Philippine External Finance, Domestic Resource Mobilization and Development in the 1970s and 1980s by Ronald Yacat

Philippine External Finance, Domestic Resource Mobilization, and Development in the 1970s and 1980s

Mario B. Lamberte Joseph Y. Lim Rob Vos Josef T. Yap Elizabeth S. Tan Ma. Socorro V. Zingapan

Philippine Institute for Development Studies

Institute of Social Studies Money, Finance and Development

ÂŠ 1992 by the

Institute of Social Studies (ISS) The Hague, Netherlands; and Philippine Institute for Development

Studies

(PIDS)

Printed in the Philippines. All rights reserved. Publication of this book was made possible by the finmlcial support of the Netherlands government. The findings, interpretations and conclusions in tiffs book are those of the authors and not necessarily those of the ISS and PIDS. Please addressallinquiries to: Philippine Institutefor Development Studies 4th Floor,Neda sa Makati Bldg. 106 Amorsolo St.,LegaspiVillage, Makati 1229 Philippines Fax No. (632)816-1091 Tel.No. (632)865705; 816-1548;88-40-59

ISBN 971-128-019-1 RP -10-92 -1000

Foreword A central theme in macroeconomic policy decision-making in the Philippines for the past decade has been the _ debt problem. Very likely, too, it will remain as a key issue in the 1990s. In the light of this, we hope that this volume would be able to shed light on the roots of this long-standing problem. The study starts by tracing the performance of the Phih'ppine ec_lomy from the 1970s, the entry of external finance in the structure of the economy, and the impact of such funds availability on the savings and investmaent behavior of the major actors in the economy, and then continues by assessing the role of policies in the web of interrelationshipe among these variables. How did policise react to the events of the period? Were they preactive or reactive? In the re_lm of _ finatx_ag, did they provide incentivse to the savings and investment environment? Toward the end, the study outlinse a set of policy actions and recommendations which may be of use and help to domestic and international pollcymakers especially these in the developing countries. For this alone, the study probably deserves extra attention for it offers some dearcut solutions. But even apart from this, the rich source of historical data and analysis contained in the volume makse it a very good reference material for any _hoM or student of exterual fi_nce and a significant contribution to the literatu_ on development finance. The Philippine Institute for Development Studies (PIDS) is therefore grateful to the Netherlands Goveamment, through its Ministry of Foreign Affairs, for the financial support of the study and printing of the book, and to the Institute of Social Studies of The Hague, Netherlands for giving the PIDS the opportunity to be part of the larger research project on "International Capital Flows and Economic Adjustmaent in Developing Countries."

PONCIANO 8. INTAI_ Jl_ President Philippine Institute for Development Studies

Preface This book goes into press shortly after the first 100 days of the Ramos administration. Ironically, the current govermnent, like its predecessor, inherited an economy that is in a state of recession, reeling from the effects of a stabilization program. Poverty incidence may have even increased at the end of the Aquino administration, after posting a slight decline in 1988 from its level in 1985. The dismal performance of the economy in the past twelve years, especially when compared to its Southeast Asian neighbors, can be partly traced to the fiscal bind of the government. Total real per capita governnlent expenditures declined by about 20 percent during the decade of the 1980s. Without doubt, external factors contributed to the behavior of the public sector. External debt is a critical element of the analysis . The study aims to integrate the effects of external capital flows, policy regimes, and institutional factors with the process of domestic adjustment, expressed mainly in terms of movements in the levels of savings and investment. A novel feature is the breakdown of macroeconomic aggregates into four categories pertaining to four sectors: households and unincorporated businesses, private corporate enterprises, public enterprises, and the government. Hopefully, the findings of this study would contribute to the formulation of policies leading to sustainable growth in the future. The National Income Accounts data used in the analysis still have 1972 as the base year. The recent change in base year to 1985, however, is not expected to affect the results and conclusions of the study. As a matter of fact, the dip in economic activity in 1984 and 1985 is much sharper when using the new data. This tract on the Philippine development experience during the past two decades is part of a larger research project on "International Capital Flows and Economic Adjustment in Developing Countries," undertaken by the Institute of Social Studies in collaboration with research institutes in selected developing countries. At present, studies from Thailand, Pakistan, and Mexico have been completed. Financial support for the study and the printing of the book was extended by the Netherlands Ministry of Foreign Affairs, Directorate General for International Cooperation (DGIS). The authors would also like to thank Ms. Janet C. Limpiado for the excellent research assistance provided, Dr. Ponciano S. Intal, Jr., then Deputy Director General of NEDA; Dr. Farrukh Iqbal, then Deputy Resident Representative of the World Bank; and Dr. Cecilia, G. Soriano, Undersecretary of the vii

Department of Finance, for their comments on an earlier draft. Ma. Corazon Abellana was responsible for the technical copyediting of the manuscript while Ms. Ma. Teresa S. Duel, s proofread the tables and text. The content is the sole responsibility of the authors. The views expressed in the book are those of the authors and do not necessarily reflect those of PIDS, ISS, and the Netherlands Ministry of Foreign Affairs. The Authors October 1992

viii

Table

of Contents

Foreword ................................................. Preface ................................................. List of Tables ............................................. List of Fisures ...........................................

v vii xii xvii

1 INTRODUCTION........................................... Objective of the Study .................................. The Role of Policies .................................... Methodology .......................................... Periodizatlon ..........................................

1 1 3 4 6

2 PEP._RMANCE AND_ OFTim l_.z_ql_ BCONOMY. The Economy from 1970 to 1990 .......................... Unbalanced growth in the 197(k ..................... Crisis and adjustment in the 1980e ................... Structural Change and MSAs: A Comparative Analyeis Based on MSAF8 for 1974, 1979, and 1987 ............................ The MAS methodology .............................. Accounting concepts ............................... Structmral change: 1974, 1979, and 1987 ............... _Alysis of MSAF Multipliers and IntoraetioaJ among Accounts .......................................... Principal Findings ....................................

. 9 9 14 15

17 17 18 33 55 73

3 EXTimNAL FINANCEANDRELATIONSHIP WrrHTHEwoma) ECONOMY ............................... Introduction ......................................... Balance-of-Payments Crises: 197(_1989 ................... Exte_! shocks and the current account ............... Decomposition analysis of the _t account .......... External Debt in the Philippines ......................... Other Financial Flows ................................. Structure of External Sector ........................... Assessment ......................................... ix

75 75 76 76 80 83 98 105 114

4 ACCUMULATION BEHAVIOROF INSTrlI_ONAL AGENT8 ........ Introduction ........................................ Savings and investment Behavic_ in 197_1989 ........... A Micro Study of the Household and Unincorporated Sector .......................................... Rs_ssion Studies ................................... Savinp ......................................... Investments and fixed capital formation .............. Savings and Investment Behavior of Government and Public Entm_prises: An Overview ................ National Government Savings ......................... Tax collection ................................... Current expenditures ............................. Public Enterprise Savings Behavior ..................... Public Investments .................................... Fiscal Policy and Busine_ Cycle ........................ General Findl.gs ....................................

119 119 119 134 143 143 148 152 155 159 162 164 166 172 178

5 FINANCIALINTERMEDIATION ANDADJUSTMENT OF INTERNALANDEXTERNALBA/A_CES .................... In/roduction ........................................ Philippine Fimmeial System ........................... Sh-ucture and development of the formal financial system ....................... The f_--ncial system and external shocks ............ Financial int_rmediat/on .......................... Credit allocation .................................. Capital markets .................................. Informal financial markets ........................ Intersectoral flows: Financial sector ................. The Private and Financial Sectors ...................... Introduction ..................................... Reliance on credit or se_-/_n--eing .................. Composition of financial assets ..................... Private Sector and Extema/Adjustment ................. Introduction ..................................... Magnitude of private capital outflows ................ Private foreign assets and private savings ............ Channels of private capital outflows ................. X

181 181 181 182 184 189 195 198 201 206 217 217 217 229 238 238 239 243 248

Determinants of private capital outflows ........ . .... Consequences and policy conclusions ................. Interaction between Financial and External Sectors ....... Public Sector Defidts and External Adjustments .......... Introduction ..................................... The fiscal and the external balance .................. Debt burden, exch_nwe rate adjustment, fiscal policy, and the transfer problem ........................... Policy considerations ............................. Public Sector Deficits and Domestic Adjustments ......... Introduction ..................................... Financing of the defidt ............................ Public borrowings from the non-bank private sector:. Effects on private portfolio balances and consumption ... Public borrowi-_s from domestic b_nkA: Effects on credits to the private sector ............... Public borrowings from the CB: Effects on money supply and private demand .......... Overall Review ..................................... Conclusion .........................................

249 257 262 270 270 272 273 285 287 287 289 291 294 301 301 304

6 POLICYIW__iM_S ........................................ Introduction ........................................ The 197(L1973 Reghne ................................ The Second I-IRlfof the Seventies (1974-1979) Policy Regime in 1980-1982 ............................ The Mid-eighties (1983-1985) .......................... From 1986 to the Present ............................. Evaluation ..........................................

............

307 307 309 310 314 319 322 330

7 SUMMARYANDGENERALDIREC'rlON FOR FOLICY ............. Appendix 1. Selected Economic Indicators for the Philippines (197(_1989): A Summary Table ................. Appendix 2. The Construction of the MSAFs for the Philippines .......................... References .............................................

333

345 347 375

List of Tables

Table 2.1 Table 2.2 Table 2.3

8eleet_ _ Indicators for the Philippine. (1970-1989) ....................................... Msc_c Social _ Framework 1987 (in million pesos) ................................... Macmeeonemie Social Accounting Framework Adjtu_d for U_ Private Foreign Asset Accumulation

(Inmillion p_os) .................................. Table 2.4

Table 2.5 Table 2.6

Table 2.7 Table 2.8 Table 2.9 Table 2.10

Table 2.11 Table 2.12 Table 2.13 Table 2.14

Table 2.15 Table 2.16 Table 3.1

Mae_ic Social Acco.n_n_ Framework Adjusted for Uneecorded Private Foreisn Asset Accumulation (in million pesos) .................................. Phih'ppino Froducti_ and _91oyment Structure accoralnn to MSAFI 1974, 1979, 1987 .................. Philippines: Factor Shares accordi_ to MSAFs 1974, 1979, and 1987 (In mfllim pomos,current pricea; poree_ .ha_) ................................. l_i]ippinos: Hommh_dl and _ Distribution, accordi_ to MSAFr 1974 ............................ C,onm_ption Pattern by Major Consumptice Categoriee ......................................... Ph/lippi_s: Savings and Investment Patterns accordinl to MSAFs 1974, 1979, and 1987 (shin of GNI_ ............ Fhilippin_ Flow_f-Fun_ 8teuctu_ of Non-Financial Institution, _ to MSAFs 1974, 1979, and 1987 (pox_mta_ shaves) ................................. Philippines: Flow-of-Funds Structure d Private Non-Financial Corporations, 19_ 1_ ................ Phih'ppin_: Deecmpoe/tion of Multiplier Effects, 1974 .............................................. Ph/lippimm: Deec_position of Multiplier Effects, 1974-A ............................................ Philippines: Ranking of Accounts by Highost Multiplier Effects duetoF_aou_ Demand Chan_ in Respe_ive Account. (mum of Â˘_d_ elementl matrix Ml) ............ Philippines: Simulations with MKKF 1974 (elum_ in income relative to base year) ................ PhilippineE Simulations with MSAF 1974 (clump in m relative to bMe year) ................ Major _ Shocks and Policy Reslxmsem in the l:_ilippines ..................................

xil

I0 19

23 27 35

87 39 44 46

51 54 59 61

65 67 70 77

Table 8.2

Table Table Table Table Table Table

3.3 3.4 3.5 3.6 8.7 3_9

Table 3.9 Table 3.10 Table 3.11

Table 3.12 Table 3.13 Table 3.14 Table Table Table Table Table

3.15 8.16 3.17 4.1 4.2

Table 4.3 Table 4.4 Table 4.5 Table 4.6 Table 4.7 Table 4.8 Table 4.9 Table 4.10 Table 4.11 Table 4.12

l_m-pines: I)ecompositkm of Current Account Deficit Period Averages (1970-1974 to 1975-1979, 1975-1979 to 19_1982, 1980-1982 to 198_1995, and 198,%1985 to 198_1988, u percentage of GNP) ................... l_;!_ppine External Debt (1970-1_0) .................. C,ovemment Expenditur_ (1970-1989) ................. Philippine External Debt (1970-1977) .................. l_"ppine Extsrnal Debt (1983-1989) .................. Cun_nt Account and GNP (as _nt of GI_) .......... Financial Flows to the Philippines: 1970-1988 (In million US dollars) .............................. Forei_ Investments, 1970-1989 (In m;l]ion US dollars) ............................. Workem' Remittances: 1978-1968 ( ,nill_n U.S. dollars) .............................. Philippine External Debt Outstandin& by Borrowing Economic Sector (In ram;on US dollars and percentage shares) ............................. Average Effective Protoetioa ]_*_, (in percent) ......... Average Effective Protoetic_ Ratee, by Major Seetoro .... Imports and Exports at Constant Peso Terms (1972=100) ....................................... Export Structure (1970-1989) ........................ Import Stru_ure (1970-1988) ........................ Memo It_ns ...................................... Real Savines and Savin_ to GNP Ratios .............. Gross Domestic Capital Fcemation and its Components (in 1972 prices) ................................... Number and Percenta_ of Families by l_;- Source of Intone, Urban and Rural ......................... Percentage Diga-ibution of Total Family Income by Main Souros of Inoome ........................... Percentase DistTibutkm of Total Family Income Derived from Entrepreneurial Activitios ....... ;. ............... Perosntaee Distribution of Total Family'Inccme Derived from Other Sources ................................ Avera_ PeopenAity to Save out of Total Receipts: Rural, Urban, Average for the 13 _ .................... Reue_on with Dependent Variable Savings out of Total Receipts, 1985 and 1968 ............................ Reiteration of Savings Rate on Selected Variables ....... Regre_'_n of Private Investment on Selected Variabl_ ......................................... Public Sector Savinp and Investments ................ Revenues and Current Expenditures of the National Government ...................................... xfil

84 86 88 89 91 93 95 101 104

106 109 110 111 112 116 118 120 127 185 136 137 138 139 141 146 151 153 156

Table 4.13 Table 4.14

Estimation of Direct and Indirect Tax Elasticities ....... 160 Estimated Undartaxation Index: Production Sectors and InJtitutional Agents (based _u MSAF 1974, 1979, 1987) .................... 161 Table 4.15 Factors Aff_in_ Changes in the National Government's Interest Payments, 1977-1988 ....................... 163 Table 4.16 Regression of Public Enterprise Savings against Selected Variables ......................................... 166 Table4.17 ResultsofRegressing NationalGovernmentand Public Enterprise Investments Against Foreign Savings and Other Financing Variables ................................. 168 Table 4.18 Outstanding External Debt by Institutional Type of Borrower (percentage shares of total long-tsrm debt)... 172 Table 4.19 External Debt Outst_n_n_ by Borrowing Economic Sector (In million US dollars and percentage shar_s) .... 173 Table4.20 Fimcal ImpulseMeasure,1975-1989 (percentage ofGNP) .......................................... 177 Table 5.1 The Philippine Financial System (as d December 31, 1988) ........................... 183 Table 5.2 Philippine Offshore BAnt_,_ System Statement of Aseete and Liabilities (september 1989) ..................... 186 Table 5.3 Demand for Savings and Time Deposits ............... 195 Table 5.4 RatioofLoans Outstand4n_ toTotal by Industry Commercial BA,k. (in percent) ............ 196 Table 5.5 Ratio of Loans Outstanding to Total by Industry Specialized GovernmentBanks (inpercent)............198 Table5.6 ManilaStock_hange Offering..................... 201 Table5.7 Volume ofTreasuryBill Trensactione by Type ofInvestor, 1988 (In million pesos) .............................. 202 Table 5.8 Manila aug Makati Stock Exchange Trading, 1975-1988 (In billion shareq/pesoo) ............................. 203 Table 5.9 Distribution of Informal I_mne by Level of NominalInterest Rates ................... 204 Table 5.10 Trends in the Lending Rates of Banks, FinA_xceCompanies, Pawnshops, CCUs, and on Postdated Checks (percent per annum) ................................ 205 Table 5.11 Sources and Uses of Funds of Private Financial Institutions (In million pesos) ....................... 207 Table 5.12 Seurces and Uses of Funds of Government Financial Institutions (In million pesm) ........................ 210 Table 5.18 Sources and Uses of Funds of Monetary Authorities (In million pesos) .................................. 213 Table 5.14 Household and Unincorporated Business Gross Savings, Real Investment, Net Financial Investment (In million pesoe) .................................. 218 xiv

Table 5.15 Table 5.16 Table 5.17 Table 5.18 Table 5.19 Table 5.20 Table 5.9.1 Table 5.22 Table 5.23 Table 5.24 Table 5.25 Table 5.26

Table 5.27 Table 5.28

Private Corporation _ Savinp, Real Invemnent, Net l_n---ial Invemnent (In million pesos) ............... Gross Savings, Peal Inv_=t_ont, Net Financial Invedz_ent (In millle_ _) .................................. Loans Outstanding of Commm_ial Banks by Type of Bormwor ....................................... Percentage Share of I_--_A! Uses for Hou_eholdl and Unincorporated Buaimm_ .......................... Percentage Share of Financial Uses for Private Corp_etio_ ...................................... Lewis of 1,'_,,--rial Assets.and tl_ir Composition ........ Philippines: Trade Misinvoicin& 1971- 1988 l_1flippines' Trade with World (In million US dollars) .... Philippines: Estimated Underreeording of Workers' RemitZances from Abroad ........................... Philippine_: Voo' Me_ of Private Foreign A_t AÂŠeumulatio_, 1971-88 (In million US dollars) .......... Philippines: Accumulation Balance and Private Foreign Asset Acquisition (pe_entag_ _ GNP) ............... Philippines: Deter_nA_te of Private Capital Outflowe (Estimation period for all regressions: 1972- 1988) ....... Philippines: Net External Aeeet Poeit_c_ of N_m-f_nAn,-ialPrivate and PublicSector, 1988 (In million US dallam) ............................. Components of Monetary Bsms (In million pesos) ........ Philippines: General Govornn_mt-Fo_ign and Domestic

CurrencyPeBourceGap_(_r_nta_ Table 5.29

Table 5.30 Table 5.31

ofGNP)..........

Table 5.3,3 Table 5.34 Table 5.35 Table 6.1

220 225 227 230 232 242 244 245 247 254

280 265

279

Philippines: MonitoredPublicSectQr- Foreign and Dcmeetic Currency _ Gape (pe_ of GNP) ............................... 281 Fi_,,_-in@ of PublicSectorDeficit (percentage of deficit) .. 290 Holders of Outstandin8 Go_mment Securities

(pem_mt_ oft_al_sieeu,-,i_) .................... Table 5.82

219

29,3

Rat_ of Currency to Total Depmite and Dep_it Sub_itut_ amof Yeamndo 1976-1989 ................. 294 Personal Income and Outlay Accounte: 19"18to 1989 (in percent of total pe_A! inmm_) .................. Sg_ Gross Ekmm_tie Credits of _ Money B_kl (In million pesos) ................................. 299 Increase in Ba_ Money due to the Public Sect_ and Ikm_ic Money Baake ......................... 302 The Philippines: RealPerCap/ta Government Expend/turns ca Social 8ervio_, 1980-1989 (Inpe_, at constant prices of 1980).................. -_I

AppendixI Selected EconomicIndicators forthePhilippi_s (1970-1989)...................................... 843 Appendix 2 The _on d the MSAFe for the Philippines ...... 345 Table A.1 Philippines Input-Output Table 1987 S=.soctor Aure_ate Tr_ Mat_z (ProduÂ˘_ Pri_e) -A.q^ (In billion pesos) .............. 883 Table A.2 Philippineo Input-Output 1987

Siz-soctorAss'regate ]mp_ Matrix(ProductPros) Table A.3

Table A.4

Table A.5

Table A-6 Table A-7 Table A-8 Table A-9 Table A.10 Table A.10a Table A.10b Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table

A.10c A.10d A.10e A.10f A.10g A.10h A.10i A.10j A.10k A.101 A.10m A.10n A.10o A.10p A.10q

M79.q^87 (ln bfl_ pssw) .......................... 354 Philippines Input_)utpnt 1987 Six.Sector Asgresate Ik_ae_iv T, amm_onJ Matrix (Producer Prices)- (A.M).q ^ ( In billions of pee_) ......... 385 Philippines Input-Output 1987 Six-Sector Aggregate Technical, Input,Output Coefficients Matrix (A-M) ...................................... 387 Philippines Input_Dutput 1987 Six- Sector Aggregate Leontief Matrix [1- (A-M)] ^-1 and Employment Linkasee .......................... 387 Philippines: Coneumphlon Trandormation Matrices, 1974, 1979, 1987 (shar_ in total) ..................... 388 Current Transfer Matrices 1987 ...................... 360 Income by Source and Ctu_nt Trauder: DiBaggr_ation by Hommhold Groups ................. 861 MSAF 1987: Mappt_ c/Household Tr---ferl to and from other Inmtitutic_ (In million pesoa) ........... Philippinel: Flower-Funds Submatricel (unadjusted) Flow_f-Ftmds: Gold and Foreign Currency Holdlnand Deposits 12, 18 ................................. 364 Flow-of-Funds - Foreign Loans and other Foreiffn Claims 14,15 ............................................. 365 Flow-of-Funds - Domestic Cut._ncy 16 ................ 365 Flow-of-Funds- I)emand Deposite 17 ................. 366 Flow-of-Funds - Savings and Time Delmeite 18 .......... 366 Flow-of-Ftm_ - Deposit Substitutes 19 ................ 367 Flow-of-Funds - Domestic Loans 20 ................... 367 Flow-of-Ftmds - Investments, Securities 21 ............ 868 Flow-of-Funds - Insurance Reserves 22 ................ 368 Flow-of-Funds - Trust Funds 23 ...................... Flow-of-Funds - Trade Credits 24 369 Flow-of-Fun& - Taxes Payable 25 .................... 3/0 Flow-of-Funds - Inter- Financial C|,,im,, 26 ............ 370 Flow-of-Funds - Inter-Govenunental CI-_-,s 27 ......... 871 Flow-of-Funds - Miscellaneous 28 ..................... 371 Flow-of-Funds - Statistical Discrepancy 29 ............. 372 Flow-of-Funds- Subtotal ..... ....................... 879. xvJ

List of Figures Fig. Fig. Fig. Fig. Fig.

1 2 3 4 5

Fig. 6 Fig. 7 Fig. 8 Fig. 9 Fig. 10 Fig.II Fig. 12 Fig. 13 Fig. 14

Fig. 15 Fig. 16 Fig. 17 Fig. 18 Fig.19 Fig. 20 Fig. 21 Fig. 22 Fig.23 Fig. 24 Fig. 25 Fig. 26 Fig. 27

Financial Flows to the Philippines .................... 97 GNP and Net Receipts with Interest Payments .......... 99 Foreign Investments, 1970-1989 ...................... 100 Savings and Investment, as Percent of GNP ........... 122 National _n_ Foreign Savings _n<!C_'_s Iuvestmente as Percent of GNP, GNP Growth Rate, ICOR .............. 123 Total Fixed Capital Formation Broken Down into Comstructic_ and Durable Equipment (in 1972 prices) . .. 131 Conetructio_x Broken Down into Private and Government (in 1972 price,) .................................... 132 Total Fixed Capital Formation Broken Down into Private and Government Invest=nente (in 1972 prices) ... 133 National Government Revenues and Current Expenditures ..................................... 158 Public Enterprise Investment8 and Foreign Borrowings .. 169 NationalGovernmentInvestment8 and Net Foreign Borrowings ....................................... 170 Nationel Government Deficit and GNP Growth ......... 174 Public Sector Borrowing Requirement and GNP Growth.. 175 The Industry and F_.... e Web: Interlork-in_ Directorates of the RCBO-China B_.ki._ Group with FinAncial/Industrial Corporations .................... 185 Ratio of Net Foreign Assets d the Monetary System to Nominal GNP ................................... 188 l_nk_ Density ................................... 190 Ratios d Ma and MS to Ml ........................... 192 Indicators of the Flow of L_mnable Fund ............... 193 RealIntereet Rat_ (ISDR)and (ITDR) ................194 Total _ and Shares of Short and Long Term Loans .. 199 Ratio of Groes Savings to Real Invemnent for Private Corporation, 1974-1983 .................. 222 Ratio of Gro_ Savings to Real Invastment for Private Corporations, 1974-1983 .................. 223 Gre_ Internal Reserves, CentralÂŁ_ and DMB .......264 Net Foreign and Domestic Assets ot the Monetary Authorities ....................................... 267 Behavior of the MonetaryBarn ....................... 268 Behavior of the Monetary Base and Components of Net Domestic AJmets ............................. 269 Credit Extended by DMBs (at constant prices) .......... 271

xvii

Fig. 28

Fig. 29

Fig. 30 Fig. 31 Fig. 32

Philippines: General Oovernment Deficit and External Deficit, 1975-1989 (percent of GN/_ Philippines: Fiscal and External Deficit (percent of GN_ .................................. 274 Philippines: Public Sector (PSRB) and External Deficits, 1975-1989 (percent of GNP) Public Sector and External Deficits (percent of GN/_ ..... 275 Use of Reserves and Exchange Financing (percentage of GNP) ................................ 283 Treasury Bill Rates and Cost of Secured Loans ......... 300 Net Credits to the Public Sector and Domestic Money Banks ..................................... 303

xviii

CHAPTER 1

Introduction Objective

of the

Study

The external debt problem has been the central theme in macroeconomic policy decision-making in the Philippines for about a decade now. Current trends seem to indicate that it will remain a key issue in the 1990s. Recent adjustment programs designed to attain economic recovery and a growth rate in the medium term of at least 6 percent per annum use a financing scheme that requires additional flow of foreign finance of about US$1.5 billion per annum. Most of the new money would come from official bilateral and multilateral sources. New money has been made available, but not quite up to the expectations of the Philippine authorities. Given the dismal experience with foreign-finance led growth and development, it may be justified to ask up to what extent and under what conditions should the Philippines embark on new adventures with foreign creditors. To a large extent, the answer will have to be based on an assessment of the structure of the economy and its capacity to absorb foreign capital inflows in a productive way. The lessons derived from the experience of the 1970s and the 1980s should provide the teaching material for external borrowing strategies in the 1990s. The study focuses on the interaction between international capital flows, on the one hand, and domestic adjustment and macroeconomic policies in the Philippines, on the other. In the period under study, significant changes in the level and pattern of foreign capital inflows occurred. From 1975 to 1979, net capital inflows were positive with the share of private inflows accounting for one.half of the total. After the second oil shock, net capital flows became negative, accompanied by a decline in the growth rate of the economy. The period saw net private inflows taking a tailspin with the slack covered by official capital flows. Interest payments rose sharply, reflecting the massive accumulated external debt which primarily caused the net capital outflows.

PHILIPPINE EXTERNAL FINANCE

This study tries to give an assessment of the processes of structural change and the rote of external finance in the Philippines by focusing more systematically on the savings and investment behavior of the main institutional agents in society and their responses to external shocks and foreign exchange availability. The minimal disaggregation of agents studied already goes much beyond conventional approaches to debt and adjustment. It is hypothesized that structural differences in the spending behavior of households and unincorporated businesses, private (financial and non-fmanciaD corporations, public enterprises, and the government sector provide a complex environment to assess adjustment processes and to evaluate the effectiveness of structural adjustment policies and debt management in a developing economy. Much of the argument will be centered around the macroeconomic accumulation balance disaggregated as follows:

I-s

-- (IHSH)+(I_-SpE) + (i_zS_Z)+ (IGSG) =

M-E+R

= (AFH+ AFpz+ 4FGz+ AFG)- ARES

(1)

where: I S M E R AF ARES

= = = = = = =

Gross domestic investment. Gross national savings. Imports of goods and services. Exports of goods and services. Net factor payments and current transfers Net capitalinflows. Change in international reserves.

to abroad.

forinstitutions (subscripts): H PE GE G

= = = =

householdsand-_corporated private corporate enterprises public enterprises government

businesses

The key argument of the study centers around two major hypotheses. One looks at access to external finance as largely determined by external factors. In the Philippines, changes in these factors significantly affected domestic spending patterns of the various economic institutions in the 1970s and the 1980s. Though not underestimating domestic factors, this study shows that external

INTRODUCTION 3 factors were a major influence toward which particular domestic circumstances responded. The second hypothesis states that the capability of the economy to respond to shifts in the availability of different sources of external finance de_nds on the sh_lcture of the economy, and the diverging saving and investm_t behavior of major institutional agents. Particular attention is given to the nature and adjustment behavior of private sector agents as they operate in different institutional and market contexts (e.g., segmented financial markets and competitive versus oligopolistic markets). In the Philippines, there is a clear dichotomy between the savings and investment behavior of the large corporate business sector operating in oligopolistieally structured markets, having strong links with the formal banking system, and that of the vast (in terms of units and people) and heterogeneous sector of small-scala firms and unincorporated businesses, including small farmers and informal service sector establishments. Unlike many other similar studies, this book emphasizes the maoroeconomic importance of the heterogeneous private sector behavior which, as hypothesized, strongly limits the scope of effective maca_economic policies and fiscal adjustment in a country like the Philippines. Using the accounting identity representod by equation l, it is thus suggested that 1.

First, an initial causality in the adjustment process would run from external f'mancing conditions (_v) to the current account balance (M-E+R), to the investment-savings balances of domestic institutions (Ii-Si), and the flow-of-funds interactions among them; and Second, the private sector accumulation balances [(IH - SH) + (]PE - SPE)] do not purely accommodate imbalances of the external esctor (_ v) and the public sector [(IG- SG) + (IGE- SGE)], but also limit adjustment of the latter.

In the Philippines, these two hypotheses have to be analyzed in close relationship with political factors and the domestic political coalition problems that underlie tendencies toward political instability, hampering consistent policy-making for long-term development. The Role of Policies The reassessment of the role of policy undertaking of this study. Often, a primary

is another important role is given to some

PHILIPPINE EXTERNAL FINANCE

preconceived set of aappropriate" adjustment policies to achieve economic stability and createa basisforsustainablegrowth.This study suggests that in external financing, policieshave been more accommodating than incentive-giving. Massive availability of foreign financein the 1970s,in excessoffmanco needed to adjustto external shocks, encouraged particularlythe public sector to engage in large-scaleinvestment programs which were infeasible because of existingmarket distortions. Following the debt crisis, no adequate adjustment finance was available; the financingbeing offeredwas heavilyconditionedon policyreforms prescribedby the multilateral creditoragenciesand the donor community. In these adjustment schemes, increasingweight was given to the private sector via privatizationand liberalization programs. The pres_med inefficient intervention of the state premised these reform proposals. While the assumption may be true, suggested schemes should also consider the responses of the private sector, its different components (i.e., unincorporated enterprises such as farms and informal urban production units, and large private corporations), and the consequences these may have in the build-up of external financing problems and harsh adjustment processes. A proper understanding of the functioning of all major institutional agents in the economic process is required to redefine the role of external fmanc_ in adjustment and future growth, as well as the managing role of the state in this process. Methodology To address the main methodologicalelements:

hypotheses,

this

study

integrates

four

I. Macroeconomic SocialAccountingFramework (MSAF), 2. Decomposition analysis of external shocks and domestic adjustment, 3. Disaggregated analysis of savings and investment behavior and financial intermediation, and 4. Analysis of policy regimes. These analytical steps provide the building blocks to assess adjustment processes and define the scope of macroeconomic management in the Philippines; but they have also been designed to serve a comparative country analysis. In a larger project conducted by the Institute of Social Studies in The Hague, similar questions were asked and the same methodology was used for four other in-depth country studies covering Thailand, Pakistan, Tanzania, and Mexico; on

INTRODUCTION $ a croes-sectio_ basis, key hypotheses were also tested for a sample of 25 other developing countries. The methodolosy may be described as follows: The MSAF provides an integrated accounting system for the overall analysis. The instrument is defied in Chapter 2 and should be regarded as a particular format of a Social Accounting Matrix (SAM). 1 The MSAF links the incomes and outlays of the main institutional sectors being studied (i.e., households and unincorporated businesses, private corporations, public enterprises, the gove_ment, and foreign agents) with the structure of production and with the process of income generation and distribution. Compared with most SAMe constructed for developing countries, the MSAF reseawes substantial space for the financial structure of the economy. This is achieved through the flow-of-funds block which identifies the savings and investments of the main institutional agents as well as the channels through which financial intermediation takes place. External f_n_nce is also part of the flow-of-funds block. The MSAF, therefore, enables analysts to identify the allocation of foreign resources by the different actors in the economy and the channels through which these affect the rest of the system. The MSAF database serves as a consistent database for the analysis of savings and investment behavior undertaken in subm_quent chapters. Since MSAFs are constructed for several years (1974, 1979, and 1987), they permit an analysis of the structural change of the Philippine economy during the turbulent 1970e and 1980s, the two decades under study. Moreover, the MSAFs are also a static, dentand-driven model of the economy (i.e., an extended Leontief input-output model) used to analyze the |inkage structure of the economy and the potential impact of foreign capital injections on domestic spending. A decomposition method is applied to assess the nature of the external shocks experienced by the economy and to identify which domestic spending categories bore the brunt of the subsequent adjustment. The decomposition analysis comes from a modified version of a method introduced originally by Balasea (1981) and also applied by the United Nations Conference on Trade and Development or UNCTAD (1987). 2 Applied in Chapter 3, it identifies shocks in terms of trade, 1. See Alareo_ van Heemst, Keunin&De Ruijter,and Vve(1991) fora refeeermetext _ SAMs. 2. See FitzGerald and Sarmad(1990) fora briefreview of the histm'yof the _ shock deemnpoeitionmudyaieand forthe adjustedmethodology.The adjustmentsrelate to a ftwther specificat_ of the im_t intemetbm tenvs between the different eemmmlcagsz'egates analyzed through the method.The nature and imlxzetaneeof these inter_u terms have been neglected in earlier applications.

PHILIPPINE EXTERNAL FINANCE

world interest rate, world trade growth, and debt accumulation burden. It further identifies whether the adjustment fell on consumption (and savings) or investment spending, and on imports or export growth. Since the decomposition analysis is based on e_post information, it is possible that observed trends in the current account balance underestimate the actual shocks since some (anticipated) domestic adjustment may compensate for them. Therefore, external shock variables are also included in the analysis of the saving8 and investment behav/or of the principal institutional agents. Chapters 4 and 5 analyze these patterns and the main determinants underlying their savings, investment, and portfolio decisions. This is done after the institutional setting (i.e., the operations of firms and of commodity and financial markets) in which these take place, is described, using econometric tests. The analysis of _n_cial intermediation and portfolio behavior (Chapter 5) deepens the flow-of-funds analysis (see MSAFs). It identifies public and private sector demands for and claims on domestic and foreign financial assets and, on that basis, the mechanisms and determinants of financial "crowding out" effects of public and private sector decisions on funds available for productive investment. The role of policies in the adjustment behavior and processes described in Chapters 4 and 5 is amplified in Chapter 6 through an analysis of pol/cy reg/mes. In this study, a policy regime refers to a combination of policies that defines a government's role in setting the incentive structure for production, savings, and investment decisions of the various other agents in the system, which it carries out to address a single or a multitude of internal and external shocks. Thus, the nature of the trade regime, debt management, fiscal and monetary policies, industrial and agricultural policies, and the changes therein are analyzed. Political-economic factors underlying policy decisions are assessed by describing the positions of the principal agents (including foreign creditors and multilateral agencies) which, together with a description of policy intentions and an assessment of the economic outcomes, provide conclusions on the available manuevering space and macroeconomic management capacity of the government. Periodization The analysis of the recent Philippine development experience will focus on various "shocks" in foreign exchange availability and the consequences on domestic adjustment. In doing so, the study subdivides the 1970s and the 1980s into five sub-perlods with the cut-off points

INTRODUE3]ON

between the periods being deter_a-_i by di_effi_ut external shocks far periods I-IV and an internal, political shock for period V: I.

1970-74: Adjustm_mtperiodtobalanee-of-payments(BOl_and short-term external debt crisis builds up during the late 19608. An authoritarian regime is e_tablished which implement4 a mac_economic adjustment program. Recovery is supported by a boom in _mmodity prices f_ l_;I;ppine exportstoward the end of t]_ period, leeding to high growth rates by historical standards, combined with an acceleration of inflation caused by cost_push factors (a major devaluation and the iewst oll price shock).

II.

1975-79: Thisperiodbeginswithadjustmeattothef_toilprice shock nnd falling prices dmajor Phih'ppine _xpÂ˘_ commodities (the oil price shock in the Philippines is reflected by deteri_ating terms of trade starting in 1975). But a supply-led _-_-_e boom provides the required adjustment finance and allows an investment boom led by import substituting industries and public infrastructure and energy programs. Massive expansion of externally financed public investment is concentrated in public en_ and follows in part a rational program of e_xgy-saving, effective import substitution and, in part, a political progrnm of consolidation of the Marcce regime. Real GNP growth reaches 6.5 percent per annum.

IIL

1980-82." This "pre-crisis" period is cheracW_ized by coinciding internal and external shocks. External shocks are, in sequence, the second oil price shock, the steep increase in world interest rates, recession in the industrialized countries, and an additional (short-term) loan-supply shock. The internal shock results tkom the external t_-_ boom of the previous period and the subsequent excessive financial leverage of public and private firms leading to an intern_! financial crisis (1981). The government's attempt to selectively bail out favored, distressed firms leads to a severe lose of private investment confidence and masaive private capital outflows. Economic growth stagnates.

PHILIPPINE EXTERNAL FINANCE

IV.

1983-85: A major BOP crisis emerges as terms of trade continue tofalland available external finance contracts, a consequence ofthe crisis in international lendingfollowing debt-payment problemsofmajordebtorcountries. Adjustmenttothecrisis involves a moratoriumon debtrepayment,publicexpenditure reductions,and a massive reductionin import volumes; subsequently, publicandprivate investment ratesalsofall. The economyplungesintoa majorrecession, particularly affecting manufacturingindustry and non-tradables. With thefinancial basishavingdisappeared, thedomestic coalition supporting the political regimebreaksapart.

V. 1986-90:Thisperiodstartsoffwiththeinternal shockofthe collapse ofthe Marcos regimeand theinstallation ofa new governmentembarking on a program of quickrecoveryby pump-primingcurrent public expenditures whilecutting public investment. Externalconditions areslightly lessadversethan intheprevious two periods, whiledebtreschedulings and new sourcesofexternal funding(official bilateral and multilateral flows) provideadjustmentfinance. Privateand publicdemand expansionand enhancedimportcapacity stimulate a recovery of privateinvestment. However,major structural economic problemsremain,sustaining thesourcesofpolitical instability.

CHAPTER 2

Performance

and Structure

of the Philippine

Economy

This chapter looks at the nature of the economy and its performance during the two decades under study. It also explains the macrceconomic social accounting matrices (MSAFs) used to analyze the changes, linkages, and shifts among the structure of production, patterns of income distribution and consumption, and savings-investment balances during the identified years. This structural background would serve as basis for analyzing the structural adjustment discussed in Chapters 3-5. The Economy

from

1970 to 1990

The Philippines is a middle-income country with a medium-sized, open economy: GNP per capita reached around US$700 by the end of the 1980s; total population stood at about 60 million in 1990; and imports and exports as a share of GNP in the 1970s and 1980s hovered between a low 36 percent in 1972 and a high of 52 percent in 1989. The country's terms of trade started deteriorating in 1975 and this brought about persistent current account deficits except in 1972, 1973, and 1986. Prices of tradable goods consistently in,eased faster than those of non-tradables in the 1970s, but tapered off toward the end of the decade; the trend reversed during the 1980s. (Table 2.1) The country's production structure is characterized by a relatively large services sector which has continued to account for at least 38 percent of GDP; an industrial sector whose contribution hovered between 30 percent to 36 percent, reaching a peak in the late 1970s and early 1980s; and an agricultural sector whose share was never over 30 percent. Sectoral development diverges between the two decades. Throughout the 1970s, a strong expansion of modern industrial activity occurred with agriculture lagging behind. By 1980, the share of agriculture in total value added was 25 percent, down from 30 percent in 1970. The debt and economic crisis of the 1980s hit foremostly the manufacturing industry; this gave relative importance to agriculture in

TAeLE2.1

Selected Economic Indicators ofthePhilippines 1970-1989

--o z_

Indicator

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

I. Income RealGNP(% growth) Agriculture I_daslp/ Sendoes

2.98 2.23 6.66 5.41

6.49 4.91 7.88 4,72

5.36 3.78 7.50 4,51

9.29 6.15 12.41 6,98

5.60. 2.58 5.64 6,19

5.80 4.31 6.70 5.90

7.40 7.98 10.98 5,98

6.34 4.98 6A1 4.93

5.76 4.15 6.11 5,8_

6.89 4.51 7,98 5.83

-i _o z _> ---

RealGDP (%shares) Agricolture InduIly Serv_

100 29.20 30.72 40.98

100 28.98 31.32 39,70

100 28.58 32.98 39.42

100 27.98 33.16 38,88

100 27.32 33.36 39.32

100 26.78 34.08 39.14

100 29.77 34.82 38.41

100 26.47 35.57 37.96

100 26.13 35.77 38.10

100 25.70 35.35 S'7,_5

II. Exlemalsector($M) M + X/GNP= Clm'ut balanoe_GNP (%) BOP/_NP(%) Ten'nso(l_ade Realeffec_ excMngetaleb

0.40 -0.75 0.34 119

0.38 -0.04 0.98 111

0.38 0.tl 1.00 10Q 100

0.41 6,02 6.31 113 105.01

0.49 -1.29 0.73 115 97.88

0.44 -5.85 -3.29 88 88.79

0.41 -5.82 -0.88 73 100.43

0.42 -3.63 0.98 71 102.94

0.42 -4.59 -0.35 78 110.88

0.44 -5.07 -1.98 82 98.41

IlL !=ub_li_uce Public_Â˘_tordefictt/GNP (%)"

0.0

0.O

0.0 /,

0.O

0.0

3.0

9.3

6.7

4.2

3.4

IV.Mo_ne_p/sector M3 (grow_role)

4.9

11.8

13.1

18.1

19.6

14.8

30.0

24.0

12.6

z Z

(TABLE 2.1 CONT.) Ifldk:Mor

1070

V.LabormÂ˘_ Openunempbymenl rate(_)d Undenlm#oymem D (%)' Rj w_e _lu (un_k)(I) 1t6.82 Secloral mpbymm 100

1971

1972

1973

1974

1975

1976

1977

19",_

1979

15 10P_10 100

13,3 190 100

12.1 88.07 100

10.1 70.89 1_

4.2 13.3 71.96 100

5.2 17.4 _.28 100

4.5 19.6 W.32 100

4_1 20.3 84.37 100

4.0 _.9 58,2

(%_.._ _ri_lture Indumy Ser_e A01blly notdefined

53.7 16.5 28.2 t.6

50,4 15.7 33.7 0.2

54.6 14.6 30.8 0.0

58.0 13.2 30.5 0.2

55.8 13.8 30.4 0.2

53.5 15.2 31.0 0.3

S3.8 1S.2 30.7 0.3

52.1 14.6 32.6 0.7

52.2 14.7 32.9 0.2

* -

_. Prk_ Ildlatton I_

14.8

21.3

8.2

18.5

34.2

qL78

9.2

7.3

18.S

97.0 97

1_4 100

100.0 100

100.9 110

112.4 115

111.4 112

106.4 107

VII.POl_lelklr. (n_., endot pno')

3"J'.5

38,6

39.7

40.8

48,1

44.3

45.5.

46.7

_,.GNPw_ _US S)(end _ pedod)

23O

220

22O

25O

420

5eO

10U 106

1G2.8 1_

N.1 t01 48

__,

SeO Z 0

(T,_3L.E 2.1CONT.) IMicstot"

198Q

1981

t982

1983

1984

1985

1986

1987

1988

1989

4.96 4.67 4.68 6.15 100 25.56 36.16 38.28

3.45 4.00 4.45 3.59 100 25.56 36.34 68.29

1,90 3.13 ?-15 3.47 100 25.64 36.07 38.58

1,11 -2.10 0.68 3.2 100 24.87 35.98 39.15

-7.07 2.27 -10.22 -7.37 100 27.05 34.37 38.58

-4.12 3.32 -10.17 -4.37 100 29.20 32.28 36.54

1.86 3.27 -2.98 2.95 100 29.73 31.14 39.15

5.8I -1.02 7.73 6.63 100 28.11 32.04 30.35

6,75 3.48 8.56 6.77 100 27.40 32.76 39.64

5.67 4.29 6.91 5.45 100 27.05 33.16 39.78

M+ X/GNPe_ Cwxenl I_/P_P (%) BOP/GNP (%) Termsoftrade Realoffec_ eJcl_mge rateb

0.46 -5.41 -1.00 69 92.51

0.44 -5.38 -I.42 60 90.21

0.40 -8.15 -4.25 59 87.30

0.47 -8.07 -6.21 61 107.48

0.45 .3.53 0.77 80 105.04

0.30 -0.32 7.16 56 92.8

0.44 3.30 4.12 60 117.64

0.46 -1.30 0.77 86 124.76

0.49 -1.00 1.67 73 129.67

0.52 .3.31 1.02 71 122.11

III.Pubicfinance P,biicsecto_ doficit/C_IP (%)c

4.36

7.28

5.62

3.08

3.56

2.64

4.29

2.12

2.0G

2`96

IV.MoM_zry secto_ M3(growth rate)

22.07

13.41

19.90

21.79

14.69

13.04

9.05

14.21

23.63

37.48

V.I._ seOtor OpenuB)mpIoymerd rate(_)d Undemmla,k_ zstJe (%)" Real_ index(u,_dlbd) Se(:lolal en_lm/m_

5 20.9 51.46 100

5.3 23.0 51.08 100

8 25.5 47.76 _ 100

5.4 29.8 45.88 100

6.2 _8.4 43.63 100

7.1 22.2 42.02 100

6.7 28.4 41.71 t00

Q.4 24,2 41.02 I(10

8.3 21.4 44.88 100

n_ n.s. 48.55

t.tnc_m RealGNP(%9rowffi)

_Zm

Industp/ Servioes RealGDP(%shines) Agricubre Industry Sewk_

,.E_ern_ se_ (Â˘_)

(%_m)

"1-rz rr', _, "_ z D z z

(TABLE-2.1 COWl'.) Ino_(:e_r

1980

1981

19_2

1983

1984

1935

1988

1967

1888

Agrk_re Indullry Se_iee AOIivfly no(de_o_d

51.4 15.5 50.0 O.0

51.2 14.6 34.2 6.0

51.3 14.2 34.4 O.O

51.4 14.4 34.2 O.O

49.6 14.8 35.6 0.0

49.0 14.2 35.8 0.0

50.0 13.3 36,7 0.0

47.6 14.6 37.6 0.0

46.1 15.0 38,3 0.0

17.60 88.7 97

12.39 85.6 98

10.21 84.3 91

10.17 85.3 93

50.35 03.8 103

23.10 35.2 101

0.75 78.3 93

3,79 812 nJL

8.76 79.2 n.e..

10.60 n.a. n.a.

'vl,PH¢_ Inflation _ Pa, tPM.• PI_ t

1989

v,.F_ (rain., end ofi_reioo')

49,2

50.s

51.8

53.2

54.5

Ss.a

57.1

sea

50.7

eo.2

_nfl. e_ _ _

980

77o

soo

749

630

S70

seo

630

732

(usS)

aM ,¢m_ npeeMdXto_po,tL bREIER(REER1.1.(I +RE")whereREERIistheREEFIinperiod t REt' - mwi(Ri+CPli-CPb_whemRB'-changeinREERinpmiodl vii - t_le we_htbr I]_lin9_ i. Rr - %change in_,)minal ez¢_ role_ courdry L

cw¢ - %¢m_,i._of,=o._L

> z

dClNndlude8 9ovemmMmonitmdoorpmaf_ EOA_bm ofPIdlipl_ Soda1Statblics ardNSO,ISH.

,q_ iMex ofagdo, hr__z/p_ index_ _ agd_o_mod_ IpIF_

C _

indexM llada_ogooda_oeIndex_ mm-lla_degoodL

Sour_e_ I_Uo_l Income _ q_eCe_lrdBm_

Na_onal Sl_(:al Co_rdlnalion B(_rd.

PHILIPPINEEXTERNALFINANCE

the total production, which moved back to nearly 30 percent of GDP in 1986. This trend in the production structure is not fully reflected in the sectoral employment trend. The employment structure shows an agricultural sector that consistently accounted for at least 50 percent of total employment in the 1970s, with peaks in the fzrst period, dropping slightly during the 1975-1979 period, and gradually tapering during the mid-1980s. The second biggest employer was the services sector whose share in total employment increased over the years especially during the recession years of 1983-1985 and the recovery period. Expansion of government services in the 1970s and of informal services during the crisis years underlie these trends. Industry consistently accounted for only about 14 percent to 15 percent of total employment. The share also failed to increase during the period of rapid industrialization of the 1970s (growth rate averaged over 8 percent per annum), reflecting the capital- intensive nature of industrial activity promoted by protectionist government policies since the 1980s. Unbalanced

growth

in the 19708

In the 1970s and 1980s, the Philippine economy suffered numerous internal and external shocks which contributed to its uneven performance. Except in 1970, the economy grew by at least 5 percent for the entire decade of the 1970s. The 1975-1979 period achieved the highest average growth rate of 6.44 percent with the prior period, 19701974, not far behind. The manufacturing industry accounted for the highest growth rate, consistently surpassing agriculture and services. The decade's exceptional growth was largely fueled by a protectionist incentive structure under the import substitution program and the massive support from public investment in infrastructure and energy financed largely by foreign borrowing during the 1975-1979 period. Influenced by successful changes elsewhere in the region and sector support of multilateral agencies (World Bank in particular), specific government support programs were also set up to promote non-traditional manufactured exports, yielding measurable success in some branches of industry, i.e., garments and electronics, (analyzed further in Chapter 3). The period also witnessed the aggressive expansion of the public sector. Public sector deficits (government and the monitored public enterprise sector) reached an all t.!__me high of 9.3 percent ofGNP in 1976. As analyzed in Chapter 4, this expansion reflects, to a large extent, investment by public enterprises.

PERFORMANCE AND STRUCTURE

Agriculture growth, though below the performance of the rest of the economy, was not unsatisfactory compared with the performance of the sector inmany neighboring countries. Averagegrowthinthesector was above5 percentin 1975-1979, wellabovehistorical ratesand rates achievedinthe1980s.Much ofthegrowthperformancecame fromthe relatively favorable prices foragricultural exports inanumber ofyears during thisperiod,and government support in terms of rural infrastructure and improvedinputsupplies ina number ofimportant sectors and regions. GNP per capita almost doubled from US$300 in 1974 to US$590 in 1979; but this growth did not seem to have trickled down in equal shares to all population groups. For the agricultural sector, relative prices (internal terms of trade) appeared favorable at the start of the period, but tended to decline toward the end of the decade. Data on real wages are scarce and have to be taken with caution, but available information on the real wage index for unskilled workers suggests a declining trend since the beginning of the decade. Failing terms of trade for agriculture, declining real wages, and employment growth falling behind output growth (particularly in industry) suggest a shift in income distribution toward urban profit incomes during this period of rapid GNP growth. Since the industrialization process emphasized the domestic market and basic consumer goods, this income distribution shift signalled an unbalanced sectoral growth path likely to hit sooner or later on demand constraints similar to industrialization experiences in Latin America. Crisis and adjustment

in the 1980s

The economy slowed down during the 1980-1982 period to an average growth rate of 3.4 percent; real GNP growth rate dropped from 4.9 percent to 1.9 percent in 1982. The effects of another oil price shock, a world interest rate shock, the deteriorating terms of trade, and a recession intheindustrialized countries uncoveredtheweaknessofthe economicfabric woven duringthepreceding decade.Despitetherisein publicsector deficit from3.4percentofGNP in1979to7.28percentin 1981tocounteract theimpactoftheexternal shocks, GNP growthstill fell. The BOP crisis in late 1983 only hastened the collapse of the economy. A series of devaluations from 1983 to 1985 seemed to have increased production costs; in particular, the inflation rate accelerated from about 10 percent to 50.3 percent in 1984, even as monetary and fiscal policies became restrictive. The growth of money supply 0VI3)went down to 14.7 percent in 1984 and 13.0 percent in 1985 from around 20 percent in 1982-1983, Government expenditures were drastically cut,

PHILIPPINE EXTERNAL FINANCE

but these cuts were offset to some extent by increased transfers to poorly performing public enterprises. The Public Sector Borrowing Requirement (PSBR) fell from 5.3 percent of GNP in 1982 to 3.1 percent in 1983, increased slightly in 1984 (3.6 percent), and settled to 2.6 percent in 1985. GN-Pdipped sharply in this period. Industrial capacity utilization dropped severely as the allocation of foreign exchange impinged heavily on import-substituting industries, worsened by a high interest rate policy which attempted to arrest private capital outflows ('capital flight') and counteract the inflationary effects of devaluation. As a result, real GNP decreased by 7.1 percent in 1984. Manufacturing industry suffered most, showing a 10.2 percent fall in output; only agriculture managed to register a meager, but positive 2.3 percent growth rate. GNP per capita receded to the levels reached in the late 1970s (fr_ ._US$800 in 1972 to US$570 in 1985). Urban sectors were hit hardest as the _gricultural terms of trade showed a slight improvement in the 1980-1982 period, while real wages for urban unskilled workers continued to fall; urban, open unemployment rates rose. Next to the strong, mainly expenditure-reducing domestic adjustment, there were attempts to strengthen the traded goods sector. A series of devaluations, along with contractionary fiscal and monetary policies, resulted in a depreciation of the real effective exchange rate (REER). The depreciation ofthe peso amounted to 7 percent in 1983 and 5 percent in 1984. This may have supported a boost in export growth and, along with the severe cuts in imports, managed to create a current account surplus in 1986. Demand-led economic recovery characterized the 1986-1989 period. Growth rebounded to 5.0 percent. In the frrst years, economic policy was mainly preoccupied with recovery led by an expansion of consumption fed by current government spending and, to a lesser extent, real private income growth with increasing wages and near-to-zero inflation (0.8 percent in 1986 and 3.8 percent in 1987). Recovery was further supported by the internal political shock of the fall of the Marcos regime, putting an end to extreme political uncertainty, restoring business confidence, and enhancing Overseas Development Assistance (ODA) support of bilateral and multilateral donors. Auspicious external developments also helped boost imports and industrial growth as world prices for crude oil fell in late 1987, coconut prices recovered, and the US sugar quota to the Philippines was increased in 1986. But the euphoria was shurtlived. The economy reached its full capacity in 1988 and supply bottlenecks occurred. This was mainly reflected in the inflation rate increase from 3.8 percent in 1987 to 10.6 percent in 1989.

PERFORMANCE ANDSTRUCTURE17 GNP per capita displayed a respectable recovery to US$730 in 1989 (preliminary estimate) and significant real wage adjustments in 1988 appeared as a major factor in reducing absolute poverty observed between 1985 and 1988 on the basis of official calculations from the Fmmily Income and Expenditure Surveys (FIES): the poverty incidence for the country decreased from 59.0 percent to 55 percent. It is not clear yet to what extent more structural factors must have contributed to this trend. However, income distribution remained highly skewed, showing a virtually unchanged Gird coefficient of 0.45 in 1985 and 1988, which is a degree of inequality not much below that of the early 1970s (the Gird coefficient was estimated at 0.48 in 1971). Structural Change and MSAs: A Comparative Based on MSAFe for 1974, 1979, and 1987 The MAS

Analysis

methodology

The social accounting method provides a convenient framework to present the overall socioeconomic structure of an economy. In many studies, the methodology is commonly known as SAM, the abbreviation of the label attached to the core table presentation, i.e., the Social Accounting Matrix. Most SAMs const_cted for developing countries 1 mainly sought to integrate distributional aspects of the income generation process and of the living standards of the population within a closed system of accounts, such that the interrelations among these distributional issues and the structure of production, employment, and capital accumulation can be identified. Social accounts were constructed for the Philippine economy for three years: 1974, 1979, and 1987; these are points in time which coincide with the respective ends of subperiods I, II, and the begi_nlng of subperiod V as defined in Chapter 1. The accounts emphasize socioeconomic links among the main types of principal institutional agents of the economy in the process of production, income formation, and capital accumulation. These principal agents consist of households and unincorporated businesses, private corporations, public enterprises, the government, public and private financial institutions, and foreign agents (rest of world). In this sense, the accounts have less detail in the breakdown of production activities, labor groups, and household groups than in many SAMs for developing countries. The study also gives full weight to the process of capital accumulation and financial intermediation, whereas most SAMs relyonly on aggregated 1. SeePyatt andThortmcke (1976); Pyatt andRoe(1977); andAlarvon, VanHeemst, Keurdng, De Ruijter and Voe (1991, forthcoming)for good references on the social accountingfran_work fordeveloping countries.

PHILIPPINE EXTERNAL FINANCE

capital accounts. 2 The more aggregate nature of the accounts led to the label "Macroeconomic Social Accounting Framework" (MSAF). The presentation of the MSAFs in this section aims to give one-page summaries of the circular flow of the Philippine economy and the structural changes therein between 1974 and 1987. A main observation derived from the MSAFs' analysis are the pivotal roles that the agricultural sector and the self-employed activities (unincorporated businesses) continue to play in the linkage structure of the Philippine economy. In the 1970s, external financing played an important role in a shift toward strengthening the public sector and urban, wage-labor based activities. The 1980s crisis, largely provoked by external debt payment problems, reversed this trend and, by the end of the 1980s, household-based, unincorporated enterprise activities played an even more crucial role in the process of production and capital accumulation than they did in the early 1970s. Accounting

concepts

The Philippine social accounts were constructed for a study of external finance and its interrelationships with the structure of production, income distribution, and savings and investment patterns. The subsequent analysis in Chapters 3-5 focuses on the behavior of the principal irtsti_tional agents of the economy, i.e., households and unincorporated enterprises, public and private corporations, the government administration, and financial institutions. Compared with many large SAMs for developing countries, the social accounts used place less emphasis on detailed household group accounts. The fairly aggregate nature of the classifications for production activities, production factors, and institutional agents explains the applied label of Macroe_nomic Social Accountin_ Framework (MSAF). The basic accounting relations bring together -1. 2. 3.

The structure of production (input-output, t'mal demand, value added distribution); Income generation by production factors and income distribution by institutional agents; and Savings and investment patterns and flow of funds between domestic institutions and foreign agents.

Tables 2.2-2.4 give the MSAFs' mapping of the Philippine

economy

2. See Vca(1991) fora discussionof the reasons fcr this cmission andthe impoetance of detailed capital accounts within social accountingfran_wca*ks.

TABLE2.2 Mecroeoonomlc Social Ac¢ounlin9 Framework 1987

(inmillionpesos) Sectors 1 _dculture Mining Light mMu_eturlng 01hern_ulactuda9 ¢.._uIRl_,elOwa Servtees Uni_ (apiUd k_me CorpormCal_dbeome Househ.: MetroMenila Otherud_n Rural Emrpr.:uni.eoq_rmd Private corp.

1 2 3 4 5 6 7 $ 9 10 11 12 13 14

20060 98 10508 11289 37 11402 55286 108023 5145

Oovmm_

Rest-o(-the-wodd Hour1. &unifloorp, ent

17 18

5673

Pul_enterpme Govemmnt Oen_lo_k Pubi_fin.in_t.lion Privatefin.insli. Informal moneylenders (:_e _ (:a,_ s_xks Rest-ef_

20 21 22 23 24 25 26 27

2 380 1047 0 3587 153 1589 3771 1471 8926

3 81890 65 21105 3468 470 11307 30891 3gOG2 -2197

4 6386 5980 3115 22467 1096 11812 18288 G2"/3 17431

5 4688 1772 14 25710 180 6267 17661 4703 25393

8801 194 35987 20_ ,_ 89643 145650 41244

73871 78815 865G2

52091 93901 162220 76480

2153 883

9Ore 17464

I?065

2125

104,_

43001

.527'0

13507

1_0 62

° Z

7> o .. "

C "

m c r.

('rABLE 2.2 CONT.) I Tolal Emldo_M (x10"3)....^^. No.households ,,x]u'_j -Wage earners -Sd-en_bye_ -Other

236346

23946

192589

9974

145 -

1310

4 154993 775 -

94805

444039

847

7775

7 239340

8 308212

9 95942

z z z

_m 10 Agrk_m Mining Light manufactur_g Other rp_nufectudn9 Construct, et_ewa Smviees Labo_ Uni_omp. capitÂ˘inoome Corporate _ income Househ.: M_mManila Othe_ urban Rural Enteqx.: unincorpmaled Pdvate co_p. Publiccmp. Govemmer_ Rest-of-the-wodd

r-o -o

14761 119 25646 5285 2315 66090

11 22243 140 37885 5971 2662 70951

_ 210 82417 6"/24 3844 77874

56553

17 30605 6311 34971 5,3864 2828 53801 237_G

10218

373 2994 71306 10305

0 890 -32027 -6304

617 0 fl592 10413

800 0 7552 12373

1440 0 4309 15762

8668 5453 2034

120 249 178

0 3443 29370 27581

7134 0 177 14260

11685 9705 4771

3876 314g 3597

0 0 0 6566

6166 0 1193 0

20_9

592

(TASTE 2.2CONT.) Sectors Househ, & unbn_x_ e_ Pdvmente_dses PuMIceme_pdm Government Ce_ralbank Publio fimu_ia.I bsgltrlon Pr_atefinanclal _mtltuti_

10 18473

11 _

48525 8621

21067

_ -W12 7276

_,_11

Empk)ymnt No.ofHoguhokls (x10"3) -Sett.emplo_ed -_he_

191273

1392

2566

0428

223 302

717 494

31_ 1005

21376

110_7

16 0 .6357 0 39302 31123 -1341 .5413 7665 Slt0

8812

Inlon_ moneylenders Clm_ in_mm. s_cks Rest-(d_ T_aJ

2582

-23?2

22es41

le4t42

19 51447 -29479 100_ 37_ 1785 128 41_16 0 14124 0 .41e2s

z 3. z C3 _o C c

N N

('r,_LE Z2CONT.) Sectom

Ag_::tdture

¢o_d_t,e_wa ,Sewices Labor

18226

Mink_ Light meaulactunng OthermaHfeOtudng

S929 0 485

0 16

0 1

12195

726s

4238

L_n;o_.cap_k_com c__m

1856

0 6

0 32

-126_, -23782

s24

Househ.: MMroManila Otherurban Rural Enteqxr.: uninooq_mded _ ooq).. Public corp. _rnmnt Rea.of4he-world Househ. &uninoofl_, ont. Pdvate enteipriaes PuSik:enlerpdses Government Centlalbank P_d)_ctkwn_aJ ml_tul_on F_voterman¢_ ins1_utioo IMan_l_ kmde_ Chanoe incomm,stocks Rest-of-the-wodd

3272 O 4206 1143 5425 .,3084 7446 4124 0 1124 0

118 0 34300 5825 3378 -11606 34274 539 O 1102 0

5 0 -15911 -,3378 9812 -10594 -36263 77462 6 17 -9542

44 1798 -3164 O O -8658 -38947 4375 0 3 -1413

218 25540 -26127 0 0 -766 23659 -310 O O 9357

7605 0 O 0 O 6 O 0

Total

40644

77090

11613

-43817

31986

7665

23918 -

O -8905 16337 -5683 11704 -22930 59_0 O O

21480

2_4S

.._

192589 154993

3 4

4440_ 239340

-1398

"_ z

236348

6853

To,_

s 6 7

50nf2 _s42

s 6

z A

15094'1 191273 25_9_ O 92638 21376 110347 226541 194142 41(125 40644 77999 11613 -42617 31986 768G 21480 -1388

10 11 12 13 44 1G. 16 17 18 19 20 21 22 23 24 25 26 27

Total

............

......

PERFORMANCEAND STRUCTURE

_,_o

......

!_ ......

- ......... _°l, _.......

" __lti|

_H..........

i l_._I_ ...... _ ..........

: °: °..... °, °, ... _°°it!_,_

"'_..........

......

,._'_"'_''_.,.,_...... _ _

; ..-+,_+, :ff,.l|L .+,!_" i + l + i +.+°ii+,L ++..+++++

(T_mE 2_corr.) "U

Se(:k_ Total Empk)y19e_

_(xlo_s)

70054

7640

g7301

75168

38160

111500

8437

1131

647

605

_qut_

7 81603

6 31344

9 12117

-4 rn

-Wage eamem

-_het z > z Seclm

Agrk_it,m

I..iOht manuf_dng O_ rmmubcmdno Omm_,e_lm_ Ser_ Labo_ Land& mntallnoome

g158 3821 _ 8120

MUUg

._m

84 736 0¢_ 1000

0 4_ _41 51_8

t371 0 4640

8207 Tee 0

294

14222 3403 _ 10791

38066 40_ _ 23751

620 2261 3¢7 13892

13118 8155 222 11481 218 105

964 t137 1385

1(100 1947 2078

_ 177".M 45778

Smqx.: unineoq_ 2336 1441 9241

13707

UehoManila (Nhermt_n Rund

Prlvam corp. PuUcoorp. Govemmnl Rest_ Housd_ & mlnoo_,ant. Pdvmenmpdm

4g13

F._eundlnome Ho_:

1"/23 2021 6824

2226 4815 3e44

587 1024 1793

26_ 10083 1_

° 1287

t86 4_ 87 1_3

IO0

206

PERFORMANCE AND STRUCTURE 2,S

' ""'"'_'"

1 - ,,==1= I

= _l_|°l°

_ "'°'°°'"

• °°°__='"'[

=i'_

" "==_il='' ' /

....

= .... _="' _

'_=u

---

l!/

"!: ,! '"" / gll

O_ "O

(TABLE 2.3CONT.) _ctors Househ.: MelroM'anila _her urban Rur_ _erpr.: untco_omted Privare corp. Pobliccorp. Government Rest-of-the-world Hoq_eh. &unincorp, enl. Private enleqorises Pubtic enterprises Government Cenl.dbank Pubtic finenci_d ins_u'dons Pdvate financial inst#ulions Inlmmal moneylenders Che_Oe incommstocks Rezt-of-_e-wo_ To_

_20

666 642 1133 3363 715 989 4057 1126 0 304 437

19064

21106

25 0 0 135 16_X) 0 1281 3072 O 61 4101 10409

Total

981 1267 2882

90 3850 2189 -277 80 -51 728 6886 0 0 0

184 4786 6500 5038 t587 6315 -18 4862 0 -9 O

5288 0 0 0 0 0 0 0 O 0

8_6 0 0 0 0 O 0 0 0 O 0

157 4893 1531 8194 1204 160 162 0 0 0

37311 44118 81054 79581 23790 6050 34311 573"/_ 45_1 _ 19064 21106 10409 13784 30221 5288 10807 19411

13784

30221

5288

10608

19411

Total

1186 0 3280 -146 -141 -9 4458 267 0 1536 0

f,_

10 11 12 13 14 15 t6 17 18 19 20 21 23 24 25 26 27

,._ z _ z z

TABLE2A Macroeoonomk: Scold Accounting Framework Adju_KI for Unrecorded Private Foreign Aimet Accumulalion (in million pesos) MSAF19"/4 1 Agd(uulmre Mintng khmulaeludn9

Infom_money leo(lets

P,NI-o_e-wodd

0 0

457 643

56O 9 3634 0 I055 7687 14141 0 18274

,_ c

6305 13950

62 125 2471 0 177 956 2039 0 3002

21 22 23

586 366

0 0 0 O 0 0 0 0 0

(_mmmnt Cenni Bank Pu_mfm.Imdtu_iom

1163 _0

le280 16 6173 0 378 6497 5842 0 12201

Land&mntalrmome Enlmpmmralboome Houehokls: MelmMnnila Ob'm_r urban Rural r:i_rlX.:Unbi:olforated Pdvate OOlp. PUbiceo_p. Governmnt ReC.o_e-worrd HouuII.&unino(xp, ant. Private enffirpltm

eloawe

38 19 361 O Sl 184 762 0 1757

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

Sorvk_

2373 6 2180 0 48 837 11617 0 16253

2504 t2"/2

7671 12885 14727 0 0 0 0 30

0 0 0 0 0 0 0 0

38454 10715 1478 388 1609

-,o =o >7 >

(TABLE 2.4CONT.)

"G'

Sector_

----" r"0 "0

To_ _nl

(x10"3)

xousehous (x10"3)

35397

4124

67731

7684

1423

9932

49155

439

4233

35316

52844

-Wageeamem

rft

Z z >. z

Sectom Agricuhm Mimg ManufaCuring

Co_Ur_, _,_wa Labor Land&re_d inoome E_repreneu_income Househ#ds: MetroMaria 01herurban Rural Emm'_'.: un_ Private oo_ Publicoorp, Govecnmnt ReJt-of.lhe-wodd Househ. &unineo_, enL Privm_

10 1787 6 5686 0

11 9920 0

8480 21 17314 0

111 2 2050 0

3254 3526 9621 0

295 B8 1102 0

_63 239 3831 0

372 4_6 2989

484 778 6073

552 12_ 1gel

4802 10_ 18472

677 8_0 1003 -

14 16 _

691

2787 3

3565 _1

373 414 475 102 0 553 835 465

795 0 1t57 1058 1211 1481

253 719 0 23S8

2466 2888 S35

(TABLE 2.4CONT.) Sectors

Publlc ente_prlses Govemmen_ Ce_mlI_tmk t:)ub_, hmtltutio_n_ PdvaleI_, im_Mions Ird_rmal money lenders Change b comm.stocks Rest-ol-_e-world Total Employmeat (XI0"3) Households(X10"3) -Wage earners -S_f-empk)yed â&#x20AC;˘.O_her

15 1576

19 320 943

-1046

1545 401 _ 1158 3171 2144 0 3817

27155

21904

15081

5708

66 326 484

14895

26635

36660

670 406 183 191

1337 890 383 64

4767 1571 28t2 384

38556

10715

2031

17370

0 880 0 0 6

z z -4

c c

PHILIPPINE EXTERNAL FINANCE

O¢_¢_¢DCDO

I+mmmmmwwl

_0_

•

i 0

O¢_¢_¢DOOOQ¢_O

-+.++_i+.+_+++ ,.+

PERFORMANCE ANDSTRUCTURE31 for 1987, 1979, and 1974. They identify through four types of accounts: 1. 2. 3.

the main economic

relations

Commodities/preduction activities account for six commodities/ production activities (1_). Factors of production -- labor, unincorporated capital income, and corporate pron_ (7-9). Current acc6unts of institutional agents -- three household groups, three types of enterprises, the government sector, and the rest of the world (10-17). Capital accounts of institutional agents and financial institutions -- Central Bank (CB), public and private financial institutions, and informal money lenders (18-27).

The accounts classification of the three MSAFs are the same, except for some differences due to differences in data availability (see Appendix 2 for further details and a note on the construction methodology). Classifications of the principal agents -- households and unincorporated businesses, private corporations, public corporations, goveamment sdmlnlmtration, rest of the world, the CB, public and private financial institutions B correspond to relevant aggregations of decision-mAklng units having different market power: household firms tend to operate in competitive market structures; private corporations mostly operate on oligopolistic markets; while public enterprise management has always been politically sensitive. The private corporate enterprise sector is fur_er characterized by a high degree of concentration where ownership patterns o_ both non-financial and financial firms are interwoven into industrial, commercial, and financial conglomerates that also exercise significant influence on policy-making (also see Chapter 7). The expansion of the public enterprise sector in the 1970s is as much related to foreign finance availability as to the nature of the political regime at the time. 0 The M_SAFe' classifications are also applied in the most important data sources, i.e., national accounts and flow-of-funds statistics. Households are broken down into households in Metro MAnila or the Natian_d Capital Region (NCR), other urban areas, and rural areas. This 3. In the 1970s, _ly financedpublic en_ eect_ expansionwas pact of a political strategy ofPceaident_ to st_ngthen his _tt.km and that ofhis _. _, e.g., Dohner and Int.etl(1_) foran ir,,,lg, ht.ful]politieal-ee0ncmieanalysis. Atf,er 1986,the fall ofthe Msrcosx_egtme provokedmajorrefcmmsandpt.ivatizaUonofthe pub_ _ sector,not only to achieve efficiencybut also to reducethe influenceof the formerMan_e' cronies.

PHILIPPINE EXTERNAL FINANCE

classification corresponds to.the one used for SAMs constructed by the National Statistical Office (NSO) several years ago for 1974 and 1979, though with a quite different design. 4 The NCR region differs from the rest of the economy for having the highest concentration of economic activity and public sector employment. Wage-labor activities tend to be more important in the capital region. The entries on the rows of Tables 2.2-2.4 represent income flows, while the column entries represent expenditure flows. 5 Since the classification of the row accounts are symmetric to the column accounts, the matrix presentation and accounting identity of incomes and outlays require that row and column totals should balance for each single account. In Table 2.2, the row total of account 1 (Agriculture) identifies total demand for agricultural commodities (1>236,348 million), which should equal the total supply identified by the column total. Similarly, account 18 identifies savings of households and unincorporated enterprises p/us credits and other capital transfers received from other non-banking agents, financial institutions, and informal money lenders adding to total available investment finance (P184,142 million); this, in turn, should be equal to total uses of investment finance recorded in column 18 in the form of fixed assets by commodity type (intersection with rows 1-6), imports of capital goods (row 17), and financial investments in the form of corporate equity (row 19, col. 18), government bonds (21, 18), bank deposits (2_/24, 18), acquisition of foreign financial assets (27, 18), etc. Several accounts summarize a set of transactions which are shown in the Appendix 2 tables. The input-output and final demand system (rows 1-6 and cols. 1-6, 10-26) of Tables 2.2-2.4 represents domestic transactions only (imports are in row 17). Total transactions and import matrices are recorded in the Appendix 2 tables. Primary income of institutions received from production factors (rows 10-17 with cols. 7-9 of Tables 2.2-2.4) is partially redistributed through the matrix of transfers between institutions (rows/cols. 10-17). These transfers consist of interest payments, dividends paid out of corporate profits, direct taxes, social security contributions, etc. The current transfer 4. Only the 1974 SAM was documented(see Samson and Buenaventura, 1978).The 1979 SAM was kindly supplied by the NSO. See Appendix2 for the link between the MSAFs for 1974 and 1979 and these SAMe. In _generalthe MSAF_reflect the same productionand incomedistributionstructures and totals of the NSO-SAMs,but savings, inve_nent_, and flow-of-fundsaccounte were (newly) constructed for the MSAFeand reconciledwith the cur_nt accounts. 5. Observethat the MSAFs are all in current prices andvalued in millions of peeve. This is a drawbackforthe comparativeanalysis. Ina later stage, an attempt will be made to estimate the thr_e MSAFat constant prices.

PERFORMANCE ANDSTRUCTURE313 matrix is the sum of separate matrices for each of these type of tr_ions. Similarly, the flow-of-funds matrix (rows/cols. 18-27) is a consolidation of accounts for various types of financial transactions (money holdings, demand deposits, time and savings deposits, corporate equity, bonds, trade credits, other domestic credits, external credits, reserve movements, etc.). The MSAFs combine various data sources of which the most important are the mentioned NSO-SAMs for 1974 and 1979; input-output tables for base years close to those of the three MSAFs; natio_-I accounts; household budget surveys (1971, 1985, and 1988); flower-funds accounts; monetary survey data; and BOP statistics. In genaral terms, national accounts aggregates were used mainly as reference totals to obtain consistency among the different accounts; see Appendix 2 for further details on the construction methodology. The reconciliation of data sources in the MSAFss however, include a number of adjustments for data discrepancies; therefore, the data presented need not always be fully consistent with the time series data presented in the subsequent chapters. The reference years 1974, 1979, and 1987 w_e, to a large extent, chosen for reasons of data availability. Nevertheless, 1974 is a year in which short-term adjustment for the first oil price shock takes place, but precedes the boom in external financing (1975- 81). The second base year, 1979, occurs in the middle of the period of high capital inflows, while 1987 initiates the economic recovery period after years of strong recession and economic adjustment due to external payments problems. The 1987 MSAF gives the economic structure on the basis of which the recovery, which has prolonged to date, could take place. To show the major features of the Philippine economy as visualized in the MSAFs for 1974, 1979, and 1987, two types of comparative static assessments are presented. First, shifts in the structure and distributional patterns of the major accounts are assessed by using direct information of the MSAFs. Second, SAM fixod-price multiplier analysis is applied to assess linkages (and shifts therein over time) *mong the different accounts. Structural

change:

1974, 1979, and

1987

a first step, structural shifts in the _illppino economy are assessed by comparing over time a number of direct relations and distributional patterns reflected in the three MSAFs. These patterns are discussed by going through the different MSAF accounts: 1. 2.

The structure of production and employment. The distribution of factor income by major factors of production.

34 PHILIPPINE EXTERNAL FINANCE 3. 4. 5. 6.

The household income distribution and major sources of household income. Consumption patterns. The savings and investment patterns by institutional agents. The flow-of-funds structure.

Production and employment structure. Table 2.5 compares the sectoral distribution of output, value added, and employment for the three MSAFe. Between 1974 and 1987, the share of agriculture in total output, value added, and total employment slightly declined. As indicated earlier, this decline is due mainly to the rapid growth of non-agricultural sectors during the 1970s, although agriculture regained some ground during the adjustment process of the 1980s because of the severe crisis in the rest of the economy. The sector, however, remains the largest employer of the economy, still accounting for about a half of the labor foa_e. The period also shows a strong expansion of the services sector, both in terms of value added and employment, This can be explained by the rapid expansion of the public sector in the 1970s. In the 1980s, government services came under strain during the adjustment process, but the services sector, as a whole, continued to expand due to the growth of private formal (particularly comme_0e and transportation) and informal services activities in the urban areas in the 1980s. The manufacturing industry could not increase its share in GDP despite an average annual growth rate of over 6 percent in the 1970s. The BOP crisis of the early 1980s and the subsequent heavy import cuts led to steep declines in manufacturing output between 1983 and 1985. The share of manufacturing in total value added fell from 24.0 percent in 1979 to 20.4 percent in 1987. By its nature, manufacturing shows the highest input-output coefficient among the major sectors of the economy (0.6), of which one-third to a half refers to imported inputs. Particularly the more dynamic sectors, including the major non-tradltional export sectors of textiles (garments) and elect_nice, have a high dependence on imported inputs. Table 2.5 shows that, in the aggregate, import dependence (imports as a shm.e of domestic production) fell from 10 percent in 1974 to 7.5 percent in 1980. But decreased import dependence was not achieved in manufacturing, although this was the main objective of the import substitution regime implemented in the Philippines since the 1950s. The 1980s crisis also showed majer p_eductivity losses particularly in the manufacturing industry (still showing maj_ overcapacity in 1987), ml-l-g (gradual exhaustion of copper mines), and construction

TABLE2.S Philil_ine Productionand Empire/meritSMacturei:Â˘_rdlng toMSAF$1974, 1979,1987 Tmlou_pet

ve_u,_

Aw_e Voco_t.

emplm,_ O.)

1974 19"/9

1607

1974

1979

1997

1974

lg7g

lg87

1974

1gi9

1987

1.Agricdu_ 2.Miring 3.Manu_tbg 30.UghtnmJaff. 4.Ok'tetr mmmf. 5.COnSb'uctlon, _ 6.$erdoes

21.2 9.5 40.7

17.S 1.9 43.1 24,$ 10.8 6.5 27.9

20.6 2.1 30.3 16.8 13.5 6.8 38.7

29.0 U 29.2

26.1 2.4 20.4 11.3 6.1 7.5 43.6

0.462 _ 0.639 0.446 0.290

0.207 0.230 0._ 0.719 0.6"R 0.509 0.237

0_50 0.319 0.600 0,601 0.600 0.463 O_

55.6 U 10.3

0.7 36.0

25.5 2.7 24.0 t2.6 11.4 6.7 30.1

3.2 30.6

51.8 0.4 10.9 6.9 4.0 3.7 38.1

47,9 0.7 10.0 6,3 3.7 4.1 27.3

Tolt

100.0 100.0

100.0

0.456

0.406

100.0

6.0 29.6

litiqpoit _

'4.AOdamm 2.MBV_)

s.._ rarely.

lg74

lgTg

0._

0.0e4 O.O24 lS.3

0,009 0.04;!

0.m

4.Ot_rmnuL 5._,eneigy

0275 0,065 0.063

6.smm

Total

0.160 0.@f/

Sourmc x_ 2.2.2A.

Pmdu0Udty _

1907 0.097

1074

17.9

288.0

1",2.5

_.e

51.5

122.5 60.1

4o,9

u.1

40.0

34,0

0.o2s o.oso 40,9 0.075

17.1

1967

306.4

o_,

0.278 0.056

1979

,,,g

32.0

95.4 00.1

PHILIPPINE EXTERNAL FINANCE

and energy (withdrawal of public investment). After significant increasesinthe 1970s,agricultural productivity almoststagnatedinthe 1980s.The shiftof workers toward the servicessectorledto a serious decline of per worker value added in that sector.Real average productivity ofthe economy went down tolevelsclosetothose achieved in 1974. Factorial income distribution. Table 2.6 lists the factor shares for 1974, 1979, and 1989. The shares are derived from accounts 6-8 in Tables 2.2-2.4. During the lg70s, a shift toward a higher share for wages and salaries, i.e., from 40.1 percent to 41.8 percent of total factor income, occurred despite the apparent real wage repression observed in Table 2.1; this reflects the externally financed expansion of the public sector and the related shift toward increased wage-labor employment in this period (cf. Vos 1990a), including the substantial growth of other modern urban sectors in manufacturing, construction, and services. In the 1980s, this trend was reversed. The economic crisis and adjustment process severely hit the formal activities and wage earners. An expansion of household firm activities, particularly in the informal services sector, is reflected in the increasing share of the operating surplus of unincorporated enterprises. The wage share declined to 37.2 percent in 1987, while the share of unincorporated profits increased to _ 47.9 percent, up from 42.7 percent in 1979. The share of corporate profits remained fairly stable at almost 15 percent of total factor income. Most of these profits were earned by private corporations (about 12 percent), although the vast expansion of public investment in the 1970s led to a slight increase in public enterprise profits to 3.3 percent of total factor income in 1979, from 2.1 percent in 1974 (see Table 2.6 and rows 14 and 15 and column 9 of the MSAFs). By 1987, this share dropped again to 3.0 percent. An important feature derived from Tables 2.2-2.4, relevant to the analysis in subsequent chapters, is the rather variable share of redistributed private company profits to the household sector (col. 14, â&#x20AC;˘â&#x20AC;˘rows 10-12). In 1974, about 30 percent of after-tax corporate income was redistributed to households. During the years of booming economic activity (1975-1979), this share declined to 16 percent in 1979, i.e., more corporate income was retained _ the company level in the form of savings. In 1987, the share went up again to 25.5 percent, but revised nationalaccounts statistics suggest this share peaked in the early 1980s,justb_foreofthe BOP crisis (1980-1982). The 1980-1982period shows declining savingsand selffinancingratiosofprivateenterprises along with massive privatecapitaloutflows(see Chapters 3 and 4),

PERFORMANCEAND STRUCTURE 37

TABLE2.6

Philippines:FaotorSharesaccording toMSAFs1974,1979,and1H7 _nmiflionpesos,currentpr_;.ix_resntage_...) Values

Shares(%)

1974

1979

1987

1974

1979

1987

7. Wages 35316 and salaries 8/9,Unincor. 38454 porated prom 9. Coqxxate 14190 profits a.Private12324

81603

239340

40,1

41.8

37.2

83368

308212

43.7

42.7

47.9

e, pri

b. Public 1866 enterpr, and government TotalFactor Income

87960

30093

9,5_N2

16.1

15.4

14,9

23606

76480

14,0

12.1

11.9

6487

19462

2.1

3.3

3.0

100.0

100,0

195064 643494

Note:Unillg011_g__ areidentified'in'_0ount'8 b Ihe.SAF lot1967.IIIN '_,AFsfor1974 and1979,_nt 8relemtolandrantsendOther rentalino_mUtalm bdudedb Table2.6as ujeoq_ OrÂ˘orpcrMe proiits usingaocounls 13,14,and15inTables2.2- 2.4. Searws:Tabbs2.2- 2.4.

suggesting that the increase in redistributed profits formed a channel for "capital flight." Finally, another important feature in the factorial income distribution is the large share of unincorporated profits in total factor income (nearly 50 percent). This reflects the great importance of self-employed activities in the Philippine economy. This type of activity is overwhelmingly important in large, family-based agricultural production and in services. Self-employment is also important in parts of manufacturing, particularly light manufacturing (food and textiles). Household f_ns are likely to respond differently to price and wage adjustments than corporate fn_msand have only limited access to bank credits. Such a large, unincorporated enterprise sector has a crucial maeroeconomic importance that will have to be considered in designing stabilization and structural adjustment policies.

PHILIPPINE EXTERNAL FINANCE

Household income distribution. As shown in Table 2.6, the major share of primary income (85 percent in 1987) goes to households and household Fr_ms. The current accounts 10-12 and 13 of the MSAFs (Tables 2.2-2.4) identify in the rows how this factor income is distributed among three aggregate types of household groups (urban households in Metro Manila, other urban households, and rural households) and how primary income of other institutions is redistributed amoz_g households. Columns 10-12 identify the outlay structure of the household groups (consumption, rows 1-6, 17; and transfer and tax payments to other institutions, rows 14-17). Household savings are identified at the intersection of row 18 and columns 10-13. Table 2.7 gives a number of summary indicators on the household income distribution: 1.

Majority of households (over 60 percent) are still concentrated in rural areas, although the share is gradually declining. The share of the rural population is somewhat lower than the urban population, reflecting a larger average household size in urban areas (5.9 household members in urban against 5.3 in rural areas). Table 2.7 (heading I) further classifies households by their principal source of income. Wages and salaries are the major source of income of most urban households. While this type of household tends to become increasingly important in Metro Manila, other urban areas show a declining share of wage earning households. This may be explained in part by the concentration of the government sector and major modern industries in the capital region. The share of self-employed households is declining particularly in rural areas. But this is not reflected in the share of self-employed and entrepreneurial income (heading VII), which fell in the second half of the 1970s but increased again in the 1980s; the trend reflects a major shift in relative remuneration levels, in particular, falling wage rates compared with other sources of income including farm incomes which benefited from a recovery of the agricultural terms of trade. Most remarkable perhaps is the inarease in households depending on other sources of income. Current private transfers received from Philippine workers abroad stand as the most important single item of Table 2.7. Many rural and urban households outside the metropolitan area depend increasingly on this source of income. In 1987, 20 percent of urban and about 16 percent of rural households lived principally on transfer

PERFOP.MANCE AND STRUCTURE

TABLE2.7

Prop#..:

and

I. Di_b_n of 1.Allhouseholds (in,_ls)

1974 1979 1987

Total

Tot_ Urban

NCR

6973 8158 10388

2207 2800 3958

870 1014 1392

Okr _ 1337 1798 2586

Rural 4767 6428

2.W_ earnm (%_are ofj houseboY)

1974 1979 1987 3.Sedf_

1974 1979 1987

Total

Total Urban

NGR

Other Lkbm

Rurel

42.4 41.4 43.4

62,8 58.0 58.1

57.0 S9.6 62.3

68.5 57,0 52.8

32.9 32.8 35.6

(%shareofeli_) Total

Total Urban

NGR

Other _

Rural

48.6 44.9 39.3

25,8 25.3 23.7

21.0 19.6 18.0

28.7 28.3 27.9

59.0 54.9 48.8

4.Onlerhousehok_ (%shareofd housetld_)

1974 1979 1987

Total

Total Urban

NCR

Uf_n

Rumi

9.0 13.6 17.3

11.4 16.7 20.1

22.0 20.8 21.7

4.8 14.7 19.2

8.0 12.3 15.6

PHILIPPINEEXTERNALFINANCE

TABLE2.7(CONT.)

II,Distribution of Population Allhouseholds (no.ofpersons,inthousands)

1974 1979 1987

Total

Total Urban

NCR

Other Urban

Rural

40656 47037 57356

13164 17226 23530

5009 5795 7316

8155 11431 16214

27492 29810 33826

III.Average RealperHousehold Income (Inpesosas of1987) Allhouseholds

1974 1979 1987

Total

Total Urban

NCR

Other Urban

Rural

54560 63388 57864

91638 88239 86302

83970 115872 107982

99828 72551 74541

37394 50400 40354

IV,Average RealperCapitaIncome (Inpesosasof1987) Allhouseholds

1974 1979 1987

Total

Total Urban

NCR

Other Urban

Rural

9358 10993 10478

15362 14343 14517

14583 20273 20546

15641 11336 11797

6483 9058 7668

V. Average RealperCapitaAfter-tax Income (Inpesosasof1987) Allhousehdds

1974 1979 1987

Total

Total Urban

NCR

Other Urban

Rural

9175 10538 10155

15030 13589 13916

14197 18937 19644

15540 10869 11331

6382 8826 7541

PERFORMANCE AND STRUCTURE 41

TABLE _7(COm'.) VI.Retst_ Dislnbu_ofAfter-tax perCsI_ Income(m_ tonatlo_ _werage)

1974 1979 19_7

Total

Total Urban

NCR

Urbcm

Fluml

1.050 1.000 1.000

1.6_ 1.290 1.370

1.547 1.797 1.934

1.624 1.051 1.116

0.696 0.838 0.742

VII.MajorSources ofHousehold inoome (sharmof_

income)

1.Allhousetx_:W_s _1

1974 1979 1987

Total

Tc_ Ud_n

NCR

Other _

Rural

0.472 0.497 0.398

0.520 0.603 0.447

0.546 0.748 0.491

0.505 0.480 0.412

0.418 0.404 0.334

Total

Total Urban

NCR

OUler Llrban

Rural

0.516 0.485 0.513

0.400 0.307 0.427

0.348 0.160 0.347

0.428 0.425 0.491

0.525 0.526 0.625

2.All____,_holds: E_

1974 1979 1987

3.Allhousetx_'.Tmns_andotherincome

1974 1979 1987

Total

Total Urban

NCR

Other l.ktxul

Rural

0.012 0.019 0.988

0.080 0.090 0.128

0.105 0.983 0.162

0.057 0.058 0.097

0.057 0.071 0.041

OIlIw.

....

PHILIPPINE EXTERNAL FINANCE incomes. More than half of these depended on workers' remittances from abroad. In Table 2.7, this source of income is even underestimated since it does not include those transfeaw recorded as factor income (wages) from abroad which in 1987 constituted about 10 percent of total wage income (cf. Table 2.2, row 7, col. 17). Many of these remittances are assumed to be underrecorded. The MSAFs include corrections for these underrecordings (see also Vce 1990b and Chapter 3). 8. Table 2.7 also gives indicators for trends in real income and relative household income distribution. Real per capita income (heading IV) increased from 9358 pesos (1987 prices) in 1974 to 10993 pesos in 1979. During the period of crisis, per capita income fell to 10478 pesos in 1987. This decline in purchasing power hit hardest the rural population which suffered a 15 percent decline in real income. By 1987, urban households appeared to have recovered their purchasing power of the late 1970s. For the 1970s, the MSAFs gives a somewhat different pattern. Rural households benefited from land reform and favorable international commodity prices. Concentration of economic activities in the capital region produced art average increaseinrealper capitaincomes,althoughotherurban areas with high population growth and large households did not benefitfrom the positive trendsofthe economy. 4. Finally, directtaxation(Tables2.2-2.4: row 16,cels. 10-12;Table 2.7:IV,V, and VI)did little to alterthe distribution ofincome. The averagetaxincidence is3.0percent.Althoughthe incidence isthreetimes higherforurban than ruralhouseholds,the total burden is toolow to significantly alterthe income inequality between urban and ruralareas.

Consumption patterns. The MSAF core table (e.g., Table 2.2) specifies consumption by type of commodity. Household consumption can be read in rows 1-6 and columns 10-12. These data cover consumption of domesticallyproduced commodities only.Aggregate imports ofconsumption goods are in row 17 with columns 10-12.This presentationisrequiredby themultiplier analysisoftheMSAF which should be based on domestic linkagesof production activities (see explanation below). However, other mappings of household consumption,includingtotalhousehold consumption by commodities, are attached in the Appendix 2 tables.One such mapping contains household consumption by major consumption categories, which is made consistentwith the MSAF presentationthrough the so-called

PERFORMANCE ANDSTRUCTURE 43 "consumptiontransformation matrix_ (mapping ofconsumptionby commoditiesand consumptioncategories). All theseconsumption transformation matricescanbe foundinAppendix2,TableA.1. Consumption by major categories are classified in Table 2.8. PrimarydatasourcesaretheFIES oftheNSO (1971,1985,and 1988) and input-output tables(1974,1979,1985).Table2.8'soutstanding featureisthedeclining totalshareoffoodconsumptionas percapita incomeroseduringthe1970s;foodconsumptionroseagainduringthe periodofeconomiccrisis. However,amorediverse patternemergesaftex analyzing thetablefurther. Realpercapita consumptionandpercapita foodconsumption(bottomTable2.8)donotappeartobea linear positive function ofrealpercapitaincome(cf. Table2.7). InMetroManila,total percapitaexpenditures increased withpercapitaincome.Growth of realfoodexpenditures, however,was belowthatofrealincomebetween 1974 and 1979,but significantly aboverealincome growth in the 1979-1987period. Behind thisisa shifting Engelcoefficient which declined inthef'trst periodand increased inthesecond.Shifting food consumptionbehaviormust have resultedfrom incomedistribution shifts. Income distribution and povertystudieson the Philippines, comparingtheearly1970swiththemid-1980s, indicate an increasing povertyincidence inurbanareas(WorldBank 1988). Low incomegroups oftenexhibited higherincomeelasticities forbasicneeds(e.g., Teekens 1988)whichcouldexplain theupwardshift intheEngelcoefficient for theurbanpopulation observedinTable2.8. The ruralpovertyincidence (58 percent) reached the same level in 1985 as in the early 1970s (World Bank 1988: 3) which could explain the more stable Engel coefficient observed for rural areas, The othermajorspendingitem,housingand energycosts, isnot strictly comparableforthethreeyears:for1974,itexcludescostsof householdoperations and furniture which areitemsincludedunder housingintheMSAF for1979and 1987.Nevertheless, a majorpartof the increasing budgetshareforthiscategoryisexplainedby steep increases in house rents, particularly in urban areas, and fuel prices. Patterns in average living standards as measured in terms of per capita consumption and food expenditures show increasing inequalities between the NCR and the rest of the country. The ratio of average real per capita consumption in Metro Manila compared with urban areas increased from 0.95 in 1974 to 1.81 in 1987; compared with rural areas, it rose from 1.9 to 2.8.

PHILIPPINEEXTERNALFINANCE

TABLE2.8 ...........

ConsumptionPaltembyMajorConsumption Categories .r,

1974 10 NCR

11 Other

12 Urban

TOTAL Rural

45.9 5,9 9,9 3,3 34,9

48.2 5.8 8,8 3.7 33,5

57.8 5.6 6.7 2.9 27,0

52.8 5.7 7.9 3.2 30.4

100.0

100,0

100.0

11 Other 48.8 5.8 19.3 5,8 20.3

12 Urban 55.9 5,4 14.9 4.4 19.3

TOTAL Rural 51,5 6.0 18.2 5.4 19.0

100.0

100,0

Food Clothing Housing &energy I-le_ &edu=_ Other

10 NCR 44,7 3,0 30,8 6.3 15.2

11 Other 52.5 3.9 23.0 6,6 14,0

12 Urban 63,0 3.8 17.6 5.3 10.3

TOTAL Rural 55.2 3,6 22.5 6.0 12.7

TOTAL

100,0

100.0

Food Clothing Housing &energy Health &educa_on Other TOTAL

1979

Food Clothing Housing &energy Health &educal_ Other TOTAL

10 NCR 40,6 8.2 25.8 7.8 17.6 100.0 1987

PERFORMANCE AND STRUCTURE 45

(TABLE 2.8CONT.) RealperCapitaExpenditures (pesos of1987)

Total: 1974 1979 1987 Food: 1974 1979 1987

10 NCR

11 Other

12 Urban

TOTAL RuraJ

11948 14448 17034 5140 5428 7614

12457 9512 9388 5412 4413 4929

6298 8678 6O63 3281 4612 3820

8227 9586 8402 3930 4667 4638

.352 267 .371

.350 .389 .418

,506 .509 .498

.420 .425 ,443

Engd

coefficient: 1974 1979 1987

No_:Engelceeffident detlned astheshareofrealpercapilaIoedconsumpti_ inrealpercepilaIneome (cf.Table2.7). Source: MSAF-PhUippines, 1974,1979, and1987.

Savings and investment patterns. The MSAF also identifies patternsof accumulationat the intersection ofcurrentand capital accounts. Savingsarerecorded asnetbalancesoftheincomeandoutlay accountsofinstitutions on rows18-9.7 (capital accounts) withcolumns (10-17). Foreignsavings(row27,column17)aredefinedasthecurrent accountbalanceoftheBOP. Table 2.9 givesa comparativesummary ofthe institutional accumulation balancesforthethreeMSAFs. Savingspatternsreflect, to a largeextent, the distribution ofnationalincome among major institutions. Householdsand unincorporated enterprises generate nearlyhalfofnational savings, equivalent toabout12percentofGNP. Totalnationalsavings(total savingslessforeignsavings) increased from 24.3 percent of GNP in 1974 to 26.5 percent in 1979; a major share of the increase was generated by the corporate enterprise sector. By the

PHILIPPINE EXTERNAL FINANCE

TABLE2.9

Philippines: Savings andInvestment Pe#erns According to MSAFs1974,1979,and1987 (shamofGNP) Savings

Investment

1974

1979

1987

1974

1979

1987

18. Househ. 0.112 & unincorp.

0,112

0,139

0.052

0,064

0.171

a. Metro 0.022 Manila (NCR)(10) b.Other 0.050 Urban(11) c.Rural(12) 0.004 d. Unincorp.0.036 enterpr. (13) 19.Pdvate 0.050 enterpr. (14) 20.Public 0.016 enterpr. (15) 21, Govern. 0.057 ment(16) 24. Private 0.005 fin.inst,(14) 22/23Publ. 0,004 fin.inst.(15) 27. Restof 0.013 World(17)

0.036

0.026

0,023

0.044

0,006 0.046

0,069

0.076

0.013

0,094

0.150

-0.025

0,018

0.012

0.058

0,052

0,032

0.051

0.030

0.038

0.037

0.015

0,005

0.010

0.502

0.005

0,501

0.004

-0.013

0.011

0.003

0,050

0.045

0.504

0,310 218,0

0.194 703.4

0.256

0,310 0.194

Total 0.256 (GNP,billions 99.9 of_sos)

PERFORMANCEAND STRUCTURE 47

(TABLE 2.9CONT.)

saving.l 18. Households &

1974

1979

1987

0,060

0.048

-0,032

.0.074

0.037

-0.034

.0.019

0.014

0,015

0,000

O.OOg

0.001

.0.014

0.045

0.004

0.000

unorp,ent.

a. MetroManila (NCR)(10) b. OtherUrban(11) c.Rural(12) d. Unincoq). enterpr, (13) 19. Pnvate .0.044 enlerpr.(14) 20. Puidic .0.043 eflterpr. (15) 21. Govern. 0.019 mant(16) 24. Private 0.003 fin.inst.(14) 22/23PubUc -0,007 fin.inst.(15) 27. Restof 0.013 Wodd(17) Total

0.000

Nole:Numbmbdwe iMilUliOmindic_ coneslmd_ng mw_;,;,_mtnumbe_z d _L (:olumaoceunt numlx_ue Inpreen ._th,_____ S_roeÂ˘ TaMm2.2- 2.4.

PHILIPPINE EXTERNAL FINANCE

end ofthe IgS0s,the totalnationalsavingsrate fell to 19.0percentof GNP, despitean increaseinhouseholdsavingsto 14.0percentofGNP. 째 Higher household savings reflectthe shifttoward self-employed incomes and higherruralincomes.The self-employed aredearlyagents with higher savings propensities(but also see Chapter 4).As a complementary explanation,the substantialincrease in transfer incomes as a share in totalhousehold income tends to be reflected in higher household savings as agents may considermuch of these transfersas transitory, ratherthan permanent income. Households and unincorporated enterprisesare traditionally surplusunitsintheeconomy. In 1987,thereappearedtobe an exception to thispattern,particularly due to a strong expansion of household investment in construction and realestate. The household investment rateincreasedto 17.1percentofGNP in 1987.This 1987 featureofthe economy coincideswith a return of _capitalflight"money, i.e., a decumulation of foreignassetsby the privateresidentsector.This patternmost likelyreflects restoredconfidenceof saversto investat home, given the economic recovery that started in 1986; with a speculativeboom in the real estatesector,it could alsoreflectthe increased importance of household firm activities.Updated flow-of-funds figuresindicatethat thispattern alsomarks the 1988 economy.7 The publicand privatecorporatesector,however, is typically a deficit unitinsavingsand investment.With fairly liquiddomesticcredit markets and ample access to foreign borrowing, the corporate investment-savings gap ran up to4 percentin1974 to 7 percentofGNP in 1979.In 1887,however,privateenterprises showed a savingssurplus due to a declinein the capitalstock.This incidental featureisalmost 6. The MSAFs relymainlyon theinstitutional disaggregation ofsavings by institutions asreported bytherevised flow-of-funds series. For1980-1989, theseshow significant discrepancieswith national accountsestimates of savings by institutions, even thottgh agg_gate numberscoincide. Trendsinnational accounts figtwes only t_for tonet household (personal) savings and,asindicated inChapter 4,showasteep d_cline inthe 1980s, only recovering after 1988. Giventhebroader concept ofsavings intheflow-of-funds (gross) andtheir consistency withestimates ofchanges inassets andliabilities, thesource wasusedforthesavings estimates intheMSAFs.Nevertheless, these datadiscrepancies a_ disturbing andwill require further statistical inquiry. Application oftheconceptual framework oftheMSAFs wouldbehelpful insuchan investigation linking together real incomeandfinm_eial flow dataonadisaggregated source-use basis. A recovery ofsavings ofunincorporatedbusinesses towardtheendofthe1980s is, however, broadly consistent withtheobserved shift inincomedistribution towardself-employed incomesandthe recovery ofoverall real household incomes alter 1986. 7. Revised Central BankFlow-of-Funds dataindicate aninvestmentsavings gapfor households ofabout4.5percent GNP,evenlarger thanthatrecorded intheMSAF for 1987.

PERFORMANCE AND STRUCTURE 49

entirely explained by a decumulation of fixed assets in the mining and quarrying sector. As in the design of the MSAFs, no account was included for _revaluation of assets;* the item was part of the fixed investment data explaining the negative entry for private corporations in 1987. Corporate investment and savings recovered significantly in 1988 and 1989.8 The government sector, excluding public corporations and public financial enterprises, earned savings surpluses for the reference years of the MSAFs. This outcome is consistent with government sector data derived from national accounts and flow-of-funds tables for these years. However, no consistent pattern exists for the entire period. The same sources also reveal that government savings gaps occurred, for more than half of the years of the 1980s. In contrast, public f'mance data show a more consistent tendency toward national government overall budget deficits. The data discrepancies partly come from differences in coverage of the government sector and classification differences in spending items. In particular, government transfers to public corporations and financial institutions are classified as expenditures in public finance data; in the MSAF, they are treated as capital transfers or net lending following national accounts and flow of funds. The conclusion that can be drawn from this is that fiscal deficits in the 1970s and 1980s were closely associated with public enterprise performance (see Chapt_z 4 and Vos 1990a for further discussion). The MSAFs also show that foreign savings peaked in the late 1970s. The boom in lending by international commercial banks allowed the country to run large current account deficits. The debt crisis of the 1980s, however, forced the country to narrow the gap in the external account. Flow.of-funds and financing of investment. The structure of investment finance and the balance sheets of net changes in assets and liabilities by institutional agents are accounted on rows and columns 18-27 of the MSAFs. The accounts were constructed from fiow-of-funds data, but additional monetary and financial data were used to convert 8. Again relying on Flow-of-funds, investments of the country's top 3000 non-flnmmial corporation reached a positive level of 0.3 percent of GNP in 1988 and recovered close to the levels of the late 1970s in 1989:11.9 percent of GNP. Savings (retained profits) turned negative in 1988 (-1.3 percent of GNP), but returned to its 1979 level in 1969 (7.5 poment). In 1988, the recovery of private enterprise investment was concentrated in manufacturing; in 1989 the recovery extended to all sectors of the economy. Cf. Central Bank, Appendix to the Flow of Funds Bulletin: Private Corporations, 1980.198g, De_rtment of Economic Research-Domestic (Manila, January 1990).

PHILIPPINE EXTERNAL FINANCE

single institutional balance-sheet accounts by financial instruments to a real flow-of-funds matrix specifying changes in asset positions by institution of origin and destination. Table 2.10 gives a summary of the resulting flow-of-funds structure for the four major, non-financial domestic institutions for the three MSAFs. A structural feature derived from the table is that investment of the corporate sector (private and public enterprises) tends to rely heavily on net borrowing from other institutions, at home and abroad, while the household sector, as a whole, mainly relies on its own savings (self-financing). External finance (row 27) does not constitute a large share of total investment finance to the main institutional agents. However, borrowing became significant as a share of total net borrewing (investment finance/ess own savings) for cerlxn-ations, govermnent and public enterprises toward the end of the 1970s. The MSAFs show that in 1979, more than half of government borrowing and about one-quarter of private enterprise borrowings were from foreign sources. Households and unincorporated businesses do not appear to have access to foreign finance. More than half of total investment funds of households are derived from their own savings. For private enterprises, this ratio is rather unstable(see Table 2.11 and Chapter 5 on Private and Financial Sectors). The pattern for the 1970s indicates that roughly half of fLxed investments of private corporations were financed out of retained profits (relating savings to "real investment" in Table 2.9). In the 1980s, fluctuations in investment and savings performance due to the economic crisis yielded a rather unstable self-financing ratio. An increasing debt-equity ratio and the major domestic financial crisis of 1981 (see Chapter 5 and also Dohner and Intal 1989) forced corporate enterprises to a significant portfolio adjustment, reducing the financial leverageand a returntohigh self-financing ratios(Table2.11). Because ofthisneed forportfolio adjustment,therecoveryofprivateinvestment after1987 was almostentirely financedout ofretainedprofits. Looking at thefinancingofinvestmentfrom domesticsourcesother than own savingsin Table 2.10,one may concludethat the relatively low share of the formal banking system (22-24)in totalsupply of investment funds reflectsthe inadequately developed financial intermediationsystem and the segmented nature of capitalmarkets. About a quarterof householdborrowing from other institutions was obtained from the formal banlting system. Of the remaining major share of borrowed funds, most came from private enterprises in the form of trade credits (40 percent to 50 percent in 1974 and 1987) and informal money lenders (about one-third). The latter estimate is consistent with

TABLE2.10 Philippines: Flow-of-Funds Struclm

of Non-Financial Institutions, according to MSAFs 1974, 1979, and 1957

O_antage shins) 18 Househ. 1974

19 Priv.Ent. 1974

20 Publ,Ent. 1974

21 Govt. 1974

18 _h, 1979

21904

15081

7769

11422

45080

(%GNP)

21.9

15.1

7.9

11.4

20.7

18.0

6.7

9.7

Sources

100.0

100.6

100.0

86.3 33.7

32.9 67.1

20.3 79.7

50.0 50.0

65.6 34.4

42.3 67.7

20.6 79.2

52.6 47,4

0,0 13.2 1.1 -2.4 0.0 0.4 9.7 9.8

15.7 4.2 1.9 0.9 0.0 13.9 11.6 0.0

19.9 4.1 0.6 42.4 4.5 7.8 -2.6 O.O

3,5 9.2 7.1 3,0 6.2 8.1 1.9 0.0

0.0 1.7 0.0 1.4 0.0 8.5 10.6 11.7

11.6 0.0 8.4 2.9 0.0 5.0 13.0 0.0

23.0 1.7 -0.8 20,9 0.7 -1.5 26.4 O.O

.0.0 -0.2 -0.7 3.4 7.6 0,4 7.0 0.0

2.0

16.6

2.7

11.3

0.3

12.5

8.0

29,3

150.0

100.6

100.0

150.0

100.6

100.0

100,0

100.0

Totalfo(edand financial bve,stment ('mmglino pesos)

OwnsavinOS Chargeinfinancial Wd_es (ornet bo.owl_frm): 19.Houimholds 19.Private enteq_iaes 20.Publinenterprises 21._vernmnt 22.Central Beak 23.PulSe fiMndalin_, 24.Pdvelefkmckdinst. 25,Inlom_money inMm 27,Rest-ol-gze-Wodd Uses

19 Pdv.Ent. 1979 _

20 PuM.Ent, 1979

21 Govt. 1979

19064

21106

_: >Z m_ > z 0 r,,h PO

C C

(TABLE 2.10CONT.) 18 Househ. 1974

19 Priv.Ent. 1974

20 Pul_Ent 1974

21 Govt. 1974

18 Houm. 1979

19 Priv.Ent 1979

20 PoleEnt. 1979

21 Govt. 1979

_. ,"0 "O

Realinvestment

23.7

62.3

75.0

33.2

30.8

83.3

59.5

36.0

Chemge b Iklancial

76.3

37.7

25.0

66.8

69.2

16.7

40.6

62.0

18.Households 19.PdvmenSeq_ises 20.Public enlerl_ious 21.Government 22,Centr_Bank 23,Public rmndalinst. 24.Plivalefieandal iesL 25,Informal money lendem 27,Rest-of-the-wodd

6.0 10.8 7.1 1.8 9.6 5.3 14.5 9.8

19.2 4.2 2.1 6.2 0.2 6.0 5.7 0.0

3.1 3.7 0.8 10.4 4.5 1.7 0.8 0.0

-4.7 1.2 28.8 3.6 20.2 18.9 -1.3 0.0

0.0 10.3 10.0 -0.0 2.8 5.7 17.0 11.7

2.0 6.0 0.8 -0.1 1.0 0.2 12.8 0.0

6.0 17.2 -0.8 -0.7 -0.0 23.4 1.4 3.0

3.0 5.4 1¢9 3.4 4.7 19.2 5.3 6.0

__ z z

17.4

0.0

11.7

0.0

6.0

2.1

18 HouNh. 1987

19 Priv.Ep¢ 1987

20 PubLEnt. 1987

21 Govt, 1987

184142

41625

40644

77090

_(,xn¢ _dingIo):

Torsifb(ede_l financial investment (Inmilon pesos) (%GNP)

26.2

-,5.9

5.8

11.0

Sources

100.0

, qip..j qp t,_ c:JocP_=b

u,,

u',

:_lnJ.gn_llSONVYDNV_O-1_I3d

_u,,'-_,,;mu,,,::,

t_ w *0

.....

.-,,_,_,

E ,.-_ .._E_,_.., .,.,---_ _

s|_

¢¢_._._

PHILIPPINEEXTERNALFINANCE

TABLE2.11

Philippines:Flowof FundsStruotumof PrivaleNon-Fimncial Corporations 1980-198g ,i

GRO_ SAVINGS DEPRECIATION TO TORXED _ INVESTMENT INVESTMENT

1980 1981 1982 1983 1984 1985 1986 1987 1998 1989

0.465 0.564' 0.459 0.194 0.457 0.070 0.782 -0.926 0.817 0.722

0.145 0.056 0.106 0.036 0.213 0.059 0.587 0.112 -0.436 0.207

SAVINGSAS RATIOTO TOTALINV.RN.

0.212 0.376 0_231 0.130 1.297 0.258 0.105 -0.659 -0.230 0.418

Nole:Om arebemdonfmandal baku_ Mintsoftop3,000i_vaWÂ˘oq_stione_ Source: Cenlcal Bank,Appendix IoFlowofFundsBull_, Pfivedle COrl_aJces, 1980-1989, Manila.

available evidence on the size of the informal credit market (see, e.g., Agabin et al. 1989). These specialized studies also seem to support the assumption made in the MSAF about the structure of the informal credit markets in the Philippines: intra-households capital transfers and self-employed and household firms are the main type of borrowers on this market. There is no reported evidence of direct links with the corporate sector, as existe in countries like South Korea (cf. Van Wijnbergen 1982). Finaru_lal investment by households has a less stable pattern than the borrowing structure. The MSAFs for the 1970s point out significant shares allocated in the form of trade credit supplies to private enterprises and the purchase of company equity. Another important share of about the same proportion consists of the supply of funds for the informal credit market, of which an important part is linked to the informal foreign exchange markets specialized in dealing with workers' remittances from abroad (see Mangahas 1989 and Vos 1990b), and the acquisition of private foreign assets held abroad estimated at 17.4 percent (P3.8 billion) in 1974 and 11_7percent (or P5.3 billion) in 1979.

PERFORMANCE ANDSTRUCTURE SS The estimation of this net outflow of mostly short-term capital (usually identified as "capital flight') takes into account .recorded private capital outflows, BOP errors and omissions, underrecordings of worker remittances from abroad, and trade misinvoicing. 9 Toward the end of the 1980s, the trend of private capital outflows was reversed (see also Table 2.10, Chapter 5 on Private Sector and _ Adjustment, and Vos 1990b), while purchases of government and CB securities at attractive interest rates became important uses of household investment funds. Both households (equity and trade credits) and private banks serve as main sources of borrowings by private corporations. Extmmal suppliers of capital are another important source, although its composition changed over time, i.e., from a mixture of trade and long-term bank credits in the 1970s to a mixture of trade and direct investment in the 1980s. Public corporations depend heavily on net borrowing from the government. The government itself received much external borrowing in the 1970s, while bond purchases by the household sector became the major ecurce of budget financing in recent years. Analysis of MSAF Multipliers among Accounts

and Interactions

By applying a multiplier analysis using the MSAFs, the study gained further insights into the linkages between the different sectem and institutional agents that make up the Philippine economy under several limiting assumptions. The use of social accounting matrices as a simple model, which generates fixed-price multipliers of socioeconomic l|,_k_ges, can be credited to the work of Stone (1978) and Pyatt and Round (1979) which made the model a familiar approach. The basic idea behind the implicit model that constitutes the SAM and, as a consequence, the MSAF is slmltar to the Keynesian income multiplier model and the Leontief input-output model. The SAM multiplier analysis fits the traditional fixed price, demand driven model systems.

9. See v_s (1990b)for a full accountof the estimationmethodology.The delved estimatesarecomparable to thosederivedin anotherstudybyBoyceandZarsky(1968), althoughthesedonot accountforunderrecordings ofwerkersnvmittaneest_eived from abroad.

PHILIPPINE EXTERNAL FINANCE

In the input-output model, an endogenous vector of sectoral output (q) can be derived from a matrix of (fixed) input-output coefficients (A) and a vector of exogenous final demand (f): q

Aq+f

(I-A)'lf

(2)

where (I-A) "1is the Leontief multiplier matrix. By changing elements of the final demand vector, a new sectoral output can be simulated under assumptions of a fixed production technology (A), fixed relative prices, and no capacity constraints in production. The multipliers indicate the backward (in the columns) and forward (in the rows) inter-industry linkages. The SAM can also be translated into a static model of the economy. Since it contains accounts on income distribution and links to final demand, final demand or at least part of it can be endogenized. For instance, household consumption can be made a function of household incomes. In the MSAF, propensities to consume per commodity type can be derived by taking the elements of the household consumption block on rows 1-6 and columns 10-12 as a proportion of the respective column totals (household income). This accounts only for the consumption of domestically produced commodities, as income allocated to imported commodities will leak abroad and does not produce multiplier effects on domestic production, employment, and income distribution. Grouping the MSAF in endogenous and exogenous accounts is the basic step left to define the matrix of multipliers to be calculated. Usually, government accounts, capital accounts, and rest-of-the world accounts are assumed exogenous on the assumption that government spending decisions are independent of the rest of the system (set by exogenous policy rules), that investment decisions are autonomous (e.g., determined by firm strategies or at least independent of current income streams), and that exports and foreign capital inflows are externally determined. The underlying assumption about savings-investment adjustment is essentially Keynesian. Autonomous investment demand will find the necessary finance through income induced adjustment in savings (or else, domestic savings are complemented by foreign savings). The study starts off with the same assumption, but later relaxes the assumption of fully exogenous capital accounts.

PERFORMANCE ANDSTRUCTURE$7 Aggregatingthe exogenous accountsintoone vector(x), 10 defining the totalincomes ofthe endogenous accountsas vectory,and defi-i-g the transactionsof the endogenous accountsrelativeto totalincome (averagespending propensities) by matrix A yieldthe following model solution: y=Ay+x=(I-A)'Ix=Mex

(3)

where Ma isthe aggregatemultipliermatrix or generalizedLeontief matrix. The SAM multipliersare more comprehensive than the input-outputmultipliers becausetheyincludetheeffects ofunitchanges in exogenous demand on factorincome generation,household and institutional income distribution, and consumption.Also,the number of assumed linearrelationships are increasedby the same amount (constantfactorshares,constant transfercoefficients as a share of income,and constantconsumptionpropensities). Despitetheselimiting assumptions,SAM 0VISAF) multipliers can givea firstapproximation ofsocioeconomicinteractions. The degreeoflinkagesamong thedifferent accountscan be analyzed furtherby decomposing Ma intomeaningful separateeffects (Pyattand Roe 1977, Pyatt and Round 1979, Stone 1978):initial impulse (I), the transfereffect(T),the open-loopeffect(O),and the closed-loop effect

(C):n y = Max = (I+ T+ 0 + C) x

(4)

where I,the initial impulse,isdefinedby the identitymultiplier(unit increase); T is the transfermultipliermeasuring the intra-groupor 10. IntheMSAF, this implies aggregating accounts 16-27 underthei'mat aseumption that all government,capital, and external accounts are exogonousLAccounts1-15am thus the endogenous accounts, whereby rows and columns 1-6 represent the tradittmml input_utput block. 11. The decompositionofmatrixMs is derivedas follows:First, a blockdiagonal matrix Ao is defined as consisting of coefficients of the endogenous accounts including only the elements at the intersection_of the different groupsof accounts (commodities,factors of production,households,other institutions) to identify intra-group multipliereffects (e.g., input-output relations form one set of intra-greup effects). Matrix Ms can now be decomposedinto three matrices: Mo= MsM_M1 . .2 Where M1= (I-Ao)"; M2=[I+A +A ]Ma and Ma = (I-A'8)"1with matrix A=(I-Ao)4 (A-A). Intra-group or transfer effects are identified by Matrix MI, open-loopeffects by mata_ M2, and closed-loop effects by Ma. Equation (4) is the additive decnmlmoition of the aggregate multiplier matrix as suggestec by Stone (1978),where: T = (Mid); 0 = (M2-I)Mt;C= (M_I)M2Mt.

PHILIPPINE EXTERNAL FINANCE

direct effects of an exogenous injection into the group of accounts where it was originally entered; O is the open-loop multiplier measuring the first-round of extra-group or cross effects of an injection outside the group of accounts where the injection was originally entered; and C is the closed-loop multiplier that measures the circular or inter-group effects starting with the repercussions of the extra-group effects on the original accounts and the subsequent next round effects. Tables 2.12 and 2.13 compare the aggregate multipliers for the three MSAFs for the Philippines and the decomposition of the different types of multiplier effects. Table 2.12 gives the results ff government (16), external (17), and all capital accounts (18-27) are assumed exogenous. Table 2.13 is the summary result a/rex having assumed that the investment decisions of households and private enterprises are endogenous. The additional implicit assumptions underlying this alternative multiplier estimation are: 1) these institutions allocate their available investment resources in fLxed proportions to different types of capital goods; and 2) capital transfers (e.g., equity investment, trade credits) among these institutions are fixed proportions of total investment finance. They act as very strong assumptions and, at best, may apply to situations with strongly segmented capital markets, stable self-financing ratios, and credit constrained investment decisions. In the Philippines, such assumptions might be true for households and unincorporated businesses. The comparative static analysis of the multipliers of the present MSAFs is further limited as relative price shifts are not singled out; as indicated, the MSAFs are in current prices. Though relative price shifts may have been important, the multipliers nevertheless indicate the existing linkages among production, employment, income distribution, consumption, and accumulation in the economy. Tables 2.12 and 2.13 present the decomposed multipliers by their column and row totals. Column multipliers give the effects of an exogenous injection in the respective accounts; row multipliers give those effects of an injection in all accounts. A high "column multiplier" means a high degree of integration of a particular account with the rest of the system in response to an exogenous injection into the system. Table 2.14 ranks the accounts with the highest multiplier effects. Factors of production and agricultural activity and, to a lesser extent, rural households show consistently the highest level of integration with the rest of the system as a response to an exogenous demand injection. Labor (wages) showed highest multipiier effects in 1974, but profits (corporate and unincorporated) topped in 1979. In 1987, however, agriculture and light manufacturing (food processing, textiles) showed

TABLE2.12 Philippines: Decomposition of Multiplier Effects, 1974 ,SinsColmnsMatrix Ma Ms

SumsFlows I_ O

I. Agdoull_ 2. Mining 3.Mam_aclmin9 5.Conm..ene_ 6.Se_ 7.Labor 3.Erd_pm_mrial boome 10.Ho_ Me¢]o IdaMla 11.Ho_ _ uroM 12.Households: Rural 13.Unincorporated enter]_e 14,I_ _

7.701 3,888 5.915 7.485 7.592 7.851 6.834 6.519 6295 7.525 7.218 2.598

1.000 1.000 1,000 1.000 1.000 1.000 1.000 1.000 1.000 1.(_0 1.000 1.000

0_I 0.192 0.728 0.728 0.428 0.000 0.000 0.000 0.000 0.00_ 0.8_0 0,233

2,117 O.g20 1.400 1.906 2.014 2.356 2.628 1.864 1.768 2.205 1.800 0.481

4.322 1.776 2.787 3,853 4.151 4.495 3.206 3.654 3.507 4.320 3.528 0,904

15.Pubicentm_rixs

1.1(IQ

1.000

0.G25

0.040

O.OQ5

7.022 1.714 1;283 1.414 6.202 6.890 9.753 3.727 0.054 6.057 8.124 2,965

1.000 1.0(]0 1,000 1.000 1.CG0 1.000 1.000 1.000 1.000 1.0_) 1.000 1,000

6,,543 0.120 1.020 0.067 0.587 0.000 0.000 0.197 0.368 0.593 0.005 0.000

1.771 0.199 3.661 0.114 2,189 2.428 3.625 0.847' 1.562 2.140 2.261 0.630

3.705 0.401 7.612 0.230 4.506 3.404 5.120 1.882 3.124 4,dl_l 4.884 1,355,

1.274

1.000

0.000

0.037

0.187

Philll_Ines:Oecompodtlon ofMultipllerEffects, 1979 SumsColumnsM_]rix Ma Me

Sins RomMatr_MR

I, A_doulme

0.276

1,000

2.140

4,860

8.630

1.000

0.706

1.9_2

5.000

>7 C) ._

2._r_

7.366

?'.000 O.20O

1,969

4,106

1.0a4

1.0C0

0.0_

0.015

0._

C_°

3.I.JBM nmnt,,f_rkzg 4. Olhermanufaotodng 5.Constr.. ¢H_

7,803 5.398 7.t05

1.000 1.000 1.000

1.822 1.204 1.751

4.641 2.509 3.776

1.050 1.000 1.000

0.305 1,148 0.0gg

2.715 1.043 0.137

7.054 2.584 0.346

0,267 0.940 0.,_ 0.eSg

11.974 5.775 1.,r_2

Z 0

C ;o ;it

8 F_.E 2._2com.) 6._ 7. Labor 8. Uninemporalled capital 9.(::_qperaSe _ 10._ MidmManila 11.Houuiz(dd¢ 0111. mban 12.Ho_ Rural 13.Unincozpmlted en_rpds 14.Private enlmixbes 15.P,t_c enteq_ri_

Ma 7.g26 _264 3.577 8.570 6.149 7.190 8.196 7.779 2.079 1.005

I 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000

T 0.310 0.000 6.000 0.000 0.000 0.005 0.050 0.873 0.143 0.000

0 2.016 2.314 1.385 3.038 1.621 1.933 2.238 1.840 0.292 0.000

C 4.801 4.970 1.182 4.5,32 3.528 4.257 4.90"7 4.686 0.644 0.000

Ma 9,911 8.968 4.006 8.934 4.830 5.651 10.979 9.660 4.016 1.675

I 1.000 1;000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000

T 0.777 0.000 0.000 0.050 0.100 0.266 0.651 0.000 0.000 0.000

0 2.291 2.933 1,164 3.091 1.204 1.450 3.100 2.916 1.319 0.268

C 5.843 5.034 1.841 4.843 2.526 2.935 6.229 5.743 1.887 0.407

"_ r,._

__. z >z f'11

Philippines: Decomposition ofMultiplier Effects, 1987 Sum Columns Msl]_Ma Ma 1.klld_illm 2.Micmg 3.1._ht m4mubOmrbg 4. CidermamdacWring 6`Goca.,_ 6`Sef,Ams 7.Labor 9.Unkxx:.q_ (xqdtaJ 9. C:oq_ (:ap_ 10._ MetroMenb 11.Ho_mhold¢ Qqh.Uibm_ 12._ RBaJ 14._enWq[m 15.Pubic(mleq_m

7.562 5.241 1.320 4.477 5.883 6.968 7210 7.195 3.0"/'2 6313 0.146 6.186 2.158 1.873

NoW:SeeZext fere_0tm_ ofsymbob.

1 t.680 t.000 1.000 t.050 1.000 1.000 1.000 1.000 1.005 1.000 1.050 1.000 1.000 1.000

T 0.331 0.410 0.734 0.471 0.581 0.451 0.000 0.000 0.000 0.005 0`005 6.007 0.229 0.438

SumRowsMa_ Ms 0

1.783 1.e65 1.578 1.068 1.603 1.735 2.125 2.122 1.425 1.7_ 1.707 1.714 0`3_ 0.147

C 4.438 2,168 4.068 1.938 2.489 3.782 4.065 4.073 0.646 3.541 3.433 3.485 0.820 0.296

Ma 8.852 1.253 6.505 4.220 1.865 10.882 6.835 9.346 3.521 5.121 6.385 6.506 4.511 1.826

I 1.005 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.005 1.000 1.000 1.000

T 0.753 0.138 0.295 1.005 0.107 0.689 0.000 0.000 0.000 0.134 0.003 0.009 0.366 0.051

0 1.302 0.031 1.385 0.608 0.208 2.537 2.2718 2.921 1.360 1.459 1.838 2.486 1.878 0.467

C 3.597 0.083 3.824 1.608 0.551 6.636 3.559 5.425 1.161 2.529 3.454 4.682 1.267 0:308

TAGU_2.1$

Philippines: Decomposhlon ofMuHil_ier Effects, 1974-A SumsColumnsM_t_ Me Ma 1.Aodcultum 2. Mining 3. Manulacmrkt 9 5. Conslr..energy 6. Sewioe_ 7. Labotr 9. En_prefmdal income 10. _ Meho Manila 11.Ho_ Olh.urban 12. HmmhoM¢ rural 13. Unlnooq_ eflteq_s 14.Prlvm enleq_ises 15.Pubio enlelpi'bes t6. Hommholdls andunk¢, an 19.PdvateeMeq_ 25. Infomiali1_ lenders

9.475 4.653 7.0e5 £079 9.282 9.613 9.00_ 6.419 6.339 8.973 9.169 6.244 1,212 4.719 6.9_ 5.719

I 1.000 1.000 1.000 1.000 1.000 1.O00 1.000 1.000 1.000 1.000 1.000 1,000 1.000 1._00 1.000 1.000

T 0.261 0.192 0.728 0.728 0.428 6.000 6.000 6.(100 0.900 6.000 0.890 6.233 0.025 0.180 6.280 0.000

SumsRowsM_ 0

2.117 0.920 1.400 1.905 2.014 2.485 2.904 2.156 2,157 2.230 2.129 1.692 0.054 1.040 1.699 1.894

C 6.097 2,542 3,957 5.447 5.841 6.128 5.098 5.263 5.182 5.743 5,150 3.348 0.134 2.4,99 4.005 2.825

Me 9.599 2.155 19.792 2.801 11,179 9.282 13.366 4.629 7.732 10.389 10.763 3.720 1.375 6.247 3,757 1.181

I 1.000 1.000 1.0(0 1.000 1.000 1.O00 1.000 1.000 1.00O 1.000 1,000 1.000 1.000 1.000 1.000 1.000

T 0.543 0.120 1.009 0.067 0.5_r7 0.000 O.OOO 0.197 0.368 0.583 O.O_O 6.000 O.OOO 0.235 0.225 6.000

Me 0 2.302 0.332 5.364 0.734 2.711 2.730 4.095 0.847 1.582 2.140 2.261 0.630 0.067 2.009 0.876 0.095

C 5.754 6.703 12.419 1._ 6.871 5.552 6.271 2.564 4.802 6.666 7.592 2.00I 0.288 3.004 1.857 0.896

"_ rfl

Z rn

> Z q3 C C rn

h,1

(TAME 2,13 CoN'r,)

""'O zrn

Philippines:Decompo6Hion ofMultiplier Effects,1979-A SumsColumns Mah_Ma Ma 1,Agriculture 10.500 2. Minin o 9.488 3. IJDM manofacturbo 9.601 4. Othermanula(:tm'bg 6.723 5.Constr,ene_ 9.092 6. Sefvkzm 10.122 7. _ 10.515 8. Landrentandotherrent 7.521 9. En_epnme_rlalineome 10.989 10.Househok_ M_roMuikz 8.685 11,Households: Oth,uiban 9.455 12.HOOH_ Rural 10.192 13.Uni_orl_at_ enler_ t0,275 14.I_ enmrprbes 6.972 15.Pubtic _ 1.000 18.Households andunknc, erd[. 5.157 19,Pdve_o_mqxises 6.569 25.Irdom_d money lend_ 6.157 26.C_ar_eincomm. stocl_ 8.717

I 1.000 1.00G 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1,000 t.000 1.000 1.000 1.0(X)

T 8,_B7 0.299 0.940 0.596 0.660 0.,3t0 8,0_0 0.000 8,000 8,000 8,000 8,000 0,873 0,143 8,000 0,126 0.022 8,000 8,000

SumsRowsMarx Me 0

2,149 1.950 1.822 1.204 1.731 2"016 2.436 t.962 3.233 2"021 2.148 2.266 2.162 1.645 8,000 1.096 1.466 1.800 2.007

C 7.174 6,231 6.039 3.934 5.672 6.797 7.079 4.569 6.756 5.643 6.307 6.926 6.239 4.184 8,000 2.935 4.091 3.357 5.620

Mo 12.086 1.4_ 15.685 10.776 4.595 14.672 13.079 5.634 13.203 6.541 7.684 15.323 13,797 5.242 1.969 6,983 5.506 1.395 2.317

1 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.Oi_ 1.000 1.(100 1.000 1.000 1.000 t.000

T 0.706 0.033 0.305 1.148 8,090 0.777 6.000 8,000 6.000 0.100 0.266 0,_1 8,000 8,00G 8,000 0.022 0.126 8,000 0.000

--I

0 2.330 0.192 3.179 2.628 1.194 3.040 3.392 1.366 3.610 1.204 1.450 3.100 2.9t6 1.319 6.268 1.936 1.482 0.149 0.487

C 8.049 0.225 11.201 6.0e2 2.293 10.056 8.678 3.268 8.593 4.237 4.968 t0,5"72 9.681 2.9_3 0.?00 3,904 2.917 0.246 0.830

_ z z

FABLE2.13CONT.)

PII111Wdmm: DecomposHion ofMuttildler Effects, 1987-A SumsCobmnsMe_o(Me Me 1.Aod_hre 2,Mink_9 3,LJoht manufactudno 4.C)_ermanufacturing 5.Constr_ eneqW 6.ServioN 7.Labor 8.Lkdnoofl_omle,d oapilal 9.Co_porete Â˘sidtal 10,Households; MelfoManila 11.Households: Oth,urban 12.Households: Ru_ 14.Pdvete eMerp_m 15.Pubioenterprlm 15.I'l_lds andunrn,_ eot 19.Pdvate enteq)rlaan 25.Informal money _ 26.Change incomm.rooks

0.004 5.964 6.700 5.141 6.535 8.271 6.973 6.004 3.356 7.916 7.905 6.089 2.479 2.031 4.924 0.20_, 5.924 3.020

Nm: SUete_for expl_rmUon of_p/mbel&

i 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.(]00 1.0_) 1.000 1.000 1.000 1.000 1.000 1.000 1.000

T 0.331 0.410 0.734 0.471 0.591 6.451 6.000 O.O00 0.(100 0.005 0.005 0.007 6.229 6.436 0.027 -1.922 6.000 0.000

Sum Rows_ O

1.798 1.e03 1.578 1.068 1108 1.735 2.288 2.295 t.372 2.000 2.011 2.068 0.260 0.142 1.260 1.290 1.895 -0.154

C 5.970 2.911 5.389 2._)3 3.342 5.084 5.685 5.700 0,984 4.910 4.889 5.014 0_tQ2 0.484 2.636 .0.160, 3.026, 2.174

Me 7.510 1.058 9.365 7.040 6.016 14.114 3.066 11.545 5.177 0.321 7.880 10.506 5.975 2.190 .0.782 5.451 0.968 -0.871

I 1.000 1.000 1.000 1.(]00 1.000 1.000 1.000 1.000 1.000 1.00G 1.000 1.000 1.000 1.0G0 1.000 1.(NX) 1.000 1.000

T 0.753 0.138 0.295 1.005 0.107 0.689 6.000 6.000 6.006 0.134 0.003 0.039 0.368 0.051 4.690 2.795 6.000 6.000

Ida O 1.068 -0.057 1.067 1.705 2.425 3.214 2.736 3.3_i0 1.942 1,459 1,838 2.466 1.878 0.467 0.9t2 0.641 -0.100 -1.474

C 4.604 _(_3 5.40_ 3.330 2486 9211 5.330 7.165 2.235 3.726 4.940 6.961 2.73I 6.672 2.010 1.915 6.076 -0,397

._ Z2 z > ;[ C_ c c

PHILIPPINE EXTERNAL FINANCE

the highest _backward _ linkage effects using the standard assumptions about the definition of endogenous accounts. If private investment demand is endogenized (in relation to available investment finance), it appears that this increases the multiplier for unincorporated capital/enterprises significantly more than those for the other accounts. In 1987, multiplier effects of unincorporated capital ranked second after agriculture, reflecting the increased importance of self-employed activities in the interactions of the economy. A policy conclusion that can be derived is that measures (injections) leading to increased unincorporated profits may be expected to induce high income effects in other accounts because the resulting relatively high savings are invested in income-earning activities of (rural) household groups with relatively high demand linkages with other activities with the rest of the system (agriculture, light manufacturing). Analysis of the sum of the row elements of matrix Ms gives insight into the total effects on each account of a unit change in all endogenous accounts. Table 2.14 shows that (light) manufacturing, services, and rural households exhibited highest (_forward") linkages in these terms in 1974 and 1979, but the relative importance of manufacturing appeared much smaller in 1987 and was replaced by unincorporated capital. A final important observation about the multipliers in Tables 2.12 and 2.13 concerns the decomposition effects. In practically all cases, the closed-loop effects (C) or circular effects are the largest. "Backward" production linkages of agriculture tended to be small, relative to other production sectors if confined to input-output relations (i.e., the transfer effects T of the column elements). But if the effects of increasing agricultural output on factor remunerations, institutional income distribution, and consumption (and household investment) are included (O, open-loop effect) as well as subsequent circular effects (C), the importance of agriculture to economic growth obtains a radically different emphasis than if analysis would have been confined to input-output relations.12 12. Thisresult supports recentrenewedmoves stressing theimportance of_nml linkages in thedevelopment process (e.g., Ranisand Stewart1987)and therural development orientation ofthedeveloped plans unfolded bythegovernment ofPresident Aquino. ButBautieta (1990) argues that agrlculturalgmwth isnotenoughandthatitis through infrastructure investment, development ofagro-based industries, andhuman resource development,that the linkage structure can be improved.Accordingto Bautista, such structural bottlenecks plus a macroseonomic environment favoring industrial protection and urban development and the secruance of a major part of agricultural income to a small elite, impeded agricultureto contributesignificantly to overallgrowth between 1965-1980.The MSAFs suggest that duringthe 1970s, linkage of agriculture and rural households with the rest of the economyincreasedsignificantly, possibly due

PERFORMANCE AND STRUCTURE 6S

TABUE2.14

DuetoExogenoua Demnd Cl..qleinRwpective k:a)unt (sum ofcolumn dements mldxMa) casek ENDOeSiOUS ._COUNTS (1-15") 1974 1.labor

1979 1.Entrepren. income

1987 1.Agdcugure

_ ._,_:_ture

ZL_or

2.L._ r,_nufa_no

3. Ruralhousehdds 4.Services 5,ConsUuc_e

3.Agdcultum 4. Ruralhousehd_ 5,SenSes

3. Usbor 4. Unlm_. capital 5.Servk_

CASEB:ENDOGENOUS ACCOUNTS (1-15Nil) 18-19,25-26)

1974 1.I.e]_ 2. Agdcultum 3. Setvic_ 4. Unkcotp. enteq0r. 5. Constn_

1979 1987 1.Enlmpren. ino:xne 1.Aglcdtum 2.Agriculture 2.U_ 3.Labor 3.Labor 4. Unincoqoormd enlmx.4.Ught 5.Rural_ 5.Sendces

capital

MullildierEffectsdueto incomeChangeindl Endogenous _n_ (sumof rowelementsmaffixIb) CASEk ENDOGENOUS/¢OOUN_ (1.15)

1974 1.Manufacturing

1979 1987 1.Ughtmanufacludng 1.Services

2.Sen_ee

2,rured househa_

3.Enlrelxenetx_ Income3.8evi¢_ 4. Ruralhousehdds 4. U_

5.U_noorporated elWpr.5.Labor

2,Unincorporated c=,dt¢

3,Ruralhoue_hd_ enteqx.4.labor

5.Agn_ltum

CASER,ENDOGENOUS ACCOUNTS (1.15,AND18-19,

1974 1979 1987 1.Manufaclud_ 1. UghtmanufacgJring 1.Service6 2. Enlmpreneuri_ income2. Ruralhousehdds 2. Unin_ated capital 3.Services 3,Se_es 3. Rural 4. Uninooq_mdenteqar.4. Unbcorporatad ente_r. 4. 5. RuralHouseholds 5. Labor 5. Lightmanufaebxing ?_moe:Taldes2.12MdP.13

PHILIPPINE EXTERNAL FINANCE

As a finalstepinthisf'trst approximateassessment ofthe natureof socioeconomicllnl_ages in the Philippineeconomy, a few simulations were performedusingtheMSAFs. Tables2.15and 2.16reporton income changes resultingfrom six differenttypes of exogenous demand injections. The sizeofthe injections are equal in each case and, since theMSAFs areonlyavailable atcurrentprices, calculated foreach base year talcing intoaccountoverallinflation (i.e., the injections amount to 3 billion pesos at 1987 prices, or 0.5percentofGNP). The simulations relateto fourtypes ofdemand impulses: I and II

Ill IV

: :

V and VI

Exogenous increaseinexportdemand for agricultural commoditiesand manufactures. Enhanced infrastructure inveshnent. Current transfers to households. Increasedcapital transfers(domesticor foreign) to households,unincorporatedbusinesses, and privatecorporations.

As indicated, the MSAF-based model simulations only assess fixedprice accounting multiplier effects assuming no supply constraints exist. In this sense, no major policy conclusions can be drawn from the above simulations, but they allow the assessment of the impact of different types of exogenous demand impulses. Simulation III resembles the predominant demand impulses during the foreign-financed expansion of public enterprise investment especially in infrastructure and energy. Simulations I and II explore income effects of policies that would induce increased demand for traded goods. Simulations V and VI (Table 2.16 only) simulate the differential impact of enhanced domestic or foreign capital mobilization for household firms and private corporations, while simulations IVa and IVb estimate the static income distribution effects from enhanced government transfers to households.

to apartial elimination of the mentioned bottlenecks and Mazcce'land reform program. In the 1980s, agricultural and rural linkages were reduced, but the crisis showed a stronger disintegration in other sectors,explaining the higher rankingof agriculture in 1987.

PERFORMANCE AND STRUCTURE 67

TABLE2.15

Philippines: SimulMione withMSAF1974 I 1,Agdculture 0.0212 2.Mining 0.0334 3.Manufacturing 0.0062 5.Coe_-'tr., 0.0016 energy 6.Sen,ices 0.00Sg 7,labor 0.0106 9. Entrepre. 0,0103 neodalincome 10.Houe_ds: 0.0098 MeboManila 1i. Households: 0.0101 Oth.urban 12.Households: 0.0101 rural 13.U_ncor0.0102 porated

III

0.0078 0.0358 O.010g 0.0014

0.0070 0,0048 0,0373 0.0527

0.0084 0.0041 0,0074 0.0020

0.0101 0.0303 O.OOg2 0.0022

0.0048 0.0065 0,0069

0.0066 O,OOg3 0.0093

0.0074 0.0072 0.0071

0.0083 0.0083 0.0083

0.0063

O,OOg8

0.0188

0,0125

0.0365

0.0090

0,0135

0.0121

0,0065

0,0090

0,0117

0.0182

0.0069

O.OOg3

0,0071

0.0382

0.0103

0.0069

0.0093

0,0071

0.0083

0,0075

0.0050

0,0068

0.0052

0,0060

Enteq0¢

14.Private

enta

15,Public

enteq ses Philippines: $imukdtorm withM,_I_F lg79 (©hange in IncomemlMivetobaseyear) I 1.Agdculture 0.0232 2.Mining 0.0007 3.Ught 0,0082 manufacturing 4.Other 0,0046 manufacturing 5,Cons'e,, 0.0010 energy 6.Services 0,0(]62

III

0.0089 0.0012 0.0115

0.0065 0.0029 0,0362

0.0096 0,0008 0.0097

0.0127 0.0003 0.0129

0.0113

0.0066

0.0049

0.0059

0,0010

0.0274

0,0012

0.0016

0.0052

0.0057

0.0072

0.0092

PHILIPPINE EXTERNAL FINANCE

('I'AELE2,15CONT.)

I 7. Labor 0.0106 8. Unincor0.0096 porated capital 9, Corporated 0.0103

c ml

10.Households'. 0.0100 MetroManila 11.Households: 0.0099 Oth.urban 12.Households: 0.0101 Rural 13.Unincar0.0103 porated enterpdses 14.Private 0.0096 enterprises 15.Public 0.0093 enterprises

III

0.0070 0.0072

0.0077 0L0083

0.0074 0.0071

0.0096 0.0091

0.0069

0,0085

0.0071

0.0092

0,0066

0.0075

0.0!64

0.0132

0.0066

0.0077

0.0149

0.0159

0.0088

0.0085

0,0108

0,0178

0.0069

0.0085

0.0071

0,0092

0.0072

0.0082

0.0070

0,0091

0,0066

0.0078

0.0066

0.0885

Philippines: Simulations withMSAF1987 (changein incomerelativetobaseyear) I 1.Agriculture 0.0201 2. Mining 0,0017 3. Ught 0.0087 manufacturing 4.Other 0.00,54 manufacturin 9 5,Constr., 0.0024 energy 6, Services 0.0063 7. Labor 0,0087 8. Unincor0.0113 porated capital g. Corporate 0,0054 capital 10.Households: 0.0085 MetroManila

Ill

0.0070 0.0037 0.0144

0.0043 0.0047 0.0045

0.(X)67 0.0016 0.0088

0.0071 0.0016 0.0092

0.0148

0.0089

0.0048

0,0047

0,0019

0,0333

0.0027

0.0026

0.0046 0,0065 0.0069

0,0041 0.0063 0,0048

0.0070 0.0059 0.0070

0.0067 0,005g 0,0870

0.0056

0.0128

0.0049

0,0047

0.0059

0.0055

0.0140

0,0081

PERFORMANCEAND STRUCTURE 69

0"_ 2.15OOHT.) I

11,Households:0.0093 Oth.urban 12.Households: 0.0100 Rural 14.Pdvate 0.0051 emeqxises 15,Public 0.0053 enter_ses ''

,,,

III

0.0063

0.0053

0.0115

0,0104

0.{X}66

0.0052

0.0090

0.0132

0.0052

0.0117

0.0048

0.0047

0,0055

0.0126

0.0049

0.0047

Note:_muinJan$refertoexogenous injection b inclioaled accou_ ofPO.5billion pesosfor19740PI INIlinofor1979,amlP3bgiinofor1987. Stnulatlno I : Change inexogenous demand fi ogdcullum i_mduCs. Simulation II - : Change b exogenous demand fixmanufa_unng (injection equally di#tbutelover manulactudng seolors). $1mubtlon III : Change inexoganous demand forÂ˘on_. Simulation IV : Change inexogenous transfers Io households, nored_dbutinn ('mjedk_d_ according toexis_n9 distribution oltran_er). ,._mu_lofl V : Change inexogenous transfers Iohousehckb group,red_ributbn (equal perÂ˘_oita injection perhouseholds group).

Maximized householdincomes,particularly _ :_reaswith the highestpovertyincidence (i.e., otherurbanand rur_ was usedas a gaugetocomparethesimulation resulte. Simulations IVa and IVb indicate that, for all t_ee MSAFs, a redistribution of household transfers in favor of rural households will not only lead to a more significant increase of rural housel_old incomes as compared with those of urban households, but also yield higher output effects on the major production activities -- agriculture, (light) manufacturing--through a redistribution of income via the injection of transfer payments. Table 2.15 using simulation IVa and Table 2.16 using simulation IVb bring out this finding. Such a result clearly supports the advocates of giving priority to rural development toward a more sustainable and equitable growth process (see also footnote 12). The current linkage structure (as well as that prevailing in the 1970s) would also ensure that successful trade policies encouraging foreign demand for traded goods (simulations I and II) Will generate highest income effects for householdd, ff the major impulse is for agricultural commodities. Such demand impulses would also favor a

PHILIPPINEEXTERNAL FINANCE

TABLE2.16 Philippines: Simulations with MSAF 1974 (¢hllnge In Inoome relative to base year) Impulse

I_ I_t

Agd.ManuL

wlh _ redinS,_l_

III

IVa

1. Agriculture 0.0229 2.Mlnbg .0`0046 3. Manufacturing 0`0030 5.Constr., energy O.O04g 6._ 0`0072 7. Labor 0.0121 g. Entrepreneurial 0,0118 inoome 10.HOuseholds: 0.0113 M_reManh 11.Househok_: 0.0116 Oth.Urban 12.Houne_: 0.0116 Rund 13,Unin0_)or_ed 0.0118

0.0089 0,0066 0`0120 0`0(05 0`0037 0`0378 0`0079

0.0084 0`005g 0.0089 0`0555 0.0077 0.0107 0.0107

0.0114 O.0303 0.0106 0`0065 0`0394 0.0037 O.(X)g6

0`0073

0.0101

0`0075

14.I_vm mer_'_ 15.PUlI_ omqxm 18.Households and unin¢, anL 18.Private eatepme= 25.Inlom_money lenders

I_fo

_, ,, _ Houneh. lad.Ent,

0.0100 0.0O52 0.00112 0`0036 0.0087 0,0088 0`0037

0.0039 0.0030 0.0042 0`0103 0.033_ O.(X)40 0.0040

0.0071 0.0065 0.0078 0.0080 0`0067 0`0035 0.0303

0.0137

0.0201

0.0(_

0,0062

0.0103

0.0134

0.0150

0`0339

0`0363

0`0075

0.0103

0.0195

0`01_

0.00_

0`0033

0.0078

0.0t07

0`0036

0.0087

0`0340

0.0066

0.0119

0.0079

0.0107

0`03_

0.0087

0.0040

0.0066

0.0086

0`0358

0.0078

0,0370

0.5034

0`0039

0,00_

0.0089

0.0358

0.0379

0`0303

0`0103

0`0_,2

0.01t2

0.0055

0`0337

0`0030

0`0043

0,0347

0.0370

0.0_8

0`0039

0`0058

0`0378

0.0101

0.0103

0`0342

0`0112

PERFORMANCE AND STRUCTURE 71

(TABLE __leCONT.) Philippines: Slmulation8 with MSAF 1979 (change In income relative to base year) F.xpelImpulse

Irdtaa I1_

Agd.Uan_ I

Trlm_ 1o Households _

1. Ao_ellum 0.0250 2. Mining 0.0_0 3. I._htmano_rlng 0,00_ 4. Oee.mn_aclurlng0.0070 S. Cortr., energy 0._45 6. Servtoes 0.0079 i'. Labor 0.0125 8. Landrentandother 0.0116 re_ls 9. _uriai 0.0122 10.Hou_dyo_'. 0.0118 klee'o_n",, 11.Households: 0.0117 C)lh.ud)en 12.Households: 0.0120 Rml 13.UnincOq)oraled 0.0122

0.0102 0.00_ 0.0128 0.01_ 0.0035 0.0_ 0.0085 0,0088

0.0079 0.00_ 0.0575 0.0106 0.050E 0.(]071 0.0093 0.0599

0.(X_ 0.0081

_ IVs

0.0146 0.0_4 0,0147 0.0MS 0.0054 0.0111 0.0116 0.0113

IVb

CIlll NIbra Hemll,

Pti.EnL

0.0113 O.OOgl 0.0113 0.0072 0.0047 0.0088 0.0092 0.0089

O,__r___ 0.0053 0.0028 0.0544 0.05_ 0.(_0_) 0.0048 0.(X)75 0___n___0.0079 0,05_4 0.0054 O.OOW 0,0(_6 0.0041 0.0058

0.0101 0.0113 0.__r,___ 0.0152

0.0590 0.0181

0.0042 G_ _r,___

0.0081

0.O0_

0.0179

0.0166

0.._r___ 0.0(04

0.0083

0._ _nr___ 0.0128

0.0128

0.0040

0.0085

0.0101

0,0113

O.OOgO 0.0042

14.Pfivaeenteq)_ses0.0115 15.Pobl_eMeq_isa 0.0111 18.Houmhokls 0.0084 endI_A_n_. e.l. 19.PnValeeeiefl_ses0.05_ 28.IrdOImid money 0.0084

0.0087 0.0081 0.0058

0.005e 0.00_ 0.0566

0.0112 0.0105 0.0100

0.0089 0.0083 0.0595

0.0041 0.0057 O.GO3g 0.0054 0.0_11 0.0044

0.0044 0.0058

0.054e 0.0066

0.00_ 0.0100

0,004e 0.(_5

0.0054 0.0311

0.0_ 0.0044

26.Change incomm. 0.0051 s_xks

0.05_7

0.0542

0.0056

0.0048

0.0056

0.0180

0.__r,_9__ 0.0054

0.__nt__ _ 0.0058

PHILIPPINEEXTERNALFINANCE

FABLE2.16CONT.) Philippines: Simulations with MSAF 1987-A (change in income relative to base year) ....

,,,

ExpoffImpulse

Inlm_ I_nt

AgrLManuf. I

..,

Tram_mIo Housdtokb

Capi_D'ansferl

Wilh wllmt redJ_ III

1. Agriculture 0.0212 2.Mining 0.5023 3.I.Jghtmanufaclurin9 0.0007 4.Othermanufacturing 0.0O72 5.Conslr.. energy 0.0076 6.Services 0.5073 7.Labor 0.0100 8.Unincorporated 0.0125

0.0076 0.0037 0.0152 0.0163 0.0055 0.0053 0.0074 0.0077

0.0546 0.0032 0.0055 0.0109 0.0370 0.0046 0.0071 0.0054

0,0064 0.0025 0.0104 0.0066 0.0086 0.0078 0.0074 0.0083

0.0081 0.0025 0.0101 0.0567 0,0085 0.0081 0.0074 0.0083

0.0043 .0.0154 0.05,52 .0.0710 0.0027 O.01M 0.0540 0.0381 0.0150 0.0351 0.0533 0,0005 0.0041 0.0550 0.0038 .0.0019

g.Corporate capital 0.0576 10.Households: 0.0097 MegoManila 11.Households: 0.0105 Oth.urban 12.Households: 0.0112 Rural 14.Pdva_eenterprises 0.0072 15.Pubgcenterprises 0.0075 18.Households and 0.0051 uninc, anL 19.Privateenterpdses -0.0030 25.Informal money 0.0051 lenders 26.Change incomm. `0.0008 stocks

0.0571 0.0067

0.0142 0,0061

0.0073 0.0095

0.0574 0.0136

0.0057 0.0037

0.0087 0.0013

0.0070

0,0050

0.0118

0.0126

0.0037

0.0006

0.0074

0,0058

0.0146

0.0116

Q.O0_

.0.0001

0.0066 0.0070 0.0029

0.0130 0.0144) 0.0006

0.0070 0.0073 0.0054

0.0070 0.0573 0.0061

0.0062 0.0067 0.0204

0.0578 0.0985 .0.0843

.0.0(_5 0.0029

-0,0021 -0.0023 0.0026 0.0064

-0.0024 0.0061

0.0045 -0.2898 0.0L_04 `0.0843

`0.0016

.0.0059

.0.0001

0.0078

0.9800

IYO

PrLEnt,

Howeh.

I/I

-0,2105 â&#x20AC;˘

Note: Simulalion$ refertoexogenous injections ofP0.5bi_ for1974,P1billion for1979,andP3,0billion for 1987; Simulation I : Change inexogenous (export) demand foragricultural produds. Simulation II : Change inexogenous (export) demand formanufacturing (equalshareineach manufacturing sectors). Simulation III : Change inexogenous (investment) demand forconstruction. Simulation IVa : Change inexogenous transfers tohousehok_, wi#tn;dsb_u_on(equalper(:al_4a tflmder perhousehold group). Simulation IVb : Change inexogenous transfers tohouseholds, nom_',M,//x/a_n (injection distributed according toexisting tTansfer distribution). Simulation V : Change inexogenous capitaltransfers tohouseholds. Simu_ion VI : Change inexogenous (foreign) capital transfers toprivate enterprises.

PERFORMANCE ANO STRUCTURE

stronger income redlsJ_bution towm_ rural households, Mthough it should be added that enhanced manufactured exports also tend to lead to a slight redistribution of income toward rural areas. The predominant demand impulse of the 1970s, which was the foreign-financed investment in non-traded activities (construction, energy), manifests significant income effects if applied to the MSAFs of 1974 and 1979; it also shows a mild redistributive effect toward rural household groups. But as analyzed further in the subsequent chapters, this was not a sustainable strategy in the medium ru_ Moreover, the same simulation with the MSAF for 1987 indicates that, due to shifts in the

llnl_ges

sta-ucture,

enhanoed

_ctul_

investment

would

have more modest income effects and would redistribute the static welfare effects in favor of urban households in Metro M_ni|a with lesser gains for rural areas. Finally, Table 2.16 adds two simulations of exogenous injections in the endogenous capital accounts. At first glance, a capital injection into private corporate enterprises (simulation VI, e.g., an increase in direct foreign investment or commercial bank lending) induced a significantly higher income and redlstributive effect in 1974 and 1979, compared with an injection into the household sector (simulation V, e.g., via increased state-bank credits). In 1987, however, a capital transfer toward households and unincorporated businesses produced much higher welfare effects, while an injection into the corporate sector even produced strongly regressive effects on the urban-rural income distribution that would crowd out profit incomes and investment levels of unincorporated businesses. This may be explained by the strain that government bend-financing put on domestic capital markets and "real" private investment in the latter half of the 1980s. In contrast, an exogenous capital transfer directed toward the household and unincorporated businesses sector yielded a significant increase in investment demand by the sector, as well as an expansion of the informal credit market of a similar size. This simulation result may reflect reality to the extent that a segmented capital market and credit constzaints on household investment yield a premium on informal lending such that a part of formal credit supplies is not directly used for real investment, but rather rechanneled via informal credit circuits. Moreover, demand impulses in the form of enhanced capital transfers have significantly smaller income effects if compared to trade expansion or direct current transfers to households. However, this is far from surprising, given the static framework and the exclusion of supply constraints and price effects in the simulation exercise. Principal

Findings

The preceeding discussion has described structural changes in the Philippine economy_that took place in the 1970s and 1980s by using a

PHILIPPINE EXTERNAL FINANCE

social accounting framework. The advantages of such a framework are thet it reconciles different sources of information and that it gives a quick but consistent overview of the economy's structure. The framework can also/be used, under certain limltln_ assumptions, as a static model of the linkages in the economic prooess. What stands out among the major conclusions derived from the MSAFs is the reinforced central role of agriculture and household f'mns in the interactions among productlon, mnployment, interne distribution, and capital accumulation in the Philippine economy. The 1970s showed some tendency toward a modernization of economy in terms of increasing wage labor relations. Externally financed public sector expansion concentratedin the NCR explainsa greatdeal ofthistrend. The 1980s' crisis and the subsequent adjustment processes appear to have resulted in a renewed shift toward self-employment and unincorporated businesses. Multiplier analysis with the MSAFs shows that open and closedloop linkage effects are highest for the agricultural, services, and unincorporated business sectors. The linkages of agriculture and rural sectors with the rest of the system were noticeably strengthened, particularly during the 1970s, possibly due to the lifting of certain structural bottlenecks in infrastructure, industrial inputs, and the land reform program. During the 1980s,overalllinkagesin the economy seemed to have dropped due to the crisis, but rural households and unincorporated businesses were less affected. Two major inferences may be drawn from the analysis of the structure of the economy and the changes therein: First, neither external finance in the 1970s, nor efforts toward diversification in the export sector in the 1980s (see Chapter 3) we_ channeled to or built around the economic and institutional sectors with high linkage effects to the rest of the system (i.e., agriculture and uuiucorporated businesses); neither do they appear to have led to a strengthening of forward and backward closed-loop linkages of non-traditional sectors, which might have led to a more self-sustained growth process, reducing adjustment costs in the 1980s. Second, diverging shifts in structural parameters of household and corporate firm savings, investment, and finance structure are closely related to shifts in income distribution, external finance availability, and shifts in claims of the public sector on domestic credit availability. The diverging parameters suggest a heterogeneous accumulation behavior within the private sector which may be a critical factor in assessing adjustment processes and options. Such behavioral patterns are discussed in detail in Chapters 4 and 5.

CHAPTER 3

External Finance and Relationship with the World Economy

Introduction Economic developments during the five years of the Aquino administration (1986-1991) demonstrate that the Philippines has not extricated itself out of the quagmire created by recurring BOP crises. After averaging an encouraging GNP growth of 5 percent in 1986-1989, the economy slowed down signitlcanfly in 1990 with GNP expanding by only 3.1 percent. The trade balance registered a deficit of US$3.9 billion, higher than the 1989 figure of US$2.6 billion, which in turn was more than double the level in 1988. This huge gap in the trade balance triggered a peso devaluation of more than 11 percent, based on a year-to-year average. To stem the decline in foreign exchange reserves, the government embarked anew on a stabilization program highlighted by a drastic cut in government capital expenditures and the imposition of an across-the-board 9 percent import levy. Output declined in 1991 as a result of these austerity measures. Some sectors, among them key supporters of the present administration, blamed the various calamities, both natural A_nfl man-made, for the current economic disarray. These calamities would include the 1989 coup attempt, the disastrous earthquake that struck the northern part of Luzon, the Middle East crisis, the killer typhoon that ravaged the Central Visayas area, and the powerful eruption of Mount Pinatubo in Central Luzon. While these exogenous events did contribute to the economic downturn, they should not be allowed to dominate any analysis of the current state of the Philippine economy. We will argue that, in spite of the euphoria surrounding the dismantling of the Marcos regime, there has been no major shift in economic policy especially in the trade sector; this contributed heavily to the dismal economic performance during the years 1990-1991.

PHILIPPINE EXTERNAL FINANCE

Balance-of-Payments

Crises:

1970-1989

Various=shocks_afflicted thePhilippineeconomy duringtheperiod 1970-1989.Unlike some ofthe earlier crises(in1970,1974, and 1979), the 1990 crisisis made more acute by the lack of availableforeign financingthatcouldhave mitigatedthe effects ofa shortfall inforeign exchange reserves. To tracetheeffects oftheseexogenous eventson the current account, the study set up a framework and applied a decompositionanalysisin orderto quantitatively assessthe impact of various factors on the current account. External

shocks

and the current

account

It must be made clear that an economic crisis need not directly put pressure on the BOP sector. While external shocks automatically lead to a change in the current account position of the economy, internal disturbances could have limited effects to the domestic sector. Unfortunately, this was not the case for the P_ilippines in the 1970s and 1980s. Economic shocks, whether internal or external in origin, had profound effects on the current account and the level of foreign exchange reserves. This was primarily due to the =openness" of the economy and the type of economic policies that were pursued during this period. Table 3.1 lists the major "shocks" experienced by the Philippine economy based on the periodization outlined in Chapter 1. The domestic shocks that took place between 1980 and 198,5 dipped the level of foreign exchange reserves as evidenced by the sharp devaluations accompanying those shocks (see Table 3.17 which is a list of memo items.) Nevertheless, the major shocks were external in origin; these included the two oil shocks and the two major recessions that hit the industrialized countries. A useful framework to analyze these crises is the basic macroeconomic identity forthe open economy which,following national accountingand BOP conventions, can be writtenas: (Ie-Sp)+(Io-So)

CAD

AF+AIF-AR-AAB-AAp-

(r)

This isa reformulationofequationi,Chapter 1. The lefthandsideofthe equationspecifies the internalbalance in terms ofprivateand publicinvestment-savings gaps,the sum ofwhich shouldequal.ex-poat tothecurrentaccountdeficit (CAD).The righthand siderepresentsa summary ofthe BOP capitalaccount;itspecifies the financingof current account deficitsin tbrms of long-term capital

EXTERNALFINANCE

TABLE3.1

malorEconomio Shoc..ks andPolicy_Responses inthePhilippines Pedod

1970-1974

1975-1979

1980-1992

1963-1985

1965-1900

F_mm_ _

F_i_

Cheap

Oii_e

S_q)aee of

Noenemu

debtcdeJs

feeign=ell inflow

shock

forekln debl kdlow

delX mdlede-

Commodity Inaea_

prk_ boom _roign

Inveentent

Oipd_ shock

FI_

moad

mumn end blloWol loan

OelerioratJ_ Highwodd termsof InWoaI trade rain P,estdmed

Net d_to debt

Doi_

_Â˘k

RUM

Dewey

Ass_

Tslmove'

=rune _k_dJ=

Dee rmnci_ =Us

ofAquino

of_ulno Wv_

Reariclive &

Expansion-

Ma_allaw dedalation Monetary_

Tightdueto

Expan_

Highly

Inlt_on_

my,sub.

expansion_l=_onmy

myin

p_luu_ from

sidlz_l creditto

am/and counlW-

IniUed yea;

devedoadon, imodiy areas _ mom expansionary in1973and 1974

high in_r_t rates

FmandoJ IlbemlizMion

tight

high Intoreal ratesin i_yems

PHILIPPINEEXTERNALFINANCE

(TABLE 3.1CONT.) Period

1970-1974

1975-1979

1980-1902 1983-1965

1986-1990

FiscaJ policy

Tightdueto

Counter-

InPtdy

ixes_res t_lady on fromdev_ government lualion, inveamonl mm expansionary in1973and 1974

onde_N_ce andbdontof government _Ixxa_ons

ary,_hl infaler _ w_h on_ont_ tionon dome_

Tradeand industry policy

I_akudion export promotion

,E.xlx_t Oegionin9 promotion, ofremove/ mntinued ofOFl's _n of impoll substauteseotot,failed for heavyindusaJaflzation

Suspensi_ of trade liberalization, laxmion of t_ ralionino of foreign exchange, devabadon

Trade liberalization siovdy depreciating pesoin 1990

Combined effects

High growth, high inflation

Highgrowth, shintonontraditional exports

Deep economic re_sskm,HiOh Inflation

Economic recovery upto 1989,

inf_o._/

_, par-

c,yck_d

coneontmd expansine-

andtax reforms

Slow growth, InlMion

mm_

torrent account

defk_

sdow 9rowlh in 1000 Private response

Favorable, Favorable, high highsavi_ls inwstments andinvestmon_

Unfavor. aide, reduced savinos,

cap_ flight but

oontinued investments

si_,ned IW Oov_. pump-

pdm_e

Collapse of business confdeeon

Flenewed mnfidonoe initially, enade

behavior inlater yonm

EXTERNALFINANCE 79

FABLE3.1CONT.) Pedod

1970-1974

1975-1979

IIII

1983-t985

1966-1990

Fm_n 51vemrs' mponse

Caution In 1970to 1972,

Fawrable, highinvest, merits espe-

Caud_ andlower 9mMh

Reduced 51vmlnu_, higbx

_ b the beoinm9,

andhlOh

b'adlioMl expetso,tar

tn_6o investments

tavondae tony fn_

ram d

w_hdmwm

upbllom b II If, reduced investments 511980

sdi'li_ 1973

61atomd and i

F_eign COUMccbl banks' mponse

•Gq. _

Sof=tantiaJ Continued _b hi51 _ and 51f_of loans loansand aid,par-

Comme_ bank _ beginsto Inoreane In 1974

mbi_ons.

Impllm of I adimmant Programs

mpl_d

Imlx_t51n _ IMF stubifizalion program

Resumption dbanS and /ngent condmons

_ta_ in

penkmdy

51198e

suppmt of energyand 51fltmctum

I liberalization end Fman_ liberalization

and1990 on manW_ andrscal talgois

Rapid and mc_ive51f51w of com. me_al loans

Hi9_ _opa0eof I _ inte_ Ioo94ena 51arts is tot duetodebt shon4ena mo_od.m oommer©iel

Re_u_of pdndl_d payments of5lens51 1987,new

move

mo_ (STOO

from medium

milan) and

ten.Ioem to aho_oma loans

schem51 Januay 1990

PHILIPPINE EXTERNAL FINANCE

inflows (F), direct investment inflows (IF), use of official reserves (R), accumulation of foreign assets (net of short-term borrowing) by the banking sector (AB) and non-bank private sector (Ap), and errors and omissions (EO). The equation assumes that official short-term borrowing or asset accumulation other than official reserves are negligible. The presentation presumes that, in a typical developing country, long-term external finance represents a net change in liabilities, whereas use of reserves and private, short-term capital movements represent changes in asset positions. Signs may be positive or negative in all cases: nevertheless, the presentation suggests a pr/or/ a certain pattern. As mentioned earlier, an economic crisis in the Philippines manifests itself in the external accounts, particularly the current account balance. Adjustment to this crisis, in turn, is reflected in the movements of the righthand side variables (external adjustment) and movements in the lefthandsidevariables(internaladjustment).In Chapter 4, we evaluatethe relationship between externalshocks and externalcapitalflows,on the one hand, and savingsand investment behavior (the lefthand side),on the other. The potentialcausal relationship between capitalflowsand the savingsgap can run inboth directions. In the present chapter, we assess the behavior of external capital flows (the righthand side) and adjustments in the external sector in response to the BOP crises. We propose to accomplish this in four steps. First, we evaluate the contribution of various factors to the current account deficit based on the decomposition methodology and results of Fitzgerald and Sarmad (1990). These factors are conveniently categorized into external and domestic components. We then attempt to relate the more dominant components, especially those described as external to the capital account of the BOP. Third, we analyze how the external shocks and the accompanying capital flows combined with domestic policy to retard the development of the trade sector. Lastly, we link developments in the world economy to the availability of external finance. Decomposition

analysis

of the current

account

To determine the relative importance of external shocks and domestic responses in the current account movements, the methodology and results of Fitzgerald and Sarmad are applied. The decomposition technique employed is a direct modification of the UNCTAD methodology which, in turn, has its roots in Balassa's work: 1 1. See Fitzgerald and Sannad (1990) for a brief history of various methoda of decomposition paper.

analysis.

The preeentstian

of the methodology

is quoted dlmcfly

f_om their

EXTERNAL FINANCE

The UNCTAD methodology is based on the decomposition of the current accouut deficit (D) in any one year (t) between izDports of goods and non-factor services (M), net payments of factor services abroad (V), exports of goods and nonfactor services (E), and unrequited trAnAfers received from abroad (T): D t

M t+Vt*E

t-T t

(5)

Imports and exports are disaggregatod between price indices (Pro, Px) and volumes (J, X) at constant domestic currency prices: IVlt -

P_Jt

(6)

Px_t

(7)

Imports are linked to real domestic absorption (A)-- in other words, consumption (C) plus investment (I) m by a single coefficient (j): Jt

jtAt

(8)

A t

C t + It

(9)

Export volume (X) is linked to world trade volume (W) by an "overall export coefficient" (x) which in effect measures export penetration as the country's share of world trade: Xt

(I0)

xtWt

Finally,factorservicesabroad (V) are broken down intooverseas net interest payments (Vi), net investment income payments abroad (Vd), and net workers' remittances from abroad (R). Net interest payments abroad are defined as the product of the current dollar interest rate (r), and the debt stock (in local currency at the official exchange rate) from the previous year (FtA): Vt

Vit

Vlt

rtFt. 1

R t

(11) (12)

It should be recalled that all the coefficients (x, j, r) are in practice derived from these equations, so that the definitional identities always sum up to the observed current account deficit (D).

PHILIPPINE EXTERNAL FINANCE

Substituting (6) to (12) into (5) and dividing current prices yields the complete decomposition DtttYt

by national formula:

]_mt"jt (Ct + It)/Zt Ft-1 / Yt + (Vdt" Rt_tP=t' xt Wc_Zt" T_Yt

income at

(13)

where national income at curr_at prices (Yt) is equal to the product of national income at constant prices (Zt) and the implicit GNP deflator

(Pyt).' Yt

PytZt

(14)

Pint

Pm_

(15)

Pxt

P,/PyÂ˘

(16)

Finally, a base year or years are chosen in order to separate the partial derivatives (d) of the variables, which then define the separate effects identified in the UNCTAD study: d[DÂ˘_ d = [j," A, / Z,]dpm t - [x_" WjZ.]dpz t + [F,.I / YJdrt - x_" Px," d[W/Zd + r," d[Ft_ / Yd + d[(Vdt * S t - T_tYt] + j," p=." d[AC'Zd + [Pm," AjZjdjt " [Px," WJZ.]d_ + interaction terms

terms of trade effect interest rate shock world trade effect debt accumulation burden other external variables domestic absorption import replacement export penetration (17)

The first three terms define the exogenous "external shock;" the next two serve as "otherexternal flows" that respond to both internal and external conditions but which are taken as autonomous; and the last three describe "domestic policy response." The difference between the sum of the explicitly defined terms and the observed change in the normalized current account deficit is defined as "interaction terms." In the UNCTAD methodology, these merely took the role of a residual. The major contribution of Fitzgerald and Sarmad was to recognize that the "residual" actually covers second-ordereffects arisingfrom the product oftwo or more partialdifferentials which, inthe presenceof relatively largeshifts associated with adjustment to external shock, can be as

EXTERNAL FINANCE 83 significant as the current account itself. These interaction further defined below.

terms will be

Table 8.2 presents a quantitative decomposition of the Philippine current account balance over four periods. The same periodization in Chapter I is used. When reading the table, one should note that a negative sign reflec_ a contribution to _t redan/on. The current account deficit increased by an average of 5.4 percent of GNP from 1970-1974 to 1975-1979, and by an average of 1.4 percent in the succeeding period. In the following years, the _h_n#e in the current account deficit was negative, reflecting the stabilization period undergone by the economy. Major external factors consisting of the terms of trade shock, interest rate shock, and world trade retardation dominated the behavior of the current account. An exceptima took place in the 1983-85 interval during which the crisis was internal in origin. In this period, the external components _lrnoet neutralized one another (the net effect was -2.48 plus 1.63 or -.85). Decline in investment, reduction in imports, and in,eased export penetration, particularly investment decline, contributed heavily to an improved current account. It would be instructive to determine up to what extent in,vases in capital inflows, especially foreign loans, responded to the exogenous shocks. As would be expected, the effect of accumulated debt was most severe toward the latter part of the period covered by the study. Domestic spending components of the current account deficit neutralized one another during the intervals 1975-1979 and 1986-1988. In the other two intervals, trade ratios, referring to import _djustment and export penetration, stood as the dominant components of domestic response. Of significance are movements in consumption and investment which are in opposite directions and are nearly of equal numerical value. This suggests that certain sectors er institutions adjusted their savings behavior, voluntarily or involuntarily, to accommodate the investment expenditures of othea_. Interaction effects are categorized into import shock, export shock, and debt shock; they consist m_inly of cross effects of price and volume. These figured promlnently in tWOintervals1980-1982-when werld interest rates soared and 1986-1988 by which time the Philippines accumulated a" substantial debt overhang; in both cases, the debt steck-interest shock component stood out. External

Debt

in the Philippines

One of the most debilitating problems the Aquino administration inherited from the.previous regime was the massive external debt the

PHILIPPINEEXTERNALFINANCE

TABLE3.2

Philippines:Decomposltlon ofCurrentAocouMDef'k_ PeriodAverage=: (1970-74 to 1975-79,1975-79 to 1980-82, 1980-82to 1983-85, and1983-85 to 1986-,88, aspercentage ofGNP) 1970-74 1975-79 1980-82 1983-85 to1975-79 to 198082 to 1983-85 to 1986-88 Observed defidtincrease

5.442

1,445

-1,945

-4.510

External shocks TOTAL Termsoftradeshock Interest rateshock Worldtraderetarda_on

5.416 4.059 0,111 1.245

3.715 1,191 1,089 1.435

.2.477 -1,588 0.177 -1.056

-5.937 -1.234 -1.874 -2.829

Otherexternal variables TOTAL Debtaccumulation burden Change directinvincome Change remittances Change unrequited transfer

0.316 0.359 .0,300 .0,435 0.693

.0,977 0.777 .1.776 .0.183 0.205

1,632 0,992 0.517 0.194 .0.071

2.746 2.172 0.801 .0,316 0.088

Domestic adjustment TOTAL Do,lestic spending Change inconsumption Investment adjustment Traderatio Import adjustment Export penetration

.0.457 0.022 -1,401 1.423 .0.479 0,576 -1.055

.2.387 0.022 .0.024 0.045 -2.409 1.012 -3.421

.1,150 .0.134 11303 -1.437 -1.016 .0.399 .0.617

.0.103 -1.046 0.679 -1.925 0,943 3.306 -2,363

Interaction Effects TOTAL Import shock Demand/unit impod Import vol.adj./price

0.167 0.056 0.003 0,063

1,095 .0.013 0.031 .0.014

0,051 0.037 0.011 0.026

.1,216 -0,373 .0.029 .0.345

Export shock Demand/unit imports Penetrstion/price Debtshock Stock/interest

0,042 .0,050 0,092 0,059 0,059

0.406 0.126 0.280 0,701 .0,701

.0.032 .0.033 0.031 0.047 0,047

.0.027 .0.157 0.130 .0,816 -0,816

Source: Reprinted fromE.V.K.FitzGerald andK.Sarmad, "Exlemal Shock andDomestic Response inI.DCÂ˘ACrces,CoonW Decomposi_on Analysis 1970.88: Further Results," Unpublished, theHague: Irmtitue ofSocial Studies.

EXTERNAL FINANCE

latter accumulated. Excessive reliance on foreign loans to cover current account deficits actually began during the first term of FerdinAnd Marcos as president-elect. External debt rose sharply from US$624 million in 1966 to US$1029 million in 1967. In 1970, the first year of Marcos' second term, the figure stood at US$2297 million. As a percentage ofGNP, external debtaveraged13percent duringtheperiod 1965-1968, thenjumpedto22percentin1969,and33.9percentin1970. Exceptfora respite in1973-1974, external debtinabsolute termsand as a percentage of GNP rose steadily during the next twenty years. The 1990 figures are US$28,549 million or 61 percent of GNP (see Table 3.3). The current account imbalances during this period can be traced to the expansionary programs of the Marees administration. Public expenditures increased rapidly culminet_lg in the most expensive election campaign in 1969. The short-term nature of most of the foreign loans only served to increase the pressure on the current account. Faced with an untenable external situation in 1970, the Philippine government agreed to an IMF stabilization program in return for a restructuring of its _al debt. Within a year, the peso was devalued from 3.9 to 6.4. The events from 1965 to 1970 became a microcosm of the economic policies to be followed during the martial law regime. In 1972, shortly after the economy recovered from the effects of the stabilization program, martial law was declared. A year later, a boom in commodity export prices resulted in a 9.3 percent increase in GNP and a decline in the external debt to GNP ratio. The euphoria was cut short by the first oil shock in 1974, a drastic drop in the terms of trade beginning in 1975, and a recession in 1974 that affected the industrializod countries. This led to a slowdown in exports (a 15.8 percent decline in 1975, Table 3.15) and a sharp rise in the value of imports (96.9 percent in 1974, Table 3.16). To cope with these external shocks, the government opted for financing rather than adjustment. This course of action was facilitated by therelatively easyaccessdeveloping countries had toforeign loan_ atthattime.The readilyavailable supplyofexternalfinancing was primarilya productofthe recycling of surplusesof oilexporting countries. From 1975to1979,external borrowingaccelerated withtotal outstanding debtaveragingclosetoa 30 percentannualgrowthrate, leading towhatcanbecharacterized asdebt-driven growth.GNP during thisperiodaverageda growthrateof6.5percentwhich,however,was mediocrecomparedtootherSoutheastandEastAsiancountries. Critics (e.g., Dohner and Intal1989)blame the ambitiousand aggressive expenditure programofthegovernmentduringthisperiod

PHILIPPINEEXTERNALFINANCE

TABLE_L$

PhiUm.e e.mmiDebt (1970.mo) ?

YEAR

LEVEL

FIATIOTO

I_T'

RATIOTO

NOM,_.

EXam OF

(_)

_qWES (_)

33.90 31.02 32.80 27.01 25.52 31.28 37.52 38.98 44.50 46.18 46.98 54.38 52.83 72.81 80.4g 81.70 93.71 83.78 71.S8 82.40 81.29

174.02 170.81 188.02 114.30 105.61 154.30 196.46 190.49 217.84 213.43 215.38 242.43 308.31 305.18 317.05 331._ 327.30 310.83 281.38 222.38 219.14

eOOl_ AND

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 i988 1989 1990 Sourceotbasicda_ Ce/d Bank.

2297 2393 2732 2886 3768 4939 6768 8059 10694 13352 172,52 20893 24677 24816 25418 28252 28256 26849 27916 27618 28549

EXTERNALFINANCE

as one of the primary reasons for the rapid rise in external debt. By pursuing a countercyclical policy to maintain the momentum of martial law, the gove_ent ran up deficits which were covered by exter-M borrowing. Table 3.4 shows that government expenditures registered the highest growth rates in 1974-1976; as a percentage of GNP, the government component was highest during the period 1975-1983. As a percentage of nonmonetary debt, 2 public sector obligations rose from 46.5 percent in 1975 to 66.2 percent in 197.9 (see Table 3.5). This assessment on external borrowing policy is consistent with the monetary approach to the BOP and the IMF view on adjustment in developing countries which emphasize internal causes to the debt problem (e.g., imprudent fiscal policy). Opposingthis orthodox view are those who emphasize external shocks. Thisgroupcanbebroadlydivided intotwoapproaches. The first approachseesthevolatile external environment ofdevelopln_ countries as "random" externalshocksin commodity and capitalmarkets. Increaseddemand foradjustmentfinanceand expansionaryfiscal policies to avoidrecessionary consequences ofunfavorable shocksin worldmarketsgave riseto theview thatfiscal adjustmentfollows disturbances in the externalbalance.Anotherapproachplacesless emphasison unexpectedshocksinworldmarkets,butmore on certain institutional changesinworldfinancial marketswhichprovidednew incentives and reducedrisksfortheinternational bankingsystemto channelglobalsavingssurpluses thatemergedafterthefirst oilpries shock to sovereign borrowers in the developing countries. Vigorous oligopolistic competition among large banks, conglomerated in loan syndicates, resulted in many cases of "loan pushing," i.e., active selling of loans to Third World clients. With little experience in managing commercial bank loans, chronic foreign exchange constrAint_s, and seemingly attractive loan conditions, countries that obtained access to the market engaged in heavy borrowing well over required adjustment finance needs. 8 Based on the above discussion, it is evident that the orthodox view contrasts sharply with the second approach of the "external" perspective, which is consistent with the structuralist view, following FitzGerald and Vce (1989). The latter contends that fiscal expansion in countries with a large share of commercial debt is seen to have resulted 2. Table 8.5 gives the share of the public sector in n_ debt (i.e., debt ine_ by agents outside ccmme_ial banks and the Central Bank) foethe yearn 1970-87 while Table 3.6 presents the sham of the public sector to total debt for the period 198389. The Central Bank could not provide data as in Table 3.6 fee the combined periods 3. This description of the "external" school is quoted _ Vos (1990e_

PHILIPPINEEXTERNAL FINANCE

TAiiLE3.4

Government Exlx,ndituru Teal e_L

Tml

consul,

eel

tlon/Ourabb Consump TeaIGovt. (govt) (1)

1970 1971 1972 1973 1974 1975 1976 1977 1976 1979 1980 1981 1982 1983 1964 1955 1986 1987 1988 1989

6O5 749 1191 1333 1858 2633 4310 4836 5441 5614 5634 6764 6090 5443 3312 2653 2522 2901 2861 3221

(2)

4250 4653 5260 5879 6744 7263 7416 7485 7710 7995 8294 8596 6145 8788 8255 8221 8167 8774 9409 10358

--,

Source: National Stat'_tdcs Coordination Boald.

Expmd_,

(1)_2)

4855 5402 6451 7212 8602 9896 11726 12321 13151 13609 13926 15362 14235 14231 11587 10874 10700 11675 12270 13579

(%)

F.mmd,

NalloMi

a=pet-

(Potion) ONP(%)

49856 53091 55930 61119 84539 68284 73338 77984 82478 88158 92532 95722 97530 98620 91644 87867 89504 94705 101003 106830

11.27 19.42 11.80 19.27 15.04 18.49 5.07 6.74 3.48 2.34 10.30 -7.34 .0.0g -18,72 -5.99 -1.52 9.02 5.10 I0,67 ..

9.74 10.17 11.53 11.80 13.33 14.49 15.99 15.80 15.94 15,44 15.05 16.05 14,59 14.43 12.62 12.38 11.96 12.33 12.14 12.71

TABLEU

Phliipldne External Debt

(aoT ls77)

(In ndllion US d_am

un_

olllendN

Indicated)

1970

1971

1972

1973

1974

1975

1976

1677

1978

2138

2Z21

2306

2720

3423

5120

6812

8189

1779

1748

1901

2025

2395

29_

4405

5003

OEQ2

108

128

14,5

159

131

238

460

666

Ira6

16"/I

le20

16M

2264

2747

3066

5047

359

340

320

281

331

438

715

1009

125"7

159

308

511

580

102g

1517

1648

1460

2506

To_ extemaJ de_

2297

2393

2732

2086

3755

4030

67W

8(M9

10004

Public debtas% of eon-moooWrydebt

48.6

36.2

49_1

43.5

43.7

46.5

53.3

,r6.g

Shoql-tenn d_ as%of toCeldel_

22.6

27.0

30.4

29.8

36.2

3g.6

34.g

30.6

35.2

GHPUM

5914

7714

8381

10685

14711

15"/80

16067

20702

240_8

H_de_ Medium andlongterm (]MFohio--) (O(INaM Sho_etrn MonetaJy sec_rdebt

1"_

m _0 z z fill

('r,a_._E 3.sco_'r.)

19/9

1980

1981

19e2

1983

1984

1985

r-"V "U

I_xn_ary

de_

9890

12318

14_

17801

19488

20211

21270

MedbmandlongImm

8086

(IMFol)tiO_)

9770

11326

13141

15412

1.5_

17671)

22808

718

936

I0_0

908

1013

844

111,5

1286

7368

8834

10296

122_

14399

15N2

16f_4

21542

13352

17252

20893

24[_/7

24016

25416

28252

28'180

39.4

43.4

45.8

403

37.G

37.3

32.7

l& 1

29553

35218

38435

39278

34136

31517

31064

m x _0

-,I ((_

Totlle_temel deM Publicde_tas%o( ;

Shod-term _ M % of llml_ GNPUS8

S_r_Ce_k P_opqmmd ,m DcÂ˘,__

m,tmJ (IOeg).

EXTERNALFINANCE 91

TABLEU Phllll_lne Exlem_ Debt

(im.1,,m ,,, TOlIIde_ Clamnmlblllmkl FoMgnbasic mndm 9or_ CCmd_ Bank _bPhap#m

191_

1984

1M5

_1818

25418

4_4 967 _67 1479

4117 1004 3023 1296

2M3 841 2112 1205

181,1

1728

8O7

4113

1M6

1037

1Me

1988

28_19

27915

27616

2744 879 1871 1t44

2_g ,m 1906 1146

2250 _ 1857 1166

2434 402 1942 1154

727

760

691

788

7161

6504

6164

15784

16111

16301

3'140

3013

_23

11(160

12151

123&1t

1_1_3

4677

4803

4778

4172

184 142 42

_7 190 47

242 O 242

546 1(12 _4

161 0 181

2S0 0 250

439 0 438

G_mmeM / _ d_Im%d

67,42

69.04

_..34

77.25

?_.41

81.20

_),47

$1mt-Om_ _

9404

94_

5,178

3792

3761

395O

d_ lib% dWtdckJt

3"/.88

37.34

_17-_

18.03

13.24

13.47

14,30

told Uqr4umC_U

lS4t2

lm-rm

_2678

24&57

24154

23666

RedCkum

Sm_ Cam_ Bank.

PHILIPPINE EXTERNAL FINANCE

from conditions at which exte____l finance became available in the 1970s. The argument over whether fiscal expansion is exogenous or endogenous is resolved elsewhere in this study (see Chapter 4, Public Investments and Chapter 5, Private Sector and _ Adjustment). Nevertheless, the simultaneous expansion of foreign debt in many countries is evidence supporting the _external" view. Data presented in Table 3.2 also support the _al school in the case of the Philippines. The observed deficit increase from 1970-1974 to 1975-79, amounting to 5.42 percent of GNP, was triggered mostly by external factors. In contrast, domestic adjustment components (including the interaction effects) even exerted contractionary pressure on the current account balance equivalent to 0.35 percent of GNP. The contribution of investment adjustment (which incorporates government capital outlays) to the increase in the current account deficit is equal to only one-fourth of the share of external factors. It is then evident that the investment component expanded during the period of easy finance (1975-1982) and subsequently contracted when international commercial banks cut back their lending (1983-present). The increase in net foreign borrowing during the same period was equivalent to 5.53 percent of GNP indicating marginal overborrowing on the part of the government. The increasing share of the public sector was driven by two factors. First, government spending expanded, as mentioned earlier. The second and more important factor was the government guarantee given to most of the private sector debt. The heavy foreign borrowing was disrupted by a second oil sho_k in 1979, the subsequent recession in the industrialized countries, and the sharp rise in world interest rates brought about by the cont_actionary monetary policies adopted by the United States. Data in Table 3.2 attest to this trend. The interest rate shock in(_eased from 0.11 percent of GNI ) in 1975-79 to 1.1 percent in 1980_2. World trade retardation also increased from 1.24 to 1.44. Interaction effects became dominant with the debt stock-interest rate fatter accounting for 64 percent, Against this backdrop, the Philippine economy deteriorated rapidly with real growth rates declining each year from 1979 until 1986 (see Table 3.17.) Instead of adopting policies to make the economy more resilient to external shocks, the government chose to implement countercyclical measures anew. The positive investment adjustment factor (equal to 0.04 percent of GNP) verifies this choice of strategy. As a result, the current account deficit, which was already advorsely affected by high interest payments on external obligations, widened further. As a percentage of GNP, the current account deficit recorded a historical high of 8 percent in 1982 and 1983 (Table 3.7). As in the late 1960s, the

EXTERNALFINANCE

TABLE3.1'

Current AccoU. and (ispe, i"

Year

Mw&mdm

F-xlxl 1970 1971 1972 1973 1974 1975 1978 1977 1978 1979 1980 1981 1982 1983 1984 1985 1988 1987 1988 1968

15.02 14.73 13.19 17.79 18.51 14.55 14.43 15.12 14.17 15.38 16.40 14.80 12.78 14.80 17.07 14.41 15.93 16.74 18.13 17.79

MeW

Trade

GNP) Invizlblm

;

Net

Cummt

Impels Bal_oe

B4duee Tmukn k:menl

15.41 15.38 14.67 15.06 21.35 21.94 20.37 18.79 19.57 20.51 21.90 20.67 19.52 21.97 19.22 15.91 16.80 19.72 20.92 28.70

-2.01 -1.13 -0.65 0.00 .0.23 -0.29 -1.45 -1,19 .0.44 -1.04 -1.13 -0.80 .2.68 -2.17 -2.61 0.00 2.40 0.00 -0.21 0.68

.0.40 -0.65 -1.48 2.74 -2.84 -7.35 -5.94 -3.67 -5.41 -5.15 -6.40 -5.79 -5.74 -7.29 -2.15 -1._ -0.68 -2.97 -2.78 -5.91

1.68 1.74 2.24 2.32 1.87 2.02 1.51 1.28 1.29 1.19 1.23 1,23 1.24 1.38 1.22 1.18 1.45 1.68 1.99 1.89

-0.72 -0.04 0.11 5.06 -I .20 -,5,68 -5.89 -3.61 -4.56 -5.00 -5.40 -5.36 -8.15 -5.07 -3.53 -0.32 3.28 -I .30 -1.00 -3.33

Sour_ CemdBim.

government resorted to sho_-torm borrowi_ to stem the c___!_.Th_ only added pressure to the alre_y swoll_ current accounts. In 1980.1982, external debt grew at a slower pace, avor_ 9.8 percent. However, the -h-_e of short-form debt, which carried ]_sh interest rates, increased from an average of 86 percent in 1975-1979 to 45 percent in 1980-1982 (see Tables 8.5 and 8.6.)_ The l_ewins economic turmoil finally erupted in 1983. Faced with a political crisis, mounting external debt obligations, and massive capital flight, the Philippine government declared a moratorium on its debt payments formally signalli_ anothor foreign exchange crisis. As in.1970, the moratorium was followed by a draconian stabilization program. The currency was devalued three times in sucoes_on.In June 1983,prior to the onsetof tie crisis, the ex,,h,m:,e rate was I>11to a dollar; at the end of 1984, the figure was close to 1>20.

PHILIPPINE EXTERNAL FINANCE

In an attempt to arrest capital flows, interest rates were increased drastically. A more detailed account of the government response to the BOP crisis isgivenin T_mberte et al.(1985). As a result of the stabilization program that responded to the crisis, GINP declined for two successive years, 7 percent in 1984 and 4 percent in 1985. During this time, the propo_ion of public sector obligations to totaldebt was recordedat 67.4 percent in 1985, and reached 80.5 percentin 1989 (Table3.6). This processofsocializing theexternaldebt overhang impaired the ability ofthe government to controlthe deficit and ledto a transferproblem which willbe explainedin Chapter 4. After the second oil shock, a significant change occurred in the structure of net capital flows into the Philippines. Table 3.8 shows total net financial flows into the Philippines classified according to origin and according to whether the creditor is official or private. From 1975 to 1979, net private flows registered an average of 49 percent of total net receipts, nearly equalling the amount of official flows. Since then, private flows ebbed, even turning negative (representing a net outflow) during the period 1985-1988. Figure I provides a graphic illustration of this trend. Official flows more than compensated for this contraction in private flows as total receipts averaged US$1,052 million during the period 1980-88, higher than the US$883 million during 1975-1979. The picture changes drastically, however, if interest payments are incorporated. After adjusting the figures in Table 3.8 for interest payments, net Financial flows turned negative from 1980 onwards. 4 The behavior of net private inflows into the Philippines during the period after the second oil shock simply echoed the global tenor at that time. The adverse effects of the oil price shock in 1979-1980 and the subsequent recession and interest rate hike proved to be too severe a burden for the economies of many developing countries. There was widespread default on debt service payments putting the financial position of international commercial banks at grave risk. As a result, massive restructuring of the external debt and stabilization policies were implemented in the affected countries. The debt crisis exposed the inability of debtor countries to repay their outstanding obligations prompting creditor banks to reduce and, in some instances, discontinue their lending to developingcountries.Given the declinein private lending,official "creditors had to pick up the slack;otherwise the repercussionswould have been disastrousfor the globaleconomy. Massive defaultstriggeredby the bankruptcy of Third World debtors would have ledto the collapseofthe international fmaneialsystem. 4. Netinflows donotinclude shoebterm flows but, evenIfwe addthis item, thegeneral picture doesnotchange.

3_)NVNIJ "I_N_I:IIX3

•

,.:i:+,,

ill

:il

f""ill .

._-

(TABLE U CONT.) 1982

1983

1984

1985

1986

1987

1988

,-r F__ "O

-1045

-442

-1311

-1636

-954

-1378

-901

zrtl

IIAC_ Japan

612 337 121

"/85 341 232

576 201 266

385 114 37

934 462 _

670 409 170

1152 494 603

Europe O_m Mul_le_ N_ IBRD IDA Oetem OPECÂ˘mm'albe Talalolndalnet ODAgmnllz ODAloans OlhwdrlOkll floR. NetFdvate IIom Dimct_ P_foio _ b F-xl_(ndib

125 29 343 106 103 8 41 -11 821 103 170 203 323 126 132 65

191 21 758 186 528 13 51 -I 1283 258 170 854 260 -103 334 95

93 16 370 147 186 10 27 0 784 256 141 388 162 187 -142 137

218 17 250 82 123 13 31 --20 882 245 242 378 -248 -250 154 -132

140 13 158 t03 23 8 28 0 1132 516 440 178 .40 03 103 -26e

53 38 178 88 43 7 39 0 1074 461 303 304 -226 78 -103 -134

7 62 106 106 -25 2 -23 0 1255 403 452 431 4 194 17 -203

Ne(w_ ilmrest

"-I

c, d.

aTolslreodpls leedivkled kltoDACblalend1lows, muUmmlflowsandI1ows fernO_'EC _ Thendom,_ bTotalreodp_eure tiedclassified keootkkdandi_ellow. _, lhesumilem dLxl e isequalteIolalmOeil_ Indudubanklending andbondlending andexdudueq)artcredit.

sounzOECO. _O._Ubnoq_ekava

to_._p_C_dr_

Various luueLRepeVe_d from LwW Oead (103e_

z z > z nm

FIGURE1

RnancialFlowsto thePhilippines 1.3 1.2 1.1 1,0 0.9 0.8 0,7 0,6 0.5 0,4 0.3 02 0.1 -4

-0.1

.o.2

..n

-0.3 1970

1975

• Totalofflci_net

1976 lgT/'

1978

1979

'f980

1981 1982

1983

1984

• Netpnvate flows

1985

1986

1987 1988

z Z m_ "4

PHILIPPINE EXTERNAL FINANCE

In the Philippine case, the pattern followed by total financial flows inclusive of interest payments mimics the trend in GNP growth rate for the period 1980-1985 (Figure 2). This supports the argument that the political crisis in 1983 only exacerbated the already debilitated state of the economy. Another important implication of this correlation is that the growth experienced in the 1970s was not sustainable in the wake of a decline in capital inflows. The reasons behind this will be discussed in a subsequent section. The economy recovered gradually with GNP increasing by 5.6 percent in 1987, 6.7 percent in 1988, and 5.7 percent in 1989 in spite of the continued net resource outflows (Table 3.8). This recovery was proven to be shortlived as the economy reverted to the downward portion of the growth path pictured in Figure 2. Other

Financial

Flows

This section presents the behavior of other indicators of the basic macroeconomic identity to determine their role in the country's economic performance in the 1970s and the 1980s, and to find out the relationship among the different foreign exchange flows. Table 3.9 shows net direct foreign investment during the period 1970-1989. As indicated by the figures, direct investment was an inconsistent source of foreign exchange inflows. This reflects the ambivalent position of government economic policy-makers toward foreign investment. As a percentage of total net inflows, foreign direct investment displayed a similar erratic pattern. The volatility of direct foreign investment proved adverse to the Philippine economy. The large capital withdrawals from 1979-1984 contributed to the economic downturn during this period. In turn, these outflows resulted from the economic deceleration of the country and retrenchment by multinationals as a result of the global recession in the middle of that period. It was only during the period 1987-1989 that a marked increase in this type of inflow occurred. This rise can be traced to three factors: First, Talwan liberalized its regulations on investment abroad during these years. As a result, the Taiwanese became responsible for the majority of foreign investment in the Philippines at that time. Japan's worldwide overseas direct investment also increased by 83 percent in 1986 and 50 percent in 1987. This was due to the increase in Japan's financial resources which was caused by the huge current account surplus in recent years, and by changes in comparative advantage caused by the appreciation of the yen.5 Thus, Japanese investment inflows also poured 5.

Lee and David (1989), p.22.

FIGURE2

GNPandNetReceipts withInterest Payments 10 8 6 4 2 0

-2

Q-

-6 .8 -10 -12

-14

-16

Z > Z

,18 1975

1976

1977

• GNPreelgrowth(%)

1978

1979

1980

1981

1982

1983

1984

1985

• Ns4withinterest(_0000m)

1988

1987

1888

FIGURE3

ForeignInvestments, t970-1989 "0

"I1.2 1.1

Z m

1,0

-_ Z

0.9 0,8 '_

Z > Z

0.7

o_ 0.6 ..Q ¢::

0.5 0.4 0.3 0.2 0,1 0 -0.1 -0,2 1970

1972

• Netdirectinves_nent

1974

1976

1978 • Inflows

1980

1982

1984

• Outflows

1986

_988

L01.

_3NVNI-I

3VN'_]IX]

il, ii

i_iil II il :

liil

3_)NVNI.:I 1VN_I:I.LX] ::lNIddlllFId

i[OL

EXTERNAL FINANCE

103

into the country. Second, the "revolution" in 1986 aroused the admiration for Filipinos among foreigners, and the expectations of economic recovery increased the attractiveness of Philippine investment projects. Finally, debt conversion schemes began to operate during this time; this may have induced the inflow of foreign investments that might not have otherwise come in. While the issue of _additionality" has not been resolved, data for debt conversions show that Filipinos accounted for 47.2 percent of the transactions. In this regard, debt conversion schemes were aimply a more profitable mechanism to revert capital flight back into the country which, given the conditions at that time (high real interest rates, low expe_ devaluation, prospects for economic recovery), would have occurred anyway. An incTeasingly important source of foreign exchange was workers' remittances. Table 3.10 shows total workers' remittances broken down into that which is reported in the BOP statistics, and that which goes through informal channels. The latter, estimated by Vce (1990b), is higher than formal remittances by a factor of about 1.3. Figures indicate â&#x20AC;˘that there was a sharp increase in remittances from 1982. The timing roughly coincides with the second oil price shock which brought about an increase in labor demand in the Middle â&#x20AC;˘East and the beg_rtnln_ of the economic slide of the Philippines which motivated people to seek better working conditions abroad. As a percentage of merchandise exports, total workers' remittances averaged 26.9 percent during the period 1982-1988 as against 15 percent during the years 1978-1981. Finally, another important consideration is capital flight. The ability of the private sector to convert its wealth into foreign denominated assets beyond the control of the government makes for the "openness" of the economy despite the presence of capital controls. In Chapter 5, we present estimates of capital flight calculated by Vos (1990b) which revolve around those done by Boyce and Zaraky (1988). For purposes of this study, the concept of capital flight was expanded to cover total private capital outflows. The accumulated amount of capital flight for the period 1971_8 reached US$12.9 billion, nearly half of outstanding external debt. This figure prompted Boyce (1989) to describe the relationship between capital flight and external inflows as a revolving door wherein external debt is mainly used to finance private accumulation of foreign assets. Referring again to Table 3.2, the negative adjustment of consumption, which is equivalent to an increase in savings, during the period of easy finance and the inverse behavior in the more recent times could support Boyce's contention.

TABLE3.10

Wod(ers' Remittances: 1978-1988 (inmillionUSdollars) 1976

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

Workers' toteJ

_ g

z 526

663

759

979

1525

1689

1191

1359

1330

1553

1636

_ Z >.

298

265

300

384

642

660

473

589

572

671

683

Unreported 317

398

459

595

883

1029

718

761

758

882

953

14.41

13.11

17.11

30.37

33.75

22.09

29.36

27.47

21.95

23.13

Reputed

As%ofexpos

15.35

EXTERNALFINANCE

Structure

of External

10$

Sector

The recurrence of the foreign exchange crisis is clearly symptomatic of a deep malaise plaguing the Philippine economy. Analyses of the roots of this problem are numerous and well documented (e.g., De Dios 1984). In a recent and comprehensive study of the debt crisis, Dohner and Intal (1989) explain why the Philippines was unable to recover from the external shocks in the early 1980s. The authors cite two fundamental economic difficulties. First, the Philippines failed to develop a selfsustaining growth that would have eased the burden of servicing its external debt. Second, the country failed to shift resources toward the traded goods sector, as was required both by its increasing debt burden and by its declining terms of trade. In concrete terms, the problems were poor returns from investments, difficulties in mobilizing domestic resources to fund investment, and maintaining a trade regime that did not sufficiently encourage exports. 6 Self-sustaining growth, in this sense, refers to the ability of the economy to hurdle foreign exchange constraints in the event of a decline in external financing; the source of foreign exchange replenishment is envisioned to be the export sector. The first difficulty is substantiated by presenting incremental capital-output ratios of the Philippines during the relevant period and comparing the figures with other Asian countries. In investment efficiency, the Philippines clearly lagged behind its neighbors. The second difficulty is described in Table 3.11 which shows that foreign loans fiowing to the economic sectors category favored the non-traded goods sector. Those which benefited greatly were the financial institutions, the energy sector, and the transport and communications sector.

Related to this analysis are two important elements of trade and industrial policy: the structure of trade protection and incentives which encouraged indiscriminate and inefficient import substitution, and the country's exchange rate policy which has been characterized by delayed responses to BOP disequilibria thereby hurting export industries, dampening export diversification, and discouraging backward linkages .7 The protection system in the Philippines is complicated: it consists of 1) tariff and indirect taxes, 2) fiscal incentives, and 8) non-tariit barriers, s Tariffs and non-tariff barriers have been the main 6. Dohner and Intal (1989), p. 396. 7. Dohner and Intal (1989), p. 437. 8. The exchange rate could also function as an instnmlent of protection although, to be effective as #uch_the _urrency must be unde_alued at_at least not overvalued. Fabella (1990) argues forusing exchan_ rate as a protection measure in lleu of tariff andnon-tar_ barriers.

TABLE3.11

Philippine External DebtOutstanding, byBorrowing Economic Sector (Inmilfion USdollars andpercentage shares)

_= _. z rn

1970

1975

1977

1G_0

1981

1982

1983

1984

1985

1986

1987

1988

_dct_re 3.7 Mbing 0.0 Manufacturing 11.8 Construetioa 0.0 13eeldaly, gasends_mrn 9.5

4.8 0.5 17.8 O.O 6.0

5.9 0.7 10.4 0.0 30.8

2.9 0.3 6.6 0.0 28.4

3.1 1.1 5.9 0,0 27.1

2.9 0.9 4.9 O.O 24.8

2.7 0.9 5.5 0.0 23.7

3.2 0.0 6.4 0.0 24.0

3.6 0.8 5.1 0.0 21.7

3.2 0.6 4.6 0.0 16.0

3.2 0.5 4.5 6.0 14.2

3.5 0.4 3.8 0.0 12.3

Tnmp(xlend 12.3 ooownunk:_on Waterand sanl_wservioes3.0 TradeandotherNrvioes 1.7 PuNcadminisntion, 1.9 dldlnse FNnci_in4_ 0.0 Otheresdors,notspecified18.1

13.7

13.0

19.7

17.7

18.4

15.6

14.5

13.1

9.4

8.7

7.9

1.3 0.0 7.7

1.1 0.6 6.2

1.3 0.5 7.2

2.0 0.6 7.9

2.2 0.7 6.4

2.0 0.8 8.1

2.8 0.8 7.0

2.6 0.8 6.8

2.1 0.7 ,5.5

2.0 0.7 5.0

2.0 0.7 4.7

15.3 6.3

12.0 3.1

16.6 2.9

17.2 4.3

23.5 4.4

20.3 9.4

19.0 9.5

15.8 9.3

7.6 7.8

7.3 8.7

4.4 10.3

Total,eoooornicsectom 62.6 -Traded 9oodssectors 15.5 -Noo-t_ goods 47.0 sectocs

76.4 23.1 53.3

85.6 17.1 68.5

86.6 0.9 75.6

98.9 10.1 76.8

89.2 6.8 80.4

90.8 10.0 80.6

88.0 10.6 77.4

80.6 10.5 70.1

57.5 6.4 49.1

54.9 6.2 48.7

50.5 7.7 42.8

pfodu_Jo.

._ z -'n

> z

(TALE &11CO_..)

1970.

1975

1977

1000

1001

1982

1003

1004

O_haaUoc_Uons -Foodaid -aud_ SUPlX_ -Salallmd psy_m

37.4 0.0 0.3 5.0

23.6 5.3 0*0 13.2

14.4 2.5 0.0 10.7

13.4 1.0 0*0 8.1

13.1 02 0.0 8.8

t0.8 0.6 0.0 7.3

0.4 0,5 O.O 0.6

12.0 1.4 0.0 5.8

32.1

5.1

1.3

4.3

3.5

3.0

2.3

100.0

-DeMreolrgaldzaUo_ ToIM (InmlBon U8dolb_ IoU domeddeM _ Ilt0n USdolank

100.0 100.0

1N5

1988

t9_/

1_8

16.4 1.1 0.0 ,5.5

42.5 0.6 0*0 4.9

45.1 0.3 O.O 4.5

40.5 0.3 0.0 3.9

4.7

12.8

36.9

40.3

45.3

100.0

100.0 224_

624

1448

2992

6656

7637

8925

10604

11350

13825

19264

1613

3052

5"/06

9M6

11360

12007

t4_00

14840

17_1

22844

20_0

z > r-

z > z

1011

PHILIPPINE EXTERNAL FINANCE

instruments of protection policy; the indirect sales tax and the exchange rate were used for revenue objectives. Despite several attempts to remove the biases created by the past protection structure, trade and industrial policies remain to be basically inward-looking. In 1973, a new and simpler tariff cede was implemented with six tariff rates ranging from 10 percent to 100 percent; import duties on 796 items were raised, 451 were reduced, and 392 categories left unchanged (Bautista and Power 1979). The new code was basically a carry-over of the code in the 1960s. The 1980s saw a renewed effort in reforming trade policy as part of a broader structural adjustment policy. This became the cornerstone of the first World Bank structural adjustment loan (SAL I). Trade reform consisted of the Tariff Reform Program begun in 1981, and was to be complemented by the lifting of quantitative restrictions on imports. Abolition of all export taxes except on logs and the reform of the indirect tax system also formed part of this program. Apart from a gradual reduction of tariff rates, other aspects of the trade reform package did not really materialize because of the advent of the 1983 BOP crisis. When a new administration took over in 1986, the lifting of nontariff barriers, especially on raw materials and non-finished goods, was pursued by the new government to hasten recovery. The import liberalization program was implemented quite haphazardly; hence, it received a lot of political flak. This culminated in the dispute surrounding Executive Order 413. The EO is a trade reform package which simplifies the tariff system and extends the liberalization program. After approving this executive order, the administration had to shelve it indefinitely following vehement protests from certain segments of the industry sector. The combined protection from tariff and indirect taxes on a good or on an industry may be gleaned from its effective protection rate (EPR). Tables 3.12 and 3.13 show the EPR structures for 1979, 1988, and 1988. The basic conclusion is that although the levels of protection decreased as tariff rates were reduced and as trade policy became more transparent, the structure of protection did not change: the primary and agricultural sectors and/or exportable sectors were penalized relative to manufacturing and importable sectors, respectively; the penalty on a mixed sector, e.g., an exportable agricultural sector, was even more pronounced. The same two tables may be used to make some inferences regarding the product mix of the economy. The commercial profitability of a certain industry or sector is positively correlated with its EPR. This implies that resources would flow to areas of greater profit and production and those

EXTERNALFINANCE

109

TABLE3.12

AverageEffc_ve Protection Rates

0n A

1979

1985

1979

1985

1979

1985

AI sectors 19 Expom_es -3 Importables 37 Primary & 0 agriculture Manufacturing35 Exportables I Imporlables 51

9 -3 20 -2

26 -4 46 2

14 -4 27 .I

24 -3 44 I

12 -3 25 -I

20 i 39

43 I 60

25 I 15

40 I 50

23 I 33

Weights used: A.FTVA(Q/1+ 1"])where B. C.

1.Mixed sector 2. _ 3.Importables 1.Mixedsector 2.Expodables 3.Impodables

FTVA = Q T = = = = -

freet'adevalue-added, valueof production, implicit tariff. F'rVA((O/1+ Tj)+ M.X), FTVA((Q/1+j).X). FTVA((Q/1+ Tj)+M). FTVA((1.5Q/1+ Tj)+M-X). FTVA((1.50/1,j)-X). FTVA((1,5Q/I +TI) +M).

_141,0e: Me(lib, ErrldL",_m_e.t oflhe"rllg R'elo.nPlopm _ T_ Lil_lizSi_." TC-PIDS Pip_-Selbs,No._ (M_mManila: PhippineInMI_ forDevelopment Sludiee, 1986)p.$.

particular sectors would expand. The economy would tend to produce more importables rather than exportables or more manufactured goods rather than agricultural goods; in'particular, it would concentrate on importable manufacturing goods as shown by their consistently highest EPR in all the years. It is not surprising then that the import structure that emerged from this system of protection had a high proportion of capital goods and intermediate raw materials. This makes the economy dependent on, one, foreign raw materials whose share of total imports has grown over the years; and, second, foreign capital goods whose importation has been unconsciously or unwittingly fostered by distorted relative factor prices brought about by fiscal incentives and the overvalued currency.

110

PHILIPPINEEXTERNALFINANCE

TABLE3.15

AverageEffective Protection Rates,byMajorSectors ,,

SectorGroup

u=ngPr_compm_

, ;,

u_ Book Rm

1985

1988

1985

03-96 Allsectors Exportable; Importables

0.4904 -0.0691 1.0226

0.3849 -0,0414 0.7514

0.2733 0.057g 0.5447

0.2254 -0.0325 0.4367

03-22 Agriculture, fishing &

0.0900

0.0521

0.0656

0.0142

.0,0849 0.7962

.0,0570 0.4928

.0.0820 0.6804

.0.0546 0.3006

0,73,35 -0.0445 1,0727

0,5549 -0.0128 0.8024

0,3797 -0.0326 0.5343

0.3313 -0.0047 0.4572

fores_y

Exportables Importables 28-96 Manufacturing Exportal_es Importables

1968

Source: Medana, Erlind& 'AnAssessment ofTradeandinclusl_l Polio/,1986-1988," PIDSWorking Paper Series, 90-07(Makatl: Philippine Inst_ute forDevelopment Sludies, 1909)p.97,

From Table 3.16, it can be inferred that the peso more often appreciated in value in spite of economic fundamentals that point to a depreciation. In this context, the presence of readily available foreign financing in the 1970s up to the early 1980s spawned a "Dutch disease" response, effectively hindering any incentive to restructure the Philippine trade and industry sectors. Using a computable general equilibrium model, Bautista (1988) shows that an increase in foreign borrowing induces an appreciation in the real effective exchange rate. This in turn results in a "resource movement effect" that discriminates against production of export-oriented and import-compoting industries in favor of the mainly nontraded goods-producing sectors. This would explain the tendency for foreign loans to flow into the nontraded goods sector, thus providing ample reason to believe that indeed a "Dutch disease" response was generated. An assessment of the export and import sectors would reveal the extent of the effects of the factors outlined above. Tables 3.14 and 3.15 show the trend in exports for the period 1970-1989. Growth rates oftotal exports both in volume and dollar terms were quite erratic in this period; this indicates that export performance was largely dependent on

EXTERNALFINANCE

111

TABLE&14

ImpodsandExportsat Constant PesoTerms (1972-100) -..... Me_Im- (Me)S) Medm- (XeOS') emm i_n_,, dbe _ix_ (MeDS) 1967 1988 1659 1970 1971 1972 1973 1974 lg75 1976 1977 1978 1979 1980 1981 1952 1983 1984 198,5 1986 1957 1958 1989 Source: _

9476 _ 9423 8884 9088 2365 9198 11165 11941 11760 12482 14169 16"/_ I(NI_ 1_1 10957 18217 16195 12677 148_ 1816g 24142 32087 Stetist__

Growth dim Rate F.xpom (_) (XGDS)

Glmeh Rile _)

5845 5551 5981 6575 7984 75_ 5416 7628 7434 9701 11317 112ie 12_g 14483 14148 14076 14198 1(_91 13787 19872 19865 _ 2tLM2

-1.67 0.54 17.01 7.74 7.20 10.77 -0.20 -2.54 3).S0 16.95 -0.21 11.48 15.04 -2.31 -0.48 0.70 14.52 -15.37 t3,67 5.23 1tL95 S.15

9.22 1.73 -5.74 2.07 3.61 -2.10 21.61 6.75 -1.52 5.97 13.70 18.11 1.23 -2.22 2,33 7.37 -11.t0 -21.72 14.98 24.20 36.80 _.16

NiImal i:_d_ (eNP) _ 45819 47070 _ 23981 _ 01119 64539 98284 _ 77983 82478 98198 225_ 95722 67523 9U20 31644 87867 _ 94705 131093 lm

XO_)S/

GNP (%)

19.60 20.31 19.54 17.82 17.98 16.65 15.65 17.32 17.4g 16.04 15.98 17.18 13,98 16.32 17.32 17.40 18.47 17.666 14.43 16,24 10.17 ;;!4.67 _.04

13,06 12.17 tt.83 13.19 13.34 I&M 13.77 11.22 10.m 13.23 14.51 13,98 14._ 15.66 14.76 14.48 14.98 17.78 15.98 17.51 17.23 19.98 19.98

Born.

external factors. This is also consistent with the policy of the government toward the export sector which is neutral at best. As a further testimony to the neglect of the export sector, a cursory glance at the export to GNP ratio (see Table 3.14) would reveal that it has remained fairly constant over this period. Given this dismal record especially when compared to other Asian countries, it is quite surprising that the structure of Philippine exports follows that of a newly industrialized economy. Table 3.15 reveals that as a percentage of total exports, nontraditional products consistently garnered a sizeable share. In 1970, traditional exports comprised 91.5 percent of the total with nontraditional products having an 8 percent share. In 1989, the figures were 27 percent and 72 percent, respectively.

112

PHILIPPINEEXTERNALFINANCE

TABLE3,16

ExportStructu_(!970-1m)

Vldue (_) 1970 lg71 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 Souroe: Central Dank.

1062 1136 1106 1886 2725 2292 2574 3151 3425 4501 5788 5722 5021 5005 5391 4629 4842 5720 7074 7821

, ,

Naa. Glewel TrIdUoMI _ T.INlUenll _ Vaduo Trdllaul % % (%) (SU) VinegU) Sam 6.97 -2.64 70.52 44.49 -15.82 12.21 22.42 8.70 34.34 25.80 -1.14 -12.25 -0.32 7.71 -14.13 4.60 18,13 23.67 10,66

972 1027 982 1606 2306 1767 1773 2037 1975 2561 3068 2742 2116 2068 1828 1302 1275 1367 1606 2129

85 100 119 269 407 504 74g 1024 1422 2000 2650 2920 2861 2846 3430 3275 3447 4197 5361 8811

g1._ g0.40 88.71) 85.15 84.62 77.03 55,88 66.55 57.55 66.66 53.01 47.92 42.14 41.32 33.91 28.13 28.33 23.go 22,70 27.22

6.03 8.80 10.76 14.26 14,94 21.97 29.10 32.50 41.62 43.47 45.76 51,03 55.78 56.86 63.62 70.75 71.19 73.37 76.76 71.74

EXTERNALFINANCE

113

Nontraditionalmanufactures,which includethe garments and semiconductor industries, formedthebulkofnontraditional exports. In a study of the export credit structure, Lamberte, et al. (1989) presented a table that shows manufactured exports overtaking exports of primary commodities in 1984. 9Table 3.2 indicates that despite an overall current account deficit during the period 1975 to 1988, there had been a consistent improvement in export penetration. These statistics actually rtin counter to the _Dutch disease" argument presented earlier. Dohner and Intal provide an explanation for the seemingly inconsistent phenomena of sluggish performance of exports, on the one hand, and a dramatic change in the structure of Philippine exports as evidenced by the rapid growth in the share of export manufactures, on the other. 1째 Behind this lies the fact that Philippine export promotion had a very narrow base. What Philippine export promotion measures did was allow producers to obtain imported inputs at world market prices, leading to the development of export processing based on imported materials and low wages of Philippine labor. Retaining and augmenting the system of protection for manufacturing ftrms producing for the domestic market meant that value-added margins of these export producers would stay very thin; the higher cost and lower quality of domestic materials precluded the growth of domestic sourcing. The high degree of protection of the domestic market also tended to limit export products to industries where materials and transport costs were low and labor input requirements were high. Garments and electronic components, which were the top two export categories from 1982 to 1990, fit those requirements perfectly; thus export growth was highly concentrated in these two sectors. This makes export growth intensive rather than extensive. The rapid transformation of the structure of Philippine exports is also misleading in the sense that it was based as much on the low growth of traditional export products as it was on the rapid growth of nontraditional exports. Unfavorable external conditions were partly responsible (e.g., decline in world demand for prime commodity exports); but these were greatly exacerbated by Philippine policies which explicitly and implicitly taxed the traditional sector (e.g., coconut and sugar levies, also see previous discussion on effective protection structure). A more compelling reason for the pattern of export growth, however, is the trend toward internationalizing the division of labor where the 9. Lambert_, et aL (1980), Table III.3b, p. 66. 10. The explanation below is drawn heavily from Dohner and Intal (1989), p. 457.

114

PHILIPPINE EXTERNAL FINANCE

industries which lost their comparative advantage in the more developedcountriesfindtheirway intoeconomies characterized by a relatively low wage scale(Broad 1988).The shallowexportbase isproof of this.The inability to diversifyto other sectorsindicatesthat the Philippineswas simplyridingon the worldwide trend toward industry relocationrather than seriouslyimplementing an export-oriented program. The structure ofimportsduringtheperiod1970-1988showcasesthe resultsofimport substitution efforts. 11 Montes (1989)argues thatthe failure toreduce theeconomy'sdependence on importsofraw materials and intermediategoods despitethe rapid risein externaldebt during the 1970s should be a cause for concern.From 1970 to 1980, the percentageshare ofthiscategoryofimportswas 39 percent(seeTable 3.16).This did not diminish during the recessionaryperiodand even increasedto 51 percentduring the recoveryyears,1986-1988.On the other hand, the share of imports of capitalgoods exhibiteda decline duringthe same period.This couldbe explainedby the risein imports offueland lubricants thatarosebecauseofthetwo oilcrises. Hence,the crowding outeffectgeneratedby the increaseinthe value ofimportsof fuelworks againstcapitalgoods,leavingimports ofraw materialsand intermediategoods relatively untouched. This constantdependence on raw materialsand intermediategoods servesas proofofthefailureofthe industrial sectorto createnecessary backward linkageswhich is an essentialingredientof a successful import substitution program. On the whole,imports exhibiteda more stablepattern than exports,having declinedonly during the period 1982-1986.Data show that the levelof importsismainly a functionof economic activityalthough the relationshipis asymmetric, i.e., the demand forimportsishigh duringperiodsofhigh growth,but the level ofimportsbehaves inelastically duringperiodsoflow growth or decline. Thus, it would take a severe stabilizationprogram in order to significantly improve the currentaccount. Assessment The experienceduring the 1970s and 1980s has shown that the Philippinesissensitive toexternalshocks;therecentMiddle East crisis has in factdemonstrated that the economy isparticularly vulnerable compared with otherEast Asian countries. Based on the discussionon the characteristics of externalflows,we may conclude that foreign 11. Data for1989 isavailablebut isexcludedbecause ofa reclassification scheme that was appliedduring thisparticularyear.

EXTERNAL FINANCE

115

finance operated as a double-edged sword during this period. In the 1970s, foreign loans provided the leverage for the government to withstand the adverse effects of two oil shocks, two recessions in the developed countries, and deterioration in the terms of trade during the second half of the decade. Unfortunately, the debt-led investment pattern, combined with a sustained import-substitution regime and an inflexible exchange rate policy, promoted the "Dutch-disease" phenomena including a real exchange rate appreciation, _capital flight," and the reallocation of resources toward nontraded sectors to the detriment of export diversification. Even as these factors greatly maligned the Philippines economy, the main "disease" ware the rigidities in public spending patterns chused by high capital inflows which were used to finance large-scale investment in nontraded sectors. When external financing conditions became less favorable, these projects either had to be discontinued implying a loss of accumulated resources, or continued at the expense of other private spending, while debt servicing placed an increasing claim on current public spending. Data supporting this argument were presented earlier although the issue of "endogeneity" of capital flows will be discussed further in the next two chapters. Past foreign loans turned out to be burdensome in at least two more aspects. These became a source of capital outflows in terms of interest and amortization payments, so much so that the economy has been experiencing net financial outflows for the past seven to nine years. Second, much of the outstanding debt was assumed by the government, thereby mitigating its control over the deficit. The presence of foreign loans also encouraged the government's ambivalent policy toward foreign investment. Greater reliance on the former rather than on direct investment flows decreases the probability of technology transfer which is a necessary component for structural cbA_ge in the economy. Finally, foreign loans could have actually been the conduit of capital flight. In this regard, the government's present task need not emphasize the need for new money but rathar it should delve on policies that would attract private holdings of foreign assets to flow back into the economy.

116

PHILIPPINEEXTERNALFINANCE

TABLE3.16 Import Structure Yew

19"70 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

Iml_ Vedue (SM)

1090 1186 1230 1596 3143 3459 3634 3)15 4732 6142 7727 7946 7667 7467 6076 5111 5044 6737 8159

Imports Growth Pae

8.81 3.71 29.76 96.93 10.05 5.06 7.73 20.87 29.80 25.81 2.83 -3.51 -2.35 -18'.93 -15,_) -1.31 53.56 21.11

Capital Goods

414 456 434 491 825 1149 1127 1077 1461 1785 1986 1925 1786 1698 1150 788 864 1210 1735

"_1970-1.988) ,,_,

Flaw Mlnem/ Con. Marls Fuels sun'mr and and ex_s Interme- I.Ixk:ants diale

452 440 471 724 1343 1166 1272 1461 1884 2476 2855 2886 3042 3017 2636 2198 2671 3426 4174

119 141 149 188 653 770 890 993 1030 1385 2248 2458 2105 2123 1649 1452 989 1249 1096

100 144 167 186 279 298 264 306 311 980 466 537 635 538 367 441 398 547 740

_oec_J Tra_. acton8

5 5 9 7 43 85 81 78 106 136 172 140 99 111 268 232 242 305 414

EXTERNAL FINANCE

(TABLE 3.16 CONT.)

Percent Share toT_eJ Imports ('m percent)

Year

Capilal G_ods

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1968 1987 1988

37.98 38.45 35.28 30.76 26.25 33,22 31,01 27.51 29.61 29.06 25.70 24.23 23.29 22.68 18.95 15.42 17.13 17.96 21.26

, ,

117

RawM_ls Mineral Fuels and and Intermediale Lubricam goods

41.47 37.10 38.29 45.36 42,73 33.71 35.00 37.32 39,81 40,31 36.95 38.32 39.68 40.30 43.43 43.01 52,95 50.85 51.16

10,92 11.89 12.11 11.78 20,78 22,26 24,49 25.35 21,77 22.55 29.09 30.93 27.46 28.35 27,17 28.41 17.23 18.54 13.43

Consumer Goods

9.17 12.14 13,58 11.65 8,88 8.38 7.26 7,82 6.57 5.86 6.03 6,67 8.28 7.19 6,05 8.63 7.89 8,12 9.07

SI_ Transaotions

0.46 0.42 0.73 0,44 1.37 2.46 2.23 1.99 2.24 2.21 2,23 1.76 1.29 1.46 4.42 4.54 4.80 4.53 5,07 ,,,

118

PHILIPPINEEXTERNALFINANCE

TABLE$.17

MemoItems YNx

Nominal Nominal Exchange Rate ExchangeRale

IndoX

1967 1968 1969 1970 1971 1972 1973 1974 1975 1978 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 /

3.92 3,92 3.92 6.02 6.43 6,67 6,76 6.79 7.25 7.44 7.40 7.37 7.38 7.51 7.90 8.54 11.11 16,70 18.61 20.39 20.57 21.10 21.74

100.00 108.89 107.67 114.71 115.78 119.00 130.01 130.03 131.52 133,91 136.98 174.27 254.57 276,93 348,12 373.49 406.36 406.24=

Real _

Exchange Am Index

100.00 105.01 87.88 96.79 100,43 102.94 110.60 98.41 92,51 90,21 87.30 107.49 105.04 92.80 117,64 124.76 128.67 122.11=

(ml

Trade

_ov_)

1.19 1.11 1.00 1.13 1.15 0.88 0,78 0.71 0,78 0.82 0.69 0.60 0.59 0.61 0.60 0.56 0.60 0.56 0,73 0.71

5.53 5.17 3,91 6.49 5.36 9.26 5.60 5.80 7.40 6.34 5.76 6.89 4.86 3,45 1.90 1.11 -7.07 -4.12 1.86 5.81 6.75 5,67

' ..... Source:

Temw of

NSCB(NIAApril1990). PIDSes_mateL Central Bank. I

CHAPTER 4

Accumulation of Institutional

Behavior Agents

Introduction Savings is a key variable in economic development particularly in the Third World. Sustained economic growth is accompanied usually by sufficient domestic savings that are efficiently channeled to investments. The investment_savings gap reflects not only the private sector's capacity to mobilize savings (or lack of it) but also the foreign exchange constraint facing the country, and the fiscal constraint that llmits the government's capacity to undertake infrastructure building and other vital government investments (see Chenery and Bruno [1962] for the two-gap approach, and Bacha [1989] and Taylor [1989] for the three- gap approach). Investment represents the accumulation of capital stock. The ability of the economy to undertake investment projects productively and to finance these projects through savings and external borrowin&,s lies at the core of the accumulation behavior. Hence, it is important to determine the accumulation behavior of both the private sector -namely, households, unincorporated businesses, and private corporations -- and the government and government corporations. Savings

and investment

Behavior

in 1970-1989

Table 4.1 gives us the real savings level of the Philippines and its components and their ratio to GNP from 1970 to 1989. Gross investments (in real terms as well as a percentage of GNP) are also given in the table. Figure 4 plots national savings and gross investments as percentage of GNP. The figure also plots the savings of households and unincorporated businesses, corporations, and the government. Figu_ 5, meanwhile, plots national savings and gross investments as percentage of GNP, together with GNP growth rate, the IncTemental

T_LE4.1 RealSavings endSavings to GNPRatios --10

--r F "O

RealSavings (inmillion pesos,at1972prices)

Yea_

GNP Grow_ rate

Households& Corporations Government Capital Unincoqx_t_l Cons,,mpti0e Business _

National

Foreign

Real G_ tnveslmeet

1970 1971 1972 1973

3.91 6.49 5.36 9.26

3561.35 3854.67 4130.00 5947.59

1394.74 688.11 843.00 1246.24

1232.31 1491.98 719.00 3488.97

4535.96 4977.26 5303.00 5474.33

10724,35 10951.90 10995.00 16157.14

257.70 235.43 '33.00 -3081.74

10982.06 11187.33 110_8.00 13075.39

1974 1975 1976 1977 1978 1970 1980 1981 1982 1983 1984 1985 1986 1987 1988 1988

5.60 5.80 7.49 6.34 5.76 6.89 4.96 3.45 1.90 1.11 -6.76 -4.42 1.86 5.93 6.58 5.55

6216.76 5778.95 7977.22 8271.25 6957.59 5753.26 5531.65 6229.55 3165.06 921.24 852.22 1031.93 2198.95 72.78 6149.37 7327.27

1618.33 1933.26 2268.33 1905.62 2364.55 4975.67 5080.42 5045,11 4331.52 4220.58 -291.08 -465.84 2245.67 3t22.79 3257.17 2862.61

3165.58 2111.09 1338.28 2373.76 3238.61 4487.30 4909.94 3626.13 3121.27 4323.18 3560.59 3025.51 1792.55 1626.09 -776.34 -2048.76

5525.65 6744.99 7034.58 7428.10 7808,36 8304.22 8585.01 9665.26 10079.73 10201.90 9340.52 9881.49 10437.28 10460.74 9636.53 9878.83

16526.53 16568.31 18618.44 19978.73 20369.10 23420.67 23807.03 24566,04 20698.59 19666.92 13462.24 10473.09 16675.45 15282.39 18263.73 17619.96

814.98 3763.93 4383.70 2829.70 3559.63 394&73 4580,91 4835.47 7358.17 7029.37 2517.04 -919.18 -4865.98 28.30 -671.13 2315.23

17341.51 __ __,__ __24 23002.14 22608.49 23_8.73 27369.49 26_7,94 29401,51 28066.75 26896.28 15979.26 12553.91 11809.47 15310.69 175_80 26135.19

r-,Z ._ z -_ > Z

(TABLE 4.1COlfl'.)

AsPercent ofGNP ICOR

1970 1971 1972 1973 1974 1975 1970 1977 1976 lgTg 1980 1981 1982 1383 1984

5.85 3.46 3.87 2.53 5.07 5.43 4.55 4.87 5.62 4.81 8,49 9,22 15.45 24.72 -2.38

6,98 7.26 7.38 9.81 9.62 3.46 10.88 10.61 8.44 6.53 5.98 6.51 3.25 0.98 0.63

?_74 1.30 1.51 2.06 2.51 2.63 3.09 2.44 2.87 5.53 5.4g 5.27 4.44 4.20 -0.32

2.42 2.70 1.20 5.75 4.90 3.0g 1.82 3.04 3.93 5.0g 4,98 3,70 3.20 4.38 3.98

8.69 0.38 9.46 9.03 8.55 9.88 9.59 ' 0.52 9.47 9.42 g.28 10.10 10.33 10.34 10.18

21.63 20.63 19.66 20.55 25.58 24.20 25.39 25.62 24.70 20.57 25.73 25.63 21.22 19.24 14.63

0.51 0.44 0.06 .5.98 1.20 5.51 5.98 3.37 4.62 4.46 4.g5 5.55 7.55 7.13 2.75

2t.54 21.98 18.71 21.57 20.85 29.70 31.37 20.99 20.01 31.55 20.68 20.72 26.77 27.07 17.44

1985 1_6 1987 1988 198g

-3.98 7.21 2.55 ?_62 3.59

1.17 2.46 0.08 0.62 6.98

-0.53 2.51 3.20 3.22 2.70

3.44 ?_63 1.72 -0.77 -1.63

11.25 11.55 11.63 9.54 9.11

15.33 18.63 18.12 18.08 10.78

-1.05 -5.44 0.55 -0.55 2.18

14.20 13.I9 16.15 17.41 18.96

C _: _.. .-I z

Souroe: National Income A_ountsDnta,Nntjona] Stntinti_d CooNinafJ_t Board (NSCB).

"1" > <

FIGURE4

SavingsandInvestments asPercentofGNP "1" 35

-o "0 I'1ri

_..M Z

' 1 ' f'

I ' I ' I ' I ' I ' I' I_ _=I 1988 '

197Q 1972 1974 1976 1978 1980 1982 1984 197t 1973 1975 1977 1979 1981 1983 1985

1987

• Net savings ofpe_s

• Netcorporate savings

• Netgoverrvne_ savings

• Capi_ consumplJon

x Natior_rsavings

v Grossinvesknent

1989

FIGURES

NationalandForeignSavings andGrossInvestments asPercentofGNP,GNPGrowthRate,ICOR

35[ 25

5 C

_-4

•5

Z _ f'n Z

-10

<_ 1970 1971

• Nationalsavings

1973

t975

• Fcre_jnsavings

1977

1979

• Grossbnves_ent

1981

1983

• Growlhrate

1985 x ICOR

1987

1989 f_

124

PHILIPPINE EXTERNAL FINANCE

CapitaLOutput Ratio (ICOR), and foreign savings (as a percentage of GNP). Both figures establish that national savings rose sharply from around 20 percent of GNP to around 25 percent within the 197_1951 period. Gross investments averaged 30 percent of GI_P in 1975-1981. The domestic and international crisis in 1982 pulled the economy downwards bringing savings and investments along with it. The period of high savings, investments, and growth coincided with the period of high foreign capital inflow; foreign savings reached 4 percent to 5 percent of GNP in the period 1975-1981. It is interesting to note that during the "good" years in the mid-1970s (1973-1978), savings of households and unincorporated businesses were very high comprising 8 percent to 10 percent of GNP. But in the stagflation years of 1979 to 1983 (with growth artificially generated by countercylical measures), savings came from corporations which increased their savings from less than 3 percent of GNP to more than 4 percent or 5 percent. This may indicate a strong bias toward big favored *crony" corporations by the Marcos government in those years. The financial ditFlculties and lack of viability of many domestic firms intheearly1980s,thedefault ofBraziland Mexicoin1982,and the shiftofforeignloansEcom medium- and long-termto short-term feedings withhighvariable interest ratesdoomedgovernmentattempts tostaveoffeconomicdecline withcountercyclical measures.The year 1982saw thefirst fall inGNP percapitaasgrowthratedeclined toless than 2 percent. Thisbroughtwith ita significant drop innational savings,particularly savingsof householdsand unincorporated businesses. The years 1982 and 1983 also saw a massive jump in foreign inflows as the government encouraged high-interest, short-term loans to keep the economy artificially going. But 1983 saw the economy slipping further with grow_ rate failing to 1.1 percent. Savings of households and imi_corporated businesses also shrank, this time to practically nil. Gross investments dipped from 30 percent of GNP in 1984 to 27 percent in 1983 while domestic savings decreased from 26 pereent in 1981 to 20 percent in 1983. The economic collapse that started in late 1953 with a debt moratorium saW savings and investments faliing drastically as GNP growth rate turned into high negative numbers. This time, private corporations joined households and unincorporated businesses in contracting savings (savings of corporations net of depreciation turned negative in 1984). Only government retained some net savings achieved only through a drastic fiscal cutback. National savi_ went down f_m 20 percent of GNP in 1983 to 15 percent in 1984. Gross investments as a percentage of GNP tumbled 10 points from 27 percent in 1983 to 17

ACCUMULATION

BEHAVIOR

125

percent in 1984. The drop in gross investments became critical since foreign savings diminished substantially from 1984 onwards as domestic savings also declined sharply. Foreign savings turned negative in 1985 and 1986 bringing gross investments to its lowest level of 13 percent of GNP in 1986, the year when the economy reached rock bottom. The pump-primlng of the economy by the new government in 1986 saw the start of the economic recovery. But savings followed quite weakly. Savings of corporations grew to around 2 percent or 3 percent of GNP (roughly equivalent to their savings rate during the mid- 1970s), but savings of households and unincorporated businesses remained in the doldrums until 1989 (and it is still too soon to say if the growth in 1989 is sustainable). To make matters worse, the government's ability to save is now practically nil because: 1)the government assumed much of the foreign debt service of the country and domestic debt servicing is growing due to the dependence on treasury bills to t'mance the budget deficit and to mop up excess liquidity, and 2) the government could not cut back its expenditures significantly during the time of recovery. One can see from Table 4.1 and Figure 4 that government savings fell significantly starting 1986 and became negative in 1988 and 1989. As a result of all these, national savings during the recovery period of 1986-1990 remained low, ranging from 16 percent to 18 percent of GNP -- a far cry from the 25 percent rate achieved during the 1970s. Foreign savings also plunged to practically nil so that gross investments more or less equalled national savings, also a far cry from the 30 percent rate achieved during the late 1970s and early 1980s. The insufficient amount of domestic savings and foreign savings is perhaps one of the main obstacles to sustainable economic growth. The ICOR for the period 1970-1989 also gives the same picture. It started at a level of 5.8 in the 1970 foreign exchange crisis. This fell to less than 4 in 1971 and 1972 as the economy recovered. The year 1973 was especially good due to a commodity price boom and soaring export receipts, bringing the ICOR down to a record 2.5 (and sending growth rates up to a record 9.3 percent). Unfortunately, the oil embargo reversed the trend and the ICOR went back to 5.0. From 1974 to 1979, the years when foreign loans were plentiful, the ICOR remained in the vicinity of 5.0. This high ICOR indicates either a not_too_fficient investment program or a program geared toward capital investment ent__illug a long gestation periocL The stagflation abroad brought ICOR searing upwards in the early 1980s: 6.5 in 1980, 9.2 in 1981, 15.4 in 1982, and a whalloping 24.7 in 1983. The exceedingly high ICORs reflected desperate and

126

PHILIPPINE EXTERNAL FINANCE

unsustainable countercyclical measures that climaxed in the economic collapse of 1984 and 1985. If the capital investments in the 1970s had a long gestation period, then the crisis came at a wrong time since maintenance and operating expenses for infrastructure were cut back quite drastically that the country enjoyed very little of the fruits of these capital investments. In 1986, ICOR still remained high at 7.2 as the economic decline ended. The recovery years quickly eliminated the economy's excess capacity, with ICORs going as low as 2.8 in both 1987 and 1988. In 1989, the need to rely more on investments to spur further growth became obvious as ICOR spurted up to 3.6; this has begun to rise further in the early 1990s. Table 4.2 gives us the components of the total fixed capital formation for the years 1970-1989 in 1972 prices, and their percentage share. Figure 6 plots total fLxed capital formation, construction, and durable equipment. As shown in these data, the years 1975 to 1983 were a period of high fixed capital formation with both construction and durable equipment going into high levels (growing quite rapidly in the second half of the 1970s). Figure 6 and Table 4.2 show that construction grew much faster than durable equipment, from about 35 percent to 38 percent of total fixed capital formation in 1970-1974 to about 50 percent in 1976-1983. Figure 7 marks the big jump made by government construction especially in the 1975-1976 period which continued to grow until 1982. This entire pattern is replicated in Figure 8 which depicts total government fLxed capital formation growing more rapidly than private fixed capital formation in the period 1972-1981. Table 4.2 also indicates that government fixed capital formation rose from 7 percent of total fixed capital formation in 1970 to 25 percent in 1976, reaching a peak of nearly 29 percent in 1978 and 1981. Figure 8 and Table 4.2 reveal that the rapid increase occurred during the period 1976 to 1981 when investments by government corporations grew rapidly and represented about 12 percent to 21.5 percent of total fixed capital formation. The crisis in 1984 to 1986, which saw both foreign and domestic sources of savings falling drastically, led to a sharp decline in all â&#x20AC;˘ components of fLxed capital formation. Durable equipment fell more sharply than construction, thus raising construction share to total fixed capital formation to more than 60 percent in 1984 and 1985 (see Table 4.2). Government fixed capital formation fell more sharply than private investment. Outside of the pump-primln_ years of 1986 and 1987, the share of government fixed capital formation share descended steadily (in 1984-1985 and 1988-present).

TABLE4.2

GrossDomesticCapit_lForm_ionenditsComponents (in1972prices) lm

lrn

1974

1977

197a

Greesdom_ capital fommtk_

9929

10645

10890

12073

14835

16323

21139

21121

22928

25493

To_lf'._l capital formation Co_mdion Private Governmnt Ni_o_ Local _s Durable eq_m_mt Private Goverme_t Na_onal Local CoqxxCms

8292 30_ 2593 496 360 60 56 5203 5094 109 ,85 44

9119 3073 2445 629 457 101 70 8046 5925 121 77 44

9231 3565 2531 1034 631 145 258 5666 5509 157 97 59 1

9495 3644 2510 1134 938 96 100 5851 5652 199 134 64 1

11383 4003 2494 1509 1146 96 267 "/380 7031 349 302 45 2

14974 6152 3658 2294 1991 59 344 8822 8483 339 272 65 2

17225 8668 4625 4043 1882 105 2046 8557 8290 267 138 40 9g

17555 g_6 4624 4282 t856 113 2313 83_ 7795 564 358 67 129

19035 9435 5029 4406 1488 152 2756 0600 8565 1035 157 107 771

21270 10546 5534 5012 1690 158 2964 10724 10122 602 483 79 40

PdvmfixedCel_l lorm_ion

7_937

9370

8040

8162

9525

12341

12915

12719

13594

1,%_,_

605

740

1191

1333

1858

2633

4310

4836

5441

5614

425 124 56

534 145 70

728 204 259

1072 160 101

1448 141 269

2183 124 346

2030 145 2135

2214 180 2442

1655 258 3527

2373 237 3004

_fixed

Cat_tai

ton_Uon Nadoul Local Coq)ora_

> c c_:

Z _ m >Z. < _o

'-4

-1-

_AKE4.2CONT.)

__ 1980

1981

1982

1983

1984

1985

1986

1987

27220

26287

25119

14215

11124

10111

TolalIComm:l_ _edealdtal_ _ 11123 Rrk_le 6263 Govmn_t 4860 Nalbnel 1415 Local 192 Coq_x4_(ms3253 DmbleEquilam_ 11614 PdWe 10040 Govemmnl 774 NdoMI 240 Local 117 Coqlefslioos 417

23542 12045 6802 5243 1203 16I 3879 11497 9976 1521 248 61 1162

23687 12521 7162 5359 1650 187 3,_22 11138 10435 731 264 63 404

23101 12037 7523 4464 1628 218 2_0 11064 10085 976 225 e3 891

15583 9448 6461 2985 795 141 2049 6147 5820 327 110 43 174

11825 7114 4772 2342 1025 119 1198 4711 44_ 311 183 t4 134

Pdvmr¢_ ¢ep_l

17106

16778

17597

17658

12281

5834

6764

6090

5443

1655 309 3876

1451 252 5061

1914 250 3826

2153 279 301I

Grolldomslic¢q:_

_809

19_

1989a

13557

1,r_6

18404

10987 5505 3344 2161 848 110 1203 4552 4101 381 116 10 235

12017 6348 4058 2290 1123 125 1042 5669 5058 81t 180 15 416

13874 6836 4537 229e 1127 128 1046 7038 6476 562 203 18 231

16616 7626 5174 2452 1202 134 t116 8_0 8221 769 381 18 380

9172

7535

9116

11013

13395

3312

2653

2522

2901

2861

3221

905 184 2223

1138 123 1332

964 120 1438

1303 140 1458

1380 144 1327

1563 152 1,506

Ge_mment _ed ¢_1 Nalional Lo_ Cecpom_m

"f'l

-_ > z m

(rAeLE 4,2C::ONT.) 1970

1971

1972

1073

1974

1975

1076

1977

1976

1979

f(xlnxtion 100.00

100.00

100,00

100.05

100.00

168.50

100.00

150.68

168.05

100.50

37.25 PrF, mae 31.27 Government 5.68 Natkxwl Govt. 4.34 Local 0.96 Â˘..ar_retm$ 0.68 Dwable Equipment 62.75 61.43 Government 1.31 NdonxlGovt 0.78 Local 0.63 Coquxations

33.70 26,8.1 6.63 5.01 1.11 0.77 63.50 64.07 1.63 0.84 0.48

38.62 27.42 11.20 6.84 1.57 2.79 61.38 50.68 1.70 1.05 0.64 0.01

38.38 35.43 11.94 9.08 1.01 1.05 61.62 56.68 2.10 1.41 0.67 0.01

35.17 31.91 13.26 10.07 0.94 2.35 64.63 01.77 3.07 2.05 0,40 0,02

41.08 25.70 15.32 12.63 0.38 2.30 58.02 50.35 2.26 1,82 0.43 0.01

50.32 26.65 23.47 10.98 0.61 11.68 49.68 48.13, 1.55 0.80 0.23 0,52

52.44 28.05 24.38 10.57 0.64 13.18 47,50 44,40 3.16 2.04 0,35 0,73

49.5"7 26.42 23.15 7.87 0.80 14:48 50.43 45,00 5.44 0.82 0.56 4.05

49.58 26.02 23.50 3.89 0.74 13.94 50,42 47,56 2.63 2,27 0.37 0.19

TntalI'md_

PrivJefo0ed capP.al fomlslfm

92.70

91.70

87.10

95.08

63.68

82.42

74.96

7245

71.42

7361

Govomilile_ _ed Cnldtal FOnlutkm No6onalOovemn_

7.30

8,2'1

12.00

14.00

16.32

17.56

25.02

27..55

28.58

20.39

5.13 1.50

5.35 1.59

7.50 2.21

11.29 1.69

12.72 1_4

14,45 0.63

1t.70 0.94

12.61 1.05

3.68 1.20

11.16 1.11

0.63

0.77

2.81

1.63

2.36

2.3t

12.39

13.61

13.53

14.12

_: c _: 7 "r >, <:

".,0

(TABLE 4.2CONT.)

= "G

1580

1981

1962

1983

1984

1985

1986

1387

1588a

19_a

-f--

100.00

100.05

100.00

100.05

100.08

100.05

100.00

Cormtnmbofl 4&02 Privm 27.55 Government 21.37 Ndonalgovt. 6.22 Local 0.94 _S 14.31 Durabte equipment 51,05 Pd_te 47.68 Goverment 3.40 Ndonal_ 1.05 Locat 0.51 1.83

51.16 28.89 22_ S.ll 0.68 16.48 48.94 42.38 6.46 1.05 0.38 5.62

52_86 30.24 22,62 6.97 0.79 14,87 47,14 44.05 3.09 1.11 0_ r 1,71

52.11 32.78 19.32 8.35 0.94 10.04 47;88 43,50 4.24 0.97 0.27 2.99

60.58 41.44 1g,14 5.10 0.90 13.14 38.42 37.33 2.10 0.71 0.26 1.12

80.16 40.36 19,81 8,67 1.01 10.13 33.84 37.21 2.62 1.33 0.12 1.13

54.74 33.25 21,49 8,43 1.09 11,96 45.26 41.G7 3.50 1.15 0.10 2.34

52.83 33.77 1g.05 9.35 1.94 8.87 47.17 42.05 5.00 1,50 0.12 3.45

49.27 32.70 16.57 8.12 0.91 7.54 50.73 40.68 4.05 1.g0 0.13 __02

45.90 31.14 14.78 7.23 0.81 632 54.10 48.48 4.83 2.17 0.11 2.35

Pdvate Itxed¢q_ fmmaJon 78_

71.27

74,26

76.44

79.78

77.56

74.02

75.86

79.38

80.62

Governmerd _1 capital formalion N_ionalovemme_ Local _s

24.78

26.73

25.71

23.56

21.24

22.44

25.08

24.14

20.62

19.38

7.28 1.38 16.14

6.16 1.07 21.59

8.08 1,08 16.57

9,32 1,21 13.03

5,80 1,18 14.26

10.05 1,12 11.28

9.59 1.19 14.30

10.94 1.17 12.13

10.02 1,04 0.50

0.41 0.91 9.08

-G

Toterfixed¢ap_ Iormeti=l

al:_l_inary asofJu_ 1990. Sourc_Netionaltncme A_ounts Ore, National Stalb_alCoordbmi_g Board.

I'n

z > r-_ Z > z

FIGURE6

Total FixedCapitalFormationBrokenDowninto Constructionand DurableEquipment (in 1972prices) 26 24 22 2018-

,5 12 10

_ C

19S0 I 19'72 I _9'74 119S6 I lg'Ta I lao1981 1 _9'8e I_g'_1985 I1_ 1987 119;81 1971 lg73 1975 1977 1979 1983 1989 • Total

• C_sl_-'tion

• Durableequipment

FIGURE7

ConstrvclionBrokenDownintoPrivateandGovernment (in1972prices)

"_ -.

r--

8. ._

5 4 3 2 1 0 1970 '_97'1

1973

1975

_977

• Construction • Private

1979

1981

_983

1985

1987

• Goverrm]ent ,, Government corpora'on

1989

FIGURE8

TotalFixedCapitalFormation BrokenDownintoPrivateandGovemment Investments (in1972prices)

24 22 20, 18-

16-

,_ 14 _c

12 10'

•

i >

0 1970 I 1972 _ 1974 I lg76 I 1978 l 1980 I 1982 I 1984 I 1988 I 1988 J 1971 1973 1975 1977 1979 ,98t 1983 1985 1987 1989 • Total

• Private

• Government A Government corpora_

_ < _5

f_t

134

PHILIPPINE EXTERNAL FINANCE

The recovery years 1987 to 1989 saw both construction and durable equipment increasing substantially from the recession years, with durable equipment increasingmuch more rapidlythus gaining back much of its shareln capital f0rmatio_ The fall of government share in capital formation,mainly through thereductionand privatization ofthe government corporate sector whose share in capital formation dropped to 9 percent in 1989, still constitutes a high figure compared with that ' in the pre-high spending days of 1975 (see Table 4.2). A Micro

Study

of the Household

and Unincorporated

Sector

This section is based on data derived from the FIES data. Table 4.3 presents the number and percentage of families by main,source of income for the survey years 1961, 1965, 1971, and 1985.1 A sharp decline in the number of families receiving entrepreneurial income occurred from the 1960s and early 1970s to the mid-1980s. Families receiving wages and salaries declined slightly from the early 1970s to 1985, although the percentage in 1985 is still higher than in the 1960s. The same pattern holds for the share of family income by main source of income (Table 4.4). The reduction in entrepreneurial income occurredmainly in the rural areas (Table 4.3). Table 4.5 corroborates this and shows that the big decline in the share of entrepreneurial income took place in crop farming and gardening. The decline in the share of wages and salaries occurred mostly in the urban areas as shown in Table 4.3. The fall in the two shares described above are compensated by the big increase in "other sources." Table 4.6 shows that the share of most of the increase in the other sources category came from "gifts, support, assistance, and relief," as Filipino workers' remittances from abroad grew tremendously in the late 1970s and throughout the 1980s. These figures paint a disturbing picture of households before the period 0f massive foreign loans and during the year of economic collapse after the _m__R_sive inflow of loans. Tables 4.3 and 4.4 reveal a slowly fallln_ share of entrepreneurial income as the share of wages and salaries increased slowly before the early 1970s. This was most likely due to the traditional "industrialization" process of rural-urban movements, as well as shift from agriculture to non-agriculture. In 1985, the share of wages and salaries, and especially entrepreneurial 1. The surveys of 1975 and 1978 were not includedin the comparisonmade by the National Statistics Office(NSO) due to data problemsand incompatibilityofdat&No full use could be made of the 1968 survey since only a limited number of tabulations were available duringthe study.

ACCUMULATIONBEHAVIOR

135

TABLE4.$

Number andPercentage of Families byMainSourceofincome,UdxmandRural AreaandMain Source ofIncome

1961

1965

1971

1985

5126

6347

9847

Philippines Totalfamilies 4426 (Inthousands) Percent 100.0 Wagesandsalaries 36.0 Enlmpreneurial activities 58.0 Othersources 5.9

100.0 38.9 56.1 4.9

100.0 43.0 51.0 6.0

100.0 40.3 40.9 18.8

1520 100.0 84.4 29.0 6.6

1913 100.0 65.9 26.1 8.1

3726 100,0 52.7 24.8 22.5

3606 100.0 28.2 87.8 4,2

4434 100.0 33.1 61.7 5,2

8121 100.0 32.7 50.7 16.8

Urban Totalfamilies 1505 Percent 100.0 Wagesandsalaries 55.5 Enlrepreneurial activities 37.3 Othersources 7.2 Rural Totalfamilies 2921 Percent 100.0 Wagesandsalades 26.0 Entrepreneurial activities 68.7 Othersources 5.3 8ourm:Natim__

Oflim.

activities shrAnlr and was replaced by tr_n-fers mainly from abroacL These patterns point to a possible stagnation in the internnl economy as it became more and more dependent on foreign injections. The two points in +ime, however, are merely snapshots and many events could have happened between 1971 and 1985. As Chapter 2 pointed out, the share of families with self- employment activities declined from 1979 to 1987, but the share of unincorporated profits in the share of income between these two years increase&

136 PHILIPPINE EXTERNAL FINANCE

TABLE 4.4 PercentageDistributionof TotalFamilyIncomeby MainSouroeof Income MainSourceofIncome

1961

1965

1971

1985

Totalfamilyincome (inmillionpesos)

7981

13023

23714

305775

Percentoftotalfamily income Wagesand salaries Entrepreneurial activities Othersources

100.0

41,9

43.0

44.3

36.8

41.3

39.1

36.8

31.2

16.8

18.0

18.9

31.9

SouroB: National Statblics Olfioe,

To determine the savingsbehavior of households particularly in relationtotheirmain income sourceand theirurban and rurallocation, the average propensity to save out of total receipts of the household was computed for the years 1985 and 1988. This is shown in Table 4.7. Simple regressions were applied on savings relative to regular household income and other receipts (the latter is defined as irregular, windfall earnings, i.e., net Winnlnm$ _ gambling, sweepstakes, and raffles; profits from sale of stocks; backpay; and proceede from irmuranco and inheritance) using a dummy variable denoting 0 for rural areas and I for urban. The results in Table 4.8 are not as conclusive as was expected. First, the results (Table 4.7) de not indicate a higher propensity to save among households dependent on entrepreneurial income and/or "other sources" as compared with those dependent on wages and salaries for the 13 regions. In fact, the 1988 data seem to point to higher propensity to save among households dependent on wages and salaries whose average propensity to save proved higher in rural areas. The same tendency does not seem to hold among households dependent on entrepreneurial income and other sources. The regression we interpret the household income to point to a higher

analysis does not also provide conclusive results. If coefficients as marginal propensity to save from and windfall savings, then the 1988 regressions seem marginal propensity to save out of regular household

ACCUMULATION BEHAVIOR 137

TABLE,U Pemenl_pDIMrll_kx_of To_l FamilyIn.me Source ofIncome

1961

1965

1971

1985

5092

8734

954t)3

Philippines Totalen_epreneurial 3297 income (inmillion pesos) Percent oftotalfamay 41.3 income Cropfarming and 19.8 gardening Livestock andpoulW ' raialng

3g.1

36.8

31.2

20.8

18.1

11.7

1.0

4.s

t.4

Wholesale andretailtrade Manufacturing Community, social, recreational, and

9.8 3.1 a

7.8 2.9 1.8

7.7 3.1 1.6

2.2 0.3

Transpodaton, storage, andcommunity servioes Mining andquarrying Constriction EnVepreneurial act_#_ n.e,¢.

1.4

1.2

1.6

n.a. n.a. 2.5

n.a. n.a. 1.2

n.a. n.a. 1.4

0.1 0.2 0.4

Fing ForesWandhunting

serc,d

,,,

•

9.8 1.g 2.0

,.,

n,¢ - not_Mble.

_dedinmshk_. dqndude_ benWe¢_ aCivi_¢

I:_oiu_0norh'Mein1961,1_, 1971isle sameassodal,rKn)albeal,andi)enmnal selvioes b 198,5.

So_rce: Na_oMI_

138

PHILIPPINEEXTERNALFINANCE

TABLE4.6

Pe.rcemgeDiMrl.bution of,,TotalFamily, Income...Derived ,,from Other . Sources Source ofIncome

1961

Totalotherincome 1341 (inmillion pesos) Perc_ tototalfamily 16.8 income Typesofotherircome: Netshareofcrops, fruits 2.8 andvegetables, and livestock andpoulW from otherhou._dds Gifts,support, assistance, 2.0 andrelief Rentalfrom 1,4 non-agricultural lands, buildings, spaces, and other properties Rentalvalueofowner6.4 occupied dwelling unit Interest from deposits a & loans Dividends from investments0.1 Profitfromsaleofstocks 0.1 andbor_ Pension andre'dremerlt .1.7 benefits Backpay andproceeds 0.2 frominsurance Netwinnings from 0.4 gambling, sweepstakes, andlotteries Inheritance incashor 0.4 converted tocash Produc_on ofarlJdes for 0.7

1965

1971

1985

2344

4458

97627

18.0

18.8

31.9

2.8

2.5

2,1

2.1

3,6

14.3

1.5

1.7

1.1

7.9

7.0

8.7

0.4

0.4 0.2

0.2 0.0

(_.2 g

1,6

2.1

1.5

0.1

0.2

0,3

0.5

0.4

0.3

0.8

0.6

n.a.

3.3

0,5

0.1

0.2

own use

Netreceipts fromfamily sustenance Others

n.a.- not,vsilalde. "' ............. a Included Individends frominvestnmnts, b Notoonsidered asincome in1985FIESbutconsidered asotherree_ipls. Â˘l.essthan0.05percent. Source: National Statis_cs Oflioe.

TABLE4.7

Average Propensity toSaveoutofTotalReceipts: Rural,Urban,Average forthe13Regions 1985 Regions WagesimclSaJades 1

NCRa

Rural Urban Average

0.1459 0.1547 0.0458 0.1136 0.0_5 0.1358 0.1238 0.0626 0.0646 0.0505 0.1430 0.1483 0.0529 0.0918 0.0732

0.0516 0.0524 0.0519

0.2050 0.1530 O.1735 0.0910 0.123_ 0.0857 0.1546 0.1731 0.1507 0.0662 0.0793-0.0201 0.0695 0.1833 0.1596 0.1670 0.0836 0.1023 0.056t

RuM Urba_ Average

0.1529 0.1862 0.0Â˘fi9 0.1114 0.0255 0.1613 0.1443 0.0313 0.0729 0.0215 0.4541 0.1637 0.0342 0.0102 0.0250

0.0680 0.05_ 0.0357

0.1235 0.1107 0.1437 0.0872 0.1248 0.0432 0.1613 0.1049 0.1699 0.0956 0.1311 0.0887 0.1030 0.1315 0.1098 0.1484 0.0891 0.1262 0.043g

0.1625 0.1430 0.0678 0.0586 0.0402 0.1743 0.1057 0.1129 0.0753 00658 0.16,59 0.1468 0.0875 0.0351 0.0332

0.0703 0.0578 0.0663

0.1264 0.1218 0.2161-0.0359 0.0M2 0.1040 0.1551 0.1187 0.1258 0.0311 0.1273-0.1402 0.0917 0.13,58 0.1203 0.1810 0.0037 0.0cJ030.0351

Othersourms RuM Urban Avenge

c C Z tDo

> <

(TABLE4.7CONT.) 1988 Regions

-,o 3: r-O

Wagesandsalmies i

CARb

NCI_ a

Rend UIban Average

0.1670 0.2396 0.1403 0.1458 0.1276 0.1816 0.2405 0.1515 0.0853 0.1042 0.1713 0.2398 0.1454 0.1207 0.1215

0.0918 0.0541 0.0802

0.2120 0.2119 0.2065 0.1429 0.1783 0.1875 0.2124 0.1851 0.1902 0.1877 0.1604 0.1782 0.1770 0.1685 0.2016 0.2045 0.2014 0.1482 0.1783 0.1853 0.1968

0.1196

Rural LYean Average

0.1652 0.2013 0.0544 0.1201 0.(_40 0.1887 0.2052 0.1308 0.1060 0.1140 0.1M4 0.2021 0.1000 0.1188 0.0973

0.055"/ 0.0760 0.0836

0.1789 0.13"/8 0.1897 0.1301 0.1375 0.1839 0.1458 0,1285 0,1596 0.2444 0.1298 0.2198 0.2136 0.1405 0.1656 0.1410 0.1960 0.1300 0.1558 0.1881 0.14,57

0.2054

0.1681 0.1973 0.1148 0.1011 0.0788 0.1720 0.2040 0.1684 0.0807 0.0833 0.1689 0.1988 0.1. 0.0942 0.0801

0.0881 0,0738 0,0838

0.1547 0.1370 0._13 0.0350 0.1156 0.1453 0.1710 0.1481 0,0570-0.3648 0.1318 0.1245 0.1274 0.1017 0.1524 0,1193 0.0424 0.0_8 0.1193 0,1413 0.1.

0.t020

_ z >.

Qqhef sou_ Rural Urban Average

fo_Cordillecu ACloe_x_sRegion wasge_eped onlystazlie91968. In_s Souroe: Family Income andExpemJilure Survey, Natio_tS_a_s'dcs Office.

_mwasmcoq>oramd in_e dalaofRegion1.

TABLE4.8

Regression withDependent Variable Savings outofTotalReceipts, a1985and1988 1985 Regions Wegu andsalams 1

Tmlinoome C)b'wre_ Ulban-mnd Conmnt R.S(lUare

0.162 0,162 0224 0.I93 0.0_ 0.170 0.222 0.570 0.302 0.082 0.080 .0,025 0.897 0.17I 0.447 -0.016 -0,296 -0.106 0.283 -0.282 -0.081 0.376 -0.036 0.633 -524.2 -118_9 .20_.0 -2833.7 -323.5 -589.0 -1500.4 -854.3 -833.8 -1784.7 -676.4 -4393.0 -204.1 -15.6 4188.2 -1147.0 171.6 -1754.4 -303.6 -5Q58.5 -2400.6 595.4 1260.5 2697.8 0.28 0.27 0.41 0.33 0.13 0.40 0.43 0.71 0.45 0.20 0.07 0.18

Totalboom O(her_ Ufeen._ural Conmnt R-=luare

0.122 0.508 429.2 -86.9 0.89

0.200 0.218 0.189 0.123 0.O(_ 0.410 0.168 0.660 0.7°05 0.520 0.012 0.236 -0.395 0.540 -0.023 0.113 0.308 0.552 -0.020 0.389 -1.100 -0.133 .028.4 .2163.7 -1214.t -1782.7 934.8 -2852.4 -1064.7 -2668.3 -_52.1 .0406.8 -1899.9 .240.1 -107&8 .223_5 -900.6 1116.4 -3274.1 -85&0 .07332 -11783.7-189_.7 -0758.2 0.40 0.09 0.36 0.07 0.06 0.77 0.40 0.87 0.97 0.92 0.78

NCR 0.290 -0.091 -9304.7 0.50

0.195 0.974 .0184.1 0.75

R ¢-

O_her Sour_m -I

Te_l inoeme Ob_er re_ipls Ud_Hrural Coestent Ft...__ =_,,_e

0.288 0.295 0.292 0.158 0.398 0.019 0.388 0.192 0.325 0.189 0.089 0.348 0.1898, 0.840 -0,078 0.634 0.222 -0.001 -0.075 -0.925 0.925 0.211 0,010 0.133 -1648.5 -820.7 -2750.5 .2264.5 -2_04.1 -2326.2 -2516.8 .2162.6 -6417.1 -1327.9 2644.7 -7940.5 -2891.8 -4133.4 -4678.9 -3L_2.5 -,5481.9 2119.1 -3087.3 228.2 -785.6 -1890.0 150.6 -,1_4.1 0.47 0.89 0,43 0.86 0.67 0.009 0.64 0.27 0.50 0.41 0,14 0.55

0.145 0.332 -34_.2 0.41

z mm "l-

(TP_I.E4.8CONT.) WNu andSalaries 1 Totllincom O_hermceipts Ud]aJi-nllal Colm_ R-mlUm

0.107 0.319 0.292 0.200 0.111 0,546 0.384 0.704 -0.611 0.077 1711.1 -2190,2 -1723.8 -3106.3 -1943.9 1115.4 -1450,1 -5464.8 457.0 1217.9 0.28 0.57 0,60 0.34 0.14

0.135 -0.133 -1902.8 -153.2 0.31

0.332 0.354 0.330 0217 0215 0.024 -0.071 0.035 0.385 0.526 -,3041.9-2_3.1 -890.5 -296.2 -368.7 -16_6.4 -_73,2 -2705.3 -2105.6 -1059.2 0.50 0,57 0.47 0.44 0,52

0.323 0.112 0.310 0.440 0,288 _.227 0.237 0.600 0.137 -0.049 -1751,5 -1512,8 -13U,1 -6147,5 -15_2,0 -__32___.1 3542,8 .,8547.9-7578,9 -2840,8 0,01 0,28 0,52 0,53 0,50

0,435 -0.066 -7041.0 -6M2.1 0,54

0.415 -0.403 -5749,4 -2834.6 0,80

0,227 0,453 0.233 0,294 0.150 0.730 .0.130 0.488 -6.058 0.404 .1491.4 .4881.3 -399.7 4024.3 -2730.5 _,5 -4058,8 -4063.4 -4571,9 -2262.5 0,80 0,57 0.67 0,45 0,38

0.170 .0.058 4512.8 -958,2 0,27

0,107 0.280 0,438 0.364 0,327 -0.077 0.133 -0.868 -0.0_8 0.149 -1127.9 .3/21.0-10116.3 -1021.7 -6G7.4 -32,2 -150P-3 57,4 -4828.4 -4441,4 0,44 0,45 0.52 0.55 0,34

0,101 0.410 0.460 -0.177 540.5 -517.4 -352.5 .5921.2 0.35 0,70

NCFI 0.403 0,059 -15205.3 0.67

Ent_eneu_ Tmlim_me Oqher recei_ Urban-Mal Commt R-_lmUe

0,234 0,529 0,683 0,448 0.388 0,288 0.182 -0.035 0.1S1 0,242 .0.0_ .0.230 -237.8 -354,3 -8419.7 -741,9 -439,0 2141,0 -914,0 -6643,2-123_.5 -7"/20,0 -4359,8 -2458,4 0.28 0.80 0,84 0,75 0,54 0.43

0.643 .0.903 -24803,4 0,?2

Olhefloureu TotCk_ome oqherrecoi_ UrbarH,Jrel R._lUme

aallt-values $ignificarfl at12percent level

0,122 0,348 0.382 0.327 18(]6.3 -1821.6 -311,5 -4354.8 0,49 0.01

0,2e2 0.209 -9638,1 0,44

"_ z > B

z > z c_ rn

ACCUMULATION

BEHAVIOR

14:]

income among families dependent on entrepreneurial activities compared with those depending on wages and salaries. The dummy variable for urb_al classification, however, was consistently negative(exceptfora few cases). This means that,giventheincome and windfallearnings,ruralfamiliestended to have higherpropensities to save than urban families. In summary, the family income surveys do not show conclusively a higher propensity to save among fRmilles dependent on non-wage incomes. This is probably why the real wage does net figure significantly in the time series regression of savings function to be discussed in the following section. The paper by Lamberte and Bautista (1989) cites higher marginal savings propensity among higher income level households and non-farm households (using the 1985 FIES). Rural families, in general, (if incomes and other receipts are the same) have higher potentialsto save than urban families,as revealedby the regression analyses. The fact that propensitiesto save are not necessarilyhigherin rural areas (exceptforhouseholds dependent on wages and salaries) indicatethatincomes and otherreceiptsarehigher inurban areasthus raisingthepropensities tosave there.This implies that redistribution from urban to rural areas willmost likelyhave positiveand significant effecton nationalsavings,reinforcing Chapter 2's conclusionthat urban-to-ruralincome redistribution will spur economic growth. Regression

Studies

Savings To study the savings behavior of the macroeconomy, we regressed the domestic savings rate (a ratio to GNI_ as well as its components -1) net savings rate of households and ,minoarporated businesses, 2) net savings rate of corporations, and 3) net savings rate of government -to the variables below: 2 1.

Income Variables a.

GNP growth rate: A higher growth rate implies a higher growth in income and we assume that more surplus income

2. We tried to reconcile the national accounts data of funds so that we can classify capital consumption savings of the various irmtitutional agents (to get their of funds data collected by the Central Bank show

(which we used he_v) and the flow allowance (depreciation) into the gzxxm savings). However, the flow a very volatile series for capital

consumption, making it almost impcasible to derive sensible assumptions source of information and to apply these to the national accotmts figures.

based on this

144

PHILIPPINE EXTERNAL FINANCE

means a higher savings rate for the participants in the economy. This can be justified using beth a permanent income hypothesis or a Keynesian approach. GNP per capita: Using a Keynseian approach, income would be a prime determinant of savings.

Distributional

Variable

Rezl Wage: The impact of the real wage on household savings is still being debated. Some hypothesize that increasing wages and wagelabor employment will harm savings as wage earners tend to belong to lowe_income groups with a relatively high propensity to consume. Others claim that a more equal income distribution (including higher real wages) may be beneficial to the savings rate, since this may siphon off monopoly rents and reduce capital flight or unproductive investments. Still others point to the institutional structure of savings in developing countries, where household savings form a major component of private savings largely generated by unincorporated, household fh_ns in agriculture, petty manufacturing, and informal services (see, e.g., Jansen 1990). For these enterprises, wages constitute a major cost of production which (unlike in the corporate enterprise sector) cannot be passed on as producer prices. Under this hypothesis, the real wage rate would relate negatively to the savings rate. 3.

Real Interest

Rate

The financial liberalization school proposes that real interest rates increases (as interest ceilings are removed) may affect savings rate positively by mobilizing savings fund. The variable used here is the real rate of six-month time deposits. 4.

Foreign

Savings

Foreign savings was postulatedto be negativelyrelatedto nationalsavingsas the two are"substitutes." Cheaper and higherlevels offoreignsavingsmay cause theprivatesectorand the government to usewhat they otherwisecouldhave saved fora "spendingspree." Others claimthatforeignsavingshelpincreasenationalsavings,but thisroute would be through increases inincome,thevariables ofwhich arealready in the model. What the regression coefficient produces, therefore, should be the direct partial derivative of national savings on foreign savings, and not the indirect one which comes via the income variables.

ACCUMULATION

Real Effective

Exchange

The real purchasing the savings rate, especially "capital flight" or a switch national savings. 6.

Foreign

Interest

BEHAVIOR

145

Rate

power of the peso is also deemed to affect if lower purchasing power brings about to foreign assets, whicl_ _y reduces

Rates

Similartono.5,a high interest rateabroadrelative to domestic interestratesmay encourage peopleto transfertheirsavings abroad, thereby reducingnationalsavings.This study uses the US prime rate as themeasure offoreigninterest rates. 7. Lagged Value ofthe Dependent Variable An aspectof savingsbehaviorcomes from custom or tradition and factors based on history. To capturethis,theone-yearlaggedvalue ofthe dependent variablewas includedin each ofthe regression. The resultsareshown inTable 4.9.The data used were annual data from 1972 to 1988. We can see that nationalsavings is significantly related(atthe 10 percentlevel)to GNP per capita,GNP growth rate, foreignsavings,and realeffective exchange rate(allwith the correct expectedsigns). Although notsignificant at the10 percentlevel, theUS prime rateand the laggedvariablesupportedthe study'sassumptions. The significance ofthe income variableswould most likelybe higherif not for multiconinearityamong the variables.This resultis quite important since it reinforcesthe Keynesian view that savings is a functionofincome. The mor_ intexesting implication, however,isthatforeignsavings rate is highly and negativelyrelatedto nationalsavings rate.This negative relationshiphas been hotly debated for highly indebted countriesparticularly in LatinAmerica. Itmust be pointedout thatin a regressionequation,the significant negativecoefficient forforeign savingsraterefersto (ina functionallinearform) the partial(direct) â&#x20AC;˘derivativeof nationalsavingsrate on foreignsavingsrate.Ifforeign savingsrateaffecttheincome variables positively (and ourresultsshow that foreignsavings de affectthe investment rate positively), then foreignsavingswillhave an indirect positive effecton nationalsavings. The negativedirecteffectofforeignsavingson nationalsavings(over

TABLE4J Regressionof SavingsRateon SelectedVariables "0

.1Oependent Veudable CormtentGNP Gm_ Rate

GNP Pm _

Real Fo_eiga Tene Real W_e Savir_ Oeposit _ Rate Exchange

US Prime Pete

lnfla- La_ed Rtioo squared

OW stabtk_ m

R_e

l. Nationalsavingsrate a 0.00340.0052 0,0002

-0,6589

(o.o3) (3.46) b (2._b

-0.0017 -0.0041

(-2._) b

(-2Jo) b (-1._

_Sand uninompomed businea a -0.0359 GNP gro_ rate

(2.34) b

Foe_gn Time m depod rate

US prime rate

Total l_eion cal_d k_ow

0.1029

NetinNet crease o_eclinin p_m ments loans toF_ivate Sector --

LNged

Rsquar_l

0.86_3

2.144G

0.8726

2.0245

-0.0004

0,3646 (1.89) c

(-1.02) _oq_ra_m" -0.00_ (.o._ _:.xlmmed u a reio_oONP. bSignificent at5%. CSigniTzcant at10%.

_70_

__(_))

___

-0.,e42 (-o._)

_> A

b.Sav_z.m _ (x_

> z

(1._

& Smdngs rmo( (:ofl_e_alJmlS a .0.0131

9.5760 0.9138 2.7232

-0._20.37e20.STSS (-o.94) (',.mc

_._

ACCUMULATION

and beyond the income effect) has been explained the following:. 1. 2.

BEHAVIOR

by factors related

147

A high foreign inflow may indues complacency in beth the public and private sectors to mobilize their own savings, and Foreign inflows may trigger a high import consumption pattern which will cut into national savings.

However, countererguments say that the endogenous variable may in fact be foreign savings rate, which increases due to insufficient national savings (see Bowles 1987). The signfficanco of the real effective exchange rate lends credence to the belief that fluctuations in the exchange rate causes speculation and outflow of savi_e assets to the rest of the worl& The regression results of the components of the domestic savings rate reveal that for the household and unincorporated sectors, GNP growth rate, time deposit rates, and inflation rate all significantiy affect household and -_incorporatod savings positively while real wages have significantly negative effect. A striking result is that foreign savings do not affect savings of households and the unincorporated sector. These regression results carry the expected signs and support various theories. The Keynesian hypothesis that income affects household and unincorporated savings is verified. The financial liberalization school hypothesis, which states that deposit rates may increase the savings rate of persons, is also validate& The forced savings hypothesis wherein inflation rate generates savings of persons also seems to hold positively for a poesibty lopsided income and wealth distribution whera_n savings are mainly done by upper income groups connected to conglomerates and large estates. The negative impact of real wage on savings of households and the unincorporated sector corroborates this result, thus affh_ing the two hypotheses that a higher real wage would mean higher savings for individuals and families associated with corporate firm income and that wages constitute a cost factor to household firms affecting their savln_s capacity. The fact that foreign savings do not figure significantiy is not surprising given the fact that most foreign credit inflows are channeled to the corporate and government sectors. The regressions on corporate savings yield quite interesting results. Three regressions are involved: The first uses total foreign savings to represent capital inflows from abroad to the country. The second regression uses total foreign capital inflow to the private sector. The third regression separates the foreign capital inflow to the private sector

148

PHILIPPINE EXTERNAL FINANCE

into direct investments sector.

inflow and foreign credit inflow to the private

The results show that if total foreign savings for the country is used, growth rate of GNP, foreign savings, time deposit rates, and US prime rates would all positively and significantly relate to the corporate savings rate. 8 The unexpected result was the positive correlation between US prime rates and the corporate savings rate. This can be possible if some multicollinearity exists between the domestic interest rates (such as time deposit rates as included in the regression) and foreign interest rates, and if interest rates on foreign excbRn_e deposits are aligned with foreign interest rates. Another interesting finding is that, unlike the result of the regression on domestic savings, the sign for foreign savings is positive rather than negative. This suggests that foreign inflow and easy foreign credit give private corporations, which are the main users of foreign credit inflow and direct investments, incentives to incur a higher savings rate over and beyond the income increases they enjoy. The different outcome in the national savings rate equation may actually be confined to credit in the government sector. The last two regressions, however, show that if we use total capital inflow to the private sector or its two components, the coefficients for these variables are negative but insignificant. It seems, therefore, that total foreign inflow to the country performs better than foreign inflows solely to the private sector. This is because the inflows channeled to the government may indeed be used for infrastructure and other government spending that may be beneficial to corporations over time. Investments

and

fixed

capital

formation

In the regression on investments, it was not possible to break investments into households, corporations, and government as was done with savings.Although the data are theoretically availablein the flow-of-funds account, the figures proved to be volatile;gross investments,forinstance, became highlynegativeforsome institutions in themid- and late1980s tobe credible. The regressionsarebased on thenationalaccountsinvestmentdata presented in Table 4.2.Four regressionswere based on the following equation: CI = Io+ aiFS + a_CR + a3LR + a4Pm + asGI

(18)

3. If the lagged value is included,the coefficientforforeignsavings remains positive but beeames insignificant_

ACCUMULATION

where

Io = FS = CR = LR = Pm= GI =

Private

BEHAVIOR

149

Investment

Constant Foreign Capital Inflow Gross Domestic Credit of the Banking System Re-_ Lending Rate ]:_ice Index of Imports (1972 as base year) Government Investment

CI, FS, CR, and GI are all expressed as ratios to GNP. It is postulated that the constant in the above regression captures the exogenous investment demand and "_nlrnR] spirit" based on expected profitability and stability of the system for the period of the regression: 1970 to 1989. The variables deemed relevant to private investments

Forei_ Savings." The higher the foreign savings, the higher private investments would be as these fill up the savings gap and the foreign exchange gap;

Gr_ss Domestic Cred/t The higher the available credit, the higher the investment level; this variable is included due to the financial repression and credit rationing in the 1970s;

R_l Lending Rate of Banks: This identifies the real cost of borrowing which, together with credit availability, is, for both Keynesians and neoclassicals, an important theoretical determinant of investments. The real interest rate is believed to be negatively

to the investment

rate;

Price Index of Imports: Since much of durable equipment and construction materials are imported, one would expect the investment rate to be negatively related to the domestic price of imports; and

Government Investment: It is believed that government investments crowd out private investments; but it does so only through the indirect route of gross domestic credit and real interest rate which are included above. More "s_ructuralist _ economists claim that government expenditures on infrastructure has a direct "crowding in" effect, increasing private investments by providing better transport, communications, and energy services to the private sector.

1S0 PHILIPPINE EXTERNAL FINANCE Table 4.10 shows three differentregressions using private investment as the independentvariable. The firstusesforeignsavings (totalcapital inflowtothe country); the seconduses totalcapitalinflow totheprivatesecto_whilethethirdseparatesthecapitalinflowstothe privatesectorintocreditinflowsand directinvestments. The resultsindicatethat domesticcreditand the priceindex of importsarehighlysignificant indetenuiningprivateinvestments. Total creditinflowtothecountryisalsohighlysignificant. But theregressions using capitalinflowto the privatesectoras well as theircomponents have thecorrectsignsbut do notfiguresignificantly. This iscontraryto the expectationthatmuch ofthe foreigncapitalinflowischanneled to grossdomesticcreditso thatsignificant increases inforeigncreditwould also increase gross domestic credit and affect private investments. Direct investments in the third equation come in almost significantly at the 10 percent level. A positive relationship also exists between government construction and private investments. This is most likely a pump-priming effect since the variables occur simultaneously. The regression equations also support the effects of external shocks on the savings and investment behavior. The investment rate contracts sharply as foreign savings plunge (and as domestic credit availability shrinks through mopping-up operations and high interest rate policies). Domestic prices of imports skyrocket as the government is forced to devalue, bringing investments further down. The growth rate and income per capita contract and these bring down the savings rate. The devaluations trigger loss of confidence in the currency and aggravates the decline of national savings. The fall in investments and output eases up the fiscal and foreign exchange constraints as imports contract significantly and as government sharply cuts back its expenditures. The regression analysis also revealed that recovery through pumppriming is not able to arrest the economic decline fast enough. Excess capacity caused by recession is quickly eliminated. But this type of recovery also occurs without any substantial increase in foreign savings; thus, it begins to sputter when expansion and investments are needed to keep the economy going. Based on the regression results, the government triestoraiseinvestmentlevelsthrough increasesin credit availability and increasesin government investments.However, the increase is not as fast and significant as having foreign savings unless a structural change occurs in the behavior of the private sector and government. Foreign exchange and fiscal constraints also limit the amount of expansion domestic pump-priming can achieve. Credit availability is negated as inflation becomes higher (sinco excess capacity

TABLE4.10 Regrmlon Oepende_ Vadable

Constant

Foreign S,avbgs

Grou OomesUcCredit

of Private investment on Selected Variables Real I._ Rate

Pdee Indexd Impels

Governmead Co,-

Total Foreign _ Inflow

He1Increase In Private loans

Net [)kect

R. Squared

DW Statis6c

0.gGGO

2,203O

0.9240

1.9358

meeds

k)pdvmm)etor 1.Private k_tment

0.1278 (9.26) e

_5.3L_

('L. _10_)

.0_00006 (.o.o2)-_0(m4 (..4.31) a

0.2713 (1.7o)

2.Pdvote 0.0

3.PH_ 0,31

0.0002

0.4088

0,1513

0.91

Z: (:: d_ aSignificant at5%. bS_nlfieant at10%'

Z _ m m

-r > <

1S2 PHILIPPINE EXTERNAL FINANCE isquicklyeliminated)and as monetary and high interestratepolicies contract domestic credit supply. Government then limits its investments on infrastructure as the fiscalconstrainttightensduring the expansionaryperiod.This isexactlythe experiencethe Philippines has gone through from themid-1980s to thepresent. Savings and Investment Behavior of Government and Public Enterprises: An Overview 4 The publicsectorexpansionisone ofthemost importantstructtwal changes that emerged during the 1970s.Much of the expansion was attributedto key developments in the domesticpolitical economy and theforeigncapitalmarkets. The firstsetof developments refersto the Marcos "constitutional authoritarianism _thatstartedwhen martiallaw was declaredin 1972. To consolidatehispolitical base and furtherthe positionof hisfamily among the country's economicelite, Marcos had toexpand government, centralize authority,and reward supporters,among others,by giving them controlof mushrooming publiccorporations. Increasingpublic investmentsthrough publicenterprises was thechosen strategytopush the government rolein development. The easy availability offoreignfinancingcomprisedthe secondset of developments that fosteredpublicsectorexpansion.While public foreign borrowings were essentiallydemand-driven, public sector expansion through these loans would likelyhave been much smaller without the favorableconditionsat which externalfunds were made availableduringthe 1970s. Two analytical questions are raised in the succeeding sections. First, did government actively use fiscal policy to influence economic activity? Second, was government behavior influenced by the availability of foreign funds? To address these, the study reviewed the trends in public savings and investments during the period under study, the overall fiscal policy, and the role of external finance in these trends. Table 4.11 gives the levels and shares to GNP of the national government and public enterprise savings, investments, and resource gaps. National government savings as shares to GNP were rising in the -1970s. The trend reversed in the 1980s, reaching a negative level in 1988. Public enterprise savings were consistently lower than those of the national government, but these deteriorated to alarming levels starting in the crisis year of 1984. 4. This section and the sections o_ Foreign Debt, Extea_al Imbalances, and Public Sectc_Deficit Census ofthe Philippines, drawn partly fec_nVce (1990).

TABLE4J1

PublicSectorSavings andInvestments a Savings NG

Inves_ents ofw.,_ NFPE 째

NGc

ofw/c owninv.

I-SGap o_w,lc NFPE

NG Transfem toPE

CPSD

2299.7 10382,6 7694.6 7587.4 10109.1 12241.5 18062.1 14536.9 12149.1 18421.4 12500.0 5952.0 8303.0 9026.0 17800.0

1319 2172 2877 3467 5130 6357 8545 9656 5959 14350 14500 32800 8700 5300 2300

1403 2349 2852 2187 342 3387 12148 14405 7431 8828 11187 31255 28100 23197 20100

3929 15868 9367 8137 14236 10175 234,53 15725 15717 29637 36000 31100 6900 7100 22300

4013 16046' 9342 6837 9448 7205 27054 20474 17189 25115 32687 29555 18300 24997 40100

mmiJon,pesos: 1975 1976 1977 1978 1978 1980 1981 1982 1983 t984 1985 1986 1987 1988 1989

2160 2291 2240 4843 8862 10205 9543 7_5 10948 13551 13517 12321 3542 -700 9500

980 1316 1661 1315 1643 2217 3314 4202 4200 1720 -19529 -21872 -10995 1608 4500

243 226 345 -180 -268 -2t3 932 1720 1527 3816 4456 313 6188 11971

3563 4640 5092 7010 9204 13002 21689 21630 18379 23379 24704 43576 23642 22500 29600

2100 2694 2823 4334 4955 8405 12679 9278 10409 9786 8796 11683 12152 14447 23400

4809 17185 11028 9452 15879 12"382 28767 19927 19917 31357 16371 0228 -4095 8708 17800

espeecent ofGNP 1975 1976 t977

1.9 1,7 1,5

0.9 1,0 1,1

0.2 0.2 0.2

3.1 3,4 3,3

1.8 2.0 1.8

4.3 12.8 7.2

H C _C -_ OZ I

2.0 7.7 5.0

1.2 1,6 1.9

1.2 1.8 1,9

3.4 11.8 6,1

3.5 12.0 6.1

154

PHILIPPINE EXTERNAL FINANCE

ACCUMULATION BEHAVIOR 155 In contrast, public enterprise investments, which fluctuated between 4.3 percent and 12.8 percent during 1975-1984, were greater than natlon-I govervJnent investments up to 1985. These trends suggest that much of the public sector expansion was carried out through the public enterprises. Consequently, the consolidated public sector deficit during the period followed more closely the direction and size o_ public enterprise deficits rather than those of the national government. In fact, the national government deficit up to 19_ had approffilm_ted the amount of government transfers to public enterprises. Without these transfers, the government would have realized surpluses in most years. Under the Aquino administration, tr_rmfers were cut back. Public enterprise investments also declined substantially to levels below those of the national gevemment thus pulling down the consolidated deficit. However, this was obliterated by the low level of savln_ SO that the deficit as share to GNP began to rise again in 1988. National

Government

Savings

Table 4.12 shows the levels and shares of the national gevern_ent's revenues and current expenditures to GNP. Figure 9 plots the shares of revenues and current expenditures to GNP. In the two decades under study, national government savings were highest in 197_1981 at 3.1 percents4.1 percent of GNP; in other years, except 1987-1989, savings averaged 2.0 percent of GNP. The picture deteriorated drastically in 1987-1989 when savings were practically nil. As a whole, savings followed a eountercyclical tren& i_wer than average savings were realized in the *good" years of 1975-1977 and during the recent years of recovery. A contrasting picture emerged in between these two periods which also saw a succession of domestic and externsA! crises. Table 4.12 shows that these changes are explained primarily by the government's expenditure policies rather than the tax effort. The relatively high savings in the first half of the 1980e were obtained from drastic declines in current expenses (as ratio to GNP) such as wages, maintenance, other operating expenses, and subsidies which mitigated the slight deterioration in tax collectio_ Savings were unrealized from hisher tax effort ratios in 1987-1989 due to the upsurge in interest payments and wages. The government's current expenses also seem to be quite sensitive to changes in national income. From the regression _esults, nominal expenses had an elasticity of 1.04 while that of taxes was estimated at

Table4.12

Revenues andCurm_lExpenclitum oftheNational Government .-Q

Revehues

(1)

Tax Fleve-

hues

I_rect Texes

(3)

(2)-

16856 18088 19559 24073 20476 347'31 35953 38206 48641 _ 68702 78583 100850 112903 151900

13753 15327 16955 20445 25954 30530 31423 33795 39598 50761 61190 65481 85823 90359 122462

I_ Trade

mr1. Trade

(s)

(6)

(4)(5)_(6)

(3)+(4) 1975 1976 1977 1978 1979 1980 1981 1982 1953 1984 1985 1986 1987 1958 lg_

Indirect Ta._s

10682 11637 13416 14949 19762 23279 23684 25416 30323 37847 42602 46343 54124 62950 84870

3820 5466 7133 7133 10283 11634 124_ 13238 14102 20215 24158 28497 37850 37370 45958

lntereM Pay-

ses(_

me_s

(9)+(10)+

(_1)

(Pmilion) 3071 3648 4089 5471 6195 7272 7758 8272 8786 13109 18588 19148 217gG 27409 375_

cummt Expert-

6862 6171 6283 7316 5479 11645 11172 12178 16161 17832 18444 17846 26274 25580 38912

14696 15798 17719 19230 20608 24516 28390 30080 34522 42873 55275 66262 97317 113600 142400

Wages and

IntraPubic

"rra_

MOE=

(11)

(lO)

14.7 13.5 13.0 13.6 13.5

12.0 11.4 11.1 11.5 f1.9

2.7 2.7 2.7 3.1 2.8

9.3 8.7 8.8 8.4 9.1

3.3 4.1 4.7 4.0 4`7

6.0 4.6 4.1 4.4 4.3

12.8 11.8 11.6 10.9 9.5

_rn

624 743 _ 1136 1841 2296 2429 3500 4896 10409 14852 20953 38929 A.'.:'.3 547100

133M 14370 16037 16708 17102 20130 21804 23830 25819 29250 36092 40015 53197 81207 7_00

686 685 784 1388 1665 2090 2967 3500 3707 3_5 4531 5294 7191 7950 9700

0.5 0.6 0.6 0.6 0.8

11.7 10.7 10.5 9.4 7.8

0.6 0.5 0.5 0.8 0.9

(_ofGNP) 1976 1976 1977 1976 1979

I __

z r> Z

ACCUMULATION BFHAVIOR

157

°°°°°°°°'°° !J

FIGURE 9

National Government Revenues and Current Expenditures

0.16

-Ira t._

r_ m

O.lS, z 0.14

o. 0.13 Z o m

0.12

0.11

0.10

0,_'

1975

1976

1977

1978

1979

1980

1981

• RGNP

1982

1983

• CURGNP

1984

1985

1986

1987

1988

1989

ACCUMULATION BEHAVIOR 159 0.98. 5 National government savings thus tended to deteriorate of economic recovery and improve during recession.

in times

Tc_ collection The unsust_in_bility of improving national government savings through better tax measures is corroborated by a study on the estimated tax elasticities for 1975-1988 (see Manasan 1990). Table 4.13 presents the computed elasticities of the major sub-categories relative to GNP. As shown by the insignificant coefficients of the d-ramies, the succession of tax reform measures implemented in 1980-1985 and 1986-1989 did not enhance the tax system. Income taxation, which is slightly more elastic at 1.145, seems unaffected- Indirect taxation, which comprised about 60 percent of total taxes, has an elasticity lower than unity, thus exp]Ainiug the low overall performance; international trade taxation, which has a computed elasticity of only 0.58 seems to have caused this result. Domestic trade taxation produced a much better result of 1.43. The findings from Table 4.13 underscore the significant role of import smuggling or underinvoicing in the tax evasion problem. (Chapter 5, Table 5.21 presents an estimate of the degree of underinvoicing of imports as well as exports.) For 1988 alone, estimates show that import and export misinvoicing may have reached US$1.3 billion and US$1.2 billion, respectively. Interestingly, the regression results show that the import liberalization measures in the second half of the 1980s, along with the removal of export taxes seemed to have mitigated the low elasticity, whereas the series of domestic taxes for the stabilization program in the early 19808 distorted revenue collectionThe low tax collection may also be traced to the undertaxation of a large portion of the economy. Based on the MSAF constructed for 1974, 1979, and 1987 presented in Chapter 2, the index of 'overtaxation/ undertaxation" was computed for the major production sectors and institutional agents. The index gives the ratio of the sectoral tax share to sectors] share in total GDP; a ratio greater than 1 may indicate "overtaxation," i.e., the sector's contribution to total (explicit) taxes is more than the proportion of its share to total income, e Table 4.14 (the computation covered nominal or explicit taxes only) suggests that 5. Other e6tlmHtesof tax elasticities a_ those of Trinidad and de Perio (1983) for 1977-1980(L 13),Llanto(1983) for 1981-1981(1,07), Manasan(1989) for 1975-1988(1.0), and IMF(1975) for 1960-1972(1.1). 6. The index may also be derived by getting the ratio of the avorage tax burden for the sectortothe overalltax burden(ortax effort).A sector is thus und_zed if its average tax burden is less than the tax effortratio for the whole economy.

160

PHILIPPINEEXTERNALFINANCE

TABLE4.13

Estimation ofDirectandIndirectTaxElasticities" ....

Constant GNP D1 D2 DI*IogGNP D2*IogGNP R2 N

Direct Tax

Indirect Tax

Domestic Trade Taxes

Internetional Trade Taxes

-5.31 (-2.65) a 1.145 (6.82) a 0.22 (0,09) -4.99 (-1.27) -0.03 (-0.16) 0.36 (1,22) 0.99 1975-89

-1.88 (-1.21) 0,954 (7.32) a 2.03 (1.05) -3.18 (-1,04) -0.16 (-1.04) 0,23 (1.01) 0.99 1975-89

-8.38 (-4.26)a 1.43 (8.72) a 6.37 (2,59) a 6.18 (1.61) -0.53 (-2,64)a -0.49 (-1,6g) 0.99 1975-89

1.96 (0.71) 0.58 (2.51) a -0.83 (-0,24) -12,57 (-2.33) a 0.07 (0.27) 0,95 (2.32) a 0.96 1975-89

a Tax_ andGNPareinlogform. D1-1for1981-1985, 0othe_ise. D2-1for1986-1989, 0othenvbe.

agriculture, construction, electricity, water, and services were undertaxed for the two decades. Considering that these sectors comprise the largest and more dynamic sectors in the economy (see Chapter 2), the result thus explains the overall low tax collection. Based on the same data, the number of undertaxed sectors seemed to have increased in recent years. Manufacturing, especially heavy manufacturing, is shown to be consistently overtaxed, probably because of its dependence on imports which give about one-third of total taxes. AS to the institutional agents, the MSAF data indicate alarge degree of undertaxation of the household and Im;ncorpocatedbusiness sector and the public enterprise, although the 1979 data shows an increase in public enterprise taxation for that year. The private corporate sector seems to have borne much of the tax burden, probably because it comprises the highest per capita earners; tax evasion is also easier to

TABLF.4.14

EstimatedUndertaxalionindex:ProductionSectorsendInstitutions1 Agentsm (basedon MSAF1974,1979,1987) k Produclbn seckxs TaxShare(%)

Ag..m__,__,_ Mining Menulactudng LigMmamdactudng Olhermanufactudn 9 _, ebOIxi(z_j, gas andwalef

COPShare(%)

Undefta_ion Index

1974

1979

1987

1974

1979

1987

1974

1979

1987

6.70 3.37 36.30

6.00 1.94 23.65 8.19 15.45 2.83

29.79 3.21 25.98 6.10

29.57 2.27 19.31 10.12 9.19 7.03

21.25 1.65 17.61 10.17 7.44 6.10

0.22 1.05 1.45

2.63

8.25 1.77 34.38 13.88 29.50 3.50

0.43

0.30 0.79 1.78 1.,37 2.23 0.50

0.38 0.99 1.34 0.80 2.08 0.46

14.42

21.04

17.62

35.62

31.50

35.48

0.40

0.67

0.50

ELInsmulkml agents TexShare(T;)

Households & uni_

buam

PdvMe_ I_d_Â˘enleq_sm

Nalional_noome Share(%)

trldex

i[]

1974

1979

1987

1974

1979

1987

1974

1979

1987

12.98

18.32

16.72

83.80

84.50

65.10

0.14

0.22

0.20

15.93 0.07

7.e9 3.75

26.62 0.16

14.08 2.10

12.10 3.30

11.90 3.00

1.14 0.04

0.64 1.14

2.24 0.05

z _m "I" >.

a Lemthan1indice_undefla,_ion. Sourceofbernda_ Y_ (_).

162

PHILIPPINE EXTERNAL FINANCE

check in this sector rather than in the informal sector. However, part of corporate taxes, including income taxes, may have been passed on to households in terms of higher prices. If this is the case, then the tax burden of the corporate sector is overstated. As to public enterprises, evasion has been condoned by the government through their tax exemption privileges. These were fortunately lifted by the present administration, but the undertsxation seems to have remalned_ The role of foreign savings in alleviating the tax effort may be viewed vis-a-vis the tax burden of the recipients of foreign funds. If foreign savings generate higher income for a loan recipient, a higher overall tax effort will be obtained if the recipient's average tax burden increases as well. However, the sectors] distribution of the country's external loans (Table 4.19) reveals that the recipients of the larger portion of these loans (e.g., electricity, gas and steam production, financial institutions, agriculture) were among those that are considered undertaxed, i.e., their tax burden was lower than the national tax burden. The undertaxation of the household and unincorporated enterprise sector also seems to indicate the government's failure in appropriating income taxes from foreign remittances that accrued to these sectors. The low tax effort ratios observed during the crisis years may also be explained by the dependence on international and domestic trade, making the tax system heavily dependent on trends in world commodity markets and on the business cycle. This vulnerability of the tax base is evidenced by the deterioration of the tax effort in the second half of the 1980s, at which time taxes from foreign levels. Current

trade also plunged to the lowest

expenditures

The government's current expenses declined during the second half of the 1970s up to the early 1980s, from 12.8 percent in 1975 to 8.1 percent in 1984. Thereafter, it started to go up reaching 14.8 percent in 1989. The underlying budget items reveal that the decline in earlier years can be traced to the steady decline in maintenance and operating expenses, including wages representing 12 percent of GNP in 1975 to 6 percent in 1985. The cuts appeared to accommodate the growing claims for interest payments which leaped from merely 0.5 percent of GNP in 1975 to 6 percent in 1989. The rising allocation for interest payments reflects not only the expansion of the national debt stock but the effects of exchange rate and monetary policies, along with the changing lntorost rate structure of foreign debt. Table 4.15 summarizes the impact of these variables. The numbers seem to imply that the government buffered itself from the

ACCUMULATION BEHAVIOR 163

TABLE4.15

Faclor=Affeoting Changes intheNationalGovemmenl'i IntereldPaymenls, 197f-1988 Foreign Interest Payments Change in Peso Foreign Change in Devalua. Change in Interest Outstsnding tlon Interest PaymentsExternal Debt Rate Rate (%) (%) (%) (%) 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986

2.72 150,33 100,26 58.26 (17.86) 26.83 90.87 94,12 (5.04) 35.07

41.53 43.71 12.12 24.07 46.18 12.58 17.97 4.80 11.91 27.89

(0.50) (0.50) 0.16 1,82 5,17 8.11 30,13 50.27 11.43 9,56

1988

7.89

8.90

2.56

1987

113.81

54.94

0.89

Domestic Interest Payments Change in Change in Change in Interest Outstanding Interest Payments Internal Debt Rate (%) (%) (%) 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

(2o.47) 59.92 43.01 1,29 31.60 60.00 13.11 121.22 77.37 52.82 54.48 32.85

15,54 16.88 6.9g 14.61 31.00 23.33 18.38 37.99 31.59 42.27 39.47 29.38

(3e.31) 43.03 36.01 (13,32) 0.60 36.87 (5.28) 83.24 45,78 10.55 15.00 3.50

basi_data:Depadment of6udget andUanageme_; Cenl_6ankofthePhJpfzk_

(38.31) 107,12 87,98 32,39 (69,22) 8.15 42.77 39,05 39.03 6.29

56.31 (1.99)

164

PHILIPPINE EXTERNAL FINANCE

pressures of a rising debt stock by managing the exchange rate within a stable range up to 1982. Other reasons also impelled government to chose to overvalue the peso in those years (see Chapters 3 and 5). During the 1983-1984 BOP crisis, the peso was devalued by as much as 50 percent, which compounded the pressures from CB's mopping-up operations that pushed up interest rates in the domestic market. In 1986, the domestic and foreign debt stock rese by 43 percent and 28 percent, respectively, owing to the tran_er of liabilities of a number of public and private enterprises to the national government The interest rate structure of public external debts also changed dramatically, a principal offshoot of the tightening international credit situation. In 1975, 95 percent of outstanding debts carried fixed interest rates; by 1985, such debts comprised only 63 percent of the total. In the previous section, it was suggested that the negative relationship between government savings and foreign savings may reflect a tendency to splurge during periods of high foreign inflows. Evidence generated from the simple regression of the various components of current expenses to foreign borrowings and other relevant variables (GNP and revenues) suggests that this is explained by the significant positive correlation between foreign interest payments and the government's foreign loans inflow. Government may have been motivated by the foreign exchange requirements of the debt service in contracting new foreign debt. Contracting the loans, subject to their availability, seemed to be the easier option for the government since the alternative -- purchase of foreign exchange from the domestic marketwould have undermined its support of the exchange rate. Public

Enterprise

Savings

Behavior

The phenomenal increase in the number of resources channelled to public enterprises is one of the salient features of the public sector structure under the Mareos regime, specifically in the 1970s through the mid-1980s. As of 1987, the Presidential Commission on Reorganization listed the number of public enterprise at 291, of which 97 were "parent" entities and the rest were subsidiaries and second-level subsidiaries. Most of these (241) were set up after 1972 (the year martial law was declared) through special laws (Presidential Decrees or Executive Orders) and the General Corporation Law. The post-1972 expansion came in two waves: the first wave which occurred before the 1980s consistedof parent corporationsand subsidiaries; the second wave which took place during the 1980s were mostly second-level subsidiariesand nationalizedprivate entitiesacquired from the

ACCUMULATION BEHAVIOR 165 non-performing assets portfolio of the state-owned Philippine National Bank and Development Bank of the Philippines. As mentioned earlier, the motive for much of the expAnAion could be traced to the political goals of Marcos which jibed well with the availability of forum funds in the 1970e, and the policy responses to developments in the external sector (e.g., the two oil shocks which paved the way for the state-owned enterp_sos inthe energy sector). Notwithstanding its expansion, the public enterprise sector's contribution to national saves were insignificant. Savings of the sector during 1975-1982 averaged 0.97 of GNP (see Table 4.11). This may be explainedby the long-gestating projects ofthelargestenterprises which embarked on projects in energy, water, transportation, and communication i-i_astructure. The oilshock in 1978 alsoseemed to have greatlyhampered theiroperationsas seen from thenon-fmanoial enterprisesavingswhich dippedtonegativelevels(-0.1 percentofGNP in 1978_79,-0.8percent in 1980).In 1981, non-financialenterprise savin_ startedto improve. Unfortunately,the financialinstitutions were loaded with non-performing assets arising from the default of private sector loans during the BOP crisis; these pulled down the financial performance of the entire sector. During 1983-1989, dissavings averaged 1.3 percent of GNP. Based on previous discussions on the role of foreign financing on the savings behavior of public enterprises, the availability of foreign savings may have engendered complacency among public enterprise m---._ement to generate more internalsavings.This contentionis supported by the results of regressing public enterprise savings against the following variables: 1) share of gross value added to GNU. a higher share implies higher income which should allow a higher savings rate, 2) expected foreign savings, and 3) growth rate of foreign savings. The results shown in Table 4.16 support the study's expectation. 7 The availability of foreign savings seemed to have triggered a spending pattern and/or, revenue policies that hindered internal savings mobilization. The pricing policies of government corporations, which constrAi-ed them from realj_ing rates of return approximating their cost of borrowing, may also be cited in this regard. Among the 14 major non-financial corporations (12 of which are public utilities), three had subsidized prices: Nat_on,! Irrigation Admlni_tration (their clients are rural farmers), National Housing Authority, and the National Food Authority. Their loss in income were financed by government subsidies. The other 11 major corporations adopted the principle of cost recovery. 7. Adding time deposit rate or treasury-bill rate yields an inaignificant positive coefficientand does not improvethe fit of the equation.

166 PHILIPPINE EXTERNAL FINANCE

TABLE4.16 Regreulo_l " of PublicEnt,,e, rprisesSavingsagainstSelectedVariablesa Constant . GrossvalueaddedD Laggedforeignsavings b Foreignsavingsgrowthrate Laggeddependent N R"2 D.W.stat

COEFfiCIENT -0,01 2.48 -O.61 -0,02 0.74 1976-1988 0.6,5 1.69

T*Sl"AllSllC -1,21 2.52c -2.03c -1.72 2.47c

_aOe_nclenl vadal_issavings toGNP rmio. uForeign Ixxrow_gs andgro_value added exlxemmd as_ toGNP. eSignificant at5percent leveL

Cross section regressions of the revenues from _ds sold against the operat_ expenditures of the 13 major corporations show that the elasticity of this group's income with respect to such costs is 8Tearer than one. 8 The regressed costs, however, exclude other current costs such as integer payments. The small diff_cenco of the estimated elasticities from one show that including these additlomx[ costs may in fact yield an elasticity of less than unity. Public

â&#x20AC;˘

Investments

Public investzxtents were the vnAi_ source of fiscal expnnmion d_ the 1970s. The internal cause for this expanRion was Mazx_' political and development strategy which used the state to change the baJanco of power within the Philippine elite and to strengthen the countz3/s infrastructure. Public investment up to 1975 was largely controlled through the government budget; thereafter (until 1985) the bulk of public investment took place through corporations. According to Table 8. From:Los(sales) = -0.68 + 1.16 log(cost of gooda) (0.862) (8.77) R"2ffi0.75 D.W: 2.9

ACCUMULATION BEHAVIOR 1&7

4.11, public corporations (financial and non-financial) mmm_,od 71 peresnt of public tnvestmen_ between 1976 and. 1985. The external factors behind the e.._anslon of public investments relate to the oil price shock and to the avn;imhility of _ finance. The first oil shock gave rise to an ambitious smeary program (strongly supportedby World Bank lo_nl) to generate dmmel_i_energy _ur_ee to sul_titute oil imports, to provide a_.it, lo_l power generating capacity to support growth, and to support rural development by extending rural eleetrificatio_ As a result, the end of the 1970s saw more than hail of public investment going into energy projects. Investment in tr_-_ortatlon and road construction was the second major sector of public investment. The critical factor in the exp_n-ion of the public enterprise sector appears to have been the availability of extsrnal finance. This is shown by the strong correlation between public investment and borrowing. Table 4.17 gives the results of regressing public enterprise and naLional government investments a_t_at foreiLm borrowln_e. The decomposition analysis of the current account based on the data presented in Table 3.9.also supports this contention, l_mres 10 and 11 reinforce _ the study's conclusion-"as foreign sources.of financing virttmlly dried up after 1982, a steep decline in public sector investment oco_ Interesth_ly, tax income does not correlate significantJy with national government investments, suggesting that it is likely current spendln_ that adjusts to tax income. Another reason to presume that the level of public investment duri-_ the 1970e and 1980s was largely driven by the availability of external finance is the Almost ineffective system of debt management that prevailed during the 1970s. Since the early 1970s, the Philippine CB managed a relatively developed system of monitoring and controlling external borrowing. This was instigated by the external debt crisis that emerged around 1970, after a period of e_p_nAionary policies coupled with a strong reliance on (short.term) external borrowing during the first Marcos administration. The IMF stabilization program, the floating of the exchange rate, and the debt renegotiation to obtain longer maturities helped to roeolve th_ erieia.The expe_enee led to _h-nges in the external debt policy toward a more comprehensive system of control and monltorins,...... s Under the new system of debt

9. See DohneF and Intai (1989) for mere details on the nature of the debt manhunt syotem tnt_dueed under Republic Act 6142 of Novembee 1970.

168

PHILIPPINEEXTERNAL FINANCE

TABLE4.17

ResultsofgegmuingNational Government andPublicEnterprise Investment AgainstFom.ign Savlng..s..a.nd Other..Finanoing V.eriables", NATIONAL GOVERNMENT INVESTMENTS

Constant Netforeign tXXTOwing== Of thenational government Netforeign loorrowirmes of

PUBLIC ENTEI:IPflI,_I_ INVF.STMEN'rS

O.11 (0,88) 0.88 (4.75) b

.0.001 (0.13) 0.62

puuic

National government

revenues

(1.9s) 0.05

(0.s2)

Netdomestic financing for

0.00g,,

(5.91)"

puUic ses Dummy ( 1= Aquino years) N R2 D.W.stat.

.0.005 (I.g2)b 1975-1989 0,63 1.68

-0.00g (0.74) 1975-1989 0.86 1.15

Allvariables mee_qxessed M shamIoGNP. Slgnili_mt ,_5penni level.

management, external borrowing became constrRined by a cap on the total debt service payments of 20 percent of total foreign exchange earnings. Given the fact that this critical debt-service ratio only referred todebtservice dueon long-termdebtandthatnew inflows (long-term and shorbtorm)were partofthedenominator, thecap didnotlimit effectively externalborrowing during periodsof highly liquid international financial markets,with international banks willing to lendmassively todeveloping countries, aswhat occurred inthe1970o. In the case of public corporations, borrowing was allowed up to a certain, annually fixed ceiling and no approval for individual loans was required

RGURE10 Public Enterprise Investments and Foreign Borrowings

0.12 0.11 0.10 0.09 0.. Z

.9 a:

0.08 0.07 0.06 O.O5

0.04 0.03 e-

0.02

o.oi 0.00,

z -'r I

1975

f976

1977

1978

1'979

1980

t98I • IGNP

IGNP - R_o ofPubtl¢Enterprise Investments toGNP

1982 1983 • AFSGNP

1984

t985

1986

1987

1988

1989

AFSGNP- RatioofAvailableForeign SavingstoGNP

FIGURE11

National Government Investments andNetForeign Borrowings

0.07

o.oe

-=I

z > f=-

0.05

z a.. 0.04

7 0

._o0.03 rr"

0,02

0.01

0,00 -0,01 1975

1976

1977

1978

1979

1980 1981 1982 1983 1984 • CAPGNP • NFiY3NP

CAPGNP-RatioofCapitalExpenditures toGNP

1985

1986

1987

1988

1989

NFBGNP - Ratioof NetForeignBorrow_ toGNP

ACCUMULATION BEHAVIOR 171

In practice, however, coilings were greatly exceeded during the 19708 and early 19808. According to Dohner and Intal (1989), the control process was undermined by the way _A_on-making could operate under marti_ law and with approvals far boneowing granted through presidential letters which could supersede any decision under the debt management system. Due to this ineffective official external debt managmnent, borrowing was then largely uneomm-i-_d so that the roal constraint was set at the creditors' end; for commercial banks, their perception of lending risk to the Philippines served as the m_iconstraint. The structurs of external indebtedness by type of borrower reflects this process of debt accumulation- The share of outstandin8 external debt of public, non-financial corporations to total, long-term external debt of the Philippines more ,_,n doubled to over one-quarter of total debt during the second half of the 16708 (Table 4.18). Presenting the distribution of external debt by economic sector, Table 3.11 shows that by the 19708 about a third was accumulated through invest_nent in energy projects and close to one-fifth through investment in roads and

TABLE4.16

Ou_mdnll F.xtern_I;)el_byI_ilugmudTypeol Borroww (Pemen_ge atmru of1_1 _ debt) n

l'_ldLm_t. Temm DdN

Cengld _ _ B_k Govern- _

r ,iT '

_ Se_r

IMF cmdl)

1670 1975 1977 1878 1979 1960 1N1 1262 1563 1M4 IN5 t986 1987 1988

,,_urm: Voo (1160).

100.00 22.0 100.00 20.7 100,00 17.9 160.20 21,6 100,20 24.3 100,00 25,7 I(X).QO 25,7 160,60 26.7 160,60 25.8 160,60 25.2 16010.60 26.2 160.00 34.6 160.00 30.6 160.60 29.0

9.5 12.4 12.7 16.3 15.8 17.6 20.4 21.0 24.1 25.8 30.7 29.4 39.6 43.5

10,2 14.5 23,8 25.0 27,4 26,4 _0 22,7 24,0 26,3 24.4 21.3 10.3 18.5

58.2 ,52.4 45.5 37.1 32..4 30.4 28,8 29.6 26.0 22.7 18.7 14.7 10.2 9.0

Marax L-T

Tell Out-

"'% d Tin, Debt

O_ (us$ mio.)

* 56.8 24.1 60.0 56.6 54.4 _.1 60.4 81.2 65.9 80.6 87.4 56.8

1613 3052 8174 10771 1_80 1742_ 2_81 24482 24294 24242 26643 36052 29448

172

PHiLiPPiNE EXTERNAL FIN^W_

tamnsportation. At a more aggregate level, Table 4.19 also indicates that by 1982 over 80 percent of long-term debt was accumulated by non-traded goods sectors. Since most of the external debt were in the hands of the public sector, this debt structure by type of borrower would peee a large and simultaneous internal and external problem to the Philippine government in the 1980s (see Chapter 5 for further discussion). Fisw_al Policy

and Business

Cycle

In analyzing the nature of fiscal policy and external borrowing in 197(_1990, the study assessed the fiscal policy stance. The effect of external and internal shocks on the economy's business cycle during the period raises the question, up to what extent fiscal policy has been used as a countercyclical device. One simple indicator would be to relate the fiscal balance to the real rate of growth. Figures 12 and 13 plot the national government deficit and the (non-financial) public sector borrowing requirement (PSBR), respectively, as a share of GNP and the real rate of GNP growth from 1972 to 1989. On the whole, both graphs show an inverse relationship between the two types of macroeconomic indicators, suggesting the existence of countercylical management of fiscal policy. A more refined method to assess the fiscal stance is that of measuring the "fiscal impulse." Since part of the fiscal balance is clearly endogenous with overall macrceconomic performance, e.g., effect of prices and growth on tax revenues, it is useful to distinguish between cyclical factors that have a transitory effect on the actual fiscal balance and the effect of policy changes or structural changes in the economy that may have more permanent effects on the budget position. A review of alternative techniques to measure both components is given in Heller et el. (1986). No perfect measures exist, but the measure originally developed by the German Council of Economic Experts and currently applied by the INIF is attractive because of its simplicity. The idea is to derive an estimate of the "cyclically neutral budget," which allows us to decompose the actual budget into the base-year fiscal stance (cyclically neutral) and the fiscal impulse (e.g., resulting from a change in policies). This decomposition is shown in the following equation:l째 BD t

ffi

(Cg + Ig )t- Tt = (goYp- toYO+ FISt

10. See Helle_ et aL(198_k3-4).

(19)

TA6LE4.19

ExternalDeblOulstendingby BorrowingEconomic Sector(InmillionUSdollarsandpercentage shares) 1970

1975

1977

1980

1981

1982

1983

1984

1985

1986

1987

1988

Agxicultum 3.7 Mining 0.0 Memufacludng 11.8 Con_molbn 0.0 Electricity, gas, 9.5 a_l marepro(I. Transpod and 12.8 ¢ocrsuunica_ns Wateremd sanilery services 3.0 Tradeendo(hersm 1.7 Publicadm.,del'ensu 1.9 F'mamalinstitutions 0.0 OtherssuO_ (tmpedfied) 18.1 Totale¢ooo¢_sector 62.6 -Traded 9oods secto_r 15.5 -No_-trsd_l goods 47.0 Olhero11o¢_io¢_ 37.4 -Food aid 0.0 -Buo'get support 0.3 -BOPsupport 5.0 -DebtreoRanizalion 32.1 Tot_ 100.0 .Memo: e24 Totalallocmddebt (USS,_rm) Totallong-tenn deM 1613

4.8 0.5 17.8 0.0 8.0

5.9 0.7 10.4 0.0 30.6

2.9 0.3 6.8 0.0 28.4

3.1 1.1 5.9 0.0 27.1

2.9 0.9 4.9 0.0 24.8

2.7 0.9 6.5 0.0 23.7

3.2 0.9 6.4 0.0 24.0

3.6 0.8 6.1 0.0 21.7

3.2 0.$ 4.6 0.0 16.0

3.2 0.5 4.5 0.0 14.2

3.5 0.4 3.8 0.0 12.8

13.7

13.9

19.7

17.7

16.4

15.6

14.5

13.1

9.4

8.7

7.9

1.3 0.9 7.7 15.3 6.3 76.4 23.1 53.3 23.6 5.3 0.0 13.2 5.1 100.0 1448

1.1 0.6 6.2 12.9 3.1 85.6 17.1 68.5 14.4 2.5 0.0 10.7 1.2 I00.0 2992

1.3 0.5 7.2 15.6 ?-9 86.6 9.9 78.7 13.4 1.0 0.0 8.1 4.3 100.0 6556

2.0 0.6 7.9 17.2 4.3 86.9 10.1 76.8 13.1 0.7 0.0 8.8 3.6 100.0 7637

2.2 0.7 8.4 23.5 4.4 89.2 8.8 80.4 10.8 0.6 0.0 7.3 2.9 100.0 8625

2.6 0.8 8.1 20.3 9A 90.8 10.0 80.6 9.4 0.5 0.0 6.6 2.3 100.0 10604

2.6 0.8 7.0 19.0 9.5 88.0 10.6 77.4 12.0 1.4 0.0 5.8 4.8 100.0 113,50

Bank,__'_

2.6 0.8 6.8 15.8 9.3 80.6 10.5 70.1 19.4 1.1 0.0 5.5 12.8 100.0 13825

2.1 0.7 5.5 7.6 7.6 57.5 5.4 49.1 42.5 0.6 O.O 4.9 37.0 100.0 19264

2.0 0.7 5.0 7.3 8.7 54.9 8.2 46.7 45.1 0.3 0.0 4.5 40.3 100.0 22991

2.0 0.7 4.7 4.4 10.3 50.5 7.7 42.8 40.5 0.3 0.0 3.9 45.3 100.0 224_

R C

_.C -_ z

3052

5706

9886

11360

12997

14686

14840

17551

22844

25560

FIGURE 12

Nattonal Government Deficit andGNPGrowth

f'n

5 4

Z > rZ > Z

o -1 -2 -3 -4

-7 -8 1975 1976

1977 1978

1979 1980 •

"_g81 1982

GNPgrowth

•

1983

GNPdefi_

1984 1985

1986

1987 1988

1989

ACCUMULATION

BEHAVIOR

17S

176

PHILIPPINE EXTERNAL FINANCE where: BD

go to Y YP FIS

= = = = =

Actual fiscal deficit. (Cgo + I_ )/Yo, the expenditure ratio in the base year. To/Yo, the revenue ratio in the base year. Actual nominal output. Potential nominal oui_put. Fiscal stance measure.

The first component on the righthand side of the equation is the countercyclically neutral component defined by the base-year expenditure ratio and the tax ratio relative to potential output. This assumes that expenditures are _mlt elastic with respect to potential output, and tax income is unit elastic to actual nominal output. Expenditures are defined cyclically neutral if they increase proportionally to increases in potential output; if they increase at a higher rate, expenditures are defined to have an expansionary (contractionary) effect. Similarly, a more (less) than proportionate increase in tax income will be contractionary (expansionary). The assumption of unitary tax and expenditure elasticities with respect to actual and potential GNP implies that the effect of "automatic fiscal stabilizere _ is included in the fiscal impulse measure. An absolute measure of the fiscal impulse can be derived by taking the fn_st difference of the fiscal stance measure; it also can be normalized by taking the change in fiscal stimulus as a share of income: FIt/Yt =

d(FISt/Yt) = d[(BDt-goYtp+ _ YtFYJ

(20)

The choiceofthebase yearisobviouslycrucial. The method suggests thatitshouldbe a year or periodwhen actualand potential output are roughlyequal.For the Philippines, potential output data were derived from econometric estimation as specified in the NEDA-PIDS macroeconometricmodel (Mariano,Constantine,and Yap 1990) and comparison with actual output data indicatesthat in 1972-1974 productionwas atclosetofullcapacity(97percent). The periodaverage was thus taken as the base year for the fiscal impulse calculations. Table 4.20 reports the results applying the methodology to both the general government budget and the monitored public sector. If the budget is to be considered as the main instrument of fiscal and countercyclical policy, it appears that expansionary fiscal impulses [d(FI_N] were the immediate responses to the first and second oil shocks (1975-1976 and 1980-1982), marking the beginning of the periods

ACCUMULATION BEHAVIOR 177

TABLE420

F'_I ImpulseMeasure, 1975-1989 (percentage ofGNP) National Gqvemm_t

Ac_u_ eudpt Deliol

1975 1976 1977 1976 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

1.2 1,7 1,9 1,2 0.2 1,3 4.0 4.3 2.0 1.9 1.9 5.1 2.9 2.8 2.1 .....

l,.

m/Y 0,0 0,5 -0.2 .0.7 -2.1 -1.0 1.7 2,0 .0.4 -0.6 .0.9 3.2 1.1 1.7 1.2

.....

d(FlS_

_PS_q

1.6 0.5 -0,7 .0.5 -1,4 1,0 2.7 0.3 -2.3 -0.3 -0.2 4.1 -2.1 0.6 -0.5

3,0 9.3 6,7 4.2 3.4 4.4 7.3 5.6 3.1 3,6 2.6 4.3 2.1 2.1 2.9

Non-lkancial Publ_SaVor

F_/Y

d (F_/Y)

1,0 7.2 3.7 1.4 0,2 1.0 4.0 2.3 .0.3 0.0 -1.1 1.5 .0.6 0.1 1.2

-1,2 6.3 -3,6 -2.3 -1,2 0.9 2.9 -1.7 -2.6 0,3 -1.2 2.6 -2.1 0.7 1.1 ,,,.

Source:Vos(lgg0).

economic recovery under the new Aquino government (1986, 1988). Including the monitored, non- financial public corporations in the definition of the fiscal balance does not alter this picture dramatically, although the periods of fiscal impulse seem shorter (1976 and 19801981, and 1986, 1988-1989). More remarkable, however, are the differences in the absolute fiecal stance (FIS/t3 between the two definitions of the fiscal sector. The monitored public sector shows a continued expansionary fiscal stance throushout 1975-1982, while the government budget stance is contractionary in 1977-1980. This confirms earlier observation that the Marcce government pursued a public sector expansion via public corporations and that this implied a ehi_ f_m current to capital expenditures. Under the present government (1986-1989), this trend is reversed, sugb,esting a stronger pressure on _t expenditures (adjustment of long, repressed public sector wages

"178 PHILIPPINEEXTERNALFINANCE

and a rising interest payment burden), and stagnation of public enterprise investment (reflecting the reorganization of the sector and privatization efforts). The fiscal impulses correlate very weakly with the external balance. The fiscal impulse of 1975-1976 coincided with a fJllln_ current account deficit, while fiscal contraction in 1977-1979 coincided with a rising external deficit, In the 1980s, the fiscal stance and the external balance moved more in the same direction, but particularly during the contractionary adjustment policies of 1983-1985, when there was _rong overshooting of the external adjustment vie-a-vie the fiscal adjustment It is thus difficult to establish a direct causal relationship which runs from changes in the fiscal stance and external imbalances. Complementary data suggest that, to the extent there is a direct correspondence, the causality would appear inverse. General

Findings

From the foregoing analysis of the savings and investment behavior of private and public sectors, particularly their responses to various external and internal changes, it can be concluded that public enterprises were the chief direct benefactors of the foreign credit injections into the system during the 1970s and the early 1980s. Public investment rates are closely related to foreign capital inflows into the sector. The debt crisis and absence of new external borrowings led to heavy cuts in the public investment rate during the 1980s. The other sectors that benefited from the massive foreign injection, but to a lesser extent, were the national government and private corporations. The household and unincorporated business sector did not directly participate in the foreign credit tramactions, but increased its net savings siffaificantly during the mid-1970e, much more than private corporations or government. Household savings appear mainly a function of real income growth. Remarkably, wage earning households tend to show higher savings rates than self-employed households. This is explained by the higher average real income levels of households with wages as main source of income. These households predominate in urban areas, particularly the NCR (Metro-MAnila). However, marginal propensities to save seem higherhLvural areas. This might suggest that measures enhancing income opportunities of farmers and other rural households may have a positive effect on national savings. Actual income trends in the 1980s for beth urban wage earners and rural households were adverse, explaining the decline in household savings.

ACCUMULATION BEHAVIOR 179

Savings behavior of private corporations seems to show quite different determinants. Foreign capital inflows appear pmitively correlated with corporate savings, which rune counter to the often asserted substitution effects. A possible explanation may be that, during the 1970e, firms borrowed over and above investment ft,.nee needs which allowed them to reserve more savings used for domestic financial investment. The positive relationship between the deposit interest rate and corporate savings seems also consistent with the unstable self-financing (own savings to investment) ratio of corporate enterprises, as analyzed in Chapter 5. Public savings appear to respond negatively to foreign capital inflows. This may be a result of possible complacency and government over-spending when easy foreign savings were available (though this is not conclusive since the direction of causality still has to be determined). The possible complacency and splurging are given further evidence as tax elasticities and performances of government corporations remained bad or even deteriorated during times of high foreign inflows. The advent of adverse external shocks such as oil price shocks, stagflation abroad, and ebb of foreign funds -- as what happened in the late 1970e and early 1980s -- proved adverse for all the institutional agents. But the earliest to be hit were the household and unincorporated businesses as their real savings fell as early as 1978. Real savings of corporations started to fall only in 1982 when the mediumand long-term foreign loans started to become _. The fall in savings for the household and the unincorporated sector also lasted a long time; it was only in 1989 that their savings rebounded from the crisis level. Government and gover-ment corporations seem to be the institutions most debilitated by the foreign debt crisis. Whereas L_e foreign inflows in the 1970s allowed massive investments by government corporations and the national government, the post-crisis situation reversed this and saddled the government with sizeable principal and interest payments for beth foreign and domestic debts. Government corporations either had to be privatized or closed. Most of their debts and a large part of private foreign debt were absorbed by the national government. This reduced government's capability to generate savings funds and implement investment programs. Since 1988, government savings became negative and this trend may continue indefinitely until debt service payments are cut. The effect on infrastructure and other public goods investments win be debilitating. Private investments in the Philippines followed public investments quite closely and might give support to the "complementarity hypothesis" (public investment "crowds in" private investment). High

180

PHILIPPINE EXTERNAL FINANCE

business confidence attained from 1970 to 1979 made sure that private and public investments both skyrocketed at the same time as foreign finance inflows were high. In the early 1980s, corporate investments also fell (though with a lag) as public investments dropped; this was due to high world interest rates and tighter foreign credit. However, private investment (households and corporations) appear quite sensitive to domestic credit availability. In the recovery years (1987-1989), investments were mainly privately spur_d as private investments grew much faster than public investments. Regression analyses show that apart from the highly intangible "animal spirits," private investments are highly and positively related to foreign financing and negatively related to domestic cost of imports as a large component of capital goods are imported. Finally, the experience of the recovery period shows that private investments suffered as investments to GNP ratio fell far below the ratios of the 1970s and early 1980s. investments will continue to suffer as foreign savings become nil and even negative. At the same time, the savings capacity of the economy has deteriorated, partly because of the sharp drop in government savings due to its debt servicing expenses and partly because of the fall in private savings (in terms of its ratio to GNP) in household, unincorporated, and corporate sectors as recovery has been highly a private spending spree activity. This limit to private and public savings and investments is perhaps the single most important problem of accumulation the Philippines will have to address.

CHAPTER 5

Financial Intermediation and Adjustment of Internal and External Balances Introduction This chapter analyzes the interdependence and interaction among the private, public, and external sectors of the economy in order to trace any changes in the way these sectors interacted with one another in the 1970s and the 1980s. The interactions and changes can be gleaned from a time series flow-of-funds account which identifies the real sector consisting of households and iinlncerporated enterprises, private and public enterprises, and government; and a financial sector consisting of the CB, the public and private financial institutions, and the informal money lenders. During external shocks, the financial system is the channel through which the different sectors of the economy adjust their imbalances via a flow of funds. The public and private sectors respond very differently to external development because the former has access to foreign credit while it has limited activity in the traded goods sectors; the reverse is true for the private sector. Solving the resource gap becomes more difficult during crisis periods because of secteral fragmentation and conflicting policy objectives. Philippine

Financial

System

The Philippine financial system consists of formal and informal sub-systems. The former fails under the purview of CB regulations and supervision while the latter operates outside the control of the CB. 1 The two sub-systems are not entirely independent from each other. They are linked through various channel, To a certain extent, CB policies affect 1. Freedom from Central Bank regulation is the characteristic mentioned by Lamberteand Balbosa (1988) as the essential differencebetween the formaland infol_nal financial sub-systems.

182

PHILIPPINE EXTERNAL FINANCE

the operaUorm of the informal finA-_ial sub-systems. For instance, the cheap credit and liberal rediscotmting policy of the CB in the 1970s caused the shrinkage of informal credit in the agricultural sector. The relative sizes of the formal and informal financial sub-systems cannot be known with certainty due to lack of information about the informal financial sub-system. Thus, more attention is given to the formal financial sub-system. ,Structure

and

development

of the formal

financial

system

The structure and development of the Philippine financial system have been largely influenced by the changing character of the real sector and by government policies. Right after its establishment, the CB encouraged Filipino entrepreneurs to go into banking. Specialized financial institutions and special credit programs established during the period 1950-1980 all contributed to the segmentation of the t'mancial markets in the Philippines. The financial reforms in the 1980B sought to reverse this trend. In particular, distinction among different types of banks was reduced to encourage more competition; the cheap CB credit policy was stopped; and some special c_edit programs were abolished while the remaining ones charged intm_st rates that matched the market rates. A recent structure of the formal financial system is shown in Table 5.1. 2 In the number of head offices, the nonbank financial system dominates the financial system. In assets, however, the banking system clearly controls the system. An important characteristic of the Philippine financial system is the large presence of government/owned financial institutions beth in the bAnlrin_ and nonbanking systems. Note that government-owned habits behave differently from private banks in that they have a development_oriented maudate; consequently, the criteria used to evaluate their performance are different from those applied to private banks. The presence of foreign banks in the domestic financial system is also sizeable. Aside from four foreign bank branches, foreign banks have equity participation in 10 out of the 25 domestic bahiaS. About 60 percent of the total financial assets of the Philippine financial system belong to the commercial bAnlrln_ system, suggesting a high degree of concentration in the commercial banking system. In 1988, 46 percent of the total assets of the commercial banking system came from the first five biggest banks. Tan (1989) noted that despite the efforts of the government to increase competition, bank 2. Note that offshorebankingunits are excludedhere.

FINANCIALINTERMEDIATION 183

TIIX.E S.t

TheNi_

R,mmlS_..

(,, NUMBER OF

TOTALASSETS

982

_o.1

Comm_ialbanks Private Government Foreign

29 24 1 4

290.3 224.6 38.8 35.9

50.8 44.9 7.8 7.2

Thdftbanks Savings &

110 S

24.9 14.2

5.0 2.8

6.7

1.3

St_kuvings& 61 k_nMsedat_n

4.0

0.8

840

10.7

2.1

28.2

5.O

2,766

140.2

28.0

135

98.3

19.6

4 131 233

68.6 29.7 21.4

13.7 5.9 4.3

143

7.4

1.6

5.6

1.1

6.4 1.8

1.7 0.4

_no_

mortpoe banks

Pdvate

Ruralbanks S_

Oownment banks Nonl:erlk finand_ i,mlled_k_ Insurance

Â˘ompm=

Government Private Investment Inslitu_m Fmns_g

oompeJ_ I_

Inves_ent.1____-_=__ 16 Trustepemtio_ 12

p=d_)

1154 PHILIPPINEEXTERNALFINANCE

(TABLE 5.1CONT.)

Otherfinancial 2,386 inten_ediaries TOTAL 3,758 m.

.,.

18.7

3.7

500.3

100.0

Sourms:Phik'Rokm FkMno_lFactBook(19aS),Insunm_Commlzston (kxd_aoai.s_moi _Znlm._ 19U),andGovernment Coq_caleMonllo_g_ Ooo_iulingCommillae forAmm_of _

Symm and Government Service I_rar_eSymm in19_i, concentration instead became more severe; the Herfindahl index of concentration for the private domestic banking sector rose from 0.045 in 1982 to 0.074 in 1988. Yap et at. (1990) also noted that in the money market, four large b_nk_ directly accounted for 13.3 percent of the total deposit substitutes of all fmanciat institutions with quasi-banking licenses, while their aff'_ates accounted for 34.7 percent. The Philippine banking system also exhibits a relatively high degree of interlocking interests. Even before the advent of universal banking, a bank and its directers would have equity participation in other financial and non-fmanciat enterprises. A typical example is illustrated in Figure 14. Enterprises affiliated with the two banks obtained preferential treatment and, in cases of tight money situation, they were the last ones to be rationed out. The strict rules followed by banks in evaluating loan applications were neither applied to them, The Philippines has an offshore banking system (OBS) that is patterned after Singapore's. The OBS was designed to be domestically-oriented, i.e., to incTease local residents' access to foreign currency. The total resources of the OBS grew remarkably from US$757 million in 1977 to US$4.5 billion in 1983. However, it declined sharply during the crisis period. In 1988, OBS' total resources stood only at US$2.7 billion. About US$2.6 billion of this was raised from banks outside the Philippines. The distribution of OBS 1o_-_ shown in Table 5.2 suggests that it has indeed improved local residents' access to foreign curt*ency.

TI_ financial

system and external

shocks 3

The Philippine financial system experienced three major crises since 1970: the fwst in the mid- 1970s, the second in 1981; and the third 3.

This section draws heavily c_ Lamberte (1989).

FINANCIALINTERMEDIATION 185 FIGURE14

The Industryand FinanceWEB: InterlockingDirectoratesof the RCBC.ChinaBankingGroup with Financial/Industrial Corporations

186

PHILIPPJNEEXTERNALFINANCE

TABLEU

Philippine_ ..........

BankingSystm:Statement of_

(September

ITEMS

andI.bldUtl_ ,

,,,r

US${MZ_JO_O

Assets Notesandcoins onhand Duefrombanks Outside thePhilippines InthePhilippines Loense,nd_ tocu_ome_othertl_mbwlks Non-reddents Residents Pul_ sector Pnvatesector BHIs discountsd purchas_ Non-mddents Residents Investment inbondsendothersecud_es Non-reddents Residents Allotherassets Intere_receivable Non.reddents Resk;le_ Otherassets inthePhilippines Otherassets outside thePhilippines Total_____u_ts Less:Aflowance forprobable losses Totalassetsafterallowance for_ Liabilities Deposit ofnon-residents otherthatbanks Duetobanks Outside thePhilippines InthePhilippines Otherlial_li_es Interest payable Non-re=dents Residents InthePhilippines Outside thePhilippines Totalliabilities Source:ForeignExchange Regulations DepOnent,Central BankofthePhiliplmu,

0 1506 35g 1147 1096 115 961 481 500 I 0 I 28 2O 8 66 40 8 32 45 I 2717 20 2697

40 â&#x20AC;˘ 2205 349 103 37 33 4 31 35 2697

FINANCIALINTERMEDIATION

187

in 198_1984. Lamberte (1989) noted that weJirneeses of the financial system came from lack of prudential reg_dations , and past credit and bnnlrlu_ policies ofthegovernment. External shocks merely exposed these we-L-_eesos. Durin8 the 15eriod1970 to 1980, the CB closed a tots/ of 48 banks, three of which were commercial banks. While the banking problems that mnerged in the 1970s were brought about by sporadic failure of some banks, the banking problems that appeared in the IM were systematic. Between 1981 and 1987, the CB closed 173 banks, accounting for 78 percent Ofthe total bank closures during the peri&i 1970 to 1967. These included three other commel_clal banks, the second largest thrift bank, and the second largest investment house. Toward the second half of 1980, several large corporations, specifically those that grew fast in the 1970e ,4 suddenly found themselves in financial difficulty as a result of the economic slump brought about by the second oil shock. In the early part of 1981, a bank that had heavy exposure to a large mining firm that collapsed, experienced a run on deposits. The run spilled over to other bagks. Then, a prmnlnent businessman suddenly left the country leaving behindPgo million of unpaid debts. Financial institutions that were heavily involved in the money markets suffered irreversible runs which eventually led to their collapse. Reeling from the painful effects of the 1981 liquidity crisis for two consecutive years, the first quarter of 1983 began with optimism, only to be frustrated by the BOP crisis that struck toward the first quarter of that year. Between 1983 and 1987, the CB dosed down a toted of 131 banks

ino.ludlnw

six large

banks.

The vulnerability of the monetary system (i.e., deposit money banks andthe CB) toforeign exeJmnge crisis may be seen fromFigure15. As a percenta6e of GNP, net foreign a_ets of deposit money b--kdeteriorated dur_-_ the period of 1970 to 1984. The same can be said of the CB, excopt in 1972 and 1973 when the economy experienced a short commodity boom. This clearly suggests that monetary system adjusted to the two oil eho_k-by esotwin8 more fe_eign loans. The share of the gross monetary sector liabilities in the toted outstanding external debt rose from 9.1 percent in 1970 to 37 percent in 1982. The interuation_! financial environment was at that time on the Philippines' side. Foreign eommq_ja] bank. awashed with "petre" dollars were recycKng them by dramatically increasing their lendi_ to the Third Worl& Despite the huge current account deficits, which increased 11 times from 1971-1975 to 1976-1980, the Phih'ppines neglected the required adjustment in the 4. Mostofthemweeefu.msownedbyMm, emcrenies(seeLeumbeaete 198_

FIGURE1$

Ratioof NetForeign AssetsoftheMonetary SystemtoNominalGNP -'r F

4 2

I _ r'-

-2

-6 -8 -_0

-14 -12 -16

-18 -20 1970

f972

1974

_'7

1 6

• CentralSank

1978

1980

1982

• Depo,dtMoneyBar'_,s

1984

;86

1988

FINANCIAL INTERMEDIATION

1189

exch-nue rate which had been appreciating most of the time during that period because of the easy access to external financing. Toward the second bR]f of the 1970s and early part of 1980s, government financial institutions granted guarantees quite liberally to foreign loans contracted by private corporations; many of these eventually failed. A World Bank study (1984) found that the share of private medium- and long-term debt, which was publicly guaranteed, reached 34 percent in 1975, fell to 20 _t in 1980, and then rose to 29 percent in 1982. It is highly probable that the usual verification practice before gra_t;n_ loans was dispensed with by foreign creditors because of government guarantees. The government used its two fiuancial institutions, the Development Bank of the Philippines (DBP) and the Philippine National B-nk (PNB), in bailing out financial institutions and large corporations that collapsed right after the second oil shock. The 1983-1984 BOP crisis further aggravated their already tainted loan and investment portfolios. Both assumed privately contracted foreign loans which they guaranteed since corporations that obtained those foreign loans could no longer repay their foreign creditors. The losses they incurred during the period 1984-1986 amounted to 1)29.8 billion. In 1986, both institutions underwent a rehabilitation program which involved the tr-nafer to the national government of their liabilities and related accounts totalling P107.6 billion. Financial

intermedlation

The main function of the financial system is to mobilize savings from surplus units and allocate them to deficit units at least ccet_ The delivery of such services requires physical closeness of financial institutions to their clients. The more developed the financial system, the more accessible are its s_iees to consumers of fi---dal services. A rough indicator of accessibility is bank density ratio, i.e., the ratio of the population to the number of offices of the financial institution. The lower the ratio, the more accessible are the services of the financial system to their clientele. As shown in Figure 16, the banking density ratio was monotonically declining during the period 1975-1988, except in 1985 when several financial institutions collapsed as a result of the economic crisis. Although accessibility of financial services has generally and significantly improved, the distribution of offices of financial institutions is still severely skewed in favor of urban centers. T_mher_ et al. (1990) noted that the b--I_;_ density ratio of the NCR increased faster than those of other regions during the period 1980 to 1988.

FIGURE16

Ba_ing Density 0.0125.:

-,Q

0.0t20 -

Z >, 0.0115z >,. Z 0.0110-

.5 _

0.0105-

0,0100-

O.(_g5-

0.0090

0.0(_5

1975

1976

1977

1978

Note:Density- FOP/ FSTO

1979

1980

[

1981

1982

1983

1984

1985

1986

\ I

t987

1988

FINANCIALINTERMEDIATION

1!11

The magnitude of the flow of loAnAhlefunds, meanwhile, indicates bow well the fineneial system is able to mobilize fin_-_al resourcos.The ratio of money supply to GDP is used here as an indicator of the magnitude of the flow of loanable funds. In a less developed economy, it is indiea_ve of the absolute size of the b_nlring system that reinvests funds in potentially new directions from old loans as they mature (McI_innen 1981). The banking system usually dominates the financial system in less developed countries l/ks the 13hilippines. The country has three measures of money euppl3n 1) M1 = currency in circulation plus demand deposits of deposit money banks, 2) MY.= M1 plus savings and time deposits of deposit money banks, and 3) M3 = M2 plus deposit substitutes of deposit money banks. Note that M2 and M3 include high yieldin_ financial instruments. The inca_asing M2/M1 and M_/M1 ratios in Figure 17 reflect the growing sophistication in financial intermediation as savers respond accordingly to the innovations introduced by the financial system by moving their funds from low to high yielding financial assets. Figure 18 gives the ratios of money supply to GDP. In general, it can be said that the financial system was not able to make a sust_zined i_ease in the flow of loanable funds. This is a far cry from the performance of other Asian neighbors, especially Thailand and Indonesim The lackluster performance of the Philippines' financial system in raisi_ more loanable funds could be attributed te continued financial repressiom As shown in Figure 19, the real interest rates were zeverely negative most of the time during the 1970,1988 period. The interest rate liberalization initiated in 1981 resulted only in a mild improvement in the real interest rates. Note that the M/GDP ratios vary clocely with the real interest rates. Moreover, other hallmarks of financial repression have remained. The reserve requirement ratio on deposit liabilities has been maintained at a high level. In fact, the Philippines has the highest reserve requirement ratio among the Association of Southeast Asian Nations (ASEAN). Also, the so-called "agr_agra" law, which requires all banks to allocate 25 percent of their total lo_Ahle funds to agriculture and agrarian reform beneficiaries, has been retains& The financial reforms in the 1980s stressed the liberAli_Jation of interest rate, bn_ir entry, and branching. The success of the reforms hinges on whether bouseholds respond positively to interest changes and to the degree of accessibility of financial services. These hypotheses were tested by regressing the ratio of savings deposits and time deposits on their respective interest rates, the London lnterbank Offer Rate (1.II_OR), and the nltmber of offices of financial institutions. Table 5.3

RGURE 17

Ratios of M3 and M2 to M1

4.6 4.4

._ "1=

4.2

4.0

:_ z rz > Z

m -4 m

3.8, 3.6 3.4 3.2

¢:

3.0 2.8 2.6 2.4 2.2 _0 1.8 1.6 1.4 1970 1971 19"f2 I973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 • Ma/M1

• M3./M1

FIGURE 18

indicatorsoftheFlowof Loanab[e Fund 0.30 0.28 0.26 0.24 0.22 0.20

o.!8 0.16 0.14

-_ Z

o.12

0.10 0.06

__. 0.04

, 1970

| 1972

; 1974

= 1976

• MI*-M1/GDP

i 1978.

_ 1980

• M2*,,M2/GDP

, 1982

' 1984

• M3*-M3/GDP

i 1986

, 1988

FIGURE 19

RealInterestRates(ISDR) and(n'DR) 2O

:1: rP_

._ z

_ z

-10

-20

-4O

-50 1970 1971 1972 1973 1974 1975 t976 1977 1978 1979 1980 1981 19821983 1984;985 1986 1987 1988 • ISDR • ITDR

FINANCIALINTERMEDIATION

195

TABLE5.3

Demandfor SavingsandTimeI)eposlts INDEFENI_NTVARIABLES

SAVINGS _

Cmmnt Interest rates Savings deposit, Real

TIMEI_Po6i'rs

0.02744 (4.06)'

-0. (-I._)O2_

O.__n,x___

(4.o9) 째

Timedeposits, nominal LIBOR,reel

0.00445 (2.91) o .0.00081 I.0.67) .0.00005 (-1.28) 0. 7 (_0(X_19) o 0.68 7.85

-0, 7 (-1.9_0_

Inflation rale

(8.5o)" 0.--n0_--1

No.ofbankOffK_ R2adjusted F

0.87 29.51

asim_mat1i_e_mlawI. bsi_r_m,,_opemm _ oSigraio_ J Siwoem leveL Nae:_ Vwlablermlm dsav_gs and timdelx_10GNP. Ped_ 197S-1_18

gives the results. All the coefficients yielded the expected signs. Thus, it can be concluded that higher real interest rate and greater accessibility of banking services will lead to an increase in the flow of loanable fimds. Credit allocation The financial sector plays an important role in the economy since it deter_;-es the magnitude of funds that would go to specific sectors of the economy. In a capital-scarce economy, credit is bound to be rationecL This has been the experience of the Philippines under a liberalized intereet rate regime (see Lapar and Graham 1988). The existence of imperfect

information

on credit

markets

(n_ates

risk

and,

therefore,

196

PHILIPPINEEXTERNAL FINANCE

makes

credit

rationing

a rational

behavior

for banks.

This

section

will

analyze

the credit allocation pattern of the two major groups of bank_. Note that all banks operating in the Philippines are subject to the "agri/agra" law as mentioned earlier. However they may satisfy this requirement by buying eligible government securities. Apart from this, no othex credit allocation requirement is imposed on banks. The last column of Table 5.4 shows the total volume of loans of the commercial banking system in nominal terms columns one to six give the correspondin_ percentages for each year. Total loans

from 1977 to 1988, while sectoral distribution in outstanding had been

consistently rising between 1977 and 1984. Then, it dropped suddenly in 1985 and 1986. However, it made a fast recovery in the last two years. The level of outstanding loan_ in 1988 already approximates that of 1984. It seems that loans outstanding lag one year behind the behavior of the economy. For instance, the economy started to enter into a recession in 1984, but declined. When the outstanding started to As can be observed biggest share of credit

it was only in 1985 that the loans outstandin_ economy started to recover in 1986, loans make a recovery only the following year. from Table 5.4, the trade sector received the from the commercial banking system in most of

TABLE5.4 Ratio of Loans Outstanding to Total by Industry Commercial Banks (in percent) Year

Agd, Fishery, Forestry

1977 1978 1979 1980 1981 1982 1983 1934 1985 1986 1987 1988

13.56 10,67 11.g0 15.56 12.85 12.92 13.26 8.14 10.79 15,97 11.98 11.19

M&Q

3.93 6,56 6.07 9.50 8.17 9.92 11.80 16.52 10.55 8,92 7.14 5,69

MNFT

32.67 32.34 32.38 35.34 30.46 30,50 31.79 27.61 24.96 26.19 40,04 40.91

M&Q- Mining andquarrying MNF'r.Manufaclurin9 EGW-Electricity, gasandwater Cons-Consiructlon Source ofbasic data:Philippine Stag's#ca Yearbook, 1989.

EGW

0.29 0,58 1.12 0.84 1.13 1,10 0.47 2.15 1.82 1,21 0.77 0.94

Cons

Trade

Total Pmillion

2.21 2,88 2.99 3.53 4.68 5.17 5.22 6.12 7.06 4.42 3.13 2,15

47.34 52.40 43,54 35.54 42.71 40,40 37,44 39.46 44.61 43,29 35.94 38,12

40172.9 54077.9 68264.2 77198.1 86505.2 98239.6 111387.7 116382.2 87573.3 83087.4 96936.5 115392,4

FINANCIALINTERMEDIATION

197

the years during the 197%1988 periocL This is not surprising since commercial banks had historically been focusinu on trade financing. Its share has been rather erratic throughout the indicated periocL About Ono'_

of the

out_Lndlng

|o_tnm of t_

comm_q_.ial

bml_in_

system

went to the manufacturing sector. However, the sector's share shrank during the period 1984 to 1986. It seems that manufacturing absorbed the brunt of the adjustment that was made during this period. Interestingly, its share rose sharply thereafter and even overtook the share of the trade sector. This seems to be consistent with the credit requirements of manufacturing which obtained growth rates above the average for the economy. 5 Except for 1984, the share of the agricultural sector in the total loans outst_ndin5 of the commercial bnnldn_ system appears to be fairly stable. In contrast, the share of mining and quarrying sector had been visibly rising. It reached a peak in 1984, and declined continuously thereafter as several mining t'wms collapsed in the wake of the 1983-1984 crisis, s The pattern of the share in total outstanding loans of the construction sector is similar to that of min;._ and quarrying, except that it reached its peak in 1985. What is surprising, however, is that the share went down in 1987 and 1988 despite the fact that there was a construction boom in these years. 7 The construction boom could have been mainly self-financed. In the housing sector, for instance, those who postponed their construction plans during the BOP crisis pushed through with them during the economic recovery period. Those who invested in the construction of buildings for commercial purposes could have partly financed them by recalling their flight capital (see subsequent section). Others were able to secure financing through the securities markets, s Table 5.5 shows the volume of loans outstanding of specialized government bankm which include the DBP, the Land Bank of the 5. The _,owth rate for the manulacttwi_ sect_ was _2 percent in 1987 and 9.6 percent in 1988 while that foethe entire eomcmy was 5.6 percent in 1987 and _7 percent in 1988. 6. These include: Marinduque Mining Corp., Nonce Mining Corp., Maricuhim Mining C_ag_p., Sabena Mining Carl_ , Philippine Eagles Mines, Golden River Mining Ccrp., Batong Buhsy Gold Mines,Western Minolco Corp., and Nm_4hDav_o Mining CeaD.These mining firms _ taken over by DBP and PNB which, in tram, t_amd them over to the Asset Privafizagion Trust for dislx_iti,m. 7. The growth rate of the construction seet_ was 17.3 percent in 1987 and 9.5 percent _a 1988. 8. Several wholesale and retail rwma (e.g., Shoemart and Robinson's) issued c_mmer_al papers'to finance the crampon of sevenal huse commercial o_mplexes.

198

PHILIPPINE EXTERNAL FINANCE

TABLE5.$

Ratio of LoansOutstanding to Total by IndustrySpecisllzedGovernmentBanks ,'

',,

(inpercent) â&#x20AC;˘

--._

Year

Agriculture

Industry

Services

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

24.27 20.79 19.49 13.38 10.85 9.52 4.44 25.04 26.22 28,56

35.31 40.25 37.11 35.11 48,39 57.21 45.49 3.30 13.62 27.50

40.42 38.95 43.39 51.51 40.76 33.27 50.07 71,67 60,16 43.94

SOurce'ofbasicdata:PhilippineSta_ticalYearbook,lgsg.

Total (P million) 16134.3 20437,5 24939.9 31653,9 40513,6 43207.7 32876.9 11928.2 g756.2 10859.8

.......

Philippines (LBP), and the Philippine Amanah Bank (PAB). Data on credit allocation are available only for the three major sectors: the agricultural, industrial, and services sectors. The movements of the total loans outstanding of specialized government banks mirror those of the commercial banking system. The only difference is that it made a very slow recovery because of the severe financial difficulties encountered by the DBP. The industrial sector suffered most when DBP reduced its loan portfolio. Its share dropped sharply to 3.3 percent in 1986 compared with 45.5 percent the previous year. A remarkable recovery occurred in 1988 as DBP was successfully rehabilitated. The share ofthe agricultural sectorin the totalloansoutstanding ofspecialized government banks have been declining duringthe period 1979-1985,but significantly roseinthe lastthree years.The lattercan be explainedby the factthat the LBP maintained the levelsof loans goingtotheagricultural sectoratthetime when totaloutstandingloans ofspecialized government banks were rapidlyshrinking. Capital markets Banks longdominated thenon-securities markets.Figure20 shows the extent of long-termloans provided by the banks.9 A noticeable 9. Medium- and long-termloans are lumped together.

FIGURE 20

TotalLoansand Sharesof Short-andLong-Term Loans 100 _9

6o, 50-

N 10, o

110 '

...4

_-i

4_ I, 'fg'_

= 19;8

a wg_

e 1981

| f982

i 1984

! 'fg_

i 1986

! ?987

i _6_8

200 PH)LIPPINE EXTERNAL FINANCE increase in the proportion of long-term loans to total loans outstanding of banks occurred from 1980 to 1985. What could have helped produce this trend were the finRnciai reforms initiated in 1980 that encouraged banks toincreasethe proportionoftheirmedium, and long-termlo_nR in theirtotalloan portfolio. However, a reversalofthe trend occurred after 1985. This reflects banks' reaction to the 1983-1984 BOP crisis and to the generally unstable political atmosphere that prevailed since 1986 when a new government took over. The volatile interest rates also made banks more conservative in lendi-_. The equities market remained very thin. Table 5.6 shows the total equity capital raised through one of the stock exchanges. The volume was below P2 billion from 1980 to 1982, but rose to P3.6 billion in 1983. It was sharply pared down in 1984 and 1985 as a result of the BOP crisis, but recoveredfastsince1986.The debt securities or bend markets also remained underdeveloped.The interestratevolatility, particularly in the second half of the 1980s, further aggravated the plightof the securities markets.Very few privatecompanies issuedlongterm bends; one ofthese was the Paperlndustries Corporationofthe Philippines (PICOP) which encountered severe financialdifficulties during the 1984-1985 economic crisis. Instead,there was a concentrationon issuancesof short-termdebtinstruments,notablycommercial papers. Individualinvestors were thebiggestholdersofcommercial papers issued by privatecompanies, accountingfor48 percent of the total volume of transactions.Other private corporations which had temporary excessfunds were thenext biggestinvestors, accountingfor 41 percent ofthe totalvolume oftransactions. The government long dominated the bonds market. The three currenttypes ofgovernment bonds are:1)those issuedby the national government (treasurybills), 2)thoseissuedby theCB (CBCI or Central Bank Certificate of Indebtednessand CB bills), and 3)those issuedby government financial and non-financialcorporations.Since the mid-1980s, the government reliedmainly on short-terminstruments. Maturing long-termbonds, such as CBCIs and DBP bonds,were not replaced. Table 5.7 shows the volume of transactions in treasury bills. The total volume reached P295 billion in 1988. The biggest investors were private corporations, followed closely by commercial banks. Commercial banks' huge holdings of treasury bills reflect their conservative stance in lending at a time when interest rates were highly volatile and inflationary pressurewas buildingup. The secondarymarket providesopportunities fortradingin already issued securities. These are done through the two exchanges in the country.At present,there are 147 listedfirms.Table 5.8presentsthe

FINANCIALINTERMEDIATION

201

TABLES.6 ,

Initial ollerlng Number Value

Year

1980 1981 1982 1983 1984 1985 1986 1987 1988 ,,

ManilaStockExchange Off_in_

â&#x20AC;˘

5 5 12 12 4 4 8 16 7 .--

220.0 690.0 1,281.7 943.1 315.0 494.0 20,467.0 2,204.2 1,150.0 ,

â&#x20AC;˘

,.....

;

Ollerk_ by _ Companies Numbs( Value

16.0 14.0 5.0 10.0 3.0 7.0 7.0 17,0 31.0

TotalEquily Capilal Raised Value

1,588.1 1,508.1 791.2 1,461.2 295.0 1,556.7 2,623.4 3,566.5 35,0 350.0 270.8 764.8 246.1 20,714.0 955.9 3,160.8 4,202.0 5,352.0 ,

$our(_:Maltila StockExchange,

volume and value of trading in the two exchanges from 1975 to 1988. As can be seen, the stock market was adversely affected by the 1981 Hquidity crisis and the 1984-1985 economy-wide crisis. The market became bullish since 1986, although its growth was interrupted several times by the series of coup attempts and some external events such as the October 1987 worldwide equities market crash. The combined tur_ver of the two exchanges reached an all time high of P40 billion for the first ten months of 1989. Informal

financial

markets

Majority of the households and firms, especially small enterprises, are completely rationed out by the banking system. This merely reflects the continuing weakness of the formal financial institutions in servicing a wider array of clientele even after financial deregulation. Those rationed out by the formal financial institutions rely on the informal financial markets (IFMs). There is no systematic information on size, trend in size, and interest rate on informal loans. The pieces of information available from past studies are based on small sample, cross-section surveys done by individual researchers and research institutions. Most of these studies

202

PHILIPPINEEXTERNAL FINANCE

TABLES.7

Volumeof Trusty BillTrunuotionsbyTypeof Inve=tor, 1988 (inmillionpeios) ......

, ,

.',

.._

1988 INVESTOR

VOLUME

A. B. C. D. E. F. G. H. I. J. K. L M, N. O. P.

78,112.60 35,425.45 90,102.98 5,824.39 19,457.24 25,567.54 11,691.81 9,056.89 4,143.18 3,541,49 3,537.95 7,744.88 604.74 435.31 15.20 5,00

Commercial banks Individuals Otherprivate corporations Otherbanking ¢oqxxatior_s Investment houses Trustpension fund Ruralthriftbanks Othergovemme_ corp. Finance comparies Investment companies Pdvateinsurance cornp. Government insurance comp. Lending investors Security dealers National government Local government

TOTAL ,

26.5 12.0 30.5 2.0 6.6 8.7 4.0 3.1 1.4 1.2 1.2 2.6 0.2 0,1 0.0 0.0

295,266.65 ,

,,,

•,

100.0 .,

S_o_r=ofbasicda_'-'CeanlBankofthePhilippines,

focused on rural areas, and very few on urban areas. Nevertheless, the information culled from these studies are quite instructive.I° In general, the various surveys conducted between 1960 and 1988 reveal a substantial dependence on the IFMs. A marked decline in the proportion of borrowers who obtained informal loans from the 1960s to the 1970s occurred. This trend continued in the first half of the 1980s, but was reversed toward the second half of the 1980s. The availability of cheap credit through the myriad of special credit programs of the government and through the redisoounting window of the CB could have helped produce this trend (a cheap credit policy was pursued until 1985). In 1986, preferential rates were stopped by the CB in favor of market rates for government sponsored credit programs. The CB also started to charge near market rates on its rediscounting funds. Obviously, the loss of funds flowing from this source was not matched by an increase 10. These were put together in Bautista and Magno (1990).

FINANCIAL INTERh4EC)IATION

203

TABLES.8

•

ManilaandMakatiStockExchangeTrading,lg75-1_ (inbillionshares/pesos) •

Manila

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 _)urQe:Manila_

Makati

Volume

Value

Volume

58.4 128 63 70 56 40 20 21 17 9 7 38 208 142

1.5 3.4 1.2 2.5 2.3 2.1 0.6 0.7 3.4 0.7 1.6 8.4 19.3 10.1

57 120 66 63 74 61 32 20 20 15 5 21 107 80

Value 1.6 3.4 1.3 2.9 2.7 2.6 0,7 0.5 2.0 1.4 0.5 3.1 12.1 8.2

Idak_l StockExchanges.

indeposits mobilizedby thebankingsystem.Thus,more borrowers turnedtotheIFMs inthemorerecentpast. A recentstudyby Agabinetal.(1989)reported thatinformal loans wereroughly9 percentoftheba,l_;-g system's total outstanding loans and advancestotheprivate sector. However,mostinformal loanswere loansto individuals. Ifonlyb_-l¢Ioa-sto individuals (excluding corporations) wereconsidered, informal loanswouldconstitute about30 percentofbank loanstoindividuals. Moreover,most informalloans weresmallloans. 11Interest ratesintheIFMs varywidelyacrosssubmarkets.They couldbe ashighas200percentperannum. However,a greatproportion ofinformal loanshavezerointerest rate. No clearevidenceexists thattheinterest ratesintheIFMs have declinedover time.Rather,evidenceshows thatthey have moved according tothegeneralcondition oftheeconomy.Thisapplies toboth ruraland urban areas.As may be gatheredfrom Table 5.9,the proportion ofruralhouseholdspayinginterest ratesabove45 percent 11. Small loans any loans amounting toY25,0C0 and below.

204

PHILIPPINEEXTERNAL FINANCE

TABLE5,9 "

Distribution ofinformal LoansbyLevelofNominalInterestRates :

â&#x20AC;˘

FISa (1981-1982)

Nominal Interest RateLevels Number (in % per annum) 0 1 - 15 15,01- 30,00 30.01- 45.00 45,01- 60,00 60.01-90.00 90.00 Total

RSMb(1988)

Number

ICMc (1987)

Number

656 116 92 93 113 111 280

44.9 7,9 6.3 6,4 7,7 7,6 19.2

3 22 19 6 20 27 72

1,8 t3.0 11,2 3.6 11,8 16,0 42,6

1356 63 305 26 4 -

77,3 3.6 17.4 1.5 0,2

1461

100.0

169

100.0

1754

100.0

aFIS bRSM = Â˘ICM =

FarmIndebtedness Survey RuralSavings Mobilization Informal CreditMarkets

Source: Ernesto Bautista andMarifeMagno, "Overtime Changes intheStructure andOl_stionof Rural Information CreditMarkets inthePhilippines," unpublished (June1990),p.38.

per annum increased between 1981 and 1986; but declined towazd the latter part of the 1980s. 12The situation in the urban areas is depicted in Table 5.10. The lending rates of cooperative credit unions (CCUs) and postdated checks represent those of the IFMs, while those of finance companies and pawnshops represent those in between the formal and informal financial markets. Interest rates both in the formal and informal markets follow the same pattern. This suggests that external shocks or changes in domestic monetary policy have similar impact on both the formal and informal credit markets. Pieces of evidence from cress-section studies indicate that interest rates on informal loans were low in areas where there were more banking units, and high where there were few banking units (TBAC 1981). They also tended to be much lower in more developed areas than in marginal or less developed areas of the country (Floro 1986). This suggests that expansion of the banking system will benefit more small t2.

Those paying zero rate were not included.

TABLE5.10

Trendsin theLendingRatesof Binks,Finance Companies, Pawnshops, CCUs,andonPo_ldated Checks (percent perannum) Fm._e Cos.

Year

Noa,Jnal

Real

Nomal

Pa_

Real

Nominal

CC_

Re_d

Nominal

[_scou.t Rate _e_ated

Real

Normal

Real

28.2

15.1

1981

18.5

3.4

28.0

14.9

26.5

13.4

1982

16.5

6.3

28.9

18.7

23.4

13.2

26.99

10.74

28.2

18.0

1983

18.6

8.6

34.3

24.3

35.3

25.3

26.89

11.(X]

30.5

20.5

19@1

26.2

-24.1

58.9

8.6

43.2

-7.1

20.72

-29.82

36.0

-14.3

198,5

26.9

3.8

40.4

17.3

48.2

25.1

20.52

-2.60

42.0

18.9

1986

14.0

13.2

27.5

26.7

52.2

51.4

19.83

18.88

31.7

30.9

Irl

Sounms:Table8 (Lambe_te 19881,TablefV,?.(LambemandBaRx_sa 1988),andTableV.7 (LaÂ˘_

a_d Jose1988t.

-_ :> Z N D __ ,-I

z O

21]_ PHILIPPINE EXTERNAL FINANCE borrowers, since aside from having access to formal credit they will be paying lower rates in beth the formal and informal credit markets due to increased competition. lntereectoral

flow_

Fl_lal

sector

This part describes the saving and investment process and the process of mobilizing and allocating funds of the financial sector using flow-of-funds data from 1974 to 1988. In the flow-of-funds account, a separate block is devoted to financial intermediaries because it recognizes that'they are not passive channels through which funds flow but rather they have a hand in determjnlng the magnitude, direction, and destination of these flows" (Superticioso 1978, p.565). In the presentation, the finanCial sector was subdivided into three groups: 1) private financial institutions, 2) government financial institutions, and 3) monetary authorities. In the first sub-sector, a state-owned commercial bank is included in the presentation of the flow-of-funds account since there is no way by which it can be separated from the sub-sector. However, this type of bank is now in the process of being privatized, and the private sector already owns 30 percent of its total outstanding shares. Unlike households and non-i_nAncial business enterprises, financial institutions simply play the role of intermediaries in the system. They are not expected, therefore, to come up with an amount of savings and investments that have the same magnitude as those of households and non-finanCial business enterprises. Detailed information on the sources and the uses of funds of private financial institutions are presented in Table 5.11, government financial institutions in Table 5.12, and monetary authorities in Table 5.13. For private financial institutions, savings and time deposits were their most important source of funds. These had been consistently increasing throughout the period 1974-1988. In contrast, the movements of demand deposits were very volatile. Deposit substitutes had been consistently declining since 1983 as the attractiveness of these instruments relative to time deposits diminished due to interest rate liberalization. Banks also mobilized foreign currency deposits through their Foreign Currency Deposit Units (FCDUs). This seemed to be an important source of funds for them. Substantial withdrawals of foreiga currency deposits occurred in 1985 and 1986, the years when the economy was still down due to the 198_1984 BOP crisis and when capital flight intensified. 13 These 13. See a subsequent sectionfor arelated diecmmionon capital flight.

TABLE5.11

SourcesandUsesd Fundsol Pdvm Financi_Inslitutions (inmillionpesos) 1874 U Tot_Ibanc_mm Tolalfinancial murms GoMandIore_ll. hokll,_ Fomipomemc,/(lelmb

1975 S

182el

1876 S

18443 17540

680

0.1

24 1018 -78

17 3051

24g lg5 .34

14440 1NSg

-3 -140

19"/7 0

1_/8 S

18448 1302t

2_e5 12529

26534

588

.178

?86

?B 7

71 1_0 39

790 4743

244 37 020

17gg

576 4588

7131

40 827 .il

3_16 1313

|1206 _

4161 -MO

20578 _iO

-51 42

r-e_ _ew oe_r_ a_,m _aJn'enoJ Dcemm_ I)epoe_ Savk_sand _ ¢lepo_s

O¢_odubm.m m In_m__ Inl_enw _ Tmalue(b T_

Mbodbnecus

14_M 7_

1713

I_I 1235 104 808 5 2001

IO_g 47_

2463

_ 218g 280 544 5g

I018g 3_4 242

_803

708

837 3 1525

0._ _ 1281

-e¢4

851 1207g 110e2 I_ 4_

_, >

80 2292

415

r--4

h,1 O

(TABLE5.11CONT.)

r"IO

197g U To(elfbandeJ uses 29582 Totalfimucial sou_ Goldand!o¢F.J_.holdings 98 Fomigscu;rercydepos_ Foreign Ioa_s Otherforeign tie/ms Dome4zti¢ cumency 133 Dma_l del_RS 412 Savings andtimede?o_ 257 D_d ml_iWl_ Do_ loans 25277 Invmt secedlm 3178 tnuramereserves Trust flmde TaxesI_yalde Inter-fizzandalclaims Mbeetbneous 238

1980 S

1981 S

32217 34653

2131 7852 13965 832 535

17_ 2998 I

2055

-71_6 2346

27575 30839

61 3161 130 6370 866 110 17

6715 To8

1982

5820 -214 4282 2290 8253 2841 5205 277 361 312 807 -86 871

13067 5040 -1 4 -87 3768

30360 29161

48 56_7 -297 -,387 -110 244 208

1983

3776 .1805 -4486 -156 9448 _ 6453 4840 2535 -795 g73 368 2332

19816 5731 56 -12 1 -915 3955

47758 30915

30 342g -331 277 157 312 -t40

2356 1948 4512 .1319 15730 452 -1346 2296 781 415 570 5310 3S91

_< --I z

47042 146 -4646 1679 11525 1670 -732 263 2266g 8960 -48 -2 8362 -94

9182 8305 5103 23t2 14146 -14_ -881 3189 457 301 150 450 5673

>Z Z

FABLE5.11CONT.) 1_

To(alI"mm:_sour_s F_ncu__ F_n _ _ _n _ _¢u_ _W_ 0epo_ sul_a_ulms l_IeCU_ II__ T_ Tuee_ InW-.qlandal dlalms

374_

1_ 1_ _ _ _1_ _ 1 2 14Ng

_ 1_ _ _ -1571 1_ _ -1_ 1_I .6010

1_ S

-5165

-1_ _ 101 -131 _ _ 119 _ 1_ __r_'__ _

_ _ ._ _

1_ S

-31944 19 _ _ 1_

-1_11 -1_31 _

1t $

24710

1_ 7_ t_0

31_ 1_ 17_

lS_ 4068

312 _549

_ _

1_ 3175

_ -lge0

_ _ I_ -11 4187

_ _ -115 _ 2324

-1_ II _ -1_ -,9236

4_ _

-1 1S931

_ 1_ I 8127

_ 1_ _1

11n 2815

411 .,_47

-N08

_74

-1 4 220e0

-_0 11_ g_S7

TddeS.12

Sources andUsesofFunds ofGovernment financial Institutions (Inmillion pesos)

r'n

1974 U

1975 S

1976 S

1977 S

1978 S

Z > -rl

Totallinenciel uses Totalfinancial sources Goklandfor.exch.hofdk_s

Fo_gn o_:y _u

Foreign loans foreign claims _ cwmncy Denan_d_ Savings andtime_posils Delx_itw b_tutes Oome_icloans I_n'tles In_ranoereserves Trust funds Taxes_yal_ Irder-_Mnckd claims Miscelleneous

604

504

0.3 -58 -11 541 111

969

768

2024

1330

-8

1669

1372

4 -19

376 145 16 -14

6 38

-7 175 706

112

30 829 128 14

871 837

-34

523

-9 5

6 725 149 33

591 759 822 412

-6

414

-2

645 980 121_ 147 47

> 7

FINANCIAL INTERMEDIATION

,_., ,__

,._ li_l_

o _..__--_.._

. .| _

J 째 _ "_i_ _"'_I_ ' _1_ !

o ,_..........

211

(TABLE 5.I2CONT.)

r"O "0

1984 U Tetalfi_utcieluses 21357 To_ finencial sources Goldendfor.exch.holdk_gs 2 Foreign currency deposils 480 Foreign loans 4854 Otherforeign daims 990 Domestic Â˘uneno/ 169 Demand deposits -65 Savings andtimedeposits 1

DeF_m_ms

Domestic bans Inv4maent/_curilm In_enee metres Trust funds Tms payable inter-fin_(:iaJ daims Misc_neous

5760 4705

708 3753

1985 S

1986 S

18044 31410 446 9895 135 28 -1719 7710 10602 1001 -1858 2507 71 2592

6214 269 37 22209

6255 24873

2 -107 -9654 450 ,448 -33 5

1987

1988

-43982

rn rn

26308

15216

-6 29g0 -3782

-23244

9548

2 121 3675 -129 -70, 3571 3791 13229 1542 113 -624 -91 -249

-36 686 1860 -521 14 10301 5819

-72 :11798

5 2930 1038 3882 1414 -41 95 -299 6890

13154 .1413 -2050 -65 1492 -39205 -1561

159 -1339

Souroes ofbasic data:1974-1979: Natio_aJ Accounts Staff,NEDA; 1980-1988; Department ofEconomic Research, CenUsl Bank.

m _ pO z

4 -2516 -15739 -21419 1120 58 -3381 11031 -35770

J,_l 2972 3 -1521 -6351 10986 5515 _

4774 634 6 765 1410 1061 759 125 534 24006 -25426

__. z>. z

TABLES.13

Souroes andUsesofFunds ofMonetary Authadliee (inmillion pesos) lg74 U Tntnlrmn_l um T_I Omnelal soums GoUantilot.e_oh.hol_. Fo_n _um_y_

9286

C_het fon_nclams Donm_ aummo/ I)m9_l depo_l

173 984 1,_g

DamNUo loans InNIhCNfl_ecLqlLl_ Immmnmrm Tnm_adu Tm I_mble h_4bandd dn_

18(30 066

S_npud_d_u

Mimehmms

lg7S S

1976 S

4287 3529 -

1841 21 -722

17 100

2sg

11_ lg81

2M8 282

854 14 e6e -_15

I50g

U 1073 16 1127 m 567 Sl . -

2 361

295

-Â˘_

lg77 $

lg78

678 1578

9468 _89

34 -34 -g me -2_

t07B ,28

774 380

1226 $

1302

7 -lg63

343

538 SO0 1878 _

6gg6 -84

14 482

757

S 3690 . _17 1468 174

_011 . 1S 86

__F__. L

214

._.._=

PHILIPPINE EXTERNAL FINANCE

._,__

....

'_"_

._'__

(TABLE _13CONT.)

1984 u

1985 s

Tatll_.ms 7o_1_nandel aouroee Go(dandfor.ectL _ldbgs Fcce_ ¢smncycbpo_ Feign loans Othec Iorcdgn ¢bkm Dom_¢ ¢B're_ Demend cleF¢_ Se/_ ud _ dolx,dls Oepcdsulmtum Oom_ 10an# Icr,_amf_ojIIM¢

39054

-312 -3171

-775 8705 -t571 -674 10Q8

Trustfu_ll T_ I_yalde Imt-flMr_cl_m M_

1 2 14rag 14084

.120S 1751 ,5640 8535

-lU76 37435

_ 1286 10928 57 845 94

lge8 u

-194 -4090 101 -10Q0 -1_

.3"R7 -3583 -716T 192 t5"_

-1221_ -3894

_ 2170

11g -448 ,J_AFar -7400

58420 -51e5

-200 343g 12556 4525

1027

12gg -11 4187 -10036

Sourom(dIxnk:dst¢lg74-1g'R; I_lioul/k:cmn Sldl,NEDA;1NO.lgM;Depa_

S04_

11586 58526

-2_ 1317

lge8

-1,()418 46176 4 _ 6606

u 21647

11064 5879 -362 -1505g

-8575 19348 g00 7270 11429

2124g 2_ 753

8376 -3917

-587 4713 01_

-5670 -1111

.821S -lg0g

-17574

.4_ -1806

2482

1S'Re

102 57_ 5711

2248 29002

134 -14,ffi -548

2225 22766

53g 1467 2072

0¢Emm_ReNa_,

__ z z

Cennl B4mk. .-¢

3: rn > O z

216 PHILIPPINE EXTERNAL FINANCE withdrawals were not yet offset by the sisniflcant rise in the inflow of foreign currency deposits in 1987 and 1988. Private financial institutions borrowedfromabroadtobeefup their resources. A significant riseinforeign loansasa sourceoffundstook placeduringtheyears 1983and 1984When thePhilippines declared a moratorium on debt payments.This was followedby significant reductions inthenexttwoyearsasprivate financial institutions had to pay theirforeign loA_. Inthe 1980s,inter-financial ci_ims(interbank callloans)became animportantsourceoffundsforbanks.AsYap etal.(1990)noted, these were beingusedby banks notonlytomeet legalreserves butalsoto finance their regular lendin_ operations. Domestic loans mainly consist of borrowing from the CB. This was a stable source of funds by private financial institutions until 1982. During the 198_1984 BOP crisis, the CB tightened its rodisceuntin8 window to stabilize the economy; hence banks had to contend with a much reduced rediscounting funds from the CB. In fact, the CB narrowed its rediscounting accommodations to export loans of commercial banks during the crisis years. On the uses of funds by the private financial institutions, the two most important items were domestic loe_nRand investment/securlties. Government financial institutions raisedfundsthroughforeign borrowing, borrowingfromtheCB, issuanceofsecurities, and lately through borrowingfrom the interbankcallloanmarkets.Foreign borrowingwas intensified bygovernmentfinancial institutions through most ofthe1980s.The yearofreckoningwas 1987when theysuffered a netoutflowofforeign loansamountingtoP23 billion. The figurefor foreign loans in 1988 seems to suggest that government financial institutions were encountering difficulties in obtaining funds from abroad to offset outflows. As in private financial institutions, the two most important uses of funds by government financial institutions were domestic loans and investment/socurities. Due to special power to create money, the money authority could raise funds by printing money. The increase in the domestic currency was most noticeable in 1983, which was the start of the BOP crisis, and 198_1988. Foreign borrowing was another important source of funds for the CB. The increase in foreign borrowing by the CB was more pronounced in 1983 and 1984, and in 1986 and 1987 when the country was able to restructure its loans for the second time..

FINANOAL INTERMEDiATION

The Private and Financial

217

Sectors

lntrod_tion This section tries to study the interaction of the private sector and the

financial

sector.

Since

it is beyond

the scope

of this

study

to tackle

all the areas of interaction, focus is placed on the degree of debt dependence and self-financing amon8 the different private institutions and their relationship with the macroeconomic environment and variables. Much.ofthedataarebased on theflow-of-funds tables provided by the CB. ]4The data have several problems. First, the data from 1974-79 may not be comparable with those of years 1980-1989 since _.e definitions and sources of many of the diffe_nt items have chAnEed. Second, the data indicate massive volatility to be credible. This is particularly true for the years 1985-1989. For example, real investments in 1986 (i.e., investments in physical assets as opposed to financial assets) for households and unincorporated businesses registered a negative I>82 billion while government real invest_nent was an unprecedented positive P174.8 billion. The next year, real investznents of households and ,mi_corporated businesses jumped to a record high (positive) of P124.9 billion while real investment of private corporations went to negative P31.5 billion. This high volatility in physical investments seems quite implausible. But despite these data problems, general directions, trends, end insights can still be derived, although conelusive statements have to be carefully made. It is also for this reason that only stylized data and percentages are used in the analysis rather than the more sophisticated methods such as regression analysis. Ibel_

on credit or selFflnancl_

Tables 5.14 through 5.16 provide the gross savings 15and investment composition of households and unincorporated businesses, private corporations, and gevernment. The ratio of gross savings to real (physical) investment indicates the dependence on credit or on self-fi--_eing. A ratio lower thA- 100 percent for realinvestment indicates a relatively high dependence on loans and credit to finance the real investment (and vies-versa). Based on this measure, the tables show that households and --;-_c_izzrated businesses are generally net 14. Fur 1974 to 1979, the tables were jointly published by the Central Bank and the Nafi_al Stabsth_ _thm Bo_d (NSCB). 15. For some yearn, thm_e m'e _aplng ea-r_s where _ savings and investznents do not balanos. Thus, the fiSures for _ inveslment were used so that the components will

addup.

,oo TABLE5.14

Household and UnincorporatedBusinessGross Savings,RealInvestment,Net FinancialInvestment (In millionpesos)

__ __. z r'rl

1974

1975

1976

1977

t978

1979

1980

1981

12351 5927

12922 8661

18734 11096

18012 13863

21822 12883

22654 18165

39552 30243

47985 38102

6424 2+08

4261 1.49

7638 1.69

4149 1.30

8939 1.69

4489 1.25

9309 1.31

9883 1.26

1982

1983

1984

1985

1986

1987

1988

1989

40784 16738 24046 2.44

42317 4838 50155 -5.40

35465 32857 2608 1,08

60797 -17505 78302 -3.47

105873 -82360 188233 -1,29

99191 124867 -25676 0.79

40758 76067 -,35309 0.54

55464 -,556 5e020 -gg.76

_o Grosssavings Realinvestmeflt Net financialbve_enl Rdo ofgrosssavings to rsalbve_mem

Grosssaves Real_nt Ne111nen(b]' in_ Ratioof grosssaves to rsalinvestmat

,_uroe: Flow_-FuMIsAooount_C,ont_ Bank

z > z >

TABLE_1$

Pdvete Coqxx_ion Gross Savings, RealInvestment, Netfinancial inveslment (inmillion pesos)

Gmu MVmgs Realbwstlmmt Net[mand_invWmegt

R_ of_

mug,

toreatbvuage_

Grogs _ I:_ kwemmt NMI_Â˘d_ bwslm_ RMIoofgrou_ to r__

1974

1975

m2 11555 .5343

8/45 18403 -qg658

1976

1977

1978

1979

1980

1981

tO2"R 2(]279 -1_00

13888 22924 _

13565 30184 -16619

21101 _ -17845

10100 33382 -23282

13701 32450 -18758

o,,_

_,_

O.S_

o.s_

o._

o.s4

_ao

e.,_

tg_

1ffi3

1964

1885

19e6

1987

lOeB

19_)

140M 5flW -87240 0.28

1geT0 72143 -52173 0.28

4540 02181 -57641 0.07

-1e05 A37 -11M 3.87

33310 -31519 64829 .1.06

_ S1_6 .12434 0.76

___ _ 1___J8___ 3.14

93064 135538 .42474 0.69

-_ > Z 3> r-

TABLE5.18

"o "r

GrossSavings,RealInvestment,NStFinancial Inveatmenl (Inmillionpesos)

1974

1975

1976

1977

1978

1979

1980

1981

Grosssavings Rul invu_nent Net_l_ocblinve_mnt

6500 8198 -1638

7297 107"/5 .3478

4723 11294 -6571

6191 8958 -2767

8047 8297 -2250

12250 23067 -19817

14635 17983 .3348

14297 22424 -8127

Rdo ofgross Savings

0.80

0.98

0.42

0.60

0,73

0.53

0.81

0.64

1982

1983

1984

1985

19_

1987

1988

19_

14490 2_43 -12153

8835 37198 -28271

26198 _ -23394

3,5885 30063 5822

2486 174776 -172290

-58318 32694 -91012

48927 12453 36474

..4281 47352 -51833

0,54

0,24

0.53

0.0,1

-1,78

3.93

-0.09

e_o_swAngz Realbv4_z_mnt Narmnci_In,amnent Rslbofgross_ tore__

S_rw: Flow.o(-FuNds Aeeow_Ce_ldBank.

1,19

N "7'

FINANCIAL INTERMEDIATION

221

suppliers of funds while private corporations and government are net borrowers of funds. There are notable exceptions: the recession years of 1985 and 1986 when households and unincorporated businesses became negative, and the recovery years of 1987 and 1988 when households and unincorporated businesses incurred high debts to recoup the disinvestments made in the previous periocL The latter period was marked by economic recovery that meant filling up excess capacity in what was called a consumption-led growth. 16 Private corporations became providers of funds in the recession years 1984 and 1986 as they relied more on self-financing to finance their real investments. The years 1987-1989 exhibit quite volatile behaviors in both households and unincorporated businesses as well as private corporations (which may be due largely to measurement errors). Households and unincorporated businesses seem to lead real investments in 1987 and 1988; private corporations joined in 1988 and took over completely in 1989 as capacity was roached. Figures21-22 and Table 5.15 show that privatecorporations' own savingsto realinvestmentsfellfrom 1977 to 1983 showing a marked increasein loan dependence forrealinvestment.They alsoshow that 1980 to 1983 was a periodwhen privatecorporations had most leverage. This coincides with theperiodofcountercyclical measures and massive and irresponsible lendingand bRillngout of "crony"firms.The figures and Table 5.16furtherindicatea quiteerratic behavioramong private corporationsduringthe financial crisis periodof 1984-1987.The steep declinein theflowof investmentsin 1984 and the high savingstoreal investmentratioseem tobe plausibleas firmsreliedlesson bank loans duringthefinancial crisis. But thebigincreaseinrealinvestmentsand steepfallof grosssavingsforprivatecorporationsin 1985 seem to be implausible(sincethe nationalaccounts showed that fixed capital formationfell by 11 percentin currentpricesin 1985).Thus, the figures for1984 and 1986 seem tobe more representative ofthisperiod.This is a sharp declineinflowsofinvestmentsin 1984 and the ensuing higher serf-financing; stagnationofinvestments(hitting rockbottom)occurred in 1986.The largenegativeinvestmentfigureforprivatecorporations in 1987 is doubtfulsince the nationalaccounts show fixed capital formation increasing more than 20 percent (in current prices) in the recovery year of 1987. Finally,fn'ms seemed to have much less leverage during the recoveryyears of 1987-1989,than during anytime in the 1970s and 1980s.More self-financing was used,asgrosssavingstorealinvestment 16. Note that the f_we, here contain and may be subject to errors.

_ne

of the volatile

f_qJ_s

mentioned

earlier

222

PHILIPPINEEXTERNALFINANCE

.o_ 0

FIGURE 22

RalioofGrossSavings toRea|investment forPrivateCorporations, 1974- 1983 0.7

0.6

0.5

0,4

0.3

0.2

0.1

1974

1975

1_6

19_

1978

1979

19_

1981

1982

19_

224 PHILIPPINE EXTERNAL FINANCE ratio for private corporations increased to 0.7 after being below 0.3 in the early 1970s (Table 5.15 and Figure 21). This partly reflects the removal of credit subsidies to highly leveraged firms and the high interest rate policies pursued by the CB. The role of households and unincorporated businesses during times of crisis is not clear from Table 5.14. The high negative investments (disinvestments) in 1985 and 1986 may be exaggerated since, as mentioned earUer, high positive investments were registered for private corporations and the government, while households investments we_ residual; the investment rate during this period is reflected in high negative values for households. The role of the households and unincorporated businesses in the commercial bank loans (where most foreign loans were eventually channeled) can be seen in Table 5.17 using other sources of data from the CB. The table indicates that loans to individuals and other tmincorporated entities (except for corporations) fell drastically (in real terms since inflation was 50 percent in 1984) in 1984 and 1985, together with that for private corporations. In percentages, individuals received about 20 percent of total commercial bank loans whereas unincorporated enterprises secured about 4 percent to 6 percent of the share throughout the period. Of importance is the increasing public sector share, especially that of government corporations, starting in 1979 and culminating in a walloping share in 1984 to 1986, as the government crowded out loans to the private sector. This crowding out, as can be seen in Table 5.15, affected private corporations the most as their share fell from over 70 percent in 1977 to 63 peresnt-63 percent during the second half of the 1980s. The recovery period 1987 to 1989 also saw a marked increase in the share of households and imlncorporated businesses, as its share increased to more than 30 percent of commercial bank loans. The share of the government sector in commercial loans fell in the 1987-1989 period but was still much higher when compared with, for example, its share in the 1977-1978 period.. Table 5.18 goes back to the flow-of-funds table to show the supposed flows of financial sources for households. It shows that the households and unincorporated business sector are less dependent on commercial loans but more on trade credit and miscellaneous (possibly informal) sources. The table further reveals that in the in, st part of the 1980s, domestic loan flows to heuseholds were negative suggesting that during times of financial crisis, the households and unhu_rporated business sector turns to trade cn_dits and miscellaneous sources of funds rather than to bank loans. The recovery period, however, saw domestic lOAni

TABLES.17 Loans OutshuMblg of Commercial Banks by Type of Borrower 1977

1978

1970

1_0

1981

1982

1983

1984

1985

1966

1987

1988

1989

To_lLo_ 40172.9 54077.9 M264.2 77198.1 80505.2 98239.6 111387.71163822 87573_ 83087.4 96936.5121973.5 Tolalpdvmsec_

39e_.8

52552.0 64882.3 70_7.3 79791.4 fr,_J

16_97

105000.9106266.4 76217.3 75731.9 _1_52 114504,_

151534.1

Indiddlml Sk_

7289.8 12456.6 11006.4 1,r_5.4 17"/92.$ 19761.7 _7 _25868__.6 17810.7 17433.4 26001.8 31643.5 1047.4 3016.9 1948.2 2324.9 2524.7 3178.7 2375.4 3448.0 1305.4 1494.3 2882.7 3"/35.1

39797.5 5895.6

PUMnlhlpand

1000.0

elmtmm_p

T01IIpublicm¢_

1556.1 1¢_>7.2 2770.8

3854.6

8.6 27 22.3 75.2 112,3 lg6J 175.6 173.6 178.0 254.1 247.8 331.3 30257.0 36754,6 5_12.8 51750.4 57840.8 674B_9 71)024.075621.8 553_.8 54894.0 61805.7 78023.5

99.1 102087.3

570.1

_ govmment 9oveemmt 4632 8.3 Govelamnt

12969

t5_.6

152SJ) 3_1.9

1221A

1521.3 14_L8

1602.2

1153.4

1727A

0260.6 6713.8 6000.7 6377.8 10115.8 11358.0 7355.5 4811.3

802.0

1566.4 1112.2 IOOU

965.9 1345.0

10.7 713.2

72.4 5143.1 ,5.5 5702.7 4.8 4890.3 53.5 5020.4 _2.4 1743.1

7489.3

88_2.9

718.1

1039.6

1672,3

11.0 10224.7 44.0 6170.1 7.6 4190.0 3.2 8813.2

7.4 6422.3

20.0 7170.6

1291.6

1087.3 1177,8

('rN_.E5.17CONT.)

=" -g

1977

Totalloans

1978

1979

1980

105.00 100.00 100.00 100.00

Totidprivatesector 98.58

1931

1982

1983

1984

100.00 100.00 100.00 100.00

1995

I986

1967

1938

1989

100.00 100.00 100,00 100.00

100.00

2: r'-

-4

97.18

95.05

91,89

92.24

93.88

24.27

91.31

87.93

9t.15

94.93

93.93

04.47

_= z

18.15 2.61

23.03 5.58

16.12 2.85

20.10 3.01

20.57 2.32

20.12 3.20

20.50 2.13

22,23 2.96

20.11 1.40

20.93 1.20

26.82 2.97

25.94 3.06

24.81 3.68

__. z

Pml]tm_ip& 2.40 asaock_oa 0.32 Coqxsret_ 75.32

2.40

2.33

1.58

1.70

1.50

1.44

0.99

1.07

1,87

1.05

2.27

2.28

0.05 66.12

6.03 73.71)

0.10 57.04

0.13 66,86

0,20 66.84

0.16 70,05

0.15 04.93

0.20 83.20

0.31 05.10

0.23 93.32

0.27 32.93

0.06 63,05

TotnJ public am(_or 1.42

2.32

4.95

8.11

7.70

6.12

5.73

8.69

12.97

0.85

5.07

6.12

5.53

Ndorml 0.23 government Lo_ Oovmrn_ 0.02 Governmnt 1.15

1.48

2.29

1.44

1.16

0.98

1.21

1.11

1.24

1.42

0.74

0.85

1.04

0.02 1.32

0.11 2.55

0.01 6.06

0.01 6.59

0.05 5.05

0.01 4.51

0.91 7.57

0.05 11.08

0.01 7.48

0.00 4.32

0.01 5.27

0.01 4.47

Individual Sk_gle

_,=_,_,

oorpom_

Souroe: CemralBankCenter forStzdiaticel lnlormatk)n (CBCSI).

Table5.18

Percentage ShareofFinancial UsesforHouseholds andUnincorporated Businesses

Financiel LOses

1974

1975

1976

1977

1978

1979

1960

1981

100.00

t00.00

100.00

100.60

.44.33 1_ 33.31 t.80

69.40 _'_ 67.64 11.e2

77.63 6.67 1.20

44.19 26.90 -4.33

GoW&Io_eign our.

ho4d_s

ForeIon eumency

29,50

dopmm

Fo_ Iomm Oqher lom_ monelmy ckdms Dome_ccw_ren_ 0_11i11_1_(k_(_91_

Savb_ &Iknedepods Del_ wbUitms Do--loans SoeudUeseq,16os InwlmeerewMs Tmslftmds Tradecredits Taxesi_q,ab_ Imm-govemmnt deim Misoel_neoos

6.97 6.06 11.66

3.91 "0174 23.88

5.11 4.16 38.04

0,.41 4.14 48.21

12.33 5.92 44.45

7.83 1l_ 39.74

92.63 2.80 7.57

27.19 6.92 8.22 31.61

.0.62 4.38 7.50

-33.02 1.25 37.71 13.63

20.52 4.14 .1.72 2.46

16.92 4.16

41.42

21.67

11.90

= z > _, _, .._

0 z

228

_=_,_

_'_

PHILIPPINE EXTERNAL FINANCE

_'._

....

.....

_=== __ ..... _

8 •- _

,> ='_.,|'t! I ,,. .i.I__i :1 ti_, ll!!liJ._t._ . ti. 11_

FINANCIAL INTERMEDIATION

229

increasing substantially for the households and unincorporated business sector (Tables 5.17 and 5.18 are more or less consistent in this) as their investment expenditures grew. Table 5.19 traces the flows of financial sources for private corporations. It can be seen that domestic loans, trade credits, and security equities play important roles in the financial sour_in_ of firms. To Sitmrnar_, the ext_rna_ shock and financial crisis that hit the Philippines in the mid-1980s resulted from a slowly growing process of highly leveragod government corporations and some private firms. The 1984-1986 economic collapse saw a massive government e_owding out of the private sector in terms of domestic loans. This led to a substantial decline in the investments of beth private corporate, and households, and unincorporated business secter_. As the crisis waned and recovery ensued, less leverage occ_ in the private corporate sector. The household and unincorporated business sector, however, took a bigger share of commercial bank loans as it expanded investments and its other economic activities during the recovery. It might be argued that, since the households and uvlnoorporated business sector is less dependent on loans, it may have adjusted better to the crisis than the corporate sector. Unfortunately, this cannot be fully determined due to the data problems in the flow of funds and the residual rmture of the households and unincorporated business sector. Moreover, the picture that emerged in Chapter 4 revealed that the share of net savings of households and the unincorporated business sector decreased even before the crisis due to the biases in favor of corporate (especially government corporate) firms. A sharp drop in the net savings of households and unincorporated business sector during the crisis also took place. All these do not seem to support the above proposition. However, it may be safe to conclude that the households and unincorporated business sector suffered as much as the corporate sector during the economic collapse (as personal incomes plunged precipitously). But as discussed above, there seems to be some indication (though not conclusive) that the households and unincorporated business sector rebounded faster from the crisis (in terms of their investments) and recovered ahead of the corporate sector, though it relied mot6 on domestic loans than its own savings. Composition

of financial

assets

Table 5.20 lists the levels of financial assets and their percentage share accerdln_ to flow-of-funds tables. Most striking is a marked shift to gold and foreign currency holdings and foreign currency deposits during the extnmxe crisis years (1984 and 1985). A smaller but still

r.,,1

TABLE$.19 Percentage Share of Financial Uses for PrivMe Corporations 1974

1975

1976

1977

1978

1979

1980

1981

._ z m

--f

F'mancial Uses &foreign our. holdings

103.03

103.00

100.00

100.03

198.03

100.00

delxJs

Foreign loans Oqher lo_iDnmonetary Cklklls Dorae_ic cvnen_ Demand det_ Savings &limedef_ Dep_ _ln_toles Oomestic loans SoGu_ios oquil_ I_reme inserts TMtfurds Ttedecredk

0.98 4.08 1.40

3.00 8.90 5.91

2.g7 7.62 10.98

2._

11.14

10.03

46.19

62.14

0.67 61.10

2.46 21.67 35.00

-12.28 -

7.70 20.58 23.84

* 0.90 39.98

Tabu pay_He Inlmr-fi_mdaldeims h_'e-gcwermem clzdms M_

Z > -_

36.11

112`28

2`43 -0.43 1.51 0.43

-,50.81 77.23 ,3.3";' 10._

10.53 11.94

-80.19 112.18

-0.67 0.98 58.28

-1.32 -1.70 61._

1.88

1.34

13.98

-25.48

-" 29.13

23.16

7.19

11.77

('I'ASLE 5.19CONT.)

Financial Uses

1982

1983

1984

1385

1986

1387

100.00

100.05

100.00

100.05

100.00

100.0,0

19_18 100.00

I_9 100.00

Gold&_re_naJr. hdd_s F_n _ncy Fore_nloans OIherk)m_nmonetezy dam

Oomeeeic curreno/ Omand_ Savings &lira _ Delx)dsabetttms

0._ 9.45 0.38 0.44

0.04 5.53 0.19 2.51

0.06 9.71 -12.71 -1.52

0.02 1.53 3.90 -15.53

-0.18 -24.30 14.33 45.09

0.44 4.11 13.82 5_38

0.03 2.38 3.73 30.76

0.01 1,84 4.91 9.45

OoelNtioloans Se_dUesequBes

20.85 14.57

29.28 14.14

-42.83 55.15

190_8 -12.91

-87.87 43.20

-224.90 106,81

0.48 5,73

19.53 22.17

trmuranoe meres Tnmtlu_ls Tradeeredlls

0.18 0.05 42.23

0.39 1.18 20.85 -.0.51

0.47 0.21 83.29

-0.53 -1._ -e,1.53

0.19 0.72 74.81

0.12 -328 114.58

0.08 -0.18 42.73

0.13 0.38 31.39

-I21

-;?.78

0.39

#.16

1.M

1.Q2

0.39

-2.34

32.61

45.22

8.43

0.25

Tsxespayale irder-_claJ dakns

0._18

_, Z r-

_: m C;

I_o_ment d_m Mbo_

11,85

Source: Fkn_-FundsAoco.m,Ce_d Bank.

26.80

TABLE_

Levels ofFinancial Assets andtheirCompostlton

h; I __

To_l-vJc_.-Pmt-_-lhe-Wodd 1974 Gold&foreigncunency

1975 18

ho_s

1976

1977

1978

113

485

-2044

584

Foreign _

deposits

1979

1980

1981

828

1610

5976

4066

71_

-_ z >

Dome_emney Demand _ â&#x20AC;˘ zvk_ & _medepoab Dep_s._

1842 5177 3160

eeo -1542 4535

8N S04 4743

1226 16_4 7131

1223 12Se 4891

1374 2114 7051

17o8 2441 9714 3_

140e -25 11677 2ee2

13ir_tse_rloesequi_ Pr_ Gov,m'nmem Fmnctalintermediary

10961 2988 5397 3196

15967 2978 3119 9870

10691 2832 559.1 1988

8285 2314 5159 832

3196

8098 3744 4354

30200 5294 22622 229_

23_6 2989 14845 5092

Total

21140

19647

10852

16395

11865

25213

5_84

40528

0.89

4.16

1.65

-12.47

5.01

23.70

9.88

1.73

7.48

10.40

5.45

3.40

3.59

3196

Perc_ ShamtoTotal Gold&fo_ignouneno/ hol_iags Foreign ez.zer_

0.09

0.11

dep_

Domeslio ounerW

8.71

3.41

5.32

3.97

_z > A

(TABLE 520CONT.) 1974

1975

1978

1977

1978

19"/9

1980

1951

Demand depos_ S_wi_$&time_pos_s O_oeaub_o_

24.48 14.95

-7.95 23.08

2.95 28.15

1027 43.48

11.¢2 41.63

_ 30.35

4.88 19.,_ 0.79

.0.08 28.81 _08

Dtre¢settles equilies

51.85

81.27

63.44

50.63

27.48

32.12

80.10

50.77

Pdvale Govemrnent b_clialy

11.20 25.53 15.12

15.16 15.88 50.24

16.81 34.95 11.95

14.11 31.34 5.07

14.85 17.27 27.43

10.63 #5.01 4.50

7.33 35.63 12.58

150.08

108.00

150.00

195.00

100.08

195.00

150.00

150.08

328

1610

5076

16484

6348

., 7

1374

1708

1495

7652

9714 398

11677 20_

8098 3744 4354

33263 5294 22622 2293

23006 2969 1404,5 50_

25240

61762

45175

Tolal

Tot__ Gold&forth cure)no/

113

485

-1939

580

895

1126

1488

4743

7131

12163

Foreign _ Oomes_curmncy

984

(189

Rmlt._-the-Wmld

Oe,n_depoeb

-1_

1804

11_

&timedepoel_ Depoea wl_um

3160

4538

Dkedseourltkm equilles Pd_le Governmnt F_andolk_enedimy Rmt-(d-_e-world

10861 2368 5397 3108

15875 2976 3119 gK70 8

102_8 __-_'_5891 1968 473

8413 2314 5130 832 126

3416

TO_d

17800

lg_2

16373

16648

lg_44

2148

3195 220

2441

-25

-I m

_: m __ > -i z r..,a

234

I111 I,

:Ii_i IIil=__ ili I

_ _ _=_ _.._

,,j,._

PHILIPPINE EXTERNAL FINANCE

-_':' _#__

(TABLE 52OCONT.)

1962

1983

1964

1985

1966

1987

1968

1989

DomeJccurmcy Demud(lepo_ts &limedepo_ Depi_ sabaltutes

1181 -1541 16465 4,52

7675 SS_ 12547 -1425

3043 5644 8966 .15"/1

2339 -,3559 19303 -4096

6591 13580 7138 -4026

_ 30381 -15_ 2128

4763 17064 33667 -2574

6"/33 6131 4330g 5724

Dire¢sec_r_ies equi_ Private _mme_ Financialintemn_imy

34302 14213 16460 3629

_ 19973 14728 2184

43451 .15247 -36490 18286

55803 13610 13143 29140

90887 2551 87802 514

21018 5208 57702 -41882

60821 11000 53298 5433

19415 11305 7921

TolM

54050

18480

115001

112782

84700

126618

107028

Pefee_ShemtoTMel Gold&foreign ¢uminoj holdl_s Foreign ewmney

8.48

-11.23

167,31

17.24

-2.40

9.42

2.64

0.40

-0.57

-_1.50

50.18

22.47

1.18

-0.91

0.40

5.65

OomeSk_ Omard dep_k &Ible_ w_l(,m

2.49 -2._5 30.48 0.84

15.41 11.0S 25.19 -2.66

18.48 84.27 42.42 -0.54

2.02 <1.07 16.65 -,t.54

5.84 12.04 6.33 -3.57

tL'17 48.95 -2,41 3.29

3.76 1z4o 26.50 -2.08

6.31 5.73 40.47 5._

Directm_dlim equllN Rdvale Oovemment F'mandaliMefmo_

63.48 26.30 30.45 6.71

74.02 40.10 29.57 4.35

-203.11 -92.,_ -221.57 111.08

48_2 11.74 11.34 25.14

80.57 2.2e 77.85 0.48

32.48 8.05 89.18 -64.74

85.14 8.78 42.09 ¢29

36.10 18.14 10.56 7.40

100.00

Total

). z n -_ O > z k,l {,rl

z_ z 1982

1983

1984

3500

-5581

27554

3509

4270

OomMtio corn)not Demand del)ods Savb0s&Umedepostls Dep_ mlWJlulm

1181 -1541 16485 452

7675 5502 12547 -1425

131r_aeeudties equilkm

34302 14218 16480 3_9

38_65 19973 14728 2164

-33451 -15247 -'wAg0 ,__._16__

57958

59843

23566

Â˘.._d&k_n

a'.ren(_

Foreign currency

G_m'lmte_ F'lltarld_ _ P,elt.d_ Total

19QS

1_6

1987

1988

1989

t9f77

-2704

6098

3348

434

15361

23650

-22699

-4773

8795

17372

3043 5644 6N8 -1571

2339 -3859 lg_38 _

_ 13580 71.38 .4_

7229 30381 -1559 2128

4763 17084 3386? -,2574

6753 6131 43309 5"/24

55803 13810 13143 29140

90867 2551 87802 514

21018 5208 57702 -418_

69821 11080 53298 5433

38841 18415 11305

113505

88747

60522

132962

118354

) z 7 > m

FINANCIAL INTERMEDIATION

237

23B

PHILIPPINEEXTERNALFINANCE

si_dficant shift of financial assets to d_aestic currency and demand deposits (the more liquid assets) can be detected in these m'kis years and the coup year 1987. This indicates that when political (and economic) instability ea_des people's confidence, a shift to safer (i_., foreign) assets and more liquid assets happens. The shift to CB bills in 1984 and 1985 ceineided with the increases in fi-nncial intermediaries' securities for these years when the CB offered high yielding CB bills to mop up exc_m liquidity aimed to deflate the economy. In normal (non.crisis) times, government socuritiea and savings and time deposits dominate the financial assets. Private securities reached its peak in 1982 and 1983 when many specialized financial institutions .issued ec_mmercial papers to finance the over_ leverab_d big "crony_firms. The shift to government securities (treasury bills) isclearintheyears 1986-1988, andalesin1990. Private

Sector

and External

Adjustment

Introduction The debt crisis in the early 1980_ exposed the problem pond by the simultaneous occurrence of private savinss outflows to foreign markets and the public sector external debt accumulation_ This was not seriously felt durir_ the 1970s when a lot of foreign finance was available. While foreign asset accumulation is not necessarily harmful for the home economy, it can bring serious welfare losses in a capital-scarce and foreign exchange constrained economy such as the Philippines. These costa may be even higher since external and internal adjustments are not automatically simultaneous processes. This section seeks to identify the relative magnitude and determinants of private foreign asset outflows from the Philippines in the 1970s and 1980s. While several measurement concepts addreuin8 the "capital flight" issue already exist, these seem to underestimate the outflows, leaving out trade misinvoicing and underrecording of workers' remittances. Moreover, there is no easy-to-measuro aec_uutin8 concept to gauge capital flight as is usually defined, i.e., money that flees from government controls anO/or particular risks in the home country. What studies-on-capital flight'usually measure is some residual estimate of all private calSital outflows. This measure is also applied here because it is precisely this concept that we are interested in: the total accumulation ofprivateassetsheldabroadand itsdeterminants. The secondpartof the sectionprovidesan econometric analysis of the 17. Thisisdrawn ham Voe (1990b).

FINANCIALINTERMEDIAllON

239

determinants of private capital outflows. It will be shown that motives for private capital outflows seem to be associated with portfolio and exchange risk considerations. Specific determinants strw_d in the studies on capital flisht, like tax evasion and the size of the external debt overhang, appear insis_ficant in the case of the Phi]ippimm. Rather, high inflows of commeedal bank loans up to the 19_s and the borrowing behavior of the Philippine Lmvernmentappear to have fue/ed private capital exports. Subsidiary evidence sunests t_i. linkage of public borrowing and private foreign asset accumulation is, at least in part, attributable to illegal financial t_nasetions of government officials. A final sip_eant determimmt appears to be foreign asset demand of the rich related to consumption preferences of the Philippine elite. The section closes with a number of considerations about the wealth effocts of private capital outflows and the consequenew for debt management and _mctural adjustment policies. Magnitude

of private

capital

outflows

Direct information on private foreign asset accumulation by residents from the Third Wortd are hard to come by. Statistics on bRnk deposits was proposed u an important source of direct _ (e.g., Khan and UI Haque 1985: 611-612). But this type of information suffm a number of llmitatiol_: 1) not all external asset acquisition need to t_k_ the form of bank deposita; 2) not all funds deposited abroad by resident private, non-banklng agents get s_wately _eS_awd as some funds are held outside re_ (to IMF and the Bank of In_ Settlements) financial centers, as the natio_Bty of the depoeitor is not always known and as differences exist in the eo_ and geographical and institutional breakdown of data amon_ the reportil_ of _-jor banking centers and country repor4.1-_; and 3) available international banking statistics, as collected by the IMF and the BIS, do not coneilt of fully direct data, but are in part based on derived information using other data sources such as the BOP to deal with incomplete covea_ge and data inconsistencies (d. LandeU-Mills 1986). The I,o.lr of good direct measurea explains the relinn_ of related studies and, of this paper, on residual measures. Is The estimation eoneept that we follow is that of Voe (1900b) which takes off from the following basic _nomic accounting identity for an open eeonom_

18.

Some o/the related eo_eptJ

are also discussed and applied to Philippine data in

Vos(1990),B_ee and_ (1988),Dooley(1986),WorldBank(19_), KhanandUl Haque(1987),Cuddinstcn(1986),andMcB_mGusrantee(1986).

240

PHILIPPINEEXTERNAL FINANCE

(I_ -S_) + (I,-S s) = CAD = bF +A IF - _q -4L_-_-EO_(1 where Ip Iz 8p Sg CAD _F AIF

= = = = = = = = =

AA_

(20)

Private investment, Public investments. Private savings. Public savin_. Current aseount deficit. Net long-term capital inflows. Net direct foreign in_ente (inflow). Net change in official reserves. Net increase in external assets of deposit money bJ_k_. Net increase in external assets of non-bank private sector, Farors and omissions.

The lefthand side of the equation specifies the internal balance in the private and, public investment-savings gaps, the sum of which should equal ex-post to the current account deficit. The righthnnd aide represents a summary of the capital aeeount of the BOP spseifying the financing of current account detieite in terms of long-term capital inflows, direct investanent inflows, use of official reserves, accumulation of foreign assets (net of shertrtenn borrowings) by the banking and non-banking private sectors, and errors and omisaions. Rearranging the terms, we get the World Bank (1985) residual measure for capital outflows: _A

ffi _+_IF-A-q-CAD

= _+_+EO

(21)

The Vos definition is an "egclusive" measure where _ is take_ out from the righthand side as these -- at least in part-- may reflect reserve holdings kept abroad to secure foreign exchange deposits of residents. An important aspect of this definition is the netting of overBtatemente in the current account deficits (and thus understatements of the residual capital outflows) due to 1) trade mlainvoicing, i.e., underinvoieing of exports and overinvoicing o_imports, and 2) underrseording of werkem' remittances. Trade misinvoieln_ has long been seen as one of the most important vehicles of illegal capital exports from developing countries (Bhaswafi 1964 and Bhagwati et at. 1974). Underinvoicing of exports and â&#x20AC;˘overinvoiclng of imports allow exporters and importers to retain part of

FINANCIALINTERMEDIATION

241

the foreign exchange acquired during their trade transactions. Incentives for trade mleinvoicing may be large eases of serious exchange into overvaluation, strict exchange controls, and rat_n_n_ of foreign exchange. Trade misinvoicing (TD), particularly export tmderinvoicing (El)), may be estimated by taking the difference between imports from the Philippines as recorded by its trading partners and the recorded exports of the Philippines after correctln= for the CIF/FOB factor. Import misinvoicing (MD) may be measured by taking the exports to the Philippines as recorded by the trading partners (corrected for the CIF/FOB factor) less recorded imports of the Philippines. This implicitly assumes that tradln_ p_ have more accurate recording than the home country. Total trade mieinvoicing leading to an understatement (TD>0) of the foreign exchange acquiredby Filipinos is then defined as: TD = ED-MD. Table 5.21 shows the computed trade misinvoicing based on the above methodology. The results reveal a consistent pattern of underinvoicing of exports. However, this potential source of private foreign asset accumulation is, in most years, fully offset by an underinvoicing of imports, meAnln_ that part of the illegally retrieved foreign exchange from export earnings is (directly or indirectly) used to finance imports. Underinvok_ng of imports is an often observed feature under regimes of import substitution since it provides a vehicle to evade payment of high import duties and to undercut quantitative import restrictions. Gulati (1987) finds such prance common in major Latin American debtor countries. The estimates suggest that trade mieinvoi_in_ did not contribute to private capital outflows in the investigated period. The not result obscures the fact that there appears to be significant export underinvoicing (exceeding import underinveieing) in Philippine trade with the industrialized countries, is However, much of the foreign exchange retained by the private sector via export underinvoiein8 is (_y or indirectly) used to finance the smuggllnu and underinvoieh3g of imported commodities from neighboring Asian countries (particularly Hong Kong, Singapore, and Talwan). Underrecordi_ of workers _n_t_ne_ in countries with large numbers of migrant workers has been identified as another source of capital exports from developing countries. The number of Filipino migrants in foreign service increased from 48,000 in 1976 to almost half a million in 1986 (Mangahas 1989). Remittances from these workers 19. This is also the conclusion derived by Boyce and Zarksy (1988) who estimated the desree of trade misinvoidn8 exclusively based on trade data c/the Philippines with the industrialized countries.

TABLE5.21

Philippines: TradeMisinvotdn_lr/1-88 Philippines' TradewithWorld (inmillion USdoffars)

._ _z r..Q

Epld .

Mpld

ClF_'OB

ED Mw.Ep*Cl FEW"

MD C4F.Mp

TD ED-MD

1971 1972 1973 1974

1121 1069 1886 2873

1376 1360 208g 2917

1_0 1365 1790 3444

14_ 1403 1871 3302

1.122 1.143 1.124 1.0_0

118 132 -31 84

243 247 313 56

-125 .115 -344 27

1973 1973 19"/7 1978 1979 1980 19el 1982 lg83 1904 198S 19N tg87 I_

2273 2574 3151 3425 4.578 5730 5756 5020 4_2 5343 4314 4807 5698 _

2852 2927 _18 3_ 5435 (Bt3 6889 _0_ 5958 6684 3110 _ 700t 8704

3"/03 3gÂŁ:2 4270 5059 _ 8295 8884 8262 7883 _ 5351 5211 _ 8_g

3656 _ 43e0 5435 (l_ _ 8835 8370 86_ _ _ _ 78"/7 2273

1.086 1.085 1.077 1.067 1.077 1.OT4 1.0e'/ 1.077 1.065 1,085 1._7 1.070 1.067 1.070

384 134 224 259 507 895 747 798 705 867 1095 890 923 1178

287 321 4,15 848 804 807 350 752 1182 674 _1 871 14U I_

118 -187 .211 -590 -387 87 398 44 -486 192 143 25 -544 -86

Souroe_ IMF,D_

e( Trade8tdMJu,vado4m yem,K IMF,hdenwfk)l_F'mandal StstlJ_ forGF_'O0emwereion foctor.

r'ri

_< -_ z > r"n >" Z

FINANCIALINTERMEDIATION 2,1L_

tended to be grossly understated in the BOP, thus overstating the current aecount deficits and undereetlm_t_ eapital outflows. The cumulative value of these underrecordinp is e_m-tod at no lees than U858 billion ovor 1976-88, which is almost two-tbirde of total private foreign assets as estimated in this study (see Table 5.22). The un_-_e were estimated following Mansahas (1988) where a proxy for actual reeeipts from ,-i_ant workers was derived based on data

fl_ma the Parody

Income

and Expencfihnw

Survey

(FIE_

The 1986

tetal income with fm_tltes abroad as the main seurce ofineeme is US$1_ billion (US$ -- 18.6 pesm). Auumin8 that only 50 _t oftbis income is _eoin abroad,

the value

of remittances

is at least

US_).9

million

1965. Income data in the PIES tend to be underestimated. Compared with national accounts estimates, the PIES total household income is underestimated by 86.8 ;mrcent, If this applies equally to all sources of inceme, actual remittances would mount to US$1.45 billion, which is more than double the recorded value of US_).7 billies for 1985 (Table 5.22, eois. 9.and 3).zo To summarize, the Vos definition which makes adjue:-..ents for export underinvoieing (ED), import overinvoieing (MD), and un_ of workers remittances (UWR) is expx_sed as follows: _% = _

+ _F-

_R- _-

[CAD- (FAD-MD)- UWR]

(22)

Table 5.23 presents the estimated aammulatbm of private foreign asset using the Vos concept. The bulk of private foreisn asset accumulation took place between 1976 and 1962, with a peak just before the outburst of the debt crisis in 1981 and 1982. A deeumulat_n (or return of capital) is recorded in 1983 and 1987. AJ diseussod in the next section, this may be explained by shifts in some of the major detm.mln-,_ts of outward movements including a stagnation in external debt aecumulat/on, real exchan_ rate adjustment, and x_luetion in fore_u and damestie real rate of return differentials, but possibly also by the debt_equlty convea_ion program in operation since 1986. Pratmt_ fore_n

as_ts

and pri_#.e

m_n_

The refinements in the method of measmmment as suggested in this s_dy emmot obscure the fact that we ave dealing at best witb very rough estimates. Counterchecks, apart from the exte_Jl bank deposit data, 20. The 1975-1988 mrle. w_en _ to 1985. The additional, admittedly

th_xwheuttheper_

era.the emme a_nm.nticnmetheeeapplied crude snumptie_ is a constant degree of

24.4, PHILIPPINEEXTERNAL FINANCE

TABLE5.22

Philippines:EstimatedUnderrecordingofWorkers'Remifisn_sfrom Abroad

1978 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

No.of Workers (x1000) 1

CB Estimated Recorded Real Es'dmated Remitt Remitt. Undermc. (USSM) (USSM) (US$M 2 3 (3-2)

47.8 70.4 88,2 137.3 214.6 266.2 314,3 434.2 425.1 389.2 414.5 496.9 477.8

111.0 213.0 290.9 364.8 421.3 545.9 810.5 944.5 658,9 593.7 595.7 808.8 874.1

232.0 445.2 608,0 762.4 880.5 1140.9 1593.9 1974,0 1377,1 1455.1 1454.0 1690.4 1826.8

121.0 232.2 317.1 397.6 459,2 595.0 883.4 1029.5 718.2 761.4 758.3 881.6 952.7

Note:Basicdataontimeseries fornumber ofworkers _ andrecorded remittances takenfrom Mangahas (198g:Table1). _ufor realremittances have1985asbaseysoz. The1985RESestimates aggregate income of households withforeign v_rkersremittances asmainsource of income atU&$1.84billion (L_S$1= P 18.61).Folbwing Mangahu(1989:14), aconservative average eslimate offoreign Incemae Inthetotalis 50%ytelding avatueof remittences for19&5ofatleut US$0.92biBon.TheRESsuweyof1985records anaggregMe household income whichis63.2%ofthenational accounts estimate, Assuming this unde_ ofhousehold income isequalforallsources ofincome andtheaverage undere_imation holds equally forhouseholds withforeign remltances asmajor source ofincome, aneslinlate of"anluat" remigances ofUS$1.45billion In1985canbecalcul_ed. Sinceestimates of Income fromthissource may hemuchmoreso,urgethanIromothersouroes(e.g.capital Inoomes, self.employed incomes) andthe underestimation intheRESislowerthan36.8%,thiseslfmate (_obmn3) migMheseenasanupper hound value.Toderive theseries for1976-88, theprobably incorrect assumption wasapplied thatthedegree of underrecerdin 9In1985[(3-2/2] wasconstant throughout theperiod. ,Source: Mangahas (1989),Cenlxal BankofthePhilippInes andowne_imms.

FINANCIALINTERMEDIATION

245

TABLE S.2I Phillp_nes:Vod Measure ofPdvMeForeignAs_t AeeumulMion.

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

, THIS STUDY (vos)

CAD _USTUENTS _ W_NV.

CAD NIJUSI1VE_ UWR

-155 13 -225 184 434 703 701 414 715 1297 2921 2375 -13 385 1612 1334 -102 322

-125 -115 -344 27 116 -187 -211 -500 -387 87 398 44 -486 192 143 25 -544 -86

121 232 317 398 459 5gS 883 1029 718 761 758 e82 953

9379 3297 22O 12897

.846 -128 -630 -2042

3O05 3267 1834 8107

Cumulative totals: 1971.82 1983-86 1987-88 1971-88

244

PHILIPPINEEXTERN ALFINANCIE

can be obtained by comparingthe private capital outflows de_ved from BOP data to national accounts figures on the domestic investment_savings balances (of. equation 20). The exlstenee of pr/vate capital out/_ows suggests the existence of a trRdnhle private savings surplus, or at least an overall traAAhle surplus of invcetment finance in the hands of the private sector. Private agents may obtain foreign exelumge surpluses out of enmmodity trade as well as out of net extm__.l

borwing. Reordering equation 1', we may write: _.p = [(S,- Is) + AF, -_d_]+ [(Sp- Ip) + AIF +_d_, -&At]

(23)

where the private capital outflow (AAp,including errors and omissions) is equal to the fiscal balance (S s - Is) plus net external borrowing by the public sector (_u "R), the private savings surplus (Sp - Ip) plus net borrowing by the private sector (AIF + AFp - _b). If the financial balance for the public sector is negative, there wi_ be a domestic

net t_ulofer

of resources

from the private

to the public

sector

(-Z). The remAinin_ financial surplus of the private sector then equals the private capital outflow:

(24)

Table 5.24 gives the trends in these aggregates, where the original national accounts data were also adjusted for the adjusted current account balance after accounting for trade misinvoicing and tm_rdlng of workers remittances. The adjustment was assumed to fall on private savings, st By implication, and such adjustmonte were included in the mac_economic social accounting framework (MSAF) set out in Chapter 2 (see also Appendix 2), household incomes are also higher than recorded in the national accounts statistics. The data show that both the average tendency toward a private savings surplus in the second half of the 1970s plus substantial (mainly short-term) external borrowing financed private capital outflows. Private financial surpluses in this period appeared to be large enough to allow significant capital outflows, accompanied by substantial 21. The aammaptiarm..beingthat ia,ivnte consumptien wM estimated with _easmmble acctwa_, so that acemmtin8 for_ incomes leads to higher household saving1. U_ emminl_ fk_matrad_ misdnvoiein8 will ai_ flow into ho_.u,ehold incomes and yield higher household savings, or if import underinvoieins ezeeeds export underirtvo_fi_i, im_ _ in fact higher and may x'effecthigher actual comm,rnnt,iocLIn the table, the po_ibflity that import under-invoicing could also _eflect higher actual investment levels is left eperL The effect on the private investment-savings balauceis the

FINANCIALINTEI?_EOIATION

247

248

PHILIPPINE EXTERNAL FINANCE

financial transfers tothepublicsector. The 1980s exhibita sharp decline in privatesectorexternalborrowinp (AFp);but during the periodof major economic adjustment to the external payments crisis of 19841988, substantial private savings surpluses went into further foreign asset acquisition and the purchase of government securities. In 19851986, the eve of the collapse of the Marcos regime, the relative si_e of foreign asset acquisition was close to the level of that of the late 19708 (4 -5 percent of GNP), but declined thereafter. Channels

of private

capital

outflows

In the Philippines, two important channels seem to have operated to export private savings. The first is the parallel foreign exchange market which was fueled mainly by foreign workers' remittances over the past two decades. The second is the Philippine OBS, established in 1976, which grew remarkably between 1977 and 1983, the heyday of Philippine capital exports, and declined thereafter. The foreign exchange component of the private savings surpluses sourced from workers' remittances largely exits abroad via the parallel foreign exchange market. Workers remittances are mainly transferred to the _dlippinos through informal money exchangers which have branches at overseas locations where Philippine workers are employed (particularly in the Middle East). The foreign branch offers a favorable exchange rate (above the official rate) and a "doo_to-door _ service (Mangahas 1989). The money exchangers accept the currencies at the foreign worksitos and deliver the peso equivalent to the workem' beneficiaries in the Philippines. Abroad, the money excba_re tend to have a legal status; at home -- to avoid CB regulation -- most operate illegally (Mangahas 1989: 15-16). After the worker has delivered the foreign exchange to the foreign branch, the sum to be transferred is wired or faxed to the home office. The foreign exchange is deposited in a foreign bank, while all remittance deliveries at home are in pesos. To generate, the pesos for the remittance deliveries, the home branch of the money exchanger offers foreign exchange services. It sells its foreign exchange at the black market rate through telegraphic transfers to traders who prefer the black market to obtain dollars (because of a lack of access to rationed foreign exchange supplied through the CB), as well as to any other demander of foreign exchange. Whereas traders may use the foreign exchange to finance imports (import underinvoicing), other agents may use this cl_A_nel to relocate their savings from domestic to foreign assets. This mechanism shows the clear link between underrecording of workers' remittances, private savings, and foreign asset accumulation.

FINANCIAL INTERMEDIATION249 The main location of the Philippine parallel market is M_nil_'s Chinatown district of Binondo. After the outbreak of the debt crisis, the government started to intervene directly in the blank market by threatenin_ the oligopolistically organized Chinese traders with arrest and forcin8 them to buy and sell at rates dictated by the government (Dohner and Intal 1989: 525-7; Ongpin 1986). This intervention, popularly known as the establishment of the "Binondo Central Bank," along with the 1983 and 1984 devaluations, helped _mlniRh the black market premium and obtain foreign exchange for the government's debt payment obligations at a manageable price. The black market premium was even virtually eliminated over a period of time, likely a majer factor in the st_ng decline in private capital outflows be_ween 1983 and 1985. In 1986, the official intervention was put to an end. The second main channel for private capital exports is the OBS, includin_ interbank foreign currency transfers. Official investigations in the post_Marcos era strongly indicated that an important part of the foreign exchange used via this channel was fueled by external debt accumulation. Citing Boyce (1989), the phenomenon was referred to earlier in Chapter 3 as a revolving door of capital inflows to the public sector and capital outflows by the private sector. Government financial institutions, particularly the DBP and the PNB, were engaged in on-lending foreign loans to the Philippine private sector, usually businessmen close to President Marces (Boyce ibid). Government guarantees backed this indirect form of external borrowing by the private sector. A portion of the borrowed funds was presumably invested in domestic investment projects, but there are clear indications from the surge and decline of offshore banking activity that significant parts were used for the acquisition of foreign financial, assets and further private sector external borrowings through interbank transfers and back-to-back loAn_. Determinants

of private

capital

outflows

The previous section provided definition and measurement concepts for private capital outflows but not for the more _wow concept of "capital flight." The determinants of private capital outflows from a foreign exchange constrained economy like the Philippines need not be confined to specific risk considerations, evasion of government controls, tax evasion, and/or other illegal transactions, but may be part of a broader set of private portfolio considerations. The reasons for the existence of private capital outflows from a capital scarce country may be based, in principle, on separate motivations. In studies on capital flight, much emphasis was placed on differential risk-adjusted rates of

250

PHILIPPINE EXTERNAL FINANCE

return on domestic and foreign mmets which led portfolio holders to shift from domestic currency to foreign currency assets (d. Cuddingtan 1986, Leesard and WilliAm_on 1987, Cardeso and Dombusch 1989). Poreeived risk. differences between domestic and foreign assets sugge_ eapitel market imperfections explai_in_ two-way capital movements frem an economy which, as a whole, mightbe considered foreilra exchange- and capital-constrained. Private agents are assumed to assess various potential risks associated with holding domestic assets: 1) inflation and exchange rate risk, 2) political risk, and 3) tax reasons. As argued by Cardeso and Dombusch (198_. 1423), these may be, in principle, separate motives to move savings abroad; but in practice they may overlap at different points in time. Inflation and exchange rate risks may retest beth porcoptions of unstable economic management and restricted access to foreign exchange (e.g., due to exchange eonemls or increasing debt problems). Political risk may be assessed as percoived political instability and a resulting expected worsening of the investanent climate. increases in capital controls or differential treatment of domestic and foreign asset claimants may be included under this headin_ aSwell. The latter motivation for private capital outflows -- discriminatory taw_tment of domestic and foreign liabilities -- was emphasized by Eaton (1987) who linked the phenomenon to the process of external borrowing in the 1970s and 1980s in which governments, the principal berrowers, explicitly or implicitly guaranteed external but not domestic liabilities. Aecordln_ to this hypothesis, increasing debt n_umulation by the private sector would form a motive for private foreign asset accumulation, i.e., it would respond to the total stock of external debt exceeding a preset critical value. However, the mechanisms discussed in the precodh_ section suggest external borrowing might have also fue/ed an important share of private capital outflows, i.e., these might have been closely related with the net inflow of foreign loans rather than with the size of external debt. Finally, differential tax treatment may be another reason for moving assets abroad. Non-resident assets in the United States and many other potontial havens fer foreign exchange holdings are untaxed. There may exist, however, other motivations to hold assets abroad which are at best only indirecUy associated with risks and rates of return on domestic and foreign assets. An impm-tant one is associated withthe lifestyle of large parts of the elite in developing countries. Many of the rich in Latin America, and also in the Philippines, spend part of the year abroad, particularly in the United States, and send their children to study there. To fmanco these activities, they will have to

FINANCIALINTERMEDIA'IION 251

ensure a certain level of current foreign exchange income. With restricted foreign exclmnge or exchange rate risks, holdin8 aseete abroad may be the most secure way of ensurin8 such an in, me. In the aggregate, this may require substantial f_eisn assets. _ Using the abovementioned reasons, empirical tests on the determinants of private capital outflows from the philippines were applied to the Ves definition of foreign asset ac_-lation. To avoid estimation biases often associated with regression analysis inciu,41n_ time series of nomln_! values, and to ensure that dependent and independent variables are dimensioned similarly, private capital outflows were taken as a share of GNP (dAo/Y). The following potential deter_inmnts we_ considered-" _A_

f[REER-t; _a;(r'-r)a;

SJY; e.l; _F/Y; W/Y)_ 1:

(TAt).1;(A a] (+)

(+/-)

(-)

(+) (+)

(+) (-)

(

(25)

The expected signs are in parentheses below the independent variables. REER-1 stands for the expected undervaluation of the domestic currency. In the results, the real effective exehan_ rate, lagged one year, was used as a proxy. _sA decrease in REER means that Â˘/9, Fro-example, a _eh household may haw one son studyin8 in the UnitAd Statms mid, at least, one othee household member spendin_ each ye_ a holiday there or _ them fae a medical e.heck-up. This would cost at least U8530,000 annually. If the avemse rote of return on dollar_eiu_nination f_eisn mmets is _ this would _equi_ an external smet position of at least half a million dollars, if it is difficult to exchange dmnmd_iclr_vcm_fro. f_eign exchange at home. If 0.1 percent d the Philippine households (i.e, _dmut 1000 households) would be in such a position, which does not seem unrealistic, tbeee would be a desire to hold US$ 5 billion in fv_eign smuts _a"US$ 95 billion if half d the required flow ddollm_ would be _ out of em_ent inane ea_ed at I'_me. Under the latt_ assumptim%nearly a q_ of the stock of l_iVate fm'eil_ sssets, _a e@tilnlted in Table 5.23 would relate to fceeisn exchar_ requirements to stt_ this type dintm_ationally o]eie_ltedconsumption pat;te_. 23. The res] effective exchange rate is deflm_d as REFA_= (q_SI/P'), where e is the nominal e=dmnse rste (pesos per dolle_), P is the domestic l_ice level (ee_umer pricel), and P" is a deflator f_ the pureh_ins pow_ of the dollar (US wholesale _ index_ As m_geetod by C_,_a|ngton (lfl_), a _ far the expected deprec/at/on of the domestic em.reney wouid be the diffe_nce between the em_ent _eai effective ezehanse rate and t_ equilibrium rate. In practice it is difficult to derive an equflibeinm egdmn_e mt_ Foilowin_ Cu_, one might assume a constant equilibrium rote thmush the sample period, lteSr_sions we_ also perfm_ned far the difference between the lq_d REER and an a_bltntrily chme_ constant equilitn_um rate far vs_ms base years (1972, 1979, 1965, 1_7_ The _esult_ w_e _ Â˘Ime to those _ported _ usins the isssed REER itself.

252

PHILIPPINE EXTERNAL FINANCE

the nominal exchange rate adjustment lags behind the positive difference between domestic and US inflation, i.e., a depreciation of the domestic currency. It is hypothesized that an expected depredation will induce private agents to demand more foreign assets. The expected inflation rate (x-l), together with BEER, form the indicators for perceived inflation and exch_ risk. A higher inflation rate make domestic currency assets less attractive and possibly reflects a deterioration in the "investment climate." The expected rate of return differential between foreign and domestic assets, (r'-r).l, was included using three alternative specifications: 1) the nominal rate of return differential, (i'- i).1; 2) the real rate of return differential, (r'-r)-l; and 3) the expected real dollar value rate of return differential, i.e., the expected rate of retuz_ differential adjusted for the expected rate of appreciation of the domestic currency, [i'-(i+E)].x. The latter indicator, in effect, combines the responsiveness to real rates of return and the expected rate of appreciation (or, with opposite sign, depreciation) of the domestic currency. 24 Outside of risk considerations, the basic portfolio consideration is a comparison of domestic and foreign rates of return, and capital may be expected to move abroad if higher earnings can be obtained there. It might also be expected that the higher the private savings capacity, the higher the potential capital outflows. In the regression analysis, the private savings capacity (Sp/Y) was included both independently and as a scaling factor for the responsiveness to the rates of return differential, i.e., (r*-r). l(Sif_r). Dependence on a limited number of primary export products, shallow manufactured export base, and a high import component of industrial inputs make the Philippine economic performance highly vulnerable to terms of trade cb A-=es. Expected falls in the terms of trade (0.1) may thus be a relevant indicator of expected loss of returns on domestic assets, reduced foreign exchAn=e availability, and investment opportunities (e.g., through an expected tightening of exchange controls). Altennatively, black market exchange rates could lm_ been used u a pr_y of the equililz_ium rate, but data could only be obtainedfor a small part ofthe sample period, i.e., 1983-1988. 24. This can be easily seen, by using the real exchangerate definition given in the pa_viousfootnote: i* * (i + ÂŁ) **-(I+ eg_+x* - z) =0-z)-(l "1*_- (1_) Where c is the rate of apl_eciation of the domeatic currency, ="is the fca_ignrote of inflation,z is the domesticrate of inflation, and e_is the rate of changeof the peso.dollar exchange rate. TM

FINANCIAL INTERMEDIATION2S3 Access to long-term foreign borrowing (_/Y) may reflect good credit worthiness and will widen the foreign exchange availability, thus cerrelating negatively to private capital outflows. At the same time, there are also grounds to hypothesize a positive relationship, if external borrowln E fue/_ private capital exports. If private agents would anticipate negative adjustment consequences t_om exter_-I debt accumulation, one would expect a positive relationship with the stock of outst_naln E debt If much of the borrowing is by the public sector, they may fear a higher future (inflation) tax burden following increased fiscal deficits and debt_service burden, as well as increased risk on holding domestic assets if government guarantees on external debt imply asynunetric treatment of domestic and foreign claimants. An inca_ase in the tax rate, (AT/Y)-I, could be an incentive to evade taxes and move capital abroacL Finally, with a distorted foreign-exchange market and if the aforementioned international lifestyles of the rich are significant, it can be further hypothesized that private agents target a certain stock of foreign asset holdings, so that private capital movements will reflect some stock-adjustment behavior, i.e., adjusting to the beglnnlng-of-year asset position, (A_. 1. A regl_ssion analysis was performed for the Vos definition of private foreign asset acquisition in the period 1972-1968. A step-wise estimation â&#x20AC;˘ procedure was followed, i.e., the hypothesized determinants were regressed first individually and later jointly with other determinants found significant_ Table 5.25 reports on the results, below:

(_Y)

0.2o6- 0.216REER.I+O.366(_*r) -1(8//) (3.03) (-3.20) (1.86) + 0.538 _jF/Y (2.10)

R2 = 0.58

D.W.

= 2.10

+ 0.092 (A_ (2.91) F

-1

= 6.42

Private capital outflows are explained by the expected real appreciation of the domestic currency, the expected real rate of return diffea_ntial on foreign and domestic assets as well as the private savin_ rate, the rate of debt accumulation (debt_fueled capital outflows), and the previous year outstanding stock of foreign assets (presumably associated with a desired level of foreign assets to satisfy foreign consumption needs).

TABLE5.25

-o "I"

Philippines:Determinants of PdvuteCapitalOutflows (Estim_ion period for ell regressions: 1972-1988) ae

REER.I

r.i)-I

(r*-r)-I

[i'-('_)J.1

0.1

¢IF/Y z

De_nde.t_. dAI_-VO$1

> 0.208¢

-0.21#

(3.03)

(*3.20)

0.214' (2.911

-0.22#' {-3.08)

0.138"

0.027"

(4._)

_0.365¢

+0_8 _

(1.86)

(2,.1_0) 0.e21 b

_0/745'

-0.138 a

Z m_

('TABLE 5.25CONT.)

ApJY.1

dT/Y.i

F/Y.1

D.W.

Dependeot vat.

d,_o/Y.VOS 1

Es4Jmalkm Procedure

_.0_' (2.01)

0._

2.10

6.42

Ot.S

_.084a _45.

0.50

1.85

6..24

OL.S

_.oe_ 11.01)

0.44

1.98

s.22

OLS z-_ > z

D 4

-1.4_9 c

(-1._

0.12

1.43

3.35

OLS

--_

;;1

8 Nole: T..ma_blicsere k'lparengzo,_ _a'S_nlficmt et1%level. nfrl¢_ atlO%tevel,

C_nmamm _ Im,¢.

256

PHILIPPINE EXTERNAL FINANCE

The results confirm the hypotheses set out, with the coefficients at _ptable levels of significance, bearing the expected signs. The real exchange rate had the expected negative sign. An expected real depreciation of the domestic currency might be an important d_ terminant of underrecording of workers' remittances. Note, however, _,_ in all attempted regressions the parameter value for REEI_I was between -0.21 and -0.25, implying that the vehicle of workers' .vmittancos as a source of private capital outilows cannot be easily assigned to real exchange rate changes. Real rates of return differences, scaled for the availability of private savings, also proved significant. The highest significance and explanatory power for this variable is obtained when estimated in a multiple regression with either real exchange rate expectations or the terms of trade (equations 1 and 3). Probably due to simultaneoum equation biases, the parametex value for the rate of return variable showed some instability in the latter specification. The (expected) inflation rate did not prove significant, while the parameter for the tax risk indicator yielded the wrong sign (equation 4), but is significant at the 10 percent level of confidence. Contrary to the usual assumption, a flow-related debt indicator (F/Y) and not the stock variable indicators (e.g., Dooley 1986, Khan and UI Haque 1985) showed a significant relationship, giving support to the "debt-fueled"capital outflows hypothesis. The regression results suggest that, during the period analyzed, some 54 cents of a dollar were "re- exported." Finally, a target asset position (using Ap/Y.1 as a proxy) s5 also proved significant, giving support to the hypothesis that part of private capital outflows has to do with international consumption patterns and lifestyles of the richer Philippine households. This aspect of private capital exports from developing countries is probably the most ignored factor in existing studies. It is a determinant which has little to do with what is usually identified as capital flight, nor is it an element of reduced availability of foreign exchange which can be easily counteracted by "better debt management or domestic adjustment policies."

25. Note that the stock variable far I_ivate f_ei_n anetm wu eatimated by taking simple cumulativetotals f_ the 1970-1988period.No adjustmentswere made forpossible capitalization of non-remitted investment income. Some studies In_pesed to include (imputed)non-remitted incvmeearned on fmwignassets in the _ definitive_A major difficultywith the "capitalization"of the non.remittsd income"iithat it is unknown how much is actually reinvented and how much is consumed. As suggested in the text, the latZcrcomponentmay in fact be quite large.

FINANCIALINTERMEDIATION 257

Consequences

and

policy

conclusions

Private foreign asset accumulation is not necessarily _ for the home economy since the capital expor+.in_ economy may benefit from increased national income due to foreign investment income steams, enhanced trade via enhanced production, and/or pttwhasin8 power in the capital-importing country. For private capital exports from highly indebted developln_ countries, there are several reasons to expect that, on balance, this leakage of national savings will have negative welfare consequences, three of which are discussed here: the growth costs of reduced savings and foreign exchange availability, the effects on the internal transfer problem and the overall adjustment of the accumulation balance, and the relation with the external debt problem. First, the capital outflow will he a magnitude equal to a reduction in available savings for domestic investment, thus limiting future growth possibilities. 2e Using a two-gap type of argument, _7 growth costs are likely to be larger if the foreign exchange constraint is binding, in which case future growth possibilities and the current level of output will he reduced by a multiple of the size of private foreign asset acquisition. Some simple, counterfaetual calculations for the Philippines suggest that the reduction in domestic investment tends to he about 1.5 times the size of the capital outflow, white the loss of potential output would be 1.9 times the capital outflow. 2s Such losses in 26. This does not take into account relative ps_e effects and other gener_ equilibrium effects of IFivats capita] e_ on domestic savinp. 27. Lassard and Williamson (1967: 224-225) apply a similar type of sz_zment. 28. In a fc_eisn exchangs constrained economy, foreign capital will be mere "l_XXluctlve"titan national esvings if the extm_aJ _tp is the lm_e gap ex-an_ In this case, a loss in savings which, at the same time, represents a loss in foreign exchange (i.e., s capital out/low) will have larg_ g_vth costs than just s lower level of domestic savings in s asvir_ cons_mined economy. This can be shown as follows. The two gaps are defined as: I_ = M-E, where I ffiinvestments, S ffirmfional esvings, M ffiimparts, and E = e_ FA_ payments are ign(a_i for c_nvenienc_ The extomal gap is financed by a f_i_ c_oital inflow, net of l_ivate capital expm_: M-E = _kF-Up. Assume that export demand szld net extmma] ban_vi_ are fixed, so that dE = O and d(_') ffiO. A capital outflow will _luce impart Â˘_oa=ity, the ccat of which may fail either on demand for impaffcedommum_ invesmlmt goods: d(_Ap) ffi-dM = _iC * m_i]) (26) where mÂ˘ and mr are, raspectively, the mar_l import eampc_ent in e_sum_- and investment _ads. C is total consumptk_ _ Irivato capital outflow leads to a l_uctinn in available resom_es, national income, and imports, _dY + _dY + dM) = -(dC - dl) (27) Resourcesare _ed to be spent on e0_mmpti_ and investmont goods sccoedingto _von msrsinal propensities to save(o = I_) _1 cvmm_ (e): dI = s(dY +dM) (28) dC ffic(dY = dM)

258

PHILIPPINEEXTERNALFINANCE

current derived

and future wealth may be mitigated by additional from remitted returns from foreign assets. However,

data suggest such remittances income derived from foreign

tend asset

to be small vis-a-vis holdings. In 1988,

income available

the expected the _corded

repatriated investment income was about one-fifth of the total foreign investment income which can be imputed by assuming an average rate of retttrn for the estimated accumulated stock of private foreign asset holdings. If, for example, an additional 30 percent of the estimated earnings would be remitted to the PhKippines, a 0.7 percentage point higher overall growth rate could be achieve_2D This line of reasoning, causes of potential welfare capital

exports

could

however, does not reveal losses. Also, the existence

indicate

Combining the equations yield: dY/dM = [(1-ml) dl/dM = (l-e)/[mle(m_-me)]

the non-existence

c(ml-m_)]

the underlyln_ of substantial

of an aggregate

foreign

(29)

Estimated values for the marital coefficients, using time-series analysis fer 1968-1988, fer the Philippines are: c -- 0.496; me ffi0.381; ml = 0.309 (based on the following estimated long-run elasticities and average propermities: r_ = 0.603 and Car = 0.822; n_ = 1.249, nmi ffi0.297 and me. ffi0.251) Thus: dY/dM = 1.901 and dl/dM ffi1.4621 (30) In the savings constrained case, dl/dS = 1. It thus sppes_ that foreign exchange is mere "productive j than domestic savings. Under the given aMmnption of the simple two-gap model, a unit incTease in foreign exchange availability yields about 1.5 times as much extra investment as in the savings ccetsti-ained case. Inversely, a unit loea in fo_ign exchange availability due to, e.g., private foreign asset acquisition would yield a multiple reductictl in domestic investment (1.5) and an even larger Â˘mtput loss (1.9). 29. Pastor (1990) also finds high potential Welfare losses due to low levels ofrepa_iated investment income on accumulated private fereign assets in major Latin American countries, The calculations for the Philippines ewebased on the following eetimateE a) an estimated stock of Ia-ivate foreign asset holdings of US$12,897 million in 1_8 (5.23), b) the six-months LIBOR rate on dollar deposits for 1988 (8.13%), and c) the long-x_m elasticity of import growth to Overall growth of 0.259. From this infce_mation,the following indicators esn be derived: Estimate4 income_in fv_ign assets is about US$1060 million in 1988 (ffiiA2ffi.0813" $12,087), while _corded repatriated investment income received by private asents was US$ 226 million according to BOP data (line 19 in the IMF Balance of Payments Statistics). To calculate the growth effectof 30Â°/0more fereign investment earvAngs being remitted to the Philippines, Pastor's procedure was followed: _g = 0.30" (iA_)" r_ ffi0.30" 8.85" 0.259 = 0.688 (31) Where _g is the percentage point change in the growth x,ate, iA_ is the total Is-irate fmei4gn investment income as a share of total impu_, and nm is the imlxrt-output elasticity (i.e., the effect of 1% import growth on growth in ontimt). The preceding analysis does not account for all possible welfare effects. Non-remitted investments income was considemt "lost_ for national welfare. However, following an earlier argument, the spending of these profits abroad may have a lo_-tea_ return to the home country if the proceeds of foreign assets are used to train hishly qualified professionals, assuming these ret_m to the Philippines.

FINANCIAL INTERMEDIATION259 exchange shortage. Complementary evidence is required to deal with these two criticisms and should be sought in the segmented nature of the Philippine foreign exchange market. Legal imports of intermediate and capital goods for preduction and investment are restricted by import regulations and exchange controls. Resources for imports in the official foreign exchange market were strongly limited by the clean-cling of export proceeds (underinvoicing), diverted public sector borrowings, and workers' remittances through the parallel foreign exchange marke t . These resources were subsequently used, to a large extent, to acquire foreign financial assets for the microeconomic reasons discussed in the previous section. Repressed foreign exchange resources in the official market could nevertheless have restrained mainly imports of intermediaries and capital goods which are eligible for tax exemptions and other incentives under the import substitution regime. Such resources became increasingly scarce with government demands for foreign exchange to service its external debt. Only in this light should the two-gap argument be considered. Second, the country will have institutionally, highly imbalanced international asset positions, with the private sector holding most of the external assets and the public sector having most of the external liabilities (see Table 5.26). This problem revolves around the public sector's lack of command over tradable surpluses (foreign exchange) to finance its deficits which increasingly are caused .by external debt-servicing obligations. Private capital outflows reduce foreign exchange availability and will aggravate the internal transfer problemAs indicated in Chapters 3 and 4, the btdld-up of external debt in the Philippines was concentrated in public enterprises and non-traded goods activities. Moreover, as a consequence of the debt crisis in the 1980s, the government and the CB took over a large part of the private sector external debt to give in to creditor demands and, where applicable, also effected public guarantees. Foreign exchange income diverted to the parallel market and private capital outflows reduced the official foreign exchange availability, worsening the internal transfer problem. The public sector responded in the 1980s initially with a moratorium on external debt payments, a decumulation of official reserves, and a government intervention in the "Binondo Central BRuit7 as mentioned earlier. None of these measures were (politically and economically) sustainable in the medium-run. Besides heightening import restrictions, "real madjustment took the form of heavy cuts in public investment programs in attempts to reduce the overall fiscal deficit. The cuts in public investment, despite observed inefficiencies in many of the earlier programs further limited growth possibilities, not

260 PHILIPPINE EXTERNAL FINANCE

TABLE 5.28 Philippines:NetExternalAssetPositions of Non-finanoial Privateand PublicSector,1988 (In millionUS dollars) Prlva_ SectOr Foreign Assets 1975 1980 1985 1988

252 4084 11343 12897

Foreign NetAemet I.labilities PosiUon 1600 2996 3278 2304 .........

-1348 1088 8065 10593

Pubic Foreign Foreign Net Assets I.bJ_ties Asset Positk)n 1314 2846 615 1003

1453 6870 14273 23268 .,

-139 -4024 -136_ -22253 -

Source: Table 5._'forstock ofprivate foreign, asset (Vos. estimale, World Bank, Debtor Repo_ng System forextemaJ liability position ofpublic andpdvale sectors, endCenWal Bank ofihe Philippines forpublic sector external assals (refers toofficial resenms asa proxy).

only by compressing the overall investment rate, but also by limiting the recovery of private investment due to increasing infrastruetural bottlenecks (see also Chapter 4). Third, large private foreign asset holdings form both a constraint and a potential tool in resolvln_ the external debt crisis. The constraint relates to the attitude of foreign creditors who have pointed at the large external assets which suggest the non-existence of a foreign exchange problem. On the other hand, foreign assets of residents may be an important source of funds to make voluntary debt conversion schemes successful. This was the ease in Chile, although the dobt_equity swap program of the Philippines is, to a large extent, also a reinvestment of private foreign assets at home. Dytianquin (1989) provides data showing that, at the end of 1988, more than 50 percent of approved debt_equity conversion transactions were by Fi].ipinos._째 The strong growth of direvt foreign investment to the Philippines in recent years more or lees coincides with the activation of ,the debt_equity conversion progr_m_ Official and other observers (e.g., Montes 1990) see in this a successful attempt to attract private funds _ abroad. Others (Yap 1990, Vos 1990d) doubt whether the program actually attracted any new funds 30. The totalvalue otepp_n,vd debt_equityomverstonsas otDemmber1988 amounted to US$1.2 billi_.

FINANCIAL INTERMEDIATION261 that would not have been invested otherwise, sl It is difficult to show this counterfactually, bu_ available evidence suggests that foreign investors and Philippine residents with foreign assets used the prregram simply as the cheapest way to finance their ventures in the Philippines, as these investments would have taken place anyway. First, the shin of debt-equity swaps in total direct foreign investment fell when the program became limited in 1989 to avoid inflationary effects (from 81.7 percent in 1988 to 45.2 percent in 1989). Second, the incentives to hold assets abroad seemed to have declined since 1986 (adjusted real exchange rate, higher real domestic rates of return, debt resehedldlngs) as reflected in reduced and even negative private capital outflows in 1987-1989. These observations do not put in doubt the potential usefulness of financial innovations like debt_convereion progr_m_ in an overall external debt, reduction strategy, but to attract funds for such programs may not require .much additional incentive (like particularly advantageous exchange rates) when the overall investment climate seems favorable to private investors. In summary, private foreign assets acquisition over the past two decades had significant growth costs for the Philippine economy and made the domestic adjustment process much more difficult and severe. Some analysts consider that such social costs could form an argument for capital controls in order to reduce the overseas leakage of national savings (cf. Leasard and Williamson 1987: 233-4). However, the _stonces under which such controls will be effective should be determlned, to avoid providing a cause of private capital outflows through their impact on the black market. The Philippines imposed relatively strong exchange controls during the period analyzed, when significant outflows took place. Controls were relaxed in 1987 as private capital outflows were falling. It is i,nllkely that single measures can prevent savings from fleeing from domestic investment ventures where they are most needed. Firstly, there is, as observed, a strong inertial component probably linked to international lifestyles of the wealthy and the rationed foreign exchange markets. Major wealth redistribution and structural removal of limits to a free and accessible foreign exchange market would seem to be required to contain this seurce of de_and for foreign asset ho]din_. Secondly, orthodox measures include real exchange rate adjustment and increasing real rates of return on domestic f'wAncial assets. Both 31. _nmbuich (1987) argued the likelihood of ,non-additionality" of foreign investment attracted bydebt-equity swaps forLatin Ameri_m debtm_.

262

PHILIPPINE EXTERNAL FINANCE

should be effective in the Philippines given the regression results. However, their effectiveness will have to be assessed jointly with the impact on other variables. A devaluation will push up the domestic currency value of external debt obligations end affect in particular the fiscal deficit (see Vos 1990c and a subsequent section). This was a major reason for Philippine policy makers to resist major exe_R_b_ rate adjustments. Thus, exchange rate policies will have to be worked out with a fiscal adjustment program and a settiement of the external debt problem. Financial liberalization and higherinte_strates might reduce the incentive to invest abroad, as suggested by the econometric rasu/ts. In recent years, issuance of high yielding treasury bills by the government to Finance budget deficits (see a subsequent section) caused a crowding out of credit availability for private investment. High-interest bend financing, in turn, is now posing additio_M fiscal adjustment problems by generating a high domestic debt burden. This strongly limits finance available for structural reform programs and essential investment in infrasta_ture and ener_ required to support private investment growth. Thirdly, the existence of large private foreign assets should not be an obstacle in the process of debt renegotiation and reduction-schemes. Creditor country policies were indubitably instrumental in the occurrence of the phenomenon. Tax-free havens have welcomed private capital from Third World residents and banks helped to swing the *revolving door" of public debt_private capital exports through the supply of many back-to-back loans. This puts part of the responsibility for resolving the Philippine extsmal adjustment problem in the hands of the creditor institutions. To conclude, policies to avoid growth and adjustment costs from private capital outflows need to be supported by a coherent i_tmework for structural reform and macrceconomic management, i.e., exchange rate policies, effective debt reduction, fiscal reforms, and structural measures aimed at stimulating domestic productive investment (including public investment in infrastructure and energy) and easing up of foreign exchange consta_ts (export support, reduction of foreign exchange market segmentation). Interaction

between

Financial

and External

SeetoN

Extel_ shocks ar_ tam.mitred to the financial _ mainly through the linkage between the BOP and the financial variables. This is true for events like changes in the terms oftrade, increases in demand for the country's exports, and changes inthe inflow of ezterna! flnAnoe.

FINANCIAL INTERMEDIATION265 To the extent that these events have a direst impact on the real seet_ of the economy, there would be an additional, albeit, indirect effect on the financial sector. This section focusel on the direct: linka_s. Total domestic liquidity, TL, is determined by the foilowin8 equation:

m" MB

where m is the money multiplier and MB is the monetary from its sources side, MB can be expressed as

NDA +NFA

(32) base. Defined

(33)

where NDA is net domestic assets and NFA is net foreign assets (specifically net foreign assets of the CB). The link between the see_r and the financial sector is eoncenta*ated on the NFA variable. The BOP is determined above the line by the sum of the current account balance and the capital account. ExternAl shocks that influence the level of exports and imports (e.g., terms of trade) affect BOP via the current account while cbA"_es in the movements in foreign finance (direct investments and foreign loan-) alter the stru_xre of the capital aeceunt. The economy reacts to the resulting BOP surplus or deficit by a ehango in the foreign excb-n_e reserves of the CB or by a clumge in the reserves of the private sector, which essentially meAnR the _mrnojf_al bavkln_ sector. The net foreign reserves position of the CB is reflected in the NFA variable. Figure 23 shows that the level of international reserves of deposit money bnnka (or commercial banks) were relatively insulated from the external shocks during the 1980e. Table 5.27 shows that the net foreign asset position of the CB was oonsistently negative (liabilities exceed assets) since 1981. Moreover, the change in NFA (DNFA) was negative from 1979 to 1988. This coincides with the period of the second oil price shock and the subsequent eeonemic chaos associated with the external debt problem. As pointed out in Chapter 3, net financial inflows inclusive of interest payments became negative during this time. Previous to that, the DNFA was negative only in 1975 when the terms of trade of the Philippines fell drastically. The DNFA registered positive during the period 197_ 1978, the height of the influx of foreign loans; this indicates that the government used a significant part of the foreign debt to enhance its foreign reserve position.

264.

PHILIPPINE EXTERNAL FINANCE

FINANCIALINTERMEDIATION

265

TABLE5._/

Components ofMonetary (inmillionpesos) Year

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 _

Ba_.

.......

Monetary NetForeion Change Base Assets inNFA (NFA) 3759 4094 5120 6216 7403 8672 9965 13136 15566 18654 21352 23889 24896 34957 41232 43039 54827 61218 71480 92881

-382 365 1031 4177 6272 1862 2180 4452 6007 5650 3506 -4023 -18070 -34784 -51622 -84502 -99018 -99699 -121581 -108236

747 665 3146 2095 .4410 318 2272 1555 -357 -2144 -7529 -14047 -15714 -16538 -32880 -14516 -681 -21882 13345

Net Domestic Assets (NDA) 3602 3181 3392 816 -125 5142 5768 5362 6086 8979 12686 21812 36714 62507 85067 122488 149001 156562 I__..-,-,-,-,-,-,-,_4 201113

266

PHILIPPINEEXTERNALFINANCE

The movement in total domestic 'liquidity was not driven by the movement in I_A because of the sterilization measures implemented by the CB. A generalized least, squares regression between NDA and NFA gives the following results: NDA

500391- 1.03 NFA

(34)

(6.83) R2 F D.W. rho

= = = =

.991 949 .59 .993

The equation shows that the level of net domestic assets of the CB is negatively related to NFA. This is illustrated in Figure 24. As a result of these measures, the monetary base kept a steady growth path averaging 18.7 percent during the period 1970-1989 (Figure 25). Because ofthe easy availability of foreign financing, monetary policy could be described as accommodating during the 1970g. Interest rate ceilings were then imposed and the CB's rediscount window was aggressively used to directly heap credit on preferred areas of investment. In the 1980s, monetary policy became generally restrictive. The monetary base grew by 17.9 percent on the average. This is not significantly different from the average for the two decades but, based on the sources of the growth of monetary base, the monetary policy in the 1980's was indsed restrictive. In Figure 24 and Table 27, the decline in net foreign assets was more than offset by an increase in net domestic assets. This apparently produced a sharply increasing monetary base. The net domestic assets was disaggregated to determine which component was largely responsible for the sharply rising monetary base in the 1980s. As can be observed from Figure 26, other net domestic assets (OTHNDA) rose sharply in the 1980e, while credit to the public sector (MACPS) and to the deposit money banks (NCDMB) moved in opposite directions, partially cancelling each other's effect on the monetary base. The revaluation effects brought about by successive devaluations in the mid-1980e drove OTHNDA upwards. Revaluation effects consist of stock revaluation, swap losses, and forward cover losses. The CB's previous policy of liberally entering into swap _mente with and providing forward exchange cover to commercial banks finally took its toll when the exchange rate ceuld no longer be defended in the face of the severe BOP problem. The rise in revaluation effects can be considered a non-discretionary action of the CB.

RGLIRE24

NetForeignandDomesticAssetsof the MonetaryAuthorities 22O

100

.lO01

-150 ,

OZ 1;70

..... lg72

1974 '9'761

_978 I ' • NFA

1980 ' ' • NDA

19_

.......1984

!9_6

1988 ",4

0 1971 1972 1973 1'974 !975 1976 1977 1978 1979 1980 1981 1982 1983 1'984 1985 1'986 1987 1988 1989 • Pesovatue(BP)

• Growthrate(%_

F_=URE26

Behaviorof theMonetaryBaseandComponent ofNetDomestic Assets 22O 2OO 180

140' 12010080-

> Z

3: I11

-20, -40

Z 1970

1972

1974

1976 • MB

1979 • MACPS

1960 • NCDM8

1982 • OTHNDA

1984

1986

1988

270

PHILIPPINE EXTERNAL FINANCE

Revaluation effects were significantly higher than the increase in net domestic assets beginning 1983. 32 If revaluation effects are removed to consider only the discretionary action of the CB, then indeed net domestic c_edit would show a much slower growth in the 1980s. The restrictive monetary policy in the 1980s induced high interest rates on loans, treasury bills, and time deposits. Figure 27 i_-_her testifies to the liquidity crunch during this time; it presents the credit extended by deposit money banks at constant prices. Readily observed is the downward trend in the amount of credit extended during the period 197&1985. A recovery occurred since then but the level of credit in 1988 did not even match the pre-crisis level. Public

Sector

Deficits

and External

Adjustments

Introduction The accumulation of a large public external debt posed a severe internal transfer problem to the Philippine government because debt servicing obligations, based on foreign currency payments, require a simultaneous siphoning off of private savings and foreign exchange holdings. This problem emerged in the Philippines because of two conditions: !) access to net new public external borrowings and other foreign currency incomes fell short of debt servicing obligations; thus, the public sector had to make a net financial transfer abroad; and 2) the required foreign exchange could not be easily mobilized from the foreign exchange market due to its segmented nature. This internal transfer problem posed a number of adjustment problems in the 1980s and these will likely remain the major issues for the medium run. This section investigates two related issues: the transfer problem underlying the existing trade-off between fiscal and trade effects of exchange rate policies, and the adverse effects on the private sector from the way the government attempts to resolve the internal transfer problem. Tighter rationing of foreign exchange at a fixed exchange rate in the official market segment may both restrict imports for production purposes and stimulate private capital outflows, while a devaluation of the exchange rate to clear some of the excess demand for foreign exchange will lead to an increase in the fiscal deficit (measured in domestic currency); inflationary or bend-financing will also affect private accumulation balances through "forced savings _ or 32. The Central Bank blockeda substantial paetian of its deposits by the revaluation differential.The blockeddeposits in effect siphoned off excess liquidity fromthe banking system. 33. This is drawn feomVos (1990c).

FIGURE 27 Credit Extended by DMBs (at constant prices) 7 6 5 4 3 2 (I1

-1

-4 I

1978

1979

(

1980

1981

1982"

I-

1983

1984

1985

'r986

1987

1988

272

PHILIPPINEEXTERNAL FINANCE

the crowding out of domestic credit availability and, hence, private investment. The fiscal and the external

ba_

The heavy dependence of the public sector on external borrowing in the 1970e and the debt burden problems of the 1980s could give the improssion that external and fiscal balances are strongly correlated. Much of the practice of adjustment policy and financial progrA_mmlng in developing countries is actually based on assuming a strong interrelationship between the fiscal and external balance (see, e.g., World BA_k 1988). In macroeconomic accounting, such a presumption implies that the private sector acctmlulation balance may remain rather stable. This becomes immediately clear after decomposing the maeroeconomic balance of the economy into an external, fiscal, and private sector balance, i.e. AF -- CAD = M* E + iF - (Ce + Is - T) + (Ip- 8p) where' AF CAD M E iF Cs Is T Ip Sp

= = = = = = = = = =

(35)

Net external borrowing Current account deficit Imports Exports Interest payments on external debt (F) Current govea_ment spending Government investment Ta._tion or government revenue Private investment Private savings

To the extent the external (CAD) and fiscal deficits (Cf + I_- T) move in the same direction and in similar proportions, the private sector will be able to maintain its e.x.ante accumulation balance position. Such a situation may occur if most external fi_nAnceflows to the public sector to finance fiscal deficits. With less foreign finance available and a higher interest burden (iF), where iF> dF, the public sector will have to make a net outward transfer. Cutting domestic expenditures or taxing domestic incomes as such will not generate the required foreign exchange to effect the external transfer. Private sector demand adjustment, reflected in both the savings-investment and the economy's trade balance, will be required to reconcile internal and externnl balances.

FINANCIAL INTERMEDIATION273 Roughly, the scenarios described above seem to apply, respectively, to the 1975-1982 and 1983-1989 periods in the Philippines. Figures 28 and 29 show trends in the fiscal and external balance for these period_ applying two different definitions of fiscal balance. In Figure 28, the fiscal balance refers to the deficit of the national government, including transfers to cover deficits of other parts of the public sector. Figure 29 defines the monitored non-financial public sector deficit, or public sector borrowing requirement (PSBR); see Table 4.11 for the consolidated public sector dat_ Figure 28 shows that, in the 1975-1982 period, the national government deficit and external balance moved in the same direction (with some deviation for several years), leaving in most years an investment-savings gap for the enterprise sector of about 4 percent of GNP. Figure 29, however, reveals that this gap (in several years like 1977, 1978, and 1981) was largely absorbed by non-financial public corporations, requiring a more or less even accumulation balance for the private sector. After 1982, public sector and external balances started to show a weaker correlation and, to the extent that there was one, fiscal and external adjustment moved in opposite directions, with the fiscal balance showing less variation (or larger rigidity). The national government deficit, after initial adjustment efforts toward fiscal restriction in 1983-1985, exhibited a strong fiscal impulse in 1986. The fiscal expansion coincided with a strong external adjustment, forced by the scarcity of foreign finance. The resulting current account surplus was financed by a large private savings surplus. The 1983-1985 period erupted into one major economic crisis, with strongly falling investment demand and import contraction. The fiscal impulse, following the change of government after the toppling of the Marcos regime, promulgated in Keynesian fashion a demand-led economic recovery. Debt rescheduling and fresh money promoted expanding import demand above export growth in 1987-1989. Debt burden, exchar_e rate adjustment, and the transfer problem

fiscal

policy,

As Chapters 3 and 4 point out, the bulk of external borrowing by the Philippines during the 1970s was channeled through the public sector and to the non-traded goods sectors. Future debt repayment requires a capacity to generate a tradable goods (export) surplus, which can be achieved by expanding export production or by compressing imports. The former option has an external constraint in the form of world demand. Import cuts will have serious growth consequences if a major share of imports is composed of essential inputs and capital goods for

FIGURE 28

Philippines: fiscalandExternal Deficit (percent of GNP)

4, -0 -Q

-_ Z > Z

5 4 3 2 1 0

-1 -2 -,34 1975

1980 • BD/Y

1985 • CAD/Y

FINANCIAL INTERMEDIATION

275

276 PHILIPPINE EXTERNAL FINANCE production. This capacity to generate foreign exchange through commodity trade to pay for the cost ofe_ borrowing is the external transfer problem of debtor economies, which is true for most Third World countries. If most of the external liabilities are held by the public sector, which does not generate much foreign exchange by itself, there may be a simultaneous internal transfer problem. However, ther_ need not be a severe internal transfer problem as long as a foreign exchange market exists where the government can buy the required foreign currency. Under these circumstances, however, an excbRn_e rate adjustment will affect the fiscal balance and, without further fiscal adjustment, additional domestic borrowing or money creation will be required. But if foreign exchange is scarce in the economy, or if the foreign exchange market is not freely accessible and parallel markets exist, the public sector may have to face an internal transfer problem which may lead to the default option on external debt obligations. As indicated earlier, the Philippine foreign exchange market shows a substantial degree of segmentation, such that the internal transfer problem is likely to occur. In analyzing the transfer problem, the interactions among trade, exchange rate, and fiscal policies should first be examined. In countries with a large external debt, the internal transfer problem may have serious policy implications as it may cause trade-offs between trade and fmcal adjustment_ Traditional instruments of trade policies are the exchange rate and import restrictions. A devaluation and import liberalization are typical instruments of orthodox adjustment programs to increase the tradable surplus. Exchange rate depreciation would enhance competitiveness of export sectors, while tariff reductions are expected to raise efficiency of previously protected industries and allow them to become more competitive in international markets. Both measures may increase fiscal problems. Import liberalization will reduce tradable tax income, assuming the income loss from tariff reduction is larger than the possible growth of the import volume. A devaluation will raise not only the domestic currency value of tradable government revenues, but also that of external payments. Thus, with a large debt overhang and debt service obligations, a devaluation may increase the fiscal deficit and require a larger adjustment of non-traded expenditures to cover a given fiscal target. The problem can be measured by decomposing the fiscal balance into components relating to foreign currency-based (+tradable') sources of income and expenditures. The budget deficit can be decomposed as follows: $4 34. The presentation largely follows the expositic_ of the problemby Reisen (1989).

FINANCIALINTERMEDIATION

(C=NT+ IsNT"TNT)+ e(Cgr + l_r- TT)

277

(36)

where the subscript T stands for tradable income while subscript gNT stands for non-tradable government expenditu_s; e represents the excb_-._e rate. The transfer problem for the govemmeat can be bi_ghlighted by decomposing equation 36 further into tradable and nontradable, non-interest fiscal balances, and interest payments on inte_ hal and external debt, and by showing the sources of fi-A_ce, i.e.-BE) where: Cg. id i_ Fs B H

(Cg.NT

_B + e(AF_) + _I = = = = = =

TNT)+ e(C_-r + I_- TT) + idB + e(i_F_) (37)

Non-interest current expenditures Interest rate on domestic debt Interest rate on external debt External public debt Domestic public debt Money supply

A devaluation will increase the budget deficit (and the demand for foreign ben'owing) if-e(i.F_) > e(TT-C,-T-Icr)

(38)

and external payments problems for the govermnent will arise if-e(Cg.T+ Igr- 'IT) + e(i_ I) > e2_,

(89)

If the tradable budget deficit ca--ot be financed from new extem_ borrowing (eq. 39) or official reserve_s, the government will have to resort to the foreign exchange market. _ A large part of this market may be 35. Note that the dietin_on between traded and mm-trwded government l,evenues and expenditures is mainly relevant fc_ the assessment of the impset of a devaluation on the fists] balance. Tradable tax income may be mainly received in pesos (althct_h in the case of the Philippines, state monopolies in a number of exlx_ marketing activities implied direct foreign currency receipts), but since molt taxes on international ta.ade ave ad valorem, exchange rote miju_nent affects g_vemment revenue. If one would as_me that all tax revenues fkom international trade are received in pe_m and all Wadable expenditures (imports of goods, services, and debt sea.icing) have to be made in foreign ctwrency, the fcreign_mn_y Rap of the public sect_ will be even lar_e_ than suggested in equation 39 and the data presented in Tables 5. 28 and 5.29.

278

PHILIPPINE EXTERNAL FINANCE

controlled by the monetary authorities as in the Philippines. If the public sector puts larger claims on this maPket, this may imply imposi_ further iimlte on import licenses ur further exchange rate adjustment in attempts to stimulate private agents to surrender more foreign exchange through the ot7_cial m-','ket. The government may also try to acquire foreign exchange from the parallel _. Inca_asing import restrictions may hamper economic growth and (trade-related and domestic income-related) tax income, putti_ more pressure on the fiscal deficit. Exchange rate adjuslanent, either in the official or parallel market, will raise the domestic currency value of debt servicing obligations. Excess demand in the foreign exehango markets will thus spill over to domestic financial markets if the government adjusts by issuing government securities or money printing, Table 5.28 presents the decomposition of the fiscal balance for the general government for 1975-1989 while Table 5.29 gives the decomposition for the monitored public sector for the same period, _ The results show that foreign income-based tax revenue systematically exceeds public sector imports. This trad*hle, non-interest fiscal surplus [e(Cs'l" + IgT- TT)] amounted to 5.0 percent of GNP at the begipnlng of the period, but declined since the_ In 1988, the surplus was 2.3 percent of GNP for general government (Table 5.28, column 7) and 2.0 percent if public enterprises are included (Table 5.29, col!lmn 3). The observed fall in the tradable fiscal surplus in the second half of the 1970e is largely a base-year problem, if considered as revenues, High commodity prices in 1974-1975 moved the government to capture part of the "windfall gains" through increases in export taxes. In early 1974, a base price was set at 80 percent of the February price for a variety of commodity exports and marginal tax rates of 20 to 30 percent were applied to capture part of the gains from price increases above the base level. Fewer windfalls were gained in subsequent years and the eta_ctural level of tax revenues from international trade fluctuated around 4 percent of GNP. Heavy import cuts during the severe adjuetanent process following the external payments crisis of 1983 caused tradable tax income to fall by 1.4 percentage points of GNP between 1983 and 1986. Rising import capacity, export growth, and higher export prices allowed the tradable tax income level to recover to its 4.0 percent level by 1989. 86. Officialdata do net readily diBtinsuiehfva_i_ and dome_ic cuneencyinceme and expenditurea ofthe public_ct_. For the In, sent exea_i_, Tt was defined aa tax income on international trade (exporttaxes, and imlxet duties and tm'iffs).Cjt and fatrefer to estimated im_ 'inputs ofgovernment services and capital good impct_ for public investment. The impc_ data for the Bovea*nment sector w_e baaedon the extrapolated impartcoefficientsforthese expendit_e catoSorle8derivedh_n the _mnmnk soda] aceountin8matrices (MSAF)forthe Philippines (see Voe 1990a).

FINI_NO_-

INTEgrAtION

279

(TABLE 5._co_"r.)

BD Gnt+iB9 1

Tnt (G-'I')nl * iSg 3

4=2-3

eG1 5

eTt e(G-T)t 6

7-5.0

eFgt

ToteJ dFg dBg+dH Net Financing Extma_ Pubic 8 9 10 11 SeÂ˘_ Resoume

Net

_ Transfer toPubic Sector

[12-

13-10-8

-2.2 -1.2 -1,8

-0.7 -1,1 -1,3

Gw _,s)-lot 1987 1988 1989

2.9 2.8 2.1

14.7 14.1 15,7

10.7 10.6 12.3

4.0 3.5 3.4

0.8 0.8 0,9

&7 3.1 4,0

-2.9 -2.3 -3,1

BD 9efidtofna_ _ment om Oome_ mrmo/_ ofaaUonaJ go_mrr_ (O-cO+lO) iBg Intreatpoyments cmdomestic debtofnationof 9overnmnt. Tnt TaxalJoo ofdomeslic incomes, eGI Foreign curree_/e_ilures ofn_JonaJ govern ment(ex_LMerestpayments). art le_mlJon _ intoma_onalbade, (S-_B-T)ntDor_ mnrcy taml ddc_ e(G-'T)t ForMgn mmm_ n_m-intere_t fis_l Fg interest payments onextenud deMof9eneraJ government. dF9 Na_x1_md 'bonowkq9 bYo_onalgovemm_ Netdomu_ bonowhl9 byae_onal,9ovemment. So,uroB: _

Bank,M,eM_m(1998)andJMF(1989),Datafor1989,,e,,re pre:Jb'nin,_y eaimates.

1.8 1.6 1.7

2.9 2.8 2.1

1.1 0.5 0.4

1.8 2,3 1,7

z> z

- -

FINANCIAL INTERMEDIATION

_d__

281

282 PHILIPPINE EXTERNAL FINANCE The non-interest tradable expenditure level of general govelenment was fairly constant throughout the period, slightly below 1.0 percent of GNP (Table 5.28, column 5). Imports related to high investment rates of public corporations raised GT for the monitored public sector by about 1.5 to 2.3 percontege points of GNP. After 1983, this tradable public spending dropped to 0.3 percent of GNP. Nevertheless, the Philippine tradable revenues exceeded non-interest tradable expenditures throughout the period [e(Cs-+l r T)T <0], both for the general government and the monitored public sector. An interesting feature of the Philippine intem_ t_mefor problem is that, before and after the debt crisis, the tradable fiscal balance for the administrative government sector registered positive, i.e., [e(CB'.IrT)T + e(iwFs) <0] of Table 5.28, cols. 7 and 8, while the balance for the non-t_mancial public sector turned negative from 1984 onwards (Table 5.29, cols. 3 and 4). Since the net inflow of foreign capital to the government sector was also positive except in 1986 (see Table 5.28, col. 10), this implies that much of the government transfers to public enterprises must have been used to cover the foreign currency deficit of public corporations. These transfers are included in non-traded expenditures, GNT, in Table 5.28, as no precise information exist about their currency composition_ The 1984-1985 was a turning point in the net external financial transfer to the public sector, i.e., e(_u_s - iwFg) <0 of Table 5.28, col. 13 and Table 5.29, col. 9. For the adrnlni_trative sector, the tradable non-interest fiscal surplus was large enough to compensate for the negative external transfer, e(Cs.+irT)T + e(iwFg)< e(_d_s) of Table 5.28, col. 12. For the non-financial public sector at largo, an external resource gap existed from 1985 onwards. Official data on the changes in official reserves do not allow a specification by type of use and by amounts that were used to cover tradable fiscal deficits not covered by net new foreign borrowing. Movements in the international reserve position as derived from BOP figures show a substantial accumulation of reserves (AR< 0) during the period of high capital inflows, 197&1980 (Figure 30). On the eve and during the first years of the Philippine debt crisis, the reserve position (_,> 0) plunged sharply, and exceptional financing (debt reschedulin8) and arrears (EXCFIN/Y) exceedln_ 4 percent of GNP took place in 1983. The extemJxl resource gap of the public sector after 1985 is not reflected in the data on changes in the international reserve position. Based on the available data, the debt renegotiation process after 1985 x_iucod private acquisition of forsign assets (see Vos 1990b), and increased direct foreign investment helped build up the country's rese_ position.

F_URE30 Use of Reserves and Exceptional Financing (percentage of GNP) 5 4 3 2

284, PHILIPPINE EXTERNAL FINANCE This erratic movement in official reserves suggests that other mechanisms were used to adjust the internal public foreign exchange gap. Three mechanisms prevailed in the 1980s: First, the government declar_ moratorium on external debt payments at the outbreak of the BOP crisis in 1983; in subsequent years, debt reschedulinge were pursued to help reduce and postpone debt servicing obligations (see, e.g., World Bank 1989 and Chapters 6 and 7). Second, taxes on international trade were increased to discourage imports and raise government revenues; 87 quantitative import restrictions were increased to free more foreign exchange resources for debt servicing (see also Chapters 3 and 6). However, these did not prove sufficient. Third, the authorities resorted to the parallel foreign exchange market. The parallel foreign exchange market was growing in the 1970s and 1980s under the influence of expanding tourism to the Philippines, the increasing number of Philippine residents working abroad, and substantial trade misinvoicing. Tourists, workers abroad, traders, and agents demanding foreign exchange for external asset holdings were the principal agents in this market_ As early as 1976, the CB started to encourage offshore bA.i_.gin foreign currencies within the Phih'ppines, mainly to mobilize more foreign exchange resources for the Philippine economy. Although offshore bAnleing units grew rapidly at the end of the 1970s, they couldâ&#x20AC;˘ not prevent the growth of the black market. As indicated earlier, the government itself was partly to blame. Before the external payments crisis of the 1980s, government officials and institutions (e.g., the PNB) were reported to operate onthe black market mainly to serve personal interests, 8s including the public debt-private capital outflows revolving door discussed earlier. From 1984 to 1986, the Philippine government intervened through the so-called "Binondo Central Bank." This intervention, along with major devaluations in 1983 and 1984, helped to diminish the black market premium on the 37. An addi_onal 3 percent stwclma_ was leviedonall impo_ in January 1983,which wu _dsed to 5 perc_tin November 1983,8 pea_nt in early 1984, and 10pe_ent in June 1984. Export duties were alio raised an primary cc_nmodityex_a_ to levels between 6 pea_entand 10 pex_ent(taxes oncoconutexpartswere doubled).See also DohnerandInta] (19_. 527). 38. Boyce and Z_wsky (1988:195), quoting a study by Thompson and Slayton _l"nompeon,M. and G. Slaytcn, 1985, *An Essay _a Credit Arrangements betwemathe IMF andthe Republicofthe Philippines,"in:Philippine Reuiew ofEcom_micsand Business 22: 59_)), said that the state,owned PNB sold dollars at the black market with the objectiw to hurt black market tr_lers smt to facilitate their _financi_l"cooperitlon with high-placedItovernmentofficials waning to transfer faeeigncurrencyabrved.

FINANCIAL IN'rIERMEDIATIC)N

285

exchange rate and allowed the government to obt_i_ foreign exchanp at a manageable price. Nevertheless, the devaluations heightened the need for dmnsetic borrowing to finance the f_eisu exchen_ purdms_. The government chose to maintain restrictive monetary policies and to resort to issuing govormnent e_n_ities which led to a substantial increase in domestic public debt and related service payments (see a subsequent section on public borrowing). The new government later abandoned the intervention in the Binondo black market, but tried to control the black market by stem_ up the high interest rate policy to siphon off private savings, as well as to reduce pressure on the foreign e_h_.n_e markets by mAIdn_ domestic financial asset holdings more attractive. Although the government successfully maintained its restrictive monetary policy end bond-fina_ing sta_tegy, the underlying structural causes of the internal transfer preblem was not eliminated and, toward the end of the 1980s, domestic interest rates end the black market premium (estimated to be about 50 percent in August 1990) started to move in an upward spiral, m-i_in_ fiSCal adjustment an ever increasing "tour de/or_" Policy

oor_lderatiorw

The heavy exts_! borrowing by the public enterprise sector, invested essentially in the non-traded goods sectors, largely caused the internal transfer problem in the Philippines. Large government tr_nAfere to public corporations were required to meet the latter_s debt4ervicing obligations in the second half of the 19808. In relation to the net external resource gap, this problem emerged only after 1985, suggesting that the moratorium on debt payments of 1983 effectively avoided major foreign exchange shortages in the public sector. The size of the debt overb_ of the public sector as of 1990 and the inadequate external fi_ncing made available, as described above, create the conditions stipulated in equation 39, which would necessitate a devaluation that would i_ase the domestic currency deficit of the monitored public sector. Exchange rate management will thus have to be closely monitored and coordinated with fiscal policies because, even if a devaluation will not raise the tradable deficit for the government sector, it will aggravate the inter_! transfer problem for the public sector at large. Moreover, exchange rate management may counteract fiscal adjustment targets even as it enhances export competitiveness and adjusts the trade balance. A general recommendation, therefrom, would be to have exchange rate management closely monitored and coordinated with fiscal policies. Government policies of the 19808 failed to come to terms with the

286

PHILIPPINE EXTERNAL FINANC.F

trade-off between trade and fiscal objectives in managing the exchange rate. This would involve the following elements: First, privatizing the hlgldy indebtod public eat_epri_ sector, whi_ is currently in progress, does not provide a real solution, as this pro_u also involves the transfer of foreign liabilities of the companies to other parts of the public sector. Second, an understand_,hle policy reaction was the delayed and incomplete exchange rate adjustments in the 1980s which served to ease t'meal adjustment. As a result, an overvalued exchange rate was maintained which likely decreased export competitiveness to some extent (see Chapter 3) and partially caused private capital outflows toward the end of the decade. Third, the government tried to increase control over the foreign exch_-_e market. The intervention in the Binonde Central B_ni_ preyed successful for a time, but it req_ political repression likely motivated by the rent-seeking behavior of government officials than by macroeconomic policy goals. Moreover, this intervention was accompanied by a clamp on official foreign exchange availability for the private sector, which exacerbated the economic crisis between 1983 and 1986. Fourth, the new government departed from the above policy. Instead it resorted to high yieldln=, government bond financing. This policy worked to mobilize private savings to finance fiscal deficits and to lessen pressure on demand for foreign assets. However, this strategy also has drawbacks. It coincided with a demand-led economic recovery and slow exchange rate adjustment. These factors steamed up import demand and created excess demand for foreign exchange. Black mat_et premiums started to rise, providln_ an incentive for private capital outflows. At the same time, domestic credit supplies were crowded out due to the increased demand for treasury bills. Accumulated damestic public debt further heightened the fiscal adjustment problems. Given the above experience, more structural ways to eliminate the internal transfer problem should be sought. Two directions are recommended: 1.

Debt reduction would seem the most logical solutio_ However, debt-reduction mech-nlsms should be carefully assessed. Current schemes mainly fOCUSon commercial bank debt. The debt_reduction strategy consists of an operational debt,equity swap program that has been operating with some success. But progress in _._.ual debt reduction is slow. So far, the program has not sufficiently reduced the vulnerability of the current

FINANCIAL INTERMEDIATION

287

current account and fiscal balance to shocks in world capital markets. 89 Without more substantial debt reduction, the risk of and incentive to default will be intrinsically linked to the budgetary transfer problem. An accompanying problem is the Aquino government's strategy of borrowing from official sources. The medium-term net effects of debt reduction and new

Public

official borrowing should be cloaely monitored to ensure that internal tr_nRfer problem is actually being eliminatedA ,mlt_tcation of the foreign exchan_ market in the medium run should be effected. This would help ensure more real exchange rate stability and reduce the trade_ffs between trade and fiscal adjustment But this will only be effective if it is supported by structural policies toward export growth and diversification, and effective import substitution. Sector

Deficits

and Domestic

Adjustments

Introduction This section will study the effects of domestic financing of public sector deficits on the behavior of the private sector. In the orthodox framework, a baUoonln_ deficit iR perennially viewed as the cause not only of the external balance problem, but also of undesirable, albeit rational, private sector behavior. In some studies on the BOP crisis of 198_1984, th_ was cited as the central problem area. Lamberte and Remolona (1986) point out that, with the monetary authorities' accommodation of the public sector deficit at that time, "households and firms were heldln_ more local currency than they desired and this somehow found its way to an increased demand for foreign goods and/or foreign assets,.., either way of getting rid of excess pesos was reflected in the worsening of the current account deficit and a depletion of exchange reserves." MAnAaan (1968) also cites the increased domestic open market borrowings for deficit financing, causing the crowding out of private investments during the 1980s. These analyses on the deficit effects are consistent with the IMF's and the government's rationale for the latter's deficit cut policy which became the centerpiece of IMF-sponsored stabilization programs since the BOP crisis years. 39. The debt buy-bsck scheme foe 1990 cnmmm_isl bank debt by about 10 percent estimated at US$ 77 millica_ in 1990 and US$ discolant on the secondary market). However,

typed US$1.3 billion, which will rvduce Interest savin_ from this opm-ation are 85 million in 1991 (ammmi_K a 50 percent the likely co_m_wnce of a one-percent point as s _sult of the _ of the world capital

in_ase in the world interest rate -- e.g., market followh_ the establishmentof the mc_eta_ union betweenthe two Goemanfs wouldraise the interut burdenby some US$130 million.

288 PHILIPPINE EXTERNAL FINANCE

The standard textbook analysis (e.g., Dombnsch and Fischer 1981) suggests that domestic private adjustments affected by public deficits would depend on how these are finanesd. Given a budget dofieit level (p*BD), the financing constraint faced by the government is summarized by: p'BD

pl*dFD + dH_ + pb'dBG

+ pb*dN

(40)

where pl" dFD

dI_

pb*dB

pb* dN

Change in outstanding public external debt, with price. Change in public sector borrowings from the monetary authorities. Change in the stock of government securities held by the domestic money banks, including reoerveeligible papers, with price pb. Change in the stock of government securities held by the domestic non-bank sector with price pb.

The first stage of the public deficit-private sector interaction, in theory, involves changes in the portfolio balances of the private sector due to I) the change in money supply which arises when CB finances the deficit, or 2) the cb-n_e in the stock of government securities when the deficit is financed by the domestic money banks and the non-bank sector. In both cases, interest rates and private demand are affectecL This section attempts to study bow the three mechanisms of domestic financing, as identified in the equation above, have separately affected 1) private portfolio balances, 2) real private investments, and 3) personal consumption expenditures. Logically, the responsiveness of interest ra_ to public borrowings sbould be studied first. This exercise was already done by Gocheco (1988) where nomln.191-day treasury bill interest rotes were found to positively correlate with borrowings from the private sector as well as with balanced budget spending, leading to the conclusion on the presence of "(n'owding-out." This section will take a step further by investigating how private demand for i_--_ial assets and real goods, as mentioned above, are in turn affected by treasury bill rates. To determine the effect of public sector borrowings from the nonbank private sector on personal eonsmnption, the study looks into the responsiveness of personal savings (as given in the national income accounts) to treasury bill rates. Following the gross substitution

FINANCIAL INTERMEDIATION289 assumption, a significant positive coefficient is hypothesized to show _.owdlng out of personal consumptiom However, consumption may be boosted by interest payments and other transfers from the public sector which constitute additions to disposable income; if the Keynesian relationship between personal consumption expenditures and disposable income holds, then it may be argued that simultaneous crowding out of consumption due to investments in government securities is absent. The second option of financing from the domestic market borrowings from the domestic money banks (DMBs) -- impacts negatively on private investments and consumption by reducing available credit or increasing interest rates. Two things are done in investigatl- S this: 1) analyze the gross c_edits and investments portfolio of the domestic banks in terms of their inetitutio-AI allocation, i.e., between public and private borrowers, and 2) relate the cost of loans from banks to treasury bill rates. Crowding out of private sector borrowers in the formal financial market is expected when treasury bill rates increase. This follows from the empirical fmdin_ of Lapar and Graham (1988) that the lower the interest rates of a loan application with Philippine banks in the countryside, the higher the probability of being subjected to rationing. Finally, the effects of the monetary authorities' accommodation of the public sector deficit are examined in terms of I) the institutional allocation of CB's net credits to the domestic sector -- the key question addressed is whether credits to the public sector were sterilized at the expense of the private sector, and 2) the effects of monetized debt on private demand. Two contending theories deal with the latter. The real balance effect of inflationary fi-A--_h_g is supposed to dampen demand, whereas the Fisher relation pointing to a fall in interest rates in the short run, as a result of money financing, should yield opposite results. Financing

of the deficit

Table 5.30 lists the contribution of each source of financing to the borrowing requirements of the national government and public enterprises (also known as the Public Sector Borrowing Requirement or PSBR). Excluded are those of the CB, other government financial institutions, and local government units. Except in the recent past, the public sector relied heavily on foreign borrowings, particularly during the years when the foreign financial markets were awash with petro dollars (1977-1980). Foreign money was even used to build up the cash balances and/or retire internal debts in 1979 and 1983. The government declared a moratorium on all the public

TABLE5.30 Financing of Public Sector Deficit (Percentage of deficil)

-_ -'r r'-

Monetary System PSSR (P_lfion) (1) 1975 1976 1977 1978 1979 1980 1981 19e2 1983 1984 1985 1986 1987 1988 1989

3460 12505 I0202 7498 7384 11541 22107 18844 11649 18769 15767 26355 14900 17197 28500

Ne_Foreign Ne_Domestic Borrowings Borro_ngs (%)

(2)

100.0 100.0 100.0 100,0 100,0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

35.9 14.4 66.0 98.8 106.1 57.7 34.2 72.9 100.2 81.2 -16.5 -0.5 44,3 3,5 25.3

Source ofbasicdata:Centnd Bank,tntematio_al Mofleta_ Fend,

ToIal

(3)-(4)+(7)

(4)-(5)+(6)

(5)

64.1 85.6 34.0 1.2 -6.1 42.3 65.8 27.1 -0.2 18.8 116.5 106.5 55.7 96.5 74,7

115.1 8.9 11.1 0.9 -19.2 15.4 16.6 40.9 44.1 1.8 29.9 -22.3 -241,6 ,-3.0 N.K

65.0 9.6 5,1 0.5 -11.3 10.4 15.0 17.7 29.0 -2TI 58.2 -3t.5 -247.7 -65.7 82.7

-_ "o Banks (6) 50.1 -0.7 6.0 0.1 -7.8 5.0 1.6 23.1 15.1 28.9 -28.4 9.2 5.0 62-,9 NA

Dornes_ Nonbanks (7) -51,1 76,6 22.9 0.3 13.1 25.9 49.2 -13.7 -44.3 17.0 86.5 128.9 297.3 99,5 NJE

z Z >. Z

FINANCIAL INTERMEDIATION

291

sector's foreign principal payments during the BOP crisis of 1983-1984 which explains the high dependency ratio during those years. 4째 In 1985, the concept of "blocked deposits" was adepted whereby peso equivalents of restructured payments were deposited at the CB, ostensibly to protect the government from the foreign exchange risk .41 The deposits were necessary to keep the base money within the targets agreed with the IMF. Thus, net foreign borrowings reached negative levels in 1985 and 1986, notwithstanding the restructuring a_ements. The domestic non-bnnic sector became the crucial source of funde whenever foreign money became scarce, and especially when the 1985-1989 rescheduling failed to provide the necessary reprieve. For three consecutive years (1986-1988), the amounts borrowed, net of repayments, were th_ same as or exceeded the deficit levels. In part, this was also due to the replacement by the government's treasury bills of the CB bills (also known as "Jobo" Bills) used in siphoning off excess money from the system. (This is also evidenced by the negative levei_ of public sector borrowings from the CB during those years.) Since 1975, the monetary system accommodated large portions of the public deficit for thee years only (1975, 1982, and 1983). Note that these were also the years around which the major crises occurred (the oil price shock of 1974, the domestic financial crisis of 1981, and the BOP crisis in 1983). The accommodations thus suggest a countercyclical pattern. As to base money creation, the exceptions to this rule occurred in 1984 when net domestic credit to the public sector reached negative levels despite a ballooning PSBR, and in 1989 when the CB financed a record high of 83 percent of the PSBI_ Public Effects

borrowings on private

from the non-baz_ portfolio balances

prlvate sector:. and cor_sumptlon

Total gross investments in government securities by the private domestic bank (except CB) and non-bank sectors went up sharply from an average of 43.7 percent of M3 during 1975-1983 to 74 percent during 1984-1989. As the national savings rate (and even foreign savings inflow) declined in the latter years, the growing accumulation of government papers implied the decumuiation of private financial assets 40. A series of _vschedulins agreements wers waeked out for the principal and interest payments that were supposed to bedue January 1, 1985_June 1986 (under Paris Club I Agreement), Jsnuary 1987-August 31, 1988 (P_s Club II Agreement), and September 8June 30, 1991 (Paris Club 1]I Ag_ement). 41. The srrangement wu costly to the Rove_nme_t. The Central Bank's losses due to the fairish exchange risk among others, were absolved by the national goveamment in later years starting 1990. In this sense, the go_rnment would have been better off without the re_eduJings.

292

PHILIPPINE EXTERNAL FINANCE

in private portfolio balances. As cited in a previous section, a decumulation of foreign assets by the private sector oecurred only in 1983 and 1987 within the 1980's decade. Table 5.31 gives us the four major investor groups in goverament securities and the size of their holdings, which include b_nkq, trust funds (Bond Sinking Fund, Economic Support Fund, and the Industrial Guarantee Loan Fund), government entiUes (Social Security System, Government Service Insurance System, DBP), and other private sector holders. From 1975 to 1984, banks were the dominant investors in government securities. Starting 1985, however, private individuals and corporations were the major investors. These groups' growing preference for government papers over deposit and deposit substitutes seemed to have decelerated the expAnAion of the banks' resources. Along with the increased reserve requirements for deposits in 1984, this deeeleration distorted the banks' position vis-a-vis that of non-banks in the government securities market." this is despite their expanding investments. The other two major investor groups -- trust funds and government financial institutions -- were captive buyers of government papers as these are mandated by law. The flow-of-funds data shown in Table 5.18 indicate that government and private securities indeed dozni_ted the financial assets portfolio of households and unincorporated businesses in 1984-1988. In contrast, deposit substitutes and traditional deposits, which started to offer lower interest rates in 1984 compared to the increasingly popular treasury bills, had declining shares. Among the incorporated business firms, government and private securities were strongly preferred in 1981, 1984, 1986-1987. During these years, domestic loans extended by this sector reached negative levels suggesting that borrowings partly financed the increased holdings of securities. The role of the high interest policy in bringing about the above portfolio changes is supported by an OLS estimation of the real demand for bread money (M1 plus traditional deposits and deposit substitutes). Following the standard specification, the regressors include real income, 91-day treasury bill rate, and inflation rate. As expected, interest rates and real demand for broad money are negatively related (significant at 5 percent). Real income has a positive and significant coefficient while inflation brings an opposite effect. These results confirm that public borrowings during the crisis years 1984-1986, in conjunction with the high interest monetary policy and the recession, succeeded in containing total liquidity. Consequently, the massive disintermediation diminished the total available credit from the banking system.

FINANCIALINTIERMIEDIATIION293

TABLE$.,11

HoldersOfOutstanding Government Securities ...,,

(Percentage oftotalWssecurities) O/SGovl. SemMlm

_.)

Banks

Tn_ Funds

43.53 42.1 43.0 48.3 47.7 44.2 41.5 39.7 40.7 35,8 23.9 23,2 15.2 18.5

10.3 8,11 8.2 8.7 10.4 14.7 14.8 12.9 14.3 11.2 8.9 6.9 7.1 6.1

Govemmmt Oilier _ Pd_m

(Pmlllon) a 1976 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

13881 16072 20603 24287 25935 29342 33198 40904 40231 58253 82708 112641 141142 189953

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100,0 100.0 100.0 100.0

a ExUdesIt_seI_1 byCennl Bank,Central Bank-issued dollarIxeuup/his.H_, government _ Institutions arein_l_led. Sowceotbasic data:Cenlnd Bank.

29.6 35.3 31.7 24,2 31.0 23.8 23.8 26.7 33.7 20.4 16.9 13.4 14.6 13.6 _

16.6 12.1 17.0 18.7 10.9 17.2 15.0 20.7 11.3 32.6 50.3 56.5 63.1 51.8 _

Similmqy, the currency deposit rat/o (where deposits include _ime and savin_ deposits and deposit sub6titutes) wnn rising since 1983 (see Table 5.32). The flow-of-funds data indicate that currency holdings of households and unincorporated businesses during this period were abnormally high only in 1984 and 198/; the ira:tease in other years tory thus be explained by the growing preference for gover-m_nt securities. The accumulation of government papers by households and --nin_)FS, t_ busiili_u_ could have also been financed by higher savings or lower consumption Evidences on the interest rate elast/city of savin_ of the household and --i-_a_rated busineues, as well as corporate savings in the Philippines, as p_esented in Chapter 4, support this conclusion-"higher treasury bill rates seemed to have induesd higher household savings. It may be argued, therefore, that personal consumption was adversely affected by the non-bn-k private sector's investments in government securities. However, a counter-evidence

FINANCE

TABLE5.32

to TorsiDeposits andDepositSubstitutes

, 97 1.9) YEAR 1975 1976 1977 1978 1979 1980 1981 1982 1983 1964 1985 1986 1987 1988 1989

.....

CC/O (_) 19.67 18,60 18.08 18.61 19.08 17.66 16.50 15,35 20.70 21,62 21.75 25.42 27.96 25.75 26.45

increasing share of interest income and other transfers government to the households and unincorporated Prior to 1985, this income brought in less than income; this climbed up to 2.35 percent in 1985 percent in 1989 (see Table 5.33). Note also that averaged 2.2. percent of personal income during that households perceived the amount of direct the tax cost of servicing public debt, the data effect of public borrowings on disposable income. from domestic banks: to the private sector money banks' gross exposure to the public sector 1980s,. During the period 1975-1983, their gross sectoraveraged13 percentofthebanks'total andinvestments insecurities). Thisrosetoover

TABLE5.33

PersonalIncomeandOutlayAccounts; 1975to 1989 (inpercent oftotalpersonalincome) kem

1975

1976

1977

1978

1979

1980

1981

1982

1.Compensalk)n of employees and entezlxeneorialand Ixoperly i.mm of persons

95.98

96.36

96.75

96.46

96.36

96.66

96.76

96.58

3.Sodalsecunly benefits

0.46

0,46

0.55

0.71

0.66

0.59

0.61

0.66

4. O'U_rcunont _ frmla 9eneralgovemment

1,52

1.52

1.23

1.33

IA4

124

1.06

1.26

5.Current transfers

2.03

1.66

1.47

1.50

1.52

1.51

1.59

1.40

h'omthe-rut_..the-

-->,.

wodd CunentRemipts

>. Z r..-

100.00

106.00

100.00

64.80

_..03

94.21

65.44

99.24

86.85

99.59

91.33

Z: 6.Personal

_oumpqm e_sml_rss

_. z

It_

1975

1978

1977

1978

1979

1980

1981

Ig02

7.Pemnal died_

1._

1.34

2.13

2.21

2,41

2.25

1.95

1.78

3.SodalSeoully

1.19

1.18

1.36

1.42

1A2

1,34

1.28

1.27

0.Cum_uansbmto theim<Â˘_he.wo_

0.02

0.01

0.02

0._

0.02

0.01

10.Smldcal

1.52

1.4g

.1.06

0.18

-1.75

.0.35

.1,38

1.28

11.Penload_

10.79

13.74

13.34

10.74

&e6

7.8g

8.,_S

4.24

100.00

100,00

IIm

1983

1984

1985

1986

1967

IJ8

19e9

1.Compensation o(

86,01

97,20

06,04

34,_

92.81

92.27

01.02

0.09

0.54

0.48

0.72

0.34

0.82

"r m

CramtOb_mnle_

employmand

emq_euri_ and properly boomof persons 3.Social see,_ benefits

0.54

_< z > r__ z 3. z

(TAtLE5_ CONT.) IN

1_94

1(185

lg_

1987

1M8

1938

4.C)_m_ bariumbm ge_ndgoumum_

1.36

1.57

_._

_L0g

4_76

e_8

f_Current Intuits from the nmt4g4he_

1.93

_70

1.12

2_1

1.77

10(_G0

100_0

Cummt AaCellm

Pmonaleonzumpllong2.00

_mxuum

94.23

100_0 _

1.i2

1_8

100_0

10_00

193.00

1G(_G0

_/_e

g_93

IIg.2Z

87.07

7.Pemnald/e_tltUN

1.93

1A2

:ÂŁ93

/.35

1.g2

1.89

___

8.Social zeoudty oonhll_onz

1.10

0.81

0.76

_93

1.10

1.27

0.Cummtlmnsgem to Ihemtdthetodd

0.01

0.00

0.93

0.01

0,01

_01

I_ StumBled

&37

2_8

-_34

0.73

0.21

_17

11.Penmal m

1_2

1.15

1,44

3.00

0.12

7.40

&93

100.00

100,00

100_0

10_93

100.00

7 Q r-

Curr_Disbemmem

_.82

z _J

298

PHILIPPINE EXTERNAL FINANCE

20 percent starting 1984, reaching 27 percent in 1986 (see Table 5.34). Hence, government securities made up most of the banks' securities portfolio. Apart from price incentives, at least two other reasons account for this. First, government securities are the only eligible papers that can serve as substitutes for the required investments in agriculture and agrarian reform which must be at least 25 percent of the banks'loAnAble funds. Being less risky assets, the banks tended to favor government securities especially during crisis years. Second, government securities are automatically considered part of the non-risky assets (as against private papers) in the capital adequacy measure (networth to risk asset ratio) used by the CB in supervising banks. Thus, privately issued securities in the banks' portfolio were successfully crowded out since the 1970s up to 1984, despite some interest differentials. Rates of private commercial papers were generally higher up to 1984; thereafter, government bills carried higher rates. The price of a riskless financial paper approximates the minimum return that banks would require from their borrowers; it is therefore expected that increases in treasury bill rates would pull the le_dlng rates of bank e. Figure 31 presents the interest rate for 91-day treasury bill and for secured loans from the banking system with the same maturity. Note that both rates moved in the same direction, with the treasury bill rate lower in most years except in 1984. The high rates for government securities were consequently followed by falls in bank lendings to the private sector, which were mostly confined to corporate firms (see Table 5.17). `2 In relation to the private investments equation presented in Chapter 4, the availability of gross domestic credit was found to be positively and signlfmantly relatedto privateinvestments.(The other policyvariable,government construction, is alsopositively relatedto private investments,although insignificant.) As earlierstated and shown in Table 5.34, gross domestic credit to the private sector from domestic money banks declined relative to those extended to the public sector since 1983. During the recession of 1984-1985 up to 1986, the private sector was hit by both the contraction of total credit supply and 42. Regressing new bank c_edits to the private sectoe (PCRED) against 91-day treasury-billrates (TB) and additionalto bank reds (NM3),yielded the following. PCRED= 17852:1 - 1271.65TB +0.67 NM3

TAGLE 5.34

GrossDomestic Credits ofDomestic Money Banks (inmillion pesos) TypeofSecur8Jes

TypeofLoans

Total, Nedional Other ToWl Total I_ Govt. GovL Go_ Loans & insecuriliesSec_ Secue_es __%__se_ie_ Advances 1974 t975 1976 1977 1978 1979 1_0 1981 1982 1983 1984 1985 1986 1987 19_

2226 2439 3314 4241 4462 5442 7156 9379 14230 17582 23615 19659 25?25 271854 39010

(_)

_,)

69-0 51.3 57.9 80.4 54.0 58.7 58.6 58.0 _.6 58.2 53.5 50.5 _.7 69.5 79.7

19.4 30.3 21.5 13.5 18.3 17,0 18.7 13.7 14.2 15.9 10.5 11.9 6.3 4.0 3.3

81.4 81.7 79.4 73.9 72.4 75,8 75.3 71.7 76.7 75.1 64.1 62.3 "/2.0 73.5 82.9

26078.0 31797 37170 43058 54069 89741 82517 97571 111775 138106 1295_ 115890 95038 113291 135064

N_ional Gov'L Loam

(_) 0.6 0.7 0.1 1.7 2.8 2,2 1.5 0.7 0.7 0.8 0.8 1.1 ?-1 1.6 2.9

OU_ Govt. Loans

Total Govl.

Tolat Gross C_

4.2 11.0 11-5 10.9 8.3 7,7 9.5 5.8 6.5 8.5 13.0 1_3 12.7 6.8 7.4

4.8 11.7 12.6 11-6 11.2 0.9 11.1 6.6 7.3 9.3 13.8 14.4 14.8 10.4 10.2

30_2 34236 40484 47290 58531 75183 89673 106950 126005 155688 15,'3214 1355,W 126704 140945 174094

GovL c_lils (%) 10.0 16.7 16.0 18.1 15.6 14,7 16.2 11-3 15.1 16.8 21.5 21.4 27.0 998 26.5

" Z Z _> r-

Souroeofbasicdata:CemdBank.

-. >

FIGURE 31 Treasury Bill Rates and Cost of Secured Loans

8 -r

31 30-

._ -Z

27 25

-Z _

2423-

19 16 17 16 _5 14 13 12 11 10 1975

1976

1977

1_978 1979 • 1980

1981 Year

• 91-dayt-bill rate

1982

1883

• 91-day loanrate

1984

1985

1986

1987

1988

FINANCIAL INTERMEDIATION301 the sharp increase in borrowings by the public sector. These would partly explain the substantied decline in private investments during those years and the slow recovery during the succeealn= two years. Public E_ects

borrowings from on morley oupply

the CB: and private

demarid

Table 5.35 provides the ehango in base money due to changes in the CB's credits to the public sector and in the domestic money b..Ir.' holdinp of reserve-eligible government securities. In most years in the 1975-1989 period, both accommodations of the public deficit, net of deposits, had an expansionary impact on base money ranging from 9 percent in 1978 to 358 percent in 1985. It was only under the Aquino admln|Atration that a contmctio-*_y trend was registered for three consecutive years (1986-1988); public sector deposits (including "blocked" deposits of government corporations) exceeded borrowings during these years while reserve_ligible securities also declined. Under the Marcos regime, the expansion in some years even exceeded the rate at which base money increased; these were in 19751976 after the first oil shock, in 1981-1982 after the domestic financial crisis, and in 1985. These could only mean that the CB drew some resources away from other sectors. Figure 32 indicates that net credits to the domestic money bRnks moved in the opposite direction to those for the public sector in the second half of the 1970s and from 1982 onwards. These suggest that monetary policy sought to sterilize the effects of the monetized public debt by tightening credit to the private setter(and vice-verea). The standard textbook theery states that monetized financing of the. deficit, unlike open market borrowings, would cause private expenditures to expand due to a fall in nominal interest rate until such time that the Fisher effect reverses it, However, Gochoco (1988) showed that the relationship between the nominal 91-day treasury bill rate and monetized debt is statistically insignificant, implying the absence of any expansionary effect. Nevertheless, we may expect that the observed tightening of czedits to domestic money b_nkA to sterilize the expansion of public debt does bring some effect. Reduced credit to the banks would negatively impact on private investments. Likewise, the unsterilized portion of monetized debt may contract censumption due to inflation tay. Overall

Review

The availability of foreign financing during the 1970s up to the early 1980s provided the private sector some reprieve from the adjustment

302

PHILIPPINEEXTERNALFINANCE

TABLE5.3S

Increasein BaseMoneyduetothePublicSectorandDomestic MoneyBanks Year

CBcredhto the_Idic sedo_ (P milton)

Change in TotalÂ˘Megein resenreelJgllde be_mo_ydue govl.se_rlties topublic oeoto_ (Pmillion) (1)+ (2)as%of basemoney

Change in Change netdomes- innetdome_ ticaedlts ticcredits to todomeslic domestic m_ey money benks banks a %

(PnWon) ofbm money

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

(1)

(2)

2250 1205 523 57 -837 1204 3323 3343 3375 -5086 9195 -8314 -36903 -11304 23558

412 349 1305 151 052 1135 931 161 982 553 -2734 -209 .489 -157 -4193

(3) 209.77 120.19 57.05 8.56 -9.23 86.69 167.68 347.96 43,31 -72.24 357.05 -72.30 -585,07 -111.68 90,49

Source ofbasicdata:Cen1_aJ BankofihePhilippines,........

(4) 4 -1154 -1342 -935 2447 4852 3325 1862 -4099 -7596 -10220 1924 18225 13144,7 1846.8

(5) 0.32 -89,25 -42.32 -38.48 79.24 179.84 131.06 184,91 -40,74 -121.05 -565.68 16,32 285.17 128,09 8.63

FINANCIAL INTERMEDIATION

31_13

304

PHILIPPINE EXTERNAL FINANCE

problems caused by the domestic financing of public sector deficits. However, the external finance and domestic political shocks in the mid-1980s (1983-1985) siphoned off private sector resources. The issuance of high yielding government securities (CB) caused disintermediation which, in the midst of exchange rate devaluations and rising import prices, exacerbated private demand adjustment problems, particularly private investments. Also, discretionary monetary policy proved disadvantageous to the private sector. Whereas net credit by the CB to the public sector contracted only in 1984, those for the private sector through domestic money banks contracted for three consecutive years. During the recent recovery years, this trend was reversed. But borrowings from the non-bank private sector went unabated. The most recent series of domestic and external shocks requiring additional public spending, the lack of definitive policy on the external debt overhang, and the foreseen tightness of foreign capital markets indicate that public sector deficit financing may once again be a major burden for the domestic private sector in 1991 and beyond. Conclusion The formal fmancial system suffers from market segmentation and concentration, and a lack of financial deepening. Nevertheless, it is one of the main channels through which internal intersectoral balances are adjusted, serving mainly the corporate institutional borrowers. Public enterprises rely on special financial institutions while small borrowers depend on special credit programs and the informal financial system. On the whole, the private sector is a surplus unit while the public sector is a deficit unit; part of the surplus of the former becomes foreign assets accumulated via the informal financial system because of exchange controls while the deficit of the latter is manifested by its holdingsof foreignliabilities (loans)sourced mainly from the formal banking system. Within the privatesector, the small unincorporated enterprises and householdsarethenet saverswhilethecorporatesector isa netborrower;nevertheless, thispatternchanged during the 1980s as part of the individual response to crisis and recovery. The corporate sector relied more on self-finance due to the credit squeeze and high interest policy, which meant lower profit distribution to the household sector and, hence, less savings. Financing of the public sector borrowing relied heavily on foreign savings during 1977-1980, 1982-1984; in other years, the non-bank domestic sectors supplied the funds mainly via a decumulation of private financial assets. When the CB financed the public sector borrowing by inducing private asset portfolio shifts, this in

FINANCIAL INTERMEDIATION

305

turn led to a crowding out of private investment. This problem was more pronounced when the economy experienced negative external shocks which reduced foreign savings and increased the peso cost of debt servicing. Private expenditure adjustments to external shocks seemed to have been constrained by three macroeconomic factors: first, the low level of financial intermediation as measured by M_/GNP ratio; second, the increasing public sector borrowing req_ent; and third, the incentives of holding foreign assets in times of economic instability. In an earlier section, M_/GNP ratio was shown to improve between 1972 and 1978, at which time foreign savings were available, but declined in 1979 and 1980 when the second oil shock struck the economy, and in 1984 during the BOP crisis. Large borrowings of the public sector seemed to exp|Ain the declining trend, along with restrictive monetary policy. The crisis periods were also shown to erode the domestic asset value and expectodly undervalued the domestic currency. These effects seemed to have contributed to the outflow of domestic savings which reduced available savings for domestic investment, thus limiting growth.

CHAPTER6 i

Policy

Regimes

Introduction This chapter describes how policy regimes elmnsed in the 1970s and the 1980s and, in particular, how external factors affected these changes. A policy regime is defined in this study as a combination of policies that a government carries out to address a single or a multitude of internal and external shocks. The ovendl effect of the shocks and implemented policies dietinguishoe one period from another. The breakdown of each period is artificial in a way sines many institutional and structural features (as well as certain policies) continued unabated throughout cortain periods or even throughout the entire set of periods. Some enduring institutional features, for example, are the continuing monopoly positions of established firms in protected industries, the continuing land concentration problem and the lack of genuine agrarian reform, and the continuing inadequacy of -i_Â˘_astructm_, particularly in tr_nA_n and communications. These e/a_ctural featuree are mm_y assumed in this study. The policies to be analyzed in each period are monetary policies, fiscal policies, trade and industrial policies, and wase and price policies. Table 3.1 (Chapter 3) etmunarizes the exte_l and domestic chocks, the accompanying policy react/one of the government, and the respe_see of the various economic agents. Aside from the ]:_Kippine government, the critical playors are the ]_dlippine domestic private sector, the foreign investors, the bilateral donors, the mul_ institutions, and the foreign c_mercial ban_ The analysis will foeue on the factors that tend to conetrain the macroeconomic management capacity of the government. Crucial factors are seen to relate to: 1) the available net external financing, and 2) the behavior of the main elements of the private sector, in terms of their influence on policy decisien-making and in terms of responding to policy incentives and macroeconomic disturbances. We will also

3(]_

PHILIPPINE EXTERNAL FINANCE

investigate to what degree financial problems reduce the government's bargaining position in negotiating with foreign governments and financial institutions, and weaken the basis for independent policy-making to influence private sector behavior. In doing this, we look at the explicit policy statements and intentions of the government, whether these were done voluntarily or due to pressures from multilateral institutions in exchange for additional financing. Hidden intentions and agenda of govor-ment may be difficult to ascertain, but this could still be incorporated in the analysis by inference or as they became transparent, as in the ease of "crenyisrn" in the early 1980s during the administration of President Marcos. To describe changing policy positions, the study divided the period 1970-1989 into the same five phases as described in Chapter 1. The first phase covers the years 1970-1974 and could be termed the "Consolidation" phase which witnessed a period of stabilization and recovery, and an establishment of an authoritarian state with a clear economic program. The next phase could be labelled "Debt-led Growth" which began in 1975 in the altermath of the first oil shock and ended in 1979, the advent of the second oil shock and the rise in international interest rates. This period was characterized by expansionary investments and export promotion programs. A "Pre-Crisis Stage" followed, covering the period 1980-1982 which featured a failed attempt to adjust to an adverse international environment, including an extremely deep recession and a fall in the net fmancial transfer from abroad. The reduced foreign financing came not so much from a lower inflow of new credits, which even peaked on the eve of the international debt crisis, but rather from the increased debt service burden caused by the debt accumulated in the previous period, and the sudden and steep rise in world interest rates following a shift in macroeconomic policies in the industrialized countries. The period also experienced the World Bank imposition of a structural adjustment program which directly clashed with the government's attempt to bail out distressed but favored firm%and to continue protecting privileged firms, and monopolies. The "Crisis Stage" in 1983-1986 saw the deepest post-war recessionary period. The debt moratorium and subsequent loss of external financing forced a drastic draconian cutback and austerity measures that set back economic growth by a decade. Political chaos and emergency interventions such as foreign exchange rationing and increases in taxes of traded goods also marked the period. Finally, the most recent period marked a "Difficult Recovery" (since foreign financing was minimal and, in fact, a net resource outflow occurred due to the debt overhang) and witnessed the beginning of another economic crisis. This period

POLICYREGIMES 309

commenced with an optlml-tic three years of respectable growth due to ellmln_tion ofexceescapacity. However, the end of this period was plagued by a set of inconeis_mt and eonfllcting economic policies by post.Marco8 government, and a deteriorating political and economic _l_mRte starting 1990. The 1970-1973 Regime The year 1970 started offwith a major _nomic turmoil as the first foreign debt crisis, aecompa-ied by a BOP deterioration (which began in 1968), e-lmi--ted in a 50 percent devaluation of the peso and a deuble-digit inflation (12-15 percent), a phenomenon unheard of in the Philippines before. The crisis resulted from a spending spree in infrasiructural investment by the first Marc_ government in the second h.lÂ˘ of the 1960s and a steep, populist increase in current government spondln_ just before the presidential election in 1969 (when Marcos won a second term). In turning to the IMF for a stand-by loan that would cover its debt payments, the government was forced to institute exchange ratianlng mechanisms and floated the peso. At the beginning of the 1970s, the Philippine foreign debt amounted to US_50 million, 69 poz_nt of which was short-term debt from multilateral and bilateral of]_ial sources. CommeaT.ial b-,-,i_- were then required to surrender their foreisu earnln_ to the CB. The economic crisis was shortlived. A major exchange rate devaluation occurred, accompanied by restrictive fiscal and monetary policies so as not to aggravate inflationary pressures. But themain source of recovery was the commodity price boom of the early 19708. Coupled with the devaluation, increased export prices pushed up export receipts which helped to cushion the initial recessionary effects of devaluation and the belt, tightening pciieies. The year 1973 saw the highest growth rate the Philippines ever experienced (-Imost 10 percent growth rate) as a result of the international commodity price boom. For the first and only time during the entire 1970-90 period, the Philippines achieved a trade surplus. It was during the time President Marcos declared martial law and set up an authoritarian government when an export-oriented development strategy, widely prmnoted by the World Bank and the Internation-! Labor Organization, was simultaneously implemented. The scheme called for -1.

The promotion of non-traditional manufactured on the comparative advantage of e.heap labor;,

exports based

310 PHILIPPINE EXTERNAL FINANCE 2.

The promotion export sector,

The use of foreign loans to finance the infrastructure of manufactured export promotion, partic_,ln_ly export processing zones; and An intense agricultural production program which would support this strategy by providing relatively cheaper food (and other wage goods) to ensu_ a low real wago.

of foreign

investments

in this manufactured

The program's implementation led to a policy of wage restraint as the martial law government prohibited labor strikes and implemented a "cheap-food" policy through the Green Revolution technology on dee production, and the institution of credit subsidies to support the program. On both eo_ts, the Marcce regime was successful. Real wages plummeted during the martial law years and continued to decline until 1987. The Philippines became self-sufficient in rice production by the end of the 1970s. The government's central political scheme in rids period was to conizol the dissatisfaction from below, and to consolidate the support from the middle and upper classes in order to achieve a consensus on a rather comprehensive economic program. Unfortunately, many sectors claimed that the government resorted to political repression in pursuing this goal. Consensus-building, according to these critics, required a loyal business, and a political and military elite run and controlled by Ma_os' state machinery, which ballooned into a formidable force never before experienced in the modem history of the Philippines. The Second

Half of the Seventies

(1974-1979)

The massive loan inflow that o_me during the mid-1970s and onwards should be analyzed within the existing conditions described above. Multilateral agencies gave the go-signal for the Marces' government to pursue an ambitious infrastructural investment program that will support a manufactured export strategy and, following the first oll price shock, to develop domestic energy sources which will reduce dependence on oil imports. Promoting foreign investments included tourism activities such as the Philippine hosting of the Miss Universe Beauty Pageant in 1974 and the IMF- World Bank Conference in 1976. These international promotion activities also led to a massive use of (external finance) resources for the consh-uction of four-star and five-star hotels, convention centers, cultural centers, and the like. The injections into construction and infrastructure coincided

POLICYREGIMES 311 with and, to some extent, led to a "crowdi_ in" of private investment, that was further stimulated by overall income _owth and the I_.in_ of f_n.,_.4.! constraints with theinfluxof fca_ei&mioRn, (see Chapter 4). As more foreign investors were a_, direct foreisn inv_;--ent inflows increased significantly from 1975 to 1977 (see Table 3.9). Much of these investment were channeled to the production of garments and semi-conductors, spurring strong growth in the non-traditional export sector. As also indicated, oil embargo and oil price shock in 1973 and 1974 made iong-torm investments on energy projects a preferred area of public investment. With the approval of the World Bank and other multilateral agencies, the Mercos government undertook ambitious projects on energy most of which had long gestation periods. In fact, half of public fixed investments in 1978 and 1979 were on energy projects. Some of these projects were beneficial in the long-run (such as many of the geothermal plants), but some expensive ones turned out to be dubious investments. The most notorious are the Chico River Basin Dam and the Baf_n Nuclear Power l_mt, which were discontinued (the current govarnment is still paying US$300,000 daily for the Bataan Nuclear Power Plant). The mid- to late 1970s, therefore, were charac_rized by "easy I_nRnco,"beth in tel'EllS of a_Ss alld terms of payment, attributable to supply shifts in world finance and the recycling of OPEC surpluses, l The existing strin_nt law on inc_ foreign debt -- an offshoot of the 1969-1970 foreign debt crisis P proved to be a liability in the long runAs emphasized in Chapters 3 and 4, much of the external financing went to the public enterprise sector which grew tremendously during this period. Much of this supported the mentioned energy and infrastructural investment program and, as shown in Chapter 4, contributed to the structural widening of the consolidated public sector deficit, as the easy n_ess to foreign loans depleted public enterprise savln-_ (related to subsidized pricing policy and increasing interest costs) and stimulated large-scale investment. Fiscal policy, related to managing the national government budget, was less expnnaionary in this period. AS analyzed in Chapter 4, the government budget stance could even be considered contractionary. The public sector, as a whole, provided an expA_Rionary impulse to the rest of the economy, but this came Almost entirely from a major shift of 1. See, e.g., Dev|in (1[$9), Boyce (19_), and Voe (1991) t,_rinteqz_tatlcna of international lend_ to developing_am_eB in the 1970s which eive prime impm_snce to supplyfsetÂ˘_ and internationalfinancial market ecrJditions.

312

PHILIPPINE EXTERNAL FINANCE

current to capital expenditures within the public sector. Foreign finance ales fueled capital expenditures by the national goverment_ Capital formation by the government admln_stration inc_ased from 1.8 percent of GNP in 1975 to 2.4 percent in 1978 and 3.2 percent in 1980, while net lending to public enterprises doubled as a share of GNP from 1.2 pereent to 2.4 percent between 1975 and 1980 (see Table 4.11). Current expenditures, in turn, dropped (from 12.8 percent to 9.3 percent of GNP between 1975 and 1980), and this burden fell entirely on the wage bill of the government (Table 4.12), an outcome consistent with the perceived "wage repression" policies of the Marcos government. Monetary policy tended to be lax during this period. As mentioned in Chapter 5, the CB aggressively used the rediscount window in the 1970e to direct cheap credit to preferred areas of investinent. The favorable international credit environment influenced this government stance, evidenced by the guarantees liberally granted by government financial institutions to several government-controlled and private corporations to secure foreign obligations. This partly contributed to the increasing liquidity of the system in the 1970s. As described in the previous section, the positive response of private accumulation to the massive inflow of foreign capital and the public investment expansion partly induced the high economic growth during this l_riod. The GNP growth rate averaged more than 6 percent in the 1974-1979 period. Savings of households and unincorporated businesses shot up from about 7 percent of GNP in 1970 to close to 10 percent during most of this period- These resulted most likely from the overall income growth, although policies may have ales contributed in the sense that the Green Revolution fostered farm incomes which, as suggested in Chapters 2 and 4, increased the overall household savings rate; similarly, the wage repression policies provided a redistributive shift toward estf_mployed incomes and (redistributed) profits benefiting the savings of households and unincorporated businesses (see Chapter 4). Private investment grew substantiedly even as public investment grew even more rapidly -- bringing total investments up from 21 percent of GNP in 1970 to close to 30 percent by the end of the 1970e. The commodity boom in 1973 was reversed starting 1974 with the oil price shock; commodity prices declined during most of this period. This might have been a blessing in disguise since it gave further incentives for the economy to shift to non-traditional manufactured exports. Exports grew at an average rate of 13 percent annually in the 1974-1980 period (Table 3.15). By the late 1970s, manufactu_d and non-traditional exports took over more than half of total exports (see Table 3.15). The manufactured export strategy of the martial law

POLICYREGIMES 313

government seemed to have achieved at least same partial success. Unfortunately, the new manufactured exports, centered around semiconductors and garments, proved to be highly impor_dependent for their intermediate inputs. Coupled with the high import content of investment, the net result was an even highor growth of impo_, surpassing by far the record high growth of exports. The current account deficit hovered around 4-5 percent of GNP (see Table 3.7) but was quickly mitigated by the high foreign debt inflow. High growth, stable economic conditions, and the large fl-_-cial inflows to the government and public corporations allowed the government to go beyond manufactured export promotion. The vast inflow of foreign funds and the consolidation of the government's hold over big businesses (partly through the powerful government corporations) allowed it to make even more ambitious economic plans. In the late 1970s, Trade and Industry Minister Roberto Ongpin drew up a grandiose plan to concentrate government support on 11 import-substituting industries in intermediate and capital goods production- The World BAni_and other multilateral agencies voiced out their opposition from the beginning, but they could not effectively resist the full implementation of the plan until the outbreak of the economic crisis and the drying up of foreign finance. The buoyant atmosphere in the economy did net encourase reforms in the trade sector, sines the growth was external in origi_ The already protectionist regime was further bolstered when the non-tariff barriers became more restrictive. The CB started classifying commodities based on certain criteria: essential, semi- or non-essential; and/or consumer or producer goods. A system of import restrictions or a ban based on these categories was then applied. The number of commodities or more specifically the Philippine Standard Commodity Classification (PSCC) lines that were regulated increased from two lines in 1970 to 14 lines in 1980, with about 1301 lines banned. Exchange rate policy during this period continued to be heavily managed by the CB. The rather protectionist policies seemed to clash with the stated export-oriented policies, but they sat well with the ambitious industrialization plans of the government and with the rise of industrial, tredln_ and financial conglomerates which were perceived to be close to the center of power. The

absence

of any

meAnlno_ul

chA_oe

in the

trade

sector

actually

resonated in all other sectors of the economy. It was at this time Extended Fund Facility arrangement was made with the IMF. in April 1976, the arrangement run for three years and included conditions to be met by the Philippines: a maximum of 7 inflation, some equilibrium in the BOP, a tax effort ratio of 16

that an Started several percent percent

314

PHILIPPINE EXTERNAL FINANCE

from 13.6 percent in 1975, the lifting of ceilings on interest rate and other prices, the meet.lng of ceillngs on domestic and foreign borrowings, and the gradual depreciation of the peso over the period. The terge_ remained largely unmet by 1979, essentially because the ready availability of foreign financing blocked any incentives to comply with them. In summary, the 19706 formed an era of high fiscal and monetary expansion resulting in big spending financed by high foreign loan inflows which spurred high growth, relatively successful but narrow-based shift to non-traditional manufactured exports, and strengthened business confidence ('.Inlmal spirite _) in the Philippine economy. This relatively successful strategy received support from foreign creditors and multilateral institutions, and helped Marcos to consolidate his martial rule and extend his control over big businesses. Monopolies in various sectors of the economy (coconut and sugar trading, beer, construction, large department stores, etc.) were identified with Marces' closestassociatesand were also closeto the mAnAgement ofthe publicenterprisesector. Although the plan began as a nontraditional export development strategy, it occurred simultaneouslywith theriseoflargeconglomeratesand was laterjoined bythe traditionally inconsistent plantobroaden theimport-substitution strategyintoa heavy,capital-intensive industry. The politicalrepression and the increasing concentrationof economic and political power began to sow dissentand dissatisfaction among largeparts ofcivil societyas the 19708 drew to a close.Studies by the World Bank showed malnutritionand poverty increasingas economic growth accelerate&As realwages declinedsharplyand land reformfailedtotakeroots,theeconomicgrowth clearly centeredaround favoredfirms and individuals, as well as a burgeoning urban middle class.Many sectorsbecame slowlydisenchantedas the economic circle around PresidentMarcos narrowed to a smallercliqueoffriendsand relatives. Policy

Regime

in 1980-1982

After the second oil shock in 1979-1980, the net financial tr_nmfer from abroad began to slow down as restrictive monetary policiesin developed countriesbrought interestrates to astronomicalheights. Foreign creditors even expanded lendin_ to the Philippines on the eve of the debt crisis, as what occ_ in other highly indebted countries. Additional financing was required to meet the increased debt burdenThe financing partly came from private creditors in an attempt to avoid

POLICYREGIMES 31$ massive default on debt payment obligations, 2 a scheme also adopted by many ether countries. For the Philippines, this took the form of enhanced short, term borrowln_ at variably high intere_ rates (see Table 3.8 where this item is included under'export credits'). New loana were also obtained from multilateral institutiens, but these were conditiened to a series of policy reforms (see below). However, the new lending proved insufficient to arrest the switch from a positive to a negative net financial tr_-_fer in 1980 (coo Figure 2). As a result, the economy began to lose steam. Faced with a tightening credit situation, the goverr, ment negotiated for a World Bank sia_ctural adjustment loan (SAL) which, as indicated, was conditiened upon a set of reforms. The cornerstone of this package was a list of intentions on industrial policy that included -1, 2. 3. 4. 5,

Lowering of protective tariffs; Liberalizing import restrictions; Promoting and facilitating experts and investment in exportreriented industries; Following a +flexible exchange rate policy to reflect basic market forces," and; Restructuring specific sectors to integrate them in the overall export effert.

Trade

referm

was

launched

in 1981

when

the Tariff

Reform

Program (TRP) was implemented in 1981, complemented with the lifting of quantitative restrictions (QRs) on imports, and the abolition of all export taxes except on legs. (The exception for logs had to be made due to the near depletion of forest resources.) The program called for reduced tariff rates from a peak of 100 percent to a maximum of 50 percent, and afloor rate of 10 percent by 1965. The tariff referm progress was eventually halted by the BOP crisis in 198_1986. A liberalization strategy for the finAnCial market was implemented almost simultaneously. This was an offshoot of a jeint IMF-World l_nk report on the financial sector of the economy. Specialization among different types of institutions was reduced to encourage more competitien among them. A new type of b_nk called "Universal l_nka" was introduced; these bnnks were to perform both investment and bankin_ functions. Interest rates were liLmralized in 1981 and emnpleted in 1983 when the interest rate ceiling on short-term leans was lifted. 2. Guttenta8 and _ (1986) labelled this phen_envn as "disaste_myopia"of the inter.nationalbank marmsea-s.See also l_au and Williams (1983) and Voe(1991) far further analysis of this bankbehaviar.

316

PHILIPPINE EXTERNAL FINANCE

The CB removed from its rediscount window the preferential treatment previously given to priority sectors. A uniform rediscount, aligned with the prevailing market rate, was charged on all CB rediscounts. The stringent stipulations of the multilatered institutions reflect a pattont that is bound to recur in the future. Vv'hen a Third World economy suddenly becomes vulnerable and in need of multilateral and commercial finance,the multi[atorals -- particularly the IMF and the World Bank _ impose strict conditionalities and structural adjustment programs. Whatevar the merits or demerits of _ese conditionalities, policies are implemented when the economy is weak and failing, not when the economy is dynamic and vibrant. The not effects, as we shall see, are negative, wherein one c_nnot separate the liberalization dl'e_ from the general weakness that afflicts the economy. The Philippine suppo_ of such liberalization moves usually come from the National Economic Development Authority (NEDA) _ the economicplanningagencywhose leadership come from theacademe and not the business sector. They are bound to resist draconian stabilization and recessionary moves to combat inflation, as well as fiscal and BOP deficits. The tension would explode into a bitter conflict, as what occurred during the Aquino Administration. These policies precisely scrapped the heavy industrialization program of then Minister of Trade and industry, Roberto Ongpin. The extravagant ways of 1970s came to an end with the onset of the 1980s. Growth rates fell to less than 5 percent in 1980, to less than 3.5 percent in 1981, and finally to only slightly above I percent in 1982 and 1983 (both years had a declining GNP per capita). Dollar value of exports started to fall in 1981 and the decline continued up to the economic crisis of 1983-1985. The l'maneial crisis in 1981 was symptomatic of the political economy of the Philippines during that period. A rich financial tycoon (Dewey Dee), with strong Marcos connections, absconded and left millions of dollars of debt with various Philippine banks. This shook the financial system and brought about massive withdrawals by money market investors and bank depositors. Many investment houses, offshore banking units, and commercial banks that dealt heavily with the money market, were hard-hit. The CB, the PNB, and the DBP had to rescue many of the troubled banks to restore the public's confidence in the financial system. With domestic credit suddenly tight, many of the highly leveraged firms (which were pampered with loans during the previous carefree period and were linked to "crony firms'), including many government corporate firms, suddenly became distressed (see Chapter 5). The government guaranteed the loans of many of these

POLICYREGIMES 317

highly levoraged firms and took ovor their non-performing assets. To do this, the government needed massive mounts of funds and used short-term, high-interest external t'mance, money creation, and domestic borrowing (all possible ways) to finanos the bail-outs. The _nAn_Al

crisis of 1981 signalled

the start

of the diaillusionment

of most classes (including the business elite outside the select circle) with the Mareos administration- Together with the economic slowdown, business confidence began to erode. Savings of households and ,minrorporatod businesses fell from a high of 10 percent of GNP in the late 1970s to 6 percent in 1980, 3percent in 1982, and less than I pereent in 1983. Corporate firms, on the other hand, doubled their eavinp to GNP ratio (from more than 2 percent to around 5 pe_ent) during this period, reflecting a higher level of self-financing and resulting from a fall in redistributed profits to the household sector, and the bailouts leadln_ to reduced current interest expenditures. Total external debt almost doubled between 1979 and 1983, but this period saw the highest level of private foreign asset acquisition ('capital flight') with much of the incoming money almost immediately brought out (see Chapter 5). Without the cooperation of the multilateral institutions and much of the private sector, and with Capital flight siphonlnw off precious foreign exchange abroad, the extreme countereyelical measures of the Marcos government in 1980 and 1981 (see Table 4.20) failed. All indicators for the early 1980s point to massive exp_n-ionary and countercyclical measures which were implemented to stave off recession (then afflicting most developed economies). Part of the expansionary monetary and fiscal policies directly reeulte_i from the bAili_$ out of distressed firms and financial institutions. The fiscal deficit shot up to 4 percent of GNP for 1981 and 1982. The expansion of the money supply in this period entirely came from public sector borrowing by the CB (see Table 5.35). Nevertheless, the pump-priminu failed to avoid economic decline as it did in the mid-1970s. The reasons were clear. The p-rap-priming occurred in a period of recession abroad and with extremely high interest rates and tight credit. The debt moratori,,m of Mexico and Brazil in 1982 virtually stopped all medium- and long-torm loans to the Philippines. Exports could not grow as the developed world was entangled in the worst recession sines 1929. At home, business and political elites (even those close to Mareos in the 1970s), and the middle class slowly withdrew their support for the regime. It was during this period that the weaknesses of the debt management policy instituted in 1970 surfaced. The non-inclusion of short-term revolving credit in the statutory debt ratio influenced the borrowing behavior of economic policy makers. Revolving credit

318 PHILIPPINE EXTERNAL FINANCE

outstanain_ increased sharply during the early 198(k, perticularly in public sector enterprises. Moreover, the ratio of revolving credit outstandin_ to trade flows being financed increased sharply, indicating that these credits were being used for g_meral financial purposes and not simply for trade fi_A_ee. The shift to shert, tenn loans, and the high international and domestic interest rates that prevailed increased the share of govm1_ment budget for debt service, which rose from less then 10 percent in 1980 to 13 percent in 1981, and 18 percent in 1988. The partial bailout of failing public enterprises sopped up another 4 percent of the budget in 1982 and 1983. Even as more short-term, hish-interost foreign loR_- were available during this period, the slowly tightenlng commercial loan market forced a slow shift of the foreign debt composition toward more bilateral and multilateral loans. Despite the decline in its leverago, the government continued to hedge against fully implementing etructatrel reforms because many of these would have harmed the conglomerates 0f Marces ' close associates. Thus_ despite the trade and/'mancial liberalization, de facto government policies continued to bail out distressed firms identified with the Mareos clique, and further nurtured monopolies, notably the sugar and coconut trading monopolies, through extra-economic means. The program initiated by the SAL agreement was overtaken by the 198_1985 BOP crisis; the government had no choice but to adopt a stringent stabilization progran_ In summary, this crucial period yielded many important lessons. In many ways, it was a strilcln_ contrast to the previous "Camelot" period. An oil price shock accompanied by tightenin_ international c_redit and high interests, and recession abroad brought weakness, vulnerability, and dissatisfaction within. The Philippine government began to lose control over economic policies in terms of its explicit and implicit agenda. The government's goal was to main_ the high growth achieved during the past decade. Its need for mca_ multilateral and bilateral loans due to the tightened international c_edit market foreed it to accept a structural adjustment program. The structural a_us/=nent program contradicted many of Marcos' attempts to bail out the ailing corporate and financial firms of his political allies. The liberalization failed to make any dent as the economy slipped slowly into decline. An overenthusiastic World B_i_ proclaimed that a rising M_/GNP ratio proved to the world that i_mancial liberalization was a success in the Philippines. In reality, the indicator proved the opposite since M2 increased because of the expansionary policies of the government, as well as its t'mancial splurge to bail out distressed firms and banks, while GNP failed to go up correspondingly. Investments _ beth public and

POLICYREGIMES 319

private -- rmnained high during this period, while output grew very slowly. This unsustainablo pump-priming would lead to an untenable situation in the next period, when investments would be the primary victhn.

The Mid.eighties

(1983-1985)

The 1983 assassination of Senator Beniffao Aquino, a key leader of the opposition, hastened the slide of the __,_,_Â˘D_ omy into a recession. With the stoppage of medium- and long-term lending in 1963 and massive outflows of private sector foreign exchange holdings, the government was forced to declare a moratorium on its debt payments in October 1983 and submitted itself to an IMF stabilization program. The stabilization program was severely contraction_ry, bringing economic growth down to a negative 7 percent in 1984 and 4 percent in 1985. Per capita income was set back to the 1975 level. The biggest component that sunk was investment, which fell by 65 percent, Unemployment (of which no official figures were supplied) shot up to astronomical heights. Laborers, whose wages had regressed for more tb*- a decade, found themselves laid off or forced to work underthne. It was not surprising that the immediate policy responses ot the government were directed toward the external sector. Severe foreign exchange restrictions and wide ranging import controls were adopted. These included, among others, the creation of a foreign exch*noe pool to fund priority import payments. Banks were required to sell 100 percent of their foreign exch_nue receipts to the CB and allocation criteria were formulated for the rationlnw of foreign exchange. To further discourage import and arrest capital flight, the peso was devalued three times between June 1983 and June 1984. To deal with the increasing intor_*] transfer problem and to dlmlniah the black market premium on foreign exchAnoe, the government further used its authoritarian power to intervene in the parallel foreign exchange market, As discussed in Chapter 5, this policy proved effective for some years, but also required massive domestic borrowing (through high-yield;n_ treasury bills) which, due to the shallowness of the domestic capital market, pushed up domestic interest rates and squeezed domestic credit availability and private invest_nent, Additional tariffs and export taxes were also imposed, which virtually reversed the trade liberalization process initiated in 1981. Interestingly, the commodity groups included in the CB list of priorities were also the ones previously enjoying low import tariffs and priority in

$20

PHILIPPINE EXTERNAL FINANCE

foreign exchange allocations. The foreign exchange allocation by the government effectively acted as quantitative restrictions on imports and the measures adopted by government in response to the cr_is once mm_ protected the traditional import-substituting industries while penalizing export sectors.Clearly, the emergency measures taken to manage the BOP were contrary to the long-run goal of rationalizing the protection structure which would have eJlmlnated the unjustified penalties against non-traditional exports and efficient import substitutes. Restrictive monetary policies further contributed to the recession_ Policies focused on reducing the money multiplier and placing a cap on the growth of reserve money. Reserve requirements on deposits were increased from 18 to 24 percent. Real money supply fell starting mid-1984, As a related policy move, the CB bills were introduced to help mop up excess liquidity. Together with the issuance of treasury bills, CB borrowings induced high interest rates in the whole system, resulting in a massive decline in trade and inventory financing. Finally, policies to restrict the use of foreign loans were instituted, particularly the prohibition of government financial institutions from extending guarantees to any corporation that would like to secure foreign loans. The exchange rate devaluations in 1983 and 1984 also took their toll on the long-standing policy of price control. The deregulation policy hoped to remove distortions that were created by previous price controls and to assure efficient allocation of scarce resources. The inflationary pressure due to the currency devaluation prompted the government to adjust legislated wages. Despite these efforts, real wages declined. Unlike the countercyclical response to the two oil shocks in earlier periods, the fiscal stance in the mid- 1980s went into the contractionary path (see Table 4.20). Constrained by the foreign funds shortage, national government capital expenditures (including net lending to public enterprises) decreased from 4.8 percent of GNP in 19_3 to 4.1 percen t in 1985, and public enterpriae investment from 5.2 to 2.7 percent (Table 4.11). The decrease in "real" investment was much more than these figures suggest as debt service and net lending to government corporations moved from 9.0 percent of the total budget to 50 percent in 1984 and 1985. Current expenditure adjustments by the national government depressed goverument employees' compensation and other operating and maintenance expenditures, as well as intra-public transfers. The last adjustment was, unwittingly, the catalyst in exposing the inefficiency of the public corporate sector whose savings dipped from !"1 pezcent of GNP 1983 to -3.3 percent in 1985 (Table 4.11).

POLICYRECIMES 321

Government investments fell in 1984; under pressure from the powerful multilateral institutions, policy discussions on res/_mcturing the corporate sector were initiated by the Office of the Prime Minister with the other economic agencies and the International Bank fo_ Reconstruction and Rural Development (IBRD). By April 1965, Mare_ signed Letter of Instruction 1454 directing the Special Presidential Reorganization Committee to conduct the necessary studies on ti_ sector as these were largely --monitored by the bureaucracy. The recommendations,

which

included

a definition

of the

areas

where

government presence should be limited, became the basis of the Aquino government's public sector reform program. The popular call for political retribution against the Marces network, most of whom wens connected with public enterprises, worked favorably for the program implementation (more on this below). The government clearly seemed to have sacrificed poverty alleviation at this juncture since the tax and deficit financing decisions, in addition to cuts in current services, were most likely severe on the poorest (and politically weakest) sections of society. Table 6.1 shows the decline in per capita social expenditures between 1982 and 1985, particularly affecting not only the low-income housing programs and sanitation services (drinking water, sewerage systems), but also curative health care and education. Faced with the prospect of low tax revenues due to the recession, the government imposed several new tax measures, further worsening the regressiveness of the system as all of these were of the indirect type. Pus]_iuE for further property and income taxation of the elite and the

TABLE8.1

ThePhilippines: RealPerCapitaGovernment Expenditures onSocialServk:es, 1980-1989 (Inpesos,at co.stantprioesof 1980) lg60 Social servk:vs 155 Educa_on 8,5 Healthcare 27 Land _orm (CARP) 0 Housing andoommuni_ 28

(levelopm_

O01ef =x_ialservices

1982

198,5

19M

lg87

1968

1989

236 99 34 0 23

115 81 23 0 5

152 107 26 2 11

180 112 27 2 3

182 129 33 0 3

221 155 30 5 2

Sources: Department ofBudget andManagement; NSCB,Philippine StatJs_,al Yearbook 1989,Man_

322

PHiLIPPiNEEXTERNAL FINANCE

middle classes would have been politically untenable. Among the enacted measures were an increase in specific tax on peh_leum products, ad valorem tax on fermented liquors aud cigarettes, conversion of some elements of specific tax to an ad valorun basil on petroleum products, and documentary tax in_ases. As mentioned earlier, the trade sector, which wu already penalized by the e_cl_Jn_e and interest rate policies, were also siapped addltionM export and import duties. Notwithstanding these, tax effort reached a record low of 9.6 percent in 1984. Manasau's study (1988) covering 1981-1965 shows a dramatic increase in tax evasion in 1984 and 1985, possibly on.account of the widening dissatisfaction with the government (a tax boycott was called by Aquino's widow), among others. The economic hardships brought about by the debt cutback and stabilization program hurt everyone from the Mareoe "cronies" to the smallest peasant, with the poor bearing most of the brunt as government se,-_ices were cut simultaneously. The economic collapse of 1983 -1985 was the lastnail senli,_gthe

coffin of the Marcos sdministration. Also undermined by increasing political instability, the regime eventually collapsed. From 1986 to the Present The coalition that supported the Aquino government was initially broad and encompassed most of the elite and middle classes. One consensus of this new regime was that the ill-gotten wealth of Mareoe madhis cronies had to be retrieved. Ano_ was that the Orwellian state apparatus -- paz_icularly the public enterprises previously controlled by so-called Mareos cronies -- would have to be dismantled. The Marc_ government was used as a negative example of why privatization and liberalization had to be implemented. The governmentthenpursueda policymix consisting ofthe unfinishedstructural programs ofthe previous administration, some measures Rimed at pump-prlming the economy (in 198_1987), and political consolidation. Privatization and liberalization policies were carried out earnestly, with a commitment that was not found in the previous administration. The actors in policy-making during this period did not chAnwe drastically as most of the middle-level officials during Marcos' time were retained; some of these were even given top positions in critical offices. In view of the 1984-1985 recession, the new government's logical priority intention for the first two years was expanding public investments through a package of rural-based, laboz_intensive, and small-scale infrash_acture projects (feeder roaclB,communal irrigation

POLICY REGIMES323 systems, sehoolbuildings, and rural water supply). Total national government capital expenditure climbed to 7.1 percent of GNP in 1986. However, only 1.9 percent of GNP turned out in the form of capital formation such as roads, schools, eta; much of government capital expenditures were spent propping up the public enterprise sector, particularly the public financial institutions. Mostly in the form of equity and loans -mounting to 5 percent of GNP, these transfen represented the government cost of subsidizing the effects of the corporate sector's inefficient operations which were deemed by policy makers as necessary prerequisites for implementing the rationalization program for the sector. The rationalization program of public enterprises consists of a set of policy actions aimed at _zing government presence in the production sectors, and at containln8 the public sector deficit. The three components of the program, as listed in the official plan, are: I) limiting the use of the government corporate form to those activities that m usually considered to be natural monopolies, those that are characterized by long and uncertain gestation periods, and/or those that are deemed essential from the point of view of national welfare, security, or defense; 2) existing corporations that do net conform to the criteria are to be privatized (sold to the private sector) or converted into regular agencies; and 3) establishing a coordinated system of supervision, performance evaluation, and control for the remaining ones. Since the expansion of these entities were popularly interpreted as a demonstration of the excesses of the displaced dictatorship, the p_glmm was launched with public approval. Financing for the problem came from a US$25(_m;Itien loan from the W_Id Bank. Due to exigencies, the privatization aspect was prioritized_ To indicate the government's seriousness, two bodies were formed to c_npeee the disposal mechanism -- an inter_agency, policy-mA_ng committee and a marketing arm. The preferred form of selling was public offering of shares with the objective of widonln_ ownership, preferably among Filipinos; negotiated sale would only be a last reserL For some properties which could net be sold due to lack of demand, privatization of m-nAwement would be done through lease or _A_agoment contract arrangements. However, the bidders turned out to be few and came from large conglomerates owned by powerful families. For sequestered assets, the original owne_ (before Marcos took over) -- usually big conglomerates themselves -- were given first choice to retrieve the companies. The privatization process was further hampered by fiscal and monetary policies and the thinness and segmented nature of the PhiLippine domestic capital market, as discussed in Chapter 5. The

324 PHILIPPINE EXTERNAL FINANCE decision to pursue tight monetary policies led the govermneut to finance its deficits by issl,lng treasury bills. The lack of domestic resource mobilization through the domestic capital market forced the government to issue its securities at a high rats of return. _ led to a "crowding out" of loanable funds for private investment as well u for funds required to purclmse the public enterprise asasts that were put on sale; naturally, high-yielding government securities made investment in the low-performing public enterprise assets even less attractive. The privatization efforts improved the cash position of the nationJ] government as a sudden rise in non-tax revenues from 1.5 percent for 1983-1985 to 2.6 percent of GNP (average) occurred in 1987-1989. Despite this additional money, however, the program was a net burden to the govermnent. As mentioned earlier, the restructuring or'cleaning of the books" of the government financial institutions, which suffered losses of about 2.5 percent of GNP in 1985, plus those of the v_n-operational nuclear power plant implied the transfer of their debt service to the national budget. Next to the rapid build-up of domestic public debt in the form of high-yielding treasury bills, these tranaforo explained the uptrend in intsrest payments of the government current expenses (on average) from 22 percent in 1983-1985 to 39 percent for 1987-1989. As a result, public sector savings and property distribution savings ran low. Public offering of equity shares was not considered, except for the privatization of the minority stocks of the PNB. In reality, therefore, the government was not serious in pursuing the distribution goal, in as much as nothing in the disposition mechanism explicitly provided, the preparation of the stock market or the low-income groups (e.g., rank and file employees of sold enterprises, residents of communities where these assets are located), with fin-neial and information resources to access these properties. Whether privatization would improve the efficiency of these assets did not also constrain the government. For example, private management of some tourist facilities, whose prefitability was constrRined more by the eeasonJllty of demand rather than quality of management (in the absence of competition), did not at all improve the financial return of the facilities; since the management fees were not centi-uent on performav_e, this could have worsened their positiov. The 1986-1988 tax reform program was put in place by the government "to improve the efficiency, equity, and elasticity of the revenue system." It consisted of the following measures: 3 3.

Quotedt_m Manssan (19g0).

POLICY REGIMES

325

i. A movement from a schedularto a globalapproach of taxing individualincome, separatelytaxing the incomes of spouses, and increasingpersonalexemption; 2. An inmase inthe fmal withholai-_taxrateon interestincome and royalties from 17.5peroentanc_15 percent,respectively, to a uniform 20 percent and the phasing out of the final withholdingtaxon dividends; 3. Uniform tax rateof 35 percenton corporateincome, from the dual 25 percentand 35 percentofthe previoussystem; 4. Adoption of the value-addedtax (VAT) in place of the saleq/ turnovertax; 5. Abolitionofexporttaxes,exceptthoseon logs; 6. Conversion oftheunitratespreviouslyused forexcisetaxesto ad valorem rates;and 7. Revisionofrealpropertyvaluationfortaxpurposes. The most recent tax policyconvertedthe actvaloram tax on oil products to specific taxes, which was made primarily to minimize the impact of the Iraq-caused international oil price shock on conBumer prices. Although the move reduced government income by P6 billion a year,the decisionwas still carriedout in view of the government's inability to sustain the subsidy program for oil companies. The subsidy was to be withdrawn due to the off deregulation policy but, more realistically, due to the increasing allocation for interest payments. The Aquino government's record in implementing tax reforms are no different from that of the Marcos admi_i-tration. The overall income elasticity of the tax system is not significantly different from that in 1975-1985. Tax collection remained low at 11-13 percent of GNP. Similarly, the regressiveness of the system remained as indirect taxes continued to account for 60 percent of total revenues. More importantly, tax reforms were implemented without attacking the perennial problem of tax administration. Corruption persisted as incentives of the tax agents remained low, and the information drive on the new tax measures was iU-propared. The _ade reforms under Aquino effected tariff cbAnwes on a total of 138 tariff I_nas, of which 55 were lowered while the restwere increase& E_.immtes by Medalla (1989) show, however, that the average tariffrate for all importables merely moved from 30.2 percent in 1986 to 30.1 percent in 1988. Whether the policy favored domestic industries would be difficult to ascertain at this point. But it may be pointed out that, at â&#x20AC;˘ the outset, the government did not attempt to study the potential response of the private sector beyond the expected protests of the import

326

PHILIPPINE EXTERNAL FINANCE

substituting, big business sectors. More importantly, as Yap (1990) notes, the tariff changes did not tie up with the design of definitive, long-term industrial policies for the country. The poverty preblem in the rural sector was to be addremBed primarily by the Comprehensive Agrarian Reform PrOgram (C_RP). Republic Act 6657, which enacted the program into law after much controversy, covers land distribution activities and extension services. The land distribution component includes 1) rice and corn lands that were not redistributed under the I_nd Reform Act of 1972, 2) all idle or abandoned lands, 3) private lands voluntarily offered for redistribution, and4) all govermuent_wned agricultural lands. From 1986 to 1989, the government distributed atotal of 320,534 hectares out of the 1.4miUion hectares envisioned for redistribution until 1992 to 223,213 farmers. Compared with Marcos' land reform program, the present one is almost 25 times larger than the total area of rice and corn lands distributed in 1972-1986. Nevertheless, the pace of implementation would have been hastened if government seriously considered at an early stage the opportunities offered by existing and newly emerging non-government organizations or cooperatives. More importantly, Aquino left much of the agrarian reform bill to the whims of a [andlord-domin-ted Conbq_ss (instead of decreeing a law before Congress convened), which came out with a watered-down law with serious loopholes. Aquino's a_rarian reform department was also beset by a land compensation scandal, a subsequent secretary llnked with military rebels (for which she was dismissed), and a replacement who was deemed by Congress to be too leftist in program orientation (which ted Congress to disapprove his appointment). With all these problems and the government strapped with financial woes in the face of an impending economic crisis, agrarian reform was again swept aside for higher priorities. Despite growing fiscal problems, the government did expand expenditures on social services, particularly in education and health care. Table 6.1 shews that the growth in realper capita expenditures increased to levels over and above pre-crisis levels. This trend is consistent with the government's priorities set in 1986. It is beyond the scope of this study to assess the impact on poverty alleviation, but recent studies suggest that the extension of these services are still far from sufficient and their reach toward poverty groups should be improved (cf. Nuqui 1991). In financial and monetary policies, cautious monetary policies prevailed. Inflation since 1985 was kept below a doubl_digit level at least until 1989. It can be assumed that the inflation tax was used to the limit allowed

by IMF conditionalities,

specifically

those under the

POLICYREGIMES 327 1987 restructuring program and the three-year Extended Fund Facility obtained in June 1989, The two programs were soulht by the government to alleviate the net external resource transfers at levels that would enable the economy to sustain the recovery that began in 1986. However, these proved to be deficient_ the net resource outflow deteriorated from US$1.2 billion in 1986 to US$1.9 billion which re m_.ined in the next three years. As indicated earlier, the restriet_ monetary expansion led to a shift in government _ from the CB to the private sector through the issuance of hish-yielding government securities. This resulted in a rapid build-up of domestic public debt and a public debt service burden ot_over 40 percent of total government expenditures. The implications are numerous. First, the debt burden limits the expenditures on the supply of government services. The primary budget balance (excluding interest payments) showed an increasing surplus (from a deficit of -1.5 percent of GNP in 1986 to a surplus of 1.9 percent in 1987, 2.7 percent in 1989,.and 3.1 percent in 1990). Given the meager grewth of tax revenues, the burden is carried on the expenditure side, particularly restrain_ public invest_ment in infrastructure and energy, the lack of which are new giving major bottlenecks to productive sectors. Second, the iss_An_ of high-interest treasury bills slows down the privatization process, since assets of the poor performing public enterprises have lower rates of return and investments in these assets are more risky. Third, the government demand for funds exacerbates the shallow and segmented domestic capital market by "crowdln_ out" available investment funds for productive investment. Ties between big industries and domestic _mercial banking ensure priority access to c_edite of the former, implying that the ,mi_oorporated businesses as well as small- and medium-sized producers would more likely carry the brunt of the squeeze on private credit availability. The government's policy on the extmw_ debt burden vacillated, at first, from selective repudiation which was advocated by the _nomie pl.n.inu agency to the more censervative "pay at all cest" stance of the CB and the t'mance dep_ent. President Aquino finally settled the initial confusion when she promised before Congress to honor all foreign obligations of the Philippines, irrespective of who benefited from these or at what conditions they were obtaine_ The official plan thus considered multi-year rescheduling agreements and continued negotiations for better terms and conditions, and for other forms of "innovative" but market.dictated debt-relief options. In 1987, a debt reschedulin_ was worked out with the Paris Club bank creditors for about US$1.0 billion in official obligations. Later that year, negotiations

3128 PHILIPPINE EXTERNAL FINANCE with commercial bank creditors were finalized. The Philippines agreed to debt rescheduling with a higher interest margin at 7/8 over LIBOR compared with 13/16 for Mexico and Argentina; moreover, the retroactive effectiveness of the new margins started four months earlier for the Philippines than for Argentina. FinJily, the Philippines also got a shorter maturity period of 17 years against 19 years of Argentina and 20 years of Mexico. Fortunately, the terms obtained from the thh-d round of rescheduling negotiated in early 1989 after the IMF approval of the extended fund facilitysomewhat improved; for example, wider coverage of loan maturities and longer grace period for some loans were given. This negotiation resulted in a pledging of US$700 million of new money from commercial banks and a debt reduction (through the secondary market) amounting to US$1.3 billion of commercial debt; the debt was retired in January 1990 with t'mancinB coming from the multilateral institutions. On the debt conversion schemes, the government agreed to a package which included: 1) straight debt buybacks which are purchases by the debtor country of its own debt in the secondary market using current resources, 2) debt_squity conversion scheme which consists of purchases by investors (foreign or local) at a discount, 3) debt_fo_nature swaps, 4) debt_fo_debt swaps, and 5) debt_for_asset swap. As of March 1990, total debt reduction under these schemes amounted to US$2170 million. (Some of these, however, were slowed down by inflationary pressures, such as the debt to equity starting February 1988.) As noted earlier, the net resource outflow still increased despite these schemes. Moreover, most of the debt_equity transactions involved CB obligations thereby increasing the base money for the period 1986-1988 by about. 14 pervent, and, consequently, .the. general price level. Chapters 3 and 5 also pointed out that this particular debt conversion scheme constitutes a subsidy to investors, with the extent that investments that came in •were not contingent on the progranL The third approach the government.took to complementthe market_ • oriented strategies to the debtpreblem and to ease the foreign excba_oe. const_dnt was the so-called Multilateral Assistance Initiative (MAD; this later evolved into the present Philippine Assistance Program(PAP). Originally conceived to be a Mini-Marshall Plan for the Philippinesby the government, the PAP involved the solicitation of additional ODA loans and grants over a five-year period beyond the amounts that committed prior to PAPs conceptualization. The first pledging session held in Tokyo generated a US$3.5 billion pledge from bilateral .and multilateral sources. These, however, were made up of pledges already made before the pledging session and delayed money• due to the deferred

POLICY REGIMES

329

implementation of the projects. By the be_--ing of 1990, only half of these pledges were honored- Net resource outflow continued. The PAP is perhaps more relevant as a lobby group for issues that are common to the diffea_mt donors' agonda; the meet outst_nai._ of these is the "absorptive capacity" issue, i.e., wheth_, the government has the capacity to allocate efficiently the additional reso_. Although the country's availment rate was comparable to most of its Asianneighbors, the government nonetheless adopted vat.us measur_ to facilitate p_jeet implementation, e.g. deeemta_l;_,_ion. Past administrations were rather raluct_t to resort to exchange rate adjus _tm_t as a means of repairing external imbalance. Two principal factors may be cited in explnlnlng why the present government balks at using devaluation as an expenditure switching tool. First, final assembly, import_substituting industries which are highly dependent on imported inputs successfully lobbied aga;-et devaluatio_ Second, the existence of an internal transfer problem related to the external debt overhaz_ (see Chapter 5) implies that a devaluation would immediately canse a rise in the national govexmnont's budget deficit via the increased domestic cun_ncy cost of foreign debt service. The pol/tieal economy of the Aquino government made a strilrln_ eentrast against the authoritarian Marcos administration. The supposed democratic institutions of Aquino brought about perceived conflicts of interest, ine_lciencies, and lack of coordination among various departments of the government. In the economic sphere, between 1986 and 19_, a power play amoug the economic offices under the NEDA, on the one hand, and the Department of Femanee, the Department of Trado and Industry, and the CB, on the other, took place. latter group espouses more protectionist policies and footholds more ao_omodating dobt.nsgotlations to the commereia/banks. NEDA, on the other hand, is the bastion of acadom_e economists:trained and reared on the free market principles of the neoclassicalschool, thus champion!_g liberalization, deregulation, and privatization procoeses but espousing a stronger stand on the foreign debt issue. The result of the power play was a decisive victory for the big business sector as NEDA was slowly downgraded in importance while the Department of Fin,nee and the CB continued to be the main economic policy makers. All these resulted in markeboriented policies that clashed directly with p_otoctionist policies (such. as import, liberalization and tariff reforms) now being cbnmpioned by the multilateral agencies. The needed devaluation of the peso was held at bay in favor of high domestic interest rates, and the debt nsgotiators, of the .Philippines lacked the . aggressive stance of its Latin American counterparts.

POLICY REGIMES

331

available. All these structural weaknesses were manifested in the early 1980s following a series of external shocks. The economic and political crisis of confidence that the Aquino government now faces ironically is the same crisis the Marcos government faced a decade ago. Since the current international environment is not conducive to growth and strong vested interests in the economic sphere have to be satisfied, the government is now wAli_in_ a tightrope of policies that will allow much needed foreign finance and still keep the powerful business sector satisfied. The tightrope is wearing thin and the Philippine economy may fall to a similar abyss it fell into in the mid-1980s.

CHAPTER 7'

Summary

and General for Policy

Direction

As mentioned in the beginning, the key argument of this study revolves around two major hypotheses. One, the access to external finance is largely determined by external factors and changes in these factors have significantly affected domestic spending patterns of the various institutions in the Philippines. Second, the capability of the economy to respond to shifts in the availability of different external finance sources depends on the structure of the economy and the diverging savings and investment behavior represented by equation 1 in Chapter 1; more particularly, the scope for effective macroeconomie policy-making tend_ to be constrained M private sector respenses (big corporations and households and unincorporated businesses) to savlng8 and investment incentives do not automatically accommodate the imbalances of the external sector (foreign finance availability) and the fiscal sector (policy adjustment). External

Conditions

and External

Finance

Chapter 3 presented a decomposition analysis of the current account noting that the behavior of the deficit was driven largely by external factors. These include changes in terms of trade, interest rate shocks, and world trade retardation. The debt accumulation burden became an increasingly significant source of weakne_ in the current account as the economy was buffeted by external shocks from which it could not recover, thereby reducing its ability to service current debt obligations. The government venturod into a self-sustained debt accumulation process by contracting new debt to finance existing obligations, a procesÂ˘ which led to an onerous external debt overhang. Evidently, the government in 1975 opted to finance its way out of the adverse effects of the external shocks spawned by the 1973 hike in world oil prices, rather than implement an adjustment program similar

354

PHILIPPINE EXTERNAL FINANCE

to the 1970 experience. Memories of the baddash were still fresh in the minds ofpollcy makers. More tbn_n anythi_ eise, however, this decision was facilitated by the ample external finance made available at low cost, a situation brought about by supply shifts in private international financial markets and global macroeconomie consequences of the recycling of surpluses of the ms, or oil exporting countries (DevLin 1980, Boyce 1990, Ves 1991). Boyce alludes to the dominant role played by the supply side in the rapid increase in Third Werld debt. He eit_ two factors: First, the debt build-up was net limited to off-importing nations like the Philippines. Oil-exporting nations including Mexico, Venezuela, Indonesia, and Nigeria also rapidly accumulated debt. Second, real interest rates were low and even negative in the 1970s, implying that, at the international level, supply shifts prevailed. I This analysis complements earlier assertions that the accumulation of foreign debt in the Philippines was more a product of external conditions rather than a result of the expansionary fiscal programs of the Marcos regime. ExternAl conditions took a turn for the worse in 1980, caused again by an oil price shock. A crisis in the interaatiomd financial system triggerod by Mexico's default led to a drastic drop in international lending. Combined with the political crisis in 1983, this ushered in the most severe post, war roceesion in the Philippines. The availability of extmmal finance was no doubt dictated by external conditions in the 1970s and 198(k. This proves the first part of the first hypothesis. What is left is the determination on how the availability or nen-availability of foreign savings affected the domestic spendinw patterns of the four institutions identified in this study. The regression results presented in Chapter 4 indicate that foreign financing significantly affects the savings and investment behavior of households and unincorporated business sector, public corporations, private corporations, and the national gevernment. Public enterprises were the chief direr benefactors of the foreign credit injections during the 1970s and the early 1980s. Public inve_ent rates are clouly co,slated with foreign capital inflows of the sector. The debt crisis and absence of new external bormwiz_p_ led to heavy cuts in the public investment rate in the 1980s. However, it is net possible to speak of a one-on-one relationship between the foreign finance end the fiscal balance (including public enterprises), nor is it possible, as is often done in policy analyses for developing countriest to.see the external and fiscal balances as fully policy determined and the private sector balance as fully accommodating. To say the least, the adjustment process is mo_ L

Boyce(1900), p. 18.

SUMMARY

$$S

complex, with the fiscal balance not being an independent policy ins/a_m_nt but, to an .important extent, a direct or in_ result of private sector behavior end adjustment. Savings-Investment

Behavior

The household end unincorporated busine_ setter did not directly participate in the foreign credit transactions but increased its net savings sibmificantly, much more than private corporations or government, durlng the mid-1970s. Household savings appear to be m_inly a function of real income growth. However, wage-earning households tend to show higher savings rates then salf-empleyed households. A likely explanation is the h_her avera_ real income levels of householdswith wages as main source of income. These househ_ds predominate in urban areas, psr_cularly the NCR. The m_l_ul propensity to save, however, seems to be higher in rural minas. Also, the finding of the MSAF/SAM-based .-ks_e analysis in Chapter 2 shows that rural households have a higher degree of integration with the rest of the economy than urban households; it also highlights the importance of unincorporated business profits in generating household savinp; these m,y explain the negative relationship found in Chapter 4 between real wage increases and household savings rate. The policy implications for these results will be discussed later. The savings behavior of private corporat/ons have quite different de_ts. Aggregate foreign capital inflows appear to be positively correlated with corporate savln_, A possible explanation is that, in the 1970s, firms borrowed over end above investment finance needs wldch allowed them to reserve more savings for future domestic investmentAlternatively, as argued in Chapters 2 and 5, firms could raise savings rates as a share of GNP in periods of relatively abundant credit availability (both domestic and external), while, at the same time, raise redistributed profits allocated to households and reduce self-finencing ratios, which spurred savings surpluses in the hands of (richer) household groups, fueling the accumulation of foreign assets (the broader concept of "capital flight'). Public savings, on the other hand, seem to respond inversely to foreign capital inflows. This may be a result of possible complacency end government splurging when easy external finance is available. This explanation is ftwther supported by the deterioration of tax elasticities end performancos of government corporations in times of high foreign capital inflows. Moreover, external borrowing over time pushed up

336 PHILIPPINE EXTERNAL FINANCE interest payment obligations and, consequently, eur_nt expenditatres so as to affect the gover-ment cavin_ capacity. Adverse external shocks such as the hike in oil prices, the e_q_flation abroad, and the drying up of foreign funds have unfavorable impacts ou all the institutional agents. The first to be hit was the househeld and -_i-om-lmrated business sector where their real savings fell as earty as 1978. Real savings of corporations began to fall only in 1982 when medium- and long- term foreign loan. started to become ecauL The fall in savings for the hemushold and untn_rporated business sector also lasted a long time. It was only in 1989 that their savings rebounded from the crisis level. Private investment in the 13Ltllppinesfollows the behavior of public investment quite closely and this lends support to the complementarity hypothesis. In the Philippine context, the high business confidence attained frem 1970 to 1979 led to th._simultaneous expansion of private and public investment. Corporate investment also declined (albeit with a lag) durin8 the period of high world interest rates and tight foreign credit. Private investment for both households and incorporated sector, however, is quite responsive to the availability of domestic c_edit. It is the latter variable, and not private investment per se, that is affected by the level and complexion of government spending. In fact, monetary policy was rather lax during the period 197_ 1979, giving the private sector easy access to cheap Â˘_edit. These findings on the savings-investment behavior of the various institutions susgest a divergent pattern in the face of external finance. Public investment received a heavy boost during the period of dobt_led 8rowt_ While private investment experienced a similar expansion, it was also during this time that a sharp increase in private accumulation of foreign assets was recorded. The estimates presented in this study indicate that the cumulative private foreign asset acquisition (not just â&#x20AC;˘capital flight')for the period 1971-1988 is approximately US$12 billion. Several elements wore combined to encourage this outflow of private fin_-clal resources, all of which find a direct relationship with the prevailing economic structure. The segmented and repressed financial system which existed from 1970 to 1982 was primarily characterized by artificially low interest rates in the formal sector, a situation exacerbated by the relatively high inflation rates at that ti,-e. The gove_ment policy of pegging interest raten drove a wedge betwee_ yields on domestic and international assets, causin8 resources to move outward. Regression results show that the difference in real rates of return is one of the significant determinants of the cbAn-e in foreign asset position of the private sector,

SUMMARY

337

The poor investment climate as evidenced by the underdeveloped capital market, the absence of financial deepening, and the minimal influx of foreign investment also proved to be important factors for capital outlew. Merever, the p_ policies of the government served as a disincentive for added invsstmant by insuring prefits despite inefficient production structures. The inward-looking trade regime also fostered an overvalued peso and this stimulated the formation of a parallel foreign exchange market which, in turn, facilitated the tranMer of domestic assets in foreign currency denominated assets (Chapter 5). What proved to be the most costly policy implemented by the government, at that time, was providln_ guarantees for foreign loans contraet_ by the private sector. This e_Ahled the private sector to obt_i_ access to the foreign loan market at very little risk, as it opened another ebAn_el for hwndorming their savin_ to foreign assets. As mentioned earlier, private domestic investment was m_i_ly driven by access to cheap Â˘ndit, giving leeway for the private sector to transform their savings, largely through the parallel market, into foreign asset holdings. Finally, rich Philippine households were seen to take simultaneous consumption and portfolio decisions, including substantial foreign asset demand to support an international consumption pattern and lifestyle, thus providing a rather inertial component to outflows of private savings. This accumulation behavior of the private sector may have spurred the government to take a more activist role than necessary, while the existence of segmanted domestic financial markets and segmented foreign exchange market placed severe constraints to effective Dla_onoD_

Public

mAnA_ent.

Spending

Patterns

Public sponding patterns failed to cement a more sustainable growth path. Much of public invsstmant flowed into the non-traded sector which involved projects with. long gostation lags, irmufficient medium-term income, and low foreign exchange-gonerating effects to service accumulating _---cing costs. As pointed out in Chapter 2, external finA-ce did not also favor the sectors with strong linkAcfeS with other sectors (identified to be the a_wicultural, services, and unincorporated businesses secte_). When its programs were finally overtaken by overseas developments, the govm_nment was left with an agglomeration of non-performing assets and a massive foreign debt bW magnified by the guarantees it liberally provided to the private sector.

338 PHILIPPINE EXTERNAL FINANCE The reduction in foreign lending compounded the government's problems in its attempt to cope with its external debt obligations. In order to cover its deficits, the govea_zment had to rely heavily on the domestic market. The government also faced an internal transfer problem because of the debt overhang brought about by its own borrowing policies in the previous years and by taking over the responsibility of much of the external debt of the rest of the public seet_, as well as that of the private sector. Budgetary access to foreign exchange diminished with the curtailment of available foreign loans and with the growing parallel foreign exch_nue market cbRn_elling large amounts of savings and foreign exchange holdings to the private sector. To finance its deficits and to acquire foreign exchange (including interventions in the parallel market), the government began marketing debt instruments at attractive yields. This dual pressure on the domestic capital market, reinforced by the shallowness of the domestic capital market and the continued exchange rate risks, drove up domestic interest rates and considerably curtailed the private sector's acoees to domestic c_edit, The results of this policy outcome are not enco_ and have strengthened, rather than reduced, potential macreeconomie instability as follows: I) higher interest rates seem to have caused seine reversal of private capital outflows; but since exchange rate policies avoided major devaluations since the mid- 1980s in order to limit further upward pressure on the budget deficit, these high rates could not eliminate tendencies toward private capital outflows; 2) high-_st domestic borrowings rapidly built up a hugo domestic public debt servicing burden with interest costs alone now comprising one-third of total government spending, thus increasing the cost of fiscal adjustment; 3) high-yielding government securities "crowded out" capital market funds available for the privatization process, thus slowing down the rationalization scheme of the public enterprke sector with negative consequences for the speed of fiscal adjustment; and 4) domestic credit availability was squeezed to affect private sector growth as private investment did not reach its pre-crisls levels and even declined in 1990 from its 1989 level. These public and private _ctor adjustment problems cause sluggish investment activity which did not augur well for future growth: they hAmperedd the recovery of public investment, which is greatly needed since infrastructure has been a very weak link in Philippine development efforts, as well as that of private investment, particularly in the sectors with the highest domestic production linkages, i.e., farmers and unincorporated businesses which are likely to suffer most from the private credit squeeze.

SUMMARY339 The period of easy external fin'nco and its abrupt end ea_ated a situation wherein the existing external debt overhang threatens macroeconomie stability and engenders potential conflict among various economic reforms. In the Introduction, it was hypothesized that, in reasseesin8 the role of policies within the Philippine context, both the decision-makin4g process and the effectiveness of macroeconomic manasement is strongly influenced by the asendas of the private sector. Hence, Chapter 6 argues that strong J.jnkabetween important segments of the busin_s community and the top government officials persisted throughout the period under analysis, but conflicting large business interoets and shitting balances of power gave rise to policy regimes _ by a lack of credibility in terms of long-term consistency of development strategy goals and by an impressive record of unfinished or failed reforms. Political stability was increasingly in d,n_er in the 1980s as diverging forces outside the business C_nm.nity, i.e., the military as well as various sectors of civil society including the trade unions, the Catholic Church, the popular organizations, and the armed insurgency, placed their claims forward in some degree, without any emerging social consensus on key choices to be made for a strategy for long-tar_ development. Finally, but cort_inly not the least, multilateral financial institutions, particularly the IMF and the World B_-k, exercised considerable influence on domestic policy decisions during critical stages and when financial consmslnts were severe. Policy Reform: Two Major Goals Previous discussions have also indicated that the scope and effectiveness of macroeconomlc management in the Philippines are strongly limited by the structural problems hampering the proper functionlng of domestic commodity and financial markets, and by the partly autonomous accumulation behavior of the various sem_ents of the private sector. Policy reform, therefore, should be geared toward two major goals: 1) hnprovement of the domestic resource mobilization capacity, and 2) redressing external economic relatious toward reduced vulnerability to external shocks and enhanced productivity of external financo. In the context of the above discussions, this study offers policy prescriptions that, in celd;am areas, are quite similar to e_ pronoui_cemants. 2 In some instances, however, the findings of this study necessitate policy mandates that deviate from the aforementioned tracts: 2. Seefore_-mpleAlbino,et eL (1986)andDehnerandlntal(1fl89).

34_ PHILIPPINE EXTERNAL FINANCE First, a structural improvement in the domestic resource mobilization capacity is required to respond to the very ]imltod availability of foreign finance that would likely occur in the 1990s and to avoid ecetiy adjustment processes to external shocks experienced in the 1970s and 1980s. The analysis of this study supports a number of recommenrlAtiolls on the dh_ons reSOUl_e mobilization enhancement should take: 1.

Economic

reforms

must

be biased

toward

those

sectors

that

show highest potential within a s_atogy aimed at sustainable economic growth. We refer, in particular, to the household and unincorporated businesses sector whose savings increased rapidly in the mid-1970s. If indeed it is true that rural households and unincorporated businesses have a higher marginal propensity to save, as suggested in Chapter 4, and if these institutional sectors also tend to show high domestic linkage effects, as concluded in Chapter 2, then there is enough good reason to implement equity_riented policies through the strengthening of agricultural and small-scale business activities. Relevant policy areas that readily come to mind are a more pervasive and comprehensive land reform program than the ones implemented so far(see Chapter 6) and enlarged access to credits for unincorporated businesses. This study concludes that the interlo_Yin_ interests of large bank, and corporate firms, as well as the wide dichotomy between formal and informal financial activities are not conducive to efficient f'mancial intermedlation and resource mobilizatio_ Thus, a fmanciai sector reform should strive, in the first place, to doconcon/a-ato capital, ease up market access, and strengthen bAnkln_ institutions that are not linked with the big conglomorates of private corporate interests. Rather than initiate orthodox financial reform measures such as interest rate liberalization, a fmanciai sector reform should include changes in bank regulations (e.g., safeguarding against overexposure to high-leveraged firms), alternative guarantee systems for producers (particularly small-scale) with little collateral, and improvement of institutional and economic infrastructure that would make decentralized bank lending less risky and costly to facilitate a reduction in the dichotomy

SU/VW_RY 341 be_veen _ 3.

formal and _om_

_dit

markets. 8

The existing tax system has to be drastically overhauled, especially the collection machinery. Not only is the system highly regressive, but tax evasion is quite widespread rasulti_ in approximately 50 percent revenue losses. This study has shown that those sectom which obtained the largest share of the external finance pie paid out the least _mount of taxes. inequity must be cerreeted in order to ease the deficit pmblemB of the national government.

Second, policy reform should seek to reduce external vulnerability of the economy and redress relations with external creditors. Some measures will directly support domestic resource mobilization such as measures leading to virtual debt relief and measures boosthlg net foreign exchange earnings. 4.

A cornerstone of a new policy regime should include a substantial amount of debt r_lief given the inter_RI transfer problem faced by the government. Market-oriented mecbRnisms, even if utilized to the fullest, cannot bring down the Amount of outstanding debt to the figure necosssary to resolve the conflict between debt payment, on the one hand, and macreecenomic stability and policy consistency, on the other (Chapter 5). Additional external finance, as provided by the multilaterals and the industri-lized country donor community, has provided some liquidity relief to the internal tr_Afer problem. However, it clearly has not resolved the problem, rather, it seems to have reinforced it. Debt relief would provide a more fundamental solution to this major maez_nomic stability problem. Obviously, debt relief requires support from the externalcreditors, the multilateral financial institutions, and the donor commimlty. The Philippines' eligibility within the scheme of the Brady Plan operations has thus far not resulted in ma_or debt-reduction operations with international public support. A credible adjustment program, includinS the

3. Following _ and Yotopouloo(1_1: 115-117),one couldadd that institutimml stronffd_ni_ ot the financial sector should8o hs_l in hand with measm'es to improve the overall economic onviruruneqa__ly, in the c_e of the agricultural _a', iml_vement ofeconomicinf__ seems vital fariml_oved financialmtermediatk_ Lendingto small farmers t_nds to be extremely rislw andcostly under pooeconditivns of trmmlmet,in-i&,afion, aswell M under conditionsd uneven avcess to sgriculttwal inputs and 1-_1 To_emedythese deficiencieswouldallo enhaneethe effectiveneMof formal and infm_malfumncialintermediathm.

342

PHILIPPINE EXTERNAL FINANCE

aforementioned elements, may provide the Philippine government with a stronger stance in debt negotiations, though it is no guarantee that actual debt relief will take place. The government can further modify its tack on the externM debt problem by also focusing on (market-orlented) measures that would encourage a return of private foreign asset holdln_ ('reverse capital flight"). It should, however, avoid gimmicks that entail huge opportunity losses. Specifically, we refer to debt_equity swaps wherein private holders of foreign assets simply took advantage of a more lucrative way to bring in fundB that, even without the debt swaps, would have found their way to the economy given the prevailing conditions at that time (Chapter 5). In this regard, the government can concentawto more on improving the investment climate mainly though deregulation policies. It will help a great deal if efforts at retrieving illegally obtained wealth (e.g., the Marcos billions) meets greater success. Debt relief _qJl help redress exchange rate policies to become anew an instrument of trade and industrial policies. The existing external debt overhang has made the government more cautious in its efforts at liberalizing the trade regime and mnkin_ the exchange rate more competitive. As mentioned earlier, the government faces an internal transfer problem and a large devaluation will bring about an equally shsrp rise in the peso equivalent of the govea_ment's external debt. Given this predicament plus the existence of a large pool of private foreign financial assets, it has been occasionally suggested that exchange controls should he imposed again similar to the sebup in the 1950s. The Philippine track record with such a system, however, does not bode well for its success and implementing it at this time may only worsen the situation.

These policy recommendations are, of course, merely elements of a broader framework and this is not the place to elaborate on it. What remains to be underlined is a rather basic, but much forgotten message to policy makers, foreign creditors, and advisers from international organizations: that any set of maca_economic policies should he based on recognition and proper understanding of the normally heterogeneous savings and investment behavior of private sector agents,and of the actualfunctioningof the oftenill-structured and segmented commodity and financialmarkets in countrieslike the Philippines.

SUN_RY

343

In stun, in an attemp_ to determlnA a common thread weaving into the various economic problems of the Philippines and their respective eauses, the study sees the dondnance of elitist interests in the conduct of economic pelicy. 4 The persistence of the pmtect_nist trade regime despite its obvious shortcomin_ manifests the stron_ of this group. The financial sector is a complex web of interlocking d/rectorates enabling the bulk of domestic credit to flow into a small number of firms. This is one reason why foreign loans enhanced the savings of the private corporate sector (which were ultimately transformed to foreign assets held abroad) without harmln_ investment activity. Moreover, the fi_nciai system is often char_terized as oligopolisti_ The private sector's ability to obtain government guarantees on foreign loans it coniawcted is proof of the influence of elite groups over government officials. Reliance on fiscal expenditu_ to perk up the domestic economy, rather than the implementation of equity oriented measures that resulted in a wider domestic market, is another important aspect of thls argument. The domln.noe of the vested interests of the elite and the prevalence of a sTstem of government described as an "elite democracy _ serve as mere symptoms of a deeper problem which is the absence of a social consensus on the development goals of this country. Viewed in this perspective, the study may explain why the Philippines' Asian noighbors were able to weather the adverse effects of the e_mai shocks while the coun/a_y's development efforts were set back by at least a decade. Venturi_ into higher ground, this perspective may also explain why policies long abhorred by the "free market" thinkers sueceeded in other countries and failed miserably in tha Philippines. These include import substitution, foreign exchange c_zt_k, and highly activist role of the government. The country will do well to forge such a social consensus and the early record of the recently instMled Ramce administration is favorable in this aspect. One of the first legislative act/ons of the new govenunent was to repeal the Anti-Subversion Law and there have been clear signals that the sdmlni_tration is bent on negotiating a settlement with all existin4g rebel factions. The establishment of the NationAl Unification Commission is a step in this directionNevertheless, political agreements will _ hollow if these a_ not accompanied by substantial economic reforms. Aside from the widely accepted goal of "world competitiveness," the other major principle of 4. See De Dios smi Villamil (1990) and Hu_ analysis of this phenomenon.

(1990, 1991) for a discussion and

3414

PHILIPPINE EXTERNAL FINANCE

the l_mos economic agenda is "people empowerment," which was the underlying theme of his presidential campaig_ Ostensibly this would be consistent with the process of reducing the economic levere4ps of the present elite. However, if programs related to this idea only pay llp service to its basic det'mition of: a) investment in human resource development; b) creating opportunities for productive employment; and c) more active people participation in planning and go_, s it would be difficult to muster the required public support. Mo_over, the conditions just mentioned are merely necessary and not sulY_eBt to release the economy frem the dominance of the oligarchy and distribute economic opportunities more equitably. The success of the economy ov_ the next decade hinges a great deal on progress in four areas: 1) market oriented (or more precisely "market creating') reforms; 2) infrastructure development; 3) effective decentralization; and 4) vigorous private sector participation. Much has already been said about the first two items and these have direct bearing on the notionof'world competitiveness." Decentralization is a topic not within the scope of the present study but this definitely goes hand in J_and with the concept of people empowermenL The discussion on the need for a social consensus dovetails with the fourth item. Indeed, it is the ability to effectively harness the support of the private sector that will make or break the fortunes of the Ramos administration. A p_ogram must be laid out to induce or even cajole the existing elite to mobilize their resources (mainly in the form of _everse capital flight9 in order to help the cash-strapped government revive the stagnant economy. This program must go beyond the traditional Five-Year Development Plan, which emphasizes macroeconomic stability and a liberal business _!imate as key factors in attracting investments and likely entail direct negotiations between an independent state and specific sectors of the private sector. Whatever its final design, this economic "plan" must reflect the needs and aspirations of Philippine society, i.e. it must evolve out of a social coDJsenBus.

5, This dermiti_ of p_ople empowerment is presented in the framework of the Five-Year Develol_nent Plan (1993-1998) prepped by the National Economic and

Dewk,pmm_t'Authc.-ity(NF_A).

APPENDIX1

APPENDIX 1 Selected Economic Indicators forthePhilippines

(19 I m Indicator

?0-?4

80.82

83.85

6.44 5.19 8,32 5.71 100

3.44 3.93 3.76 4.34 100

-3.36 1.16 -6.57 -2.85 100

5.02 2.51 5.28 5,45 100

26.37 35.32 38.31

25.50 36.19 38.22

27.04 34.20 38.76

28.07 32_28 39.65

0.43 -4,95

0,43 -6.31

0.44 -3.97

0.48 -0.58

-1.17 79.40 101.63

-2.23 62.67 90.01

0.57 59.00 101.78

1.89 67,50 92.77

5.32

5.75

3.09

2,87

22.27

20,13

16,51

21.24

Underemploy. 12.63 meritrate(%)d

4.40

23,43

29,47

24.67

Realwageindex 95.55 (Un_,ed)

19,02

50,09

44,21

44.04

LIncome(in%9rowthnde) RealGNP 5.94 Agda_ure 3,93 Industry 8.00 ,Senses 5.56 RealGDP 400 Ag_dture Industry Sen,icw

28.41 32,11 39.48

H.Extenmlsector M+ X/GNPa 0.41 Current balance/ 0.63 GNP(%) BOP/GNP (%) 1.69 Termsoftrade 111.60 Realeffective 97.63 exchange rate HI.Publicfinance Publicsector 0,00

7S-_

der_/ GNP(%)b IV,Monetary sector M3(%growth 13,51

rate),

V.Laborsector

(CONTINUED NEXT PAGE)

346

PHILIPPINE EXTERNAL FINANCE

(APPENDIX 1CONT.) Indicator

70-74

75-79

8082

83-85

86-89

100

100.0

54.0 14.8 30.7 0.5

52.9 14.9 31.8 0.4

51.3 14.8 33.g 0.0

50.0 14.5 35.5 0.0

48.9 14.0 37.1 0.0

19.1 103.9 104.4

9.9 104.5 105.4

13.4 86.2 93.7

27.g 88.4 99.0

6.0 79.6 23.3

42.0 2.82

51.8 2,71

48,0 2.6

55.8 2.47

60,2 2.42

VIII. SocialIndicators(end of period) GNPpercapita 300 590

800

570

732

49,5

43.9 50 82 0,447

31.8

0.445

52.1

51.8

9.3

Sectoralemploymerit(&shares) Agriculture industry Service Activitynot defined Vl, Prices Inflation papna e Pt/Pntf VII. Population (rnin.,end of period) Population growthrate

(us$)

Populationbelow 49 povertyline(%) -NCR .Urban 37 -Rural 56, Incomedistribu. 0,48 _on(Gini-coeff.) -Top20% 54 (incomeshare) -Bottom30% 7.1 (incomeshare) .....

,H,,.....

a M-refers toimports andXtoexports, o Includes government monitored corporations. b REERt = REER t-1"(1 d NEDA Compendium ofPhilippine Social REERt istheREER inperiod t Sla_tic andNSO, ISH. REr - sumwi(Ri'+ CPli' - CPIo_ e Price index ofagriculture goods/pri_ index Where REt' ., change inREER inperiod t ofnonagrinultural goods, wi - tradeweightforlmdingpertneri, f Prlco index oftradable goods/prine index nt Ri' - %change innominal exchange rate non-tradable goods. withcoun_i. CPli' - %change inCPIofcounW i CPIo' - %change inCRntcountry Philippines Sources: National income Accounts, NEDA; TheCentral Bank; Philippine Statislical Yearbook, 198g,

APPENDIX 2

The Construction

of the MSAFs

for the Philippines Overall

Outline

and Comparability

The Macroeconomic Social Accounting Frameworks (MSAFs) constructed for the Philippines largely follow an outline designed with 1 a comparative country study framework. Similar frameworks were or are being constructed for Thailand, Tanzania, Pakistan, and Mexico. The MSAFs for the Philippines were constructed for three year-1974, 1979, and 1987 -- each based on roughly comparable, but independent data sources. The disaggregation of accounts is largely the same for all MSAFs, with the basic design of the matrices as explained in the text. Based on data availability, the three MSAFs show some minor differences in the breakdown of the accounts, as follows: 1.

Production accounts (PA): the 1974 MSAF does not divide the manufacturing industry sector into light (food processing, beverages,tobacco, and textiles) and other manufacturing, as in those for 1979 and 1987. 2 Factors of production (FP): the 1974 and 1979 MSAFs have a breakdown of value added into wages, land, and other rental income and gross operating surplus. Operating surplus of unincorporated businesses is in a separate institutional account (13). The 1987 MSAF shows, as was suggested in the original outline of the MSAFs (see footnote 1 of this appendix), unincorporated capital income as a separate part of sectoral value distribution, while rent and other rental incomes (which could not be allocated by sectors) are included in the redistribution of value added in the current interinstitutional transfer matrices.

1. See ISS (1989). 2. This difference was mainly due to time consU-aints.For the 1974 MSAF, the input_)utput blockwas basedon theSt_rnrnel_y statement ofproduction accounts as presented ina smallSocial Accounting Matrix (SAM)constructed bytheNSO for1974; this didnotallow a breakdown into light andothe_r manufacturing.

348

PHILIPPINE EXTERNAL FINANCE

Current accounts of institutions (CI): for 1974 and 1979, there is a separate entry (account 13) for unincorporated enterprises, while -- as indicated -- for 1987 gross operating surplus of unincorporated businesses was allocated by industry (row 8) and subsequently redistributed by household groups (col. 8, rows 10-12). Account 13 of the 1987 MSAF subsequently remained zero.

Investment by commodity type and institution: the 1974 MSAF has no separate entry for change in commodity stocks. Inventory changes are included in the gross capital formation data (rows 1- 6, cols. 18-24). For 1979 and 1987, these entries refer to gross fixed capital formation. Changes in commodity stocks are specified separately by commodity type in rows 1-6 and col. 26, and by institution at row 26 with cols. 18-24.

All other accounts are defined identically. Principal

Data

Sources

For the 1974 and 1979 MSAFs, basic information came from two SAMs for the same reference years constructed by the NSO. The 1974 SAM is documented (Samson and Buenaventura, undated). Of the 1979 SAM, only a workcheet copy was available which was kindly supplied by Nso. The SAMs used the 1974 and 1979 Input_Output tables (also constructed by NSO), the national accounts, and the FIES as basic data sources. These sources cover the production accounts, factors of production accounts, and current accounts of institutions. For the 1987 MSAF, these accounts were estimated using the 1985 NSO Input-Output table, the revised series of the national accounts of NSCB (1983-1988), and the 1985 and 1988 Family Income and Expenditure Surveys. The capital accounts were constructed on the basis of the flow-of-funds accounts. For the 1974 and 1979 MSAFs, these were based on the first series of the flow-of-funds accounts for 1974-1979 constructedby a NEDA-Central Bank JointProject, coordinatedby the National Accounts Divisionof the NSO/NSCB. As of 1980, a new flow-of-funds serieswas constructedunder theresponsibility oftheCB. The two seriesarenotstrictly compatible, with theformer showing some internalinconsistencies. The flow-of-fund accountsaregivenas balance sheetstatementsforthe major financial and non-financial institutions by typeoffinancial transaction. To constructflow-of-funds by institution oforiginand destination, additionalmonetary and financial statistics

APPENDICES349 (in particular, the Central Bank Statistical Yearbooks and Annual Reports) were use& National accounts aggregates wero generally used as reference totals for the different groups of accounts and were used to achieve overall consistency. In general, this procedure did not produce major problems, since most of the principal data sources, including the flow-of-funds accounts, already use the national accounts to derive their reference totals. The Input-Output tables give in principle an inverse link, providing benchmark totals on production for the national accounts. Construction

Methodology

by Major Blocks

input-output (rows 1-6 and 16-17 and cols. 1-6, 10-12 and 16-26) The MSAFs only show a reduced input_output system. On the basis of the Input-Output tables (1974, 1979, and 1985) and the 1974 and 1979 NSO SAMs, commodity-by-commodity transaction matrices (at producer pr/ces) were constructed using ]5oth commodity-by-industry and domestic production (or "make') matrices. For the 1974 MSAF, the 14 commodity and 10 activity breakdown (an aggregation of the 1974 Input_Output table) was reclassified into the 6x6 commodity breakdown of the MSAF. For the 1979 MSAF, the input-output accounts were aggregated from the 25 sector breakdown of the 1979 NSO Input-Output table, while for 1987 this was done on thebasis of the 69 commodity/industry breakdown of 1985 Input-Output table, subsequently updated using flied input-output coefficients to 1987 output data. Import matrices were derived by aggregating the original 1974 and 1979 matrices. The 1985 input-output system lacked an import matrix at the time the 1987 MSAF was constructed. The 1987 import matrix was derived by updating the 1979 matrix using aggregate sectoral import data for 1987. Domestic transactions matrices were derived by subtracting the import matrices from the total transaction matrix. Tables A.1-A.5 give the input-output system tables, including input-output coefficients and the Leontief matrix for 1987 as an example. The Input_Output tables were also used to derive the commodity structure of the major final demand components (consumption, investment, an&exports). The 1974 and 1979 NSO SAMs could be used to specify household consumption by commodity and location of the

31SO

PHILIPPINE EXTERNAL FINANCE

household (NCR, other urban, and rural). This was done by using the so-called =wants _ or consumption transformation matrices far each of the household groups (see Table A.6) and by assuming that the average import coefficient of total household consumption by commodity type applied equally to each household group, so as to derive domestic household consumption by household groups and commodities (rows 1-6, cols. 10-12). A similar procedure was followed for 1987, but cembining information of the 1986 Input-Output table and the 1985 FAmily Income and Expenditure Survey. The emerging structure was used to update the consumption transformation data to fit 1987 household consu_m_ption levels. The derived fixed investment and gross capitalformation by commodity type and institutions(rows 1-6, cols.18-24 and 26), aggregate investment data by commodity from the NSO SAMs, and Input_)utputtableswere combined withnationalaccountsestimatesof total gross capital formation and flow-of-fundsinstitutionally disaggregatodfixedand totalinvestment data.The nationalaccounts estimateforaggregategrosscapitalformationservedas the reference total; the distribution oftotalinvestmentby institution was taken from the flow-of-funds. National accounts data on (privateand public) investment in constructionwere used to define the share of fLxed investment in construction foreach of the institutions; investmentsin other capitalgoods were derivedby applyinga limitedRAS method using known totalson investment by commodity and investment by institutions. Factor incomes (rows 7-9, co_.

and income distribution l-6 and rows 10"17, cols.

by instit,,tlons 7-17)

The income distribution subsystem for the 1974 and 1979 MSAFs were derived from the NSO SAMs with the same base years. Separate entries for depreciation were included in the sectaral gross operating surpluses (row 9). The 1979 SAM showed indirect taxes as being paid by (private and public) enterprises. The 1979 MSAF shows indirect taxes as part of the input, output system (row 16, cols. 1-6), using the 1979 NSO Input-Output table. The total amount of indirect taxes was subsequently deducted from the gross operating surplus received by enterprises as recorded by the 1979 SAM. For the 1987 MSAF, initial estimates for wages, gross operatin_ surplus, and indirect taxes by sector were derived from the 1985 InpubOutput table. Sectaral wages were updated to 1987 using the national accounts estimate of the total wage bill for that year and sectoral employment data for 1985 and 1987 (from NSO, Philippine Statistical Yearbook 1989). Indirect taxes were

APPENDICES 351

derived by taking the 1986 sectored indirect _ output coefficients and adjusting these with equal weights to obtain the avora_ 1987 o0etT_ent. Total _ces operating surplus of households was derived from the tmtional accounts. The sectored distribution of nr,lr-wrpcrated capital income was derived using the average entrepreneurial (self.employed) income by economic sector as e_tt_-tod by the 1985 PIES. Current transfers between institutimas (taxes, redistribution of profits and other ,rental incomes째 and other transfers) wea_ ditwct_ taken from the 1974 and 1979 SAMe. Neither of them provided estimates of intra-houeehold tr_nafere. The current transfer matrix for 1987 was built from the institutional income and outlay accounts of the revised national accounts for 1987 and the average inCOlne-by-sourco sta_cturo for the three household groups was derived from the 1985 and 1988 FIES (Tables &7-9 give the detail). The FIES of 1985 and 1988 also do not allow the identification of intra-household transfers, so that, in the 1987 MSAF, the intersection of rows and cois. 1(_12 remains empty. Savings

and flow-of-funds

(rows 18-27 arid col& 10-27)

Savings by institutions for the 1974 and 1979 MSAFs were directly derived from the NSO SAMe, with the difference that savings of public lmd private corporations were further split into financial and non-financial enterprise savings (retained profits) based on the flow-of-funds accounts (SCO/NEDA/CB, undated and Philippine Statistical Yearbook 1982). For 1987, gross savings by institutions were derived from the institutional income and outlay accounts of the revised national accounts, and again the split in savings of private and public fmancied and non- financial institutions was based on the distributional structtwe of the total savings by these institutions as recorded in the CB's flow-of-funds accounts for 1987 (revised data, as provided by the CB, February 1990). The flow-of-funds accounts also provided the basic source of information for constructing the flow_f-funds block. The first main problem to be dealt with was to "reconst_ct" the flow of funds on a source-use basis, i.e., by institution of origin and destination_ The flow-of-funds accounts only provide the accounts (though with the required breakdown) as consolidated balance sheets for each institution, specifying changes in fmancied assets and liabilities for a fairly detailed number of financial instruments. The reconstruction of accounts was achieved by making submatrices for each type of financial instrument, with the institutio,_AI accounts (18-27) on the rows and columns. For a

352

PHILIPPINEEXTERNAL FINANCE

number of financial instnmxents, the matrix could be directly derived due to the limited number of entries (or even single entries) on either the liabilities or asset side such as in the case of foreign loans, domestic currency holdings, inter_gevernmental claims, and insurance and retirement funds. For the other submatrices, complementary information was required to fill at least the principal entries. Centr_ Bank Statistical Yearbooks and complementary flow-of-funds information (the more detailed f_-_ncial balance sheets of outstanding assets and liabilities for commercial b_nkA and public financial institutions, supplied by the Domestic Researdt Division of the CB) helped derive reasonable estimates of the major part of deposit holdings by owner and financial institution and of domestic loans, securities, and trade credits by supplying financial institution and receiving financial and non-financial institutions. Public finance data were used to deduct net lending of the national government to public financial and non-financial corporations. Other entries were derived as residuals. In a few cases with too many residuals, a RAS method was used to achieve final consistency of accounts by instrument. The set of subnmtricoe for the 1987 MSAF are presented as Tables A. 10 a-q. Aggregating the subma_ces yielded a consolidated flow-of-funds m_a_x by institutions which should be reconciled with the already derived savings and physical investment data. Before making the final reconciliation, two adjnst_onts were made first to the flower-funds accounts, inciuding estimates _ 1) the informal credit _,ket, and 2) the private acquisition of foreign assets (often labelled as "capital

mght. The size of the informal credit market was estimated based on available evidence from _nomic studies. Existing studies also suggest that informal credit markets in the Philippines have no identifiable linkages with the Corporate enterprise sector or the formal banking system. The informal credit market is defined here as the completely unregulated financial sub-sector (i.e., fully outside the control of the CB and bank law regulations). To quote an insightful survey study (Agabin, Lamberte, Mangahu and MAn_ahas, 1989: 11), the structure oft he Philippine informal credit market essentially â&#x20AC;˘reflects "the extended family system and social structure. Kinship, h_endehip, and other personal ties underpin a large proportion of informal loans: _60 percent of the mount of informal indebtedness...i up to 78 percent in the small enterprise sector...; and up to 66 peroent in the underground micro-business enterprises ..." This would explain why a significant portion of informal lending was found to be non-interest rate bearing (about 25 percent). Where family ties did net

APPENDICES

3S3

play a role, informal credit supplies appear to be between profoesional informal money lenders, traders and merchants, landlords, and informally organizedsavings and londin8 "dubs" on the supply side and households and unlneorporated businesses on the demand eid_ On this basis, the informal money market was assumed to consist mainly of intrs-household financial transfers. In the MSAF, this is eaptu_d in row 25 and cel. 18 ('deposits" received or generated by the informal money lenders for onlending) and row 18 and col. 25 (informal mwdit supplies to households and uninmrtm_ted businesses). The survey data for the mid-1980e estimate the mam_eeonomic size of informal lending at 30 percent of the lendin8 of the formal banking. system to households and individuals (Agabin et at. 1989). This ratio was applied to estimate the size of the informal c_edit market in the 1987 MSAF. Inca_asin8 fi_A, eial repression durin8 the 1970e and the severe credit restrictions f_ part of the po_debt crisis adju_nt policies (19_g- 1986) formed the background assumptions to interpolate the size of the informal credit market far the 1979 and 1974 periods, aliowin8 for growth of the market segment during these periods. The ratio applied to 1974 was 22 percent while that for 1979 was 25 pm_nt. Information on a foreign exchanse segment of the informal financial sector led to a further upward adjustment of the size of the informal _edit market_ Remittances of Filipino workers abroad were reported to be channeled via informal money exehanse houses with foreign branches at the job sites of the workers (see Mansahas 1989 and Vos 1M). The foreisu branches take in the foreign exdmnge and wire the transfer to the home office which supplies the benefith_ families with the peeo-oountervalue of the remittance. The foreign exchanse may be demanded subsequently from the exchange houses by importers short of foreign exchanSe and households wishing to hold part of their s avinse in the form of foreisu assets. Given the enormous amounts of rcmitted earninp of workers abroad, the inclusion of this informal market sesment roughly double, the initially estimated size of informal lendins. Acquisition of foreign assets by resident and non-b_-I_n8 asente (households, row 27, col 18) were derived from an extensive study, usin8 the Morgan Guarantee, residual BOP estimate for private foreis_ asset aceumulation, but indudin8 adjustments for trade mialnvoiain_ and underrccerded workers remittances (see Vos 1980b). OveraU reee-_l;-tion of the flow-of-funds accounts with sav;_s and investment data was achieved, using a restricted RAS method (i.e., ret_i,;,ff data cells considered reliable information) to distribute the discrepancies on the row and column totals. The major adjustments

$S4

PHILIPPINE EXTERNAL FINANCE

went into the main residual accounts relating to direct capital tawndeN between households and private corporate enterprises. Concluding

l_marks

The MSAFs are largely comparable and the construction methodology was quite similar for each of these. In several blocks, data rvconoKiation had to be "forced* with more Â˘_ude assumption than might be desirable. The fact that the MSAF forces this consistency is, however, an advantage in itself and a useful cheek on the consistency and comparability of data sources that otherwise might seem fragmented. These automatic and per_nent consistency checks by applying the S_SAF methodology are, in themselves, useful assessments about the reliability of the different data sources; by themselves the MSAFs may be considered "improved," consolidated data sources. However, the MSAFs remain at best an approffilmation of the structure of the Philippine economy. Besides providing the tool for the present analysis, the MSAFs show once more the advantages of the more permauent and institutionalized application of the social accounting framework may bring to improve the country's social and economic statistics. The major discrepancies and information gaps apparent in the existing data sources suggest that the unqualified use of single data sources may easily misguide both policy makers and academic researchers in understsmding Ph/lippine reality.

TABLEA.1

PhilippinesInput-Output Table1987 S_-Sec_or Agg_ 1

1.Agdcu_te 2. Mining 3. Light Manut 4.O_erManuf. 5.Cons_. 6.Sefvioes

20.4 0.1 12.3 14.1 0.0 12.0

0A 0.1 0.0 4.3 0.2 1.8

66.1 0.1 31.4 5.8 0.5 11.9

Toted Id Wages Deprec. Ind.tax NetOper.Surpl. T(3tal V.A. TotalOutpm

59.1 58.3 8.9 5`8 104.2 177.2 238.2

7.8 3.8 3.0 2.1 7.4 16.3 23.9

Employmerd

9974.0

Tnmsicliom_ Match( (Produoer Pdces) - A.q" (Inbillion lmsos)

Tot.M

6.4 29.6 3.1 39.5 1.1 13.2

4.7 1.9 0.0 29.7 0.2 7.4

8.7 0.2 11.8 39.1 21.0 67.2

106.7 32.9 58.7 132.6 22.9 113.6

78.3 0.5 135.1 28.9 8.8 230.3

0.0 0.0 0.0 0.0 0.0 57.6

115.9 92.9 30.9 18.3 5`0 5,9 9.0 17.0 31.6 20.9 76.8 62.0 192.0 155.0

43.9 17.7 12.6 3.1 17.5 50.9 94,8

148.1 69.0 14.8 19.4 172.0 295.8 444.9

487.4 215.5 50.4 58.6 353.7 679.3 1146.7

482.3

57.8

145.0 1011.0 650.0

847.0

7775.0

20826.0

dST

EXP

10"2 0.0 0.4 34.1 60.0 10.2

18.5 24.0 -12.5 -15`0 0.0 7.0

30.0 6.3 35.0 53.9 2.8 53.6

-99,2 7.2 -34.5 -,53.1 -22.8 -85.9

7.5 40.1 24.1 79.5 011 27.7

115.3

22.5

182.2 -288.4

179.0

..O

z Â˘/1 f_ f,n f,n

356

"q' 'qll''_-- "tIP

,_jo_

oo __o

°°°°°°

PHILIPPINE EXTERNAL FINANCE

.E .-_ _. oNo_o,--

° _

TABLEk3 PhiBppines Input.Output 1987 S_c_or Aogregm_T_i,_rk

p_ducerPdo.) - (A-I,q.q" pnwAonp_cm)

1.Agrk_ltum 2. Mining 3. IJjhtMaxuf. 4.O_erManuL ,S.Corse. 6.Sendem TotalId Wages De,pmÂ˘. Ind.Tax NetOlDer. Su_

20.1 0.1 10.5 11.3 0.0 11.4 53,4 55.3 8.9 8.8 t04.2

0.4 1.0 0.0 3.6 0.2 1.6 0.8 3.8 3.0 2.1 7.4

61.9 0.1 21.1 3.5 0.5 11,3 90.3 30.9 .'5.0 9.0 13.0

6.4 5.1 3.1 22.5 1.1 11,8 40.9 18.3 5,.8 17.0 _.2

4.7 1.8 0.0 25.7 0.2 6,3 38.7 17.7 12.8 3.1 17.5

8.6 0.2 9.2 36.0 21.0 50,6 134.6 8_.6 14.8 1g.4 177,0

TotalV_ I_ TotalOutpet

177.2 5.7 236,2

16.3 0.g 23.9

76.8 17.5 192.6

12,0 43.0 156.0

50.9 5.3 94.8

295.8 13.5 443.9

6?IE3 85.6 1146.7

9_'/4.0

145.0

1011.0

650.0

847.0

7775.0

20826.0

Emplo_

"l'oLkf i02.0 8.2 44.0 102.5 22.g 102,0 3_1.6 215,5 ,.50.4 50.0 353.7

75.3 0.5 125.9, 18.0 8.8 214.0 443.4

0.0 0.0 0.0 0.0 0.0 56,0 56.6 -

' '

r.'z %0

r,rl ¢D "13

(TABLE,_3 CONT.)

_Z r-

"13 "13

I'I

1.Agriculture 2.Mining 3.LightManuf. 4.OtherManor. 5.Conn. 6.Se_ Totaltd Wages

D_or_

Ind.Tax NetOper.Su_ To_dV.A. ]mixers To_alOe_ut Emldoymnt

10.2 0.0 0.4 -2.6 59.9 10.2 78.1

dST

18,5 9.0 -12.6 -16.9 0.0 7.0 5.0

EXP

30.0 6.3 35.0 53,9 2.8 53.6 181.6

F'D

-102.2 -7.8 A3.9 -102.5 -2Z9 -102.3 -381.7

7.7 39.7 24.0 79.5 0.1 28.1 179.1

TOT. DEM

236,1 24.3 192.6 155.0 94.8 444.5 1147.3

TOT. DOfdESDEM TIC DEMAND TD-M -0.2 0.4 0.1 0.0 0.0 -0.4 -0.1

-7.9 18.1 210.3 169.2 85.3 379.7 853.7

r'. _< .--I Z -z > z

APPENDICES 359

TABLEA.4

PhilippinesInput-Output 1987 Six-seoter Aggregate Technical, Input-Output Coefficients Matrix (A-M) 1 1.Agdou_lme 2. Mining 3. I..Ighl Manuf. 4.O1_Man_. 5.Con_. 6.8efviam Tolalkl Wages Ind.Tax NetOper.Suqd Toted V.A. ImFoCm TalalOuw EmldoY_

0.0549 0.0504 0.0445 0.0478 0.0002 0.0483 0.2260 0.2340 0.0276 0.0307 0.4411 0.7500 0.0240 t.0505

0.0158 0.0437 0.0505 0.140e 0.00_4 0.0664 0.2823 0.1575 0.1268 0.0882 0.3073 0._58 0.05_ 1.0(]00

0.3214 0.0412 0__NJ_9_ _ _ 0.0_27 0.1056 0.0_0t 0.0180 0.14,50 0.0024 0.0571 0.0587 0.0762 0.5105 0.3222 0.1804 0.1180 0.0261 0.(_2 0.04_) 0.1100 0.0704 0.2530 0_: _',_9___0.4003 O.Og07 0.2775 1.G¢05 1.0000

0,0405 0.0187 0.050_ 0.2712 0.0019 0.0663 0.4078 0.1863 0.1329 0.0529 0.1844 0.5366 0.0558 1.0500

0.0194 0.0(X)4 0.0208 0.0811 0.0473 0.1342 0.3031 0.2020 0.C, r3_r3 0.04,58 0.3875 0.6664 0.0304 1.0500

42.2183

6.0574

5.2505

8.935_

17.$1M

4.1047

Tot kl. 0.0590 0.05"/2 0.0_ 0.0894 0.0505 0.058_ 0.2328 0.1880 0.0440 0.0620 0.3085 0.5824 0.0748 1.0050 18.1814

TABLEkS

Philippines Input-Output 1987 Six-sector Aggregate Leontief MaMx[1- (A-M)]"-1andEmployment Linkages 1 t. AGl_ullure 2.Mhtlng 3.LIBhl MamJf. 4.OIh.MUuf. 5._. 6,Seh,ieN TolalBL

1.1187 0.0051 0.05Q2 0.0726 0.0543 0.0733 1.3314

2 0°0332 1.0529 0.0086 0.2003 0.0130 0.1018 1.4098

0.4085 0.0685 0.0780 O.C_r2i 0.0412 0.0315 1.1474 0.0552 0,014,5 O,_e_e_e_e_e_e_e_e_e__ _ 1.1_ 0,3415 0.0054 0.0143 1.01(]0 0.1068 0.1158 0.1152 1.7341 1.4709 1.5805

En_oymm Unkages

1.Agrloullum 2. Mining 3. LightManuL 4. 0ULManuf. 5. ConMr. 6. _ TOlaJ

Fowtard _L)

Back. weld

74,050g 8.8g_8 8.8t20 10.0340 9.8905 58.5804 23.2085

4g._ 10.7384 27.3129 11.5544 16.3361 23.9705 23.2085

Tolal (ETL)

Dim¢l

61.6847 422183 8.8158 8.06"74 18.0524 8.8018 10.7946 5`0W5 13.1135 &2360 26.7800 17.5104 23.2055 18.1614

indim¢

19.4664 2.7580 11.2805 5,7912 4.1T/8 9.;_635 5.0471

6 0.0456 0.0563 0.0328 0.1339 0.0568 1.1764 1.4517

Tolfl 1.'7535 1.1379 1.2958 2.0056 1.10_) 1.6882 8.9887

TABLEA.6 Philippines: Consumption Transformation Matrices, 1974, 1979, 1987 (shares in total)

= -_ i

Consump_on Transfonnaion Mat_ 1974 Wants-.-. Commoditie6 _

Food

Agriculture Mining Manufacturing

0.138 0.001 0.566

Con_.,energy Services TotaJ

Cblhmg HouskR &enecgy

Healll EducaL

Other

"ro_

10 NCR

11 Ok Urban

12 Rural

0.429

0,175 0.001 0.526

0.155 0.000 0.519

0.162 0.00,I 0.520

01100 0.00"I 0.532

0.011 0.314

0.010 0.307

0.008 0.2W

0.856

0,097 0.001 0.502

0.116

0.144

0.166 0.285

0.728

0.571

O.OOg 0.2_

1.000

1,000

1.000

Total

10 NCR

11 O_ Uroen

12 Rml

0.001

0.148 0.001 0.531 0.010 0.308

0.117 0.001 0,534 0.014 0.334

0.148 0.001 0.522 0.012 0.320

0,171 0.001 0.524 1.009 0.295

1.000

0,271

Consump_on Tmsl_rmmion Mat_ 1979 Wants--, Coa.nodities *

Food

Agr_ltum Mining Ma_ufac_dng Cocs_.,eneflly Sen,t_

0.282 0.001 0.665

Torsi

1.000

Clothing Housktg & enecgy

Hedh Educat.

0.523 1.000

0.052 1.000

0.517 0.048 0.412

0.164 0.836

0,138 0.008 0.853

1.000

"1'1

> _ m

(APPENDtX k.6 _.) Commmpziml Trazmfommzk_ Matl_,1987

Wants--,. Colnmodides .I.

Food

Clothin9 Hogekz0 &energy

Agdcultum Minbg Manufeotud_g _., energy Secvices Tolal

0.372 0.002 0._3

1.000

0.O6g 1.GO0

1.000

0.063 0.00_ 0.258 0.180 0.405 1.000

HeeJL'h EdueeL

0.164 0.836 1.000

Ogzer

ToteJ

10 NCR

11 Ogzer Ud_

12 Rurel

O.OO0

0.162 0.001 0.340 0.018 0.478 1.000

0.123 0._1 0.289 0.0t9 0.568 1.000

0.152 0._1 0.330 0.017 0.500 1.000

0.194 0.00t 0.379 0.019 0.407 1.000

0.098 0.(X_ 0.768 1.000

"Ig "13 m

362

PHILIPPINEEXTERNALFINANCE

TABLEA.7

CurrentTransferMntdces1997 1.RentsandRedistibutedPropertyIncome 10-12 Houu_olds Privale Ent. PubBo E_ Government RNI.d.Wodd

10-12 14 15 18 17

Total

16156 2858

2858

18755 7134

3443 16510 2"/581

14260

60832

21384

6166 .5,183 34138

Total _ i 161M 3443 16510 47_

6166

115,388

Totid

2.Subsidies, SocialSecudty andDirecttaxes 10-12 Houeholds Plbm Ent. PubUo Ent. Government Resl-of-Wodd

10-12 14 15 16 17

Tolal

134

42_ 0

4729 0 0 31061

4595

35790

18024

13880

1"17

18024

13860

311

3.OtherCurrentTransfers 10-12 HolmohoUs EnL PubioE_. Government Rell-01-Wodd

10-12 14 15 16 17

Toml

To(al

413

3811

10622

13846

1193

1822 225

429 42

183

471

413

2994

11815

158_

4.TotalCurrent Transfers

HowehoUs PdvaleEnt. Public Ent. Govemmnt ReC-ol-Wodd Tolal

10-12 14 15 18 17

10-12

0 2858 0 18463 42

18158 0 3443 26370 27581

547 7134 0 177 14260

26161 0 0 0 5566

10622 8166 0 11_ 0

21353

76558

22118

31727

17981

TOtld 53486 18158 3443 421g_1 47442 169729

TABLEA.9 Income by Source and Current Transfer: Diseggregation by Household Groups 1985Family Income andExpenditure Survey(FIES) No.ofFmit_ (_,mmm'l_) 10NCR '110thUrb+ HH 12RuralHH Total

Wages Entarpren. Remit. Inaome Abroad 766 1197 2003 3966

219 704 3104 4026

153 191 225 569

IncoÂ˘_) (inmillion pes_)

Wages Entarpren. Redt lnoome Abroad

10NCR 11Oth1._b+ HH TotalUrban 12RurelHH Total

38_12 41410 80222 45496 125718

12902 31011 43913 62964 106877

12931 10506 23438 12002 35439

Rents

25 22 7 54 Rents

2299 1163 3463 135 3658

latamt I_ 1 4 3 7 Intamt Inoome 47 210 257 334 591

Divid.

Soc Sec. Ber'_.

OthTrims _ HH

Total Househ.

12 45 47 104

135 252 733 1120

1311 2416 6121 9847

Di,_l.

See. See _nef+

OthTmns FromHH

Total Inoome

42 129 171 31 202

1070 2945 4015 1464 5470

7086 9345 10391 11420 27911

74953 35g16 171670 133906 305775

0 1 1 1

> z

Â˘pk

(TABLE A.6CONT.)

_' --o -I"

1988Family Income aad Expenditure Survey (FIES) No.ofFmnlles _omaeds) 10,11Urban 12Rural Total

Wages Entefi3een. Remit Income Abroad 2364 2442 4906

948 3155 4103

343 269 612

Rents 40 12 52

Income ('mmiEonpesos)

Wages Enteq)re_. Remitt income Abroad

Rents

10,11Urba. 12Rural Tots]

132714 76754 209468

3742 455 4197

550_ 79000 134091

27936 13731 41667

MSAF1987:Est_ Wages TotalHHIncome TranderPsymt_ Oisposa_e Income 10NCR 110_. Urb 12R.ml Total

tnte_esl Income 6 4 11 Inlemt lnoome 657 127 783

Dk,id.

Soc.Se. Benef.

1 1 2 Divid.

63 53 117

O{hTrans FromHH 314 650 964

Tolal Hour.

.._ zt"n

4079 8587 10666

__. z>. z

Soc.Se. Bend.

OthTrens FromHH

Total Incom

3885 1769 5655

16151 11442 27593

240443 183299 423743

Soc.Se. Benef.

_ Trans FromHH

To_l Income

3224 429 2795

800976 21353 579623

267 21 288

[)alaforMacmeconomicAcoour_ng Framework 1987

Enlerpme. Remitt Income Abroad

Rents

Interest Income

I_vid.

0 2858 -2858

34911

349t1

4729 18024 -13295

239278

308212

239278

308212

10622 42 10580

73871 78815 86582

52091 93901 162220

3876 3149 3597

0 0 0

18731 11784 4396

0 0 0

923 2542 1263

819 1081 1324

150311 191273

238278

308212

10622

34911

4729

3224

60()976

TABLEA.9

MSAF1987:Mapping ofHousehOld Transfers toandfromotherInstitutions (inmillionpesos) Expenditures Receipts

NCRHouNh. OZl_UCben HH RulalHoumbo_ P1tmte Enl. Pulzi¢ F.,t. Govemmnt Rest-of-World

10 11 12 14 15 16 17

TransfersReceipts bySource

8668 5453 2034

120 248 176

11685 970G 4771

3876 3148 3597

817

800

1440

6592 10

7552 13

43_ 19

To_

7219

8365

57_

TaxandS(x,Se_

6489

7419

4116

134

45_

Prope_kcome OtI_T_

817 113

800 146

1440 16156 212

413

18755 2811 10622

16156

547

TotalPrope_ Taxes Other RemitL Income Soc. Trend. Row Sec.

24,349 18556 10580 2858 0 18453 42

18731 11784 4396 2858

923 2542 1263

819 1081 1324

18024

429 42

3876 3148 3897

Tolal

24349 18556 10580 2858 O 18453 42

28161 10622

>. "ID

¢P, r,,n

TABLEA.10

-_-

Philippines: Flow-of-Funds Subnmtrices (unadjusted) TableA.lOa Fk)w.a_unde_ G0klandFmeign Curremp/Hoklbgend Deposb12,13 SmJrce_Use H(_sehlds Priventer Pubtealter Govmment Ceolra_ Pu_k_ PrMinin _nfotinin

Total

1 2 3 4 5 6 7 8 g

z 7

-14881 7528 316g

5325

-1

185

5325

-1

185

-4184

To_ 0 0 0 0 -148Sl 7528 316g 0 550g 0

z >" z m_

('I'ABLE/s,.10 CONT.) Ta, ble/LlOb FIow-ot-Fund¢ Foreign Loans an(Iothe_ FoceiBn Claims 14,15 Soum_t_U_ Househlds Pdvente_ Publentef Govmment Cent_Llbk Pu_inin Pdvfin_ lnfofinin Restwodd Total

1 2 3 4 5 6 7 8 9

g g867 18337 _ 766 -22952 2881

-1G072 -1G072

-19_2 -19_12

10317 10317

Total 0 9867 18337 -5683 766 -22952 2881 -8687

3216

TableA.10c Flow-of-Funds: Oorneslic Currenc_ 16 Source_Use

Ho_sehlds Pdventer Publenter Govmment Cenbalbk

1 2 3 4 5

Pubflinin Prh_nin Infofinin Restworkl

6 7 8 9

Totel

31500

-350

-23264

-2017

1287

Total

7229 z

31500

.350

-23264

.2017

1278

¢P,

f,_

(TABLEA;$OCONT.)

== "o -r

TableA.10d Flow-of-Funds: DemandDeposits17 Source_Use

Total

--o m

Househlds Priventer PtJbleeter

1 2 3

Govmment Cenh'albk

4 5

Publlinin PrMinin

6 7

le_ofinJn Restwodd

8 g

Total

15703

12037

3627

-764

19330

-764

.282

115 0

-282

12152

-72

27685 -167 2863

-72

30381

TableA.10e Flow-of-Funds: Savingsand`timeDeposits 18 Source_.Use Househlds Pfiventer Pub_eeter Gownment Cenixalbk Publfinin PrkCmin Intofinin Reslwodd Total

1 1 2 3 4 5 6 7 8 g

-t3132 7087

186

2533

0 -757

-6045

2533

-757

186

14,92

1032

1492

1032

Total

0 -12946 11387

z > "-tl

z > z

(TABLE AIO CONT.)

TableA.10f Flow-ol-FundÂ˘ Deposit Subslitutes 19

Sooroe_Use Househlds Pdventer P.blenler Govmmea! Centratbk Publfinin Privfinin Info_mi_ Restworld

1 1 2 3 4 5 6 7 8 9

Total

-15380

10908

4881

-15380

10908

4881

0 O O 0 0 0 2128 0 0

1719

Total

1719

Table/L10g Flow-of-Funds: Domestic l_o_ns 20 Souroe_Llse Househlds Privemr Publenler Govmment Centralbk Publfinin Privfinin Infofinkt Restwodd Total

1 1 2 3 4 5 6 7 8 9

27981 -22986

A1820

27891 -648O6 -8327 2871 0 -1855 -2082 0 0

-8327 2871 7698

41820

7698

-3731

-9187

-39952

42034

20106 -2082

25101

Torsi

-60308

> z m m

('TABLEAIO CONT.)

o TableA.lOh Flow-of-Funds: Invesl_ents,Secodties21

SourceWse

"T r6

. 7

Totat

_-o z r-13

House_flds Priventer Pubtenter Gownmen| Centralbk

1 2 3 4 5

Publfmin Pdvfinin

6 7

InMinin Restwodd

Total

4625

0 5208 8453 • 49253 -22742

-938 0

-19419 289

5208 17816 -119

8453 11408 -3634

-1795

20029 -21819

-17929

-552 28g

. 22905

19861

-3634

0 0 -19724

-1790

-263

3687

21042 •

TabteA.lOi Flow-of-Funds: lesurance Reserves22 Sou_oe_Use HouseMds Priventer Publenter Govmment Ce_albk Pubtfinin Privfini_ lefofinin Restwodd Total

1 1 2 3 4 5 6 7 8 9

0 0 0 0 0 1120 o2321 0 0

1120 546

1666

-2889

Total

-1201

-_ z > rz > z

(TABLE A.10CONT.) TableA,10j FIow-oI-Funds: TrustFunds23 Soul_ce_Use Househkls Priventer Publenler Govmment Centralbk Pubffinht PrMinin Infofinin Aes_wodd

1 1 2 3 4 5 6 7 8 9

Total

241 620

-183 .427

861

-610

0 0 0 0 0 58 t93 0 0

7otaJ

251

TableA.lOk Flew-ef-Fund_: TradeC_ed_s 24 Sou_oe_Use Househlds Priven_r Pub leeter Govmmeal Cen'eralbk Publfinin PrMinin Infofinin Res_erld Total

1 1 2 3 4 5 6 7 8 9

2 -1443 18338 1143 2527

4206 1143 2526

286

-1443 22793 2286 5053 0 741 0 0 0

-37

741

21306

7875

286

-37

Total

> -,o z _ c_ ua

(TABLEA10 CONT.) TableA 101 FIow-of-Ftmds: TaxesPayable25 Source_Use

Houseklds Prive_lter Publenter

1 2 3

Govmment Centralbk Publfinin

4 5 6

Privfinin Infofi.izz Restwodd

7 8 9

Total

-401

._ I_ r6

808

0 808 0

134 .2916

â&#x20AC;˘0 134 -3318

-1

774

-401

Total

-1200

774 0 0 0

-1

TableA,lOm Flow-of-Fu_ls: Inter-Financial Claims26 Source_Use Househlds Priventer Publenler Govmment Cenb'albk Publfinin Privfinin Infofinin Reslwodd Total

1 2 3 4 5 6 7 8 g 0

0 1500 1672

-5240 0 4909

-4000 5397 0

3172

-33t

-317

To_ 0 0 0 0 -9240 6897 6372 0 0

4029

z _< z > .LJ

(TABLEA.IOCONT.) TableA.lOn Flow-ol-Funds'. _ntar-Govern mentalClaims27 Source_Use Househkls Pdventer Publenter Gownment Cenlrslbk Publfinin Pmfinin lnk>finin Restworld

1 2 3 4 5 6 7 8 9

Total

-169

5437 3378

-169

8815

Total 0 0 5437 3209 0 0 0 0 0

8646

TotaJ

TableA/i0o Flow-of-Funds: Misoellaneous 28 Source_Use Househlds Priventar Publentar Gownment Centralbk

1 2 3 4 5

Publ{i.in Privfinin Infofinin Restwodd

6 7 8 9

Total

46027 0 500 0 25247

0 0 0 0 1453

0 -10119 5337 -1744 0

1788 -41t6 0 0 0

0 0 0 0

-33388 70670

0 0 0 0

1453

30756

0 3068 0

71 -64367

7478

3068

-2"328

47815 -14235 5837 1324 23732

-2968

-33317 6303 0 0

-2968

3"/'45g

> "_

(TABLEA10 CONT.)

'_ TableA.10p Row-of-Funds: Sta_tiad Discrepancy 29

..Q r-

"X3

Souroe_Use Househ(ds

2 1

Priventer Publenter Govmmen! Centralbk Pubffmin

2 3 4 5 6

Privfinin InlofV,in Re_twodd

7 8 9

Total

_. -_ z

> z

A 101

Tabbe A,10q Flow_-Fu_ls'. Sublotal Soume_use Ho_sehlds Pdventer Publenter Govmment C,erdxalbk Publfinin Pdvfinin I#ro4'inin ReSworld Total

1 1 2 3 4 5 6 7 8 9

__ z

Total

0 7867 18337 5683 .14115 -15424 6050 0 0

74263 -40365 32023 56027 12683 -91630 319,56 0 -1178

-968

73779

0 5208 0 17816 47084 -11771" -3500 0 0

44584 -23482 10096 't3915 _ 228 -52095 0 0

0 4206 1143 5425 -3984 741"6 4124 0 0

0 1094 5437 3378 .1_i435 .20520 774 0 O

0 -10119 -2390 21156 -21819 -35619 72342 0 -9747

1788 -4'P53 0 0 -7329 -40504 4608 0 -1933

27981 -22986 0 0 -1048 24564 -1"38 0 10502

0 O 0 0 0 0 0 0 0

54938

18595

18330

-21272

13204

-47523

37161

REFERENCES

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THE AUTHORS

MARIO B. LAMBERTE is the Vice-President

and coordinator

of the

Monetary and Banking Policies Research Program at the Philippine Institute for Development Studies. He received his Ph.D. at the Univer_ sity of the Philippines School of Economics and took his post_doctoral studies at the Stanford University, Department of Economics. His areas of expertise include money and banking, and international finance. His numerous published papers include: _Trade in Banking Services: ASEAN Countries," Services in Asia and the Pacific Vol. I (UNCTAD, Geneva, 1990); "Social Adequacy and Economic Effects of Social Security: The Philippine Case," ASEAN Economic Bulletin Vol. 3 (July 1986); and "Production Technology of Colnrnercial Banks," Philippine Review of Economics and Business Vol. XXI (1984). He was also editor of the 1990 issues of the Philippine Economic ,]o11.rnal of the Philippine Economic Society. JOSEPH Y. LIM is an Associate Professor and Research Director at the School of Economics, University of the Philippines. He finished his Ph.D. in Economics at the University of Pennsylvania and his M.S. in Operations Research at the Massachusetts Institute of Technology. He did his p0st-doct0ral Kingdom.

research

study

at Cambridge

University,

United

ROB VOS (Ph.D., Free University, Amsterdam) is a Senior I_cturer at the Institute of Social Studies. His rosin teaching and research areas include international finance, stabilization policies, income distribution and poverty, social accounting and genera] equilibrium modelling. His studies have been published widely by development economics and international finance journals. His recent books include (with E.V.K. Fitzgerald) F/nanc/ng Economic Development: A Structural Approach to Monetary Policy (Gower, Aldershot U.K., 1989); (with J. Alarcon, et al.) The Social Accounting Frameworh for Development (Avebury, Alde_ shot U.K., 1991); and The World Economy Debt and Adjustrnent: Structural Asymmetries between North and South (forthcoming,, Macmillan, London, 1993). JOSEF T. YAP is a Research Fellow at PIDS. After receiving his Ph.D. in Economics from the University of the Philippines specializing in monetary economics and macroeconometric modelling, he spent a year

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PHILIPPINE EXTERNAL FINANCE

at the University of Pennsylvania for a post-doctoral program. He is the coordinator of the ASEAN Macroeconomic Outlook Project which is tasked with building a multicountry model with macromodels of ASEAN economies at the core. ELIZABETH $. TAN is a Research

Associate

at PIDS. She holds a Master

of Arts in Economics degree from the School of Economics, University of the Philippines (UPSE). She is also a part-time lecturer at UI_E. Her research specialization is on the micro aspects of trade reform and liberalization. MA. SOCORRO V. ZINGAPAN was a Research Associate at PIDS. She earned her Bachelors degree in Business Economics (cum laurie) and Master of Arts in Economics at the University of the Philippines. Some of her published works relate to the off-balance sheet activities of commercial banks and the effect of Central Bank policies on the behavior of money markets. At present, she is a Ph.D. candidate working as a freelance researcher on a project in health care financing jointly coom dinated by PIDS and the Department of Health.