Financial Reforms and Balance of Payments Crisis: The Case of the Philippines

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

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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.

REFERENCES

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,"