Is the Philippine peso overvalued?



The Philippines in the Asian Crisis / Rolf Hanisch. - [Electronic ed.]. - Bonn, 2000. - 17 pp. = 71 Kb, text. - (FES analysis)
Electronic ed .: Bonn: FES Library, 2001

© Friedrich Ebert Foundation





  • The elections of the last few years have shown that the old families, the clientele networks and self-privilege groups still play an important role in the voting decision. Progress in the institutionalization of the party system has failed for the time being.
  • President Estrada, who has been in office since 1998, has to serve many interest groups who supported him in the election campaign, but his room for maneuver is restricted by the pressures of the crisis and an attentive international public (IMF, financial markets). Domestically, he is supported by his remarkable show talent, which has so far guaranteed him an undiminished high approval rate, especially from poor citizens and voters. This does not solve the problems themselves, but neither does it make them politically worse.
  • In principle, the Estrada administration is continuing Ramos' policy, which is negotiated and coordinated with the IMF and implemented more or less efficiently. Attempts are made to increase tax revenues, maintain budgetary discipline and keep capital movements open, i.e. not to follow the example of Malaysia (1998) and reverse the reform.
  • The economy is now showing signs of recovery. 1999 will bring moderate positive growth (maybe 2.4%). For the year 2000 about 3% are forecast.Although the crisis hit the Philippines less hard than some other countries in the region, the country is currently not trusted to catch up with the other growth economies.
  • Locational disadvantages are in particular the inefficient, cumbersome and also unpredictable bureaucracy and judiciary because of its corruption with a clientele that extends to the very top of the state apparatus; the infrastructural equipment in the traffic and communication sector as well as an inadequate and expensive energy and water supply. Furthermore, wage costs are seen as too high and labor relations too regulated and too rigid.
  • A tax reform and making the tax system more effective are of central importance. An efficient and non-corrupt state administration cannot be had at low salaries (even if the question of pay alone does not solve the problem). Even if parts of the infrastructure are or are being privatized, there remains a huge need for public investment in both material and human infrastructure (education, health).




Key facts at a glance

The "Asian crisis" emanating from Thailand did not spare the Philippines either. The Philippine peso came under pressure and ultimately had to devalue hardly less than the Thai baht Debt servicing more complicated. Many companies got into trouble, with closings, layoffs and a rise in what was already high unemployment. Banks were faced with an increase in "bad" loans. However, this remains moderate compared to the other crisis countries and the crises of the past. There was no banking crisis, but a more cautious lending policy, liquidity bottlenecks for companies and, related to this, a collapse in investments.

The social hardship was not only exacerbated by the Asian crisis. A parallel event worsened the economic and, above all, the social appearance during the crisis: A devastating drought as a consequence of the El Niño phenomenon led to a dramatic collapse in the production of staple foods and some industrial and export crops. The decline in total agricultural production was only exceeded by the slump in the construction industry. Industry only experienced a slight contraction, and (industrial) export production even increased by double digits. All other sectors posted weaker positive growth.

All in all, the crisis has shaken the Philippines far less severely than Thailand, South Korea and Indonesia, for example. This is a novelty insofar as the Philippines were unable to keep up with the dynamic development in the region for decades and were clearly left behind by Singapore and Malaysia, overtaken by Thailand and almost overtaken by Indonesia, which was far behind (based on GDP pc ). It was only in the last few years - under the Ramos presidency (1992-1998) - that a trend reversal with higher growth rates appeared to be indicated, aided by some structural reforms. This was stopped for the time being, However, the homemade causes of the crisis are not as serious as in neighboring countries. The crisis management that is possible within one's own limits to overcome the current crisis therefore has far fewer problems to overcome than in Thailand and Indonesia, for example. On the other hand, there is still a considerable backlog of reforms that the Ramos government was not able to cope with or because of which it failed. After all, this government was guided by a more or less consistently implemented development strategy vision. Such a vision is not yet recognizable under President Estrada, who was elected to office with a clear majority in May 1998 as the incumbent vice-president and opposition candidate (both are possible in the Philippines).

Change of power in the crisis

general Fidel Ramos was elected as a pale candidate in 1992 with the support of his predecessor Cory Aquino with only 23.6 percent of the vote, just ahead of a populist candidate for president. He turned out to be a relatively successful reform presidentwho sought the connection of the Philippines to the East Asian growth economies and also had some successes to show. Deregulation and privatization should reduce the power of the economic oligarchy and increase competitive pressures and the efficiency of the economy. Ramos attempted to consolidate the state budget by privatizing individual state fields of activity, through spending discipline, tax reform and improving tax collection, which he has been able to do since 1994, but only taking into account the temporary privatization proceeds and without taking into account the ancillary public budgets. The government succeeded in relieving the state budget and improving the infrastructure, which, however, still cannot keep up with the successful countries in the region in terms of quality and price.

The previously protected inefficient, expensive, not very saver-friendly banking system was opened to foreign competitors. The deposit and loan rates increased significantly. Finally, the movement of capital was liberalized and brought about the unhindered flow of foreign capital to increase the low domestic savings and investment rate, but of course also for speculative purposes. The Ramos administration thus enabled a deepening of the monetization and internationalization of the economy of the Philippines. It got stuck in many sub-areas (as in the tax reform) or was only able to achieve ambivalent successes (as in the case of the partial privatization of the energy sector). Nevertheless, there was a clear economic upturn. It did not come close to the boom phases in the neighboring countries, which had already been successful, but seemed to have overcome the agony of the past few years with a clear objective. There was therefore a strong case for an election-confirmed extension of Fidel Ramos' presidency.

However, the 1987 constitution prohibited re-election. At that time, the constitution-makers had in mind the long twenty-year term of office of Ferdinand Marcos, which was initially enforced with impure means and then later by force. But the re-election ban also hit a relatively successful administration. A campaign by Ramos supporters in favor of a constitutional change provoked bitter resistance from the Catholic Church, Cory Aquinos, the left and parts of the oligarchy. Ramos therefore withdrew into private life.

In the elections in May 1998, the former film actor, mayor, senator and most recently Vice-President Joseph Estrada prevailed with almost 40 percent of the vote, well ahead of the candidate and confidante of Ramos, the previous speaker of the House of Representatives de Venezia (16 percent) . Estrada had also run as a presidential candidate in 1992, but had given up prematurely for lack of money. As a vice-presidential candidate, he joined one of the most successful Marcos cronys, Eduardo Cojuangco, who ran for the presidency with enormous use of his own resources, but narrowly failed as the third (18 percent). Estrada was elected vice-president without influence with 33 percent of the vote, demonstrating his continued popularity from his days as a film actor - in macho roles in which he still likes himself as a politician.

This election - and the public opinion polls that followed - made him a serious presidential candidate, and investing in his further rise was promising. Estrada was elected with broad support across the country - he was ahead in twelve of 15 electoral regions and second in three regions. No other candidate had a similar national anchorage. As usual, Estrada's election manifesto was not particularly specific. Of course, the fight against corruption and crime as well as concern for "the poor" was the focus. The poor in the cities and in the countryside probably also voted for him in the first place and, if the opinion polls are to be believed, have given him high approval rates so far Loyalty. With his political style, his language of expression, his limited intellectual possibilities and his way of life, he can hardly gain sympathy among the academic middle classes. He received direct support from a group of bankers, Marcos-Cronys, a left-wing NGO network and a group by professors from the University of the Philippines, some of whom he has been personally connected to for years.

The elections of the last few years have shown that the old families, the clientele networks and self-privilege groups still play an important role in the voting decision. The cost of the election campaign has risen, but the use of naked force tends to decrease. The free - and unpredictable - voter who makes spontaneous decisions and is influenced by emotions and television advertising is on the rise.

Progress in the institutionalization of the party system has failed for the time being. Fidel Ramos and his mastermind, the security advisor General Alomnte, tried to build a "ruling party" with a mass base, analogous to the model of the UMNO in Malaysia. The MPs, provincial and local politicians who profess their support were indeed impressive. The 1998 elections were also impressive - despite the lost presidency - brought her clear majorities again. Nevertheless, it already eroded before the polls and collapsed completely after the lost presidency. The party had a structural problem with its size: It could not satisfy the demands of all members and aspirants, and that weakened them.

President Estrada, who has to serve many of the interests that supported him, has similar problems, but his room for maneuver is restricted by the pressures of a crisis and an attentive international public (IMF, financial markets). Domestically, he is supported by his remarkable show talent, which has so far guaranteed him an undiminished high approval rate, especially from poor citizens and voters, if the opinion polls are to be believed. This does not yet solve the pending problems themselves, but neither does it make them politically worse.

All in all, the Estrada administration is continuing Ramos' policy, which is negotiated and coordinated with the IMF and implemented more or less efficiently. The core of this policy can be paraphrased as an attempt to increase tax revenues, maintain budgetary discipline - but now again with limited deficits - and keep capital movements open, i.e. not to follow the example of Malaysia (1998) and reverse reform.

Let us take a look back at the deregulation of capital movements, then at the outbreak, the course and consequences of the crisis and the crisis management first of the Ramos and then the Estrada administration.

The deregulation of capital movements and the economic boom

In the 1980s, the movement of capital was still heavily regulated: exporters could (legally) freely dispose of just two percent of their foreign exchange income. Foreign currency exchange for trips and stays abroad was limited. Foreign investment was prohibited. The approval of re-transfers of investments and profits from the country by foreigners could take three to nine years. The deregulation of these provisions in the early 1990s led to an increase in capital movements in both directions and a significant increase in the capital inflows into the country that financed the investment and offset the deficit on the current account. Net capital inflows increased from 4% of GDP (1990) to 12.8% (1996). The movement of capital also partly induced the international movement of goods and services, which was also significantly expanded in the 1990s. Exports of goods and services rose from 29% of GDP (1990) to 47% (1996), and imports from 37% (1990) to 53% (1996). Short: The internationalization of the economy of the Philippines was significantly advanced. It was now above the values ​​of Thailand in the movement of goods and services and was able to narrow the gap in the movement of capital.

For the first time, it was again possible to attract foreign direct investment into the country. In the 80s these had sunk to a low point. The statistically reported inflows were mostly reinvested profits, the conversion of debts, etc., hardly any real new additions. Since 1994, new inflows of around US $ 1 billion annually have accounted for around two thirds of reported foreign direct investment (in 1990 and 1991 it was just over a quarter). Portfolio investments increased even more, although - in the opposite direction - wealthy Filipinos abroad are also participating. High inflows were therefore also offset by high outflows, with a positive net balance that peaked in 1996 at over $ 2 billion.

The volume and structure of external debt in the Philippines also developed significantly more favorably than in Thailand before the crisis: net borrowing as a share of the financial account is significantly lower in the Philippines. Medium and long-term loan inflows dominate, in Thailand it was short-term loans. This has to do with the fact that state and multi-state lenders are still the largest creditors in the Philippines and that the state, the central bank and public companies are still more evident here as borrowers and debtors than in Thailand, for example, although before the crisis (since 1994, especially 1996) the private companies and banks also borrowed considerably abroad.

The influx of private capital into the Philippines was well in line with the trend in the region. However, it was still lower than in the countries that have already been successful. It is associated with upward pressure and rising inflation risks. The central bank therefore intervened actively to keep the currency relation to the US dollar in a narrow range between 25.5 - 26.2 peso / US $. It tried to limit the expansion of the money supply by expanding its foreign currency balances by reallocating its peso into foreign currency balances, which in 1996 finally accounted for 95% of the reserve money (1992: 26%). However, the Philippines' foreign exchange reserves only covered three months of imports and were therefore much lower than in the neighboring crisis countries. There it turned out, however, that higher reserves could not contain the confidence and currency crisis, but could only be squandered uselessly in it.

By lowering the banks' minimum reserves and by eliminating the state as a net borrower, it was possible to lower the high interest rates somewhat, but still remained at a considerable level in an international comparison. The inflation rate was also acceptable by Filipino standards. Consumer prices rose 8-9 percent annually from 1992-96. However, they were thus significantly higher than the inflation in the countries of the most important trading partners. In view of the relatively fixed exchange rate, this meant a real appreciation or overvaluation of the peso. The real effective exchange rate (comparing the prices of commercial goods to domestic prices) rose by 40 percent. The overvaluation of the peso meant that goods and assets that could not be traded internationally became relatively more attractive and expensive, while imports became cheaper. The imports experienced a boom, which was additionally favored by the lowering of the import tariffs.Investments in domestically oriented economic sectors and assets became more and more attractive - and indeed the projects approved and funded by the Board of Investment point in this direction.

Yet: The export sector also boomed. It grew by no less than 18 percent annually on average between 1992 and 1996. Its dynamism was carried - as in other Southeast Asian countries - by the electronics / semiconductor sector, the clothing industry and - since 1995 - the machine and transport industrywho were able to further expand their share of total exports - from 53% (1992) to 72% (1997). The overvalued peso is unlikely to have significantly hampered the development of these export industries. They are still poorly integrated into the local (supply) economy. It is assumed that the electronics industry imports 75% of its production costs, the clothing industry 60%, and the metal industry 40%. The share of labor costs is 11%, 10-30% and maybe 20%.

That means: This growth-oriented part of the export economy benefited more from the relatively cheap imported goods, and rising exports also led to corresponding imports. The electronics and mechanical engineering / transport industries will also predominantly be made up of parts of transnational corporations (TNC), for which currency relations are of little importance anyway. The overvaluation of the peso thus primarily discriminated against the agricultural and extractive export industries, whose development continues to suffer from volatile world market prices and weather conditions, the exhaustion of resources and a lack of modernization.

Exports grew much more slowly than imports. This led to a widening of the trade deficit (1996: 13.7% of GNP) and a relatively high steady current account deficit (1993-96: around 5% of GNP), which is not necessarily negative, but is irritating. Exports also rose in 1995 (29.4% and 1996 (17.8%)). Only the clothing industry experienced a decline of 5.7% in 1996, which continued by a further 5% in 1997. In contrast, machine and transport goods exports quintupled in 1994 / 97, and the electronics industry doubled its export income in 1994/96. Overall economic growth has increased steadily since 1991 and has been over 5% since 1994 (1996: 6.9%). Apparently the boom had not yet reached its peak. You thought you were on the way to the status of an emerging country.

On closer analysis, however, the problems could not be overlooked. The Philippines latched onto the globalization strategy already successfully practiced by the neighbors at a profit. The growth achieved in this way was still significantly lower than in the old boom countries - with the same level of risk, as it should then show. The growth base was still very narrow. The industrial sector was unable to expand its relatively low share of GDP and, above all, of employment. The extractive sectors, mining, forestry saw dramatic slumps. They are dying industries due to resource depletion and plunder. More important was the unsatisfactory growth in the agricultural sector. Exports grew primarily in the sectors that had the least inland links and were therefore not dependent on the still relatively expensive domestic inputs. That was an important indicator. Compared to other competitors, the competitiveness of the "location Philippines" had still not improved, despite the progress that could be made in individual areas.

Were there leading indicators for the imminent crash? Was it crackling - as in Thailand - in the beams before the crisis broke out? The central bank and the government saw no problems. The "Fundamentals"were correct. The peso was not thought to be overvalued. A study for the IMF only recommended reducing inflation even further and substantially increasing international reserves in order to better support confidence in the stability of the peso. However, the real estate crisis in Thailand also cast its shadow on the Philippines. The still rising real estate prices began to cause increasing uncertainty, although the construction industry was still booming (1996: 10.9%); Real estate heaps with large vacancies and falling prices were not yet a problem. In February 1997, UBS Securities published the (alleged) over-exposure of the Philippine banks to the real estate sector and their excessive foreign debt, which would make them vulnerable to a peso devaluation. In fact, however, the banking exposure in the real estate sector was significantly lower than in Thailand (there via the finance companies). Nevertheless, the central bank reacted shortly before the outbreak of the crisis in June 1997. It ordered that the banks should only lend a maximum of 20% of their loans to the real estate sector and only lend a maximum of 60% (previously 70%) of the value of the real estate. Real estate companies have also tended to be more robust and healthier in the Philippines than in Thailand. They financed a large part of their investments from equity and through pre-sales. A piece of news unsettling the economic climate finally came from a dying branch of the economy: The largest sugar processor, Victorias Milling, announced that it would no longer be able to service its liabilities of over 6.6 billion pesos. This news also threw the banks involved into twilight and raised the question of whether "more Victorias cases" were to be expected. This latent uncertainty in the country initially only had real consequences for the stock exchange , but somewhat lower for real estate values ​​(end of January - end of June 1997: - 14.7%) than for the market as a whole (- 16.4%).

This paved the way for the Philippines to be immediately infected by the currency and stock market crash in Thailand in July 1997. It didn't help the Philippines either that there were some significant real economic differences to Thailand. The planning authority listed these in 1998:

  • Lower credit exposure of the financial system to the real estate sector, 11.6% of all bank lending in the Philippines, 9.5% of bank lending in Thailand and 23% of financial company lending;
  • significantly lower vacancies in the real estate sector (4% to 25%);
  • Banks' foreign exchange liabilities are less susceptible to currency fluctuations and capital flight, since 52% of the same belonged to residents (with foreign exchange accounts in the country) and 60% of these resident dollar loans were used by exporters, i.e. these were secured by export revenues;
  • lower share of short-term in total external debt (19.1% versus 36.6%);
  • the expansion of bank lending occurred as part of the expansion of economic activity and asset growth after liberalization. The loan-to-GDP ratio was therefore only 63% in the Philippines (1996), but 114% in Thailand;
  • the current account deficit, at 4.5% of GDP, was significantly lower than in Thailand (8%). In Thailand exports shrank by 2% in 1996, in the Philippines they expanded by 17.7%. The Philippines also had significant remittances from migrant workers (1996: $ 4 billion).
  • Finally, notes the government document, the structural reforms of the past few years have not only liberalized and opened up the economy and strengthened its institutions, but also improved the transparency of state activity and its adherence to rules rather than spontaneous criteria. In other words, reforms that the other East Asian countries, which recently had to seek support from the IMF, have yet to implement.

In the script of free and networked financial markets, however, there is no room for a balanced assessment of the different real economic conditions. Market participants did not believe in the stability of the peso after the baht fell. The peso was also overvalued, and the real economic arguments mentioned above could not change that. If there is a devaluation, it is important to act quickly to limit the damage. The Bank of Thailand had demonstrated how it was squandering virtually all of its reserves without being able to defend its currency. Bangko Sentral in the Philippines learned from this. After using about $ 1 billion (of her $ 12 billion reserves) to defend the peso, she gave up and allowed the peso to float freely and devalue. Against the US dollar it lost 38% of its value from June 1997 to January 98 (from 26.4 to 42.4 Peso / $). The peso then recovered somewhat (August 1999: 39.7 peso / $). That was hardly inferior to the devaluation of the baht.

Mainly portfolio capital was withdrawn. The banks liquidated significantly fewer assets abroad, and significantly more bonds were bought abroad than were sold (and repaid). In other words: Not only foreigners (speculators !?), but also local owners of capital feared devaluation and caused it.

The stock market could not remain unaffected by this capital withdrawal and the general uncertainty. Also on this exchange - one of the smallest in the region - insider trading, illegal manipulation and fraud are not unknown. Fuel was poured into the fire of the general mood of crisis when a well-known newspaper columnist accused her stockbroker of cheating on her out of 7 million pesos. It took the stock exchange eight months to investigate the allegations - and to wash the suspects clean. So this affair did not end any differently than others before. No investigation of the stock exchange in the direction of insider trading or stock market manipulation has so far produced a result. In the interested public, this incident only reinforced the view that the small private investors are disadvantaged by the brokers and the stock exchange establishment compared to the large investors. The Securities and Exchange Commission has now ordered that brokers and dealers are no longer allowed to manage their own securities accounts, in order not to be tempted to tamper with their clients' investments and transfer them to their own accounts. One can hardly expect much from this regulation in practice either. In this uncertain environment, stock exchange listings plummeted dramatically. From June to November 1997 they fell by 37% and, after a slight interim recovery, reached their lowest point in August 1998 at 1192 points (-58% compared to June 1997 and -65% compared to the all-time high in January 1997). By the end of 1998 it then recovered to almost 2000 points, only to fluctuate by 2200 points in 1999 (-35% compared to January 97).

Crisis Management and Course of the Crisis

The sudden collapse of the currency had to catch foreign currency borrowers in the Philippines who had not hedged their liabilities on the wrong foot. In the last two years in particular, private companies and commercial banks had increased their dollar debt. However, this was still significantly lower than in Thailand. The currency crisis therefore had significantly less real economic consequences in the Philippines. However, these were not insignificant.

The Philippines - like Thailand, South Korea and Indonesia - also sought IMF support. However, as in the other cases, the fund did not first have to be brought into the country. He's been there - for 35 years. 24 programs, including three structural adjustment programs, had been implemented during this period. The so far penultimate program ("Extended Fund Facility"), agreed in June 1994 for three years, was actually supposed to be the last. In it, the liberalization, privatization and tax reform policy was agreed upon, for which the IMF $ 650 million It was supposed to expire in June 1997. The crisis forced an extension to March 1998. A further "Preventive Stand By Agreement" had previously been negotiated with the fund in February 1998, initially for a two-year term. The fund opened a $ 1.6 billion line of credit in the Philippines. With this, Ramos was certainly trying to pin down his successor on his (IMF) reform program. It was already becoming apparent at that time that it would hardly be his preferred candidate (de Venezia), but Estrada who would succeed him.

The agreement on an IMF program means that the government enters into a context of discussion with this international actor about its economic policy. Economic key data and forecasts are discussed, economic goals and the necessary implementation steps are negotiated. The result is reflected in voluntary commitments by the government, which is then exposed to periodic (quarterly) evaluations and assessments, possibly also critical inquiries and assessments by the fund.

Opponents of the fund, of which there are quite a few among the left and the pension capitalists in the Philippines, the whole direction does not fit. They seek to play the nationalist card and speak of a "dictation" by the fund. As a rule, there can be no question of that. The implementation of the program is the responsibility of the government. It has many options for watering down programs that have been decided upon or implementing them diligently, if they do The Fund can withdraw or threaten to withdraw, but it will only really do so in extreme cases. In many cases, the government is simply not in a position to implement reforms in a targeted and efficient manner. The bureaucratic apparatus is porous and can only act to a limited extent. Established interests cannot simply be ignored. In a democratic country with a separation of powers, it requires the involvement of Congress in passing reform laws that the government cannot be sure of. In fact, the IMF is only a important actor who can strengthen the reform group in the country concerned. If this is missing, he has little chance of really being able to make a difference. If the central actor in personalist political systems - the president - cannot be assigned to the reform faction (as in the case of Ferdinand Marcos), the actual scope for shaping it is also very limited. The prospects are best when the president sees himself as a reformer. That was the case with President Ramos. The results were therefore remarkable.

For the Philippine government under Ramos and then also under Estrada, regulating and "closing" the current account and capital account during the crisis or as a consequence of the crisis was not up for debate, as happened in Malaysia in 1998. Nevertheless, attempts were made to use the peso to defend, first through direct purchases on the foreign exchange market, then by raising interest rates, increasing the reserve ratios of commercial banks, limiting the banks' international assets.

The Ramos government also wanted to keep its budget balanced. She announced a 25% cut in spending. In the summer of 1998, 38% of the household (excluding the wage and salary budget) was in fact frozen. After all, the government simply stopped paying its bills for services in order to improve its balance sheet. By the end of 1997, outstanding debts were accumulated to 129.3 billion pesos - with total expenditures of 470.2 billion peso. In June 1998 it was still 108.5 billion pesos, in March 1999 68 billion peso. In 1997, a visually balanced budget was achieved - at the expense of suppliers and contractual partners. The Estrada government accepted a moderate budget deficit of 50 billion peso (1.8% of GDP) and (assumed) 68.4 billion peso for 1999. A good part of this had to cover the rising interest payments (+ 22 billion peso). Peso, 1998). The purpose of the interest rate hikes and budget discipline (on the expenditure side) was to limit imported inflation, (re) establish international confidence in stability, to demotivate capital outflows and to inspire inflows, also to stabilize the peso.

This policy of defense of the peso was not without opposition. Five professors from the prestigious School of Economics at the University of the Philippines - two were to later join the Estrada government as budget and planning ministers - declared this policy in August 1997 in a joint memorandum before the House of Representatives' economic committee to be nonsensical and counterproductive : The real problem of the Philippines and the cause of this crisis - the dwindling competitiveness - is only exacerbated by the previously stable and overvalued exchange rates. They therefore expressly welcomed the devaluation (at that time, however, only 11%). In their opinion, this should have been initiated much earlier by Bangko Sentral, as the overvalued peso had become one of the most important obstacles to the continuation of the growth course. The rate of the peso could not only be determined by the conditions of the national economy. International competitiveness had a relative dimension and therefore the exchange rate of the peso had to be seen in relation to the devaluation of the currencies of the other major competitors in the region.

The peso depreciated against the dollar by 40% until August / September 1998 (to 43.7 P / $) and then recovered slightly (February 1999: 38.7 P / $, -32%).Against the currencies of the other large markets in Japan, Europe and Hong Kong, the devaluation was also of this magnitude. The peso was also devalued against the currencies of its competitors Taiwan (- 21%), Singapore (- 19%) and South Korea (- 10%), albeit at a lower rate. These emerging markets are actually already in a different league. The exchange rate against the Thai baht and the Malaysian ringgit as well as the Indonesian rupiah is more important. The peso appreciated slightly (+ 3%) against the first two and strongly against the rupiah (+ 124%). On balance, the Philippines were hardly able to improve their poor competitive position through the devaluation.

The UP economists also pointed out that rising inflation could counteract possible improvements in competition through currency devaluation. The usually associated decline in real income could lead to intensified social conflicts. Not least because of this, they pleaded for a low interest rate policy, which at the same time would demotivate the undesirable volatile portfolio inflows.

Indeed, whenever possible, the government tried to avoid covering its deficit in the peso market. It was able to place several large bonds on the world market or to take out loans on the domestic foreign exchange market. Initially, however, a high interest rate policy remained. If the devaluation of the peso put dollar borrowers who had not secured their debts in distress, the rise in peso borrowing rates put a strain on the entire borrowing economy.

However, the high interest rates were not only a consequence of central bank policy. They were also an expression of the precautionary policy of the oligopolistic banking system. This is also made clear by the growing interest rate difference between the credit and debit interest. This difference, which has always been significantly higher in the Philippines than in the other Southeast Asian countries, had been reduced somewhat before the crisis (to 3.3% in 1996). In 1997 the difference rose to 5% and in the first quarter of 1998 to 7.7%.

At the same time, the price-adjusted borrowing rates almost doubled in 1996/97 and in the first quarter of 1998 were at least 12.5%. These low credit and high borrowing rates led to riots and protests by the middle class in the provinces, organized by the local chambers of commerce. The indignation was greatest in Mindanao. In Midsaysap, North Cotabatu, businessmen temporarily closed their businesses in protest. One newspaper reported that "thousands of small businessmen, peasants, laborers and market traders began to close their bank accounts." Under pressure from Bangko Sentral, the Bankers' Association of the Philippines agreed to cut interest rates, or at a surcharge In fact, the interest rate peak was reached in January 1998, government bonds stood at 20.5% and bank borrowing rates at 21.1%. By February 1999, the nominal interest rate on Treasury bonds fell again to 13%, the borrowing rate (until January 1999) to 14.9%. If the borrowing rate is adjusted for the rate of price increase, it fell in real terms to 3.6% in the fourth quarter of 1998 (1st quarter of 1998: 12.5%, 1996: 5.7%) and is thus lower significantly lower than before the crisis.

However, this did not solve the companies' credit and liquidity problems. The banks are now extremely cautious and hesitant about lending. They lack "good customers", risky loans are no longer granted. The bank loan thus effectively collapsed and contributed significantly to the economic difficulties of companies. It particularly affects medium-sized and small companies, which are not like large customers on the can refinance the domestic foreign exchange credit market, where interest rates have remained unregulated.

All of these factors have contributed to the fact that a growing number of bank borrowers can no longer service their debts. The share of problem loans in all loans jumped from just 3.5% (1996) to 5.4% (1997), 11.0% (1998) and 14.5% (April / May 1999). The assumption of collateral (real estate and other assets) also increased: from 13 billion peso (4th quarter 96) to 19.26 billion peso (4th quarter 97) and finally even 46.58 billion peso (4th quarter 97). Quarter 98). In relation to the total loan amount, this would be 0.9%, 1.1% and 2.8%, which the banks can hardly monetize again at this level. In relation to GNP, problem loans are now likely to have gained in importance as they did in the great crisis of the mid-1980s.

However, there can be no talk of a crisis in the banking system today. The Philippines differ significantly from Thailand and Indonesia. The loan defaults, the significant increase in minimum reserves ordered by Bangko Sentral, and finally the decline in banking business led to a collapse in profits for most banks, but mostly not to losses. The profit slump ranged from a moderate -5% at the well-run Equitable Banking Corp. (to 2 billion Peso) and - 10.4% at the largest bank in the country, the Metropolitan Bank and Trust Corp. (to 4.7 billion peso), up to a profit slump of over 40% at the Philippine Commercial International Bank (to 2.16 billion peso). Only the once largest and now privatized Philippine National Bank fell into the red among the big banks (- 5.15 billion Peso). Overall, the profitability of banks (return-on-equity) decreased significantly from 16.3% (1996) to 12.4% (1997) and 6.6% in December 1998. But it remained positive.

A study by Bank of America placed the Philippine banks in a "medium risk category". Among the Asian countries examined (Singapore, Taiwan, Japan are missing), the Philippine banks follow the banks of Hong Kong by some distance. However, they are still ahead of the banks in Malaysia , India, the PR of China and South Korea as well as (beaten) the Thai and Indonesian banks. In a regional comparison, they performed relatively well in terms of liquidity and asset quality, significantly worse in terms of profitability, vulnerability to external influences, interconnection with the world market and access to capital.

Still, there were losses. Three smaller banks got into trouble, probably due to loans to owners, managers and their relatives. A massive deposit withdrawal by savers led to the intervention of Bangko Sentral, which helped out with a total of 8.7 billion pesos to prevent the crisis of confidence from spreading to the entire financial system. The crisis has so far not provided any incentive to restructure the banking system, although business circles are generally convinced of the need to create larger banks.

An important merger has been recorded, but it has nothing to do with the Asian crisis, but rather highlights the corporate culture of the country: The two main shareholders of the Philippine Commercial International Bank (PCIB), the business magnates John Gokongwei and Eugenio Lopez, no longer came and decided to auction their bank and cash in. The smaller Equitable Bank prevailed as a successful bidder, and this merger made it the second largest bank. So far, this has not been an initial spark for further mergers. Merger talks have only taken place between two medium-sized banks (Asian Bank, Philippine Bank of Communications).

The previous president of the auctioned PCIB, Rafael Buenaventura, became governor of Bangko Sentral in June 1999. He is considered one of the most capable and innovative bankers in the country and happens to be a fellow student of President Estrada in the Ateneo de Manila in the 1950s. He may have even more powers than his predecessors in terms of his supervisory rights in bank lending. In 1999 a bank amendment was introduced in the Senate, through which attempts are made to further strengthen the supervisory rights of Bangko Sentral and which should enable a previously impossible complete takeover of Filipino banks by foreigners, but only up to a maximum of 30% of all bank investments in the country. It remains to be seen whether the bill will pass Congress in this form and whether it will then gain any real significance.

Balance of payments and real economy in crisis

What are the consequences of the crisis for the real economy? Capital inflows decreased dramatically from 1996 (+ $ 11 billion) to 1997 (+ $ 6.4 billion) and 1998 (almost $ 1 billion). As expected, portfolio capital, which only saw a net outflow in 1997, was responsible for it, as well as bond trading, where a growing deficit is being recorded, and short-term capital. Finally, the statistics note a change in the banks' non-monetary assets, which went from a high inflow to a net outflow (1998). It is important, however, that foreign direct investment and, in particular, the actual new inflows in 1996 and 1997 remained at a level of around $ 1 billion, which is encouraging for the Philippines, and increased considerably to $ 1.6 billion in 1998.

So far, capital inflows have had to finance the large current account deficit, which was actually a trade deficit. That was no longer necessary in the crisis. The current account deficit widened again in 1997 (1996: approx. $ 4 billion; 1997: $ 4.3 billion), but in 1998 it recorded a net inflow for the first time (+ $ 1.3 billion). This was essentially a result of the balanced trade balance, which - as in the other crisis countries - was made possible by a weakening of imports and - unlike in neighboring countries - by a dramatic increase in exports. Exports increased by no less than 44% between 1996 and 1998. Nevertheless, one cannot speak of an export boom that would allow conclusions to be drawn about the positive stimulating devaluation or the state of the economy as a whole. Exports are carried solely by the electronics and machine and transport sectors, which have not yet completed their expansion in recent years. These two sectors increased their export value by 81% in 1996-1998 alone. They now generate almost 70% (1998, 1996: 55%, 1992: 31%) of all export income. The boom in the two industries was made possible by the expansion of the export zones in which transnational corporations settled, which produce parts of their internationally dispersed production chains, whose import requirements are correspondingly high and their connection with the national economy is rather low. In spite of these deficits, the development is still positive overall, as the booming sectors are not hindering or crowding out other exports.

Their picture looks cloudy in itself: The clothing export industry is stagnating. All other industrial goods exports collapsed by 11% in 1998. The exports of agricultural goods and raw materials are stagnating, at most with the price fluctuations on the world market. Part of the deficit trade balance has so far been offset by a positive balance in services. The most important assets are the remittances from guest workers, seafarers and emigrants to their homeland, although only a little less than 2/3 of them use the banks for this. These Filipinos abroad and their families at home are only partially winners of the peso devaluation. The guest workers in the Asian region (1992: 26%, 1997: 42% of all new placements) were also threatened by the crisis in their host countries with layoffs or deterioration in working conditions. The officially registered transfers collapsed in 1996/98 by -25% from Asia, from Europe even by -44%. These slumps, however, were more than offset by the sharp increase in remittances from Filipinos who emigrated to North America (+ 55%), whose share of total remittances rose from 60% (1996) to 81% (1998). Overall, the number of officially registered dollar transfers increased during the crisis, as in previous years. In doing so, they made a significant contribution to external economic and social stabilization.

Unsurprisingly, the Philippines' current account has suffered a significant outflow in interest and earnings. It is noteworthy, however, that the outflow is partly offset by a growing inflow of interest and investment income (1995: 43%, 1996 and 1997: 66%, 1998: 53%).

The Philippines have been trying to build a tourism industry since the 1970s. It was less successful than some neighboring countries. Nevertheless, there was no slump in the crisis, and even an absolute peak in 1997, which, however, could not be repeated in 1998. It is noteworthy, however, that Filipinos are also increasingly traveling abroad and this desire to travel and this ability to travel was not restrained during the crisis. In 1998, travel expenses clearly exceeded travel income for the first time.

The crisis did not hit the real economy until 1998. After investments had grown by double digits in the previous two years (+ 12.5 and + 11.7%), they plummeted in 1998 by double digits (- 17.1%). Mainly fixed investments in machinery (- 18.4%) and private construction investments (- 10.1%, 1997 + 11%) contracted. Public construction investments experienced slower growth (+ 6.4%, 1997: 20.9%).

The construction sector - after double-digit growth in the previous two years - now collapsed by - 8.1% (1998). Licenses for residential construction projects and residential units issued by the state regulatory authority - which had continued to increase until 1997 - declined by 19% and 43%, respectively, in 1998. Office and apartment rents in Metro Manila fell by 20-25% in 1998, and presumably by a further 10-20% in 1999, and real estate prices a little more in each case. The decline in the manufacturing industry, on the other hand, was much smaller (1998: - 1.1%). However, since 1995 the growth has already flattened out (1997: + 4.2%). The most dramatic decline, however, was in agriculture. However, it has nothing to do with the "Asian crisis": El Niño with an extraordinary drought had struck. In 1998 the production of rice fell by - 24.1% and that of maize by - 11.7%. The entire agricultural sector fell by - 6.6% in 1998 (1997: + 2.9%). Under these conditions, growth in the service sector was also slow (1996-98: 6.4%, 5.5%) The economy as a whole experienced a rather soft landing in a regional comparison. After a growth of 5.17% (1997), the GDP decreased by -0.5% (1998), the growth of the GNP, due to the factor income from abroad, even remained minimally positive (1998: + 0.07%).

Already in the first half of 1999 the economy began to recover (GDP around + 2.4%), one could say with the help of the weather gods. Agriculture made the main contribution, as it had rained again.

The social dimension of the crisis

One of the main problems facing the Philippines is the issue of employment. The high unemployment and underemployment can hardly be overcome in view of the high population growth, the low employment contribution of (domestically oriented) industries and the low rate of growth. Emigration and labor migration abroad offer an outlet. In 1996, 660,000, in 1997 and 1998 approx. 750,000 each were officially registered as guest workers and seafarers. That was around 40% of all guest workers working abroad. Their total number (including emigrants) is likely to be around 4-5 million (approx. 15% of the workforce in the country). They make an important contribution to stabilizing incomes, and this is increasing during the crisis. A study with the data for 1991 showed that 16.6% of households received 31% of their income from abroad. The income of migrant households was on average 75% higher than that of other households. These conditions are likely to have shifted even further in favor of migrant households during the crisis.

In July 1997 the labor market statistics showed a willing workforce of 30.1 million. Of these, 2.6 million were unemployed (8.7%), 6.3 million were underemployed (23.1%). Statistics from the Ministry of Labor show that in 1998 3,072 companies with 155,198 workers had to close or switch to short-time work. In 1996 80,701 and in 1997 62,724 workers were affected by this fate. These figures do not indicate a dramatic slump in the medium-sized and large business sector. A study by the Ministry of Labor of companies that closed or downsized in the first half of 1998 showed that only 10% gave the peso devaluation as the reason. 35% mentioned market problems, 13% the need for operational reorganization, 42% other economic reasons. Workers in larger companies with more than 100 employees (76%) and in industry (59%) were particularly affected. Overall, employment increased by 4.7% (to 29 million) in the two crisis years up to July 1999. Unemployment - there are considerable seasonal fluctuations here - increased until January 1999 and has since decreased again. In July 1998 it was determined to be 8.9% and in July 1999 to be 8.4%. These numbers are unpleasant.However, the rate of increase is not dramatic. However, there are some indications that many of the employees have to find their livelihood in rather unproductive jobs. The increase in employment of around 1.2 million in July 1998 / July 1999 was achieved primarily in the agricultural and service sectors (0.8 and 0.4 million, respectively). Only 28% or (at least) 46% were employed as wage earners. In the secondary sector, manufacturing was just able to compensate for losses in construction, mining and the utilities sector (+ 13,000 employees). Overall, wage jobs were lost here on balance (-77,000), while the number of self-employed and (unpaid) family members increased. These are not indications of a productive easing of the labor market.

The economic boom of the Ramos years also contributed to higher real incomes (1991/97: 21%), which were, however, unevenly distributed. Income growth was higher in cities (+ 27%) than in rural areas (+ 13%). The wealthy benefited disproportionately (richest tenth of the income pyramid: + 27%, since 1988 + 42%), the poor disproportionately (bottom tenth: + 10%, since 1988 + 6%).

Official statistics also indicate a decrease in Poor population from 49.3% (1985) to 45.3% (1991) and 37.5% (1997). This linear reduction is not entirely plausible. It probably came about through the change in the tax base (1988). The population officially regarded as "poor" has absolutely not decreased. It was lower in 1997 (27.2 million people) than in 1991, but higher than in 1985 and 1988. The "poverty list" is defined by a basket of food and some other basic needs . Depending on the different prices, this is differentiated regionally and between town and country. The national average of this necessary minimum income was assumed in 1997 at 21.2 pesos p.c./day for food and 31.2 pesos for all basic needs (0.7 and 1 $, respectively). One can, of course, argue about whether these income lines are appropriate. The private left IBON think tank considers 61.5 Peso p.c./day (1997) - each based on a family of six - to be more desirable. In 1997, 77% of families failed to reach this threshold. When people are asked whether they consider themselves "poor", 58% answered in the affirmative in April 1997. The idea of ​​those interviewed who describe themselves as "poor" where they would see the poverty line is not too different from the official ones, by the way Removed ideas that they don't know. The crisis will have exacerbated poverty. In the spring of 1998, 65% of those questioned thought they were poor.

The strained income situation of broad strata has not exacerbated the social conflictswhich would ultimately have only further complicated the situation and made it worse for everyone involved. Many affected groups, small farmers, small traders, day laborers, domestic workers, etc., have hardly any opportunities to organize and express themselves collectively anyway. Against whom should your protest and action be directed? This would most likely be expected from organized labor. The unions, which are deeply divided organizationally, compete with one another and in some cases hostile to one another, are only weakly represented in the larger and some medium-sized companies. Their actual membership is unlikely to be close to the widely accepted 3.6 million they stated (that would be 27% of all wage earners), but rather close to the approx. 0.5 million workers in approx. 3,000 companies (an average of 177 each Company), in which they could conclude a collective agreement (that would be just over 4% of all wage earners). Deviating from the otherwise published figures, a study in companies with 10 or more employees revealed an almost identical figure for union members and workers with collective agreements: 0.68 million. This is 41% of employees in export and 18% in domestic companies with an average Company size of 270 workers (export) and 65 (domestic). The tense situation of companies, layoffs, short-time work, etc. is likely to have further weakened the unions. The main concern for them had to be job security, if necessary also under worsened conditions. In February 1998 some major trade union confederations formed an alliance with the employers' association and the Chamber of Commerce to refrain from strikes and layoffs, which was later renewed (November 1998) and expanded in January 1999. In fact, strikes (1998: 91 with 35,000 workers, an average of 385 workers per company) did not increase compared to previous years. The wage demands remained moderate in 1998 and 1999 and, like the only slightly increased minimum wages, they remained below the inflation rate.

outlook

The economy is now showing signs of recovery. 1999 will bring moderate positive growth (maybe 2.4%). For the year 2000 about 3% are forecast. These assumptions are below those of China and Taiwan, which were only marginally affected by the crisis, but also below those of South Korea, Singapore and probably Malaysia. Similar growth is assumed for Thailand in the coming year, lower for the special case of Indonesia and Hong Kong. Although the crisis hit the Philippines less hard than some other countries in the region, the country is currently not trusted to catch up with the other growth economieswhich, however, will probably have to be satisfied with lower growth than in the past.

The withdrawal of some transnational corporations from the country led to a lively public debate in the spring of 1999 about the competitiveness of the Philippines as a location. It remains to be seen whether the motives of the companies in question were correctly seen or whether it is just more or less common restructuring as a result of the regional crisis. In fact, there were even more new entrants, although the investment requests registered with various government agencies plummeted 34.5% year-on-year in 1998, a trend that continued in 1999 (1st quarter - 60%). However, local companies proved to be even more cautious: their investment registrations fell by 57.7% in 1998 and by 42% in the first quarter of 1999.

The Estrada government is following the policies of the Ramos administration and is continuing to liberalize and open up the country to foreign investment. It seeks to open up previously closed areas, retail, land ownership, utilities and media, for which a constitutional amendment would be necessary. An annual new investment priority plan and tax incentives are used to make investors aware of investment fields and to motivate them to invest.

We haven't got very far in this regard. Ultimately, it is also a sideline. The investment of transnational corporations or national companies should not be particularly encouraged and favored; rather, the general investment conditions must be improved, which induce efficient and cost-conscious investors to invest. It is ultimately irrelevant which passport they have.

The following areas are repeatedly included in today's location disadvantages:

  • Inefficient and cumbersome, also unpredictable because of corrupt bureaucracy; Clientele economy up to the highest point of the state apparatus;
  • The unpredictability and inefficiency of the legal system, the judiciary is "notorious for its incomprehensibility, lengthiness, inconstancy". In addition, the judges rarely have an understanding of economic issues.
  • The infrastructural equipment in the traffic and communication area; especially the energy and water supply is inadequate and / or too expensive.
  • The wage costs are considered to be too high, and labor relations are too regulated and too rigid.

These problems certainly need to be resolved. The tax reform and the effectiveness of the tax system are of central importance. An efficient and non-corrupt state administration cannot be had at low salaries (even if the question of pay alone does not solve the problem). Even if parts of the infrastructure are or are sensibly privatized, there remains a huge need for public investment in both material and human infrastructure (education, health). The problem of high wage costs and the supposedly rigid labor relations - which are for the most part only fixed on paper and are in fact mostly undermined - can hardly be solved by lowering wages, for example by freezing nominal wages. Labor productivity must be increased. Then wages lose weight and can also be increased from their level, which is actually very low for the workers. If productivity increases not only selectively, this will not be associated with an increase in unemployment and underemployment, which, however, will hardly be overcome if it is not possible to reduce the birth rate.

The paradox of (relatively) high wage costs in spite of the "starvation wages" for the workers points to another problem which has to be solved: the high cost of living, and for the poor this is primarily the expenditure on food (50-70% They are also an expression of inefficient agriculture, the modernization of which has been demanded for decades and also practiced "somehow", but so far without sustainable success.


© Friedrich Ebert Foundation | technical support | net edition fes-library | January 2001