Philippine Institute for Development Studies
Policy Notes August 1999
Credit Crunch!
Credit Crunch!
Credit Crunch?* Mario B. Lamberte**
“Things are seldom what they seem, Skim milk masquerades as cream.” Gilbert H.M.S. Pinafore
D
espite improving outlook of the Philippine economy in the past few months, recent statistics still show that bank loans have continued to shrink. The seeming reluctance of banks to lend has worried policymakers and some analysts because it could undermine the strength of the economic recover y. In fact, a lot of people are now ganging up on the banks for not expanding their loans fast enough to support the expected economic turnaround, screaming “credit crunch!” But is there really a credit crunch? If so, what factors have caused it? These were the questions that the
No. 99-08
Economic Monitoring Group (EMG) attempted to answer when it called representatives from the business sector, bankers’ associations and academe to a meeting at the Bangko Sentral ng Pilipinas (Central Bank) last June 25, 1999. And despite the lack of consensus on the issue about the existence and causes of a credit crunch since the onset of the Asian financial crisis, the participants of said EMG-led meeting then proceeded to put forward some recommendations to encourage financial institutions to increase the flow of credit to the private sector. This Policy Notes issue looks back into these questions tackled by the group and attempts to answer them based on empirical evidence and analysis. In addition, the Notes puts forward some suggested policies that would help to accelerate the recover y of the Philippine economy.
Credit crunch vs. credit slowdown A credit crunch is always associated with a decline in the quantity of credit, but not ever y decline in the quantity of credit is a credit crunch. Thus, it is necessar y to differentiate the term credit crunch from the term credit ———————— * This is based on Lamberte (1999). The author wishes to acknowledge the research assistance provided by Ms. Chelo Manlagnit and Ms. Hope Gerochi and secretarial assistance by Ms. Juanita Tolentino. The author is Acting President of the Institute.
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PIDS Policy Notes are observations/analyses written by PIDS researchers on certain policy issues. The treatise is wholistic in approach and aims to provide useful inputs for decisionmaking. The views expressed are those of the author and do not necessarily reflect those of PIDS or any of the study's sponsors.