FINANCIAL REF_
AI_ BAI._ICE-OF-PA_S
CRISIS:
THECASEOF THEPHILIPPINES:1980-83
Eli. M. R_noZo_
ca_ Mea,_o B. :Sarnberte. "_
STAFFPAPERSERIESNO,
Assistant Professor, U,P. School of Economics (UPSE) and Kesearch Fellow, Philippine Institute for Development Studies (PIDS), respectively. This paper was presented Development in the Philippines: U.P. School of Economics (UPSE) circulated as a UPSE Discussion
during a seminar on "Economic Analysis and Perspectives" at the on December 1985. It was also Paper.
TABLE OF CONTENTS
Im
II.
Ill.
IV.
V.
INTRODUCTION
.6_eQiuwo
me
•w._eooQeooe_
eeegeQiie_
AN_EWOF THE 1980 FINANCIAL REFORMS AND THE 1983 BALANCE-CF-PAYMENTS CRISIS ........
FINANCING
THE BUDGET DEFICITS • ...-....°...-.............,...........
UNDER
I
4
THE 29
THE VUIRERABILITY OF THE BANKING SYSTEM TO THE _-OF-PAYMENTS CRISIS ........ .....
41
SU_4ARYANDCONCI/2SIONS
53
........................
I.
In July
the Philippines_
1981 with
and loans were
financial
the deregulation
l_ans_
clearly
INTRODUCTION
all interest
freed fr_
sa_essful
She, d-term
_S,
rates oh deposits,
deposit
in l_unlng
sJ_ee,
foreign
the
C_u__
public
July
'la_Uest
after struggling
through
Deposits
ling almost
cial
banking
This
remained
with
bank
episode
th_s
also
of
SUlM_Itu_eS, were
_eAlln_t But
within The
Inten_ned.
two
depletion
fell sha_p1y
orlais?
its doors
_o
_ The
hypo_s
in
"_Q
_he
for ten days
It reopened
foe awhile,
due _
of the d_es_
£EMers-
banks
control-
l_ivate
¢_er-
bank,s had. to _e .shut. ... down
two__a_or
f_nan_l
_,
ex_e
fo_ six _e_cial
assets
least
foreign
it _ently
A .umbe: cZ malle_
at
the
debt6
_ilI
a series of runs.
raises
foreign
__
had _to close
a fifth of the total
seo_o_.
1983,
guaranteed
Bank had to close
First _, to what extentdid• __nts
what
1984,
savings
but _hen the Central Ible run.
and .publicly hogged
. In
for
_eserv_ forced a moratoriumon PaFaents of
gov_
debt,
of payments
Excep_
in the _ow_h
_The _astr_u_4-_ in January
in
The reforms
Inareae48
lohn rate_ was lifted
on-all
ceillngs.
_
a crisis in the balance
_iPal.
_
rates.
administrative
of the Counery,e_
_
of bank interest
rates. 0% sa.v_ngs w_d time deposits. on
rafor_as beqan
'4s_ues
rbf_
for
re_
conclude h_e"
_k _that-"_c.he
tO the z'e.foqcams
2
reduced
the
resources
.b_ks:through
the
government
.the, interest
could
differential
extract
between.-publiu
4 .e_.,.t-:,-:paz_ticul:ar_y .._h_,o.u_h...the .creation...of. bamk g_v_n
'the .li_lits ._I_-how. mgch. the
h_i ..,to, resort ,_ficlts
.to.=urrency
_t_.. public
,creation. to
..the._we_nment
was. willing
wha t then :led to .pad@ntis
to
_m0_%t..of
H_mce it
f/m_lnee, the .:bulk ol: .its..,_Audget
r@sourges
McKinno
the
test
aoz-_%y
caseis
that
loans, carried comD1ne_
_o
•over
more
vulnerable
-_u_..a_,!Y if..the crisis, l@a.,st in
_.sis¢.__ we
the
to _put a severe
banks
l_r t
,est'_te
_n
the
higher
from
to: measBre: .the,.. _x)_ti_, ,the .._e_oz_,:,
t/_at Argentina,'
the. depletion,
did
the
deposit period
squeeze .to a
and
on
bank
.re_ves,
.•the
the
profits.
balance-of-payments
low
returns
interest This
higher
ir_ on
rates w_uld
crisis,
_aPi.t_l .:Zli_ht tha:tiwas _depOsits.:
financial
" The.hypothesis
of .repressed
on. d0_sti_
_he..:e.ffec_ of
weaken
crlsis?
rates
s ,budg_t_ficlts
of:..e_nge
reforms
external
g._v_ ris_..,tO
by a.. run
tO,_]_e.
,-we d_.ri.ve
lost: because_of
being
•extent
weather
the
0 res_rves..,and
argued.--f_r..&; s_%ilar..hypothesi_ifom_.
rat_-_:
to What
currenoy., creation/was
_"-'........... ._:_&shypothesis,
@overnment
n .(1982.)_has
Second, sec_or-s
exch_ng
th e de-ma;_. _or .base. money
r.es_/l_e_ _Ul.Anzl_
a_
s.
Got_Id bor[Qw_..abz,u_,
:such excess,
a run..on..official
..Ar_e,ntina, .the only_ dif_.erence
made
reserve
.,s..neec_s ,_ho_eMeEi,. far _ex&_ed-.:what
]_id,.
cli.sis.,in. 1983 •. T_ .....
_s.t._teS,.of.
this
gov.errament
:and private
in .1981..and ;1982:_ ..:The. a/._ount.Of..our rgmcy:_:o_eg,tign:,_._.t was
r eq_i/.red.£D meet
R_na_:
from commercial
have
particfinanced
To.,.test _.,this,',.bYpOth-
depo.sit :rates. _n..h_nk..:Profits.
Both of the above how a country
can avoid macroeconomic
to mlaroeconcmic of
issues are part of the broader
efficiency.
In this reqard,
the PhilÂŁppines, can provide
program
of economic
instabllity
_nportant
the recent
lessons
of
the transition experience
on how to manage
a
reform,
_n ,the next _se_tion, .wetset, the stage issues,by, providlng
during
problem
an overvlew_of
for _nf_onti_
.the.. 1980 financlal
those
reÂŁo_as
and
the _1983 .. external _.payments crisis... !i_iSection _,I_Z,_ :-W.e_,_then_,_valuate the _extent to whlch.the budget deficits zn Se_.ion pro_!ts
reforms
_e
it ,more difficult
to .finance
and the impact of this on international
IV, we evaluate
in the banking
the balance-of-payments in the conoludlng
the extent
sector, crisis,
rmnarks.
to which
thus making Finally,
reserves.
the reforms
squeezed
it more vulnerable we $_mazize
_
to
results
II
THF 1983
Thls
seetlon
sub_ectlon the wlth
the
u%al
system
_he
1983
1980
Before
of
the
g%ven
1980
6ntl-Usury
Between
purpose
of whlch
develop
that
during
flxed
but
the
the
the
Most
Act
of
to
1974
reforms
pollcy
environment
cris%s
and
to
capltal
constantly
1916
1980,
its
an
1973 the
four
interest by
them
The
and
fiEst
the
response
The
second
impact
on
of deals
the
was
the
_Dnetary
maximum
deposit
long-term
rate
finan-
rates
were
Monetary
Board and
for It
still
sevezal
vlrtual
reforms
funds
introduced
the
Instltuted
The
interest
were
adjusted
already
among
noblllze
market
period,
had
notable
prescrlbe
and
were
thls
subsectlons
flnancial
new
THE
CRISIS
two
Ph11_pp_nes
lj
authorlty
rates
to
1980
AND
Reforms
reforms
the
to
Into
balance-of-payments
F_nanc1_l
flnanclal
@Iv!ded
the
system
REFORMS
BAI_CE-OF-PAYMENTS
is
dlscusses
flnanclal
Âą9 _o FINANCIAL
repeal
was
then
lending the
investment
should
be
and
noted
admlnistratlvely
Board
to
reflect
market
conditions
The
earlier
Speclflcally,
loans
reforms were
l--/See Lamberte
fa_led
still
(1985)
to
produce
concentrated
the in the
desmred shorter
results end
This could be attributed interest rates.
rates
set by the Monetary
To realize
higher
lent out short-term, again and again further
biased
reforms, reduced
towards
sary to introduce
yet another
The objective
achieve rates;
term funds_ 2/
set of
_n_ezest exce_)t shmrt_term
Report
over the same loans of interest.
among
which
factor was the
The 1972 financial
various
reforms
led to
types
of financial
These
in the financial
reforms of more
the availability techniques are
of the finamcial
Competitive
of and access utilized
to to
of the interest
.system; and
(3) strengthening
instruments.
rate ,:ceilings on all •types of deposits were lifted
system.
was twofold:
have been
(I) floating
of .Central Bank _licy
loans,
This was
policy
specialization,
by means
Three major
(2} restructuring
the effeutlveness
market.
habitu_..y
the end of the 70s, it was felt neces-
efficiency
these objectives.
banks
Another
of the 1980 financial
greater
below market
redlscounting
loans.
financial
conditions; .and (2) to increase longer
and rolled
Bank's
competition
Thus, towards
rates,
compounding
short-term
enforcing
scope for direct
(I) to promote
frequent
One is that the
were still
lending
in the financial
by formally
institutions.
Board
effective
by the Central
lack of competition
factors.
say one month,
for more
encouraged
was overly
to several
in J_ly
an d iGams,
1981. . .The _eason
:•26T_e Joint IMF/World Bank Report• (1979) a_ ••t_.e HuEt_o (1979) -are the main bases of the _!980 financi_i refo_o
why
6
the •interest
rate
ceiling
on
allay .• •fear s that
the
o_e
and als_i
deregulated
relatively rate
more
ceiling
Together
with
reduction liabilities
was intended=to
lendlng
on
loans
short-term
influence for
banks
the
the reserVe-requi!ement
the
release
large
The
against of
to
overshoot rates
interest 1983.
was
the
•deposit banks. 3/
resources
an
was
at
January
ratio
preventing
long
ceiling
ratio
amount • of •bank
thereby
lend
in
rate
net&worth-to-_isk-assets
lifted
loans.
lifted
interest
not
•loanswould•
to
sl%ort-term
_Jas finally• of
was
to
excessive
This
be made
•increase
in
rates.
tiation
a step
towardsgreate
_ongcategoriesof
quasi-banking Of
financial
by
other
types
r competition,
banks
activities
type
done
tO
latter
to borrowers,
As
one
rate
than
lifting
both and
available
the
the
of
interest
attractive
for
short-term
• (_QBs)
institution of
financial
and has
non,banks been
can
functional
do
authorized
significantly almost•all
insSitut_ons.
dif_e;en
For
to
perform
reduced.
those
that
inst&nce,
_
Thus, can
be
thrift
3JUnder CB Circu!ar_No, 782 dated 27 February 1981, _ Eeserve requirements against• demand, savings, "No%_" accounts and time deposits with original maturity of 730 days or less• shall be 19% (fr_ 20%) and shall be decreased at the rate of one percentage point every semester thereafter until the reserve re_ufrement shall have been decreased
to ••-16%while
time
deposihs
with
original_maturity
than 730 days shallbe /i_ and shall be increased percentage point every• semester .thereafter until shall have been reached. The amended authorize
Board
to
ratio
lower
worth
and
than
General Bankinq Act has a ban k to maintain anet
i0_,
compliance
such
as 8%
of other
or
more
at•the rate of one the 5% requ_rament
empowered worth to
6%, depending/on
conditions.
of
the risk the
_netary assets bank' s net
and
rural
sively
banks
offere_l
have
been
other
types
the
1980
they
of
of
part
requirements Table license
only
million.
big
reasons stable banks
to
can
put
bigness
is
given
exploit
can
meet
through
internal
type
of
the
for
of
increase
capital
financial
entity
the
of
in
scale.
the
capitall Existing
minimum
and/or
similar
no_-J
range
of
authorized II, l.
minimum
capital
increased
(see Ba_k_ng
capital
of
current
reforms.
banks
_500
larger•and
second, financial
capital
it
enables
insti-
requirement
merger
and
to
German
the
and
a Universal
it provides
long-term
in the
for
minimum
emphasized
for
are
apply
required
first,
build-up
4--/These institutions (see Krummel [1980]).
may
banking,
in Table
the were
in
'_niversal
broader
s_ized
reforms,
with ,._
or
allied
The
NBQBs
O'f •
investment
Banks.
are
of
types
Banks"
a much
financial
this:
economies
Universal
entities
being
funds
Commercial
exclu-
innovation
bigger
in both
a bank up
of
offer
be
functions
important
investment banks
to
effectively
and
name
recent
instance,
sources
tutions
banks
the
if it
are
the
more
commercial
these
financial
each
For
Thus,
equity
used
and
introduction
"Expanded
combining
hence
of
for
II.2).
One
is the
which
powers
institutions,
Indeed,
various
The
compete
into
services;
As
more
go
activities.
activities
them
called
from
deposits
to
reforms
also
demand Danks.
allow
financial
Aside
now
financial
Two
to
institutions
may
offer
commercla!
financial
"--4/
allied
Dy
now
increased
financial Banks.
may
consolidation.
universal
J.at_h. II
I
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dl_luln ew_twesz__u_ lws_ _al_m:_ st_.mWR_ ufe elmm_t t_e _ of mdu._ fws _w_ ,,_s_oths. s/_la._v||_eo_t_ _atw_ me_'iste As_ :a• Ir_ ase_ eASy thae be_. Fill hl_
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Table MINIMUM
CAPITALI_%TION AUTHORIZED.TO
.._'
PRIVATE
PERFORM
QUASI
I!. 2 _%MESTiC BANKING
BANKS
AND
ACTIVITIES•
NON-B_N_S
,_--_
Minimum Type
of •Institution
I. " Universal 2,
FCDUs
5,
COmme_cial
4.
Thrift (a)
Banks
•
(NBOB)
_--.
Capitai_.a_on (In PM)
P ;500: .i50
Bank.-_.
1.00
B_znks New. ,l_irift .Banks
(i)
Metro
•M_ni.la
20
(ii) Other-Places (b) Existing
10
Banks
(-i)• Metro
,Manila
iO
(ii). OT.b_._l.aces
,5,
.' .RLIrK1-, Ba_ks"
.New _Ru_. ,.Ba_kstt_. b_:iest_blis_ed mu.st: have.. _ _5M _/_..z_ they _can oper_t_, • Exf:_:_n_. ru:al ba6k_ are ax±owed _9,"' .... _. •,£nd_eaS_,._" i , their., capital, within a period of time depending upon their •n_mber of years of operation. 6.
Non_Ban_ (a) •{D)
QU_._
Investment
Ban.k s Houses
(IH)
NeW.-NEOBs...O.t2*eWthan
If{
20 20 &,.
.
.
.
II
With the floating more
funds would
ava/!ability
bee_
of longer-term
The recent posture
given
financial
of the Central
Treasury paper
phasing
program
out its CBCIs
market.
issued _n the 70s were utilized urba_ to the rural ar_as. instruments
the acquisition
Bank
window."
evidencing
a proposed
also call
deposit
lia-
is some potential policy
for
enviromment.
for the change
the Central
in the
to a Bank ini-
securities
in 1981o
in that year to giver way to the become
the prL_ry
It is to be noted mainly
to rechannel
Hence,' they were
financial
the Central
rediscounting papers
favorable
it has
government
that the funds
not effectively
CBCIs
from the used as
for stabilization.
To induce financing,
there
for government
Bill which will eventually
in the securities
further
Since
short-term
For this purpose,
a rationalization
It started
reforms
below.
Bank• from a devel0pment-orientation
stabilization-orientation. tiated
a more
easing the
To increase
as discussed
stable core,
thereby
have also been encouraged
system possesses
with a more or less
such term transformation
lending.
•funds, banks
in term transformation, the banking
it was expea•ted•that
deposits,
of funds for longer-term
fo_/_ that
bilities
ratesf
flow into longer-term
the availability to engage
of interest
This
medium-
of fixed
or on-going
institutions has opened facility
to .go into long-term the "medium-
allows banks
and long-term assets,
expansion
working
and 10ng-term to rediscount
loans extended capital
development
by: them
i**_unnection
program,
investment
for with in
12
affiliates
and
.securities. mation, paper
other
To
a
encoura_e
"lender
Of
-=Irrespective
facility.
• Banks
while
.in the
this
facility.
to be
banks
last
and
a
resort"
NBO.Bs
policy
without
encountering in
rate• closer
to
the
.secondoil early the
out
Shock,
part.o_ lead
banks
found
in
banks
This
has
the
economy The
banMs
into
in
contrary
government-acqui/ed
privatelY,owned government, _!eeat. tional
financial
4_fZ_t
banks.-
the
the
transfer
from
.banks"have enjoYin 9
they. hav e. captive-institutional
the. slightest Corporate
Bank
sisn Co.
of
:trouble.
For
(Interbank)corners
to
of
_by
•Of
the
"in" the
bail comber-
Table
financial
.f&nancial
II.3). system,
irefozms,
advantages
backing
of
over
the.
deposits
•which •do
example,
the
the
Many
to
pri_ate (see
undue the
played
effort
the
1980
questio_
collapsed..
sO_e
of
the
_he
house, • whlch"had
Corporations
•of the
agail
.are •going
crisis
C,overnment's
.
problems
may
being• weakened
landscape
spirit
'£his
answer
innovations,
The
Commercial •Aside
t_
_investment"
the
under
syste_
a liquidity
government
changed to
After
trouble.
.the hands_of
substantially
a development
of
suffered
in
:Any
liquidity
rate. •
financial
resulted
opened.
security
market
indee_
biggest
intro@ucing
themselves
distressed
is
hasbeen
transformation
the
qrade
in ..term trans.for-
•moral. hazard,_ iban_s
qualificati0nsl
1981.
role
cial
The
some
It
in high
engace-
%emporary
term
to minimize
enviror_ent?
making
:_BOBs to
_cceptable.
._.rnathas:"beedl th_ /esponse new
for .investment
faciiity
is
of •engaging
:._{owever,
or and
of •maturity
course
charged
:nstitutioms,
not
Interna-
.._eposits of
•
13
T_Lbl e PRIVATE
COMMERCIAL BANKS BY GO_RNMSNP
II R_CFNTLY ACQUIRED/CONTROLI CORPORATIONS
kD
.L
Prlvate
1
Bank
AssocAated
Controlllng Government Corporatlon(s)
Bank
Development
Bank
Ph11_ppln_s 2
Commerclal
Bank
o_
M_nlla
Government System
3
Internatxonal
4
P_l_plnas
5
On_on
Sourc,
Corporate
Bank
Bank
A_)n_u_l _k_l_rts
bo_xa/ and
of
_(%nt_olln%
the
Soclal
Insurance
(GSIS)
National Development oratxon (NDC) Phlllpplne (PNB)
Bank
of (DBP)
Natzonal
Corp-
Bank
%ecur_ty SySte_ Land Bank
goverm_ent
cor_oratlon_
(SSS)
L4
subsidiaries ration cial
•and acquired
(NDC), Bank
Security
a government
of
Manila
System
(GSIS),
are
(SSS)
It
cheaper
only
a commendable
•these
banks •have
effects
of
the
The of the
expansion
To
date,
ten
as
u/li_ersal
supposedly
directions
also
Co.,
People's
recently rolein
Development
top
their
have
Corpo-
Bank
and
from
the S_ial
Insurance
these
to
arrange
depositors
There
is
deal
Co_ner-
System
banks
captive
to
ten
to
if
no doubt • that
with
banks
the adverse
given the to
have
(BPI) into
re_&il in order
licenses
number
of
position
to
been
For
to make
bank,
• It
has
affiliates/
affi-
II.4.
with•an
eye
instance,
the
Family
Bank
in order also
itspresence
in
list ••of
in Table
acquired
market.
operate
themselves
selected
a savings
indicator
their
A partial
markets. has
is one
financiallreforms,
is presented
Islands
Bank
1980
environment.
certain
the
operations
the
been
in
converted
and
expanded
expansions
edge
Philippine•
a greater
banks•have
of
the
Trust
system
competitive
Bank
their
capital
merger/acquisition
a competitive
of
of bank
through
gaining
and fcr
position
They
of
deposits
statement.
banks.
new
union
Service
with
income
financial
liates/subsidiaries The
rate
Development
crisis.
commercial
•subsidiaries the
of
company,
of stable
in abetter
1983 BOP
National
is •even possible
deposit
been
response
holding
the
and Government
a relatively show
of
assured
respectively.
to
firms
to
and
to play
acquired felt
in the
•
_5
%able • DP F_VE
B_S
AND
SOME
OF
II
4
THF_R
AFFZL_ATES/Sb_SID_ARTES
Bank
1
2
_ank
Far
Aff_l Idtes/Subsldlarles
of the I_lands
East
Phll_pp_ne
Bank
a b c d
BPI Fatally Bank Peopl_a Development Bank Fillnvest Cr_t Corp AF Merchants
e f
Ph_ec Isv_sEm_nt BPI Internationa/ Lnd
g
BPI
a
c
Private Development Corporation of the Philippxnes Far East Chemco Leas%ng and F_n_noe FEB insuranc_ Brokers, Inc
d e Z
Cawxt_ Deve_Op_len_ Bank Makatl Insurance Co , Inc Banoo Davao
a b c
Bh111pp_n_ 5a_ngs Bank First Metro Inve_tmen_ Cozp Pan Ph_ L_fe Xnsu_anee _
d e
_TC-Vcn_ure Capl tal _hazter Insza_ce Co
a b
PCI PCT
c_ d
B_nk_zd PCX Lea_lng
a
_ev_._ul rur_l across _
b
3
4
Mer_opollt_n Ba_ Trust Company
and
Phllzppzne Commercial Zntcrnat_onal Bank, Inc
5
Unl_ed _conut Bank
Sot,_c:es
V_r_O_S
Planter_
ar_nual
reports
of
Investment
corp Finance,
Corp
Cozp _nc_
_apacal C_r 8 Insurance Brokers
Indzvl_u_l
ba_k_
and
Inc
Flilanee
bunks _pread country
Inc
16
agricultural acquired to
sector. _/
several
take
the
rural
lead
Another 1980 and
rates
and
interest
rates
rates
expected only
time
deposits
deposits loans term
and
from
trend
towards
loans
had
because compared
Table
II.5
deposit
these
with
shows
the
1981and to
1981
years
and
As may of
at
the be
be
of
what the
at
nominal of
is,
share
the
of
of
demand
exercised
in
drawing
before
from
structure the
1980
Table
however, hank
savings of
demand
o_ iong-te_
expense
gleaned
lending
of
expense
share
people
and
structure
the
the
of
deposit There
to
the+deposlt
a lot
combined
1982
the•maturity
established
[o
Similarly,
must, •however,
been
movements
maturity
The
both
structure
1982.
the
II.6). in
same
figures.
the
deregulation,
regard
has
response
of
maturity
rate in
(UCPB)
areas • in order
system's
adjustment
in the
substitutes.
lengthening
already
financial
Contrary
little
Bank
industry.
years.
increased
Caution
sions
change
(see Table
increased•in loans;
the
up a
loans
the
Planters
coconut-producing
coconut
of
interest
change
in the
the
in certain
inched
deposltsand and
loans.
Coconut
is the .upward
and
from
a perceptible
in
reforms
deposits
had
role
banks
indicator
financial lending
united
and
conclu-
:Ii.6,
the
of deposits financial
short-
and
reforms.
_/There is also an added advantage in owning a savings bank it has lower reserve requirement against deposlt liabilities with commercial banks.
17
Table NOMINAL
Ii.5
INTEREST
RATES
Deposits Time Year
Savings
(360
Loans
days)
WAIR*
(Secured)
Short-Term
_
Long-Term I___7
1977
7,00
i0.00
12.59
12o00
19.00
1978
7,00
10,00
10.72
12.00
19.00
1979
9.00
12.00
12.89
14.00
21.00
1980
9,00
14.00
13.27
14..00
21,00
1981
9.79
15.60
15.80
16.00
21.08
1982
9.78
14.21
14.21
17.13
21.74
*WAIR
Source:
= weighted
Department Philippines
average
of
interest
Economic
rate
Researchj
of
deposit
substitutes
Central
Bank
of
the
9""
The some
actual
comments.
spelled
out
Instead.of
in the
still-continued gathered _dd/or
1980
robe
from
the
after
its
selective
virtually
all
The largely
the
.middle
of
the
"lender
of
by
the
1983.
the
resort"
of
rese_t". '..._ This
first
windows
it
i reforms
i_s
!0st
its
c_nqu_lify
financial
has
as has
may
be
maintained-
(see-Tab!9[_I_,7), s@lective_ess
for
system
balance-of-payments
This
last
deserves
the CentralBank
policY.
activities
of
also
reforms,
financial
credit
Bank
"lender.
rediscounting
_@80
development
conditioned
theCentral
financial
the
economic
by
being
numerous
opened
[gdeed,
in the
role-played
since
_adiscounting,
after
1982
is"
crisis
that
struck
is qgin_, to:_:be discussed
in th_
EQIIQwxn__IDsecÂŁ10_.
:Thie 1983
Balance-of-Pa_Tments
,The government iS
$600
million
HSwever,
the
that
year.
_ne
1983
d_ficit
BOP The
failed
already
(BOP)
intended
:in 1983 further sharp
f_om
the
trim
to reverse
the
_o-the
down
1982-Iev%1
deteriorated
adjustment
leached
to
6/ Crisis _-'
o_
the
the
_ne_cnange
6--/Beforei983, the Philippines already evere..BOPcris.es. The first o_e.,_occ_red in second, in 1969-70. among-the three. _
The
c,_rent"BOP
first ra_e
level
_ri_is
is
of
t_
billion.
.By August.!983,
staggering
deficits
ofUSS1.6
during
trend.
BOP
semester
of
ezrectea
in
tha..BOP
US$1.3--bi11,ion.
encountered 1949-50_andth_ by far
the
two , woE:st
2O
_I_,_I_
Fa:ility
Isolmenti_
l, 2.
5_mevis_J Ce_its _-S_e_lRd C_ts
3;
f_ll/_edim Scale l_ustr7 F,Xp_S No_Tvidit io_l 7e_itimal"
4,
7_ • 7_
Table
I Iii 7
_l,k_
I1_ rE _%'r_
DaCe
!_;
Loa_
_edisc©u_t
Ler&i_
_atm'i:ies
Feb. _/, 1981 Feb. _, l_I
1_ N
3 -8
1_ Z_
1_ cLus _ _rs/Z;_ clars/L_q)l
7_
Feb. _7, 1%!
_
8
)_
IL_ to _
7_
Feb. Lr/, 1591 M l_
3 8
I_ 14
_ da)'s l&-_e d_s _" _gh_ draf_;l
&;rs
for ceed;t;
e.
mm r,_
784
Feb, _
F_o__,emm
081
J_
Ce_y_©_
t
6ea,:_s_eGa_/
_ 715-001
I_!
25, 19_.
J_e h 19BI Fn. h 19_/ JuNe 1, 1901
I_
.
"3
6
180 d_s
ti_
3
le
196 darj
M M
_ 0
i4 1A
_Mda_ 1Oe08_ _ke to _ive
,usu.itot
ml|o_ b
12.
_ll_r
Ik_Jismmmt;m 875-9H
I_ 81; 19_./
:9_ _es
foe
Dollars, Sold to 121
Ii
_
-
,l_,_ie
Dollars Ikmosited with _.
1811
12
.,
.368 dais m" •_t_,ity mietvfirst
•Se_t.24, 15M
21
I; Co._ess Orea_izers 16. Cxx'oeutHillers/ s_catnrs
921
Ja_. _, 1963• _ " March_, 1983
_
Feb. h 19&_
91_,
_
3
12
1lie days
_
3
i_
_ _n
lf.
15
75,
t1'
i5
79
i4
-"
a. Sm_e_/llIk_lie_.era_i_ !.
_i=e- aed L_Tin . - for ac_isLt:ioe of fixed assets - foruorkiMe_ita_ in _me_io_ .ith
'_
w t_ 10 _e ,W_e 3 m _e
iO_ngexMeesir_ developmnt - for investmet in affiliates _
&
- f_ ieemstimt _, bi_ ne_e seem.ities Lenderof Last
_m._ 7 mreemmble me Mr
74_Y_'_
:A,S._I
_i_ ee as ur,der ar,_
- Thrift:_,_kS
_mm _
,
_le_mre w_th "
Io_s raMiw3 _!_ _ f_-e_h v_iI-over
o. So='ce: Sin Jose_19_.)_. :;a'l_:.
iO--_ys
•22
The •political accelerated dwindling
disturbances •capital
of
economic
international
over to
meet
torium
on
principal
foreign
more
moratorium
than six
reserves
0f money
supply
several
t_!go
the
Finally,
Philippines includes
trade
credit
1983
to31
with
vaxying
•arranged
on
US
May
mfllion and
US
i986
interest
a standby
debts have
rates.
•credit
been
and
of
the
excessive to
the
for
billion
loans,
US in
foreign
with
the
financial
the IMF
on
from a
out
creditors long
creditors
of package.
in zev_Iving
short-term
restructured
growth
the
$3 billion
banks
inter-
bailing
reasons bank
dzagge_
90-day _ of
the main
$10
and
repayments
bank
In additi°n,
facility
IMF
foreign
billion
due
the
mora-
90-day
some
a US
$5.8
a
overstatement
•4•83 • foreign
in new
for
the
t ° stop •
PhiliPPines.
debt
million,
of
the
extension
elections
the
approved
short-term
December
$600
were
1985
the
of
the a_d
creditors
with
of. the
the •reluctance
20 May
$925
in
1984
agreement
facility'
million.
least ••US
formally
$5.8 5illion
$608
and
to
asked
rescheduling
discovery
to the
_iththe
Th_S
US
due
banks_
ahead
delay.
by at
loans
to
political
bank
Negotiations
resulting
The
contributed
attendant
Philippines
for. the
a year,
The
short-term the
assassination
significantly
several•• foreign
repayments.
times.
national
of
maturing
banks
•the Aqu_no
•reserves.
repayments,
creditor
for
/This
prompted
their
Unable
on
flight.
uncertainty
roiling
following
debts.
The
17 October
lO-year
Philippines equivalent
basis has to
US
23
The causes of the
1983 BOP crisis
Hence,
there is no need to discuss them
to say
tha t both the international
policies
contributed
deterioration ra_es,
partners,
to the BOP crisis.
recession
an:overvaluation
uary po_Ic!es, exhibited
experienced
incremental
factors
There is persuasive
evidence
to blame
the severe
indicating
documented
and thoroughly
In Darticular,
trading
investment
as
•ratio (ICOR) were
BOP diffic_ity.8_
that domestic
policies
are
• 9/ for the BOP crlsls.--
,The iresponse of the government well
interest
••fiscaland mone-
anu wasteful
capital-output
causing
the sharp•
by important
expansionary
It •suffices and domestic
Specifically,
_/%e system o_ protection,
by the rising
environment
high international
of the peso,
among the important
largely
here in detail.
economic
in the terms of trade,
the prolonged
are well documented. 7/
poliuies
analyzed
first became
to the 1983 BOP crisis in Lamberte
very
et_al.
restrictive
is
(1985).
in the wake of
i0/ the BOP crisis.
In addition
to the exchange
rate •adjustments, .....
7/See Remolona et al. (1985), Power (1984), Canlas (1984), Intal (1984) and Lamberte et al. (1985). 8/See Annex
I for important economic
indicators
et al.
frc_
1975
to 1985. 9--/Asidefrom sutdies see a_so Hill
and Jayasur_iya
mentioned
in footnote
no. 7 above,
(1985).
10----/The adjustments occurred and on 6 June 1984 (_18 to $1).
on 5 oct0ber
1983
(_14 to $i)
24
the Central•Bank
imposed• •quantitative controls
.on foreign•exchange
holdings by•domestic
:'the need: to secure a standby •agreement of-the
sharp deterioration
:accepting orthodox •I_ freeing
in
rate and prices
of tax exemptions
•protective
tariffs
One wake
reduction.- of budget
with the markets
controversial
of foreign
Invlew •began
inc1ude, among 0thers,
of basic commoditieS_ I-2-/
import
dismantling controls,
deficits,-and
Of overly
restraint
on
aligning _of r'edls-
rates.-
aspect of monetary
bills wh±ch are intended
Pressing
the _overnment
These
and" subsidies,
and quantitative
of the BOP crisis.was
outflow
growth,
• ii/
.withdrawal
count rates
became more
economic
banks. • But as
the iMF and a'"resQhedullz
prescript_ons._
o_ the exchange
money growth,
commercial
program-with
•with foreign .bank.creditors
on •importations and
the introduction to mop-up
exchange.
The
excess rates
policy
adopted
of high-yielding liquidity
for Treasury
in the CB
and arrest bills
the
approxi-
mated, the raovaments of •those•of CB bills• for most of %he time'.I-_
• ,.,
.
.
1-_- Real
GNP plung.,ed
. 12---/A free float
by
5.5
percent
of the exchange
•1984. while price ceilings lifted.
of-basic
13/CB and Treasury-bills
in
i_4.
rate was declared
co_nodities,
are short-term
in October
except rice._:were
in nature.
While
CB bills are iimed at big instituti°nalsavers because of th_ minimum placement of P0.5 •million, Treas,lrybills are aimed at the general public since they can be sold in smaller say B5,000, at the secondarymarket.
denomlnations,.
25
The
90-day
(see
Treasury
Table
banks
bill
II.8).
responded
To by
compete
offering
promissory
notes.
•term
in.themarket,
funds
• Thus,
(MRR), I-_/ closely rates. the
CB
:onsequence, loans, the
to those the sate
low
for
be dealt
the on
the
loss
bank
with
lending
which in
as
became
later rates
were
be
_%e
with
Note
on
the is an
that
new
old
Treasury
to banks
Rate bill•
since
1984.
up_ _/
fixed
short-
As
However,
rates
still
carried
situation,
especially
transformation.
Unless
loans
loans
the
a
old
is enough
thexe
Will
to be
compena
empiricalquestionthat
all
severe!yne_ative
acquiring
CB
zhot
term
and
Reference
and
1984
Bank,
Manila
unsettling
rates
of
_beginning
with
in
central deposits
expensive
loans
an
engaged
This
on.
new
the
cost
the
to
loans,
interest
profits.
up
on
can
incurred
average
more
in November
:_or time
movement_.of
rates
have
with
indexedby
tied
This
43 percent
rates
baM_'s
longer-herm
rates.
banks
the
were
interest
increase
squeeze
_eal
rates
especially
old
higher
also
at
effectively
foliow_dthe
borrowings
rediscount
•rate peaked
real in
all
rates the
will including
months
of
the 1984.
14/MRRs (90 and 180 days) are weighted average interest rates on 90- and 180-day promissory issues paid during the immediately preceding week by the ten commercial banks with the highest levels of outstanding deposit substitutes.
mediation
15/Lendlng cost to
rates are usually the relevant MRR.
increased during the same reserve requirement ratio
arrived at by adding The intermediation"cost
the
period due partly to the. adjustment from 18 to 24 percent.
interof
26
27
This means
that even banks
absorbed
the inflation
tax during
this
in severe
finan-
period.
The BOP cri:si_,has put the clal
stress.
unable
Since •September
to meet
reserve
requirements
study,
the
ratio •of 20 percent
sudden upsurge their piling
up of rediscounting
past two years,
heavily
reached
of their assets
banks
II.8).
outstanding
in thei%
arrearages
According
loans.
portfolio
of the entire
(see Table
11..9).
of them having
system,
The
led to Bank.
banking During
and two oonu_ercial hanks banking
to
exoeeding
with the Central
Bank rediscounting,
Js..obilized, with 85 percent
system has been
had past due/loans
Bank. 16--/ The rural
on Central
With the Central
banks
59 percent
four thrift
by the Central reiies
(see Table
1984, the past due ratio
system had already
closed
ten commercial
of non-performing
As of 31 December
system
1983, _the banking
a Worl_ Bank critical
banking
were which
has been completely past due obligations
Bank.
16---/The thrift banks are: Banco Filipino and Mortgage Savings Bank, Royal savings Bar_c (taken over by ComBank), Daily Savings Bank and PAIC Savings and Mortgage Bank; the comanercial banks arez Philippine Veterans Bank and Pacific Banking Corporation, a medium-size bank.
the
28
Table
Ii.9..
REDISCOUNTI_GARB_2ARAGES BY TYPE •_r
the yyear
BANK,
December;_'31_1984
,
outstanding Rediscounts* (_M)
Type of Iastituti0n.
Government
ended
W_TH;THE_ENTRAL' OF-BANK
-
LBP
301.9
Priv_teCommercial
Rural
Banks
Banks
Includes
1/690.8
472.6
472_6
3,569,9
Central
7,4,98.8
advances
Bank
of
by
the
355.3 I.
3,154.4
Banks
Total
Source:
,:@eroent to _al
Phs% Due Ratio <,.(%)
Banks
PNB
Thrift
_astDue Amount (@M),
CB
2,579.1
5,097.8
to distressed
Philippines.
banks,
7.0 .....
33.2 9.5 .
25.8
53.6 100.0
50.6
72.2
-!DO'.0
59.4
III.
FINANCING
THE
UNDER
The
Shift
in Monetary
As 1980 une
far
financial would
the_e
III.l,
_l.b
28.4
expense which
of paid
demand
for
in
no
been
and
the
money
rose
This
corresponded in
23.5 of
a
to 1980
from
in
For
by 3.4
the in
a fall 6.1
1982o
the
meant
GNP
in 1980
liquidity 198.1:.,
impressive,
two
CXHK_IQ
for
demand
the
reforms.
Hence,
ratio in
in of
1981
the
1981 base and
base
4.2
money
5.9
both
of has
money,
lower
ratio
and
in the
component
came
from
shift for
currency
the
of money
a downward
the
3.7
paztl_at
forms
in demand
29
in
pereen_in
of
percent
by
led
shown of
component
in the
rates,
came
a reduced
other
to
deposit
Total
27.0
_posits
from
1980
As
As
is pretty
in turn
the
effects.
aggregates
percent
to
th_
crisis.
reduce d demand
to
in
1980
concerned,
on
money
20.9
deposits,
This
ceilings
deposits.
financial
demand
are
expected
broader
such_ growth
reduction
from
the
percent
GNP
stemming
mandated
the
intereSt-earning
mentioned.
base
percent
of
into
The
reserves,
requirements
and
1982.
money,
had
of
(_2) grew
interest.
base
have
in the
percent
currency
aggregates
interest-earning
1981
wake
shif_
to
lifting
money
in
the
components.
already
6.4
the
into
25,6
REFORMS
monetary
growth
in
percent,
The
bank
from
broad
from
it did
its
seem
percent
(M_) grew
as
reforms
wa_ _ substantial
Table
an_
basic
shift
DEFICITS
Aggregates
the
expect
a portfolio
to
as
_TE
BUDGET
reserve
of
M2
in
1982.
to
GNP
percent
in
to
from 1982.
3O
Table
Ill.l
SELECTED
MONETARYRATIOS 1978-83 (EndyearStocks)
•
"" "
,i
ii |ml*ll
n
1978
1979
1980..
!.981:,
!98.2.
1.983
Ratio of M2LtO GNP (%)
22.7
20,5
_0.9
21.6
23.5
25.3
Ratio of M3 to GNP
29,1
26.0
25.6
27.0
28.4
29.8
(%)
•Radio-of
M2 to base money
•3.3•
3.1
•3.4
3.7.
4.2
3.5
Rat:iOof
M3 to base money
4.2
3.9
-4.2
4.6
5.1 •.
461
•6.9
6.8
6.4
6.1
5.9
7.7
1.5
1-.6
•1.7
•1.6
1,5
Ratio of base money
to GrIP (%)
RatiO.of;baSe money•to • in circulation
source
curzency
of basic data: Central
Bank of the Philipp_es
1.6
31
All this increased
should have been desirable
flow of resources
put more of their savings reflected
a potential
resources
as the relaxation
narrower
spreads
it ,also.meant.that
a larger deficit some means_of the' burden
Financing
At the same time
of the reserve
deposit
were
staggering
rates.
deficit.
allow
However, a _aller To finance
have to mean more
burden-
In the case of _the Philippines,
reserves.
Deficits
time the financial
size.
â&#x20AC;˘in 1980 was recorded
would
be providing
budget
it
of those
requirements
and lending
base would
fell-_on internati0nal
ÂŁhe Budget
allocation
system would
the revehue.
tha knational qovernment
reforms
rates
of the government
extracting
of unprecedented
started
As shown
to be
@12.2 billion,
In 1981 and 1982,
reforms
were being_ut
running
budget
in Table
_3.4 billioh.
first imp!emented , the
Up until then, the budget GNP.
into bank ;deposits.
from a smaller
At the very place,
system as people
the monetary
base for the financing
an
into the financial
for a â&#x20AC;˘more efficient
between
as it reflected
b_get
in
deficlts
III.2, the budget But, i_ _98!,, wh_ deficit
leac_ed
Df
deficit _the a
and in 1982 it was _14.4 billio_. _I-_7_ deficit
this ratio
had not exceeded had reached
3.0 percent
4.0 percent
of
and 4.3
17/According to records of the Office of the Budget and Management, the combined deficits of the 13 major nonfinancial parentatals were even larger (_12.5 billion in 1981 and P14.5 billion in 1982).
32
••Table III.2 FINANCING OF THE BUDGET •DEFICIT OF THE
NATIONAL :GOVSRm_NT 1978-83 (Biilions of Pesos)
.
%f
.
_,,,
m_._.
r
!978 •-
r
Budget
...
n
1979
1980
v
1981
1982
i
deficit
Damestic
- "
2,___2 0.3
financing
0.4
-2.8
-0.5
-0.2
I
.Curzency creat£o an _/
1983
..........
l
I
=
I
3.4 •
¢
/
12.2 lJ.____4 6°5
1.2
6.2
0..2
4.2
•
9.7
i
7..0
.'.
0,8 [
6.1
c er ial banksb-b/
1.1
0.4 2.7
3.6 o.,1
Non_ankborrowin_£/
-0.3 "3.0 -1_.7
0,7 -0.9 -s.4
1.8
6i0
EStez_al financing
3.1
2.2
4.7
5,__7 7
a--/Measured as the change in Central Bank claims .on the national igovernment net of deposits less the change in Mnk resei b/Measured as-.thechange in _ commercial, bank claims on .the national deposits. ci/tea
Source
s%lred
of basic
as
_.I
_I_esiall
reserves plus the cha.ge in govermmmnt net of gOWeZTi_lit
I. I
data: Central....l_ank of the
Philil_ines,
33
percent
respectively.
•market'as
poorly
developed
guvernmen_nau._o finance_£hese
In a countrywith as that of the PhilippineS,
turn aDroaaan_Eo
providen
Percent 0 more
.government However,
than 33percent
pointed
access
source of financing.
ment
sti11 financing holdings
securities.
deficit
to
_inancing
to match
the result
zxnanc_n_.Hence,
financing.
III.2
shows,
reforms
cheap
in 1980 commercial deficit,
whether
holdings
banks by
of gOvern -
in spite of a much• larger
banksprovided In 1982,
the increase
financing
systa.
now limited
as a relatively
or by increased
currency
Hence the
banking
less than half of
these banks in the budget
did increase deficit.
more than to any other-domestic
wn_le
l_b_ceRt_.of_d_estic
banks
to
this source could
was still that th_ gover_enthad
icurrency'creatlonmuch
cent:-in 1981_and
the financiai
By 1981, however, commercial
borrowing
to the domestic
the bulk of the budget
of reserves
to finance,
theless,
But in 1982,
to commercial
As Table
toforeign
of the needed
out,
the 1980 level of financing. their
resorted
of its deficit.
as wehave
.Increase_
tne aomestlc _ba_hg:s_t_
had to turn increasingly
thegovernment's
were
the _national
de£iCits.
in 1981, the government finance49
a capital
creation
None-
to resort means'Of
accoUntedforO_ly16..7
in 1980, it ac_unted:for67_,7_:per-
for 72.2 percent
In 1982o
to
34
The demands
the government
placed
however, far
exceeded
the willingness
A_ m_tioned
earlier,
one. result
shift away from holding from holding
currency
the increments Central
of the public
of the financial
bank reserves
on the part
deficit째
to the national
.As shown in
sources
of base money creation
Central
Bank
whatbut
liquidity
by not nearly
of _the national accor_odation reserves.
credit
government,
government.
authorities
suffered
the external
payments
pressures
.._useholds
replace
shows,
the Philippines
to flnance that other
One such other
source,
did decline
_the credit
declines
crisis
Bank holdings
net foreign
some-
requirements
starting
of international
they will
of
of international
assets of monetary in 1981,
leading
to
in 1982.
by
reserves
having.to.finance through
and firms find themselves
it with other
such lending
banks,
accommodate
would have worked
than they desire,
As a consequence,
III.3, this meant
to commercial
on the peso exerted
._udget deficits
and
As it turned out, the entire burden
acute
The accommodation
Table
on Central
As Table III.3
it.
was a
of banks
and bank reserves
had to suffer.
enough_tc
was placed
to absorb
in 1981 and 1982 fell far short of
being the sum of the uses of currency the budget
creation,
reforms
on the part of the public.
in base money
Bank holding
on currency
various
holding
the increased
unusually channels.
!a/.ge When
more. local currency
find a..way to either
assets.
to the.
spend .it or to
In an economy
as open
as that of
spending
somehow
find its way
must
35
Table SOURCES •'
I!I.3
OF CHANGES IN BAS E MONEY 1978-83'" (Billi0ns
of PesOS)
•
1978
1979 _.t980'
•
change
An base money
of which:
Net credit Credit chamge
to
Bank reserves
Rational
to, commercial , .... in net foreign
Government _/ banks assets
_.ge ehan._.ges
1982,.
2.8
1.9
1_ 7
1.0
9.4
0.9
1.5
0.6
0.2
-0.2
2.2
0 :, 4
1.3 •
0,8
.4° 4.
-6.8
8.3
3.0
3.8
4.4
3.6
0,6
-0.7
-1.2
-2,1
-3.4
-15.8
-27.7
n r_
-!0_ f
m
"_ c_traZ Bankci_i-S on t_e national goveu_u_t net An gove_runt
deposits.
1983.
( .......
r ||ram
2.4
,,
of
1981. tim
(
II
Table _STIMATES
! Equation
Dependent. Variable
• Constant
M2
(z_
OF
"_ •
THE
DEMAND
"' 'i . Inflatio_n
FOR
" . Rate
BROAD
MONEY (M2) AND 1958-80
: Return on -_.Foreign Assets
(2)
log ,T •.
-0.62 .-
(31
M2 log -_
-1.70 '
-1.89 _
o.21
log -:
(2.57)
i-i.19 (-2.62)
. •
Note:
M2 "' (-_) -i.
_ 2 ": i' R
0.24
-2.77
.-
• S._.
D.W.
Q
:i., -:
o.so
o.98. _,_. o;o6.:-2.61
0.91
(6.06)
l.lO
9..91=: 0_0_
_a.02
0.88
_..25
0.i4
(11.35)
.:
.
_
0.55
:,_ ..
:..flogM2
(H).::MULTIPL!ER
(6°44)
._(I. 83)
(-2.07)
1.01
.0,.48 " _.
-0.06
[
':'
':(-o. , !6) .
-0.70:: ('0.68)::
H (6)
MONEY
(y.i- g)
0.30 .
(0,80)
"(J_.is,),_ (5)
BASE
. log ::<log
H , iog
THE
.
-o.e_.
{-2.59)
(4)
OF
..
goq -_
...
III.4
_.34 <_-5.3o)
01.5s 0.09 ii0.94 . ._
'-0.30 (-2. i6)
0270 ....
:
0.08 i
1.91 _...
0.21
-0.98
0.69
"
-
0.56
" 1.15
-0.34
(1.21)
(-5.0'4)
0.55
, .•.
Egtimates i
are
two-sEage-least-squares
foreign"assets ±_ the minus real goverr_nent
U.'S. T-Bill expenditures,
based
on".annual
rate.plus the instruments
peso are
!dataiifor dePr_iation two lagged
1956-80.;
t-statistics.in
pare_thes.es."..
The:.ireturn
rate_ The scale variable, • y - g,:..::, is. real values of the right-hand side variables.
GNP
on :
Uu
38
(5}..and-(6) for happened
the multiplier
what w_id
to base mone T had the_e .been no financial IEeform_
inf_tion;,/ates fit_-as
been what they w@re.
far as-equation
ilk'oUr concl_sions
these sets,
:ef£ect of .ithereforms.. (i) and
This
.s_rt oz the actual
.._2 ana
_nese..more
o_
values
ro_st
indicate"a
very n_dest. sums. given i_ !981,..the._15.8
lag in the of.
eauat_ons_...(2)_ and
to its coefficient for
increase in base
estimates,
in inflation,
d._f_icits (see TablesIII.2
.as
increaSe_
money
based
(5).. However,
postponing
in 1982.
are greater
even
the .reforms would
._ase money
creation
These appear
.to be
the.PilO.8 billion";fall in net foreig,
billion
that
1982 the.lh1_othetical.
in additional
additional
(_.),
in.. 198.1 fall
This may be due to the. problem
l_J an_ equations-(2)and
billlon
in Table
for the combination
in hase_money
In any case,
_avoraD1e
there
at yearends
are presented
estimates
is..the.case
.at.most P630 million
•n _!9_l-an__ _.6
coef-
to seeihow
Zor base money
in base money do exceed the. actual
The..hypothetical
have meant
values
increase,
we _.hgve.Ina_cateu amove.
Q_ eq_a_!ons
_e
of our four equations,
increases
.(6) has with. regard
increases
and had
has .Be worst
sig_ Tot
it anyway
(6) and the combinationof
in which the hypothetical
._a_ion
use
combinations
These. hypothetical
:I!_i.5. Zn tWo-of
eqUations
the WTo_g
we shall
sets of hypothetical
1981. and 1982..
(6}
have
are.
Using different are-.four
Equati_
(4), Jrhas
•_c,Aent on',Inflatlon---but
us_n9
.to try to predict
assets
fall in..198_ ..andthe size O.f/;theh_get and IXI.3).
Hence,
while
the reforms
39
_Table CREATION
III.5
OF BASE MOI_EY:iACTUAL AND,:. HYPOTHETICAL 1981-82 (Billlons of Pesos)
A=tual
1981
1982
1.69
1.03
Equations
(1) and
(5)
2.32
3.10
Equations
(1) and
(6)
1.57
2.17
Equations
(2) and
(5)
2.27
3.60
Equations
(2) and
(6)
1.52
2.63
Source of basic data:
Central Bank of the Philipp_nes _ and _. Table III.4.
4O
do
seem
to have
deficits the
in 198!
enormity
exchange
of
1982 , theydid budget
were
depleted,
would
have
to
finance
the
budget
so only 'in a mino r
deficits
and
the
it does
been
experience confirms
earlier
developments
reforms
Philippines,
rate
not
look
preventedhad
difference
national
in the reserves.
reforms
deficit, Argentina
was
and
by
faced_
to
was
that
those
unable
Chile,
avoided
in to
inArgentina
Philippines
keeping
thus
the
lesson
in Argentina
similar
Argentina
inflation,
cial
difficult
at
way.
which
Given foreign
as
if the
the
reforms
balancenot
introduced.
undertook
only
the
crisis
This from
it more
and
reserves
of-payments been
made
on
the
a tight the
and the
result other
lid
problems
Chile.
on
Both
hand, the
was
countries the
control.
The
runaway
a depletion supported
government's Philippines
drew
Like
fiscal
result was
the
(1982)
Philippines.
establish the
the
McKinnon
of its
interfinan-
budget and
IV.
THE
VULNERABILITY THE
This
hig_.er_ i,terest ;" ,, . , . â&#x20AC;˘ and
borrowed
the
period
squeeze
on
bY _sing
ra_es-on . , ,
bank
profits.
empirical
gross
the
of
.of funds,
re_urns
on
rates
2-0/
hypothesis
net
el ,em.ents
.of
by.ba_ks
their
YO,_+
Y.
= gross
YO
:=theJrev_n_e.not in the
the
that
the
:i.eo-,.aeposits
.lo_ns.:c.arriw._....O..._er _f_.om
combined
to put
is
_qoing tO' be
ag.cQunting_-model. el em_n.t_
a severe
of
the
tested
2-!/
Me.:_ill
said .model.
accounting
model
provides
rates
of
(cost)
which
their
por_olios.,,
return
is.:_ssumed
portfolio.
=
=
sources
The
TO
hypothesis
interest
1 Y.
yj %
lo w
the
e_rned
the
......
revenue-cost
of
.various:
elements
where
baDk'.s , -
test
here., the_ essential
estimates o_
to
SYSTEM
CRISIS
revenueTgost
statistical
revenue
the
.
the. statistical
The
ze
and
repressed
bri._.fly discuss
rea,!i,
is going
funds, of
BANKING
BALANCE-OF-PAY_IENTS
section
,.
OF THE
That
banks
In _he,model,
.to be a
the
lin_r-func.tion
of
is,
YjXji
_
income
(i) of
the
ithba_nk,
associated.with
por_folio.:.(bala_ce
gross.rate
portfolio,
of. return
an_
of
the:elements
.sheet),
on
the
_th
element
in
the
_nd
2-_/Thlshypothesis has been suggested in IMF (1983). %_
_21---/See Lamberte of. the
(1983)
sai_;_odel..
41
for
the
development
and
application
42
Xji = the book value
of the jth element
in the portfolio
of the ith her_.
The total cost •Zhe elements
Where
is also
of bank portfolio.
Ci
=
Ci
_ Me
b0
=
That
to be a linear
function
of
is,
b0 +. _ bjX_i.
(2)
total current
the cost not
=
operating
associated
the Portfolio, b.
assumed
cost for the ith bank,
with any
of the elements
and
the rate of cost on the jth element
To obtain- the net rates of of bank portfolio,
in
in the Portfolioo
return on the various
we •subtract equation
elements
(2) from equation
(I).
This gives
where
_i = Yi - Ci = net income
for the ith bank,
rj = Yi " b.J - net rates of return on the portfolio, _0 = YO
- b0 = net fixed
balance
sheet constraint,
an increase
in expected
equal amount,
thereby
of
revenue
a Peso income,
increasing
rj
in
and that does
any of the elements
The interpretation
the Jth element
not v_y
of the bank's
has to be clarified.
increase
with
portfolio°
Under
in loans will result
but this will drain the expected
reK_vesby
cost of short-term
a
in an
43
borrowing.
Similarly,
cost" of servicing
a peso increase
them,
though
cost Of borrowing.. Thus, return or a_usted'
Instead by total assets aients
r. J
to avoid with
form of the equation
R.
_
cost
should be interpreted
equation
to be estimated
]
rjX*ji
the
as the margir_l
liability
of short-term
_tz borrowing.
(3}, we deflate
all variables
in the estimation
of coeffl-
heteroskedasticity
TA i = total assets Ri
of an asset or
inefficiency
a + r0A0i
will raise
also reduce _the expected
and probability
of estimating
associated
where
this will
'_uplic_t zate of return by the marglnal
in deposits
of residualso
Thus, t_
is:
+ wi
(4)
of the ith bank,
-_Ri/TAi_
A0i =a
scale variable
given by the reciprocal
assets of the ith bank,
i.e.,
of the total
I/TAi_
X_i = Xji/TAi_ r0
=coefficient
a
= the constant
rj
= net rate of return portfolio,
wi
Of the 'scale variable,
= the stochastic
assets
disturbance
all domestic
of co_nercial
banks
of the total assets of the entire therefore
be said _hat the banki_
In our stuffy.
on t/le _c_ element
zn _e
and
our study includes combined
term,
term.
commercial
comprised
banking system
banks.
about
system
The
72 percent
in 11984.
is reasonably
It can
coVered
44
Under in equation
normal conditionM_
(4) are expected
to be nonnegative
liability
items, nonpositive.
estimates
of equation
If the estimated financial
cial reforms,
---one
and after
of return
are lower •than
while
we need
th_ •financial re$o_Rs.
on earning
assets
after
those obtained
before
the finan-
of the asset
items
after the financial •reforms
in 1981 and another
items
those• of the
the
then our h'_pothesis is said to be supported.
that _the coefficients be negative
of the asset
To test our hypothesis,
(4) before
net rates
reforms
the coefficients
in equation
(4) may even
considering
in 1983---had
badly
Note
that two crises
hit the financial
system.
This study covers two subperiods, Reform
Period
subperiods, payments
namely. (198.1-84).
namely:
crisis;
Balance
the period Pre-Reform
1981-82,
and 1983-84,
(1977-80)
before
divided
into two
the balance-ofcrisis
sheets and income •statements of individual
commission
(SEC).
We encountered
sheet items since
banks do not follow
from the Securities great
the balance
a uniform
format_ 22/
from the Central
difficulty
sheets
into
and the Post-
the balance-of-payments
Were obtained
individual o_rrequest
It is divided
is further
the period
1977-84
2_/Data
Period
The latter
the period
balance
1977-84.
banks
for
and Exchange in sorting
submitted
out
Dy individual
More disaggregative
Bank would
period.
have been ideal
data,
since
banks are required to follow a certain format. However, to obtain _ata from the Central Bank was turned down.
45
for
example,
according have
.loans
to
because•most The
could
come_ upwith
earning
assets,
items,
banks
best
as
namely
excluded balance
cash
from
to be
The equation
ordinary
(4)..
IV.l.
other
and
its
_sset
our
was
itemswe two.
two-liabil-ity •cash reserve, is deliberately
exclusion always
is that so
and. liability
that
of the
the if
_items,
This .is :required
interpretatign
not
financial
includes
items,
satisf£ed
adjusted-accordingly. with
It
cash
for
to be the
sheet
Note-that
reason
least,squares
since
pooled . .
•
dummy
variables.
Table elements The
be
aggregative
investments,
and
of
However, • this . .
_uld
in
coefficients
(4) .
uu11!ze_
reforms.
The
-inanY
consistent
Delng
on the
checks
time. deposits,
balance
borrowings.
t needs
changes could
of •equation
tically
hand,
sheetconstrain
reserve
order
on
and
of
deposits
..
highly
in-Table
loans• and
the-mOdel.
there •ar e any
submitted
is presented
and
purpose. , •
classification
namely-deposits
defined
our
maturity and
_to
_demand, savings
type-, i.e.,
statements.
qU_te
•according
been •more-appropriate-for • . .. . .
-possible
cash
classified
•
(OLS)method
time
series . .
, we
esu_ma_e
equation
IV.2
presents
the
significant reasonable
at
_'-statlstics .01 level,
_considering
to
estimate
and.cross-section-data
are
_4)-wlta
estimated
of .bank portfolio COmpu_eu
.
that
before of and
net
and
used
wltnout
rates: of
and after all
the
we•are
is
the
regressions values
using
Of
tmme
return
(Cost)
financial are R_
-cross-section
statis are data.
46
Table VARIABLES
IV.I
INCLUDED
IN
THE
Variable
I.
II.
Description
Dependent R.
VarlaDle
_et
Independent I/TA. 1
MODEL
income
of
the
ith
of
total
bank
Variables Reciprocal
Xli
Investments
X2i
Loans
X3 i
Outstanding
X4i
Borrowings
of
assets
the
outstanding
ith of
deposits of
the
of
the
ith
bank
the Qfthe
ithbank
ith
bank ith
bank
bank
47
Table ESTIMA_D
IV. 2
NET RATES 09':RS_I_JRN(COST)•ON THE ELEMENT OF BANK I_OR_LIO: PRE-F_FORM (1977,80) AND POST-P_FORM (1981-84) _IO[M_
•PoSt-Re£o__ _Period (1981-84) • : Without With Time O__ies T_ D_es constant
0.0 350 (5,31),
0.0354 (4.42) *
Pre-Re_oz_p _ezio_ (1977-80) W_thout : Wit_ Ti_e DI_O,iE_, :T_me IAz_mies -0.0041 (--0.33) •
-
•
-0.0088 (-0.68)
_
I/TA
-0.1377 (-0.47)
-O .124 2 (-0.41)
"5.636 (,2.95) *
• Invest/aents
-0.0208
-0.0206
(-i.22)_
(-:1.15)
Loans
-0.0116 (L:I-39):
L0.0122 (-i-28)
.0 .O504 (4 .:25)*
Deposits
-0.0128 (-2:37) **
-0.0128 (,2.31) *_
_0.0275 (--2-80)
-0.0 26 3 ('2;65) **
Borrowings
-0.Q418 (,5.69 *
-0.0419 (-5.60)*
-0-.0 326 (r2.87_*
-0.0.306 (-2.6_)*"
0.0804 -(6.34)*
-4.8293 (,2.36) ** 0.0837 ( 6.42)" 0.0 5! 2 ( 4.27) *
o.oo"27 (i,,o6)
o?_ -:D79
0.0015 (0.59)
DgO
0.00 34 (i._)
:D81
082 •
-o.ooii (_o.48)
•D83
"0.0097
D84..
-0.0040 (-0.15)
_2.
0.2l •
0 ..0 _ •...
F
7.6a*
4.78"
,Significant
at
.01 level.
0 . 31 "
0'.31 .:
ii.6_'_
7_46,
48
Note
that
the
coefficients
statistically
significant
The
of
bank
estimated
portfolio
significant
at
constant
term.
that
the
is,
Their
net
rate
for
cost
deposits.
This
borrowings
consist
deposits
include
liability
of
The than
that
include rates average
be
expected
traditional deposits
our
not
the
for
a pz_o_ are
the
expectation;
positive,
negative. higher
a greater whose
while
Note
that
the
than
that
for
proportion rates
are
which
non-interest
are
el_ments
statistically
except
assets are
on
whereas,
rate
loans.
of
return
This
equity
on
investments
all
investments
relatively
rate
was
lower
23---/Investments also were
fixed
by
by
the
was
imposed
return
on
include
the
since
in allied
for
interest
investments
is possible
return
rates
are
deposits,
controlled
whose
to
substitutes
not
the
levels,
since
are
hence,
are
is slightly
return
on
(cost)
Period
items
deposit
demand
net
of
a ceiling
return
earning
borrowings
of of
of
conform
liability
variables
periods.
significance
of
dummy
the
of
usually
variable bearing
banks.
bank's of
both
Pre-Reform
signs
is to
those
time
rates
coefficients of
than
net
standard
coefficients of
for
forthe
the
higher
ofthe
Central
is relatively the
investments
undertakings Central
pulled on
variable
loans
who s_
Bank;
up. 23/ during
higher
hence In
the
contrast,
this
period;
loans.
investments Bank
at
in low
qovernment levels.
bonds
49
For the Post-Reform_Pericd, coefficients
of deposits
only the •constant term and the
and borrowings
are statistically
No_e tnau _ne net rake o_ cost oz norr0wlngs for,the
Post-ReformPeriod
interest
substitutes
deposit
substitutes.
average
interest
•percent
per annum
(WAIR) of deposit
in 1981 from
It suggests
bank profits.
The
and borrowed
investments
carrled•overfrom
namely,
crisis; and reason
1983-84:
Bank heavily
of, its effort
it playedonlya rate before
1983.
although
passive role
theweighted
jumped to 15.8 in 1980.
the low returns
the period
of
not statistically
is that the higher
adversely
interest
rates
on loans and
of repressed Indeed,
interest
rates
the results
of
hypothesis.
was further
subdivided
before
this period
the movements to_p
II.5,
rates for
and loans have
the balance-of-payments
influeaced
When
is that the coefficients
the period
subdividing
higher
per annum
on bank profits.
PeriOd
1981-83:
for further
84 as part
reason
seem to support'our
The Post-RefOrm periods,
result
funds•and
to put a squeeze
our analysis
nlgner
in the market
substitutes
that investments
on deposits
combined
to offer
13.3 percent
and loans are negative,
significant. affected
banks
competition
may be seen from Table
The most interesting investments
stiffer
compelled
As
rate
is relatively
than for the Pre-ReformPeriod.
rates were liberalized,
for deposit
significant. •
the balance-of-payments crisis
period.
The
is that the Central
of the interest
up excess
into two
liquidity.
in the determination
rate in 1983In contrast,.
of interest
50
The of
bank
estimated
portf01io
periods
are
on
profits
bank
with
presented for
not:statistically positive other
net
for
and in
i983_@4
for
tions-are in
1981,
the
the
result
1981,
This
reflects
over
the
having
the
market Bank
PNB
variation
the
(PNB)
alienated in
the
variation
in
on
interest even
net
for
the
two
sub-
effects
coefficients
are
of
while
investments
negative
is not
is
for
the
statistically
coefficient
period
time
down
in
from
banking
of deposit
rates
1982
by
remained inched
Table
II.5).
effort
the
oligopoly
have
explana-
only
the
not
not
liberalized
commercial
community
s did
Some
virtually
(see
deposits
but
were
deposits
exercised
Indeed, away
1983-84,
deposits
on
of
1981-82.
interest
savings
power
the
the
the
the
went
break
from
volume
the
theâ&#x20AC;˘period
rate
deposits. to
is that
_hen
oligopoly
for
elements
negative
coefficient
dummies
the
have
coefficient
during
rate
and
although
during
here.
interest
while in
National
order
dummies
on
regressions.
significant
in
same,
a little
the
the
(cost)
Loans
The
statisticallysignificant
statistically
IV.3.
time
however, the
time
periods,
without
all
return
without
Table
both
The â&#x20AC;˘intereSting is
of
Significant.
regressions;
significant
rates
of
for
the
banks Philippine
resulted awhile.
much
up
to do
in
24/
Thus,
with
income,
24/Commercial ----. banks seem to have no oligopoly for deposit substitutes since they are dealing mostly institutional investors who are sensitive to changes rates. In addition, banks are also from non-banks authorized to perform
over the market with large in the interest
confronted with strong competition quasi-banking activities (NBQBs).
51
T_I_ :w.3 ESTIMATEON_T _A'n_ o_': __a_" _c_)_IO":
(COST) 0_. THE-_m__TS
BE_'ORE-(1981-82)
_D
OF.SANK
DURING .(19:83-84)
Bi_C E-OF-PAYMEI_'_rS CRISIS
_ -. ,.1983-84 witho_ul: - With • Dtmmies Dumm£eS Constant
-I/TA
"
0,03)7 •'(3,82)*
0.Q431 (3.22).*
i',3921
.0.6162
(o.2s) Inve_tments
_ Dem,==£ts •
0•..0043 .(0.16)
(o.11)
0 .0285 .(.2..88).* -0 .70 99
(-o.2o)
0; 0290 (2.91) -0 .7536
(-_o.m.)
-0.0024 (-0.08)
-0.0.378 •(-,i.66)
:-O.O384 (-i ._8) ***
-0-0o_v
-o.o1-s6
_ ,ozo7_
:,o,0£02
(-O.76)
('O.97) .
:('0.89)
-(i_0.. 84)
-0.0257
'0.0261
-o;oo14
_0.0009
(.3.24),
--(--0:.18)
(-,o.iz)
-0;,04291
-0.0_32
--0-;0354•
-0.0359
(,3._94) *
(-3.94) *
_ .22).-_ l_rl_Owincj_ "
z_z-s2. w_out : ' " Wi._ Dummies Dum_.-es
D_-
(-_.4_.),
(-3.46.) *
--0,0019.
(.-o.6o) o81
-o.0o16 (-0.69)
_2
0;32
0.33
0.14
0.13
F
5.11:
4.27*
3.14'*
2.67**
*$ignlficant
at .01 level.
"'-_.z9_Zzcant at .U_ level. _**Signif_cant
at .i0 level.
52
The situation previous
period.
in 1983-84
The Central
CB bills and Treasury
time deposits deposits profits
Confronted
banks
from the
traded
with
high-yileding
the possibility
offering
This could
significant
higher
of
rates
for
be the reason why
negative
effect
on bank
in 1983-84.
Note that the interest However, period
started
to stay competitive.
had a statistically
different
Bank actively
Bills.
severe disintermediation,
is quite
the estimated
1983-84.
This
net rate of return suggests
on new loans contracted the interest contracted
rate
loss incurred
Those
Qn medium-
years,
who have heeded
this was severely
system's
ability
to weather
in interest
and long-term
have been badly
rate for
loans
the losses due
the Central
crisis
for the
to compensate
not to mention
must
Indeed,
is negative
that the increase
for term transformation period.
shot up in 1984.
in 1984 was nQt enough
in the previous
to loan default.
rate on loans
Bank's call
hurt during
weakened
the balamce-of-payments
the
the banking crisis.
SUI'4MARYAND CONCLUSIONS
V.
In 1981, the Philippines financial system.
reforms
primarily
aimed
HoweveT,
tWo years
after,
intervened, This
and thishas
episode
raises
at least.two
crisis?
the banking paper
Second,
system's
_as attempted
summary
ability
major
isles.
contribute
First,
extent didthe
these
The
the external
issues.
money.
demand
The
of base money, requirements
public shifted
The
following
which
is the other
To finance
alarger
The downward
that the monetary finahcing deficit
way of:extracting reserves.
$3
ofbase
component
due mainly to the lower reserve
by the reforms.
a'_smal.lerbase_orthe
the
into inteEest-_LE_ing
for bank reserve,
implies
is a
shiftin
is a component
had also decl_ned,
This
of the study.
which
d_____ndfor_basemoney
international
crisis?
of_currency,
mandated
â&#x20AC;˘moEe"burdensome
to what
reformsweaken
had led to a downward
base money.
system.
to the balance-of-
The financial
reforms
cri_
stress on the financial
and conclusions
the exp_nse
.on
a balance-of-payments
to weather
to address
depositsat
deficit.
to what
a set of
the financial
of the .major findings
de_and.for
pr_id'ing
reforms
to implement
atliberalizlng
put severe
extent did the finanuiai payments
started
shift
in the
system had been
of the government
from a smaller
the revenue;
budget
base means
and the burden
fell
54
The The
losses
results
were
very
size
of
can
small
drawn
from
could
not
inability
to
reforms
were
cial
national
cation
by
on
the
these be
put
in
in
1981 is
attributed
to
and that
the
the
resulted
reforms
money net
due
were to
foreign
1982. the
The
1983
financial
fiscal_control
partly in
rate
at
calculated.
the
reforms
assets
and
comolusion
the that
balance-of-payments reforms,;
the
in the
the
struck,
further
squeezed
bank
the
during
loss
the
R_ther,
tlmewhenLfinan
depletion
incurred
previous
years,
of and
low
has
a
the
study
-
of _ inter-
returns
of
the
repressed
the
and
on
bank
profits.
crisis
new
.
_terest.
period
was
to mention
no_
long-term the
losses
tO
loans
new
'
p Eewented t_hls has
resu!ts
rate,,on _nough
,.the
had But
_the
banks
d_0olit
deposits
In particular,
and
made
ensuing
disintermedi_tiQn.
i n the
in mediumnot
and
investrates
Whe_
The
that
induced
and
experienced
flight.
loans
had
crisis.
system
capital
funds
interest
This
impli-
indicate
_on loans
profits.
banking
tar-reaching
borrowed
balance-of-payments
increase
the
the period
rates
flight
deposits
o n bank
financed
interest
that
the
a squeeze
capital
contracted
on
and
_rom
further
show
liberalization Results
rates
to
crisis
which
the
fall
the
results
! reforms
vulnerable
increase
in
base
introduced
over
to
external
for
in
operation.
financia
combined
study
losses
establish
interest
,ments carried
runs
to
deficits
interest
bank
higher
more
due
reserves.
The
the
the
money
relat!ve:,to
budget
crisis
base
that
the
be
the
show
in
of
the
loans
compensate contracted
incurred
due
to
55
._umerous loan defaults. Centzal
Bank's
experienced
Indeed,
call to engage
greater
financial
those
banks
which
in term transformation difficulty
during
heeded
the
must have
the crisis
period.
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de
Dios,
E., ed.. An Analysis Of the Philippine Quezon city: u.P. Press, 1984.
Economic
Crisis.
Hill,
Hal and Sisira Jayasuriz a. "The Philippines: Growth, Debt and Crisis," Australian National University, Development Studies Center WorkingPaper NO. 85/3 (1985).
IMF.
"Interest Rate Policies in Developing Paper No. 22, (October 1983).
IMF/WB
Joint
Mission
Report.
Philippines Intal,
Hans-Jacob. Journal of
Lamberte,
M.
B.
the
Financial
"Anatomy Paper No.
of the Philippine 2 (1984).
"German Universal Banking and Finance,
"Financial
BOP
Banking Vol. IV
Liberalization
Structure of Capital Markets: Staff Paper Series No. 85-07
M.
B.
Response Monograph McKinnon,
Ronald
John
S.
et al.
A Review
t9 the 1983-84 Series I¢o. 8 I.
"The
and
and
the
Internal
The Philippine (April 1985).
Appraisal
of
Economic
Case,"
"Response
to
San
the
of
the
E. et al. "Foreign Debt, 1983-84 Philippine Economic of Twenty-Four, UNDP/UNCTAD
Jose, Armida S. "Central CB Review (September
Liberalization:
PIDS
Staff
PIDS
Lessons
Conference
Crises
Balance-of-Payments Crisis," A Report (July 1985).
Bank Rediscounting 1983).
56
Government
Crisis,
Balance-of-Payments
Philippines,"
PIDS
Commercial Banks," X, No. 1 (First
Balagce-of-Payments (October 1985).
Order
1970s: Korea and the No. 83-05 (1983). Re_olona,
The
Problem,"
from Chile and Argentina," Carnegie-Rochester Series on Public Policy, No. 17 (1982). Power,
Sector:
Scrutinized," (June, 1980).
. "Outputs and Inputs of Philippine Journal of Philippine Development, Vol. Semester, 1983). Lamberte,
Occasional
(1979).
Ponciano, Jr. PIDS Working
Krummel,
Aspgct@of
Countries,"
Paper
to
in the Series
and the the Group
Operations,"