cabinet is a mixture of rightists, centrists, and leftists including former rebels and political detainees. The President is determined to complete the peace process by reaching a political settlement with the communist-led National Democratic Front (NDF) and the separatist Moro Islamic Liberation Front (MILF). Recent events, however, have raised fears that cronyism is back again, which could undermine both the political and economic stability of the country. The personalities that were highly favored during the Marcos regime are now back on the reins of major corporations in the country. Most of them are close friends and were strong backers of the President in the past presidential the government out for to avoid country during
election. Cronyism is one thing that independent bodies within sector, media, and the general public should carefully watch the same damage in the political and economic stability of the the Marcos regime from happening again.
General assessment Most recently, the domestic economy, in general, and the financial market, in particular, have started to stabilize. Interest rate had been going down in the last 6 months and inflation had been tamed. Although unemployment had risen
306
Economic
crisis... Once more
lately, this was not expected to continue for long since the economy grew in 1999, albeit at a modest rate, and was expected to grow more in subsequent years. The return to economic stability couldI be attributed to a combination of , , external and internal factors. Regarding external factors, the regional crisis seemed to have subsided in the last few months and a run on the currencies of most Asian countries similar in magnitude t6 _thesecond half of 1997 is unlikely to occur. Also, the Japanese currency had regained its strength vis-a-vis the US dollar, relieving some pressure off the currencies of Asian countries. Internally, measures adopted by the government in the past to restructure the economy and strengthen the financial system and most recently in response to the regional crisis have cushioned the impact of such a crisis on the domestic economy. Unlike the crisis experienced byl the country in the mid-1980s, this time the country has a much larger export sector which continued
to grow during
the regional crisis period, partly offsetting the decline in output of other sectors of the economy. Indeed, the firm resolve oF the government to continue witld the trade liberalization program and not to !mpose capital controls despite calls from various quarters sends a clear signal to all market players that economic restructuring as envisioned by the government before the regional crisis struck the country will proceed. As the regional crisis seeped into the domestic banking system, the central bank saw the need for introducing additional prudential measures to maintain the safety and soundness of banks. These measures will certainly produce a much healthier and sounder banking system. There are, however, prudential issues that need to be addressed further. For one, the Philippines has yet to adopt the Basle risk-based capital standards, Second, the disclosure requirement should be extended to all banks, not only to fisted commercial banks, to enhance market discipline. Third, some unusual features of the Philippine regulatory system, such as secrecy of bank deposits and examiner legal liability, should be reduced, if not completely eliminated. The social compact between management and labor that was facilitated by the government
seems to be holding
well and has avoided
unnecessary
economic and social costs on both parties. In interviews for this study, several respondent firms adversely affected by thel drop in demand for products said that they resorted to reducing the number of working days rather than to laying off workers. Although
it came after losing a significant
amount
of its reserves,
the
central bank's decision to float the peso in July 1997 was certainly the right response to the currency run. The NDF facility developed by the central bank tO relieve pressure on the spot market, however, needs to be reviewed because
iChapteT"
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307
it could be rendered ineffective in a massive peso run and lead to huge losses that eventually have to be monetized. The initial monetary and fiscal policy response to the regional crisis was a bit controversial. During the first few days of the crisis, the central bank raised the interest rate to defend the peso. A high interest rate was maintained for quite some time to discourage speculative attack on the domestic currency. It cannot be denied that the high interest rate policy adversely affected the real sector including the export sector, which contaminated the financial sector. While the budget cut enabled the government to put the fiscal position under control, uniformly applying it to all sectors was ill advised. The social sectors should have been spared from such a budget cut at the outset. Easing of the monetary policy in recent months and the restoration of budget cuts on basic health and social services programs are steps in the right direction. The interest rate has already reached its precrisis level. While lower interest rate is a necessary condition for relieving the debt service burden of several enterprises, a more important condition is for demand for goods to rebound. Given that the private sector demand has remained sluggish, the decision of the government to pump-prime the economy towards the second half of 1998 was an appropriate response. Securing external funds to finance the pump-priming activities of the government helped relieve pressure on the domestic interest rate. The government, however, needs to carefully manage the country's external debt to avoid repeating the balance of payments problem experienced
in the mid-1980s.
Future direction Short-term
of economic
recovery
and development
More than a year after the Asian currency crisis struck, uncertainty remains as to whether the economy can quickly recover. Although both the government
and the private
sector forecasted
a GDP growth rate of more than
1.5 percent for 1999, still there are downside risks. A second round of sharp currency depreciation could occur if the Japanese economy continues to slide down, putting pressure on the Chinese currency, and if the situation in Russia and some Latin American countries deteriorates further. Because of the slowdown
in global growth,
continuing
uncertain
investment
environment
in
emerging markets, and previous volatility that has made investors more risk averse, financial flows to the Philippines are not expected to return to their historical highs in the 1990s in the very short run. The decline in domestic interest rate in the last few months has significantly reduced indebtedness are expected to decline; obviating
of the corporate sector. The NPLs of banks the need for large resources to recapitalize
308
Economic
the banking
system. Nonetheless,
despite
the recent
crisis... Once more
decline
in interest
rate,
there are still no indications that bank credit will start growing again even moderately. This can be attributed to continuing fears of recession and the possibility of another round of currency instability in the Asian region. The export sector, which had been performing exceptionally well during the crisis, was recently threatened by the appreciation of the domestic currency. Meanwhile, the corporate sector had been increasingly underusing its capacity as it continued to slow down production activities and run down its inventories. The expected rebound of the agricultural Sector in 1999 was not sufficient to offset the potential decline in both industtrial and services sectors if current trends are going to continue. There are, however, positive signs that can create a favorable environment for the economic recovery of the Philippinhs. First, the decline in the interest rate in the US had eased concerns for a global liquidity crunch. The additional benefit to the Philippines was that it partially eased the external debt burden of the country and, at the same time, supported the continued decline in the domestic interest rate. Second, the passage of a series of measures made by the Japanese parliament to address the ailing Japanese economy, in general, and the banking sector, in particular, had significantly abated fears of a Japanese meltdown. Third, the agricultural sector was given a reprieve from the bad weather as E1 Nifio faded away. These positive developments could be exploited to restore confidence in the domestic
economy
and spur economic
recovery in the short run. Aggregate
demand must be pushed upward through a combination of expansionary monetary and fiscal policies. The recent decline in the domestic interest rate did not create pressure on the exchange rate, suggesting that there is some scope for a looser monetary policy. The large pool Ofunemployed, underused capacity of the corporate sector and low commodity prices in international markets can help cushion the impact of an upward shift in aggregate demand on domestic prices. prevent
More than ever, the export sector needs to be supported. The BSP must further appreciation of the peso to maintain the competitiveness of the
export sector. It could a comfortable level, maintaining a flexible liquidity must not be The government
start purchasing dollars to rebuild its reserves, bring it to and avoid using it tO defend the peso. This requires exchange rate policy. The resulting increase in domestic sterilized to support ailow domestic interest rate. had programmed a :P17.9 billion deficit for 1999. This
may not have been enough to support a raach-needed increase in aggregate demand. It should, therefore, have allowed aimuch higher fiscal deficit for 1999, possibly bringing forward the P9 billion theiIMF was willing to add to the P40 i billion deficit the government had programmed for 1998.
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This expansionary policy could easily reverse the currently positive current account position of the country. Since private capital flows are expected to remain weak in the short run, the growing current account deficit resulting from the expansionary policy could create huge pressure on the exchange rate, possibly causing more currency instability that could undermine recovery efforts. To forestall the occurrence of this situation, the financing gap must be filled by official flows. Imports for the agriculture sector are expected to rise partly as a result of the newly passed Agriculture and Fisheries Modernization Act. Agricultural growth will have beneficial economic and social impacts as most of the poor reside in rural, agricultural areas. The government, therefore, has to secure additional ODA for balance of payments support to finance the gap. The higher budget deficit could exert pressure on the domestic interest rate and crowd out the private sector if much of it is financed by borrowing from the domestic market. The government can avoid such a situation if it can secure more ODA for budget support. It must also continue its program of lengthening the maturity of its debt instruments to reduce volatility in the domestic interest rate whenever it goes to the market to borrow. The additional government expenditure can be directed to the social sector to make up for the effects of budget cuts in the past and to make up for past backlogs, such as construction of classrooms. Aside from the education and health sectors, housing also needs a boost. The sharp slowdown in bank credit in the last few months has severely affected SMEs' access to the credit market. Part of the additional government expenditure could be used to beef up resources of government banks for onlending to SMEs, which could lead the way for private banks to open their lending
windows again to SMEs. The relatively low NPLs of the banking system can allow banks to quickly resume lending to the private sector. As the banking sector resumes lending to the various sectors of the economy, however, there is a need to improve
prudential regulations for and effective surveillance of banks to maintain their financial health and avoid past mistakes. This calls for the immediate reform of laws and regulations covering entry and operations of banks. become
Mergers, consolidations, and acquisitions in the banking system will more intense in the next few months as banks try to strengthen their
capital base. The BSP could take a more proactive stance to facilitate and speed up mergers, consolidations, and acquisitions. This, together with the further liberalization of the banking system to allow foreign banks greater participation in the domestic banking system, could be addressed in revising the general banking
act.
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Economic crisis... Once more
Some corporations have already started raising long-term funds from the capital market. Others are waiting for the right time to raise long-term funds from the capital market. Some investors have already learned to put their money in the capital market. More investors, however, could have invested in the capital market if they only had stronger confidence in the market. This, therefore, calls for a reform of the securities act to boost investors' confidence in the capital market. This should be accompanied by reforms in the mutual fund system to raise more long-term funds and, at the same time, give small savers greater access to the capital market. Medium and long-term Monitoring of capital [lows While the government continues its policy of allowing a free flow of capital, it should, however, continuously monitor capital flows, particularly, short-term capital because these flows highly depend on changes in sentiments or market perceptions of foreign lenders or!investors. Nowhere is this problem more clearly demonstrated than in the differences in the report prepared by the World Bank and the Bank for International Settlements (BIS) on short-term foreign liabilities of the Philippines. In 1996' for instance, the World Bank reported that short-term liabilities of the Philippines constituted 19.3 percent of its total foreign liabilities, while the BIS reported 58 percent. Information on external liabilities of the Philippines that truly reflect real conditions can greatly help policymakers and the private sector make informed decisions and avoid sudden changes in sentiments or perceptions of the market, which are eventually reflected in the volatility in the exchange rate and the domestic interest rate. Once the domestic and international markets have stabilized and better prudential regulations for banks are put in place, the government should continue liberalizing the capital account of the balance of payments. Fiscal management Economic recovery can only be sustained in the long run if the government manages its finances weU. This underlines the need to improve the government's revenue effort, which requires a two-pronged approach: improvement in tax administration and further tax reforms. Improvement in tax administration can yield high pay-off for the government. In 1996 alone, Manasan (1998) estimated that uncollected revenue from individual income tax amounted to P48.5 billion, which was equal to 13.2 I percent of the national government tax reverlue for the same year and 2.1 percent of GNP. The level of corporate income tax _vasion for the same year reached P43 billion, which was equivalent to 11.7 plercent of national government tax
Chapter 9: Lamberte and Yap
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revenue or 1.7 percent of GNP. As regards the VAT,the level of VAT evasion hovered around P79.7 billion in 1996, which was equivalent to 21.6 percent of national government taxes or 3.4 percent of GNP. The recently instituted Comprehensive Tax Reform Program (CTRP) cannot make a substantial difference unless tax administration is considerably improved. The CTRP has left out several items that could further improve the government's revenues. One of the most important items is the rationalization of fiscal incentives and subsidies. In 1997 alone, the Department of Finance estimated that various fiscal incentives cost the government about P28 billion. Fiscal incentives should be scaled down and sharply targeted to economic activities that need them most. The potential revenue from these reforms can easily close the budgetary fiscal deficit and provide the government more resources to finance worthwhile activities. In this regard, Manasan (1998) recommended that capital outlays and government expenditures on MOOE as a percentage of GNP be restored to their former levels before the 1984-85 crisis. The amount can be adjusted to account for the increased involvement of the private sector, but it is most likely that only government capital outlays will be affected. The government must emphasize MOOE because the adverse effect of underspending on the upkeep of infrastructure :is cumulative and manifests mostly in the medium term, creating severe disruptions and damage to the economy. Capital market development Tosupport the development of the capital market, taxation of the financial sector to minimize distortions and transaction costs must also be reformed. The two important taxes are the documentary stamp tax (DST)and the gross receipts tax (GRT).The cascading effect of DST on highly traded financial instruments has reduced the attractiveness of these instruments, thereby undermining the development of the securities market. The GRT,on the other hand, tends to raise the cost of credit. The abolition or reduction of DST and GRT rates can have large implications on government revenues, thus, reforming these taxes should be done in tandem with tax and tax administration reforms so as not to blow up the government deficit out of proportion during the recovery period. Industrial restructuring The Estrada administration's decision to push through with the policy of moving towards a uniform tariff rate by 2004 can lead to more restructuring of the industrial sector and improvement in microeconomic efficiency. The sharp depreciation of the peso provides domestic-oriented industries with enough
312
Economic crisis... Once more
time to make the necessary adjustments to survive in a more competitive environment. Improvement in productivity will be a key factor for the survival of these industries. Technology and human resource development This area should focus on bridging the dichotomy between the export sector and the domestic manufacturing sector. The key is the development of technological capability. While technology transfer is important, it is not possible without the appropriate level of human capital. There are four key areas for policy reform: (a) technology transfer mechanisms must be made more effective; (b) R&D effort must be more focused and integrated; (c) human resource development must be oriented to improve factor productivity; and (d) the functions of the Department of Science and Technology (DOST) must be streamlined. Technology transfer mechanisms. The government must first set clear strategies for technology development whether adoption, modification, or generation by industry. This recommendation hints of industrial policy but given that technology does not have the standard characteristics of a commodity (in economic jargon, it is "nontradable") government intervention may be justified. Government intervention can be effective if carefully designed, sparingly granted, strictly monitored, and offset by measures to force firms to aim for world efficiency standards. Four advanced technology areas for aggressive supply push strategies have been identified: microelectronics, materials science, information technology, and genetic engineering. The private sector must be encouraged to practice "mirroring" in their ventures with multinational corporations. As explained in other studies, regardless of the initial arrangement of technology transfer, the Koreans instituted incremental changes to absorb technology, like replacing expatriate personnel with local people, substituting local engineering for foreign engineering, doing forward and backward integration, and others. Similarly, multinational corporation-local enterprise technology transfer programs similar to what Singapore and Malaysia did musl be encouraged. I
RdrD effort. R&D capability must be enhanced to eventually achieve technological self-reliance. Linkages among the government, private sector, and academe on specific technological programs must not only be strengthened but at the same time, their roles must be c_early delineated. For example, the responsibility for developing advanced technologies will rest primarily with the public sector. There should also be investment in industry-linked R&D institutions and university-linked basic re _earch in selected areas.
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For this to succeed, there should be greater investment in R&D. This can be achieved through larger government appropriations for this purpose. Private investment in R&D can be _encouraged with greater competition, by strengthening laws related to patents and intellectual property fights (IPR) and by implementing incentives (e.g., tax breaks) to increase fund allocation toward R&D. Finally, institutional gaps that weaken the linkage among technology generation, adaptation, and use must be addressed. For example, the government can support pilot testing of inventions to determine their commercial and technical feasibility. Human resource development (HRD). A well-educated labor force is the sine qua non of technological development. The government can start by strengthening education in the primary and secondary levels. The proposal of some experts to teach mathematics and science in the regional language at the elementary phase to ensure that basic concepts are well assimilated must be considered seriously. At the tertiary level, government support for science, engineering, and other laboratory-intensive courses must be emphasized. To remedy the incentive system, salaries of professors in centers of excellence must be exempted from the salary standardization law. At the same time, a strict accreditation system for the faculty must be instated. The country should train its human resources for the higher stages of production?not only so prime qualified skilled workers could work in developed countries but also to prepare them for future shifts toward higher skill-intensive domestic production activities. This should complement rising labor costs relative to countries like Indonesia, China, and Pakistan. This can be supported by government and private sector investments in industry-linked polytechnics and HRD programs. Infrastructure Infrastructure development economic chain in the Philippines.
has been described as the weak link in the During the 1980s, infrastructure expansion
in the Philippines lagged behind other Asian countries in terms of paved roads, electricity generation capacity, electricity production, telephone main lines, railroad tracks, and access to sanitation. Privatization, deregulation, and liberalization of the various infrastructure sectors were recently undertaken to spur development. Overall, sectoral reforms had been beneficial, resulting in increased supply, lower water rates, and better quality of service. Reforms should continue, particularly in areas where government presence is still strong and is not producing desirable results, such
314
Economic
as good-quality
service and revenues.
For instance,
crisis... Once more
the government-owned
National Power Corporation (NPC), which continues to lose money heavily, needs to be privatized. Other issues in the power sector, such as pricing and consolidation of various regulatory functions into a single agency, need to be studied. The experience of Metro Manila in transferring responsibility for water supply and sanitation from the government to the private sector has to be examined carefully other cities.
so that a similar, if not better, scheme can be promoted
Rural infrastructure
projects,
such as small irrigation
systems,
in
farm-to-
market roads, drinking water supply system, etc., must be given top priority by the government in its budget and/or development assistance program. Other issues in the infrastructure sector must be addressed by the government. These include, among others, the creation of a competitive environment in the infrastructure sector, equipping agencies with the necessary capacities to effectively deal with the demands of a market-oriented policy regime, organizing lead agencies to facilitate coordination and strategic planning, exercising prudence in assuming contingent liabilities, and properly delineating national-local government roles. Agriculture
sector
The primary focus in this area should be the restructuring of agriculture tariffs. The recent depreciation of the peso presents an opportunity to correct the high protection rates of major commodities such as rice, corn, sugar, livestock and poultry, and other minor crops. At the same time, a market-based approach, i.e., auctioning, must replace the current system of in-quota imports of these commodities, as specified by minimum access volumes, to transfer to the general public the rents received by quota holders. Aside from increased public expenditures for agriculture, more efficient allocation and streamlining of the bureaucracy are required to strengthen support services to agriculture. A greater proportion of the budgetary allocation for agriculture must be spent for productivity-enhancing investments, especially agricultural research, development and extension, market infrastructure, and irrigation
support.
streamlining governments
Institutional
reforms
should
and strengthening of coordination in delivering better quality support
aim at facilitating
the
between local and central services to the sector.
Action plans This section outlines specific action plans that the government should adopt to stage rapid economic recovery in the short run and sustainable growth in the long run. Although some of these aCtion plans may not be new or are
Chapter 9: Lamberte and Yap
315
currently being contemplated by the government, they are, nevertheless, discussed here to emphasize their importance in resuscitating the economy. The action plans are grouped into two categories: short term and medium to long term. Action plans in the short term are those that the government must immediately initiate and complete within 2 years. These are essentially confidence-building measures to spur economic growth in the short run. It is to be noted, however, that some of these actions have very specific purposes and have short-run impacts on the economy, while others have long-run impacts. Action plans faUing under the medium- to long-term category include those that the government ought to immediately initiate, although they may not necessarily be completed in 2 years and/or those that can only be done after completing some prior actions. These actions are aimed at restructuring the economy or specific sectors of the economy and, therefore, they have implications on the long-run sustainability of economic growth that is expected to occur in the short run. Short term Pump-priming measures The government should continue its pump-priming activities weU into 1999. The 1999 government budget, which was passed by Congress, however, did not clearly reflect this program. There was, therefore, a need to request for a supplemental budget so that pump-priming activities of the government can be completed within 1year. Pump-priming measures should focus on the critical sectors of the economy, specifically agriculture, which has the most extensive linkages with the rest of the economy, thus generating the highest multiplier effect; SMEs, because of their insufficient access to formal credit and modern technology and the fact that they are going to be the shock absorbers for those who are going to be negatively affected by corporate restructuring; and social sectors, because the poor do not have the resources to protect themselves against the adverse effects of the economic crisis and because of their long-term impact on productivity. Agricu#uresector. The devastating effects of E1Nifio and La Nifia weather phenomena on the agricultural sector should have already convinced the government of the need for directly confronting these problems by accelerating the provision of much-needed infrastructure for the agricultural sector, such as irrigation, postharvest facilities, farm-to-market roads, etc. Unfortunately, however, the President's proposed 1999 budget for the agricultural sector in nominal terms was even lower than the 1998 general appropriations act, and in real terms much lower than the 1997level. Government expenditure on irrigation
316
Economic
crisis... Once more
t
has been declining
in real terms over the years, making it difficult
to maintain
existing facilities and doubly difficult to construct new ones to make up for backlogs due to several years of neglect. Mindanao, which has long been neglected by the government in terms of infrastructure programs and was hardest hit by E1Nifio, must be given priority when allocating additional budget. Between capital outlay and MOOE for the irrigation system, the latter must be given a higher allocation to restore the efficiency of existing irrigation systems. The DA should identify irrigation facilities that need rehabilitation and give these priority. Together with the Department of Public Works and Highways, it must also identify facilities and give them priority.
agricultural
farms that need new irrigation
Social services sector. The President's proposed 1999 budget for the education and health sectors was also lower in real terms than their corresponding 1997 and 1998 budgets. This has immediate implications on the poor's access to basic services, especially those who have been laid off because of the ongoing crisis. This will also impact negatively and labor productivity competitiveness.
on human
in the long run, which can undermine
development the country's
For the health sector, priority should be given to increasing the budget for MOOE. Also, timely releases of these funds are important. As regards education, both MOOE and capital outlay must be increased significantly. For capital outlay, however, priority must be given to areas in the country that need them most. The Department of Education, Culture and Sports can easily identify these areas. Housing is another sector that must be given additional attention by the government especially because it has direct economic impacts in the short run. Although the President's 1999 budget for this sector increased in real terms relative
to 1998, it was far below
the 1980_i levels, making
it hard
to meet a
sizable proportion of the existing housing backlogs. A substantial part of the increase in budget allocation for the housing sector must be used for the I following activities: 1.
To build up resources for one-time capital grants. This grant, proposed by Llanto et al. (1998_ as an alternative subsidy scheme that will not distort housing credit markets, will provide better incentives for private sector participation, especially banks, and is transparent to the public and policymakers;
2.
To transform the National Home Mortgage Finance Corporation (NHMFC) into an institution mainly active in secondary mortgage
Chapter 9: Lamberte and Yap
3.
317
and provide resources for it. NHMFC can play a big role in the development of asset-backed securities; and Tobeef up resources of the Home Insurance Guarantee Corporation (HIGC) to provide guarantees to bonds to be issued by LGUs for financing mass housing projects in their respective localities.
Credit prosrams. The rise in NPLs of banks in recent months has constrained them from aggressively lending to sectors they normally serve. The deceleration in credit flow was also affected by the slowdown of the economy because it adversely affected banks' efforts to mobilize deposits. Worst affected among banks were the thrift banks and rural banks, which cater to SMEs and the agriculture sector. Also, rural banks were hardest hit by the sharp contraction of the agriculture sector in 1998 caused by E1 Nifio. Other than deposits and relending windows of government financial institutions, thrift banks' alternative source of funds were commercial banks. This fund source, however, had dried up due to the high cost of maintaining funds and the cautious attitude adopted by commercial banks during the crisis. The government has been giving attention to the SMEs' and the agriculture sector's credit needs as shown by several special credit programs created for these sectors. Most of these credit programs, especially those that were administered by nonfinancial government agencies, however, had been ineffective and inefficient (Lamberte et al. 1997 and 1998). All this suggests that the SMEs' and the agriculture sector's access to credit will likely be impaired in the next 2 years?a situation that will hamper economic recovery efforts. To address the liquidity problem faced by SMEs and the agriculture sector, two actions are proposed to the government. First, the government's various credit programs to SMEs and the agriculture sector must be rationalized to improve their effectiveness and efficiency. Second, resources of government financial institutions (GFIs), specifically the Development Bank of the Philippines (DBP) and Land Bank of the Philippines (LBP) for SMEs and the agriculture sector must be beefed up to provide liquidity to these sectors. Private banks that want to resume or increase their credit to SMEs and the agriculture sector could tap the wholesale windows of these GFIs. Resource mobilization measures RenegoOating the short-term bridge financing loan. The government must try to renegotiate the 1-year US$610-milllon bridge financing it obtained from domestic banks' FCDUs a few months ago for a longer period, say 3 or 5 years, so that it can save resources for pump-priming activities for 1999.
318
Economic
crisis... Once more
Privatizatibn. Due to the cyclical doWnturn of the economy, government tax revenues are likely to decline during the crisis period. On the other hand, the rebound in tax revenues will not immediately happen when the economy starts to recover due to lag effects. This suggests that the government must look for other ways to raise resources in the short run to fund its pump-priming activities. Privatization can be a good solution. There are still several so-called "big-ticket items" that can be privatized to substantially increase the nontax revenues of the government in the next 2 years and partly make up for the cyclical decline in tax revenues. Examples are the government's remaining shares in PNB and Petron, Food Terminal Inc. (FTI), Philippine National Oil Corporation's Corporation--and the NPC.
subsidiary--Energy
Development
If needed, the legal instrument for privatizing these "big-ticket" items should be completed within a year so that privatization can proceed; for example, the Omnibus Bill on the Electric Power Industry. The final draft should take account of increasing playing field for all.
the efficiency of this industry
by establishing
a level
Financialsector re[orms. The financial sector must continue to improve its effectiveness and efficiency in mobilizil_g and allocating funds to meet the growing demands of the economy, especially the new challenges posed by the recent trend towards globalization and greater international integration of financial markets. The antiquated legal frameworks governing the banking system and the capital market in the Philippines must be overhauled to modernize the domestic financial system, raise confidence of both local and foreign depositors and/or investors in the financial mobilization and allocation of savings.
system, and facilitate the
Banking sector. The General Banking Act was formulated in the late 1940s and was slightly amended in the 1970s and 1980s. Since then, the financial sector environment has changed a lot, exposing banks to greater competition and new types of risk. This is compounded by the freer flow of capital, which was mostly intermediated by the banking system. Indeed, the large swings in capital flows experienced in recent years by the Philippines underline the close relationship between the degree of economic stability, and the safety and soundness of the banking system. ,, The General Banking Act must, thus, be vigorously implemented, taking into account the ability of financial institutions to create a wide variety of financial instruments, bringing the prudential regulations of the Philippines up to internationally accepted standards, adopting modern approaches to bank
Chapter 9: Lamberte and Yap
319
supervision, and strengthening disclosure rules to make banks more transparent to the public, among others. Substantially amending the Deposit Secrecy Act will strengthen the effectiveness of bank supervision and examination and reduce insider abuse, which has been the major cause of many bank failures in the past. Capital market. Despite the boom in the securities market recently experienced by the Philippines up until the Asian currency crisis struck, the resources raised by the capital market still fell far below its potential due to inefficiencies of and lack of confidence of the public in the market. Increasing public confidence in this market can be partly addressed by having an effective regulatory framework. Unfortunately, however, the present legal framework cannot respond to this need and als0 does not measure up to the challenges posed by a fast-evolving capital market that is becoming closely integrated with the rest of the world. The existing securities act, therefore, should be amended to develop a more orderly, transparent, and effective capital market that can inspire confidence among investors. Modem approaches to securities development, such as shifting from merit regulation policy to full disclosure, allowing securities associations to become self-regulatory organizations, separation of broker-dealer roles, improved protection of minority shareholders, tighter provisions on insider trading, etc., must be expressly incorporated in the new law. Also, the regulatory body, i.e., the Securities and Exchange Commission (SEC), must be reorganized for greater flexibility to respond to requirements for effective supervision and regulation of a fast-evolving capital market. The mutual fund industry, which can be a good investment vehicle in the capital market for small savers, has been lagging behind that of other countries in the region. One of the reasons for this is the antiquated, controloriented legal framework called the Investment Company Act, which was passed more than 35 years ago to address the collapse of some mutual funds. For example, it does not give mutual fund managers sufficient flexibility in determining investment objectives. Also, the stringent seed capital requirement discourages the registration of mutual funds with multiple investment objectives. The Investment Company Act must thus be amended. Bond issuance. Issuing government bonds in the international private capital market is one way of quickly mobilizing resources. In fact, the government has already drafted a concrete plan on this. The government, however, must resort to this only if the premium placed by international investors on emerging market issues has returned to normal levels.
320
Economic crisis... Once more
Medium and long term Monetar]_ banking, and exchange rate policies Monetary and exchange rate policies should aim at providing an environment that is conducive to wholesome economic growth. Since July 1997, the BSP is committed to a flexible exchange rate. This policy should be maintained, and the signals the BSP gives to the market must be consistent with this policy. Monetary policies, on the other hand, need to be reviewed in the light of rapid financial innovations brought about by the liberalization of the banking sector and foreign exchange market. Although the BSP has started doing this recently,however, it must intensify its efforts to maintain the effectiveness of its monetary policies. Given that a major economic crisis, including the most recent one, strikes the Philippines almost every 7 years, it is _indeed worthwhile to develop an early warning system, for balance of payments and financial crises similar to that developed by Yap (1998). Such an early warning system could be made part of a wider system of monitoring and surveillance of the economy. In view of the increasing financial market integration, the BSP must improve its information system on capital flows, especially short-term capital flows which are highly volatile and largely intermediated through the banking system. Also, given the contribution of increasing corporate debt to the recent crisis, the BSP must include the level and structure of corporate debt in its monitoring system. To complement proposed legal reforms for the banking system, the BSP needs to upgrade its capability to supervise and examine banks which are operating in a more liberalized regime. Competition policy framework Tobe resilient and dynamic especially with the current trend towards globalization, the economy must have a competitive market structure. The government should work towards accomplishing this goal by developing a coherent national policy framework on competition. As demonstrated here and elsewhere, liberalization alone does not necessarily lead to effective competition. A good antitrust law and an agency capable of enforcing laws and regulations on competition are required. Unfortunately; the current legal, regulatory, and institutional framework for competition!is highly diffused and weak in preventing anticompetitive behavior. The itrend towards bigness achieved through merger, consolidation, or acquisitipn needs to be watched closely so that no dominant player can set up antico_npetitive barriers. Recent events, such as the alliance made by three dominant shipping companies and the acquisition by a dominant player in the cellular phone subsector of another
Chapter 9: Lamberte and Yap
321
dominant player in the telephone subsector have left the general public wondering whether liberalization without any effective regulations to make markets competitive will be beneficial in terms of excellent and prompt services at prices affordable to a great majority of the population. Estab/ishin 8 competitive infrastz_cture sectors J_ The infrastructure system in the Philippines is inadequate and highly inefficient, which raises the cost of doing business in the country and lessens the competitiveness of the economy as a whole. Sachs et el. (1998) have proposed increased private participation in the infrastructure sectors (i.e., electric power, telecommunications, water supply and wastewater, and transport) as a way of meeting the demands for infrastructure and of improving their efficiency. This, however, requires a legal and regulatory framework to support competitive infrastructure sectors. Policy-induced barriers to entry must be identified and dismantled. For example, it takes a long time to obtain a public utility license from the legislative and executive branches of the government. The dual role played by the government (i.e., as a regulator and an operator) in infrastructure sectors as in the ports subsector discourages private sector participation. Regulations that tend to distort the market must be changed. For example, the tariff setting based on rate-of-return method gives utility firms incentives to overinvest, inflate costs, and engage in cross-subsidization. Aside from a good legal and regulatory framework for increased private sector participation in the infrastructure sectors, the technical capabilities of regulatory agencies must be strengthened to effectively deal with the complex demands of a market-0riented policy regime (Serafica 1998). Improved tax revenue To improve tax administration, Manasan (1998) suggests the following measures: Improved monitoring of stop[ilers. Available data show that only 78 percent of all VAT registrants filed returns in 1994.While no comparable figures were available for other types of taxes, key informant interviews suggested that this was a problem common to all types of taxes. The importance of and the inadequacy of the present system of monitoring stopfilers are exemplified by this little story on how the recent and highly publicized tax diversion scam was uncovered. Apparently, the scam was first noted when one Regional Development Office (RDO), which has a functioning manual taxpayer monitoring system in place, noticed that some taxpayers had failed to pay their 12This complements
the discussion
in the previous
section.
322
Economic crisis... Once more
taxes. After fonow-up calls were made to these taxpayers, the RDO was informed that the taxpayers had already paid their taxes. The rest is history. Even with the large amount involved in the scam, it took a while before nonpayment was discovered. This shows that many RDOs have weak monitoring systems in place. To enhance monitoring of stopfilers, it is critical for the BIR to have a taxpayer master list. The absence of such a list has been a persistent problem to date. The full implementation of the BIR computerization program (or the integrated tax system) in 1999 is expected to address this lack. The installation and use of manual systems in the meantime, however, is imperative. Also, under a computerized regime, it is important that RDOs learn to use the system properly so that they can fully maximize its capabilities. Initial reports in the pilot rollout areas showed that some RDOsistill request the BIR Data Center to print out lists of stopfilers and generate reminder letters even if the system allows them to do these tasks themselves. : Installation of selective audit policy and procedures. In principle, the objective of tax audits is not so much to increase or enforce filing of revenues as to improve voluntary c0mpliance. The BIRIs audit function is not only central to its effectiveness as an institution but als0 key to its poor public image. Within the BIR, the audit function is a highly debated subject treated with ambivalence even by its key officials. On the one hand, many revenue officers request authority to examine all tax returns even if this is beyond their ability to complete and are outside their capability to quality audit. At the same time, while some taxpayers have not been examined at all, others have been subject to annual tax audits despite high tax compliance. This has led to the widespread perception that tax audits are being used to systematically harass many taxpayers. On the other hand, some key Officials from time to time have tended to disregard this audit tool. Thus, sometimes there are protracted periods when the issuance of Letters of Authority (LA) (for the conduct of audit) was suspended. While the BIR officially supports a program of selective audit, there appears to be some inconsistency between! policy pronouncement and actual practice. For instance, Revenue Memorandum 26-94 prioritizes the audit of large taxpayers. This not only prejudices these large taxpayers but also sends the wrong signal about being big and successfUl. The experience in countries with modern tax administration tends to show that tax audit is not an all or nothing proposition. In fact, it is the opposite. One of the principal ingredients in enhancing the effectiveness of tax audits is the implementation of a selective audit program. The key to these programs is a means of selecting taxpayers who are shown to have the highest probability of underreporting their tax liability. Usually this is aided through the use of
Chapter 9: Lamberte and Yap
323
statistical analysis. The computerized BIRtax system, when fully implemented, is expected to have this capability. However, it is one thing to know that there are provisions in the integrated tax system for the incorporation of a selective audit program, and it is another thing to find out "whether the selection system fulfills the requirements of the Bureau before it becomes operational" (TAAP Memorandum, 30 May 1997). Third party information (TPI). Evasion estimates of the income tax tend to show that the bulk of the problem stems from underreporting receipts/ income. Third party information is one way of addressing this issue. Initial efforts to collect and analyze TPI have focused on oil/gas dealers. This work has been well received by BIR officials. It has also generated interest in extending its application to other sectors. There has been some disagreement, however, on whether the TPI should be used to assess additional taxes through the issuance of LAs or whether concerned taxpayers should simply be encouraged to file amended returns. There has been some apprehension that the first approach may lead to harassment of taxpayers. In either case, it is important that a good internal control system be put in place to keep track of how data from TPI are used and to ensure that the same are not used to harass taxpayers. Also, it is important that data generated from the TPI be used to develop audit procedures and techniques, standards, and norms specific to concerned sectors/industries. Improved performance evaluation system for revenue officers. There is a general agreement that one of the most serious problems facing the BIR has to do with its personnel. For one, the public image of the BIR is one of inefficiency, if not corruption. Coupled with the low pay scale, this has resulted in the low morale of BIR personnel. To deal with this problem, it is important that an appropriate performance evaluation system for revenue officers be developed and put in place. It is essential that good performance is rewarded in the same manner that bad performance is sanctioned. In this regard, it is noted that while the reshuffling of revenue officers once every 3 years might be justified in that it discourages special arrangements/relationships between revenue officers and taxpayers, the current practice of reassigning revenue officers to far-away posts as "a disciplinary device only transfers inefficiencies from one place to another in the revenue service." t
Trainingfrontlinepersonnelfora computerized regime. There are many expectations from the ongoing computerization program of the BIR. It has been pointed out that "automated systems do not collect taxes; they only provide
324
Economic
crisis... Once more
the supporting framework, which can maximize the productivity of people." As such, it is essential that human aspects of the shift towards the more computerized regime be carefully managed. In this regard, the very first step is to provide computer literacy training to frontline personnel. Undeniably, the degree of computerization in the Bureau prior to this change is low. As such, revenue officers view computers and the accompanying system with some trepidation, if not resistance. It is essential that this problem be dealt with immediately even before training on the specifics of the new integrated tax system is conducted. CzeatJon oddata centers.
The creation of data centers is already proposed
in the continuing streamlining effort at the BIR which is under review by the DBM. Data centers are important in ensuring timely and consistent data input. They are the heart of a computerized
system's quality assurance
Taxes on the financial sector There are three taxes that must be reviewed. loan-loss tax.
provisions
of banks, documentary
Since general loan-loss provisions
system.
These are: tax treatment
of
stamp tax, and the gross receipts
and the restructuring
of specific loan-
loss provisions, which will compel banks to set aside more resources to comply with the new schedule of allowance for probable losses, have been introduced, there is a lively discussion on tax deductibility of loan Iosses. Countries all over the world vary in the method of tax deduction for l¢)an losses that they use. Some use the charge-offmethod, which requires that a debt be uncollectible and written off at the time the tax deduction is claimed, while others use the provisions method, which allows the tax deductibility of eligible provisions for bad and doubtful debts without requiring a book write-off of the underlying asset (Escolano 1997). Concerning the latter, the tax-deductible provisions may be general (general provisions method) or specific (specific provisions method). A particular design for tax treatment of loan losses can have a strong incentive for prudent or imprudent bank behavior. It can also have a sizable impact on government revenue. Thus, thisi issue must be carefully studied before drafting the necessary legislation. There is now a growing consensus on the need to abolish the documentary stamp tax for highly traded financial instruments to support the development of the capital market. Instead of immediately abolishing the DST, however, it could be gradually reduced from the present level to zero over a 4-year period to give the government adequate time to improve tax administration and put other tax measures in place. This way, the negative revenue impact of the DST
Chapter 9: Lamberte and Yap
325
abolition can be mitigated. The legislative framework for this measure must be drafted and passed soon so that it can immediately be implemented. The government must complete its study regarding the possible substitute for GRT and its impact on government revenue so that the legislative framework could be passed in 2000 and implemented in 2001. Pension fund system reform The pension fund system, particularly the government-sponsored pension funds namely the Social Security System (SSS) for private sector employees and Government Service Insurance System (GSIS) for government employees, needs to be reviewed so that it can be more effective. One of the issues that must be addressed is whether the two systems need to be merged or maintained separately but their benefits made portable to promote labor mobility. Enhanced labor mobility is needed to make the economy more resilient. Another issue is the need to improve funds of both systems by possibly employing external private fund managers as is done in other countries like Chile. Together with this is the need to liberalize the investment of pension funds in foreign assets to minimize exposure to country-specific risks. This, of course, requires some prudential standards and supervision. A thorough review, therefore, of the pension fund system is recommended; the results of this review can serve as a basis for drafting the necessary legislative framework to reform the system. Industria] restructuring The govemment must remain firm in maintaining the policy of moving towards a uniform 5 percent tariff rate by 2004. The BSP should complement this by maintaining a flexible exchange rate policy and preventing any overvaluation of the peso. A more competitive industrial sector is expected to emerge. To further enhance the competitiveness of the industrial sector, the govemment must continue addressing infrastructure bottlenecks (e.g., major highways linking industrial and commercial areas, farm-to-market roads, fishing ports, airports, etc.), which have raised the cost of doing business in the Philippines, through an appropriate level of public expenditure in infrastructure and appropriate policies for private sector involvement in infrastructure investment. The government must also provide an "enabling environment for the private sector to purchase technologies that it views as profitable" (Sachs et al. 1998). Finally, the government must increase its investment in education, particularly science and engineering education, and improve science education at all levels.
326
Economic
crisis... Once more
Agricultural development TO support agricultural development, the government must act on the following issues: First, to encourage long-term investments in land improvement and tree crops and develop an efficient land market, the government must change its policy of retaining ownership of lands with a slope beyond 18 degrees and prohibiting sale of lands transferred to agrarian reform beneficiaries under the Comprehensive Agrarian Reform Law. Second, rural transportation infrastructure must be substantially improved to reduce transport cost and bring farmers closer to their markets for farm produce and inputs. Third, investment in agricultural research, which will have a very high return in the long run yet is grossly underfunded by the Philippine government compared with those of developing countries, needs to be increased substantially. This, however, should be accompanied by a reform of the agricultural research and development system. Fourth, agricultural trade policy must be reviewed especially in the light of the huge depreciation of the domestic currency vis-a-vis the US dollar. More specifically, the huge peso depreciation can allow for a significant reduction of the currently high import tariffs of major agricultural commodities, which will bring benefits to exportable commodities as well as to the hog and poultry industries without necessarily hurting the import-competing commodities.
Chapter 9: Larnberte
and Yap
327 Appendix
Financial
sector restructuring
A
in the 1980s and early 1990s _
The history of the Philippine financial system is littered with institutional failures, which are not only limited to small institutions but to large ones as well. During times of rapid economic growth, financial institutions relaxed their lending criteria and took on more risks. This was done under an environment of weak regulatory framework and supervision. As often the case, a slowdown of the economy exposed the weaknesses of financial institutions and eventually led to the collapse of many of them. By far, failures of several financial institutions in the 1980s were the worst in Philippine history. The country entered the decade of the 1980s with an economy that started financial system in obligations to several houses and finance
to slow down. Then, a severe liquidity crisis struck the 1981 when a large borrower failed to honor his huge banks and nonbank financial institutions (i.e., investment companies). Although signs of weaknesses of several
financial institutions started to appear, the central bank took time to quickly resolve them, hoping to restore their financial health. But as the financial sector started to recover, a devastating balance-of-payments problem hit the economy, aggravating the problems of many financial institutions. The government tried to rescue five commercial banks by injecting more funds into them. When this strategy failed, the government eventually ended up owning the closed banks. The nonperforming assets of these banks were cleaned up and the government sold the rehabilitated banks back to the private sector. Apart from the rehabilitated commercial banks, the government closed 3 commercial banks, 32 thrift banks, and 138 rural banks during the 1981-87 period. It launched a massive rehabilitation program for the rural banking system, in which about half of the remaining 1,000 rural banks participated. Others opted out, anticipating that they would no longer meet the stringent requirements of the rehabilitation program. Several large finance and investment houses, which borrowed heavily from the market, were also closed. Saddled by huge nonperforming assets, the two large government-owned banks--the Development Bank of the Philippines (DBP) and the Philippine National Bank (PNB)--also collapsed in the mid-1980s. The government came to the rescue by cleaning these banks, resulting in worth of nonperforming shares of PNB is already
up nonperforming assets and contingent liabilities of the transfer to the government of about P108 billion assets. Presently, 43 percent of the outstanding owned by the private sector.
_3A more detailed discussion of this issue can be found in "Assessment of the problems of the financial system: the Philippine case. PIDS Working Paper Series No. 89-18 (December 1989).
328
Economic The central bank's financial
assistance
to troubled
crisis... Once more financial
was by no means small. It went up to as high as 47 percent during the first quarter of 1986.
institutions
of reserve
money
Several causes could be attributed to the collapse of several financial institutions in the 1980s. The most important, however, was insider lending or lending to bank directors, officers, stockholders, and related interests (DOSRI). Usually, a bank, which is part of a conglomerate, lends to its DOSRI or affiliates, which, in turn, use the funds for very risky ventures. If the investment succeeds, then the DOSRI and/or affiliates reap all the benefits. If it fails, the bank may not report the losses so that bad loans will not be reflected in its books. Or it may understate the losses arising from such loans to prevent a bank run. In any case, the bank would not be reporting its real financial position until the problem turns into a crisis. Most often, DOSRI ceilings were violated by failing banks. While insider abuse was committed by some private bankers, fraud was committed at the highest level in government in the case of the financial collapse of DBP and PNB. These financial institutions were saddled with behest loans and credit guarantees that went sour. Behest loans and guarantees were accommodations which could not have been granted by these banks to President Marcos' relatives, "cronies," and d associates werit not for pressure from him and/or his personal endorsements. Weak regulation and supervision contributed to insider abuse. The central bank examines banks only once a year, and most violations of DOSRI loan ceilings were made in between examination periods. Also, although central bank examiners might have seen violations of DOSRI loan ceilings, which they promptly brought to the attention of banks concerned for correction, in cases where dummies were used, they usually found it difficult to prove the flow of funds from the dummies to the DOSRI (when made through deposit accounts) because they could not examine any deposit account. The Secrecy of Bank Deposit Law prevents them from doingthat. Since 1986, several measures were introduced to liberalize and, at the same time, strengthen
the regulatory
framework
for the financial
system (see
Appendix A - Table 1). For instance, the central bank raised the minimum capital requirement for banks three times during the 1986-94 period, forcing undercapitalized banks to merge with other banks. Although the Secrecy of Bank Deposit Law was left intact, the central bank tightened regulations on DOSRI loans. More importantly, the central bank made it clear in a written policy that it would refrain from sustaining weak banks. The Philippine financial system entered the i990s better capitalized and with a much healthier balance sheet. In fact, none of the banks went under during
the 1991-92 economic
slowdown
and the Treasury
bill scam in 1993 that
Chapter 9: Larnberte and Yap
329
caused a run on some banks. It cannot be denied that the policy of bank closure, which was applied to several ailing banks in the past, has kept pressure on bank owners and managers to be more prudent in managing their banks. Because of liberal bank entry and bank branching policy espoused by the central bank in the 1990s, the number of commercial banks increased from 29 in 1990 to 54 in 1997, while the number of commercial bank offices rose from 1,863to 4,078. Thereis now greater participation of foreign banks in the domestic banking system as can be seen from the entry of 4 subsidiaries and 10branches of foreign banks. Intermediation has also greatly improved as shown by the rise of M3/GNP ratio from 27.9 percent in 1990 to 42.2 percent in 1997. With more banks and bank branches opened in the country, the general public's access to a variety of financial services at more favorable terms has greatly improved. But all is not well, however. Most recently, a newly opened small commercial bank collapsed primarily due to mismanagement and insider abuse. This shows that the existing regulatory and supervisory framework for dealing with insider abuse remains weak. Indeed, the General Banking Act needs to be amended to strengthen internal governance of banks, impose greater market discipline, and improve the oversight of banks. Also, the Secrecy of Bank Deposit Law must be amended to give more teeth to bank supervisors and examiners.
330
Economic
Appendix
A - Table 1. Financial
Policy measures
crisis... Once more
sector reform in the Philippines,
Before reform
After reform
1986-94. Date
L Selective credit control 1. Central Bank rediscount window
Z Central Bank special credit pro grams
Rediscount rate: varies by type of economic activities (allowable spread: 1-11%)
Uniform floating rata for all; no prescribed spread,
November 1985
R_discount value: varies by type of aconomlc actlvlti_ (value: 60-100%)
Uniform: 80°/,,
November 1985
Directly managed special credit programs
Central Bank-managed special credit programs transferred to govermnent financial institutions
1987-1988
New commercial banks i moratorium since 1980; Other banks -- no moratorium,
New commercial banks -- moratorium lifted
1989
1_n foreign banks allowed to have 6 branches each; foreign banks may acquire or establish a bank up to 60% of the total equity of each bank.
1994
II, Bank competition, 1, Bank entry
Foreign banks -- no entry since 1949.
!. Branching
3, Government banks
Restrictive branching Branching was liberalized but the policy--the country was Central Bank retained discretionary divided into fiw service â&#x20AC;˘ power in opening branches in certain areas: heavily areas considered "overbanked." overbranched areas; overbranched areas; Banks may open branches anywhere ideally branched ames; they like provided they meet the underbranched areas; and required minimum capital requlmm,_nt. encouraged branching ames. Largdy doing retail lending that directly competes with private banks
More focus on wholesale lending using private banks as conduits.
May 1989
May 1993
since 1987
4. Interest rates a. DeposJ t rates
No cap since 1981
b, Lending rates
No cap since 1983
same
Private banks
Cap on end-user rata
i No cap on end-user
1987
Special credit programs
[If. Prudential measures
Deposits of insiderborr'owers war protected by the Secrecy of Bank Deposits Law,
Prohibited concurrent officerships betweeaa banks or between a bank and a nonbank financial in_rm_diary except with prior approval of the Monetary Board. Required each bank to cause an annual financial audit to b_ conducted by an external independent auditor not later than 30 days after the close of the calendar year. Required all banks and nonbank financial intermedlari_s to adopt the Statements of Financial Accounting Stendards.
September 1986
December 1986
December 1987
Chapter 9: Lamberte Appendix
and Yap
331
A - Table 1. continued...
Policy measures
Before reform
After reform
Date
The Central Bank declared a policy that it shall refrain from sustaining weak banks,exceptintimesofgeneral financial emergency or when sp_:ific banks face problems of liquidity rather than solvency.
May 1989
Included contingent lJabiliti_ in determining lending limits to a single borrower or group of affiliated borrowers.
Jurm1993
Insider-borrower shall waive the s_crecy of tl'mirdeposits for examination purposes, Increased the minimum capital requirements for banks, Increased th_ minimum capital requirements for banks,
l_posits of insiderborrowers were proud by the S_crecy of Bank l_posits Law.
V, Foreign Exchange Markets 1.Foz,eign exchange trading
On-floor
Off-floor through an electronic screenedbased network for sharing information and undertaking transactions.
D_-_mher 1992
2, Export receipts
Mandatory surrendm" of foreign exchange receipts,
Foreign exchange earners may retain 100%of total receipts and can u_ them freely without prior Central Bank authorization,
,_pt_mber 1992
3. Foreign exchange purchases
Limits on foreign exchange purches_a such as travel, educational expen_sretc,
No limit.
September 1992
4. Repatriation and remittances of inv_tments
Staggered from 3 to 9 years subject to Central Bank approval,
Full and immediate repatriation without Central Bank approval for foreign investments duty registered with th_ Central Bank or custodian bank.
September 1992
5. Outward investment by residents
Not allowed.
Allowed initially up to US$1Mr but lately increased to US$6M.
1992 - 1994
6. Access to domestic FCDU loans.
None.
Direct exporters allowed access.
September 1992
Indirect exporters allowed access
}'uly1994
Source:MarioLamberte.1995.Recentfinancialstructurereformand macroeconomicmanagement in the Philippines. Paper presented at the Conference on Financial Reform in Asian Countries,3-4 February,Kyoto, Japan.
332
Economic crisis... Once more References
Bangko Sentral ng Pilipinas. 1998. The Philippines: onward to recovery. Bangko Sentral ng Pilipinas. David, Cristina C. 1998.Towards an efficient path to food security: the Philippine case. PIDS Discussion Paper Series No. 98-39. Makati City: Philippine Institute for Development Studies. Harrigan, F. 1996. Saving transitions in Southeast Asia. EDRC Report Series No. 64, Asian Development Bank. Lamberte, Mario B. 1995. Managing surges in capital flows: the Philippine case. Journal of Philippine Development XXII, 1. Makati City: Philippine Institute for Development Studies. Leung, S.E. 1996.Capital flows, monetary policy and exchange rates in the Asian region. Manuscript. Australian National University. Llanto, Gilberto M., Aniceto C. Orbeta, Jr., Ma. Teresa C. Sanchez, and Marie Christine G. Tang. 1998. A study of housing subsidies in the Philippines. PIDS Discussion Paper Series No. 98-42. Makati City: Philippine Institute for Development Studies. Manasan, Rosario G. 1998. Fiscal adjustment in the context of growth and equity, 1986-1996. PIDS Discussion Paper Series No. 98-11. Makati City: Philippine Institute for Development Studies. Medalla, Erlinda M. 1998. Trade and industrial policy. PIDS Discussion Paper Series No. 98-05. Makati City: Philippine Institute for Development Studies. MedaUa, Erlinda M., G.R. Tecson, R.M. Bautista, J.H. Power and Associates. 1995. Catching up with Asia's tigers. Makati: Philippine Institute for Development Studies. Medalla, Erlinda M. 1998. Trade and industrial policy beyond 2000: an assessment of the Philippine economy. PIDS Discussion Paper Series No. 98-05. Makati City: Philippine Institute for Development Studies. Sachs, Jeffrey, Richard Goldman, Nilgun Gokjur, Steven Radelet, Vijaya Ramachandran, Eli Remolona, Donald Snodgrass, and Jeffrey Vincent. 1998. Promotion of broad-based economic growth in the Philippines. Philippines: National Economic and Development Authority/Harvard Institute for International Development/United Nations Development Programme. Serafica, Ramonette B. 1998. Beyond 2000:I an assessment of infrastructure policies. PIDS Discussion Paper Series No. 98-07. Makati City: Philippine Institute for Development Studies.
Chapter 9: Lamberte and Yap
333
Virtucio, Felizardo K., Jr. 1998. Social implications of the Asian financial crisis: the Philippine case. Paper presented at the Regional Conference on the Social Implications of the Asian Financial Crisis held at Seoul, Korea on 29-31 July 1998. Yap, Josef T. 1998. Beyond 2000: assessment of economic performance and an agenda for sustainable growth. PIDS Discussion Paper Series No. 9828. Makati City: Philippine Institute for Development Studies. Yap, Josef T. 1999. Developing an early warning system for BOP and financial crises: the case of the Philippines. PIDS Discussion Paper Series No. 98-40. Makati City: Philippine Institute for Development Studies.
10 Social Safety Net Programs in the Philippines Ma. Melanie
R.S. Milo
net is a broad term that encompasses
all informal,
family-based
arrangements (or private safety nets), and all social security programs and poverty-targeted interventions (or social safety nets). It includes all cash and in-kind transfers. Social safety nets, in turn, can be defined as those instruments that are specifically aimed at mitigating potential adverse effects of reform measures on the poor (Chu and Gupta 1998). In the Philippines, measures to ease transitional problems during stabilization and structural reform, and to protect the well-being of the poor focused primarily on three types of safety net programs: â&#x20AC;˘food subsidies, public employment programs, and credit-based livelihood programs (Subbarao et al. 1996). The following sections discuss some of the specific measures that the Philippine government implemented under these programs Asian crisis on the poor.
to alleviate
the social impact of the East
Food subsidy programs The National Food Authority (NFA) launched the Enhanced Retail Access for the Poor Sari-SarfStore 1 (ERAP-SSS), Palengke ng Bayar_ (ERAP-PB), and â&#x20AC;˘ Rolling Store (ERAP-RS) program to ensure the availability, accessibility, and affordability of basic food commodities such as rice, coffee, sugar, cooking oil, milk, sardines, and noodles in depressed and/or remote areas of the country. Under the ERAP-SSS, the NFA accredited community stores owned and operated either by private individuals, cooperatives, or organizations to sell basic food commodities at subsidized prices. The ERAP-PB is similar to the ERAP-SSS, except that the former covers stores located in wet markets. The i I.e., _mall community store. I.e., community wet market.
336
Economic
ERAP-RS
stores
the number incidence outreach.
are owned
operated
by the NFA using vans.
of ERAP stores all over the country
Of the estimated
as of July 1999, around
1. Number
Region
Total
4.7 million
70 percent
and distribution
more
Table 1 gives
to give an idea of the stores' Region (NCR) or Metro Manila
total customers
were
Once
as of July 1999. The 1997 poverty
and 1995 population are also shown The bias in favor of the National Capital
is evident.
Table
and
crisis...
served
by the ERAP-RS
from Metro Manila.
of ER_Pi
stores
as of July 1999.
ERAP-SSS
ERAP-PB
ERAP!RS
1997 poverty incidence (%)
Unemploymenl rate (Oct. 1998)
3,219
683
410
37.5
9.6
12.9
19.3
9.6
15.1
By region
Percent distribution
NCR
10.8
CAR
5.3
2,3
2.4
49.4
8.9
I
7.1
14.6
4.9
44,7
8.2
II
6.2
7.5
3.4
38.0
4.1
IiI
15.0
9.1
10.$
20.1
11.9
IV
10.5
10.7
12.4
30.0
9.4
V
8.8
7.2
5.4
57.5
9.4
VI
2.7
0.7
3.9
48.2
8.0
VII
6,4
11.9
7.6
39.5
11.2
VIII
6.6
5.7
6.!
49.0
7.8
IX
4.1
4.4
3.7
45.5
7.1
X
7.4
2.3
5.4
53.2
6.8
XI
4.6
5.1
6.3
44.6
8.7
XII
2.9
5.3
5.9
55.4
6.6
ARMM
1.6
0.3
2,9
63.8
4.8
b
Sources: National Food Authority, National Statistic_ Office, National Statistical Coordination Board,
The government January
1998,
both
weather
patterns.
also implemented in response
The program's
a rice subsidy
to the financial primary
and quality rice to the subsistence threshold. The program specifically
crisis,
objective
program as well
beginning
was to provide
poor those families targeted identified
in
as the adverse affordable
living below the food Comprehensive and
Chapter 10: Milo
337
Integrated Delivery of Social Services (CIDSS) areas 3 that were also highly vulnerable to adverse weather patterns. Beneficiaries were given rice discount cards which they used to purchase rice at stores identified as rice retailers for the program. Cardswere nontransferable and could only be used by immediate family members. The amount of the subsidy was P2.50 per kilo regardless of the variation in the prevailing price of rice. Furthermore, a special action program for displaced sugar workers was instituted in the form of an emergency loan package of P100 million. Sugar workers were also given rice subsidies and other benefits. More than 15,000 sacks of rice worth around P10 million were distributed to almost 77,000 sugar workers and their families from August to November 1998 (Reyes et, al 1999). While it is still too early to assess the impact of the food subsidy programs, the NFA's past performance may prove instructive. In particular, the NFA's past food subsidy programs were found to have had little impact on the poor's consumption and nutrition, and the low impact was achieved at a high cost. Furthermore, the poorest income groups and regions did not receive their share of benefits from the NFA's past food subsidy programs. This was due to substantial leakages as a result of poor targeting. Thus, it had been recommended then that the NFA eliminate consumer subsidy without adversely affecting the poor's nutritional status. The resources saved by doing so could then be used for a better-targeted in-kind transfer program such as a food stamp or nutrition program (Subbarao et al. 1996). Public employment programs The Rural Works Program under the Department of Labor and Employment (DOLE) was established to fund various small infrastructure projects. These projects aimed to generate employment in selected depressed, rural communities, particularly those affected by company closures and retrenchments, and adverse weather conditions. Regions in Mindanao (Region IX-Caraga) were initially targeted because of the severe drought in those areas. The program was eventually expanded to cover the Luzon (CAR, Regions I-IV) and Visayas regions (Regions V-VIII) as well. As of the first quarter of 1999, more than P20 million of project funds had been released, which benefited more than 4,800 displaced workers (Table2). The Rural Works Program was part of the DOLE's Comprehensive Program for Displaced Workers. Under this program, DOLE was also tasked to monitor trends in firm closures and lay-offs, assist in job loss prevention, and provide training and placement assistance for displaced workers. Thus, DOLE, through its regional offices and the National Conciliation and Mediation Board, 3That is, the barangays in the two lowest classes municipalities that were the targeted beneficiaries of the Flagship Program on Comprehensive and Integrated Delivery of Social Services (CIDSS).
338
Economic
crisis... Once more
Table 2. DOLE's rural works program as of I st quarter 1999. Region
Project cost (million P)
1. Project ,fund released
Workers benefited (no.)
vs,
Workers perrnanenfly laid off in 1998 (no.)
20.4
CAR
4,0
322
483
Region I
1.4
351
543
Region III
1.0
223
8,390
Region IX
1.0
782
277
Region X
0.6
263
1,647
Region XI
0.8
682
3,439
Region XII
5.6
665
399
Caraga
5.9
1,549
1,032
Region II
0.6
111
356
Region IV
2.7
289
7,816
Region V
1.5
i na
849
Region VI
7,2
1562
3,242
Region VII
1.8
239
7,062
Region VIII
1.0
na
290
2. Project for evaluation/ approval/implernentation
na = data not available. Source:
" .
Bureau of Labor and Employment
Statistics.
conducted dialogues with distressed companies to avert or minimize job losses. In cases where firm closure was inevitable, assistance was given to facilitate the release of separation pays and to help displaced workers avail of loans that were made available especially for them. DOLE also established a registry of displaced workers for employment assistance. Finally, the Technical Education and Skills Development Authority (TESDA)i provided various training courses. Table 3 gives a summary of the number of !workers that benefited from these various schemes across regions. In April 1999, a clean-up to provide immediate casual
drive, the Linis Bayan program, was launched employment, and at the same time address
environmental concerns. Although the clean-up drive was a government initiative, private businesses were encouraged to participate by hiring casual workers at the minimum wage rate to be assigned to the program.
c_
°.
Table
3. Workers
benefited
T_pe of assistance
by DOLE's
U
for Displaced
All
NCR
UI
IV
8,984 4,285
4_580 1.871
126_ 442
1,830 1,249
5
separation
4,699
2,709
826
581
5
18, 98l
°,,053
373
1.008
3,569
183
68
449
322
361
223
1,800
250
Z Employment Registration
t
Program
1, Job loss prevention Job saved Fa cili_f_o_ o f pay
CAR
Comprehensive
V
VI
Workers,
VII
Vm
923 fi84
1998" IX
X
86 40
36
).I 26
XII
Cam_
O
Z_2
0
239
0
46
35
26
0
232
5,841
585
189
12
552
380
1,071
2,770
1. 707
306
52
97
87
15
739
1,573
263
682
665
1,549
1,404
3,364
assistanc_
Job placem_t 3. Rural works program
4,837
410
71Y2
(as of 1a quarter) g TESDA
_ail_hlg _
1_r'_9
5. (_hers Special
action program
/or sugar workers issuance ot veaificalien ce:_ifiostion
for
emergency
[oarks
Fokal dizx.ct assistance total no. of permanent
2,308
34,177
_ lay-oOs
28,580
90
21,247
4,763
390
1,800
79,308
43,480
483
raO
1,058
5,108
356
286
2046
1,830
5
8,390
7,816
849
52 3,242
94
11
1,020
1,058
868
385
7,062
290
277
1,647
7_ 3,439
399
1,0132
"Except for the Rural Works Program; _No reg/ona] breakdown; ¢Computed as the sum of (1)-(4), plus Special action program for sugar workers. Source: Bureau of Labor and Employment Statislics.
ba k.a xO
340
Economic
crisis... Once more
Public works programs can serve as an employer of last resort to the poor, address the problem of seasonal unemployment, create assets for the poor (such as schools), or provide disaster relief. In particular, public works programs can play a major role in shifting the demand for labor and developing the infrastructure base in rural areas where most of the poor live. The Rural Works Program, in that sense, was a step in the right direction. But, as in the food subsidy programs, the concept of targeting is crucial. If programs are targeted to the poor, employment should be restricted with poverty targeting indicators, means-tests, or self-targeting measures such as low wages (Subbarao et al. 1996). Thus, the government's current use of geographical targeting in allocating funds may not be enough to achieve the objective of generating employment for the poor. Credit-based
livelihood
programs
Of the government's three main forms of social safety nets, probably the most developed and extensive were its credit-based livelihood programs. One of the flagship programs of the Social Reform Agenda was the expansion of credit to the poor. The implementing agency was the People's Credit and Finance Corporation (PCFC), a government nonbank financial institution. The PCFC was established in February 1995. It was mandated to be the lead institution in the wholesale delivery of microcredit funds to nongovernment organizations (NGOs), people's organizations (POs), and rural banks for relending to the poor or marginalized sectors. It is wholly capitalized by the National Livelihood Support Fund (NLSF), which was another entity established earlier to finance credit*based livelihood programs Under the supervision of the Land Bank of the Philippines (LBP) and the Department of Finance. Accredited conduits or partners of the PCFC may obtain funds through its two credit programs--the Helping Individuals Reach their Aspirations through Microcredit (HIRAM) Lending PrOgram, and the Asian Development Bank-International Fund for Agricultural Development Rural Microenterprise Finance Project (ADB-IFAD/RMFP). The HIRAM program was initially funded at P100 million in 1996 by the NLSF. The NLSF also turned over to the pCFC a loan portfolio of 63 active program partners worth around P103 milllon in 1995. For NGOs and POs to become eligible conduits, they needed to l_ave a minimum track record of 3 years; a working
capital of at least P250,000; at least 500 clients; past due rate of
not more than 20 percent on its lending operations; and no loan arrears with other lending institutions. Eligible financial institutions, on the other hand, should have capital to risk assets ratio of 10 percent; past due rate of not more than 20 percent on loans; no legal reserve deficiencies application; and at least 500 clients.
for the year preceding
its
Chapter 10:Milo
341
The RMFP, on the other hand, is funded by a US$34.7 million loan from the ADB and the IFAD, which was contracted by the government through the LBP.The loan was specifically intended for the replication of the Grameen Bank Approach (GBA) in the Philippines. It has a maturity of 40 years, although PCFC was given 20 years to repay the LBP following a grace period of 6 years from 1997. The loan from the LBP consisted of P1.2billion for investment credit and P22.56 million for institutional credit, at lending rates of 5.25 percent and 1 percent, respectively. Eligible partners under this program must be experienced in the implementation of the GBA or other social lending schemes, in operation for at least 2 years, and with financial resources of at least P500,000 and a minimum net worth of P250,000. Both programs offer investment and institutional credits. The former is used for relending to target borrowers, whereas the latter can be used by conduits to finance start-up costs, training of staff, and preparation/training of target borrowers. Lending rates are currently at 12percent and 3 percent, respectively. Pass-on rates to end-users, on the other hand, range from 14 to 30 percent, depending on the conduit's spread. There is no ceiling on the amount that conduits can borrow under HIRAM, but there is a ceiling of P3.5 million per annum per branch under the RMFP. For end-borrowers, on the other hand, maximum loanable amounts are P25,000 and P14,000 under HIRAM and RMFP, respectively. Table 4 shows PCFC's total number of active Conduits and end-clients served as of April 1999, whereas Table 5 presents its cumulative lending under its two credit lines over the period 1997-April 1999. The PFCF has disbursed a considerable amount for lending to the poor since it began to operate--over P1.18 billion, which benefited a total of almost 120,000 borrowers. There has also been a rapid increase in the number of active conduits of PCFC. Most of the conduits, however, were located in Luzon but outside of Metro Manila. This was because PCFC is based in Metro Manila and has no regional offices. In terms of performance, the PCFC's HIRAM program was found to be effective in reaching its target borrowers, whereas its RMFP program had a low outreach capability. In terms of cost recovery, however, both programs failed to fully recoup their full costs of implementation (Larnberte et al. 1998). PCFC's reported collection rate was a high 98.5 percent. PCFC is not the only government agency involved in lending to the poor, or directed credif programs in general. When the Asian crisis broke out, there were 86 directed credit programs operating in the Philippines, which were being administered by different departments/line agencies, government financial institutions (GFIs), government-owned and controlled corporations (GOCCs),
342 Table 4.
Economic PCFC's cumulative served, 1997-99.
number
of active
conduits
crisis... Once more and end-clients
1997
1998
April 1999
16 10 10 1 58
20 28 20 18 1 87
18 37 30 20 2 107
5 3 7 0 15
9 9 9 14 41
70,175 1,550
99,921 19,649
Active conduits HIRAM NGOs Rural banks Cooperatives Cooperative banks Thrift banks Total
21
RMFP NGOs Rural banks Cooperatives Cooperative banks Total Clients served (no.) HIRAM RMFP
39,962 0
Source:People's Credit and FinanceCorporation. and nonbank financial institutions (NBFIs).* These programs are directed toward specific sectors, such as agriculture and rural sector, low income and poor communities, disadvantaged groups, and small and medium enterprises. They are primarily funded by government budgetary allocations, special funds, and official development assistance from bilateral and multilateral donor organizations through grants or loans. The basic rationale for these programs is that the target sectors have inadequate access to formal credit sources, which in turn impairs their capacity to generate employment and income. Many of these programs, however, do not just provide credit but also include technical assistance in the form of institution and skill building and support services, especially those that are being administered by various government departments such as the Departments of Agriculture, Trade and Industry, Labor and-Employment, and Social Welfare and Development.
Credit-baSed
livelihood programs, for instance,
were introduced to expand self-employment opportunities for the poor. The provision of subsidized credit, training, and other services to promote self4Lainberte et al. (1997,1998)present a comprehensive review and assessment of these directed credit programs.
Chapter 10: Milo Table 5. r_r|,
â&#x20AC;˘ Rm
343
PCFC's cumulative approved 99 (In thousand pesos).
credit lines and loan releases,
1997-
t
Cumulativeamount
Cumulativeamountreleased
approved HII_M
RIVlFP
HIRAM
RMFP
Investment credit 1997
388,600a
0
345,299a
0
1998
527,450
117,500
732,026
8,500
April 1999
681,650
327,800
1,039,491
108,147
1997
32,782_
0
19,197
0
1998
35,902
18,595
22,816
0
April 1999
49,587
40,252
25,155
Institutional credit
. 8,624
Amounts included loans that PCFCabsorbed from the NLSFin 1996. Source:People'sCredit and FinanceCorporation.
employment was thought to be the answer to the Philippines' slow economic growth and labor absorption. In fact, livelihood programs became the cornerstone of the Aquino and Ramos governments ' poverty alleviation schemes, with many of these programs conceived after 1986. Of the existing programs, at least 13 directly target the poor and disadvantaged sectors, while around 24 directly target the agriculture and rural sector. In general, the results of Lamberte et al. (1997, 1998) showed that credit programs administered by government financial institutions, which consist of the LBP and the Development Bank of the Philippines (DBP), were more effective in reaching target borrowers, and efficient in terms of cost recovery, relative to the GOCCs, NBFIs, and nonfinancial government agencies. While the latter agencies generally performed fairly well in terms of outreach, they did so very inefficiently. But sustained inefficiency will ultimately affect a credit program's effectiveness because it will hinder its expansion and sustainability. Credit programs run by the different government departments/line agencies were â&#x20AC;˘found to be even more inefficient. This was attributed to the supplementary nature of such programs, which made performance standard setting and independent assessment difficult. Hence, their emphasis was only on effectiveness. Government departments were also more prone to politicians' interventions. Cost inefficiency of most of the government's directed credit programs had to do with their social preparation component (involving prelending
344
Economic crisis... Once more
activities such as institution and capacify building, and various forms of training), which represented unrecoverable costs for the government. Moreover, since the loans were either interest-free or carried subsidized rates, the programs did not recover operations, administrative, and other costs, making them insufficient and unsustainable, and/or dependent on budget donations and allocations. But it must be pointed out that credit is not welfare, and loans from the government are not dole-outs. Thus, Lamberte et al. (1998) recommended that the management of all the government's directed credit programs be transferred to GFIs, which have clear guidelines and accountability, and are directly supervised by the BSP.This would allow the other government agencies to focus on their primary functions and save on scarce government resources. The PCFC's abolition, notwithstanding its fairly good performance, was also recommended because it only added another administrative layer. A consolidation of the government's directed credit programs is clearly warranted because of the many overlaps. The fungibility of credit also requires strictly targeted interventions. Finally, a reorientation of directed credit programs towards cost recovery, which in turn would help make them viable and sustainable, is justifiable because it is often claimed that the poor's problem is not cost but access to credit. The indirect mode of credit delivery was also found to be more effective. This involves the use of conduits, especially those that are closely connected to end-borrowers, such as community-based and group-lending methods. An earlier study of microfinance institutions (MFIs) in the Philippines (Llanto et al. 1996) also affirmed the effectiveness of the targeting mechanism used by MFIs in identifying poor clients. However, weak institutional capacity, lack of a viable and extensive delivery system, small financial base, and huge investments in training clients hamper most MFIs' attempts to reach more of their target clientele. In the short run, MFIs may be able to expand their present reach, but because they are not viable or sustainable financial institutions, the effort cannot be sustained. Hence, their reliance on financial assistance from the government and donor funds for continued operation. The experience of other countries on MFIs, particularly in Latin America, shows that they need to be financially viable so they can provide credit to an increasing proportion of significantly large numbers of poor people on a sustained basis (Christen et al. 1995). Vihbility can be achieved through an appropriate interest rate policy, administrative efficiency, and volume. Microfinance should not be treated as charity because if it is, then it will lead to many problems, as shown by earlier directed credit programs of the government. In addition to demonstrating the credit Worthiness of its own borrowers, an MFI must likewise demonstrate its own v!ability.
Chap_rlO:Mi_
345
The principal objectives of livelihood programs are to open up credit lines for the poor, which could help them create sustainable livelihoods. Sustainability is critical. The subsidy can be rationalized if a family is permanently lifted out of poverty. On the other hand, the subsidy would amount to atransfer if the benefits are short-lived or if the borrower defaults in payments. Such programs, then, need to be evaluated based on targeting, costs and benefits, and sustainability. Studies, however, have shown that the income and employment effects of livelihood programs are only short term. That is, they provide only temporary financial relief rather than create sustained livelihood (Subbarao et al. 1996). Thus, while such programs may prove useful as shortterm tools, for instance, to alleviate the adverse effects of stabilization and structural adjustment measures, and economic shocks on employment, they cannot be relied upon to permanently address poverty. Therefore, they should not be used as the cornerstone of any poverty alleviation scheme. Furthermore, there may be more efficient ways of effecting the transfer rather than through subsidized credit. Overall, given the issues in managing the various social safety net programs in the Philippines, and the necessity of rendering such programs fiscally sustainable, the focus of public policy should be on redirecting resources and effecting design changes rather than on simply providing additional resources. Furthermore, transfer programs must not be seen as substitutes for basic social services. Even if cash and in-kind transfers are maintained at generous levels, but access to health care and education is eroded, then the poor will not benefit in the long run (Subbarao et al. 1996). Addressing poverty requires that government be pragmatic in its use of scarce resources. In essence, this should entail greater allocation of thenational budget for basic social services such as health and nutrition, education and training, and housing and social welfare, all of which should be efficiently designed to reach the poor. But again, ultimately, the focus should still be on broad-based economic growth to generate and sustain gainful employment and livelihood opportunities for the poor. Other safety nets Safety nets can also be coursed through formal social security arrangements, although the coverage of the latter is often limited to a small portion of the formal sector that is less likely to fall into poverty as a result of periods of unemployment, sickness, or accidents. As such, they cannot protect broad groups of the population from the effects of economic shocks. Nevertheless, existing social security arrangements can be a useful component of future social safety net programs. Also, as a country becomes more developed, social security programs can have a substantial impact in preventing or lessening poverty among particular groups, for example, the elderly. As per capita GDP
346
Economic
crisis... Once more
increases, attempts should be made to broaden the coverage of social security programs to include; for instance, workers employed by small firms and the self-employed, such as farmers and fisherfolk. Over time, retirement, survivors, and disability protection also need to be extended to lower income workers. And if phased in slowly and with financial caution, health insurance could also help to protect the poor, who are least able to self-insure against illness (World Bank 1996). There are two primary social security programs operating in the Philippines--_e Government Service Insurance System (GSIS) and the Social Security System (SSS). These provide payments for old age, disability, death, worker's injury, sickness, medical care, and maternity for public and private employees, respectively. About 60 percent of workers in the formal sector of the economy and all government workers are members. There is, however, a wide discrepancy between membership figures and the number of actual contributors, particularly for the SSS. In 1997, the SSS had almost 19.08 million members, of which only around 6.26 million were paying members. As a response to the employment and income effects of the Asian crisis, the SSS implemented an emergency loan program for displaced workers in March 1998. The maximum loan amount per displaced worker was P12,500. The interest rate charged on the emergency loan was 6 percent, deductible in advance. The loan had a 12-month grace period and was payable in 2 years. At the end of 1998, the SSS granted a total of 17,379 emergency loans, which amounted to around P188.7 million. This amount, however, represented only around 3.5 percent of the total loans granted by SSS for 1998, which reached almost P5.4 billion. DOLE's assistance in certifying that a worker had been terminated or had suffered income losses due to job rotation Or reduced working hours was crucial in facilitating the release of emergency loans. Most of the recipients, however, came from Metro Manila. Despite the existence of various social safety nets, they are still considered highly inadequate. Thus, private safety nets, particularly family-based arrangements, have historically been the most important in helping Philippine households cope with financial difficulties.: This was again evident during the 1997 crisis. For instance, in the 1998 APIS, more than 18 percent of families belonging to the lowest 40 percent income brackets reported receiving assistance from relatives or friends to help them cope with the crisis, in contrast, only around half of that number received assistance from the government. In particular, remittances from abroad and domestic private transfers have been crucial in augmenting household incomes in the Philippines. Furthermore, most overseas remittances went to upper income households, whereas domestic private transfers were more important for poorer households (Subbarao et al. 1996). Reyes et al. (1999) found that househOlds with migrant workers especially
Chapter 10: Milo
347
benefited from their relatives" remittances,
which remained stable in dollar terms
but increased significantly in peso terms because of the depreciation. Credit was also another source of funds for households. This was used primarily for consumption rather than for production. Informal lenders continued to be the predominant source of credit for households, particularly relatives and friends, and moneylenders. On the other hand, the SSS and the GSIS, pawnshops, and cooperatives were among the most common sources of formal credit for households in the Philippines (Reyes et al. 1999). Conclusions Various social safety nets were in place when the crisis broke out, which helped to alleviate its adverse social impact. However, they were generally inadequate both quantitatively and qualitatively. Overall, the main issues in managing the government's various social safety net programs were targeting and efficiency. Thus, the focus of public policy should be on redirecl_g resources and effecting design changes, rather than on simply providing additional resources. But the issue of efficiency in the use of resources pervades in all government programs, and not just in its social safety net programs. The issue has become even more critical as the government's fiscal position worsened as a result of the crisis. In fact, a recent study noted that in addition to the fiscal crunch, some long-identified structural weaknesses in resource allocation have persisted and even worsened (Pineda 1999). The World Bank even estimated the cost of corruption in the Philippines, and placed it at around US$48 billion over the past 20 years. In that sense, the World Bank and the IMF's recent focus on the government's fiscal position was warranted. The lynchpin, however, should not be the level of the fiscal deficit per se, but improved revenue performance and greater efficiency. Ideally, fiscal adjustments toward greater efficiency in using public resources should cut across the different departments and types of expenditures. But if they cannot be done simultaneously, then inefficiencies elsewhere should first be dealt with before inefficiencies in the social safety net and social expenditure programs. Otherwise, the more vulnerable members and sectors of society may be hit from both sides, with the private sector still undergoing a period of adjustment as a result of the crisis. Also, there is a growing body of literature that seeks to characterize and measure the adverse impact of globalization,
particularly
of financial
markets,
on labor and on the
poor (e.g., Diwan 1999, Rodrik 1997, 1998). Thus, the importance of an adequate system of social protection cannot be overly emphasized, especially since the social safety net is quite minor when compared with the financial safety net. Two years after the crisis broke out, President Estrada launched his own antipoverty program, which had an allocation of P2.5 billion. Doubtless some
348
Economic
crisis... Once more
of his pronouncements were overambitious, even unrealistic. For instance, there was the declaration to liberate 10 million Filipinos from poverty, which is around a third of the Filipino poor, over the next 5 years. The program would initially target the 100 poorest families in each of the 1,600 cities and towns. They would then receive integrated and comprehensive services from the government. Around 160,000 households or about 1 million Filipinos were expected to be reached. It was a start, albeit a small one, considering that there were already over 4.5 million poor families prior to the crisis. But the strategy was criticized for being narrowly focused and simplistic. It was also pointed out that its design and implementation were full of leakages. Furthermore, the program did not address the key issues involving poverty in the Philippines. It has been noted that poverty in the Philippines was a "structural" problem. Thus, longer-term solutions must go beyond dole-outs and addressthe key issues.
Chapter 10: Milo
349
References Christen, R.E, E. Rhyne, and R.C. Vogel. 1995. Maximizing
the outreach
of
microenterprise finance. USAID Program and Operations Assessment Report No. 10. Washington, D.C. Chue, K.Y. and S. Gupta. 1998. Social safety nets: issues and recent experiences. Washington, D.C.: international Monetary Fund. Diwan, I. 1999. Labor shares and financial crisis. Paper presented at the Global Development Network Forum, 5-8 December 1999, Bonn. Lamberte, M.B., M.S. Casuga, and D.C. Erfe. 1997. Assessment of the role and performance of government nonfinancial agencies in implementing directed credit programs, Manuscript. Credit Policy Implementation Program Philippines. Lamberte, M.B., M.S. Casuga, and D.C. Erfe. 1998. Assessment of the performance of GFIs and GOCCs/NBFIs in implementing directed credit programs, Manuscript. Credit Policy Implementation Program, Philippines. Llanto, G.M., E. Garcia, and R. Callanta. 1996. An assessment of the capacity and financial performance of microfinance institutions: the Philippine case. Discussion Paper Series No. 99-30. Makati City: Philippine Institute for Development Studies. Pineda, V.S. 1999. Impact of the financial crisis on social services financing and delivery. Discussion Paper Series No. 99-30. Makati City: Philippine Institute for Development Studies. Reyes, C.M., R.G. Manasan, A.C. Orbeta, and G.G. de Guzman. 1999. Social impact of the regional financial crisis in the Philippines. Discussion Paper Series No. 99-14. Makati City: Philippine Institute for Development Studies. Rodrik, D. 1997. Has liberalization gone too far? Washington, D.C.: Institute for International Economics. Rodrik, D. 1998. Capital mobility and labor. Draft report. Washington, Institute for Intemational Economics.
D.C.:
Subbarao, K., A.U. Ahmed, and T. Teklu. 1996. Selected social safety net programs in the Philippines. Discussion Paper Series No. 317. Washington, D.C.: World Bank. World Bank. 1996. A strategy to fight poverty. Philippines. World Bank.
Washington,
D.C.:
Lg_
en
_ll
m
m
_
"0
mm
_
ill
11 Currency Crisis: Where Do We Go from Here? Maz_oB. Lambe_e _
other Asian countries. Indeed, the quickness and magnitude of the havoc he financial fluflu that started in Thailand ineconomies July 1997 quickly spread to inflicted by the virus on emerging Asian are unimaginable. Just a few months before the regional crisis struck, most pundits considered some Asian economies such as Korea,Thailand, Malaysia, Indonesia, Singapore, Taiwan, and the Philippines, good investment havens. Currently, these economies are going down under the weight of massive corporate and banking bankruptcies, causing untold economic, social, and political problems. Even international credit rating agencies failed to comprehend theemerging problems facing East Asian economies and to anticipate the timing of the currency crisis} Their emphasis on traditional country risk indicators, such as debt service payments, fiscal deficit, etc., totally missed the balance sheet problems facing banks and the nonbank corporate sector. Many have pointed out thatthe Asian flu virus already existed longbefore July 1997, but it was just waiting for a sign of weakness in Asian economies to make its move. There were vital signs of the existence of such a virus. More specificaU_ the emerging Asian economies had pegged their currencies to the US dollar either formally or informally. They benefited from this policy in terms of rapid export growth when the US dollar depreciated against the Japanese yen. Growth in corporate earnings attracted huge inflows of foreign capital, which was facilitated by a more liberal policy on capital mobility. But when this situation reversed in 1995, currencies in emerging Asian economies became * The author is grateful to Ms. Ma. Chelo Manlagnit Tolentino for secretarial assistance.
for research assistance
and Mrs. Juanita
1 It would be worthwhile to point out Wyplosz's (1998) observation that past crises often occurred without warning signals and came as a big surprise. Indeed, some observers like Young (1992) predicted a slowdown in Asian economies, but not a crisis.
354
Economic
crisis... Once more
overvalued, making their exports less competitive internationall_ The sharp devaluation of the Chinese yuan in 1994 further aggravated this situation. With imports becoming cheaper and exports becoming less competitive, most emerging Asian economies began to run h_ge current account deficits. Thus, it was just a matter of time for these economies to make the necessary correction for the overvaluation of their currencies. When the correction came, however, it i came in a big way with short-term foreign investors rushing to the door. Devaluations ranged from 36 percent to 76 percent for emerging economies that ran huge current account deficits in 1996 and 1997 (Table 1). Surprisingl_ even the currencies of Singapore and Taiwan, which have been running huge current account surpluses, were dragged down by the sharp devaluations experienced by their neighboring countries, prompting some quarters to howl at currency and stock market speculators.
Table 1. Southeast
Asian current account balances and currency movements. I
Country
Cu.rrent account balance as perce_t of GDP 1996 1.997 â&#x20AC;˘ .|.|
Currency decline Relative to US dollar 7/1/97 - 2/2/98
t
Indonesia
-3.4
-4.5
-76
Malaysia
-6.3
29.9
-39
Philippines Singapore S. Korea Taiwan Thailand
-4.5 15.2 -4,9 4.0 -7.9
_2.9 16.2 -2,7 1.8 -4.2
-36 q6 -43 -17 -49
Source:J.P.Morgan, World Financial Markets,1998fit'st quarter.
In spite Ofthe high interest rates pursued
by these countries,
and backed
by the International Monetary Fund (IMF) bail-out packages, capital still continued to flow out, suggesting that cUrrencies of these countries would remain unstable for quite some time. Krugman (1998a) suggested temporarily imposing currency controls as a way out fox crisis-hit Asian economies. Indeed, Malaysia took this route Ostensibly to isolate itself from currency and stock market speculators, while the rest of crisis-hit Asian economies resisted this temptation. The continued weakness of the Japanese economy and a Chinese yuan devaluation could lead to another round of currency instability in the region before Asian economies can fully recover from the recent currency crisis, making the imPosition
of capital controls
more tempting.
Chapter 11: Lamberte
355
Should the Philippines give way to this temptation? This paper argues that the Philippines does not have to reimpose currency controls, in general, and capital controls, in particular, which it already substantially dismantled in the past few years, to deal with the ongoing economic crisis. Instead, the paper offers some measures to minimize the vulnerability of the economy to a crisis similar to the present one. To put the debate on capital controls on a broader perspective, section reviews issues on the sequencing of economic liberalization.
the next This is
followed by a discussion on forms of controls imposed by two countries on capital flows and the extent of their effectiveness. The fourth section describes economic liberalization measures the Philippines has implemented since the 1980s and existing foreign exchange regulations. The sixth section discusses some indicators that point out the vulnerability of the Philippine economy to a crisis similar to the current regional crisis and recommends some measures so that the economy can better handle concluding statement.
such a crisis. The last section provides
a
Sequencing of liberalization The current currency crisis in Asia is not entirely new. Corbo and de Melo (1985) documented similar problems in the Southern Cone economies of Latin America in the late 1970s and early 1980s. To the surprise of many observers, this problem occurred at a time when the Southern Cone countries were liberalizing their economies to achieve a respectable growth rate. This same condition existed in Asian countries when the currency crisis struck. Unwittingl_
liberalizing the Latin Cone economies facilitated the buildup
of foreign debt, which eventually led to banking panics and massive corporate failures. This had prompted authorities to reintroduce some controls on economic activities to save failing banks and corporations. The dismantling and subsequent reintroduction of some controls to address unanticipated and emerging problems led some analysts to think that apart from instituting appropriate reform measures, proper sequencing of implementation procedures of these reform measures mattered a lot. To maximize gains from reform measures, McKinnon (1991) suggested the following order of economic liberalization: Fiscal control should precede financial liberalization, followed by liberalizing domestic trade and financial markets. Next is liberalizing the current account of the balance of payments (BOP). Liberalizing the capital account of the BOP should be the last stage.
356
Economic
crisis... Once more
As suggested by McKinnon, gradual economic liberalization will eventually lead to full convertibility of the capital account of the BOP. Needless to say, the three elements mentioned abo_e are preconditions to liberalizing capital account. 2 The IMF recognizes the need for _properly sequenced and careful liberalization so that more countries can benefit from access to international capital markets (Fischer 1998). In this regard, the IMF is currently working on an amendment of its charter that will make liberalization of capital movements a purpose of the Fund. Not all, however, subscribe to the order of economic liberalization put forward by McKinnon. As Johnston (1998) pointed out, one view holds that early capital account liberalization can play an important catalytic role in broader economic reforms, and can help overcome entrenched vested interests that otherwise postpone necessary reforms. The close linkage between political and economic power is pretty common in developing countries, weakening political will to implement much-needed reforms. Accordingl)5 an open capital account can exert pressure on authorities to institute reforms. â&#x20AC;˘ Others hold the opposite view. No less than Keynes himself said that "it is widely held that control of capital movements, both inward and outward, should be a permanent feature of the post-War system. "_ Bhagwati added that if one believes in free trade, he / she does not necessarily believe in capital account convertibility. He suggested that countries that have not yet liberalized their capital account should be left alone and should not be enticed by donor agencies to do so. 4 Some economists (e.g., Roubini 1998, Sachs 1998) would rather go for selective capital control. More specificall_ they want some controls to be applied on short-term capital inflows (i.e., short-term loans and portfolio inflows) but not on foreign direct investment (FDI) and long-term loans. This is called the "sand-in-the-wheals" policy targeting short-term capital flows, which are perceived by authorities as volatile and destabilizing. Controls are applied on inflows, not on outflows, of capital. Accordingly, the objective is to prevent the problem from arising, rather than to attempt to clean up afterwards. One way of doing it is to impose a Tobin tax on shore-term capital to make short-term speculation more costly while having little effect on long-term investment. At the other end of the spectrum are economists, like Greenspan and Dornbusch, who go for unfettered out that "free flow of short-term
capital capital
mobility. Greenspan (1998) points facilitates the servicing of direct
2Many authors echoed the same idea. For example, see Wyplosz (1998)and Johnston (1998). s Takenfrom Grenville (1998). 4Takenfrom the IMFEconomicForum on Capital account liberalization: what's the best stance? held on 2 October 1998.
Chapter 11: Lamberte
357
investments as well as the financing of trade. Indeed, it is often difficult to determine whether certain capital flows are direct investments or short term in nature." There are practical problems associated with designing capital controls when short-term capital flows cannot be clearly distinguished from long-term capital flows. The standard BOP table, which classifies capital inflows into various categories, is less useful in distinguishing which capital is short term or long term. For instance, foreign capital invested in short-term time deposits or government securities can actually be rolled over several times. On the other hand, foreign capital invested in long-term instruments can be withdrawn on short notice if there is an active secondary market providing liquidity to those instruments. Controls imposed on the secondary market of such instruments can certainly affect the primary market for long-term securities. Dornbusch (1998) argues for the simultaneous liberalization of both current and capital accounts. He points out that "Since gradualism and sequencing are more likely to be hijacked by political pressures adverse to the best utilization of resources and a persuasive case for gradualism has never been made, full steam ahead is the right answer." He also thinks that the Tobin tax on capital flows will be ineffective in preventing capital outflows, especially if the tax rate is much less than the rate of currency devaluation. Dornbusch points out that "Anyone who contemplates 30 percent depreciation will happily pay 0.1 percent Tobin tax." According to him, the same result would emerge-massive corporate bankruptcies. Capital controls in action There are several types of capital controls imposed by countries. In this regard, Malaysia is chosen because it is the first, and perhaps, the last country in the Asian region, to reimpose controls in response to the regional currency crisis. The other country is Chile because it has a long experience with various forms of capital controls. Also, its recent capital control program has often been cited by many observers as a good example of how to deal with surges in capital inflows, which emerging_economies in Asia experienced a few years before the regional currency crisis struck. When Malaysia started to feel the pain of the Asian regional currency crisis, authorities tried to implement a textbook approach to address the problem; that is, they tightened monetary policy and slashed government expenditures by postponing implementing mega projects. As the economy continued to plunge and the exchange rate remained unstable, Malaysia abandoned its original program and adopted in July 1998 the National Economic Recovery Plan, which relaxed monetary policy and increased fiscal spending. Together with these measures was the imposition of controversial currency controls, which
358
Economic
crisis... Once more
were more sweeping than anticipated. Prime Minister Mahathir justified the currency controls on the grounds that the free market had failed disastrously because of abuses perpetuated byinternational currency speculators. Malaysia's recovery program has two primary objectives: 1. to eliminate speculative flows that had battered the Malaysian ringgit and the stock market for more thana year; and 2. to allow a progressive reduction in interest rates (without the risk of a deterioratition in e exchange rate or capital flight) to encourage increased investment and consumption, and thus a reactivation of the economy. The program includes fixing the exchange rate to 3.8 ringgit per US$1; repatriation by I October of all ringgit held abroad; ending offshore trading in ringgit instruments and domestic credit facilities for overseas banks and stockbrokers; retaining proceeds of the sale of Malaysian securities in the country for a year; payment in foreign currency for imports and exports; and central bank approval for converting the ringgit into foreign currency. It is still too early to assess the impacts of these currency controls on the Malaysian economy. Krugman (1998b), however, quickly cautioned Malaysia that its recently imposed currency controls should only be temporar_ say 3 years or less, to buy space for economic growth and mus_be regarded as an aid to reform, not an alternative. Chile has a much longer experience with capital controls. But unlike earlier capital controls that were aimed at limiting capital flight, the Chilean capital control program aimed to change the composition of capital inflows in favor of long-term capital. Like other emerging economies, Chile was experiencing surges in capital inflows in the 1990s. it imposed capital controls to support its tight monetary policy without necessarily undermining its export competitiveness. Its capital control prograrn has three major components', first, the central bank has engaged in a sterilized intervention in the foreign exchange market to prevent the real exchange rate from appreciating excessively, purchasing dollars in exchange for local currency to maintain the exchange rate within a 12.5 percent band around a doUar-DM-yen reference rate. Second, capital investment was subject to several laws and restrictions specifying minimum entry amounts and the time which must elapse before capital can be repatriated: 째
Decree Law 600 requires f째reign capital to enter Chile through a foreign investment contract with a specified minimum duration, which varies according to the industrial sector concerned. Capital cannot be repatriated until 1 year after entr_ although there are no restrictions on the repatriation of profits.
Chapter
11: Lamberte
359
â&#x20AC;˘
Law 18,657 creates Foreign Capital Investment Funds. Foreign investment in public securities and equities is allowed, subject to a minimum amount of 1 million dollars, which must be invested within I year. Capital invested in these funds cannot be repatriated for a minimum of 5 years. Profit repatriation is not restricted. Third, the central bank has imposed a 1-year reserve requirement of 30 percent on short-term capital inflows. This unremunerated reserve requirement (URR) effectively serves as a tax on short-term inflows, s The government has used other policy instruments to restrict the speculative inflow of capital, including minimum conditions for external bond and equity issues, and reductions in availability and increases in the cost of swap facilities at the central bank. Several studies evaluating the effectiveness of the Chilean capital control program were already made. s Results of these studies generally showed that the effectiveness of the program in reducing short-term capital flows is ambiguous. At best, its effectiveness in changing the composition of capital inflows is very limited and short lived. 7 The private sector eventually found a way of circumventing capital controls and succeeded. Chile imposed the same URRin the 1970s and early 1980s, but unlike in the 1990s it failed to prevent the major banking and currency crisis in 1982. Edwards (1998) attributes the stability Chile has achieved in the 1990s to the much-improved banking regulations after introducing banking reforms in 1986 rather than to capital controls. This was the same point stressed by Dornbusch (1998) in his critique on capital controls. In their study using the general equilibrium model, Reinhart and Smith (1997b) found that for capital control to be effective in reducing capital inflows, tax rate on capital inflows must be punitive. They also found that the benefit of capital inflow taxes is small and tends to vanish very quickly, suggesting that any capital control should only be temporary and must be removed shortly after the shock to the world real interest rate. Chile has started recently to relax its capital controls to encourage more capital inflows.
s Let rbe the urtremunerated reserve requirement, and lithe nominal foreign interest rate, then the effective cost of foreign borrowing to a resident after imposition of the reserve requirement, _+, becomes: ei_ = i I/(1 -r). '_ For a good review of these studies, see IME International Capital Markets: Developments, Prospects, and Key Policy Issues (September 1998). 7 Brazil's capital controls also failed to achieve the objective of limitIng the volume of inflows or changing the composition of capital inflows. In fact, it abolished the 1 percent tax levied on foreigners investing in the stock mm'ket in 1995 in the wake of the Mexican crisis to encourage inflows. Colombia's capital control program failed to reduce net capital inflows but succeeded in changing the composition of inflows (see Reinhart and Smith 1997a).
360 Economic
Economic liberalization
crisis... Once more
in the Philippines
This section discusses the economic reforms implemented by Philippine authorities since the 1980s and existing foreign exchange regulations. Economic
reforms
The Philippines has been affected by the Asian regional crisis, albeit less than its neighboring countries. GDP growth rate for 1998 will likely be flat, which can be mainly attributed to the poor performance of the agriculture sector that was badly hit by E1Nifto and the slowdown of the industrial sector. But the Philippines is no stranger to economic crisis. A BOP crisis, the worst in Philippine history, hit the country in 1983-84. Another one occurred during the 1990 Gulf war. In spite of these crises, Philippine authorities have continued restructuring the economy through a series of reform measures. Although some of these reforms were made under certain adjustment programs supported by multilateral agencies, however, many were unilaterally done by Philippine authorities. These are discussed below. A comprehensive tax reform program aimed at raising more government revenues and, at the same time, addressing equity and efficiency concerns was implemented in 1986. it consisted of the following: (1) a shift from schedular to a more global approach in taxing individual income from compensation, business, trade, and exercising a profession; (2) increase in personal and additional exemptions; (3) separate treatment of income of spouses; (4) increase in final withholding tax rate on interest income and royalties to a uniform rate of 20 percent; (5) phase-out of final withholding tax previously levied on dividends; (6) unification of the earlier dual tax rate levied on corporate income to 35 percent; (7) introduction of value-added tax (VAT) in place of sales/ turnover tax and many other taxes; (8) conversion of unit rates formerly used for excise taxes to ad valorem rates; (9) abolition of export taxes; and (10) further reduction in tariff rates? Between 1990 and 1997, some tax measures were introduced to fine-tune earlier tax measures and also to raise more revenues to support the fiscal adjustment program. In 1997, another round of comprehensive tax reform program was implemented for: (1) widening the tax base; (2) simplifying the tax structure to minimize leakages from undeclared revenues, overstated deductions, and corruption; and (3) making the system more elastic and easier to administer to ensure adequate revenues in the future. Aside from these tax measures, the government program, contributing a substantial
seriously started in 1986 its privatization amount to government revenues.
Because of tax reforms, the tax effort increased from 11 percent in 1986 to 16.3 percent in 1997, which is comparable w_th those of its neighboring countries. As a result, the share of tax revenue in total: government revenues rose from an Taken from Manasan
(1998).
Chapter 11: Lamberte
361
average of 82 percent during 1986-91 to 86 percent during 1992-96. A large chunk of the nontax revenue came from the privatization program. The 1983-84 BOP crisis taught the government a good lesson on fiscal management. Since 1986, fiscal policy was aimed at prudently managing the government fiscal position to support strong economic recovery and sustainable growth. By 1994, the national government achieved its objective of running a budget surplus (Table 2). In 1996, the consolidated public sector account recorded a surplus for the first time in two decades. The deregulation of the domestic economy started in the mid-1980s. Price ceilings on all basic commodities, except oil products, were removed. More recently, the oil industry was deregulated. The highly protected sectors of the economy, such as telecommunication, transport (air, water, and land), and energ_ were opened up in the early 1990s. The build-operate-transfer (BOT) scheme was introduced to allow greater private sector participation in financing and implementation of government projects. The Foreign Investment Act was passed in 1991, liberalizing entry of foreign investors within the provisions of the Philippine Constitution. As a general rule, there are no restrictions on the extent of ownership of export enterprises (defined as those exporting at least 60% of their output). As for enterprises oriented to the domestic market, foreigners are allowed to invest as much as 100 percent, unless the participation is prohibited or limited to a smaller percentage by existing laws and/or the provisions of the Foreign Investment Act. All these measures have significantly improved the efficiency of the domestic economy as can be seen from the variety and favorable prices of goods and services being offered by players in each industry. The 1983-84 BOP crisis revealed weaknesses in the banking system, eventually resulting in weeding out of weak and poorly managed banks. Since then, the financial sector has undergone a massive restructuring (Table 3). Starting in November 1985, banks have been weaned away from the cheap rediscounting window of the central bank so that they could be motivated to mobilize funds. Authorities sought to enhance competition in the financial system by decontrolling interest rates, lifting the moratorium on opening new commercial banks, and by substantially relaxing rules on branching. Government-owned bank participation in credit markets was reoriented towards supplementing the private banking system's initiatives rather than supplanting them. This was done by having the government financial institutions concentrate on wholesale lending rather than on retail lending and using private banks as credit conduits. The latest reform measure in the financial sector was the liberalization of the entry and scope of operations of foreign banks. The law encourages foreign banks not only to go into wholesale banking but also to engage in retail banking
h_a No
Table 2. Consolidated
Percent
public
sector financial
(In percent
of GNP).
1986
1987
1988
1989
199(}
1991
1992
1993
-5.9
-6,6
-1,8
-3.1
-3.8
4.7
-2.0
-1.9
-1.7
-3,0
4.3
-1,3
-1,9
-2.7
4,1
-1,3
-1,5
-2.2
-5.2
-2.5
-2.9
-2.1
-3.4
-2.1
-1.2
-1.4
-1.1
0.0
0.4
-0.3 -0.9
-1.8 49.1
-0.6 0,8
0.6
1,8 0.3
1.5 -0.3
0.8 -0.2
0.5 0.1
0.5 0.7
-3.0
-2.3
-0.5
-1,2
-1.1
1.0 -2.7 -3.3 0,1
0,1 -3,1 -2-1 0.1
0.8 -1.6 0.1 0,i
0.6 -2.1 0,2 0.I
0,8 -2.3 0.3 0,2
1994
1995
1996
199P
_5
-0.1
0.2
-0,9
-3,7
4],4=
-0,8
-0,6
-1.6
-0.8 0.4
-1.5 -I,0 -1.7 49.5
0.9 -1.4= 4).6 0.I
0.6 -1-.0 -0.1 -0.5.
0.3 43.6 -0.5 0.2
0.1 -1.8 -0.7 0.0
0.5 0.0
0,2 -0.1
0.8 0.2
0.4
0.I
0.I
. 0.1
-0,6
-0.7
_.4
2.0
0.0
0.7
0.8
0,7
1,0 -2.0 0.3 0,2
{).6 -1.7 0.2 0.i
0,6 -1.6 0.3 0.1
0.8 -0.1 0.4 0.4
-0.7 0.3 0.2 0.3
{),0 0,2 (}.3 03
{),4 -0,1 (}.4 0.2
{).2 0.1 0.2 0.2
0.2 0.O
-0.1 0.0
03 0.0
to GNP
Consolidated
public
sector surplus/(deficit)
Public sector borrowing
requirement
National government CB restructuring Monitored GOCCs OPSP Adjustment of net lending Other adj'ustments Otherpublic
and equity to GOCCs
sector
SSS/GSIS BSP GYIs LGUs Timing adjustments Other adjustmen_
of interest
Consolidated
sector primary
Source:
position
1985
public
Department
payments
to BSP 1.9
of Finance.
surplus/(deficit)
-2.8
2.5
-1,5
0.i
0.0
-0.1
5.1
3.9
3.0
(}.0
0.0
0.2
0.5 0,0
-0.1 0.0
2.5
4.6
4.5
4.3
4.8
4.3
4.1
_Yl ,,_
c_
_. _)
Chapter 11: Lamberte
363
to provide more competition with local banks. As of December 1997, there were 20 domestic universal banks, 16 ordinary domestic commercial banks, 1 branch of a foreign bank with a universal bank license, 13 branches of foreign banks, 4 subsidiaries of foreign banks, 117 thrift banks, 832 rural banks, 12 nonbank financial institutions with quasi-banking licenses, and 6,935 nonbank financial institutions without quasi-banking functions. The Central Bank introduced some measures to strengthen prudential regulations. These included, among others, improvements in bank reporting requirements and specific guidelines for asset valuation and loan loss provisions to tighten, standardize, and apply criteria uniformly to all banks; regularly reviewing and increasing the minimum capital requirement; and several measures to curb insider abuse. The process of deregulating the foreign exchange market started in mid1991 and has continued to the present. In some cases, the Central Bank phased in the relaxation of some rules to test the reaction of the market. In other cases, it was done immediately;
A very important measure
done by the Central Bank
was to lift the prohibition on off-floor trading. The creation of the Philippine Dealing System, which started operating in April 1992, was the response of the Bankers Association of the Philippines (BAP) to the lifting of the ban on offfloor trading. The creation of a new central bank, i.e., the Bangko Sentral ng Pilipinas (BSP), is a major institutional measure initiated by the government in 1993. It addresses two closely related issues: independence of the central bank and absorption by the national government of loss-inducing liabilities of the old central bank incurred in the early 1980s. This reform was facilitated by two factors. One was in response to the excessive use by the Executive Branch of the central bank to do quasi-fiscal functions, and the other was the growing sentiment in other parts of the world to make central banks a trulyindependent entity. Trade liberalization in the Philippines was done over a long period? The first phase of the tariff reform program, which was implemented during 198185, reduced all tariff ranges within 50 percent from highs of 100 percent. This was followed by an import liberalization program implemented during 198688, which brought down the percentage of import-restricted items to less than 10 percent. Another round of tariff reform program was implemented during 1991-95, which narrowed the tariff range to mostly within 30 percent. The last and ongoing tariff reform program, which commenced in 1996, aims at further narrowing down the tariff range to within 3 and 10 percent (excluding some agricultural products) by 2000. The Philippines uniform 5 percent tariff by 2004. 9Basedon Medalla (1998).
is committed
to implement
a
364
Table
Economic
3. Financial
sector
reform
in the Philippines,
crisis...
Once
more
1986-94. L
Policy measures
Before reform
After reform
Date
I, Selective credit control
1, Central Bank rediscount window
Rediscount rate: varies by
Uniform floating re_e for all; no
type of economic activities (allowable spread: ld1%)
p_rlbed
November 1985
Rediscount value: varies by type of economic activities
Uniform: 80%
November 19B._
Directly managed special
C.entral Bank-managed special credit
1987-1988
credit programs
programs transferred to government Financial institutions
New commercial banks -
b/taw commercial banks - moratorium
moratorium since 1980; Other hanks - no
lifted
spread,
(value: 60-100%)
2. Central Bank special credit programs
II, Bank competition
1. Bank entry
1989
moratorium.
Foreign hanks - no entry
Ten foreign banks allowed to have 6
since 1949.
branches each; foreign banks may
1994
acquire or establisha bank up to 60% of the total equity of eachbank,
2. Branching
Restrictive branching policy
Branching was liberalized but the
-the country was divided
Central Bank retained discretionary
into five service areas: heavily overbronched areas;
power on the opening of branches in certain areas considered "overbanked."
May 1989
overbranched areas; ideally
3, Government banks
branched areas; underbranched areas; and
B_nks may open branches anywhere they like provided they meet the
encouraged branching ames.
_tulmd
Largely doing retail lending that directly competes wlth private banks
May 1993
minimum capital mqoirereent.
i Mbre focus on wholesale lending using private banks as conduits.
Since 1987
4, Interest rates a, Deposit rates
No cap since 1981
b, l._nding rates
No cap since 1983
Private banks Special credit programs
r
Cap on end-user rate
,
same N Ocap on end-user i
i
1987
Chapter 11:Larnberte
365
Table 3. continued... Polic_ measures
Before rdonn
After reform
Date
IIL Prudential measures IV, Foreign exchange markets On-floor 1. Foreign exchange trading
Off-floor through an electronic
Deomnber 1992
_ereened-based network for _ha ring information and undertaking transactions.
2. Export receipts Mandatory surrender of forei_ exchange receipts.
Foreign exchange camera may _'_in 100% of total receipts and can use them
September 1992
freely without prior Central Bank authorization. 3. Foreign exchange purchases Limits on foreign exchange
NO limit.
September 1992
Fulland immediaterepatriation
September 1992
purchases such as travel, educational expenses, etc.
4.Repatriation and remittances Staggered from3-9years of L_vesIvnents
5,Outwardh'tvestment by
subject to Central Bank
without Central Bank apprOval for
approval,
forelgn investn'tents duly registered withtheCentraIBank orcustodian bank.
Not allowed.
AllowedinRially up toUS$1M, but
residents
6,Accasstodomestic PCDU loans No access.
Source:
1992-94
lately increased toUS$6M.
Direct exporters allowedaccess,
Sept_'nber 1992
Indirect exporters allowed access
]'uly1994
Mario Lamberte. 1995. Recent financial structure reform in the Philippines. Paper presented at the Conference Countries, 3-4 February, Kyoto, Japan.
and macroeconomic management on Finandal Reform in Asian
After the 1983-84 BOP crisis, Philippine authorities tried to improve its management of external debt with some success. As Table 4 shows, the ratios of debt service burden to export shipments, exports of goods and services, current account receipts, and GNP had been declining during 1986-96. The ratio of foreign exchange liabilities to GNP had also been declining, while the ratio of gross international reserves to debt service burden had been increasing during the same period. Existing foreign exchange regulations in the Plfflippines It may be worthwhile to discuss at this point existing foreign exchange regulations of the Philippines to see where the country is now in the spectrum of capital account convertibilit)_
o_ o_
Table 4. Selected
external
debt ratios (Amount
Item I. Debt service burden Total Principal Interest
in million
US dollars;
ratios in percent).
1986
1987
1988 _
1989
1990 6
1991
1992
1993
1994
1995
1996
1997
3,091 1,117 1,974
3,005 1,092 1,913
3,002 994 2,008
3,139 915 2,224
3,547 1,712 1,835
2,828 1,140 1,688
2,942 1,607 1,335
3,229 1,791 1,438
4,188 2,647 1,541
5,032 2,853 2,179
5,026 2,820 2,206
5,597 3,029 2,568
4,842 8,633 9,078 29,250 28,256 2,459
5,720 9,174 9,749 32,616 28,649 1,959
7,074 10,666 11,444 37,546 27,915 2,059
7,821 12,407 13,239 41,958 27,616 2,375
8,186 13,028 13,745 44,073 28,549 2,048
8,840 14,464 15,292 45,656 29,956 4,526
9,824 17,267 18,093 53,889 30,934 5,338
11,375 18,872 19,618 55,321 34,282 5,922
13,483 24,033 25,074 65,742 37,079 7,122
17,447 31,821 32,968 76,180 37,778 7,762
20,543 39,,549 40,734 87,084 41,875 11745
25,228 48,063 49,733 85,742 45,433 8,768
63.84 35.8 34.05 10.57 96.6
52.53 32.76 30.82 9.21 87.84
42.44 28.15 26.23 8 74.35
40.14 25.3 23.71 7.48 65_82
43.33 27.23 25.81 8.05 64.78
31.99 19.55 18.49 6.19 65.61
29.95 17.04 16.26 5.46 57.4
28.39 17.11 16.46 5.84 61.97
31.06 17.43 16.7 6.37 .56.4
28.84 15.81 15.26 6.61 49_59
24.47 12.71 12.34 5.77 48.09
22.19 1.1.65 1t.25 6.53 52.99
79.55
65.19
68.59
75.66
57.74
160.04
181.44
183.4
1.54.25
233.68
(19513)¢
Export shipments Exports of goods & services Current account receipts Gross national product Foreign exchange liabilities (end-of-period} Gross international reserves (end-of-period) H. Ratios DSB to ex_ort_ments DSB to exports of goods and services DSB to current account receipts DSB to gross national product Foreign exchange liabilities to gross national product Gross international reserves to debt service burden
â&#x20AC;˘Exdudes interest rebate of $33 million. b Based on the revised methodology from 1990 onwards. e Debt service burden represents principal and interest payments Source:
Bangko Sentral
ng Pilipinas.
170.06
156.66 _' __"
after rescheduling, 9
Chapter 11:Lamberte
367
Sale and purchase of forei8_ exchange In general, anybody may sell foreign currency for pesos to a bank without restriction. The purchase of foreign currency from the banking system, however, is subject to certain restrictions and documentation. Residents may purchase foreign exchange from a bank up to $10,0001° or equivalent, without documentary evidence of the underlying transaction over a 15-banking day period. Nonresidents may only buy foreign currency from the banking system equivalent to the amount previously sold by them to a bank. Nonresident individuals departing from the Philippines may convert unspent pesos up to a maximum of U55200 at airports or other ports of exit without proof of previous sale of foreign currency. Pesos may not be taken into or out of the country in an amount exceeding PIO,O00without authorization by the BSP. Trade-related foreign exchange transactions Exporters of goods and services, and overseas Fi_pino workers (OFWs) are given complete freedom in disposing of their foreign exchange earnings. They may deposit their foreign exchange receipts in foreign currency deposit units (FCDUs). Exporters can hedge by selling expected export receipts forward in the foreign exchange market. Banks may sell foreign currency to importers, without prior approval from BSP,for letters of credit, documents against payment, documents against â&#x20AC;˘ acceptance, open account arrangements, and direct remittance. All of these, however, require presentation of documents evidencing the underlying import transaction before foreign currency can be sold by the bank. Loan-related foreign exchange transact_ons In general, loans to enterprises that are serviced using foreign currency purchased from the banking system must have prior BSP approval, except for the following: short-term export advances from buyers abroad; short-term loans to exporters, if these are used to purchase export-related goods from abroad; short-term loans to manufacturers, if these are used to purchase production-related goods from abroad; certain trade-related loans; and loans granted by foreign companies to their local branches. In these cases loans must be registered with BSP even though prior approval is not required. Applications for loan approval must be filed with the BSP at least 15 working days prior to the target completion of negotiations. Loans must be registered with BSP at least 15 working days prior to loan draw down. t
_oThe ceiling was $100,000 before the currency crisis.
368
Economic crisis... Once more
Any Philippine enterprise planning to borrow an amount equivalent to at least US$10 million must advise BSP of their plans at least 6 months prior to negotiations or mandate awards for medium- and long-term loans, and at least I month for short-term loans. The BSP usually grants approval only for foreign currency loans for export- or investment-related projects. Issuance of securities in international capital markets All issues of peso-denominated instruments in international capital markets require prior BSP approval. The transaction should not involve the import or export of Philippine currency, either physically or electronically. Foreign invesOnents Foreign investments need to be registered with BSP if the foreign exchange needed to service the repatriation of capital or the remittance of dividends, profits, and any earnings that accrue, is to be purchased from the banking system. Proof of an actual transfer of assets into the Philippines is needed for the investment to be registered with the BSP. All investments are classified into direct foreign equity investments, foreign investment in government/listed securities, and foreign investment in money market instruments. Repatriation of capital may be made any time upon presentation of appropriate documents. Any proceeds (i.e,, profits, dividends, etc.) from an investment can be immediately repatriated in full. They may, however, be temporarily deposited in a bank prior to repatriation and any interest earned on the deposit can be remitted automatically without further registration. Reinvestments of proceeds of an investment must also be registered with BSP. Outward in vestmen t Philippine residents may purchase up to US$6 million foreign currency per investor per year from the banking system to invest abroad without BSP approval or registration. Whether BSP approval is required or not, every application submitted to a bank to purchase foreign exchange for outward investment must be accompanied by a project feasibility study and a written undertaking to remit and seU for pesos, through the banking system, the dividends and profits earned from the investment. Any dividends or profits must be remitted to the Philippines within 1_ days from receipt and converted into pesos within 3 working days after remittance. Forward foreign exchange All banks wishing to engage in forward exchange dealing must secure authorization from BSP. The BSP has prohibited banks from entering into
Chapter H: Lamberte
369
nondeliverable forwards (NDFs) with nonresidents where the bank sells foreign currency without prior BSP approval. Overbought/oversold foreig_ exchange positl"on of banks The BSP limits the open foreign exchange position of banks. The maximum amount a bank can be overbought in foreign currency against pesos is equal to 5 percent of its capital or U5510 million (whichever is smaller), and the oversold ceiling is equal to 20 percent of its capital. The BSP has changed these ratios several times in the last 5 years to prevent banks from using their dollar resources for speculation. Most recently, it has required banks to consolidate their accounts with subsidiaries and affiliates when computing their net foreign exchange positions. The foreign exchange exposure of the bank must be revalued on a monthly basis. The foreign exchange deregulation allowed the country to attain the Article VIII status of the IME This means that the Philippines has already achieved current account convertibility. The same, however, cannot be said for capital account. Although the capital account of the balance of payments has been substantially liberalized in the last few years, it is still far from being fully convertible. In fact, some of the controls were tightened in response to the crisis. It should be pointed out, however, that the remaining capital controls in place are milder than those recently imposed by Malaysia and Chile. Earlier discussions show that the Philippines has already undertaken wide-ranging policy reforms to restructure the economy in the last 20 years. Economic restructuring, however, is far from being complete and more reforms are expected in the coming years. It is clear though that the implementation of reforms did not show a pattern close to the optimum order of economic liberalization proposed by McKinnon. Although liberalization of the capital â&#x20AC;˘account started much later than liberalization of the current account, it, however, was done much faster than the latter. Should the Philippines impose additional capital controls? It is worthwhile to review briefly some factors that would show the vulnerability of the Philippine economy to a currency crisis and the effects of the huge peso depreciation on corporate debt and bank balance sheets. After a lackluster performance in the 1980s, the Philippine economy showed marked improvements in the 1990s. GDP growth rate had been increasing during 1992-96, peaking at 5.8 percent in 1996. Concomitant with this was the rapid expansion of the business sector. To finance growth, the business sector had been borrowing heavily from the banking system. Thus, the total outstanding loan of the commercial banking system to the business sector rose to 52 percent of GDP in 1996, which was double that of 1993, and
370
Economic
crisis... Once more
which peaked at 58 percent in 1997 (Table 5). There were indications that the proportion of business sector loans denominated in foreign currency had been increasing in the 1990s. For instance, total loans of FCDUs of the banking system rose from 4.4 percent of GDP in 1993 to 13.1 percent in 1996 and peaked at 17.4 percent in 1997 (Table 5). 11 The business sector, particularly the "blue-chip" companies, had also been relying increasingly on foreign loans. Its share in the total foreign exchange liabilities of the country rose from 15.5 percent in 1992 to 21.8 percent in 1996, and increased further to 27.5 percent in 1997 (Table 6). The share of domestic banks in the total foreign exchange liabilities of the country had also been increasing--from 2.6 percent in 1992 to 12 percent and 11.8 percent in 1996 and 1997, respectively. This suggests that the domestic banking system had been actively intermediating foreign loans most probably for less reputable corporations that could not directly access foreign capital. Banks then undertook both maturity and currency transformation, opening up to additional sources of weakness. amotmt
One indicator of vulnerability of the country to a currency run is the of short-term loans and debt-service payments that could be covered
by the gross international
reserves available
at the Bangko Sentral ng Pilipinas.
Foreign creditors may not renew their short-term foreign loans the moment they see a marked deterioration in the domestic economy. Although the outstanding short-term foreign loans remained relatively stable during 199295, it declined when expressed as a percent of total foreign exchange liabilities of the country (Table 7). In 1996 and 1997, however, short-term foreign loans, both in terms of outstanding amount and as a percent of total foreign exchange liabilities of the country, rose markedly. Based on the ratio of debt-service payments plus short-term debt to gross international reserves, the Philippines' vulnerability to a currency run had declined substantially since 1992. The ratios, however, were still high even when compared with those of Thailand. The ratio of M3 to gross international reserves, which also indicates the degree of financial vulnerability of the country as residents may try to obtain foreign currency for their domestic currency holdings during periods of economic instability, has been very high in the 1990s. Meanwhile, net portfolio inflows increased significantly in 1995 and 1996, making the country more vulnerable to a currency run. In fact, it became negative in 1997 as a result of currency instability. Increased reliance on foreign currency-denominated loans and rise in portfolio inflows, particularly in the 2 years immediately preceding the July 1997 currency crisis, could be attributed tO a combination of two factors: the relative stability of the exchange rate especially in 1995; 1996, and the first 6 'I 11These are foreign cun-ency-denominated of banks.
loans fi'om!the foreign currency
deposit
units (FCDUs)
Table 5. Structure of loans of the commercial banking system (In million pesos). 1990
1991
1992
1993
1994
2t5,631.86
230,783.61
278,040.32
376,176.66
483,937.94
42.02
41.63
44.46
48.69
49.57
53.34
4,265,97
4,920.54
8,433.57
9,252.72
8,386.55
1.98
2.13
3.03
2.46
2,992.22
3,323.01
4,317.45
%of total loans
1,39
1.44
4. FCDU loans (US $ Million)
879 20.54
1. Total loar_, net " % of total assets b Z Res_ctured
loans, net
% of total loans 3. ROPOA, net
% of total FCDU assets
1995
1996
678,679.98 1,117,966.31
1997
Apr-98
t,400,081.67
1,378,635.33
58.06
54.58
55.57
5,289.13
13,257.97
14,271.35
t5,624,68
1.73
0.78
1.19
1.02
1.13
7,860.50
8,913.08
8,762.05
10,898.42
18,406.90
23,018.98
1.55
2.09
1.84
1.29
0.97
1.31
1.67
741
1,697.00
2,344.00
3,478.00
5,323.00
10,811.00
10,547.00
9,317.00
16.42
29.36
32.98
35.62
43.17
54.65
46.25
45.82
â&#x20AC;˘ Excluding interb_k loans. _"1994, 1997, and 1998 were based on unadjusted total assets. Source: Baxlgko Senualng Pih'p/m,s. t.,,a "..4
L,o
Table 6. Total foreign
exchange
liabilities:
by borrower
14.67 7.28
Bangko Sentral Commercial banks
2,372
739
1,288 2,010
3_62 5.66
855 3,288
2.21 8.49
1,212 4,240
3.00 10.77
1,415 . 7,217
3.38 1723
2,499 8,165
5-50 17.97
3,275 7,811
7.17 17A1
Goverv, ment banks b Private banks
924 1,448
2.88 4.51
1,489 521
4.19 1.47
2,308 980
5.96 2.53
2,240 2,000
5.69 5.08
1,838 5,379
4.39 12.85
2,187 5,978
4_1 13.16
2,162 5,649
4.73 12.37
603 845
1.88 2.63
422 99
1.19 0.28
376 604
0.97 1.56
259 1,741
0.66 4.42
348 5,031
0_ 3 12_1
609 5,369
1.34 11.82
686 4,963
1-50 10.87
27,381 22,406 22,406
8533 69.82 69_2
4,975
15,50
32,236 26,940 25,293 1,647 5,296
90.72 75.81 71.18 4.63 14.90
34,580 27,721 26,015 1,706 6,059
89.30 71.59 67.18 4.4I 17.71
33,9t5 26,664 25,172 1,492 7,251
86.15 67.73 63_94 3.79 18.42
33,244 24,132 22,943 1,t89 9,112
7939 57.63 54.79 2_4 21.76
34,768 22,271 21,39_ 878 12,497
76-53 49_02 47.09 1.93 27-51
34,575 22,063 21,227 836 12,512
75.72 48.32 46.49 1.83 27.40
1,053 32,089
3.28 100.00
1,097 35,535
3.09 100.00
508 38,723
1.31 100.00
426 39,367
1.08 100.00
421 41,875
1_)1 I00.00
496 45,433
1_9 100.00
498 45,662
1.09 I00.00
a
Foreign banks Domestic banks Public and private Public Public-NGO & others C_ BOL Private of w/c: Red dause Advances / exportadvances Total
1993 3,298
9.28
4,143
uS dollars).
4,709 2,337
Banking system Central Bank
1994
% of total
in million
1992
Item
% of total
(End of period,
% of total
Effective 3 July 1993, accounts o[ old CB were split between Accounts of the Development Bank of the Philippines have Source: Bangko Sentral ng Pilipinas.
1995
% of total
1996
% of total
1997
% of total
March 1998
% of total
10.7
5,452
13.85
8,632
20.6l
10,664
23.47
11,086
24.28
Bangko Sentral been reclassified
ng Pilipinas & Central Bank - Board from public nonbanking to banking
of L/quidators. sector liabil/ties
-_)
_. starting
1996. _
._. O t_ _o
,째
Table7.Debt-service, short-term foreign loans, andnetportfolio inflow(Inmillion US dollars). Year
Short-term (ST)foreign loans Outstanding % of total foreign loans
Debt-service payments
GIR
M3
Exchange rates: P/$ (end-of-period)
(Debt-service + ST foreign loans) G IR
1992 1993 1994 1995 1996 1997
5,256.00 5035.00 5,197.00 5,279.00 7,207.00 8,439.00
16.379 14.169 13.421 13.41 17.211 18.575
2336.00 3,973.00 2,892.00 3,458.00 5,047.00 7,207.00
5,218.14 5,801.47 6,994.62 7,632.62 11,620.04 8,649.63
15354.18 17329.24 24881.65 29051.13 33526.06 26663.58
25.10 27.70 24.42 26.21 26.29 39.98
1.455 1.55_ 1.156 1.145 1.055 1.809
Jurt-98
8,162.00
17.830
3,641.00
10,448.02
25726.02
42.09
1.130
Jan-Jun 1998. Source: Bangko Sentral ng Pilipinas.
Net po_olio inflow Levels % of GNP
M3/ GIR
155 897 901 1,485 2,101 -406
0.29 1.62 1.37 1.95 2.44 -0.47
2.94 2.99 3.56 3.81 2.89 3.08
0.56
2.46
389 _
3 74
Economic
crisis... Once mo_re
months of 1997, and the fairly large spread between domestic and foreign exchange rates (Table 8). The peso was pegged to the US dollar, albeit informall3# even though its trade with the US was roughly 25 percent of its total trade. When the dollar appreciated sharply against the yen and European currencies after 1995, the Philippine peso also appreciated sharply against these currencies. Although the peso looked stable at P26.20-26.38 until June 1997, it actually appreciated against the yen and other major European currencies, except for the British potmd3: The Bangko Sentral had engaged in sterilized intervention during this period to meet monetary targets of the government and IMF. This occurred against a background of a relatively open capital account. Because of the wide spread between domestic and foreign interest rates, several domestic corporations resorted to borrowing in foreign currency abroad or from FCDUs of domestic banks. In many instances, banks encouraged their clients to borrow in foreign currency. Most of these loans were unhedged on the expectation that the exchange rate would remain the same. Also, most corporations were unfamiliar with hedging instruments. Because of the sharp depreciation of the peso in July 1997, many corporations became more heavily indebted. Table 9 shows that most of the debt-to-equity ratios of the top 1,000 corporations in the country classified by sector inched up in 1997, suggesting that they had a fair amount of foreign currency-denominated debts. The subsequent risein domestic interest rate and slowdown in demand had further weakened the financial conditions of many corporations. 13 The sad plight of the corporate sector contaminated the balance sheets of banks. Nonperforming loans of the banking system rose from 4.0 percent of total outstanding loans in June 1997 to 10.11percent in May 1998, and slightly went down to 9.7 percent in June 1998 (Table 10). One small commercial bank and six thrift banks were closed by the Bangko Sentral, while two mediumsized thrift banks were rescued by large commercial banks during the first 10 months of 1998. Should the Philippines then impose additional capital controls to mitigate the impact of the regional crisis on the domestic economy and avoid encountering similar problems in the future? The answer is no for several reasons. First, let us take the sequencing of liberalization argument for imposing capital controls. As mentioned earlier, the Philippines did not adhere to the optimal sequence of liberalization suggested by McKinnon, which might have contributed to the currency crisis. Thus, imposing additional capital controls is u Wyplosz (1998) calculated that the real exchange rate :appreciated by 47 percent during 1990-97. 1_ Admittedly, some companies would have collapsed anyway even in the best of economic environments.
Chapter H: Lamberte
375
Table 8. Nominal exchange rate and interest rate spread. Year
1992
1993
1994
1995
1996
'1997
Nominal exchange rate (S/P)
91-day T-bill
Interest rate spread 90-day LIBOR
Spread
19922 1992.2 1992.3 1992,4 1993.1 1993.2 1993,3 1993,4 I.994, l 1994.2 1994.3
25.38 25.58 25.1.2 25.10 25.51. 27.27 29.81 27.70 27.57 26.91 26.(.10
18.74 i5.08 15.62 14.77 13.31 10.75 10.88 14.36 15.05 14.74 !1.45
4.39 4.00 3.28 3,63 324 334 3.12 336 3.89 4.64 .5.12
14.35 H.08 12.34 11.14 10.07 7.41 7.76 11.00 11-16 10.10 6.33
1994.4 1995.1 1993.2
24.42 25,99 25.58
9,64 11.24 14.14
6,38 6.27 6.01
3.26 4,97 8.13
1.995.3 1995.4 1996.i 1996,2 1996.3 1996.4 1997./. 1997.2 1997.3 1997.4
26.07 26,21 26.20 26.20 26,26 26.29 26,37 2638 33.$7 39,98
[0.05 1/),94 12.76 12.91 12.10 11.59 10,54 1.0.45 13.90 16,70
5.86 5.75 539 5.56 5.62 5.55 5.61. 5,80 5.72 5.91
4,19 5,19 737 7.35 6,48 6.04 4,93 4,65 828 10.79
Sottrce: Bangko Sentral
ng Pilipinas.
Table 9. Average debt-equity ratio of top 1000 corporations Philippines, by sector. Sector
in the
1996
1997
Agriculture, Hunting, and Forestry Fishing Mining and Quarrying Manufacturing Electricity, Gas, and Water Corkstl_action Wholesale and Retail Trade Hotels and Restaurants
1.6404 2.4864 0.4409 1.2381 2.3791 1.7279 2,2953 0.7628
1.7116 3.2378 0,7239 1.6124 3.1262 2.2961 2.7589 1.0447
9 Transport, Storage, and Communication 10 Financial Intermediation
1.7208 2.7735
2.8850 2.9234
0.7065
0.8708
0.2827 0.3435
0.1898 0.2408
0.6025
0.7071
0.8429
1.1038
1 2 3 4 5 6 7 8
11 Real Estate,
Renting,
and Business
12 Public Administration 13 Education 14 Health 15 Other
and Defense;
Activities Compulsory
Social Security
and Social Work Community,
Source: BusinessWofld
Social, and Personal
Top 1000 Corporations
Service
Activities
1997-98.
376
Economic
Table
10. Nonperforming - latest
loans
available
Year
loss
provisions,
of total
loan).
NPL
annual
more
data:
Loan loss provision TBs RBs
1980
TBs
RBs
Total
KBs
1980 1981 1982
10,966 13.440 15,352
5.623 16,530 7.281
26,976 26.290 20.204
11.288 14.106 15.203
2.062 0.933 1.270
0,168 0,358 0.475
1.783 2,516 1.954
L950 0.964 1.265
1,983 1984
12.072 21,013
7.961 15.070
2Z215 36.272
12.232 21.245
1.327 2.537
0.472 0,667
2.301 2.905
1.319 2.465
1985 1.986
22,637 20.442
15.478 1.4.358
42.752 41.811
23.057 20.879
3,452 22.228
1.137 1.115
3.315 3.638
3.345 20.591
1987 1988 1.989
13.71.4 10.797 8.236
9,895 8.030 6.684
37.295 34,906 31.239
14.492 11.618 8,941
8.035 5.966 5.424
0.837 0.854 0.691
3.990 4_078 4_181
7.308 5.483 4.968
1990
7.175
7.238
28.502
7.863
4,683
1.403
4.252
4.417
1991 11992
6.612 6.1.32
7.605 7,870
26,331 24.426
7.308 6.837
4.008 3.395
1,792 1.724
4_160 3.765
3.829 3.266
1993 1994
4_708 3.931
6.017 8.359
21,327 18.166
5.267 4,711
2.628 1.883
1.365 3.077
3.281 3,219
2.546 2.027
1995 1996 1997
3,233 2_799
7.894 7.741
1.6.068 14,139
3.983 3,513
1.591 1.240
2.665 2.685
2.758 2,036
1,718 1,387
Mar
3.294
7.434
14.858
3.946
1..319
2.271
2.022
1.422
Jun
3,373
7,742
1.4.633
4.030
1.305
2.106
1_941
1..393
Sep Dec
3,962 4.688
10.091 110.633
14,950 16_177
4,756 5.433
1.435 2,211
2,166 3.119
1_847 1.953
1.509 2.275
1,998 Mar
7,420
14.321
16.177
8,167
2.590
3.564
1,953
2.651
Apt May June
8.595 9.441 8.947
16.263 16.090 16.760
16.177 16A77 1,6.177
9,371 10.127 9,710
2.678 2.744 2.744
3.658 3.492 3.949
1.953 1.9,K3 1.953
2.737 2.784 2.818
Sentral
ng Pilipinas,
justifiable
until
be argued
the other
is still
fully
not
reforms
accelerate
sectors
however;
convertible,
could
Experience many
sectors
in the
Philippines
maintain
taxes
whose
the status
quo
in other
areas
on financial
â&#x20AC;˘
are completed.
sector is still a highly protected trade sectors. Some tax measures
financial
Total
It could
capital
account
on the capital
account
of the
economy.
For
sector. The same is true also need to be reviewed
instruments
create
substantial
market.
clearly
shows
of the economy. is that
economy
is, the, Philippines,
of reforms
For instance,
in the
of the
that
implementation
rationalized.
distortions
in other
way,
instance, the agriculture with utilities and retail and
loan
percent
Once
KBs
Source: Bangko
but
and
(In
crisis...
The
it could
that
it is very
danger be viewed
difficult
of imposing
to introduce additional
a_ a weakening
capital
reforms controls
in the government's
in
Chapter 11:Lamberte
377
resolve to continue with or to hold on to reform measures already in place and could open the floodgates for reregulating many sectors of the economy. In fact, there has been strong clamor from certain industries for more protection from competing imports since the onset of the crisis. The same sectors are asking for rationing of available foreign exchang e in their favor. In the end, the cost of imposing additional capital controls just to abide by the proposed proper sequencing of reforms could be more costly to the economy. The liberalization process outlined by McKinnon should take into account the starting condition of the country Cer tainl)5the Philippines is already far advanced in terms of liberalization. That there is yet no persuasive case for gradualism as pointed out by Dornbusch should make us extra cautious in imposing additional capital controls. Second, let us take the argument that the Philippines should impose selective capital controls similar to those of Chile, favoring long-term capital and discouraging short-term capital, which is very volatile. As pointed out earlier, some studyresults do not show persuasive evidence that Chile's selective capital control policy had been effective. Market participants can always find ways to circumvent regulations. The danger is that, to avoid controls, capital flows are channeled through riskier, less regulated financial institutions and instruments. Before the 1990s, the Philippines had rigid capital controls; still, a massive capital flight occurred during the 1983-84 balance of payments. The timing of imposing selective capital controls is also awkward because of the present direction of capital flows. More importantly, Chile's recent decision to relax its controls on capital to attract more foreign capital during this lean period signals to other emerging economies that this is not the right time to impose such measures to prop up a sagging economy. If the Philippines opts not to impose capital controls, then how can it reduce its vulnerability to a crisis similar to the ongoing East Asian currency crisis? If we look at the analysis made earlier, we can identify three factors that greatly contributed to the vulnerability of the Philippines to such a crisis: inappropriate exchange rate policy, poor corporate governance, and inadequate prudential regulations for banks. These three interrelated factors must be addressed squarely As shown earlier, the exchange rate was relatively stable, especially in 1995 and 1996, which co_d be attributed largely to the sterilization measures adopted by the Bangko Sentral. 14This could have been taken by market players as a signal that the country preferred to have a fixed exchange rate, at least informall_a The defense of the peso made by the Bangko Sentral during the first few days of the crisis merely reinforced this view. Given the wide differential 14Lamberte(1995)foundthispolicytobeineffective.
378
Economic
crisis.,. Once more
between domestic and foreign interest rates, the relatively stable exchange rate made it attractive for domestic corporations and banks to borrow abroad. Were a more flexible exchange rate policy adopted, domestic corporations and banks could have been made aware of the risks they were facing when they contracted foreign currency-denominated debts. Related to this is the lack of awareness of the corporate sector to hedging instruments. Exporters had a natural hedge, but domestic-oriented corporations, which contracted foreign currency-denominated debts, lacked that natural hedge. Instruments for hedging and managing risks, therefore, need to be developed and fully understood by market players. Hedging instruments can redistribute risks and assign them to those who can manage risks very well. Borrowers need tO understand that acquiring hedging instruments comes with a price, which increases the effective cost of borrowing. In fact, ff borrowers had only hedged their foreign currency-denominated loans, the interest rate differential could have been smaller than if their borrowings were unhedged. The difference, however, is that the price borrowers have to pay for buying hedging instruments could be lower than the losses they incur if the exchange rate moves against their position. In any case, borrowers have to weigh heavily this factor before deciding to borrow in foreign currency. In this modernworld, the private corporate sector serves as the principal engine of growth of the economy. The Philippines can attest to this, especially when the corporate sector grew significantly in number and asset size in the 1990s. The sector, however, needs good corporate governance to sustain its growth. Corporate governance is the assurance by a corporation that its assets will be managed in the best interests of owners and stakeholders. Corporate governance, however, had been weak in many Philippine corporations. There are many cases in which management and controlling owners of corporations misused corporate assets (e.g., expanding plant capacity without rigorous feasibility study, buying or establishing subsidiaries, etc.), often appropriating for themselves hefty salaries and bonuses despite deteriorating corporate financial conditions. This is because existing governance instruments did not provide corporate owners and management with the incentive to use resources efficiently. For instance, disclosure of material information is not given emphasis. Even publicly listed corporations have remained opaque to most investors, especially foreign investors. Foreign investors, such as those on !mutual interested in the management control of corporations
funds, are usually not but in the value of their
stocks. When the controlling majority and management of a corporation pursues objectives other than profitability, such as expansion of market share and diversification,
which
are financed
through
excessive
borrowing,
foreign
Chapter
11: Lamberte
379
investors will likely divest themselves quickly to preserve the value of their money Indeed, the 1990s witnessed the expansion of many corporations well beyond their core competencies. While lack of transparency yields opportunities for making huge profits that warrant taking large risks, it, however, can make the market susceptible to herd behavior--that is, once doubts start, a crisis can be self-fulfilling (Sachs 1998). Overoptimism based on lack of information about conditions of corporations could easily change to overpessimism. A culture of transparency and timel3_ accurate information, however, can restrain the boom by enabling investors to assess risk more accuratel3_ and it can cushion overreaction once a downward slide begins (Reisen 1998). Finally, it is important to point out that a currency problem may originate from the banking system or from the corporate sector, which can affect the banking system and ultimately affect the entire economy. A safe and sound banking system, however, will be resilient even with sudden changes in investor sentiments. This, of course, requires effective prudential regulations to ensure that banks lend and invest safely, and that owners put enough of their own money at risk to discourage them from gambling with depositors' money. The Philippine banking system entered the 1990s with a much healthier balance sheet because weak banks were weeded out in the wake of the BOP crisis in the mid-1980s. With the deregulation of the financial sector in the 1990s, however, new banks entered the banking system, enhancing its competitiveness. This occurred against a weak regulatory system. For example, the "fit-andproper rule" was not applied in licensing new banks, allowing new investors with little background and experience in banking to establish banks. Risk-based capital standards were not put in place. Best practices in loan loss provisioning to ensure that banks' financial capital is intact were not applied. The lack of transparency and inadequate disclosure requirements of publicly listed banks did not encourage the establishment of good internal governance. A system of prompt corrective action that specifies actions for regulators as bank conditions deteriorate was not put in place. Delays in taking action on ailing banks had weakened the public confidence in the banking system. Given this background, destructive competition would naturally arise. Newly established banks took on more risks without adequate capital backing, encouraging other banks to do the same. Some banks even encouraged their clients to borrow in foreign currency without explaining to them that they will be exposed to currency risk, aside from the interest rate risk. Admittedl3_ a good banking regulatory system will take some years to develop. Aside from overhauling the General Banking Act, the capacity of supervisory staff of banking systems needs to be upgraded. This is a propitious time to start reforming the regulatory system for banks and upgrade the capacity
380
!I
Economic
crisis... Once more
1
of supervisory agencies because short-term capital inflows will unlikely reach the level of that achieved before the currency crisis in the next few years. Foreign investors are now more cautious when _t comes to investing in emerging economies, not to mention the fact that yields on financial instruments in the US and European countries have lately beeome very attractive to investors. Conclusions This paper reviewed the arguments for and against imposing additional capital controls in the Philippines and discussed the liberalization process undertaken by authorities since the 1980s. The conclusion arrived at is that the country does not need to impose selective capital control as Chile did. To make the country less vulnerable to a currency crisis like the East Asian currency crisis, however, three major measures are !recommended: adopting a flexible exchange rate; improving corporate governance; and strengthening the banking system by improving prudential regulations to make the economy more resilient to sudden changes in investors' sentiments.
Chapter 11:Lamberte
381 References
Corbo, V. and J.de Melo. 1985. Liberalization with stabilization in the Southern Cone of Latin America. World Development Report. Corsetti, G., P.Pesenti, and N. Roubini. 1998. What caused the Asian currency and financial crisis? Unpublished paper (September). Dornbusch, R. 1998. Capital controls: an Idea whose time is gone. MIT (March). Edwards, S. 1998. Capital flows, real exchange rates, and capital controls: some Latin American experiences. A paper presented at the National Bureau of Economic Research Conference on Capital Flows to Emerging Markets, Cambridge, Massachussetts (February). Fischer, S. 1998. Economic crises and the financial sector. A paper prepared for the Federal Deposit Insurance Corporation Conference on Deposit Insurance, Washington D.C., 10 September 1998. Greenspan, A. 1998. Testimomy of Chairman Alan Greenspan before the Committee on Banking and Financial Services. US House of Representatives. 30January. Grenville, S. 1998. The Asian crisis, capital flows and the international financial architecture. A talk delivered at the Monash University Law School Foundation (May). Griffith-Jones, S. 1998. How to protect developing countries from volatility of capital flows? A paper prepared for the Commonwealth Secretariat for the Expert Group Meeting, London, 15-17 June 1998. Johnston, B.H. 1998. Sequencing capital account liberalization and financial sector reform. IMF Paper on Policy Analysis and Assessment (July). Krugman, P. 1998a. Saving Asia: it's time to get radical. Fortune Investor (7 September). Krugman, P. 1998b. An open letter to Prime Minister Mahathir (1 September). Krugman, P. 1998c. What happened to Asia? Massachusetts: Massachusetts Institute of Technology [cited January 1998]. http://web.mit.edu/ krugman/www/disinter.html Lamberte, M.B. 1995. Managing surges in capital inflows: the Philippine case. Journal of Philippine Development, No. 39, Vol. XXII, First Semester. Manila, Philippines. Manasan, R.G. 1998. Fiscal adjustment in the context of growth with equity, 1986-1996. PIDS Discussion Paper Series No. 98-11 (December). McKinnon, R.I. 1991. The order of economic liberalization: financial control in the transition to a market economy. Baltimore: The Johns Hopkins University Press.
382
Economic
crisis... Once more
I
Medalla,
E.M. 1998. Trade and industrial policy beyond 2000: an assessment of the Philippine economy. PIDS DiscUssion Paper Series No. 98-05 (May). Radelet, S. and J. Sachs. 1998. The onset of the East Asian financial crisis. A paper presented at a seminar at USAID, 29 January 1998, and at the National Bureau of Economic Research (NBER) Currency Crises Reinhart,
Conference, 6-7 Februar)_ C.M. and R.T Smith. macroeconomic (20 March).
1997a.
_roo much I
of a good
effects of taxing capital inflows.
thing:
Unpublished
the
paper
Reinhart, C.M. and R.T. Smith. 1997b. TempOrary capital controls. Unpublished paper (August). Reisen, H. 1998. Domestic causes of currency crises: policy lessons for crisis avoidance. Technical Papers No. _136, OECD Development Centre (June). Roubini, N. 1998. Asian crisis: an interview With Nouriel Roubini (27 January). Sachs, J. 1998. Creditor panics: causes and r_medies. A paper prepared for the Cato Conference on Money in the New Millennium, 22 October. Wyplosz,
C. 1998. Globalized financial markets and financial crises. Geneva: Graduate institute of International _tudies (April). Young, A. 1992. A tale of two cities: factor a_cumulation and technical change in Hong Kong and Singapore. NBER Macroeconomics Annual, MIT Press.
12 A Second Look at Credit Crunch: The Philippine Case Mario B. Lamberte*
wo years after the East Asian financial crisis struck, the Philippines
is
finally seeing a light at the end of the tunnel. Gross domestic product (GDP) grew by 1.2 percent in the first quarter of 1999 and by 3.6 percent in the second quarter. Inflation rate fell to a 23-month low of 5.7 percent in July 1999. Meanwhile, the bellwether 91-day T bill rate dropped to 8.5 percent on 6 July 1999, the lowest in the last 12 years. In June, gross international reserves reached a record high of US$14 billion, which covered more than 4 months of imports. A dark
cloud, however,
seems to be lurking
at the end of the tunnel.
Despite an improving Philippine economy in the past few months, recent statistics still show that bank loans have continued to shrink. The seeming reluctance of banks to lend has worried policymakers and some analysts because this could undermine the strength of the economic recovery. In fact, many people are now ganging up on banks for not expanding their loans fast enough to support the expected economic turnaround, screaming "credit crunch!" Is there really a credit crunch? If so, what factors have caused it? These were the questions that the Economic Monitoring Group (EMG) attempted to answer when it called representatives from the business sector, bankers associations, and academe to a meeting at the Bangko Sentral ng Pilipinas (BSP) on 25 June 1999. Although there was a lack of consensus on the issue about the existence and causes of a credit crunch since the onset of the East Asian financial crisis, participants of the EMG-led meeting forwarded some recommendations to encourage financial institutions to increase the flow of credit to the private sector. "Theauthor wishes to acknowledge the research assistance provided by Ms. Chelo Manlagnit and Ms. Hope Gerochi and the secretarial assistance of Ms. Juanita Tolentino.Thanks are due to the participants ofthe seminar held on 25 August 1999,wherein the draft of this paper was discussed.
384
Economic
crisis.., Once more
This paper attempts to revisit those questions and amplifies some of the points made in an earlier paper on the credit crunch issue in the Philippines during the East Asian financial crisis. 1 To pu i this issue in a proper perspective, the next section briefly discusses literature o_ the credit view and credit crunch. The third section presents a conceptual definition of credit crunch and a simple theoretical framework for detecting its exisfence. The fourth section discusses the necessary and sufficient conditions for its existence, while the fifth section provides an empirical analysis of its existerlce in the Philippines using macro and firm-level data. The sixth section briefly! discusses what can be expected in the near future, while the last section makes some policy recommendations. Credit view and credit crunch At first look, the credit crunch problem
looks like a simple operational
problem. It, however, actually forms pant of the literature on monetary transmission mechanisms and business cycle.Z The traditional Keynesian view, whic h is also referred to as the money vlewor the textbook I$-I, Mmodel, consider_ only two financial assets, namely, money and bonds. All nonmoney assets, stlch as bonds, commercial papers, stocks, bank loans, etc., are assumed to be p_rfect substitutes. Thus, monetary policy is transmitted to aggregate demand _hrough a single interest rate, the bond rate. It can be summarized as follows: M t _i
_ I t aY[
(1)
where Mis money supply; ir, real interest rate;/, investment; and Y, output. That is, an expansionary monetary policy reduces the real interest rate, which leads to increased investment, which is a component of aggregate demand, and to a rise in output. Variants of this model include exchange rate and equity prices as channels. The effectiveness of monetary policy depends on the elasticity of the demand for money. The money view does not have a banking sector, and therefore, credit movements do not exert an independent influence on economic activity. The money view has been challenged by the so-called credit vie_. 3 This new view assumes that there is imperfect substitution among nonrrtoney assets. For example, bonds and bank loans are not perfect substitutes. Another example is that credit instruments available to large corporations are different from those available to small corporations. Likewise, savings instruments available to large savers are different from those available tO small savers. The credit view,
See chapter 5 of this book. Neumann (1995) and Mishkin See Brurmer
and Meltzer
(1996) provide
(1988); Bernanke
an excellent review.
and Blinde_ (1988); Bernanke
(1993), among
others.
Chapter 12: Lamberte therefore,
emphasizes
385 the interplay
between
credit and economic
activity. The
implication of this view is that disruptions in credit markets can have significant effects on output and employment. Therefore, monetary authorities must use other tools to influence the credit supply. The credit view suggests two new channels of influence for monetary policy, which arise as a result of information problems in credit markets. One is referred to as the "balance sheet channel," which emphasizes the effects of changes in monetary policy through balance sheets of consumers and firms. More specifically, an increase in money supply leads to a rise in equity prices; hence, the net worth of firms improves. This reduces adverse selection and moral hazard problems,
which encourages
process can be summarized M t _ Pet
banks to lend to firms. The whole
as follows:
* adverse selection
_ moral hazard _ _ lending
t _ I t * Y ? (2)
P refers to equity prices. Adverse selection refers to the problem of distinguishing good-risk borrowers from bad-risk borrowers before making a loan, while moral hazard reflects the lenders' difficulty in monitoring borrowers after making a loan. The other variables are defined as above. The other channel of influence is referred to as the "bank lending channel," which states that changes in monetary policy affect bank deposits and, hence, banks' loanable funds. The increased supply of bank loans encourages investment,
which, in turn, affects output. That is, M ? =_bank deposits
t _ bank loans
Accordingly, monetary policy will have different firms. More specifically, loan-dependent firms, affected more by changes in monetary policy than to alternative fund sources, such as the securities
t _ I _ _ Y t (3)
impacts on different types of such as small firms, will be large firms, which have access market.
What is a credit crunch? The rapidly growing literature on the "credit crunch" has emerged with the debate between money view and credit view providing a backdrop. According to Kliesen and Tatom (1992), the phrase "credit crunch" first appeared in mid-1966 when the US Federal Reserve Board instituted a restrictive monetary policy to slow the growth of demand for goods and services in order to fight inflation. Since then, credit crunch had been used to describe credit contraction associated with high interest rates? The character of a credit crunch in the US, 4In its 7 August 1999 issue, The Ecoaomistwarns of an impending credit crunch in the US as demonstratedby thewideningin spread ofcorporate-bondissuesandmortgage-backedsecurities.
Chapter 12: Lamberte
393
with that of the credit ratio since the first quarter of 1997. After rising in the third quarter of 1997, the spread tended to narrow in subsequent quarters. In fact, the spread became much thinner in 1998 when the growth in bank loans became severely negative compared with the previous year. Results, therefore, do not satisfy this particular condition for the existence of a credit crunch.
Figure 5. Percent change in the ratio of commercial bank loans to GDP and spread between lending rates and 91-day T-bill rates, 1997.1 - 199912. Growth
ratas
Spread
30
5.0
10
3.0
200
__ 1997.1
1997.2
"1997,3
1997,4
1998.1
-I0
_ 19.t8_,1
I
I
_
|
1
1
I 1999,2 J
4.0 2,0 1.0
-20
0,0 Period
I
--C_o_thR._
--- sp_aa J
The third condition that was examined was the unwillingness of banks to lend caused by the tightening Of regulatory standards, which could result in widening the intermediation spread. It appears from Figure 6, however, that bank intermediation spread has not widened since the onset of the East Asian financial crisis, except during the first quarter of 1998. Thus, this condition for the existence of a credit crunch has not been satisfied. Evidence from firm-level data A survey of 541 firms was recently conducted by the National Statistics Office (NSO) with financial support from the World Bank to determine the impacts of the East Asian financial crisis on the manufacturing sector. '4 Of the total number of firms surveyed, 69percent claimed to have experienced a decline in output since July 1997. Some of the data can be used to answer the question of whether the information asymmetry problem was aggravated in the Philippines during the crisis period from the point of view of firms.
_4See Chapter
5 of this volume.
394
Economic
Figure 6. Percent
change
in the ratio of commercial
and spread between -1999.2. Growth
lending
bank loans
rates and time deposit
to GDP
rate, 1997.
rates
30 25
crisis,,. Once more
Spread
I _
:7
I
10 -4
5
15 -5 -10
_ 1997.t
i__._1 1997.2
i_
1997.3
1997.4
1998.1
.5 1998._998,3
I998.4
-]5
1999-1
1999.2
_
.. 2 â&#x20AC;˘ 1
-20
0 Period
I
--
Growth Rates
_
Spread
]
For pure credit rationing, survey results show that the proportion of firms denied bank credit rose from 6.4 percent before the onset of the Asian financial crisis, i.e., January to June 1997, to 13 percent during the crisis period (Table 1). Although the percentage of those who admitted having been denied loans by a bank or finance company had doubled during the crisis period, it was still much smaller than what was generally expected considering the economic uncertainty brought about by the East Asian currency meltdown. A great majority of the sample firms still have continued access to credit from a bank or finance company during the crisis period.
Table 1. Enterprises
denied
of bank loans (In percent). 1 Januar 30 June 1997
1 Jul 31 December 1997
So fa in 1998
A Enport orientation 1. Enporters 2. Nonex.porters
6,61 6.28
11.98 12,56
14.34 11.61
B By finn siz 1. Small 2, Larg
5.24 7.56
8.66 15.68
11.16 14.77
C Total
6.42
12.21
12.98
Source: Surveys of Philippines Industry and the Finar_cialCrisis (1998).
Chapter 12: Lamberte Before admitting
395 that pure credit rationing
intensified
during the crisis
period, it is important to find out if banks have a good basis for denying loan applications of some firms during the crisis period. Heavy debt exposure of firms could be one of the reasons for denying loans. Survey results show that the average debt-equity ratio of firms that were denied bank loans increased from 3 in 1996 to 5.1 during the first half of 1998, whereas the debt-equity ratio of firms that were able to access bank credit declined from 3.5 to 2.7 in the same period (Table 2). This means that banks were able to sort out risky from less risky borrowersbased on customers' debt exposure. These results do not support the view that pure credit rationing intensified in the recent past. In sectoral credit rationing, it is generally expected that during periods of economic uncertainty accompanied by sharp currency depreciation, banks will discriminate against small firms and nonexporters and favor large firms and exporters. Survey data in Table 1, however, do not support this view. The proportion of exporters denied bank loans during the crisis period had increased more than that of nonexporters (beginning vs. end period), is Both small and large firms saw a doubling in the proportion of firms denied bank loans during the indicated period. 16 Indeed, results do not confirm the existence of a credit crunch during the crisis period. Rather, it is argued that the decline in the quantity of bank in the most recent past merely reflects normal cyclical phenomenon; that decline can be mainly attributed to the decrease in demand for credit due economic downturn. First, economic growth rate already slowed down before the East Asian financial crisis hit the Philippines. More specifically, Table 2. Debt-equity Period
loans is, the to the even after
ratios (In percent). Denied
bank
loans
Given bank loans
Median
Mean
Median
Mean
1996
2.06
3.00
2.32
3.51
199
3.18
4.43
2.36
3.52
1998: first hal
4.03
5.10
1.96
2.68
Computation of meansexlude outliers. Source:Surveys of PhilippinesIndustryand theFinancialCrisis(1998).
1._There is anecdotal evidence that some exporters ran into financial trouble right after the sharp depreciation of the peso in _uly 1997 because they contracted dollar-denominated loans to finance their nonexporting businesses. _6Small firms are those with employment in 1996 of less than 150.
396
Economic
crisis... Once more
peaking at 6.1 percent in the second quarter of 1996, GDP growth rate declined in subsequent quarters. Second, the average capacity utilization of the 541 firms surveyed declined from 78 percent in 1996 to 69 percent during the first half of 1998 (Table 3). As expected, nonexporters and small firms experienced a larger decline in capacity utilization than exporters and large firms during the crisis period. The average capacity utilization rate of sample firms, however, already started to decline tO 75 percent during the first half of 1997. All these could have affected the firms' demand for credit in the most recent period. Credit slowdown has been associated with recession. Results
of the
analysis suggest that the recent credit slowdown episode is due to the economic downturn. To further boost results, we examined the behavior of the credit ratio and real GDP from a longer period,
say from the first quarter
of 1982,
when quarterly data on GDP started to become available, to the second quarter of 1999 (Fig. 7). During this period, there were three episodes when growth in credit ratio became negative for at least two successive quarters. The shortest occurred in the early 1990s (3 successive quarters) and the longest in the mid1980s (17 successive quarters). The first and third episodes were associated with a recession; that is, GDP shrank for at least two successive quarters. 17 The two variables----GDP growth rate and growth in credit ratio----depicted in Figure 7 seem to move together during the indicated period. Which one precedes or causes the other? Did weaknesses in bank loans lead to a recession or vice-versa?
To answer this question, Granger-causality
Table 3. Capacity Period
utilization
All sectors
tests were performed28
(In percent). Export orientation Exporters Nonexporters
Firm size Large Small
1996
78
78
77
79
76
1997 1st half
75
76
74
79
72
1997 2nd half
73
76
71
77
70
1998 1st half
69
72
65
73
65
Source:Survey of Philippine Industry and the FinancialCrisis (1998).
1_In this case, the GDP is used instead of the GNP.
Chapter 12: Lamberte
397
Figure 7. Percent change in the ratio of commercial bank loans to GDP and real GDP growth rates, 1982.1 - 1999.2. G_r_vth rat_; KB Lt_ns (as % of GDP)
Growth rate5 I_al GDP
8O
_0
15
A
_
_4_
" 10
40 _0 , I)
-40
, -10
-60
' -15 Period I '-m-Cnowthra_es:KBLL_l_s (as%ofGDP)
_Cmwthra_esRealCDP
I
Results of causality tests shown in Table 4 suggest that declines or increases in GDP growth rate preceded declines or increases in bank loans, and not the other way around as many expected. Bank loans were further categorized according to economic sectors receiving loans. For brevity, only three large borrowing sectors, namely, manufacturing, retail, and real estate sectors, were considered in this paper. The ratio of commercial bank loans to the sectoral value-added was used as the credit ratio for each of the three sectors. Results in Table 4 indicate that GDP growth rate Granger-causes or precedes manufacturing and retail loan growth rates. Such a pattern, however, is not observed in real estate loans. Additional results from the same survey also confirm the observation that the recent credit slowdown originates from the demand side as a result of depressed economic activity. Table 5 ranks the various reasons for the decline in output. The effects of the peso depreciation on the cost of raw materials and interestratewere the top two reasons for the decline in output. Firms, regardless of export orientation and size, consistently ranked decline in demand higher â&#x20AC;˘ than insufficient credit available from banks, either for working capital or for expansion, at the prevailing rates of interestas a reason for reduced output. Expectations in the near term Given such results, what then can be expected in the next few quarters? The data series in Figure 7 are quite instructive. In the 1980s, bank loans continued to decline, albeit at a decreasing rate, long after the GDP growth rate became positive. If past experience can be used as a guide to the future, then there is a possibility that the pattern just described can be repeated in the next
398
Table
Economic
4.
Results
crisis...
Once
of causality tests (1 Lag). Direction of causality
more
Results
A. GDP growth rate does not cause loan growth rate (F=4_20) Loan growth rate does not cause GDP growth rate (F=0.03)
Reject * Accept
B.GDP growth rate does not cause manufacturing loan growth rate (F=8.69) Manufacturing loan growth rate does not cause GDP growth rate (F=0.10)
Reject ** Accept
C. GDP growth rate does not cause retail loan growth rate (F--8.69) Retail loan growth rate does not cause GDP growth rate (F=0.80)
Reject** Accept
D, GDP growth rate does not cause real estate loan growth rate (F=0.13) Real estate loan growth rate does not cause GDP growth rate (F=1.12)
Accept Accept
Notes: • 5% level of significance. •* 1% level of significance. Figures in parenthesis are F-statistics.
Table
5.
Reasons crisis
for the decline in July
Reason
a, Decllne in domestic
I All responden_
demand
b, Decline h_ foreigl_ demand c, Insu ffieient o_edlt extended d. Ato, ln_ntlnlL_restrat,_
by suppliers
s, insufficlentcredb
available b'om bank__I'or working e, Atcurrentinterestrates,
in output
since
the onset
of the financial
1997. I
Exoort orlenta Hon Ex!ocxters None×rotter3
334
3
2,49
6
322
2.28
8
3,21
3
1,45
2,17
10
1,98
10
2,(_0
$
2,6_
254
7
[
/
Firm size Small
Large
2
3.,'_
2
2.85
4
10
1.96
10
2,69
5
2,_
7
2.34
9
1,96
9
8
2,_4
5
2.68
5
2.50
6
2.40
7
2.29
9
2.50
7
2,14
8
capital
insufficientcredit
available from banks fo,r expansion f.
3.24
2
3,26
2
3,23
3
3,19
4
3,31
2
g. Higher clr_l'of raw matenals due _o dapreclation of the p_r_
3.78
]
3.66
]
3.88
1
3.94
1
357
]
h, Increases ha labor cost
3,10
4
3,08
4
311
4
3,21
3
2.96
3
L Shortages
2.45
6
2.38
8
250
6
2.66
6
2,19
7
2.Zg
9
2.15
9
2._)
8
2.48
8
],92
]0'
j.
Hi_v,h[uw!l 0flr_tex_:St rate_q
in raw materials
Nondullvery oFgo0ds because suppliers hurt by crisis
Score ranges from i to 5, I being the highest and 5 the lowest. Source: Survey of Philippine Industry and the Financial Crisis (1998).
few quarters: growth in bank loanswill lag b_hind GDPgrowth or GDPgrowth will become positive before growth in ban k loans does. In fact, this already happened in the first two quarters of 1999.
Chapter 12: Lamberte
399
Are the firms hard pressed for funds? Survey results show that about three-fourths of total sample firms claimed to have adequate liquidity to finance production (Table 6). This proportion is higher among firms without loans than among those with existing loans. In both cases, a smaller proportion of exporters and large firms face liquidity constraints than nonexporters and small firms. Liquidity constraint should ease up as demand for goods picks up because survey results show that income from sales covers 36 percent of the short-term financing requirement and 38 percent of the long-term financing requirement of firms.
Table 6.
Enterprises percent).
with adequate Allfirms
liquidity
to finance
Firmswith loans
production
(In
_'Firmswith no loans_
A. Exportorientation 1. Exporters 2. Nonexporters
79.8 72.2
73.5 62.9
90.4 84.6
B. Firmsize 1. SmaU 2. Large
74.4 78.2
67.1 70.1
82.3 96.0
C. Total
76.2
68.7
87.5 rr
Source:Surveyof PhilippineIndustryand the FinancialCrisis (1998).
Conclusions and policy implications Study results generally do not support the claim that the country has been facing a credit crunch since the onset of the East Asian financial crisis. On the contrary, they tend to show that the current slowdown in bank loans merely reflects a depressed economic activity. Therefore, bank loans are expected to rebound once economic activity picks up. This should serve as a warning that loosening up lending policies recovery. 19It was not very long was blamed for the present measures that were recently maintained.
may endanger the sustainability of economic ago when the aggressive lending stance of banks economic crisis. At the very least, prudential put in place by the Bangko Sentral must be
19The problem of small and medium enterprises' (SME)lack of accessto bank credit,which is a structuralone, should not be confused with the issues discussed in this paper.
400
Economic
crisis... Once more
In terms of macroeconomic policy, policymakers should concentrate on raising aggregate demand. Both monetary and fiscal policies should support this stance. There is, however,â&#x20AC;˘ a limit as to how much monetary policy can push aggregate demand. Since monetary policy has already been substantially relaxed in recent months, it must now take a neutral stance. Raising interest rate to defend the exchange rate must be avoided, especially since there is a reason for allowing the nominal exchange rate to depreciate. Figure 8 shows that the Philippines' real effective exchange rate has recently returned to its precrisis level, suggesting that the peso has been appreciating in real terms in recent months. It likewise shows that the Philippines has been losing its international competitiveness in the region in recent months--bad news for both the country's domestic- and export-oriented industries. Exports, which are a major component of aggregate demand, â&#x20AC;˘need to be sustained during the recovery period. The other reason for maintaining a low interest rate is to allow loan work-outs done by some firms and banks to proceed in a less costly and orderly manner. Figure 8. Real effective
exchange
rate, 1997,1 - 1999.6
140 120 i00 80 60 40 20
I_Philippines
_Malaysia
-°--Indonesi_
_Singapore
_Thailand]
On the other hand, fiscal policy must remain expansionary for the rest of 1999. Indeed, the government announced in 1998 a set of pump-priming measures for this year. There are, however, some doubts as to whether real pump-priming measures have been effectively activated this year. The budget figures net of accounts payables seem to suggest that fiscal policy has not taken a strong expansionary stance after all. Whether the recent bulge in accounts payables is purely technical in nature (i.e., due to accounting and auditing procedures) or is a result of an attempt by the past administration to use it as a fiscal instrument needs to be seriously examined. Next year, however, it may not be prudent measures.
on the part
of the government
to implement
pump-priming
Chapter 12: Lamberte
401
References Anonymous. 1999. Crunch time, again? The Economist. 7-13 August. Bernanke, B.S. 1993. Credit in the macroeconomy, Federal Reserve Bank of New York Quarterly Review, Vol. 18, No. 1, Spring. Bernanke, B.S. and A.S. Blinder. 1988. Credit, money, and aggregate demand. American Economic Review, Vol. 78, No. 2, May. Brunner, K. and A.H. Meltzer. 1988. Money and credit in the monetary transmission Process. American Economic Review, Vol. 78, No. 2, May. Cantor, R. and J. Wenninger. 1993. Perspective on the credit slowdown. Federal Reserve Bank of New York Quarterly Review, Vol. 18, No. 1, Spring. Cecchetti, S.G. 1995. Distinguishing theories of the monetary transmission mechanism. Federal Reserve Bank of St. Louis Review, Vol. 77, No. 3, May/June. Council
of Economic Advisers. 1992. Economic report of the President. Government Printing Office. Ding, W., I. Domac, and G. Ferri. 1998. Is there a credit crunch in East Asia? World Bank. Hadjimichalakis, M.G. and K.G. Hadjimichalakis. 1995. Contemporary money, banking, and financial markets: theory and practice. USA: Richard D. Irwin, Inc. Hubbard, R.G. 1995. Is there a 'credit channel' for monetary policy? Federal Reserve Bank of St. Louis Review, Vol. 77, No. 3, May/June. Ito, T. and L.A. Pereira da Silva. 1999. The credit crunch in Thailand during the 1997-98 crisis: theoretical and operational issues the JEXIM Survey. Exim Review, Vol. 19, No. 2. Kliesen, K.L. and J.A. Tatom. 1992. The recent credit crunch: the neglected dimensions. Federal Reserve Bank of St. Louis Review, Vol. 74, No. 5, September/October. Mishkin, ES. 1996. The channels Ofmonetary transmission: lessons for monetary policy. NBER Working Paper Series No. 5464, February. Neumann, M.J.M. 1995. What do we know about how monetary policy affects the economy? Federal Reserve Bank of St. Louis Review, Vol. 77, No. 3, May/June. Waiquamdee, A., S. Krairiksh, and W. Phongsanarakul. 1999. Corporate views of the constraints to recovery. Unpublished paper, March. Yoshitomi, M. and K. Ohno. 1999. Capital-account crisis and credit contraction: the new nature of crisis requires new policy responses. ADB Institute Working Paper No. 2, May.
13 Recent Developments in Corporate Governance in the Philippines Mal"Jo B. Lamberfe
z
I ike the rest of crisis-hit countries in the region, the Philippines is now in /the process of recovering from the crisis that hit East Asia in 1997. GDP _growth rates for the first two quarters of 2000 were higher than _ose for the same quarters of 1999 (Figure 1). Inflation rates have been kept at lower levels, although they have been observed to be inching up since January 2000 â&#x20AC;˘partly as a result of the successive increases in the price of oil and depreciation of the peso (Figure 2). The current account balance has posted a surplus of US$1.8 billion for the first four months of 2000 while the gross international reserves have risen to US$15.3 billion in June 2000, which can cover more than 4 months of imports: Exports have continued the height of the East Asian financial crisis. Figure 1. Quarterly
to grow impressively
even during
real GDP growth rates, 1996.1 - 2000.2 (In percent).
8 7
6 .,/
_
-3
Source: National Sta{@licalCoordinationBoard. 1Theauthor thanks Ms. Sharon Thea Vitaland Ms. JuanitaTolentinofor their excellent assistance in preparing this paper.
404
Economic
Figure 2. Monthly
inflation
crisis... Once more
rates, 1996.1 - 200.7 (In percent).
14.0 12.0 10.0 8.0 6.0 4.0 2.0
...................................................
0.0
.........
Source: National
Statistics
1 â&#x20AC;˘
Office.
Weak corporate governance was found to be "one of the major contributors to the building-up of vulnerabilities in the affected countries that finally led to the East Asian financial crisis in 1997" (Zhuang et al. 2000). In the last two years, Asian economies have tried to address this problem. This paper provides a brief discussion of the recent developments in financial and corporate governance in the Philippines. The second section focuses on recent developments in corporate governance of banks while the third section discusses the measures adopted of nonfinancial firms. Corporate
governance
by the government to strengthen corporate The fourth section Contains the conclusions.
governance
of banks
Having gone through a crisis in the mid-1980s that resulted in the weeding out of weak banks, the Philippine banking system faCed the East Asian financial crisis with a much healthier balance sheet than those of its crisis-hit Asian neighbors. However, not all banks were able to weather the crisis. In 1998, one small commercial bank was closed by the Bangko Sentral ng Pilipinas (BSP), the Philippines' central bank. In 2000, ithe collapse of a medium-sized commercial bank caused a bank run on some small commercial banks. Both banks were brought down by their heavy exposure to the real estate sector, which went into a slump since 1997. Timely intervention of the Central Bank had calmed the market. While the first closed bank is being liquidated, the second closed bank was recently taken ove_ by another commercial bank. During the crisis, a number of large and medium-sized nonfinancial enterprises 2See related
that were highly leveraged discussion
in the succeeding
pages.
went bankrupt. 2 This had adversely
Chapter 13:Lamberte
405
affected the balance sheet of banks. As Figure 3 shows, the total nonpefforming loans (NPLs) of the commercial banking system rose from P59.4 billion in the third quarter of 1997 to P218.6 billion in May 2000. Since outstanding loans had remained fiat throughout this period, the ratio of NPLs to total loans outstanding rose from 4 percent to 14.4 percent. Because of the rise in NPLs, banks had worked out arrangements with distressed borrowers to engage in loan restructuring. In some cases, banks went into foreclosure proceedings, which led to the rise in their balance sheets' real and other properties owned and acquired assets (ROPOA). Thus, commercial banks' ROPOA rose from P14.6 billion to P102.8 billion during the same period. As a percent of total loans outstanding, it increased from 1 percent to 6.8 percent during the period indicated. If the ROPOA were added to the NPLs, then the total NPLs of commercial banks should have already be around 21 percent. Although high, it is still lower than the NPLs of commercial banks during the height of the crisis in the mid-1980s and compares favorably with those of crisis-hit countries in the ASEAN region. Moreover, commercial banks have been raising their loan-loss provisions since the onset of the East Asian financial crisis. Figure 3. ROPOA, total loans, loan loss provisions and NPL of KBs, 1997.3 - 2000.2. N'_L & ROPOA as %of Total Loans 2O
Loan Loss Prov. as % of NPL 5O 30
5 0
0
re e r_
re ¢
NPL as % of Total Lo,'ms
e $
ROPOA as % of Total Loans
Lom_ Loss Prov. As % of NPL Source: Bangko Serttral ng Pilipinas.
The BSP gained formal independence with the passage of the new Central Bank Act in 1993. Aside from conducting monetary policy, the BSP is also given the responsibility of regulating and supervising banks. Since the onset of the financial crisis, the BSP has introduced a number of measures to strengthen corporate governance of banks. In April 2000, the President signed
406
Economic
crisis... Once more
into law the new GeneralBanking Act of 2000 (GBA 2000). The long delay in the passage of said Act turned out to be a blessing in that the framers of the law were able to take into account the major lessons brought about by the recent crisis. Thus, the law includes several provisions aimed at strengthening corporate governance of banks. The following discUsses the key measures adopted by the Central Bank and some provisions of th e GBA 2000 that have a direct bearing on corporate governance of banks. There is now widespread acceptance of the important role independent directors can play in enhancing good corporate governance. GBA 2000 recognizes this and explicitly provides for an inclusion of independent directors in a bank's board Iof directors? It also broadens
that The two and
strengthens the authority of the Monetary Board to prescribe, pass upon and review the qualifications and disqualifications of individuals elected or appointed bank directors or officers and disqualify those found unfit. In the past, the "fit-and proper" rule was hardly given any importance in the selection of board of directors or officers of banks. _Under the new law, the Monetary Board is mandated to constantly monitor_ the performance of bank directors and officers to ensure that they make prudent decisions for their banks. It can disqualify, suspend or remove any bank director or officer who commits or omits an act which renders him unfit for the position. The financial marketis very fluid. Naturally, the true financial position of banks changes frequently. It is, therefore, crucial that the board of directors frequently meet to monitor and assess the financial position of their banks. In this regard, the new GBA allows banks to avail of modern technologies, such as teleconferencing and video-conferencing, in conducting board meetings, which could be more convenient and less costly. Bank loan s and credit guarantees tO its directors, officers, stockholders and their related interests (DOSRI) was a major contributory factor to past bank failures and undermined the banks' role in monitoring corporate governance. In this regard, the new GBA has tightened the rules and ceilings on connected lending and stipulates that such lending be done in an arm's length manner as banks do with their ordinary clients. Violation of this regulation is enough ground for the remox/al of a bank director or officer. The BSP has been regularly increasing the minimum capital requirements of banks. In 1998, it mandated another round of increases in the minimum capital requirement of banks toibe gradually implemented over a two-year period. Universal banks or banks With expanded commercial banking functions, are supposed to raise their minimum capital by 20 percent and ordinary commercial banks by 40 percent Iluring this period. The GBA 2000 enjoins the Monetary
Board
in using inter'nationally
accepted
The number of board of directors of a bank can be between 5 and 15.
standards
in
Chapter 13:Lamberte
407
determining risk-based capital adequacy of banks. Thus, it is not enough for banks to identify, quantify and manage risks, but that their owners must be ready to put extra capital to cover additional risks they want to take. As part of its effort to improve the transparency of banks, the BSP issued new rules on reporting the quality of the assets of banks to reflect their true financial conditions. Loan classification system has been improved and appropriate specific loan loss provisions have been prescribed for the different loan classifications. In addition, the BSP has required banks to put a 2 percent general loan loss provision. The definition of past due loans has also been tightened aligned with international standards. Toenhance transparency, the BSP started to require listed and nonlisted banks to disclose to the public more detailed information relevant to their financial health in a manner understandable to laymen. This includes vital information such as nonperforming loans, total classified loans and other classified risk assets, loan loss reserves, connected lending and return on equity (Espenilla 2000). These are supposed to be reported together with the banks' balance sheet and off-balance sheet conditions to the general public every quarter. Market discipline can exert pressure on banks to improve corporate governance. The key to this is a credible policy of allowing weak banks to fail and/or to be taken over by other investors or other banks. This has been the policy of the BSP since the 1990s. In fact, it has closed several banks in the 1990s. Another measure adopted by the government to enhance market discipline was to improve the competitiveness of the domestic banking system through the liberalization of the entry of foreign banks. Foreign banks are supposed to have better corporate governance and are well regulated in their home countries. In 1994, a law was passed allowing foreign banks market access through three modes: establishment of a branch; establishment of a subsidiary (i.e., up to o 60 percent control); and acquisition of an existing domestic bank (up to 60 percent control). As of 30 June 2000, there were 13 branches of foreign banks and 6subsidiaries of foreign banks? Although the total number of foreign banks already accounts a little over one-third of the totalnumber of commercial banks in the country, their combined assets are still less than one-fifth of the total assets of the banking system. The GBA 2000 has further liberalized this law by allowing foreign banks to have wholly-owned subsidiaries. The BSP has been encouraging domestic banks to merge and/or consolidate with other banks to further strengthen their balance sheets and attain a certain size that will enable them to compete with foreign banks and project themselves as regional, if not international, players. The upward adjustment
408
Economic
in the minimum
capital
BSP to encourage several
banks
requirement
banks that
to merge
merged
was
crisis...
one of the instruments
and/or
to comply
Once
used
consolidation.
Indeed,
with
minimum
the
new
more
by the
there
were
capital
requirement. However, there were also mergers that occurred among large domestic banks, suggesting that banks do not only want to hurdle the new minimum
capital
reach
improve
and
able to gain (Table
the depth
competitiveness
1). Needless
governance Table
requirement
or to achieve
bigness
and breadth
of the range
as they
participate
1. Mergers
more and
of their
in the process
to say, the need for these banks
is much
but also to broaden
to strengthen
market
services
to be
of globalization their
corporate
urgent.
consolidations.
I
SURVMNG ENTITY YEAR
NAME OF BANK
(Merged with/Acquired by) EFFECTIVITY
1998
Bank of Southeast Asia/ DBSBar& of Singapore
DBS Bank (Philippine), Inc.
$ep. 8, 1998
1999
Equitable Banking Corp./ Philippine Commercial International Bank
Equitable PCI Bank
Sep 28, 1999
Global Bank/Asian Bank
Global Bank
Sep. 9, 2000
Global Bank/Philbank
Global Bank
March 24, 2000*
2000
Bank of the Philippine Islands / BPI-Far East Far East Bank and Trust Co.
7-Apr-00
Prudential Bank/ Pilipinas Baixk
Prudential Bank
2-May-O0
Metrobank/SolidBartk
Metro Bank
30-Jun-00
Bank of Commerce/ Traders Royal Bank
Bank of Commerce
For MB Approval
1
**Date of Monetary Board approval Source: EspeniUa (2000).
Corporate governance The Philippine The Business Profiles revenues.
However,
corporations
belong
Philippines
are mostly
of nonfinancial
firms
industries is characterized by interlocking directorates. 1997-98 listed 7000 top corporations in terms of gross a closer to one
look
at them
conglomerate
family-owned
would
reveal
Or another.
businesses.
Given
that
many
Conglomerates the scarcity
of those in the of capital
Chapter 13:Lamberte
409
in the country, conglomerates typically include finanCial institutions as a means to secure funds for their affiliates. In terms of governance issues, corporations in the Philippines may be classified into the following: (1) family-owned, family managed corporations; (2) family-owned, professionally managed corporations; (3) publicly-owned, professionally managed. The shams of the corporations of the first two categories could be listed. In the Philippine setting, however, the listed shares usually comprise no more than 20 percent of the total outstanding shares of these corporations. Among the three categories, the first is the most prevalent. It cannot, however, be said that the family members who are managing these corporations are not professional. In fact, many of them, particularly the second generation, are well educated, having obtained their college and graduate degrees from top universities in the Philippines and abroad and have some experience in managing other firms. Family-owned, professionally managed corporations are few and can be found mostly in the banking system. In fact, most of the presidents of domestic commercial banks formerly occupied top positions in multinational banks, like Citibank and Bank of America. There are few corporations belonging to the third category. Since January 1997, more than 6,000 establishments (incorporated and single proprietorships/partnerships) resorted to closure/retrenchments due to economic reasons. Of this, a little over 20 percent were permanently closed. Half of the incidence of closures occurred in 1998 at the height of the East Asian financial crisis. Focusing on the corporate sector alone, the SEC reported that 360 companies have so far been dissolved since 1997 of which 86 percent have a capital of P1 million or less. Only 14 corporations that were dissolved had P10 million or more in capital. Philippine corporations are less indebted compared to those of its neighboring countries. This is because they had less access to both the domestic and foreign capital markets compared to those of other countries in the region before the onset of the crisis. Although they rely mostly on banks as external sources of funds, they prefer to depend more on internally generated funds due to high interest rates on loans. Also, since ownership of most Philippine corporations is highly concentrated, there is less principal-agent problem that sometimes leads to high leveraging of capital to generate high profits in the short-term. The average debt-equity ratio of the top 5000 corporations in the country declined dramatically from 3.63 in 1997 to 2.14 in 1998 (Table 2). For the manufacturing sector, the ratio decreased from 1.99to 1.36 over the same period. Corporations reacted to the financial crisis by slowing the growth in their
410
Economic
Table 2.
Net income, corporations,
Major
[ndustry
crisis... Once more
net profit margin and debt-equity annual data: 1997 - 1998. i |lrr
Group
Net Income
i Net Profit
ratio of top 5000
Margin
Debt-Equity
Ratio
I 1 i All lnd_.Jstries Agriculture,
Fishery
and Forestry
1997
1998
7|111 152,662
142,479
(974)
1997 I '
1,106
Mining and Q_arrying
(2,219)
M0mufactlning
(2,475)
57,_6
Public Utilities
] 6,_3
] 5,374
1998
] 997
1998
18.13
21.73
3-63
2.14
(32.15)
31.02
2,19
0.97
(776)
(1_6.44)
0,78
0.78
(476.71)
(5.58)
24.18
1.99
1_36
11.06
14.71
3.01
2.74
Construction
2,756
(43)
29.40
(1,724.33)
2.81
3.03
Wb01esaLe and Retail Trade
3,547
3,431
136.10
151.61
3.01
3.31
Transportation
and Co_unication,
8,185
(15,935)
17.18.
(10.90)
1.71
Z84
Financing, Insurance, Real Estate and Business Services
116,447
72,846
5,27
8.53
2-38
2.30
11,092
9,170
4.13
5.15
1.33
'1.05
Con'anunity, Social and Personal Services Source:
Security
and
Exchange
Commision.
liabilities and at the same time increasing their equity by raising capital from their existing owners and/or by inviting foreign partners into their business. Other corporations sold off their "noncore" assets to raise cash and also to focus on their core competencies.
4
But the average debt-equity ratios hide the weaknesses of some highly leveraged corporations that encountered financial problems in the wake of the East Asian financial crisis. Due to their inability to service their liabilities, 66 corporations sought refuge from the Securities and Exchange Commission (SEC) by applying for a suspension of debt payments since January 1997 (Table 3). Twenty-five belong to the top 7,000 corporations in the country in terms of gross revenues in 1996. Of the 66, 37 cases are still ongoing, with most creditors demanding outright foreclosure or greater participation in rehabilitation programs. The rest were either withdrawr_ by applicants or dismissed by the Securities and Exchange Commission (SEC) for lack of merit. the SEC took much longer to decide on the c_ses in 1997 than in i delay in the resolution of cases could have lcontributed to the the assets of these corporations. Saldafla (1999) made a comprehensive and detailed I Philippine
corporate
governance
environment
It appears that later years. The deterioration in assessment
of
and policy and their impact on
performance and finance. Our task here i_ to discuss the efforts made by the Philippine authorities to address the major weaknesses in corporate governance he found. In this regard, we will focus on tw o major measures: the new Securities Regulation Code and the new Rules of Procedure on Corporate Recovery. 4 Each
foreign
bank
given
a bank
branch
license
can Open
up
to six branches
in the country.
Table 3. Cases involving suspension of payments filed with SEC, January 1997 to September 9,1999.
Year Fried
1997
W/thdrawn
_Dura_on _e Case
Disrcfissed
Duration of the Case
1 Auto Brands
1-yr & 10-day
1Slructua] Forms Inc
1-yr &4-n'_
Corporation 2 Duvaz Corp.
1-yr & 4-day
2 C__e Construction and Development Corp.
1-yr & 5-too
Ong_ng
Started
1 Gerry Alcantara Shoes, Inc.
6/19/97
¢_
Total
-.
_,_
and BandoIino Shoes Corp.
3 Victoria C. Alcantara et al. (F'a.rr_yPlans)
6-fro
4 Nor& Negros Marketing Co., Inc.
5-too
0_
2 Maurfli_s Pulp & Paper 6/26/97 Packaging Corp. (MPPPCO,eta].
5 Essence Hca-ae Development Corp. et al.
2-yr & 6-too
3 Vicioria's Milling Co., Inc.
7/4/97
6 Eduarosa Realty Development Corp.
2-yr &,5-rnD
4 G.G. Sp_tsvcear Mam_can'ing Corp.
8/29/97
1-yr & 4-n_
5 Nikcn Indusla-ial Corp. lX_,olite Indusb-ial Corp.
9/16/97
7 Rominart blmufaciuring Merchand/sin& Inc.
&
• 8 Agusan River Enterprises Corporation
1-yr & 1-too
9 Dragon Lady Industries
1-yr &5-too
10 (3hayo Plastic Products
1-yr & 9-n_
2f100Industrial Corporation Trade Hope lrdusix-ial Corp.
4_
Table 3. continued... Year Fried
Withdrawn
4_ Duration of the Case
Dismissed
11 Universal Cons_cfion
Corp.
Duration oi the Case
Ongoing
1-yr & 9-mo
First Uni-Brands Food Corp.
Started
Total
Integral Steel Corporation Clarion Printing House Inc Nikon Plaza Inc Niko Land Corporation Eyco Properties, Inc. Thames Philippines, Inc. 6 HSC Management Development Corporation .... _ U_caa '
1998
_
tl
1A & T
15-day
1 Talsan Ent., Incorporated
2 Tranapadfic Towage Inc.
ll-day
2 Hnanciera Manila, Inc. Growth Dimensions International Inc.
3 Paper City Corp.
lyr & 4 mxm
of the Phils_
6
2-mo & 9May 2-rna & 12 day
Costa Mesa Development, Inc.
_mo
& 8<lay
10ranbo
Realty Corporation
19
2/2/98
2 Duty Free First Superstore, Inc.
2/16/98
3 Midas Diversified
2/16/98
Export Corporation Manila Home Textile Inf_
4 Solid Builders, Inc. 3-too & 4-day & Medina Foods Industrial, Inc. 5 Mmmtain Highway ExpressInc.
12/11/97
[_
c_" _. _"
D and D Manuiactmmg In_ __ oJ 3 Pacific Lenders, ln_. Anocia_or Inc.
_
& 3-day
Table 3.continued... YearFiled
W'_alrawn
Durallon
Dismissed
Duralion
ofa_ec_e 5 Mom_.tain
3-too & 8-day
_shw_y ExpressU_c.
Ongoing
Started
ofthec.ase 4 Manufac_rers
3-too & 1-day
Assoda_, _
Total â&#x20AC;˘ .o
FL Industrial _tion
_._
ro_svai_ Realty and
5 Visual Realities, Inc.
3-too & 23-day
Development Corp.
6 James Kermeiy Lugmoc
l-too & 28-day
4 Anva Land Development Corporation
2/27/98
7 Patrium Holdings, Inc.
3 mo& 2..day
5 Brighlstar Tropical Friu_ Phils., Inc.
3/13/98
6 Fieldman Co_m_ Center
3/26198
8 Serg's Produds, Inc.
8 mo
9 Benewin Realty and I_elopment Corp.
3 n_ & t0-day
10Hm'_"nen Industries Corp., Inc.
_.,
Corporation
7 Lucky _ Dev't Corp.
Realty and
8 Fo_'une Ve.r0awes De_opment Corp.
6/1/98
Inc.
9 Philippines _
4/2/98
6/19/98
10 Hebrock Ven_,_.s and Dewlopment Corp. llGlobelandConm_Otols
a_ r_dop_
712198
Omxraion
12 J_tan C.o_h'uclio_
and
7129198
r_'t. corp. 13DesertF, oxTransI_t
Corporalion
813198
4_
Table 3. continued... Year Filed
Withckawn
Duration of the Case
Distained "
Duration of the Case
Ongoing
14 Quarter Fast'don and
S_ted
Total
4_
6/17/98
GarmentsCorp. 15 Gold-Richwell Development
8/26/98
Corporation 16 Long Rive_ Developers Corp. 8/27/98 17 Plast-Pri_ntIndustries, Inc. ODC Basic
10/5/98
Packaging Industries, Inc. 18 Polymate lnd_Bial Mam_ac_xlring Cc_p., Holland LP_ustries, Inc.,
10/5/98
H_ Developn-amt Corp. 19 Chung Fu Industries (P_k),
11/24/98
_r_ %-
rnc.
20 Solar Steel Corpora(ion
11/24/98
21 Surdowr, er Development
12/21/98
_'
_udCarporation
Total 1999
5
10 1 SMSinop
_.
a_ C__o_t Ho_,_ 21
22-day
1 CatmonSales
Cortmraticm
36 2/8/99
2 Trans-_ Investment
2/8/99
3 Standforcl Resot_ces
3/3/99
Development
._. ;_ P_
Table
3. continued...
Year Filed
WiLhdrawn
Duration of bheCase
Dismissed
Duration ofthe _se
Onl_z_g
Star tefl
Total
째.
4 HighlandE_r, Inc
4/28/99
5 Marfel Marke'dng Corporation
6/1/99
6 Sagay Dive_ified Industries
6/t7/99
7 Uniwide Sales, UrdwicIe Holdings, Naic Resom_es and
6/25/99
_.
Corl_aUon Uniwide Sales Realty Resoumes F_st Paragon Uniwide Sales Realt y Club, Inc.
Total Grand Total
0 7
1 22
8 Mr. _Mat_._m Center, Inc..
7/13/99
9 C_G. Spo_wear Manufacm_in 8
7/26/99
10 Sea,shine _ Trading Co.,
9/9/99
10 37
66 4_
Source: Securities
and Exchange Commision
(SEC).
o_
416
Economic
crisis... Once more
The SEC has jurisdiction and supervision over all corporations, partnerships or associations who are grantees of primary franchises and/or license or permit issued by the government. The Securities Regulation Code (SRC), which was passed in July 2000, has given SEC the flexibility to reorganize itself and fix compensation for its staff so that it can hire highly qualified people to manage its affairs efficiently and effectively. With this reform, the SEC will be placed at par with the BSP in terms of independence, in supervising the firms under its jurisdiction.
capacity
and strength
The SRC ha s strengthened the internal management control structure of publicly listed corporations. It has shifted from "merit-based system" to "full disclosure approach" so that investors have all the necessary information to base their decisions. It has also strengthened the disclosure rules on securities trading. More specifically, any person who acquires directly or indirectly the beneficial ownership of more than 5 percent s of any listed security must comply the reportorial requirements within 10 days after such acquisition. The stricter reportorial requirements prescribed in the SRC apply to an issuer with a class of securities listed for trading on an exchange as well as to an issuer with assets of at least PS0 million and having 200 or more holders each holding at least 100 shares of a class of its equity securities. The protection of minority shareholders has been one of the issues in corporate governance. The Corporation Code has provisions dealing with this issue. These are cumulative voting of directors, appraisal rights, voting by proxy, right to demand inspection of company records and mandatory annual general stockholders' meeting. The SRC has strengthened this further by requiting any person or group of persons acting in concert who intends to acquire at least 15 percent of any class of any equity security of a listed corporation or who intends to acquire at least 30 percent of such equity over a period of 12 months to make a tender offer to stockholders by filing with the SEC a declaration to that effect. Such rule also applies to any corporation with assets of at least P50 million. This new tender offer'rule will avoid repetition of recent cases of acquisitions shareholders.
that
grossly
undermined
the interests
of minority
Just a few months before the passage of the SRC, the equities market was rocked by allegations of possible insiderl trading and price manipulations? The SRC now has a much tighter legislative framework to prevent fraud, price manipulation and insider trading. It has mandated the Philippine Stock Exchange to demutualize not later than 8 August 2001. It has also stipulated that the board
of any exchange
5A case in point is San Migue]Corp. 6This used to be 10percent.
should
include
at least 51 percent
who are
Chapter 13: Lamberte
417
independent directors and persons who represent the interests of issuers, investors, and other market participants. Recently, the Philippine Stock Exchange has complied with SEC's requirement prior to the restoration of its self-regulatory organization (SRO) status that its 15-man board of directors should include at least eight independent directors. The SRC allows the courts to slap stiffer penalties (i.e., an amount not exceeding triple the amount of the transaction value plus damages) to those found to have committed any of the following violations: false registration, false or misleading prospectus, communications and reports, fraud in securities transaction, manipulation of security prices, and insider trading. Bankruptcy law can be an effective instrument for strengthening corporate governance. In the Philippines, there are two existing laws governing distressed corporations. One is the antiquated Republic Act 1956 or the Insolvency Law of 1909 and the other is Presidential Decree No. 902-A of 1981 which sets out an orderly process of rehabilitating or liquidating distressed corporations. The SEC did not have clear rules and procedures for applying those laws and had taken each petition for suspension of payment on an adhoc basis. This has raised someissues
on corporate
governance. Knowing that they
can petition for suspension of payments whenever they encounter financial stress, corporations can be more aggressive in borrowing funds from creditors. It will result in a slowing down of the exit of truly insolvent corporations because it confers some incentives to owners going for the rehabilitation route rather than for an immediate liquidation. This has indeed been the case in the most recent past. Due to their inability to service their liabilities, 76 corporations sought refuge from the SEC by applying for a suspension of debt payments since January 1997. Twenty-eight of these belong to the top 7000 corporations in the country in terms of their gross revenues in 1996. Of the 76 corporations, 44 cases are still ongoing, with most of their creditors demanding outright foreclosure or greater participation in rehabilitation programs. The rest were either withdrawn by the applicants or dismissed by the SEC for lack of merit since, as previously stated, the SEC took much longer time to decide on the cases in 1997 than in later years. Because of the sudden increase in the number and size of companies petitioning for debt relief and mounting criticisms of creditors of distressed corporations, the SEC issued in December 1999 the Rules of Procedures on Corporate Recovery that sets out a good framework for processing and quickly resolving insolvency cases. Figure 4 outlines the suspension of payment proceedings and Figure 5, the rehabilitation proceedings. The Rules took effect in January 2000.
418
Economic
Figure
4. Suspension
of payments
Debtor
of Payments
SEC determhaes whether debtor is ientitled to I
[Casedismiss
T Source:
LEr_titled
and Carmona
5. Rehabilitation
_
Debtor
files Rehabilitation
petition
4
Interim
Receive,',
on motions
imposes
to summarily
[ Creditors
Oebtor _ubmits plan for _pproval by SEC allegir_ creditor opposition and moving for override |
ted toliquidation
]
1
Not hnplemented
[
[
_
ted]
Debtor
[ ordel$;
(2000).
"stay"
[
dlsmi_
petitl
[
plan;is
.......
appolnta'Rehabilitation [
plan
submits plan for approval by SEC ] alleging no creditor opposition I
[ P,,, n is notlsut._cess fully i m p] ....
SEC determines that is not feasible
and Carmona
[
dex_ide on rehabilitation
SEal approv_
[Wla n is s LICCessfuHy imp, ......
Source: Fitzpatrick
and rescheduling
(2000).
SEC holds initia[ hearing
T
[
"
(Rule IV) [Implemented
SEC tlppoints
.........
reliefI
proceedings [
[Ca
3
[ Moratorium
T
Fitzpatrick
Figure
[
Case converted to Rehabilitation
t
more
petition.
"stay;" sets hearing date,, Oversight Co'mmittee
Not Entitled
Once
proceedings.
files Suspension
SEC ianposes appoints
crisis...
Plan found
ece_ary
ted]
Receiver to mqulre
mcn:lification
I
Chapter 13: Lamberte
419
The recent passage of the SRC has somewhat complicated the application of the Rules. Section 5.2 of the SRC stipulates that the jurisdiction over intracorporate disputes and suspension of payments/rehabilitation cases be transferred to the Regional Trial Courts (RTCs). At present, the RTCs lack the capacity and procedural rules to govern the suspension of payments/ rehabilitation cases. Although they may adopt the Rules of Procedures on Corporate Recovery recently put into effect by the SEC, however, they are not bound to do so. Thus, there is real danger that the RTCs will adopt the antiquated procedures of the Insolvency Law of 1909. In view of this, a bill has been filed in Congress proposing a comprehensive legal framework for corporate recovery. Concluding remarks This paper has examined recent developments
in corporate governance
of banks and non-financial firms in the Philippines. The newly passed legislative measures such as the General Banking Act of 2000 and the Securities Regulation Code, and the issuance of the Rules of Procedure on Corporate Recovery, have addressed some issues needed for strengthening corporate governance of banks and nonfinancial firms. Well-regulated and adequately supervised securities market can boost the development of the domestic capital market and wean corporations away from bank loans. Improved banking system regulations, such as stricter rules on connected lending, can enhance banks' role as external control agents of nonfinancial firms. However, if one goes over Saldana's list of recommendations to strengthen corporate governance in the Philippines, one cannot but conclude that more reforms are still needed. Some of the needed reforms are: (1) increasing the minimum percentage of outstanding shares for public listing; (2) specifying a minimum number of independent directors in the board of publicly listed companies; (3) increasing the required majority percentage votes on critical corporate decisions; and (4) developing the market for corporate control. There is also a need for the Regional Trial Courts to quickly resolve the issue regarding what rule they are going to follow in resolving cases of petition for suspension of payment or for rehabilitation of distressed corporations. Finally, the government mush push for the passage of a comprehensive legal framework for quickly resolving insolvency cases.
420
Economic
crisis... Once more
References Espenilla, Nestor, Jr. 2000. Enhancing the Philippine Banking Regulatory and Supervisory Framework. A paper presented at the Asia Development Forum: From Crisis to Opportunity; Singapore. 5-8 June. Fitzpatrick, Daniel and Cheselden George Carmona. 2000. An Introduction to the Rules of Procedure on Corporate Recovery. Business World, 15 February. Saldafia, Cesar G. 1999. Philippine Corporate Governance Environment and Policy and their Impact on Performance and Finance. Asian Development Bank: Manila. Zhuang, Juzhong, David Edwards, David Webb and Ma. Virginita Capulong. 2000. Corporate Governance and Finance in East Asia. Asian Development
Bank: Manila.
Part V:
Monitoring Systems
14 Developing an Early Warning System to Help Understand and Monitor Economic Crises Jose
17.Yap
s the East Asian economies recover from the 1997 financial crisis, the debate on the causes of the crisis remains unresolved. It is necessary to understand the nature of the crisis to implement appropriate policies that will minimize chances of similar incidents in the future. At the very least, a system must be developed that will help policymakers anticipate future crises. There has been a tendency to categorize the causes of the crisis into two broad themes: economic fundamentals and contagion. In the former (e.g., Corsetti et al. 1999), the deterioration in macroeconomic and financial fundamentals attributed to faulty policies led to the crisis. On the other hand, the contagion theme suggests that the debacle was a self-fulfilling crisis brought about by arbitrary shifts in market expectations and confidence that resulted in investor panic (e.g., Radelet and Sachs 1999). This classification is quite restrictive in several ways. First, it assumes that the change in investor sentiment has an underlying cause related to economic fundamentals. What could be considered irrational is the magnitude of the reaction. Second, it suggests a distinction between financial weakness and financial vulnerabilit_ Indeed many of the economies in East Asia were vulnerable, judging from the state of their fundamentals at the time of the crisis. A state of vuinerabilit35 however, does not by itself lead to a crisis. Third, as Kim et al. (1999) clarify, a contagion can imply many things. An economic crisis may spread through trade links, direct and indirect financial channels, and through what is called pure contagion. This paper uses the Early Warning System (EWS) developed by Kaminsky and Reinhart (1996) to shed light on this debate. By itself, the EWS would be useful for monitoring whether the economy
specific economic fundamentals. It would has become weak or vulnerable to a crisis.
determine
424
Economic crisis... Once more
A review of the various causes of economic crises is presented in the second section. This includes a discussion on the various transmission channels of the contagion. The EWS methodology and results as applied to the Philippines are presented in the third section. Based on the results and those of another study (Yap 1999), the various viewpoints on the debate on causes of the crisis are consolidated in the fourth section. A summary is given in the last section along with a discussion of areas for reform that are related to the crisis. I
Crises and their causes Interest in early warning systems has been revived after the spate of currency and banking crises in the 1990s. The basic idea is to monitor key economic variables, which would enable policymakers to predict a crisis, allowing them sufficient time to implement appropriate measures to stern the crisis or, at the very least, minimize its adverse impact. The contrasting view is that predicting a balance of payments (BOP) crisis or financial crisis is like predicting an earthquake, although such an analogy refers only to the actual timing of the crisis. An early warning system is designed to signal an impending crisis. The exact moment is not crucial if there is sufficient lead time to react to the signal properly. Economic indicators to be monitored are readily derived from the theory of the causes of banking and BOP (or currency) crises. The literature distinguishes three types or, more precisel_ three generations of BOP crises. Krugman's 1979 seminal paper stressed that crises are caused by weak economic fundamentals, such as excessively expansionary fiscal and monetary policies. These resulted in a persistent loss of international reserves that ultimately forced authorities to abandon the fixed exchange rate regime. The International Monetary Fund (IMF) was quick to blame macroeconomic fundamentals that were out of line with equilibrium values as the cause of the Asian financial crisis. Current account imbalances, especially in Thailand and Malaysia, and overvalued currencies were the main factors. As a result, policy prescriptions centered on traditional stabilization policies, a course of action that met with dire consequences. Following the European Monetary System (EMS) collapses in 1992 and 1993, later models of currency crises dealt with cases where the depletion of international reserves might not be at the rqot of currency crises. These models focus on the different, and oftentimes conflicting, objectives of government policymakers. For the twin goals of reducing inflation and achieving a target economic growth rate, fixed exchange rates may help achieve the first goal but at the cost of a loss of competitiveness an_ a recession. With sticky prices, a devaluation may restore competitiveness and help eliminate unemployment,
Chapter 14:Yap
425
thus prompting policymakers to abandon the parity during recessions (Kaminsky 1998). More recent models have shown that a crisis may develop without a significant change in economic fundamentals. In these models, economic policies are not predetermined but respond to changes in the econom)5 and economic agents take this relationship into account in forming their expectations. This set of assumptions opens the possibility for multiple equilibria and self-fulfilling crises. 1This type of model suggests that it may be difficult to find a close relationship between fundamentals and crises, as the latter may take place without a preceding significant change in economic fundamentals (Kaminsky et al. 1998). Corollary to the possibility of self-fulfilling crises is the role of contagion effects. A recent paper by Kim et al. (1999) identified three main transmission mechanisms for contagion effects. The first is the trade channel where the devaluation of the currency of one country forces the devaluation or depreciation in other countries that compete for the same export markets. The second is the financial channel where both direct and indirect transmission mechanisms are identified. The former involves foreign investment--bank lending, portfolio investment, and direct foreign investment--among the crisis countries. A contagion through the direct financial channel was significant in the case of Korea, which made considerable investments in Southeast Asian countries beginning in the mid-1980s. On the other hand, the indirect financial channel works through international investors (e.g., mutual funds), who have asset positions in various countries under crisis. A crisis in one country can affect the portfolio strategy of international investors due to various reasons. For example, losses in one country could lead international investors to pull out their investment in other developing countries to meet a specified capital-adequacy ratio or margin calls, or to resolve their liquidity constraints. A contagious crisis can take place if these international investors suddenly and simultaneously change their investment positions in several countries. The third channel is what is referred to as pure contagion, which is actually a variant of the indirect financial channel. A pure contagion is related to changes in the behavior of international investors, which are not caused by systemic or mechanical changes in their portfolio composition but by shifts in their perception toward market risks. One theory in this category assumes that international investors follow "herd behavior" in portfolio and risk allocations. This is brought about by the incentive scheme among fund managers, which penalizes those who deviate on the low end from the average performance of a regional portfolio (Montes 1998). aSee for example
Obstfeld
(1996).
426
Economic crisis... Once more
Another form of pure contagion is what is termed "informational cascade," wherein instead of evaluating countries individually, investors tend to lump them in one group. Hence investors pay little heed to countries' economic fundamentals and do not discriminate properly among countries (Kaminsky et al. 1998). Thus, for instance, ffinvestors pull out their investment from Thailand, they would simultaneously lower their portfolio investment in Southeast Asia. The literature on banking crises is more straightforward and gives flavor to sources of weaknesses in the financial system. The health of the banking system revolves around the relation of the value of bank liabilities and the value of their assets. When the value of their assets falls short of the value of their liabilities, banks become insolvent. A full-blown crisis ensues when the insolvency becomes systemic. Under credit risk, borrowers become unwilling or are unable to service their debt (due to specific factors), reducing the value of bank assets. Credit risk can be minimized through greater capitalization, prudential regulation, closer supervision, and greater portfolio diversification. The argument as related to the Asian financial crisis is that inadequate prudential regulation prevented risk of bank loans to be evaluated appropriatel)a Instead of source_ of financial weakness, financial fragility or vulnerability could be assessed. Bank balance sheets can deteriorate even without an increase in the number of defaults if the rate of return on bank assets falls short of the rate that must be paid on liabilities. Perhaps the most common example of this type of problem is an increase in short-term interest rates that forces banks to raise the interest rate paid to depositors. Because the asset side of bank balance sheets usually consists of long-term loans at fixed interest rates, the rate of return on assets cannot be adjusted quickly enough, reducing the profits or losses of banks. Even if banks are able to pass on the higher interest rate cost of their liabilities to their borrowers, higher lending rates may result in an increase in nonperforming loans (NPLs). Thus, a large,increase in short-term interest rates is likely to be a major source of systemic banking sector problems (DemirgucKunt and Detragiache 1998). Recentl)_currency mismatch became a prominent source of banking sector vulnerabilit3a This happens when banks borrow in foreign currency and lend in domestic currenc_ An unexpected depreciation occurs, threatening the banks' profitability. The banks can pass on the risk to borrowers if they lend in dollars as had been the case in many East Asian economies. But ff borrowers do not have a natural hedge, the unexpected currency depreciation would still affect bank profitability negatively through an increase in NPLs. The last consideration in banking crises is the role of deposit insurance. When bank deposit s are not insured, a deterioration in the quality of a bank's assets may trigger a run. A situation may arise when a bank run may be self-
Chapter
14: Yap
fulfilling--it
427
may take place simply because
depositors are withdrawing the bank's balance sheet.
depositors
believe
that other
their funds even without an initial deterioration
of
Deposit insurance minimizes chances of self-fulfilling crises and systemic bank runs. On the other hand, having a deposit insurance creates moral hazard problems, which are amplified in a more liberalized financial environment. With greater competition and greater access to funds, bank managers choose riskier loan portfolios, knowing that when a crisis occurs, they will be bailed out by deposit insurance. The argument on moral hazard can be extended to the role of implicit guarantees by the government and also to include the issue of crony capitalism. The ability of some borrowers to obtain behest loans of dubious quality has considerably weakened the banking system. These loans, however, need not necessarily arise from implicit guarantees provided by government officials to banks for preferred clients, but may be DOSRI-type loans (directors, officers, stockholders and other related interests). The extension
of the theory on economic
crises is to link currency and
banking crises. Kaminsky and Reinhart (1998) have provided a brief survey of the literature related to this topic. One chain of causation runs from BOP problems to banking crises. An initial external shock, such as an increase in foreign interest rates, coupled with a commitment to a fixed parity will result in loss of reserves due to capital outflows. If not sterilized, this situation will lead to a credit crunch, increased bankruptcies, and a financial crisis. Moreover, if a devaluation occurs the position of banks could be weakened further if a large share of their liabilities is denominated in foreign currency. Such a problem becomes more acute when the capital flows are in portfolio transactions or short-term capital movements rather than foreign direct investment. Liberalizing capital account transactions, which allows this type of short-term capital flows, may contribute to the instability of reserve flows and adversely affect the ability of the country to peg the domestic currency (Kaminsky 1998). Meanwhile, other models point to the other direction financial sector problems give rise to the currency collapse. Such models stress that when central banks finance the bail-out of troubled financial institutions by printing money, there arises the classical situation of a currency crash caused by excessive money creation. The debate on the causes of economic crises, particularly financial crisis, is one that is not easily resolved.
-_
the East Asia
A key issue is whether
self-
fulfilling crises and panic among investors had a major role to play or whether all economies involved had weak fundamentals to justify the downward spiral. The use of an early warning system can help shed light on the debate by
428 determining
Economic whether
crisis... Once more
the 1997 crisis, on a country-by-country
basis, could have
been predicted by the behavior of specific economic variables. If the values of many indicators were relatively extreme prior to September 1997, then the crisis could be related to weak fundamentals. On the other hand, if signals were within normal range, then the crisis could be attributed to a contagion and panic on the part of foreign investors. Application of the EWS to Philippine data Methodology" Literature on the different indicators
and various
methodologies
employing them is aptly reviewed by Kaminsky et al. (1998). They also provide a list of the main indicators used in empirical work classified by category (capital account, debt profile, current account, international variables, financial liberalization, real sector, fiscal variables, institutional/structural factors, and political variables). Four methodological categories are, cited in the review paper. Two of them have been prominent in recent literature. The first estimates the probability of a devaluation, or more broadly, the probability of a crisis, based on regression estimates using any one of the limited dependent variables techniques. One such application is that of Demirguc-Kunt and Detragiache (1998) who studied factors associated with the emergence of systemic bank crises in a large sample of developed and developing countries using a multivariate logit model. Some of the variables they found significant are real interest rates, economic growth, inflation, and M2/reserves ratio. In some variations of their regression model, they found institutional variables, such as the presence of deposit insurance and law and order, significant. The advantage of this methodology is that it summarizes all information in one useful number, the probability of a crisis. Also, this approach considers all variables simultaneously, and disregards those that do not contribute information that is independent from that provided by other variables already included in the analysis (Kaminsky et al. 1998). This methodology has some important limitations. First, it does not provide a metric for ranking indicators according to their ability to accurately predict crises and avoid false signals, since a variable either enters the regression significantly or it does not. While measures of statistical significance can help pinpoint the more reliable indicators, they provide no information on whether the relative strength of a particular indicato_ lies in accurately predicting a high proportion of crises at the expense of sending numerous false alarms, or instead missing a large share of crises but seldom sending false alarms. Second, this method does not provide a transparent reading of where and how widespread macroeconomic problems are. Within this approach, it is
Chapter
14: Yap
429
difficult to assess which of the variables
is "out of line," making it less than
suited for surveillance and preemptive action. 2Third, there is evidence that the ability of the probability approach to generate accurate forecasts tapers off quickly as the forecast horizon moves beyond one period ahead. The shortcomings of the probability approach are addressed by the "signals" approach developed by Kaminsky and Reinhart (1996). This is the methodology used in this paper. The step-by-step procedure has been discussed extensively (Kaminsky et al. 1998, Kaminksy and Reinhart 1996) and we adopt the discussion of Goldstein (1998). First, a sample of countries must be identified. It is possible to base the analysis on just one country, but the limited number of crises will prevent a robust generalization on the usefulness of indicators. Second, the definition of a crisis must be delineated. Kaminsky and Reinhart define a bank crisis in terms of bank runs, closures, and mergers, or large-scale public sector takeovers of important financial institutions. For currency crises, they construct an index of exchange market pressure by taking a weighted average of changes in nominal exchange rates and changes in international reserves; when the nominal exchange rate depreciates and international reserves fall, exchange market pressure is greater. Extreme values of this index--that is, readings of three or more standard deviations above the mean--signal currency crises. Third, the term "early" must be defined. For currency crises, Kaminsky and Reinhart define early as between 1 month and 24 months before the beginning of the crisis. For banking crises, a laxer definition is adopted, namely, either 1 month to 12 months before the start of the crisis or up to 12 months after the beginning of the crisis. This is because banking crises frequently last 4 to 5 years?much longer than currency crises (typically less than a year)?and because the peak of a banking crisis often takes place several years after it starts. The signals approach has been criticized as being arbitrary in delineating a period that is considered "early" (Demirguc-Kunt and Detragiache 1998). Corollary to this, it should be noted that indicators have different lags in their impact on the economy Hence, the definition of an "early" period may vary from country to country. In this study, the definition of Kaminsky and Reinhart is adopted. The fourth task is to pick out a list of potential early warning indicators. Knowledge of the theoretical causes of currency and banking crises provides a basis for identifying possible indicators that signal a crisis. For example, based on Generation I models (which emphasize macroeconomic variables out of line),
2The discussion (1998).
on the limitations
of the probability
approach
is quoted
from Kamlnsky
et al.
430
Economic
crisis... Once more
economic variables to watch out for are excessive monetary growth, deteriorating fiscal balances, and rapidly depleting international reserves. Another criterion used for selecting an indicator is the availability of highfrequency data. A list of indicators used by Kaminsky and Reinhart that were applied to this study is presented in Table 1. The list includes a brief explanation of each variable. Table 1. Leading Financial
indicators.
sector
M2 multiplier: A higher multiplier indicates higher growth in money supply which may lead to higher inflationary expectations and expectations of a future devaluation of the currency, Domestic credit: A larger amount of credit increases the chances of bad loans and bank failures. Higher credit also implies a larger amount of money suppl)_ In the absence of data on domestic credit, the growth of M2 in real terms was used instead, M21Reserves: Economic agents fearing a devaluation may substitute local currency for foreign currencja The M2/Reserves ratio is an irldication of the extent to which the Central Bank can withstand this pressure. Lending/Deposit rate: A higher spread indicates that the Central Bank is increasing interest rates to stem credit growth. Higher lending rates increase the chances of bad loans. Deposits:
A decline in the deposit base increases
the chances of a bank run.
Real interest rate: Higher interest rates increas]e the probability of loan defaults. Excess money balances: Equilibrium real M1 balance was estimated using the HodrickPrescott filter. The difference between actual and equilibrium values is equal to the excess money balances. External
sector _
Exports: Lower export growth may signal problems with the trade balance. Imports: Higher import growth may signal problems with the trade balance. Real exchange rate: The equilibrium real exchange rate is estimated using the HodrickPrescott filter that allows for stochastic trends. The difference between the actual value and the equilibrium value is a measure of the degree of overvaluation. published by JP Morgan was used in the computations. Reserves: This is the classic low level of reserves below currency. Interest rate differential: 90-day US Tx_asu13r Bill rate) the differential, the larger is
indicator based on Krugman's a critical threshold may trigger
The real exchange
rate
seminal paper on BOP crises. A a speculative attack against the
This is defined to b4 foreign interest rates (as measured by the less domestic interest rate (91-day Treasury Bill rate). The higher the probability of an outflow of reserves.
Real sector Output growth: Lower output growth indicates a deceleration of the economy prior to a o:isis. A modification would be to take the first difference of output growth to reflect more accurately an economic deceleration. The valud index of manufacturing output was used and this was deflated by the consumer price index (CPI) to obtain an index in real terms. Stock market prices: A decline in the growth r_te of asset prices may lead to loan defaults. It also signals a loss of investor confidence. This i0dex was not included in this paper because of lack ot data prior to 1987. * Note that variables fi'om the external sector can be leading of the relationship of a BOP crisis and banking crisis.
indicators
of a banking
crisis because
Chapter 14: Yap
431
Given the indicators,
step number five is:t6find an optimal threshold for
each indicator that, once reached, will give an accurate signal of a future crisis. The point at which an indicator signals a crisis must be set. Thresholds are determined using an i,terative procedure. Given an indicator X, an arbitrary tail of the frequency distribution for X--say the 10 percent tail--is set. Depending on the nature of X, it canbe the upper or lower tail. Any observation that falls in the 10 percent tail of the time series of X is regarded as a signal. It is considered a true signal if a currency crisis occurs within 24 months after the signal was given, and a false signal (or noise) if no crisis occurs within that early-warning time frame. Various thresholds are then experimented with until the optimal one is found. The optimal threshold maximizes the number of true signals and minimizes the number of false signals. The tail that minimizes the noise-tosignal ratio is used. Optimal thresholds as determined by Kaminksy and Reinhart were used in the study. After applying the basic steps of the signals approach, the data for the indicators
Xjt--indicator/at
time t--are
S, = 1 if the value of Xtcrosses = 0 if otherwise. According
to the definition
transformed
in the following manner:
the threshold
of Kaminsky and Reinhart the indicator is
considered good if in most of the cases when Sitis 1, a BOP crisis occurs during the period t + 24 months. As mentioned earlier, a laxer definition is adopted for banking crises Sit assumes a value of 1 when X_ crosses the threshold either 1 month to I2 months before the start of the crisis or up to 12 months after the beginning of the crisis. For this paper, only Sit is monitored to determine which signals were flashing prior to the onset of the crisis in each country that was considered. The early warning system should enable policymakers to determine when the economy is becoming fragile. One way to facilitate analysisand make the system tractable is to compress the various indicators into a composite index. The most straightforward procedure is a simple count of flashing signals, which is the composite index labeled S by Kaminksy (1998) and defined as: St = Y.Sj, J This statistic, however, does not fully use the information provided by urtivariate indicators because it does not account for the different forecasting accuracy of each variable. One way of combining this information is to weight the signals of different variables by the inverse of their noise-to-signal ratio. The second composite index, labeled K, is defined as:
432
Economic crisis... Once more
Kt--Z sj,/ni J
where n.3 is the noise-to-signal ratio of indicator]_ In this exercise we applied the noise-to-signal ratios calculated by Kaminksy and Reinhart. The above composite leading indicators assign the same weight to a signal provided by a mild anomalous behavior of a variable and that provided by an extreme aberrant behavior of that variable. To account for this distinction, two different thresholds can be defined for each indicator: a mild threshold Y and an extreme thresholdYo. IY I < IYoI and based on the criterion defined earlier, St= 1 when IXt I > [ Y_)I- Y_jis the mild critical threshold for indicator
/
An extreme signal D is then defined based on Y such that Djt= 1when ] Xt I > I Y_ I- Sit= 1 whenever Djt = 1. The third composite indicator that accounts for the intensity of the signal of each univariate indicator, labeled W, is defined as: W, = 5](Sit+ Di,) Time series probability forecasts are then computed to evaluate the reliability of each of these composite indices. We can construct a sample-based vector of conditional probabilities: Pr(Ct, t +h I St = I ) = Months with S t -- I and a crisis within h months Months with S t = I Pr(Ct, t +h I Kt = I ) = Months with K, = I and a crisis within h months Months with K t ---I Pr(Ct,, + h IWt = I ) = Months with W t = I and a crisis within h months Months with W t = I Emp lri cal results The signals approach can be applied to individual countries. Indicators should be used along with the respective optimal thresholds computed using data for all countries in the sample. Extending the number of indicators is a feasible task but to determine the optimal threshold for additional indicators in a robust manner, the same cross-country format must be adopted and high frequency must be obtained. These data, however, are not readily available for variables such as short-term foreign debt and the ratio of nonperforming loans. This is another limitation of this methodology. â&#x20AC;˘ In the meantime, the signals approach Using basic indicators was applied to the Philippines for the period January 1976-May 1998. Two episodes of currency crises using the definition of Kaminsky and Reinhart were identified:
Chapter 14:Yap
433
October 1983and September 1997. Another BOP crisisactually transpired during the sample period and this was during the Gulf War in August 1990. This was excluded for the following reasons (1) the particular period was not in the list of Kaminsky and Reinhart; (2) the crisis was prompted primarily by external causes; and (3) the signals at that time were relatively weak. Table 2 shows the values of Sjtfor the entire sample period along with values of the three composite indices. The noise-to-signal ratio, the optimal threshold, and the corresponding cut-off value for the 13indicators are likewise presented. In the 1983 crisis, indicators that were consistently flashing were (1) total foreign exchange reserves; (2) the ratio of M2 to total reserves; (3) the interest rate differential, and (4) the money multiplier. These indicators are ranked according to the number of signals they emitted during the early period (October 1981-September 1983). On the other hand, during the 1997 crisis, indicators thatwere most active were: (1) overvaluation of the currency based on a measure of the real effective d_change rate; and (2) growth of domestic credit. These signals did not flash consistently during the 2-year period prior to July 1997. The difference in the sets of active indicators in the two episodes implies that the source of a crisis varies. Incomputing for the time-series probabilities, a slight modification was made on the methodology of Kaminsky and Reinhart. The 24-month period after the 1983 crisis was excluded to account for the adjustment period when signals were flashing but no new crisis occurred in the following 24-month period. At this time the Philippine economy contracted by a combined 15 percent a good enough reason for excluding the period in the analysis. Table 3 shows the frequency table of probabilities for the different values of each composite index. A composite index is considered more desirable when the probability of a crisis obtained from the index rises in periods close to the crisis. Moreover, the probability should also rise along with the value of the signal. Both criteria showed that the composite indices generally performed well. This observation was supported by a summary measure called Brier's quadratic probability score or QPS (Table 3). The QPS evaluates the average closeness of predicted probabilities and observed realizations as measured by a zero-one dummyvariable. Tprobability forecasts, given by the time series probabilities, labeled Pt, are compared with time series realizations of the crisis, Rt. Rtequals I if a crisis occurs between t and t+ 24,and 0if otherwise (with a slightly different definition in the case of a banking crisis). Brier's quadratic probability score, which is the analog of a mean squared error is:
Table 2. Transformed • indicators for the Philippines. tl',ze_ ozd neoise/s_oml _60
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1._ L9
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_-__ J-_'_" l:gT,_I_B 1977 l_ql_. 1977A.PR 197"IM..q.¥
0 0 0 0 0 13 13 13 0 13 13 0 13 0 0 1 0 0 13 1 O 1 0 t 3 O 0 13 13
n/a n/i _/a n/a n/a n/a n/a n/a n/a n/a n/u n]* 0 O 0 13 0 D O 13 0 • 13 q0 0 13 13 13
O 0 O 0 O 13 13 0 0 13 13 13 13 13 13 13 13 13 0 0 9C" _" G 0 0 0 0 13
19_TJUN 19T7JUL 1977 ALTG l'_TZ_ 19'7_'lull" 19"77_O v
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13 0 0 0 0 13
1917 1"3r'_D_X_ JAN L"_ e_._ "J97_, MAR [V78 APR lgT'_/_A.¥
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1_ ,rAiN 1_7_/,'/_ 19_5 MAR 19_ _ 1_ MAY 19'7_JUN 19"_jiq.TL 1975 AUG 1'-_ bUlL" 19"_C_T 19_ NOV 1973E_C 1'9"/6JJ_P,,i 19761,_ 1976MAR 1976 APR ]976 MAY 1976JUN 1976yl..rL 1976ALK] 1976'_bl" 1976_1" lg 76NOV
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0 1 0 0 13 13 1 1 ! [ 1 13 13 13 13 0 0 0 13 0 13 13 13 O 132 0 0 '_ 9-
n/a z_/a n/a z_/a riga n/a a/a n/a n[a n/a n/a n/a 0 13 0 0 0 O 0 13 13 13 13 0 13 13 0 0 13
0 0 0 0 0 0 • 0 0 13 13 I 1[ 13 13 1 t 1 13 13 13 0 0 ,8 13 13 0 0 0
0 0 0 0 13 13 13 13 13 13 13 13 13 13 13 0 0 0 13 13 13 O 13 O 13 0 13 13 0
0 0 0 0 ! ] 1 13 $ I _ I 13 l L 13 13 13 13 0 0 0 0 0 13 13 13 0 13
1 0 0 O 13 0 13 0 O 0 0 13 13 13 13 13 13 13 13 13 13 13 0 0 0 13 0 1
_/a n/a _/a _/a _/a _n/a _./s _/a. _/z n/x n/x _[s 13 13 13 13 13 13 13 13 13 0 0 _ 13 13 O 0 0
0 0 0 0 0 0 0 0 13 13 0 13 13 13 0 0 13 13 13 13 13 13 13 _I 0 1 0 0
13 0 0 13 13 0
13 13 13 13 13 13
13 13 13 13 13 13
0 13 0 13 13 13
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Table 2. continued... 1LEN/Z_P
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191_ JMAR 1995 A_. 198,5MAY 19_5 _
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0 0 Q 1 1 0 0 0 0 0 0 0 0 t 0 0 ) 1 O 1 1 0 0 0 0 0 0
p./¢. It,f# nta n/a
0 0 0 a/a
1990 OCT
n/a
ICJ_8Ut_t_
n/|
i_8 I_)H lggR 1990
P0N 'K.,q. AUG _
_ 0
9.40 0
_9.02 1
],07 0
-1 I_L 0
34_5 0
-_-28 0
0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 O 0 0 0
0 0 0 0 0 0 0 0 0 0
0 0 O 0 0 0 0 0 0 O
0 0 0 0 0 0 0 0 0 0
'0 0 0 0 0 O 0 o 0 0
0 0 0 0 0 6 0 0 0 )
O 0 0 0 0 o 0 0 0 0
0 0 C. 0 0 0 0 0 0 0 0 0 0 O 0 0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 O 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 O '0
0 0 0 '0 0 0 0 6 0 0 0 ,0 O 0 0 0 0 1 1 1 0 Z ) 1 1 0 0
O 0 0 "J ) 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 O 0 0
0 O 0 0 0 0 O 0 O 1 O '_ 0 0 ) 0 0 0 O' 0 0 i 0 0 0 0 0
0 0 0 0 0 ,0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 '0 O 0
0 0 0 0 0 0 0 o 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
n/s _%_a n/a n/a
O 0 0 u/s
0 0 0 O
0 0 0 o/a
0 O 0 n/a
0 0 _fz _/a
a/a
n/a
n/t
0
n/a
n/a
n/a
n/a
p_/at
m_fa
n/a
n/a
L07 0
-27.62 0
_
=..yz
_v-t
0 0 0 0 0 o 0 0 0 O
0 u O U 0 u 0 0 o U
7. t "z i u 2 2 x 'z •
-z.7_ Lo/ _ JL._ e.e_ 7.25 -,r..._
0 0 0 0 0 0 0 o 0 O 0 0 0 0 0 o O 0 0 0 0 0 O 0 O 0 0
0 0 0 I 0 "J 1 e 0 l 1 1 I z l ] 0 0 0 0 0 o 0 O U O o
O o O o 0 o 0 o 0 O O 0 o o • v 0 0 o o 0 z O _ v ',J o
v u o _ 2 2 2 t 1 _ s $ ] 2 7. J. z • t 2 • 2 x J. _: J. t
0 0 n/a _/a
0 0 0 0
0 _ 0 0
u U o e
u u o u
u._ v.t_ v.oe _ee
_t/a
n/e
O
U
n/z
e
_5
t_a
n/a
r_a
O
n/a
v
_*_
I
• •
x.7._ _-_u _eu o._ 7.._,_. 7.2=. t..o:,, LbX 1..e_ tce.i a.os =,._ _.t_ •:_.:._, ,r'.teL_ ::_u -/...z_ L,o L_a _._ _._-,: LT_ L.,m z."_z. J.._.7 LW
_J_
4_
Table 2. continued... threshold _/se/_n_l
[3.68 ra'l"o
1.62
6L52
t._r_IVm"
M21RFaS
_
M2 Multiplier
[.I_//DEP
L_ding/Depo_
',,42/R.F_
M2/R_'ves
_IR
Re_I Inlez'_+sL Rate
13.34 DRI_
9.40 RIR
_9.02 _
L 07
-1 L54
34.35
-29.8
L07
RX
X
M
]gIRD
OVER
-_3.$ 2 I:O]IIDC
$
K
Ra_s
DCRI_
DQam_licC'r_l_t
gg3(
_¢.e_
_RBX
[k_ex R_etv_
RR_D
Fti_l _nterest Rate Diff_ eraiaI
OVER
3vercalua_ion
M1 Bal_
]
_)
O Source ot basic data: International
Financial
Statistics
(CD-ROM),
IMF ]P Morgan
website
(www.jpmorgan.com)
for Real Exchange
Rates.
._-
Chapter 14:Yap
441 QPS = 1/T Et 2( Pt" Ph)2
The highest possible value of the QPS is 2, while perfect accuracy implies a value of 0. The QPS for the Philippine composite indices are 0.29 for the S index, 0.19 for the K index, and 0.21 for the W index. These are lower than values obtained by Kaminksy and Reinhart, which are about 0.33. Based on the behavior of the time-series probabilities and the value of the QPS, the K composite index seems to be better suited as an early warning signal. Kaminsky and Reinhart also found that the K measure performs better. The S and W index were relatively mild during the period prior to the 1997 East Asian financial crisis. On the other hand, the K composite index emitted a relatively strong signal from December 1996 until June 1997 (Table2). But the signals were intermittent and rather weak especially when compared with the 24 months prior to the 1983 crisis. The peak value of K was 12.83 and this occurred in August 1982. In conclusion, the exercise showed that the EWS of Kaminsky and Reinhart has some promise and only a slight modification had to be made. To be more effective, the system must use additional indicators mainly from the financial sector. The data, however, must have a monthly frequency and the study must involve other countries. This means that data from these countries must be available. At present, both conditions have not been met.
Table 3. Probability tables for composite indices. S Composite Index Sj Pr(BOP Crisis) 0 0.07 1 0.12 2 0.29 3 0.43 4-5 0.67 Brier's QPS: 0.29
K Composite Index
Kj
Pr(aOPCrisis)
0.0 - < 1.0 1.0 - <2.0 2.0 - <3.0 3.0 - <5.0 5.0 - < 7.0 7.0 - above Brier's QPS:0.21
0.07 0.10 0.18 O.34 0.67 0.87
W Composite Index Sj 0 1 2 3 4 5 6 and above Brier's QPS: 0.19
Pr(BOP Crisis) 0.07 0.07 0.21 0.51 0.14 0.60 0.20
442
Economic crisis... Once more
Consolidating the debate Empirical results of the EWS methodology indicate that the economic fundamentals of the Philippines were much sounder prior to the 1997 crisis than in the 2-year interval prior to the October 1983BOP crisis. In another paper (Yap 1999) the methodology was extended to 11 other countries: Indonesia, Korea, Malaysia, Thailand, Denmark, Finland, Norway, Sweden, Mexico, India, and Pakistan. The first four countries plus the Philippines comprise the Asian 5, the economies hardest hit by the crisis.i Key results can be summarized by ranking the cases by number of indicatorsl flashing on a regular basis: 1. The Asian 5 during their respective economic crises prior to the 1997 debacle (e.g., the Philippines in 1983)_ 2. The Scandinavian countries during their crises in the late 1980s and early 1990s. 3. The Mexican crisis in 1994. 4. Pakistan prior to the 1997 crisis. 5. The Asian 5 prior to the 1997 crisis. Results generally indicated that fundamentals cannot explain the depth of the 1997 crisis because the other episodes did not have as severe an impact-especially in the number of countries involved--and yet the fundamentals were weaker. Several studies, however, have shoWn that the five Asian countries were indeed in a state of increased vulnerability especially when compared with their neighbors.a These studies also accounted for variables--amount of shortterm foreign debt, ratio of nonperforming loans--that are not included in the EWS. Vulnerability, however, cannot explain the spread of the crisis. The extent and magnitude of the crisis can be attributed to the contagion that resulted in a vicious cycle of capital outflow--> depreciation'-) financial weakness'_ capital outflow. This line of analysis actually fuses the two major factors: weakness in the economic fundamentals of one country was the trigger, while the contagion exacerbated the crisis. It can be argued that the Asian financial crisis was sparked by the collapse of the Thai baht due to weaknesses in the Thai financial system and a widening current account deficit--brought about primarily by a slowdown in exports-that was deemed unsustainable. But Radelet and Sachs (1999) contend that the essence of the crisis was a huge, sudden reversal of capital flows. Net private capital flows into the Asian 5 jumped froml$37.9 billion in 1994 to $97.1 billion in 1996. But in the last half of 1997, these inflows suddenly reversed, with net
SE.g., Corsetti
et al. (1999) and Athukorala
and Warr (1999).
Chapter 14: Yap
443
private capital flows turning into an outflow of $11.9billion. The turnaround of $109 billion in just 6 months is estimated to be 10 percent of the precrisis GDP of these five countries. Krugman (1999) succinctly states that the punishment was surely disproportionate to the crime. But what form of contagion was most relevant? The empirical analysis of Kim et al. (1999) shows that the indirect financial channel was a very significant source of the propagation of the crisis, while the trade channel was not. They did not investigate directly the channel of pure contagion although references alluding to its _ignificance were cited. Policy implications are the same, however, if the primary source of contagion is through the indirect financial channel or pure contagion. The debate should also focus on the evolution of these economies leading to the crisis situation. One strand of thought blames poor economic policies--revolving around the idea of inadequate prudential regulation--and consequences of the moral hazard problem. The latter of course is a euphemism for corruption and cronyism in the domestic financial system. Meanwhile, another line of argument attributes the financial vulnerability primarily to twin liberaliTation: capital account and financial liberalization. Capital account liberalization allowed financial institutions and private corporations to borrow abroad even if they did not have a natural hedge against a sharp depredation. The policy of a fixed or managed exchange rate only served to encourage this behavior. On the other hand, increased competition among domestic banks brought about by financial liberalization provided an incentive to lend to riskier projects, thereby exacerbating the problem of asymmetric information. Analysts who support this argument point to the case of the financial crisis in Scandinavia in the early 1990s where factors of inadequate prudential regulation and crony capitalism were absent but did not prevent a similar experience. Summary and policy implications The East Asian financial crisis was triggered by weaknesses in the Thai financial system. The other members of the Asian 5 were engulfed in the crisis because of the vulnerability of their financial systems. But vulnerability became aweakness because of the contagion. This paper, however, did not resolve what caused the weaknesses in the Thai economy or the fragility of the financial systems of Indonesia, Korea, Malaysia, and the Philippines. Among the major arguments, two stand out: (1) the twin liberalizations led to problems in the financial system (Montes 1998);and (2) structural causes (i.e., crony capitalism) are to blame.
444
Economic
crisis... Once more
The empirical evidence in this paper shows that, contrary to the International Monetary Fund (IMF) analysis, macroeconomic ftmdamentals could not explain the magnitude of the crisis. The paper shows this through the results of the Kaminsky-Reinhart EWS methodology, wherein signals did not flash as regularly as during the Scandinavian crises o r during earlier â&#x20AC;˘crises of the Asian 5. The paper basically agrees with the contention of Radelet and Sachs (1999) that the essence of the crisis in East Asia was a huge, sudden reversal of capital flows. Capital outflows were partly a manifestation of investor panic, and since the contagion is a primary factor in explaining the depth of the crisis, there is a need to implement measures to prevent huge and sudden movements in international capital flows. Policy prescriptions both strengthening the domestic financial international financial architecture.
should therefore be aimed at systems and reforming the
Given the strong possibility of the importance of self4ulfilling crises and contagion, Harding (1998) suggests that multiple equilibria in modeling time series be explicitly accounted for. Nonlinear models that account for endogenous changes in asset prices will be useful, in addition, for monitoring and surveillance, the importance of self-fulfilling crises makes it imperative to undertake regular market surveys among economic agents to obtain a feel of their sentiments and expectations. Measures to deal with the domestic financial system are quite straightforward and include recommendations to strengthen prudential regulation and supervision of banks by implementing a comprehensive riskbased assessment and supervision instead of focusing primarily on credit risk. In addition, there is a need for more stringent information disclosure requirements, adequate accounting and auditing standards, and clearer rules and greater transparency Llanto 1998). Meanwhile, vulnerability governance, evaluated.
in asset classification and provisioning (Intal and the result of the debate on the causes of financial
would determine whether apart from the emphasis on improved the extent and timing of the liberalization process should also be
â&#x20AC;˘ On the other hand, policies
to deal with the reform
of the international
financial system require more study and greater effort. These should deal with the issue of regulation of capital flows. Despite the daunting task, the process must be initiated as soon as possible; otherwise the next crisis could be devastating
for the world economy.
Chapter 14:Yap
445 References
Athukorala, E and EG. Warr. 1999. Vulnerability to a currency crisis: lessons from the Asian experience. Manuscript. Corsetti, G., E Pesenti, and N. Roubini. 1999. Fundamental determinants of the Asiancrisis: the role of financial fragility and external imbalances. Paper presented at the Tenth Annual East Asian Seminar on Economics, 9-12 June 1999, Hawaii. Demirguc-Kunt, A. and E.Detragiache.1998. The determinants of banking crises in developing and developed countries. IMF StaffPapers 45, 1 (March). Goldstein, M. 1998. Commentary: the causes and propagation of financial instability: lessons for policy-makers.Manuscript. Harding, D. 1998. Tools for surveillance of the East Asian economies. Paper presented at the Workshop on Monitoring Financial Systems in Selected East Asian Economies. Shangri-la Hotel, Makati Cit)_ 25 June. Intal, P.S.,Jr.and G.M. Llanto. 1998. Financial reform and development in the Philippines, 1980-1997:imperatives, performance and challenges. PIDS Discussion Paper Series No. 98-02. Makati City: Philippine Institute for Development Studies. Kaminsky, G. 1998.Currency and banking crises: the early warnings of distress. Manuscript (March). Kaminsk_ G. and C.M. Reinhart. 1996. The twin crises: the causes of banking and balance-of-payments problems. International Finance Discussion Paper No. 544 Washington, D.C.: Board of Governors of the Federal Reserve System (March). Kaminsky, G., S. Lizondo, and C.M. Reinhart. 1998. Leading indicators of currency crises. IMFStaff Papers 45, 1 (March). Kim, S.H., M.A. Kose, and M.G. Plummer. 1999. Understanding the Asian contagion: an international business cycle perspective. Manuscript (December). Krugman, P. 1999. The return of depression economics. Foreign Affairs 78, 1 (January/February). Montes, M.E 1998. The currency crisis in Southeast Asia (updated edition). Singapore: Institute of Southeast Asian Studies. Obstfeld, M. 1996. Models of currency crises with self-fulfilling features. European Economic Review 40 (April). Radelet, S. and J. Sachs. 1999. What have we learned, so far, from the Asian financial crisis? Manuscript (4 January). Yap,J.T.1999. The East Asian financial crisis: causes, impact and policy lessons. Paper presented at the World Bank-sponsored Global Development Network Conference in Bonn, German)_ 6-8 December 1999.
15 Assesment Monitoring
of Existing Systems
Celia Reyes. Rosario Manasan, Azticeto Otbeta, and Genewso de Guzman
wo years have elapsed since the onset of the crisis and it is still not widely known what the social impacts are. While we have monthly data on prices and international reserves, we have data on poverty incidence every 3 years and prevalence of malnutrition every 5 years. The absence of an adequate monitoring system makes it difficult to assess the impact of macroeconomic crises and natural calamities. This also hamper s the design and implementation of targeted interventions to alleviate the adverse impacts of the crises. This is primarily because social indicators, unlike economic indicators, are generally fewer and collected infrequently.Moreover, some data are available at the local level but they take a very long time, if ever they do so, to go up to â&#x20AC;˘ the national level to make them useful to national policymakers. On the other hand, some indicators are too aggregated to provide useful information for targeting interventions. Assessment There are recent attempts by the government to develop monitoring systems, especially related to poverty. While there are systems for collecting data, there is no system for collecting, processing, and disseminating data regularly that would enable policymakers and program implementors to monitor and evaluate programs that will enhance social development in a comprehensive and regular manner. â&#x20AC;˘Nationalmonltoringsystem There is no single monitoring system at the national level that tracks the performance of the country vis-a-vis the different aspects of social development. There are different sources of data on different dimensions of welfare.
448
Economic
crisis... Once more
Administrative reports of different government agencies, and surveys and censuses undertaken by the Philippine statistical system, particularly the National Statistics Office (NSO), are the major sources of data. For instance, poverty incidence is available from the Family income and Expenditure Survey (FIES) but this is conducted by the NSO every 3 years. In 1998, the Annual Poverty Indicator Survey (APIS) was conducted to generate poverty-related data such as access to potable water and sanitary toilet facilities. Unfortunately, no estimate of poverty incidence has been released. Although not directly comparable with the FIES, the APIS is the only possible source of income-based measure of poverty incidence. As such, it is critical that NSO and the National Statistical Coordinating Board (NSCB) exert efforts to generate poverty incidence estimates from the APIS to fill the gap in between PIES years. Data on infant mortality rate can be obtained from vital statistics records of NSO and the National Demographic and Health Survey (NDHS). The former provides annual estimates but they are considered to be understated because not everybody reports births and deaths. The NDHS, on the other hand, is conducted only every 5 years. Enrolment rates can be obtained from the administrative reports of the Department of Education, Culture and Sports (DECS). It takes about a year, however, before the data from the various school districts could be processed and aggregated to generate regional and national estimates of various education indicators and then released to the public. At the central offices of the line agencies, provincial and regional data are available, but municipal and barangaydata may need to be collected from provincial municipal offices. Table 1 shows the different items of information related to th e well-being of the population that could be obtained from these various sources. While sectoral assessments may be done yearly by the different government agencies during the preparation of their annual reports, a comprehensive assessment of the performance of the country vis-a-vis the various social concerns is undertaken when a development plan is made or updated. Since a new development plan is prepared every 6 years and is updated at mid-period, an assessment is done every 3 years. More recently, the Philippines' international commitments to achieve social development targets necessitate a regular though not annual review of accomplishments
in the social area. In this regard, the United Nations
Economic
and Social Council for Asia and the Pacific (U N ESCAP) is considering setting up a social development monitoring and information system. In an ESCAP meeting, it was noted that such a monitoring system does not exist in Asian and Pacific countries, in the Philippines, Reyes (1998) claims that it is feasible to develop a system given the existing data collection activities.
Table 1. List of available
indicators,
c_ t_
Indicators
Empl_ent Labor Force by Employment Status by Major OccuFmtion Group by Major [ndusta'y Group Employed
Diseggregation
National, Regional
Source
Frequency of Data Collection
Labor Force Survey from hhe Natiorm[ Statistics Office (NSO)
Every quarter (Jan, April July, Oct)
Sd_dule of Data Release
'_
five mc_ths after the conduct of the sur_ey (Ma_ Aug, Nov, Feb)
.._'_ _:_ _.
Perscrn by class of workers
Overseas Filipkao Workers Deployment Remmittm_ce Minim um Wage Rate
Poverty b_cleaxce Poverty Threshold Poverty Incidence Magnitude of the Poor Subsistence Threshold Subsistence Incidence Magnitude of the Sub_fistence National Accounts Gross Domestic Product Gross Regional Domestic Product
by Country of Desthmtion
Philippine Overseas Employment Aclminis _afion(POEA) Seiectod Phitipp'me Economic Indica_'s (_E1) from tim BSP
Every month
three months after the reference month
Every month
two months a/ier file reference mor_l
National Wage and Productivity Commission (N'WPC)
Every month
NatienaL RegiortaL by Urbanity
Naticem] Statistical Coordination Board (NSCB)
Every three years (1991,1994,1997 )
One year after the rofemt_e year
Natic¢la]
Nati_ml Income Acc_an from ffm NSCB
Every quarter (Jan, April Iu_, Oct)
Two months after the re/erelxe quarter (May, August, November, Febniary)
Regi_l
Gross Regional Domestic Product from tim NSCB
Every year
Seven Mcmtl'_ after the reference yem"
Every m_th
Ov,e week after the m_ce
Every month
Frye days after the rderer_e monffL
by Country of Dest_aation/ by Type of Worker National
Regional,
Prices of basic commodities
National
Regional
Corommer Price Index
Natimtal. Regional
Bureau of Agricultural Statistics _AS) NSO
Housing and Housing C_t,-actmislics Tm%u*,e Status Roofin 8 Ma_e*ials Wall Materials
National, Regional, lh'oviP, da], by u*banity
Family Income and F.xperalitm_ Sumrey (FIF_ h'om the NSO
Every h"wee years (1991,1994, 1997)
One year after _
Housint_ Convmxlen_ Electricity
Matienal, Regional, by urbanity
National Demographic from the NSO
Every Fly • ymtxs (1988,199"8, 1998)
Four months a/'t_ the _ (April)
Survey
_._ -
month
(July)
reference year
year
:_ '_0
Table 1. continued... Incllcatx_rs
01 Disaggregatfion
Souro_
Frequer_'y of Data Collec6on
Sohedule of Data Release
Source of drinking water _me to getto water source Sardtafion Facility Floor_ Persmm per s_eepingroom Mean persca3s per room Iodized salt Access to Social Servk__* Aocess to basicneeds : Soun_ of Water SuppD Electridty ToRet Faci_ ¢y Ownership of Durable_ (Radio, TV, Sala S_ etc_..) Unduplicated Number of C.]ien_ s_rved Coverage and Con_ibutions by GSIS/SSS _ Paid by GSlS/SSS Crime Statis_s Crimesby Type Irmhx Crimes Non Index Crimes _e _e
Na_a], Regional, Provincial by u_anity
FIES from the NSO
National, Regian_
Slat Yearbook/tom NSCB
National Regianal Pm_ by C.ifi_
Philippine
Every" fixreeyea_ (1991, 1994.1997)
the
Naliocml Police
One year _
_
referen_ year
Every year Three months after _
Eveay year
reterence year
One month after h'xereference yea_
Agahast Property Against Person
_q
Cx'hneRate
Na_ral,
Gross Enrolment Ratio Participation Rate Cohort Surcival Rate Retentima Rate Gtadlaation Rate
National, Regiena_ bySe_ by type of school (Govt, Private)
Statistics Bulletin from the Department o f Educaf_on Culture and Spore (DECS)
Everyyear
Na,ln, na1_ RegimmL by sex, byage gxtmp by urbanity
F_ T.ii-a_ra t.y_Edaaoaiq_ and Mass Media Sm-vey _) of the NSO
Every Five years (1989,1994, 1999)
Orop out Ra_ Completion Rate T_,ansltlon Rat_ Repetition Rate Fumtional Liiemo] Ram
Regional
" Four monflas affterthe reference school year (Octob_)
_" _ _.
C_ O_ yeaz _
the a_._rence year
¢3 Table
I. coniinued... Indica_'.
Disa_a,_on
Source
F_q_.ncy
of Data
Collec6c_
HeaLth Mortality Rate Infant Mortality Rate Child Morality Rate • Maternal momti_ Rate
Naticma[, Regional
LeadingC_.a_u_es Number of Crude Death Rate Fertility Ra_ Current Fer_ity Fertility Trends Teenage Fertiity Family planning
Na_fio_l Demographic of the NSO
Surcey
Release
Four months after the reference year (April)
._ National Regional by age, urbaxfity by marital d_atl.on
Nut,dijon I..i_eExpectancy
National, Regimxa!
National Demographi£ of the NSO
MaLnu_ition Percm_t of Malnourished Children Protein Ener_ Malnu_a (['_M3 Dafaclmey h_ : Vimm_ A Iron and MT_cmnutti_n_ Iodine
Natimxal, Regional by urbanity •
Natlm_l Nutzi1_'_ Survey from h_ Food and Nltla_ion R_a_arch _im_e ffNRI)
Mean Per Capita Food Consumption Nutrient Intake Enez_y Pro_in Iron and I_._.ronutriev_
Na_ior_ Regional. by _rb,_ity by _e Quartile by One-day per Capita Food Peso Value
Sa_rvey
Every Five years 0988, 1993, 1998)
Four mtm_hs after the reference (April)
Every five years (1993, 19_, 19t_, 1998)
One year alter _
reference year
byHH_ze byOccupationof_t
I_aol Equivalent Thiamin Riboflavin Niac_ Aseorbic AcM Fa_ _tes
_zurem Various Govemme_
Eve+ Five years (1980,1993, 199S)
Schedule of Data
h_ome ean_r
Agencies.
_
452
Economic crisis... Once more
Commu_ity-based monitorlng system With the deficiencies in the existing statistical system, there has been a lot of interest in developing a community-based monitoring system (CBMS) recentl_ The CBMS would be very useful in monitoring what is happening to the different population subgroups. Moreover, it would provide the necessary information for more efficient targeting. A_'cro Impacts of Macroeconomic Projects (MIMAP) The MIMAP has proposed a community-based monitoring system in 1992. Details about the system are presented in the paper of Florentino and Pedro (1992) and modified in the paper of Reyes and Alba (1994). A set of indicators has been identified and flow of information has been designed. Comprehensive and integrated Delivery of Social Services (C1DSS) The Department of Social Welfare and Development (DSWD) implemented the CIDSS in 1994. Part of this program is a community-based monitoring system using minimum basic needs (MBN) indicators. This is intended to meet the information needs of social workers to identify appropriate interventions for the famil)_ The Social Welfare Development Indicators have been developed as early as 1990 to identifylthe needs of families. Presidential Commission to Fi_ht Poverty _PCFP) The PCFP views the community-based information system (CBIS) as an empowerment tool for the community. The Commission started to undertake this in 1996. By June 1998, when PCFP w_s merged into the newly created National Anti-Poverty Commission (NAP_), about 29,000 barangaj_ have conducted at least one round of the community-based census of households. In the meantime that changes in the organizational structure of the NAPC are being effected, no one has taken the lead in monitoring the conduct of the CBIS. Visits to selected barangays by the study team reveal that many have not undertaken the survey every 6 months as originally designed. In fact, for some of the barangays, the first and last survey was done in 1996. Despite the data collection that has been undertaken by many communities under the supervision of PCFP, the data have not been consolidated to reach policymakers at the provincial a_ad national levels. The proposed PovertyWatch that will enable policymaker_ to know the status of communities vis-a-vis minimum basic needs still has to be implemented.
According
to PCFE
Chapter 15:Reyes et al.
453
Recommendations The lack of an adequate monitoring system can hamper the ability of various stakeholders to respond appropriately to adverse impacts of a macroeconomic crisis. It is therefore imperative for the government to establish a social monitoring system that will enable policymakers, researchers, and the general public to assess the welfare status of individuals and households, and to provide early warning signals on the adverse impact of a crisis. The proposed social monitoring system will obtain its data from the following: (1) administrative reports being collected by the various agencies of the national government and local government units; (2) censuses and surveys of the NSO; and (3) community-based monitoring system. Since the data will be coming from different sources, it is important that a focal agency be designated for this social monitoring system. Moreover, an annual report on the performance of the country in the social sectors should be prepared and presented to policymakers and the public, similar to the regular briefings done on the economic performance of the country. As proposed by MIMAP2, a monitoring system calls for the creation of databanks at each geopolitical level. Data on relevant indicators will be retrieved periodically from concerned line agencies and the information will be fed to development planning bodies at the respective levels. The databank could be the Barangay Development Council (or a Barangay Development Planning Office) at the barangay level, and the Municipal/City and Provincial Development Planning Offices at the municipal, city, and provincial levels. The National Statistics Office may then obtain statistics from these databanks for reporting to national level policymakers (Fig. 1). Alternatively, the national monitoring system could be lodged at the National Statistical Coordination Board, the National Economic and Development Authority, or the Philippine Institute for Development Studies. The community-based information system developed and implemented by the PCFP could be revived and modified and be made a crucial component of this social monitoring system. The concern regarding the quality of data being collected in the CBIS could be addressed by modifying certain features of the current CBIS.For example, the experience of MIMAP suggests that it would be better to use the barangayhealth worker and mother leaders as enumerators. Moreover, data on malnutrition should be obtained from the records of the barangay health worker and not depend on the recall of household survey respondents. Furthermore, reliable data on income is very difficult to obtain from such a data collection activit)a Instead, proxy indicators for income should be used in this system. 2 Refer to papers of Florentino and Pedro (1992), and Reyes and Alba (1994).
4_
Figure 1. MXMAP Monitoring System Flow of Information. LEVEL
DATA SOURCES
DATA PROCESSING/ DATABANK
I National
Provi_ia/
City
National Government Agencies
.
I
I___
1 I
NSO; NGOs
Lhle Agencies; NSO District Offices; NGOs
Enumerators; NGOs; POs
NSO
_-
;
_,
MIMAP City/Municipal Monitor
Barangay Monitor
Program In_tem_tors Other Data Users
CPDO/MPDO " Program Impl_aentors Other Data Users
MIMAP _-
NAPC; NEDA; DSWD; Other DataNGOs; Users
t; Pmvidal Monitor
MIMAP Ba_an_y
DATA USERS
BDC _-
Program hnplem_rs Other Data Users
._.
Chapter 15:Reyes et al.
455
To ensure that barangays will continue conducting the survey, it should be made part of the barangay planning process as proposed by Reyes and Alba (1994). In Davao City, the study team found that it is a requirement to conduct the MBN survey first before the barangay development plan is approved. It was also found, however, that the same survey conducted in 1996 could be used repeat_zdlyLocal government units could adopt the same strategy to ensure that programs being proposed by barangays are based on their unmet needs. The Department of Interior and Local Governments can also strengthen the planning capabilities of barangays by incorporating the use of data from the CBMS in their training modules for local officials. The APIS undertaken by NSO could provide data in between the triennial conduct of the FIES.The APIS could provide data on family income. With a social monitoring system in place, particularly with the community-based monitoring system, the targeting scheme being employed by the government in its poverty alleviation projects can be further improved. During the Ramos Administration, 20 provinces were selected as priority areas for implementing the Social Reform Agenda. This was further refined to fifthand sixth-class municipalities nationwide. More recently, the President has announced that poverty alleviation efforts will be focused on the poorest 100 families in each province and city nalionwide. The community-based monitoring system will be useful in identifying the poorest families in each locality. With clear guidelines on eligibility for government assistance programs, local governments could identify beneficiaries.
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Economic
crisis... Once more
References Florentino, R., and R. Pedro. 1992. Monitoring the MIMAE Paper presented during the Technical Workshop on the Results of the Second Phase of the MIMAP Project, 1 June, Tagaytay Cit)_ Reyes, C. 1998. Institutionalizing a poverty monitoring system in the Philippines. Paper presented during the Third MIMAP Annual Meeting, 2-6 November. Reyes, C. 1996. Monitoring systems for poverty tracking. Paper presented the MIMAP International Worksl_op, 1-5 July. Reyes,
during
C. and I. Alba. 1994. Assessment of Community-based systems monitoring household welfare. Paper presented during the Technical Workshop of MIMAP Project III, 17-18 Februar)5 Cavite.
TheAuthors Caesar Cororaton, a senior research fellow at the Philippine Institute for Development Studies (PIDS), has a Ph.D. in Economics from Clark University in Massachussets, USA. His research interests include econometric modelling, money and banking, and trade and investments. His most recent studies focused on productivity issues and the oil price increase. Margarita Guerrero Statistics Office' Industry and she works for the Statistics Consultant. She received her University, USA. Her fields methodologies and operations, economic indexes.
is a former director of the National Trade Statistics Department. At present, Division of the United Nations as a Ph.D. in Statistics from the Iowa State of expertise include sample survey statistical analysis, and construction of
Generoso de Guzman received his master's degree in Statistics from the University of the Philippines. He retired from public service in 1990 after almost two decades of working with the Bureau of Agricultural Statistics with the last four years serving as the Bureau's Director. He is presently affiliated with the United Nations as a consultant in statistical surveys, agricultural statistics and human development, among others. Ponciano Intal Jr., former PIDS president, holds a Ph.D. in Economics from Yale University. He has special interests in international economics, macroeconomic policy, agricultural policy, trade and industry, and development economics. He now heads the Angelo King Institute for Business and Economic Studies of the De la Salle University. Mario Lamberte, PIDS president, received his Ph.D. in Economics from the University of the Philippines School of Economics (UPSE). He pursued his post-doctoral studies at the Stanford University. He specializes in money and banking, international finance and development economics. 457
Rosario Manasan, a PIDS senior research fellow, received her Ph.D. in Economics from UPSE and pursued her post-doctoral studies at the Massachusetts Institute of TechnolOgy. Her researches at PIDS focus on public finance, decentralization and education. Erlinda
Medalla,
a PIDS senior research
fellow, conducts
research on trade and industrial policy _nd has written a number of papers on trade and investment, shadow Iprice estimation, tariffs and nontariff barriers to trade, and many others. She obtained her Ph.D. in Economics from UPSE and was also a post-doctoral Fellow at Yale University. Melanie Milo has a Ph.D. in Economics from the Australian National University and presently works as a research fellow at PIDS. One of the youngest research fellows at PIDS, her fields of specialization are international macroeconomics and money and banking. Aniceto Orbeta Jr., a PIDS senior research fellow, received his Ph.D. in Economics at the UPSE and pursued a post-doctoral course in Harvard University. His interests include demographic economics and macroeconometric modelling. He has done a number of studies on population, education and, recently, information and communication technology. Virginia Pineda has a master's degree in Economics from UPSE. Her studies focus on international trade, health economics, public finance and governance. She was formerly _ Research Associate at PIDS. Celia Reyes, a PIDS senior researc h fellow, received her Ph.D. in Economics from the University of Pennsylvania. Aside from supervising two database projects at PIDg, she undertakes studies on econometric modelling. Josef Yap, a PIDS senior research fellow, received his Ph.D. in Economics from UPSE and pursued a post-doctoral course at the University of Pennsylvania. His interests include econometric modelling and development policy.
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