Monetary Tools: A Choice Between Traditional and Nontraditional

Vol. XVIII No. 1

January - February 2000

ISSN 0115-9097

The Philippine economy in 2000:

Prospects and key issues

by Josef T. Yap*

E

conomic recovery in the Philippines in 1999 was anemic. While gross domestic product (GDP) posted a moderate growth rate of 3.1 percent (see Table 1), the disaggregation of economic activity indicates weak fundamentals. Only the performance of the agricul-

ture sector was remarkable but given the better weather conditions, this was largely expected. The industry sector was virtually flat while services grew only at

Editor's Notes Chinese astrologers predict that the year 2000 will be a prosperous one as it is the year of the dragon, the most fortunate among the 12 animal signs in the Chinese zodiac. Thus, predictions were rife at the start of the Chinese New Year that “money and business in 2000 will be good”1 and financial activities will be very successful because the dargon leaves wealth and money in its wake. But the Chinese also note that there is a downside to these achievements: disaster will come in waves alongside with fortune.

Such ironic equilibrium of bad and good is a reflection of the dragon’s character: “ambitious for power, righteous and willing to fight

to page 4

What's Inside 6

Is there a credit crunch in the Philippines?

8

Monetary tools: A choice between traditional and nontraditional

9

What is wrong with the 1997 GSIS Act?

12

Corporate news: 1999 PIDS sportsfest

16

Mission 1999 and beyond: Opening a direct channel with legislators and local executives

a modest rate. The manufacturing sector, however, after three consecutive years (1996-1998) of slower growth or decline, finally posted a higher growth rate compared to the previous year.

The discouraging performance of the Philippine economy becomes even more pronounced when compared to the recent performance and prospects of other East Asian economies. Table 2 reports the estimates and forecasts of Consensus Economics, Inc. for the years 1999 and 2000 for China, Singapore and the five economies most severely affected by the recent financial crisis.1 Only Indonesia is estimated to have a lower GDP growth than the Philippines in 1999 but by 2000, both economies would have the same to page 2

*Senior Research Fellow, Philippine Institute for Development Studies (PIDS). The usual disclaimer applies.

1 The estimates and forecasts are as of December 1999. The data, along with the Malaysia and Thailand manufacturing sector data (later cited), were obtained from the Asia Recovery Information Center (ARIC) website.

DEVELOPMENT RESEARCH NEWS

Table 1:

January - February 2000

Selected Macroeconomic Indicators, Philippines, 1992-1999 and Forecasts for 2000 (Annual growth rates and share to GDP, with the latter shown in italics)

Gross National Product Gross Domestic Product Agriculture, Fishery and Forestry Agriculture and fishery Forestry Industry Sector Mining and quarrying Manufacturing Construction Electricity, Gas and Water Service Sector Transport, communication and storage Trade Finance Ownership of dwellings and real estate Private services Government services Personal Consumption Expenditure Government Consumption Capital Formation Exports (nominal $) Imports (nominal $) Inflation (average) 91-Day Treasury Bill Rate (average) Nominal Exchange Rate (average)

Sources:

2

1992

1993

1994

1995

1996

1997

1998

1999

2000 Forecast

1.7 0.4

2.8 2.1

4.6 4.4

4.9 4.7

7.3 5.9

5.2 5.2

0.1 -0.5

3.5 3.1

4.5 3.8

0.1 22.75 0.4 22.17 -12.0 0.58

2.0 22.75 2.5 22.28 -15.7 0.48

3.4 22.36 3.8 21.98 -16.3 0.39

1.2 21.55 1.9 21.32 -37.1 0.22

3.9 21.13 3.9 20.91 7.7 0.22

2.8 20.69 3.3 20.56 -39.0 0.12

-6.5 19.42 -6.5 19.32 -20.9 0.10

6.8 20.08 6.9 19.99 -16.3 0.08

3.0

-0.3 34.41 8.1 1.60 -1.7 25.03 6.1 5.04

1.6 34.25 1.1 1.58 0.7 24.69 5.7 5.22

5.8 34.71 -7.2 1.40 5.0 24.84 9.3 5.45

6.8 35.38 -5.6 1.25 6.8 25.34 6.6 5.55

6.4 35.58 1.4 1.20 5.6 25.27 10.9 5.81

6.2 35.92 2.9 1.16 4.2 25.05 16.4 6.42

-1.8 35.42 3.3 1.20 -1.0 24.90 -8.5 5.91

0.1 34.41 -6.9 1.06 1.3 24.48 -4.2 5.49

3.4

0.7 2.74

2.8 2.76

13.9 3.01

13.0 3.25

7.5 3.30

4.8 3.29

3.4 3.41

2.1 3.38

4.5

1.0 42.84 1.4 5.82 1.6 15.27 0.4 4.06 0.7 5.64 0.6 6.89 0.2 5.15

2.5 42.99 2.5 5.85 2.4 15.32 2.4 4.07 1.8 5.62 2.9 6.94 2.9 5.18

4.3 42.93 4.2 5.84 4.0 15.26 5.5 4.12 2.9 5.54 4.3 6.94 5.5 5.24

5.0 43.07 5.8 5.90 5.5 15.39 7.3 4.22 3.1 5.46 4.3 6.91 3.8 5.19

6.4 43.29 7.4 5.99 5.5 15.34 13.7 4.54 4.2 5.37 5.0 6.86 5.9 5.19

5.5 43.40 8.2 6.17 4.0 15.16 13.0 4.87 3.8 5.30 4.9 6.84 2.6 5.06

3.5 45.16 6.5 6.60 2.5 15.61 4.5 5.12 1.6 5.41 4.7 7.19 2.6 5.23

4.0 45.52 5.1 6.73 4.5 15.83 1.9 5.05 0.5 5.28 6.0 7.39 3.3 5.23

4.5

3.3 76.86

3.0 77.06

3.7 76.38

3.8 75.59

4.6 73.69

5.0 73.53

3.5 76.00

2.7 75.41

3.0

-0.9 7.60

6.2 7.85

6.1 7.96

5.6 8.02

4.1 7.77

4.6 7.74

-2.1 7.56

5.5 7.71

5.0

8.4 21.09

7.9 22.11

9.0 22.93

3.7 22.65

13.3 23.81

11.6 25.26

-16.4 21.13

-2.5 19.84

7.0

11.1 20.5 8.9 16.0 25.5

15.8 21.2 7.6 12.4 27.1

18.5 21.2 9.1 12.7 26.4

29.4 23.7 8.1 11.8 25.7

17.7 20.8 8.5 12.3 26.2

22.8 14.0 5.1 13.1 29.5

16.9 -18.8 9.7 13.4 40.9

19.5 4.1 6.7 8.9 39.1

18.0 15.0 7.0 9.5 40.6

National Accounts of the Philippines, National Statistical Coordination Board Selected Philippine Economic Indicators, Bangko Sentral ng Pilipinas Forecasts of J.T. Yap

0.0 3.0 5.0

DEVELOPMENT RESEARCH NEWS

Table 2:

GDP Growth Rates, Asian Prospects

Countries

1998

1999

2000

China Indonesia Korea Malaysia Philippines Singapore Thailand

7.8 -13.2 -5.8 -7.5 -0.4 0.3 -9.4

7.3 0.1 9.4 5.0 3.0 5.4 4.2

7.5 3.9 6.5 5.7 3.9 5.7 4.9

Source: Consensus Economics, Inc. forecasts, December 1999.

growth rate. Meanwhile, the V-shaped recovery of Korea greatly weakens the argument that the essence of the crisis was domestic structural fragility brought about largely by crony capitalism.

Economic growth for most of these countries emanated mainly from the industry sector. Manufacturing value added in Malaysia, for instance, grew by 9.7 percent in the first three quarters of 1999. In contrast, the Philippines just managed to eke out a 1.3 percent expansion for the whole year.

For Thailand, its manufacturing index rose by 9.6 percent in the first nine months of 1999 while a similar figure for the Philippines shows a growth of only 3.3 percent. These data indicate that recovery in Malaysia and Thailand is more robust and sustainable.

Two things have become rather clear over the past two years. One, the primary reason that the Philippines was spared the harshest effects of the Asian financial crisis was because it experienced relatively less foreign capital inflows prior to the onset of the crisis. It had very little to do with superior economic policy or structure, particularly a sounder financial system. Two, structural problems were holding back economic growth even at the time President Ramos was proclaiming the Philippines—rather prematurely—as the

3

January - February 2000

new tiger economy of the region. These same problems have likewise prevented the economy from recovering more rapidly from the crisis. The structural bottlenecks were discussed in an article in this newsletter last year (DRN January-February 1999). Fresh insights will be given in this issue.

Recent economic performance The three sectors hardest hit by the Asian financial crisis—construction, financial services and real estate— continued to languish in 1999. The construction sector further contracted while the other two sectors posted significantly lower growth rates. Manufacturing was also adversely affected by the crisis, especially in 1998, but this sector was already experiencing a deceleration as early as the fourth quarter of 1995. Since it is difficult to disentangle the effects of the crisis and the contribution of existing structural problems, a meaningful statement on the relative weights of these two factors affecting manufacturing performance is not possible.

covery in the area of retail trade, which is related to the rebound in the agriculture sector and growth in food manufacturing.

Several macroeconomic indicators, meanwhile, have double-edged interpretations. For example, for the first time since 1973, the Philippines posted a surplus in the trade balance account.

One reason is the continued expansion in exports (in nominal dollar terms), which eased the pressure on the peso to depreciate and helped contain inflation. Imports, however, contracted for a second consecutive year, an indication that there is still a great deal of idle production capacity. And considering the fact that a large part of the importation was in support of the continued rise in exports, one can easily grasp the severity of the situation.

Interest rates averaged 10.1 percent but for the most part of the year, the benchmark 91-day Treasury Bill rate remained below 9 percent. One reason for this, however, is the continued sluggish demand for credit as investment remains to be held back due to excess capacity and weak consumer demand. For the first 10 months of 1999, outstanding domestic credit in nominal terms contracted by an average of 3.1 percent. On the supply side,

The agriculture sector swiftly recovered from the 1998 El Niño weather disturbance, with its growth rate having spillover effects on the food manufacturing sector in terms of both supply and demand. Higher incomes in the rural sector boosted demand for food, which was met with the increase to page 4 in supply. The food manufacturing sector, which comprises about ...the primary reason that the Philippines was 10 percent of spared the harshest effects of the Asian fiGDP, thus grew by 5.7 percent in nancial crisis was because it experienced rela1999. tively less foreign capital inflows prior to the The services sector grew at a modest rate of 4 percent. Its growth was driven largely by the re-

onset of the crisis. It had very little to do with superior economic policy or structure, particularly a sounder financial system.

DEVELOPMENT RESEARCH NEWS

Economy 2000...

From page 3

commercial banks continue to be wary of lending to high-risk borrowers.

In the meantime, despite the rapid rise in fuel prices in the latter part of 1999, inflation was lower than the initial government target of 7.5 percent. This was largely due to improved agricultural production, which stabilized food prices. The low inflation rate, however, is also related to weak consumer demand.

On the expenditure side, growth in private consumption fell from 3.5 percent in 1998 to 2.7 percent in 1999, underlining the lack of consumer confidence in the economy. Demand for money, however, started picking up in the latter half of 1999 indicating a possible turnaround. Investment spending contracted for a second consecutive year, putting a constraint on output

Editor's...

From page 1

and sacrifice others for [the sake of] law and justice” yet very much capable of massive destruction. Thus, the year 2000 is foreseen to be a mixture of ups and downs and both good and bad major events. Achievements as well as failures will be experienced depending on how things are run. Overall, astrologers say that the dragon fashion of doing things the big way will have much impact on things to come in 2000.

Although things are astrologically foreseen to improve, the end result still lies within the planned actions and/or decisions of major players. As reiterated in another Chinese astrology website: “While fate remains to be largely indomitable, you still have control over your decisions.”2

4

January - February 2000

growth in the medium-term. Government consumption responded to pump priming and expanded by 5.6 percent.

Key issues

growing fiscal deficit and the ebb in investor confidence especially after the revival of the issue of cronyism. Concern over the fiscal deficit—which was recorded at P120 billion in 1999— would have been less if this resulted in pump priming of the economy. Unlike in other countries, however, the fiscal stimulus in the Philippines was largely muted. While the National Income Accounts reported a 14.2 percent increase in public construction, this did not, however, provide the needed boost to private expenditure. For one thing, the deficit was as much a result of a fall in revenues as a rise in spending. And two,

The discussion in last year’s outlook centered on the ways to address the country’s low labor productivity.

Apart from the usual recommendation to increase the investment rate, measures at the microeconomic level— a well-defined technology policy, measures to improve social cohesion, and the need for bureaucratic reform (or more effective governance as is the common parlance)—were also presented.

These issues re...despite the rapid rise in fuel prices in the main relevant latter part of 1999, inflation was lower than today.

Attention, however, has been diverted to the

the initial government target of 7.5 percent.

This was largely due to improved agricultural production...

In the local scene, Filipinos have high hopes that the incoming year will bring everyone good luck and prosperity despite the sequential scores of unfortunate events that struck the economy. The start of the year, therefore, brings in great expectations for more effective solutions to address every major problem that has beset the Filipino nation for years.

Amidst these expectations, we face the big questions: What’s up for year 2000? Will the Philippine economy be any better? Being an optimistic people, we cross our fingers and hope that good things will happen this year —the Y2K bug and other problems notwithstanding.

If foreseen trends in the international scene are any indication of the way the Philippine economy will go, then, there is reason to look forward to the offerings of the new year.

In this regard, we feature in this first issue for 2000 an article by PIDS Senior Research Fellow

Dr. Josef Yap who shares anew his projections for the coming year. Dr. Yap identifies the sectors that will be largely affected by movements in the world market and recommends measures that should be taken to address the present pressing problems in the country such as the decline in investors’ confidence.

In the final analysis, then, where and how our economy will be by yearend of 2000 will depend on how well our socioeconomic and political decisions/policies are played out by the major actors in the national arena. As the saying goes, "We make our own fate." DRN

2000 - The Year of the Dragon. Available from World Wide Web: (http://www.kenaz.com/ notes/chinese_2000).

2 Main page (http://www.chinese-astrology.com).

1

DEVELOPMENT RESEARCH NEWS

a significant portion of expenditures was allocated to the settlement of accounts payable, implying that no new projects were associated with these expenditures.

5

There are also several specific measures that must be addressed by the government over the course of the year to improve investor confidence.

January - February 2000

This would include efforts to increase transparency, enhance protection of investors’ interest, and strengthen regulation. Many of the reforms, however, are included in two pieces of legislation which are still pending in Congress—the Revised Investment Companies Act and the Securities Regulations and Enforcement Act. Again, faster action on the part of Congress is required.

One, the financial sector must be Despite a projected lower deficit strengthened through better superviin 2000, the issue of sustainability must sion and monitoring. Legislation— be addressed. Slower output growth through amendments of the General and the sharp nominal depreciation of Banking Act and the New Central Bank the peso now constrain fiscal flexibility as does a high initial level of debt. This is quite prob- Infrastructure is still one area where the government needs lematic in a context where ad- to channel more of its resources. ditional resources need to be channeled to key areas such as infrastructure, where the Philippines lags behind other East Asian countries badly, and to poverty programs. The need to drastically improve tax administration has become as important an issue as ever before.

To address the issue of investor confidence, President Estrada created the Economic Coordinating Council (ECC) and the Economic Advisory Council. The ECC, which is composed mainly of the government’s top level economic managers, is tasked with “ensuring the consistency and complementation of all issuances, pronouncements, plans, programs and projects, and proposed legislation with the DTI country’s economic reform direction to further promote deregulation, liberalization, free and fair market competition, and increased private sector participation.” On the other hand, the advisory council is composed mainly of senior businessmen and industrialists whose mandate is to provide guidance in the formulation of economic programs. It is still too early to determine whether these two councils will be able to help modify the perception of businessmen but the ECC was able to facilitate the passage of the Retail Trade Liberalization Act.

1998 Annual Report

Act which are supposed to enhance the supervisory and enforcement powers of the Bangko Sentral ng Pilipinas (BSP) and promote its independence— remains pending. This must therefore be hastened. The reforms are also geared toward improving prudential standards in the banking system and encouraging competition in the financial sector.

Related to reforms in the financial sector are measures geared towards the development of the capital market.

Two, to promote efficiency and at the same time boost revenues, the government must complete the privatization of the National Power Corporation (NPC) and the National Food Authority (NFA) as soon as possible. The government must, however, carry out these programs without putting itself at a due disadvantage. For example, the issue on the liabilities of the NPC must be settled fairly.

And three, the government may consider a review of the reforms initiated under the Philippines 2000 program of the Ramos administration to see whether the reforms implemented had their desired effect.

In the 1992-98 Medium Term Philippine Development Plan, the economy was supposed to achieve an 8.5 percent GDP growth rate by 1998. In that year, however, GDP contracted by 0.5 percent. The deviation between the target and actual figure has largely been attributed to the Asian financial crisis and weather disturbances although of late, the slow pace of reforms has been prominently mentioned.

The Ramos administration was hailed for the speed and scope of its reform program. Still, it can never be overemphasized that the manufacturto page 13

DEVELOPMENT RESEARCH NEWS

I

n the past several months, the Philippine economy has been showing signs of recovery and improvement from the regional financial crisis that hit the country more than two years ago. Despite this, however, there are still a number of complaints on the unavailability of credit. While people are asking banks to lend more, policymakers and economic analysts, on the other hand, are worried that the banks’ unwillingness to lend could weaken the vigor of the country’s economic recovery.

What is the reason for this situation? Is there a so-called credit crunch in the country? What is a credit crunch in the first place? What causes it?

Defining a credit crunch Two sources define credit crunch as the result of (a) a restricted supply of credit below the range usually identified with prevailing market interest rates and the profitability of investment projects 1 and (b) the unwillingness of banks able to lend to creditworthy customers. 2 A credit crunch is always associated with a decline in the quantity of credit. However, not every decline in the quantity of credit or bank loans is a credit crunch since the decline may be attributed to the interaction between the supply and demand for credit. Clearly, credit crunch is a supply side phenomenon.

In view of this, there is a need to determine whether the interactions or movements are the results of a shift

6

January - February 2000

Is there a credit crunch * in the Philippines?

by Mario B. Lamberte**

from the supply or demand side before a situation is identified as a credit crunch. For all we know, the situation may be a credit slowdown, resulting from shifts from the demand side or from the combined effects of both supply factors and demand considerations.

One may ask, though, why there is a need to distinguish a situation as the result of either a credit crunch or a credit slowdown. Does it make any difference?

The answer is Yes. We have to differentiate the two phenomena not only

because their roots vary but also because—and more importantly—each one requires a different set of policy prescriptions.

Credit supply and demand What factors cause the decline in the supply of credit?

One is disintermediation wherein people withdraw their money from banks and invest them in other instruments. With less money to lend to their customers and given the same demand, banks have to increase their interest rate and ration out others who cannot afford the new rate.

Two is regulatory policy. Tightening regulatory standards like past due

Banks ration out bor-

* Highlights of the Pulong Saliksikan on credit crunch presented last 25 August 1999. ** Acting President, Philippine Institute for Development Studies.

1 US Council of Economic Advisers, 1992.

2 Hadjimichalakis and Hadjimichalakis, 1995.

rowers when they cannot determine risky transactions from nonrisky ones.

DEVELOPMENT RESEARCH NEWS

loans and general loan loss provisions increase the marginal costs for banks, making them more reluctant to lend.

Moreover, credit rationing in the credit market is prevalent simply because of asymmetric information wherein there is unequal level of information among the concerned parties. Since banks cannot determine which transactions are risky and which are not, they tend to tighten up their lending decision and ration out more borrowers. Therefore, a tight monetary policy which can shift the supply curve upward combined with an aggravated asymmetric information exacerbates the credit crunch situation.

On the other hand, a downturn in the economy may induce a decline in the demand for credit. Firms which experience a sharp decline in the demand for their goods have lower productivity and a bigger need to borrow more capital. With more borrowers but with basically the same level of credit supply, the amount of money to be loaned eventually declines. This decline in credit, however, cannot be attributed to a credit crunch but to cyclical factors.

Figure 1.

7

January - February 2000

Detecting a credit crunch A necessary condition to detect the existence of a credit crunch during a certain period is a contraction in the quantity of credit. When the credit ratio, or the growth rate in the ratio of commercial bank loans to GDP, becomes negative for at least two consecutive quarters, this can be associated to credit crunch. However, aside from this, there should also be a corroborating evidence or sufficient condition that must exist before a situation is defined as a credit crunch episode.

Four conditions may be described as providing a possible corroborating piece of evidence to satisfy its definition. These are: v Real lending rate must be rising during a credit crunch episode since a drying up in the supply of bank loans, accompanied by an unchanged demand for bank credit, causes a rise in interest rates. v The spread between lending rate and risk-free assets should be widening during a credit crunch period since banks are not motivated to lend especially in times of credit contraction.

v Bank intermediation spread should be widening during a credit crunch period due to a reduction in banks' willingness to lend resulting from the imposition of tighter regulatory standards. v Credit rationing is intensified by banks during a credit crunch period as a result of an aggravated assymetry in information, especially during periods of uncertainty.

The existence of any of these four corroborating conditions is sufficient for the occurrence of a credit crunch.

In this regard, what did the empirical data show?

In our examination of the macro data, we noted that the indicators in the first three conditions outlined as corroborating evidence were on a decline during the period when the credit ratio was contracting. Based on Figure 1, real lending rate declined after the fourth quarter of 1997 while the spread between the lending rate and risk-free assets narrowed out. Except for the first

to next page

Growth rates of commercial bank loans (as % of GDP), real lending rates, spread between real lending rates and 91-day T-bill, and spread between real lending rates and time deposit rate (First quarter of 1997 to second quarter of 1999) & Time Deposit Rate, 1997.1-1999.2

Real lending rates & Spread 14

Growth rates 30 25

12

20

10

15

8

10 5

6

0

4

-5 -10

2

-15

0

-20 1997.1

1997.2

1997.3

1997.4

1998.1

1998.2

1998.3

1998.4

1999.1

Spread:Lending rate & 91-day Tbill

Spread:Lending rate & Time deposit rate

Real Lending rate

GR: KBs Loans Outstanding / Nom GDP

1999.2

DEVELOPMENT RESEARCH NEWS

Credit...

From page 7

quarter of 1998, the spread between lending rate and time deposit rate had not widened since the outbreak of the financial crisis.

Thus, it is safe to conclude that none of the three sufficient conditions for a credit crunch period was satisfied.

The decline in the quantity of bank loans during this period may thus be attributed to the normal cyclical phenomenon due to a slump in the economy.

Regarding the fourth condition, meanwhile, two types of credit rationing were examined. The first is broad credit rationing wherein all borrowers are denied of credit while the other one is selective or sectoral credit rationing

C

redit crunch is not an operational problem, which could easily be solved by increasing the supply of credit.

The credit crunch issue goes beyond that for it both challenges macroeconomic policy and questions the traditional monetary policy framework of any economy at the same time.

The traditional monetary framework assumes that the movements of credit in the economy reflect the movements of the monetary aggregates or money supply. Hence, traditional monetary policies can be implemented to confront business cycle problems.

On the other hand, the credit view framework assumes that credit flows may not actually move together with monetary aggregates such that there might be disruptions in the credit market that will have an impact on economic activities. In other words, even

8

wherein only some specific groups of borrowers are denied of credit.

A recent survey of 541 firms conducted by the National Statistics Office (NSO), with financial assistance from the World Bank (WB), assessed the impacts of the Asian financial crisis on the manufacturing sector. It revealed that a majority of the firms surveyed have continued access to credit from a bank or other financial institutions during the crisis. Based on the average debt-equity ratio of firms, banks were able to classify risky borrowers from nonrisky borrowers on the basis of their customers’ debt exposure. These data confirm that banks did not practice broad credit rationing.

While banks have a tendency to discriminate against small firms and nonexporters and favor large firms and exporters during a credit crunch ac-

January - February 2000

companied by currency depreciation, the results of the NSO survey conducted did not show this trend. In fact, the proportion of exporters denied of bank loans had increased even more than that of the nonexporters. Likewise, both small and large firms experienced a doubling in the proportion of their denied bank loans. These results indicate that banks did not practice sectoral credit rationing during the crisis.

Accordingly, the asymmetric information problem was not aggravated during the financial crisis from the point of view of broad and sectoral credit rationing.

What is the verdict?

None of the four indicators mentioned earlier therefore satisfies the to page 14

Monetary tools: A choice between traditional and nontraditional if a correct monetary policy is in place to address money supply movements, this will be ineffective since money supply and credit flows do not move together as assumed. This therefore indicates that there is a need for nontraditional monetary tools.

In countries suffering from credit crunch, some suggested nontraditional monetary tools include the unlimited and unconditional provisions of domestic liquidity by the central bank through the banking sector by injecting more money

into it since it is unwilling to lend during said credit crunch situation.

Another is the temporary suspension of capital adequacy standards wherein banks are spared from complying with minimum capital requirements so that their capital may be used for lending. There is also the employment of nontraditional channels like nongovernment organizations (NGOs) and government banks. The guarantee system and compulsory bank recapitalization are also used. DRN

DEVELOPMENT RESEARCH NEWS

9

What is wrong with the 1997 GSIS Act?

by Rustico M. Varela, Jr.*

T

he 1997 Government Service Insurance System (GSIS) Act, otherwise known as Republic Act (RA) 8291, which took effect on 24 June 1997, represented a most welcome amendment to the 29 year-old revised chapter of the GSIS known as Presidential Decree (PD) 1146.

RA 8291 introduced the following amendments: v Expansion of the GSIS Compulsory Coverage to temporary and casual employees, estimated at 150,000 in 1997; v Elimination of service requirement to claim disability benefits; v Adoption of two new programs (separation and unemployment benefits); and v Increase in the monthly pension benefit from P2,700.00 under PD 1146 to P9,900.00.

the modes of retirement under RA 660, RA 1616 or PD 1146." The same may not be said for civil servants who joined the government service after said date.

Thus, only civil servants who joined the government before 1 June 1977 are given a number of retirement gratuity benefit options whereas those employed after said date are not given the same choices.

Retirement features of the Act who have joined the government after 31 May 1997 and those whose average monthly compensation (AMC) for the last 36 months is higher than the P11,000.00 ceiling.

Why is this so? Section 2.4.2 (5) of its Implementing Rules and Regulations (IRR), for instance, provides that "those in the service before 1 June 1977 shall have the option to choose among

Since many civil servants will surely be affected by the new provisions regarding retirement under RA 8291, it is useful to enumerate some of the more significant features.

Under the 1997 GSIS Act, retiring employees may choose to avail of their retirement benefits from either of the following options: to page 10

"Given the Filipino’s average life expectancy of only 64 years, most of the retirees will probably not be in a position to avail of their monthly pension."

However, a deeper scrutiny of RA 8291 shows that its provisions on retirement are very prejudicial against those

*Chief Economist, National Economic and Development Authority (NEDA), Regional Office, Region IX. Mr. Varela has a Master of Arts in Rural Development from the University of East Anglia, United Kingdom. He is currently pursuing a Masteral in Economics at the Ateneo de Manila University.

January - February 2000

GSIS 1995 Annual Report

DEVELOPMENT RESEARCH NEWS

There are three important provisions affecting the determination of the amount of the BMP, namely: (1) the formula for computing BMP; (2) the maximum amount of the average monthly compensation (AMC) used as the base for computing pension and other benefits is only P11,000.00 in accordance with Section 4.6 of the IRR; and (3) the BMP which shall not exceed 90 percent of the AMC.

v A lump sum equivalent to 60 months of the basic monthly pension (BMP) payable immediately on the month of retirement and a BMP payable for life starting after the expiration of the five years covered by the lump sum, or v A cash payment equivalent to 18 times the BMP and a monthly pension for life payable immediately on the month of retirement (Section 8.1, IRR of RA 8291).

Likewise, there are three factors which affect the computation of the BMP, namely: v Total years of service (YOS) v AMC v Revalued AMC (RAMC)

A government employee is eligible for retirement if he has served the government for a minimum of 15 years, at least 60 years old at the time of retirement, and not a recipient of a monthly pension benefit due to permanent total disability. However, retirement is compulsory for a member who

Years of Service 15 20 25 30 33 15 20 25 30 33 34

January - February 2000

reaches the age of 65 years unless extended by proper authorities.

GSIS...

From page 9

Table 1.

10

where AMC = Total compensation in the last 36 months preceding retirement 36 months

and RAMC = AMC + P700 Under RA 8291, BMP is computed as follows: If YOS is < 15 years, then BMP = 37.5 % x RAMC If YOS is > 15 years, then BMP = 37.5 % x RAMC + RAMC (YOS-15) Using this formula to obtain comparative data on two AMC brackets (P7,000 and P11,000), this author tried to determine the brackets’ respective BMP, lump sum benefit and the corresponding replacement ratio with a fiveyear variation in the length of service.

The results, as illustrated in Table 1, clearly show the “unfair” compensations for retirees under RA 8291.

What is wrong?

What are the implications that can be gathered from the results which show certain “unfairness” in the new law?

Comparative table of BMP, lump sum value and replacement ratio

AMC

1

BMP

2

RR

3

Lump sum value Option 1 Option 2 BMP x 18 months

P7,000.00

P11,000.00

Average monthly compensation Basic monthly pension 3 Replacement ratio 1 2

Source: GSIS and NEDA Region IX

P2,887.50 3,850.00 4,812.00 5,775.00 6,352.00 P4,387.50 5,850.00 7,312.00 8,775.00 9,652.50 9,945.00

41% 55% 69% 83% 91% 40% 53% 66% 80% 88% 90%

P51,975.00 96,300.00 86,616.00 103,950.00 114,336.00 78,975.00 105,300.00 131,625.00 157,950.00 173,745.00 179,010.00

BMP x 60 months P173,250.00 231,000.00 288,720.00 346,500.00 381,120.00 263,250.00 351,000.00 438,750.00 526,500.00 579,150.00 596,700.00

DEVELOPMENT RESEARCH NEWS

Given the Filipino’s average life expectancy of only 64 years, most of the retirees will probably not be in a position to avail of their monthly pensions.

11

tor will receive a BMP of only P8,275.00 and a lump sum of P157,950.00 under Option 1 or a P526,500.00 lump sum under Option 2.

First, a retiree under RA 8291 will only be awarded 90 percent of his AMC—which should not exceed P11,000—even if he has rendered at least 33 years of government service.

This 90 percent restriction discriminates those who joined the government after May 31, 1977 and are receiving an AMC higher than P11,000.

Third, the two retirement options provided in RA 8291 are not comparatively attractive. An employee who considers Option 1 will receive a lump sum value which is only 30 percent that of the lump sum under Option 2 but will receive his BMP immediately on the retirement month. Thus, a retiree with a BMP of P9,652.50 will choose between P173,745.00 (Option 1) or P529,600.00 (Option 2).

Second, under this retirement scheme, all retirees—even those with salary or AMC higher than P11,000— will get the same monthly pension benefit and lump sum value regardless of rank and salary grade differences if they have equal length of government service.

Fourth, under the law, the eligible age for retirement is 60 years old. If the retiree chooses Option 2, he will receive his BMP upon reaching 65 years.

Given the Filipino’s average life expectancy of only 64 years, most of the retirees will probably not be in a position to avail of their monthly pensions.

Thus, an Economic Development Specialist with salary grade 13 (step 4) and a Regional Director with salary grade 28 (step 3) will get the same retirement benefits if both have served the government for the same number of years, say 33 years. Both will receive the same benefits in either of the two retirement options under RA 8291:

Recommendations

Option 1: P134,735.00 lump sum with immediate payment of P9,945.00 upon retirement payable for life, or Option 2: P579,150.00 lump sum and a BMP of P9,945.00 payable after five years for life.

Under the existing formula, too, a Regional Director who retires after 30 years in government service will receive lower retirement benefits than an Economic Development Specialist I who retires after 33 years. The Direc-

The observed flaws in the current GSIS Law will affect a majority of retiring civil servants. Thus, there is a need to address these weaknesses through legislative amendments.

The following are some recommendations that may be considered:

January - February 2000

who joined the government service after 31 May 1977 and who are receiving salaries higher than P11,000 are unfairly prejudiced. v Amend Section 2.4.2 (5) to override the restricting provision that only civil servants who joined the government before June 1977 have the option to choose among the modes of retirement under RA 660, RA 1616 and PD 1146. There should really be no distinction as to the first day in government service so that the retiree can have the option to choose the package that will most likely benefit him, thus providing equal opportunity to all government workers. v Instead of a cash payment in Option 1 equivalent to 18 times the retiree’s BMP (Section 8.1.2) which amounts to only 30 percent of the lump sum value in Option 2, a factor of 30 months would make the first lump sum value lesser by only 50 percent and a comparatively attractive option to consider. v Retirable age should be lowered to 55 years old with compulsory retirement at 65, provided the retiree has rendered at least 15 years of government service. This is a more realistic provision considering the average life expectancy of Filipinos of 64 years. v There should be a provision for availing early retirement. Civil servants with at least 15 years of government service should have the option to avail of an early retirement with a cash equivalent twice his average monthly compensation in the last 36 months multiplied by the number of years in government service. DRN

v Computation of retirement benefits should be based on the actual value of the average basic monthly compensation in Retirable age should be lowered to 55 years the last 36 months old with compulsory retirement at 65...This and not on a ceiling pegged at 90 is a more realistic provision considering the percent of the average life expectancy of Filipinos of 64 AMC which is P11,000 only. Unyears. der the current scheme, those

DEVELOPMENT RESEARCH NEWS

12

January - February 2000

The

CORPORATE NEWS

The Corporate News section includes brief accounts of inhouse PIDS activities and staff training and workshop results.

The idea for the inclusion of this section is to let our readers know what is happening inside the Institute. That behind the pages of the Instituteâ&#x20AC;&#x2122;s various research outputs and analyses are stories about departmental staffs, work groups and individuals getting together to plan the next set of programs, striving to further improve their knowledge or skills through trainings, and/or interacting with one another to promote better teamwork. Most of the time, the stories focus on serious stuff. On certain occasions, though, they simply talk about the PIDS staff having fun.

Whatever the topic is about, however, the objective is to show that they are meant to help the staff become better persons and performers in their respective fields so that they can contribute more to the attainment of the Instituteâ&#x20AC;&#x2122;s overall mandate.

1999 PIDS sportsfest: Bringing out the best from the PIDS family

by Mari-Len R. Macasaquit*

A

ll work and no play make the PIDS family dull, not to mention nerdy and boring. The PIDS family has always been regarded as an intellectual lot and never been thought of as sporty, let alone a family that enjoys lots of fun. Little do people know that this family knows how to balance work with fun. But enough of all that nerdy talk. It's time to have those biological motors running; it's time for the PIDS annual sportsfest!

The annual event started with a bang in October 1999 at the Barangay Valenzuela Sports Complex in Makati City. Said place was rented for the occasion and also served

* Ms. Macasaquit is Project Evaluation Officer III at the Project Services Department of PIDS.

as the staging ground for one of the major sports activities, volleyball.

After the usual ceremonial opening, the volleyball started bouncing from court to court, with all four teams, Yellow, Violet, Green, and Blue, participating.

In the weeks following the inaugural games, the spirit of competition and sportsmanship became apparent among the PIDS staffs. Game after game, the members of each team came out to play or give support to their players. New discoveries in sports manifested themselves during the games as each service, spike and toss was counted as contributing factor to points scored.

Of course, in the end, only one team will emerge as the champion. After a stomachcrunching fight between the Green team and the Blue team, the latter won the most number of sets and was declared the champion of the PIDS volleyball game. to next page

The Champions! Members of the undisputed Blue Team line up for a souvenir photo after winning the volleyball game. From left: (standing)Lanie, Tina, Novie, Necy, Arthur, Majah, Shine, Bless, Susan, Danny, (sitting) Luz, Jun, Ed, Danny and Edmund.

DEVELOPMENT RESEARCH NEWS

Economy 2000..

From page 5

ing sector decelerated for 15 consecutive quarters over the period 1995Q4 to 1999Q2, well before the crisis erupted. As such, it would perhaps be prudent to start considering a threshold—most likely in terms of performance of the manufacturing sector— at which point a review of the reforms may be necessary.

Prospects What lies ahead for the Philippine economy?

An evaluation of the prospects of the Philippines is naturally affected by prospects for growth in the global economy. The latest World Economic Outlook (WEO, September 1999) estimates a global output growth of 3.0 percent in 1999 and forecasts 3.5 percent

13

in 2000 (Table 3). Much of this acceleration in global output growth is expected to occur as stability and growth are restored in the emerging markets.

This implies that growth in the advanced economies will not be strong.

January - February 2000

market and this could have a significant impact on the real sector. The increases in the key interest rate since the third quarter of 1999 are viewed as precautionary and pre-emptive moves on the part of the Federal Reserve.

Given this impending deceleraOf particular concern for the tion in the US economy as well as the Philippines is the performance of the existing woes in the Japanese economy, United States (US) economy since the latter is the country’s number one export market. The WEO forecasts show to page 14 a deceleration in the US economy, which Global Growth is consistent with the Table 3: rising trend in US in1998 1999 2000 terest rates. The conWorld 2.5 3.0 3.5 cern is not the slowAdvanced Economies 2.2 2.8 2.7 down but whether a United States 3.9 3.7 2.6 soft landing can be France 3.1 2.5 3.0 achieved. A sharp deGermany 2.8 1.4 2.5 Italy 1.4 1.2 2.4 preciation of the dolUnited Kingdom 2.1 1.1 2.4 lar (vis-à-vis the yen Japan -2.8 1.0 1.5 or euro) could trigger a sharp correcSource: World Economic Outlook, September 1999. tion in the US stock

Sports...

From previous page

A chance to also be named as a champion came when the bowling games began. Again, the players of the four teams showed their bowling skills at the bowling lanes of the Makati Cinema Square. The thunderous sound of the bowling balls as they went crashing on the pins added more excitement into the games and made the air of competition thicker in each strike or spare made by the players. At the end of it all, the Blue team again emerged as the champion.

The 1999 PIDS Sportsfest has succeeded in bringing out the best in all the members of the PIDS family, not only physically but also mentally and emotionally as points were made, strategies formulated,

and teams bonded. And of course, the activities provided a much needed respite from the rigors of work and showed that the Institute is not only serious in policy research and analysis but also in having good fun as a corporate family. DRN

Bayona in action! The Blue Team's unofficial most valuable player, Ed Bayona, shows his form that won his team the first place in the volleyball game.

DEVELOPMENT RESEARCH NEWS

Economy 2000...

From previous page

one can safely conclude that there will be no strong external stimulus for economic growth in the Philippines. The bulk of the recovery will thus have to emanate from domestic spending, granting that consumer and investor confidence returns.

Unfortunately, a number of factors are working against this scenario, namely: a) there are virtually no resources for more pump priming; b) the legislation that is needed to boost investor confidence may take some time to pass; c) performance of the manufacturing sector has been erratic as shown by the contraction of the volume of production index in November 1999; and d) the Estrada administration cannot rid itself overnight of its proclivity for generating controversy.

Based on such unfavorable conditions, the most likely scenario is a marginal increase of about 3.8 percent

Credit...

From page 8

14

of GDP growth in 2000. This is ...there will be no strong external stimulus lower than the for economic growth in the Philippines. The government tarbulk of the recovery will thus have to emaget of 4â&#x20AC;&#x201C;4.5 percent.

There nate from domestic spending, granting that should be a relaconsumer and investor confidence returns. tively strong recovery in construction and investment but both variables will be growing from a inflation rate will accelerate, however, low base. Agriculture will revert to its in the second half of the year and may historical norm of 3 percent and this likely reach double digits in the last will curtail the manufacturing sector, four months of 2000. Interest rates will which depended a great deal on the follow the path of inflation and start food sector to perk its growth rate in rising beyond 9 percentâ&#x20AC;&#x201D;most likely 1999. Manufacturing should expand by after May. The full year average will be only 3 percent. The slight improve- about 9.5 percent. ment will be reflected in a marginal inAnd finally, the exchange rate crease in the growth rate of private consumption. The services sector should hover in the vicinity of 40.4 and would take the cue from agriculture 40.8, momentarily breaching 41 if the and industry and expand by 4.5 per- Chinese renminbi is devalued. Further increases in US interest rates and the cent. return of the trade balance to a deficit Meanwhile, inflation would most position will add pressure to the peso. likely be contained to single digits and The average exchange rate for the be at most 7 percent on average. The whole year will be about 40.6. DRN

since bank loans will eventually pick up once the economy picks up.

What the future holds condition that would warrant the existence of a credit crunch given the results of the analysis of both macro and micro data. What can be concluded is that the decline in bank loans is simply a reflection of the recession and is expected to bounce back once the economy starts to improve.

Thus, instead of focusing on the movements of bank loans, the government should concentrate on fundamental issues, especially those related to increasing the aggregate demand,

January - February 2000

There are a number of things, though, that can be expected in the next few quarters.

One, growth in bank loans will lag behind GDP growth in the next few quarters. Thus, GDP growth will turn positive much ahead of the growth in bank loans.

Two, firms can pull it through in the coming months because they are not facing severe liquidity constraints and their liquidity problem will ease up once the economy starts to pick up.

In conclusion, what are the implications for policy of these results?

The following may be listed as areas for the concerned sectors to concentrate on: v Maintain the prudential measures recently instituted by the Bangko Sentral ng Pilipinas. v Policymakers should focus on raising aggregate demand by pushing for a neutral monetary policy and an expansionary fiscal policy for the rest of the year. v Credit programs must address old problems such as access to loans. v Follow market-based banking and corporate work-outs. DRN

DEVELOPMENT RESEARCH NEWS

Mission...

From page 16

get audience for this series are the senior staffs of the Senators, the technical staffs of the various committees and the Senate Secretariat's staff. The Series served as a key outlet for disseminating to the Senate staffs recent empirical research results related to issues and problems in their sectors of legislative concern. It also helped address critical problems in specific sectors through a better understanding of economic issues, thereby allowing the staff to provide a more enlightened support to the Senators in the formulation of economic policy options for legislative action.

Issues tackled A total of six meetings (three sessions for each Series) were held from May to December 1999 focusing on various topics. Under the PIDS-Legislators Forum Series held at the Batasan Pambansa Building, Dr. Mario B. Lamberte, PIDS acting president, led the first session with his presentation and analyses of the key issues involved in the deliberations of the General Banking Act and the Central Bank Act. Present during the discussion were the Congressional members of the House Committees on Banks and Financial Intermediaries, on Economic Affairs, and on Appropriations.

15

nancial crisis under the PIDS-Senate Staff Economic Forum Series last 26 August and 30 September 1999 at the Senate Building in Pasay City. PIDS Senior Research Fellows, Dr. Josef Yap and Dr. Celia Reyes, presented the key results of their respective studies on the financial crisis entitled “Macroeconomic Review/Impact of the Financial Crisis” and “Social Impact of the Financial Crisis.” Dr. Rosario Manasan and her associates, Ms. Virginia Pineda and Mr. Ruben Mercado, then capped the senate forum series for the year in October with their analysis of the national budget for year 2000 and the effect of the financial crisis on the budget for social services.

Reaching out to the LGUs The Institute likewise touched base with local officials in the provinces.

Dr. Manasan and her research group made the rounds of three provinces, presenting the key results and policy recommendations of a completed major PIDS project on urbanization under a decentralized framework of governance. The team presented its study in Bohol in a forum organized by the League of Cities of the Philippines and in Tuguegarao and Zamboanga City during consultative fora jointly sponsored with the regional offices of the National Economic and Development Authority (NEDA) in Regions 2 and 9, respectively. The highlights of these consultative fora will be featured in the March-April 2000 issue of the DRN. DRN

Dr. Rosario Manasan and Dr. Gilberto Llanto, PIDS senior research fellows, followed in the succeeding months with their discussions on the 1999 national expenditure program analysis and on housing finance policy and strategy, respectively.

On the other hand, the PIDS staff gave a two-part presentation on the impact of the 1997 East Asian regional fi-

January - February 2000

Vol. XVIII No. 1

January-February 2000

Editorial Board Dr. Mario B. Lamberte Acting President Mr. Mario C. Feranil Acting Vice-President and Director for Project Services and Development Ms. Jennifer P.T. Liguton Director for Research Information Ms. Andrea S. Agcaoili Director for Operations and Finance Atty. Roque A. Sorioso Legal Consultant

Staff Jennifer P.T. Liguton Editor-in-Chief Genna J. Estrabon Issue Editor Liza P. Sonico, Jane C. Alcantara, and Edwin S. Martin Contributing Editors Valentina V. Tolentino and Rossana P. Cleofas Exchange Delia S. Romero, Galicano A. Godes, Necita Z. Aquino and Federico D. Ulzame Circulation and Subscription Genna J. Estrabon Layout/Design and Photography

Starting with the year 2000 issues, the new prices of the Development Research News (DRN) will be P25.00 per copy for walk-in purchase, P200.00 for local subscription (including mailing cost), and $20.00 for dollar subscription (including mailing cost).

DEVELOPMENT RESEARCH NEWS

16

January - February 2000

Mission 1999 and beyond: Opening a direct channel with legislators and local executives

T

he Philippine Institute for Development Studies (PIDS) launched two new outreach and advocacy activities during the second semester of 1999. In response to a call from its Board of Trustees to effectively connect with its various policy publics, the Institute organized the PIDS-Legislators Forum Series and the PIDS-Senate Economic Forum Series.

Complementing this back-to-back activity was the program undertaken to disseminate the results of a major PIDS project on urbanization and decentralization to various local government units.

As a government think tank, the Institute is mandated to provide analyses of various socioeconomic problems and issues that would help the country's planners and policymakers in their formulation of relevant policies. With the Committee’s recommendation, the Institute reviewed and recast its research agenda as well as some of its dissemination and outreach program activities. The most significant change and addition was in the opening of a more direct channel of communication with legislators in the two houses of the legislature and with local government officials.

Background

Channels in the legislature

In 1998, an External Review Committee composed of highly respected professionals from various sectors was commissioned to assess the Institute's contribution and usefulness to the policymaking scenario in the Philippines, with the end view of redefining and strengthening its role and thrusts toward assisting policymaking in the country.

In its report submitted to the Institute's Board of Trustees, the Committee recommended that the Institute’s responsibility should not stop with the production of outputs with “correct methodologies and sound scientific fundamentals.” Rather, the Institute should extend its role to answering the needs of its clients by making these studies more understandable, relevant and easily available.

fice of the Speaker, through the Congressional Planning and Budget Office (CPBO), to hold a joint monthly forum series for the members of the House on topics of legislative interest and wherein the Institute has done intensive studies and analyses on. The topics were jointly agreed upon and dealt mostly on issues directly related to or have a significant impact on outstanding and forthcoming concerns in the legislative agenda.

Meanwhile, at the Senate, the PIDS-Senate Economic Forum Series was launched in collaboration with the office of the Senate Secretary and the Policy Studies Group (PSG). The tar-

At the House of Representatives, arrangements were made with the Of-

to page 15

DEVELOPMENT RESEARCH NEWS is a bimonthly publication of the PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES (PIDS). It highlights the findings and recommendations of PIDS research projects and important policy issues discussed during PIDS seminars.

PIDS is a nonstock, nonprofit government research institution engaged in long-term, policy-oriented research.

This publication is part of the Institute's program to disseminate information to promote the use of research findings.

The views and opinions expressed here are those of the authors and do not necessarily reflect those of the Institute. Inquiries regarding any of the studies contained in this publication, or any of the PIDS papers, as well as suggestions or comments are welcome. Please address all correspondence and inquiries to: Research Information Staff Philippine Institute for Development Studies Room 304, NEDA sa Makati Building, 106 Amorsolo Street, Legaspi Village, 1229 Makati City, Philippines Telephone numbers 892-4059 and 893-5705 Telefax numbers (632) 893-9589 and 816-1091 E-mail address: publications@pidsnet.pids.gov.ph Reentered as second class mail at the Makati Central Post Office on April 27, 1987. Annual subscription rates are: P200.00 for local subscribers; and US$20.00 for foreign subscribers. All rates are inclusive of mailing and handling costs. Prices may change without prior notice.