Page 1


Economic Crisis... Once More


Economic Crisis... Once More edited by Mario B. Lamberte

Caesar Cororaton Margarita Guerrero Generoso de Guzman Ponciano intal Jr. Mario Lamberte Rosario Erlinda

Manasan Medalla

Melanie Milo Aniceto Orbeta Jr. Virginia Pineda Celia Reyes Josef Yap

pls Philippine Institute for Development Studies Surian sotogaPag-aaral Pangkaunlaran ngPi/ipinas

:


Copyright

2001 by

Philippine Institute for Development 4/F NEDA sa Makati Building 106 Amorsolo St., Legaspi Village Makati City 1229, Philippines

Printed

in the Philippines.

Studies (PIDS)

All rights reserved.

The findings, interpretations and conclusions in this volume are those of the authors and do not necessarily reflect those of PIDS.

Please address all inquiries

to:

PHILIPPINE INSTITUTE FOR DEVELOPMENT NEDA sa Makati Building 106 Amorsolo St., Legaspi Village 1229 Makati City, Philippines Telephone: (63-2) 8924059, 89357051 Fax: (63-2) 8939589, 8161091 E_mail: publications@pidsnet.pids.gov.ph URL: http://www, pids.gov.ph

iSBN 971-564-033-8 RP 12-01_500

STUDIES


Table ofContents Foreword

Chapter 1

Introduction - Mario B. Lamberte

1

Part 1:

The Philippine Economy before the East Asian Financial Crisis

Chapter 2

Philippine Economic Performance Before the East Asian Financial Crisis - Melanie R.S. Milo

Part I1:

Impact of the East Asian Financial Crisis

Chapter 3

Overview of the Economic and Social Impact of the East Asian Financial Crisis - Melanie R.S. Milo

53

Chapter 4

The EastAsian Financial Crisis and Philippine Sustainable Development - Ponciano S. Intal, Jr. and Erlinda M. Medalla

75

Chapter 5

Impact of the East Asian Financial Crisis on the Philippine Manufacturing Sector - Mario B. Lamberte, Caesar B. Cororaton, Aniceto C. Orbeta, Jr. and Margarita Guerrero

109

Chapter 6

Impact of the East Asian Financial Crisis on Households - Celia M. Reyes, Rosario G. Manasan, Aniceto C. Orbeta, Jr. and Generoso de Guzrnan

145

Chapter 7

Fiscal Impact of the East Asian Financial Crisis - Rosario G. Manasan, Celia M. Reyes, Aniceto C. Orbeta, Jr. and Generoso de Guzman

199

23


Chapter 8

Impact of the East AsiaJnFinancial Crisis on Social Services Financing and Delivery - Virginia S. Pineda

Part III

Government's Response to the East Asian Financial Crisis

Chapter 9

Economic Policies and Measures in Response to the East Asian Financial Crisis - Mario B. Lamberte an_l Josef T. Yap

Chapter 10 _ Social Safety Net Programs in the Philippines - Melanie R.S. Milo Part IV Chapter11

223

263

335

Special Issues -

Currency Crisis: Where Do We Go from Here? - Mario B. Lamberte

353

Chapter 12 -

A Second Look at the Credit Crunch - Mario B. Lamberte

382

Chapter 13 -

Recent Developments in Corporate Governance in the Philippines - Mario B_Lamberte

403

Part V

Monitoring

Chapter 14 -

Developing an Early Warning System to Help Understand and Monitor Economic Crises - Josef T_Yap

423

Chapter 15 -

Assesment of Existing Monitoring Systems - Celia M. Reyes, RosariD G. Manasan, Aniceto C. Orbeta, Jr. _andGcneroso de Guzman

447

Systems


Foreword

here were many questions regarding the impact of the East Asian financial crisis on various Philippine sectors. The foremost being just how deeply affected the Philippine economy was by the crisis, especially by the sharp depreciation of the peso. In response, the Institute implemented a number of studies since 1997to understand the nature and causes of the crisis, examine its impact on the domestic economy, and recommend some measures to mitigate the negative impact on these sectors in the short-run and reduce the vulnerability of the economy to another currency crisis in the long-run. The result of the undertaking is a collection of exhaustive studies on the recent East Asian financial crisis, a modest achievement which the Institute is only too enthusiastic to share with its readers and clients. The book has five sections which deal separately on the following concerns, namely, the Philippine economy before the crisis, the socioeconomic impacts of the crisis, the government's response to the crisis, an assessment of the early warning and monitoring systems, as well as other important economic issues such as capital controls, credit crunch and corporate governance, that emerged as the crisis unfolded. Although no two crises are exactly similar, the lessons learned from the various chapters of this book can certainly be useful to policymakers in formulating policies and instituting measures to prevent the occurrence of another currency crisis, reduce its adverse effects should one occur, and better manage risks that may emerge as the country's economy deepens its integration with the rest of the world. Lastly, the Institute is grateful to the following organizations that provided support to some of the studies in this book, namely, the Institute of Southeast Asian Studies (ISEAS), the World Bank, Japan


Bank for International Cooperation (formerly the Overseas Economic Cooperation Fund, Japan) and the Asian Development Bank. Thanks are also due to a number of individuals who, in one way or another, had contributed to the completion of the studies in this book.

_tO

t

Mario ]_.Lamberte, LPresident

Ph.D.


Introduction Mario

B. Lamberte

he last quarter of the 20 t" century saw the Philippine economy experiencing three major crises, which amazingly occurred at regular intervals--every 7 years (Figure 1). The first and the worst among the three crises occurred in 1984 when the gross domestic product (GDP) shrank by 7.3 percent. It further contracted by another 7.3 percent the following year. The second crisis occurred in 1991 when GDP contracted by 0.6 percent. The third and latest crisis struck in 1998 when GDP shrank by 0.6 percent.

Figure 1. Real GDP growth rates (In percent).

[0 1

ml0

Year

Source:National StatisticalCoordination Board.


2

Economic

crisis... Once more

Indeed, the boom-bust cycle appropriately characterizes the Philippine economy in the last 25 years. Because of this, the economy grew only by an average of 3.2 percent annually during this period. For a population growth rate of more than 2 percent per year, this is precariously low that a small decline in economic activity can have a significant, negative impact on employment and poverty in the country. As Figure 2 shows, the country has not yet returned to the highest real per capita income attained in 1982. Figure 2. Real per capita income

1.3,500 13,000 12,500

_ jr'--

11,000

KJ

10,000

.

10,500

(In pesos).

_RGNP/Pop. -

"_

_RGDP/Pop,

,

_.L_

j

' Year i

Source: National

Statistical

Coordination

Board,

As yet it cannot be explained why economic crises in the Philippines occurred at regular intervals. However, their causes can be explained and their effects on the economy can be analyzed. This is what the PIDS has been doing over the years to enrich the quality of policy debates in the country and to reduce, if not avoid, policy mistakes in the future. This volume focuses on the third crisis. 1 It puts together the Institute's studies on the causes, effects, and policy responses

of the Philippine

authorities

to the East Asian financial

crisis.

It is hoped that lessons drawn from the rece_ crisis can be used by policymakers in shaping policies that would shepherd the Philippine economy out of the boom-bust cycle as well as to students of business and economics who will become

important

players in the economy

The East Asian Financial

in the future.

Crisis

Unlike the two previous crises experienced by the Philippines, the recent crisis is unique in that several countries in East Asia encountered a similar crisis almost at the same time, suggesting that these economies became vulnerable, 1For the Institute's studies (1989), Philippine Institute Yap (1994).

dealing with the first two Crises, see Lamberte et al. (1985), Lamberte for Development Studies (1986), Montes (1987), and Lamberte and


Chapter 1: Lamberte

3

albeit in different degrees, at about the same time. It would be worthwhile, therefore, to view this crisis from a regional perspective. What follows is a brief review of the East Asian financial crisis and a presentation of views attempting to explain it. 2 Just as many people were beginning to appreciate the so-called "East Asian Miracle, "3 a currency crisis occurred in the East Asian region. 4 It started in Thailand in July 1997 when the Thai central bank, after assessing that it could no longer changed exchange vis-a-vis

withstand the massive speculative attack on the Thai baht, suddenly its exchange rate policy from an implicit dollar peg to a floating rate system. In a week's time, the Thai baht lost 15 percent of its value the US dollar. The free fall of the Thai baht continued unabated in

subsequent weeks. The currency crisis then quickly spread to neighboring countries in the region, notably Indonesia, Malaysia, the Philippines, and South Korea, which like Thailand had been pegging their currencies to the dollar prior to the crisis. The sudden loss of investor confidence in these countries prompted private capital, which came in droves before the crisis, to flee at a staggering pace? As Radelet and Sachs (1998) pointed out, the US$109 billion net capital outflow that occurred in the second half of 1997 represented a sizable shock to the region, accounting crisis-hit countries.

for 10 percent of the combined

precrisis GDP of the five

The effects of the huge capital outflows immediately became evident in the currency and stock markets of crisis-hit countries. From June 1997 to December 1997, currencies of these countries depreciated by 29-50 percent in nominal terms and stock price indices plunged by 28-47 percent (Table 1). The following year, the economies of these countries shrank precipitously, reversing a substantial portion of the gains realized in the preceding 10 years. Imports were cut substantially, inducing a sharp reversal in the current account balance from substantial deficits in previous years to large surpluses in 1998 and 1999 (Table 2). The severity and speed with which the crisis spread in the region and later to other countries outside the Asian region went beyond everyone's 2There is no attempt to discuss at length these issues here since they were thoroughly discussed in several papers (e.g., Krugman 1998, Radelet and Sachs 1998, Furman and Stigfitz 1998, Mishkin 1999). The World Bank (1993) coined this term to refer to the rapid growth with equity experienced by 8 East Asian economies, excluding the Philippines, from 1965 to 1990. 4According to Ito (1999), "[A] currency crisis is usually understood to be a collapse of the domestic monetary system together with the drying up of foreign reserves in a country adopting a fixed exchange rate. Moreover, sizable fluctuations of the exchange rate beyond the theoretically appropriate range under a floating rate may constitute a currency crisis in a broader sense. Furthermore, even ff t_here_are.no currency fluctuations, a substantial decline of the foreign reserves to fend off speculation may be described as a currency crisis in the sense that the country's monetary system is subject to a speculative attack." 5The aggregate capital inflows of the five crisis-hit countries averaged US$40 billion annually in the 1990s, reaching a peak of about US$70 billion in 1996 (Dornbusch et al. 2000).


4

Economic

expectations monitoring

including economic

East Asian

financial

given

emphasis

certainly

crisis

It is, therefore,

Table

1. Market Asian

has raised

important

indicators countries

important

discussions

to the shaping

come.

Once

more

those of multilateral institutions, which have been closely developments in the region for a long time. Indeed, the

in previous

contribute

crisis...

of the international to understand

have

economy

performance

not yet been

These

issues

will

in the years

to

of this crisis.

of crisis-hit

East

change).

Noulina] exchange rate

1. Indonesia 2. South Korea 3. Malaysia 4. Philippines 5.ThaJlartd

that crises.

the nature

and economic (percent

June-December Co,retry

issues

on currency

1997 Stock price index

-50.16 -40.06 -34.21 -29.03 -29.03

-44.41 -45.08 -47.24 -33.94 -27.61

GDP. 1.998 -13.70 -5.80 -7.50 -0.60 -10.40

Source: ADB, Asia Recovery Information Center.

Table

2. Current

Year

account

Indonesia

1990 1991 1992 1_,_)3 1994 1995 1996 1997 1998 1999

-2.6 -3.3 -2.0 -1.3 -1.6 -3.2 -3.4 -2.2 4.0 4.0

balance

as % of GDP.

Rep- of Korea

MMaysia

Philippines

Thailand

-0.8 -2.8 -7.3 0.3 -1.0 -1.7 -4.4 -1.7 12.7 6.1

-2.0 8.5 3.7 4.5 , 6.1 9.5 4.6 4.7 13.0 15.8

-6.1 -2.3 -1.9 -5.5 -4.6 -2.7 -4.8 -5.3 2.4 10.3

-8.5 -7.7 -5.7 -5.1 -5.6 -8.1 -8.1 -1.9 1Z5 8.9

Source: ADB, Asia Recovery Information Center.

The Asian

Policy

Forum

(2000)

describes

as a "capital account crisis, the origin of which capital relative to the underlying current account term nature,

followed

by a sudden

and massive

the East Asian

financial

crisis

was large inflows of private deficit and of a largely shortreversal

of capital

flows."6

The

6 The Asian Policy Forum (APF) consists of 17 policy-oriented research institutes including PIDS representing 14 Asian economies. Earliel; Reisen (19_8) and Yoshitomi and Ohno (1999), among others, pointed out that the East Asian financial crisi_ was basically a capital account crisis, not the conventional current account crisis.


Chapter 1: Lamberte

5

large capital inflows created a "double mismatch," that is, mismatches in both maturity and currency, which made balance sheets of local financial institutions and nonfinancial enterprises extremely vulnerable to both currency devaluation and bank runs. The sudden and massive reversal of capital flows led to the "twin crises", i.e., currency and banking crises7 Several economists had put forward their views to explain the causes of the East Asian financial crisis? Ito (1999) identified three common causes: (1) the foreign exchange system, i.e., crisis-hit Asian countries adopted the dollar peg system; (2) vulnerable financial system, i.e., prudential regulations and supervision of financial institutions in crisis-hit countries were inadequate to deal with the double mismatch; and (3) excessive short-term foreign debts of the private sector in the wake of capital account liberalization. These countries' effort to simultaneously attain the three objectives--dollar peg system, capital liberalization, and independent monetary policy otherwise known as the impossible trinity--inevitably led to the crisis (Fig. 3). As the crisis quickly deepened, crisis-affected countries abandoned one of the three objectives (Table

3). Figure 3. The impossible

trinity. Fun capit_ controls

Monetary

Pure float

_

Exd._ .angerate

Full final_cialintegration

Monetary union

Source: Frankel (1999).

7interestingly, Kaminsky and Reinhart (1999)found that the link between banking and currency crisis has strengthened since the 1980swhen emerging market economies started to liberalize their financial sector. sFor example,see Radeletand Sachs (1998,1999),Krugman (1998),World Bank (1998),Hill (1999), Asian Development Bank (1999),and Sachs and Woo (1999).


6

Economic

Table 3. Policy objectives Dollar peg

Capital l_beralization

met by crisis-hit Independent monetary policy

crisis... Once more

Asian countries.

Resul.ts

Yes

Yes

Yes

Crisis

No

Yes

Yes

Adop_on flexible exchange system

Asian examples

Asian countries before 1997 of rate

Postcurrency crisis in Thailand, h_donesia, Philippines, Taiwan, South Korea and Singapore

Yes

No

Yes

Capital control

Cl_il_ and postcrisis Malaysia

Yes

Yes

No

Currency board

Hong Kong

Source:Ito (1999). Prior to the East Asian financial developed to explain the underlying that occurred in Western Europe common

features,

crisis, several theoretical

models were

causes of currency crises, specifically those and Mexico. Because some of them had

they were then categorized

into two groups of models: first-

generation or exogenous policy models, which view a currency crisis as the unavoidable outcome of unsustainable pohcy stances or structural imbalances (e.g., chronic budget deficits, huge current account deficit); and secondgeneration interaction

or endogenous policy models, which emphasize the point that the between investors' expectations and actual policy outcomes can lead

to self-fulfilling crises and the possibility of multiple outcomes or equilibria (Krugman 1998). They are also called fundamental and self-fulfilling views, respectively, of the currency crisis. However, these models have overlooked important features of the East Asian financial crisis, notably the role of the banking and financial sector and the strength of the contagion effect. 9 This has prompted several economists to develop new models, such as, the moral hazard/ asset bubble model, the liquidity crisis model, the banking crisis approach, the contagion approach, the panic model approach, and the credit cycle approach to explain the East Asian financial crisis. 1° Still, not one of these models offers satisfactory explanations of the events that unfolded in crisis-hit East Asian countries. Pesenti and Tille (2000), therefore, have proposed a synthesized view, which stresses the point that the role of the banking and finance sectors and the international transmission of crises or contagion encompass both fundamental and self-fulfilling

views. In this synthesized

financial sector, overborrowing

syndrome,

view, the health and stability of the common shocks, or displaying

similar

Dornbusch et al. (2000)define contagionas a "significant increasein cross-marketlinkages after a shock to an individual country (orgroup of countries),as measured by the degree to which asset prices or financial flows move together across markets relative to this comovement in tranquil times," 1. These are elaborated

on in Ito (1999).

•


Chapter 1: Lamberte

7

elements of domestic vulnerability such as high reliance on foreign-denominated debt and relatively stable exchange rate against the US dollar, trade and financial linkages, and common creditors all fall under the fundamental view. On the other hand, international liquidity-driven crisis and information asymmetries fall under the self-fulfilling view. Table 4 gives a summary of this synthesized view, which also captures the main issues addressed by other newly developed models mentioned earlier. Pesenti and Tille assert that: ",4 synthesized view approach combines the strengths of each view and stresses how they complement one another, Fundamental wealcnesses leave countries at the mercy of sudden shifts in market sentiment, and cont_dence crises have devastating implications when they act as catalysts o/ongoing processes. Indeed, advocates of both the fundamental and self[ultiTling views agree in principle that a deterioratlng economic outlook increases an economy's vulnerability to a crisis. Whether or not the plunges in assetprices after the eruption of the event are driven by self-fulf_71ingexpectations and investor panic, weak economic fundamentals are a crucial element the genesis and spread of a crisis. " Table 4. Synthesized view. Key aspects of the East Asian crisis View

Fundamental

Self-fulfilling

view

view

Role of banking and finm_cial sector

Contagion

Health and stability of the financial sector;

Common shocks; transmission through

overborrowing

trade and _lmlcial channels; con_non c_editors

International driven crisis

syndrome

liquidity-

In/ormation asymmetries (imperfect information, herding behavior)

Indeed, fundamental imbalances, such as large current account deficits, real currency appreciation (except in the case of Korea) resulting from the dollar peg system, and exposed position of the banking and corporate sectors in an environment of weak prudential supervision, that were present, albeit atvarying degrees, in the five crisis-hit economies prior to the onset of the crisis were absent in less-affected Asian economies, such as Singapore, Taiwan, and Hong Kong.


8 Overview

Economic

crisis... Once more

of issues and findings

The studies included in this volume were written at different periods as the East Asian financial crisis unfolded. It was, therefore, unavoidable to have some overlaps. Nonetheless, each one offers a unique contribution to the issues raised during the East Asian financial crisis. To highlight this point, the studies are organized into five thematic areas. Part I discusses the performance of the Philippine economy before the onset of the East Asian financial crisis. Milo's paper (Chapter 2) reviewed the reforms in the financial and real sectors of the economy initiated by the government in the second half of the 1980s. These reforms were broadened and deepened in the first half of the 1990s to reduce macroeconomic imbalances and liberalize a once extremely protected economy. She noted that the economy, aided by favorable external economic and stable domestic political environment, responded well to these reforms. After contracting in 1991, GDP growth rate steadily rose in succeeding years, reaching 5_8percent in 1996. Economic growth was also accompanied by improvements inI some social indicators, as gleaned from the rise in the Philippines' human development index during the period 1992-95. Because weak banks were weeded out in the wake of the 1984-85 crisis and prudential regulations and supervisio n of banks were strengthened, the banking system came into the 1990s with a relatively strong balance sheet. However, the country's vulnerabilities to a currency crisis had been gradually building up. More specifically, trade deficits had widened in the 1990s. Although its fiscal position had improved, however, it was highly dependent on privatization proceeds, which are nonrecurring income. The dominance of shortterm capital flows and the significant rise in Commercial banks' foreign liabilities that facilitated the lending boom in the 1990s had made the economy ".increasingly vulnerable to sudden shifts in market sentiments. Part II includes studies that examined the impact of the crisis on various sectors of the economy. Milo's paper (Chapter 3) provides an overview of the economic and social impact of the crisis in the Philippines. The immediate response of the Bangko Sentral ng Pilipinas (BSP), the Philippines' central bank, to the unfolding currency crisis in the region was to raise the interest rate to as high as 32 percent per annum in mid-July 19'97 and, at the same time, to heavily intervene in the foreign exchange market to keep the exchange rate stable at around P26 per US$1. After spending around US$1.5 billion of its reserves without achieving its objective, the BSP allowed the exchange rate to float freely, and the peso immediately reached record lows against the US dollar. Stock market prices plunged sharply as foreign investors divested of their holdings and headed for the exit door. The effects of the crisis, which were magnified by the E1 Nifio weather phenomenon that devastated the agricultural sector, were •fully felt in 1998. The number of firms affected by the crisis more than doubled


Chapter 1: Lamberte between

9

1997 and 1998 and unemployment

rate rose to 9.6 percent in the third

quarter of 1998. The decline in family income fell heavily on poor families and income distribution worsened. Unlike other crisis-hit countries in the region, the Philippines did not experience a widespread Nonetheless, the commercial banking systems'

failure of financial institutions. nonperforming loans rose to as

high as 14.4 percent in the third quarter of 1999. The sharp rise in interest payments caused by the surge in domestic interest rates and peso depreciation and the decline in government revenues as imports and corporate profits shrank had impaired the government's fiscal position. intal and Medalla (Chapter 4) studied the impact of the East Asian financial crisis on sustainable development concerns, that is, social development and natural resources and environmental regeneration, through four channels: employment, income and poverty channel; interest rate and inflation channel; real exchange rate channel; and fiscal contraction and expenditure realignment. The East Asian financial crisis aggravated the aggregate unemployment situation and poverty because the industrial sector could not provide better employment prospects for both urban and rural workers who were affected by the E1 Nifio weather phenomenon. The authors pointed out that the mandatory 25 percent reserves imposed on the 1998 budget aimed at arresting the ballooning budget deficit could constrain the capability of the government to provide social services and safety nets. n For the natural resource and environment sector, the program of the Department of Environment and Natural Resource (DENR) that could be most adversely affected was environment management, followed by forest management. Indeed, it made the 1998 budget for DENR's maintenance and other operating expenditures the lowest in real terms during the 1990s. High interest rates are expected to discourage investments in reforestation and modernization of wood processing plants, unless the government continues with its subsidization of reforestation activities. Interestingly, in their simulation analysis, Intal and Medalla found that trade reforms accompanied by exchange rate adjustment exhibited higher potential improvement in pollution intensity than reforms without exchange rate adjustment. Lamberte et al. (Chapter 5) examined the impact of the East Asian financial crisis on the Philippine manufacturing sector and its response to the crisis, using secondary and primary data specifically gathered for the purposes of this study. The classification of sample firms into five subsectors, size, and export orientation enabled them to assess the differential impact of the crisis on various types of firms. They found that capacity utilization of firms already declined even before the East Asian financial crisis occurred, indicating that the observed capacity

underutilization

rate of firms could be attributed

to both structural

u Editor_aote: This paper was written before the government decided to exempt the social services sec_r from the mandatory 25 percent reserves.


10

Economic

crisis... Once more

and cyclical factors. As a result, the average profit rate of sample firms dropped dramatically from 12.1 percent in 1996 to 3.5 percent in 1997, and to 2.1 percent during the first half of 1998. As expected, the capacity underutilization of nonexporters dropped much more significantly than that of exporters during the crisis. The significant drop in capacity utilization of firms would have required a large labor lay-off. However, firms resorted to certain means, such as reducing workweek or days, applying forced vacation leave, and freezing salary increases to minimize labor layoffs. Another significant finding was that firms reduced their debts as they began to feel the effects of the crisis. However, the adjustment made by small and nonexporting firms in their leverage ratio was much bigger than that made by large and exporting firms. Although the percentage of those who were denied loans from financial institutions doubled during the crisis, it was smaller than generally expected considering the economic uncertainty. Also, most firms surveyed claimed to have continued access to suppliers'

credit during

the crisis period.

Reyes et al. (Chapter 6) analyzed crisis on households and their response

the Iimpact of the East Asian financial to the crisis using recently published

secondary data and primary data gathered specifically for this study. As unemployment rate rose due to the crisis and the E1Nifio weather phenomenon, per capita income declined in real terms. What made it worse was that the average family income of all decries, except for the richest decile, decreased in 1998, worsening income inequality. Survey results showed an increase in selfrated poverty during the crisis. The vulnerable groups affected by the crisis were farming communities, which also had to absorb the adverse effects of the E1 Nifio phenomenon; fishing communities, which had to deal with rising operating costs; children, who had to stop schooling to take care of younger siblings so that their parents could work or to become additional income earners of the family; and women, who had to take on additional jobs to raise family income. Households adopted some measures to cope with the crisis, such as reduction and reallocation of expenditures, borrowing, and selling of assets to compensate for reduced income, among others. Although households protected their budget for food, however, they made some changes in consumption patterns, such as having only one viand per meal, doing away with nonessential food commodities, and substituting more expensive food with cheaper food. Some households postponed the entrance of their children into the elementary and secondary levels so that their children who were already in school could continue their studies. Others transferred their children from private to public schools and asked them to walk to school to save on transportation expenses. Adjustments matte by households during the crisis will certainly term implications on human development and labor productivity.

have long-


Chapter 1: Lamberte Manasan

11

et al. (Chapter 7) examined

the impact of the crisis on the fiscal

position of the government. Tax effort dropped from 16.4 percent of GNP in 1996 to 16.3 percent and 14.9 percent in 1997 and 1998, respectively. For 1998, the Bureau of Internal Revenue and the Bureau of Customs missed their revenue targets by a wide margin. On the other hand, the national government's budget for 1997 was expansive. Although this expansive mood was carried over in 1998, however, the government, after making a downward adjustment in the revenue program in the early part of 1998, imposed a 25 percent reserve on total maintenance and operating appropriations of all national government agencies. In July 1998, the government decided to exempt government agencies engaged in the delivery of basic social services, which unfortunately was implemented only toward the latter part of the year. Local government units (LGUs) were also affected by the budget crunch as the government imposed a 10 percent reserve on their internal revenue allotments, which have been their most important source of revenue. Thus, a revenue gap was observed in most of the sample LGUs. Since LGUs were not allowed to incur a budget deficit due to recurrent expenditures, the revenue gap immediately resulted in lower levels of LGU expenditures. Pineda (Chapter 8) focused on the impact of the crisis on the government's financing and provision of social services through the Department of Health (DOH), Department of Education, Culture and Sports (DECS), and the Department of Social Welfare and Development (DSWD). She observed that the government accorded the highest priority to the social services sector by providing it the biggest budget allocation. Thus, social services sector expenditures, after cutbacks were restored, increased in real terms in 1998, while those of other sectors declined. Among the social services subsectors, education and social welfare appeared to be the most protected subsectors, while housing was the most adversely affected subsector by the budget crunch. In 1999, however, the appropriation for the social services sector declined in real terms. In view of this financial constraint, the social sector agencies adopted some remedial measures. For instance, the DOH, among others, adopted focused targeting and reallocated inputs in favor of vulnerable groups. DECS, among others, increased the maximum number of pupils per class to deal with classroom shortage, ordered the return of teachers holding administrative positions back to the classrooms to address the shortage of teachers, and declared a 2-year moratorium on acquiring supplementary reference materials so that it could use the savings to buy more textbooks. For its part, the DSWD, among others, encouraged LGUs to give priority in allocating funds for its services and intensified social marketing business sector.

and advocacy to encourage

support from the private


12

Economic

crisis.,. Once more

Part III puts together two studies that examined the government's response to the East Asian financial crisis. Lamberte and Yap (Chapter 9) discussed the economic policies and measures adopted by the Philippine government in response to the crisis. The BSP instituted several measures to stabilize the exchange rate and mitigate the effects of the currency crisis on the banking system. These measures included, among others, the prohibition of banks from entering into nondeliverable forwards (NDF) with nonresidents, including offshore banking units without BSP prior approval; adjustment in the overbought/oversold position of banks to discourage them from speculating in the foreign exchange market; establishment of the Currency Rate Protection •Program, which is a BSP-sponsored NDF facility; increase in overnight borrowing rate; rise in liquidity reserves of_banks; revision in the treatment of past due loans; tightening of specific loan-loss provisioning and imposition of a general loan-loss provisioning; increase in the minimum capital requirement of banks; tightening of rules on insider borrowings; and issuance of policy guidelines on resolving issues related to problem banks. In contrast to the previous 4 years, the national government ran a budget deficit in 1998 to pumpprime the economy and funded it mainly by borrowing abroad to reduce pressure on domestic interest rates. • The authors also discussed the future direction of economic recovery and development given domestic and international environments. They identified downside risks, such as the possibility of a second round of sharp currency depreciation and slowdown in global growth, that can undermine the recovery as well as positive developments, such as decline in US interest rates, passage of key reform measures in Japan, and favorable weather condition, that can support the recovery of the domestic economy. The authors outlined some short-term and medium- and long-term action plans that may be adopted by the government to stage a rapid economic recovery in the short run and sustainable growth in the long run. Short-term action plans are confidencebuilding measures that the government must immediately initiate and complete within 2 years. They include pump-priming measures for 1999 that will highly focus on key sectors of the economy and resource mobilization measures, such as renegotiating the short-terra bridge financing, privatization, and acceleration of financial sector reforms. Medium- to long-term action plans are aimed at restructuring the economy or specific sectors of the economy, and must be immediately initiated but may not be completed in 2 years. They include consistent monetary and exchange rate policies, improvement on information system on capital flows, development o 4 a coherent competition policy framework, establishment of competitive irlfrastructure sector, improvement in tax collection, rationalization of taxes on the financial sector, pension fund system reform, industrial restructuring, and agricultural development.


Chapter 1: Lamberte

13

Milo (Chapter 10) discussed the existing as well as the newly installed safety net programs in the Philippines to alleviate the social impact of the East Asian financial crisis. The major safety net programs are food subsidy, public employment, and credit-based livelihood programs. Of the three, credit livelihood programs were the most developed and extensive. Overall, she concluded that these programs were inadequate both quantitatively and qualitatively, and pointed out the need for better targeting and improvement in efficiency in the delivery of social safety net programs. Part IV includes studies dealing with three special issues that emerged during the East Asian financial crisis. Lamberte (Chapter 11) tackled the issue of whether the Philippines should re-impose currency controls, in general, and caPital controls, in particular, in the light of the currency crisis affecting the region. To put this issue in proper perspective, he reviewed the different views on sequencing of economic liberalization, including full capital account convertibility, and selective capital controls and contrasted Malaysia's capital control program, which was imposed to eliminate speculative flows that had battered the ringgit, with Chile's capital control program, which was aimed at changing the composition of capital inflows. Although the Philippines has already substantially liberalized its economy, its capital account, however, is still not fully convertible. Lamberte concluded that imposing additional capital controls similar to that of Chile or Malaysia to the Philippine economy during the crisis is inappropriate. Instead, he recommended the continued adoption of a flexible exchange rate, improvement in corporate governance, and strengthening of the banking system through improved prudential regulations to accelerate the recovery and make the country less vulnerable to another currency crisis. Another issue that cropped up during the East Asian financial crisis was the possibility that the crisis-hit countries in the region were experiencing a credit crunch. Lamberte (Chapter 12) reviewed the literature on credit crunch, which is part of a larger literature on monetary transmission mechanisms and business cycle, and emphasized the need for differentiating credit slowdown, which refers to the combined effects of both supply factors and demand considerations on the quantity of credit, from credit crunch, which refers only to a reduction in the available supply of credit. The results of the empirical analysis suggested that the Philippines has not been experiencing a credit crunch since the onset of the East Asian financial crisis. On the contrary, they showed that the slowdown in bank loans merely reflected depressed economic activity. Thus, loosening up prudential regulations to encourage banks to lend to the business sector was not deemed advisable. One of the issues that figured prominently during the crisis was weak corporate governance, which accordingly made countries in the region more vulnerable to external shocks. Lamberte (Chapter 13) highlighted this in his


14 paper. Most banks, especially

Economic those that survived

crisis... Once more

the 1984-85 crisis, came into

the Asian crisis with much stronger balance sheets than those of neighboring crisis-hit countries. Also, Philippine nonfinancial corporations were less indebted compared with corporations of other crisis*hit countries. This does not mean, however, that they were not adversely affected by the crisis. Several corporations had gone bankrupt, affecting the balance sheets of banks that heavily lent to them. Lamberte reviewed recent efforts m_de by the government to improve corporate 'governance of financial and nonfinancial firms. He noted some progress, particularly in existing laws governing distressed corporations because they have encouraged weak governance in the past. For instance, corporations can be more aggressive in borrowing because they know that they can easily get a suspension of payment once they suffer financial difficulties. Part V includes studies that proposed the development of monitoring systems: one, to anticipate future crises; and the other, to quickly assess the social impact of the crisis. Since crises have now become more frequent and their effects more devastating to affected economies, it is therefore necessary to develop a system that will help policymakers detect symptoms of an imminent crisis. Admittedly, no two crises are exactly the same. However, they may have some common elements that can signal their beginning. Yap (Chapter 14) attempted to capture these common elements in the early warning system he applied for understanding and monitoring economic crises in the country. The results he derived from using a slightly modified Kaminsky-Reinhart signals approach suggested that the huge, sudden reversal of capital flows explain the magnitude of the crisis in the Philippines, not the macroeconomic fundamentals. However, the latter served as the trigger in Thailand, exacerbated the crisis. He extended the same methodology and found similar results.

while the contagion to 11 other countries

Among the three crises in the last 25 years, the last one has raised greater concerns about its social impact. The lack of an adequate monitoring system, however, has hampered the ability of various stakeholders to quickly analyze and make appropriate responses to amy adverse social impact of a macroeconomic crisis. Data on different dimensions of welfare are collected by various government agencies and published separately with a considerably long time lag. Reyes et al., (Chapter

15). _herefore,

proposed

that a social

monitoring system be developed and a focal Iagency be designated to maintain it? This agency shall obtain data from administrative reports being collected by national and local government agencies, cenguses, and surveys of the National Statistics Office as well as from community-based monitoring systems.


Chapter

1: Lamberte

Economic

crisis..,

once

The gloom quickly

15

that pervaded

disappeared

recovery

more... East Asia

in 1999 (Fig. 4). These

countries

rates, interest rates, and short-term gross international (Table external crisis

reserves

5). The swift

underpirmed

environment.

Their relatively

it possible

which

Cooperation

Figure

4. GDP

successfully

brought

good

of East Asia's

Development

growth

fiscal

rates

(OECD)

levels

countries

policies

was

and favorable

at the onset

expansionary

countries,

inflation and raised

than precrisis

position

rapid recovery

by robust growth

levels

of crisis-hit

macroeconomic

to have

a "V-shaped" down

debts to manageable

for them to conduct

was supported

and

1998 seemed

exhibited

of the economies

expansionary

and 1999, One of the drivers growth,

foreign

and

countries

to levels much more comfortable

recovery

by domestic

made

in 1997

as the five crisis-hit

of the

fiscal policy

in 1998

was the strong

export

of Organization

for Economic

particularly

the US.

(In percent).

10

Indonesia Rep. of Korea

5

_

o

_'_

-_'_

&

....

........ "%// .....

- 10 -15

MMaysia

-i- Ph ippine _

Thailand

Source: ADB, Asia Recovery Information Center.

Table

5. Inflation rates, lending term external debt.

Country

h_donesia Korea Malaysia Philippines Thailand

h_flation rate (in percent) 1998 58.4 7.5 5.3 9.7 8.1

1999 20.5 0.8 2.7 6.7 0.3

rates,

Lending rate (in percent) 1998 Q4 1999 Q4 35.2 21.7 11.9 8.7 8.2 6.8 14.4 10.9 12.3 8.3

international

reserves

International reserves (-US$billion) 1997 16.6 20.4 20.8 7.3 26.2

1999 26.4 74.0 30.6 13.2 34.1

and

short-

Sh0rt-termexternaldebt (US$ billion) 1997 38.5 66.3 16.7 13.7 42.4

1999 21.0 45.8 9.1 9.1 16.5

Source: ADB, Asia Recovery Information Center, Bangko Sentral ng Pilipinas, and BIS-IMF-OECDWorld Bank Statistics on External Debt.


16

Economic All this, however,

crisis... Once more

does not mean that the five crisis-hit

countries

have

already gone over the hump. Nonperforming loans of banks in these countries, particularly, Indonesia, Thailand, and the Philippines, have remained high and the problems of many distressed corporations have yet to be resolved decisively. It is to be noted that the expansionary fiscal policy adopted by crisis-hit countries in the wake of the crisis has caused fiscal deficits to rise sharply (Table 6). This certainly cannot be extended for a long period as it will cause domestic price instability. Also, the robust growth of the US economy, which has now run for almost 10 consecutive years, cannot be expected to last long. In fact, the US Federal Reserve Bank has been trying to engineer a soft landing or gradual slowdown of the US economy by raising interest rates in several steps for a total of 175 basis points since November 1998_Thus, while the economic recovery of crisis-hit countries is swift, it is still essel_tially fragile. Table 6. Fiscal balances Year 1995 1996 1997 1998 1999

Indonesia 2.2 1.2 -02 -2.3 no data

as % of GDF. Rep. of Korea 0.3 0.1 -1.3 -3.8 -4.6

Malhysia 0.8 0.7 2.4 -i .8 -3_2

Philippines 0.6 0.3 0.1 -1.9 -3.7

Thailand 3.2 O.9 -0.3 -2.8 -3.3

Source:ADB,Asia RecoveryInformation Center.

This fragility has been demonstrate d by the turbulence that recently rocked the financial markets of the five crisis-hit countries. In particular, currencies inthe region have remained volatile, except for the Malaysian ringgit, which has been fixed to the US dollar since 1998 (Table 7). Stock market indices plunged by 18 percent to 39 percent during the same period. Investors view East Asia's recovery to have been affected by external factors, such as rising US interest rates and international oil prices, and internal factors, such as rising fiscal deficits, slow progress with corporate and banking restructuring and other reforms, and political instability in the case of Indonesia and the Philippines. A hard landing or rapid decline of the US economy cannot be underestimated. As The Economist (2000) pointed out, "history shows that soft landings are hard to pull off." A hard landing of the US economy can significantly hinder, if not reverse, the progress of economic recovery of crisis-hit countries, which export a sizable countries

proportion of their GDPs to the US, and make it harder for these to attract foreign funds as panicky investors seek safer havens. With

Japan's economic recovery uncertain in the next few years, a simultaneous slowdown of European economies can easily aggravate the situation.


Chapter 1: Lamberte

17

Table 7. Movement

of exchange

rates and stock prices indices January - November

Country

(In percent).

2000

Nomilml exchange rate

Stock price index

1. Indonesia 2. South Korea

-22.2 -2,3

-37.0 -43.4

3. Malaysia 4. Philippines 5. Thailand

0.0 -18.7 -14.6

-18.3 -29.5 -39.0

Note: Computations

are based

Source: ADB, Asian Recovery

on average

monthly

Information

Center.

values.

If another crisis strikes the region soon after the 1997 crisis, then such a crisis will easily dwarf any of the crises in the past and will likely extract more painful adjustments on the part of recovering East Asian countries for several reasons. One is that the fiscal position of crisis-hit countries, including the Philippines, is no longer as strong as before the onset of the crisis. The national governments of these countries, therefore, will be constrained from absorbing the additional costs of cleaning up the balance sheets of failing corporations and banks as they did in 1998 and 1999. Another reason is that the banking systems of the five East Asian economies are still saddled with a sizable amount of nonperforming loans, and another crisis will inevitably cause more corporate bankruptcies, and hence, further impair the balance sheets of banks. This can delay the recovery Still another reason is that a large chunk of the International Monetary Fund's (IMF) resources is still locked up in rescue packages it installed in Indonesia, Thailand, Korea, Brazil, Russia, Turkey, and more recently, Argentina. It would be extremely difficult for capital-rich countries to quickly mobilize relatively huge financial resources to complement IMF rescue packages as they did for crisis-hit countries in the region especially since they may need to pumpprime their economies in the event a worldwide economic slowdown OCCURS.

The biggest challenge facing the Philippines as well as other crisis-hit countries is how it can reduce its vulnerability to currency and banking crises and make the economy more nesilient. Taking a cue from the Pesenti-Tille synthesized view that "the Asian crisis resulted from the interaction between structural weaknesses Philippine authorities regional, and global.

and the volatility of the international capital markets," must approach the challenge from three levels: national,

At the national level, the various papers in this volume have offered several recommendations to strengthen the fundamentals of the economy. These


18

Economic

crisis... Once more

include, among others, the adoption of appropriate exchange rate and monetary policies as well as prudent fiscal policy, improvement in the supervision and prudential regulation of financial intermediaries to strengthen the health and stability of the financial sector, refinement in the country's bankruptcy law, development of the domestic bond market, and strengthening of corporate governance. The reforms envisioned in the new General Banking Act and the Securities Regulation Code can certainly strengthen corporate governance in financial and nonfinancial firms in the country. Structural and institutional reforms aimed at improving the efficiency of key sectors of the economy must continue. It is not enough to put these measures in place. Equally important is the need to constantly monitor not only macroeconomic indicators but also microeconomic indicators (e.g., leverage ratios of nonfinancial firms, maturity mismatches on banks' foreign assets and liabilities) so that the country's policymakers can immediately institute appropriate measures to prevent the buildup of vulnerabilities and reduce the risk of a currency crisis. Should a crisis occur, the government must exert efforts to minimize its social impact. In this regard, well-designed social safety netl programs must be in place even prior to the occurrence of any crisis. At the regional level, the Philippines should continue its active participation in the establishment of a regional financial arrangement and other regional cooperative efforts to reduce the region's vulnerability to currency and banking crises. At the global level, the Philippines must actively participate in discussions aimed at reforming the international financial architecture. Fischer (1998) pointed out the two most important reasons I for revamping the international financial architecture. First, the internationalicapital flows to emerging markets are too volatile and that volatility subjects recipient countries to shocks and crises that are both excessively frequent and lexcessively large. Second, there is too much contagion in the system. Although some efforts have already been made to reform the international financial a_chitecture since 1997 (e.g., private sector involvement in crisis resolution, lender of last resort facility at IMF), many issues remain unresolved (e.g., rules cov!ering cross-border transactions, governance structure of the Bretton Woods institutions). It is to be noted that developing economies including East Asian economies and industrialized economies represented by the G-7 still hold divergent views on many of these unresolved issues (Lamberte 2000).


Chapter 1: Lamberte

19

References Asian

Development Bank. 1999. Asian Oxford University Press.

Development

Outlook.

Hong

Kong:

Asian

Policy Forum. 2000. Policy recommendations for preventing another capital account crisis. Tokyo: Asian Development Bank Institute. Dornbusch, R., Y.C. Park, and S. Claessens. 2000. Contagion: understanding how it spreads. The World Bank Research Observer, 15(2). Washington D.C.: The World Bank. Fischer, S. 1998. Reforming the international monetary David Finch Lecture, Melbourne, 9 November Frankel,

Furman,

system. Presented at the 1998. Available at http:/

/wwwimf.org. J. 1999. No single currency regime is right for all countries or at all times. Working Paper No. 7338. Cambridge: National Bureau of Economic Research. J. and J. Stiglitz. 1998. Economic crises: evidence and. insights from East Asia. Brookings Papers on Economic Activity 2. Washington D.C.:

The Brookings Institution. Hill, H. 1999. An overview of the issues. In: H.W. Arndt and H. Hill (eds.), Southeast Asia's economic crisis: origins, lessons, and the way forward. Singapore: Institute of Southeast Asian Studies. Ito, T. 1999. Asian currency crisis: its origin and backgrounds. Development Fund.

Assistance,

5(1). Tokyo: Overseas

Journal

of

Economic Cooperation

Kaminsky, G. and C. Reinhart. 1999. The twin crises: the causes of banking and balance-of-payments problems. American Economic Review, 89(3). Krugman, P. 1998. What happened to Asia? Unpublished paper. Massachusetts Institute of Technology. Lamberte, M.B. 1989. Assessment of the problems of the financial system: the Philippine case. Working Paper Series No. 89-18. Makati City: Philippine Institute for Development Studies. Lamberte, M.B. 2000. Reforming the international financial architecture: the East Asian view. Discussion Paper Series No. 2000-37. Makati City: Philippine Institute for Development Studies. Lamberte, M.B. and J.T. Yap. 1994. The Philippines. In N. Hamid and S.N. Zahid (eds.), External shocks and policy adjustments: lessons from the Gulf crises. Manila: Asian Development Bank. Lamberte, M.B., R.G. Manasan, R.S. Mariano, E.M. Medalla, M.F. Montes, and C.M. Reyes. 1985. A review and appraisal of the government response to the 1983-84 balance-of-payments crisis. Monograph Series No. 8. Makati City: Philippine Institute for Development Studies.


20

Economic

crisis... Once more

Mishkin,

F. 1999. Lessons from the Asian crisis. Working Paper No. 7102. Cambridge: National Bureau of Economic Research. Montes, M.E 1987. Financing development: the political economy of fiscal policy in the Philippines. Philippine Institute for Development Studies Monograph Series No. 13. Pesenti, E and C. Tllle. 2000. The economics of currency crises and contagion: an introduction. Economic Policy l'_eview. New York: Federal Reserve Bank of New York. Philippine Institute for Development Studies; 1986. Economic recovery and longnan growth: agenda for reforms. Volume I, Main Report. Radelet, S. and J. Sachs. 1998. The onset of the,East Asian financial crisis. Working Paper Series Research.

No. 6680. Cambridge:

National

Bureau of Economic

Reisen, H. 1998. Domestic causes of currency crises: policy lessons for crisis avoidance. Technical Papers No. 136. Paris: Organization for Economic Cooperation and Development (OECD) Development Centre. Sachs, J.D. and W.T. Wool 1999. The Asian financial crisis: what happened, and what is to be done. Unpublished. The Economist. 2000. America's economy: slowing down, to what. London: The Economist Newspaper Limited, 9 December. World Bank. 1993. The East Asian miracle: economic growth and public policy. New York: Oxford University Press, Inc. World Bank. 1998. East Asia: the road to recovery. Washington, D.C.: The World Bank. Yoshitomi, M. and K. Ono. 1999. Capital account crisis and credit contraction. Working Paper, No. 2. Tokyo: Asian Development Bank Institute.


Part I:

The Philippine Economy Before the East Asian Financial Crisis


2 Philippine Economic Performance Before the East Asian Financial Ma. Melanie

Crisis

R.S. Milo

his paper describes the state and performance

of the Philippine

economy

before the East Asian crisis. It is divided into four sections. The first section discusses the major macroeconomic developments in the 1990s. The following section gives an overview of developments in the financial sector from 1980 to 1997. Social sector developments are reviewed in the third section, while the last section presents some conclusions and continuing policy issues. Macroeconomic

developments

The challenge faced by policymakers in the 1990s was to turn the illusion of the 1980s-- the transformation of the Philippines into an outward-oriented, export-led economy_into a reality. Only by painful structural adjustment could the Philippine economy hope to achieve sustained growth. And this had to be accomplished while the macroeconomic environment needed break the pattern of growth, overheating, balance-of-payments

stabilizing, to (BOP) crisis,

restrictive policies, and economic slowdown, which had consistently characterized the postwar Philippine economy (Fabella 1994, World Bank 1992). In May 1992, President Ramos was elected into office. His vision was to • transform the Philippines into a newly industrialized

economy (NIE). The tasks

involved in this transformation included: (1) the restoration of political stability; (2) implementation of economic reforms to level the playing field and democratize the economy to make it more competitive; (3) infrastructure and energy development; (4) environmental protection and preservation; and (5) bureaucratic reforms (Ramos 1994). In line with the second objective, the government implemented policy reforms in critical areas of the econom)_ which served to reinforce the reforms of the 1980s. In particular, further tariff reforms


24

Economic

crisis...

Once more

were implemented to achieve a more neutral tariff policy. In the fiscal sector, various tax reforms were initiated, such as the expanded coverage of the valueadded tax in 1995. Also, the government's privatization program was accelerated, and private sector participation was encouraged especially in various energy and infrastructure projects through the Build-Operate-Transfer (BOT) scheme. The Foreign Investments Act of 1991 expanded the number of sectors open to full foreign ownership, streamlined approval procedures, and made the remaining restrictions and prohibitions more transparent. The government further liberalized foreign investments _ October 1994. Foreign exchange transactions were also significantly liberalized and upgraded. Beginning in January 1992, there was full deregulation of remaining restrictions on current account transactions. The full lifting of mandatory surrender requirements on foreign exchange

receipts, foreign

exchange transactions

outside the banking

system, deposits in foreign currency deposit units (FCDUs), and full and immediate remittance privileges for investment purposes were some of the measures put in place to support the policy thrust of open trading and investments. Rules covering foreign investments in Central Bank-approved securities were also relaxed. Finally, entry barriers in key industries such as telecommunications, transport (land, air, and sea), banking, and other key commodities, such as cement were dismantled or relaxed. Following

near-zero

growths

in 1991-92, the economy

again began to

post modest growth rates in 1993 (Table 1). This was attributed to improvements in infrastructure,

'particularly

in power g_neration

which eased supply-side

constraints; continued liberalization Imeasures which increased the competitiveness of several sectors and encouraged the inflow of foreign investment; a stable macroeconomic and political environment which buoyed investor confidence; and the economic recOvery of the country's major trading partners. All these helped to create a more conducive business environment. Furthermore, the Philippines was deemed as finally being on the path towards more stable and sustainable growth after decades of boom-bust cycles, and a decade of structural reforms that considerably reduced macroeconomic distortions

and liberalized

a once extremely

protected

economy.

On the supply side, the industrial sector, which accounted for around 35 •percent of GDP, was a major contributor to the country's growth performance. Construction, in particular, performed strongly. Manufacturing, which accounted for around 25 percent of GDP, also performed fairly well. There was also strong growth in the services sector, wtlich constituted more than 40 percent of GDP, particularly transportation and communication, and financial services. The latter was due to efforts to liberalize these subsectors.


Chapter 2: Milo Table 1. Growth

25 of real GDP by industry, 1990

1_91 0,3 •

1990-97 (In percent).

1992

]993

1994

1995

1996

1997

GNP

5.0

1.7

2.1

5,3

5.0

7.2

5,3

GDP

.3,2

-0,6

0.4

2,1

4,4

4.8

5,S

5.2

AgriCUlttu_

0.5

1,0

0`1

2.0

3,4

4.3

2,8

lndusn_

0.8

3.0

-2,7

,0.3

1,6

5,8

7,0

6,2

6,2

Manufacttaing Construction

2,7 12,1

-0,5 -15,9

-1.7 6.1

0.7 5.7

S,0 9.4

6,8 6.6

5.6 10,9

4,2 16.4

Ufi/ities

-0,3

4,7

0,7

2,8

13.9

13

7.6

4,8

S_rvice

49

0,2

1,0

2.5

4.3

5.0

6.4

5.5

"lYanspoctafi on -and tY2_lTll_tLrficat_On

2.2

0,5

1.4

2.5

4,2

5,8

7.4

8.2

Finatrfal. lv-al estate

10,1

-2,7

0.4

2.4

5.5

7,3

13,7

13,0

Source:

ADB,

National

Statistical

Coordination

Board.

Philippine economic growth in the 1990s was also qualitatively different in that it was truly propelled by exports and investments. Manufactured goods constituted the bulk of exports, thus reducing the country's traditional reliance on volatile commodity earnings. External debt and debt service payments were also significantly lower in real terms relative to the late 1980s. As a result of restructuring and the rapid growth of exports, the country's debt servicing burden in 1997 was at a more comfortable level of 10.4 percent of exports, compared with around 35 percent in the mid-1980s. Moreover, international investors' confidence in the economy was stronger than ever, as evidenced by the substantial inflow of foreign investments. The country's growth performance was also mirrored in employment trends, although not as strongly. The October unemployment rate, which is deemed as the least affected by seasonal factors, fell from 8.6 percent in 1992 to 7.4 percent in 1996. The underemployment rate, on the other hand, fell from 21.4 percent in 1993 to 19.4 percent in 1996. In actual numbers, the number of unemployed persons declined from 2.3 million in 1992 to 2.2 million in 1996. However, the number of underemployed persons rose from 5.1 million to 5.3 million over the same period. Also, in terms of sectoral growth of employment, most of the increase was recorded in the services sector and construction with their percentage shares in total employment increasing in the 1990s (Table 2). In contrast, the share of manufacturing in total employment fell slightly from 1992 to 1997.


26

Economic

crisis... Once more

In terms of labor productivity, however, the trend was reversed in the 1990s relative to previous periods. In particular, gross value added per worker in all sectors, except mining and quarryin+, increased between 1991 and 1997. Medalla (1998) attributed the seeming incoi_sistency between improvements in efficiency measures in the manufacturing sector and continuing structural problems to a period of adjustment to a more open trade regime, an overvalued currency, and a shift in protection from manufacturing to agriculture. Table 2. Distribution

of total employment

by major industry

group,

1990-97 (In percent). Industry

To_I

1990

fin thousands)

Agriculture,

22,532_0

fishery,

and

1991

1992

1993

1994

1995

22,979.0

23,917.0

24,443.0

25,166.0

Z5,696.0

1996

1997

27,442.0

27,888.0

45.2

4.5.3

45.4

45.8

44.7

44.1

41.7

40.4

16,6

16.7

fores_y

h',d us v,3."

1KO

16,0

16,0

15.5

15-8

15.6

Minir_g and quarrying

0,6

0,7

0.6

0,5

0-4

0,4

Mamffactufing

9,7

10.4

10,6

10.0

10.3

10.0

10.0

9-9

Electricity,

04

0.4

0,4

0.4

0-4

0,4

" 0.4

0.5

4.3

4.6

4.3

415

4.7

4,8

5.7

5,9

39.7

38.7

38.5

38.6

39,5

40.3

41,6

42,9

14,0

13,8

13,7

14.0

14.2

14.6

14,8

1.5.1

5,0

5,0

5.1

5.6

5.6

5.8

6.0

6.3

2.0

2.0

1-9

Z0

2,0

2.1

2.5

2.4

18,7

17,9

17.8

17.1

17,8

17.7

18.3

19,0

gas, and water

Collsl:l-uct jol_

Services Whotesale

and _'etalt

Transl-_or tation, ¢ommunlcatlon, Financial

0_4

0,4

and storage

real estate,

ond

business Comrnullj,

ty, sndai,

and

personal

Source:October Rounds of the Labor ForceSurve_ National StatisticsOffice. L Concerns

over the sustainability

of the country's

economic

growth had

been expressed. Of particular concern was the widening gap in the trade balance (Fig. 1). Although export growth overtook impor t growth in 1995, most Philippine manufacture exports had very high import contents so that their growth contributed much less to foreign exchange earnings than the numbers suggest (Krugrnan et al. 1992). In particular, _lectronics accounted for over half of total exports m 1997. On the other hand, the increase in merchandise imports was accounted

for by capital

formation

goods

necessary

for production


Chapter 2: Milo

27

expansion. Also, unlike in previous periods, fiscal expansionism was not to blame for the large deficit and it was mostly financed by nondebt capital inflows. Furthermore, some improvements in the efficiency and competitiveness of the manufacturing sector following various reforms had been reported (Medalla et al. 1995, Tecson et al. 1996). The country's merchandise trade deficit was significantly offset by the surplus in nonmerchandise trade, which was largely due to remittances of overseas Filipino workers (OFWs). Thus, the current account deficit remained fairly stable at around 5 percent of GDE

Figure 1. Trade balance of GDP).

and current account balance,

0 -2

_

-4 -6

/

-8

,,__._"_"'"

_.....,_

__

1990-97 (In percent ---.

Trade balance

--

Current

account

balance

.,...,_. %

-10 -].2

%_,.,,,.

"-_._ _.,_..,_.

-14

"_'"

--'-"

-16 1990 Source: National

1991

1992

Statistics

1993

1994

Coordination

1995

1996

1997

Board (1998).

On the other hand, the country registered BOP surpluses from 1994 to 1996 as a result of strong inflow of foreign investment. The net inflow of foreign investment to the Philippines from 1970 to 1987 was negligible, averaging just 0.3 percent of GDE Fairly significant inflows were recorded beginning only in 1988 due to the government's debt-for-equity program, and foreign investment and foreign exchange market reforms in the 1990s. Thus, net foreign investments reached around 4.2 percent of GDP in 1996. In terms of composition, the surge in portfolio investment inflows began in 1993 and significantly out-paced foreign direct investment inflows. For instance, in 1996, total inflow of portfolio investments amounted to almost US$6.9 billion, while total foreign direct investment inflows amounted to around US$1.5 billion. In net terms, however, foreign direct investments

were still dominant

because portfolio

investment

outflows were also substantial (Fig. 2). This indicated the short-term and speculative nature of foreign portfolio investments. A more significant recent source of foreign exchange inflows were changes in net foreign assets of commercial banks, which rose from around US$40 million in 1991 to more than US$4.2 billion in 1996, or around 5 perc ant of GDE


28

Economic

Figure

2.

Main components GDP).

investment,

Once

more

1970-76

(In percent

2.5 -

7.5 _

Direct, outflow

2.0 -

6.0 __ Portfolio, inflow

1,5 -

4.5

"-

of foreign

crisis...

of

Portfolio, outflow

IH

o.0._..... __ _ 0,0 -1.5 -3.0 4_5

- •

• 11.975

1970

, 19_0

1985

, 1995

-6.0

Note: Inflow and outflow of foreign direct investment are plotted on the left scale, while in flow and outflow of portfolio investment are plotted on the right scale. Source: Bangko Sentral ng Pilipinas; National Statistical Coordination Board.

Another For the

first

area of concern time

was

in the postwar

the management period,

of government

the national

government

finances. posted

a

budgetary surplus of less than 1 percent of GNP from 1994 to 1997 (Fig. 3). The consolidated public sector fiscal position 1 (CPSFP) also improved, falling to a deficit of about 0.5 percent of GNP This was due partly to an extensive past

decade,

in 1975-85

which

in 1994 and restructuring

led to the rise in tax effort 2 from

to 16.2 percent

in 1996. However,

CPSFP

and t2 24.9 billion,

still registered

deficits

These meant

2.5 percent

and

respectively. Also, there was a deterioration in the buoyancy in relation to GNP. The tax buoyancy coefficient _ fell from 1.15 in 1993-97, 1994, 1998).

which

implied

in 1996. over the

of 11.3 percent in fiscal position

proceeds, which are nonrecurring in 1994 and 1995 amounted to more

respectively.

of around

an average

the improvement

was also highly dependent on privatization' income. For instance, privatization proceeds than ia34 billion

registering a surplus of the tax system

a deterioratiOn

that the underlying 1.5 percent

of GNP,

of the tax system 1.41 in 1987-92, to

in tax administration

(Manasan

LThe consolidated public sector fiscal position (CPSFP) include the combined balance sheets of the national government, monitored government-owned or controlled corporations, local government units aM govelTtrnent financial institutions. 2 I.e., the ratio of total tax revenue to GNP (Manasan 1_)98). -_The tax buoyancy coefficient measures the percentage change in tax yield given a percentage change in the tax base (Manasan 1998).


Chapter 2: Milo

29

Figure 3. Consolidated government's 6 4

public sector (CPSFP) and the national fiscal positions, 1985-97 (In percent of GNP).

0_ _

2

I

i

4- ....

---

CPSFP

--

National

"_" ------

"_-__...f_

-- -- Primary 0

/

/....-

-2 ..,d 4:.,

,

1985

..

!.,

T

1987

Source: Department

Thus, while especially remained

Gov't balance

1989

1991

of Budget

significant

1993

Management,

1995 National

gains had been

1997 Statistical

achieved

Coordination

Board.

in tax mobilization

in the last 6 years, the fiscal position remained tenuous, to be done. Efforts to broaden the tax base and improve

and more collection

efficiency had so far been insufficient to ensure the stability of public sector finances in the long run (Manasan 1994, 1998). Compared with fiscal excesses of the past, however, fiscal policy in the 1990s was considerably more prudent. Furthermore, the CPSFP had been posting surpluses in its primary balance 4 since 1987, which averaged around 4.5 percent from 1991 to 1996. Thus, total national government expenditure net of debt service was fairly stable. The rapid growth in debt service, however, was at the expense of capital outlays, and maintenance and other operating expenditures (MOOE), which suffered major cutbacks. The cutbacks were not restored even with improvements in fiscal position in the 1990s. Hence, capital expenditures of the national government consistently fell from 4.6 percent of GNP in 1975-85, to 2.9 percent in 1986-91, and 2.7 percent in 1992-96 (Manasan 1998). The low level of public investment in infrastructure would necessarily impair the economy's growth prospects. Monetary policy in the 1990s was also tighter compared with previous periods. Thus, while high inflation in the past was attributed primarily to the growth of money supply, this was not the case in the 1990s. Although inflation had been brought under control from the mid-1980s, it reemerged as an immediate concern towards the end of the 1980s and early into the 1990s. This was due to the growth of the fiscal deficit and its monetization; cost push effects from the nominal depreciation of the exchange rate; sharp oil price increase due to the Gulf war; and supply bottlenecks that resulted from adverse weather

4 The primary balance is equal present a more accurate picture

to the overall balance less interest payments, and is deemed of the government's fiscal stance (Manasan 1998).

to


30

Economic

crisis... Once more

conditions. The monetary authorities' contractionary stance reduced the growth of money supply from 28 percent in 1989 to just 11 percent in 1992. Inflation consequently went down to single-digit levels, averaging around 8.5 percent from 1992 to 1996 (Fig. 4), and even falling to 4.6 percent in the first half of 1997.

Figure 4. Inflation 1990-96.

rate, 91-day Treasury bill rate, and exchange

30

rate,

-- - inflation rate (%)

25 20

_

--

15

**

--

-- - 91 _day Tbillrate (%) Exchange rate (P/US$)

"-- _'_ "

'I0

"" k

....... -......--''''--..,

.....

5 0 1990

1991

1992

1993

1994

1.995 1996

Source:Bangko Sentral ng Pilipinas.

The conduct of monetary policy was complicated by the liberalization of the capital account in 1993. The surge in foreign exchange inflows put strong pressure on the Philippine peso to appreciate. Because of the potential adverse effect of such appreciation on the export sector, monetary authorities sought to minimize it by intervening in the foreign exchange market, among other measures. The rapid increase in the Philippine central bank's net foreign assets accelerated the growth of money supply to an average of 25 percent from 1993 to 1995. Higher liquidity contributed to the decline in interest rates, although it also fueled inflation. To meet monetary and inflation targets set under the country's IMF stabilization program, the BSP sterilized the monetary effects of its foreign exchange purchases. However, the appreciation of the peso was not arrested as the substantial differential between domestic and foreign interest rates induced further capital inflows. The fiscal surplus eased the pressure on domestic interest rates, but tight monetary policy prevented domestic interest rates from going down further to reduce the differential (Lamberte 1994). Although sterilized intervention enabled the BSP to build up its gross international reserves, it also proved to be very costly because the BSP incurred huge quasi-fiscal losses on the interest-bearing securities it issued to sterilize excess monetary growth (Cororaton 1995). Thus, the combination of still relatively high inflation rates, stable interest Fates, and a strong peso prevailed in 1993-96. The appreciation of the peso, Which experienced the largest real currency appreciation during the 1990s relative to other Southeast Asian


Chapter 2: Milo

31

currencies, exacerbated the country's trade deficit. Also, the peso appreciation coupled with high interest rates led to the growth of the nontradable sector, with investments going into real estate and the stock market, and encouraged foreign borrowing. Overall, the Philippines' macroeconomy was marked by significant improvements in the 1990s. There was some cause for concern, particularly on the widening trade deficit and fiscal position. However, these were not considered "critical" and were expected to improve as the economy continued to grow and restructure. More importantly, with the exchange rate becoming more responsive to financial flows relative to real flows, and the dominance of short-term capital flows, the economy was becoming more vulnerable to shocks in the international capital markets. Hence, the importance of fine-tuning monetary, fiscal, and exchange rate policies to maintain astable macroeconomy was emphasized (Yapand Reyes 1994). Financial sector developments The period from 1980to 1997was marked by substantial financial reforms. There was a snowballing effect, in that the reform process set the motion for further reforms. The Philippines formally embarked on a financial liberalization program in 1980as part of an overall structural adjustment program. Itincluded the gradual liberalization of interest ratesfrom 1981to 1983;easing of restrictions on the range of operations financial institutions were allowed to conduct in domestic markets, such as the introduction of universal banking in 1980; and rationalization of financial market regulations, including higher capital requirements for banks and nonbank quasi-banks (NBQBs) (Remolona and Lamberte 1986). But soon after the start of financial liberalization, the financial system underwent a crisis of confidence, which was triggered by defaults of a prominent businessman who fled the country in 1981, and compounded by a series of investment frauds and stockbroker failures (Laya 1982). The financial crisis deepened as a result of the political and economic crises in 1983-85, which led to significant financial shallowing (World Bank 1986). Financial reforms were resumed in 1986, which specifically addressed problems endemic to the system since the 1960s, and further highlighted by the reform effort and financial crisis during the early 1980s. These included the interlinked problems of fraud or insider abuse by bank owners or officers and inadequate/ineffective prudential supervision and regulation of banks. Policies effecting prudentialbank management were instituted. These included increased minimum capitalization requirements; compliance with the minimum risk asset ratio; the single borrower's limit; limit on loans to directors, officers, stockholders, and related interests (DOSRt);allowable interlocking directorships and officerships; provisions for loan loss or doubtful accounts; audit and


32

Economic

reporting

requirements;

crisis,,. Once more

and stricter bailout policy of problematic

banks (Bautista

1992). The government also rehabilitated ailing financial institutions, notably government-owned banks and rural banks. However, the problem was not just the lack of prudential rules, but a weakened Central Bank of the Philippines (CBP)---both financially and politically, a3 well. And a strong central bank, which effectively carries out its role of supervising financial institutions, is a prerequisite for a stable financial system (World Bank 1988). Thus, the CBP was rehabilitated in 1993, with the creation of a new, independent called the Bangko Sentral ng Pilipinas (BSP). Other reforms

implemented

central monetary

in the 1990s included

authority

the deregulation

of

the entry of new domestic banks and bank branching in 1993, which was further rationalized in 1995, and easing of restrictionsI on the entry of foreign banks in 1994. Ten foreign banks were initially allowed to open up to six branches, while others could buy up to 60 percent of an existing local bank or subsidiary. Reforms in other sectors of the financial system included the liberalization of the private insurance industry in 1995, and efforts to develop equity markets such as the unification of the Manila and Makati Stock Exchanges to form the Philippine Stock Exchange in 1994. In particular, liberalizing foreign investments and foreign exchange transactions had a significant impact on the growth of the capital market. The Philippine financial system consists of banks and nonbank financial institutions (NBFIs). Banks are classified .as commercial banks (including expanded commercial or universal banks), thrift banks (savings and private development banks, and stock savings and loan associations), rural banks, and specialized government banks, although the latter had all been upgraded to commercial bank status by 1996. NBFIs include insurance companies, investment houses, financing companies, securities dealers and brokers, fund managers, lending investor s, pension funds, pawnshops, and nonstock savings and loan associations. Figure 5 shows the total assets of the Philippine

financial

system from

1980 to 1997. The system has been consistently dominated by banks in general, and commercial banks in particular. The growth of commercial bank assets was significantly higher in the 1990s as a result Of the entry of new domestic and foreign banks, and further increases in minimum capital requirements. On the other hand, the share of NBFIs in total assetsifell from 24 percent in 1980 to just 15 percent in 1997. Government-owned social security institutions, in particular, accounted for over half of the total assets of this subsector.


Chapter 2: Milo Figure

33

5. Assets of the Philippine 1980-97 (In P billion).

financial

system,

by type of institution,

3000 2500

[] Con_mercial banks • Other banks

2000

I NBFIs

1500

1.,

,ooo 0 1980

...... 1985

1990

"l! |

1995

Source: BangkoSentral ng Pilipinas.

Despite the rapid growth of the banking sector in terms of assets and number of offices, financial deepening from 1980 to 1997 was fairly modest. After stagnating for decades around the 20 percent level prior to financial liberalization, the ratio of M2 to GDP rose to around 26 percent in 1983. There was considerable financial shallowing during the crisis period from 1984 to 1985, and a substitution away from deposits into secure, higher yielding government securities. Significant financial deepening occurred beginning only in 1993, with the M2 to GDP ratio reaching 43 percent in 1997. But this should be interpreted with caution. In a comparative study of financial liberalization in Asian and Southern Cone countries, Cho and Khatkhate (1989) found that to the extent that short-term inflow of foreign savings is incorporated into this ratio, an increase in this ratio cannot automatically be interpreted to mean enhanced efficiency in mobilizing resources by drawing them away from less productive uses. Also, the Philippines' M2 to GDP ratio was still fairly low compared with other countries in the region, and considering the robust state of the financial sector and the economy as a whole. This was partly due to the tight liquidity management pursued by the BSP to meet inflation targets set with the IMF. Also, high reserve requirements and the 20 percent withholding tax on interest income resulted in low rates of return to deposits. Thus, there was a sharp increase in off-balance sheet activities of commercial banks, which was facilitated by the easing of banking regulations. These included the use of foreign currency (FCDU) deposits to extend foreign currency loans, and trust accounts for securities investment, especially in the 1990s (Table 3). For instance, the trust fund operations of banks increased significantly from P13.5 billion in 1980


34

Economic

crisis... Once more

to almost P320 billion in 1996, or an almost 200 percent growth in real terms. Since trust accounts were not subject to various intermediation taxes until 1993, they were able to offer higher yields relative to traditional bank deposits. Thus, if the trust operations of banks were included in measuring financial deepening, since banks were effectively using them in the same way and for the same purpose as deposits and deposit substitutes, the ratio would reach 55 percent. While the development of trust accounts enabled banks to tap additional sources of funds, they also drew a significant portion of funds from deposit substitutes, and catered particularly to large depositors (Lamberte 1993). Foreign currency deposits, on the other hand, amounted to around 28 percent of traditional deposits in 1996. Table 3. Selected

liabilities

of domestic

Traditional deposits Total (billion P)

Distribution by type (%) Demand Savings

Time

:ommercial

banks, 1980-96.

Deposit

Tiltst

FCDU

substitutes

accounts

deposits

(% of total deposits)

(billion us$)

1980

72.63

19

32

50

17

19

1985

143,02

10

39

50

6

18

1.86

1990

310.74

10

58

31

1

25

2.56

1991

365.61

11

58

31

1

37

3.16

1992

426.58

10

62

27

1

42

4.37

1993

556,80

10

65

25

0

33

1994

693.08

9

68

23

1

34

7.72

1995

873,83

9

67

24

1

30

9.12

1996

1,119.56

9

61

29

1

29

14.52

5.61

Source:Bangko Sentral ng Pilipinas. One of the criticisms leveled against the Philippine banking system was its poor performance in savings mobilization. This was partly attributed to the fixity of interest rates especially on savings deposits. Tan (1989) cited the existence of market segmentation: small savers who receive low, even negative, real deposit rates, and big savers who have access to the money market, and whose deposits banks compete for. Thus, the large pool of low cost savings deposits contributed to commercial banks' high profit margins. The danger with persistently large negative real deposit rates is that they misdirect savings (Dombusch 1991). The problem of low domestic savings needs to be addressed because the sustainability of economic growth is closely linked to this. The major determinant of savings is income, and income growth depends on growth of


Chapter 2: Milo investments.

35

On the other hand, low savings mobilization

hinder investment

growth, particularly in the private sector. Thus, a policy gridlock could ensue (Yap and Reyes 1994). The savings-investment gap (Fig. 6) that resulted from low domestic savings and high investment requirements was filled by private capital inflows in the 1990s, as opposed to official flows in previous periods. Figure 6. Gross domestic of GDP).

savings and investment

rates, 1990-96 (In percent

30 .... 25, 20 , 15 10 5 0

Grossdomestic _

_

_ "'" .....

. ......

__

savings Gross domestic investment

"".........

1990 1.991 1992 1993 1994 1995 1996 1997 Source:ADB (1998). Another trend that was observed in the 1990s was the significant increase in foreign liabilities of commercial banks, as reforms resulted in easier access to foreign funds. The total foreign exchange liabilities of private commercial banks increased from around US$0.52 billion in 1993, prior to the deregulation of foreign exchange transactions, to more than US$7 billion by the third quarter of 1997. When expressed as a percentage of total foreign exchange liabilities of the country, it rose from around 1.5 percent to around 15.2 percent for the same periods. Figure 7 shows the foreign assets and foreign liabilities of commercial banks expressed as a percentage of GDE The gap between the two steadily increased from 1992 onwards, but what is striking is the substantial increase in foreign liabilities of private commercial GDP. Figure

banks in 1996 to almost 32 percent of

7. Foreign assets, foreign liabilities, and total loan commercial banks, 1990-96 (In percent of GDP).

60 50

."

40

.."

30 .o

20

.o

-..

Loanportfolio

--

Foreignliabilities

- -- Foreignassets

. .---''

..............

o 1990

1991

1992

1993

1994

1995

portfolio

1996

Source:Bangko Sentralng Pilipinas;National StatisticsCoordinationBoard.

of


36

Economic

crisis... Once more

This rapid increase in commercial banks' foreign liabilities facilitated the lending boom in recent years. For instance, the contribution of foreign currency loans to domestic lending of eight commercial banks that resorted to international capital markets was estimated at 12 percent in 1993, rising to 40 percent in the first quarter of 1997. The increase in foreign liabilities is not necessarily a problem. What ultimately matters is how the funds were used, and this was the source of concern in the Philippines. The distribution of FCDU loans, for instance, showed that while at least 50 percent went to exporters, the share of nonexporters increased from 4 percent at the start of 1994 to 30 percent by the third quarter of 1997. The distribution of loans outstanding iby commercial banks according to industry (Table 4) shows that there was a significant drop in the share of agriculture (sector 1). The share of manufacturing (sector 3), on the other hand, increased during the recovery years of the 1980s, but its share has since consistently fallen as well. In fact, the share of manufacturing to total loans outstanding of commercial banks in 1996 reverted to its prereform level. In contrast, sectors that increased their share were those in the services sector (sectors 6-10). communication

The increase in the share, of transportation, storage, and was due to the liberalization of these sectors. The increase in

the share of consumer loans such as housing credit cards (sector 10) was also notable. Table 4.

Distribution by industry,

of loans outstanding 1986-97.

Total Year

(billion P)

loans (sector 9), and car loans and

Distribution 1

2

3

4

of commercial

banks

by industry (In percent) 5

6

7

8

9

10

1986

88.3

15.9

8.4

25.0

2.1

4.2

15.7

3.5

17.7

2.5

5.0

1987

101.1

12.3

7.0

39.9

1.1

3.1

14.2

3.5

10.7

2.6

5.5

1988

126.6

10.7

5.4

42.2

0.8

1.7

17.7

3.8

8.9

2.8

5.8

1989

165.9

8.4

7.5

42.7

0.7

L4

16.0

4.9

8.7

3.3

6.3

1990

].99.6

8.2

8.4

42.8

0.5

2.2

17.7

3.8

7.9

4.0

4.5

1991

144.3

9.5

1.8

40.3

0.6

3.8

17.6

3.2

11.1

4.3

7.7

1992

256.3

9.6

5.6

37.3

0.9

2.4

20.3

3.8

10.6

3.7

5.8

1.993

235.3

5.4

3.3

38.0

1.1

2.3

14.4

4.2

17.9

5.5

7.7

1996

1,203.7

4.1

0.9

26.5

2.2

3,8

16,3

5.2

23.8

8.0

9.1

1997

1,542.3

3.9

0.8

27.2

2.1

3.6

16.8

7.1

17.2

10.4

10.7

i Note: 1 -- Agriculture, fishery and forestry; 2 -_ Mining and quarrying; 3 = Manufacturing; 4 -Electricity, gas, and water; 5 = Construction; 6 = Wholesale and retail trade; 7 = Transport, storage, and communication; 8 =- Financing, insurance, business services; 9 = Real estate; and 10 -Community, social, and personal activities. No data was available for 1994-95. Source: Bangko Sentral ng Pilipinas.


Chapter 2: Milo

37

More dramatic

trends

are revealed

by the distribution

of loans granted

by commercial banks according to industry from 1981 to 1997 (Table 5). The downward trend in the shares of manufacturing and mining was also evident. On the other hand, the downward trend in agriculture's share from 1984 to 1993 was reversed in 1996. The share of construction, in addition to the services sector, substantially increased. The growth in the amount of loanable funds that went to construction and real estate between 1993 and 1996 led to the imposition of a 30 percent cap on commercial banks' total exposure to the property sector in June 1997 by the BSP. The dominant share of financing, insurance, and business services, on the other hand, was largely accounted for by interbank loans. If this sector were excluded, the same trends would still be evident. The overall trend in the loan portfolio of commercial banks was thus worrisome because it had serious repercussions on the viability and stability of the financial sector, and the sustainability

of the country's

growth performance.

Finally, although there had been some lengthening of loan maturities, loans outstanding of commercial banks were still predominantly short term (Fig. 8).

Table 5. Distribution 1986-97.

of loans granted

Year 1986

(billion Total P) . 325.9

1

2

6.5

2.0

25.7

3 Distribution 4 2.3

1987

368.8

5.9

1.5

26.2

1.0

1988

421.9

6.2

1.9

30.2

1989

385.9

6.0

2.1

36.8

1990

512.4

6.2

1.4

1991

844.0

4.5

1992

1,094.1

3.7

1993

3,459.6

1996

10,253.7

1997

9,653.2

by commercial

banks by industry,

5 industry6 (In percent) 7 8 by 1.2 14.7 1.6 42.4

9

10

0.6

3.0

1.1

15.0

1.3

41.7

1.0

5.3

0.7

1.3

14.2

1.6

36.1

1.5

6.3

0.9

1.5

18.3

1.9

20.7

2.6

9.1

32.3

0.7

1.8

17.0

2.1

28.0

2.6

7.9

1.3

26.8

0.7

1.3

12.0

1.7

412

1.8

8.1

2-2

23.4

0.7

1.1

10.4

1.6

48.1

1.4

7.4

1.1

0.7

8.1

0.4

0.8

4.9

0.7

74.8

0.6

7.9

5.7

0.4

6.3

0.5

6.0

13.2

7.8

43.5

6.0

10.6

3.9

0.6

6.7

0.8

2.5

13.3

3.9

51.0

6.6

11.0

Note: 1 =- Agricultttre, fishery, and forestry; 2 = Mining and quarrying; 3 -- Manufacturing; 4 -Electricity, gas, and water; 5 = Construction; 6 = Wholesale and retail trade; 7 = Transport, storage, and communication; 8 = Financing, insurance, business services; 9 -- Real estate; and 10 -Community, social, and personal activities. No data was available for 1994-95. Source: Bangko Sentral ng Pilipinas.


38

Economic

Figure

8.

Distribution maturity,

of 1990-96

loans outstanding (In P billion).

of

crisis...

Once

commercial

more

banks

by

1200 1000

[] Long-term • Intermediate

800 600

400

1

1991

Source: Bangko

On the source

other

of trading

the

of four from

than

in the

rapidly

in

region 1975

to 1997.

copper

mining

was

a speculative and

boom

economic

Trading

volume

economy

recorded

returned

in 1989

Philippine P41

9. Philippine

billion

due

in

gradually

increased

following

the

country

fundS.

market,

to more

Thus, than

billion

the

beginning

In

As

a

market in 1986

in government. and

the launching

capitalization

grew

in 1989,

or a four-

1975-97.

800 "r 600 700 + +

market

P261

1970s.

1992).

1980s,

change swaps

market

to the Bank

early

the even

the volume

securities

prior

(World

the

base, and

9 shows

private

stocks

to the debt-equity

in 1986

stock

The

important

small years

Figure

in oil stocks

turmoil

a more

a very recent

in 1994.

and

closed-end more

Figure

was

very

became

from

from

in the

An increase

grew

market

starting

of gold

contracted.

as confidence

stock

Albeit

market

political

significantly

Philippine

years.

markets

stock

[] Short-term

I

mostly

there

of the

the

market

in the

1970s,

result

hand,

all other

composed

I!!

ng Pilipinas.

in recent

stock

outperformed

was

Sentral

of funds

Philippine

1

@

250

_

Tradfi'tg value

200

_

No. of listed

500 + 4O0 +

150

300 +

100

I

companies 200 + 100 +

_

50

0 l.-V-t. : '._: : _; ; .... 1975

1980

1985

L 1990

_._

0

1995

Note: Trading value is plotted on the left axis, while number the right axis. Source: Philippine Stock Exchange.

of listed companies

is plotted

on


Chapter 2: Milo

39

fold increase in real terms. As a ratio of GDE it increased

from less than 7 percent

in 1986 to more than 28 percent in 1989. However, market capitalization, was almost halved in 1990 as a result of various crises. Dramatic increases in trading volumes were recorded beginning in 1993 with the liberalization of the capital account and the recovery of the economy. The privatization program of the government also continued apace. Thus, total market capitalization rose to 97 percent of GDP in 1996. There were 216 companies listed in the Philippine Stock Exchange at the end of 1996, compared with 138 a decade ago. However, only about 75 of these are actively traded, and the market is concentrated in several shares. For instance, of the total market capitalization of P1,355 billion in 1994, around 40 percent was accounted for by six companies. The largest component is the property sector, with residential and property developers accounting for 23.1 percent of market capitalization at the end of 1995. The consumer sector accounted for around 17.4 percent, although it was largely dominated by the beverage corporation giant San Miguel, the single largest stock on the equity market (with a capitalization of P122 billion at the end of 1995). It alone made up 8.5 percent of the entire stock market's value. Conglomerates accounted for 15.4 percent of the market, banking for 14.0 percent, and utilities for 12.8 percent (BMI 1996). As in the real sector, the Philippine financial sector was a lot stronger in the 1990s compared with the 1980s. Several worrying trends, however, were also beginning to emerge. In particular, the years of significant net capital inflows were associated with rapid expansion in the banking sector's foreign currency liabilities, deposits, and domestic lending. As a result of the rising proportion of external debt intermediated through commercialbanks, a significant portion of which went into the nontradable sector, commercial banks became vulnerable to sudden movements

in the exchange

rate.

Social development Ultimately, the goal of economic policy is to maximize some social welfare function. Thus, in assessing the growth episode of the 1990s, its social impact needs to be considered as well. Along with various economic reforms that were necessary in transforming the Philippine economy to make it more competitive and efficient, goals for human development and poverty alleviation were also integrated in the Ramos administration's development plan. Proposed policies to achieve the latter included: (a) promotion of sustained income and employment growth among the poor; (b) provision of safety nets for displacements due to structural adjustments; (c) effective response to natural and man-made calamities and disasters; and (d) public resources and efforts directed toward basic social services, disadvantaged regions, and specific groups of the poor. Employment


40

Economic

crisis... Once more

generation was seen as the key to increasing incomes and alleviating poverty. The Social Reform Agenda (SRA) 5 was launched in 1994 as the government's poverty sectors.

alleviation

and safety net program

for specific geographical

areas and

The SRA represented a government attempt to streamline all direct antipoverty programs under one package. It operationalized the human development goals that were embodied in the government's development plan. Its macro poverty reduction target was to bring absolute poverty down from 40 percent in 1991 to 30 percent in 1998, when a new president would have been elected. The SRA centered on three major strategic interventions: (a) access to basic social services as an imperative for survival; (b) asset reform and access to economic opportunities for employment and_income generation; and (c) people's effective participation in governance toward self-reliance and empowerment. The SRA was initially formulated to address the minimum basic needs of priority provinces, which were identified in a series of consultations between representatives from different government Offices and community members in 1993-94. Priority provinces were chosen based on poverty incidence, existence of armed conflict, isolation, and special development needs. Specific target beneficiaries included farmers and landles_ agricultural workers in agrarian reform communities; fisherfolk in coastal communities in priority bays and lakes; urban poor; workers in the informal sector; and other disadvantaged groups such as women, children, youth, persons w_th disabilities, senior citizens, and victims of disasters and natural calamities. _ key factor in drawing up the SRA was the participation of disadvantaged groups and nongovernment organizations (NGOs) in formulating specific goals and projects. Components of the SRA began to be installed in priority provinces in 1995, and its implementation began in 1996. Acknowledging the different needs of marginalized sectors, the SRA constituted nine flagship programs that were to serve as its core commitment to these sectors: (1) agricultural development; (2) fisheries and aquatic management; (3) ancestral domains; (4) socialized housing; (5) comprehensive and integrated delivery of social services (CIDSS); (6) workers' welfare and protection; (7) livelihood; (8) credit; and (9) institution-building and effective participation in governance. Thus, poverty alleviation was not the sole concern of the SRA. Convergence,

or focusing

and synchronizing

the delivery

of

programs and resources to priority areas and target groups, was the major strategy for localizing the SRA. The ins,titutional structure designed to operationalize municipal,

the SRA thus cut across

and barangaylevels,

the national,

regional,

with basic sector counterpart

provincial,

structures

at each

The discussionon poverty alleviation and the SRAdraws heavily on Reyes and del Valle(1998).


Chapter 2: Milo

41

level. It also involved establishing interorganizational interfaces to facilitate convergence. The overall governing body for the SRA is the Social Reform Council (SRC). To fund the SRA, the 1996 national budget was subjected to a disaggregation process to identify public sector investments for the SRA. That is, agency budgets were tested for their sensitivity to antipoverty and other social reform efforts. Of the total budget of P394.9 billion, P86.7 billion or 22 percent was found to be "SRA-enrolled," or focused on specific commitments made to basic sectors under the SRA. Whether these investments actually benefited the poor is another issue. The amount allocated for SRA-directed activities in the 1997 national budget was lower both in absolute and relative termsmP85.6 billion or 19.7 percent of the total budget. Thus, it was ironic that the 1997 budget was hailed as an antipoverty budget. In general, there were minimal increases in budget allocation for social services, which accounted for around 25 percent of total allocation from 1993 to 1997. In addition to the national budget allocation, SPA programs were funded by a special purpose fund called the Poverty Alleviation PAF amounting to P4 billion was intended for priority

Fund (PAF). The 1996 areas where standard

government programs were inadequate, particularly in agricultural development, CIDSS, and workers' welfare. Specific projects funded by the PAF in 1996 included communal irrigation, scholarship programs, hiring of teachers and purchase of school desks, and reintegration assistance for returning overseas Filipino workers (OFWs). The 1997 PAF appropriation was specifically intended for poverty alleviation programs in the two lowest municipal classes in priority provinces, and amounted to P2 billion. Overall, economic growth was accompanied by improvements in some social indicators. The Philippines' Human Development Index 6 improved from 0.621 in 1992 to 0.677 in 1995 (UNDP 1998). More specifically, gains were made in health, nutrition, and education as evidenced by increasing life expectancy and literacy rates, and declining mortality and malnutrition rates. Overall there was wider access to health, nutrition, and family planning services. Thus, the general health condition of the population improved, with life expectancy at birth increasing from 66.6 years in 1993 to 68 years in 1997. The infant mortality rate declined from 52 per 1,000 live births in 1993 to 45.8 in 1997, while the crude death rate decreased from 6.9 per 1,000 population in 1993 to 6.1 in 1997. The total fertility rate likewise declined from 4.2 percent in 1990 to 3.6 percent in 1997. The nutrition status also improved, with the prevalence of underweight preschool and school children declining from 10.0 percent and 9.4 percent in The Human Development Index measures a country's overall achievements in three basic dimensions of human development - longevity,knowledge, and a decent standard of living.It is based on life expectancy at birth, educational attainment, and real GDP per capita.


42

Economic

crisis... Once more

1992, to 8.4 percent and 7.4 percent in 1996,irespectively. The basic literacy rate likewise improved from 89.9 percent in 1989 to 93.9 percent in 1994, while the functional literacy rate 7 rose from 75.2 percent to 83.8 percent. The participation rate for both elementary and secondary levels also improved from 1993 to 1997. There was also some improvement in access {o safe water, sanitary toilet facilities, and electricity of the bottom 30 percent of families. The proportion of households with safe water supply increased from 80 percent in 1992 to 86 percent in 1996, while those with sanitary toilet facilities ro._e from 69.5 percent to 74.4 percent. As for poverty alleviation, poverty incidence declined from 39.9 percent of families in 1991 to 32.1 percent in 1997. In terms of percentage of the population, poverty incidence went down from 45.3 percent to 37.5 percent during the same period. However, the decline primarily took place in Metro Manila, while the situation in rural areas in particular only marginally improved (Table 6). The subsistence incidence likewise Went down from 20.4 to 16.5 percent of families, or from 24.3 to 20.4 percent ofi the total population from 1991 to 1997. Again, subsistence levels were sigrlificantly higher outside of Metro Manila, or in rural areas in general. The latter measure refers to the proportion of families or individuals who were unable tOmeet their basic food requirements, or the core poor. In terms of magnitude, however, the downward trend in number of poor families from 1991 to 1994 was reversed in 1997 (Table 7). The number of subsistence families also increased from almost 2.30 million families in 1994 to 2.34 million in 1997.

Table 6. Poverty incidence 1985

1988

and subsistende 1991

1994

Pover!y incidence of families

incidence,

199_ _

1985

1985-97 (In percent). 1988

1991

1994

1997

Poverty incidence of population

Philippines

44.2

40.2

39,9

35.5

32.1

49.3

45.5

45.3

40.6

37.5

NCR Outside of NCR

23.0 47.5

21.6 43.1

13.2 44.2

8,0 39,9

7.1 36.2

27.2 52.8

25.2 48.7

16.7 49.9

10.5 45.5

9,6 42,1

Urban Rural

33.6 50.7

30.1 46.3

31.1 48.6

24.0 47.0

18.5 44._

37.9 56,4

34.3 52.3

35,6 55.1

28.0 53,1

22.5 51.2

Philippines

Subsistence incidence of families 24.4 20.3 20.4 18.1 16,_

NCR Outside of NCR

6.0 27,2

5.0 22.7

2.1 23.3

0.7 20.8

0.8 19.0

7.1 31.9

6.3 27.2

2.8 27.8

1.0 25.1

1.0 23.5

Urban Rural

15.2 30.0

12.1 25.3

14.3 26,4

10.4 25.6

7.2 24.8

17.8 35.2

14.4 30,4

17.0 31.7

12.8 30.8

9.3 30.4

I

Subsistence incidence of population 28.5 24,3 24.3 21.8 20.4

Note: NCR stands for National Capital Region or Metro Manila, Source: National Statistical Coordination Board,

7 Basic literacy refers to the ability to write a simple message in any language functional literacy also includes numeracy and problem-solving skills.

or dialect,

while


Chapter 2: Milo

43

Table 7. Magnitude

of poor families, 1985

1985-97.

1988

1991

4,355,052

4,230,484

4,780,865

301,973

310,284

217,602

4,053,079

3,920,200

4,563,263

4,389,499

4,412,594

Urban

1,250,398

1,198,555

1,847,579

1,521,882

1,246,173

Rural

3,104,655

3,031,929

2,933,286

3,009,288

3,307,215

Philippines NCR Outside

Source:

of NCR

National

Statistical

Coordination

1994

1997

4,531,170

4,553,387

141,671

140,793

Board.

There was also a downward trend in the poverty gap ratio, which measures the inadequacy of family income relative to the poverty threshold, from 13 percent in 1991 and 11.2 percent in 1994, to 10 percent in 1997. Thus, on average, poor families were better off in 1997 compared with previous years. But again, the decline was more pronounced in the NCR (from 2.9 to 1.2%) and urban areas (from 10 to 5%), compared with the rural areas (from 16.0 to 15.2%). Furthermore, income distribution worsened from 1991 to 1997, although it improved from 1991 to 1994 as the average annual family income of the wealthiest decile declined while the rest increased (Table 8). The widening gap between the poorest and richest deciles is stark. The lack of improvement in income distribution becomes even more evident over a longer time frame (Fig. 10). The richest 20 percent of families consistently accounted for over half of total income from 1985 to 1997, with the Gini coefficient at its worst in 1997.

Table 8.

Distribution of total family by income decile, 1991-97.

income

and average

income

Decile

hlcome share of families (%) 1991

1994

1997

1991

1994

1997

(%)

Philippines

100.0

100.0

100.0

42,886

42,800

51,790

3.2

First

1.8

1.9

1.7

7,853

8,040

8,621

1.6

Second

2.9

3.0

2.7

12.618

13.002

13,801

1.5

Third

3.8

3.9

3.4

!6.251

16,839

17.783

1.5

Fourth

4.7

4.9

4.3

20.911

22.187

1.7

Fifth

5,7

6.0

5.3

27,676

2.1

Sixth

7,0

7.4

6,7

30,108

34,751

2.4

Seventh

8.8

9.1

8.6

37,555

39,062

44,715

3.0

Eighth

11.4

11,8

11.4

48,832

50.558

59,149

3.2

Ninth

16,1

16.4

16.1

69,041

70,363

83,648

3.3

35,5

39.7

162.081

152,106

205,543

4.0

Tenth '_urce:

37,8 Family

Income

and

Expenditure

Average annual family income (P, in constant 1988 prices)

family

20,033 24.481

Survey,

National

25,630 31,478

Statistics

Office.

Ave. annual gn'owth rate, 1991-97


44

Economic

crisis... Once more

Figure 10. Distribution of total family income by income quintile Gini coefficient, 1985-97.

and the

i

0.5 T 0.49 * 0.481-

..... /? /

0.47 J"

_

/

_=_

__

°4st _-0.44_

0.42 x 0"46T 0-41

_

i ..... L__

1.985

11.988

,

1991

100% 90% 80%

_ Ffffl'_ _ Fourth mrrnThird

70%

_

Second

50% N

_ J 1994 1997

40o 3O%

_Gini

10% 60% 0%

--First

Note: The bar chart is plotted on the right axis, while the Gini coefficient Js plotted on the left axis. Source: Family Income and Expenditure Sttrve}_ National Statistics Office.

Clearly, the Ramos administration's adoption of a comprehensive and consolidated antipoverty program midway into its term was both timely and necessary. Some improvements in key social indicators were observed. However, such improvements were evidently not happening fast or deep enough, and there remained large discrepancies within and between geographical areas. That the magnitude of the poor continued to increase suggested that the program has not had a positive impact yet. Reyes and del Valle (1998) attributed this to the following factors, among others: •

°

The SRA was still in its infancy. And because it largely took an institutional approach to address identified social problems, it would therefore take some time for its intended effects to be fully _ealized; Although the SRA appeared to correctly identify

the problems

of the poor,

funding for specific projects remained inadequate and was inefficiently used in some cases. Furthermore, notwithstanding the government's claim of an antipoverty budget, there had been no visible increase in the share of social services expenditures in the national budget from 1993 to 1997; and °

Poverty is also a function of factors other than direct intervention programs. Economy-wide and sectoral policies have a greater impact on the situation of the poor. Thus, it was difficult to say to what degree poverty reduction could be accounted for by direct interventions vis-a-vis indirect programs. Despite

the government's

good intentions,

the amount

allocated

for

poverty alleviation would seem to belie its true importance. In fact, PAF allocations were consistently halved from P4 billion in 1996 to P2 billion in 1997. The original allocation for 1998 was P1 billion, although this was later


Chapter 2: Milo increased

to P2.5 billion. It was estimated

45 that, for the government

to have

achieved its poverty incidence reduction target of 30 percent of families by 1998, it needed to have additionally spent an average of P9.6 billion annually from 1994 to 1998. As it was, the P6 billion total allocation for 1996-97 was estimated to help reduce poverty incidence by only 1.1 percent in each year (cited in Reyes and del Valle 1998). Hence, the government needs to ensure that future PAFs are substantial enough to have a strong impact, especially given the magnitude of the problem. One estimate of the amount needed to eradicate poverty completely was P86.2 billion annually, which represented the value of insufficiency of poor families. The enormity of this amount indicated that direct income transfer was not a feasible option for the government. Instead, this suggested that the government still needed to focus on programs that would enable the poor to earn income on a sustained basis. In particular, the focus should still be on broad-based economic growth to generate gainful employment and livelihood opportunities. There should also be continued and much-improved provision of basic social services, which had proven effective in alleviating poverty in the past. Programs that improve the poor's access to quality education and primary health care, in particular, were effective towards equalizing human capital. Finally, there was still the need for social safety nets to assist the poor during the transition period. However, these should be targeted programs appropriately designed to minimize leakages (Reyes and del Valle 1998). In a comprehensive study of poverty in the Philippines up to early 1990, de Dios (1993) cited the following reasons for poverty: (a) failure of growth and lack of employment opportunities; (b) declining productivity; (c) high population growth; (d) inequality of incomes; and (e) inadequate provision of social services. Clearly, these reasons continued to hold all throughout the 1990s. Simply put, poverty remained high in the Philippines because of the economy's failure to grow rapidly enough, sustain that growth, and generate employment. Growth was also lopsided, which consequently resulted in significantly higher poverty reduction in urban/capital cities than in rural areas. The failure of past growth was attributed to the failure, in the long run, to restructure the economy to make it externally more competitive and allow broader participation by the people. That is, the quality of growth is just as important as its magnitude (de Dios 1993). Reforms instituted in the 1990s were precisely directed toward those objectives. Adjustments in the right direction were being made, such as improvements in efficiency and competitiveness of the manufacturing sector as a result of trade reforms. But overall, the structure of the trade sector was slow to change. Medalla (1998) noted that relatively more investments were going into nontradable sectors than in exportable sectors, which could have serious repercussions in the medium term, especially in the


46

context of a growing

Economic

trade deficit. Overall, production

crisis... Once more

and investment

patterns

were still not optimal for growth, and qn e source of distortion was the overvalued currency prior to the currency c_isis in 1997 (Medalla 1998). There was also a continuous decline ha productivity, particularly in the agricultural sector, which remains the primary source of income for most of the poor. Another reason for poverty that continued to hold in the 1990s was the inequality of incomes. Rapid and sustained economic growth would significantly contribute to poverty alleviation. The speedl at which it does, however, would depend on whether the benefits from growfla are equally distributed (de Dios 1993). But this was not so in the Philippines even in the 1990s. Thus, poverty incidence remained high, not only because growth was not sustained, but also because of the uneven distribution of benefits that were generated. Finally, there was the inadequate provision of social services, which directly contributes to the poor's low productivity and are important tools for income redistribution (de Dios 1993). The fiscal crises in the past put severe pressure on budgets for social services. BUt with the government's surplus positions in the 1990s, this should have bean less of a problem. In fact, there was no appreciable increase in budgetary allocations for social services. This was compounded by low levels of capital expenditures, which constrained the economy's overall growth capacity. In principle, the government's poverty alleviation strategy involved raising both the poor's private income (i.e., income from productive assets they own, including from employment) and public income (i.e., income derived from the state via social production of free or subsidized goods and services, and income transfers). In practice, it relied heaVily on the former. However, the quality of growth overall was not socially Optimizing, in terms of providing sustained employment and improving income distribution across regions and income groups. Ultimately, the means ch0sen to alleviate poverty proved inadequate. Also, despite the comprehensiv e approach to poverty alleviation, the social impact of macroeconomic and se_toral policies were still not fully understood and accounted for. Although various social safety nets were in place to help mitigate any adverse impact of policy on specific sectors of the population, overall, they were poorly designed and implemented. Conclusions The outlook for the Philippines for 1997 was quite bullish, and with good reason. Following a recession towards late 1990, the economy began to recover in 1993 and further strengthened in 1994-96. More than that, the Philippines was deemed as finally on the path towards more stable and sustainable growth after decades of lackluster economic performance characterized by boom-bust cycles and unsustained

growth

momentum.

This was attributed

to prudent


Chapter 2: Milo

47

macroeconomic management, continued structural reforms, and political stability, which resulted in a more liberalized investment setting and a more conducive business environment. The Philippine economy's strong performance was thus expected to continue. As in the real sector, the Philippine financial sector was also a lot stronger in the 1990s compared with the 1980s, and adjustments in the right direction were being made. Nevertheless, the Philippines is still mending its economy and further strengthening its economic fundamentals. A truly solid foundation toward sustained and robust economic growth is still being laid. Thus, the fairly stable macroeconomic conditions remain fragile, and some macroeconomic vulnerabilities still exist (Intal et al. 1998). Similarly, financial development in the 1990s was accompanied by some trends, particularly the significant increase in commercial banks' foreign liabilities and lending to the nontradeable sector. The latter could become problematic if they are not managed well or if they persist (Intal et al. 1998). While the concerns raised were not considered "critical" and were expected to improve as the economy continued to grow and restructure, they made the macroeconomy and financial sector vulnerable, especially to sudden shifts in the external environment. Vigilance, policy consistency, and continued reform efforts are thus crucial to preserve and deepen the growth momentum, and improvements in poverty alleviation and other social indicators. A more progressive approach to poverty alleviation, and the provision of social services and social safety nets is also necessary to cushion the impact of necessary structural adjustments on the more vulnerable sectors of society. While some improvements in poverty alleviation and key sociai indicators were observed, they were evidently not happening fast enough or deep enough. There also remained large discrepancies within and between geographical areas. Thus, the government needs to do more and to do so more efficiently, to make a truly sizable impact on poverty. Growth per se may not lead to socially optimizing outcomes. What matters is not just the level of economic growth, but its overall quality in providing sustained employment and improving income distribution across regions and income groups. Ultimately, "Poverty is an unacceptable human condition. It is not immutable; public policy and action can, and must, eliminate poverty. This is what development is all about" (ADB 1999).


48

Economic

crisis... Once more

References Asian Development Bank. 1998. Asian Development Oxford University Press. Asian Development

Bank. 1999, Fighting poverty

Outlook 1998. New York: in Asia and the Pacific: the

poverty reduction strategy of the Asian Development Bank, draft. Bautista, E.D. 1992. A study of Philippine monetary and banking policies. PIDS Working Paper Series No., 9211. Makati City: Philippine Institute for Development Studies. Business Monitor Ltd.

International

Cho, YJ. and D. Khatkhate.

Ltd. 1996. Philippines

1996-98. London:

1989. Lessons of financial liberalization

comparative study. World Bank Discussion D.C.: World Bank.

BMI

in Asia: a

Paper No. 50. Washington,

Cororaton, C.B. 1995. Surge in capital inflows, response of the government and effects on the economy: the Philippine case. Discussion Paper Series No. 95-24. Makati City: Philippine Institute for Development Studies. De Dios, E.S., E. Medalla, S. Gochoco, E. Tan, G. Jurado, C. David, E. Ponce, R Intal, A. Sanchez, B. Balagot, and F. Alburo. 1993. Poverty, growth, and the fiscal crisis. Makati City: Philippine Institute for Development Studies. Dornbusch, R. 1991. Policies to move from stabilization to growth, in Proceedings of the World Bank Annual Conference on Development Economics 1990. Washington, D.C.: World Bank. p 1%48. Fabella, R.V. 1994. Investment and the allocation of resources under macroeconomic instabihty, in Fabella R.V. and H. Sakai. (eds.) Resource mobilization and resource use in the Philippines. Tokyo: IDE. Intal, R, M. Milo, C. Reyes and L. Basilio. 1998. Case study: the Philippines, in MacCleod, R.H. and R. Garnaut (eds.). East Asia in crisis: from being a miracle to needing one? Routledge, London. Krugman, P., J. Alm, S. Collins, and E. Remolana. 1991. Transforming the Philippine economy. Quezon City: NEDA-APO Production Unit. Lamberte, M.B. 1993. Assessment of the financial market reforms in the Philippines, 59.

1980-1992. Journal

of P1)ilippine Development. /

20(2):231-

Lamberte, M.B. 1994. Managing surges in capital infows: the Philippine case. PIDS Discussion Paper Series No. 94-20. Makati City: Philippine Institute of Development Studies. Laya, J.C. 1982. A crisis of confidence of the Philippines.

and other papers.

Manila: Central Bank


Chapter 2: Milo Manasan,

49

R.G. 1994 Breaking

away from the fiscal bind: reforming

the fiscal

system. Makati City: Philippine Institute of Development Studies. Manasan, R.G. 1998. Fiscal adjustment in the context of growth and equity, 19861996. Discussion Paper Series No. 98-11. Makati City: Philippine Institute of Development Studies. Medalla, E.M. 1998. Trade and industrial policy. Discussion Paper series No. 98-05. Makati City: Philippine Institute of Development Studies. Medalla, E.M., G. Tecson, R. Bautista, J. Power and Associates, E. Tan, R. Aldaba, and L. de Dios. 1995. Philippine trade and industrial policies: catching up with Asia's tigers. Vol. 1. Makati City: Philippine Institute of Development Studies. Ramos, EV. 1994. Towards Philippines 2000: a resurgence of optimism and growth. Manaila: Office of the Press Secretary. Remolona, E.M. and M.B. Lamberte. 1986. Financial reforms and balance-ofpayment

crisis:

the case of the Philippines.

Philippine

Review

of

Economics and Bus/iae_, 23(1 & 2): 101-141. Reyes, C.M. and E.A. del V_ille. 199_. Poverty alleviation and equity promotion. Discussion Paper Series N 0. 98-06. Makati City: Philippine Institute of Development Studies. Tan, E. A. 1989. Bank concentration apd the structure of interest. UPSE Discussion paper No. 89-15. Quezon City: School of Economics, University of the Philippines. Tecson, G., M. Austria, V. Pineda, L. de Dios, D. Lapid, C. Medilo, C. Banzon, F. Trabajo, and E. Mendoza. 1996. Philippine trade and industrial policies: catching up with Asia's tigers. Vol. 2. Makati City: Philippine Institute of Development Studies. United Nations Development Programme. 1998. Human development report 1998. New York: Oxford University Press. World Bank. 1986. The Philippines a framework for economic recovery. Washington, D.C. World Bank. World Bank. 1988. Philippines financial sector study (in three volumes). Washington, D.C. World Bank. World Bank. 1992. Philippines capital market study (in 2 volumes, Vol. 1: Main Report; Vol. 2: Contractual Savings Sector). Washington, D.C. World Bank. Yap, J.T. and C.M. Reyes. 1994. Country report on the Philippines. presented at the 7th Workshop on Asian Economic Outlook, Development Bank, Manila, 26-28 October.

Paper Asian


3 Overview of the Economic and Social Impact of the East Asian Financial Crisis Ma. Melanie R.S. Milo

his paper discusses both the immediate contagion effects and the indirect longer-term impacts of the East Asian financial crisis on the Philippines, together with the government's policy responses to contain them. The first section discusSes direct effects and policy responses, while the second section explores the immediate and longer-term impacts of the crisis on the Philippine financial sector. Income and employment effects are discussed in the third section, which is followed by a discussion of their eventual impact on the poor. Following the implementation of fire-fighting measures, the policies that the government implemented to bring about economic recovery are discussed in the fifth section. The sixth section places these policies in the bigger context of the interrelationship between macroeconomics and poverty, and the underlying relationship between the government's choice of policies and the evolution of the crisis. Some conclusions are presented in the final section. Immediate impact and policy responses Thailand's property and financial crises broke out in April 1997, which led to the pullout of foreign investments from the stock market. This, coupled with the country's widening current account deficit, put tremendous pressure on the baht. The Bank of Thailand finally devalued the baht in July, its first devaluation in 14years. Speculators then began to prey on the other currencies in the region initially, the Malaysian ringgit, the Philippine peso, the indonesian rupiah, and the Singaporean dollar, and later the Hong Kong dollar and the Korean won. In general, the combination of contagion effects from Thailand, overvalued currencies, vulnerable capital inflows, and increased uncertainty fomented the regional currency crisis (Magdaluyo 1998). The Philippine Central Bank (Bangko SentralngPihpinas) or BSP's initial response to the speculative attack on the peso was to raise its key overnight


52

Economic

crisis... Once more

borrowing rate from 11.25 percent in May tO 20 percent in June and 32 percent in mid-July, to penalize speculators and discourage the conversion of peso holdings into US dollars. The BSP then began to heavily intervene in the foreign exchange market in early July to keep the exchange rate stable around the P26/ US$1 mark. Finally, the BSP allowed the peso to depreciate in mid-Julj6 after spending around US$1.5 billion in its defense. The exchange rate subsequently breached the P30/US$1 mark in August, reaching more than P45/US$1 in early 1998. The BSP then successively lowered its overnight borrowing rate to 20 percent

at the end of July to 14 percent in August, In addition

to widening

the trading

band

and 12 percent in October. of the peso,

the BSP also

tightened some foreign exchange controls.lit placed a cap of US$100,000 on over-the-counter sales of foreign exchange (or nontrade purposes, which was further lowered to US$25,000 at the end of J_ly. This ceiling was partially lifted I for residents in September. BSP also imposed a limit on commercial banks oversold position of 10 percent of unimpaired capital, while their overbought position was set at 20 percent, with penalties and sanctions imposed on banks that exceed the allowable positions. The limits were later reversed, and the overbought position of banks was even lowered to 5 percent, US$10 million, to force commercial banks to off-load their holdings. To further stabilize the foreign exchange market, Bankers Association of the Philippines (BAP) entered into

but not to exceed foreign exchange the BSP and the an agreement in

December to set daily quotas for the supply of dollars to be sold at an agreed rate, and for the BSP to provide forward cover to banks that had nondeliverable forward contracts with unhedged dollar borrowers. Finally, the BSP increased reserve requirements on deposits, deposit substitutes, common trust funds, and other trust and fiduciary accounts of banks. In addition to a 13 percent statutory reservel the BSP imposed an additional 3 percent liquidity reserve, that is, hands required to be placed in short-term market yielding instruments. This was raised consecutively until it reached 8 percent in August, to siphon off excess peso liquidity in the system and to limit banks' dollar purchases. The BSP's tight monetary policy to defend the exchange rate led to a sharp increase in domestic interest rates (Fig. 1). From a low of 10 percent in April 1997, the bellwether 91-day Treasury bill rate rose to 19 percent in January 1998, while the average lending rate went upito more than 20 percent in the last quarter of 1997 from less than 13 percent in April 1997. Overall, however, the tight monetary policy failed to arrest the depreciation of the peso. But in contrast to previous

episodes

of peso devaluations,

the inflation

rate was fairly steady

during the first 6 months of the crisis. This _as due to the relative stability of food prices. Also, domestic manufacturers ci3ose to run down their inventories and deferred price increases to compete with cheap imports, whose entry was facilitated by the more liberalized trade environment.


Chapter 3: Milo

53

Figure 1. Trends in exchange rate, interest rates, and inflation 1997-October 1999. 50

m

45

_

35 3O 40 25

_...-%

/_

rate, January

Ave exchange

rate

(pesos / US$)

... Tbill rate (%) -Ave lending rate (%) -- -- h_flation rate (%)

_

15 10

--

_ ....

5

Source: Bangko

Sentral

ng Pilipinas.

Impact on the financial sector Figure 2 shows the monthly movement of the Philippine stock exchange's composite price index (Phisix) and total value turnover from 1987-99. It indicates increased volatility in the stock market from 1993 as a result of the opening up of the capital account. As in other bourses plunged as the domestic currency reached and foreign investors divested themselves 3,171 points at the end of 1996, the Phisix 1997, which was just slightly higher than

in the region, stock market prices record lows against the US dollar of their holdings. From a high of fell to 1,772 points by November its preboom level. Banking and

property stocks were the worst hit. The thinness of the stock market and the surge in portfolio capital inflows made the stock market highly vulnerable to shifts in international capital, as well as the domestic and international environments. Figure 2. Philippine stock market composite price index (Phisix) and total volume turnover, January 1987-October 1999. 4,000 -

700,000 _

-- Phisix

3,5°° •

600,000 _

-- Total

,-,2500 • '_ 2"000

400,000 _. 300,000

115001 1,000

200,000

3,000. _ 500. 0

............

1987

1989

Source: Philippine

500,000 _ 0100,000 _,_ 1991

1993

Stock Exchange.

1995

1997

1999

ttmlover


54

Economic

crisis... Once more

In contrast to Thailand, Indonesia, and Korea, there was no systemic failure of financial institutions in the Philippines. Only one fairly small, newly upgraded commercial bank--Orient Bank--failed in the immediate aftermath of the currency crisis. As in previous cases of bank failures, insider abuse was the ultimate cause of the bank's failure. Of its reported P6.1 billion worth of nonperforming loans, around P5.7 billion directly or indirectly benefited its owner. In particular, there was excessive lending to the real estate sector, primarily to companies associated with the bank owner, who also tapped other commercial banks and the stock market to finance his property acquisitions. He reportedly amassed more than P22 billion in loans from a total of 30 creditor banks. The currency depreciation, the stock market crash, soaring domestic interest rates, and the property sector bust _ledto the collapse of his real estate ventures, In addition to Orient Bank, 6 thrift banks and 15 rural banks closed in 1998. The adverse effect of the crisis on banks became evident in the volume of nonperforming loans, or loans that missed debt payments for 3 consecutive months, relative to total loans of commercial banks. Prior to the crisis, commercial banks'

nonperforming

loans accounted

for just less than 3.4 percent

of total

loans. The sudden depreciation of the peso plus the uptick in interest rates, and the weakening of the economy with the characteristic drop in levels of production and consumer demand, rising 'unemployment, and low business confidence, impaired the ability of both corporate and individual borrowers to service their debts. As a result, nonperforming loans rose to 4.7 percent of total loans at the end of 1997, to 10.4 percent at the end of 1998, and climbed even further to 14.4 percent in the third quarter of 1999. The ratio appears to have peaked or to be nearing its peak. Companies, that borrowed in dollars were hard hit when their debts nearly doubled as the peso fell steeply against the dollar. On the other hand, businesses with peso-denominated loans suffered as interest rates shot up to as high as 30 percent. Commercial banks' total loans, and consequently total assets, fell following the write-offs and provisioning for bad loans (Table 1). The alarming growth of past due loans and loan loss provisions caused banks to be overly cautious in their lending in 1998o99. The contraction in outstanding loans of commercial banks until the first quarter of 11999was a dramatic reversal of the 41 percent loan growth seen in 1996. Loan growth significantly slowed down to 4.9 percent in 1997, and contracted by 2.2 p_rcent in 1998. While the increase in nonperforming loans has slowed down in recent months, other components of commercial banks' nonperforming assets continued to grow. In particular, commercial banks' exposure to the property sector was reflected in the increase in their real and other properties owned or


Chapter 3: Milo

55

Table 1. Selected Year

data on commercial

Total assets

Total loans

(billion pesos)

(billion pesos)

banks,

1997-99.

Nonperforming

loans

Loan loss provision

(% of total loans)

(% of total loans)

1997 Mar

2,005.00

1,284.59

3.3

1.3

Jun

2,085.60

1,418.95

3.4

1.3

Sep Dec 1998

2,310.70 2,513.00

1,499.25 1,573.15

4.0 4.7

1.4 2.2

Mar

2,417.00

1,517.63

7.4

2.6

Jun

2,535.90

1,595.37

9.0

2.7

Sep Dec 1999

2,529.00 2,528.00

1,586.25 1,542.49

11.0 10.4

3.1 4.0

Mar

2,508.30

1,484.46

13.2

4.6

Jun

2,583.10

1,505.60

13.1

4.8

Aug

2,546.90_

1,504.44

14.4

5.1

Source: Bangko Sentral ng Pilipinas.

acquired (ROPOA). ROPOA assets increased from around P14.6 billion prior to the crisis to more than P82.9 billion at the end of the third quarter of 1999. The decline in lending, in turn, inevitably became a drag on commercial banks' profitability, which went down although it remained positive. Return on equity fell from 16.3 percent in 1996 to 12.4 percent in 1997, and 6.6 percent in 1998. With lending activities down, banks were forced to concentrate on other sources of income such as fees and charges, foreign exchange trading, and other investments. The 1998 data show that bank investments grew by 47.6 percent to P1.2 trillion from 1997 figures, as banks shifted to holding government securities such as Treasury bills instead. Thus, much of the money that fueled the 1999 first quarter's 2 percent growth in real GNP came from pump priming and remittances. To mitigate the impact of the sharp depreciation of the peso and the deterioration in bank assets, the BSP mandated increases in minimum capital requirements for banks over the period 1998-2000. For instance, the required minimum capital for universal banks was raised from P3.5 billion prior to the crisis, to P4.5 billion in 1998, P4.9 billion in 1999 and P5.4 billion pesos in 2000. For commercial banks, the increase in minimum capital requirement was from P1.6 billion to P2.8 billion in 2000, while minimum capital requirement for thrift banks located in Metro Manila doubled from P200 million to P400 million. The BSP likewise instituted stiff penalties for failure to comply with the new minimum capital requirements. As a result, there has been a rise in merger and


56

Economic

crisis.,. Once more

acquisition activities especially in 1999, which could lead to a restructuring of the banking system (Lamberte and Yap 1999). Despite the crisis' negative impact, the Philippine banking sector still fared relatively well compared with the crisis economies, particularly of Thailand and Indonesia. This was attributed to reforms that had been implemented, and the adjustment period in the 1980s that saw weak banks weeded out and stronger prudential regulations instituted. The implication is that the expected benefits of financial sector reforms were actualized. This was true to a certain extent. In particular, banks were better capitalized, with capital adequacy ratio ranging between 17 percent and 20 percent from 1992 to June 1997. However, the emergence of similar trends in lending behavior and foreign liabilities of commercial banks raises the question of whether efficiency gains from financial liberalization in particular were realized. Overall, the answer would seem to be no, and this could be attributed both to commercial bank behavior and monetary authorities' policy stance (Milo 1998). Doubtless the banks' imprudence contributed to their problems, as they became lenient in their lending activities. The rapid buildup in resources and the increasing number of players fostered a more competitive lending environment. Thus, banks tended to relax credit evaluation procedures. There was also the emphasis on collateral as the basis for granting a loan, instead of cash flows, for instance. Hence, the penchant for real estate, which was traditionally seen as a sound investment and collateral. On the other hand, there was the policy stance of the BSP, which reinforced the banks' false sense of security. In particular, prior to the crisis, monetary authorities in the Philippines gave a strong signal that the exchange rate level was not only appropriate, but would be maintained for an extended period. This stance led to the underpricing of foreign exchange risk, which encouraged foreign borrowing and dollar-denominated lending, and discouraged the development of a forward market. The underpricing of risk plus the BSP's implicit policy of ensuring that no commercial banks would fail, would necessarily be allocationally inefficient since it would lead the financial system towards excessive exposure to high-risk activities, such as the property sector and the stock market. Fortunately, such worrying trends were fairly recent and had not yet reached the same proportions as those in the crisis economies. Hence, the muted effect of the regional Income

crisis on the Philippine

financial sector.

and employment effects The growth momentum from 1994 to. 1996 was sustained

during the first

6 months of the Asian crisis, although there was a deceleration in GDP growth (Table 2). Growth of gross capital formation even accelerated, as ongoing and planned investment activities were completed. Exports also continued to


Chapter 3: Milo

57

perform well. On the other hand, the slowdown in construction became evident in the last quarter of 1997. The impact of the crisis on the economy became more evident in 1998, particularly in the construction and manufacturing sectors. This was compounded by the poor performance of agriculture as a result of adverse weather conditions. The latter also resulted in higher inflation rates, which again reached

Table 2.

double-digit

levels by the end of 1998.

Growth of real GDP by expenditure share and industrial origin, and other macroeconomic indicators, 1994-99 (In percent). 1994 1995 1996

Growth Growth

of realGNP of realGDP

Growth by industrial origin Agticul_re, fishery & forestry Industry Manufacturing Construction Services Inflation rate Trade balance (% of GDP) National govertunent deficit (% of GDP) Source:

National

Statistical

1998

1999

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

7.3 5,9

5.4 5,5

5.3 5,6

5,1 4,9

5,1 4.7

1,5 1.1

-0.5 -1.0

0.7 -0,1

-1.2 -2.0

2.1 1.2

3.8 3,6

3.3 3,1

3.7 6,1 9,0 15.2 15,6

3.8 4.6 5,6 4.1 3,7 13.3 16.2 9.6 16,0 16,9

5.0 4.5 14.9 8.6 3,0

5,1 5.0 4.9 7.3 6.2 0.4 7-1 9.3 15,0 15.2 15.0 14_8 2_7 10.2 15,0

4,5 3,9 2,9 2,6 -5,4 -2,4 -1.3 0.6 -6,0 -18.2 -19.1 -22,3 10.6 -1.4 3.9-14,4 -2,3-12,1-13,1-33.9

2.5 7,6 -9.7 0,7 -16,7

2.6 6.2 6,2 3,0 2,4

2.6 3.7 -5,3 8,0 1,9

3.4 5.8 5.0 9.4 4,3

1.2 3.9 6.8 6,4 6.8 5.6 6,6 10.9 5.0 6.4

4.9 5,1 2.3 21,3 6.2

1.8 0.4 7,6 6.4 5.3 4.3 18.5 18,1 5.8 5,5

2,9 11,1 -2,2 -0.7 _1.0 0.9 -6.0 -5.3 3,0 4.0

5,6 0,2 2,2 -5,9 4,4

4,6 4.4

Growth by expenditure share Personal consumption Government consumption Gross capital formation Merchandise exports Merchandise impor_

1997 Q1

4.9 4,7

8.3 8.0 9.1 -12.2 -12,1 -13.7 1,0 0,6 0.3

Coordination

4,1 5,6 4.7 7.6 4,4

5.3 5.3 5.9 7,3 -13,7 -12,6 -15.5 -12.2 -0.1 0,8 0,1 -0,4

-3.8 -11,5 0,2 -0,7 2.0 -0.9 -12.8 -5.1 4,5 3,6 7,9 -7.2 -1.9

9,9 -1.6 -1,9

-3.1 -2,0 -1,5 -7.5 2,8

-7,8 _4.7 -3.5 -8.5 3,2

10,4 10,6 3.3 4.3 -0.3 -3.2

10,0 3,1 4,9

6.8 0.8 -2.6

5.6 _4_

Board.

On the demand side, gross capital formation declined as high interest rates, tight financing, and the uncertain economic environment discouraged investment spending. Merchandise exports continued to grow, albeit at a substantially decelerated rate in 1998, while merchandise imports significantly declined. However, total exports declined as exports of nonfactor services such as tourism fell. The nominal peso depreciation led to a significant adjustment in the real effective exchange rate, which depreciated by 30 percent from June 1997 to February 1998. The real depreciation effectively wiped out the real appreciation international

of the peso during the 1990s, and thereby helped improve the competitiveness of Philippine exports especially of labor-intensive

manufactures (Intal et al. 1998). Contraction in domestic output was tempered by the inflow of overseas workers" remittances, although the latter also declined from US$5.7 billion in 1997 to US$4.1 billion in 1998.


58

Economic

The

slowdown

in

the

unemployment rate, which 7.4 percent 2 years earlier unemployed with almost directly 1997

economy

was

crisis...

strongly

Once

reflected

more

in

the

rose to 9.6 percent in the third quarter of 1998, from (Fig. 3). This translated to more than 3 million

persons out of a labor force of almost 31.3 million in 1998, compared 2.2 million unemployed in 1996. The number of firms and workers

affected to 1998

by worsening (Table

economic

3). Again,

worst

conditions hit

were

more those

than in the

doubled

from

construction,

manufacturing, and services sectors (Table 4), which spearheaded growth the 1990s. In addition to lost jobs as a result of the crisis, the slowdown

in in

economic activity the labor force.

to

Figure

prevented

3. Unemployment

the creation

of new jobs to absorb

rate, first quarter

14 13

1997-third

quarter

new entrants

1999 (In

mrcen0.

....

1997

--..-.

1998

_

1999

.IL t

12

t

*

.

•.

t

10 9

_,

11 8

"_-_..

4

' " • ' m il

_

_

! ii ": _

I

,

_.

7 6 Q1

Q2

Q3 • :

Q4

Source: National Statistics Office.

Table

3.

Number

of firms

reasons

and number Firms reporting

Year

1996

Total

Closure

that

(no.)

Retrenchment

closed

or retrenched

of workers

affected,

. RotatlOn,

etc.

due

to economic

1996-99. Workers

affected (no.)

Total

Permanent layoff

Temporary layoff

i

Rota_iom, etc.

1,(/79

347

724

39

80,70_.

47.008

29,487

4,206

1"t aem

614

146

455

20

,t0,323

22,631

15,915

1,777

2''d s_m

599

21]

372

23

40,378

24,377

]3_572

2,429

1,155

i

338

804

48

62,724

•39,176

19,843

3,705

1_tsere

580

'180

381

26

33,115

21,463

9,773

1,879

2"a sere

683

163

_J8

25

29,609

17,713

10,070

1,826

1998

3,072

642

2,310

293

155,198

76,726

50,744

27,728

y,t sere

1,936

403

1,420

172

83,852

39,923

29,442

14A87

2'_'tsere

] ,725

254

1,378

169

71,346

36,803

21,302

13,24]

_,ug-99

2,107

257

1,341

S21 _

45,238

34,167

28,833

1997

:

108,_8

Note: Permanent layoff means complete and total separation from employment; temporary layoff means separation of workers for not more than 6 moflths; rotation, etc. means rotation of work, reduced working time. Numbers may not add up due ito multiple reporting. aIncludes fh-ms that reported temporary layoffs. Source: Bureau of Labor and Employment Statistics, Department of Labor.


Chapter 3: Milo Table 4.

59

Number

of firms

that closed

reasons

by industry,

1996-99.

or retrenched

due to economic

Industry

1996

1997

1998

Aug-99

All industries

1,077

1,155

3,072

1,586_

97

70

95

44

Industry Mining and quarrying

545 14

568 23

1,254 48

565 7

Manufacturing Construction

508 21

505 31

1,025 173

479 72

2

9

8

7

Services

435

517

1,723

977

Transportation, commrmication, and storage Wholesale and retail trade

68 134

91 167

257 600

142 339

Financing, insurance, and business services Community, social, and personal services

93 140

130 129

491 375

306 95

Firms located in National Capital Region (NCR) Firms located outside of NCR

610 467

575 580

1,708 1,364

1,284 823

Agriculture, fishery, and forestry

Electricity, gas, and water

Excludes 521 firms that reported temporary layoffs, rotation, etc. Source: Bureau of Labor and Employment Statistics, Department of Labor.

Table 5.

Change in average current prices).

family income

decile,

1997-98 (in

Income decile

1997 FIES

1998 APIS

Philippines

123_000

121,438

-1.3

100.0

100.0

20,659

]4,644

-29.1

1.7

1.2

Second

33,064

26,852

-18.8

2.7

2.2

Third

42,611

36,689

-13.9

3.5

3.0

Fourth

53,101

47,211

-11.1

4.3

3.9

Fifth

66,291

60,176

-9.2

5.4

5.0

Sixth

83,224

76,641

-7.9

6.8

6.3

Seventh

106,919

100,170

-6.3

8.7

8.2

Eighth

141,394

135,051

-4.5

11.5

11.1

Ninth

199,891

196,018

-1.9

16.3

16.1

Tenth

482,927

520,928

7.9

39.3

42.9

First

% change

by income

% distribution of total family income 1997 FIES 1998 APIS

Note: FIES stands for Family Income and Expenditure Survey; APIS stands for Annual Poverty Indicator Survey. These two surveys are comparable since they had the same household samples, although the former is more extensive. APIS was started only in 1998. Source: National Statistics Office.


60

Economic

crisis...

Once more

With the economic slowdown and rise in unemployment, average family incomes, except those from the richest decile, expectedly declined (Table 5). The poor performance of the agricultural sector due to adverse weather •conditions further worsened the poor's situation, who live predominantly in rural areas. The rate of decline in average family income was regressive, with families belonging to the poorest decile suffering the highest decline of 29 percent. Income distribution consequently worsened in 1998. The increase in average family income of the richest decile could be due to windfalls from the crisis. Only the top three deciles increased their savings from 1994 to 1997 in real terms, with the richest decile registering the highest growth and share (Fig. 4). This decile also had access to a wider range of saving instruments, such as peso and dollar deposits, trust accounts, and Treasury bills. Thus, families belonging to the top decile were well placed to benefit from increases in interest rates and the peso depreciation as a result of the financial crisis. In contrast, savings deposit, which carried low and static interest rates, was practically

the only financial asset available to small savers.

Figure 4. Average family income and savings 1997 (In constant 1988 prices). 250000 200000

!

150000

/,

100000

-50000

decile,

1994 and

125000

_

1.994 Savings

100000

_

1997Savings

.......

1994 Income

--

1997 Income

.75000 .50000

50000 0

by income

25000 __ ...........

0

Is[ 2nd 3rd 4th 5th 6th 7fl_ 8th 9thl0ft:

Source: Family Income

and Expenditure

-25000

Survey, s gtatistics

Office.

Impact on the poor In considering

the social impact of theicontagion

effects of the Asian crisis

on the poor, one has to consider that the crisis took place simultaneously the weakening of the agriculture sector due to adverse weather patterns. sector accounts for more than 40 percent of total employment.

with This

Thus, the decline

in this sector would have reinforced• the adverse impact of the Asian crisis on production, employment, and income, an d contributed significantly to the increase in inflation rates. In October

1998, the National

Statistics

Office conducted

an Annual

Poverty Indicator Survey (APIS) to supplement its triennial Family Income and Expenditure Survey (FIES). Results on the impact of the financial crisis on Filipino families showed that, of the projected 13.5 million families, 96.6 percent


Chapter 3: Milo

61

were affected by higher prices of food and other basic commodities as a result of the financial crisis; this was also due to adverse weather conditions. More than 20 percent reported losing jobs within the country, while around 17 percent reported reduction in wages. Less than 5 percent of total families reported job loss of a migrant worker. In addition to the financial crisis, more than 76 percent of families belonging to the poorest 40 percent cited the drought or the E1 Nifio effect as their second most serious problem (Table 6). Table 6. Impact of the financial

crisis on Filipino

Projectedno.

families.

Pmventage of families affected by:

Income sWata

of families

Higher prices

Job loss (local)

Job loss Reduced (migrm_t) wages

Drought

Philippines

13,487,569

96.6

20.3

4.9

17.0

62.9

la'_west40%

5,495,298

95.7

17,9

3.7

15.2

76.0

Highest 60%

7,992,270

97.0

22.0

5.9

18.4

,54.0

Source:Annual Poverty Indicator Survey 1999,National StatisticsOffice. Table 7 shows the various ways Filipino families coped with problems brought about by the financial crisis. Almost 50 percent reported a change in their eating pattern; around 29 percent increased their working hours; almost 7 percent took their children out of school; more than 5 percent reported a family member migrating to the city or another country, more than 16 percent received assistance from relatives or friends, while only less than 7 percent received assistance from the government. Figures for the lowest 40 percent income brackets were a few percentage to the poorest income brackets attendance

rates, further

Table 7. Filipino

points higher. Considering that those belonghng already have lower nutrition status and school

declines would have grave consequences.

families'

responses

to problems

due to the financial

crisis

Percentage of families reporting: income

Change

Took

Member

Received

Received

Increased

Other

strata

in eating pattern

children out of school

migrated to city/another country

assistance from family/friends

assistance from gov't

working hours

steps taken

Philippines

47.9

6.9

5,2

16,2

6.9

28.8

9.9

Lowest 40%

51.4

7.5

6.1

18,5

9.7

31,5

10.0

Highest 60%

45.5

6.4

4.6

14.7

5.0

27.0

9.9

Som'ce:Annual Poverty Indicator Survey 1999,National StatisticsOffice.


62

Economic

crisis... Once more

Minimum daily wage earners were among the hardest hit, since the minimum daily wage rate only rose slightly. In Metro Manila, it increased from P185 prior to the crisis to P198 in February 1999, which is less than half of the estimated daily cost of living of P441 for a family of six. Thus, it is almost certain that the small gains made in alleviating poverty in the 1990s have been nullified as a result of the Asian crisis. The Asian Development Bank (ADB), for instance, foresees that poverty incidence in the Philippines will grow by 5 percentage points from 32.3 in 1997. The various human development indicators are thus expected to take a turn for the worse (Reye_ 1998). The surge in interest rates adversely affected the government's fiscal position as it significantly raised interest' payments. Furthermore, import declines and the slowdown in economic activity led to shortfalls in revenue collection. Thus, from a minimal surplus in the first half of 1997, the government posted a deficit of P2.3 billion in the second half of 1997. This further grew to P50 billion in 1998. To contain the deficit, the government imposed a mandatory 25 percent reserve requirement on all expenditures other than personnel and debt service and a 10 percent deferment in internal revenue allotment for local government units, in addition to suspending all tax subsidies of all government agencies and corporations. The social services subsectors were eventually exempted from mandatory reserves in July 1998. Expenditures on social services fell by around 10 percent relative to programmed levels in 1998 in contrast to economic services, for instance, which fellby B0percent. Although this reduction was less than that in other sectors, it has Serious repercussions on the poor, especially given the government's historicalunderinvestment in the health and education sectors. Decreases in capital outlays, and maintenance and other operating expenditures will also have a direct negative the quality of capital stock (Pineda 1999). Policies toward economic recovery To date, the worst of the crisis seems

impact on growth

and

to be over, and even the crisis

economies are deemed to be on the (long) road to recovery. True to earlier predictions, the Philippines was among thel first to recover, posting a positive growth rate in the first quarter of 1999 along with Singapore and South Korea. However, first quarter growth was attributed primarily to the recovery of agriculture, which in turn was due to improved weather conditions, and government pump priming. But how far carl the economy's recovery go, with the continued weak performance of the in_tustrial sector? The latter, in turn, was attributed to continued weak consumer demand, tight credit conditions, and the uncertain economic and political environment. To avert economic slowdown, the government in 1999 to take up the slack in private sector spending.

shifted to pump priming The government resorted


Chapter 3: Milo

63

to foreign borrowings to finance its pump-priming strategy and the resulting deficit, which was programmed at P68.4 billion. It secured US$3 billion worth of external financing to cover its programmed 1999 budget deficit. The amount consisted of borrowings from official development assistance (ODA) facilities, as well as bond flotations in the international capital market. It began the year with a US$1 billion two-part global fund, which was further increased by US$200 million. This was followed in March 1999 by a 350-million Euro bond, which was Asia's first overseas bond venture in the single European currency. By shifting the government's financing source from local to foreign creditors, the government sought to lower domestic interest rates and avoid crowding out the private sector. Thus, the benchmark 91-day Treasury bill rate followed a declining trend from a peak of more than 19 percent at the start of 1998 to reach a 5-year low of less than 9 percent in October 1999, which was even lower than its precrisis level of 10.5 percent. The government's foreign borrowings also beefed up the country's gross international reserves, which rose from a low of US$8.5 billion dollars at the start of 1998 (equivalent to less than 2 months' worth of imports) to almost US$14.5 billion as of end-September 1999 or more than 4 months' worth of imports. Thus, the exchange rate has appreciated and stabilized around the P38-39 per US dollar. Resumption of foreign investment inflows also contributed to the strengthening of the peso and the stock market. But while foreign borrowing helped stabilize the peso and lower domestic interest rates, the government was also criticized for allowing the country's foreign debt to surge. Monetary policy was likewise eased, with the successive lowering of the BSP's overnight borrowing and lending rates to 8.8 percent and 11.0 percent, respectively, as of November 1999, compared with 13.4 percent and 15.4 percent at the start of the year. The sustained reduction in interest rates was made possible by the downward trend in inflation rates, which began to decelerate from 11.5 percent in January to 5.4 percent in October 1999. The BSP also cited its overperformance relative to monetary ceilings set with the International Monetary Fund (IMF). In addition to interest rate cuts, the BSP reduced total reserve requirements on banks from 17 to 15 percent. However, the reduction was on liquid reserves, that is, funds that can be placed in government securities and can carry market rates, rather than the statutory reserve requirement that stood at 10 percent. The BSP pays only 4 percent on 40 percent of the funds placed in its vault. Bank lending rates likewise followed a declining trend. As noted in the previous section, however, commercial bank lending continued to contract in the first quarter of 1999. This was due to weak private sector demand, and the banks' cautious stance. The easing of monetary policy, particularly the reduction in liquid reserve requirement, had little impact on bank lending behavior since


64

Economic

crisis... Once more

they opted to increase their holdings of government securities instead. This explains why recent bids during weekly auctions of treasury bills have reached as high as P12 to P18 billion, compared with offerings of about P5 to P5.5 billion. Thus, it has been argued that, since private sector demand for funds was still weak and interest rates had already gone down to precrisis levels, it would have been cheaper for the government to fund its 1999 pump-priming activities from the domestic credit market (Lamber_e et al. 1999). Strong demand for government securities works to the government's advantage because it incurs lower financing costs for the securities it issues. The economy, however, may not gain anything or may not gain as much when banks invest in government securities instead of releasing fresh funds _at can be used more productively by the private sector. Also, further declines in the treasury bill rate may not be followed by equivalent their profits.

drops

in lending rates as banks struggle

to maintain

While the government is doing its best to bring down the cost of funds, cutting key rates and bringing down liquidity reserve requirements do little to address the credit environment bankers currently find themselves in. The issue of risk then becomes an issue of confidence, both in emerging positive economic trends and the sustainability of the government's policy stance, in the context of possible shifts in the international environment. Political issues, such as the proposed constitutional amendment, also add to the uncertainty. If the banking sector is to play a more significant role in the economy's recovery, stronger positive trends in the real sector need to emerge. Thus, the role of fiscal policy in stimulating aggregate demand is crucial. Banks are set to become more liquid as bad debt portfolios are removed from their balance sheets. Any premature tightening of policy, however, could derail the economy's still nascent recovery. Macroeconomics and poverty Stabilization policy in the Philippines typically relied on tight fiscal and monetary policies. The social impact of this policy stance was unmistakable. The reduction in social sector expenditures, which were already deemed inadequate, came at a time when demand for basic social services was expected to increase as economic conditions deteriorated. The crisis also exposed the i underlying weakness of the government's fiscal position, which relied primarily on privatization proceeds and expenditure! cuts to post a surplus. A budget deficit ceiling of P68.4 billion was originally set with the IMF for 1999. This was raised to P85 billion when it became apparent that the original ceiling would be breached due to poor revenue collection. But the actual amount was a much higher Pl13.6 billion, or around 3.6 percent Of GNP. The real concern is not the deficit per se, but the weak revenue performance government's intertemporal budget constraint.

and its implications on the Although the government


Chapter 3: Milo

65

attributed the revenue shortfall due to weak tax administration.

to the economic

downturn,

ultimately

it was

The government's fiscal framework envisages a steady improvement in its fiscal position beginning with a lower deficit of P62.5 billion in 2000, toward a small surplus over the medium term. But the improvement must be derived from an enhanced revenue effort. Otherwise, expenditures on priority areas, such as infrastructure, the social sector, and antipoverty programs, may again be sacrificed. The latter's adverse effect on economic growth and social development is well established. Furthermore, without a sustainable revenue base, the government will not be able to manage its foreign debt burden, which again grew significantly as the government shifted to foreign financing. If this is the case, the brunt of the adjustment will again fall on monetary policy, and monetary authorities may again be constrained to manage the exchange rate very conservatively via a high interest rate policy. This was one of the factors that made the Philippines vulnerable to the contagion effects of the Thai crisis. In fact, the BSP governor had broached the idea of increasing its key overnight rates if the recent weakening of the peso, which was in turn due to the government's higher fiscal deficit and some political concerns, continues. The linkage between the conduct of monetary policy and the poor has to do with the former's influence on economic prices that affect the latter, both directly and indirectly. In particular, monetary policy influences inflation rate, interest rates, and exchange rate (Gochoco 1993). Monetary policy in the Philippines has typically been used to defend the exchange rate. In the past, this was due to the Philippine central bank's limited foreign exchange reserves, which constrained its ability to directly intervene in the foreign exchange market. The exchange rate, in turn, was linked to the foreign debt service of the government (Lim 1992). In particular, high interest rates were used to prompt a switch to peso-denominated assets, when an excess demand for foreign exchange was evident. Domestic interest rates had to carry a premium to compensate for the perceived risk of devaluation, which reflected the concern that the peso was overvalued. This accounted for the large differentials between domestic and foreign interest rates (Krugman 1991). Monetary authorities' penchant for a strong peso was also because of its positive impact on inflation, given the economy's dependence on imports. But the linking of the exchange rate to financial flows was detrimental in that it brought about a dichotomy between exchange rate policy and trade and industrial policies (Lira 1992). In contrast to the 1980s, the BSP became a net buyer of foreign exchange in the 1990s because

of the surge

in capital

inflows

and

the consequent

appreciation of the peso. However, monetary ceilings set with the IMF resulted in the BSP sterilizing its foreign exchange purchases. Thus, domestic interest rates remained high, which in turn encouraged more capital inflows. Ultimately,


66

Economic

crisis... Once more

monetary authorities' continued conservative management of the exchange rate gave rise to some perverse results: In particular, the very stable and strong peso, which was considered overvalued, itself became a source of instability. Because the policy target was exchange rate misalignment, the peso was subjected culminated in the mid-1997 currency successful in defending the peso from

stability at the cost of a currency to several speculative attacks, which crisis. Although the BSP was fairly speculative attacks prior to the 1997

currency crisis, there were economic costs. IAllowing interest rates to increase fended off speculators, but only temporarily. And it had adverse, longer-term effects on the banking system, the pat!ern of investment, production, employment, growth, and ultimately the poor. That is why the BSP's use of high-interest rate policy to defend the peso at the outbreak of the crisis was highly criticized for its failure to stem the fall of the peso and its adverse effect on the economy. The BSP was urged to loosen up on its defense of the local currency and to focus instead on bringing, down interest rates, which had a stronger impact on the economy than the peso depreciation. The adjustment lag, especially in the response of banks, underscores the importance of maintaining the current low interest rate policy stance. One major outcome of financial liberalization in a regime of floating exchange rates was to increase the influence of financial markets in exchange rate determination, with financial flows vastly exceeding the value of international trade in goods and service s .Financial markets clear or adjust faster than real markets, hence the overshooting of nominal (and real) exchange rates in the short run (Dornbusch 1976), in response to surges in capital inflows. Over time, as the impact of trade and industrial reforms become more fully realized, underlying structural changes should exert a greater influence on the real exchange rate, moving it to a more realistic level. In the interim, however, macroeconomic policies--fiscal and monetary policies, external borrowing, and exchange rate management--also play an important role because of their impact on aggregate demand and price levels, including the nominal exchange rate. Thus, they can either reinforce, neutralize, or even temporarily reverse the effects of structural changes on the real exchange rate (World Bank 1987). The choice of exchange rate regime depends on several economic and political factors, including the nature of disturbances, structure of the economy, information available to agents, and policyrnakers' preferences. And central bank intervention in the foreign exchange market will have 'different objectives at different times. Given the changing environment, the alternative is no longer between fixed versus floating exchange rates. On the one hand, there is the difficulty and cost of maintaining a fixed exchange rate in a deregulated, globalized environment. On the other hand, leaving exchange rates to be


Chapter 3: Milo

67

determined exclusively in a market _ that does not always behave as an "efficient financial market" is also not tenable since the costs of ignoring speculative swings could be very high (Cutler et al 1990, Macfarlane and Tease 1989, Miller and Weller 1991). Thus, there is a body of theoretical literature that suggests that a purely fixed or flexible exchange rate would not generally be optimal, given the diverse nature of shocks facing an economy (Dornbusch 1993, Turnovsky 1994). Rather, some intermediate degree of flexibility is seen as generally best able to stabilize the economy in response to economic disturbances. As Krugman (1989) pointed out, exchange rate volatility, that is, high frequency fluctuation around the "true" fundamental value, is not necessarily an acceptable or even inevitable cost of allowing the foreign exchange market to operate freely. Efforts to stabilize the exchange rate, however, must also guard against inducing a currency misalignment, or a persistent deviation from fundamentals. Compared with the impact of persistent deviations of the exchange rate from its long-run equilibrium value, the welfare costs of exchange rate volatility seem to be rather small. For instance, firms' investment decisions may be distorted, even if they are perfectly aware that a particular value for the exchange rate may be u_nsustainable (Dixit 1989a, 1989b). Also, international portfolio investment that takes place when exchange rates are misaligned can lead to large welfare losses resulting from resource misallocation. These suggest that welfare costs of exchange rate misalignments are likely to be substantial (Miller and Weller 1991). Although excessive fluctuations in the exchange rate would also need to be avoided in a still shallow and inefficient foreign exchange market, greater exchange rate flexibility would also encourage the development of forward markets, which would lead to improved management of exchange rate risks. Then currency speculators would bear the exchange rate risks, while hedgers (usually traders and arbitrageurs) would be able to cover their foreign exchange exposures in the forward market. Simply put, a poor exchange rate policy risks misrepresenting true opportunities, and thus misallocating resources. Ultimately, the goal should be a competitive, stable, real exchange rate (Dornbusch 1993). Only then will the Philippines undergo a structural experience in export development. What the events of the past two years show is that the Philippines

has

yet to escape the grip of a boom-bust cycle that had characterized its economy for decades. But the Philippine economy is als0 one of the more open, transparent, deregulated, and democratic economies in the region. Thus, it is well poised to adapt to the changing external environment, and to take advantage of the opportunities in a more liberal environment. The importance i A market is said to be efficient ff all available information is fully reflected in current market prices. Miller and Weller(1991)discuss some important arguments that have been forwarded to explain the divergencefrom market efficiency.


68

Economic

crisis... Once more

of maintaining sound and consistent policies cannot be overemphasized. Furthermore, care has to be taken that the reforms are not reversed but deepened further, both in the financial and the real sectors. The financial sector is crucial because it serves as the mechanism through which monetary policy is transmitted to the rest of the economy. The financial system also plays a very important role in facilitating economic growth andprosperity by channeling funds from savers to investors. The more competitive and efficient is this intermediation process, the more likely it iS that funds will be made available and allocated according to their most productive uses. However, the financial system does not operate in a vacuum, and inefficiencies and distortions in the real sector will be reflected in the financial sector as well. Conclusions In discussing the impact of the Asian crisis on the Philippines, three key points need to be made. First, the impact of the Asian crisis on the Philippine economy and financial sector has been quite moderate, especially when compared with the crisis economies of Thailand, Indonesia, and South Korea. The Philippine economy contracted from the 2nd to the 4th quarter of 1998. But true to earlier predictions, it was among the first to post positive growth rates, from 1.2 percent in the 1st quarter of 1999 'to around 3.1 percent in the third quarter. While there has been a significant weakening of the commercial banking sector in particular, again, it was still very moderate. Second, the social impact has also been less severe. This was borne out by a microeconomic study, which conducted focus group discussions and household surveys to determine the social impact of the crisis on the more vulnerable members and sectors of Philippine society (Reyes et al. 1999). Finally and most importantly, as it has been frequently noted in the literature, the Philippines was a laggard in the region both in economic growth performance and human development. Thus, even a slight deterioration in economic and social conditions will have severe implications, especially on the poor. It is almost certain that the crisis has nullified the gains that have been made on poverty alleviation and other human development indicators. Furthermore, while the direct impact of the Asian crisis may have been fairly moderate, the disruption that it caused in the Philippines' growth and adjustment process could prove to be more significant and costly. The positive reports about the Philippines clearly need to be kept in perspective. The fundamental restructuring of the Philippine economy toward greater efficiency and competitiveness will necessarily hurt certain sectors during the adjustment period, especially in the short to medium run. Thus, policies need to be designed such that they will hurt the poor the least, or distribute the burden of the adjustment

in the fairest manner possible (de Dios 1993). Clearly, properly


Chapter 3: Milo

69

designed and targeted social safety nets still have an important role to play in alleviating the effects of stabilization and structural adjustment measures. In particular, the globalization of financial markets has resulted in labor bearing the brunt of adjustments to external shocks, as increased capital mobility narrows the range of variation of returns to capital within a country to match "world" rates (Rodrik 1997). The UNDP's Human Development Report (UNDP 1998) even said that globalization has been bad for the poor. Thus, the importance an adequate system of social protection cannot be overly emphasized.

of


70

Economic

crisis... Once more

References Cutler, D.M., J.A. Poterba, and L.H. Summers. 1990. Speculative dynamics and the role of feedback traders. NBER Working Paper No. 3243. New York: National Bureau of Economic Research. De Dios, E.S. 1.993. Poverty, growth, and the fiscal crisis, in de Dios and associates. Poverty, growth, and the fiscal crisis. Makati City: Philippine of Development Studies. Dixit, A. 1989a. Entry and exit decisions under uncertainty. Economy 97:620-39. Dixit, A. 1989b. Hysteresis, import penetration, Quarterly Journal of Economics.

Journal of Political

and exchange rate pass-through.

Dornbusch, R. 1976. Expectations and exchange Political Economy 84:1161-1176. '

rate dynamics.

Dornbusch, R. 1993. Policymaking University Press.

in the open economy.

Gochoco,

for banking

M.S. 1993. Policy options

Institute

Journal

of

New York: Oxford

and financial reforms,

in: de

Dios and associates. Poverty, growth, and the fiscal crisis. Makati City: Philippine Institute of Development Studies. Krugman P.R. 1989. The case for stabilising exchange rates. Oxford Review of Economic Policy 5(3):61-72. Krugman, P.R. 1991. Transforming APO Production Unit.

the Philippine economy. Quezon City: NEDA-

Lamberte, M.B. and J.T. Yap. 1999. Scenarios for economic recovery: the Philippines. Discussion Paper Series No. 99-05. Makati City: Philippine Institute of Development Studies. Lamberte,

M.B., C.B. Cororaton,

M.F. Guerrero,

and A.C. Orbeta. 1999. Impact

of the Southeast Asian financial crisis on the Philippine manufacturing sector. Discussion Paper Series No. 99-09. Makati City: Philippine institute of Development Studies. Lira, J.M. 1992. A study on Philippine exchange rate policies. PIDS Working Paper Series No. 9209. Makati City: Philippine Institute of Development Studies. Macfarlane, I.J. and W.J. Tease. 1989. Capital flows and exchange rate determination. Research Discussion Paper No. 8908. Sydney: Economic Research Department, Reserve Bank of Australia. Magdaluyo, R.E. 1998. Southeast Asian currency flu: a look at the fundamentals. A.I.M. Policy Forum Briefing PaperS. No. 2 (January):2-14. Miller, M. and P. Weller. 1991. Financial liberalization, asset prices and exchange rates. Working Papers No. 95. PariS: Department of Economics and •Statistics,

Organization

for Economic

Cooperation

and Development.


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71

Milo, M.M.R.S. 1998. Financial liberalization in the Philippines: retrospect and prospect. Unpublished dissertation. Canberra: Australian National University. Pineda, V.S. 1999. Impact of the financial crisis on social services financing and delivery. Discussion Paper Series No. 99-30. Makati City: Philippine Institute of Development Studies. Reyes, C.M. 1998. The social impact of the regional crisis in the Philippines. MIMAP Research Paper. Micro Impacts of Macroeconomic Policies (MIMAP) Project. Makati City: Philippines Development Studies. Reyes, C.M., R.G. Manasan, A.C. Orbeta, and G.G. de Guzman.

Adjustment Institute of 1999. Social

impact of the regional financial crisis in the Philippines. Discussion Paper Series No. 99-14. Makati City: Philippine Institute of Development Studies. R0drik, D. 1997. Has liberalization International Economics. Turnovsky,

D.J. 1994. Exchange

gone too far? Washington, rate management:

D.C.: Institute for

a partial review, in Glick, R.

and M.M. Hutchison. (eds.) 1995. Exchange rate interdependence: perspectives from the Pacific Basin. Cambridge University Press.

policy and Cambridge:

United Nations Development Programme 1998. Human Development 1998. New York: Oxford University Press. World Bank. 1987. The Philippines: issues and policies in the industrial

Report sector.


Part I1:

Impact of the East Asian Financial Crisis


4 The East Asian Financial Crisis and Philippine Sustainable Development Ponciano

Intal, Jr and Erlinda Medalla

ustainable discussions

development on the East

issues Asian

a

have so far been overlooked in financial crisis. To some extent

this is not surprising because, as Paul Krugman (1998) stated, "...nobody anticipated anything like the current crisis in (East) Asia." Thus, the first order of business is to understand why the crisis happened, why it involved several countries, and why a few countries were particularly hard hit. In the process, appropriate policy and adjustment measures can be proposed and undertaken to address underlying problems and thus minimize the adverse social and economic effects of the crisis and point to a faster resolution. Asia is the most polluted and environmentally degraded region in the world. Moreover, it has the largest number of poor households in the world. Thus, because of its magnitude, the current economic and financial crisis of East Asia is expected to impact on the region's sustainable development prospects and challenges. Whether or not the impact is large or small, temporary or permanent, and short term or long term in each of the affected countries is likely to be determined by the state of the environment and social development before the crisis. Impact is also affected by the magnitude, length, and nature of the adjustment and policies that each country undertakes in response to the crisis .3

This paper was presented during the Meeting on the Asian CurrencyCrisis and Sustainable Development, Sixth Session of the United Nations Commission on SustainableDevelopment, New York,21-24April 1998. 2The authorsacknowledge the assistance of the other membersof the Philippine StudyTeam, namely,Cielito Habito,MariandelosAngeles,RaphaelLotilla,andEllaAntonio,and theexcellent researchassistance of LeilanieBasilioand RonaldYacat. 3Thesocial impact of the EastAsian financialcrisisis discussedin Chapter 6 of thisbook.


76

Economic

crisis... Once more

This paper presents an analysis• of the impact of East Asia's financial crisis on sustainable development challenges facing the Philippines. It is exploratory, given the paucity of data and information on hand. Nevertheless, we hope that analyses and and •economic It must

the paper would contribute, even modestly, to more in-depth discussions in the future on the impact of East Asia's financial crisis •on the region's sustainable development. be noted that the crisis occurred at the same time that the E1 Nifio

phenomenon took its toll on the country. Thus, both the crisis and E1 Nifio significantly shaped the country's economic performance and affected its sustainable development concernsmsocial development, and natural resources and environmental regeneration. This paper has four major sections. Section one provides an overview of the East Asian economic and financial crisis. Section two looks at the Philippine •economic performance and prospects in the light of the crisis. Section three explores the actual or potential impact of the crisis on Philippine social development and the environment and natural resources sector. The last section discusses the implications of the crisis and E1 Nifio on• a number of policy and institutional challenges facing the country especially in the areas of water resources, upland and coastal areas, and the urban environment. Overview

of the East Asian financial

crisis

The suddenness and severity of the East Asian currency and financial turmoil has spawned a burgeoning body of literature that helps us understand what went wrong and what needs to be undertaken to minimize the havoc, and at the same time hasten the recovery of affected East Asian economies. The crisis arose as a result of both microeconomic and macroeconomic factors, especially microeconomic and regulatory infirmities in the financial arena and macroeconomic vulnerabilities, particularly to the contagion and lossof investor confidence (for example, see Krugman 1998, Radelet and.Sachs 1998, Stiglitz 1998, Garnaut 1998, Nasution 1998, and Nidhiprabh a 1998). In addition, Radelet and Sachs (1998) assert that the initial, policy response to .the crisis, drawn with the International Monetary Fund (IMF) .and the donor community, appears to have been inappropriate, thereby causing :financial panic and deepening the crisis unnecessarily, especiallyin IndonesiA. I " There is a growing consensus that the financial and capital markets played a big role on why the crisis occurred, in the number of countries affected, and in ,

.

I

ii

its unexpected severity. On hmdmght ther_ appears to have been irrational exuberance" among foreign and local inve_tors and bankers before the crisis, which was probably caused partly by severe moral hazard problems, arising from perceptions of implicit government gtiarantees on liabilities of local banks .(Krugman 1998). The inherent imperfections of the financial market arising


Chapter 4: Intal and Medalla

77

partly from asymmetric information (Stiglitz 1989) puta premium on prudential banking rules and regulations, which have been inadequate in several East Asian countries affected by the crisis. There appears to have been some "herd behavior" on the part of foreign portfolio investors, facilitated partly by a revolution in telecommunications .that allowsthe international transfer of massive funds in seconds, The apparent "irrational exuberance" before the crisis turned into an apparent "irrational pessimism" which led to massive capital outflows as macroeconomic uncertainty deepened partly because of, as Radelet and Sachs (1998) emphasize, inappropriate While the crisis is rooted

initial bailout packages.. in the financial sector, there were nonetheless

macroeconomic

in the affected

vulnerabilities

where the crisis .started', was particularly

countries

vulnerable

(Table 1). Thailand,

to currency

speculation

and loss of investor confidence because of the high share of short-term debt to total foreign debt (about a third), an excess of short-term debt to international reserves, and a high ratio of current account deficit to gross domestic product (GDP). The failure of financial institutions (as the real estate market softened markedly) and the stagnation Ofexports in 1996 pointed further to the need for a currency correction. The rapid spread of the Thai contagion to other countries can also be attributed partly to macroeconomic vulnerabilities in these countries. Although the Philippines had a much smaller share of short-term debt to total debt and its external debt service burden has declined significantly during the 1990s, it experienced the largest real currency appreciation and the highest ratio of merchandise trade deficit to GDP during the 1990s among the Association of Southeast Asian Nations (ASEAN) countries. Hence, the country was vulnerable to a major Thailand. handicapped short-term compared

currency depreciation of an important competitor country like Indonesia, despite manageable current account deficits, was by a heavy external debt service burden and a higher ratio of debt (primarily of the private sector) to international reserves with Thailand. As such, Indonesia's corporate sector became

particularly vulnerable to sharp depreciations of the rupiah and to a sharp rise in interest rates. South Korea's ra_o of short-term external debt to international reserves was even higher tb _ those of Thailand and Indonesia (Table 1). As a result, South Korea, particv_rly the private banking and nonbanking sectors that were the borrowers, also became vulnerable to the increased skittishness of foreign lenders and investors of the Thai financial collapse:

toward

countries

in the region in the aftermath

The return of foreign portfolio Capital into the region, together with the slowdown in import payt. ents, has triggered the ongoing recovery of currencies and stock markets, and the reduction in interest rates, especially in South Korea, Thailand, and the Philippines. Ironically, Indonesia, which before the crisis had


78

Economic

relatively

manageable

current

account

crisis... Once more

deficits and fiscal situation,

and one of

the least overvalued currencies in the region, became the hardest-hit economy. Radelet and Sachs (1998) attribute this to policy missteps contained in the initial IMF adjustment program and the attendant serious erosion of international credibility of the Indonesian government when it balked at fully implementing the initial package of reforms. As a result, the initial contagion turned into financial panic with dire socioeconomic effects. The severity of socioeconomic effects has fueled greater political uncertainty to slow down the full recovery

in the country, which is expected

of the Indor_esian economy. i

Table 1.

Selected

ASEAN

(Averages,

countries:

macroeconomic

vulnerabilities

in percent of GDP Unless other_iseindicated).

Item

Indonesia "1991-95 1996

Export growth rata (value in US $)

Malaysia 1901-95 1996

Pl'dlip pine_" 1991-95 1996

Thailand 1991-95 1996

11.4

10,3

20.3

5.8

16,6

17,8

19.7

1,3

-3,3

-5.'1

-7,8

-4.2

-36.9

-5,9

4.7

-5,2

Excha nf_ rate Real effective exchange

ra te [percent chtlnge

over the period; appracia Balance of payments

lion (_)jr,

Current

accottnt deficit

-2.4

-3,6

-6.5

-5.2

-3,6

-4.1

-6,7

-8,0

Capltal Debt

inflows (net) ¢

4.0

5,2

11,5

7.7

5,8

8,9

10.4

9,2

191,5

178.5

43.8

40,3

168.2

103.6

105,5

118.6

7.7

8.5

18,2

_,7

15).

13.8

44.4

43.6

32.4

32.8

6,7

25.4

I5,4

10.9

11,4

EXtum_I debt (% of exports of goods and selvlces) Shot tqerm debt (% of ext_rl_a[ debt) Debt-service

ratio (% of exports

of g0_xts and _rvlces)

5.7

Financial st-ability Central government

balance

Publlc debt

Interne tiona[ claims held by/oceigcl Short-termReserves

-0.2

1.0

0.1

0,7

-1.6

-0.4

2,8

37.2

27,7

21.8

15.9

113,0

88.0

17.2

1995-96

M/d- 97

"19cJ5-96

1.9

1,7

Mid- 97

1995_96

M_d-97

1995-96

0.6

0.6

0.8

1.2

2.3 103

Mid-97

bal_k__

(ratio) '1

Memo item International claims held by foreign banks Short-term/Reserves (ratio)

0.4

1,5

Mexico End 94 5,2

End 95 1,5

°Allratios are in percent of GNP,unless otherwise indicated. bFor 1996,December 1996over December 1995. ¢Includes errors and omissions. dAverageo£December 1995and 1996. Sources: Hicklin,Robinson, and Singh (1997);Short-term/Reserves estimates from Radelet and Sachs (1998).

The East Asian financial crisis appear s to be stabilizing as currencies and stock markets have started recovering and ii_terest rates have likewise started declining. Nevertheless, with asset deflation, reduced capitalization of banks, higher debt service and interest rates, and sltlggish domestic demand, the crisis


Chapter 4: Intal and Medalla

79

can be expected to further run through the real and corporate sectors of affected economies for perhaps another year or two. Most analysts agree that several fundamentals that have contributed to the rapid growth in East Asian countries during the late 1980s and early 1990s remain (e.g., comparatively high saving rate, demographic transition, and export orientation). Moreover, real exchange rate adjustments, institutional reforms toward greater transparency and better prudential regulations, and the ongoing restructuring of corporate sectors can be expected to strengthen the growth prospects of affected countries. Hence, East Asian countries are likely to recover and resume robust economic growth rates in the near future, although probably not at sizzling rates of past years. The crisis brought out the need for prudence and "less exuberance" in both corporate and macroeconomic arenas domestically and among foreign investors and lenders. The East Asian financial

crisis and the Philippine

economy

The Philippines is one of the Southeast Asian countries that have not been hit very hard by the crisis so far. A decade-long process of financial reform and rebuilding is a major factor behind the country's greater resiliency during the crisis. At the same time, the Philippine financial institutions' foray into the intemational capital market came later than those of Thailand, Indonesia, and South Korea. in addition, the peso depreciation, in conjunction with the crisis, is in fact the unexpected marketqed and depoliticized exchange rate adjustment needed to cushion the domestic industry from a significant peso appreciation in the face of tariff reduction during the 1990s. However, the country's macroeconomic condition remains fragile primarily because the government's fiscal situation is particularly vulnerable to high interest rates. The country has the highest ratio of public debt to GDP among the Southeast Asian countries. Thus, an unwarrantedlong and high interest rate regime could lead to a "doubledeflationary whammy" on the Philippine economy, namely, an adverse impact on investments and operations of large and small businesses and sharp cutbacks on noninterest payment government expenditures. Thus, it is critical for the Philippines that the regional currency situation stabilizes so that monetary policy and interest rates could ease up appreciably. At the same time, the crisis points to the need to strengthen further the fiscal situation of the country primarily through an increase in tax and overall revenue effort as well as through further streamlining of government operations. Exchange rate and [iaaace The East Asian financial

crisis had an immediate

effect on the foreign

exchange and financial arena in the Philippines. When Thailand devalued its currency in early July 1997, the Philippines eventually had to let the peso


80 depreciate

Economic

crisis... Once more

in mid-July when the Bangko Sentral ng Pilipinas (BSP) intervention

in the foreign exchange market, amounting to about US$1.5 billion sales, proved useless because of the heavy speculative attack on the peso. The exchange rate rose to more than P30 per dollar in August, hitting P45 per dollar in early 1998 before appreciating to around P38 per dollar by mid-April 1998. The Philippine policy response to the crisis centered on monetary policy and balance-of-payments management. The BSP tightened monetary policy as it raised overnight lending rates, increased liquidity reserves on banks on top of the required reserves, momentarily closed the overnight lending window, and imposed tighter rules on oversold and overbought positions of banks on foreign exchange. The result was a sharp rise in domestic interest rates. For example, the banks' average lending rate rose from 12.9 percent in February 1997 to 20.9 percent in October 1997; the bellwether 91-day Treasury bill rate increased from 10 percent in April 1997 to 19 percent in January 1998, while the average high prime lending rate of banks was 26.8 percent in January 1998. Interest rates, however, have been dropping in response to the easing of reserve requirements (both liquidity and required) and the increased stability of foreign exchange markets in the regioN. Thus, the 91-day T-bill rate had declined to 15.5 percent, whereas the average high prime lending rate had dropped to 22 percent in April 1998. Nevertheless, interest rates remained high and the gap between deposit and lending rates remained substantial; as a result, businessmen in southern Philippines demonstrated against the high interest rate regime. Portfolio flows, as expected, turned negative as a result of the crisis. Indeed, foreign portfolio investments turned from net inflow during the first four months of 1997 to net withdrawals beginning in May up to November, except surprisingly in August. Predictably, the high interest rate and the flight of foreign portfolio capital led to a sharp dro p in the stock market, with the Philippine Stock Exchange composite index iplunging from 3171 points at the end of 1996 to 1772 in November 1997. Foreign portfolio investments have gradually trickled in, resulting in the uptick in the composite index (2185 in mid-April 1998). The Philippines' financial institutions did not fail as a result of the crisis. Only one bank a fairly small and newly upgraded

commercial

bank failed due

primarily to DOSRI (directors, officers, stockholders and related interests) loans mainly to the real estate companies of the maior owner. Behind the resiliency of the Philippine financial system to the East Asian crisis are the decade-long reforms that have been undertaken in response to its own financial crisis in the early 1980s. Most of the reforms are prudential in nature, including increased capitalization requirements, compliance wit h the minimum asset ratio, limits on single borrowers and on DOSRI loans; stricter audit and reporting requirements, and stricter policies on bail-outs of problematic banks (Bautista 1992).


Chapter 4: Intal and MedaUa The series of increases

81 in bank capitalization

requirements,

together with

the further opening up of the financial sector to a limited number of foreign banks, have proved to be important stabilization factors in the financial turmoil in tbe region. The average capital adequacy ratio in the country hovers around 16 percent, significantly higher than the Bank for International Settlement (BIS) requirement of 8 percent. It is likely that this ratio is not fully risk-adiuSted. The ratio of nonperforming loans to total loans of commercial banks has remained manageable at 4 percent 3 months after the crisis compared with 3 percent before the crisis. These rates are much lower than in the mid-1980s, reaching more than 20 percent during the economic crisis. While the Philippine financial sector has largely weathered the regional crisis, the government's fiscal situation has turned precarious because of the high interest rates and slowdown in the economy. For example, the national government budget deficit more than doubled during the first quarter of 1998 compared with the same period in 1997 (i.e., P12.4 billion vs. P5.7 billion), arising from the shortfall in customs duties as dutiable imports declined. In addition, public debt service payments increased significantly because of the Philippines' higher ratio of public debt to GDP compared with other Southeast Asian countries (Table 1). The precariousness of the fiscal situation arises from internal dynamics--the larger the deficit, the greater is the need of the government to borrow domestically, and therefor interest rates to remain high.

e the greater

is the pressure

for domestic

The Philippine government has realized the precariousness of its fiscal position. Among the more important measures undertaken and promised under the Memorandum of Economic and" Financial Policies with the IMF are the 25 percent mandatory reserve on all expenditures other than personnel and debt service; a 10 percent deferment in the internal revenue allotment (IRA) for local government units (LGUs), suspension of all tax subsidies to national government agencies, corporations, and LGUs; suspension through presidential veto of a specified amount of new programs and proiects in the 1998 budget; and renewed effort to strengthen tax administration. In addition, the Philippines is tapping foreign long-term loans to help finance the budget to reduce pressure on the domestic debt market, thereby allowing for the softening of domestic interest rates. The fiscal belt tightening, while important for macroeConomic purposes, means cutting government expenditures for social development, and environment and natural resources protection and rehabilitation two central concepts in sustainable development. This is discussed in another section.

Output and trade Wl_ile the crisis had an immediate and significant impact on the country's financial sector, its impact on the country's output and trade had been much


82

Economic

crisis... Once more

more muted. On the surface, the East Asian crisis appeared to have had a significant impact on the country's national output (Table 2). The growth of GDP decelerated from 6.1 percent and 5.4 percent in the third and fourth quarters of 1996 to 4.9 percent and 4.7 percent in the third and fourth quarters of 1997, respectively. However, a closer look at the quarterly growth figures gives a less clear picture. For example, growth rates decelerated even during the first and second quarters of 1997 relative to the first two quarters of 1996. It is clear that the crisis did not precipitate the deceleration in growth of the Philippine economy. Table

2.

Philippines: macroeconomic otherwise indicated).

indicators

Annual [11d.J,cato1

19_)6

growth

ra_;s

unless

Quarterly

1997

1996 Q]

ReaJ GDP

(In percent

1997

Q2

Q3

Q4

Q1

Q2

Q3

Q4

5.7

53

5,1

6,1

6,1

5,4

5

5.8

4,9

4,7

6,9

5,8

6,!)

8,1

6.9

6.7

5.8

6,4

5.7

5,2

Ab_-iculture

3.1

2,8

1,9

5,9

3,6

1,6

3.7

2.9

0.7

3,4

Mat_ufacturing Sarvices

6,3 (_,5

5,7 5,6

6,1 63

6,4 5,9

6,8 6,7

6 7.1

4 6.4

6.9 6.2

6-2 5,6

5,8 4,5

25,7 11,6

23,2 10,5

23,9 7,]

24.8 4,8

27.9 4.7

23.9 4.5

24.1 4.9

25,6 6,1

10,9 7,4

7.5 h.3

7.4 1.4

7.7 2.5

10,4 -3.4

8,7 -4,8

7.9 -10,4

-4.8 -5.1

-2,3 -3.3

-7,1 -8,2

-6,9 -8.4

-3.3 -4.7

Real. GNP growth rates Growth ('at cor_stant pric._,s) in:

]'I/"ves {flleo t I'_{_ (GI3CI _ as % oIGPCP; in real temls) hfflatiol_ ra t'es

24.4 8.5

25.4 53

Unemp/0ymen{ rate (period average) Overall ba[_.ce of payi_._el_.ts Positlon (% oICNP)

8,6 .1,7

_,7 -3,9

Current account balance (% of GNP) Trade balance (% of GNP)

-4.5 -5.2

-4.9 -62

-3.8 4,6

-9.4 -10.l

4).2 -l.1

Growth in eoltm set-rictus

24.3

21,5

30.5

18.3

20.6

19

32

24.3

15,4

17

17.7

22.8

25.8

13,9

I1,8

20,9

17.5

26.5

24.7

22.2

22,5

21,2

26,3

18,5

23.4

22.8

26.9

18

28.7

12.9

20,8

14.0

31,0

,23,4

16.9

14,2

14.2

12.9

33.3

29.3

8.3 r, ,_.8

20.9

11.3

29

76.1

Change in net foleignl investments Change, in direct in vc_stm¢_lts

118.6 -1,7

-78.2 -16,5

7,5 10.6

-I28,2 -10.6

-101.5 -46.5

Change il7 portto/ioinvestlnel7tS (_,_ral t_ su p us/defici (-) (";, of GNP) Ratio cd debt _rvice bul'dell

778,6 0,3

-ll6,1 0,1

3.8

-170,3

-147.7

12.7

11.3

5.8

6.2

Growth

exports

in meccl_anclise

Growtln h-t dollar serv),ces

imports

Growth

in me;chandise

Change

in _'orkers'

to expores

of goods

and

exports of goods

aid

impocts

rem.itrances

of G & S (%')

[_.,:Ltioof cl,_bt 'aax'k.'i¢_burdell

_o (_N.Ip (%)

8,3 -.t,4

-98.2 -2"1.1 -115.2

Note: Growth rates for quarters are on year-on-year basis. Sources: PIDS Data and Information Resource Program; BSP Selected Philippine Economic Indicators, Yearbook1996and March 1998;NSCBNational Income Accounts,various years. It is more likely that the crisis aggravated

the deceleration

in growth of

the economy. Thus, for example, net reduction in inventories in the third quarter and only a small increase in inventories in the fourth quarter of 1997 partly reflect the cautious attitude of manufacturers with the onset ofthe crisis. The inventory drawdown contributed to the deceleration output during the second half of 1997.

in growth of manufacturing


Chapter 4: Intal and Medalla

83

Other factors which are not strongly linked to the crisis contributed to the deceleration in economic growth. For example, the more important cause of economic slowdown during the third quarter of 1997 was the sharp deceleration in the growth of agriculture relative to the previous year's corresponding quarter, arising primarily from sharp declines in rice and sugarcane output. This was linked to the E1 Nifio phenomenon, which had affected the farming timetable. Another sector that was also badly hit by E1 Nifio was the water utilities industry, which declined during the fourth quarter of 1997 as a result of the worsening drought problem. Finally, government services also grew only marginally during the last quarter of 1997. Another factor was the slowdown in granting of salary adjustments in the public sector in 1997 compared with the previous year. However, this may have resulted from the crisis. In sum, the national account estimates did not indicate that the East Asian crisis exacted a heavy price on Philippine months of the crisis.

output during

the first 6

Similarly, the crisis did not have a significant impact on Philippine foreign trade so far. The growth of imports in real terms was higher in the third and fourth quarters of 1997 than during the first two quarters of the year. Aggregate merchandise exports had been growing at a robust pace in 1997 and at an even faster pace during the first 2 months of 1998. 4 Indeed, given the substantial real appreciation of the peso during the early 1990s, the depreciation of the peso arising from the crisis should in principle be conducive to the growth of exports. During the early 1990s, the appreciation of the peso, reduction in tariff, and rise in wage rates reduced the international competitiveness of some labor-intensive manufactures and forced them to restructure due to greater competition. The textile industry is a good example of industrial restructuring to enable it to face a more open at the same developing accelerated

economy. The sector's output had been declining for several years; time textile exports had been growing as some firms succeeded in export niches. It is not yet known if industrial restructuring had or slowed down because of the crisis.

The robust growth of merchandise exports in 1997 and 1998 was fueled largely by electronics exports, including computer parts. The surge in electronics exports is likely not caused by exchange rate adjustments but rather by the increase in investments in export-oriented electronics and computer parts during the past 3 years. About 75 percent of all investments in the Philippine Export Zone Authority's (PEZA) sanctioned industrial estates and special economic zones during 1995-97 were in the electronics and semiconductor industry. It is likely that the depreciation of the peso would be beneficial to the export sector in the medium term. Of course, what matters is the real 4 Estimatesof services exports in the national income accounts are not very reliable because of problems related to the attribution of peso conversions of foreigncurrency deposits (FCDs).


84 depreciation

Economic of th e peso, not nominal

depreciation.

crisis... Once more

In this regard,

one of the

significant impacts of the crisis is that the substantial nominal depreciation of the peso has been translated into a significant real depreciation, thus possibly making the output and trade effects of the depreciation positive in the future. In contrast to past decades, the substantial depreciation of the peso during the crisis has not translated so far into significantly higher inflation rates. This can be attributed to (a) the relatively tight monetary and fiscal policy adopted, (b) high protection rate in food crops like rice before the crisis, coupled with the large duty-free importation of rice and cornby the government whicheffectively dampened upward price adjustments in such politically sensitive items like rice; (c) responsible and relatively noninflationary wage adjustments during the crisis, and (d) reduction in the world price of oil, an important imported input. Real exchange employment

rate

adjustment

and

trade

re[orms

on output

and

Over the medium term, the real depreciation of the peso is expected to serve as the much-needed complementary measure, which the government failed to take advantage of when it started to implement ongoing trade reforms in the 1980s. Basically, the currency adjustment would further reduce price distortions, which in the long run would benefit the economy. In particular, the real depreciation of the currency is expected to improve the relative price of tradables (especially export-oriented sectorslwith relatively high value-added) compared with nontradabJ.es. ! A recent study by the Philippine Institute for Development Studies simulated the impact of ongoing trade reforms implemented by Executive Order (EO) 264 (together with more recent amendments) on output and income. Using the same model this paper attempts to analyze the impact of the Asian currency crisis by comparing estimated potential effects of ongoing trade reforms with and without exchange rate adjustment. Scenarios with exchange rate adjustment provide some indication of the possible impact in the medium term of the peso depreciation in the aftermath of the East Asian crisis. The model is partial equilibrium in nature in that it assumes zero crossprice elasticities and could not incorporate other factors such as investment and monetary variables. These shortcomings limit the analysis to comparative statics. The advantage of the model, however, is its multisectoral, input-output framework, highlighting best the variation in effective rates of protection and the varying effects of trade reforms across s6ctors, and incorporating to some extent linkages among them. Basically, the model works as follows. Changes in tariffs (or tariff equivalents in the case of removing quanfitaiive restrictions) brought about by


86

Economic

crisis... Once more

with or without exchange rate adjustment. Without exchange rate adjustment, however, output growth would increase by only about 0.40 to 0.75 percentage point (for low and high elasticity assumptions, respectively) due to trade reforms under EO 264. Income growth would even decline slightly by around 0.03 to 0.06 percentage point. This is attributed mainly to a decline in the growth in manufacturing value-added. This also implies a reallocation of resources to sectors with relatively lower value-added ratio, which characterizes the Philippine manufacturing sector including its major exports. The effects on the growth in both output and value-added for agriculture are positive. This is mainly because EO 264 maintains protection for agriculture while lowering industrial tariffs substantially to 10 percent and below. The exportable sector benefits most, which could grow by around 4-8 percent. This is brought about mainly by improved relative prices due to trade reforms.

Table 3. Simulation

of the impact of trade reforms (E.O. 264). l W/o

Sector Output Importables Exportables

exchange rate adjustments A B

With 10% exchange rate adjustments A B

With 20% exchange rate adjustments A B

0,75 -2,09 7,85

0.40 -1.16 4.27

7,81 11.07 21.45

4.27 6.02 11.77

14.85 24.22 34.96

8.13 13.20 19.22

Agriculture Importables Exportables

0.82 0.74 2.03

0.51 0.46 1.27

5.87 8.82 9.18

3.67 5.51 5.74

10,93 16.89 16.33

6.83 10.56 10,20

Mant_facturing lmportables Exportabtes

1.92 -2.08 10.33

1.03 -1,11 5.51

17.08 12.72 26.51

9.11 6.78 14.14

17.16 14.67 22.70

32,18 27.51 42.56

-0,06 -4.02 6.20

-0.30 -2,21 3.40

6.29 8,24 19.15

3.48 4,57 10.61

12.61 20.50 32,02

6.99 11,34 17.77

Agriculture Importables Exportables

0.92 0.77 2.01

0.58 0,48 1.26

6.42 8.85 9.16

4.02 5,53 5.72

11.93 16.93 16.30

7.46 10.58 10.19

Manufacturing Jmportables Exportables

-0.12 -4.97 8.49

-0.06 -2.65 4.53

14.88 9.53 24,51

7,94 5.09 13.07

29.83 24.04 40.37

15,91 12,82 21.53

Income lmportables Exportables

A : Effects of E,O, 264 using high supply elasticities. B : Effects of EIO, 264 using low supply elasticities.

With real exchange rate adjustment, growth in both output and income increases much nlore. Output growth could increase by as much as 4.3-7.8 percentage points with a 10 percent real exchange rate adjustment, and by much


Chapter 4: Intal and Medalla

87

higher rates (8.1-14.8 percentage points) with a 20 percent real exchange rate adjustment. The corresponding effect on income is slightly less at around 3.56.3 percentage points for 10 percent adjustment and 7-12.6 percentage points for 20 percent adjustment. This implies an increase in GNP of up to 1-2 percentage points per year. These results are drawn from a model subject to constraints and limitations,

and the magnitudes

are not absolute. Nonetheless,

results highlight

the complementary role of the exchange rate in trade reforms. It is likely that the output and export impact of the peso depreciation will take time to be felt. To some extent, this depends on the state of the real interest rate and the availability of credit, considering that investments and financing are important means of seizing opportunities offered by the real depreciation of the peso. As the interest rate declines further, it is likely that the output and trade effects of the real peso depreciation willbecome more apparent and appreciable. Impact of the East Asian and environment

financial

crisis on Philippine

The two key pillars of sustainable

development

social development are social development

and poverty alleviation, and natural resources and environment regeneration and protection. The East Asian crisis impacts on these two pillars through several mutually interacting channels, both direct and indirect. One is the employment, income, and poverty channel arising from the general slowdown of the economy. Another is the interest rate and inflation channel, because investments in both human resource development and natural resource regeneration are long gestating. The third is the real exchange rate channel that impacts on the relative profitability of production of industries, especially export-oriented, importcompeting, and nontraded industries. The fourth channel is fiscal contraction and expenditure realignment, which directly affects government provision of social services, and natural resources and environment management. The eventual

impact of the crisis through

these and other channels

would depend

partly on the institutional, political, and policy factors affecting the behavior and welfare of the various participants in the sectors and industries. •Employment, income, andpoverty The Philippines has the highest poverty incidence and unemployment rate in Southeast Asia, with more than a third of all Philippine households poor in 1994 (Table 4). Thus, other things being equal, even a small decline in output and income will have a potentially significant impact on poverty in the country. In addition, most of the poor in the country are in the rural sector, primarily farmers. Hence, the state of Philippine agriculture has a particularly important


88

Economic

effect on poverty. an important (Intal 1994),

Finally,

outside

of Metro

share of the income of households indicating that industrialization

employment outside in the country.

Table

in regions

4. Poverty

of Metro

indicators,

Economy

Manila

crisis...

Manila,

Once

wage

income

in the higher income and nonagricultural

is an important

means

more

is

brackets wage

of reducing

poverty

1985-95. Head-count

index

Poverty

1985

(percent) 1993

1995

Malaysia Thailand

10.8 10.0

<1.0 <1,0

Indonesia

32.2

Philippines

32.4

China Papua New Guinea

gap

1985

(percent) 1993

1995

<1.0 <1.0

2.5 1.5

<1,0 <1.0

<1,0 <1,0

" 17.0

11.4

8.5

2.6

1.7

27.5

25.5

9.2

7.3

6.5

37.9

29.7

22,2

1,0.9

9.3

7.0

[5,7

n.,a,

21.7 t_

32

t_.,a.

5.6 b

Leo PDR c

61.1.

46,7

41,4

18.0

H,5

9.5

Vietnam

74,0 a

52.7

42.2

â&#x20AC;˘ 28.0'_

17.0

11.9

Mongolia East Asia"

. .â&#x20AC;˘

East Asia excluding

China

Merno item

85,0

n,a.

81.4

42.5

n,a.

38.6

37,3

27.9

21.2

â&#x20AC;˘I0,9

8.4

6.4

35,6

22.Y

18.2

11,1

6-0

4.6

1985

1988

1991

I994

Subsistence

24,4

20.3

20.4

18.1

Total basic expeoditure

44.2

40.2

39.9

35.5

Philippines (in % of families below poverty

line)

I n.a. = not available Note: All ntunbers in this table (except for Lao PDR) am based on the international poverty line of $1 per person per day at 1985 prices. Figures in italics ihdicate specific data sources different from all the figures and follow some methodological exemptions. " Includes only those economies presented in the table. b Data are for 1996. Available data on purchasing power parity (PPP) exchange rates and various.price deflators for Lao PDR are not very reliable and lead to anomalous results. Poverty estimates for Lao PDR are based on the national poverty line, which is based on the level of food consumption that yields an energy level of 2,100 calories a person per day and a nonfood .component equivalent to the value of nonfo,_d spending by households who are just capable of meeting their food requirements. While the. $1 dollar a day poverty line is based on characteristic poverty lines in low-income countries that have comparable food and nonfood consumption needs, this is a different methodological approach than that used for the rest.of the economies in the table. Thus the poverty estimates for Lao PDR are not strictly comparable with those for other economies. a Preliminary estimate from Dollar and Litvack forthcoming. Sources: Ahuja et al. (1997); Memo item for the Philippines is from Gerson (1998).


Chapter 4: Intal and Medalla

89

Aggregate employment and unemployment estimates show that the reduction in total number of unemployed in 1996 and the first half of 1997 reversed starting from the third quarter of 1997 until the quarterly labor force survey in January 1998 (Table 5). Thus, the slowdown in the economy during the second half of 1997 and the first quarter of 1998 had resulted in increased unemployment. The unemployment rate had risen from 7.7 percent in January 1997 to 8.4 percent in January 1998). Table 5. Employment

indicators

(Numbers

Jai_uary 199b 1997

Selected variables

in thousands;

April

rates in percent).

July

1996

1997

1996

1997

October 1996 1997

Labor force participation rate

65,5

65.4

69.1

68,8

66,3

65.7

65.8

65.5

Employment rate

91,7

92.3

89.1

89,6

92.6

9] .3

92,6

92,1

Total employed persona By class of worker

26527

27M6

27358

28105

27419

27531

27442

27888

Wage and _lary Own accouter

12171 10246

12974 10332

12395 10367

13386 10416

12934 10395

13917 10016

13096 10297

13565 10647

4110

4040

4595

4302

4090

3598

4049

3675

11485 2645

11428 2686

11975 2627

11601 2791

11668 2754

10987 2697

11451 2756

11260 2785

8.3 -28

7,7 -101

10,9 -180

10,4 -92

7,5 -278

8.7 385

7.4 -147

7,9 182

2I,0

21.1

22.2

23.4

2].5

" 23,1

19,4

20.8

Unpaid family worker By indust D' Agricul_are Manufacturing Unemployment rate Change in the number of _a_employed Undererl_ploymerlt rat_: Note:

Numbers

may

not add

up to total

due

to rounding.

Sources:PIDSData and InformationResourceProgram;NSOSectoralStatistics, onlineedition; BLESLabstatUpdates, Vol.2, No. 1. The low aggregate employment stemmed largely from a sharp decline in employment in agriculture and a sharp reduction in increase in industrial employment especially in manufacturing. Low agricultural employment was largely caused by the drought in many parts of the country arising from E1 Nifto. (For example, the Philippine government estimated that rice production declined by 12.7% during the first quarter of 1998 and by 25% during the second quarter compared with 1997.) The marked slowdown in manufacturing growth partly caused by the East Asian crisis has meant, however, that the dislocation in the rural sector arising from the El Nifio phenomenon could not be absorbed by the industrial sector. The January 1998 employment estimates showed that unemployment rate greatly increased in Metro Manila and urban areas, whereas it remained constant in the rural areas compared with January 1997. This suggested that the drought situation in the countryside encouraged migration into urban areas especially Metro Manila.


90

Economic

crisis... Once more

The migration pattern during the recent crisis differed from that during the crisis in the 1980s. In the early 1980s, migration to uplands accounted for more than half of interregional migration (Cruz and Repetto 1992), resulting in increased population in the uplands. Upland migration in the early 1980s was affected by the sharp fall in industrial production due to the economic crisis. But at that time, relatively better agroclimatic conditions allowed increases in agricultural output. In contrast, the E1 Niflo phenomenon hit the uplands, with its heavy reliance on rainfall for agricultural production, hard? Thus, the poverty and sustainable development problem after the East Asian crisis and the E1 Nifto phenomenon is less about upland migration and soil erosion and is more about rural distress and rising urban unemployment. The substantial reduction in agricultural output together with the large peso depreciation has not translated into significant price increases though. There are two major reasons for this. First, the rate of protection in the two major grains, rice and corn, was very high around 65 percent in the mid-1990s. In effect, rice has become a largely nontradable commodity, and as such its domestic price is not affected as much by peso adjustments as by the interplay of domestic demand and supply. Second, because of the adverse effect of E1 Nifio on imports. farmers' the bulk challenge the rural

domestic production, domestic rice supply was stabilized by large Given that domestic prices of grains have not risen substantially, incomes will likely suffer significant declines due to poor harvest. With of the poverty problem among farmers, it is apparent that the major facing the government in terms of poverty alleviation efforts will be sector.

In the nonagriculture sectors, the longer the high real interest rate regime remains, the greater are the dangers of growing pressures toward economic recession and larger numbers of corporate retrenchments or closures and worker layoffs. The number of firms that reported retrenchments ballooned during the fourth quarter of 1997 spilling into the first two months of 1998. Interestingly, the number of firm closures declined substantially during the last quarter of 1997 compared to the first three quarters of the year. The number of workers affected by the firm closures or retrenchments increased significantly in January and February of 1998 compared to the previous year. To minimize the adverse impact of the crisis on employees and firms, employers, labor unions and the government signed a social compact during an economic summit in February 1998 to work together to prevent strikes and layoffs. This social compact

is a positive

development

given the historically

s The reported deaths of around 40 starved tribal people or ]umads in severely drought-stricken parts of Mindanao due to eating wild yams,which are poisonous unless prepared well, indicates that the uplands had alsobeen badly hit by the E1Nlftophenomenon and therefore cannot be an important migration destination at this tirneunlike in the early 1980s.


Chapter 4: Intal and Medalla

91

adversarial relationships between management and labor in the Philippines. The improved industrial relations environment is seen in the more cooperative arrangements that have been worked out at the firm level both within and outside the collective bargaining agreements (CBA), such as, subcontracting to displaced employees, greater financial assistance to affected workers than is stipulated in CBA provisions, training of affected workers, transfer to sister companies, greater focus on working conditions, among others. Indeed, wage adjustments that were agreed upon in the regional wage and productivity boards last December 1997 to February 1998 were remarkably restrained, which contributed to the modest inflationary impact of the crisis on the country. The government has been monitoring the labor situation partly because of the social compact. It is apparent, however, that the government monitoring system is geared primarily to the formal sector and establishments. Monitoring of the rural labor market is particularly inadequate. As a result, public discussion and proposed policy measures have focused on the formal sector, while the rural sector, which was actually the hardest hit because of the E1 Nifio phenomenon, has been relatively neglected. The East Asian financial crisis has caused the hobbling of the industrial sector, preventing it from providing better employment opportunities for the distressed rural populace. The employment (and poverty) problem during late 1997 and early 1998 was an E1 Nifio problem aggravated by the East Asian crisis. The longer the crisis and the E1 Nifio problem dragged on, the greater were the adverse effects on the employment and poverty situation in the country. At the same time, the employment problem became less tractable for the government because stresses in the labor market were in the informal sector. For example, the January 1998 labor force survey showed that the percentage of unpaid workers increased. Similarly, there had been anecdotal reports that children were being "bumped off" in the queue in informal labor markets by older men. Since the working children likely came from very poor families, their being bumped off may have meant greater financial distress. The overseas employment market has been a major safety valve for the Philippines especially since the 1980s. The East Asian financial crisis sparked worries over Filipino overseas workers in the region being forced to go back home due to economic difficulties. So far, this initial fear has not been realized, however. While a few may have been sent home, the number of overseas workers in East Asia actually rose in 1997 compared with the level the year before. Perhaps the deterioration in domestic employment during the economic slowdown may have been a factor in the rise in overseas employment. However, a more compelling reason was the substantial depreciation of the peso, which made foreign employment more financially rewarding. The higher overseas deployment (by 13.3%) and the significant increase in remittances (76% in the


92

Economic

crisis... Once more

4th quarter) from Filipino overseas workers in 1997 (Table 2) provided an important safety net during the economic slowdown and with the devastation wrought by E1 Nifio in the countryside. Budget High interest rates and the peso depreciation immediately affected the government's budget. The peso depreciation increased the 1998 government expenditure budget by about 3.9 percent, while the increase in T-bill rate raised total budgeted expenditures by 5 percent. The total projected increase in budgetary expenditures arising from the peso depreciation, interest rate hike, and increase in inflation was estimated by the Department of Budget and Management at around P50 billion. With the slowdown of the economy and the significant deceleration in import growth resulting in lower growth of tax revenues, substantial increase in expenditures arising from the peso depreciation, and hike in interest rates effectively threatened an upsurge in the government's public sector deficit. In response, the Philippine government adopted several emergency measures, including a 25 percent mandatory reserve on all expenditures other than personnel and debt service, a 10 percent deferment in the IRA for LGUs, suspension of all tax subsidies of government units, continuation of the selective ban on creation of new civil service positions, suspension of about P14.4 billion worth of new programs and projects, and renewed effort to strengthen tax administration (GOP 1998). The imposition of the 25 percent mandatory reserve impacts on the capability of the government to provide social services and safety nets during the economic slowdown and the E1 Nifio phenomenon. For example, with 8090 percent of the government budget for primary and secondary education allocated to personnel costs, the 25 percent mandatory reserve has to be charged against regular programs. The negative impact will be evident on the printing of instructional materials; conduct of special education, school health, and teacher training programs; and construction of school buildings. For the Department of Health, the peso depreciation and the 25 percent mandatory reserve will likely mean less supply of drugs; reduced laboratory and diagnostic services, lower case finding and treatment, higher caseload of government facilities, and probable widening of service gaps particularly for vulnerable groups with limited access to health care (NEDA 1998). The budget of the Department of EnVironment and Natural Resources (DENR) is shown in Tables 6 and 7. Both tables show the impact of the 25 percent mandatory reserve. DENR's major operations bore the brunt of the budget cuts (Table 6). The program that was most adversely affected was environment management and forest management. The 1998 budget for protected areas and


Chapter 4: Intal and Medalla wildlife management

93

dropped

slightly from the 1997 level, but is nonetheless

significantlY higher than the 1996 budget. Although budget appropriations tend to be somewhat bloated and can be further trimmed, large drops in operational budgets are expected to impact negatively on the quality of services provided by the Department. Indeed, with adjustments for inflation, DENR's 1998 budget for maintenance and other operatIng expenses (MOOE), adjusted for the 25 percent mandatory reserve, is the lowest during the 1990s (Table 7). The 25

Table 6.

New appropriations, by program/project, of Environment and Natural Resources.

1996-98,

Depaz_ment

1996

1997

1998

645,636,000

656,765,000

832,746,000

I. Office of the Secretary A, Programs 1. General

administrative

a. General

b. Productivity Subtotal, 2, Support

and support

administrative incentive

services

and support

services

benefits

Gen. ad_rdnistrative

and support

services

38,478,000

38,146,000

645.636.000

695_243.000

870,892.000

86,236,000

100,657,000

118,368,000

57,078,000

63,541,000

70,852,000

37,943,000

58,071,000

19,715,000

11,633,000

13'572,000

14,674,000

92,909,000 45,486,000

41,633"000 51,197,000

44,900,000 63,469,000

27,000,000

28,000,000

55'520,000

3,957,000

4,077,000

3,507,000

to operations

a. Coordination,

formulation

and integratictn

of ENR sectoral plans and policies b. Coordination, monitoring and evaluation of ENR programs those devolved c, Information

and projects

system

development

d, Statistical services e. Production ea_d dissen'dnafion and popular

materials

and develop_ent

in support

,'rod environmental h. Adjudication i. Provision resources including

of technical

resources

education

of special studies,

development

designs

of forestry,

u|anagement

of pollution

payment

of rewards

and seizure

as amended

mining

operations illegal forest activities, to informers

of illegally

tr,'trtspor ted forest products of violatol_

and

cases

for operations against extraction/utilization

the discovery

Units and maintenance

ha the conservation

of natural

including envirmtn_ntal f, Legal services g. Conduct

inck_ding

to Local Government

in

collected/

and apprehension

of Section 68 (b) of P.D. No. 705, by E.O. No. 277, the hauling

of confiscated representation

fees

logs, space rentals, guards, expenses

ha the disposal/selling

and other expenses of confiscated

logs, subject to Special Budget by the President j. Laboratory services Subtotal, Support to operations

illegally

cut

and approval 8,100,000

10,500,000

8,460,000

25,159,000 395,501,000

40,702,000 411.950,000

33,445,000 432,910,000


94

Economic

crisis... Once more

Table 6. continued... 1996

1997

1998

3. Operations a. Forest mea_agenrea_t b. Land management c. Protected

. .

areas and wildl.ife management

d. Mh_es and geosciences e. Enviromnental

developn_ent

1,655,358,000

2,025,587,000

1,569,430,000

555,784,000

628,663,000

689,061,000

149,700,000

300,136,000

268,760,000

115,408,000

m_magement

f. Ecosystenxs resetn'ch and development Subtotal, Operations

Total, Progr_ns

......

295,461,000

305,403,000

144,287,000

11.1,765,000 2,883.476,000

146,068,000 3,405.8572300

255,043,000 2,926.581,000

3.924,613,000

4,513.050,000

4.230.383,000

B- Projects 1. Locally funded

project (s)

a. Construction

of Region_

b, Lon-oy Watershed

Office V building

Development

10,000,000

Project

J.n,Region I c. Maasin Watershed Project in Region VI d. Rehabilita tion of Riverbanks _'md Lakeshore Project--National Capital Region e. Eawironmental and_att_ral resource f. Water resources

developnrent

11,838,000 6,266,000

1,090,000 accoun_ag

69,750,000

,urd mmmgement

100,000,000

Subtotal Locally funded project(s) 2. Foreigp_a-assisted projects(s) a. Indus _rial Pollution

Control

10,000.000

19,194.000

169,750.000

9,807,000

16,516,000

36,124,000

357,639,000

187,553,000

162,754,000

5,050,000

4,305,000

8,500,000

15,915,000

18,300,000

16,273,000

392,031,000

228,840,000

235.121,000

402.031,000

248,034,000

404,871,000

i 4,326,644,000

4,761,084,000

4,635,254,000

36,568,000

40,908,000

45,819,000

Project

3,620,000

b. Natural Resources M,magement Progrmn c. Environment and Natural Resources--Sector Adjustment

Lotto Project

d. Pasig l_tver Rehabilitation e. Conservation f. Integrated

of Priority

Protected

Environmental

Sustainable g. National

Proiect .Areas Project

Management

for

Development lnt%n'ated

Protected

Progranr

(E'U Grant)

Subtotal,

Foreibm-assisted

Areas System 11,470,000

project(s)

Total, Projects Total, New appropriations II. National

Mapping

A. Pro_'ams 1. General

aa_d Resw.lrce Inforu'tation

achninistrative

a. Gener_

adnm_strative

b. Prod.uc6vity

services

m_d support

services

1,412,000

1,420,000

36.568.000

42,320,000

47,239,000

a. Water, coastal, and land surveys

45,294,000

91,87G000

141,184,000

b. Mapping

36,330,000

43,097,000

52,552,000

].1.,789,000

20,982,000

1.8,863,000

93,413,000

155.955.000

212.599.000

129,981.,000

198,275,000

259,838,000

Subtotal,

i_centtve

and support

Authority

benefits

Gen. administration

and support

2. Operations

c. Irdormation Subtotal, Total, Programs

and remote

sensing

maa_ageanent

and statistic_

services

Operations , i


Chapter 4: Intal and Medalla

95

Table 6. continued... 1996

1997

1998

B. P_:ojects 1, Foreign-assisted

project

a, Acquisition of two hydrographic/oceanographic vessekq (Iru_fituto de Credlto of the Kingdom

of

Spah_ and B_co Santander) Subtotal, Foreign-assisted project

B17.922.000 317.922,000

Total, Projects

317_92Z000

Tot,'fl, New ,_ppropriations

129.981,000

IlL Mines mrd Geosdences

198,275,000

57Z760.f100

16,136,000

57,683,000

Bureau

A. Programs 1. Gener_

admil"dstrsfive

a. General

admimstrative

b. Human

resource

¢. Productivity Subtotal, 2. Support

and support

services

development

hlcentive

General

servk:es

t_d support benefits

administration

and support

c. Research Subtotal, 3. Operations a. Mineral

m_d ptthlications

m_d development Support

to operations

lands adminis_ation

b. Geoscience development Subtotal Operations

and services

Total, Programs Total, New appropriations

Source:

tot_,

446,000

1,696,000

1,874,000

18,269,000

60.003.000

5,401,000 9,346,000

5,491,000 8,254,000

21,499,000

29,110,000

36,246,000

42,855.000

116,085,000

195,279,000

29,584,000 145,669.000

66,073,000 26L3522_

200,184_(100

364.210.000

200.184.000

364,210.000

5,159,543,000

5,577,224,000

to operations

a. Plara'th'tg and policy fonnulation b. Mh_eral eco_omics, fl'fformation

Grand

437,000

New appropriations

General

Appropriation

4,456,625,000 Act,

1996-1998,

percent mandatory reserve dramatically in real terms since 1996.

DBM.

accelerated

the drop in MOOE budget

Budget cuts are likely to be temporary and therefore their negative impact would also probably be short term. The Memorandum of Economic and Financial Policies submitted by the Philippine government to the IMF explicitly gives preference to social programs, especially on poverty alleviation for the 21 poorest provinces and 5th- and 6th-class municipalities. These programs are protected from the 25 percent mandatory reserve and are given top priority for budget restoration if the situation improves during the year. No such priority is accorded to budgets for natural regeneration programs.

resource

and environmental

protection

and


96

Economic

Table 7.

Budget,

Department

(In thousand

pesos

Particulars

of Enviranment at constant

crisis...

and Natural

Once more

Resources

1985 prices). I

1990

1991

1992

1,874,548

1_423,262

1,330,428

1,281,141

1,443,250

1,029,934

858,720

873,239

761,802

741,011

844,613

564,542

457,189

519,339

702,238

B. Capital outlays

1,373,919

828,829

524,611

559,650

572,985

Total

3,248,467

2,252,091

1,855,039

1,840,791

2,016,235

1995

1996

1997

A. Ct_rrent operating

expenses

1. Personal services 2. Maintenance and other operating Expenses

Particulars

1993

1994

1998 approved

A. Current

operating

expenses

1. Personal services 2. Maintenance and other operathlg expenses B. Capital outlays Total "_Approved

budget

b

1,252,010

1,410,734

1,462,821

1,656,252

1,525,439

765,861

855,721

914,062

1,132,998

1,132,998

486,148

555,013

548,758

523,254

392,441

189,935

341,376

466,872

342,420

239,446

1,441,944

1,752,110

1,929,693

1,998,672

1,764,885

(R.A. No. 8250).

b Approved budget less 25% of authorized regular appropriation (Administrative Order no. 372). Source: General Appropriations Act, 1990-98, DBM.

Impact

a adjusted

on the natural

resources

for nonpersonal

service

items

sector and the environment

Environmental indicators for the Philippines up to 1993 are shown in Table 8. The data indicate the seriousness of the environmental problem in the country. For example, total forest cover in 1993 declined to nearly half of the 1985 forest cover. Metro Manila's particulat e matter in 1993 was almost twice the national ambient standards, starkly in_ticating the serious air problem in the capital city. Dissolved oxygen in Laguna de Bay, the largest freshwater lake straddling Metro Manila and the provinces of Laguna, was 50 percent higher than the national ambient standard.

pollution country's Rizal and Rivers in

the Metro Manila area are even much more polluted or almost biologically dead. The country's coastal resources are also in serious trouble, with a substantial decimation of mangroves and serious overfishing in several major municipal or coastal fishery areas. Padilla and de Guzman (1994) estimate that actual fishing effort in small, surface-dwelling fishery has been twice that needed for maximum economic yield; as a result, actual fish catch is lower than the optimal yield despite twice the fishing effort. It is useful to examine whether or not the crisis would

further

exacerbate

the country's

environmental

problems.

For


Chapter

4: Intal

example, fisheries

and Medalla

there are indications intensified

during

97

that population the crisis

years

pressure

on coastal

of the early

and artisanal

1980s (Cruz

and Repetto

1992). It is not possible to assess this issue in relation to the East Asian crisis because of lack of data. Nevertheless, it appeared that this time, increased population

pressure

may be less pressing

because

of the apparent

migration of the population during the crisis. Another concern was the impact of the high depreciation

on private

environmental

Table

protection.

8. Environmental

Year

Forest cover (thousand ha)

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993

15,898.90 15,875.01 15,671.10 13s893.96 13,690.06 13,476.04 13,272.14 13,068.23 12,864.33 12,661.00 12,456.52 12,252.61 11,963.41 11,759.50 11,555.60 10,368.03 9,180.47 6,789.64 6,460.60 6,307.40 6,158,80 6,015.40 5,900.20 5,787.46

investments

in natural

For example,

indicators Particulate matter a (rag/Ncm) ........ ........ ........ ......... .......... 70.75 73.00 79.00 73.60 67.20 88.00 81 _50 86.25 93.00 84.00 ...... ...... 159.13 151.57 188.56 172.50 173.38 176.63 142.17

interest

resources

reforestation

urban-bound

regime

and peso

regeneration

programs

and

offer the most

in the Philippines. Sulfur dioxide a (ppm)

Carbon Dissolved monoxide b oxygen b (mg/Ncm) (rag/l)

0.040 0.025 0.024 0.026 0.028 0.018 0.022 0.016 0.027 0.014

4.70 4.70 4.18 4.40 3.75 3.83 4.43 3.98 4.00 8.10

0.007 0.013 0.011 0.011 0.013 0.008 0.012

------

Suspended solids b (rag/l)

-----_ 8.67 8.14 8.51 8.38 7.62 7.53 8.13 7.90 7.42 8.00 7.80 7.85 7.73 7.50

"Annual averages are only for Metro Manila. Annual averages are only for Laguna Lake. Notes: Ambient standards (source: Philippine Environmental Quality Report 1990-95). Particulate matter 90 mg/Ncm Sulfur dioxide 0.03 ppm Suspended solids - not available Dissolved oxygen 5 mg/L Carbon monoxide - not available Source: Rufo and delos Angeles (1996).

43.10 39.73 38.89 32.13 23.45 44.77 47.26 37.26 47.03 71.35 47.78 38.63 56.30 --


98

Economic

crisis... Once more

realistic way of increasing the country's depleted domestic supply (Niskanen and Saastamoinen 1996). Niskanen and Saastamoinen (1996) show that tree plantations, withvarious alternative management options including community forestry and intercropping, have substantially higher economic profitability (including environmental effects) than financial profitability In addition, improving the efficiency of wood processing

in the Philippines. in the Philippines

would likely improve the economic and financial profitability of mahogany tree plantations, similar to Thailand's experience in establishing teak plantations. High interest rates are expected to discourage private investments in reforestation government

and modernization continues subsidizing

of wood processing reforestation activities.

plants,

unless

the

In the medium term, exchange raty changes impact on the natural resources sector and the environment by influencing relative profitability of natural resource-based industries and the production structure of industries, which have different pollution intensities. To analyze the corresponding potential impact on the environment, this paper combines the results of the exchange rate and trade reform simulation discussed earlier with the ENRAP (Environment and Natural Resource Accounting Project) estimates of pollution abatement costs by industry. The different output structures implied by the different scenarios yield different average pollution intensities for the whole economy. The potential impact of the currency devaluation the difference in average pollution intensity associated scenarios.

is then indicated by with the different

To provide an indicator of environmental protection costs across activities, Table 9 presents estimates of pollution intensity (abatement cost per unit value of output) by sector derived from ENRAP results. In general, pollution (air and water) abatement costs areestimated using the valuation of waste disposal services needed to reduce pollution to a nondamaging level. Full installation and operation of pollution control devices are costed and an effective emission reduction

rate of 90 percent is applied. In agriculture

and forestry, environmental

protection costs pertain to costs of shifting upland agriculture to soil conservation technologies. The average abatement cost per unit of output for all activities is estimated at around

1.62 percent

using output

in domestic

prices as weights;

a lower

average of around 1.57 percent is obtained using output in border prices as weights. The higher average using domestic prices indicates that sectors with higher nominal protection tend to have higher pollution intensity. As such, trade reforms are expected economy.

to lead to a lower average

pollution

intensity

for the

Among the industries, "other metallic activities" had the highest pollution intensity at 32.9 percent followed by forestry activities with 28.8 percent (this included incremental costs of upland agriculture in forest lands shifting to less


Chapter

Table

4: Intal

9.

and

Pollution

PSIC

Medalla

intensity,

99

by sector

(In percent).

Industry and process

Agriculture, forestry, and fishery 11-13 11 Agricultural crops produclion 111 Palay production 112 Corn production 113 Vegetable production 114 Fruits and nuts (excluding coconut) production 115 Coconut production incl. copra-making 116 Sugarcane production 117 Tobacco production 118 Fiber cops production 119 Agricultural crops production 12 Livestock, poultry and other animal prod. 121 Livestock and livestock products 122 Poultry and poultry products 13 Agricultural services 14 Fishery 15 Forestry Mining and quarrying 21 Metallic ore mining 211-212 Gold ore mining 213 Copper ore mining 214 Nickel ore mining 215 Chromite ore mining 219 Other base metal ore mining 214-219 22 Nonmetallic mining and quarrying 221 Coal mining 222 Crude petroleum and natural gas exploration and production 223 Stone, quarrying, clay and sand pits 229 Other nonmetallic mining and quarrying 221,222,229 Manufacturing 31 311-312 313 314 32 321 322 323-324 33 331 332 34 341 342

Manufacturer od food, beverage, and tobacco Food manufacturing Beverage manufacturing Tobacco manufacturing Textile, wearing apparel and leather industries Textile manufacturing Wearing apparel Manufacturer of leather and leather products Manufacturer of wood and wood products including furniture and fixtures Manufacturer of wood and wood products Manufacturer and repair of furniture Manufacturer ofpaper and paper products: Printing and pub lishin g Manufacturer of paper and allied products Printing, publishing and allied industries

Pi 1.585 2.343 2.343 2.343 2.343 2.343 2.343 2.343 2.343 2.343 2.343 0.524 0,524 0.524 0.036 0.102 8.790

5,521 0,272 1.940 5.920 7.981 2.939 48.818 3.286 2.030 1.645 1.063 0.149 5.349

0.253 0.240 0.552 0.087 0.235 0,347 0.099 0.416 0.983 1.289 0,238 0.462 0.564 0.304


100

Economic

Table

crisis...

Once

more

9. continued...

PSIC

Industry and Process

35

Manufacturer of chemical and chemical products, petroleum, coal rubber and plastic products Manufacturer of chemicals and plastic products Petroleum refinery and manufacturer of miscellaneous products petroleum and coal Rubber products Manu/actut_r oFnon-metallic mh_eral products Manufacturer of pottery, china and earthenware Manufacturer of glass and glass products Manufacturer of cement

351,352,356 353-354 355 36 361 362 363 369 37 371 372 38

Pi

0.134 0.240 0.039 0.181 0.775 0.877 0.580 0.609

Manufacturer of other nonmetaU_c mineral prod. Basic metal industries Iron and steel basic industries Non-ferrous metal basic industries Manufacturer of fabricated metal products, machineries and equipment. Manufacturer of fabricated metalproducts Manufacturer of machinery except electrical Manufacturer of electrical machinery, etc. Manufacturer of transport equipment Manufacturer of professional and scientific and measuring and controlling equipment Manufacturer and repair of metal furnish, and fixtures

381 382 383 384 385 386 385,390 39 390

1.360 0.394 0.335 0.210 O.15_ 0,186 0.643 0.088 0.213 0.120 0.361 0.105 O.104 0.104

Other manufacturing industries Other manufacturing industries

Using domestic output (Qd) as weights. * Using border output (Qb) as weights.

erosive

technologies).

for gold

Other

and 11.9 percent

the average

with

low abatement

mining

activities

for copper.

1.6 percent.

cost ratios,

Manufacturing

with

were

Agriculture

all except

also high

with 10.3 percent

was only slightly industries

fo_ wood

registered

products

being

lower

than

relatively lower

than

I percent. These

estimates

production/output

of pollution structures

intensity

resulting

by sector

fro m earlier

are used

together

simulations.

with

Specifically,

the simulation results of the three scenarios Itogether with pollution intensity estimates, yield simulations of pollution intensity associated with four different cases: (a) pre-EO 264, (b) post-EO 264 under fixed exchange rate, (c) post-EO 264 with 10 percent exchange rate adjustment, and (d) post-EO 264 with 20 percent

exchange

rate adjustment.

Table 10 summarizes is associated

with

appears

trade

that

the results

the highest reforms

of thelexercise.

pollution under

intensity

EO 264

with

The pre-reform at around or without

scenario

1.57 percent. exchange

It rate


Chapter 4: Intal and Medalla

101

adjustment potentially reduces the average pollution intensity of the economy. The average pollution intensity decreases to around 1.53 percent without exchange rate adjustment, 1.49 percent with 10 percent adjustment, and around 1.45 percent with 20 percent adjustment in real exchange rate. The potential pollution intensity differs in scenarios with and without exchange rate adjustment. Table 5 indicates that the potential improvement in pollution intensity is higher with exchange rate adjustment. The pollution intensity associated with 10 percent real devaluation (at 1.49) is about 3 percent lower than that without devaluation. The reduction in pollution intensity with 20 percent devaluation Table 10.

I-O

is even higher at more than 5 percent.

Impact on average (In percent).

PSIC

pollution

28-37

15 Forestry 21-22 Miningand quarrying

38-169 31-39 Manufacturing 1-169

11-39 All sectors

by major grouping

Post-EO264 Pre-EO264 W/o exchange rate adjustment

Description

1-26 11-14 Agricultureand fishery 27

intensity,

Withexchangerate adjustment 10% 20%

1.359

1.374

1.388

1.388

28+790

28.790

28.790

28.790

9.299

9.377

9.379

9.379

0.269

0.270

0.270

0.270

1.567

1.535

1.4861i¢1

1.486

Note:Using high trade elasticities,based on 1988input-output structure.

Improvements as a result of trade

in production structure toward less pollutive industries reforms and real peso depreciation have increased the

production level of most sectors because of the favorable income and demand effects of the trade liberalization-cum-real exchange rate adjustment. Thus, pressure on the environment continues even if growth industries can invest in pollution abatement facilities. (The best example of growth industries with better capacity to invest in environmental protection is the electronics industry. In the Philippines, the industry comprises mostly multinationals, with plants/factories located mainly in industrial estates with waste treatment facilities.) For industries with large environmental impacts like mining and forestry and traditional manufacturing industries composed mostly of old firms or smalland medium-scale firms, real peso depreciation improves producer incentives, but at the same time increases

potential

adverse

effects on the environment.

The challenge is in instituting nonprice regulations and schemes that can maximize the potential benefits from the real peso depreciation and at the same


102

Economic

crisis... Once more

time minimize adverse impacts on the environment. For example, for forestry, the government may pursue increased taxation on logging outside of privately or community owned reforested areas, thereby encouraging investments in reforestation and discouraging the government may initiate

logging on Iprimary growth forests. Similarly, incentives for providing common treatment

facilities surrounding traditional industr!es Bulacan), in tandem with stricter enforcement

(e.g., tannery in Meycauayan, of pollution control rules, so that

increased domestic tannery, for instance w_uld not worsen further the quality of the environment (e.g., river in Meycauayan). Without complementary policies specifically addressing the pollution problem, the real exchange rate depreciation arising from the crisis could result in further environmental degradation. The East Asian financial sustainable development

crisis, E1 Nifio, and the challenge

of Philippine

There are three major broad challenges facing the Philippines in its drive towards sustainable development. The first is the reform of the industrial protection system and improvement of th e macroeconomic environment for sustainable development, in the Philippines, ireducing the pressure of population and poverty on agricultural land and natural resources requires that nonagriculture sectors, especially the industrial sector, take a larger role in employment creation. It is important therefore that the industrial protection system and the macroeconomic employment creation?

environment

encourage higher investments

and

The second is pricing and investing ior the future. Proper valuation of resources and the social cost of resource extraction, and clear delineation of property rights are essential for minimizing the trade-off between economic growth, social equity, and environmental/resource protection. This is easier said than done, however, because this involves a complex set of issues related to the design of implementing policies to encourage appropriate pricing, fair and effective property rights delineation, and private investments in resource regeneration and agriculture. As the Philippine experience shows, the political economy of pricing and property rights reforms is particularly difficult. Considering that the sustainability of rural development and poverty reduction requires appropriate resource pricing and prosperous agriculture, among the policy challenges needed for sustainabl E development are redirection of government expenditures and public investment toward providing infrastructure and technological requirements of sustainable agriculture rural roads, integrated pest management).

6 This paragraph

and the next two paragraphs

are largely taken from Intal (1992).

the (e.g.,


Chapter 4: Intal and Medalla

103

The third sustainable development institutions, and governance structures,

challenge is investing in people, and mechanisms for sustainable

development. This involves improving policies and government programs to support investments in human capital formation especially of the rural poor, strengthening national and local linkages in natural resource management in tandem with increased reliance on local communities and organizations in monitoring and maintaining the natural resources stock, and the integration of environmental and equity considerations in decision making at the national and local levels. The East Asian

crisis

is related

primarily

to the first sustainable

development challenge. In this regard, the crisis does not only present problems but also offers opportunities. While there are short-term costs and problems arising from the macroeconomic adjustment process, the real exchange rate correction that the crisis engendered for the Philippines is an important complement to he redesign of industrial protection policies being pursued by the government during the past decade. With trade and investment liberalization and real exchange rate adjustment, the overall incentive structure is more conducive to greater allocative efficiency and export orientation. This is also consistent with the country's comparative advantage, especially in semiskilled labor. As a result, the country's nonagriculture sectors in general and the industrial sector in particular will likely be more important generators of employment in the future. The East Asian crisis brought

out the importance

of strengthening

the

prudential, transparency, and corporate governance environments in concerned countries. Improvements in such areas will contribute to a more sustainable and robust economic growth in the region in the future. As the Philippines becomes more economically integrated with the rest of the region, it is clear that improved policy and institutional regimes in its partner countries also augur well for its economic prospects. Similarly, as the country further pursues internal reforms in the fiscal and monetary sectors in response to the crisis, the Philippines also strengthens its macroeconomic environment for sustainable development. And as the economy grows steadily and the country's demographic transition accelerates (i.e., lower fertility rate), the country's domestic savings rate will likely rise, further strengthening the macroeconomic fundamentals for sustainable development. 7 The E1 Nifio phenomenon has brought out inadequacies in the country's poverty monitoring and emergency food mechanism. 8 It also pointed to the importance of improving policy and institutional regimes on water use and 7The Philippines has the lowest East Asian "miracle' is fotmded economies. This is discussed

in chapter

savings rate among major East Asian developing countries. The partly on high domestic savings rates among high-performing

15 of this book.


104

Economic

crisis... Once more

investments. The tragic death of several starving tribal people indicated that they, especially those in the uplands, had been left out in the poverty monitoring and social safety net mechanisms; they are in a sense the "great neglected." The E1 Nifio phenomenon, while largely outside the control of the government and populace, shows the importance of addressing issues related to water pricing and water resources development. The water shortage in Metro Manila since 1997, while immediately attributable to the E1Nifio phenomenon, is fundamentally linked to the lack of appropriate pricing for raw water. As a result, the development of appropriate dams has rested on the public sector and has depended on governmen t budgetary largesse and official development assistance. The net result is that water supply has been erratic and inadequate for the growing industrial, commercial, household, and agricultural needs. Similarly, investments in irrigation facilities, especially small-scale systems relying on groundwater, have been inadeqOate. Water resources development has also been neglected because institutional arrangements within the bureaucracy have been weak and diffused. The Presidential Task Force on Water Resources Management has been studying i_sues and concerns and is finalizing recommendations to address institutional, informational, and incentive inadequacies in the water resources sector. The current E1 Nifio phenomenon may have some international dimension.

Its severity may be related to th_ unusual

global warming

in 1998.

Preventing its severe effects in the future thus calls for addressing the global warming problem. Since developed countrie s mainly contribute to this problem, it is important that they undertake more ambitious measures to reduce their contributions to greenhouse gas production and global warming. There is also some international dimension to the restructuring of the industrial protection system and improvement of macroeconomic management for sustainable development in developing Countries like the Philippines. This includes improving trade and sector policies of developed countries to be more supportive of reform efforts of developing countries. This will help them make their economic development more consistent with their evolving comparative advantages. Two specific areas for reform lin developed countries are worth highlighting here, namely, agricultural trade and subsidy policies, and protection policies on labor-intensive manufacturing. Also, there may be a need to address the potentially destabilizing effects of international capital flows under a regime of imperfect information and inadequate regulatory institutions, as brought out in the East Asian crisis.


Chapter 4: Intal and Medalla

105

Conclusions Sustainable

development

has turned

out to be the overarching

and

unifying framework for sound development policy and equity-oriented institutional arrangements. The fundamental issue, however, is whether there is sufficient political will, both domestically and internationally, to effect reforms in policies and institutions consistent with the demands of sustainable development (Intal 1992). Finally, it is apparent that the path to sustainable development is long, difficult, and multifaceted. Despite efforts by the government to address sustainable development challenges, much remains to be done in the future to ensure that Philippine development is indeed sustainable.


106

Economic

crisis.,. Once more

Bibliography Bautista, E. 1992. A study on Philippine mor_etary and banking policies. Working Paper Series No. 92-11. Makati City: Philippine Institute for Development Studies. Bidani, B., F. Ferreira, M. Walton and V. Ahuja. 1997. Everyone's miracles? Revisiting poverty and inequality in East Asia. Washington, D.C.: World Bank. Cruz, W.D. and R. Repetto. 1992. The environmental effects of stabilization and structural adjustment programs: the Philippine case. Washington, D.C.: World Resources Institute. Cruz, M.C., C_Mayer, R. Repettor and R. Woodward. 1992. Population growth, poverty, and environmental stress: frontier migration in the Philippines and Costa Rica. World Resources Institute. I

Garnaut,

R. 1998. The financial crisis: a watershed in economic thought about East Asia. Mimeo (to be published in Asian-Pacific Economic Literature).

Gerson,

P. 1998. Poverty, income distriblttion, and economic policy in the Philippines. IMF Working Paper 91_/20. Government of the Philippines (GOP). 19_,8. Memorandum of economic and financial policies of the Philippine Government., Mimeo. Hicklin, J., D. Robinson, and A. Singh. 1 797. Macroeconomic issues facing ASEAN countries. IME 18 July. Intal, P, 1992. Sustainable development: international perspective. In Brownsey, K.L, J.W. Langford, H.E McKenna, and J.R. Nethercote (eds.). 1992, Sustainable economic growth and development: implications for governance in the Asia-Pacific Region. Canberra Bulletin of Public Administration, No. 69. Intal, P. 1994. The state of poverty in the Philippines: an overview. In Intal, P. and Bantillan, M.C. (eds,). Understanding poverty and inequality in the Philippines. Manila: NEDA/UNDP. Krugman, P. 1998. What happened to Asia? Online edition in Roubini N. The Asia Crisis Homepage. i Nasution, A. 1998. Improved management Of the financial sector: a case study of Indonesia. Paper presented at the ESCAP Seminar on Improved Management of the Financial Sector, Bangkok, 20-22 May. National

Economic and Development Authority (NEDA). 1998. Social impact of the currency crisis. Discussion points for the Director-General,

Donors' Meeting, Asia Development Forum, 6 March. Nidhiprabha, B. 1998. Improved management of the financial sector: a case study of Thailand. Paper presented at the ESCAP Seminar on Improved Management

of the Financial Sector, Bangkok,

20-22 May.


Chapter 4: Intal and Medalla

107

Niskanen, A. and O. Saastamoinen. 1996. Tree plantations in the Philippines and Thailand: economic, social and environmental evaluation. Research for Action Research.

30, UNU/World

Institute

for Development

Economics

Padilla,

J.E. and F. de Guzman. 1994. Fishery resources accounting in the Philippines: applications to small pelagics fishery. In: IRG and Edgevale Associates. ENRAP III: Technical Appendices. Radelet, S. and J. Sachs. 1998. The onset of the East Asian financial crisis. Online edition in Roubini N. The Asia Crisis Homepage. Stiglitz, J. 1989. Financial markets and development. Oxford Review of Economic Policy 5(4)59-68. Stiglitz, J. 1998. Sound finance and sustainable development address at the Asian Development Forum, Manila.

in Asia. Keynote


5 The Impact of the East Asian Financial Crisis on the Philippine Manufacturing Sector* Maffo B. Lamberte, Margarita

A

Caesar B. Cororaton,

E Guerrero,

plethora

and Aniceto

C. Orbeta, It.

of studies already exists

on

the poor performance

of the Phil-

M ippine economy in the wake of the East Asian currency crisis. 1 Most, if m nmnot all, of these studies, however, examined the impact of the crisis from a macroeconomic perspective. Certainly, the crisis will have differential impacts on various economic sectors or sizes of firms, which, in turn, will have different responses to the crisis. Fairly detailed and accurate knowledge of these issues can greatly help in fine-tuning government policies and programs designed for staging a rapid economic recovery in the short term. This, however, requires good, firm-level survey data. This study, therefore, tries to fill this gap. It attempts to analyze the impact of the East Asian financial crisis on the Philippine manufacturing sector and study its initial response to the crisis to survive

using firm-level survey data collected from a sample of firms. The next section gives a brief description of the survey of Philippine industry and key characteristics of sample firms. The third section examines issues pertaining to the impact of the crisis on firms surveyed and their views on the causes of the crisis. The fourth section discusses issues related to the firms' main sources of funding, debt structure, transparency, and policy environment, while the fifth section briefly discusses the firms' assessment of the prospects of their business in the short term. The last section presents some concluding statements and suggests some policies.

*The survey of sample firms conducted by the National StatisticsOffice (NSO)and this report prepared by the Philippine Institute for Development Studies (PIDS)were funded by the World Bank.The authors are grateful to Ms.Ofelia M.Templo,assistant director general of the National Economicand Development Authority,for providing direction to the research team. The authors thank Ms. Ma. Chelo V. Manlagfiit and Ms. Hope A. Gerochi for research assistance and Ms. Juanita E. Tolentino for secretarial assistance. For example, see Virtucio(1998)and Chapter 11 of this book.


110

Economic

Description of the survey The Survey of Philippine

Industry

(SPIndAFC) covered establishments industries:

crisis... Once more

and the Asian

engage d in the following

Sector code

Financial

Crisis

manufacturing

Description

1

Food products

2

Textiles

3

Wearing apparel and footwear

4

Chemical and rubber products

5

Electrical machinery

More detailed descriptions of each sector in terms of the 1994 Philippine Standard 7ndustrial Classih'cation are given in Annex A. These particular manufacturing sectors are among the top 10 contributors to manufacturing output. In addition, the electrical machinery sector, which includes semiconductors and electronics, and the food products sector rank high among both import-dependent and export-oriented industries. Standard sampling methodology for Philippine establishment surveys uses a List of Establishments (LE)compiled and updated by the National Statistics Office (NSO). The sampling frame of the SPIndAFC was the 1997 updated version of the LE, which included about 3,800 establishments belonging to five sectors covered by the survey. Food products (32%) and wearing apparel and footwear (29%) comprised 61 percent of the total number of relevant establishments. In terms of employment size_ 68 percent is listed as having less than 100 workers. Over half of sample establishments are located in the National Capital Region (NCR). Based on the list, an approximately equal number of establishments were independently selected for each sector. The number of engaged workers (NEW) was used as a stratification variable, wRh more samples selected from establishments with more than 100 workers. A simple random sample was drawn from each stratum. Annex B shows the percentage distribution of establishments by sector and NEW classes _n the frame and in the resulting sample. The SPIndAFC questionnaire consisted of two separate forms. Form 1 was designed to elicit responses from interviews with chief executive officers (CEOs) of enterprises who own the establishments. Form 2 was designed as a self-accomplishing schedule for personnel officers, production managers, and/


Chapter 5: Lamberte et al.

111

or financial managers. Questionnaires were fielded from September 1998 to January 1999 by the NSO. This report is based on the responses of 541 establishments out of a targeted 750. Food products, wearing apparel and footwear, and electrical machinery sectors are about equally represented in this set of respondents, with textiles and chemical products having half that number (Table 1). This was because most establishments in these two sectors were contacted much later and retrieval rate was thus lower. Table 1. Profile of responding By Size

firms.

By Export Orientation

By Volume of ExportS

Large Small Exporters Non export. Small Medium

High

By Foreign Control None Some Total

Aver. No Employees Total

SECTOR l- Ft_od 2- Textiles

59 28

78 49

51 39

82 37

24 14

8 4

19 21

113 58

13 8

11 11

384 242

137 77

3_ Wearing al._pam[ 4- Chemicals 5- Elet_tricalreachilvery

61 47 59

62 40 58

78 38 70

42 49 46

30 19 17

4 7 3

44 12 50

78 62 62

16 8 9

29 17 46

331 250 643

123 87 117

AGE New Old

71 183

105 182

98 178

77 179

39 65

2 24

57 89

96 277

19 35

61 53

330 413

176 365

LOCATION NCR Others

113 141

125 162

105 171

131 125

34 70

19 7

52 94

188 185

22 32

28 86

429 342

238 303

Total

254

287

276

256

104

26

146

373

54

114

388

Source:

Survey

Philippine

Industry

and

the Financial

Crisis,

1998.

Responding firms had an average of 388 employees in 1996. Small establishments (defined as having less than 150 employees) dominated the food products and textiles sectors with 57 and 64 percent, respectively. Wearing apparel and footwear, and electrical machinery sectors were both equally represented in terms of size. Sixty-seven percent of the firms were located outside the NCR. More than half (65%)of respondent firms were "old" or were established before 1990. Establishments in the electrical machinery/electronics sector employed more workers than any other sector, averaging about 643. "Older" firms had more employees than new ones; establishments located outside the NCR had more employees than those in the NCR. Exporters comprised 51.9 percent of sample respondents. For "new" firms and those located outside the NCR, there were more exporters (56%and 58%, respectively) than nonexporters, but both groups were evenly represented in "older" firms. Among the manufacturing sectors, food products and chemicals had more nonexporters; the reverse is true for wearing apparel and footwear, and the electrical machinery sectors.


112

Economic crisis... Once more

About 53 percent may be considered as high-volume exporters, with exports comprising more than 50 percent of sales. Except for the food products and chemicals sectors where more firms_ were small- or medium-volume exporters (with exports comprising less _than 50% of sales), high-volume exporters dominated in all sectors. This' is most evident in the electrical machinery sector, which includes the electronics sector with 71 percent highvolume exporters. A firm has "no foreign control" if its foreign equity comprises less than 10 percent; if foreign equity accounts for at least 50 percent, the firm is said to be under "total foreign control." About 21 percent of responding firms were under total foreign control. For all sectors, a larger proportion of firms had "no foreign control." Only 8 percent of the food products sector but a higher 39.3 percent of the electrical machinery sector were under total foreign control. A larger proportion of new firms compared with old firms had large foreign equity. Because most industrial estates and technoparks are located outside the NCR, it is therefore understandable that there were more firms outside the NCR with large foreign equity. Analysis of the impact of the crisis on finns Changes in capacity utilization and proFitability before and alter the crisis Capacity utilization The period 1996 to the first hal5 of 1998 saw a continuous decline in capacity utilization rate in all sectors covered by the survey. From an average high of 78 percent for all sectors in 1996, capacity utilization rate declined to an average of 69 percent in the first half of 1998 (Fig. la). Performance varied across sectors. Of the five manufacturing sectors, the wearing apparel sector attained the highest capacity utilization rate of 82 percent in 1996, whereas the food and textile sectors registered the lowest at 75 percent. In the first half of 1998, the capacity utilization rates of all sectors dropped. From a high of 82percent in 1996, the highest capacity utilization rate declined to only 71 percent (chemical sector) in the first half of 1998. Similarly, the lowest capacity utilization rate dropped from 75percent in 1996to 66percent (food sector) in the same period. The same figure also shows the umeasonalized percentage changes in capacity utilization of the different sectors. Capacity utilization rate significantly declined (-3.4% relative to 1996 average for!all sectors) during the first half of 1997, with wearing apparel and leather as t_e worst performer experiencing a -5.5 percent change. Food products also did poorly, reducing its capacity utilization rate by 5.1 percent during the first half of 1997. Although the decline in capacity utilization rate continued in the second half of 1997, it was not as deep as in the first half. On the average, capacity


Chapter

5: Lamberte

et al.

Figure

la. Capacity

113

utilization

by sector.

90

zo

6O

} 50 4O

Sector 1

Sector 2

'm1996 Io-T'_" 1st half I

75 71

75 73

82 77

1[319981st half

71 66

72 69

75 70

73 71 _

79 79

75

76 68

73 69

Percent Change

I

utilization year.

2

3

4

5

6

0.00 -6.81 -5.12 -3.98

-2.16 -3.71 -2.11 -2.66

-3.55 -5.73 -4.94 -5.54

-3.06 -3.26 -2.09 -2,80

-3.41 -10.83 -4.75 0.00

-2.30 -6.49 -3.37 -4.05

rate dropped

Results on

1

seemed

the Philippine

utilization

by only 2.3 percent*gelative to suggest

industrial

rate declined

to the first half of the same

that the recessionary

sector

on the average

during

by 6.5 percent

period. The worst performer was the electrical utilization rate shrank by 10.8 percent.

effect had taken its toll

the first half maghi_ry

of 1998.

relative I_ctor

Capacity

to the previous whose

capacity


116

Economic crisis... Once more

Profi"tability The financial crisis has indeed generated substantial negative impact on firms' net pl"ofitability. From a high of 12.1 percent in 1996, net profitability of sample firms dropped dramatically to 3.5 percent in 1997 and to 2.1 percent in the first half of 1998 (Fig. 2). The average profitability of firms classified according to export orientation and size showed a consistently declining trend for the last 2 1/2 years. Differences in net profitability between large and small firms and between exporters and nonexporters, however, are evident. In particular, large firms and exporters appeared to have higher profitability than small firms and nonexporters throughout the period indicated. Of the five sectors, the food and electrical machinery sectors exhibited a consistently declining net profitability in the last 2 1/2 years, while that of the textile, wearing apparel, and chemical sectors fluctuated. The food sector appeared to be the most profitable among the five sectors; still it was not spared by the recent financial crisis. Sectoral performance versus broader sector performance Table 2 presents indicators of the general macroeconomic environment in the Philippines during the period of analysis. Real GNP growth reached a peak of 7.8 percent in the third quarter of 1996, then decelerated thereafter until it started to contract in the second quarter of 1998. In the fourth quarter of 1998, real GNP contracted by 1.2 percent. The overall output of the manufacturing sector started to contract in the second quarter of 1998. By the fourth quarter of 1998, it declined by 3.4 percent. In terms of sectors covered by the study, only wearing apparel registered an improvement in real growth in gross value added. In particular, this sector peaked at 18.2 percent in the second quarter of 1998. The other sectors slowed down considerably. The electronics sector reached a peak of 43.6 percent in the fourth quarter of 1997. Since then its growth decelerated considerably, although it did not contract. Based on these indicators, survey results confirmed the general slowdown in the manufacturing sector during the crisis period. Perceived causes of slowdow_ The survey identified 10 major causes of output decline: (1) decline in domestic demand; (2) decline in foreign demand; (3) insufficient credit extended by suppliers; (4) insufficient credit for working capital from banks; (5) insufficient credit for expansion from banks; (6) high interest rates; (7) high cost of raw materials due to the peso depreciation; (8) increases in labor cost; (9) shortages in raw materials; and (10) nondelivery of goods by suppliers hurt by the crisis. If reduced capacity utilization implies reduced output level, then these reasons could also be the cause for the drop in capacity utilization rate discussed earlier.


Chapter

Figure

5: Lamberte

2. Net

et al.

117

profitability

overtime.

Net profitability

over time, All

12.07

15

[]1996 U1997 [] Firs t half of 1998

10 3.53 5

0

] Net profitability

over time by Sector

5O 45 40 35 3O 25 20 15 10 5 0 [] 1996 [] 1997 half of 1998

Sector 1

Sector _

44.65 10.74 6.17

0.79 1.82 0.20 Net profitability

Sector 3 4.22 0.69 2.19

Sector 4 0.39 0.91 0.19

over time by Size

25 2O 15 10 5 0 [] 1.996 ,,,1997

half of 1998 Net profitability

Small

Large

2.01 0.84 0.46

19.99. 5.91 3.51

over time by Export Orientation

10. 0, []1996 []1997 DHrst half of 1998

Exp

Non-Eテ用

19.64 5.16 3.18

2.47 1.51 0.59

Sector 5 4.17 2.63 0.77


118

,Economic

Table 2. Macroeconomic

indicators, Q1

I

Q4

Q1

Q2

Q3

Q4

National

Product

7.3

8.7

7.8

5.1

5._

5-3

5.2

5-3

2.0

(0.3)

(0.0)

(1.2)

Gross

Dornestic

Product

5.3

6.1

6,9

4.9

5,_

5,6

4.9

4.8

1_6

(0.85

(0.7)

(1.9)

2.9

6-8

7,9

(055

4.9

1,8

0.4

4.1

(3.85

(11.5)

(3.1)

(7,8)

5,8

5.5

7.0

6.5

5,1

7,6

6,4

5,6

1.6

(0.2)

(3_5)

(3.3)

3,1

(13.1)

(1.01

1-8

23,9

17.5

5,7

0-3

Agriculture Industry

Fishery

and Fo1_astry

Sector and Quanying

Mioing

4.6

Manufacturing

Chemicals, Electronics

plastic I

Export

6.3

4,9

2,_

5-3

4,3

4,7

2.0

(0.9)

(1.5)

5,2

7,8

3-4

2,7

(0,65

(1.9)

5,7

(3-9

1.5

(3.1)

(6,1)

7.4

(8,0)

(14.1)

(6.8)

(0-1)

4,6

(4,1)

(8,5)

(8,8)

4-3

(417)

(4,5)

(23.3)

(14,0)

4.3

6.2

719

513

18.2

9.1

(2,1) 14,9

6.5 17.9

11,0 14,3

6.6 12.3

10,2 21.8

2.7 20,6

10.0 33.7

6,1 46,3

(5.6) 2L9

(2.1) 7,3

(0.3) 7.9

7.6

9.3

12,8

13.8

21-3

18.5

18.1

7,6

(5,0)

(1,8)

(15,65

6.1

6.3

6,5

6,7

6.1

5.7

5,6

4.6

4,5

3.6

2.7

5.3

8.7

8,6

15.2

17.6

14,5

13,4

3.7

3-7

8-5

(8.2)

Sector _

12,9

ll.3

Garments

11.6

(12,9)

(6,4)

(13.9)

Semiconductors

25.4

14,3

(2.55

3.5

3.6

21.1

43.6

'11.6

10,5

7,0

4.8

4.8

4.5

4.8

13-i)

12,8

11,5

11.5

10.1 b

10,5

15.3

lnl:latio_

Rate

91- Tl-easut'y

Sill Rate "_

Q1

6.2

Construction Service

Q4

10.1

l,_ather

nlbber,

Q3

3.3

Textiles apparel,

Q2

4.9

Food

Wearing

(19.25

Q3

growth rates (In percent).

Gloss

i iffr

Q2

crisis... Once more

(7,2)

(5,8)

9.9

(9-6) 413

(0,15

(4.4) (16,0) (3,4) .

(10.0) 3.3

25.4

15,1

1,6

6.0

7.0

8.0

10,4

10,6

17,7

16.6

14.0

13.8

13.4

Chemicals only In Real Peso Value Note: Details for Mfg: 1985constant prices 91-TBillsiEnd of period was used. Inflation rate was computed using the average consumer price _ndex. 3Level of T-bills

Figure 3 shows how exporters and nonexporters perceive the possible causes of output decline. In the survey, I means no contribution, while 5 means major contribution. Thus the higher the number, the bigger the contribution to the decline in output and capacity utilization. For both exporters and nonexporters, the biggest contributor to the slowdown in output was the increase in input costs due to the peso depreciation. The effect of the currency depreciation was slightly bigger for nonexpot:ters (3.88) than for exporters (3.66). While a peso depreciation would be favorable to all exporters, nonetheless it would adversely affect some of them because of the relatively high import content of their pro ducts. For exporters, rates. On the other decline in domestic factor perceived by was the third factor

the second major cause Iof the slowdown

was high interest

hand, for nonexporters! the second major factor was the demand. Changes in foreign demand were the third major exporters to cause the slowdown, while high interest rates for nonexporters.

For both exporters

and nonexporterS,

the fourth

and fifth factors were

the same, that is, labor cost and access to cap!ta!, respectively. For exporters, the sixth and last factors in the list were locall demand and access to credit for


Chapter 5: Lamberte

et al.

119

Figure 3. Perceived

causes of current output decline. Perceived

Causes of Current Output Decline

I Exporters + Non-exporters

M

Local demand Perceived

Foreign demand

r

Accessto capital

Depmciatloninput costs

[

.......

Laborcost

High interest rates

Rawreaterials shortage

Ca uses of Current Slowdown

Peso DepreCiation - Input Costs Higher Interest Rates Foreign Demand Labor Cost Acess to Capital Local Demand Access to credit for Expansion

Exporters

Rank

3.66 3.26 3.21 3,08 2.68 2,49 2.40

1 2 3 4 5 6 7

Nonexpor

ters

Rank

Paso Depreciation - Input Costs Local Demand Higher Interest Rates Labor Cost

3,88 3.72 323 3,11

1 2 3 4

AcesS to Capital Raw Material Shortage Access to credit from suppliers

253 2.50 2,33

5 6 7

expansion. For nonexporters, the sixth factor was raw material shortage, while the last in the list was access to credit from suppliers? From the point of view of a firm facing a perfectly competitive market, these results may suggest that the simultaneous drop in demand and increase in average cost during the crisis period squeezed the firm's profit. Results also seem to suggest that firms did not have much problem in accessing credit, although they had to pay a higher interest on it. 3 2 The detail 3 This

issue regarding below. issue

will

the impact

be discussed

of the crisis

in greater

detail

on the firms" in succeeding

access pages.

to capital

is discussed

in greater


120

Economiccrisis...

ComFetJtor's

Once more

grodHe

Figure 4 shows that the biggest and major competitors of firms selling in the domestic market were other local inveStors/owners or producers, jointventure companies and multinationals were considered far less of a threat in the domesti¢ market, iI Figure

4. Competitor's

profile. Domestically 6O 4O 20

0_,. r

ic it

"lDomesticproducers , _ i Do_lesticjoint venturea _

, 1996

1.997

1.998

50.35 9.01

44.14 10.87

40,10 11.41

.:/t1_

Internationally 15 ... .10

..... _ u,. t i Low C_)stPr_xt_I_ers. i Nei -hborin Co_tl'lt_is '

1996 9.89 12.37

D NI,.Cs _ _ []OECD Countrie,s ' ,_ J

8.83 6.54

1

1997 :' 11_88 14.43 i ,_

8.66 6.96

1998 13.00 13.95 %51 8.40

4

Note: Low Cost Producers = f'.l_ in Vietnam,China, _ambodia, Laos,Myanmar Neighboring Countries = firm¢ia Malaysia,Indonesia,_hailand NICs = firms in Korea, TaiWa__Ong, Singapore ' OECDCountries = firms"!n"Id_,_, .Europe


Chapter 5: Lamberte et al.

121

In the international market, the biggest competitors of local exporters were firms from neighboring countries, such as, Malaysia, Indonesia, and Thailand. Not too far from the first group were firms in low-cost producing countries like Vietnam, China, Cambodia, Lao PDR, and Myanmar. The third group of firms Which posed competition in the international market were those in newly industrialized countries or NICs (South Korea, Taiwan, Hong Kong, and Singapore). The last group of firms considered as competitors were from Organization for Economic Cooperation and Development (OECD) countries. Level of employment before and after the crisis Share of h'rms with fewer workers About two-fifths of sample firms reported operating with fewer workers after the crisis struck in July 1997 (Fig. 5). Firms in the wearing apparel and leather sector had the highest (49%) proportion that reduced the number of workers in the wake of the crisis, followed by the electrical machinery sector (44%). Nonexporters had ahigher proportion of firms (46%)with fewer workers after the crisis than exporters (38%).More large firms (44%)operated with fewer workers after the crisis than small firms (39%).Finally, more firms (43%)with no foreign control had fewer workers after the crisisthan firms with some foreign control (41%) and those controlled by foreigners (35%).

Figure 5. Percent of firms with fewer workers.

I :ta _

i

.

â&#x20AC;˘

41 38

' "

m

1(_

40 7

......

%_

Profile ofjobs Survey newer (Table capital. Also, appointments

37.7

43.4

'_

38.7

4L4 [

_

./;/V/ "

,

,

lost results showed that workers who left firms were younger and 3). This was expected because firms invested little on human many newly hired workers may not have had permanent yet.


122 Table 3. Profile

Economic of workers

leaving

crisis... Once more

the plant.

Average age (years) 30 or less 31-50 above 50 % % i % By Sector Food products Textiles Wearing apparel, leather Chemicals,rubber, plastic Electricalmachinery Total

43 51 59 49 7:l 55

42 38 36 42 26 37

15 10 5 9 3 9

By ExportOrientation Exporters Non exporters Total

58 51 55

34 40 37

8 8 8

By Size Small Large Total

58 52 55

35 38 37

7 10 9

Average tenure (years) 3 or less 4-10 above 10 % % %

"â&#x20AC;˘

40 41. 50 44 53 46

31 35 29 31 36 32

30 24 21 25 11 22

49 43 .46

30 35 32

21. 22 21

51 41 46

31 33 32

18 26 22

Source:Survey of Philippine Industry and the Financial Crisis,1998.

More than half (55%) of workers who left were 30 years old or below. About 37 percent was between 31-50 years old. Many of the younger and newer workers who left were from the electrical machinery sector, exporting firms, or small firms. Almost half of the employees had been with their companies for 3 years or less, whereas about one-third had been With the company for 4-10 years. Share ol:[irms retrenching workers or uMng other methods of reducing labor Some 39 percent of sample firms filled their vacancies as workers left (Table 4). Twenty-nine percent of sample firms, however, laid off workers as a result of the crisis. Sixty-one percent gave severance pay or benefits to workers who were separated, from work. While the wearing apparel sector (42%) and chemicals sector (43%) had more firms that filled their vacancies, they also had more firms (34% and 37%, respectively) that laid off workers as a resu!t of the crisis compared with the other sectors. More firms from the electrical machinery sector (48%), textile sector (54%), and wearing apparel sector (55%) gave severance pay or benefits. More exporting firms than nonexporters filled their vacancies, whereas more nonexporting

firms laid off workers.

Both exporters

and nonexporters


Chapter 5: Lamberte

et al.

123

Table 4. Responses

to crisis: labor.

Are fi]ingup vacancies

Laying-off workers

Pay severance

%

%

%

By S_c|or Food prc)d ucta Textiles

39 31

21 29

68 65

Wearing apparel, Jeather Chemicals, r_lbbe_,plastic Electrical machinery "]_tal

42 43 38 39

34 37 29 29

St-, 7(} 47 61

By Export Orientation Exporters Non exporters Total

47 30 39

29 3'1 30

By 51ze Small

33

Large Total

45 39

Cutdown ot_hours

Compressed workweek

Forced vacation

Flx-_ze salary:

F_ze salary:

Salary ¢tlt:

Salary etlt

%

%

r,_k & file %

mgt. %

rank & file %

mgt. %

35 3,5

16 17

26 20

27 29

32 37

2 1

4 9

43. 33 40 38

20 Ig 22 19

23 23 25 24

27 33. 28 28

29 29 27 31

6 4 3 3

7 2 4 5

59 62 60.

34 43 38

20 18 19

26 22 24

25 32 28

29 33 3"1

3 4 3

5 5 5

27

59

37

17

16

29

31

4

5

32 29

62 61

39 38

20 19

32 24

27 28

31 31

2 3

4 3

%

Source:Survey of PhilippineIndustry and the FinancialCrisis, 1998,

had almost the same proportion off workers.

of firms that gave severance

benefits

More large firms than small firms filled their vacancies

to laid-

and laid off

workers. Large and small firms, however, had almost the same proportion gave severance benefits to laid-off workers.

that

Aside from laying off workers, firms resorted to other measures to cope with the economic crisis, including: (1) cutting down on hours/days of hourly/ daily paid workers; (2) compressing workweek for monthly paid workers; (3) applying forced vacation leaves; (4) freezing salary increases of rank and file workers and/or management; and (5) cutting salary of rank and file workers and/or management. Almost two-fifths of sample firms cut down on work hours/days, about one-fifth implemented a compressed work week, about onefourth used forced vacation, and close to one-third froze salary increases of rank and file employees and management. Only a small proportion of sample firms implemented salary cuts for rank and file (3%) and management personnel (5%) (Table 4). More firms belonging to the wearing apparel/leather sector cut down on working hours in response to the crisis, whereas the electrical machinery sector had the most firms that compressed the workweek for employees. Forced vacation, on the other hand, was enforced by more firms in the food and electrical machinery sectors than in other sectors. More firms in the textile and electrical machinery

sectors froze salary increases

of rank and file employees

than other

sectors. Freezing salary increases of management personnel was employed more firms in the food and textile sectors than in other sectors.

by

The proportion of firms resorting to compressed workweek and forced vacation was higher for exporters than for nonexporters. On the other hand,


124

Economic

crisis... Once more

the proportion of firms that cut down on work hours/days, and froze salary increases of both rank and file and management personnel was higher for nonexporters than for exporters. More large firms cut down on work hours/days, compressed workweek, and resorted to forced vacation than small firms in response to the crisis. On the other hand, more small firms froze salary increases of rank and file workers than large firms. Membership of workers in unions was mentioned by 41 percent of sample firms (Table 5). Compared with other sectors, the electrical machinery sector had the lowest proportion (23%) of workers who were union members. Most workers from exporting firms (43%) and large firms (53%) were union members. Fifty-two percent of sample firms claimed to have formal training activities for their workers (Table 5). More than half of the firms in the food, chemical, and electrical machinery sectors reported having training activities. More exporting firms (61%) and large firms (67%) had training activities for workers than nonexporting and small firms.

Table 5. Human

resources

and training. Memberworkers of union %

With formal training %

Decreased amount of training %

By Sector Food products Textiles

45 43

51 44

26 21

Wearing apparel,, leather

48

44

38

Chemicals, r ubbel, plastic

49

59

24

Electrical machinery Total

23 41

62 52

18 25

Exporters

45

61

22

Non exporters

37

42

31

Total

41

52

25

Small

27

38

25

Large

55

67

25

Total

41

52

25

By Export Orientation

By Size

I

Source: Su,:vey of Philippine

Industry

and

the Fmanoali

Crisis, 1998.


Chapter 5: Lamberte et al.

125

Of the number of firms with training activities for workers, one-fourth reported that they were planning to reduce the amount of training for workers due to the crisis. The wearing apparel and leather sector had the most firms that planned to reduce training activities. Nonexporters had a higher proportion of firms that intended to reduce training activities. One-fourth of the large and small firms planned to decrease their training activities. Financial position of firms before and after the crisis Sources of [unds Firms raised short- and long-term funds from internal and external sources. Income from sales, which is an internal source of funds, and loans from local banks, which is an external source of funds, were the two main sources of short-term and long-term funds for sample firms before (i.e.,January to June 1997) and during the crisis period (Fig. 6). The structure of sources of shortand long-term funds of sample firms hardly changed at all since the onset of the East Asian financial crisis. Firms" reliance on debt The long-term stability of a firm can be gauged from various indicators, one of which is the debt-equity ratio, which measures the relative amounts provided by creditors and owners of the firm. Highly leveraged firms are bound to be more vulnerable to sudden negative changes in conditions of financial markets than less leveraged firms. The average debt-equity ratio of sample firms in 1996 stood at 2.274(Fig. 7). It inched up to 2.46 in 1997but dropped to 2.04 in the first half of 1998. This pattern was true for large and small firms, for exporting and nonexporting firms, and for all but the electrical machinery sector, whose debt-equity ratio already started to decline in 1997. These results seem to suggest that firms reduced their debt as they began to feel the effects of the East Asian financial crisis in 1998.s However, the degree of adjustment in the debt-equity ratio, varied by type of firm. More specifically, the decline in the debt-equity ratio in the first half of 1998 was much larger for nonexporting firms than for exporting firms.Small firms made more adjustments in their debt-equity ratio than large firms during the same period. Among the five sectors, the food and chemicals sectors experienced a much larger decline in the debt-equity ratio compared with the other three sectors. On the other hand, the textile sector made the smallest adjustment in the debt-equity ratio in the first haft of 1998. In 1996, the electrical machinery sector obtained the highest debt-equity ratio, followed by the wearing apparel and leather sector. This ranking was reversed in the first half of 1998. 4 This is based on the median. s See below for a discussion on the credit crunch.


126

Economic

crisis...

Once more

The shares of short-term and long-term debt in total financing could serve as a good indicator of the vulnerability of firms to sudden tightness in the credit market. Short-term debt comprised almost one-third of the total financing of firms (Fig. 8). The share of or degree of reliance of firms on short-term debt changed very little from 1996 to the first half of 1998. Large firms showed much larger changes in the share of their short-term debt than small firms during the indicated period. In the first half of 1998, large firms' share of short-term debt stood at 33 percent compared with 31 percent for small firms. various

Some differences in the pattern of the share of short-term debt among sectors can also be discerned. The food, chemicals, and electrical

machinery sectors exhibited an inverted U-shaped pattern of share in shortterm debt between 1996 and the first half of 1998. On the other hand, the textile and wearing apparel sectors showed a rising share in their short-term debt. The wearing apparel sector stood out prominently among the five sectors with its short-term debt accounting for 44 percent of total financing. When firms were classified according to export orientation, the share of short-term debt of nonexporting firms declined to 29 percent in the first half of 1998 from 33 percent in 1997, whereas that of exporting firms remained the same at 34 percent. The share of long-term debt to total financing of sample firms declined from 23 percent in 1996 to 21 percent in 1997, and stayed at that level in the first half of 1998 (Fig. 9). Large and small firms have almost the same level and pattern of share in their long-term debt during the indicated period. Exporters and nonexporters showed a similar pattern, but the former's share of longterm debt was lower. Among the five sectors, the textile and wearing apparel sectors experienced a significant decline in the share of their long-term debt to total financing from 1996 to the first half of 1998, while the other three sectors experienced

very little change. In the first half of 1998, the textile and chemicals

sectors showed sectors,

a much

higher

share in lopg-term i

debt than the other three

i

Results suggested that the decline _ the debt-equity ratio experienced by firms in the first half of 1998 can be attributed to the drop in both their shortand long-term debt during that period. AwHabillty

of crvdft

Almost half of total sample firms pointed

out that domestic

banks were

renewing or extending new loans to them (T_ble 6). A larger proportion of large firms (60%) and exporters (55%) made thi_claim than small firms (37%) and nonexporters (42%). Among the five sectols , the electrical machinery sector had the lowest proportion of firms that made the same claim. Only 9 percent of total respondents mentioned that foreign b_nks were renewing or extending new loans to them. This was because only! a handful of sample firms (18%) availed of services of foreign banks.


Chapter 5: Lamberte Table 6. Denied

et al.

of bank

131 loans

(In percent).

June 30, 1997 January1-

Category

[

December 31, 1997 July1-

1

in 1998 so far

By Sector Food products Textiles

6.31 6.15

16.22 9.23

11.71 15.15

Wearing apparel, leather Chemicals, rubber, plastic Electrical machinery Total

7.48 6.49 5.61 6.42

15.89 10.26 7.55 12.21.

17.59 15.38 6.54 12.98

By export orientation Exporters

6.61

11.98

14.34

Non exporters Total

6.28 6.45

12.56 12.26

11.61 13.03

By Size Small

5.24

8.66

11.16

Large Total

7.56 6.42

15.68 12.21

14.77 12.98

Source: Survey

of Philippine

Respondents

Industry on the Financial

were asked

whether

Crisis, 1998.

banks

or finance

companies

had

declined to grant them a loan before and during the crisis. Only 6 percent answered positively to this question before the East Asian financial crisis, that occurred from January to June 1997 (Table 6). During the crisis, the proportion of firms denied bank loans had doubled. This proportion was slightly higher for exporters (14%) than for nonexporters (12%), and for large firms (15%) than small firms (12%) in the first half of 1998. The electrical machinery sector was the least affected by the crisis when it came to access to bank credit. Only 6 percent of the electrical machinery firms were denied bank credits in the first half of 1998. On the other hand, 18 percent of the wearing apparel firms were denied bank loans in the first half of 1998, up from only 7 percent in 1996. Although the percentage of firms that were denied loans by a bank or finance company doubled during the crisis period, it is still much smaller than what was generally expected considering the economic uncertainty as a result of the East Asian currency meltdown. A great majority of sample firms had continued access to credit from a bank or finance company during the crisis period. Firms typically buy inputs on credit. Seventy-four percent of sample firms confirmed this practice (Table 7). The proportion of firms engaging in this practice did not significantly differ among the different categories. Results suggested that access of firms to suppliers' credit during the crisis seemed not to have diminished. Eighty-one percent of sample respondents said that their input suppliers

still extended

credit after July 1997 (Table 7). The proportion

of


132

Economic

Table 7. Access to suppliers' Category

crisis... Once more

credit (In percent).

Buying inputs on credit

Suppliers still extending ,credit (after July ,1997)

Selling products on credit

Still extending credit to buyers (after July 1997)

By Sector Food proditcts Textiles

71,43 72.73

82.30 84,06

80.45 83.12

84.96 "81+16

Wearing apparel, leather Chelrticals, rubber, plastic

69.42 7558

75,45 82.72

55.37 86.05

59.63 90.00

Electrical, mac}finery Total

80.00 73.68

8333 81 29

80.00 75,94

79.25 78.20

By export orientation Exporters Non exporters Total

72.89 75.10 73-95

84.34 77.92 81.25

77,.79 80.63 76,05

74.39 82.17 78.15

69.96 77.91 73.68

75,31 87.19 81.29

75.27 76.71 75,94

76.37 80.00 78.20

By Size

"

Small Lazge Total

i

Source:

Survey

of Philippine

Industry

and

the Financial

i

Crisis,

1998

firms which maintained this view did not significantly differ among the various categories. Firms also typically sell their products to customers on credit. About three-fourths of sample firms were doing this before the crisis. During the crisis, a little over three-fourths of sample firms claimed to have continued selling their products on credit to their customers. The proportion of firms that extended credit to their customers appeared to be higher for nonexporters than for exporters. More big firms extended credit to their customers than small firms. Among the five sectors, the chemicals sector had the most firms selling products on credit, while the wearing apparel and leather sector had the lowest proportion. Firms were asked which loan or credit sources had become more restrictive in granting credits since the onset of the regional financial crisis in July 1997 (Fig. 10). Domestic banks were the !most frequently mentioned credit source by respondents, followed by input suppliers. Thirty-six percent mentioned that availability of credit from their usual source had remained the same. The same response patterns were observed when respondents /

were broken

down by size and export orientation. When sample firms were classified according to sector, however, the electrical Imachinery sector had a different pattern of responses from the rest of the sectors. Half the firms in this sector claimed that their access to credit had not changed at all during the crisis period. Only a little over one-fifth said that their access to bank credit had become more restrictive.


Chapter 5: Lamberte et aL

133

Sample firms were also asked whether they currently had adequate liquidity to finance their production. About fi'tree-fourths of the total sample claimed to have no liquidity problem during the interview (Table 8). The proportion of large firms that made the same claim did not significantly differ from that of small firms. The same can be said of exporters and nonexporters. The textile sector had the lowest proportion of firms with no liquidity problem. Among those who said that they had inadequate liquidity to run their operations, a little over half singled out low revenue as the major reason (Table 9). A little over one-third mentioned low collection rate and insufficient loans as the major reason for encountering a liquidity problem during the interview. Table 8. Adequate liquidity to finance production (In percent). Category

Yes

By Sector Food products Textiles Wearing apparel, leather Chemichls)_ubber, plastic Electrical maclmxery Total

75.00 67.57 73.28 80.95 82.88 76.22

By export orientation Exporters Non exporters Tot_

79_77 72.18 76.08

By Size Small ' Large Total

74.36 78.33 76.22

Source: Survey

of Philippine

Industry

and

the Financial

Crisis, 1998

Transparency Financial statements, collaterals, and guarantees â&#x20AC;˘ The problem of asymmetric information, wherein lenders know less about borrowers and their prospects for repayment than borrowers, is pervasive in the finance process and prevents lenders from lending freely. This problem can be reduced if lenders have adequate informationabout the business performance of borrowing firms and if they have a strong and effective recourse in case of default, such that loans are adequately covered by collateral and lenders can quickly seize the collateral when borrowers default. Accounting information, such as, balance sheets and income statements, is one instrument that can make firms transparent to lenders. The value of this accounting information can be enhanced if it is certified by an independent auditing firm. Coming out with audited accounting reports regularly can greatly facilitate the job of lenders in monitoring borrowers to minimize the moral hazard problem.


134

Economic

Table 9. Causes of inadequate Category

liquidity

Low revenue

crisis... Once more

(In percent).

Insufficient loans

Insufficient credit from suppliers

Low collection rate

Others

By Sector Food products Textiles

44.83 50-00

32.26 28.57

24-14 20.00

37,93 33.33

13,33 6,67

Wearing apparel, leather Chemicals, _lbbel_ plastic Electrical machinery Total

60.71 40.00 66.67 52.63

60.71 14.29 14.29 34.26

25.00 1538 6.67 20.00

30.77 50,00 28.57 35.58

28.57 40.00 22.22 21.43

By export orientation Exporters Non exporters To td

52.08 53.03 52.63

32.61 35.48 34.26

16.28 22.58 20.00

19.05 46.77 35.58

29,63 16-28 21.43

By Size SmaU Large "Ibtal

59.09 43.75 52.63

35.48 32.61 34.26

25.00 13.33 20.00

38.33 31.82 35.58

22.73 19.23 21.43

Source:

Survey

of Philippine

Philippine

Industry

and

the Financial

firms and banks are required

Crisis,

1998.

to maintain

appropriate

financial

records that observe standard and generally accepted accounting and auditing principles and procedures. In practice, however, some firms, especially small ones, do not regularly prepare balance sheets and income statements, and if they do, financial statements are not audited by an auditing firm, Of the total sample firms, 88 percent claimed to have financial statements audited by an independent auditing firm. As expected, the proportion of firms with audited financial statements was lower for small and nonexporting firms (both 82%) than for large and exporting firms (93%). The rigor involved in competing in the international market is perhaps one of the compelling reasons for exporters to have audited financial statements. Of the five sectors, the textile sector had the lowest proportion by food-producing percent. In general,

of firms with audited financial statements firms (83%). The rest had: proportions

Philippine

banks require 10an applicants,

(80%), followed

ranging

from 89 to 92

especially

business

enterprises, to submit financial statements ias part of documents needed to evaluate the credit worthiness of their borrowers. Whether they accept audited or unaudited financial statements is a different matter. Results showed that despite the fact that 88 percent of total sample irespondents

for this study claimed

that their financial statements were auditedlby independent auditors, only 65 percent said that they typically needed audlted, financial statements to apply for and receive a bank loan (Table 10). As expected, large firms reported a higher proportion (71%) than small firms (60%) that were required to submit audited


Chapter 5: Lamberte

et al.

135

financial statements when applying for a loan. The difference was less significant between exporters (68%) and nonexporters (63%). Among the five sectors, the electrical machinery sector reported the lowest proportion (56%) of firms that were required to submit audited financial statements when they applied for and received a loan. Usually, the longer the maturity of the loan, the more the banks require collaterals from their borrowers. Survey results supported this observation. Almost half of total respondents said that they typically provided a collateral when borrowing for 12 months or longer, whereas only 24 percent and 27 percent said that they provided a collateral when they borrow for less than 6 months, or 6 months or longer, respectively (Table 11). There was not much difference when respondents were grouped by export orientation or by size. When classified by sector, the textile sector had the highest proportion of respondents who claimed that they were required to present a collateral for loans with less than 6 months' maturity period. On the other hand, the electrical machinery sector showed the lowest proportion of firms that were required to present a collateral for long-term loans. Of those who said that they were required by their banks to present collateral, 87 percent mentioned land and buildings, while 65 percent reported machineries and equipment. Only 24 percent mentioned stocks being used as collaterals for their loans. In some cases, banks required borrowers to have guarantors for their loans, especially if borrowers could not present an acceptable or adequate collateral. Twenty-nine percent of total respondents mentioned getting guarantees on their financing. More large firms and exporters obtained guarantees for their loans than small and nonexporting firms. A large proportion (60%) mentioned stockholders as their usual guarantors (Table 12). One-fourth mentioned other banks as guarantors. Short-run

prospects

Sample firms were not optimistic about the economy, in general and their situation, in particular, in the next 6 months. Almost half thought that their capacity utilization rate, which already significantly dropped to a certain level since the onset of the East Asian financial crisis, would remain the same, while one-fourth expected a further decline (Fig. 11). Only 27 percent were optimistic, expecting a rebound in their capacity utilization rate in the next 6 months. In terms of export orientation, results showed that nonexporters were more pessimistic than exporters; they expected capacity utilization rate to decline further or remain the same in the next 6 months. Small firms were more pessimistic than large firms. The wearing apparel sector was the least pessimistic, whereas the textile sector was the most pessimistic about prospects of business in the short term.


136

Economic

Table

10.

Submission (In

of audited

]

Required

By Sector Food products Textiles

66.67 63.08

Wearing apparel leather Chemicals, rubber, plastic Electrical machinery Total

64.81 78.48 55.96 65.25

By export orientation Exporters Non exporters Total

67.48 62.95 65.32

By Size Small

59.48

Large Total

70.83 65.25

Source: Survey

11.

statement

to apply

Once

for

of Philippine

Requirement

Industry

and

of a collateral

the Financial

for

loan

Category

loan

Crisis, 1998

(In percent). L O A N

Less than

6 months

12 months

6 months

or longer

or longer

By Sector Food products Textiles

22.77 37.29

25.77 41..38

50.00 55.00

Wearing

25.25

29.90

50.49

18.67

19.18

56.41.

17.65 23.39

21.00 26.59

35.64 48.65

Exporters

21.97,

25.00

45.6i

Non exporters Total

24.641 23.27!

28.02 26_48

51.87 48_64

Small

23.561

25.49

46.98

Large Total

23.25! 23.39

27.60 26.59

50.22 48.65

Chemicals,

more

percent). Category

Table

financial

crisis...

apparel., leather rubber, plastic

Electrical Total

machinery

By export

orientation

By Size

Source: SurVey of Philippine

Industry

and

the Financial

Crisis, 1998


Chapter 5: Lamberte

et al.

Table 12. Guarantor

137

(In percent).

Category

Other Banks

Affiliated Films

By Sector Food products Textiles Wearing apparel, leather Chemicals, rubber, plastic Electrical machinery Total

20.83 20.00 10.00 50.00 16.67 24.24

12.50 21.43 20.00 25.00 38.10 23.23

0.00 7,14 10.00 10.53 11.76 7.53

66.67 66.67 69.57 45.83 50.00 60.00

0.00 23.08 0.00 0.00 0.00 3.30

39.13 23_08 16.67 11.11 13.33 21.84

By export orientation Exporters Nc_n exporters Total

23,64 25.58 24.49

23.64 20_93 22.45

8.00 4.76 6.52

62.71 58.00 60.55

4.08 Z44 3.33

17.02 27.50 21.84

By Size Small Large Total

28.57 21.05 24.24

22.73 23.64 23.23

10.00 5.66 7,53

51.11 66.15 60.00

5.13 1.92 3.30

36.36 12.96 21.84

Source: Survey

Conclusions

of Philippine

Industry

and

Finance Cornpanies

the Financial

Stockholder

Government

Others

Crisis, 1998

and recommendations

This study examined the impacts of the East Asian financial crisis on Philippine manufacturing industries and their responses to such a crisis. Data were collected from a sample of 541 establishments representing five sectors, namely: food products; textiles; wearing apparel and leather; chemicals, rubber, and plastic products; and electrical machinery. Survey results clearly showed that the capacity utilization rate of manufacturing firms started to decline even before the crisis struck in July 1997, and that it continued to drop as the crisis worsened. The recent drop in capacity utilization rate can be attributed to the slowdown in both domestic and foreign demand for goods and the sudden rise in input costs, especially imported inputs, and interest rate, which squeezed the firms' profits. The earlier drop in capacity utilization rate was probably due to overinvestment in building additional capacity under a more liberal and cheaper access to external fund sources. Thus, the current low capacity utilization rate may be attributed to both cyclical and structural factors, which call for demand management and industrial restructuring policy measures. As the crisis deepened,

there seemed to have emerged

a consensus

that

firms were facing a credit crunch, that is, institutional lenders had stopped lending to them due to the highly volatile economic situation. Study results did not provide a clear evidence of the existence of a supply-side credit crunch


Chapter 5: Lamberte

et al.

139

during the crisis period. Majority of fir,_,s still had continued access to institutional loans, albeit at a much higher interest rate. While banks are now much more discriminating in lending to the business sector, the decline in total loan growth in 1998 could also be attributed to the lower demand for credit brought about by the sharp reduction in demand for goods produced by firms during the crisis period. The significant drop in capacity utilization rate and output of firms during the crisis period would have required a large labor layoff. To minimize labor layoffs, however, firms resorted to means, such as reducing workweek or days, applying forced vacation leave, and freezing salary increases, to save some jobs. Although this study generally confirmed the adverse impact of the financial crisis on the manufacturing sector, it also yielded some positive signs which the government can use as a platform for formulating policies and programs to stage a rapid economic recovery. First, most of the firms surveyed were still earning profits, although these declined in the last 2-1/2 months. If the worst of the crisis had already passed, then these firms can quickly rebound, partly using their profits to finance their growth. Second, most of the firms still had access to credit, although at a relatively higher price. Reduced interest rates will surely help during the recovery period. Third, although firms resorted to some cost-cutting measures, most of them still preferred to preserve jobs, a strategy they think would pay off once the crisis fades away. With most core staff intact and excess capacity readily available, a resurgence in demand will certainly be welcomed by them. The most appropriate policy the government could adopt would be an expansionary one to stimulate aggregate demand. Both monetary and fiscal policies are required to support such an expansionary policy. There is still some room for relaxing monetary policy. First of all, inflation rate already started to come down in February 1999. The agricultural sector, particularly the crop subsector, which suffered a large decline in 1998 as a result of E1 Nifio, was expected to rebound in 1999. In fact, the price of rice, which constitutes a large component in the consumer price index, already softened in the last few weeks. Second, the reserve money level during the February 1999 test period was P30 billion below the level agreed upon by the government and IMF under the existing standby arrangement program. Relaxing monetary policy, which will push interest rate down, can accomplish four things. One is that it will lighten the debt-service burden of enterprises, freeing some resources that can be used to meet increased demand for goods. It can also reduce the cost of debt restructuring, whenever resorted to by both enterprises and banks. Still another benefit is that it can stimulate consumer spending and revive the sagging consumer durable sector. Finally, it


140

Economic

crisis... Once more

can help arrest the appreciation of the peso vis-a-vis the US dollar and improve the competitiveness of the export sector, which has been pulling the economy up during this crisis period. There is a limit as to how much monetary policy can accomplish the task above. Pushing the interest rate further down and exhorting banks to lend to private enterprises would not be sufficient to stimulate growth unless demand for goods is pulled upward with the helpl of fiscal policy. Thus, on the fiscal side, pump-priming measures should continue in 1999, focusing on critical sectors of the economy, specifically agriculture, which has the most extensive linkages

with the rest of the economy, and the social sectors, such as health,

education, and housing. There are, however, two important programs the governmen t could launch to directly help the labor and manufacturing sectors. One is to provide skills training programs for those who have been laid off as a result of retrenchments

in the wake of the crisis. These programs

can be offered

in various regions to spread the benefits. Those who were laid off were usually younger, most probably less experienced, and less skilled, but highly trainable. The government can give incentives to those firms that had resorted to reducing work hours/days to encourage them to offer unused facilities and slack time of senior staff for training. The other is for the government

to stimulate

the housing

sector, which

has direct short-term economic and social impact. There is still a huge backlog of housing units in the country today, especially for the lower middle class and poor households. One way to meet this shortage is to beef up the resources of the Home Insurance Guarantee Corp. (HIGC) so that it will have additional resources to provide guarantees to bonds issued by local government units (LGUs) for financing mass housing projects in their respective localities. Of course, the government housing finance system has to be reformed quickly so that it can efficiently provide services for the public. To support its pump-priming measures in 1998, the government tapped foreign fund sources to avoid crowding out the private sector and also to secure foreign exchange to beef up the country's international reserves. Since private sector demand for funds is still down and interest rate has already come down to the precrisis level, it would be worthwhile for the government to secure funding for its pump-priming measure_ for! 1999 from the local market, which now stands cheaper than foreign loans. ! Finally, the recent crisis has underscored

the importance

of keeping

a

flexible exchange rate policy. However, evefi if a flexible exchange rate policy is pursued and corporate governance is improved, the level of foreign capital inflows experienced by the country before the East Asian crisis is unlikely to be attained in the near term unless additional measures are put in place. One way is to liberalize further the entry of foreign banks into the country, preferably


Chapter 5: Lamberte

et aL

141

allowing foreign banks to wholly own domestic banks either by establishing new subsidiaries or buying existing ones, especially those that are not well capitalized. The presence of more foreign banks in the country can certainly breathe new life into the banking system and make additional capital available to Philippine industries.


142

Economic

crisis... Once more

Annex A. I Sector

Industry

Codes

Description I

1

2

3

Food products 1512 1513

Production, Processing seafoods

1514 1515 152 154 156 157 158, 1593, 1594

Processitag and preserving of fruits and vegetables Manufacture of vegetable and animal oils and fats Manufacture of dairy products Manufacture of starches and starch products Manufacture of bakery produc_ Manufacture of sugar Manufacture of coconubbased products

1591 1592

Manufacture Manufacture

1.595

farinaceous products Coffee roasting and processing

1599

Manufacture

of other food products,

171 172

Spin_lilag, weaving add fhaishing Mare.fracture of other textiles

173, 174

Manufacture Manufactufe

Wearing

apparel

nec (eg, soup, vhaegar,

nuts)

Ready-lrtade Manufacture Manufacture

Chemical

of textiles

of haitted and crocheted of elrtbroidered fabrics

fabrics

and artides;

& footwear

products,

garments manufacturing of wearing apparel, r_ec of fodi_wear

rubber

241.1

Manufacture compounds

2412 242_3

Manufacture of plastics in primary forms ,and of synthetic rubber Manufacture of pah'_ts, varnishes and. similar coatings, . printing ink mad mastics Manufacture of pharmaceuticals, medicinal chemicals mad botanical products

2424 2425

'

of basic chemicals

except fertilizers

mad ni_ogen

243

Manufacture of soap and detergea_ts, clemaing and polishing preparatiors, perfumes and toter preparatior_s Manufacture of other Chemical products, nec (eg, matcb_s, ink, glues and adhesives) Martu facture of man-made fibers

251 252

Manufacture Mannfacture

of rubber products of pl_tic products

311

Mm'tufacture

of electric

312, 313 321,322

Manufacture Mm'tufacture Manufacture

of electricit_ distribution and control apparatus; of insulatedwire mrd cables of electronic valves artd tubes; Mmrufacture of

323, 324

semiconductor Mm_ufacture

devices and other electronic components of t¢:16vision and radio transmitters and apparatus

2429

5

of cocoa, chocolate and sugar confectionery of macaroni, noodles, couscous and similar

Textiles

181 189 192 4

proce ._/ng and preserving of meat and meat products and preserving of fish and fish products and other

Electrical

machinery motors,

generators

and tralasformers

for

line telephony mad line t61egraphy; Manufacture of television and radio receivers, so,.md or'video recording or reproducing apparatus, and associated goods


Chapter 5: Lamberte et al.

143

Annex B. ATE Class

Ir_dustry Stratum/Sector TOTAL

Food products

Textiles

20-49

50-99

Frame

46.9%

Sample

19.3%

% frame % sample

>=200

21.1%o

15.7%

16,4%

100,0%

17.2%

18.0o/o

45.5%

100,0%

54_1%

21.0%

11.5%

13.3%

32.0%

18-1%

17.4%.

19.6%

44.9%o

22.0O/,,

40.1%

24.1%

16.3%

19.5%

10.0%

21,3%

23.2%

18.5%

37.0%

18.0%

% frame

46,8%

19.7%

15.8%

17.7%

20.0%

% sample

15.6%

12.5%

13.7O/o

58.2%

22.0o/o

% frame

46.3%,

22.1%

19-4%

12,2%

23.0%

% sample

20.3%

15.2%

16,9%

47,6%

20.0o/o

% frame

21.8%

19.0%

21.8%

37.5%

6.0%

% sample

21.8%o

19.0%

21.8%,

37,5%

18.0%

% frame % sample

Wearing apparel & footwear

Chemical products, rubber

Electrical machinery

% of total

100-199

"


144

Economic

crisis... Once more

References Lamberte, M.B. and J.T. Yap. 1999. Scenarios for economic recovery: the Philippines. Discussion Paper Series No. 99-05. Makati City: Philippine Institute for Development Studies, March. Lamberte, M.B. and G.M. Ltanto. 1995. A study of financial sector policies: the Philippine case, in: Shahid N. Zahid (ed.). Financial sector development in Asia. Manila: Asian Development Bank. Virtucio, EK. 1998. Social implications of the Asian financial crisis: the Philippine case, in EDAP Joint Policy Studies No. 9: Social Implications of the Asian Financial Crisis. Seoul: Korea Development Institute.


6 Impact of the East Asian Financial Crisis on Households Celia M. Reyes, Rosario G. Manasan, and Genero$o de Guzman

Aniceto

C. Orbeta, Jr.

years of the financial turmoil continue to linger. The crisis, together with the after the phenomenon, financial crisis had hit East Asia economic in July 1997, the effects E1 Nifio weather caused contraction, increased unemployment, and higher prices. These have had adverse social Three

consequences and forced many affected families and individuals to make adjustments especially in their consumption and spending patterns. The government, faced with huge revenue shortfalls, adopted austere measures that caused reductions in spending in several economic and social services. While this helped in minimizing the deficit, it aggravated the situation as it tended to weaken rather than strengthen the government's capability to provide assistance to those adversely affected by the crisis. This study in general takes a closer look at the impact of the East Asian financial crisis on households in the Philippines. More specifically, it aims to identify the various groups affected by the crisis, assess the differential impact on them at the microlevel, and document their responses or coping mechanisms. Unlike similar studies done earlier, this study benefits from being able to use official statistics that were made available only recently and from data gathered specifically for the purposes of this study. A participatory assessment approach was the primary tool used in determining the social impact of the financial and economic crisis specifically on vulnerable groups and in identifying coping mechanisms adopted by households in response to the crisis. Focus group discussions (FGDs) were conducted in January 1999. This timing was deemed appropriate as it provided a more complete picture of the impact of the crisis on Philippine households. The FGD covered 57 communities (barangays or villages) all over the country representing fishing, farming (upland, earners.

sustenance,

and commercial),

urban poor, and middle income/wage


146

Economic

crisis... Once more

In addition, a key informant survey and a household survey were conducted to provide supplementary data. The key informant survey covered 31 out of the 57 FGD communities and tried to elicit views from communitybased leaders regarding the impact of the crisis on the community. Key informants included the barangay chair, health worker, nutrition scholar, principal or head teacher, and social worker. Additional respondents, such as the municipal accountant, budget officer, health officer, and social welfare officer, were also interviewed The household

in municipalities where these barangays are situated. survey consisted of 430 households in the same 31

communities. Sample househoids were selected based on spatial and sectoral dimensions. The spatial grouping considered four broad divisions: Metro Manila, Luzon, Visayas, and Mindanao while the sectoral divisions were based on the dominant economic characteristics of the community. Secondary data were also obtained from1 the following: (1) administrative reports of various government agencie ; (2) budget data of national and local governments; and (3) surveys done by the National Statistics Office (NSO). Administrative reports of the Department of Education, Culture and Sports (DECS), Department of Health (DOH), and :Department of Social Welfare and Development (DSWD) were used. Budget and expenditure data from the Department of Budget and Management (DBM), Commission on Audit (COA), and selected local government units (LGUs) provided data on national and local government spending. The NSO data included those obtained from the quarterly Labor Force Surveys (LFS), triennial Family Income and Expenditures Surveys (FIES), and the 1998 Annual Poverty Indicators Survey (APIS): Impact on households This section examines

the impact

of the East Asian financial

employment; household income; household purchasing distribution; poverty; health, nutrition and population; vulnerable groups. !

crisis on

power; income education; and

Employment The regional financial crisis and the abnormal weather pattern adversely affected the employment situation in the Philippines. Firms resorted to retrenchments, temporary lay-offs, and reduced working hours as demand slackened and production costs increased. Workers in the agricultural sector, meanwhile, had to contend with higher underemployment due to drought. Although massive lay-offs were not noted, the crisis and the drought prevented the economy from absorbing neW entrants to the labor force. This contributed to a higher unemployment rate_ which was already considerable even before the crisis.


Chapter 6: Reyes et al.

147

The labor force participation rate (LFPR) declined from 65.7 percent in July 1997 to 64.9 percent in July 1998. However, starting October 1998, the labor force participation rate increased slightly relative to the same quarter of the preceding year. The decline in the LFPRs was more pronounced in the 15-19 and 20-24 age groups, which could be attributed mainly to the increase in number of individuals in these age brackets opting to go to school rather than joining the labor force. This could be because of the belief that there was no work available for them. When the regional financial crisis struck in July 1997, the unemployment rate stood at 8.7 percent. Since then, the unemployment rate for the next six quarters rose higher than the corresponding quarters of the previous year. The largest percentage increase in the unemployment rate was observed in April 1998 when it rose to 13.3 percent from 10.4 percent a year ago, due to the combined effect of the financial crisis and the E1 Nifio weather phenomenon. The unemployment rate rose to 8.9 percent in July 1998, 9.6 percent in October 1998, and 9 percent in January 1999 (Table 1). This translates to a pool of 2.8 million unemployed Filipinos in 1999. Based on the October rounds of the LFS, the underemployment rate rose from 19.4 percent in 1996 to 20.8 percent in 1997 and to 23.7 percent in 1998. Workers had to settle for less working ti.-Le than be laid off. Moreover, displaced workers and the rest of the population, particularly the poor, tried to find some form of employment, even part-time work, to generate some income. The financial crisis and E1 Nifio exacted tolls on both the urban and rural labor markets. The unemployment rate in the urban areas rose to 12.1 percent in the fourth quarter of 1998, representing 1.8 million unemployed, while that for rural areas rose to 7.4 percent in the same quarter, which translates to 1.2 million jobless persons. The underemployment rate surged to 20.6 percent in urban areas and 26.3 percent in rural areas in the same period. The older and presumably more skilled workers were better able to hold on to their jobs. The proportion of employed persons who were in the 15-19, 2024, and 25-34 age groups fell while the proportion of employed persons in the older age groups increased. In July 1997, the proportion of workers who were in the 15-34 age bracket was 46.5 percent; this declined to 45.5 percent in July 1998, and went down further to 45.1 percent 3 months later. The regional

financial

crisis had adversely

affected

the deployment

of

overseas Filipino workers (OFWs). Th Knumber of OFWs deployed increased slightly by 1 percent from 747,696 workers in 1997 to 755,684 in 1998, which was much lower than the 13 percent growth registered in 1997. The number sea-based OFWs grew by 2.6 percent. On the other hand, the total number land-based OFWs increased by 0.6 percent.

of of


q_ oo

Table

1. Labor

force,

status,

urban-rural,

1995-98.

Q2 1995Q3

Q4

Q1

Q2 1995Q3

Q4

(_1

(_2 1995(_Y3

(_4

(_1

_)2 1995_3

Q4

t_)q

27619 13530 14089

29259 14209 15051

28602 14027 14574

28040 13542 14497

28924 14129 14795

30713 14975 15738

29657 13841 15816

29637 13826 15811

29631 13738 15893

31368 14596 16772

30154 14145 16009

30265 14180 16084

30240 14212 16027

32111 15112 16998

30593 14363 I6230

31278 14733 16545

31168 14720 I6448

25194 11964 13230

25724 12103 13621

26090 12379 13710

25698 12045 13652

26527 12637 13890

27358 12883 14475

27419 12478 14941

27442 12505 14937

27335 12423 14912

28105 12748 15357

27531 12523 15008

27888 12688 15200

27689 12658 15031

27837 12790 15046

27856 12680 15176

28262 12947 15315

28368 12963 15405

2425 1566 859

3535 2106 1430

2512 2342 1648 1497 8(::L4 845

2397 1492 9_k5

3355 2238 2092 1363 1'2,6._ 875

2195 1321 874

2296 1315 981

3263 1848 1415

2623 1622 100_

2377 1492 88_

2551 1554 996

4274 2322 1952

2737 1683 1054

3016 1786 1230

2800 1757 1(143

8.8 11.6

t2.1 14.8

8.8 11.7

8.4 11.1

8.3 10.6

10.9 14.0

7.5 9.8

7.4 9.6

7.7 9.6

10.4 •12.7

8.7 11.5

7.9 10.5

8.4 10.9

13.3 15.4

8.9 11,7

9.6 12.1

9.0 I1.9

6.i

9.5

5.9

5,8

6.1

8.0

5.5

5.5

6.2

8.4

6.3

5.5

6.2

11.5

6,5

7.4

6.3

18.6 14.6 22.2

20.3 17.3 23.0

21.3 19.1 23.3

19.8 17.3 22.0

21.0 18.5 23.2

22.2 19.9 24.3

21.5 18.1 24.4

19.4 14.4 23.6

21.1 16.9 24.5

23.4 20_2 26.1

23.1 19.1 26_3

20.8 16.9 24.1

21.6 17.7 24.9

21.0 17.1 24.3

20.8 17.3 23.8

23.7 20.6 26.3

22.1 18.6 25.1

rate

Rural Underemp[oyment Philippines Urban Rural Source: National

employment

[ Q1

Labor force Philippines Urban • Rural Employed Philippines Urban Rural Unemployed Philippines • Urban Rural Unemployment Philippines Urban

by

rate

Statistics

Office.

_" _. "_

C3


Chapter 6: Reyes et al.

149

The marginal increase in land-based OFWs could be traced to fewer job opportunities in Asia. Deployment to Asia dropped by 6percent in 1998. Crisishit countries such as Hong Kong, Singapore, and Malaysia, which are among the top destinations of OFWs, were forced to cut back on the hiring of new workers as a result of the regional financial crisis. More specifically, the number of Filipino workers sent to Hong Kong fell by 18.3 percent, Singapore by 16.7 percent, and Malaysia, 65.7 percent. Meanwhile, deployment to the Middle East, which regained its position as the top destination, grew by 2.6 percent. Although deployment to America, Europe, and Africa increased, still these were not enough to compensate for the decline in deployment experienced in Asia. Although remittances of OFWs declined by 13.4percent from $5.15billion â&#x20AC;˘in January-November 1997 to $4.46 billion during the same period in 1998, the peso value, however, went up by 20 percent. Although massive layoffs were not observed, loss of gainful employment was noted among many communities as reflected in the FGD results. Construction, real estate, manufacturing, and agriculture seemed to be among the hardest hit sectors. Loss of jobs was felt largely in fishing communities, and urban poor and middle-income communities. FGD participants reported that the crisis and the E1 Nifio weather phenomenon forced many farmers and fisherfolk to abandon their jobs (whether temporarily or permanently) for more viable sources of livelihood. Two major reasons were cited. One was the lack of control over prices at which they sold their produce to traders. The other was the crisis-driven increases in costs of basic inputs. The diminished use of farm/fishing inputs resulting from price increases (along with such elements as poor irrigation facilities, competition with commercial fishing vessels, and weather disturbances) contributed to lower farm yield/fish catch. In Kalanganan, Cotabato, for instance, serious flooding destroyed fishponds, which were the main source of income of most residents. Repairing the damage became difficult for many because of high input prices. As a result, many small fishpond owners had to sell their fishponds to big fishpond owners. Daily wage laborers especially FGD participants in Baguio and Benguet were among the hardest hit. With the onset of the crisis, opportunities to work, which from the start were already irregular, became even scarcer and more difficult to access. Communities that were largely dependent on employment were directly hit by the retrenchment program initiated by the business sector. Of this, 39 percent came from the middle-income, 43 percent from the urban poor, 23 percent from farming, and 50percent from fishing communities. Factory closures affected 31 percent of middle-income communities. Forty-three percent of urban


150

Economic

crisis... Once more

poor communities complained of huge unemployment problems due to the slowdown in real estate and construction industries which resulted in slack demand for construction workers and other semiskilled and unskilled laborers (Table 2).

Table 2.

Impact of the crisis and E1 Nifio on employment (Percent of communities). Impact

No effect Retrenchment Closure

Middle income 15 39 31

'

and labor market

I I Urban poor

Fishing

I

Farming

43 14

50 13

18 23 9

Large-scale unemplyment Slack demand for laborers

8 15

29 43

13

9 5

(esp. construction workers) Longer working hours Job rotation Contractualization

8 31 8

57 14 57

13 25 13

9 5 5

15

14

13

8

29

13

Below minimum wage employment Reduced business operation

Sources:SocialImpact of the Regional FinancialCrisis, 1999,and Focus Group Discussionsl Household

incomes

Incomes declined for many households during the Asian financial crisis. More households seemed to have been adversely affected compared with those who benefited from the crisis. Available data also suggest that the poor suffered more. Simulations done by Reyes (1998) using the Micro Impact of Macroeconomic Adjustment Policies (MIMAP) models show that the economic slowdown due to the financial would have resulted in declines The percentage declines ranged and a high of 7.3 percent for the Results

crisis and the E1 N_o weather phenomenon in the average income for the different deciles. from a low:of 4.6 percent for the richest decile poorest deCile (Table 3).

of the 1998 APIS and the 1997 FIES tended

to support

the

simulation results obtained by Reyes, except for the richest decile. The data show that per capita income declined by 3._ percent in nominal terms and by 12.1 percent in real terms (Table 4). Moreover, the average family income of all deciles except for the richest decile decreased (Table 5). The percentage decline is greatest for the lowest income decile at 29 percent.


Chapter 6: Reyes et al.

151

The 1998 APIS also revealed that 17 percent of families experienced reduced wages. The richest 60 percent seemed to have been more affected as 18 percent of the families in this group had reduced wages compared with 15 percent of families in the poorest 40 percent. Household survey results indicated that 53 percent of households did not experience a change in income during the crisis. Thirty percent suffered reduction in incomes, while 17 percent had higher incomes during the crisis period. Half of the households in upland communities and 40 percent of households in subsistence farming communities had lower incomes. On the other hand, less than 20 percent of households in middle-income communities â&#x20AC;˘ experienced a decline in incomes. The major reasons cited for the decline in incomes were poor harvest mainly due to bad weather (38%), lower price for their produce (18%), reduced number of earning members (12%), reduced financial support from relatives (8%), and retrenchment from work (6%). Farming and fishing communities ranked poor harvest (52%) as the number one cause for the decrease in their Table 3.

Impact 1998.

of the financial

crisis on income

of households,

Decile

Percent change in income

1 2 3

-7.28 -7.08 -6,82

4 5 6 7

-6.65 -6.30 -5.87 -5,50

8 9 10

-5,06 -4.88 -4.64

by decile,

Sources: 1998Annual Poverty Indicator Survey,National StatisticsOffice. Table 4. Per capita income using

_orainal Real Sources: National StatisticsOffice.

the 1997 FIES and 1998 APIS. 1997 FIES 24,840 19,909

1998 APIS 23,949 17,494

Growth rate (3.6) (12.1)


152

Economic

Table 5.

crisis... Once more

Comparative annual income per family using the 1998 APIS and 1997 FIES, by income decile.

Income decile

I

1997Family Income

I and ExpenditureSurvey

Phihppines

123,008

Firstdecile Second decile Thirddecile Fourthdecile Fifth decile Sixthdecile Seventhdecile Eightdecile Ninth decile Tenthdecile

20,659 33,064 42,611 53,101 66,291 83,224 106,919 141,394 199,891 482,927

1998Annual Poverty Percentagechange Indicator Survey _] 121,438 14,644 26,852 36,689 47,211 60,176 76,641 100,170 135,051 196,018 520,928

1997-98 (1.28) (29.12) (18.79) (13.90) (11.09) (9.22) (7.91) (6.31) (4.49) (1.94) 7.87

Sources: 1997FIESand 1998APIS,National StatisticsOffice. income.

Households

from middle-income

communities,

on the other hand,

considered the reduction in number of earning members (61%) as the principal factor that contributed to the deterioration in their income. Among urban poor communities, reduction in financial support from relatives (35%) and retrenchment experiencing

from work (26%) were reduction in income.

the two most important

reasons

for

Seventeen percent of households claimed that during the period under review, their income had in fact increased. Among households in middle-income communities, 23 percent claimed an increase in household income. The major reasons that contributed to the increase in household income were job promotion (22%), increased number of earning members (14%), new or additional work (12%), favorable prices for their outputs (6%), and increased harvest coupled with good weather condition (3%). About 25 percent of households from upland communities claimed that part of their additional income was derived from winnings in gambling. A few households from the middle-income (6%) and urban poor (7%) communities, on the other hand, said that they availed of some credit to augment their income. In the middle-income community, over 60 percent of households said that their additional income came

primarily

from job promotion.

NeW or additional

work

(29%) and

increased financial support from relatives i36%) were the two most important factors that contributed to improvements in income of households from urban poor communities. Household

purchasing

power

Prices of goods and services increased significantly due to the drought and the financial crisis. Many FGD participants lamented that such sharp


Chapter 6: Reyes et al.

153

increases in prices were not matched by corresponding increases in incomes. Thus, the net result was a weakened purchasing power and a decrease in households' access to basic necessities. The focus group discussions and the household survey provided the following more detailed information on how households were affected by the increase in prices: a. There was a widespread spiraling of prices; some households were forced to forego buying/consuming some goods. The crisis forced more than 42 percent of households to refrain from buying certain goods they used to enjoy before. Ninety-three percent cited high prices as the single major reason that prevented them from buying these item_ (Table 6). b. In general, households maintained three full meals a day. Despite the hard times, 98 percent of households was able to maintain three regular meals daily. The decrease in the number of meals taken was in fact, more of an exception (Table 6). No one from the farming and fishing communities reduced the number of meals taken. Meals were reduced to two in 4 percent of urban poor communities and 2 percent of middle-income communities. Two percent now have irregular meals (Table 7). More than half of those who reported reducing the frequency of regular meals said that they were forced to do it since over a year ago. Thirty percent had been doing it for about a year. The rest were equally divided between those who were forced into it 6 months ago and those who went into it only a month ago (Table 6). c. There were major alterations in the household budget (Tables 6 and 7). tYome-larepared load. Forty percent said that the cost of preparing food for the household had increased. Sixty percent of the households from subsistence farming and 32 percent from middleincome communities shared this opinion. Majority said that the increase in food price in the market caused a 25 percent rise in household food budget. About a fifth believed that it was much higher. Half of commercial farming communities said that it increased by 10 percent. About 48 percent of upland communities thought it went up by 25 percent. Thirty percent said that it did not go beyond 10 percent. Others noted a 50 percent increase. In subsistence farming communities, 36 percent noted a 10 percent increase. However, an equal number said that it increased by up to 50 percent. On the other hand, 18 percent said that their food budget actually decreased. Most had 25 percent reductions. Many households from middle-income communities cut their food budget by 50 percent.


154

Economic

Table

6. Changes in household consumption communities, January 1999.

Item Stopped consuming some goods due.to High prices Not available Lost interest Others When reduced All times Sincelast monflx About 6 monflls ago About a year Over a year , Changes in number of full meals One in 1997 and now Two in 1997 One now Two now Three now Tkree In 1997 Two now Thzee now Irregular now Irregular in 1997 and now No reply Changes in household expenditures Dining out Not aware No d_ange hlcreased at most 10% up to 25% up to 50% Decreased at most 10% up to 25% up to 50% up to 75% over 75% No reply Food prepared at home Not aware No change Increased at most 10% up to 25% up to 50% over 50% Decreased

I Percent respondents of Total 41,6 93.3 2.2 0.6. 3.9

100,0 6.7 6.7 33.3 53.3

0,2 3.7 6.3 75,0 18,8 93.5 1.2 98.3 0.5 0.2 2.3

100.0 23.0 37.2 9.3 52,5 25.0 â&#x20AC;˘ 22.5 17,7 14.5 19.7 30.3 1415 21.1 12.8

crisis... Once more

and expenditures,

Item

I

Percent respondents of Total

at most 10% up to 25% up to 50% No reply

27.6 40,8 31,6 4.0

Children's clothing Not aware

100,0 6,0

No change Increased at most 5% up to 10% up to 25% up to 50% Decreased at most 10% up to 25% up to 50% over 50% No reply

35,1 28.8 23.4 40,3 22.6 13,7 18,6 23.g 20,0 38.8 17.5 11.4

Adults"dothing Not aware No dmnge Increased at most 5"/0 up to 10% up to 25% up to 50% Decreased at most 10% up to 25% up to 50% over 50% No reply children's transportation Not aware No change Increased at most 5% up to 10% up to 25% over 25% Decreased at most 10%

100,0 4.4 44,9 22.3 28.1 43.8 17.7 10.4 20.5 23,9 15.9 35.2 25,0 7.9 100.0 12.6 29.5 34.0 20.5 28.8 38.4 12,3 3.3 35.7

100.0 1.2

up to 25% over 25%

14.3 50.0

34.9 42.3 39,0 33.5 22.5 4,9 17.7

No reply

20,7

Others' transportation Not aware No change Increased at most 5%

all

100.0 9,3 23,0 29,5 21.3


Chapter

Table

6: Reyes

et al.

155

6. continued... Item

I Percent of Total respondents

Item

I

up to 10% up to 25% over 25% Decreased at most 10% up to 25% over 25% No reply

33.1 37,8 7.9 3,5 46.7 13.3 40.0 34,7

School fees and related expenses Not aware No change Increased at most 10% up to 25% up to 50% over 50%

100.0 12,1 6.3 48.1 38.6 42.5 16.4 2.4

Decreased at most 20%

3.0 61,5

over 20% No reply

38.5 20.5

Medical expenses Not aware No change Increased at most 10% up to 25% up to 50% over 50% Decreased at most 10% up to 50% over 50째/,, No reply

100.0 5,6 25,3 55.1 38.8 39.7 17,3 4.2 6.0 50.0 38.5 11.5 7.9

House rent, repair, and maintenance Not aware No change increased at most 10% up to 25% up to 50% over 50% Decreased at most 10% over 10% No reply

100.0 11.2 47.2 25.1 41.7 30.6 20.4 7.4 1.4 66.7 33,3 15.1

Utilities Not aware No change Increased at most5% up to 10%

100.0 3,5 24.0 62.1 15.0 40.8

Source : Social Impact of the Regional

Financial

I Percent of Total I rcspondents

up to 25% up to 50o/째 over 50% Decreased at most 10% over 10% No reply

27.7 11.6 4,9 2.8 58.3 41.7 7,7

Leisure Not aware No change Inc_ased at most 10% up to 25% up to 50% over 50% Decreased at most 10%

100.0 17.9 39,8 11,2 45.8 33,3 12,5 8,3 13.7 20.3

up to 50% over 50% No reply

47,5 32.2 17.4

Gambling Not aware No change Inc_ased at most 20% over 20% Decreased at most 10% up to 50% over 50% No reply

100.0 38.1 23.7 4.4 57.9 42.1 7.4 40.6 18.8 40.6 26.3

Food Education Medical Clothing TranSportation Housing Leisure

1997 1998 46,3 47.3 10.0 10.3 7,9 8,1 7.0 5.9 7.2 7.3 5.0 5.2 2.8 2.1

Crisis, Household

Survey.


156

Economic

crisis... Once more

Table 7. Changes in household consumption and expenditures, by type of community, January 1999 (Percent of total household respondents). Item

Commercial

" Upland

Subsis_nce

Pishing

Middle

.... Stopped conauming High prices Not available Lost interest

some goods due to

Others Changes

25,0 95`3

40,0 95.8

48,3 _3 10.3

45.8 88,9 3,7 ,3.7

6.7

4.2

10,3

3.7

100,0

100,0 1,7

100.0

100,0

38.6 100.0

II poo, 50.0 97.8

2,2

in number of full meals

All meals One in 1997 and now

100.0

100,0

Two in 1997 One now

5.0

8.3

3.4

1.0

4,5

Two now

33,3

lot20

50.0

100.0

100.0

Three now Throe in 1997

66,7 90,0

83.3

50.0 94,9

99-0

93,3

100.0

2.0 96,0

$.6 96.4

Two now Three now

100.0

100.0

98,3 100.0

Irregular now Irregular ill 1997 and now No reply

20 1.1 5,0

6.7

1.7

1.7

100,0 23,3

100.0 31.7

100,0 26,7

100,0 37-3

100,0 14,9

100,0 14,4

no change Increased at most 10%

35.0 15,0 66,7

33,3 8,3 40,0

28,3 16,7 60,0

39,0 1.7

39.6 8.9 44,4

45,3 6.7 30.0

tip to 25% up to 50% Decreased

22,2 11,1 5.0

40,0 20,0 10,0

20,0 20.0 18.3

100.0 10,2

22,2 33.3 30,7

16,7 35,3 21.1

182 #5.5

16.7 50,0

19.4 22.6

_3

16.7

32.3

21,1

15.7

19.4 6,3

1_8 57..9

Changes

in household

Dining out Not aware

expenditures

at most 10% tip to 25%

33.3

up to 50%

33.3

66,7

273 9.1

33,3

16.7 16.7

up to 75% over 75% No reply

1,1

21.7

16.7

10.0

11,9

5,9

14.4

100,0 1.7 33.3

100.0 5.0 25.0

100,0

]00,0

100.0

20.0

25,4

53,5

100,0 1.1 37,8

40.0 .qO.O

45.0 29,6

60,0 36.1

47.5 35,7

31.7 43.8

38,9 40.0

Lip to 25% LIp to 50% over 50%

33,3 167

48. 2 14.8 Z4

22.2 36.1 5,6

32,1 14,3 1Z9

3Z5 18.8

31,4 28.6

Decreased at most 10%

20,0 58,3

18,3 18.2

18,3 182

27.1 " 18,8

11.9 16,7

15,6 35.7

up to 25% up to 50%

16.7 25,0

45.5 36.4

63,6 18,2

50.0 31,3

33,3 5.0,0

35,7 28,6

Food prepared at home Not aware No change Increased at most 10%

5-0

6,7

1.7

3,0

6.7

Children's clothing Not aware

No reply

100,0 5,0

100,0 13.3

100.0 8.3

100.0 3,4

100,0 5.0

100,0 3,3

No change Increased at most 5%

33,3 33,3 30.0

26,7 23.3 35.7

30.0 31.7 21.1

37.3 30.5 22-2

41,6 26,7 18,5

36.7 28,9 19.2

up to 10%

2$0

50.0

36.8

33,3

40.7

5.3.8

up to 25%

25.0

I4.3

36.8

11,I

29.6

l,q..4

up to 50% Decreased

20.0 13.3

26,7

5.3 25.0

3t3 25,4

11,1 13,9

11.5. 13.5

at most 10%

25.0

25.0

20.0

20.0

14.3

41,7

up to 25% tip to 50% over 50%

5(7.0 125 12.5

18,8 37.5 1g.8

26.7 533

66.7 13,3

28.6 28.6 28.6

8.3 167 33,3

15.0

10.0

5.0

3.4

12.9

17.8

No reply


Chapter 6: Reyes et al.

157

Table 7. continued...

Transportation/or Not aware No change Increased at most 5%

children

up to t{_Yo up to 23% over 235% Decrea_nd at most 10%

100.0 11.7 30.0 30.0 33.3

1C0.0 183 33,3 23.3 11-8

100,0 21.7 13.3 45.0 2Z2

100.0 8:5 44,1 40,7 42

100.0 11.9 23.8 3"_7 21.2

3._3 33,3

11.8 _.

_.6 _7 Z4 10,0 50.0

3Z5 41.7 16,7 5,1 33,3

2Z3 27.3 2,1.2 2-0 S_0

13

up to 25% over25% No reply

1C0.0 6.7 34.4 30,0 _.6 2_,6 _._P $4,8 2.2

233

100.0 18,3

l&7 3G,3 10.0

_.7 1.7

_0 -29,7

I00,0 26.7

100.0 3.0

100.0 11-7

100.0 18.3

100.0 5.1

100.0 6,9

100.0 10.0

No change Increa_i at most 5%

31.7 23.3 3,q7

31.7 21.7 2.,tl

21.7 40.0 16.7

30.5 30.5 33.3

11.9 333 11.8

23.0 26.7 20.8

up to 10% up to25% over 25% Decrear_d at m_t 10%

28,6 2& 6 ZI 1.7

IS# 482 1_4 5,0 _7

¢,_8 37.5

278 389

2_S .1,4,1 a"_6 3,0 6d-_'

5_0 29..2

Transportatlon for others Not aware

up to 23%

-

or.,23% School fees end related expen_r. Not aware

5,1

33 C_-2'

_

._0

33,3

_

._s

._.3

38,3

30-0

16.7

285

44.6

40.0

100,0 10.0

100.0 10.2

100.0 13.9

100,0 8.9

7.9 47,5 27-I

14.4 47.8 &¢8

41,7 2_0 63 2.0

27,,9 1_0 23 1,1

lOO, o

No reply

33 ,_,0

100.0 133

100.0 16.7

No change Increased at most 10%

23.3 40.0 333

23.3 35.0 _i

20.0 51,7 29,0

13,3 67,8 3_0

up to 25% up to 50% over 50% Decreased at most 20% over 20%

,15.8 2_8 3,3 ,_0 _7.0

,?_6 1_3

,.¢_1 12,9

83 _.0 _,0

1,7 100,0

52.5 1_0 23 3,4 100,0

No reply

233

_0.0

10.0

3,4

282

27-8

100.0 5.0

100,0 16,7

100.0 3.3

100.0 6.8

100,0 2.0

1C0.0 33

No change Increased at most 10%

21.7 53,3 3Z5

20,0 45,0 37.0

18.3 61.7 4_6

27.1 57.6 3_2

35.6 $35 31._

233 58.9 41,$

up to 25% up to 50% over 50% Decreased at most 10%

375 1_6 9.4 6.7 ._0

2_6 I_ 14lB 83 400

32.4 1.89

_1 I_" 317 2.0 7000

41.5 17.0

15-0 W.d

41.3 176 _,,9 5-1 33-3

2_0 .

60,0 .

33.3 2Z2

M.3 33.3

13.3

10.0

12

3A

100.0 10.0 46,7 15.0 _2

IOID.O 23.3 433 183 27_

1[_1.0 6.7 60.0 233 3_7

3&4 36.4

_0 14.3

1.7 11_0.0

33 $0.0 _").0

Medical expends Not aware

Including medicine

up to 50% over 50% No reply Houserent, repair, and maintel_n_ Not aware NOchange lnc_a_ed at mo_t 10% up to 25% up k_5if'A., over50% Decrea_d at m(_t 10% over10%

ILl 44.4 22-2

100.0

100.0 153 49,2 273 4_8 4_8 12=¢

85

l_l_O

33 333 66,7

. 6.9

11.1

100.0 5.0 42,6 38.6 _2

100.0 11.1 4_,6 21-1 _-K

2,._6 IZ9 10.3 1,0 100.0

No reply

283

13.3

6.7

Utilities Not aware

100.0 33

100.0 5.7

100,0 1.7

1410,0 3,4

100,0 3,0

12.9

21,1 I,E8 10-5 2,2 _0.0 319.0 20.0 1_,0 33

No change In=:rea'_i at mo_t _%

20,0 (_3.3 13,2

40-0 40.0 ,2"9.2

23.3 71.7 2.3.3

27,1 66.1 1(L3

175 67.3 .K_

2111 61.1 l&2

up Io 10% up to 23% up to 50%

34.2 ,_L3 1_8

2._0 2_0 1_;

34,9 2._6 I¢0

53.8 23.1 Z7

4ZI 30,9 103

,R_0 3_9 RI


158

Economic crisis... Once more

Table 7. continued...

Decreased at mo_t 10% over 10% No reply

1.7 ]O/).O 11,7

3.3 100.0 10.0

Leisure Not aware No change Increased at most 10% up to 25% up to 50% over50% D_cr_ased at most 10% up to 50% over_l_, No reply

100.0 18-3 36,7 5,0 66.7 33.3

10,0 16.7 66,7 1_ 30.0

100.0

Gambling Not aware No change

100.0 38.3 23,3 1,7

Increased at mo_t 20% over _'Y,, Deo_a_ed at most 10% up to 50% over ..=0% No reply

100.0 1.7

100.0 28,3 43.0 6.7

1,7 100.0

3.4

I00.0 32.2 38.6 3.4 100.0

18.3

15,0 22_2 44.4 333 510

22.0 1_ 4 46,2 31iS 6.8

100.0 40.0 23.0

100.0 40.0 41,7

100.0 5Z5 23.7

3,3 ._0 ._0 6.7 7.,i0

5,0 _7. M,3 3.3 100.0

3.4 1(]0.0

2,_0 1.7

100,0

-2.$,0

35,0

25,0

8,9

3.3 66,7 33,3 11,1

100,0 7.9 343 19.8 450 3aO 1_0 10,0 18,8 26,3 47.4 2_3 18,8

100.0 13,6 36.7 13.3 SaO 1_7 2._0 8_ 12.2 1_2 3¢L4 _$ 22,2

180,0 36,6 14.9

100,0 2%8 21.1

3.0 80.0 20.0 3,0 2_.3

6.7 33.3 E_7. 17.8 3Z5

6a.7.

125 50,0 26,7

1,7 100.0 13.3 55,0 11.7 42.9 57.1

7ÂŁ0

3-0 100.0

100.0

10.0

10.2 1_7 1_7 65,,7 10.2

40,6

Source: SocialImpactoftheRegiortalFinancialCrisis,HouseholdSurvey. Over 50 percent of households from middle-income communities reported that despite the crisis, they were able to maintain their usual food budget. About 30 percent of the rest of the communities concurred with this view. Dining out. There were big cuts in dining-out expenses. About 18percent claimed that they decreased their budget for dining out. A fifth in this group reduced their budget by as much as 75 percent. Over 30 percent of households from middle-income communities and 21 percent from urban communities reported significant cuts in their budget for dining out. About a third said that reductions were up to 50 percent, while over a fifth claimed a more than 50-percent cut. Fifty-eight percent of urban poor communities cut their dining out expenses by more than 75 percent, Clothing. While over 30 percent of households said that they were able to maintain the same level of budget for clothing, some .29 percent averred that the budget for children's clothing increased. About 40 percent thought that the increase was between 5-10 percent. Over a third felt that the budget _creased by more than 10 percent. Meanwhile, about 19 percent of the households reported a decrease in their budgets for clothing. Thirty-nine percent reduced clothing expenditure budget by as much as 50 percent.


Chapter 6: Reyes et al.

159

Schoo//ees. Forty-eight percent had to shell out more for their children's education. Some 42 percent of the total households made 25-percent increases. Sixty-eight percent of fishing households allotted â&#x20AC;˘ more money. Of this, 53 percent increased budget for education by 25 percent. Fifty-six percent of urban poor households only made up to 10percent adjustment. Very few reported reducing their expenditures for this. Transportation. As much as 45 percent of households from â&#x20AC;˘ sustenance farm communities said that they had to increase the allocation for transportation of their children. Forty-one percent in this group and 33 percent from the middle-income group claimed to have increased their budget for their children's transportation by more than 25 percent of their precrisis budget. Medical expenses. Fifty-five percent of households had to increase their budget for health care to cope with increased costs of medicine and medical fees. About 40 percent increased their health care budget by up to 25 percent. Another 39 percent claimed a 10percent increase. Housing. At least 47 percent of all households had to appropriate additional money for housing expenses including monthly rental fees. Forty-two percent in this group said that they made up to 10 percent adjustment, while 30 percent claimed that they had to add up to 25 percent. Ut21ities.Among all expenditures, that for utilities was adjusted by the highest proportion of households. Sixty-two percent of all households said that they had to increase their budget for this expense item; 41percent claimed up to 10percent adjustment, while 28percent reported an increase of up to 25 percent. Among farming communities, at least. 15 percent provided up to 50 percent more than what they used to set aside before the crisis to pay for electricity, water, and fuel. Income distribution The combined effects of the financial crisis and E1Nifio reduced household incomes and contributed to a further worsening of the income distribution. Income inequality had increased as shown by the increase in the GINI ratio from 0.451 in 1994 to 0.496 in 1997based on the 1994 and 1997 FIES. The share of the poorest quintile to total income declined from 4.9 Percent to 4.4 percent during the same period. Meanwhile, the share of the richest quintile rose from 51.9 percent to 55.8 percent. The ratio of the richest quintile to the poorest quintile went up from 10.6 in 1994 to 12.7 in 1997.


160

Economic Simulations

crisis... Once more

done by Reyes (1998) show that the financial

crisis and the

E1Nifio weather phenomenon would have resulted in declines in average income for the different deciles but the percentage declines were greater for the lower income groups (Table 3). The lowest four decries experienced contractions in income ranging from 6.7 percent to 7.3 percent, with the poorest decile obtaining the biggest percentage reduction. The higher income groups were not spared either, although the richest decile suffered the lowest contraction of 4.6 percent. Consequently, the GINI coefficient increased, indicating greater income inequality. This pattern was also supported by!data from NSO. Notwithstanding differences in methodology, the 1998 APIB and the 1997 FIES showed that incomes of all deciles declined between 1997 and 1998 (Table 5). Furthermore, the share to total income of the lowest 90 percent decreased, while the share of the richest decile increased. The share of the poorest quintile went down from 4.4 percent to 3.4 percent, while the share of the richest quintile rose from 55.6 percent to 59.0 percent (Table 8). In 1998, the ratio of the richest quintile to the poorest quintile increased further to 16.4. Table 8.

Income

Comparative average monthly 1997 FIES, by income decile.

decile

1997 Family Income Value

and Expenditure Percent

(in P1,000)

iSurvey

using the 1998 APIS and 1998 Annual Poverty Value

Indicator Survey Percent

(in P1,000)

Philippines

145,482,668

100_0

145,429,030

100.0

First decile

2,443,310

1.7

1,753,661

1.2

Second

3,910,487

2.7

3,215,663

2.2

Third decile

5,039,661

3.5

4,393,773

3.0

Fourth

6,280,286

4.3

5,653,844

3.9

Fifth decile

7,840,237

5.4

7,206,445

5.0

Sixth decile

9,843,010

6.8

9,178,194

6.3

12,645,437

8.7

11,995,918

8.2

Eight decile

16,722,746

11.5

16,173,106

11.1

Ninth

decile

23,641,295

16.3

23,474,261

16.1

Tenth decile

57,116,200

39.3

62,384,166

42.9

decfle

decile

Seventh

Source:

Po

income

decile

National

Statistics

Office.

vel_

Income reduction and price increase i were expected to worsen further the poverty situation. While there had beeft a reduction in poverty incidence from 35.5 percent in 1994 to 32.1 percent in ]1997, the absolute number of poor _: families increased by 22,217 to 4.6 million fainilies. More than 70 percent of the poor or 3.3 million families lived in the rural areas.


Chapter 6: Reyes et al.

161

The household survey conducted as part of this study revealed an increase in self-rated poverty from 40 percent just before the crisis to 43 percent in January 1999. Some households sank below the poverty threshold while others moved above the threshold. Of those households who considered themselves poor in January 1999, about 10.3 percent were not poor before the onset of the crisis. Of those who were not poor after the crisis, 2.5 percent were poor before the crisis. More than half of households in fishing and upland communities rated themselves poor. Forty-eight percent of households in urban poor communities considered themselves poor. Only 21 percent of households in middle-income communities considered themselves poor in 1999. Thirty-eight percent of households indicated that their well being improved since June 1997; 30 percent said that there was no change; and 31 percent claimed that they were worse off. Sixty-two percent of households in upland communities said that they were worse off now. The corresponding figure for households in fishing communities was 53 percent and in urban poor households, 43 percent. The least adversely affected were the middle-income communities where only 20 percent were worse off. The surveys of the Social Weather Stations (SWS) also indicated an upward trend in self-rated poverty between 1997 and 1998. In the April, June, and September 1997 rounds, 58 percent of respondents considered themselves poor. In December 1997, the proportion rose to 63 percent and went up further to 64 percent in March 1998. In September 1998, self-rated poverty was 62 percent. While the increase in self-rated poverty incidence seemed small (3 percentage points based on the household survey for this study and 4 percentage points based on the SWS survey), it is still a cause for concern since poverty incidence was already high to begin with. Health,

nutrition, and population Expenditures in health are motivated by both consumption and investment motives. The consumption motive is driven by the fact that good health is necessary to enjoy other goods and services. Better health and nutrition are known to raise labor productivity as well as improve the performance of students (Behrman 1990). These considerations underlie the investment motive. Essentially, for almost identical reasons that people invest on education, people also invest in their health and that of their children. Fertility, on the other hand, has a direct impact on the health of the child and the mother, and is likewise affected by the health and nutrition status of the mother. In times of a crisis, people tend to become shortsighted and are prone to foregoing expenditures when benefits accrue only over the longer term. For instance, preventive care and expenditures on public health is often sacrificed in favor of curative care.


162

Economic

crisis... Once more

Using macroqevel data, Lira (1998) pointed out that infant mortality is positively correlated with inflation rate and negatively correlated with GNP per capita. General mortality rate, on the other hand, is positively correlated with unemployment rate and negatively correlated with a 4-year moving average of GNP. These imply, Lim pointed out, that the crisis, which is characterized by decline or stagnation in GNP and higher unemployment, higher infant and overall mortality rates.

meant

Using household data, Orbeta and Alba (t999) have computed larger income and price elasticities of demand for outpatient care for poorer households compared with richer ones. This means that a price increase (one of the primary effects of the financial crisis) will adversely affect the demand of the poor for outpatient care more than the rich households. In addition, home care and public clinics have income elasticities that are negative, which means that households consider these sources of care as inferior. Thus, a decrease in income Clue to the crisis clinic. crisis home crisis.

is expected to increase dependenc e on home care and in public/charity Using this model, Reyes and Mandap (1999), simulated the impact of the on the choice of outpatient care: The study ,pointed out fhat demand .for care and health care public/charity clinics will increase because of the This meant that more resources are needed in public clinics to meet this

increased demand. Using a similar model for food demand in Orbeta and A1ba (1999), Reyes and Mandap (1999) simulated the impact of the crisis On nutrition. They found that the crisis had a negative impact on macronutrient availability. Hence, prevalence of.mah3utrition is expected to increase because of the crisis. FGD results showed that participants believed that in response to the crisis, households had given less priority to health care. In particular, participants had observed the following: (1) an increase in malnutrition or a decrease in "nutritional status" among children, (2) a trend of decreasing weight among children, and (3) an increase in illness and a general weakening of resistance and vulnerability

to illnes s. It was also mentioned

that parents often left children

to fend for themselves because of the pressing need to work. Other participants, however pointed out that children were often times shielded from adjustments that households

needed

to make, particular!y, in terms of food intake.

The FGD also pointed out deterioration in health services as one of the key effects of the crisis. One of the primary iaspects of this was the absence of medicine that used to be more abundant land free at local health centers. Accordingly, this had rendered these institUtions virtually useless except for prescribing pain relievers and referring patients to hospitals that they could illafford. In addition, facilities became even more poorly maintained, feeding programs were suspended, longer free.

and some serviqes (e.g., pregnancy

tests) were no


Chapter 6:Reyes et al.

163

Household survey results, on the other hand, indicated that health centers continued to be accessible. Only 3 percent of all households believed that health services had worsened while 26percent reported improvement in service. More households in poorer communities stated that government health services had improved: 33 percent, 27percent, and 26 percent,respectively, among subsistence farming, fishing, and urban poor communities compared with 18 percent in middle-income communities. In addition, households reported that health workers continued to be available and even increased in some areas.Households, however, agreed that prices of medicine and medical fees had increased. Respondents estimated that the price of medicine increased by 20 percent on the average. For medical fees, they estimated some 50 percent increase in hospital and private clinics. Key informant interview results showed that the number of immunized children and pregnant women given tetanus toxoid vaccination did not decline on the average. If ever there were any declines, these were experienced mostly in depressed communities such as upland, subsistence farming, fishing, and urban poor communities. The number of health facilities and personnel were mostly not affected. The observation in the FGDs that more people were getting sick was also shared by key informant interviews although they differed in their assessment of the availability of health facilities and personnel. Finally, the key informant interview confirmed that cost of medicine and medical services had increased. In terms of nutrition, key informant interviews showed a couple of surprises. First,the number of malnourished children declined contrary to the impression highlighted in the FGDs. This was true in urban poor and upland. communities, but not in subsistence farming and fishing communities. This was surprising because food-producing areas were expected to have less malnutrition. Second, the number of baranga.y scholars supported by communities increased rather than decreased in all communities. Again, this was contrary to the observations made in the FGDs. To give a broader view of the problems highlighted by primary data sources, monitoring data using the DOH Field Health Services and Information System (FHSIS) were also gathered for regions covered by the FGDs. Many of the regions, however, were not able to submit complete data for the whole 1998. For the immunization program, six of the 12 regions covered by the FGDs were able to complete their 1998 report. Five of the six regions reported a decline in immunization coverage even if three of these five reported increases in the number of immunized children (Annex A). The crisis may have affected the ability of the system to respond adequately to increasing demand for immunization even if some were able to increase the number of fully immunized


164

Economic

crisis... Once more

children. These were insufficient to improve on previous immunization coverage records. This failure to push forward the immunization coverage could be a sign of the decline in health services due to the crisis highlighted in the FGDs. For the nutrition program, the FHSIS 1998 data was complete for six of the 12 regions covered by the FGDs. Of these six, only two regions (CAR and Region 7) reported increases in both number and proportion of moderately and severely malnourished among children 6-59 months old (Annex B). This corroborated results of the household survey and key informant interviews and did not support the common impression given in the FGDs that malnutrition among children has increased. The effects of the crisis on family planning

practices

were not discussed

in the FGDs nor were these covered in the key informant interviews or household surveys. The only information source that can give an indication on what happened to family planning practices during the crisis were the National Demographic Surveys (NDS) done by NSO and Macro International in 1993 and 1998 and the Family Planning Surveys (FPS) done by NSO in 1996 and 1997. Table 9 shows a declining trend in contraceptive prevalence rate (CPR) from 1996 to 1998. It is therefore difficult to attribute the decline in CPR between 1997 to 1998 to the crisis. However, it is clear from Table 9 that while the overall

Table 9. Contraceptive prevalent rate for currently married women, years old, 1993, 1996-98 (In preCent). Overall

By type

1993

40.0

Modern 24.9

1996 1997 1998

48.1 47.0 46.5

30.2 30.9 28.2

I

Traditibnal L 1511 17i9 1611 18.3

I

15-49

By locality Urban 43.0

Rural 36.8

50.7 50.0 50.7

45.5 44.1 42.2

I

Sources:

1993National DemographicSurvey,NSOand MacroInternational; 1996,1997FamilyPlanningSurvey,NSO_and 1998 NationalDemographicand Health Survey,NSOand MacroInternational.

CPR was declining from 1996 to 1998, the proportion using modem methods was rising until 1997 before it declined in 3998. On the other hand, while the proportion of those using traditional methods was declining between 1996 and 1997, it increased in 1998. In terms of locality, while the CPR in urban areas was stable at around 50 percent, it declined slightly in rural areas between 1996 and 1997 and sharply between 1997 and 1998, IAlthough some of the differences may be due to methodological difference._ in the two surveys, these results


Chapter 6: Reyes et al.

165

pointed to two possible impacts of the crisis. One, the crisis had prevented households from using modem methods of contraception. ] Two, there was a drastic decline in contraceptive use in rural areas. For the family planning program, the FHSIS data for 1998 was complete for four of the 12 regions covered by the FGD. Of these four regions, three reported either a decline in current users or new acceptors or both (Annex C). This generally corroborated the results of the NDS and FPS, which showed that contraceptive prevalence rates had declined. In spite of conflicting data from various sources, the effects of the crisis on the health, nutrition, and population sector can be summarized as follows: (1) immunization coverage was adversely affected; (2) even if household eating pattern was affected, this did not result in a universal increase in malnutrition rate, particularly among children; (3) the use of modem family planning method had been adversely affected and contraceptive prevalence in rural areas had declined. Education The role of education in development has not been questioned. It is well known that education improves both the market and home productivity of individuals. Investment in education is also critical in poverty alleviation (Behrman 1990). Besides these private benefits, there are also large public benefits (particularly for basic education) in having an educated populace. However, these returns are evident only over longer time horizons. In times of economic crisis people tend to become more shortsighted and put less weight on those activities whose benefits only accrue after longer periods. This is exemplified by parents who ask their children to quit school and help augment sagging family incomes. Not only are households oftentimes shortsighted, policymakers likewise frequently fail to see beyond the short term. Several studies have related schooling indicators with variables that are affected by the crisis. For instance, based on regression estimates using aggregate data, Lim (1998) pointed out that enrollment rate in all levels is positively correlated with GNP per capita. In addition, elementary enrollment is positively correlated with real education expenditure of the government. Finally, college enrollment is positively correlated with unemployment rate. The crisis is expected to reduce income per capita and increase unemployment. Therefore, the crisis is expected to reduce enrollment in elementary and secondary levels. The impact on college enrollment, on the other hand, will depend on the relative magnitude of the effect of GNP per capita and unemployment rate. Based on 'The 1998 National Demographic and Health Survey reports that as much as 26.3 percent of respondents get theirmodern contraceptivemethod supplies fromprivate medicalsources,notably private hospitals/clinics (15.4%)and pharmacies (8.1%).


166

Economic

crisis... Once more

the larger share of elementary and secondary enrollment to total enrollment, Lim (1998) expects that the net effect of the crisis on human capital accumulation will be negative. Using household survey data, Orbeta and Alba (1999) also found a significant, albeit small, impact of income on enrollment rates of children 7q4 years old even among those belonging to the bottom 30 percent Ofthe population. In addition, the study also found that enrollment of this group is highly responsive to pupil-teacher ratio that is obviously dependent on government expenditure on education. Using the Orbeta and Alba (1999) model to simulate the impact of the crisis on enrollment, Reyes and Mandap (1999) pointed out that the negative effect of the crisis on income had a detrimental effect on school attendance. This result was validated by a special survey of schools in Metro Manila by DECS which revealed an increasing number of students dropping out of school and DSWD's observation of an_increasing number of street children. Of course, this study will later point out that this is not only true for Metro Manila but for the whole country as well, particularly at the secondary level. In the FGDs, participants identified decline in enrollment, higher dropout rates, increased absenteeism, and decreases in student participation in special school activities as negative impacts of the Crisis. Many families were reported to have difficulty coping with increases in tuition fees and other school expenses (school materials, uniforms, food, and trans )ortation money). The reasons cited for increases in absenteeism included: (1) he need for children to help out in farm work to save on labor costs; (2) need For children to watch over younger siblings while parents were at work; and 3) lack of basic school supplies and money for allowances, transportation, an lodging. Absences were noted to have resulted in poor grades and poor qual: ty education. Attendance in special school activities, such as scouting, also declined because it meant additional expenses. Finally, the decline in food and transportation money resulted in skipping of breakfast and sometimes children walking to school. All of these, participants added, contributed to the decline in children's interest in school. The household survey showed that the proportion of those quitting school due to financial reasons was 60 percent. This proportion ranged from 8.3 percent for commercial farm communities to 55.6 percent for urban poor communities (Table 10). Those who quit school to 1oo14for employment ranged from 4.8 percent for middle-income communities t6, 13.6 percent for commercial farm communities. Other reasons such as helping in the farm or helping in household chores were mentioned by less than 10 percent of households. Thus, financial difficulties had forced many households postpone schooling.

tO ask their children to either quit or


Chapter 6: Reyes et el.

167

Table 10. Reasons for changing school, by type of community, (In percent). Commercial

-

Financial Graduation

I to higher grade

8.3 75,0

Change of residence Source:

Social

Impact

Upland

Subsistence

40,0 60.0

40.0 60.0

I I

[

16.7 of the Regional

The household

Fishing

40,0 50.0

I

Middle income

10,0

Financial

Crisis,

Household

January 1999

25.0 10,0 65.0

Urban poor

I

55.6 33.3 11.1

Survey.

survey also revealed that more households

expected that

enrollment in public schools would increase and that in private schools would decrease. Many survey participants also expected that there would be more school dropouts although more than half had no opinion about this issue. Among the primary reasons cited in the FGDs as the cause of higher dropout was the high out-of-pocket costs. Substantial proportions of these outof-pocket expenses were for transportation costs and school projects. This observation was confirmed by estimates from a 1995 FAPE survey cited in Maglen and Manasan (1998). percent of total expenditure per respectively. FGD participants were inaccessible. For instance,

Transport costs comprised 16 percent and 27 student in private and public secondary schools, also mentioned that public secondary schools it was mentioned that students had to walk as

far as 7 kilometers to reach the highway and paid P20 for a round-trip fare to go to school. While FGD participants volunteered to give estimates on the extent of decline in enrollment and dropout, these were deemed less reliable so data on enrollment and dropout _ in the locality were taken via key informant interviews and administrative reports of the city, provincial, regional, and national offices of DECS. Key informant interviews covered schools in the locality where FGDs were conducted. Key informant interviews showed that total elementary school enrollment rate increased in all but one community between school year (SY) 1997 and SY 1998. Total elementary enrollment even grew faster than the growth in Grade 1 enrollment (4.7% vs. 3.4%) indicating that households postponed entrance of children to the school system for better times. Even if there was almost an even growth in number of boys (3.1%) and girls (3.6%) entering Grade 1, still the growth in enrollment rates for boys (6.4%) was higher than those for girls (2.9%) for the total elementary grades. Declines in enrollment rate were observed in urban poor communities (-10.0%), whereas middle-income communities showed positive enrollment growth (15.4%). At the high school level, the total enrollment rate increased by less than 1 percent, with girl's Because of the small magnitude, dropout rates gathered reliable. Hence, these were not included in the discussions.

at the

school

level

were

deemed

less


168

Economic

crisis... Once more

enrollment even declining by 1.6 percent. Again, localities showing declines in enrollment growth in secondary schools were depressed ones such as fishing (-10.6%) and upland (-11.9%) communities. The 1998 APIS asked households about their responses to the crisis. Survey results showed that a small proportion (6.9%) of households had taken their children out of school. This proportion Was higher for the bottom 40 percent (7.5%) compared with the upper 60 percen_ (6.4%). Based on administrative reports from DECS, total enrollment in elementary schools continued to increase by 2.0 percent between SY 1997-98 to SY 1998-99 (Table 11). This was lower than the growth rate of enrollment, which was usually about the same as population growth. Growth in enrollment in Grade 1, however, declined by 2.0 percent indicating that families had postponed the entrance of their children into the school:system. This was true in all regions except for Region 4. Only total enrollment in public schools increased, with private school enrollment declining. At the secondary level, while enrollment growth between SY 1997-98 and SY 1998-99 was positive and higher than the growth between SY 1996-97 and SY 1997-98, this was lower than its historical average.

Only enrollments

in public secondary

schools increased

while total

enrollment in private secondary schools declined by an average of 5.4 percent. Positive growth in private secondary school enrollment was seen in only two regions (CAR and APaMM). However, considering that enrollment in private secondary schools had been declining since the enactment of the Free Secondary Education Act in 1988, it was difficult to att]:ibute this decline in enrollment in private secondary schools to the financial cycle, there was a decline in enrollment indicated that households were also secondary enrollment while postponing

crisis. Again, similar to the elementary growth in first year high school. This allo_ing older children to continue the enrollment of new entrants.

Dropout 3 data showed that the crisis!may have affected only the public secondary grades (Tables 12 and 13). Elementary grade dropout rates declined for both public and private schools. For secOndary level, dropout rate declined for private schools but increased by 15.6 percent for public secondary schools. Even if figures from different data Sources did not match, still it was clear that the crisis had the following effects! (1) enrollment in both elementary and secondary school levels had increase d at a lower than usual rate, (2) households had allowed older children already in the system to continue, but postponed the enrollment of new entrants both at the elementary and secondary levels, (3) dropout rate of those already i_ school was not affected in the elementary and private secondary school but increased in public secondary i schools, and (4) children

had smaller food _nd transportation allowances. i 3This consists of the proportion of enrolled students Who did not continue to finish the school year,


Table 11. Percentage change in elementary enrollment, by region, 1996-99. Percentage change Public Region I II III IV V VI VII VIII IX X XI XII XIII NCR CAR ARMM Total

1996-97 to 1997-98 Private

Total

Grade 1 Total (1-6)

Grade I Total(1-6)

.ox 1997-98 to 1998-99â&#x20AC;˘ Private

Public

Grade I

Total (1-6)

-3-3 -3.0 0.0 0.8 0.6 -2.2 -3.5 3.6 0.4 -0.9 12.2 -21.6 2.1 1.2 -125 2.1

0.8 2.4 2.8 4.9 1.6 4.2 0.5 2.1 2.7 4.7 15.6 -19.9 4.1 325 225 45

4.0 -2.3 5.4 5.9 -2.6 11.7 -1.3 -2.1 325 -7.3 7.0 1025 16.8 0.4 -6.0 94.8

4.0 3.0 6.9 7.2 0.1 11.5 3.2 1.0 525 -1.6 9.5 14.6 6.1 1.9 -7.9 3Z6

-3.0 -3.0 0.4 1"2 025 -1.7 -3.4 3.5 0.5 -1.2 11.9 -20.5 2.5 1.0 -1.9 2A

1.0 2.4 3.2 5.1 I25 45 0.7 2.I 2.8 4.4 15.2 -l&4 4.1 3.1 1.6 4.7

-1.7 -1.5 -1.7 -0.1 -0.2 -2-3 -2.6 -4-3 -4.4 -2.4 -1.6 0.2 -5.6 -0.4 -4.0 -2.4

0.9 1.6 225 2.8 2.7 025 2_q 1.9 -0-3 2.9 2.0 2.7 1.5 3.4 1.6 6.2

-3.2 -1A 1.8 325 1.8 3.8 -17.9 4.9 8.1 -3.8 -1.4 -11.9 -23.0 -10.7 -1.9 -30.9

-0.2

3.1

3.3

4.6

0.0

3"2

-1.8

2.2

-425

_prelim/nary, as of 3 June 1999. Source: Department of Education, Culture and Sports.

Grade 1

Total (1-6)

Grade 1 Total (1-6)

_.r_

Total Grade I

Total (1-6)

2.6 43 3.7 7-3 2.4 2.4 -4.9 11.7 9-3 -0.6 1.9 -16.4 -8.1 -5.4 1.4 3.0

-1.8 -125 -I.4 03 -0.1 -2.0 -3.4 -4"2 -4.1 -225 -1.6 -0.4 -6.1 -2.7 -3.9 -2.7

1.0 1.7 2.6 3_3 2.6 0.6 1.9 2.1 0.0 2.7 2.0 125 1"2 1,3 1.6 6.1

-0.I

-2.0

2.0


Table

12. Percentage

change

in high

school

enrollment

by region,

1996-99.

Percentage change 1996-97 to 1997-98 Public

1997-98 to 1998-99"

Private

Total

Public lstyear

Private

Total(I-IV)

lstyear

Total

Region

lstyear

Total(I-IV)

lstyear

Total(I-IV )

lstyear

Total(I-IV)

Total(I-IV)

!styear

Total(I-IV)

I lI IU IV V VI VII XllU IX X XI XII XIU

-014 1.5 3.1 4.1 1.6â&#x20AC;˘ -0.1 6.3 4.4 -6.4 10.2 13.8 -15.6 12.8

1.6 3.7 4.1 Z9 -1.9 0.4 7.7 &3 -83 6.6 1Z I -l&l 11.4

-4,8 -9.9 4.9 -2.8 4Z2 -53 -1.1 -6.6 11.6 -11.0 8.6 -2&9 -2.1

-3.7 -6.0 -4.8 -1.5 -10.2 -3.7 -0.5 -4-4 20.3 -7.1 14.4 -18.1 1.6

-1,2 -1.1 0.5 1.9 -1.1 -1.0 4-2 2.7 -3.8 3.6 12,7 -19.2 9.5

0.5 1.2 0.8 1.3 -3.8 4).4 5.0 -0-6 -3.5 1.8 12,7 -1&1 8.9

2.1 1.4 2.4 4,5 4.6 -82 5.0 4)_2 -1,2 1.1 4,7 Z9 12,4

1.6 1.6 3.8 6.2 6.2 -6.3 8.4 3.4 0.2 4.3 7.3 2.9 15.0

-1.6 -4.7 -2.8 -5.9 -6.0 -2&4 -2.5 -5.1 -24.8 -2.5 -4.8 -11.4 -5.3

-2.8 -6.2 -3.1 -4.8 -7.1 -16.7 -2.4 -6.6 -22_3 -2.8 -11.9 -11.0 -5.1

1.4 0.2 0.8 1,3 2.7 -10.3 3.0 -0.9 -5.2 0.1 2.8 -0.5 8.9

0.7 -03 1.4 23 33 -8.3 5.1 1.7 -4.5 2.0 2.4 -1.1 10.3

NCR CAR ARMM

-0.1 -1.8 21.2

0.2 -2.8 13.7

-4.4 -1t.3 5.7

-3.I -7.3 -0.1

-1.5 -4.7 18.3

-0.9 -4.3 10.9

-1,0 7.7 -1.4

1.1 9.6 0.7

-9.6 3.5 -5.4

-2.0 5.8 7.8

-1.8 6.5 -2.1

0.0 8.4 2.0

2.6

1.9

-4.9

-2.6

0.7

0.6

1.7

3.4

-5.8

-5.4

-0.1

0.9

_ _. _"

_. Total

*preliminary, as of 3 June 1999. Source: Source: Department of Education, Culture and Sports.

: O


.e,. Table 13. Elementary

dropout

rate, by region,

1995-1998

(In percent).

Q

Level 1995 -96

1996 -97

Region

Public

private

Total

Public

[ I] IlI IV V VI VII VIII

3,26 7.10 4.22 4.72 7.08 10.20 7.52 9.25

4.50 7.07 3.39 7_25 10.94 3,22 4.03 7.56

3.18 7.09 4.15 4-50 7.19 9,92 7,35 9,7.2

10.82 6.66 8.72 11.29 11.70 4.11 7.77 22.96

5.35 14.95 3.13 3.55 12,27 0.43 6.93 3.54

7.66

2.90

IX -X XI XII XIII NCR CAR ARMM Total ,Source:

Source:

Department

Percentage 1997-98

1995-96 to 1996-97

change 1996-97 to 1997-98

Total

Public

Private

Total

Public

Private

Total

Public

4.77 7.42 4.99 6.91 8.26 10,16 5.75 11,50

4.59 0,07 2.76 3,44 :3,84 2.77 9.42 3.96

4.76 7.20 4.79 6.59 8.14 9.87 5,96 11.38

4.71 6,83 5,24 4,39 7.00 7,39 9,32 10.65

4.48 5.64 1.90 1.80 5.29 6.25 6,98 8,37

4.70 6.79 4.95 4.15 6.96 7.34 9.19 10.61

46.32 4,51 18.25 46.40 16`67 43,39 -23.54 24,32

2.00 -99,01 -18.58 52,89 --64.90 -13,98 133_75 47,62

49.69 1,55 15.42 46.44 13.21 -0,50 -18.91 23,43

-1.26 -7.95 5.01 -36.47 -15.25 -27.26 62.09 -7.39

-2.40 7957.14 -91.16 -47.67 37,76 125,63 -25.90 111,36

10,68 7,10 8.37 10,97 11.72 3,17 7.69 22.80

13,2I 9.92 9.85 12"40 7.51 4.6t 6.98 21,10

1.57 4.20 8,88 6.87 5.05 3,81 2.24 7,48

12.96 9.65 9.79 12.17 7.44 4.41 6.58 20.98

12.69 8.03 10.33 9.60 8.15 4.51 7.64 19.79

4.61 8,04 1.58 1.50 6.09 3,90 12.72 23.69

12.51 8.03 9.78 9.26 8.09 4.36 8,07 19.82

22.09 48.95 12,96 9.83 -35.81 12.17 -10.17 -8.10

-70.65 -71.91 183_71 93.52 -58.84 786.05 -67.68 111 ._0

21,35 35.92 16.97 10.94 -36.52 39.12 -14.43 -7.98

-3,94 -19,05 4.87 -22.58 8.52 -2.17 9.46 -6.21

193.63 91.45 -82,21 -78.17 20.59 2.36 467.86 216.71

-3.47 -16.79 -0.10 -23.91 8.74 -1,13 22.64 -5.53

7,31

8.37

4,22

8,06

7.70

3.93

7.42

9,27

45.52

10.26

-8.(_

-6.87

-7.94

of Education,

Culture

Private

_"

Private

Total

-_

-1.261 -5.69 9.34 -37.03 -14.50 -25,63 54.19 -6.77

and Sports.

,,q


172

Economic

crisis... Once more

Vulnerable groups Farming comm unf ties Farming communities

had to absorb 'the impact of two crises: the Asian

financial crisis and the E1Nilio weather phenomenon. Farmers largely attributed the significant reduction in the volume of their output to the E1 Nffio weather phenomenon. Although the upland and rain-dependent farmers were the hardest hit, even irrigated farms were not! spared. Many irrigation facilities failed to deliver water to farms due to the 10w level of water supply. A coconut community like Bogo, Tomas Oppus in Southern Leyte, observed that before the E1 Nifio, 150 kilograms of copra from 500 nuts was normally produced. Because of El Nifio, their 500 nuts could only give them 6070 kilograms of copra. Thus, they missed the opportunity to benefit from the very attractive copra price of P17 per kilogram compared with the P7 a kilogram in June 1997. The crisis had the following effects on the participating barangays,: 1. Prices of farm inputs increased--fertilizers, pesticides, animal feeds, farm labor, and equipment rental. The FGDs reported that price increases varied from 15 percent to 100 percent, with animal feeds and farm labor registering close to 100 percent increases. The cost of fertilizer during the last year and a half reportedly increased anywhere between 30 percent to as much as 60 percent. Farmers also observed an increase in transportation costs. Palay farmers from Bantol, Marilog, Davao City noted that because of poor road conditions, hauling a 50-kilogram sack of palay from the farm to the poblacion, which is less than 10 kilometers awa)_ was costly. The rate was P20 for transportation plus P10 for labor. To save money, some of these people made their wives and children do the work. Con sequentl_ school-aged children were forced to either absent themselves from classes or completely drop out from school. 2.

Price increases, coupled with the lack of sufficient capital (raised through savings or credit), led to the decline in the use of farm inputs, which contributed to the decrease in agricultural production. The increase in cOsts of farm inputs forced farmers to reduce the use of these inputs in their fie_ds. Some FGD communities even reported that farmers did not apply fertilizer at all. This might have caused the significant drop in agricultural output. In Sorsogon, for example, percent.

barangays

claimed

their production

went down

by 40


Chapter 6: Reyes et al. 3.

4.

5.

6.

173

Many families chose to temporarily abandon their fishing/farming activities to engage in odd jobs thatcould provide alternative sources of income, as reported by at least 20 percent of the upland and subsistence farming communities. Therewas selling of farmlands and other household assets, although others said this was not widespread. Insome FGDcommtmities close to urbancenters, there was an observed increase in land conversion or sale of farmlands. For example, in Barangay Opol, Malanang, Misamis Oriental, participants expressed their concern over the 1,897 hectares of timberland in their barang'ay which may soon be converted to agricultural land because the lease contract made by the government with farmers already expired last year. Residents had heard that the Department of Environment and Natural Resources was planning to award this land to some farmers. They said that once the area is declared alienable and disposable, the ecological balance in the area would most likely be adversely affected. Almost all farmers claimed that they could not sell their produce at good prices. FGD participants reported that the very unfavorable prices for farmers' produce further compounded their problems. As is the practice, landowners and/or traders were the ones dictating selling prices. The regional financial crisis further weakened the farmers' power to dictate prices for their produce. The government's decision to import huge volumes of rice and corn had been identified in many FGDs as the main reason for the very low buying price of palay and corn in 1998. Corn farmers, for example, said that before the importation, traders bought corn for at least P5.30a kilogram. During the last major harvest in September, however, corn was priced at only P4-4.50 a kilogram. Ev.en some big wholesale buyers in Mindanao stopped purchasing corn altogether. In Davao Cit_ palay prices went down from P6 per kilogram in 1997 to P4.30 per kilogram in 1998. Farmers also suffered from poor marketing strategies. At least 23 percent of all FGD farming communities said that their main problem in increasing farm income was either the absence of the market that would absorb their produce or the lack of information on efficient marketing systems. Most farming communities relied solely on their su/_'or traditional traders as their main market.


174

Economic

crisis... Once more

l_'slu'ng communities The recent financial crisis had a larger impact on the input and operating costs of fisherfolks. This was exacerbated by the already depleted traditional fishing grounds and the consolidation of resources in favor of the elite in the fishing industry. 1. Fisherfolks benefited from better market prices but this was more than offset by higher maintenance costs. For the positive effect, fisherfolks participating in the FGDs said that with the increase in prices came the increase in the market price for fish. This meant added income for the same level of output they used to get from their traditional fishing grounds. The negative effect, however, was that while the price for a kilogram of fish had increased, the cost of maintaining fishing vessels and gears also increased. The costs of oil and other intermediate inputs had increased accordingly. Most fishing communities said that the

2.

3.

increase in price offish could not compensate for the increase in cost of inputs. The higher cost of oil and gasoline prevented fisherfolks from expanding into new fishing grounds. Fisherfolks could no longer catch the same volume because the fish stock in traditional fishing grounds had been depleted. And, because of the increase in oil price, they could not venture into new fishing grounds. In some cases, the crisis also contributed various

economic

resources

to the consolidation

of

at the hands of the elite---endowed,

as

they were, with the financial capability to maintain such resources in productive use. Forty percent of small fishpond owners in Barangay Kalanganan, Cotabato City, sold ttleir fishponds to big pond owners. With the high prices of labor and fishing inputs brought about by the crisis, small fishpond owners found it impossible to repair fishponds destroyed by floods in 7998 and were consequently forced to sell out to.bigger fishpond owners. This widespread selling of ponds virtually altered the pattern production within the industry.

of ownership

of the means

of

Children and youth The efforts of poor families to cope with the crisis had serious effects on the welfare of children and the youth, compromising not only the health, education and over-all development of these young individuals, compromising the country's "social capital," the next generation the future of the country depends.

but possibly upon which


Chapter 6: Reyes et al.

175

Unhealthy changes in the diet caused malnutrition and weakened resistance among children. About three-fourths of the depressed FGD communities reported that their children, high school and college, left school either to look after younger siblings while parents worked or to become additional income earners. Young girls would work as salesladies or domestic helpers often in cities like Manila or Cebu. Young men would work as farm hands, or migrate to the cities to look for odd jobs. In the Bicol region, many of these children were recruited as household helpers in Manila and other urban areas. FGD participants expressed apprehension over the physical dangers that such young income-earners were exposed to. WoI'11 e_l

The crisis appeared to have reinforced women's proverbial "multiple burdens" forcing more women to take on, in addition to the role of wife/ mother/homemaker, the role of secondary income-earner doing odd jobs. Women were also additionally saddled with the need to stretch meager household budgets, tap various sources of credit, and find money to pay past loans. Trying to make both ends meet had also put tremendous strain on husband-wife relationships. Two FGD groups reported cases of domestic violence resulting from fierce disagreements or not.

as to whether the wife should work

Households' responses and mechanisms for coping withthe crisis This section discusses the responses of households to the East Asian financial crisis. Employment In general, workers affected by the crisis took two major courses of action: got government jobs perceived to provide a more stable employment, or struck on their own through formal and informal business ventures. A big shift in favor of government work was noted in farming communities. Before the crisis, only 4 percent of respondents were in government service. At the time of the surve_ close to 12 percent were already working in government offices. Increases of about 4 percentage pointswere also observed for those who entered household-operated activities, transport and utility industries, and factories (Table 14). Government and factory workers from fishing communities surged from zero during the precrisis period to 9 percent of the respondents after the crisis. An increase of 18 percentage points in the number of employed persons was also noted in the informal sector. Similarly, those engaged in business and personal services increased from 9 percent to 36 percent.


"-4 Ox

Table 14. Distribution of persons, 15 years and over, who changed work in the past work and type of community, as of January 1999 (In percent).

Place of work All sector Government Private office, bank Factory Informal sector Owner, household-operated Transport, utilities Store, business and personal service Commun/ty services (school, hospital) Others, rLe.c.

[

Former

Farming

Present

[

Former

100.0 3.8 7.7 3.8 7.7 7.7 7.7 23.1

I00.0 11.5 7.7 7.7 7.7 11.5 11.5 26.9

100.0

9.1

3.8 34.6

15.4

63.6

9.1 18.2

F_shing

Present

[

2 years, distribution by place of

Former Present Middle income 100.0 4.3 8.7

[

Former Present Urban poor

100.0 9.1

100.0 4.3

9.1 27.3

_

17.6 5.9 17.6 5.9

36.4

17.4 21.7 4,3 8.7 17.4

8.7 21.7

11.8

23.5 5.9 23.5

13.0 13.0

21.7

18.2

41.2

17.6

8.7

100.0

100.0 17.6 ll.8

{5 Source: Social

Impact of the Regional Fdnandal

Crisis, Household

Survey

_.

0


Chapter 6: Reyes et al.

177

In the urban poor communities, before the crisis nobody worked in government offices. During the crisis period, 18percent of the employed labor force had government jobs. There was also a 12-percentage point increase in business and personal service industries and a 6-percentage point addition to the informal sector. Affected workers in the middle-income communities took entrepreneurship as a survival route. Table 14 shows a 22-percentage point increase in the number of persons engaged in household-operated activities. Others moved to community service and business and personal service industries. FGD participants claimed that businesses like motor repair shops, appliance repair, and personal services (beauty and barbershops), felt a slump in business operations. Some entrepreneurs who used to operate in town or in business centers were forced to close shop because of the escalation in rent, increase in transport, and other operating costs. Some decided to conduct their businesses in their residences to cut down on overhead costs. About 25 percent of all household survey respondents cited the desire to change work as the majorreason for job shifting. Twenty percent cited the search for better pay and job stabilit_ Fifteen percent said that they changed work because they were either retrenched, dismissed, or their factory or place of work closed shop. Twelve percent said that their change of residence triggered the change of work. On the other hand, 10percent said that the irregularity of their former work compelled them to look for other jobs (Table 15).

Table 15. Reasons for leaving last job, all communities, January 1999. Reason Retrenched/dismissed/closure Seasonal Desire to change work Change of residence For better pay/job stability Others

[

Percent 15.1 9.6 24.7 12.3 20.5 17.8

Households with relatives working elsewhere received large financial support. About 28 percent of these households derived at least 50 percent of their income from relatives' remittances. Another 26 percent received anywhere from 25 percent to 50 percent of their income from these remittances. In upland communities, some 38 percent of households with relatives abroad said that at


178

Economic

crisis... Once more

least 75 percent of their income regularly came from relatives abroad (Table 16). Although remittances of these OFWs had remained the same, however, FGD participants had observed remarkable improvements in their lifestyles due to the peso devaluation. Extra money was usually spent for the home, either for the renovation of current residences or for the purchase of new ones. It was also observed that while most households had problems in supporting children's education, families of OFWs even sent their _children to better-known schools. In many instances, invested

these families

started

their own small businesses.

Some

their money i n real estate.

Table 16. Distribution of households getting financial support from migrant family members by percent share to total household income, all communities, January 1999. Share in household income

iI

i

Total

Percent 100.0

at most 5%

12.2

over over over over

18.4 15.3 26.5 13.3

6-10% 11-25% 26-50% 51-75%

over 75%

14.3

Source: Social Impact of the Regional

Financial

Crisis, Household

Surve)_

The increase in prices of consumer goods, and--in the case of farming/ fishing familiesmthe increase in prices of farm/fishing inputs, combined with low harvest and fish yield, and low selling prices, forced families to look for other sources of income by letting children or housewives work for a fee (Table

17).

Table 17. Household response to employment and labor market problems, January 1999 (Percent of commullities). Response

Middle income

'Urban poor

Fishing

Farming

Increased child labor

31,

71

75

59

Working housewives Seek employm_mt elsewhere Shift to home-based operations

46 15 8

29 14 14

50 25 1,3

18 18 9

l lri

Source: Social Impact

of the Regional

Financial

Crisis, Household

Stu'vey.


Chapter 6: Reyes et al.

179

tYousehold expenditures FGD participants reported various ways in which people coped with the crisis, particularly with the increase in prices of consumer items and other basic necessities. Some of the coping mechanisms included reduction and reaUocation of expenditures, borrowing, and selling of assets to compensate for reduced income. As a result of the financial crisis, household respondents were forced to make some adjustments in their budget (Table 18). Adjustments reflected the priority attached to a specific item of expenditure. Food received the largest upward adjustment to catch up with price increases of basic food items such as meat, vegetables, cooking oil, sugar, and other processed food items. Households also made upward adjustments in the budget for education, medical/health, transportation, and housing expenses. They sacrificed clothing and leisure in the process. In spite of the bigger allocation for food, households still had to adopt some changes in food consumption patterns. Many households did away with nonessentials such as softdrinks, ice cream, meat, coffee, etc. Others resorted to having only one viand per meal, and generaU)_ less meat and more of the cheaper food items such as dried fish and vegetables. Some resorted to backyard food production to augment food supply. Apparently because of poor harvest and unattractive prices for agricultural products, upland farm communities had to make the largest adjustment in food budgets. Respondents from these areas reported a 4-percent increase in the food budget. Fishing and middle-income communities made a 2-percent increase. Sustenance farm and urban poor households managed to keep their budget. Commercial farming communities reduced their food budget by 2 percent. To cope with the increased cost of schooling, majority of households in all communities increased the allocation for education. Subsistence farming communities made the largest adjustment of 0.6 percent. Fishing and upland communities had 0.5 percent. Commercial farming communities made a 0.2percent adjustment. Urban poor and middle-income households registered the lowest adjustment of 0.1 percent. The surge in medicine and medical fee costs also resulted in budget changes. Middle-income communities made a 0.6-percent upward adjustment in the budget for medicine. Urban poor communities made a 0.5-percent increase. Upland and fishing communities made a 0.4-percent upward adjustment. Two communities reduced their budget for medicine. Commercial farm community households scaled down their budget by 1 percent, while subsistence farming community

households

managed to shave off 0.4 percent.


180

Economic crisis... Once more

Table 18. Percent changes in household budgeting and poverty and wellbeing assessment, by type of communist, 1997-98. Item Household budget Food

[ Commercial

[ Upland

1997 1998 Education

48.0 46,3

49.5 53.3

50,7 50.4

49.9 52.0

38.5 40.4

46.4 46.7

1997 1998 Medical

11.6 11.8

9,8 10.3

13.1 13,7

10.9 11.4

9.4 9.5

7.1 7,2

1997 1998 Housing

8.8 7.8

8.1 8.5

8.8 8_4

8.7 9A

7.3 7.9

6.9 7.4

1997 J998 Clothing

2.9 2.9

2.9 3.1

2.9 2_8

5.1 5_3

9.1 9.5

4.5 4.6

1997 1998 'l'ranspca'tation

6,9 6.3

7.5 6.0

8.1 6.7

5.1 4.1

6.8 6.4

7,5 5.9

1997 1998 LeLsut'e

6.3 5.7

6.6 6.9

7,9 8.1

6.7 7.1

7.6 8.3

7.4 7.1

1997 1998

1.3 1.4

0.S 0,6

3,2 2.0

3.1 1.6

4.3 3- I

3.4 2.8

31.7 94.7 5.3

60.0 83-3 16,7

41.7 100.0

69.5 87.8 12,2

47,8 95.3 4.7

65.0

36.7

56.7

27.1

20.8 76,2 19.0 4.8 76.2

100.0

12.5 87.5

2.2 97.8

3.4

1.3 98.7 1.0 2_0

Poverty

amessment

Poor now Poor in 1997 Middle income in 1997 Rich in 1997 Middle income now Poor in 1997 Middle income in 1997 Rich now arid 1,997 No reply self rating Worst Worse Bad Neutral Go_M

of change

5.1 94.9

Social

Impact

3.3

3,3 i

8.3 11,7 10.0 41.7 23.3

20.01 20_0! 21.7 23.3 H,-7

1.7 11.7 20.0 51.7 10,0

5.1 11_9 35.6 22.0 16.9

4.0 4.0 11.9 25_7 30.7

12.2 12,2 18.9 2¢.4 24.4

5.0

3.31

1.7 3,3

8.5

16.8 6.9

7.8 -

in well-being

Bette_Much hnpr oved _ource:

100.0

of the

Regional

1_7

50.0

2.2

i

Financial

CrisisJ

Household

Survey.

For housing, four commtmities (urban poor, middle income, upland, and fishing) made upward adjustments from 0.1 _ercent in urban poor communities to 0.4 percent in middle-income communities. Commercial farm households kept the precrisis proportion of housing expenditure, while sustenance farm communities reduced their budget by 0.4 percent.


Chapter 6: Reyes et al.

181

Increased transportation budget was largest among households in middle-income communities at 0.7 percent. Fishing, upland, and subsistence farm households effected increments not exceeding 0.4 percent. Decreases were 0.6 percent for commercial farm and 0.4 percent for urban poor communities. The larger allocation on transportation was noted in spite of efforts to reduce transportation expenses. People resorted to more walking instead of riding vehicles; riding jeepneys instead of tricycles and taxis; segregating errands that entailed transportation expenses; and requesting neighbors going into town to buy whatever was needed. All households reported reducing their budget for clothing from 0.4 percent in middle-income communities to 1.6 percent in urban poor communities. Second-hand clothes were bought instead of new ones and use of hand-me-downs was resorted to. Ready-to-wear clothes were bought instead of having custom-made dresses. School children either had to use the old uniform or buy just one set. Budget for leisure was significantly reduced in urban poor (1.6%) and fishing (1.5%) communities. Households from middle-income and subsistence farm communities likewise made a 1.2-percent reduction. Sixty-three percent of households availed of credit during the past 18 months prior to the survey and credit was used as an additional resource, for variouas reasons. Of those who borrowed, 32 percent used the money to augment their household income. Twenty-seven percent went to support school expenses of children; 21 percent went to pay for medical expenses of sick household member(s); 19 percent used the money to buy household capital goods (mostly appliances); 16percent repaired their houses; another 16percent used the money to support household productive activities. At least 30 percent of borrowers from farming communities used the credit principally to support farm production. It is apparent from the pattern of credit use that at least 84 percent of the credit obtained by households (except for farming communities) was used for consumption purposes. It would not be surprising if many of these households would not be able to repay their loans later. The amount of credit availed is a clear indication of the financial difficulties brought about by the current crisis. Forty-four percent of those who availed of credit said that they borrowed more than what they used to borrow before the onset of the crisis. Informal lenders were the main loan sources. Of those who borrowed, only 26 percent obtained loans from banks. According to FGD participants, formal lending institutions were reported to have become more inaccessible during the crisis because of stricter lending guidelines, increased collateral requirements, and voluminous paper work.


182

Economic crisis... Once mare

When credit was not accessible or available, people resorted to selling assets to raise cash. About 17 percent of households surveyed reportedly sold some assets in the last 18 months. About 20 percent of them sold real property specifically land. Appliances and jewelry (18% each) were the two other properties often sold. Only about 3 percent sold their houses, most of them from fishing communities. The rest sold other household assets. In farming communities, 77 percent sold animals such as carabao, cattle, hogs, and goats, while 43 percent of the urban poor sold their jewelry. The most compel!ing reason cited for the disposition of properties was to augment household income (52%).Additional reasons were payment of school fees (11%),payment of health service fees including medicine (8%),and payment for loan (4%). Only 3 percent claimed to have sold some asset to provide capital for productive activities. Health and nutn?ion The FGD gathered information on household coping mechanisms. There was a general tendency to deprioritize health in household budgeting. Other coping schemes included reliance on free or cheaper sources of health services such as government facilities, traditional healers, self-medication, seeking assistance from barangay official.s and politicians, nongovernmental organizations operating in the area, and prayers. Health care from private practitioners or hospitalization had become aluxury. However, as mentioned earlier, the lack of medicine had often hindered access to public health care facilities. The 1998 APIS asked households about their response to the crisis_The survey revealed that 47 percent altered their eating pattern. This proportion was higher for the bottom 40 percent (51.4%) compared with the upper 60 percent (45.5%). As to the effect of this adjustment on nutrition, however, no indication was given. Educaa'on FGD participants pointed out thatl families resorted to several costminimizing measures just to keep their children in school. These include: (1) letting their children stay in public schools; (2) transferring their children from private to public schools; (3) asking younger children to postpone schooling to allow older children to finish a cycle so that they can in turn help younger ones to go back to school; (4) sacrificing basic necessities like sugar to save for tuition; (5) setting school allowance to minimum levels or letting children go to school without allowance and supplies; (6)letting children go to class without uniforms or with untidy clothes to save on soap; and (7) asking children t¢ walk to school to save on transportation expenses.


Chapter 6: Reyes et al.

183

Asking students to do part-time work was another coping mechanism used by some families. Students tended stores, worked as sales ladies or house help, or sell bottles and plastic bags. Conclusions The financial crisis, together with the El Nifio weather phenomenon, has affected vulnerable groups through reduced employment and higher prices, which resulted in lower real incomes. This in turn forced affected households to cope by attempting to look for other income opportunities, mostly in the informal sector, and to make adjustments in their spending and consumption patterns. Because of financial difficulties, their need for public social services, particularly health and education services increased. Unfortunatel)_ because of the fiscal crunch, social services especially in health suffered. Available data suggest that the impact of the crisis on households did not seem to be very serious. However, the social effects of the crisis are still just unfolding. Moreover, given that prior to the crisis, the country's human development situation was already less favorable than that in the other ASEAN countries, any further slippage, no matter how small, is a cause for concern.


Annex A. continued .... msrda pal_tlnd m',

_.:mt_d popu]alJun

et_t_ pOOh.

4,_11 .'_ gOl 46,883 44,861 6,08/ 10.545

7,_4 35,']_, 36,0_ 40,_07 4,847 8,8_,

158.9 9L9 77.0 91.2 _.7 _-'L5

1S,8_ 4L6-_ ,_.,611 7,4,39 6,520 2,785 5,443 5,500 4.144 5,b47 919 _ 308.,9_ 251,444

'_?_0 34,7131 36,539 6_840 6,543 1,_0 1,375 4,395 3.1_ 4,97_ _ 16@ _4,'g5? 2] 7,g6

_431 13,464 37,336 6,165 [9,gr37 18,1"75 ?,,572. 4,376 3,87_ 1_2,.,"_

mg_ue pq_

_ l_opula_an

_ _o_L

m_n_e I_

_ I_

e]_r_ l_

1996-1997

1997-L99_

1996-1997

i_r7-i998

o,.

Re_4 A_rcz-a _m'_m_ Cavi_ Lahore _e_hxLIJqUe •ac_d.sro 0o_ide_.lal Pa_aWs_ Quezcm Rb_ Rm_nthlun 1_n_ O1ty Cavl_ CRy ClW Lure-he (_¢)' _ Ch'y Sm Pab]o('I¢3' C_y • TramM_'th'_O._ !Regain4 _ _max:lk

5,036 _9.?Y/" 49,917 46D51 6,168 10,914

4,512 3&,9_' 44_¢P_ 43,554 5.132 10,2_

89.6 92.9 _3J 94.0 832 93.-.8

5,164 4_.6Y_ 53,146 47,890 6,255 ] 1.296

4_ 36,933 ,¢'/,220 44,90_ 4,546 9,307

83.0 90.9 8_.,9 93.8 7__? $2.4

-42.2 3-_ 24.6 65 59 !&3

-5.0 QO 5_0 3A -LI..4 @.l

A3.6 L1 17.0 3.1 4.4 [2.3

79.2 &_ _3 91_9 l_ ._.6 _ ;'9.9 _"_4 88.1 24.5 Z6_2 833 8635

16,473 41473 43.9"/57,541 6,689 2,?90 5,551 5,6_4 4,417 5,7B4 956 b_ 32_10,S _,[,J 59

12,7113 _ 41.910 5.2_9 6,341 3,001 5.599 5,342 5,755 5.._0q 942 865 2_0,_1. 243,0_,5

77.1 _3. 95.3 879 94_, I_YL_ 100.9 _42 _5.0 952. _ 123.6 90_ 9_.C_

17.07_ 43,335 46,472 7,64_ 6,_! P._W_ 5.662 5,_2 4,710_ 5,9_ _ 7J2 _1,740 271_

9,_ 11.7.24 _6,44! 4,428 6,532 7"_Y-_ 5,6_ 4,748 3,919 5,L41 1,_7 9Y:. 25_,28t 23_Q21

_ _.9 78.4 5"79 95.2 105.£ 1_2 81.1 83.2 _ 106.2 L:X3_ 779 87.7

09 0.4 14.7 -8_6 -3J _0_ 3071 _ 3 _l I0.7 3J8.7 4U..8 9.7 11.7

-13.0 -29.1 3.0 -L4 1.3 -11.1 4`4 .-6.7 112 9.9 -t 1.1 -ll

-17 -i.7 83 _.8 -5.5 80.4 _8._ I?.9 117 8.1 ._ZO 3_7.0 S3 7.5

_T._8 11,,,_07 _L2_6 5,147 !8,773 L_,7&5 |,gg'/ 4,755 4,356 119.594

9_2 _ 83.7 83.5 94.2 86,7 79.1 1_lg? 11.23 90.4

_.,9_. 13,_[ -'/,990 6..l_ 20,3b_. 18.602 .?,.5"? _ 4.,_0"/ 3549 136,_fi5

19.4_, LT,3_ 33._T3 6_4"7 15.6_. L_,JS. _. 2,121 5_ 4,7"_ 11),00_

72.3 _3 g'73 1_ .4 77,0 85.1 82-4 _ I19.7 833

17,_O 2,7'_9 14/:i_,B _ L_¢_60 1l._J.4 <_ 2,120 _!3_3 66,462

64`5 19.5 37,5. _P5.2 _i 603 YL7 'g=..7 59.3 48.3

-349 53 53 _ -169 0.4 6.2 -3J.,2 85 -53

16,170 11,818 1_.5 37,178 4_353 3,742 12.422

129A _.2 _ 86.7 973 97.4 L'_

1Z_,71 15,._4_ 15.557 412,47 4,7"0_ 3_D4 12_"_

g,.O_ 11,071 12,489 3_r'_ 5@,[_ 3,2_ 1_,4_0

6._,9 83.6 80_ 76.0 1403 _ 99.4

4,_,0 5,064 5j04 12;_22 16,444 1407 B/A7

353 37,6 33.7 27_o 586 35.? 67.5

-50.0 ,.,153 33 -11/, 463 -1_ 02

420_

3.729

91A

-7.4 -Z2 1.4 -0_ -12_6 -[2._

%_

-17.7 -30.2 0.4 -! .6 -0.7 -13.9 -2J. 7_ 4.6 -14`2 -5.7

seg_,,s ATh_y Ce_nmr'i_?qo_e _ Calm_.,Im_s Sam,._g'cm. ]_l_zCIT/ l.egaspl_ Chy ]l_km 5

27_0_ 14,06) _ 6.351 20,_'g// 19,03P 2,631 4,6_.1 4,Q21 13"/,4_.

-_,.4

-_.4 4.2 4__ 21,4 -183 -13 4.2 -_3.2 6.6 .7.3

.54.,_

_gtm_ A_em. An_l_us C_l_z _llo _ l:_n.'mlh.d O._" _

12.4_r2 13,0_ 15,364 47.896 4_',4_86 3,_,4 12,297 4,_6

4,114

10_.

%2,J_ 13,3_9 L%'Pr_ 43,6_ _ 3_5 12,764 4,1_

LS"_

453

_'.4

qS?L9

-50.6 -73 -9.7 -!Z3 44.7 -14.9 -1.6 -10.6

_33

O0 L_


Annex A. continued

....

oo o,, 1996

I5o_ceJ

No. or

CiP/ pc,2uial[o_

Cadiz CAty ]_(,Ro C_'ty

f{o. of

%,:¢ po 1.on.

_,>p_a_o_

5_444 9,531

142_7 93.7

3_50 10,333

3,656 3,043 3,$19 171.714

19Z_ 2.944 A049 • 164,_4

8;0.2 96_8 79_8 96.0

Bohoi Cel-ml Negros Ori_t_d _cluijt_r B_is City C_¢-/aoml _ly C_ 6il3, Oma_o City

2_08_ $1,687 25,319 2.213 1,923 1265 29,175 _37

24,664 3_685 2_4fi2 L510 1,589 904 19,299 2.655

D _%_ k_'_¢ City I_pu-Lat>u Ci_ •_an_.awe C_r_ T_ _la_ City. Tob._o City •_ 7

_ 5,384 5,5_ 2,065 3fl62 152"g_2

74649 5r61_ 6.6_a 1_3 972. 127,538

R_.w2.s Ci:_ ._a_C._ _o_ City. Sd_y City _egay Ci ._'2 • ,=g_aa 6 _ion

3_14 10.1 _4

popuh_n

199g

poput_0t_

199a f_o.o$

% c_ po_

l_pula_o_

poptd_an

3,712 9,883

96_4 9_ 9

3_7 1_,4_5

3,(_i[_ 3,769

3,753 3,043 3_962 3_ 177, _fi0

• 3.19_ 2,776 2,&IS 3,0_ 169,976

_.0 91.2 71.4 77.2 95.5

3._3 3._43 4.109 4,0_ 1_0,331

1.633 1,449 1_96 2,335 3O,_F/

_7._ 7L0 _K7 60.2 _17 71-5 95_7 109.0

28,_30 52_726 2"5_t I 2.2[_ 1,945 I,_g_ 2%486 2,476

23,_ I 44, _16 _,236 1_471 1_65i 1,0_7 16.967 _69_

_15 K_.7 8E2 663 _¢.9 a?-7 _ZIt I CgJ0

28,$82 53,[_6 26,311 22/3 1,_67 1.316 2@_0! 21516

22,704 45 2a%_ !1,193 1._7 122_9 i._517_,Oj 2,684

'918 104.4 1118 _.3 26.6 a5-4

_932 5_¢61 6,014 2;131 3_61 155,576

2,713 6,'1220 6,523 1,722 _.679 134,144

%._ pol_'_-

% c/rang ¢, mEnb_ 19S¢_-l_q

% c/m_

1997-1_

1996

1997

77.4 35-9

-31.a 28

-314 I__

424 47.6 48.6 58.2. 39.1

&? -5-7 -7. 2

6.0 -_ - 105

3.1

-00_

e, _,'-_pordo_ 1997- ] 9_

7

925 111.9 I_.5 8_ I_L_ 8&2

_._2 5_74_ 6A_2 2,199 _ 15_1,219

3127 6,133 6_5 1,9_9 _ 134.580

79.4 a4.2 _L5 66_3 65.5 TLg _4. ! 1_i7

E4 20-3 - 1.0 - 2_6 &9 l&[_ -121 L6

-1.6 16 -4.7 -0.3

-7.2 17.9 -2a_

-5.9 3.1 -005

LiT - 135_ 0-0

-_6 _6 - E6 - 003 -_9 -5-_ 1.6 -00 1

103& 106.g 1113 _&2 VZ2 85.1

_4 10.7 15 - 6.6 _&_. 5.2

15.3 -1.4 5.i 116 -_0 8_3

-0J 7.2 -3.8 -_ 27/_ 14

17.2 -4.6 3"5 g.2 -_ -L3

Region 8 _]k-an Le'_e De/_-x_on e L_y_e:De[ S/r _ast_ .Ssgmsr

49052 36.679 9,527 li ,065

3.a69 32.602 t 1,332 10,209

95,5 _19 I 1E9 92-3

4,139 37,/72 9,5_ 11,26_

3,717 30_%_ _,213 IO,7a2

Northex_ Samar Westcma Salm_ Ci_ _'y,::_ CSty City

14fi63 14.064 3,95_'9 4,akq7

10,917 13_195 4.562 #,515

77.6 9&8 115.2 1014

14,515 14,_ 4.044 _.496

9,810 12,516 3,209 4,554

3,326 94,5"17

63.8 91.7

5_411 I_,[]97

9717 94ll _6 9.t.0

T*_loh_nCi_y _z_h*n _

5,212 1_,02_

_o_ C.zra_ h_, /_fisa_d s Oceid emta]. /dll_c_ Odem=d

28.7'9¢ 2,063 7,763 15,319

28.116 1,9,;1 $_173 14,_7

Catmy_t De Oro City GLggoog City

13,420 2,655

t3,645 2,684

Oz,_t_ Ozam6s City

1,701 3,121

1,767 1,562

tOL7 lOLL 103.9 ._lO

4,22_ 38.07_ 9,5"27 ii,467

i,gl 3 7,415 3,$0_ 4,_6

4!9 19,5 36._ 42.1

-3.9 -5.4 -27.5 5.6

-&0 -71 -275_ 3.7

67.6 87J .'_'.3 1_l _

14,9_1 14,59_ 4,131 4,S_7

6,823 6,009 1,339 2,299

4"5.5 41.2 32.4 50.1

- 10.1 -5. l -29.7 I].9

-1__9 -6.9 -311 - LI

5,2_ g8./147

96.2 84"5

log5,618 _.215

• 33.4 3119

56_6 -6.1}

508 -7,9

29,3al 2._186 7,_ 15.643

26,_59 1,7_ 5_87 14,370

9/5 /L3.2 76.0 • 91,9

2.9,982. 2,1_ 7,_95 LT,975

27,520 1,914 1_5_ I4,56_

91.8 _.;g l&2 91.2

-44 -II16 15.7 0-9

14 103

14,016 2.684

_2,063 2,387

_16_ $_L9

14,613 _714

13.649 Lg_

_9.1 "/3.3

111.6 -11.1

8.2 -1&7

1,743 3,_i0

1,556 3,74/t

• 1153 8912

1115 99.0

ll_

1222 3.185

1,52._ 3,11_

_9_ _ ,g6=2 95.7

8&_ 97.6

1,737 35_767

114

_'_ • (_ ('_ _

-&3 -IL6 14.1 -L2

-G8

-153 lZl

005 -17.5

-14_ 9512

003 9ll ("1

006


+,

Annex A. continued .... 1996 No. st lmmmmaz_d l_ptd_daa

_city

Te_s_b_ ]_ 10 ,_ _mqpk,_ei_ _

%aL eli_"Ne p_

t_'sjp'Ne pop--on

11_/" No. Of t_mmteed p_d_

9_of el_ble l_i

I_p'ble p_a_tlan

1998 No+of inmmntzed p_th_m

%of clone pop_

% change, rarer,test

%c_mtge,_ _e_

199_1_T

1997-1998 21.9 -2.9 3.1

1996-1997

1997-1998

-11_ 4.0

20-5 -51 0.6

L_ 76_30

1,121 _,25_

_ 92.2

1,417 7_011 66,949

1,_ 69,952 59,95"/

70.9 895 89.6

1,435 _,_40 68,59d

1.27.5 67,018 61._.17

85.4 83.9 _-1

-I_3 -13

19,134 12312 3¢_5_

17e_93 11,519 29,739

_.5 9.21 $1.+

19,_47 IZ_23 +7,392

1(:_2/_. 11_ 3Z1_9

_ 89.7 86.1

20,173 17+731 _18,244

8.194 4_8_ 6,656

4{)+6 33.7 17.4

_.7 -1.7 S.2

-12D -2_ 5+q

87.0 92+6 893 _J

11

Cc_lo D_ _ DevaoDe,]NoNe De.-+ +"Oe.l _ O_y Genlmlmtl Sm-_tmCJty L1

20572 31,178 10_17 141,8_P

l_/:rKl 24,7,64 8,197 t 2g,065

89.8 79.4 79.5 _,+7

_063_ ]2, t,B2 10,_ 14_,661

18,[3_ _-'_J,+IB_ 9_83 127,141

LemmoDe] _r_ _m-<hCo41aba_ SlhanKudmm Co_ 'City

t_ _b,475 1_1_ 4_.2'4

9,$27 2),75B 12+815 4,666

_3 69.7 79.1 103.1

t3,877 2?,064 I8,762 4,848

9,9_3 _,10_ L3,203 5+2237

72.,80"7

$9,.211

Sl-_

74,880

63_9'_

"m_a_ m._ c++1`) ._ + -_+,_

8.._ +_+ +._os+'

+',+.so 1_+ m.m.s

m,.+. _z

e,zm +.T_ 1_o_

7,+.,_ 7..4;,4 lO.O+,

?1.7 9+--7 78_ IIZ7

.m.+ ++.+ 84..9 .m,._

2_J02 ._I_.L8 11,489 t49,_5

3.T_ L4,.W_ 4.782 46r897

17.7 433 419 _i.3

-1.9 20.0 L&9 SI9

-3._ t6.9 1L._ 3.1

14_15 Z_,707 17339 4,775-

4.7_4 11,192 9•762 1.,891

_t3.7 40.4 S_3 39.0

4-_ 5_ 3.0 12.2

2[ 33 _.4 9.2,

77,C14

+2,429

_,m+ +,ml lZ_

.+_,t 8 +at4 4.m_,

m..7 +3.+ 4Z_. 3+.2

6,+, m..o 7.4 _,.+,

-._ +._ -s"_.

4+.0

+.o m+.4 4.4 1+..+

-m..4 -.m..++ -mA -m.+,

Source: Department of Health.

O0 "-4


_

_ou0 ""s_.s.uo o_.u_ouoo._

,

N

_,_

_._

e_

!._

!,&'_

_

88[

Z


6gI

"Iv1_sa,¢_1:9 _ldvvlO


a_u, oou0 ...s_.s._o o_.vuouooH

06


_6I

-...-

_ _ sa_%_t:9 a_clvztD

J

ii

_. ___'_ooo_._o_o ,._o_ __,____ o_._ _o. _ r__o_.__o__o__


Annex B. continued...

'_ t',o I_D"

1¢x96 Mot_bj _t Provhh__fCJty CaF_z nm!.o . Me_o_ Ocddenial Gulmaras Bam]od C_ _O CRy Ca&_City ]lo_.oCity L_Carlota City "Ra_s City SanC*.dos City f:,_.yc_ Sagay City R_ion 6

Elig_l_ population

No.

_dy emderw,_ f,h! %

M_at_y, emd _-¢_ely _xc1_cwei_ht No. %

%

No.

62,4P9 174,445 168,711 _,_ 5_&_ 16_3"7l 15,511 2,414_ 14,1869 12,374 ]5.-53_

9,090 76,273 9,_24 2576 3,846 L._0 6,7"_, 5,7-:)3 _,455 L___2 2,312 908

14-5 43.7 5_ !6,5 7.7 9.3 43,6 _.9 2I .1 _A 1_-7 5.g

1,931 8,1_9 2_66t 244 417 70 495 _ 423 154 178 54

3.1 4_7 [.6 1.6 0-_. 0.4 3.2 0.9 0.6 1.0 IA 0.3

698,3[}2

137,983

19.g

16_542

2.4-

9,4_ 12_436

_ -59

l_lg2 ;3_104

!.0 1.6

10,L_67 15_740

856 431 34_27 57U 406 1,222

9_5 19-9 8.4 426 $.8 3_ 5.6

74 2_ 63 1,970 78 15 994

0._ _7 1.2 2-4 0-8 _1 4.5

9'32 1,213 494 06_97 648 42_ 2,216

169

2.(I

1141 84,462 11,705 _ 4,263 1590 Y,253 6,.!.20 1,4_ 1,406 2,490 9fi2 154,525

17.6 4&4 6.9 l&0 _5 9.7 46.8 14-8 _1_ 9.5 20-1 6.2 27.1

M,xi,_u_ly _der_e E_'bl e poyuhiltm _,26V _ 17_972 _6 50,949 16_00 15,_, _ _ 15,26-4 12,574 16_f,4 16,11D 723,7_

No,

Sev,_dy u_'_ et'_d _nt %

No.

No.

%

7,698 50,3_ I_,904 1_1 11_318 I_F57 _ 2,.29(1 71__1 _)_2 508 1,J_7 3_94113,914

12.2 28,6 ILl 7.7 29.2 1116 14-6 5.4 10._ 5_ 4- I 6.8 15.7

0.g 1.1

9,186 1(1_95

_,0 5.0

24 61 :31 5_6 375 15 111 48

0_ 88 0.6 _-6 3,7 El 0.5 _

:_$_ 572 _'r4 11,974 2,11.5 273 1,0s.3 1,690 372

9.1 7.2 5_2 14-4 21.0 ?-3 4-6 6-9 _.7

6.2

_3

_6

Lfl_3

E7

_.

zlT.1 19.._ 2._.4 25.9 10.7 29._ 2.L6

4_ 6,4_ 1_6 3,220 _3_ 4-_fi_ _

2.8 4_ 2.7 Y.O 5.6 7.3 $_

49.9 23_5 28,1 _.9 16.4 _6.4 _6.9

_"

11,9 5-2

6_4 _

_.6 15

21..2

20,_'_.

4-8

6.,_S 45017 17,084 _.1 ll_8_t_ 1,646 2189 2,098 _7U4 707 4_ _ 3,114 I_3_L_

10.8 25.5 10.0 5.6 2[.2 9.9 3_ 4-9 1Ct2 4-6 3.8 _ 19.4 14.3

86_ 5,._15 I,$2_ 343 515 111 I?'5 .?.]2 7 _5 43 _ 4_0 10,761

g_t2 _

7.2 _.9

924 2.073

8.6 fh5 4-6 13.7 17_5 2.2 4-1 6._ 3.7

%

Modemtdy ant se_dy unde_'_li

L4 3.0 L1 2_ L(1 0.F 1.1 0.5 0.1_6 0-3 30{).2 15

Ik-gio_ 7 Bo]_ Cebu

114_194 210,194

S/_¢¢ Hah_Ci_ Cardaon _ty Cebu C._, Dame C_y Du.mag_ ereC.ity Lapa-Lal_ Ci_ Ma._,z..,,_City Ta8b_,-an City

_9_ 7.818 5,144 _ 9,910 11,6_9 21,894

Toledo _

142L_0

199

1_

2_

0.2

16,476 149,_ _43 44_999 57,]91 $7_D5 16,1_2

3,160 37,061 12,11(1 11,5_ 1_q51 19_1_ 3,1_I

_8,9 24-8 _ _5.2 _2.1 3_.4 19._

4_ 1_,4_ 2.611 £.7_t 3...431 5,949 5]9

2.7 5.7 6-7 10.45 _(1 10.4 3-2

1./_8 _

9.1 6.6

Bilizam I-3'le Del 1Voxte I_ De_ S_a EaatmaSam_r 9mn_ Weal_t'nSeam_ C_]bay_ City Omloc _ty Tadoha_ _ I_imx _,

_,_6

17,92_ 21,_4 41_$1

_

4,64_ 7,q_ $16,874

17923.(1 37.6 2_.9

29,2_

7.0

9_ 7.5

1t5,2_0 _.4A19

10.4 I5_5 9.6 45.0 65 3.6 1R1

8.99_ Y,9_. 5_"47 _,3[]_ 1_1_ 11,925 _._614 _ _

IS9

2.0

._

L_

3,5_9 45_a0 14_21 16,123 21_"K2 _,057 3_7_0 6,26S 9,072 146_13_2

21_6 _ _ ._ ,38,1 43.(1 _LO _5.(1 44.2 34.9

- 14JCg7

1_831 151,9_ 3f_4_ 45,8_ 59,{I_ _ _ 18,2_ 22J_ 427"_)4

_n94 511 243 1£.44g 1_40 _ 9"32 1..642 _ _

7,923 _,_ 9,625 11,1_ _ lfi_92Y _ _ 1_14_ 90._04

_ _.,,746 10,879 15_36_ 9,f_6g 2LLO2 4b_8 4J_6 1/t_ 111_"

_q.7 6.7 26.1

<_

(_ f_


Chapter 6: Reyes et al,

193


',O 4_

Annex B. continued... 1996 Mod_l _]y T:'._ov_,u_/C:i_, _,_

_1,]e p_on

No.

le,_7 ._vet_y

% .

Moderaidy

No.

Y*

',.md,uwdghi No, %

Modcax4dy Eli_Ide _/mlmi_

No.

S_dy %

N_

_r76 5g f_1_ 6;.'a5 243 417 433 _3 124 4.102 2,959

Mod_ah_y %

nJ'_de_g, ht No. %

10

BI_aO_ Camlg_dn _arJ s O0_id_ln_a] h_asam/sO_fi_r.la] Cagayan De OroCA_y Gf_,o og City C'_o,_ela Ozamil C_c_ TeZZbo_b _ Re_ o,n10 wt _om.vle_ _ec_da Ik-_.on -11 Soa_ Cc4ahio ¢3._-__1 Oavao Dd Notre Da_raoDd Su_ I_va oCiey C_._a] Sa_hn_CPcy r_on ll

117,081 SgOD _ 1 62,_'6 . 54_4 10,7_6 6,917 1_6_2 ..... _4.316

L9_552 _ Yg0_ 8_'2_. _9_2 2_ 6_0 298

11.6 34_4 _ 14_ 5.3 2¢9 9.1 _

1,4_D ;311 1,4_ 974 294 6_ 71 18

1.2 3.7 4,6 1.6 55 5_ 1.6D.l

14,961 3,194 $,4_ 9,g'_ 3,196 3._5 701 316

l_L8 38.1 24_6 1.5.9 5.9 a0._. 10.1 2_

38,931

12.l

5,157

.1.7

_

14_

5_3 421 856 _

6-0 _ 0.6 L1

_ _

O_ Jig

6132 _ 9_6 6,(_4 _615 9_948 41,_4

7.9 _'.6 6.60.0 7.6 Y0. 7_

119,481 _,1 _ 6_._i17 56_98 10,915 7,001 12,952 5,760 317,244 2_,2_.

I__._O 1,406 6,252 _ 5)14 _ _1 416 787 36,,2_2 _,9_aO

10.6 16,6 195 9_! i0.4 2_5 47 3.2 1L8 11.4 105

79,!O7 _ 152,060 84__'31 130_7'/ 44_1_1 _

106 t f'-_" 4,L_4 99 g417 0._6 17_

_1 8tO 3.2 6-1 6.4 _0 _9

24 186 474 12 1,2t3 174 _.171

6-f2 0.4 " 0.3 O.01 0.£_ 0.4 t3.4

130 _..._/_ 5.315 111 9,630 1_0 19,2W

3,5 6-1 7.4 .24 _.2

10.4 17.7 -_1.9 6_

1,1_ 3_741 _4 282

2-0 3.4 0.3 1.5

_,9_ 23_238 17..1_ 1_569

124 21.1 25.2 K9

__ _', _'_

9.9 _4 15--2

4.54 676 f_?l_

1.3 5.$ Z9

3,981 2,149 _,1_13

1L1 14.2 I&l

_ * N. r_

77_8t2 S0,_82 14ft.,_683,66_7 19fi,790 41.¢_6 576,774

5_39 _ $,£_i) 5,_vO

7..1 _ 5.8 6.9

29506 37_5

_.2 _.5

LaxtaoI_] Ne_e NimLhC otahato S_han Kudaxat C6_ab_ Cil_j

_5_8 1_,6_6 fi_8 18,_98

9,1_ .18.265 10,0M 1,975

16.6 17.0 15.3 1_8

1_ 3_7_ 3_R 548

a_6 _O 5.0 $_

11_ 21,477 13_56 _

_2 19._' _3 1_7

5_,432 1li_.142 fi_26_ _

5_ 19fligq 1_9S6 I_L_

il;_ C/ty M_mw'_C_ ReOcm 12

34_2 14_41t) 2¢_o,062

_ _35 42,649

5.7 5.2 14.4

113 _ 9,_7

O_ 4g ,33

_4_' 1,6fl5 5_

7.0 1L0 _17

_._ 15,1/_ 304_ 11

3_-%,_ r .1_3 46"$9B

D.$ [17 3.6 1.1 0.4 3.$ 6.2 [_ 22 1._ 1.0

I3f_.5 .I,464 7_95 6,938 6,157 2,551 764 449 _61 AO,a3A _

33.4 17.3 23.1 lC_9 16-$ 10.9 _.5 149 127 11.5

0.2

r_si,,- 12

;_ •

t'_


c_

Annex B. continued... I_8 Modc_/tty

poFuhHc, n

No.

Sev_cly

%.

No.

M_emtdy

%

V_°_mF _ L_mb'__ a_der_te_ z_d .eye.ely

%clu_eln mode_ely

i_97

I_7-98

199@97

1997-9S

-15.? -45_

-I0.6 _4.F .0._ _IA 845

-17.4 -46.1

No.

%

03 0._ 15 9.6 0.2

11_IF Y@_ _420 _299 I,_2_

_.4 _ 75 0.0 $5

-8_ -54_ -12_ -29_ ¢z2_

41 1_9 14 2,629 2,157

0.6 1.4 O_ 9.S 0.7

4_7 _59 237 24,3_t _:_, __r

_._ i9.4 4.1 _.1 _._.

9.0 47-i

_ 51

0._ 0.1

1,_0 641

_2 1_

443 _5

_,_ _S.4

S_

-00.1 -5_

ln_P_ °_ _cl lcv_ely

R_gion l0

_

B_ddn_m Camigum Mi_r_. Ooc_tai /d_ar_. C_iental Ca_,_y_m D_ O_o C_

_21_951 _75 _,51_ 04,965 59,$28

I_,621 F24 1,954 3,$89 1,717

C_oqui_ta OzaamuCity T_=_C_ /'_o _t1[} w/_cmf, l_ [ec_ds

7,087 15,_18 5_836 329,6_4 292.,17_

45_ 2,370 223 25,682 2i,728

Oa_o O_! No_e l_vao D_! _u_

19_,527 ._1,_¢_

LOgO _90

_.7 1,!

4_92 00_,_

_0 _,2_E

0.7 1._

_

9_ 0.1

_ _.1_

_._ 1_

_4A -g4._

6.9 103 _,0 _

999 J_? 1_$_ 21_

1.0 15 2_ 9.l

9_5 1_017 7_4_ _

7_ 11.0 10._ 6_

_7-_ _ 2_1 _7_

._4 _ _.0 ._55 -21.7

-_$.7 '..9 29.4 -_9._

-_6A -_ 375 -_.9"

216

1.0 1_

9_ _,771

5_ 95

3_ _._

30_ -00.0

_9,_ 2.0

-_6.5 _7,_

]_n

_tos 11

O_ . .

C_

].a_ D_]Nor_ N_lh Cotabito S,_m Kud_r_ Cotaba_ C_ty

$_,_¢ 11_ 70_1_ 19,020

_,_6l _1_90 0,0S, _ 1•01_

Mam_ C_ I_on 92

I_S4 _1_,190

6_ 2_,_4

S.F 8.4 6.0 0.0 2_ 0_ 17_ _._7.3 7.4

4.0 B.0

89E F4 4_ _99 111

_

a__

_9:7 -70.4 ._7.6 '[_9.9 -7_3 ._4-5 -_5

7.7 o_'.2 -12.2

-_95 -71.0 _Sr_ 45_ -_.0 -36_ -_

Notes: # - no data

* - 1st quarter report only Source:Department of Health. oa


196

Economic

Annex C. Family

Planning

Program performance,

crisis... Once more

1996-98. l_m_

d_u_e

2g_,4 -16.4 28.1

-7.0 -14,8 -9.7

41.2 17.7 16.2

-20.15 -4'6,6 41.1

1OZ7r[ 29.544 21_87 49,567 17,()47

16.7 42fl,5 4)2 343 -2.9

q,l -34,0 1.8 -10,11 -13,7

11.8 22.8 -14.9 34.11 2,6

22 -6,7 14.._ 19,8 _._

310,687

14,7

_15.3

_.4

4,8

5,221 39119 13.557 32.73 3,686 2,997 5,348 37.291

1.2 113 -]2,1 _),9 38.3 19.6 19.4 1,6

6,3 -12.5 7.8 -&7 -3/).5 -15.'t _._,M -3.5

4_.7 -148.6 -64.1 -5,1 ,,226,2 -7,0 6,7 -7&2

4),8 -77!,I ll_,d _O.'i 12..1 -17.7 13.4 -14.5

NCR

] _ I)i_;t. M¢._. MaJ61.. _[ _t. MLfft. Ck,u:._ln Cir_ 3,L_ Disc Mum. Cal_alI_ C,b 4th D_,t Mw_. P_L_ayCity Maka tl City NCR

17,846 9_,?T'61 J5,8'94

212491 32'_33 33,774

22,551 24,fl_9 211,__12

37,Z18 59,1_ _),_4

47_405 5,256 16,I.r_. 16,&%9 8.38_ 15242 _71,648

88/336 24.444 2'1,171 27.302 17,175

._._322 27,777 1 $.99,_ 22,6_D 8,1't8

HKt.467 31,651 18,424 .IL385 17,636

266,628

196,817

326,283

211,LA59 _11,49';' 18,-_7

29,55-1 _1,918 411,2'12

44,760 18,3211 _6.22_ 11245 7,(135 18b,6/19

CAR

Abra Apnyat_ _ktet f&_gao Kalin_a M_, P_ovince [_gaio City CAR

2J 4U 1,5._i 6,6_ 5138 2,1182 IJ_[9 1,673 2f),f142

5,719 __.366 10,676 .g,744 10.706 3_96 4A03 77,5_0

2, [ 66 1,7111 5,762 4,718 2,879 1,936 1,997 21,1(_

5,2Z_1 14,6__1 6,_)4 8,&67 3,282 3,642 4,7]7 43,_14

4,_71 6,621 7,,128 29,287 1,[)48 I,'R)9 2J3_9 5"_,423

21.181 22,271 23A28 78,477 ¢_,I7_ 5,5_ 3;302 I _%%603

._,320 11,(,_ 7.21_ 31,264 1,107 1,422 3,32.5 0],733

18.q81 _., £¢J8 _),156 85,_94 17,168 4,_5 3,&_ .%42,_42

_,3_B 1,499 6,214 4_q08 2,(_01 1.643 2.453 20,421

[_,*gioo 1 IIt,c_ Notre [k_-'_ Sur 1_ Unlca_ l_n_h_ D4gut_:_ City lmoag City San Cal'Ii_ Oty ReStart 1

_370 _344 _,439 1_,9()5 487 _es58 1,_2 29.&,'_3

36,673 19.165 26,698 76,111 4,659 4,699 3,382 17] ,_87

'

16.4 67.5 -_.0 6.8 6,6 0,9 61.5 19.9

-15,1 73,0 223 8,5 7&7 -21 ,.q 9,_ ."4.6

]_-'glon 3 &ltdaa Bulacmn NL,Wa Eclia I'ampmW_ Ta rlac Z.Im 6.1h,,t; ,\ng_i_ Ci_ Catx_tam_ City Olonga po C[ly Polaym_City Sa n Jo_ C'l ty _h_glon 3

7,197

24_124

5,98J

2._._N

1,619

31.9&_

q6,9

22,77'[] 16,[_)6 16.K_ 17,00_ 6,2"18 7,2(')t4

83,942 36,526 26_30 52,192 "[7,482 13B_

26,344 1.q,676 20,ff26 17,18.5 4,8,"%1 l.&_

65,1X]6 31,846 28,_.N 35.279 17,7114 8,172

13,4._3

56,78_

11,324 8.o12 '),7N9 .1,_(10

27,05 i _8.982 16,9GI 7J.)_18

15.7 -2.1 18.9 .4,5 -21.._ -7#.6

1.6 -14.7 7.9 ,_.b 1,4 4"0.0

6.362 4Agl] 3,705 249.432

1,9(Y, 4.64218 458 485 99,378

_7 1,!_8 "174 q67 45,673

8,848 4,6_ "1,439 5,8"12 209,8.%

33 312 27,9 .t_.7 -1 ,l

53.9 8.8

1,_5 3,._15 3,_8 _37 I00,4_

_,622 4,92._ 706 5174 __92,fall

3,9

_1.4 13

Rsgion 4 Aurora

6,347

6,643

3,9_i

8,439

3,834

Batangas Cavi_ l_gurla MaHnduquu

"I9,_17 18,101 25,976 2,-_37

37,772 3_,745 172259 21289

4,78.'I 25.05d 436A 2,28_3

101.939 ] 98,$44 _9,9C_ 7_89

Mh_,ln i Occid(_ntoj Mind_._roOrim_ml 1>o1_w,,._ _ (.%.te_,_

11),365 8,883 9,194 '17,760

16,5_ 24_342 '[3,q82 84,077

1,62_ 12,._46 2.449 11,941

46,196 29,616 -18,936 71"3) 5

_,313 "1_ 1,985 _914

RiT._l la,Dtt0._Lon Ihtang;6 C5ty Cavlte CI_ Upa Gty [_<m_a City Pu_rtn I'r b_ce:;aCity _n Pab]o City

24d_2 1,9_, 2,321 1246 J.,45"1 4,769 868 ] ,-574

432_8 9,594 4,167 1,827 l,fx3 I1,7,t2 7,&_7 5,115

_3,618 1_ 2,804 t78 267 3,3_-5 2r_ .365

42,065 34,196 4_'_8 6,6_43 7,176 22,454 39.848 22,947

16,477 I_241 3_457 197 149 13_62 1_(_,_1 _)7

Tagaytay City Trc,_ M,wfiru_ (3r/, R_gio. 4 w/ complete regor6n

461 730 15_,579 131,_6

1,182 L,,N-'L ,ITL247 4415,188

97 131 100.433 P_%,1)43

5,1(_4 6,953 _1,3711 751,(111_

7,736 0,25"1 1.1_99 2,J 18 851_. lS,(K_g 717 2_01 3jY72 63,540 58_87

35J.144 22,893 22,2G1 3,N)5 24,004 _1,098 8105 3,_5 23,782 1732184 14_ff67

] 5,1_r_4 5,,r4)2 14,(_6 8,879 32,$93 6,191 1,107 1,68_

87,_;53 17A_I 139,(_12 i 3,991. 36,974 59,987 24.4(_ 11,4_#'_

8._,150 &3.4fi2

391,019 379,[_:_1

3,694 27,171 18.7_5 [,739

122 15b 111),34!1 I(H+_)

'

8.128

-38.0

-2,6

21.5

56,674 237.328 Ik3_2 4,._4

-75._ Og.4 4]4.0 -10,0

.Z2,8 8.4 3FO.4 -23.8

80.3 81,2 -115,6 -188,1

16/R)_ 57,844 43,5_11 36_41

-84.3 412 -73,3 -32.8

42.4 -15.8

64.6 18.4 76,3 24.2

4_4.5 _6.9

5.5,9_3 11,111 5,£i[6 l,&_. 2,175 3.[47 4157 7A1_

4.0 a_5,1 112 4_4.5 4_1.6 -._g)_3 -76.0 -76.8

-_).2 86.9 ?33 111.7 _14.2 298,9 414,4 -'16.6

-2.7 T[.9 5.7 72,7 72,6 47.7 81.1 77,7

-12.2 -67,5 15.9 -75.3 _.7 -86.0 _9,6 _7,7

25.8 193 K9 21.4

W,1 7_1.2 48,._ 463

.57.0 -50.7 -342 -_.5

1,_6 2,108 58Q,II06 4c_

-79.0 -82.1 -36,7 -_.6

29,.85"1 1&78_ 36,(L1_8 3d'L_) 1"1,331 15,340 5,4/49 5,802

(J5,'[ -39.7 -2,7 3192 263.9 -5&9 54.4 - 2.5_'_

149.8 122,9 524.4 316.2 /'_l,0 99,3 201.1 225.6

34.0 4_3,2

125.9 160.4

R_h_ha_5 r/Iba'," Ca mal'hl_u_Nork, C,m_al'hl_ 5u¢ (_lt_uam,_; Masbate £_,i'_'_c_. h'i_,l C;t)' ] _gasp; Ci_ Nasa Cky Regis- 5 w/ complete recol%1s

7,910 1,454 6,616 1,527 4,_22 5,_63 373 )'71 _,045

124,506

-3.7 -_.5 21.4 -20.8 _18,2


Chapter 6: Reyes et al.

197

Annex C. continued... £'mv_-_:e/C_ty Newa_aepto_

1990 Cueeentu_ts

I<_J7 New____',_ph_l's Cm,rent._es

Nc, caCCeL_rs

199H Currw_tu_

N_v _ 19¢_-07

14.915 19_.17 17,6_J 38,152

53.5 14.7 4].t_ 4.2

1_¢7a_4

Ctu_t 19_-_7

u_m_S 1_774_

Region 6 Aklm_ An_quc, Capi_ IIn41o

4+106 8,056 7,_)3 17,108

11,27a lfi,3_'#_ 211,g(k2 57_6_

6_¼ q,244 7+74_, 17,8.'!4

13,170 IK,2&_ 19,96_ 52,."O.. t

Neglx_ Ckx:lde.tal G_dJv-ll_,_

24,370 3,386

56,_2 5_38

40,749 3,124

52,562 6,21_)

R._ol(x[ City B%.._Ci L 3, Cadi_ CiL_ I [tJ h; Ci Ly L_ Ca,.tata C_IV

3)¢'¢? 1,_Y4 1341 2, [t'_ 38v

• ,_ c_,, f4ml C.u'h_ CLty Sllay City

LLK_ 1,471; 755

ge_¢_ 6 Regim

7_,_51

21,11.! 5,151 5,74] I 1.5141 I ,'J53

4,507 3`62_ 2,231 2,ff26 5_9

2ll,Tl 4 7,2¢0 %164 13,339 2D_

22_5 L.73a 4 _Y2Lt

51_ L,878 131O

2,._1 2..%'_ 7 4,170

222,470

3.1143 3.NB 3293 7.301 11.349 _U

_,6 11_ _13 a).6

55,750 3.221

85..q -12.9

-7.6 11.0

4,h5.i 1-1¼3 2-1117 1.327 191

2t)_f15 6.34,_ 3,437 13,618 2_30

13.fl !_1.0 _(_.4 _7,4 36.O

-1.9 40`6 7A 154 20,7

210 a4 _ 1,403

1,849 2,_"_) 4_b49

-3Z4 273. 47.8

0.3 63,1 3.7

32,7

4,6

1{14J1117

_2 J_.

_2.M_

18.55 i 29,:_{_

48,354 203.,_3

216.169

7

[Iraqi Cubu

15,7_9 ]9,[_

49 `6_35 5fi,_}_

N_¢_ Oriental Siqui_r R_b Ci_ Cm_lm_n City

16,1241 1,{143 2,015 _

372.75 4A43 'U_)6 1,9,_

19,1_4 2h_(I]

3_.301 _2.1157

l8. I 5(_,0

2.q -11,5

21,] 21 LI-r_ 2,146 7l_

49,_4 '4 4,_6 4,437 2/)18

18,349 /46_ 1.2_1 g26

61,1}33 5,_ 5.1_ 2,674

31.0 10.9 6.5 ,g,_

-13.i -25.4 .40.3 13.9

Cebu CRy [_u_l (_ty

q'_'4 I,_7

11-,772 6Lx_

7,2"16 1,457

78,_ :_5_,110

3,875 l,lql)

21.94'_ 8,447

-21,8 6.6

[_apu-I ._pu t_ty Ma,xtawc CSt_ Tah_iiaron Cily

2,*i_ 3,131 466

4,_0 13,612 1,_

3,t_J7 3,470 573

6.iT/0 5,_1 I_44

4.2_'N 2,&'ff 698

8.965 7_381 2,2(11

383 10.8 12,7

Tohal¢_ City Regk_n 7

227 72+650

3_57 2_5,871

919 92,043

3,_ 498.flq3

Billl"_n Leyte Del NorSe I ryt¢ rX, I 5u,' Lxstem _.mu_r Noethcm _,i W_._teei_ -_t_lal" Catboyog CIity C_,n_ Ci_ Tocloban City Region 8

._,411 18LF_ _*,6M 314_0 3,285 3,H_ 2-11_ 2,98_ I,t_:5 43,(g_18

]2,.471 .0 _,26_ 37,158 6264 7,764 h,924 Ll'_2 l'l i07_ _ltl 131^3"18

3_131 17,782 5,78U _,55_+ 2,74fl 2_5LI 1 i975 2'_03 ql7 42.1447

7,285 31.33,4 11,493 10,_7 ._,933 6_77, 8.73," _3_ 2,1(_ 112,732

Bukldntm C_31i"_oln Misanli_ Ck'_idvn ml

1_,37<_ _ 2,701

_222,743 4,9-37 3/,_ 1:_

19,650 l,Llh 3,081

Mis,'a_lis Orie£_tal 12_yml U_._C)t¢_City (._tE_,_ L'i_y C_x_uk.ta City CVm.I_ City 'rangub City Region 10 w/ complete records

%795 4,926 1143'9 11485 nll "[F(J _lJ.37h 37.675

_I,t_I 19_TI 15,279 5.7(k) 11),(_,4 31432 -%33.-362 332.757

9,c123 3,747 1,3__ i 1,444 2,783 170 -13.452 -_11.31-1

R_gi_a

Regi.n

,

633 85,601

2_'O0 2.30,812

1,4_ 3_.1 2.3_ 2.223 2-1M2 2.3u9 _1 1,110 21_ ]b3.37

]5,896 42.2_3 11_77 ¢L967 4.'P_ ) 6,743 n,_33 _,_'_) I._09 I t 0.09_

72,383 3,.,_70 I 1.714

21,844 I_ 876

2_J,211 %40) 17,476

32.g74 14,3_ 15,6_1 3,107 6,712 3,_7 I _'_14 I_,_J

9.776 4,4_1 3,113 1,1;_ 2,691 4_ 45,972 45_16

_ 2_),213 4,739 5,425 7,153 3,233 _'483,853 36b_'_'.

i3,79_ 11,197 24.2./E

iR),2(k_ 22,t_ 7g,395

6it,r2_ 4,1195 31441

_M,157 7._64 26,ggfi

."_t 8 26.7

-2.6 366,1]

4/) -7"Z_

32.9 3.4 8_1 33

23.2 -19A 15.1 _.5

-18,0 -lg.3

342`6 290.4

-72,1 -67,6

] )-,4 -18,2 33,[1

_1,8 -37,5 -I .2

-31.1 -9.2

-1,7 142.3

X'L7 -1,7 -I 2.8 592 -1_6 -6.1 -5.3 -26.2 -13.9 _J.b

47.)Z7,7 19A -29,4 2*93

41.6 18,7 _,1 542. -23.6 41.7 79.0 -24.4 131.4 -14.1

10 M.tl 583 14,1

10,0 412

-67,5 -21,4 _317

.'_r2,6 I3A

1.4 4_3.9 -712 -2-8 243.4 13_ 7,6 7.2

-I .5 18`8 1_3iI) -21.9 -3.4 101,8 5.8 H.7

-35.1 -27,_ 2,6 -10,4 4¢3.4 3.3 -_4iI} -33.5

12,6 4(I.4 419,8 62 6,6 "_,4 121},8 137/)

21.1 13.3 118.7

-19.M -(0.4 -_7.-a;

-_.2 -Z_.I __`6

]3.1 -(_.7 41_2

8.6 (L7

_k3.4 -78`8

-3.(] 1.3

6.1 -_M/)

-._(]`8 -55.7 0.4

7.3 -._.6 -').0

4)._ -11_ -41)_

11

_._11_ Ct_taba t[i E_W_*_,C_'i_tal Day,,. D_t P_i'k,

II.3_ v,_ 11.{kC

31,8_g9 _hl73 56,577,

-_¢an_mi [_W_l_ [_[ _lr

7,7Lt_ 19,06_

:5,,167 48,457

H_'_8_ Iq2(_

54,a95 49,11E

_,745 4,0-_

26.195 2,_7

_,,'_ CLty Ge+_raL Sm_x_ City RegiOn 11

16,221 8-1_17 83,444

47_3,_3 _,_:K_ 276.4_g4

24_732 11,126 4_%917

50,857 15,132 2TI ]_l(I

12, I'_,.% 4,925 42,404

_r'/,)_2 13,_3 161;474

_.6 37.4 ,.47.4

I ._a_, I_,1 r_)rh, North t_-o_ _ _._ 5ultal_ Kud,l/at

fi,476 15,56_ 10,61 I

15,512 43,756 21 _'_

7,1 _ I ] g,(kl5 13,2X4

I1 ,_ 4_,355 28,@12

3,22.5 12._",(I !1,422

14,9_'_i 42_8"2 _,299

C'o_ab, ltn City llig_x City Ma ra'.¢i C3ty Region 12

3,353 982 104 37,(U0

6 kF._l 12276 222 99,346

2,4)-5 1726 3_3 43,'_t7

2,/'13_ J 17,49a A%_ "1 ( k5,9'47

],272 _22 135 27-1gk'_

10.6 _4 i 24.8 -27.2

-Z33 5.9 29_ -53.5

75.g 2111.6 18I_

42_ 65,8 7._

2,573 17_1 135 1[11,474

Source: DOH, Field Health Services and Information Systems (FI-ISIS),Manila.


198

Economic

crisis... Once more

References Reyes,

C.M. 1998. Impact of macroeconomic crisis on the poor. Philippines Research Paper Series (February).

Reyes, C.M. and A.B.E. Mandap. 1999. The socialimpact crisis in the Philippines. MIMAP-Philippines (February). Behrman,

J. 1990. The action of human resources

MIMAP-

of the regional financial Research Paper Series

and poverty

on one another.

Living Standards Measurement Survey (LSMS) Working Paper no. 74. Lim, J. 1998. The social impact of and responses to the current East Asian economic and financial crisis: the Philippine case. Manila: United Nations Development Programme. Maglen, L. and Manasan, R. 1998. Education finance in the Philippines. Manila: Asian Development Bank/international bank for Reconstruction and Development. Orberta, A. Jr. and R. Alba. 1998. Simulating teh impact of microeconomic policy changes on macronutrient availability in households. MIMAPPhilippines Research Paper Series no. 21 (February).


7 Fiscal .Impact of the East Asian Financial Crisis Rosario (7,. Manasan, Celia M. and Generoso de Guzman National ReveTt

government

Reyes, Aniceto C. Orbeta, ft.

revenues

and expenditures

lge$

ignificant progress in tax revenue performance has been achieved, _articularly in the late 1980s. Although some gains are still apparent in mid-1990s, tax effort appears to have tapered off. Tax effort rose by a total of 3 percentage points of gross national product (GNP) in the 4-year period between 1986 and 1990. In contrast, it only increased by 1 percentage point of GNP in the period 1992 to 1996. The slowdown in the upward trend in tax effort, however, was masked by the large inflow of privatization proceeds (1.7% of GNP in 1994 and 1.2% of GNP in 1995) (Table 1).

Table 1. National government

revenues

as a proportion

of GNP, 1986-1999

(In percent).

1.

2.

1978-85

1986-91

1992-97

1986

1990

1992

1994

1996

1997

1998

TOTAL REVENUES

12,90

15,97

18,34

13.29

16.71

17.52

19.36

18.26

18.67

16.59

TAX REVENUES

11.26

13,12

15,86

10.98

14,01

15.06

15.62

] 6.3,8

16.31

14.94

a, Bureau of hlternM Revenue

6,72

8.86

11.04

7.85

9.61

9.66

10,80

11,64

12.44

12.09

b, Bureau of Custt_ms

4,04

4,08

4,70

2,93

4.24

5.26

4.70

4.62

3.77

2.72

¢, Other Offices

0.51

0.20

0.13

0.20

0.16

0-14

0.13

0.11

0.11

0.12

1.64

2.84

2.48

2.31

Z70

2,45

3,74

1,88

2,36

1.65

NON-TAX REVENUES

Source of basic data: Bureau of Treasury.

Thus, the national

government

posted a surplus in its fiscal position for

the first time in more than 20 years in 1994. This feat was replicated 1996 (Table 2).

in 1995 and


200

Economic

Table 2. National government (In percent). 1975-85

Revenues

xpenditures [SURPLUS/DEFICIT

'1986-91

deficit

1992-97

1986

as a proportion

I

crisis... Once more of GNP, 1986-1999

1990

1992

1994

1996

"1997

1998.

12.90

Average 15.97

18.34

13.29

16.71

17.52

19.36

18.26

18.67

16.59 II

15.15

18.87

18.34

18.53

20.15

18.67

18.42

17.87

18.61

18.37

(2.25)

(2,90)

(0.00)

(5.24)

0,94

0,39

0,06

(3,44)

(1.15)

(1.79!

Sourceof basic data: Bureau of Treasury. National

government

revenues

started

to falter in the last haft of 1997

following the start of the East financial crisis. Tax revenues slipped from 16.4 percent of GNP in 1996 to 16.3 percent in 1997. The primary cause was the dramatic shortfall in import duties which was P34.7 billion short of the year's target. In contrast, the deficiency in collections of the Bureau of Internal Revenue (BIR) was smaller at P3.1 billion (Table 3).

Table 3. 1997-1998

Revenue "I997BESF 1/ Progran't Target

1.

program 1997

(In million

Devialaon

1998BF_qF

pesos).

'1998GOP_/-IMF

1998

1998

Target 2/24/98

Targt_t 6/16/98

Acutal Collection

(6)

(7)

(8)

488,037 ' 17.0%

462,616

-78,304

49B,354 18.5%

453,661 15,8%

416,585

796,503

389,087

378,688

367,303

337378

-51,912

"12],205

116,9"18

83,611

2,748

2,748

32,948

34,376

Ac/al,_l Collection

(2]-(1)

(1)

(2)

(3)

(4)

(3)

TOTAL REVENUES % of GNP

485,1"10

471,843 18,4%

-'13,267

7-,40,920

531,302 19.7%

TAX REVENUES % of GNP

450,595

412,165 16.1%

-38,430

5"13,088

a. Bureau of Internal Revenue

317,786

314,697

-3,0_9

b. Btll"Ual.1 0 f C1.1_k11115

]29,486

-34,686

c. Other Offices NON-TAX

REVENUES

34,515

94,8(X] 2,668

2,668

59,678

25,163

Program Target

27,832

76,005 3,40,_ 45,930

Deviation (7)-(4)

-45,200 3,405 18,098

Notes : _BESF- Budgeof ExpenditureandSourcesOfFinance 2GOP - Governmentof the Philippines Source:Departmentof Budgetand Managemer_t

The 1998 tax initially from P513.1 billion in June 1998. not meet the target. the original

revenue target of the national government was reduced billion to P498.4 billion fin February 1998 and then to P453.7 In spite of these adjustments, total tax collections still did Total tax take reached P416.6 billion, P96.5 billion short of

target. Of this amount,

P51.9 billion was accounted

and P45.2 billion by the Bureau of Customs from 16.3 percent

for by the BIR

(BOC). In toto, tax effort dropped

of GNP in 1997 to 14.9 percent in 1998.


Chapter 7: Manasan et al.

201

Expenditures At the time of the preparation of the 1997national government budget in the early part of 1996, the national government's fiscal position had been positive for 2 consecutive years, the first time in more than 2 decades. The picture was rosy, maybe at its rosiest in recent history. Thus, the 1997 budget of the national government (net of debt service) was expansive. It grew by 21.2 percent compared with the previous year's growth rate of 13.5 percent and the 18.5 percent average in 1993-97 (Table 4). As a proportion of GNP,it rose to 16.4 percent from 15.0 percent in 1996 (Table 5).

Table 4. Growth rate of national government expeditures, by sectoral classification, 1975-1999 (In percent). 1975-85

1986-92 AVERAGE

1993-97

1995-96

1996-97

1997-98

GRAND TOTAL

16.06

19.08

13.48

4,76

17.95

12.59

9,72

Tot,'fl Economic Services

14.05

8,03

15.12

1.20

27,66

-25.85

20.07

Agriculture Agrarian Reform Natural Resources Industry Trade Tourism Power & Energy Water Resources Devt. Tremsp. & Comm. Other Econ, Services

9.84 3-72 10.83 18.90 2,76 8.54 -3.02 35,48 9.02 38.95

13.51 29.22 19.11 3.98 -5.16 21.10 22.67 5.18 16.98 -36.60

20.24 18-89 23.20 11.89 14,14 23.24 1.08 4,37 11.95 59.24

23.07 12,42 14,41 9.61 33.66 47,45 -78.19 25.87 3.59 -16,20

52.64 44,92 65.98 2.04 3.83 28,48 120.59 18,57 19.48 -15.59

-38.73 63.75 -37A9 -31.54 -17,07 -37.21 -50.62 -86.12 -17,39 -89.07

31.13 2739 2.99 21.98 35.83 9,75 -55.66 48.17 20.69 -69.19

15,60

19.52

19.29

25.49

11,28

7,52

16.02 14.45 7.63 25.75

21.29 20,64 22.34 -18.50

20.21 6.48 30,24 47,61

20.45 34.56 42.95 55.23

2728 26.17 10.97 -47.24

11.39 -6.03 31.33 -10.81

632 2.11 11.49 62,89

5.81

15.25

17,33

13.02

20.22

2.91

-2.39

17.28

22.66

15,50

22.63

14.62

7.37

3.78

13.89 30.73

23.89 20.01

15,37 15,83

21,.52 25,34

14.99 13.74

7.22 7.73

-1.98 17.45

Others

17.90

22.33

28.69

6,43

22.32

46.73

8.81

Debt Service

34.68

28.63

2.84

-14.29

6,72

33,65

12.63

13.77

15_25

18.46

13.50

21,&_

6,20

8.60

I

Total Social Services Education Health Social Welfare and Employment Housing & Com. Devt, National

Defense

Total Public Services Public Administration Peace m_d Order

21,73.;

]

1998-99

MEMO ITEM:

Grand Total Less Debt Service Source:

Mini

Budget,

Department

of Budget

and

Management.


202

Economic

Table 5. National government sectoral classification,

expenditt_res 1975-1999.

crisis... O_,_cemore

as a ploportion

of GNP, by

m

1975-85

1986-92

1993-97

1996

1997

1998P

1999 GAA*

15.67

21,57

21,17

20.23

21.35

21.78

21.28

6.20

4,51

4,08

3.77

4,31

2.90

3,10

AgricLdtttte

0,79

0,75

0,69

0.67

0.92

0,51

0,60

Agrarian Reform Natural Resources

0-08 0.25

0.27 0.29

0.15 0.28

0.14 0.25

0.18 0.37

0.26 0.21

0.29 0.19

Industry Trade Tourism

0.31 0.04 0-03

0,16 0,01 0.02

0,12 0,01 0,03

0.12 0.01 0.03

0.1]. 0.01 0.04

0.07 0.01 0,02

0.07 0.01 0.02

Power & Energy Water 'Resources Devt.

0,77 0.14

0.31 0.08

0.21 0.05

0,05 0,04

0.10 0.05

0.04 0,01

0.02 0,01

Transp, & Comm. Other Econ. Services

2.71 1,08

2.14 0.48

2.29 0,27

2.19 0.27

2,34 0.21

1.75 0,02

1.88 0,01

3,16

3.94

4,13

4.46

4.85

4.89

4.69

GRAND

TOTAL

Total Economic Services

Total Social Services

"

i Education Health

1.87 0.57

Z74 0.67

3,12 0.45

3.25 0,46

3.71 0.52

3.74 0.44

3.54 0,40

SocJa] Welfare and Emplo?,Tnent Housing and Con_munity Developn'met

0.24 0,47

0,23 0.30

0.44 0.13

0,54 0,21

0.53 0.10

0.64 0,08

0,K_ 0,11

1.78

1.31

1.38

1.37

1.48

1.38

1.20

1,70

2.53

2.73

2,82

2.90

2.82

2.60

1.1,6 0.54

1,94 0,59

1.94 0,79

1.98 0,84

2.04 0,86

1.98 0.83

1.73 0.87

Others

0,82

0.90

2.70

2,59

2.84

3,77

3,65

Debt Service

2,01

8.38

6.14

5.21

4,97

6,02

6.04

13.66

13,19

_5.03 I,

15.02

16.38

15.75

15,24

National

Defense

Total Public Services Public Administration Peace and Order

MEMO ITEM: Grand Total Less Debt Service

" GAA- General Appropriations Act. Source: Mini Budget, Department of Budget and Management. This expansive mood was carried !over when the Executive branch formulated the 1998 budget in the first Semester of 1997 as , the national . [ government continued to post a surplus in 1996 and as the consohdated pubhc I sector itself posted a surplus for the first tim e in 20 years. Given this perspective, the President's Budget (net of debt service)ifor 1998 was projected to grow by 12.4 percent, climbing to 16.7 percent of GNP (Table 6). National government budget in 1998 Despite the onset of the East Asian financial crisis in July 1997, the 1998 President's Budget was not downscaled when it was presented to Congress. Moreover, Congressional initiatives led to art even larger budget appropriation.


Chapter 7: Manasan Table 6. Evolution

GRAND

et al.

203

of 1998 national

TOTAL

government

1997

1998

1998

Actual

President's

GAA

budget (in million pesos). 1998

Preliminary

98 Prelim/

98 Prelim/

1998 GAA

98 PRESIDENT'S

539,461

590,702

641,674

607,377

0,9466

] ,0282

73,165

83.509

86,692

78,559

0,9062

0,9407

Public Administration

51,554

59,423

62,368

55,278

0.8863

0.9302

Peace & Order

2'1,611

24,086

24,324

23,282

0.9572

0.9666

37,366

45,487

46,492

38,454

0.82T1

0.8454

122,668

144,954

152,,301

137,106

0.9002

0.9459

Education

93,639

107,144

109,130

104,301

0.9558

0.9735

Health

13,062

13,770

14,506

12,274

0.8462

0,8914

13,493

20,113

23,418

17,720

0.7567

0.8810

2,474

3,126

4,447

2,207

0.4962

0,7059.

108,952

101,918

115,159

80,786

0,7015

0.7927

4,426 23,225

8,371 17,22]

8,426 18,372

7,247 14,229

0.8601 0.7745

0.8657 0.8263

Total Public Administration

National

Defense

Total Social Services

Sc,zial Welhre Housing

& Employment

& Community

Total Economic

Development

Services

Agrarian Reform Agrlculhlre Natural

9,336

6,687

6,626

5,836

0.8808

0.8727

Industry

Resource

2,766

2.031

2,288

1,894

0.8276

0.9325

Trade T0orism

215 940

213 677

213 810

178 590

0,8364 0,7284

0,8364 0.8715

Power

2,541

3,968

1,495

1,255

0.8392

0.3161

Water

1,1 75

362

422

163

0.3864

0.4505

59,101

62,057

76,164

48,823

0.6410

0.7867

5227

330

343

572

1,6678

1.7310

125,649

"125,450

125,459

167,927

"1.3385

1.3385

71,661

90,175

116,371

105,147

0.9036

1,1660

413,812

465,243

516,215

439,450

0.8513

0.9446

16-38

16.68

18.51

15-75

Transportation Other

Economic

Services

Debt Service Others MEMO ITEM: Grand Total Less Debt Service Pet_2er_t of GNP

Source: Mini Budget, Department

Whereas the expenditure

of Budget

and Management.

obligation program net of debt service under the 1998

President's Budget was equal to only 16.7 percent of GNP, it was equal to 18.5 percent of GNP under the General Appropriations Act (GAA) of 1998 (Table 6). Concomitant with the downward adjustment in the revenue program in the early part of 1998, the national government expenditure program was similarly modified. Administrative Order 372 was issued in February 1998 imposing a 25 percent reserve on total maintenance and operating appropriations of all national government agencies. At the same time, it imposed a 10 percent reserve on the IRA share of local government units (LGUs). Total national 14.9 percent relative

government expenditures net of debt service was cut by to the programmed level under the 1998 GAA and by 5.5

percent relative to the programmed national government expenditures

level under the President's Budget. Although net of debt service grew by 6.2 percent in


204

Economic

crisis... Once more

nominal terms (Table 4), they actually declined by 3.5 percent in real terms in 1998. Thus, national government expenditures net of debt service contracted from 16.4 percent of GNP in 1997 to 15.8 percent in 1998. Of the major expenditure items, those on economic services and national defense were the most adversely affected. Preliminary estimates of actual expenditure obligations indicate that national government expenditures in these sectors were cut by 30 percent and 17 percent, respectively, relative to their programmed levels in the 1998 GAA. Among the economic service sectors, water resource services and transportation/communication services suffered the deepest cuts relative to the 1998 GAA expenditure program. Actual national government expenditures in water resource development and transportation and communication for 1998 only reached 38.6 percent and 64.1 percent of levels under the GAA expenditure program. Moreover, national government expenditures in all economic service sectors, except agrarian reform, posted negative growth rates relative to their 1997 levels. National government expenditures on infrastructure services (combined power/energy, water resources development, and transportation and communication service sectors) also decreased from 2.5 percent of GNP in 1997 to 1.8 percent of GNP in 1998. On the other hand, expenditures on social services and general public services were relatively protected. On the average, the reduction in aggregate expenditures in these sectors was equal to only 10 percent of the GAA program levels. This came about as the reserves earlier imposed on social service sectors were selectively lifted. Among the social service sectors, housing/community services and social welfare/employment services were the hardest hit by fiscal austerity measures enforced in 1998. Preliminary estimates of actual national government expenditure obligations in housing/community services and social welfare/ employment services show that national government expenditures in these sectors were cut by 50.4 percent and 24.3 percent, respectively, relative to their GAA levels. Thus, expenditures on housing/community services declined in nominal terms during the year. Although allocations for the education and health service sectors in 1998 were not reduced aS much as those Of the other sectors relative to the 1998 GAA levels, per capita expenditures real terms during the year (Table 7). These developments are largely consistent with the crisis years of 1983-85 when a reallocation of national from economic services and national defense to debt services, and social services was evident.

on these sectors slid in the experience during government resources service, general public

In July 1998, the government announced the exemption of major departments engaged in the delivery of basic social services from mandatory reserves (equivalent to 25% of nonpersonnel expenditures) earlier imposed on


Chapter 7: Manasan

et al.

205

Table 7. Per capita national 1996-1999.

government

expenditure

in 1985 prices,

1975-85

1986-92

1993-97

1996

1997

1901.00

2408.04

2561.33

2517.49

2733.04

2736.47

2700.25

775.87

51Z23

492,07

"469.76

551.98

363.97

371,36

104.09 12.26 33.57

90.28 29.75 31.80

81,24 17.51 32.55

83.75 16.81 30.96

117.66 22.42 4730

64,11 32.65 26.29

69.63 37.51 24.58

34,98 6,84 4,39

19,73 0.92 2.49

14,06 1-12 3.57

14,92 1.14 4.03

14,01 1.09 4.76

8-53 0,80 2.66

9.45 1,02 2.69

Power & Energy Water Resource,_ Devt,

107,14 18.02

34.35 9,43

27.35 6.27

6.34 5,46

12.87 5.95

5,65 0,73

Z81 0.98

Transp. & Comm. Other ECOn.Services

359,84 94,75

228.06 65.43

275.35 33.05

272.27 34.09

299.42 20,48

219.97 2.58

219,42 3.27

388.49

444.16

490.16

554.70

621,47

61Z72

605.38

229.39 70,45 32.26 56.19

305.50 74.32 23.92 40,41

370.01 53.84 51.31 15.01

404.97 56.98 66.93 25.82

474,40 66A7 68.36 12.54

469,92 55,30 79.84 12.66

447,81 50,92 89.77 16.88

National Defense

249.83

148.66

166.21

171.09

189,31

173.25

152.62

Total Public Servio-_

206.34

281.05

327.95

351.36

370,67

*_3.94

332,44

144.14 62.20

214.83 66.22

233.01 94,93

246.77 104.59

261.18 109.49

249.05 104.89

222.10 110.34

96,73

94,98

325.25

322,48

363-05

471.01

470.18

18.3.75

926.96

759.69

648.10

636_7

756.58

768,28

72.19 1717.25

84.03 1481,08

317,58 1801,64

311,52 1869,39

359.95 2096,47

328.4] 1979,89

393,12 1931.98

GRAND TOTAL Total Econom]c Services Agriculture Agrarian Reform Natural Resources I_d_stry Trade Tourism

Total Social Services Education Health Social Welfare and Employfftent Housing and Conxmtmity Development

Public Administration Peace and Order Others Debt Service

1998

1999F

MEMO ITEM: IRA Grand Total Less Debt Service Source:

Department

of Budget

and

Management.

all government agencies. The lifting of reserves, however, was not implemented immediately. 1 Moreover, a slowdown in the release of Notices of Cash Allocation (NCAs) effectively restricted the spending of government agencies. Given this situation, government agencies naturally gave the payment of wages and salaries the highest priority. Thus, many agencies suffered delays in implementing their expenditure obligation program as they postponed contracting for the supply of goods and services even if the allotment authority (i.e., the authority to obligate) was available in anticipation of inadequate cash availability. In cases where procurement was not intentionally put on hold, existing suppliers and t In the Department ofHealth, for instance, it was not until the last quarter of 1998that the [lifting of the]

25%

mandatory

reserve

was

actually

lifted.


206

Economic

crisis... Once more

contractors paced their delivery of goods and services with their perception of the government's ability to pay for its obligations) It is also important to emphasize that government agencies/departments were given the discretion to decide which programs/activities will be given funding priority so that the impact of the fiscal austerity measures on actual expenditure obligations on various programs is largely uneven. Department of Health (DOll). In the health sector, procurement of drugs and medicine was most harshly affected by the financial crisis. The allotment authority for acquiring drugs and medicine that was actually released at the end of September 1998 was equal to only; I 23.6 percent of the appropriation cover (Table 8). In the last quarter of 1998, allotment authority for another 63.1 I percent of the appropriation cover was issued, bringing the allotment-toappropriation ratio up to 86.7 percent (Table 9). Undoubtedly, the delay in the release of allotments for drugs and medicine contributed to the slowdown in their procurement. As of the end of December 1998, actual obligation for drugs and medicine represented a low 49.2 percent of allotments and 42.7 percent of appropriations. In regional assistance for drugs and medicine, there is no slack between obligation and allotment. But just the same, only 75 percent of its appropriation was supported by an allotment authority. The dramatic cutback in the expenditure obligation for drugs and medicine coupled with the 25-30 percent increase in drug prices following the depreciation of the peso in mid-1997 implies a critical contraction in the supply of drugs and medicine in the public health sector. What makes this situation worse is that this comes at a time when households themselves have little resources to supplement what the public health care system is able to provide. The delay in the restoration of 25 percent mandatory reserves is an oftrepeated tale in the DOH. Only 72.8 percen i of appropriations in public health services were supported by allotment authority as of the end of September 1998. Within this subsector, the most badly hit activities were family health program with allotment cover equal to 50.1 percent of appropriations, the MOOE portion of physicians for doctorless commumtles (54.7%), Community health program (56.2%), STD/AIDS control program (59.9%), noncommunicable disease control program (62.5%), expanded immunization program (68.7%), primary health care (70.0%), dengue control (75.0%), rabies control (75%), and tuberculosis last quarter

control (75.8%). Additional allotmen t authority of 1998 such that the allotmentqo-appropriation

was issued in the ratio for most of

2 The accounts payable of the government piled up towau'ds the end of 1997, amounting to P108 billion (The World Bank. 1998. Philippines Social Expenditure Priorities. Draft. Pasig City: the World Bank).


Table 8. Department office

of Health, 1998 appropriations,

only), as of September

Railo of Aliotments

A. PROGRAMS

and obligations,

Office ofthe

Secretary

(central

PS

MOE

0370_

0-7500

1.0000

0.v066

to Apl_ropriali_ CO

Ratio of Obligations TOTAL

PS

MOF

to Appropriaficras CO

Ratio of Obligations

TOTAL

PS

MOE

0.1895

0.4368

0.4977

to Alloime_xts CO

TOTAL

AND ACt W[TIES

I. General Adminisirado_ II. Support

allotments

30, 1998 (Current).

and _apport

to Operatltxts

IIL Operations a, Public Health Services

e.. 0.4].90

01623

(]3_33

0.4S24

0.75@0

03770

0.4678

0.q269

&0000

0.3569

0.4678

0.4646

@JBfl00

0.4593

1.0000

02011

1.0000

0-728._

0.6469

02-209

0.@391

02_69

0_69

0.3151

0.0591

035Z7

1, Family Health Ntzizitim_ and Welfare a. Materrml and C_d Health Serv_e

1 _0O 121000

02327 0_@15

1.0000 1.0000

02485 09109

0.6._6 0.6_7

0.2003 0.1_

0_91 0J0391

0.2211 0.2370

0_6 @fJO@7

&2_o4 0.21_9

0J0@91 0.O09q-

f1.7._54 0.2602

b. Nt_trltio_ Service indudh_ 8 Sz@ Iodizaticm Program c. Family Plarmmg Service d. Dental Health Servic_ e. Comff_ctlof ERarrheal Diseases

1.0000

0_6960

02248

0,6952

0A281

0.4_8

0.6952

0_6134

0.6234

1.0000 1.000(]

0-750@ 0.7500 1J0000

0.7836 0_462 1.0000

0.70_ 0.6335

0L22_2 0.1419 0.0@21

@.29_3 0.8312 8.CO21

0.7068 0_xq38

0_q056 0.1892 0J0021

0.3743 0-3918 0.0@21

0_866 1.0000

0J6866 1_O00

0.12.59 0.5627

0.12-_9 0.5627

0.183@ 0.5627

_0_3 0._627

0._013 0_862 0-7268 0-7_@2 0-7500 0-7500

03@13 0.71.30 0.7348 0_'575 0.7584 0_763

&0q@3 0_2279 &IW0 0.4709 _1@13 &4@29

0.0_8 0_6 0.29.53 0_.77 01217 03125

0.1861 02021 0.2435 0.6Z77 0.1391 0.5_7"2

_1861 @3697 0_@4 0_._5 &1604 0L5849

0.7500 0-7500 0._614 0.7500 8.75@0 O.Y_O

0.7_00 0.7500 0_ 0_111 0.73(]0 0.90_

0.83:30 IX@220 _5_47 _6438 _0401 8.2988

0_3 0_@220 03288 0.6447 0.0401 036_1

0-7_00 0.7495 0.7500 @_:d]_3 02378 0.5656

025(]0 0.74_v_ @.7500 O_q3@ 0_ 0.5656

8.90,8,3 01.2019 @36@2 @_136 @.2979 0_3_

0.9383 0,2@19 0.3_2 0.$506 0.4_1 0.80@8

f. [mmtmizaiion Program g. Cor_ol of Acute Respiratory Infection/ Integrated Child C_re Management h. Family Health Program 2. Nat_orml Utsease Ccmtr ol Program a. Co_ammica ble Disease Centrol Proszam 1. Communicable Disease Cen@rot Service 2. Tuber culo,4s Cenbrol a. Tub_ Control Set vice_ b. _pine T_erculo_s S_dety c. National Tuberculosis Contr_ Program 3. b_'D/A1DS C(m/_of Program 4, Malaria Cem_oi Program 5. Rabies Cor_rol Program 6. Schlstoaon_r_ Con_ol Service 7. Dengue Contzol Program 8. Fi]ada Control Program 9. Naticmal Lepz o_'y _tioa Frog*am b. N_ommu_d_ble DL_s_ Contr_ Program 1. Nonoommtmicahle IXsea se_ Service 2. Cardiovascul_ Disease Ccmtrol 3. ,_anokir_ Ce_lion

Program

1.000@ 1.0000 1.0000 1.0000 1.0000

1.0000 1.0000 1.0009

1.0000 1 -riO0@

0_45_ 0_ 0,6598 0J6198 0J6198

0.4_35 0_M66 02047

0_325 0_25

" _6_0 0,0165 0300"2 " 0.4828 0.0300 0_40

0_25_ 0_165 0.3167 0.52_9 0,0301 052_8

0.7(B7 0,1_i.q 02912 03_0 0.2198 0_t346

0-v_37 0.IS13 02912 02,441 0A232 0.4546

0.6454 0.6484 0.6_98 0.6198 0.6198

0.4_5 _6466 &7047

0.6325 &6325

0-75@0

02500

@31S8

0_q158

0.4210

0.4210

4. Caucer Co_re_ Program 5. m/rides* Pre_mti_m Progrmm

0,1766 0.7500

0A7_6 0.7500

0.1237 0.45_r7

0.1237 0_t577

0.7.595 0_610@

0.259S 0.6103

6. Preventive Nephr ology 7. Na_icmalPreven_ve Mental Health Pr o_r _m

0.5923 0_04

0.5923 09001

0.2947 0.7780

02947 0.7780

0.4975 0J8362

0.4975 (X8362

.

_e_ _,]


Table 8. continued... O0 Ratio o_ All_mevas PS 8. Occupational Health prc_am 9, National Diabetes Program 3. En_ir caxtnent_ Health Program a. Enx4r cmm_ta 1He_l Ih Service b. Opera tio*t of Lrde_-Agency CommiRee o_ En%Honm_tal Healflx c.HospRal Waste Managemem 4. C ommLmily Health Program a, Cgmamamlty Health Service b. TradRicmal Medicine Prog_m c. Health Developmot Program d. _LaxiOz-based Rehala_-t afion Program e. Imdigenous P._ople 5. Provision fo* a pool of efgJaty (80) R_ral Health Physidans for Ooctoatess Communities b. Primary- Health Care Prog_m c, Health Fad_ti_ l_{aimenamc_ and Operati_ms d. H_ltk F ao3h'y StandaxcLs, P,_htlons and T.icensmg e. Drugs and Medicines j. Wctmer_ and Cl'.fldren protec_oix Program k. Re#onalAsslsianoe Fund fc_ Drugs & Miczc_tulfienls Subtotal, llI TOTALA

1.00_ I.C4@4 1.00(]0

1.0O(g) 1.0000

1._00 [#.CO00 0.S912 1.0000 [#S_388

0.9877 0_64-

MOE

to Appropriations CO

Ratio of Obligations to App_opria tions

TOTAL

0_500 05400 0.7_=g10 0_500 0,7497

0._'WJO 0_00 0.818t 0..83_(]d'_uR5

0YS00 05241 0`7_00 0.6175 4}.40(17 4}`7500 0.7500 03470

0.7_0 • 0.5618 0.8811 0.6175 0.4(]07 0.7500 0,7_30 0.8441

0.7488 0.7891 4}.7500 02174 011491 0.7_ 0.6885 _=,_919

0.7014 0,8532 0.85_4 0.2365 0.0491 0.7500 0.7Z71 0.6_17

0.990[# 0.750[#

0.9716 0.9617

PS

0.7852 0_'_88 _0.6893

0.6069 0.6069

[#_78 0_0_0 [#fa224 [#_o,'_ 0.4672

0,6343 O_

MOE

CO

TOTAL

0.6039 0.0747 0.4621 0.5419 0.441[#

0.6099 0.0747 0._i02 0.6209 0AT&5

0.0802 0.2831 0.1 T57 0.1040 0.So_. 0.`7'330 [#,0000 0_24_

0.0802 0.3086 0AO19 0.1044} 0.389_ 0.7330 0.0000 [#.4747

0.2496 0.6134 0L450_ 0.4}199 0.04_ 0.750_ 0D_39 0.2907

0.2338 _LS_(_ 0,47c23 0,0_17 0.0000 0.7500 0.3101 0.2._"

0.0762 0LIFO0

0.0662 0.068_

Ratio o_ Obligations PS

0578_. 0,7882 4.689[#

0,(O69 0.6069

0.597_

[#.6279 0.66_ 0.4976

0.6t22 G_o"i

MOE

to Allotments CO

TOTAL

0.8132 [#.1¢94 0.6162 0J2Z5 O_g2

0.8132 0.1494 0J6W'*.5 [#.7479 [#J60_'1

0.1009 0.5898 02543 4}.I68g 0_480 0.9773 0/11000 0.43 Y2

[#1069 0.5492 0.4561 O1684 0.8480 4}9773 0.0004] 4}.8624

02_q_ 0.7773o 0.6011 0/]915 0.0000 ]_000 0A123 0._O1

0.0682 6_8

fl3_3[# 0.6106 4}5604 0,1342 O.OK]40 1.4_]40 0.4266 0Xe3_

IJO000

1_0000

0,0769 [#,0000

B. PROJECTS L Locally-FundedProjeci_s) a. C4mstlucd m'_ Improvement, Rep_Lkand Rehabflit a tion / Renovatlmx indud_g _e Purchase o/Equ_ment of 8pedaI Hos_italg Medical Cer_ers, Sat_tazi_ R_caxa 1 Hosl_t als, C,_a_r al Off, e% Re_onal Held Office and Other P-_Iat ed Fatalities on a PfiorRy Basls as may tie Detmunlned by the Se_etary c_ Health b.Health St aius S4_x_ey f. Coast_mt/mx and Expan_on H_pital, Bag.Mo C/_h. Assistm_ce to Man_luy_t$ Mandahr),ong City L Proo.zrement j. _

_-_. 0.750[#

c_ the Bagu._ ,G_.eral Medkal

Ce_t_,

4}.0267

of Medidn_ and Heallh Ktis of Deop lqo_.s for NaRcaxal Mmatal Heal_

0_86_

0,7500

i_000

011400

0.0018

0.0.371

4_0000

0.0041

10000

8.16G_6

4},0230 $.75_

1_000 1_]0

1_000

1,0000 1.8000

0__0

0.412

o_s_s

0.4222

0127_

4}AL3b'I

[# _ 5;01)

4}.0658

0.0(300

0.0011

0.0267

0/]230

TOTALS GRAND TOTAL

0.7500 4}.0168

0.0230 3"`7_0

0.0230

3.1676

0.18S0

O.OSn

Om_S

4}.I0_8 4}.0200 0.C_2_

0.6673

02"295

0.6015

Source: Department of Health, Office of the Secretary.

031_8

0.2817

0.0292

0261.7

0._51

1.0K](lO 0,0000

0£o--76 1_000

_o " _,,. "


Table 6. Department office

of Health,

only) as of December

1998 appropriations,

and Suppolff

to Opera Hoos

IlL O_ra_ons a, public Hea_

Office of the Secretary

(centr_

_o Ap_opria_o_s

PS

MOE

CO

0_700

0.7500

1.0000

0.70_6

09500

1._00

0.9(_75

1.00(gl ]._

0.969£ 0,9427

1.0(_0 1.01_ 1.0()00

Ratio o_ Ohligaii_s

lo Appr oI_alio_s

TOTAL

PS

MOE

CO

0.4190

0.2537

0.5786

02770

0_9888

fl.5432

02500

1J0000

0.9159

0.99_0

0.4402

1.0000 1.0300

0.9716 0.9569

0.99_ 1.000(}

0,;3_68 0.2_69

0.9637

0.9669

0,99_

0.8802 0,9113 1.0000

0_263 0.9454 1.0_0

l_0000 1.00{)0

1,0000 1_00

1.00_0 1.0_0

06833 0.8632 0.9139 0.9063 0.9609 0._9_9

0.6_3 0.8749 0.9228 0.9841 0.96_2 0.9475

0.75_

0.7500

0_05 0,8654 0.9790 0.8568

0.6621 0_8_ 0.9790 0.9476

0.9732 0_245 _

0.973'2, 0._45 (Lq0_

TOTAL

-q ' •

gatio of Obligali(ms to _ PS

MOE

CO

TOTAL

0.29.=6

0.6_7

02715

0A55_

0.98_3

0.7720

1B0(10

0£4.?5

0_91

0.4865

0.9980

0.4851

0_91

0.5_12

0.0_91 0.0391

03851 0_q675

0.9999 1.0000

036'_ 0.?d)4_

0.0391 0.0391

0,,.-q6_ 0,3841

0.54_

0~_

0.99_

0_06

0.6100

0,4945 0. _'_19a3 0. 00"_

0.5625 0.5"190 0.007_I

1.0000 1.0000

03618 024_ 0,(]070

0.6_6 0.5498 0._g0

0.3109 0.562Y

031_ 0.5627

03109 0.5622

0-3109 0.5627

0.2614 0.5424 0.5826 0.7268 0.6021 0.5646

02614 0.5812 0.6248 0.9431 0.61b'! 0-77_

03825 0.6284 0_374 0._97 0.6267 • 0f_15

0.3825 0.6642 0.679'1 0 _L_84 0fao392 0_13

0.75_

03_00

1.0000

1_00

0-3629 _13 _ _

0.4174 0_3"71 0.7050 0-_6

0_-o6 0_023 02204 O-.q_8

0_q04 0_2 0.7"204 0_94

0.7182 0.6399 021.71

0.7182 0A._99 0.71TI

0-_0 0-7161 02639

0.7"380 0_761 02639

ACTIVITIES

[. Genc_r_1 AdmlnlSbrati_ [I, Suppo_

and obligations,

30, 1998 (current). Ralio _ Allo_enls

A, pROGF, AMS AND

allotments

0-71155

._ Services

1. Fa ma'ly HealtlxNulfiliorL and Wd_'are a. Mat_'n_l and O'a3d Heallh S_'¢ice b. lXhll_tio_ Servi_e Lr_l_ Salt [odizalio_ Program _ Family Plarmmg ,servic_ d. Dental H_allh S_¢ice e. C_.(m_r ol of lY_arrheal [3gseases f. In_o_alion Program g. Co_r ol of Acute Raspir a_ca'y lrJe,c'doa/ lnte_ated _ _ ..Manag_t h. t;amily Heallh Program 2. Na_d Disease C.on_o_ Program a. Comm'ard_ble [Xseas_ Cam_ol Program L Commum_cab_e Disease Control Service 2_T_beroalo_s C._rt_ol a l Tuberc_dosis Control S_vic_ b. Fl'a2ippi_e T_erculo_s

Society

3, STD/AIDS Control Prc_m 4. Mala Ka ConhroI P_ogr _an 5_Rabies Control Prosr _a 6. Schis_om_mia._is _ Se_c_ 7. I_o_ _ Pro_r_ar_ 8. _ Cobol Program 9. National L_?r(_sy _agnatio_

1.0000 1.0000 I.O0(D 1.0_0 1.00_

1.00_0 1.0(_0 1.00_0

Pr ogzam

0._9_0 0.(3943 0.9878 0._72 0.987"2

1.0000 0.99_h72 I._000

0.99_ 0.9943 0._78 0_72 0_2

1_0000 0.99_ 1.0000

bO qb xO


t_

Table 9. continued... Ratio _f ALtotmenl_ toA_ol_atlon_

b. N(mcc_tmicable Disease Control Progxam 1, Noncomir, un_hle IX_ea se C_trof Service 2, Cardlovascular DS_ease C_Irot 3. Smoking Ce_alicm P_ogram 4. Cancer Coned Prog_m 5. _Jz_ess th'e'v,en6m_.Program 6, Prevenllve Ne_olog)-

7. National Prev_ve Mer[_l Health Program $. OCC_lOalio_ HeaJt_ Program 9. Nalkmal Diabeles Program 3. En',Ar_:m,e_la 1Health Program a.Ertv_anaental Health Ser_ b. Operation of Inter-Agency Commi_lee on E,n:v_ ,..'a',am.en'_ alHealth

PS

MOE

1.0000 1.00(_

• 0,7624 0_674 0J(_2 09572 0,5_-7 0.7964 0_9,4

1.0000 1.0(]00 L CE](10

c. Ho_Jt al Waste Management 4.

Comn-amity Health Program a. Co_m_mity H_alth Servi_ b, Tra dd_iortal Med/cine Program c. _rmaIth Developmenl Pr o_rmn d. Commtmity-based

Rdm bflitzti_t

1.01_0 I.CY'J(30

Phy_iclams t_r Dodorless Cc_nmum_li_ b. Frimary Health Care Prosr am c. Health Fao3itles Main_c_ and Opezations d. Health Fad]JtyStandards, ReguIatimas artd Lic_.nsing e. Dru_s and Mediates j.Women and_ChildrenProt_ffion Program l_ 1/_ional Assi_no_ F_rtcl fc_ Dru_ & Micr onul_i_ts Subtotal, Ill i

TOTAL A

Ratio of Obligatio_ TOTAL 02742 0.9327 0ffGI32 095_2 0579_7 0.7'964 0_TcJ_i

1_ 0921B 0_9357 0.._,_" 0£_322 05977

1_)_0 0.9218 0._357 05_85 0._0 09112

059_

05936

0.7104 09q29 037382 0_145

02332 0.9,.586 02382 0.6145

PS 0.9995 0S995

0,99_ 12_0 09471

l_fl@0 1_4_0

MOE

to A_ropriali_s CO

Ralio of G_ligatlc_s TOTAL

0.46_ 0.44_ 0.5130 0.7121 0.2273 0.587] 0.5L'_95

00894 0.7155 0_730 027121 02_"3 0.5_71 0..qJ3f__

0 5Z51 0.662.4 0.]if00 0.5514 0.6a_Y] 0.5738

0.6251 0.6624 (I.1700 0.'&'v32 _ 0.67_.7

0.1068

03066

0.4286 0_27 0-5052 0_]45

0.4736 0_51 " 0.5052 0.3448

to A/lotmer_s

PS

I_OE

0.9_5 0SO95

0,6069 0__$6 0.7295 02439 0,4348 02372 0_q794

0-6o_21 0,7704 0,7295 0.7439 0.4348 0.73o72 O.b-"._c_

0_ 7-_I 07185 0.1816 0551_ 0_76_ 0.6o'91

0.B251 0.7185 03816 (]37578

0.1195

0,1195

05_3 03699 0.6844 0S_611

0,6459 0,7147 0.6844 0,5611

0,_,4 I f_l 0.9471

1.0000 1.0(]00

CO

TOTAL

O.&'vG5

094_

0,9470

0ff329

0.7329

0-7739

0.77"_9

1.O300

I..00£_ 0.7154

1,0000 09_2-0

1_

0,6755 0.2o407

O.6Tm-J5 0.7356

1,0000

0,6'755 03365

0.6755 0.81_8

(k0000 O,_912 1.6000

0.7488 05500 02._0

0.99_0 0.7500

0.701-4 0.8947 08,_1

020000 0-q_I 1 09961

0,4040 0,7498 0,5504

0J0762 0_Jl_

0.37E4 0.6670 0.6659

0_ 0.9:)61

0.5395 05822 02339

0.9585

0_Y/6

0.8675 0.0491 0.7500 0_946

0_[F_3

0._77

056_ 0.0491 0.7500 0.8812

09857

0.4140 0.0050 0.7_0 0.4_79

0_1675

0,47.71 0,0050 0_00 0_-t4

0.5864

0 J_6L3

0,9617

0.7929

0.5002

0._,._8

O_q9

0,4_89

Program

e.Ic'a:ligenous Peo_e 5. Pro_i,_on for a pool of e_ghty (80) Rural Health

CO

0.0_769 0.0204

0._95 0.7455 0_7_4

_9979

0A7-'_ 02024 I_000 05,507

0_94

0.4924 0.1024 1,0000 0_828

0.8684

05756

0,1018

0.6166

0.9_5

_1_

_" _. _.

(_ [


f_

.'9. Table 9. continued... Ratio of Alla_'nent s to Appropriations PS

B.PROJECTS I. LooOy-Funaea pm_(s) a. Cor.__trudior., Improvement,

MOE

CO

Ratio of Obligalic_s

TOTAL

PS

MOE

to ApproF.riaiians CO

TOTAL.

Rat_. of Obligations PS

MOE

Repair and. Rehabilitation/

to A1]ofme_B

_r_

CO

TOTAL

0,4895

0.4895

0.9_15

L0000 0,3210

Renova fion iv.dutding _he Put close of Equ_pmeB! of _c_p e,c_l Hospitals, bf_:_ cal CJ_r_s, Sar,itarla, Red,real Hospitals, Cen_al Offiee, Re_al Field _ and Other gdat sd Families c_t aPriority Basis _ maybe Detemdned by lhe ,Seorelary c_ Heall.h b. Health Stak2s Sua'vey f, _o_t and Eacpansk_ of the Baguio Gene_a] Hospital, Bag_Ao Oly h- Assistat'_ to Mandaluyong Medical Center, Mandaluy_ng City i. Pro OLJS,eu,.ent of MedJdnes and Health KI_s j. _on

_ Deep Wd]s fc_ Na_mal TOTAL B TOTAL

0,71500

0._67

03"500 0_6_K3

0.7500

0.0l_ 0.0(100

0.0041

0,001_

0,0230

OLO00iO

0,0230

Merttal Health 0_864

0,1883 0 J_.B5

3.1676 0.04 ,r'4 0:2406

3.7500 0.084S 02097

0.5092

0.08째_ 0.4760

0.0152

0-7500 0.0210

1.000(3 0,1186

0.0000

0.000(]

0.fl000

O,OOO0

O.OIXIO

33.676 0D465 0.4_69

0.8684

0.000D 0.4749 0_,_745

0,4991

0,9_32 1,0000 0.6376 0.9857 0.9055

0,9662 09662 0-5754

3,16_76 0.(B01 0.0446

0.0000 O.ODO0 l .(X)00 0.6637 0.1852

0,8447 0.,r_480 0,6156

0.1_52

0,_2 1J_0 0.88_" 0._ 0.64_8

Sub-allotmenL A_t_m_afic Appr(_i_t (LiFe & Retlreme_t) Prodt_ivity lncen_ve Boreas M_scel.laneo_ Per soBnel B enefits TOTAL SUB-ALLOTMENT GRAND TOTAL

0.8o-76

0,8305

0.2406

0.7729

0.7765

0.4 _P_

0.0446

Source:Departmentof Health

N_


212

Economic

these programs

surged to 95 percent. The rati0 for STD/AIDS

portion for physicians for doctor less communities, however, remained at about 75 percent, i

crisis... Once more control, the MOOE

and primary

health care,

Moreover, actual delivery of services appears to be adversely affected as the obligation-to-allotment ratio reached aia average of only 53.1 percent for public health services at the end of December 1998. In particular, the ratio for maternal and child health services, nutritior_ services, expanded immunization program, family health program, and the !MOOE portion of physicians for doctorless hospitals were all below 50 percent. For immunization, there is some data, albeit incomplete, that shows immunized children in 1998.

a decline

in the proportion

of fully

Department og Education, Culture and Sports (DECS). With over 80 percent of its total budget earmarked for personal services, the DECS has very little room to maneuver in times of fiscal restraint. Thus, in 1998, it found itself having to reduce the allocation for key educational inputs like textbooks, desks, school buildings, and teacher training. In particular, obligation authority (or allotment) for desks, chairs, textbooks, and instructional materials amounted to only 37.7 percent

of total appropriation

cover (Table 10). To make matters

worse, no expenditure obligations were actually made for this expenditure item as of the end of December 1998. This situation aggravates the existing textbook shortfall, with the current textbook-pupil ratio of 1:8. In a similar vein, the allotment-to-appropriation ratio for land and land improvement was a low 19.6 percent whereas those for teacher training and Government Assistance for Students an a Teachers in Private Education (GASTPE) were 63.4 percent and 75.0 perce_t, respectivel)_ The gap between I allotments and obligations for these items, however, was nil. Enrollment figures in both elementary and secondary levels were lower than normal in 1998. This may be attributable to households' inability to provide out-of-pocket costs 3 of education even in public schools which have been estimated to amount to 27.8 percent of total unit cost (or P1,830) at the elementary level and 41.2 percent of total unit cost (or P3,030) at the secondary level. This result indicates the need to reexamine and rationalize the government'_ scholarship program (particularly the GASTPE) in terms of both coverage and support level. 4

Out-of-pocket uniform.

costs include

expenditures

on transportation,

textbooks,

and supplies

but not

4 It has been shown that the support level of the Education Service Contracting (ESC) and the Tuition Fee Supplements (TFS) is low such that only families which are relatively better off are able to leverage then" own resources and enjoy the benefits of these schemes.


Table 10. Department

of Education,

of the Secretary

Culture and Sports,

1998 appropriations,

alllotments

(central office only), for the period ending December Ratioo_AlloementstoAppropriations

and obligations,

Office

31, 1998.

Rat_oofOb_ga_ons toApI_Ol_na4ions

Ratioo[Obligatiore toAHol_esds

PS

MOE

CO

TOTAL

PS

MOE

CO

TOTAL

PS

MOE

CO

TOTAL

1.00000

0L_5479

050000

0.88745

1.000_0

0.TS479

0,50000

0L8_745

1.00000

1.00000

1.00000

1.00000

L00000

0Lg0165 0,61543

0.91704 0.63447

L00000

0.9¢3t65 0.51545

1.00000

0.91704 0,63447

1.00000

L00000

1.00000 ].00000

1.00000

1.00_00 1.00000

'_ *•

A. PROGRAMS AN*D ACTIVIT]ES I. Gemeral AdmlnL_atlon snd Support a. Genexal Adm_n at_l Support Services _- General Mat'_g_nept and S_p_'v_ion 1. Get_esal a_ti_e _cvices b, Operation and _ of C_ c _an R_s Trah_ a_d Develol_met_t tnd_di_ _n amount of P15 Million [cor Teacher's Tr_in d. Contr_t_tio0_ to Vinous A clivilie s

b_

.

Ottt-o_-School Ad,ah Edu_ tlonFx.'_g_ am Subtol al, [ IL Support

to OperMions

.

g _00584

0.80_64

0.808_4

0.008_1

1.00000

1-_000

0750{)0

0.75000

035000

0.75000

1.00000

1.00000

1.000q)0

0.76_,58

0.86300

1.00000

0.76858

0.86309

1.0000 0

1.00_00

1.00000

0.60302

0.66667

0.88246

1.00000

0.68302

0.66667

0.88246

1.00000

Lt]0080

1.00000

1.00000 LS00(]_

0._1128 0,81818

8_004_

0_24074 0.81518 0.75{)000

0.2412b 0.81818

8.00080 0.7-0000

0.24074 0.81518 0,75000

1,00008 1.0{)04100

0.75000

1.00008

1.0_80 1.00000 1.00000

L00000

1,00000

1.00{)00

1.00000

0._O00

0.75000

0.{)0{)00

0.00000

IU. Ope_aRor_ e.RegionalOpera_._ 16. NATIONWK3E Requiremez_ o_ N mcly-C..reated Pos_b0ms 34 Re_ fmr th_ioll_rmg Pcsi_o_.s AuSu_zed in 1996 8_c_ _oAc_l I_l_yme_t by Mm_i_IRies a. Te_he_ I Po_tiot_ (_800 Items) b_ Public I'#.md_t Ntu'sePos_5o_s (2,240 _e_DnS) b. Gov_r_mera Assistat_ce to Students and Teadlers inpnva_ Education(GASTPE) c Lump-sum _ Re_l_i_fion of Posli_ts

1.0_000

e,Pre-SchoolEducation £ Secondary Educaeon 1. O_.rat_onal Expenses o_ Newty-Le_e_d/ Fmtabllshed High Schools b.Putchasec_Desk_ Chahs, T_tbook_ Insiz.action_ Matenalr_ Tc.ols, "_ar_.t_e. Ext,_,_ Comptaers end other _l_/n_sa m_ I.Au_ps_tmforLand at'_l Uaml Imp _ovemm-aOutley Sul_o_tl, IH To_[

Source:

DECS,

Office

of the

Secretaiy.

0_782

0_0000_ 0.512_

0.47949 0.00000

0..3":7714

8_5_2

0.{)0{)08 0.000043

0.47949

1.00000 0.800{)0

R000@8

i.{)0{)00

0.0{)0{)0 0.0000_

1.0000_ 0.00flO0

000000

0,19595

0.19595

0,IT380

0.17"3{)0

0,88697

0_8697

0_1

_66390

0.03403

0.58369

0.5_351

0,46453

0.0_18

0.46676

].00000

0.69970

0.80697

0,_967

0.68070

t167_01

0_4449

0.63371

0.68070

051052

0,04_70

0._3732

1.0{)000

0..'_296

8,91497

8_4Y90

t'O _,


214

Economic

crisis... Once more

Appropriations for two items (new teacher positions and newly legislated high schools) were largely left unfunded. The allotment-to-appropriation ratio for new teacher positions was 24.1 percent, whereas that for new high schools was 47.9 percent in 1998. While these items may not be that critical given efficiency considerations, it cannot be denied that funding shortfalls may cause short-term problems? Department

of Social

Weffare and Development

(DSWD).

The most

severely reduced programs of the DSWD were the assistance to persons with disability (with an allotment-to-appropriation ratio of 41.8 percent as of end of September 1998) and calamity relief operations (45.7%).6 All of its locally funded projects, including the Comprehensive and Integrated Delivery of Social Services (CIDSS), had ratios equal to 75 percent (Table 11). It is notable, however, that the absorptive capacity of the DSWD is rather high. The obligation-to-allotment

ratio in most activities is close to unity.

Nationalgovernment budgetin 1999 With the government's fiscal difficulties continuing in 1999, aggregate national government expenditures net of debt service (based on 1999 GAA) further declined from 15.8 percent of GNP in 1998 to 15.2 percent. National government expenditures on economic service sectors posted some recoverjg Aggregate expenditures on economic services were the fastest growing major expenditure item in 1999. Thus, infrastructure expenditures inched upward from 1.8 percent of GNP in 1998 to 1.9 percent of GNP in 1999. Also, expenditures on both agrarian reform and agricultural serviaes registered substantial growth. In spite of this, agriculture expenditures in 1999 stood at 0.6 percent of GNP, 25 percent lower than the 0.8 percent average in 1975-92. This appeared to be rather inconsistent with policy pronouncements giving priority to the agriculture sector. On the other hand, it is worrisome that national government per capita expenditures on education and health services declined again in real terms in 1999. This was the second year in a row that this occurred. LGU revenues Revenues

and expenditures

Fiscal austerity measures undertaken the East Asian financial crisis have adversely

by the government in the light of affected local government finances.

It has been pointed out that the high pupil-teacher ratio in public schools is traceable not so much to a real shortage in the rmmber of teachers in the DECSpayl"ol!but to problems with deployment of teachers. 6Data for end of December was not available as of wl_ting.


Chapter 7: Manasan Table 11.

215

aL

et

Department

of Social

appropriations, Cecretary

Welfare

allotments

Development,

(central office only) as of September Ratio of AIIotrm.'nts to Appropriations TOTAL

A. pROGRAMS

and

and obligations,

1998

Office

of the

30, 1998.

Ratio of Obligations

Ratio of Obligations

to Appropriations TOTAL

to AUotme_l_ TCfrAL

AND ACTIVFTIES

1.Gvn_ral Adll_inistrafion and Support a, C__.rteralAdministrath'_l and Support _¢karvioas I, C_neral Manal_ement and Supervision b, l'r_×'iucfivlry M_.x, ntix,e I_,nus

0,87231 1,1_X)00

0.772._ 1.0(Y_(_l

0.88569 l.fl(I)(_

I, Family and Comnmnity Welfare 2. Child arid Youth Wel fare 3 Woraan's Welfme 4, Disabled Per_m's Welfare

0,86T34 0.67152 0.63824 0,8887B

0,82510 0.(K6774 t).631EO 0,87694

0,95131 0.99438 0,98945 0,98667

5, Ewargtn_y

O._'_/(I

0,48729

0,99873

0.45737

0.44"158

0,96546

0,41824

0,41824

1,00000

0.63173 0.79948

0.5406_9, 0,79818

0.85579 0,99837

0,75391

0,72,185

0,96145

0.7,_O86 0,75000 fl.7_(ll0 O,750fYO 0,7-_IX)

0.74976 0,74867 0.75(1/) 0.66787 0,74_}

0.998,53 0,99822 L00fK3fl 0,89050 0,994_)

II. Support to Ol._rarions a, Policy forrnulaliort, Stand_lrd Setting. Progran-_ t3avt, .tk_ial R_earch, Inmrnational and Local Networkin B, and TeaahnicaI A_ista_'_c-e

Asis tance

Ill Ol._n_ tions a. A_$1st,illl_-_Pl,Ogl'all_for Distressed al_d Disadvantage Population "l.Natiowvide Emergency A._sistatlce\Czlamity Relief Opera t ion.%e_. 2. AssislanCe to Persons with Disability i_tch.tdJa_g P15,000,t"(]O for F-_nior Citizens 3. Protective Services for Childrt._x and Yolltlx Especially Difficult Circttillst_lnces c, Mahal_'tance _d Operatit_aas of Cea-_ters and Inst TOTAL B. PROJECTS l, i.ocany-Runded Proj,_,ct(s) a, CID_ in the MOStDepressed Provs ul_der SRA b. Suhmg Dunong Pare sa Kabataan c, Ttd_W 2fl(I) d. Special Proiect for I'overty Mappin_ e. SEA-Katu!laran [1 f. _amily Welfare Ftmd

0.7_00

0.1¢-,667

0,22222

Tt.YrAL

0,75(_)

0.74510

0.99241

GRAND TO-I'A L

0.75268

0.7328-9,

0.97362

Source:Department of SocialWelfareand Development,Officeof the Secretary.

Early in 1998, the national government announced that it will withhold 10 percent of the IRA share of LGUs. Although 50 percent of the total amount withheld was eventually released to LGUs, unfreezing of mandatory reserves was made very late in the last quarter of the year such that LGUs operated within the more restricted fiscal framework for the most part of the year. In fact, approximately half of the LGUs in our sample reported that partial lifting of reserves was only operationalized in January 1999. Imposing a 10 percent reserve on the IRA share of LGUs was equated to a measly 2.6 percent growth in the IRA level in 1998, whereas a 5 percent reserve


216

Economic

crisis... Once more

meant that, on the average, the 1998 IRA Was 8.3 percent higher than its' 1997 value. These figures are way below the projected 14.0 percent growth in IRA in 1998. Many LGUs likewise registered a decline in locally generated revenues over and above the reduction in their IRA shares. This situation is true in 7 of 20 LGUs in the sample (Table 12). In these LGUs, total locally generated decreased by 0.9 percent to 49.8 percent in 1998.

revenues

The shortfall in LGU revenue inflows from local sources appears to be largely driven by significant reductions in nominal real property tax (RPT) collections. The RPT collections of rural LGUs appear to be more adversely affected than those of urban LGUs. Thus, 7 out of 11 municipal local government units (MLGUs), 2 out of 4 provincial local government units (PLGUs), and 2 out of 5 city local government units (CLGUs) in the sample had lower RPT revenues in 1998 relative to 1997. The reduction in RPT collections ranged from a low of 1.1 percent to a high of 29.5 percent. In contrast, non-RPT tax revenue collections of CLGUs exhibited a greater tendency to decline in 1998 compared with those of MLGUs and PLGUs. Note that non-RPT tax revenues in 2 of 5 CLGUs decreased MLGUs had a similar problem. Table 12. Percentage

chance in locally RPT '

Province Bulaean Iloilo Misamis Oriental Southern Leyte

sourced

GROWTH RATE (%) Other Tax ' Nontax

in 1998 while only 2 of 11

revenue,

1997-1998.

Total LSR 2

Ra rio of Actual LSR to Estimated LSR

0.26 23.25 (1.70) (0.02)

(0,29) 2.46 3.21 (0.04)

0.26 5.30 (20,27) (0.10)

0.14 16,70 (19.01) (0.05)

100,00 125.61 71.43 8G50

(1.06) .(5.31) 8.74

12,88 (5.02) 6.47

(58.93) (8.28_ 12,37

(18.34) . (5.50) 8.18 '

91.70 76.23 100.00

Cities Antipolo Q_lezon lloilo Cagayan Dovao

de Oro

Municipalities San Jose del Monte, l_ulacan Bauan, Batangas B_na re, IIoilo Leon, Iloilo San Miguel, lloilo Libagon, S. I_yte Padre Burgos, S. Leyte Tomes Oppua, S. Leyte Gitagum, Misamis Oriental Libertad, Misamis Or[erttal Opal, Misamis Oriental

8.23 25.78

15,95 (12,47)

(14,24) (27.68) (7,99) 1,97 26.01 13,38 69.88 (6,97) (29,49) (22,39) (20.42)

11.70 5.58 (64 20) 25,41 15.43 25.09 9.95 (6.24) 8-56 29,00 30.38

Notes : ' RI_ - Real Property Tax 2Locally SourcedRevenue Source:Local Government Units.

8.42 26.56

(23,05) 19,92 (49.51) (8.70) 18.98 (7.23) (3.17) 37.96 25.75 , 29.25 19.70

11.86 4.22

84.57 68.99

(9.11) 11.84 (49.75) (1.22) 20.64 2.11 6,00 10.30 (0.91) 22.63 16.39

119.77 98.00 23.65 106.49 _12.93 94,09 49.95 68.14 93,36 45,16 47.98


Chapter 7: Manasan et al.

217

But what perhaps caused greater dislocation in local government finances in 1998 was the overall shortfall in LGU revenues relative to projected or programmed levels. Actual local source revenues in 15 out of 20 LGUs in our sample were lower than target levels in 1998.The revenue gap (i.e., the difference between actual collections and target levels) was substantial in most LGUs, ranging from 4.5 percent to 92.4 percent of actual collections. Expenditures Because projected revenues were generally higher than their actual receipts in 1998, LGUs had to adjust their actual expenditure obligations and disbursements accordingl)a The expenditure response of LGUs to the fiscal crunch was similar to that of the national government with one exception. LGUs in the Philippines are not allowed to incur a fiscal deficit due to recurrent expenditures. This means that when LGUs suffer a revenue shortfall, they simply cut back on their expenditures. Thus, the revenue gap is not reflected in terms of a higher fiscal deficit, but rather in lower levels of expenditures. Many LGUs imposed an across-the-board 25-30 percent cut on nonpersonnel recurrent expenditures (or maintenance and other operating expenditures, MOOE, in Philippine parlance). A few responded on a more targeted basis by securing expenditures in programs and projects that are high on the priority list of local chief executives while implementing greater cuts on other items. But on the whole, most LGUs reduced their overall expenditure levels. Thus, per capita total LGU expenditure fell in real terms in 13 out of 20 LGUs in our sample in 1998 (Table13).7 Specificall)_ this was the situation in 2 out of 4 provinces, 4 out of 5 cities, and 7 out of 11 municipalities. When programmed/appropriated expenditure levels were compared with actual obligations, LGU expenditures on economic services and other purposes were the most severely affected by the fiscal cutback in 1998 (Table 14). In particular, the expenditure share of economic services in total actual obligations in 10 out of 20 LGUs in our sample declined relative to the sector's share in total appropriations. In other LGUs, the share of other purpose expenditures in total obligations was reduced relative to their share in total appropriations. In contrast, LGU expenditures on general public services (consisting of general administration and police services) were the most resilient to the financial crisis. The share of the general public service sector in actual total obligations was considerably higher than its share in total appropriations in 16

7Some LGUs, however, were able to inca'ease their expenditures despite revenue current year by oh'awing down on their cash surpluses in previous years.

shortfalls

in the


Table 13. Real per capita LGU spending, Px_vince of fi=l_-an

I_ov/n_ _1_

oI

1997-1998,

P_o_-_ of MJsamis G_ental

current general funds

I_ovince d Son &m-aLeyte

Qu_zon CRy

An_po]e G_,

Ilo/le G_

(In 1997 prices).

Ca_y_m de (_o City

Dsva o Ciiy

OO

SanJc¢-_DM_ 8u]a_

3Cq'AL 1997 1998

285_8 260-_3

• 1_2.3_ 1_6_

1997 199_

11Z7_ 129.67

_7_ _3_14

1999" I998

145.13 1_7.40

_.09 _0.06

4_94 45_- 1_

451,9_g 45_

1,574.93 1,5"70.35"

333,09 445._

1,07l, E6 986. g4

1_935,90 1_0_.87

1,_L75 1,2_-01

359_,23 307".07

332.73 y24_ {_1

32K76 330.65

541.50 4___

1_336 14-_ _5

571.&_ 5_5_5

66_.20 636.95

42_08 378.9_

1_5._1 15-ti_3

II_'37 . t_'L85

8_._2 119_2

$14__3 697.33

1&9_8 1_25

430,71 415.M

38&31 389-09

_'_7,.41 780-74

122.{!_ 97.26

24.14 _._6

78.89 _

21960 1_50

_'gL5 113-37

182.4_ 1_i_64

1_&26 8_

84.39 _.19

111D._ 101.62

_25.11 594.97

_47.3_ 1K_60

5_.57 481.47

4_1.g5 _7_..89

680.59 57&_9.

243.20 190_X-2

44-96 70.12

L51.01 1_._

1_I_ 1fl_96

_-_f/$ 342.19

76.50 50.1"!9

5_[} _.[_

1_.40 125.L_4

_.42 245.4g

_-_26 160-64

43.17 _

Y_ta] l°S

Tv tsl MOCE

_otal CAtLVX 1997 1998

23".52 3.76

28_'-'q _9._$

1997 199_

SL29 97-T7

59_ _3_7

3.997 199g

32_3_ 09.25

I#.£7 1_._

1997 1998

60.91 5L_5

4.5_65 3_7

_9_7 1998

24.70 _3.18

fi&TD 9.45

To*a1_S 1[_t54 114.93 I_.57 l&O0

9.45 10,32

_ _67_

1"oraI Ecoa',omicSe_'ice 18554 191.44

17_26 l"f_ 8_

84-11 8_6

3_67 43.30

30.09 2_k_

9.56 _

41._6 _

34.71 _

11L&l _19_

25.76 1_..97

40.5.00 45_D.86

Ill.86 111.17

_24.22 ZW._

_15.00 _81

_24.18 :244.64

" 54_73 61 09

190-_ 190.19

5_86 37.54

14Z_ 151.80

_9_90 1_.65

153.73 14_1

15.54 15.56

I_.61 I74.66

_74 61.6_

3_.4_ 36.65

124.4,5 199_

19_69 1_5.$1

95.4_ 95.26

39.21 41.49

Economic Servic_ MOOE 9.89 395

28_5,5 17.59

To_] Se6a/S_r 1997 1998

125.96 109-4{I

20_ 29_"_

123.47 139.4-_

17L59 19_3.1_

1997 199_.

_"3._5 _ 42.6_.

._00 1.11

19.56 10.95

15.[_3 1636

1997 1998

_.._, _.70

730 950

1997 1996

21_ 11.70

_52 0.19

"l&l$ " 7,92

17.01 IE20

1[_$1 15.12

1.5.60 14_6

a_ 45,5g

5_L84 45.59

56.24 _9.35

6.,_' 7._0

1997 1998

25._ 21,94

532 5_

06.98 _5.,li

7&88 _l.'J_l

64.94 6_C_

9._5 2_._7

91._ 90.73

98,90 93.25

72_84 68.06.

30.88 36.66

_ _,_

1997

9_9

0.52

.7.16

652

1_81

_

_61

I_42

5.44

_'_

19_

_39

0.19

1._"1

7.29

15.05

11.85

1___7

24.97

?_.fi5

5+71

1997

5.76

0_

3,52

_

_

5Zfl_

19.4_

Z?._

3._'

¢._ I_

19_.

6.85

O:_

9.5"2

.7.93

_.4._

5.95

4_45

_xgo

_5.51

5.99

:_

1997 1998

1.71 144

_ O_

Z76 2_6

1-02 _

_-0g 1_

3_0_ 24.56

_L_5 12.._"

I&34 1_29

2.46 2.82

_'

Tol_l Hea]lh S_v/_ lll_ 1_.47

Health 8et'vlo__

Total Basic Health

-._ r_. k.;

Basic Head_hMO(_

"fotai $o<ial Welf_e S0oa_ W_J_a_et_$OOE

10.14

4_ 4.51

9.61


Table

13. continued...

_ Bz_ Bataa_as

Bar_te, fle/lo

Leon, I1o/1o

San b_ffue] _m3a

Libagm% Pa_e B_o., S. Leyte S. Ley_

Tma_l Oppe_ S. Izyte

_tasun_ Mmm_ Oz.

h'_ea_aul, Mi.a_d. OL

O_d, l_m6_ L'_.

1_61._ 1_g80_I

57]_93 _L_8

544_1 424.51

595.51 ._L95

648,33 84_K5

953.06 _

_35 73033

717-21 739.79

_.6J 5_-_

5_,4_ G33.36

4_72

324_8

4_625

6_.91

_59_

43_.43

51_.4_

68_62

429.55

66.46

1_.6_

1L7,45

1,_0.N

L96.72

197J_"

76.95

1._9,4._

140-69 _9._

1-52

104.L5 52.21

75.48 19._

17-78 4_59

39._2 10.2_

2_z_. 5.87

12.71 19,95

_ 56_.95

,t_2.6_ 46_72

426.52 427.45

_._7

73.46

$5.69

_ "_I

TOTAL

Tc4alPS 61_19

1,.L._,9'_

L10._6

217.54 L3fi43

234

Tc4alG_x3.

" 5_._. _

._,_

+

_09.,,q6 _Ofi4_

,,-_75._ 2_2_9

_4.64 242-87

_.q_31 _9-_

5895

59.58

39.92

41A3

43-20

82.16

Lq'_ll

1_.42

2_12.76

15454

29J0

64._

.37._

_.69

L?.L84 136.94

95.76 124.51

91.38 _.0'7

33a_ ,_._

9"_44 ._L_ 50.74 _52

_ _11

._SJD

24.06

5___7

Lql6.94

t51.70

9.17

95.4_i

L_-5.OI L%_kl0

200,39 117.58

1_9._9 61.23

7.63 4.95

f_lA2 80-q6

M.39 4.7.55

s_.0_ 14.95

7551 6_78

71_ $7.0_

11_5A6 56.6_

81.52 5_19

4_1 2.91 "

11.96 21.97

31._g 3._

5q.51 " 3._36

6.$._7. 68._

_75.86 5_

8L52 5& 19

Total Econm_'_c8ewioe 12Y7._

7_-/4

$[_19

10.74

31824 36_._

61_ 51._

_ 7L4_

111.10 97-4_

7Z48 100.61

16.52 14.54

23.86 15.62

_.85 17._

_14.fi6 22251

46.68 _._7

b_.._4 54,4.3

59.99 4_97

5_39 7L_)

I'Ll9 10.0_

1_ 7,47

10.,._7 _

45.41 _

46.(:$ "_.67

40.69 4Y.84

_ gr,_2

_6-76 76.69

5_..74 70_

7_..51 6_78

5.46

llA_

L74

071

2.23

2.44

4._I

5-18 9.46

14.8'/ 16.12

1L_ lO._n_

20.1_ "1_,.'/4

.._4.7_ 60.05

4'/._ 53.3_

1.5.86 14J0

_Lll 4.17

0.2_ 4_0

0.60 _

0310 048

_ 1._

20.(_ _._q5

"J5-5-36

E_ra_c_nac Sea.ricesMOOE â&#x20AC;˘ _

_i.g8

Tolal Soda] Sedo_

$e_d Sectoz MOOE

Tmal Heahh Servicer ,[6.76 76_

Heal_ Serv/o_ MgX_ 2.23 249

___44 0.54

Total Batic H_lth

Baai_ Hedlh MOOE _

_

3L51

:_19.44 _

._,.99 4_.19

13,4_ 10.93

26.64 1_'_2

31-76 26.26

5.q_. 1.76

To_I So,_d Welfaze

So_l WeFare MOOE

Source: Local Government Units.

_2 _

[_

_O


t,O bO

Table 14. Expenditure

Share by sector, appropriations C_neral Services Appr oFdali_

Oblig a tio_ts

versus

Eo3nO_LiCServices Appr opHaff (ms

Obliga ticats

obligations

general

fund, 1998 (Current account

Social Services Approlxia

ti_ms

He_d{h

Ohlig alions

Appr opal _tions

only).

Social Welfar,2 ObH ga Eior_

Appr opcia fio¢_

O Miga tions

tk ovince Bula can

19.65

19.65

9926

25.19

40.70 22-23 20.54

,3527

46_1 Z335 22_.2

26.95 83.31 50.47

29-39 _$8.9_ 26,81

15.34 28,64 55.71

t6.z-9 28,34 38.f15

5 97 20 "22 _4.95

7.01 22 .0G 38.11

0.54 1.97 0.63

0.64 1.93 0.64

38.33 46.97 _.3B 29.97 41.76

40.96 43.42 48-_9 31.28 46.56

17.42 " 5.15 21.72 21_'3 19.70

17.42 6.0 ! 12-67 20,09 18.42

24.86 2g.5_ 29.29 3728 lg.46

24_1 31.44 28.10 37.92 19.70

8.09 4,58 9.64 I_._4 728

8.22 4_0 12.39 14.63. 7._7

1O5 • t.85 3.88 1.91 Z(_

I,_3 1.7")" 4_1 2,19 Z05

$at_ Jos e _M o_t_ Bt_Ol_ l_umx l_alalxgas Ban,ate, Ilo0o Leon, Ilc_o

64_9 16.91 51,70 54.38

_ 1699 56,91 5721

10.56 63.35 19.3g 18.11

tt,7.9 64,52 18-62 19-36

10_i3 18.24 11,94 16.21

20.09 18.36 13_L6 16_&2

12,16 11._3 7.95 1121

13_'1 11.24 9.13 12_62

I._ 0.48 5.98 2.18

1.72 OA8 4.18 2,86

San l_figue], hollo Libagon_ S. _ Padre Bt_r8o*, S. Leyie

49.97 56.37 _.87

84.41 6Zff2 61,14

27.73 24.12 28.48

z3,92 20.95 2524

17.35 14.20 11,10

16.26 16.17 I_A$

8_7 7.86 6.24

8.61 9,0_ 7.65

2.77 6."_1 4_-_

3_9 7.00 5._

Tomas OFpus , S. L_-te

63.22

63.08

21.44

21.16

10.47

11.38

8.70

9.42

1.77

1,96

GitagumL Misamis O_en_ Lib_d_ Mi_amis Ori¢m lal

_.7 43.95

b-7,78 49.87

21.59 21 `70

20.73 25.47

20.47 273.4

21.37 21.83

10.47 12.09

11.27 10.54

8.57 7._

8.59 7.88

_.

42-31

_1_3

2_,82

28.98

1_

lZSS

z_

z_6

_.

Ocdlo Misamis Orienhal Southern Leyle

_5.57

,39.26

"

25.19

2.62

Z62

Ci_ies Antipolo Qu.ez_x't 11c_o C_gavan de Oro EMvao R&micipalit[es

o_a,_ Source:

oa_ LocM

Government

Units.

9,9_

8_7

_'_-

._-

Q 0b


Chapter 7: Manasan et al.

221

out of 20 LGUs in our sample. This may be explained by the fact that LGU expenditures on general public services were largely composed of wages and salaries which remained untouched even in times of fiscal crises. In like manner, the share of social service sectors in total actual LGU spending is slightly higher (or, at the very least, just about equal) to their share in total LGU appropriations in 15 of 20 sample LGUs. In this sense, LGUs accorded some degree of protection to social sectors (Table 14). The picture, however, is not that rosy when one looks at the level of real per capita LGU spending. Although LGUs appeared to have been partly successful in putting up a firewaU around social sector budgets by maintaining the expenditure shares of the sector, actual levels of LGU expenditures in real per capita terms posted some deterioration in 1998. Thus, real per capita total social service expenditures declined in 10 LGUs in the sample (1 province, 3 cities, and 6 municipalities). Moreover, per capita real expenditures on basic health services declined in 12 of 20 LGUs under study. Although per capita LGU expenditure on personal services declined in only 9 of the sample LGUs, real per capita MOOE and capital outlays were reduced in 12 LGUs in 1998. One of the areas that was badly hit by the fiscal bind was MOOE in total social service sectors where 15 sample LGUs had lower per capita MOOE expenditures in 1998 compared with 1997. In particular, per capita MOOE spending in basic health services declined in 13 out of 20 LGUs for which we have data. This situation severely affected the availability of drugs and medicine in barangayhealth stations, rural health centers, and devolved hospitals and was consistently noted by FGD participants in most areas. With the greater devolution in delivery of basic social services to LGUs under the Local Government Code of 1991, the experience of 1998 suggests that cutting the IRA during times when the fiscal situation is tight is extremely destabilizing for LGUs. This policy needs to be revisited and reviewed. If the national government indeed has no recourse but to implement reductions in the IRA during times when fiscal restraint is critical, then it is imperative that a safety net mechanism be designed to ensure that all LGUs are able to provide the minimum level of basic social services despite the IRA cutback. Such a mechanism should specifically address the inequities in the IRA distribution formula which are further exacerbated when the IRA is cut. In turn, such a scheme would require the presence of a strong monitoring System at the LGU level so that better targeting of scarce government resources is achieved.


8 Impact of the East Asian Financial Crisis on Social Services Financing and Delivery VLWL,da S. Pi_eda

the government, through Administrative Order No. 372 (dated 27 ue to the economic difficulties arising fromdirected the Asian financial crisis, December 1997, effective 1 January1998), all its departments and agencies to reduce total expenditures for 1998 by at least 25 percent of authorized regular appropriations for nonpersonal service items. It also withheld 10 percent of the internal revenue allotment (IRA) to local governments. Eventually, budgetary reserves imposed on the appropriation for maintenance and other operating expenditures (MOOE) for critical basic health and social services programs amounting to P1.5 billion were lifted on 10 July 1998. This is to mitigate the adverse impact of the financial crisis on the disadvantaged sectors of societ_ The crisis has raised many concerns for the social sector. Shortly after the crisis, several studies were undertaken to assess its impact (e.g., World Bank 1998, Lira 1998, and Reyes 1998). In the absence of actual trends, these studies presented the likely or projected impact of the crisis on the social sector. The most recent study by Reyes et al. (1999) used focus group discussions, key informant survey, and household survey in addition to secondary data to determine the social impact of the financial crisis on the populace, particularly vulnerable groups. This paper focuses on the effects of the crisis on the government's financing and provision of social services through the Department of Health (DOH), Department of Education, Culture and Sports (DECS), and the Department of Social Welfare and Development (DSWD). It seeks to address the following questions: 1. What were the effects of the crisis in 1998 on the following: a. financing of the social sector relative to other sectors;


224

Economic

crisis... Once more

b. financing among the social subsectors; and c. financing and performance of social services programs. 2.

3. 4.

What was the impact of the crisis on 1999 appropriations among the social subsectors, economic category of expenditures, and specific programs and projects? What were the remedial measures taken by the social sector agencies to cope with the fiscal constraint? How far has the government progressed identified budget-related issues?

The impact of the financial crisis on financing analyzed in terms of the following: 1.

2.

in addressing

long-

of social programs

was

How much the agency actually spent relative to the appropriated amount. This was indicated by calculating the ratio of obligations incurred to current or new appropriations for the year. Obligations are liabilities legally incurred and committed to be paid for by the government. Current appropriation pertains to the amount allocated by the government for each agency, programs, projects, and activities for the current year as contained in the General Appropriations Act (GAA). How much the government released relative to appropriations. This was computed using the current allotment/current appropriation ratio. Allotment refers to the authorization issued by the Department of Budget and Management (DBM) to an agency which allows it to incur obligations or enter into contracts for specified amounts. Based on the Advice of Allotment, DBM releases the corresponding Notice of Cash Allocation (NCA) which specifies the maximum amount of withc_rawal an agency can make from a government servicing bank.

To indicate the absorptive capacity of a particular agency_ that is, how much it was able to use from allotment releases, the obligation/allotment ratio was also computed. The impact on delivery of services was evaluated based on the programs' percentage of accomplishments to targets as measured by performance indicators.


Chapter 8: Pineda Effects

225

on 1998 financing

and performance

Comparison between social and other sectors The government accorded the highest priority to the social services sector by providing it the biggest budget allocation. In 1998, the sector received about 30 percent of the GAA (Table 1). It was likewise relatively protected from cutback in expenditures as imposed reserves on social services were selectively lifted. Accordingly, expenditures on social services were reduced by 10 percent of the GAA program level, in contrast with economic services which fellby 30 percent, and national defense, by 17 percent2

Table 1.

General national

Appropriations Act (GAA) appropriations government expenditures, by sector. GAA (P million)

Sector

Actual expenditures (P million)

1998

and actual

Share in GAA (%)

Actual/GAA (%)

1997

1998 a

1998

1998

Social services

152,301

122,668

137,106

29.5

-10.0

Economic services National defense

115,159 46,492

108,952 37,366

80,786 38,454

22.3 9.0

-29.8 -17.3

Public services Others

86,692 116,371

73,165 71,661

78,559 105,147

16.8 22.5

516,215

413,812

439,450

100.0

=9.4 -9.6

Total national government expenditure

b

preliminary. excluding debt service. Sources: Department of Budget

and Management,

-14.9

Reyes et al (1999).

Compared with the 1997 level, expenditures on social services increased not only in nominal terms but also in real terms, although only slightly, by about 2 percent (Table 2). On the other hand, the other sectors increased in nominal terms but declined in real terms. The hardest hit was economic services which fell by 33 in favor of the percent in 1997 1998 relative to

percent in real terms. As the limited funds in 1998 were allocated social services sector, its percentage share increased from 30 to 31 percent in 1998, while those of other sectors were lower in 1997.

In terms of per capita, however, social services expenditures declined in real terms, from P621 in 1997 to P618 in 1998 (Table 3). Nevertheless, it has the least reduction

of only 0.6 percent. Again, economic services suffered the greatest

-reduction as per capita expenditure declined by 34 percent. even lower than the 1996 level by 22.5 percent. Financing adjustments

The 1998 level was

and performance of social services programs may have also been related to the transition from the Ramos to the Estrada administration.

affected

by


226

Economic

Table 2.

National 1997-98.

government

expenditure

changes and shares, by sector,

Percent change Sector

Nominal

Social services Economic services National defense Public services Others Total national government expenditures ;' tl

crisis.., Once more

Percent share

Real :'

1997

1998

11,8

1.7

29.6

31.2

-25.8 2.9 7.4 46.7

-32.6 -6.4 -2.3 33.5

26.3 9.0 17.7 17.3

18.4 8,8 17.9 23.9

6.2

-3.4

100.0

100.0

i .ll

based on 1996 prices. b excluding debt service. Sources: Department of Budget

Table 3.

National 1996-98.

and Management,

government

Reyes et al (1999).

expenditures,

per capita, by sector,

Amo_u_t (P) Sector

1996

(in 1985 pr!ces) 1997

1998

Percent change 1996-97 1997-9

Economic services Social services National defense Public services

470 555 171 351

552 621 189 371

364 618 173 354

17.5 12.0 10.6 5.5

-34.1 -0.6 -8.5 -4.5

Others

322

363

471

12.6

29.7

3,869

2,096

1,980

12.2

-5.6

Total national government expenditures

'_

excluding debt service. Sources: Department of Budget and Management,

Reyes et al (1999).

Comparison among social services subse_tors Among the social services subsectors, leducation and social welfare were the most protected sectors. Education had the highest appropriation--about 72 percent of the total for social sectors in 19981 Its actual expenditures were also cut the least, by 4 percent, relative to the GAA level. Compared with the 1997 level, actual expenditures in education increased by I percent in 1998. Moreover, its share in total social expenditures remained high at 76 percent in 1998. Per capita expenditure, however, decreased from P474 in 1997 to P470 in 1998 or by about I percent. Social welfare and employment sector expenditures declined by 24 percent as a percentage of GAA (Table 4). Rea! expenditures, however, increased by 19 percent from 1997 to 1998. The percent share of social welfare and


Chapter 8: Pineda

227

employment in total social expenditures likewise increased from 11 percent in 1997 to 13 percent in 1998 (Table 5). More significantly, real expenditures per capita increased by 17 percent. In the health sector, actual expenditures were 15 percent lower than the GAA level. Similarly, expenditures in real terms declined by 15 percent, unlike those of education and social welfare which increased. The health sector's share in total social expenditures also shrunk from 11 percent in 1997 to 9 percent in 1998. Moreover, per capita health expenditures decreased the most in 1998, by 16 percent (Table 6). In addition, in 1996 (P57). Table 4.

GAA and actual subsectors.

the 1998 level (P55) was even lower than that

national GAA (P million)

government

expenditures

Actual expenditures (P million)

Subsector

Education Health Social welfare and employment Housing and community development Total social services â&#x20AC;˘ preliminary. Sources: Department

Table 5.

1998

1997

1998 a

109,130 14,506 23,418 4,447

93,639 13,062 3,493 2,474

104,301 12,274 17,720 2,207

71.6 9.5 15.4 2.9

152,301

122,668

137,108

100.0

of Budget and Management,

National government subsector, 1997-98. Subsector

Department

changes

Percent change Nominal Real

1998 -4.4 -15.4 -24.3 °50.4 -10.00

and shares by social Percent share 1997 1998

11..4

1.3

-6

-14.5

10.6

9

31_3 -10-8 11.8

19.5 -18.8 1.7

11 2 100

12.9 1.6 100

Health Social welfare and employment Housing and community development Total sodal services

Actual/GAA (%)

Reyes et al (1999).

expenditure

Education

Sources:

% share in social expenditures 1998

on social

of Budget and Management,

Reyes et al (1999),

76.3 "

76.1


228

Table

Economic

6. National subsector,

government 1996-98.

Education Health Socialwelfareandemployment Housfiagand community development Totalsocialservices Department

per

Amountper capita(P) (in 1985prices) 1996 1997 1998

Subsector

Sources:

expenditures

of Budget

crisis... Once more

capita

by social

Percentchange 1996@7 1997-98

404,97 56.98 66.93 25.82

474.4 66.17 68.36 12.54

469.92 55.3 79.84 12,66

17,1 16.1 2.1 -51.4

4).9 -16.4 16.8 1.0

554,7

621.47

617.72

12.0

-0.6

and Management,

Reyes et al (1999).

Housing was the most adversely affected sector. Its actual expenditures were only 50 percent of its 1998 appropriation. Actual expenditures in 1998 declined by 19 percent in real terms over that of 1997, the biggest reduction among social subsectors. Its low share of 2 percent in social expenditures in 1998 further dwindled to 1.6 percent in 1998. Furthermore, per capita real expenditure on housing of P13 in 1998 was only half of that in 1996. DOH programs:

Financing

and performance

Actual expenditures vs. appropria_on Public health services programs

were more severely affected by the fiscal

crunch relative to health facilities maintenance and operations. The percentage of expenditures to total appropriation was only 49 percent for public health services compared with 67 percent for health facilities maintenance and operations (Table 7). The procurement of drugs and medicines was likewise adversely affected as the obligations incurred were only 43 percent of appropriations. The lowest obligation/appropriation ratio was for the women and children protection program (women and children protection units in selected hospitals), which i was below 1 percent. I Among the public health services, the ratio of obligations to appropriation was below 50 percent in some programs. These include control of diarrheal diseases (1%), national diabetes program (17%), cancer control program (23%), immunization program (31%), and sexually transmitted diseases (STD)/ acquired immunodeficiency syndrome (AIDS) control program (42%). Those with relatively higher obligations to appropriation include rabies control program and smoking cessation program (both at 71%)), leprosy elimination program and dengue control program (both at 72%), schistosomiasis control service (76%), and national preventive mental health program (83%).


Chapter

8: Pineda

Table7.

DOH

229

(Office

of

Appropriations,

the

Secretary,

Allotments

]P_ogrm_,(O[:n_llQns)

Central

& Obligations

(H ol[_k_31)

(in of 1_-31)

Office),

1998

(Current).

(u o[ Sq_.30)

(a) _ 1_¢.$11

a, Public Health Servit_s

0.49

0,50

0.73

0.92

b. Primary Health Care Program c, Health Fadlities Maintenance and Operalion_

0-,_ 0.67

0.54 0.75

0.70 0,80

0,70 0,69

d,Health Fa dllty Standards, Regula ttoixs and Licensing e. Dr'ug$ and MedJ.c_es [. WoDl&rt _d Cl_dEel_ Protec[loll Program

0.67 0,43 0.01

0.70 0A9 0.10

0,86 0.24 0.(_

0,86 0,87 0.80

g. Regional Assist ance Fund for Drugs &Micr tmutdenta

0,75

1.00

0,75

0,75

029 0.37

0.40 028

0,75 0,91

0.97 0.96

0_59

0.61

0.72

0.97

0.56 0,52

0.63 0,_

0,78 0.80

0.90 0.95

0,01

0-01

1.00

1.00 "

0.31 0.56

0,31 0.56

0,69 1.00

1.00 1,00

0.26 0.58

0_36 0.66

0,_1 0.71

0.68 0.87

Public Health

Services

1. Family Health Nula'iflon and Wdfam a, Mat_ltal sad Child He,-dth Service h. NtaJrltion Service including Iodizatltm Program c. Fmxtily Hanning SerVice d, Dental Health SeTvice e, ContrO_C_Diarrheal

Salt

Diseases

f. [mmmaiza liorL Pr0,gr am g, Contzol of Acute Respiratory Ia feclion/ Integrated Child Care Management h, Family Health Program 2, Nailc_al Disease Conlrol Program a. Cc¢/mnu_icable Disease Coat_ol Program I, Ctmununic_ble Disease Conlrol Service

0.62 0.94

0.68 0,96

0.75 0.96

0.92 0.96

2, Tuberculosis Cot_trol a, Tuberculc_is COnITOI5_vices

0.62 0.78

0.64 0.62

0.76 0.88

0,96 0,95

b. Phllipph_ TuberculoUs Society c. National TuberCulosis Contiol Prog_ _ 3. STD/AIDS Control Program

0.75 0.58 0,42

1.00 0.59 0.6_

0.75 0.75 0.60

0.75 0.99 0.66

4. Malaria Control Program 5.Rabies Conlzol Program 6. Schistosomiasis Con_ol Service

0.64 0.71 096

0.71 09"2 0.80

0.81 0.75 0.91

0.90 0.98 0.95

7. Dengue C_trol Progrim 8. Fllarla Ctmtrd Program

0.72 0,64

0.74 0,78

0,75 0-75

0.97 0,62

0.72 0,49 0.72 0.53.

0.76 0.63 0.77 0,73

095 0,62 0.87 0.57

0,94 0.77 0._1 0.70

0.71 0.23 0,_9 0.51

0.74 OA3 0.74 0.58

0.75 0,46 0.75 0.59

0.96 0m 0.80 0.88

0,83 0.66 0.17 0.67 0.76

0.83 0,72 0-16 0,76 0,80

0.90 0-75 0._0 0.82 0,83

1.00 0.92 0,94 0.89 0,89

0,62

0,66

0,78

0.91

c,Hc_pital Waste Maxaagemeat 4._u_ltyHealth Program • i.Community Health Service b, Traditional Medidne Program c. Health Development Program

0.11 0,47 0,69 0,51 0.34

0,12 0.65 0.71 0,68 0..%

095 0.56 0.86 0,62 0.40

0.89 0.7_ 0.96 0,74 0,6"I

d, Community-based Rehabilitallc_ Program e. IndtgonOU_ People 5, Pr 0vi_40n for a p0ol of 80 Rural Health

0.73 0.68 034

0.77 0.68 0,82

095 0.75 0,_4

0,95 1.00 0.90

9. Natimxal Leprosy El/minatic¢_ Program b. Nat_-communicable Disease C_'x_ol Program 1. Non-¢ommunlcaHe DiseaseConi_ol _tvice 2. Cardlowa_cttlar Disease Control 3, 4. 5. 6,

Smo_ Cer_sation Program Cancer C_,xtrol Program BllndeSS Prevenilcm Program Prevenliw N_phrolosy

7, Na_ic_l Preventtw Mental Health Pro_am 6. Oompationat Health Program 9. Natic_aal Diabetes Program 3. Environmental Health Program a, Environmental Health Service b.Operation c_fInter-Agency Environmental Health

Phyddar_

for Doctorle_

CO_lttee

On

Communll:[es

Source Ofbasic data: Department of Health.


230

Economic crisis... Once more

Government allotment releases as against appropriations One reason for the low obligations/appropriations rati o is low allotment •releases. In several DOH programs, however, the proportion of allotment to releases has been high, even 100 percent in some cases; but the amount obligated constituted a small percentage of allotment.i In such instances, where allotment is high but use is low, the problem may be traced to delays in fund releases and low absorptive capacity due to administrative constraints. The slower releases of allotment in public health serviceS, to some extent, caused the low level of expenditures in publichealth services relative to health facilities maintenance and operations. At the end of 1998, allotment releases for public health services reached 92 percent 0f appropriations, higher than that for health facilities at 89 percent. As of the third quarter of 1998, however, the amount released for public health services Was lower at 73 percent relative to health facilities at 83 percent. The earlier releases for health facilities enabled a higher allotment use rate of 67percent, whereas the public health services' ratio of obligation to allotment was lower (49%). Government allotment releases for drugs and medicine amounted to 87 percent of appropriations as of December 1998 but only 42 •percent of the allotment was obligated for the year. The allotment releases have been much delayed--as of September 1998, only 24 percent of the appropriation has been released, which constrained fund obligation and slowed down procurement. For the women's health protection program, the government provided a low allotment of 5 percent of appropriation and the DOH obligated only 10 percent of this allotment, indicating tha t this is not a high priority program. Among• the public health services programs, for immunization, the government has provided i00 percent of the appropriation at the end of 1998. AS of 30 September, however, only 69percen_ has been released. This contributed to the low obligation allotment ratio of 31percent. Similarly, the national diabetes control program has a high allotmen[/appr0priation ratio?94 percent as of December. But as of September, only 50 percentof the appropriation has been released. Such•delays partly caused low allbtment use; only 18 percent of the allotment was obligated for 1998•. In the case of the program on control of acute diarrheal diseases, the allotment has already been released 100 percent as early as 30 September, but the amount obligated as of 31 December was quite low (1%). Such low use of funds was attributed to the holding of drug procurement due to some allegations of anomalies. For cancer control and STD/AIDS _ontrol, allotments released were relatively low--only 52 percent and 66 percent, respectively, of appropriation as of 31December. Obligated amounts were likewise low: 43 percent of allotment for cancer control and 63 Percent for STD/AIDS Control.


Chapter 8: Pineda

231

Although delays in releases contributed to the low allotment use in some programs, such as the provision of drugs and medicine, there are real problems with DOH administrative capacities. Based on Commission on Audit (COA) data, allotments released for capital outlay in 1996 totaling P257.2 million intended for purchasing equipment and constructing new buildings were not used and thus considered lapsed after 2 years (as provided for by National Budget Circular 406 dated 28 April 1989). The budget officer obligated the releases in favor of DOH but no purchase orders were prepared by the supply officer and approved by the agency head. There have also been allegations of anomalies in DOH procurement such that decentralization of procurement has been initiated. According to DOH Secretary Alberto Romualdez (1999), not enough is being spent on developing administrative capacities leading to low absorptive capacities especially of public health programs. Performance by program Table 8 shows DOH performance by program from 1996 to 1998. For consistency, DOH data were adjusted to exclude areas with incomplete reports in any of the years covered. The adjusted data are almost the same as DOH's reported data. Both showed a generally declining percent coverage of eligible population from 1996 to 1998. As adjusted full immunization coverage fell from 89 percent in 1997 to 85 percent in 1998. For the same period, under the nutrition program, the proportion of moderately and severely underweight children supported with new food supplementation decreased by about 6 percentage points. Only 4 percent of the eligible population was given iodized oil capsules in 1998 compared with 17 percent in 1997. Similarly, DOH was able to provide oral rehydration solutions (ORS) to only 19 percent of diarrhea cases in 1998 relative to 32 percent in 1997. The ratio of pneumonia cases to the eligible population was also lower in 1998 (55%) than that in 1997 (71%). Under the National Tuberculosis Control Program, DOH reported that the ratio of TB cases given treatment to the target population decreased from 76 percent in 1997 to 63 percent in 1998. Likewise, of the diagnosed cases for the same years, the proportion provided treatment fell from 88 percent to 51 percent for malaria and from 68 percent to 29 percent for filariasis. These coverage reductions could increase incidence of diseases and permanently impair the physical and mental health of the affected population. DECS programs." financing

and performance

The government provided the lowest allotment releases relative to appropriations for Teacher I positions (24%), purchase of desks/chairs,


232

Economic

Table 8. DOH performance Program

by program,

and Coverage

1996

Expanded Program of Imlnunization Cowarage of eligible population:

crisis... Once more

]996-1998. I

AS _vorted I " 997 I

1998

1996

Adjusted 1997

1998

(EPI)

% given full irnn_unizatior_

89.8

88.9

81,3

89.6

89.2

85.0

% given 3rd dose of Hepa B % of pregnant women given TF2 Plus

62.2 49.0

36.7 52.2

34.3 50.2

61.9 49.0

37.5 52.2

37,1 50,3

Food. supplementation

among

children

Numberofmoderataiyunderwaightchildren

1,145,936

% given food supplementation (new) % receiving food supplementation (follow-up) % rel_abilitated Number

of _verely

Lmderweight

% given food supplementation

chnd ran (new)

16.2 23,7 9,0 333,170

861,556 14,8 15.9 103 143,967

665,227 10,5 9.0 9.5 I09,486

993,711 16.1 23.6 8.9 309,268

752,047 15.2 16.4 10,7 122,350

612,203 10,8 9.4 9.9 104,589

28,6

21.2

15.2

28,0

21.5

15.5

71,3 34,0

21.5 17.t

10.0 9,5

75,8 32.7

22.7 15.0

10.2 9.8

% of lactating mothers % of children (9-11 mos)

52.0 66.7

49.8 71.6

49.2 72.9

51.9 66,4

50.4 71.5

50.7 73.4

% of children

94.0

93,2

89.7

93.7

93.8

91.0

â&#x20AC;˘

39.7 36.4

46,9 42.2

41.4 38.5

39.3 36.4

46.9 42,2

41,6 38.7

Given Iodized Oil Capsule % of women (1_-49 years old)

21.3

173

4.0

21.6

17.3

4,0

33-8

33.9

34.6

34.9

34.5

35,8

164.3

156.4

185.9

165,1

158.3

192.0

6.3

5,3

5.5

6.4

5.5

5.6

% receMng food supplementation % rehabilitated

(follow-up)

Micmnutrlent supplementation Coverage of el'igible population: Given Vitamin A

(12-59 mos)

Given Iron % of pregnant women '!4,of post-partum mothers

Dental

Health

Coverage of eligible Preschoolers:

population:

% given curative Schoolers:

tseatrnent

% given preventive % given curative Pregnant wortlen:

treatment treatment

60.6

60.1

60,5

62.2

60.0

61.1

% given curative Other Adults;

% given preventive

treatment

44.4

45,3

47.2

49,8

39-1

47,5

% given curative

treatment

48.3

47.8

49.6

49.3

48.6

50.0

35.5

3I.6

28.4

35.2

31.7

19.2

76.9

69,9

55,0

75.4

70.6

55-3

88.9

91.3

94.7

90-7

91.2

94,7

91.5

76.0

63-3

323,139 40.5

'282,804 88.1

326,887 50,8

15,293

13,625

J.3,679

Control

of diarrheal

% of diarrhea Pneut_oni_

treatment

diseases

cases given ORS

Control

% of pneumonia

cases seen out of eligible pap'n.

% given treatment Nationa_ I"l"ubareulosis Given Treatr_aot Malaria

Control

Number of diagnosed % given treatsnent Schistosomiasis Number

Number

cases

Control

of cases

% of ca_s Filariasis

Progra rn

as % of Target

glver_ treatment

83.7

97.4

95.5

Control of cases

% of cases given treatment

1,504 44.7

2,35'1 . 67.8

4,754 28,7


Chapter 8: Pineda

233

Table 8. continued... Program Schistosomiasis Number

and Coverage

of case.'_

15,293

13,625

13,679

83,7

of cases

1,_04

"to of cases given treatment

Animal

1998

1996

Adiusted 1997

1998

97.4

95.5

Control

Number

Rabies

AS Reported 1997

Con _'oi

% of cases given treaur.arlt Filariasis

1996

44.7

2,351

4,754

67.8

28.7

Control bite cases seen

% given post-eテ用,:_ure

35,790 imm_.miza fion

29-8

60,788

63,325

39.0

47.1

Source:Field Health Service Information System (FHSIS).

textbooks/instructional materials, tools, furniture, fixtures, Computers, and other equipment (37%), and land and land improvement (20%) (Table 9). Consistent with such low allotment releases, the obligations/ appropriations ratios were also low for the same items: teacher I positions (24%), and land and land improvement (17%), while no amount was obligated for purchase of desks/chairs, textbooks/instructional materials, tools, furniture, fixtures, computers, and other equipment. In contrast to DOH, however, DECS had high use rate for the amount released: 89 percent for land and land improvement, and 100 percent for most of the specified programs. education. Also severely

Exceptions

affected

are the purchase

by the fiscal constraint

of desks and preschool was the DECS school

building program. The program is administered by the Department of Public Works and Highways based on the work program submitted by DECK Its programmed amount for 1998 was cut by 52 percent from the 1997 level. This was aggravated by the very low disbursement in 1998 as it covered only 46 percent of obligations for the same year (Table 10). The number of school building projects (construction, rehabilitation, replacement, completion, repair) declined substantially from 12,147 in 1997 to 4,903 in 1998 or by 60 percent. Furthermore, the proportion of completed projects to the programmed target was much lower in 1998 (76%) compared with those of 1996 and 1997 which were almost 100 percent (Table 11a). This will further worsen the classroom backlog which was estimated to be 10,942 in 1997 (NEDA 1998). The percentage of projects completed varied widely across regions. Central Mindanao had the lowest ratio of 29 percent, followed by Western Mindanao with 49 percent, and Caraga with 52 percent. In contrast, Ilocos had the highest proportion of projects completed (99%). Southern Tagalog and Central Luzon had 93 percent and 91 percent completed

projects, respectively.


234

Economic

Tabble 9. DECS (Office 1998o

crisis... Once more

of the Secretary, Central Office) financing Allotments/ Appropriations

Obligations/ Appropriations

ratios,

Obligations/ Allotments

A. PROGRAMS AND ACTIVITIEs I. General Administration and Support a. General Administration and Support Services a, General Management and Supervision 1. General Adrrtinistrative ,Services

0.89

0.89

1.00

b, Opera tion and Maintenance of Centers c. Human Resources Training and Development including an amount of P15 Million for Teacher's Training d, Contributions to Various Activities

0.92 0.63

0.92 0,63

1.00 1,00

0,81

0,81

1.00

e, Out-of-School Adult Education Program Subtotal, I

0.75 0.86

0,75 0,86

1,00 1,00

0.88

0,88

1,00

0.24 0.82

0.24 0.82

1.00 1.00

0.75 1,00 1.0fl 0.75

0.75 1,00 LOII I).00

1,00 1.00 1.00 0.00

0,48 0,38

0,48 0,00

1,00 0,00

0,20 0,58

0.17 0.47

0,89 0,80

0,63

0.54

0,85

i1. Support to Operatioos Ill. Operations Regional Operations (Nationwkle) a. Requirements of Newly-Created Positions Teacher I Positions (2,000 Items) Public Health Nurse Positions (2,240 Items) b. Govemn'_ent Assistance to Students and Teachers in Private Education (GASTPE) c, Lump-sum for Reclassification of Positions d. Lump-sum for Subsistence and Laundry Allowance e. Pre-School Education f. Secondary Education 1, Operational Expenses of Newly-Legislated/ Established High Schools g, Purdxase of Desks, Chairs, Textbooks, Instructional Materials, Tools, Furniture, Fixtures, Computers and Other Equipment h. Lump-sum for Land and Land Improvement Subtotal, III

Outlay

Total I Source

of basic

data:

Department

of Education,

Table 10. DECS school building Amount Year

programmed (P '000)

Culture

and

Sports.

program: I financing.

Allotment/ programmed (%)

Obligation/

i

allotment (%)

Disbursement/ obligation (%)

1996

4,051,275

99.6

97.4

93.3

1997

4,508,083

96.2

93.1

83.3

1998

2,163,058

97.9

86.0

46.0

I

Source:Departmentof PublicWorksand Highways (DPWH).


Chapter 8: Pineda

235

Table 11a. DECS school building program: completed projects. Projects Year

(no.)

Programmed

Completed/ Completed

programmed

(%)

1996

11,221

11,217

99.9

1997

12,147

11,962

98.5

1998

4,903

3,738

76.2

Source: Department

of Public Works and Highways

(DPWI-I).

When percentage completion of projects was related with poverty incidence, Central Mindanao, which had the lowest completion rate, had the second highest poverty incidence (Table llb). In contrast, Central Luzon and Southern Tagalog, with high completion rates, had the second and third lowest poverty incidence. There, however, seemed to be no strong linkage between percentage completion and poverty status of regions since some poorer regions like Bicol and Northern Mindanao also had high completion rates.

Table 11b. DECS school building program: regional level. 1998 Region

12 9

Region

Projects (no.) Programmed Completed

1997 Percent completed

Poverty incidence (%)

Central Mindanao Western Mindanao

293 227

85 112

29.0 49.3

49.1 39.8

13 6 CAR

Caraga Western Visayas Cordillera

197 477 96

102 274 57

51.8 57.4 59.4

41.6 42.3

7

Central Visayas

309

207

67.0

34.2

8 2 10 NCR

Eastern Visayas Cagayan Valley Not'them Mindanao Metro Manila

353 243 260 160

264 189 210 130

74.8 77.8 80.8 81.2

40.7 31.6 46.8 7.1

5 11

Bicol Southern Mindanao

394 248

335 227

85.0 91.5

50.1 37.9

3

Central Luzon

411

379

92.2

16.8

4 1

Southern Tagalog Ilocos

980 255

914 253

93.3 99.2

25.7 37.6

CAR = Cordillera Autonomous Region, Sources: DECS (1999), NEDA (1999).

NCR -- National

Capital Region.


236

Economic crisis... Once more

Concerning the provision of textbooks, as of 30 June 1999, all째trnents released for purchase of textbooks for 1998 were only 78 percent of appropriations (Table 12). Delays in releases of NCAs slowed down procurement. For Regions 2, 4, 5, 13, and CAR with data on both actual and planned purchases, the proportion of actual (P1.8 million) to planned (P3.7 million) purchases was quite low at 50 percent as of June 1999. Table 12. DECS' purchase of textbooks for fiscal year 1998 (as of 30 June 1999). Item

Amount

Appropriations Allotments Obligations incurred

(P)

_15,149,000 399,228,320 349,135,363 Ratio (%)

Allotments/Appropriations Obligations/Allotments Obligations / Appropriations Source:

Department

of Education,

Culture

77.5 875 67.8 and Sports.

DSWD programs: financing and performance Financing Of the appropriated amount, only 42 percent was released for asslstance to persons with disabilities and senior citizens, 46 percent for nationwide emergency assistance/calamity relief operations, and 63 percent for protective services for children and youth in especially difficult circumstances (Table 13). Greater priority was given to maintenance and operations of centers and institutions. Allotment for this item reached 80 percent of appropriation. This covered reception and study centers for children, Lingap centers for street children, regional rehabilitation centers for the youth, women centers, and centers for persons with disabilities. For obligations/appropriations ratios, the same ranking as above applies. For locally funded projects, allotment released was 75 percent of appropriation and the obligated amount was 99 percent of allotments. Similar to DECS, DSWD had high absorptive capacity. Except for the family welfare fund, which had an obligation/allotment ratio of 22 percent, the obligation/allotment ratios of other items ranged from86 percent to 100percent. Perdormance: accomplishments vs. targe_ DSWD fell short of its targets in som e activities, particularly the Sulong Dunong Para sa Kabataan and the Self-Empl0yment Assistance Kaunlalran (SEA-


Chapter 8: Pineda

237

Table 13. DSWD

(Office of the Secretary)

financing

Allotments/ Appropriations

ratios, 1998. Obligations/ Appropriations

Obligations/ Allolraents

A. PROGRAMS AND ACTIVITIES I, General Administration

and Support

0.88

0.78

0.89

0.73

0_72

0,99

II. Support to Operations HI, Operations a. Assistance Program for Distressed and Disadvantage Population 1. Nationwide Emergency Assistence\CalarMty R_llef Operations, etc. 2, Assistance to Persons with Disability including P15,000,000 for Senior Citizens

0.46

0.44

0.97

0.42

0.42

1.00

3. Protective Services for Children and Youth in Especially Difficult Ciro.tmstances b. Technical Assistance to LGUs

0.63

0.54 .

0.86

¢, Maintenar_e

0.80

0,80

1.00

0,75

0.72

0,96

0.75 0,75 0.75 0.75 0.75

0.75 0.75 0.75 0,67 0.75

1.00 1,00 1,00 0,89 0.99

0,75

0.17

0.22

TOTAL PROJECIS

0.75

0_75

0_99

GILAND TOTAL

0.75

0.73

0.97

and Operations

of Centers and Inst

TOTAL PROGRAMS AND ACTIVITIES B, PROJECT_" I, Locally-Funded Project(s) 4. CIDS5 in the Most Depressed Provs trader SRA b. Sulong.Dv, nong Pare sa Kabataan ¢. Tulay-200O d- Special Project for Poverty Mapping e. SEA-_raB 11 f. Family Welfare F_md

Source

of bas!c

data:

Department

of Social

Welfare

and

Development.

K) projects (Table 14). Sulong Dunong provides relevant skills training for outof-school youth. For 1998, DSWD achieved only 15 percent and 17 percent of its targets for number of youth associations to be organized and involved in community projects and activities, respectively. The SEA-K, which is a Social Reform Agenda (SPA) _ program, is a livelihood assistance program that involves the provision of an integrated package of social welfare services to needy family heads, disadvantaged women, out-of-school youth, and persons with disabilities. The program includes capital assistance; social preparation/capability building, technical assistance, and other Support services aimed at enhancing the capability of community-based credit 2 The

SPA is the government

sectors and

like farmers,

youth,

it involves vulnerable

persons

centerpiece

fisherfolk, with

the implementation groups.

program

overseas

disabilities,

Filipino disaster

of flagship

that workers

victims,

programs

addresses (OFWs), and

the needs senior

indigenous

by na tional

of marginalized

citizens, people.

government

women, Launched

agencies

basic children in 1994,

targeted

at


238

Economic

Table 14. DSWD targets and accomplishment,

1998.

Target

A. Prodt_ctivity Skirls Capability Building for Disadvantaged women 1. No. of women trained on PSCB

crisis... Once more

Accomplishment

Percenl Achieve_

44,918

38,023

85

2. No. of trained women gainfully employed

28,911

29,861

103

B. Comprehensive and Integrated Delivery of Sodal Services (CIDSS) 1. No. of poor families benefited by CIDSS projects/activities 2. No: of depressed barangays served 3. No. of commtmity projects ilnplemented 4. No. of coalmunity structureso_gardzed 5. No. of leaders/vohmteers trained/mobilized

171,216 1,259 2,189 3,399 25,423

268,861 1,323 4,047 6_152 78,072

157 105 185 187 307

'1,089

192

18

14,918

2,307

15

946 668 225

834 789 138

88 118 61

3,987

2,235

56

1,489

2,170

146

388

194

50

85

117

138

245

82

33

1,357 : 1,222 1,472

2,135 934 3,225

157 76 219

845

43

C. Sulong Dunong 1. No. of PYA organized 2. No. of PYA involved in corrm_tmJ.ty projects/activiges 3. No. of Out-of-_hool Youth (OS짜) served with: a. educational support services b. practical skills development c. livelihood D. Social Mobilization of Permns with Disabilities and Senior Citizens _%nd Their Families 1. Early Deteclion, Prevention and Interven_on of Disabilities No. of 0-6 years old children provided. wifll .intervention 2. Self-Help Group (SHG) of Persons with Disabilities (PWDs) a. No. of PWDs assessed and provided with intervention b. No. of SHGs strengthened, organized and mobilized c. No. of SHGs involved in income generating projects d. No. of PWDs involved in. inc_m_e generating projects 3- Sel_ior Citizens (SCs) as Vohmteer Resource a. No. of SCs assessed and provided with intervention b. No. of SCs trained on volunteerism c. No. of SCs mobilized as volunteers

I

E..Assistance to Disadvantaged Transnationals No. of transnational "children served (repatriated, educational/support/legal assistance)

11,946 I,


Chapter 8: Pineda

239

Table 14. continued... Target

Accomplishment

Percent Achieved

570

655

115

91

279

307

194

286

147

104

79

76

1. Revolving Settlement FLmd (RSF) a.No. of individual projects established b. No, of SKAs assisted C.NO. of SKA members served 2. PSCB

2,650 833 6,647

2,843 535 12,867

107 64 194

No. of women provided with SEA 3. CIDSS

2,602

1,407

54

415 2,384

1,971 368

475 15

75 15

82 13

109 87

21

5

24

3

16

533

886

673

76

692

444

64

414

147

36

F. Community-Based Rehabilitation Services for Children i_ Conflict with the Law No. of YouthOffender_ (YOs) served (income-generating projects, educational/support services, practical skills training, job placement) No. of YOs supervised by volunteers G. Local Adoption and other Alternative Family Care 1. No of adoption forum and advocacy activities conducted 2. No. of foster families provided with subsidies H. SIIA-K

a. No. of individual projects b. No. of SKAs assisted 4. Sulong Dunong a. No. of OSYs provided with SEA b. No. of OSY families provided with SEA 5. Transnational No. of transnational children families provided with SEA 6. CBRS No. of YO families provided with SEA 7. Abused Children No, of abused children families provided 8. Level II: Kabayans a. No. of families provided with assistance for micro-enterprise b. No. of families provided with assistance for home improvement c. No. of families provided with assistance for housing construction [. CPC-IV - Women in Development 1. No. of women provided transportation assistance 2. No. of women referred for medical assistance 3. NO. of women Ixained at PSCB 4. No. of women volunteers _ained/mobilized

350

864

247

88 2,089 1,790

356 4,968 1,161

405 238 65

5. No, of women provided sessions on modular packages

5,514

10,192

185

Source:DSWD.


240

Economic

crisis.,. Once more

associations to self-administer a socialized credit scheme for income-generating projects. For 1998, the actual number of SEA-K associations assisted was only 15 percent of the target. Likewise, the DSWD was able to provide selfemployment assistance to only 5 of its targeted 21 families (24%). For other projects, however, DSWD surpassed its targets. Most notable was the Comprehensive and Integrated Delivery of Social Services (CIDSS), which is an SRA flagship project. The CIDSS specifically addresses the lack of access to basic services. It is a two-pronged approach aimed at building the capabilities of disadvantaged families and communities to analyze their conditions as basis for collectively accessing resources that will address their problems and at the same time build capabilities for social services delivery. Local government units (LGUs) are likewise provided with technical and other forms of assistance towards providing minimum basic needs (MBN). For the CIDSS program, DSWD accomplishment/target ratios ranged from 105 percent to 307 percent. Performance indicators include number of beneficiary families, barangays served, community projects implemented, community associations organized, and leaders/volunteers trained and mobilized. The DSWD likewise exceeded its targets in Community-Based Rehabilitation Services (CBRS). The program aims to rehabilitate youth offenders with suspended sentences and to assist them and their families in reintegration into mainstream society. Their families are also provided with support services, such as capital assistance for income*generating projects, and parent and child counseling to strengthen parents' capability to supervise their children. Impact on 1999 appropriations By department The 1999 GAA explicitly states that no budgetary reserves shall be imposed for DECS, DOH, and DSWD. Despite this, financing was tighter in 1999 relative to 1998. New appropriations in11999 were lower in real terms by 22 percent

for DSWD, 20 percent for DOH, a_d 4.5 percent for DECS compared

with their 1998 levels (Table 15). The 1999 appropriations lower than the 1996 level (by about 4%). By economic In terms

category

for DOH were even

o[ expenditures

of economic

category,

capital

outlay

suffered

the greatest

reduction and personal services the smalles_ shrinkage in 1999 appropriation (Table 16). (For comparison purposes, appropriations were valued in 1996 prices.) The decrease in capital outlay was particularly severe for DSWD (76%), followed by DOH (66%). For DECS, the d6cline was relatively lower at 25 percent. Thus, the share of capital outlay dropped from 5.2 percent in 1998 to


Chapter 8: Pineda

241

Table 15. New appropriations" Agency DECS DOH DSWD

under

the GAA (P million).

Nominal (P million) 1997 1998

1999

48,418

56,271

78,813

81,665

16.2

40.1

3.6

9,302 1,184

11,370 1,594

13,085 1,827

11,340 1_55

22.2 34.6

15.1 14.7

-13.3 -14.9

64,445 8,949

9.4 15

27_4 4.7

-4.5 -20.1

1,227

26.7

4.3

-21.6

1996

Real (in 1996 prices, P million) 48,418 52,965 67,482 9,302 10,702 11,204

DECS DOH DSWO

1,184

1,500

for the whole department adjustment measures. Sources: GAA (1996-99).

inclusive

Table 16. GAA appropriations Amount Category

1,565

of bureaus/agencies

by economic

(P million)

1998

1999

Percent chan_e 1997-98 1998-99

1996-97

and

category

Change

funds

under

GATr-related

(In 1996 prices).

(%)

Share (%)

1998-99

1998

1999

DECS IX3

59,117

57,184

-3.3

87.6

88.7

MOOE

7,345

6,497

-11.6

10.9

10.1

CO

1,020

765

-25

1.5

1.2

67,482

64,445

-4.5

100

100

PS

4,292

4,001

-6.8

38.3

44.7

MOOE

4,736

4,219

-10.9

42.3

47.2

CO

2,176

728

-66.5

19.4

8.1

11,204

8,949

-20.1

100

100

Total DOH

Total DSWD PS MOOE CO Total

387

372

-3.8

24.7

30_3

1,096

836

-23-7

70

68.1

82

19

-76.5

5.2

1.6

1,565

1,227

-21.6

100

100

PS = personal services, MOOE outlay. Sources: GAA (1996-99).

= maintenance

and other operating

1.6 percent in 1999 for DSWD, from 19.4 percent from 1.5 percent to 1.2 percent for DECS.

expenditures,

to 8.4 percent

CO = capital

for DOH, and

With the decline in capital outlay, the share of personal services increased by 6 percentage points for DOH and DSWD. Although MOOE also decreased, this item continued to account for the greatest share in appropriations for DOH


242

Economic crisis... Once mote

and DSWD. In contrast, about 89 percent of appropriations of DECS went to personal services. Decreases in capital outlay and MOOE had negative implications on growth and quality of the capital stock. DOH programs Health facilities maintenance and operations had the least reduction of 2.5 percent (Table 17a). It accounted for 60.8 percent of DOH (Office of the Secretary) appropriation in 1999. In contrast, budget for public health services suffered a bigger cut of 15 percent. It constituted 11.5 percent of the 1999 appropriation. Thus, health facilities maintenance and operations continued to be favored in 1999. The provision of drugs was accorded high priority in 1999 as its appropriation increased by 27 percent. It was the only item with a positive percent change. Under public health services, appropriations for most of the programs decreased by 17percent (Table17b). Within family health and welfare, nutrition services, and maternal and child health service had the biggest reduction of 26 percent and 24 percent, respectively. In contrast, family planning services had the least reduction of 13 percent. For immunization program, appropriations fell by 17 percent. Within the disease control program, the greatest reduction was for smoking cessation (56%),cancer control (33%),blindness prevention (27%),and STD/AIDS control (26%). For dengue control, the decrease in appropriation was moderate at 17 percent. Appropriation declined most for locally funded projects (94%).Although lower, the reduction in appropriations for foreign-assisted projects was also severe (68%).DOH only had two foreign-assisted projects in 1999 compared with six in 1998. To cope with financial constraints, DOH adopted the following remedial measures: t. 2.

3.

focused targeting, redirection of program strategies,and reallocation of inputs in favor of vulnerable groups; intensification of program imple_nentation in financially burdened LGUs which are generally 5thand 6thclass municipalities populated by predominantly low-incone families, particularly the improvement of hospital and prir _ary health care (PHC) outlets such as rural health units (RHUs) and barangay health stations (BHSs); provision of grants to support/augment community-based/ managed health projects in SRA convergent areas, indigenous communities, and in 4th- 6 th class municipalities;


Table 17a. DOH GAA Appropriations (P'000, in 1996 prices), 1998-1999.

OPERATIONS a. Public Health Services b. Primary Health Care Program ¢ Health Facilities Maintenance and Operations d. Health Faolity S_tards, Regulations & Licensing e. Provision of Drugs and Medicines, Medical and Dental Supplies & Materials, Vaccines, Reagents & Biological Supplies f. Implementation of the Regional Licensing & Standards Enforcement, Malaria, Fdariasis and Schistosomiasis Programs and Other Health-related Retained Activities g. Local Healih Board Liaison and Coordination h Regional Funds to Assist Primary Health Care Prograw_ of _ Government Units L Centers of Wellness Program for Special and Regional Hospilals, Medical Centers, Sanitaria & other hospitals j. Women and Children Protection Program k. Regional Assistance Fund for Drugs, & Micronutrients for the Devolved Prov. And District Hospitals LNafl Govt Subsidy for the Premium Contribs of Indigent House_holds Enrolled under h'_ NHIP

_ROIECrS Locally-Funded

.

GATT-Related Adjustment Prcr_ Foreign-Assisted Source of basic data: GAA, 1998-1999.

1998

I999

1,212,635 22,969 5,538,942 319,(_a0

1,025,498 19,186 5,400,434 264,179

-15.43 -16.47 -2.50 -1Z36

64,715

82.247

27.09

52,132

45_.02

-13.29

13,328

11,330

-14.99

122,964

95,930

-21.99

18,316 10,695

15,3_ 8,441

-16.20 -21.08

55,727

46,225 7,891

-17.ff5

44,192

-o_08

746_ (Locally Ftmded)

16,664 1,400,221

14,437 448,729

i998-1999

-13.36 -67.95

._. _.. _.


244

Economic

Table 17b째 DOH GAA appropriations 1996 pdces), 1998-1999.

crisis... Once more

for public health services Appropriations 1998 1999

l. f_amilyH_alth Nutrition and Welfare a. Maternal and Child Health Service b. Nutrition Service incl. Salt Iodizatlon Program c. Family Planning Service d. Dental Health Service e. Control of Diarrheal Diseases f. Immutxization Program g. Control of Acute Respiratory Infection h. Family Flealfl_ Program i. R_productive Health Prograca j. Early Childhood Devt. Program k. Natl Family Planning Program I.Anemia Control and Prevention Program 2. Nail Disease Control Program _LCommunicable Disease Control Program 1. Communicable Disea_ Control Service 2. Tuberculosis Control 3. AIDS and STD Ct_ltrol Program 4. Malaria Control Program 5. Rabies Control Program 6. SchistosomiaSis Control Pro__am 7. Dengue Control Program 8, Filaria Control Program 9. National Leprosy Elimination 10.Soil-transmitted Helminthlasis Prewntion anti Control Program b. Noo-comr_uolcable Diseases control program 1. Non-communicable Disea_ Control Service 2. Cardiovascular Disease Cor_trol 3. Smoking Cessation Program 4. Cancer Control 5, Bllndnea_ Prevoxtion 6. Preventive Nephrology 7. National Preventive Mental Healflx ProgTam 8. Occupational Health Program 9. National Diabetes Control Program 10,Asthma Prevention and Cor_trol 1l. Iniury Prevention and Control 12.Drug Abu_ Prevention and Col_lrol 3. Environmenbal Health Program a. Environmental Heal flaService b. Operation of Inter-Agency Committee on Environmental Health c. Hospital Waste Management d. Local Public Health Systems Development Program 4. Commtulity Health Program a- Community Health Service b. Traditional Medicine Program I c. Health Development Program d. Disability Prevention & Community-Based Rehabilltatk_n Prograh_ e. hadtgenous People's Health f.Sttpport to the Prlority Province_ i 5. Provision for a Pool of 80 Rural Health Physicians for Doclorless Communities i

-

6.Health and Nutrition of Special Populations a. Women's Health and Development Program b. Urban Ftaalth uod Nutrition Program

Source of basic data: GAA, 1998-1999.

[ : i

(P'000, in % Change 1998-1999

559,580 55,871 75,028 46,607 16,112 16,326 300,713 32,229 16,695

483,095 42,388 55,133 52,719 19,628 1K542 249,435 26,734 13,848 3,157 789 3,157 2_67

-13.67 -23.77 -26.52 13.11 21.82 -17.05 -17.05 -17.05 -17.05

492,733 338,884 8,058 '193,918 3%018 24,845 38,455 17,456 13,334 793 3,097

397,853 277,340 7,536 156,062 28,742 20,604 31,898 15,876 11,053 706 2,494 2,367

-19.26 -18,16 -6.47 -19,_._ -26.34 -17,07 q7.05 -9.0,5 -17.10 -10.92 ' -17.(k_

153,850 15,546 37,604 7,995 30,641 15,726 27,142 3,785 6,850 8,562

120,513 13,789 28,035 3,512 20,539 11,465 22,514 3,139 5,682 7,102 1,578 789 2,367

-21.87 -1L30 -25.4S -56.07 -32.9'7 -27.09 -17.05 -17.05 -17.(LB -17.(Z_

24,633 20,300 1,528 2,808

22,064 16,873 1,286 2,326 1,578

-10.43 -16.88 -15.84 -17.06

105,055 8,583 13,571 28,887 4,053 2.098 47,863

90,248 7,644 11,257 23,962 3_(_ 1,740 42,282

-14.09 -10.93 -17.05 -17.fk_ -17,04 -17.05 -ll.(kq

30,634

27,5913

-10.22

4,735 2,367 2,367


Chapter 8: Pineda 4. 5. 6.

245

hiring and deployment of doctors to 5'hand 6_ class communities; expansion of the subsidy given to private hospitals for the medical care of indigent patients; and augmentation of budget of priority programs that specifically cater to vulnerable groups from the Poverty Alleviation Funds (PAFs) or the Structural Adjustment Loan from the World Bank, such as Expanded Program of Immunization, Nutrition Program, Tuberculosis Control Program, SRA-Related Program, and all hospitals (Capones 1998).

In selected CIDSS areas, the government implemented a rice subsidy program wherein priority was given to families with at least five members and with moderately and severely malnourished children. It also distributed ironfortified rice in Surigao and Sorsogon, areas with a significant degree of iron deficiency (Reyes et al. 1999). DECS programs Among operations, the greatest reduction in appropriations in real terms was in the requirement of teacher I positions (98%), followed by buildings and structures (61%), and land and land improvement (40%) (Table 18). The smallest reductions were for preschool (2%), elementary education (4%), purchase of desks (5%), Government Assistance to Students and Teachers in Private Education or GASTPE (8%), and purchase of textbooks (10%). Only secondary education posted an increase in appropriation of 6 percent. The appropriation for locally funded projects declined by 14 percent. Construction of school buildings and other facilities was prioritized as the appropriation for these projects rose by 38 percent. For foreign-assisted projects, appropriations more than doubled in 1999relative to 1998. The most substantial increase was for the Third Elementary Education Project (TEEP) at 139percent. TEEP seeks to provide classrooms for schoolchildren in the 6-12 age bracket in 26poor provinces with the highest dropout rate for elementary school children. ForDECS projects under the GATT-Related Adjustment Measures Fund,which are also foreign-assisted, appropriations declined by 34 percent on the whole. Appropriations for the DECS school building program also fell by 26 percent in real terms in 1999. The secondary level was most severely affected as appropriations lowered by 51 percent. To ease the classroom Shortage, DECS adopted the following measures: 1. Coordination with LGUs, Parents-Teachers Associations (PTAs), civic organizations, and private firms in mobilizing additional funds for classroom construction, renting private buildings to be used as


246

Table

Economic

18. DECS

GAA

appropriations

(P'000,

crisis...

in 1996 prices),

Once

more

1998 and 1999.

1 AppropHatioor. [

1.998

% Chang_ , 1999

1998-1999

Or°ERATIONS a. Non-formal Education b. R_._arch & Pronlotion

of School Health & Nutrition

C- Medical/Dantal Health Serv]ces d. Palarong Pambansa Program e. Regitmal Operations 1. Pre-school Education 2. Elementary

Education

3. Secondary Education 4. I_quimment of Teacher

I Positions

5. Govt. Assistance TO St_dor_ts and Teachers 6. Purchase of Desks 7. Purchase of Textbooks 8. Requirement,a of Newly Created 9. Lump

Sum for Reclassification

10, Lump-suln

for Subsistence

11. Lump-sum 12. Lump-sum

for Furniture, for Buildings

in Private

Education

(GASTPE)

Positions

of Positinr_ and L_undry

Allowance

Fixtures, Eqpt. and Books Outlay and StructuresOutlay

13. Lump-sum for Land and Land Improvement Outlay 14. Lump-Sum for the Conduct of NEAT and NSAT "15. Ponchase of Dosks, Chairs, Textbooks, Instructional Materials,

Pay

]9, Financial

A_istance

30,098 50,154

-7.84 _29.58

30,953 82,009

28,527 59,800

-7.84 -27.08

62,376,038 115,509

59,713,934 112,872

2,.27 -2.28

44.,041,_39

42_303,114

-3.95

14,165,724 805,007

14,976,430 18,033

5.72 -97.76

649,557 243,934

598,662 232,739

-7.84 -4.59

441,086 992,335

398,175 778,871

-9.73 -21.51

5,994

5,120

-14.58

27,399

17,213

-37.18

115,526 109,909

86f_10 43,4(B

-25.09 -60.51

26,542 25,687

]5,783

-40.54

Tools,

Furnitxlce, Fix_res, Computers & r,_MherEqpt. 16. Scholarship Program . 17.Maimt_naoca of Computer Eqpt. For Schools in NCR 18. Hardship

32,657 71,222

477,776 131,859 856 57,015

to ARMM

3,946

20- Early Child Development Program 2L Mass Production of Science Eqpt, and Purcha_ of Sets of Accessories for Computer Aidad Experimen_ 22. Lump-sxlm

for Purchase

of instructional

31,566 26,56.3

Materials

7,89]

PROIECI_ l. Lt_ally-Ftmded

Pr_ects

a. DECS Comput'erization

Program

d. Cork_truction of School Bldgs, Claasr trams amd Othar Facilities b. Purchase of Computers, Instructional Printed Materials and Electrorfics Video Hardwava as wall as the Prod_icfon and Di_eminatlon of Materialg for the Information Campaign c. Ti tling of School Si tes e. Prcn2urement Sub-total,

for Climate

-7.84

76,152

37.68

-14.29

District of lsabela

R. Magsay_ly

H.S., Manila

171

Projec_

180,921

155,066

a. Engineering and Science Education Project (IBRD) b. 13xilippine-Australia Project in Basic F.dtication (PROBE)

Foreigxx-A_sisted

Funded

in the Fourth

78,914

55,312 38,102

1,712

of Mxasical Irtstruments,

Locally

Chang_

85,623

Projects %081 42,640

43,900

2.95

c. Educatior_al Facilities Improvement 1 reject ]Vi JICA Ch'an t d. Third Elementary Educ. Program (IBRD)

Z3,254 301,793

35,776 720,072

53.8.5 138.60

_¢_ab-total, Foreign-ar_isted

376,768

799,748

112.27

ATT Pro)_c_ (Forelgn-A_'_isted) a. Agricultural Education Program

- EEC grant

b. PhiL-Australia Agricultural Technology c, Non-formal Educational Project- ADB Sub-total,

Educ. Pro

-NAES-AusAid

grant

GATT Projects

3ECS SCHOOL. BLDG. PRCK_,,RAM (35 Bldgs & Structures Elementary Secondary Total

Source of basic data: GAA, 1998-1999.

8,939

1,301

-85.45

16,970 224,918

12,339 150,801

-27.29 -32.95

250,826

164,440

-34.44

1,689,014

1,491,475

-11.70

991,961 2,680,975

481,376 1,972,851

-51.47 -26.41

outlay)

I


Chapter 8: Pineda

2.

3.

247

classrooms, and maximizing the use of nonacademic classrooms like gymnasiums, laboratories as well as chapels, barangayhalls, and other government buildings (Manila Bulletin, 6 June 1999). Consideration of a sort of Build-Operate-Transfer (BOT) scheme where private contractors will build initially 10,000 classrooms. DECS will use the classrooms, estimated to cost P8 billion under a lease-purchase agreement under which the rental will be considered amortization for interest and principal over a 10-year period (Manila Bulletin, 12 April 1999). Obtaining funding support from foreign institutions for the construction and repair of classrooms, particularly in far-flung areas.

According to DECS Secretary Andrew Gonzalez, he will also push for a new legislation that would give the department a special appropriation----on top of its regular national budget--to wipe out the present shortage of classrooms (Manila Bulletin, 6 June 1999). To alleviate the shortage of teachers, DECS has ordered the return of teachers holding administrative positions back to the classrooms. These included 400 of the 1,400personnel in the main DECSoffices in Pasig City (Manila Bulletin, 12 April 1999). DECS also directed principals and special teachers such as guidance counselors, librarians, canteen teachers, clinic teachers and coordinators, among others, to teach two subjects each and for field officials to identify vacant positions in their respective areas and immediately fill them up in time for school opening (Manila Bulletin, 6 June 1999). Other emergency steps taken when there were not enough teachers included: 1. increasing the maximum number of pupils in a class from the ideal 40 to 55 or even 60; 2. adopting the double-single class program where a teacher handles one class in the morning and another class in the afternoon to come out with a two-in-one setup; 3. organization of a multigrade class which is made up of a group of pupils belonging to several grade levels (like Grades I, II, and III or Grades IV,V, and VI) and handled by only one teacher; and 4. using double shifting in densely populated secondary schools where one group of students (e.g., 1st year and 2nd year) report to class from 6 a.m. to 12noon, and another group of students (e.g., 3rd year and 4th year) attend classes from 12 noon to 6 p.m. with both groups of students handled by the same mentors (Rimando 1999).


248

Economic

crisis... Once more

DECS also had to contend with textbook shortage. The pupil to textbook ratio is 1:6 in elementary and 1:8 in the secondary level. The textbook shortage was particularly severe in 1998. According to DECS Secretary Gonzalez, although P550 million was allotted for new books in 1998, no corresponding cash was provided (Manila Bulletin, 12 April 1999). The government should thus make sure that funds needed are available at the start of any given calendar year so that books could be printed and delivered before the start of a new school year. To remedy the textbook shortage, DECS is restudying the book requirements in accordance with available meager funds, so that noncore subjects will use only mimeographed materials instead of books. Secretary Gonzalez has also declared a 2-year moratorium on acquiring supplementary reference materials so the Department can use the savings to buy more textbooks. DECS is also tapping other countries and international financial institutions to provide funds for new books, as well as training for teachers. With funds lost to overpricing, short deliveries, and ghost deliveries (such as the publicized desk and armchair scare, and textbook scare), DECS is undertaking new measures to avoid irregularities. These include the use of inventory checks in field offices to curb ghost deliveries or underdeliveries, devolution of bidding to regional and local offices, and inclusion of at least two private sector representatives in the Pre/Post Qualification, Bids and Awards Committee (PBAC). Committee members will serve for 6 months to 1 year, without anyone knowing when he or she will be replaced. To prevent collusion with agents and suppliers, PBAC members will be chosen by drawing of lots just before the start of every bidding (Manila BuUetin, 12 April 1999 and Philippine

Daily Inquirer, 23 April 1999).

DS WD programs Among DSWD operations, the assistance program for the distressed and disadvantaged population has the most reduced appropriation of 43 percent (Table 19). Within this program, the appropriation for assistance to persons with disabilities and senior citizens was slashed by 52 percent, and that for assistance to victims of disasters and calamities by 47 percent. For other programs such as technical assistance to LGUs, nongovernmental organizations (NGOs), and people's organizations (POs) and maintenance and operation of centers and institutions, reduction in appropriation was lesser at 16 percent. In contrast to 19 locally funded projects in 1998, DSWD only had 3 locally funded projects in 1999. These included the CIDSS, SEA-Kaunlaran II, and Mt. Pinatubo Assistance, Resettlement and Development Project. The appropriation for Mr. Pinatubo was severely cut by 74 percent. CIDSS remained the top priority project, with appropriations rising by 5 percent.


Chapter 8: Pineda Table 19. DSWD

249 GAA Appropriations

(P'000, in 1996 prices),

1998-1999.

Appropriations 1998 1999 OPERATIONS a. Assistance Program for Distressed & Disadvantaged Population 1, Nationwide Emergency Assistance/Calamity Relief Operations/AssistalKe to Victims of Di_sters & Natural Calamities 2, Assistance to Persons with Di_bility and S_nior Citizens 3, Protective Services for Cl_ildren & Youth in Especially Difficult Circumstances inc[, A,qe_iStance to Indigent Patients in Hospitals as well as Assib_ance for Burial and Transportation Expanses b. Technical Assistance to LGUs, NGOs, & PO's Including Disaster R_ponse & Monitoring Capability Building c. Maintenar.ce & Operation of Canters & hxstitntlons Sub4otsl, Operations

r,ROlECrs l. Locally-Funded Projects a. Comprehensive & Integrated Delivery of Servicc--s in the Mnst Depr_sed Provh_es under the Social Reform Agenda b. SEA-Kaunlaran I1 (Livelihood Development Project) c, Mr, Pinatobo Assistance, Resettlement & Dovelopment Projoct d. Other: Sulong-Dunong Pare Sa Kabataan 2(100 'Fulay 20(X) Spe,.hal Project for Poverty Mapping Family Welfare Fund Assistance to Setlior Citizens at Welfareville, Mandaluyong Purchase of Utility Van for Senior Citizens being served by the Offictxof .c_ani.orCitizens, Mandaluyong Asshstanoe to Central Day Care Center, Welfareville, Mend. Construction of Tuloy Street Children Tralni ng Center, Tuloy Foundation, Inc. Constru___ionof Day Care Centers Financial Assistance to Community-based Tnformation & Educational Program and Livellh,xx_iPrc_ects for Women Crisis Intervention and Temporary Shelter/A_istance for Abandoned, N_lected, Abused, Surrenderedlnfants & Exploited/Disadvantaged Women and Famili,_s Assistanceto Ugnayan Pag-Asa Conter (DSWD-NCR) Finat_ial Assistanc_ to Summon to Serve Foundation Fh't.u'a.-ialAssistance to Indiger_ts, Victims of Disasmss and Calamiti,v,_,Distres_ & Disadvantaged Population, Persnns with Disabilities, Elderlles & their Famili_ Cor'nmunity Projects for Persons with Disabiliti_ Construction of Family Resom'ce Ctn,tters ,¢yub-total,Locaily-Fund_| Projects

il, Foreign-Assisted Project Productivity Skills Capability Building for Women

%Change 1998-1999

101,367

58,205

-42.58

54,863 19,357 27,148

29,014 9,360 19,8,'30

-47.11 -51.64 -26.95

7,042

5,937

-15.68

311,019 419,428

262,089 326,231

-15.73 -22,22

376.137 8,562 59,936 156,880

394"570 7,891 15,7&_

4,90 -7.84 -73,67

601,516

418,244

-30,47

53,086

21,066

-60,32

Source ofbasic data: GAA, 1998-1999.

DSWD's only foreign-assisted project, Productivity Skills Capability Building for Women, also got a substantially reduced appropriation in 1999, which was 60 percent lower than the 1998 level. This program aimed to provide women with training and job opportunities.


250

Economic

crisis... Once more

DSWD's coping mechanisms for fiscal constraints included the following: 1. encouraging LGUs to give priority in allocating funds for DSWD services; 2.

intensifying social marketing and advocacy to encourage support/ assistance from the private business sectors; strengthening linkages with NGOs and other stakeholders to police their ranks in compliance with approved DSWD standards and

3.

regulations. This would facilitate provision of quality services to the target clientele, thereby minimizing travel costs regulation enforcement activities; and 4.

maximizing volunteeers, for DSWD programs.

Budget-related This addressing services. It to indicate Health

NGOs, media, and community

issues in the social services

support

sectors _

section examines how the government has been progressing in long-identified weaknesses in financing education and health compares previous expenditure patterns with those of recent years improvement or deterioration.

sector

UnderinvesOnent

in the health sector

In 1993, general government expenditure (national government and local government units) on health per capita at P95.10 ($3.51) was not enough to cover the price of a minimum package of basic health interventions estimated to cost $12.61 in 1993 (based on a World Bank estimate of $12 per capita in 1990 adjusted for inflation)i For 1998, national government and local government expenditures on health amounted to P13.7 billion and P12.9 billion, respectively, or a total of P26.6 billion. This was about $8.65 per capita (based on the 1998 population of 75.2 milfion and exchange rate of P40.89/$1).4 Adjusted for inflation, the World Bank-estimated price of a minimum package of basic health interventions was equivalent to $18.45 in 1998. Thus, the shortfall between such price and the general government expenditure onhealth further widened from $9.1 in 1993 to $9.8 in 1998. Overallocation

for curative care

It is widely estimates

indicated

accepted

that prevention

is cheaper than cure. World Bank

that cost per life save_/ was much higher

(at least two to

I

_TThis

section draws largely from Manasan et al. (1996). 4 Data were sourced from the 1999 Asian Development Bank Key Indicators countries and the Commission on Audit Report on I_GU Operations.

for Asian and Pacific


Chapter 8: Hneda

251

five times as much) in curative care than in preventive care. The government, however, had been 0verinvesting in curative care services and underinvesting in preventive care services. This was indicated by the very high share of curative care services relative to preventive care services in total government expenditures. On the average, from 1986 to 1993, about 70 percent of DOH expenditures was spent on curative and only 21 percent on preventive health services. In recent years, the proportion of curative services was lower at 55 percent in 1997, but it rose to 60 percent in 1999 (Table 20). On the other hand, the share of preventive health services in health expenditures declined further to 11percent in 1997 and 10percent in 1999. This indicated that curative care is still increasingly given priority over preventive health care. Table 20.

Comparison of preventive and curative health expenditures.

Services Preventive Curative Others Total health expenditures Source: NEDA (1999).

Nominal (in million pesos) 1997 1998 1999 (Actual) (Adjusted) (Proposed) 1,530 1,414 1,465 7,756 7,540 8,414 â&#x20AC;˘ 4,868 4,790 4,229 14,154

13,743

14,108

1997

Percent share 1998 1999

10.8 54.8 34.4

10.3 54.9 34.8

10.4 59.6 30.0

100.0

100.0

100.0

Given limited funds, one recommendation to augment resources for public health programs was through cost recovery, such as charging users of public hospital facilities. For itspart, the DOH had a revenue enhancement and â&#x20AC;˘cost recovery project, which aimed to increase hospital income through improved pricing, billing, collection and revenue retention, and cost recovery in hospitals. This was undertaken in several hospitals such as Rizal Medical Center, Ilocos Regional Hospital, Cotabato Provincial Hospital, Quezon Memorial Hospital, and Palawan Provincial Hospital. Restrictions on retention of income generated by DOH hospitals severely limit the incentive of hospital personnel to charge and collect user fees (Manasan 1994). Recognizing this, DOH Secretary Romualdez proposed fiscal autonomy-allowing hospitals to collect, retain, and allocate revenues from socialized user fees. At present, hospitals are still highly subsidized. About 61 percent of the 1999 DOH appropriation was for health facilities maintenance and operations (Table 21). This limits funds for public health services. Overallocation for administrative services DOH outlays for administrative services have not been reduced in proportion to the devolution of a substantial number of its personnel (45,000


252

Economic

Table 21. Appropriations Percent Year

for health facilities

Health facili.ties and

and public health services. Percent change in appropriation (based on 1996 prices)

share in DOH GAA

maintenance

crisis... Once more

Public health

Health facilities

services

maintenance

operations

Public health

and

services

opera tions

1996

46.7

13.5

1997

51.2

11.7

26.1

-0.3

1998 1999

49.9 60.8

103 11.5

1.8 -2.5

-2.2 -15.4

Sources: GAA (1996-99).

out of 75,000) and budget

(P3.9 billion out of P10 billion). The allocation

for

general administrative services in 1993 was estimated to be P382 million higher than what its reduced personnel and bludget warranted. The share of administrative

services in DOH expenditures

even went up from 6.2 percent in

1992 to 12.1 percent in 1993. in 1999, the proportion of general administration and support services to DOH new appropriations remained high at 13 percent (Table 22). Local officials noted with resentment the continuing high DOH budget despite the devolution of majority of its employees. They complained that while service delivery responsibilities had been transferred to local governments, funds remained at the national level (ARD 1999). s Table 22. Share of administrative appropriations (%).

services

in DOH

expenditures

Year

Share in expenditures

1991 1992 1993

6.3 6.2 12.1 Share in appropriations 13.3 11.3 11.0 13.0

1996 1997 1998 1999

and

.I

Sources: Manasan

et al. (1996), GAA (1996-99).

5 Other devolution issues that remain to be resolved are the mismatch in costs and revenues transferred from national government agencies to LGUs und6r the Local Government Code and p_edevolution backlogs. Solon (1999) revealed that investments earmarked for local health facilities were never carried through. Thus, facilities were already dilapidated when the LGUs took over,

To solve predevolution backlogs and to encourage LGUs to allocate more resources for health services,the recommendation was for DOH to set aside adequate resourcesthat will be provided as grants to LGUs.Such grants will be used to leverag_ forbetter performance from LGUs.


Chapter 8: Pineda

253

The ongoing streamlining in the central office that includes reduction of staff, resources, and functions is expected to decrease general administration expenditures. Underfunding of maintenance and operating expenditures Low allocation for MOOE resulted in shortage of complementary inputs such as drugs, medicine, supplies, fuel, and building and vehicle maintenance. This reduced the effectiveness of the health staff. There had been a marked increase in the ratio of DOH personal services expenditure to MOOE?from an average of 0.63 in 1980-82 to 1.02 in 1989-91. In recent years, based on GAA appropriations, the ratio fell to 0.82 in 1996but had been increasing to 0.86 in 1997, 0.91 in 1998, and 0.95 in 1999. Education Underfunding of education Providing adequate and quality educational inputs and facilities for the growing student population requires resources. Compared with other members of the Association of Southeast Asian Nations (ASEAN), education in the Philippines is underfi.mded. The country has the second lowest ratio of education expenditures to GDP in 1990(Table23). This ratio was higher in 1996-99 (around 4%)6but it was still below those of ASEAN members in 1990. Low allocation for MOOE The allocation for maintenance of existing facilities and other operating expenditures was very low compared with personal services. In 1990,16 percent of DECS' new appropriation was for MOOE, while 71 percent was for personal services. In 1999, the share of MOOE decreased further to 10 percent while personal services rose to 89 percent. Thus, the sector continued to experience chronic shortages in textbooks, desks, and other facilities. Inequity in regional allocation The inequitable allocation of resources among regions showed in the wide disparity in educational performance across regions. Less developed regions had lower educational performance. To enable poorer regions to have abigger share of the budget, including poverty incidence in the allocation criteria had been recommended. This was also expected to help reduce dropout rates and improve survival and completion rates. The government had now recognized the weaknesses of the current Fair and Equitable Access to Education Act (RA 7880 of 1995) in allocating Computed based on data from Key Indicators ofAsian andPacific Countn'es, Asian Development â&#x20AC;˘ Bank, 1999.


254

Economic

Table 23. Comparison of education countries, 1990.

expenditures

Country

crisis... Once more

among ASEAN member

Ratio to GDP (%)

Indonesia Malaysia Philippines Singapore Thailand

1.7 5.7' 3.1 4.4 19.5

1988. Source:Manasan et al. (1996).

educational

resources. It noted that the scheme (allocation of capital outlay based

on student population and classroom shortages ) did not address small areas that were equally disadvantaged educationally; and it did not close the gap between the well-endowed and less-endowed areas (NEDA 1999). As such; a review of RA 7880 was included

among the priority legislative

agenda.

The need to ratzonalize terffary education To provide lower income groups with access to higher education, state universities and colleges (SUCs) were created_ Studies (Tullao 1993 and Manasan et al. 1996), however, indicate that SUCs in general were not as cost effective as private schools and that they were also not efficient providers of quality education. The cost of instruction per student in SUCs was much higher than the average tuition fee per student in high-priced private schools. Financing of SUCs (numbering 107 as of 1998) had also strained limited public resources available which could have been used for basic education. The consensus among the studies was that it was better for the government to subsidize the student's education directly, for example, through well-targeted and well-defined scholarship universities

schemes for poor but deserving students, rather than operate and colleges (NEDA 1999). In July 1999, President Estrada had

ordered a moratorium (Confreres 1999).

on the creation

of state

universities

and

colleges

At present, DECS helps needy students through GASTPE7 Its low support level, however, enables only relatively better-off families to benefit from the scheme. Conclusions The financial crisis has raised much concern for the social services sector. Compared with other sectors, the social services sector is relatively more protected from the effects of the financial cflsis. The subsectors have a lower cut in expenditure relative to GAA and to th_ 1997 level.


Chapter 8: Pineda

255

While no reserves were imposed on DOH, DECS, and DSWD for 1999, the situation was tighter as appropriations in real terms were lower than 1998 levels. In particular, the 1999 DOH appropriation was even lower than 1997 and 1996 levels. After adjusting for inflation, the proposed new appropriations for DECS and DOH for 2000 were 3 percent and 8 percent below their respective levels in 1999. The adverse social impact of the financial crisis could be long term and irreversible since human capital formation is affected. Delayed or foregone health care and dropping of students from school reduce the health and education status of the population. Thus, there is a need for the government to undertake specific measures on health and education to cope with the shortterm impact of the crisis, to assist those that have already been severely affected (e.g., special programs may be implemented for dropouts), and to address longidentified structural weaknesses. The government

could consider

carrying

out measures

which studies

(Reyes etal. 1999, Knowles et aL 1999) had identified for dealing with shortrun effects of the crisis as well as for minimizing costs and promoting better use of resources. These include the following: 1. stabilizing food prices and expandingâ&#x20AC;˘well-targeted feeding 2. 3.

programs; reducing the number of textbooks to cover only core subjects, and requiring better-off families to pay for their children's textbooks; exploring other more cost-effective options with the objective of "an elementary school in every barangayand a high school in every municipality" such as provision of (a) bus services in areas where there are good roads, (b) dormitory housing for students from farflung areas (if bus services are not feasible), and (c) incentives for teachers to locate in areas where schools can be cost effectively

â&#x20AC;˘4.

provided; increasing the support covering out-of-pocket benefit;

value of subsidy under GASTPE and costs so that more poor families could

7GASTPEhas the followingcomponents: 1. Educationservice contracting(ESC)scheme:provides financial assistance for tuitionand other school fees ofoverflow studentsfrompublichigh schoolsenrofledin qualifiedprivate schools; 2. Tuitionfee supplement(TFS):given to high school students enrofled in low-tuitionprivate schoolsand forstudentsenrolledin prioritycoursesin bothdegree andnondegreeprograms in tertiary institutions; 3. Private education student financialassistance (PESFA):made available to underprivileged but deserving high schoolgraduates who would liketo pursue collegeor technicaleducation in private collegesand universities; 4. Study-now-pay-laterplan; and 5. Collegefaculty developmentfund: intended for training and development ofcollegeteachers.


256

Economic

5.

6.

crisis... Once more

facilitating the rapid expansion of training facilities (e.g., by temporarily employing the educated unemployed like teachers, and by temporarily renting unused space for training facilities) to help youth acquire additional skills during the crisis; and establishing a strong monitoring system on crisis impact for identifying those that should be targeted for assistance and for providing feedback on effectiveness of policies.

Some long-identified structural weaknesses in resource allocation have persisted and even worsened. These include the rising share of curative relative to preventive â&#x20AC;˘health care services in the health budget, the declining share of MOOE in DOH and DECS appropriations, and the continuing high proportion of general administration and support services in DOH appropriations despite the devolution of its many personnel. In some of these areas, there may be possible future improvements. In the health sector, DOH is streamlining its central office structure and operations. In education, the priority legislative agenda include a review of the Fair Access to Education Act and the Omnibus Education Bill. Among the provisions of the bill are as follows: the budget allocation basic education and shall be provided

should meet the full requirement annually in the GAA; the share

of of

education in the total budget for the year shall not diminish from the previous year; and shall, in fact, be increased in proportion to enrolment; and setting up a voucher system for educational financial assistance. In comparing yearly budget levels, it is advisable to make adjustments for inflation rather than just consider nominal values. Another positive development for the three agencies covered in the study is the current project under the Social Expenditure Management (SEM) loan from the World Bank, which aims to improve their core management capacity, including financial procurement systems, i Other specific ways to address structural weaknesses have already been identified in previous studies. Hence, what needs to be done is implement these measures which include the following: _1 1.

Promotion of cost recovery in publichospitals, providing them fiscal autonomy, and stopping renationalization of devolved hospitals. I This will free resources

for preventive

health care and MOOE.

2.

Provision of support to Philipp_e Health Insurance to improve its coverage of indigents and fund use.

Corporation

3.

Integration of uneconomic-sized SUCs to achieve economies of scale, implementation of full-cost pricing, and privatization. These will free resources for basic education and MOOE.


Chapter 8: Pineda 4.

Inclusion of poverty incidence among the budget to minimize inequity in regional allocation.

257 allocation criteria

The adoption of these measures can certainly help the social services sector to weather the financial crisis and become structurally strong to face challenges of the new millennium.


258

Economic crisis... Once more

ReferenCes Anonymous. 1999. DECS seeks aid of LGUs. Manila Bulletin. 6 June. Anonymous. 1999. Gonzalez bares DECS problems and reforms. Manila BuUetin. 12 April. Anonymous. 1999. TEEP seeks to upgrade basic education in 26 of the country's poorest provinces. Manila Bulletin. 27 June. Anonymous. 1999. Educators speak. Manila Bulletin. 31 October. Asian Development Bank. 1999. Key indicators of Asian and Pacific countries. Manila: ADB. Associates in Rural Development. 1999. 8ta Rapid Field Appraisal (RFA). Governance and Local Democracy (GOLD) Project. Capones, E. 1998. Impact of the Asian currency crisis on the Philippine health sector. Paper delivered during the International Symposium on Health Initiatives in Asian Economic Crisis-HumanCentered Approach, United Nations University, Tokyo, Japan, 27 April 1998. Contreras, V. 1999. Erap stops creation of new state colleges. Philippine Daily Inquirer. 10 July. Lira, J. 1998.The social impact and responses to the current East Asian economic and financial crisis: the Philippine case. Manila: United Nations Development Program. Knowles, J., E. Pernia, and M. Racelis. 1999. Social consequences of the financial crisis in Asia. Asian Development Bank Economic Staff Paper No. 60. November. Manasan, R., G. Llanto, and W. Nuqui. 1996. Financing social programs in the Philippines: public policy and budget restructuring. Makati: Philippine Institute for Development Studies (PIDS). Manasan, R. 1995. Fiscal Decentralization: The early years of code implementation. PIDS Development Research News. Vol. XIII, No. 4. July-August 1995. Manasan, R. 1994. Breaking away from the fiscal bind: reforming the fiscal system. Makati: Philippine Institute for Development Studies (PIDS). Manhit, V.1999. Gonzalez's vision for DECS. Philippine Daffy Inquirer. 23 April. National Economic and Development Authority. 1998. The President's 1997 socioeconomic report. Manila: NEDA. June. National Economic and Development Authority. 1999. Medium-term Philippine development plan, 1999-2004. Manila: NEDA. Reyes, C., R. Manasan, A. Orbeta, and G. de Guzman. 1999. Social impact of the regional financial crisis in the Philippines. Paper presented during the


Chapter 8: Pineda

259

Finalization Conference: Assessing the Social Impact of the Financial Crisis in Selected Asian Developing Economies, ADB, Manila, 17-18 June 1999. Rimando, T. 1999. No new teachers. Manila Bulletin. 6 June. Romualdez, A. 1999. An agenda for health financing reforms. Paper presented during the DOH-PIDS Roundtable Discussion on Health Care Financing, Makati, 8 April 1999. Solon, O. 1999. Inter-LGU cooperation: the key to the issues of a devolved health care system. Policy Notes No. 99-01. Makati: Philippine Institute for Development Studies (PIDS). World Bank. 1998. The socioeconomic impact of the financial crisis in the Philippines:

a mission report. 11 June.


Part II1:

Government's

Response

to the East Asian Financial Crisis


9 Economic Policies and Measures in Response to the East Asian Financial Crisis Mario B. Lamberte

and lose[ T. Yap

General background The Philippine economy

in the 1990s

improvement in terms of macroeconomic stability (Table 11. Inflation was trend and the current account showed deficit was under uringon athedownward period 1992-97, Philippines marked control. Added to this was a rising M3/GNP

ratio (Fig. 1) which indicated a

greater amount of savings flowing into the formal financial sector and the economy's increased ability to absorb credit into the system without generating inflationary pressure.

Table 1. Selected

economic

indicators,

1990-98.

1990

1991

1992

1993

1994

1995

1996

1997

1998

GNF growth rate

5.4

0,2

1.5

1,3

5,3

5

7,2

9.3

0.30

GDP growth rate Inflation

3.2 14,2

-0,6 18.7

0.4 8.9

2.1 7.6

4.4 9,1

4,8 8.1

5.8 8,5

5.2 SA

0" 9,7 b

-4.7

-2,1

-1,9

-1.7

-0,5

-0.2

0.3

-0.9

-3,5

-2.1

-1.2

-I.5

0.9

0.6

0,3

0.1

lrLterest rate

23.7

21.5

16

12.4

12.7

11.8

12.3

13.1

13.5c

Export growth

4.67

7.99

11,13

15.79

18,53

29-4

17,75

22.81

19.16d

Import growth

CPSD/GNP

(%1

NG fiscal positionlGNP

(%}

-1.44"

'17.15

-1.27

20,48

21.2

21.23

23,71

20.82

14.02

-14.16 a

GDCF/GDP (ratio)

0.24

0,2

0.2]

0.23

0,24

0,23

O.25

0.26

0.22 a

Total trade/GDP (ratio)

0,68

0.69

0,74

0.79'

0,88

0,96

1.06

] .16

'1,06_

lst-3rd quarter average January-November average ' October dJanuary - July total " forecast SouKes:National Statistics Coordinator Board(NSCB) Bangko Sentral ng Pilipinas (BSP).


264

Economic

Figure

1. Ratio of M3/GNP

crisis... Once more

(1980-1997)i

45

35

20" 15" 10" 5'

198(I

1981

11982 1,983 '1984 1.985 1986

1987 3.988 "1989 .[_JO 1.991 "1992 '1993 1_)4

1995

1996 1997

Ye_ Sources:

National

Statistics

Coordinator

Fiscal policy was aimed

Board

(NSCB),

at prudently

Bangko

Sentral

managing

ng Pilipinas

(BSP).

the government

fiscal

position to support strong economic recovery and sustainable growth. Thus, reforms were made to broaden the revenue base, minimize, if not eliminate, fiscal distortions, and simplify the tax system to facilitate compliance. This fiscal stance had produced positive results, Tax yield increased from 15.3 percent in 1993 to 16.3 percent in 1997 despite the substantial drop in customs revenue as a result of tariff reforms. The national government had been running budget surpluses from 1994 to 1997. In 1996, the consolidated public sector account recorded a surplus for the first time in two decades. The strategy adopted by the government to manage external debt had generated some desirable results. The ratios of debt service burden to export shipments, exports of goods and services, current account receipts, and GNP had been declining during the period 1992-96 (Table 2). The ratio of foreign exchange liabilitie_s to GNP had also been declining, while the ratio of gross international reserves to debt service burden had been increasing during the same period. At the microeconomic level, firms realized comfortable profit margins, which were reinvested to expand productive capacities. Some firms found the domestic capital market an attractive form of financing, creating a stock market boom. The stock market price index soared from 1256 in 1992 to 3170 in 1996. A few large corporations issued bonds in the international capital market at reasonable rates. Before the liberalization of the financial sector, the financial system was highly segmented with subs ectors focusing on a few financial services. Competition across types of banks was very minimal due to regulations. Only


Chapter 9: Lamberte and Yap

265

Table 2. Selected external debt,_1990-98 (In US $million, ratios in percent). item [, Debt service burden Total

(I_B

1990

1991

1992

1993

1994

]995

19°_

1997

3,547

2,828

2,942

3_229

4,188

5,032

5,026

5,440

1,712 1,835

LI40 I,b88

1,607 12_35

1,791 1,438

2,647 1,541

2,&53 2,179

2,820 2,206

2,921 2,519

B

PHndpal Intere_t Expor t shipcaar_ts

8,840

9,824

11,375

13,483

17,447

20,,543

25,228

Exlxtr ts of goods and services Current accoun t retail0 ts Gross national prod_ct

13,028 13,745 44.073

8,186

14,464 15,292 45.(x_

17267 18,093 5_'4_19

18,87"2 19,618 55,321

24_83 25,074 65.742

31,_1 32,968 76,180

39_49 40,734 87,084

48JYo3 49,733 85,742

Foreign exchange liabilities (end-of-period) Gross internatk_al reserves (end-of-period)

2fl.549 2,048

29,956 4_26

30,934 5,3_.1

.M._.82 5.922

37,079 7,122

37,778 7,762

41,875 11,745

45.433 8,768

DSB to export shiprr,_n LS

43.33

31.99

29.95

28.39

31.06

28.84

24.47

21.56

DSB to expor_ of goods _'mdse rvic'a_ DSB to ctn'_n t accot]n t receipt_

27.23 25.81

19.55 18.49

17.04 16.26

17.11 16.46

17.43 16.7

15.81 15.26

12.71 12.34

11.32 10.94

8.05

6.19

5A6

5.84

6.37

6.61

5.77

6.34

57.4 181.44

61.97 183,4

56.4 170.06

49.59 154.25

48.09 233.68

52.99 161.1g

[l. _ttos

DSB to gross national pr¢_uCt Foreign exchaxage liabilities to gr_s national productc Gt¢_ toternaticalal reserv_ 'at d_bt serx4ce burde_

64.78 57.74

6,_.61 160.04

Based on the revised methodology. bDebt service burden represents principal and interest payment after recheduling Source: SPEI, Bangko Sentra] ng Pilipinas,

four branches of foreign banks were allowed to participate in the domestic banking system. Banks were prohibited from owning other types of banks. The liberalization of the financial sector started in the early 1980s with the introduction of universal banking and the blurring of distinction among different types of banks to improve competition. More measures to liberalize the financial sector were introduced in the second half of the 1980s and the early 1990s (see Appendix A - Table 1). Indeed, the liberalization of the financial sector had substantially changed the structure of the banking system. As of December 1997,there were 20domestic universal banks, 16ordinary domestic commercial banks, I branch of a foreign bank with a universal bank license, 13 branches of foreign banks, 4 subsidiaries of foreign banks, 117 thrift banks, 832 rural banks, 12 nonbank financial institutions with quasi-banking license, and 6,935 nonbank financial institutions without quasi-banking functions. The banking system had a total of 6,947 branches/other offices and nonbank financial institutions numbered 3,021.Some universal and commercial banks had thrift banks to make their presence felt both in the wholesale and retail market. Many of them were active in both investment and commercial banking. The economic growth realized by the Philippines in the 1990s, albeit modest compared with that of neighboring Asian countries, increased labor absorption and led to reduced unemployment rate from 10.5 percent in 1991 to 8.6 percent in 1996. Poverty incidence decreased from 39.9 percent in 1991 to 32.1 percent in 1997.


266

Economic

crisis... Once more

It was in this period, however, that economic managers faced new threats to macroeconomic stability and at the same time contended with old ones. The liberalization of the capital account in 1992 and the surge in global capital flows significantly changed the parameters of macroeconomic policyrnaking and financial regulations in the Philippines. Table 3 shows the composition of foreign exchange flows of the country from 1990 to 1997 focusing on the capital account. Medium- and long-term (MLT) loans had been greater sources of financing than foreign direct investments (FDIs), similar to the extemalborrowing episode in the mid- to late 1970s. Unlike that period, however, MLT loans in recent times have been primarily private sector debt. FDI flows were dominated by debt conversions during the early 1990s and privatization proceeds especially in 1994 and 1995. This indicated that the Philippines still lags in terms of attracting export-oriented FDI. Contrary to popular perception, portfolio capital on a net basis was relatively low although the level of gross flows rose sharply in recent years. The breakdown of portfolio capital, however, revealed that nonresident portfolio investment had been positive and was increasing since 1991. The accumulated nonresident portfolio investment for the 1991-96 period was slightly over US$5 billion. Given that the foreign exchange reserves of the Bangko Sentral ng PilipJnas (BSP) hover around the US$10 billion level, large and sudden movements in nonresident portfolio capital can have microeconomic variables.

a tremendous

impact

on macroeconomic

and

In several Southeast Asian countries and Korea, periods of large net capital inflows were associated with rapid expansion in the banking sector, in their foreign liabilities, deposits, and domestic lending. The Philippine experience in the past 3 years indicated a similar trend. The sharp rise in foreign liabilities of commercial banks contributed to the rapid increase in loans and advances to the private sector and overall level of foreign debt (Tables 3 and 4). The rising proportion of the external debt intermediated through the private commercial banking system had increased the vulnerability of the banking system to adverse movements in the exchange rate. The proportion of shortterm external debt to total external debt rose substantially in 1996 to 17 percent as against 14-15 percent in previous years, making the country more vulnerable to sudden changes in sentiments of foreign creditors. Foreign-denominated loans, meanwhile, were distributed almost equally between exporters and nonexporters (Table 5). The lack of a natural hedge against foreign exchange risk for the latter contributed a great deal to the spread of the crisis. The real estate sector was one of the beneficiaries of economic growth in the 1990s. The stock market price index of the property

sector rose by 290 percent

during the 1992-96 period, higher than the 150 percent stock market price index for the same period.

increase

of the overall


Chapter 9: Lamberte Table 3. Foreign

and Yap

exchange

267

flows (In US $million).

Levels

1990

1991

1992

1993

1994

Trade balance

-4020 -3211

Ctu'rentaccount

-2567

1995

1996

1997

-10708

-4695

-6222

-7850

-8944 -11342

-869

-858

-3016

-2950

-3297

-3914

19

349

660

-148

1002

-56

540

495

MLT loans, net

674

835

633

2455

1313

1276

2690

4688

FDI, net

528

529

675

864

1289

1361

1338

1117

-56

125

62

-52

269

248

-170

-461

-52

125

155

897

901

1485

2101

-55

603

40

289

-299

674

1574

4211

1191

-1Z25

-12,06

-13.54

-12,87

-4,60

-4,45

-4,67

-5.17

Short -term capital, net

Portfolio, net Nonresidents,

net

KBs

-4303

Share to GDP (In percent) Tradebahxnce

-9,07

-7.07

-8,86

Current account

-5,79

-1,91

-1,62

-5.55

Short -term capital, net

0.04

0.77

1.25

-0.27

1,56

-0,08

0.64

0,59

MLT loans, net

1.52

1.84

1.19

4.52

2,05

1.72

3.21

5,63

FDL net Portfolio, net Nonresidents,

net

KBs Source: BSP, Selected

Philippine

-1144

1,19

1,16

1-27

1.59

2,01

1,84

1.60

1.34

-0.13

0.28

0.12

-0.10

0,42

0,33

-0,20

-0,55

-0,12

0.28

0.29

1.65

1,41

2.00

2.51

-0.07

1.36

0.09

0_55

-0.55

1,05

2,12

5.03

1.43

Economic

Indicators.

The greatest challenge to macroeconomic managers is to minimize asset price volatility in the face of these capital flows. Figure 2 shows that among the ASEAN countries and China, the Philippines had the highest appreciation of real effective exchange rate (REER) between 1991 and 1996. Because of its sharp devaluation in 1994, China had a real exchange rate depreciation. The extent of the appreciation may have been higher if BSP had not bought dollars in the market to increase demand for foreign exchange. This intervention, however, had limited effects because of International Monetary Fund (IMF)imposed ceilings on monetary aggregates. The BSP had to sterilize the monetary effects of its dollar purchases in the market and this put upward pressure on domestic interest rates. This, in turn, attracted more capital inflows which partly offset sterilization measures. Lamberte (1995) estimates the offset coefficient at 0.88 for the Philippines, 1996). Sterilization

which is higher than estimates for other countries (Leung

measures

also carried a quasi-fiscal

cost because

of the

interest differential between domestic and international interest rates. High interest rates also have a dampening influence on investment spending.


t_o oo

Table 4. Foreign

exchange

liabilities,

1990

as of dates

I991 %Share

1992 % Share

to to_

Amount

to to_

Amo_

28549

100

29956

100

3(]934

Medium and Ioug-term b IMF

24173 997

84,67 3.49

25129 1Z65

83_9 _

2.5678 1183

Others

23_4

80

(In US $million).

$993 % Sb.are

Amount By debt

indicated

to to_ 100

1_" % _are

Arr_unt

to Lore]

34282

100

83_l 3_2

29247 1312

85.51 3_83

1995" % Share

Amounl 3_9

to total

i995 %_are

Amotm_

to total

1997 %Share

Arno_rtt

to total

% Share Amount

to to_

11_

57778

100

41875

100

45433

31882 1139

8_9_ 8.O7

32499 814

86.03 2.15

34668 405

82.79 0.97

36994 889

81.43 1_96

1GO

31685

83,87

34263

81,82

36105

79.47

13,97

7207

23176

81,18

24495

79.]8

27935

81.49

307-13

82._

Short-_rm

4376

1533

4827

16.n

_56

16.99

5(B5

14J69

_97

14.02

Trade

4099

1436

4_fl9

15.32

4937

15.96

3495

10.19

3401

9.17

2674

7.08

4C96

9.78

4fl82

8_87

0_7

238

0.79

319

1_3

1540

4_49

17_

4_84

2605

6_9

3111

7.43

4407

9.7

28549

100

29956

1(30

30934

100

3,1282

100

370"_

I00

377"_

1_

41875

I00

45433

20744 16958

72/06 59.4

22491 184_

75_0_ 61_

26720 21745

86.38 70.29

53879 26_3

92_99 77_

3_O52 27193

9_4 _.34

33591 26340

88_92 69.72

33244 24132

79_9 57_63

34768 22271

76.5_ _9.82

24969

72_3

25_6

68.84

24886

6_87

22943

54_

21393

47_9

3786

13_26

4_8

1_48

4975

16_08

1_14 5296

4.71 1_.45

i667 685_

4,5 18.5

1454 7251

3_5 19.19

lIB9 91]2

2.84 2I .76

.87_ 12497

1.93 27_1

_ 5A_]

Z7_4 I9_

7465 _

24._ 17._

4214 _

13a_2 7.44

2403

7.01

302?

8.16

4187

11_0_

8632

2_61

10664

23.47

blon_ade

2_

By borrDw_ NIonbanklng Public Public _G

and _th_s)

Central Bank- BOL Private Banking -Cenl_al _k

o| the Phil.

Bang_ko Several ng Pilipinas Banks

_

172l

8439

18_

iflO

12,88

3.76

855

2-31

1212

3=2]

1415

3_

2499

5,5

2324

8_14

2140

7.14

1911

6.18

1115

3.25

2172

5_6

2975

7,87

7217

17.23

816_

17.97

28549 11491

1(10 4035

.29956 11007

100 36.74

30934 9407

lOg 30.41

34282 5985

1_0 17.46

37079 55_9

l_g 14.91

37778 634_

100 20

45433 10176

lgO _,4

9.58

3185

9.29

3549

9_

6.18

2359

7949

23_]9

8216

22-16

80_8

13369 5794

39 ]1.97

1_33 4_

40.54 12.82

14393 6426

__

o By ¢_edltor Banks and other flrmnclal insto. Suppliers

2.312

28_2

9.35

2963

Mu_ato_al

6005

21_03

_1

6499

21.7

7368

BBal0er a_ O_hers

8547 194

29.94 [X68

9ff'_2 76

31.95 0.?5

H3_.8 68

2_17 36_62 0.22

_

100 16_8

41B75 8373

_85

2588

21.25

8634

38.1 17.01

13439 8841

_0_ 3_._1)_ 2] .11

_1?

8638

19_1

13307 109_

2_.29 24.1|

"As adjusted; excludes "Due to Head Office/Branches Abroad" accounts amounting to $519 million for end-1994 and $861 million for end-1995. Includes cumulative toreign exchange revaluation on US$ denominated multicurrency loans irom World Bank and the ADB of $817 million for end-J996, $417million for March 1997 and $587 million for June 1997. Source: Bangko Sentral ng Pilipinas (BSP).

C_ _.

-_


Chapter 9: Lamberte

and Yap

269

Table 5. Foreign currency deposit Levels

unit loans (In US SmiUion).

1993

1994

1995

1996

1997

Commodity exporter Service exporter Producers/manufacturer Oil companies Public utilities Others Total

1108.9 44.1 18,5 492.4 335.0 16,1 2015.0

1715.8 56.3 14.6 538.7 448.6 320.5 3094.5

2985.8 107.5 56,6 400.3 869.6 614.0 5033.8

5868.0 285.6 89.3 448.7 1484.5 2400.8 10577.0

5171.20 351.09 150.47 402.13 1614.60 2713.50 10403.00

Share to total (In percent) Commodity exporter Service exporter Producers/manufacturer Oil companies Public utilities Others Total

55,03 2.19 0.92 24.44 16.63 0.80 100.00

55.45 1.82 0.47 17.41 14.5 10.36 100.00

59.32 2.14 1.12 7.95 17.28 1,2.20 100.00

55.48 2.7 0.84 4.24 14.04 22.70 100.00

49.71 3.37 1,45 3.87 15.52 26.08 100.00

Source:Bangko Seni_alng Pilipinas.

The most effective response to large foreign exchange

flows is sustained

prudent fiscal policy. It makes monetary policy more flexible and reduces pressure on domestic interest rate by reducing public sector borrowing requirements. The challenge is how to maintain a tight fiscal policy without sacrificing much-needed public sector expenditures particularly in infrastructure. In her review of fiscal policy for the period 1986-96, Manasan (1998) commends the depth of fiscal adjustment during the last decade. From 6.6 percent of GNP in 1986, consolidated public sector deficit reached a surplus in 1996, equal to 0.2 percent of GNE She notes, however, that the bulk of fiscal adjustment in recent years was due to the large inflow of privatization proceeds. Capital outlays and government expenditures on maintenance and other operating expenditures (MOOE), which suffered major cutbacks during the adjustment period, have not been restored to their normal levels. With the impending sharp fall in tariff revenue following the tariff reduction program, it remains to be seen whether the fiscal position is sustainable. Table 6 shows the revenue performance

over the past 10 years and projections until the year 2004.

The national government seems confident that it would be able to compensate for the reduction in revenues from privatization and customs collections.


270

Economic

Figure 2. REER of selected

asian countries

crisis... Once more

1975-1996

2 _0 â&#x20AC;˘_ -6-

Philippines PROC Thailand

_

Malaysla

1, ;0

-

_

=

=

_-

Year

A cause for concern is the deterioration in the overall tax buoyancy coefficient from 1.41 in 1987-92 to 1.15 in 1993-96 (Table 7). Buoyancy measures the percentage change in tax yield given a percentage change in the tax base. The decrease is a reflection of less effectiveness in tax administration. The decline in buoyancy and economic slowdown are the primary reasons why tax revenue dropped sharply in 1997 and 1998. On the expenditure side, the unabated decline in MOOE and capital spending does not augur well for sustainable economic growth. Aggregate capital outlays of the national government shrank from 4.6 percent of GNP in 1975-85 to 2.9 percent in 1986-91 before settling at 2.7 percent for the period 1992-96. Total public sector investment, however--incorporating the national government, government corporations, and !local government units (LGUs)-increased from 4.3 percent of GNP in 1986-911to 5.2 percent in 1992-96. With the decision to reduce spending levels following the crisis, capital outlays necessary to improve infrastructure will fall further below the optimal rate. A more detailed analysis of the structure of the Consolidated Public Sector Deficit (CPSD) revealed, however, that the government overadjusted its fiscal position. Manasan shows that the actual primary surplus was consistently higher than a computed sustainable primary surplus. This condition held even if transitory adjustments which included temporary revenue measures,


C3 =3

Table

6. National

government 1986

1987

revenues 1988

1989

1990

Reverazes

79245 103214

TaxReve_ues BumuoflnternalRevenue Domestic-based Net Income & Profits ExciaeTax Sa]esTaxes&Licenses O@terDomestic taxes Internal Travel Tax Forex Tax

65491 46804 46454 19148 16383 9245 1675 350 324 26

85923 58600 58322 21799 22641 12132 1750 278 278

90"352 63721 63155 27409 19597 12356 3793 566 566

17496 16859 637 119I

25992 25977 15 1331

25014 25011 3 1617

3837_5 45948 38375 45948 2086

13754 1961 5182

17291 5751 5369 1253

22509 9211 5322 6006

29948 14190 5114 4176

BtmeuofCus_oms [mpor_ of Duties & Taxes Export Ta>_es O_her Offices Ncm-TaxRevenues B'l'RIrm0cne Fees and other charges Sale of_a_ets of whid_ BCDA CARP Com_romi_ Settle_ment Economic Support Ftmd Grants Foreign Domestic O_hera Sourc_

Actual

figures

112861

(In P million). 1991

ACTUAL 1992

152410 180902 220787 242714 122462 82001 81464 37592 24857 15687 30"28 537 537

1993

1994

260405 336160

151700 182275 200705 230170 271_ 103985 116256 133904 145927 187445 103368 115682 133207 145207 186738 49366 61053 70123 74795 91885 28075 25411 27629 30259 39596 20266 24204 27794 33458 36450 4861 5014 7661 6695 10807 617 574 697 720 707 617 574 697 720 707

1995

1996

1997

1998

I999

PROJECTIONS 2001 2002

"_2003

471841

310517 210195 209915 109353 41115 53259 16186 282 282

412163 416585 507200 563200 62800(] 701900 800700 904_00 514695 337175 408100 457600 511700 575900 649900 7261(]_ 31430_ na 164170 na 63049 na 67671 na 19416 na 387 na 387 na

64391 64391

72870 72_0

81971 81971

81610 81618

9'7601 104566 97601 104566

1767

1628

1931

22T2

2250

2721

29202 14217 5726 4181

38o'12 22049 7215 4119

34009 20069 5889 1877

3Q235 19414 6917 1677

64855 21495 12714 29914

50703 15885 11001 22Y76 15486

601500 666700 740800 841500

2004

361228 410449 367094 260774 260490 156356 48309 59300 16445 284 284

462.515 550500

2000

945200

94800 9_800

76005 76005

93200

2554

2668

3405

5900

11100

120{]0

12900

13900

15000

42555 24593 11733 5660 4113

59678 35352 13160 9428 4170

45930 22535 21046 1717

43300 15200 17500 10400

38300 18300 18800 1000

38800 17800 19700 1000

38600 16900 20700 1000

40700 17800 21700 1000

404-00 16300 22800 1000

200

200

200

200

300

_g_

94500 104300 113100 136900 163700

236 53 6150 199 199 262 are from

5116 â&#x20AC;˘ 195 1393 1775 t393 1404 371 409 the Bureau

4767 1701 1357 344

2044 2380 2262 118 654

1659 3072 3009 63 400

1704 2144 1744 400 2326

481 1551 1515 36 1_3

732 732

988 988

569 569

1738 1738

396 596

300

of Treasury. _o "4


272

Economic

Table 7. Overall

buoyancy

coefficients

Total tax revenue

crisis... Once more

ot major tax groups,

1976- 96.

1976-86

1987-96

1987-92

1993-96

0.93

1.31

1.41

1.15

h_dividual income tax

0.62 _

1.62

1.67

1.53

Corporate income tax Sale Tax/VAT and licen e Exci e taxe

0.90 _ 0.95 1.22

1.6 1.52 0.8

1.57 1.43 0.6

1.67 1.67 1.14

0.71

1.25

1.88

0.29

Import dutie orefers to average for 1980-1986 Source:Estimates by Manasan (1998).

underspending on MOOE and capital outlays, and one-shot privatization receipts were accounted for. The overadjustment actually reflected the prudent stance of the government following the debt crisis in 1984-85 and its continuation should help in riding out the present crisis. The overadjustment of the fiscal position also implies that the public sector cannot be relied upon to contribute substantially to an increase in the saving rate of the economy in the future. Apart from fiscal prudence, the impact of foreign exchange flows can be mitigated by capital market deepening which will allow capital surges without resorting to raising domestic interest rates to temper the inflationary pressure. Capital market deepening, however, has to be supported by an increase in the level of domestic savings. Two important implications arise from the previous discussion. First, that achieving a sustained fiscal surplus and increasing the domestic saving rate are medium- to long-term issues. They cannot be relied upon if another surge in foreign capital inflows occurs within the next few years. This puts a great deal of pressure on sound monetary policy. Second, that despite the underspending over the past decade, the new government has to grapple with a widening fiscal deficit. Emphasis, therefore, must be placed on the revenue side particularly on tax administration. i Export growth and industrial structure The Philippines was pointedly left out by the World Bank in its list of high-powered Asian economies (HPAEs) largely because of its erratic economic growth path, which has been punctuated by boom-bust cycles. The performance of the Philippine economy during the postwar period has been directly linked to the fortunes of its industrial sector. The various studies on this sector came up with the following

major conclusions

(Medalla et al. 1995):


Chapter 9: Lamberte and Yap 1.

2.

273

That the more than three decades of protection had been very costly in terms of its inherent penalty on exports, its serious adverse impact on resource allocation, and dynamic efficiency losses arising from lack of competition; That a reform toward a more liberal and neutral trade policy is necessary to propel the economy to a higher level of industrialization.

The antiprotectionist-neoclassical view became dominant among government technocrats starting in the late 1970s. As a result a major trade reform program was implemented in 1980. The objective was to make the Philippines more outward oriented by opening up its economy. After the trade reform process was disrupted duringthe external debt crisis in 1984-85, major import liberalization programs were implemented from 1986 to 1988. During this period, imports for more than 1,400 items were liberalized bringing down the percentage of import-restricted items to less than 10 percent. This was followed by the second phase of the Tariff Reform Program which narrowed down the tariff range to mostly within 30 percent. This was implemented by the Aquino administration under Executive Order (EO) 470 which covered the period 1991 to 1995. Tariff reform was accelerated during the third phase of the program, this time under the Ramos administration. EO 264 called for a tariff range from 3 percent to 10 percent by 2000 and a uniform 5 percent tariffby 2004. Despite calls to reverse the policy direction because of the crisis, President Estrada's administration has declared that it would continue with the programs initiated by the two previous administrations. One reason for this was that based on empirical studies, the impact of trade reforms is rather encouraging. Medalla (1998) shows that the average effective protection rate (EPR) across all sectors declined from 44.2 in 1983 to 29.4 in 1990 to 24.1 in 1995. The gap in EPRs especiaUy between agriculture and industry and between the exporting sector and the import substituting sector had been significantly reduced. Moreover, although exports remain penalized by the protection structure, the degree of the penalty had declined. Partly because of reforms in the trade sector, both total exports and the share of manufactured exports increased substantially. From only US$4.8 billion in 1986,total exports surged to US$25.2billion in 1997(Table8). This represented an increase in the share of Philippine exports in the world market from 0.24 percent in 1986 to 0.40 percent in 1996, although it was lower than the share of developing__HPAE_s:The share of manufactured exports increased from 55 percent to 83 percent. Exports, however, were still concentrated in electronics and garments (at least up to 1993for the latter) revealing aslow pace of change in the structure of the trade sector.


-q 4_

Table 8. Value of exports by commodity group" (In US $million). Electronic Year

Total exports

1986

4842

1987

5720

1988

7074

1989

7821

1990

8186

1991

8840

1992

9824

1993

11375

1994

13483

1995

17447

1996

20584

1997

25228

Forest products

Philippine

Peixoleum products

Manufact-_es b

equips/ parts

Garments

Special txansactions

Reexports

201 4.15 243 4.25 261 3.69 197 2.52 94 1.15 73 0.83 57 0.58 45 0.4 26 0.19

589 11.13 462 8.08 764 10.8 829 10.6 723 8.83 610 6 _9 633 6:43 686 6.03 780 5.63

94 1.94 133 233 162 Z29 95 1.21 155 1.89 I75 1.98 150 1.52 136 1.2 132 0.95

2672 55,18 3430 59.97 4338 61 32 5192 66.39 5707 69.72 6403 72.43 7298 74.15 8729 76.74 10615 76.68

919 18.98 1119 19.56 1476 20.87 1751 22.39 1964 23.99 2293 25. 94 2758 27.97 3551 31.22 4996 36.09

751 15.51 1098 19.2 1317 18.62 1575 20,14 1776 21.7 186I 21.05 2140 21.74 2272 19.97 2375 17,16

8 0.17 7 0.12 27 0r38 10 0.13 19 023 17 0.19 32 0_3 38 0.33 74 0.53

112 2,31 149 2.6 80 1.13 71 0.91 95 1.16 82 0.93 98 1 165 1.45 181 1.31

-38 0.22 42

893 5.12 772

171 0.98 273

13868 79.49 17106

7413 42.49 9990

2570 14.73 2423

108 0.62 157

273 1.56 323

_. e_

0,2 45 0.18

3.76 764 3.03

1.33 257 1.02

83_31 21488 85.18

48.65 13052 51.74

11.8 2349 9.31

0.76 263 1.04

1.57 512 2.03

_. _. :

=Shares to totals, b Breakdown of major manufactures Source: BSP, Selected

Mineral products

(Garments

economic

and Electronics

inclicator_.

Parts/Equipment)

follow.

_1 ;_


Chapter 9: Lamberte and Yap

275

The deceptive export configuration explains why despite the increasing share of manufacturing in exports, the share of value added of this sector in total out-put had remained stagnant for the past 20 years and was even lower than the value in 1980 (Table 9). The year-on-year growth of value added in the manufacturing sector in real terms had actually declined for 11 consecutive quarters from 1995Q4 to 1998Q2 (Table 10). Medalla attributes the conflicting trends--a rise in efficiency measures in the manufacturing sector and continuing structural problems--to three factors: (1) adjustment, oftentimes a painful one, to a more open trade regime, (2) a persistently overvalued currency, and (3) the switch in relative protection between agriculture and manufacturing, this time in favor of the former. We could add to this list a relatively low investment rate in the Philippines and poor infrastructure. An inevitable outcome of a more open trade regime is that inefficient local firms are weeded out almost immediately because of the deluge of imports. It will take some time before resources are reinvested in more efficient sectors which are usually export oriented. The restructuring process is akin to the "Jcurve" effect of a currency devaluation. In this case, the manufacturing sector contracts because of the closure of noncompetitive firms, but it should start to grow rapidly once resources are used more efficiently. The restructuring process would have been smoother ffthe currency were allowed to depreciate in real terms following the increase in demand for imports. The lower value of the peso would have acted as a cover for import-competing industries. Because of the overvaluation of the peso, import-competing firms were hit with a double-whammy: lower tariffs and an artificially strong peso, both of which made imports cheap. An overvalued currency could also explain why exports are heavily concentrated in commodities that are importdependent. Because it is relatively cheap to import, exporters focus on products whose inputs can be sourced from abroad making labor the primary source of value added. Overall, the Philippines has taken great strides to enhance its outward orientation and is bordering on being a completely open economy by 2004. This progression is dovetailed to globalization. Despite policy reforms, however, manufacturing has not grown according to expectations. Macro and microeconomic impacts of the crisis 1 Since June 1997, the peso has depreciated by about 50 percent vis-a-vis the US dollar and seemed to have stabilized at around P40/US$1. The Philippines was one of the countries that was spared the harshest effects of the These are discussed in detail in the previous chapters of this book.


276

Economic

Table 9. Production

structure

tt Industry

of the economy, percent

crisis... Once more distribution

1975

1980

1983

19K'$

1988

1990

1993

1996

1997

1. Agrlflah_ry, forest_/

24.74

23,55

22,04

25.28

23,8

22.19

22,37

20.21

19,62

a. Agriculture b. Forestry

21,06 3.68

20,54 3

20 2.05

23,66 1,62

22.07 1.73

21.18 1.01

21.9 0.47

20,1 0,1

19.56 0.08

2. Industry sector a. MiJli_g and quanying

38.48 1.27

40.59 1.3

41.01 1.41

36,06 2.14

:_._,56 L79

35.28 1.53

33.67 1,55

34.3 ]-19

34.27 1.09

b. Manufactttdng c, Con#_cfion

28.39 7.01

27.65 9.41

26,49 10.7

_5.87 5.22

25.95 5.09

25.39 5.78

24,27 3,13

24,34 5,6

23.91 6.15

],82

2.04

2.41

2.84

2.73

2.58

2,71

3.18

3,12

37,04 4,77

36.05 4,79

38.44 4.97

41.5 5,69

41.56 5,81

42.02 5.67

42,26 5,75

41,56 5.77

41.63 5,88

d, Electricltv

tndustl'y

gas and water

3. Service sector ,L Transportations,

commui_icafion,

and storage b. Tn_de

12,35

[3.04

13.68

14,9

14,59

14,83

15.06

14.77

14.54

c, Fi nonce

3.36

3.94

3,8

3.08

3.65

4,14

4

4,37

4.64

d. Own dwelJings and real estat_

6,49

5.2

5.29

8,78

5,62

5.54

5.55

5.17

5.07

e, Prlw_te servlc_s

5.18

4,91

6,45

7.04

6.94

6.81

6.83

6,61

6.56

f, Government so!trices

4.69

4.17

4,24

5.02

4,95

5-03

5,1

4.87

4.94

100,26 -0,26

100.19 4),] 9

101.49 -1,49

10_,84 -_'.84

100.92 -0.92

99.49 0,31

98,29 1.71

96.06 3.94

95.53 4.47

100

100

100

100

100

Gross domestic product Net factor income from abroad Gross nationalrltproduct

Source: The National

100

Accounts

11)(I

100

of the Philippines,

i100

National

Statistics Office.

I

I

Table 10. Growth rate for the manufacturing

sector, quarter data: 1994-98.

(In percent). 94Q4

6.5

95Q4

6.0

95Q1

6.6

96Q1

4.9

95Q2

8.3

96Q2

6.2

95Q3

6.4

96Q3

6.3

95Q4

6

96Q4

4.9

96Q1

4.9

97Q1

2.3

96Q2

6.2

97Q2

5.3

96Q3

6.3

97Q3

4.3

96Q4

4.9

97Q4

3.8

97Q1

2.3

98Q1

1.3

Source: National

Income Accounts,

National

Statistical

Coordination

Board.

crisis. GDP growth rate was expected to be fiat in 1998 but it would have been positive

if not for the impact of the E1 Nifi0 weather

phenomenon.

Inflation

should be about 10 percent on average, a far cry from the 15-20 percent experienced as early as the Gulf War crisis iia 1990-91. Interest rates measured by the benchmark

91-day T-bill rate did not climb much higher than the 1996


Chapter 9: Lamberte

and Yap

277

and 1997 averages. Export growth has remained strong, which partly explaind the current account surplus. Weak import growth, as a result of low demand during this crisis period, however, is still the main reason for the current account surplus. On a sectoral basis, both industry and agriculture contracted for the first three quarters of 1998 (Table 11). Since the agriculture sector performance was affected by weather disturbances, it was the industry sector that bore the brunt of the financial crisis. This was quite obvious for the construction sector. The manufacturing sector, however, was already experiencing trouble 2 years before the crisis. The Asian financial crisis merely exacerbated the situation.

Table li11. Sectoral growth m in i gross domestic " Gross domestic Agriculture,

product

fishery, and forestry

Industry

product, 1991-1998 (In percent).

1991

1992

1993

1994

1995

1996

1997

-0.63

0,38

2.10

4.38

4.78

5.80

5.20

1998a 0,23

0.98

0.10

2.00

335

0.83

4.28

2.80

-6.13

-2._

-0,28

1.58

5.75

6,98

6,20

6.18

-0.10

-15,93

6.08

5.73

9,35

6.60

10.88

16.38

-7.27

Manufact_tring

-0.48

-1.65

0,68

5.00

6.83

5,58

4.15

0.67

Food manufactures

-1.,54

-2,86

-1.55

5.47

2,78

6.58

0.76

2.87

Construction

0,77

*2,30

-6.66

6,05

6.05

7.79

8.54

-0.18

Tobacco mano factxares

Beverage industries

-1-41

1.35

-3,61

3.77

-0.73

8.01

5.86

-2.89

Textile manufactures

-2,92

-12.02

-0.73

-7,39

6.33

-2.01

-3-24

-6.28

6,99

0.60

7.07

5.49

8-11

-8.83

2.66

5.24

Wood and cork prod,

-3,62

-17.91

6.68

-19,42

2.48

-3.67

6.72

-10.87

Furniture

Footwear and wearing

apparel

and fixtures

-5,21

-11.20

-3,79

6.87

11.28

1,98

11.76

15.56

Paper and paper prod,

0.83

-11,65

-8,40

4.27

19,36

-2,53

-5.52

6,07

Publishing and printing

-0.17

-0.40

-6,24

4.59

6.25

1.27

3.82

8.70

Leather and leather prod,

6.76

-5,70

_2.68

138

14.97

13,02

12.57

9.40

Rubber prodtmts

0,46

-5,37

-13,70

-4.15

11.78

-8,16 '

-8.22

-11.49

Chemical and chemical prod,

5,79

-8,31

3.27

1.32

8,06

5.78

7.27

-9,62

-3.77

11.55

-0,66

4,72

7.76

8.79

1.18

-8.03

9,93

-5.72

9,83

10.71

14.14

7,51

12.57

-6.93

0.88

-20.81

7.21

3.89

26.80

-3.91

-1.55

-4.18

Metal industries

-7,41

4,99

1.57

-1.07

4.99

10,77

-4.35

-7.43

Machinery excl, electrical

Petroleum and coal prod. Nonmetallic

mineral prod,

Basic metal industries

-0.14

5,02

4.05

7,00

17.29

15.30

13.51

0,34

Electrical machinery

3,35

2.97

14.95

22.69

13.47

14.74

31.10

14,65

Trar_sport equipment

-7.90

15.18

21.83

7.76

16,55

1.45

-11.08

-30.39

Misc, manufactures

6.16

-19,22

8.86

13-26

2,17

6.40

13.16

14.36

,Service sector

4,90

0.18

1.00

2,48

4.25

5,00

6,40

5.50

2.20

0,45

1,40

2.53

4,23

5.80

7,40

8.23

4.58

0,58

1,63

2.43

3,95

5,55

5.53

4,00

10.08

-2,65

0,35

2.38

5.45

7,33

13,73

13.0_

Transport, communication,

and storage

Trade Finance Ownership

2,75

0.Z_

0,73

1.80

2.90

3.05

4.15

3,80

Private services

of dwellings

3.&_

-0.18

0.60

2.88

4.28

4.33

4,98

4.85

Government

9.00

1.53

0.23

2,&_

5,53

3.75

5.93

2.90

services

1st * 3rd quarter Source: National

and real estate

1998 except for breakdown of manufacturing Statistics Coordination Board.

sector

(1st

half

1998

only).


278

Economic

crisis... Once more

Among the manufacturing subsectors that experienced the largest Contractions were: transport equipment, rubber products, wood and cork products, textile manufactures, and metal industries. Electrical machinery and furniture and fixtures experienced robust growth, an indicator that the export sector was instrumental in keeping the economy afloat. Food manufactures, which constituted about 45 percent of valued added in manufacturing, recovered from low growth in 1997. The major concern for policymakers, however, is fiscal deficit. From a surplus position for four consecutive years (1993-97), the national government was projected to record a deficit in 1998. This reflected the sharp decline in revenue performance mentioned earlier. There are no short-term remedies for this situation except to temporarily reduce expenditures. Once the economy starts to recover, revenues are expected to rise; but to sustain this momentum, reforms in tax administration should be implemented. The slowdown in demand coupled with the sudden increase in the cost of money due to high interest rate and sharp depreciation of the peso had adversely affected several firms. From 1 January to 30 September 1998, 2,402 enterprises resorted to closure/retrenchment (Table 12). The overall stock market price index and the stock market price index for the property sector were reduced by half in recent months. The leverage ratio of the top 1,000 corporations, however, perceptively rose in 1997, suggesting that a significant number had foreign exchange liabilities (Table 13). The plight of the corporate sector had adversely affected the balance sheets of banks. The nonperforming loans (NPLs) of the banking system rose from 4 percent 1998.

of total loans outstanding

The unemployment

in June 1997 to 9.7 percent

rate rose to 8.4 percent

in January

in June

1998 compared

with 7.7 percent of the same month in 1997. As the crisis deepened, the unemployment rate rose further to 13.3 percent in April 1998 compared with 10.4 percent of the same month in 1997. The Department of Labor and Employment (DOLE) reported that for the first three quarters of 1998, the number of workers affected by establishment closure/retrenchment due to economic reasons already reached 115,478. Given this situation, poverty ncidence could have already risen above the 1997 level. Policies and measures currency crisis

adopted

in response

to the East Asian financial

The immediate concern of policymakers after the crisis erupted in Thailand was to ensure that the economit" situation would not go out of hand I

and plunge the country into a downward! spiral. Thus, pohcymakers sought to stabilize the exchange rate and protect the soundness of the banking sector.


Chapter 9: Lamberte Table 12.

and Yap

279

Establishments resorting to closure/retrenchment due to economic reasons and workers affected, 1 January to 30 September 1998 (Actual and expected/planned).*

Region

[

Number of establishments

[

Number of workers affected

ITotal _

Actual

Total

Actual

Planned b

Philippines

2,402

2,276

190

120,359

115,478

4,881

National Capital Region

1,450

1,337

174

69318

64,652

4,666

Cordillera Administrative Region

12

12

0

555

555

0

Region I- llocos Region

30

30

0

447

447

0

Region II -Cagayan Valley

18

18

0

270

270

0

Region III - Central Luzon

134

128

9

15,289

15,110

179

Region IV - $. Tagalog

132

132

0

10626

10,826

0

20

20

0

771

771

0

Region VI -W. Vi_yas

152

148

4

3,598

3,590

8

RegiOn VII - C. Visayas

198

198

0

10,142

10,142

0

Region VIII- E. Visayas

28

26

2

236

222

14

Region IX- W. Mind,'uaao

18

18

0

1,961

1,961

0

Region X - N. Mindanao

45

45

0

1677

1,877

0

Region XI- S. Mindanao

136

135

1

3,362

3,348

14

Region XII -C. Mindanao

10

10

0

267

267

0

Caraga

19

19

0

1,440

1,440

0

Region V - Bicol Region

Planned b [

" Details (actual and planned) may not add up to total due to multiple reporting. bExpected/planned retrenchment of workers for October, November and December. * Preliminary Source: Bureau

of Labor and Employment

Statistics.

Fiscal measures were adopted to reign in the budget deficit that started to widen because of the drop in revenue collection. These were also designed to support the prudent monetary policy at that time. Complementary measures in trade and industry and the social sector were implemented to prevent any policy reversal but at the same time protect the most vulnerable groups. Measures to accomplish these objectives are discussed in detail below. The ultimate objective was to restore investor confidence in the economy. Foreign

exchange

policy

and measures

2

When the Bank of Thailand announced on 2 July 1997 a managed float of Me baht and called on the IMF for "technical assistance," pressure on the peso started to mount. At the Philippine Dealing System (PDS), the average daily turnover increased to US$255.8 million from an average daily turnover of US$174 million before the onset of the Asian currency crisis9 The BSP intervened 2Most of these measul_s are presented in BSP,The Philippines:Onward to Recovery,July1998. 3On 8 and 11 July 1997, the volume and US$619 million, respectively.

of foreign exchange

traded

at the PDS rose to US$633 million


280

Economic

Table

13.

Average

debt-equity

Philippines,

ratio

of

total/average

by

the

top

crisis...

1000

Once

more

corporations

in

the

sector. L

Sector 1

Agriculture,

2

Fishing

3

Mining

hLm_g

3.2378

0.4409

0.7239

Manufacturing

1.2381

1.6124

2.3791

3.1262

6

Construction

1.7279

2.2961

7

Wholesale

2.2953

2.7589

8

Hotels

0.7628

1.0447

9

Transport,

10

Financial

11

Real estate,

12

Public

gas and water

and retail trade

and restaurants storage,

and con-m_unication

intermediation renting

and business

administration

activities

and defense;

1.7208

2.885

2.7735

2.9234

0.7065

0,8708

0,2827

0.1898

social security

13

Education

0.3435

0.2408

14

Health

0.6025

0.7071

1.5

Ofl_er commtmity,

0.8429

1.1038

in

dollar

sales

billion

or

the

and social work

17

the gross US$11.2

Sensing exchange

foreign

of which

from

the

rate,

announced band.

P26.4/US$1 continued

m_d personal

Top 1000 Corporations

about

1997,

social

activities

exchange

at the PDS.

proportion

peso

1.7116

2.4864

Electricity,

heavily

wider

1.6404

5

Source: BusinessWorld

and

1997

4

service

billion

and forestry

and quarrying

comptilsory

July

1996

from

percent

of

occurred

during

international

on

a month

end

the

volume

that

As and

peso

1997, of

week

(GIR)

the

by

the

increasing

BSP sold

transactions,

of July

of the

a sizable

1997. 4 By the

BSP

its

US$5.05

dropped

end

of

to US$9.7

month.

of

1997,

4In April 1997, the BSP increased

the first

th_se

its dollar

1997

to depreciate

total

reserves

of July

earlier.

defend to 11 July

the previous

reduced

11 July

to

2 January

ineffectiveness

the BSP

By the

market

Thus,

billion

1997-98.

interventions

sales

it would the

pressure reached

peso

foreign

let the

exchange

depreciated

mounted a low

in stabilizing

in the

exchange

move

to P29/US$1

on all Asian of P43.9/US$1

[ its dollar sales when strong pressure

rate

the market in a from

currencies, in August

the 1998.

on the peso was felt.


Chapter 9: Lamberte

and Yap

281

After 11 July 1997, BSP's intervention in the foreign exchange market had been minimal, signaling to the market that it was adopting a new exchange rate policy. While the exchange rate was left to the determination of the market, BSP adopted some measures to discourage market players, especially banks, from currency speculation in the foreign exchange market and maintain the financial health of the banking system. These measures are discussed below. Nondeliverable

forward

contracts

When the peso sharply depreciated in July 1997, the BSP became aware of the impact of nondeliverable forwards (NDFs) on the exchange rate. In particular, several players in the market had used NDFs to speculate on the exchange rate, which added pressure on the peso since the Asian currency crisis struck. To deal with this problem, the BSP issued a circular prohibiting banks from entering into NDFs with nonresidents including offshore banking units without its prior approval. The same circular also made it clear that only banks with expanded derivatives license can engage in NDFs. Overbough t/Oversold position of banks In the aftermath of the Asian currency crisis, the BSP tightened the overbought position of banks while it relaxed the oversold position to discourage banks from speculating in the foreign exchange market and flush out dollars kept by banks. The overbought position was reduced from 20 percent to 5 percent â&#x20AC;˘of the bank's capital or US$10 million, whichever was lower. On the other hand, the oversold position of banks was increased from 10 percent to 20 percent of the bank's capital. To prevent banks from circumventing this regulation by conducting foreign exchange transactions through their subsidiaries and affiliates, the BSP required the consolidation of banks" accounts with their subsidiaries and affiliates, s The BSP increased penalties on banks, which fared allowable overbought/oversold position of banks.

to comply with the

Over-the-counter sales of foreign exchange To prevent individuals and corporations from speculating in the foreign exchange market during the crisis period, the BSP reduced the over-the-counter sale of dollars without need of any documentation from US$100,000 to U5525,000 in July 1997 and finally to US$10,000 in April 1998. Those who want to purchase

_â&#x20AC;˘ Most domestic banks have foreign exchange (forex) corporationswhich are registeredwith the Securitiesand ExchangeCommission (SEC)but not regulated by the BSP.These unregulated forex corporations buy and sell foreign exchange.


282

Economic

crisis... Once more

dollars from the banking system in excess of this amount will have to show documents spelling out legitimate uses for such currency. Alternatively, they may purchase the same from the unregulated parallel market. BSP's lVDF facility Encouraged by the recent, relative stability of the exchange rate, especially in 1996, several corporations borrowed in foreign currency either from the international financial market or from the foreign currency denomination unit (FCDUs) of domestic banks without covering their foreign exchange exposure through some hedging instruments. When the peso depreciated sharply in July 1997, most of the unhedged corporations rushed to the spot market to buy dollars even if their foreign exchange obligations had not yet matured because of fears of additional depreciation. This situation put unnecessary pressure on the spot rate. Some corporations borrowed pesos from domestic banks to finance their dollar purchases, which exerted additional pressure on the domestic interest rate. To protect corporations with foreign exchange liabilities against currency fluctuation risk, the BSP created in December 1997 the Currency Rate Protection Program (CRPP), which, essentially, is an NDF facility. Settlement of the difference between the contracted rate and the market rate is done in pesos. Eligible foreign exchange liabilities include unsecured registered foreign currency loans, foreign currency trust receipts, and customer liabilities booked locally before 19 December 1997 that are unhedged. Later on, exporters' loans were made eligible to the CRPP. Since the CRPP can spread the demand for dollars between the spot and forward markets, therefore, it can also ease the demand pressure in both the spot market caused by corporate borrowers wanting to cover their foreign exchange exposure and the domestic interest rate. The BSP could lose a lot of money in this program, especially if the peso sharply depreciates when many of the contracts mature. Losses from this program can undermine BSP's ability to manage the liquidity of the system. 6 A few months after the introduction of the CRPP, however, the peso started to appreciate vis-a-vis the dollar, which many analysts attributed partly to the success of the program. The demand for the CRPP facility subsequently died down. When the peso and other currencies in the Asian region sharply depreciated again in August 1997 followirig Russia's call for a moratorium on its external debts, the BSP reactivated the CRPP.

This is reminiscent

of the old central bank's

operations

in the early 1980s.


Chapter 9: Lamberte and Yap

283

Monetary and Credit Policies In conducting monetary policy, the BSP has been gradually reducing its reliance on traditional monetary tools, such as the reserve requirement ratio and the rediscount window, and has increased its reliance on open market operations. Inview of the huge inflationary impacts produced by previous sharp devaluations of the peso, especially in the mid-1980s, the BSP quickly put in place some measures to control liquidity growth of the system. These are: Open market opera_ons The BSP adjusted its overnight borrowing rate to as high as 32 percent per annum on 11 July 1997. In the following month, the BSP temporarily suspended its overnight lending facility to prevent banks from using BSPloans to speculate in the foreign exchange market. As the financial system began to stabilize, the BSPgradually reduced its overnight borrowing rate and reopened its overnight lending facility. As of end-September 1998,the overnight borrowing rate of the BSP posted at 16 percent per annum and the overnight lending rate at 18 percent per annum. Required reserve and liquidity requirements The BSP had been gradually reducing the statutory reserve on bank deposits from a high of 25 percent in 1990 to 14 percent in January 1997.Twentyfive percent of the statutory reserves was supposed to be kept in the form of below-market, interest-bearing deposit at the BSP and the rest in the bank's vault. The BSP has maintained its policy of gradually reducing the statutory reserve, which now stands at 8 percent. In view of the need to control liquidity growth and at the same time reduce the bank's intermediation cost during the crisis period, however, the BSPmade a series of increases in liquidity reserves, which reached a high of 8 percent in August 1998.7 This was brought down to 4 percent in November 1997, but was raised again to 7 percent in March 1998 in exchange for the reduction in statutory reserves from 13percent to 10 percent. Since October 1998, the statutory and liquidity reserves stand at 10 percent and 7 percent, respectively. To reduce further the bank intermediation cost, the BSP increased the proportion of interest-bearing statutory reserves from 25 percent to 40 percent in May 1988.

T The BSP started in December 1993 to impose a 2 percent liquidity reserve on deposits, which banks cart keep in the form of short-term, market-yielding government securities purchased from the BSP.


284

Economic

crisis... Once more

Table 14 shows the liquidity and credit growth rates from 1990 to June 1998. Liquidity growth rate drifted upward during the second semester of 1997 as the BSP accommodated loans to some banks, which encountered liquidity problems. It was, however, brought down in the first semester of 1998. The growth in bank loans was flat for 1998, notwithstanding the continued decline in the domestic interest rate. Observers attributed this to both demand and supply factors. On the demand side, the corporate sector had slowed down their production activities due to the decline in demand for their products during the crisis period and resorted to running down their inventories to meet sales orders. On the supply side, banks had been extra cautious in making new loans due to the lingering uncertainty in the financial market. Banks had reduced the amount of loans made available even to some of their long-time clients because of the deterioration in the quality of the collateral being offered. Thus, banks had plenty of cash and nowhere to place them but in foreign exchange or in risk-free government securities. Auction results since July 1998 (Table 15) showed that dealers' tenders for government securities had always exceeded the volume accepted by the Bureau of Treasury by a wide margin. 8 Bankin 8 sector restructuring The Philippine financial system entered the July 1997 Asian financial crisis on a much firmer ground than its Asian neighbors. This was because it had undergone a massive restructuring in the 1980s and 1990s partly as a result of changes in banking policies and regulations (e.g., creation of universal banks, liberalization of bank entry and branching, removal of interest rate ceilings, etc.). This was also partly a result of the severe crises it had experienced in the midq980s which led to the weeding out of badly managed banks, investment houses, and finance corporations. The NPLs of the banking system soared to 23 percent of total loans outstanding in 1985 (Table 16). The following year, loanloss provisions of banks went up to 20.6 percent. From 1981 to 1987, the central bank closed 173 banks including 6 medium-sized banks, leaving strong banks to continue operation. Since then, banks have been cleaning their balance sheets. Thus, in June 1997, the banking system's NPLs stood at 4 percent only and loan-loss provisions were at 1.4 percent. The cost of the closure of several financial institutions in the midq980s fell heavily on the government as it absorbed a sizable amount of the liabilities of failed banks, investment, houses and finance corporations and paid depositors the insured deposits (Lamberte 1989). Some banks were nationalized, and it took the government some time to reprivatize them. The proceeds from the privatization of some financial institutions lwere significantly less than the cost s Most government

securities

dealers are also banks 0r their affiliates/subsidiaries.


;x* Table

14. Growth

of credit

of the banking system, Total loans

Y ear

KBs _

Share

TBs

1990

270.76

89.10

1991

306.17

1992

366.81

1993

1980-98

(Levels

in P billion,

share

in percent). Domestic liquidity

Share

RBs

Share

Total

Growflq

Amount

Growth

23.38

7.69

9.74

3.20

303.87

28.08

300.54

18.36

88.63

28.52

8.26

10.74

3.11

345.44

13.68

347.08

15.49

88.58

34.64

8.36

12.67

â&#x20AC;˘3.06

414.12

19.88

385.39

11.04

506.43

89.31

45.06

7.95

15-54

2.74

567.02

36.92

480.02

24.55

1994 1995

637.18 866.33

88.25 88.37

65.69 89.16

9.10 9.09

19.14 24.88

2.65 2.54

722.00 980.36

27.33 35.78

607.61 761.43

26_58 25.32

1996

1221.76

88.71

122.11

8.87

33.40

2.43

1377.27

40.49

881.40

15.76

Mar

1284.59

88.50

13Z58

9.I3

3432

2.36

1451.49

901.79

17.25

Jun

1418.95

88.59

145.81

9. I 0

36.90

2.30

1601.66

923.61

18.92

Sep Dec

1499.25 1573.15

88.89 89.79

147.99 139.61

8.77 7.97

39.35 40.80

2.33 2.33

1686.58 1752.12

27.22

987.68 1066.02

23.53 20.9.5

MarP

1517.63

89.82

131.16

7.76

40.80

2.42

1689.60

16.40

1057.42

17.26

Apr P

1528.55

89.85

131.78

7. 75

40.80

2.40

1701.13

1065.31 e

18.04

May F

1517.64

89.72

i33.15

7.87

40.80

2.41

1691.60

1063.60 a

16-51 (

Jun P

1595.37

90.06

135.20

7.63

40.80

2.30

1771.38

t_

ffa

_.,

1997

1998

10.60

Inclusive ot specialized government banks, b As ofend December 1997. *Partial figure as of July 1998. a Partial figure as of August 1998. _Growth rate: Apr 1997 - Apr 1998. _Growth rate: May 1997 - May 1998. P Preliminary Source: BangkoSent_al ng Pilipinas.

oo


t,o Oo

Table 15. Treasury Da t e

bill auction results, 91-a_y

Week

VolLcne Tendered Accepted

July to latest available 182-d_r Rate

Rejected

Tendered. Act'epted

l 2 3 4

&Jul-g8 18-Ju_-9_ 20-Jul-9_ 27-Jul-9_

3,156 S,7S0 3,530 2,350

1,311 1,500 1,500 635

1,845 2,2-50 2,0_0 1,715

14.921 14.756 14.193 14.18'9

7,845 12,220 8,640 5,105

1,820 2,000 2`0f_3 2,000

August

1 2 $ 4 5

3-Aug-98 10-Au8-93 17-Au_-98 24-Au8-93 3t -A_g-98

7.,225 1,180 3,212. 3,822 2,475

810

1,415

14.178

1,500 1,500 1,500

1,717 2,322 975

14.14 13.9"_9 13.91_

2A80 1,465 S,7g5 4,414 2,320

Septe mb_

1 2 3 4

7-Sep-ht8 14-Sep-_ 2t-Se_9_ ?.._-Sep-_

3,415 2,525 2,275 750

1,500 1,500 742 380

1,..°15 1,02J 1,533 _O

1_q._ 13.754 1S.754 L3.795

October

1 2 3 4

5-Oc_-98 t2-Oct-90 49-Oct-90 26-Oci-9_

4,805 4,225 2,285 1,785

750 1,500 1,_00 1,_0O

4,_5 2,7"Z_ 785 285

1 2 3

2-Nov-_ 9-Nov-9_ 16-Nov-98

1,780 815 2,83

800 420 1,_0

4 5

23-Nov-98 30-Nov-98

2,505 . 2,389

t 2

7-_c-96 14-Dec-98

3.230 1,610

Decemb_

Source:Bureauof Treasur_

[

Volume

J u 1y

November

(Volume

in P million). 3_4-a_r

Ra_e j Reje_led

I

Volume

I Tendered Acort,ted

T_l

Rate R_e_tecl

Tendered

Acc_ed

1C_od

6,¢,'25 10,220 6,640 3,105

17.198 16._2 15.495 15.296

19-,280 10,560 5,265 5,415

1,420 2,t_0 2,000 800

10,66_ 8,5@3 fi,2_ 4,615

L$.585 17344 16_37 16._

23,281 26_ 17,435 12,870

4,751 5,_0 5,500 3,435

18,530 2I,fl_0 11,S'35 9,4_

160

2,C¢20

15:24

250

2310

16_29

S,545

2,285 2,91-4 8_.0

15.194 14.924 14.965

2,000 2,000 2,000

1,165 1,446 1,075

16_27 162m_I 16.769

6,765 4,445 10,167 11,682 7,870

1,220

1,500 1.500 1,500

2,360 1,800 3,165 3,446 3,075

5,0(_ 5,_ S,IK'_

5,1_7 6,682 2,870

fl_2_ 1,9_0 1,840 Lf_O

17_00 1.300 13_ 92O

1,7"50 680 1,710 72.0

14.79 14.788 14.785 14.9_

4,510 3,935 2,4_ _

2,000 . 2_f100 $50 _0

2_'10 1,935 1,9S0 1,100

16_34 16.484 16Ao_ 16-599

11,175 8,440 6,595 4,080

5,000 4,800 1,422 _,8_

6,1_5 3,640 5,17"3 2,_

13.7R3 1S.489 1_.4$9 13.475

1,8o_ 2,513 3,079 4,459

l_(l_ 1,500 1,503

1,013 1,579 2,959

I4.759 14.615 14.442

S,949 8,496 _,810 7,850

1,776 _00_ 2,000 2,000

2,173 6,496 3,61(_ 5,850

16_599 15_26 15522 15.136

10,5_:_ 15,234 10,974 14,094

2,57.6 5,000 5,000 5,000

6,228 10,234 5,974 %0°,4

980 _95 1,005

1S.474 13.5(_ 13.473

5,165 4,465 5,725

920 2,C_ 2,00(3

4,245 2,465 1,7"25

14.4,_ 14.271 14388

5,350 5,891 5,939

2,000 2,000

5.350 3.391 3,9'39

15.186 I5_n3 14_53

12,295 10,671 12,169

1,7"20 4,420 5,500

10,_S 6,2_1 6,669

_ • _'3

1,500 1,500

1,005 889

15.401 13.4(0-

1,_t5 5,275

1,84_ 2,003

0 3,275

14.(_6

7,153 4,500

2,000 2,(]00

5,153 _

14344 14273

11,503 12,164

5,345 5_0_

6,15_ 6,664

_ • _,.

650 300

2,5_0 1,310

13.405 13.406

2,680 1,851

500

1,3_1

13.863

3.684 3,100

505

2,595

14.22

9,_94 6,_61

6_ 13_

5,7._6

_'_


Chapter 9: Lamberte and Yap

287

Table 16. Nonperforming loans, total loans, and loan loss provisions of the banking system, 1980- latest available (Ratios in percent). NPL / Total loans

Loan loss provisions

/ Total loans

Year KBs _

TBs

RBs

Total

KBs '_

TBs

RBs

Total

1980

10.966

5,623

26_976

11.288

2,062

0,168

1,783

1.950

1981

13.440

16.530

26.290

14.106

0.933

0.358

2.516

0.964

1982 1983

15.352 12.072

7.281 7.961

20,204 22.215

15.203 12,232

1.270 1.327

0.475 0.472

1.954 2.301

1.265 1.319

1984

21.013

15.070

36.272

21.245

2.537

0_667

2,905

2.465

1985

22.637

15.478

42.752

23.057

3.452

1.137

3.315

3.345

1986

20.442

14,358

41.811

20.879

22.228

1.115

3.638

20.591

1987 1988

13,714 10.797

9.895 8.030

37.295 34,906

14.492 11.618

8-035 5,966

0.837 0.854

3.990 4.078

7.308 5.483

1989

8.236

6.684

31.239

8.941

5.424

0.691

4.181

4.968

1990

7,175

7.238

28.502

7,863

4,683

1.403

4.252

4.417

1991

6.612

7.605

26.331

7.308

4.008

1.792

4.160

3.829

1992 1993

6.132 4.708

7,870 6.017

24.426 21.327

6.837 5,267

3.395 2,628

1.724 1.365

3.765 3.281

3.266 2.546

1994

3,931

8.359

18.166

4.711

1,883

3.077

3.219

2.027

1995

3.233

Z894

16.068

3.983

1.591

2.665

2.758

1.718

1996 1997

2.799

7.741

1,4.139

3-513

1.240

2.685

2.036

1_387

Mar

3.294

7.434

14.858

3.946

1.319

2.271

2,022

1,422

,lun

3,373

7.742

14.633

4.030

1.305

2.106

1,941

1,393

Sep Dec 1998

3.962 4.688

10.091 10.633

14.950 16.177

4.756 5.433

1.435 2.211

2.166 3.119

1.847 1.953

L509 2,275

Mar P

7.420

14.321

16.177

8.167

2.590

3.564

1.953

2.651

Apr P

8,595

16,263

16.177

9.371

2.678

3.658

1.953

2.737

May p June P

9.441 8,947

16,090 1&760

16.177 16.177

10.127 9.710

2,744 2.744

3.492 3,949

1.953 1.953

2.784 2.818

_preliminary; â&#x20AC;˘inclusive of specialized Source: Bangko Sen tral ng Pilipinas.

government

banker.

the government incurred when it absorbed the liabilities of failed financial institutions. Because of its sad experience in assisting ailing banks in the 1980s, the government has been very cautious in intervening and providing financial support to ailing banks. This also prompted the government to strengthen its prudential rules and regulations and improve the technical capabilities of bank examiners. The financial crises in the mid-1980s had taught Philippine financial institutions the value of prudent financial management. Liberalization of bank entry and branching of domestic banks in the late 1980s and liberalization of


288

Economic

crisis... Once more

the entry and scope of operations of foreign banks, however, saw increased competition in the financial system. The economic recovery in the 1990s provided banks with many profitable opportunities. Bank loans grew by 32 percent on average during the 1992-96 period, peaking at 40.5 percent in 1996. For commercialbanks alone, the share of its loans to total assets increased from 42 percent in 1990 to 58 percent in 1996 (Table 17). What was worth noting though was that the ratio of foreign currency loans of the commercial banking system to the total assets of its foreign currency deposit system rose from 20 percent in 1990 to 55 percent in 1996. Clearly, bank exposure to credit and currency risk had increased during the last 6 years. A sharp downturn in the economy could surely weaken the balance sheets of many banks. Because of this, the central bank introduced some prudential measures to maintain the financial health of individual banks. These measures could also lead to a restructuring of the financial system. These will be discussed in this section. Cap on real estate loans The vulnerability economy 1997.

of the real estate sector to sudden

was amply demonstrated

by the halving

downtums

of its market

in the

price index in

A few months before the Asian currency crisis struck, the BSP had already been closely monitoring banks' exposure to the real estate sector. In June 1997, it finally placed a cap on banks' loans to the real estate sector equivalent to not more than 20 percent of a bank's total loan portfolio, exclusive of loans to finance the acquisition or improvement of residential units amounting to not more than P3.5 million. This was aimed at moderating the growth in banks' financing of the construction of high-rise buildings, some of which were built by developers and purchased by investors for speculative purposes. Banks' aggregate loans to the real estate sector inclusive of loans to finance the acquisition or improvement of residential units, however, are not to exceed 30 percent of their total loan portfolio. In addition, the BSP reduced the loan value of the real estate used as collateral

for bank loans to not more than 60 percent of the appraised

value of

the real estate property, exclusive of individual loans not exceeding P3.5 million. The banking system's exposure to the real estate sector turned out to be much less than the cap imposed by the BSP (Table 18). Nonetheless, some banks, especially thrift banks, which had heavy iexposure to the real estate sector encountered some financial difficulties during the Asian currency crisis. Thrift banks are quite different from commercia 1 and universal banks in that they tend to specialize in housing and small and medium enterprises (SME) loans-the two sectors that are highly vulnerable

to _udden downturns

in the economy.


Table 17. Structure of loans of the commercial banking system (In P million).

1. Total loans, net a % total assets b

1990

1991

1992

1993

1994

1995

215,631.9

230,783.6

278,04,0.3

376,176.7

483,937.9

678,680.0

1997

1,117,966.3

April 1998

1,400,081.7

42.0

41.6

44.5

48.7

4,266.0

4,920.5

8,433.6

9,252.7

% total loans

2.0

2.1

3. ROPOA, net

2,992.2

3,323.0

% total loans

1.4

1.4

879.0

741.0

1,697.0

2,344.0

3,478.0

5,323.0

10,811.0

10,547.0

20.5

16.4

29.4

33.0

35.6

43.2

54.7

46.3

2. Restructured

loans, net

4. FCDU loans (M US$) % total FCDU assets

Excluding Interbank Loans. b 1994,1997 and 1998 were based on unadjusted Source: Bangko Sentral ng Pilipinas.

3.0 4,317.5 1.6

2.5 7,860.5 Z1

49.6

1996

8,386.5 1.7 8,913.1 1.8

53.3

58.1

54.6

5,289.1

13,258.0

14,271.4

0.8 8,762.1 1.3

1.2 10,898.4 1.0

1.0 18,406.9 1.3

t_

1,378,635.3 55.6 I5,624.7 1.1 23,019.0 1.7 9,317.0 45.8

total assets.

b,j t_


t,o

Table 18. Commercial banks' loans outstanding in P million, share in percent). Jun Total loans outstanding (CSOC) â&#x20AC;˘ Purpose of loans to the industry

to the real estate sector, by purpose,

Slxare

1267180,8

Acquisition of residentiat prop_ty Land Individual units

Sept 1997 Share 1354011.6

34980.9 6904.5 21901.6

21,9 4,3 19.7

3tM45.4 4705.2 25940.3

Acquisition of comnxercial property

17644.4

ll.O

Developme_at of subd_ for housing

26629.1

16.7

Development of industrial park Development of commercial property

2774,9 26096.8

Development of recreatiorm!and amusement park Development of memorial park Construction of office condominium Construction. of residential condo0minium Construction of infrastructure Project Other purposes Total Ratio of real estate loans to total Loans outstanding â&#x20AC;˘ Exclude

interbank

loan receivables,

Source:Bangko Sentral ng I'ilipinas.

Share I

1405521.0 32447.5 6952.6 25494.9

16470.5

8.9

18685.5

9.2

42755.3

23.1

&_519.1

22-4

1.7 16..3

41.77.0 27308.0

2_3 l&7

5947,8 30166A

2.9 14.8 .

4060.2 823.0 6958.9

2.5 0.5 4.4

4338,0 922.5 9839.4

2_3 0.5 5.3

3814.6 1020.8 9629.6

9758.7 3373.2

6,t Z1

11782.1 4761.1

6.4 2_6

26774.0

16,7

32459.9

159874.1

100.0

185453.2

real estate transactions

13.7

Mar

Share1998

1367483.0

16.5 2.5 14.0

12_6 banks without

Dec

as of dates indicated

15.9 3.4 12,5

(Amount

Jurt

Share

1402470.4 16.5 5.2 13.2

33226.2 6826.6 26399.6

17510.9

9.0

16869.8

8.9

46420.5

23.7

36945.5

19.4

5879.1 27857.7

3.0 14.2

4977,5 28123,9

2.6 14.8

1.9 0.5 4.7

3643.8 910.2 10276.6

1.9 0.5 5.3

4040.5 862.2 11728_3

2.1 0.5 6.2

14073.0 5175.2

6.9 2_5

15008.7 5009.4

7,7 2.6

12626.2 7110.1

6.6 3.7

17.5

37054.2

18.2

30857.2

15.8

33882.0

17,8

i00.0

203532.9

100.0

195553.5

I00_0

190392.2

1O0.0

14.5

and real estate loans

of Banks' trust

32179.4 6354.5 25824.9

16.3

13.6

17.5 3,6 13_9

_[_

D _. _"

departments. O_


Chapter 9: Lamberte and Yap

291

Thirtypercent liquid cover on all foreign exchange liabilities of FCDUs As pointed out earlier, the banking system's foreign exchange intermediation increased significantly during the 1990s. The relative attractiveness of foreign exchange deposits and loans of foreign currency deposit units (FCDUs) over peso deposits of banks can be attributed to the relative stability of the exchange rate in the 1990s and tax advantages. More specifically, the interest income of banks from foreign exchange loans of their FCDUs was not subject to the 5 percent gross receipts tax imposed on interest income from peso loans. Likewise, interest income on foreign exchange deposits was not subject to the 20percent withholding tax until 1997when the government started to impose a 7.5 percent tax on such income as part of its comprehensive tax reform. Although banks are fully hedged when they lend in foreign currency from their FCDUs because they also expect payment in the same currency, their borrowers may be exposed to currency risk and may default on their loans if the exchange rate unexpectedly moves the other way. Due to pressure on the exchange rate experienced by the Philippines during the second quarter of 1997, the BSP in June 1997 required that 30 percent of the 100 percent cover on all foreign exchange liabilities of FCDUs of banks be kept in liquid assets. As a result of this regulation, the general slowdown in the demand for loans and the shift towards peso-denominated loans made by the corporate sector due to increased exchange risk, the share of FCDU loans in the total assets of FCDUs dropped significantly from 55 percent in 1996 to 46 percent in 1997 and remained at this level until April 1998 (Table 16). Treatment o[past due loans The BSP has tightened thedefinition of past due loans. Before thelatest revision in the definition of past due loans, loans were treated as past due if the number of installments in arrears reached six in loans payable monthly and two in loans payable quarterly.Starting October 1997, the number of installment in arrears was reduced to three and one, respectively (Table 19). The other provision that banks must consider is that when total arrearages reach 20 percent or more of the outstanding balance of the loan, the outstanding balance is already considered past due regardless of the number of unpaid installments. This should prompt banks to immediately take remedial actions on problem loans before they become worse and irrecoverable. Indeed, part of the rise in NPLs of banks since October 1997 can be attributed to the change in the definition of banks.


292

Economic Table 19. Treatment

crisis... Once more

of past due loans. Installment in arrears

Mode of payment

1987

Pre-1997

Current

Monthly

10 or more

6

3

Quarterly

4 or more

2

1

Semiannually

3 or more

1

1

Annually

2 or more

1

1

Source: Infonotes,BAPPolicy ResearchGroup. General and specific loan-ioss provisions As a ratio to total loans, loan-loss provisions of the banking system started to creep up since the onset of the Asian currency crisis in tandem with the rise in NPLs. Such provisions already reached 2.8 percent of total loans in June 1998. In the past, the BSP had only specific loan-loss provisions. Since October 1997, the BSP is requiring banks to put up a 2 percent general loan-loss provision, which is over and above the specific loan-loss provision. Table 20 shows the schedule of compliance of the general loan-loss provision. As regards specific loan-loss provisions, only "substandard loans that are unsecured," "doubtful loans," and loans classified as "loss" had specific provisions, in April 1998, the BSP started to tighten specific loan-loss provisioning. It prescribed a 5 percent loan-loss provision for "loans especially mentioned" regardless of collateral. These are loans that are potentially weak because of some technical defects or collateral exceptions, such as inadequate documentation. The BSP also prescribed a 25 ipercent provision for secured loans classified as "substandard loans." Thus, theie was no more distinction between substandard loans that were secured and those that were unsecured. Table 21 shows the schedule

of compliance

Table 20. Schedule provision

for the new specific loan-loss provisioning.

of complianc_ general loan-loss (In percent Of loan amount).

1 October 1998

1.0

1 April 1999 1 October 1999

1.5 2.0

Som'ce:BangkoSentralng Piliplr_as.


Chapter 9: Lamberte Table 21.

and Yap

293

Schedule of compliance allowance (In percent of loan amount). Classification

[

for probable

Existing [ 12/31/981

4/15/99

Loans especially mentioned Substandard

0

2.5

5

Collateralized

0

12,5

25

25

25

25

50 100

50 100

50 100

Uncollateralized Doubtful Loss

losses

Source:Bangko Sentral ng Pilipinas. With these new regulations on loan-loss provisioning, bank loan-loss provisions are expected to increase further both in absolute terms and as a ratio to total loans outstanding, affecting the profitability of banks. One of the biggest issues here is the giving of the same weight to coUateralized and uncoUateralized substandard loans. Both are essentially given equal probability of default when in fact the moral hazard problem of a collateralized loan is much less than that of an uncoUateralized loan. Increase in minimum bank capitalization requirement The BSP had been intermittently increasing the minimum capitalization requirement of banks. Because of the sharp depreciation of the peso and possible deterioration in the assets of banks as the Asian currency crisis proceeded, the BSP decided in March 1998 to increase the minimum capitalization of new banks by 20 percent for universal banks (or expanded commercial banks), 40 percent for regular commercial banks, and 60 percent for rural banks. Existing banks were given 2 years to build up their capital to comply with this new requirement (Table 22). The BSP issued a circular imposing strict penalties on banks for failure to comply with this new minimum capital requirement. In particular, a universal or commercial bank unable to comply with the new minimum capital requirement will be slapped with penalties as high as P10,000 per day, computed from the time it is notified by the BSP to the time the program has been submitted. Thrift banks will be fined P5,000 per day and rural banks P1,000 per day. In addition, the BSP shall impose graduated sanctions on banks for noncompliance of the new minimum capital requirement. prompt corrective action on banks that are undercapitalized

The BSP will take up to 20 percent;

another set of prompt corrective actions on banks that are significantly undercapitalized up to 60 percent; and still another set of prompt corrective actions on banks that are critically undercapitalized by more than 60 percent.


294

Economic

Table 22. Minimum

capital requirement

crisis... Once more

(In P million).

Existing

Compliance

requiremc_lt

period

12/24/98

12/31/99

12/31/00

3,500

4,500

4,950

5,400

1,625

2,000

2,400

2,800

200

250

325

400

40

40

52

64

Within Metro M_'mila _

20 '

20

26

32

Cities of Cebu and Davao _'

10

10

13

16

5

5

65

8

3

3

3.9

4.8

2

2

2.6

3.2

Expanded

conm_ercia]

Commerdal

bal_ks

banks

Thrift banks Within

Metro Mm_ila

Outside

Metro ManJ.la

Rural ballkS

lst/2nd/3rd

class cities & 1_tclass

municipalities 4th/5th/6th

class munidpalitJes

class cities & 2nd/3rd/4th

class municipalities 5fl_/6th

class mtmicipalities

"For existing banks only. No new banks Source: Bangko Sentral ng Pilipinas.

are presently

allowed.

Banks have several options to choose from to comply with the new minimum capital requirement. One is to raise more capital either by asking contributions from stockholders or inviting new stockholders or partners. Another option is to merge with other banks. Still another option is to apply for a reclassification, i.e., change to another type of bank that has lower minimum capital requirement. This new minimum

capital requirement

could lead to a restructuring

of

the banking system. There will be mergers and/or consolidations among banks, which could result in the reduction in number of banks in the system. The sharp depreciation of the peso had made it very attractive for foreign banks or investors to invest or increase their equity participation in domestic banks. Of the 24 domestic universal banks, 5 had capital below the new minimum requirement that took effect on 24 December 1998 (Table 23). On the other hand, half of the 16 domestic commercial banks still needed to build up their capital to meet the new minimum

capital requirement.

All four subsidiaries

of foreign

banks needed to raise capital to hurdle the new minimum capital requirement. The Chamber of Thrift banks reported that more than 50 percent of their members are already in conformity with the new minimum capital requirement. It is likely that most of them are affiliates or subsidiaries of universal or commercial banks.


Chapter 9: Lamberte

and Yap

Table 23 . Selected balance sheet accounts quarter 1998 (In P billion).

295 f commercial

banks,

third

fl

Assets

Capital accounts

Expanded commercial banks (EKBs) Domestic banks 1 Allied Banking Corporation 2 AsianBank Corporation 3 Banco de Oro Universal Bank 4 Bank of the Philippine Islands 5 China Banking Corporation 6 Development Bank of the Philippines 7 Equitable Banking Corporation 8 Far East Bank & Trust Company 9 Land Bank of the Philippines 10 Metropolitan Bank & Trust Company 11 Philippine Bank of Communications 12 Phil. Commercial International Bank 13 Philippine National Bank 14 Prudential Bank 15 Rizal Commercial Banking Corp. 16 Security Bank Corporation 17 Solidbank Corporation 18 Union Bank of the Philippines 19 United Coconut Planters Bank 20 Urban Bank, Incorporated Branch of a foreign bank 1 ING Bank N.V. Nonexpanded

88.663 33.496 33.407 212.388 59.822 110.125 107.428 140.393 170.939 269.661 32.648 145.448 225.080 26.696 115.672 52.900 53.370 40.021 111.647 11.667

8.983 3.765 3.987 27.688 9.934 13.927 15.763 18.738 15.184 41.208 4.230 23.407 23.075 3.193 12.153 7.222 5.497 9.622 14.072 2.501

91.399

0.894

2.585 11.960

1.746 2.002

9.279 5.196 5.606 27.416

1.689 1.692 2.240 3.169

Commercial Banks (NEKBs)

Domestic banks 1 A1-Amanah Islamic Inv't. Bank of the Phil. 2 Asia United Bank Corporation 3 Bank of Commerce 4 Bank of Southeast Asia, Incorporated 5 East West B_inking Corporation 6 Export & Industry Bank 7 Global Business Bank 8 International Exchange Bank 9 Orient Commercial Banking Corporation

i


296

Economic

crisis... Once more

Table 23. continued... Assets

Capital accouters

10 Philippine Banking Corporation 11 Philippine Trust Company 12 Philippine Veterans Bank 13 Pilipinas Bank 14 TA Bank of the Philippines 15 Traders Royal Bank 16 Westmont Bank

16.004 20.006 14.915 13.493 2.133 11.680 20.771

1.975 2.436 3.704 1..756 1.391 1.425 1.937

6.751 6.874 5.172 5.470

1.729 1.827 1.789 1.635

10.161 4.016 11.411 147.802 14.833

0.250 0.266 0.210 2.547 0.625

43.377

1.000

6.082 29.487

0.257 0.900

9 The Bank of Tokyo-Mitsubishi, Ltd. 10 The Chase Manhattan Bank

19.1.96 13.320

0.720 0.217

11 The Development Bank of Singapore 12 The Fuji Bank, Ltd. 13 The International Commercial Bank of China

14.146 9.077 10.434

2.139 0.202 0.440

Subsidiaries of foreign banks 1 Banco Santander Philippines, Incorporated 2 Chinatrust (Phils.) Commercial Bank Corp. 3 Dao Heng Bank, incorporated 4 Maybank Philippines, Incorporated Branches of foreign banks 1 ANZ Banking Group, Ltd. 2 Bangkok Bank Public Co., Ltd. 3 Bank of America, NT & SA 4 Citibank, N.A. 5 Deutsche Bank AG 6 Hongkong & Shanghai Banking Corporation 7 Korea Exchange Bank 8 Standard Chartered Bank

Source: Bangko

Sentral

ng Pilipinas.

Some domestic

banks have already

intensified

their campaign

to raise

more capital from their stockholders and/or by inviting foreign banks or investors. Others have been contemplating merging or consolidating with other banks. So far, two banks, one a universal bank and the other an ordinary commercial

bank, have formally

secured

a merger and have sought approval have formally

agreed

approval

from their stockholders

from the BSP. Two other universal

to merge and will secure approval i

from the BSE

for

banks


Chapter 9: Lamberte

and Yap

297

Other banks have so far been unsuccessful in raising capital from existing stockholders or new foreign investors. Existing stockholders and foreign investors are still cautious in investing in banks because of the lingering effects of the Asian currency crisis. Other optimistic investors are constrained from investing because they want more shares than local stockholders are willing to sell. Recently, one universal bank decided not to pursue its capital build-up program anymore and instead reverted to a regular commercial bank. It, however, had to reduce its equity in an investment firm because commercial banks are allowed only up to 40 percent equity participation in such allied undertakings. This was not easy to do with investors' low interest in such undertakings because of continued economic uncertainty. Other universal banks may follow suit if they cannot find a way of raising more capital. On the other hand, one branch of a foreign bank with a regular commercial bank license has applied for a universal banking license. It has signified its intention to raise capital to meet the new minimum capital requirement for universal banks. Some thrift banks that are facing difficulties in complying with the new minimum capital requirement contemplated converting into rural banks. Others offered themselves for sale to commercial banks. Lessons from recent experience, however, suggest that size, that is, sufficiently capitalized banks, is important in dealing with the financial crisis. Thus, as a result of the ongoing restructuring of the banking system, a much leaner system with less banks but with much stronger balance sheets will likely emerge. Rules on disclosure In March 1998, the BSP tightened rules on disclosure to improve bank transparency to the public in general, and to their stockholders in particular. Beginning in the last quarter of 1998, banks listed in the stock exchange are required to disclose in their quarterly published statement of conditions the amount of nonperforming loans and ratio to total loan portfolio, amount of classified loans, general loan-loss provisions, and specific loan-loss provisions. The BSP will determine later if such a rule needs to be extended to nonlisted banks. Another directive issued by the BSP in June 1998 required banks to include in their consolidated statement of conditions the following information: current level of restructured loans both with and without uncollected capitalized interest, and total loan-loss reserves which include the 2 percent general provisioning and provisioning for losses on loan accounts and other risk assets. Some banks opposed these new disclosure rules for fear that their depositors and the general public might misunderstand the figures, particularly on NPLs, which were seen to be rising since the onset of the Asian currency crisis, and might cause bank runs. The new disclosure rules could also place


298

Economic

crisis... Once more

thrift and rural banks at a disadvantageous position because they historically have higher NPLs than commercial banks, and thus may have been perceived by the public as generally unsafe and unsound. Terms on emergency

loan facility

Under existing law, the conditionalities for emergency loans include maintaining the total volume of loans or investments of the borrower; making the Monetary Board ascertain that the bank is not insolvent and has the assets to secure advances; and that loans are only up to 50 percent of the bank's deposits which will be released in two tranches. ,Since July 1997, several banks, mostly thrift banks, have tapped the emergency loan facility of the BSP to tidy up their liquidity problems. Thus, the outstanding emergency loans, excluding overdraft, provided by the BSP to banks ballooned to P13.4 billion in September 1998 from only PI.1 billion in June 1997. Since October 1998, the BSP has tightened the terms of the emergency loan by adding to existing conditionalities the following requirements?the emergency loan should be used only to service withdrawals of deposits; bank directors, officers, shareholders, and related interests (DOSRI) should submit written agreements not to withdraw their deposits from the bank; and a BSP comptroller will be assigned to the bank to See to it that all conditions are met. To ensure compliance with these rules, the BSP required bank owners to waive their rights to the deposit secrecy law. These new requirements were intended to ensure that bank owners will not abandon itheir bank once it gets into financial trouble. Insider borrowings Unpaid loans of directors, officers, Stockholders, and related interests were often the cause of bank failures. Bank supervisors found it hard to detect abuses on DOSRI loan limits due to the deposit secrecy act? Some of the DOSRI loans were made through dummies. To address this problem without changing the deposit secrecy law, the BSP issued a circular in August 1998 stipulating that all directors, officers, shareholders, and related interests who borrow from their banks shall be required by the lending bank to waive the secrecy of their deposits of whatever nature in all banks in the Philippines. Any information obtained from an examination of the deposits, however, will be held strictly confidential. This measure is expected to aid in exposing dummy borrowers of banks.

Aggregate DOSRIloans should not exceed 15 percent of the total loan portfolio of the bank or 100percent of the net worth of the bank. There is also a single borrower's limit of 25 percent of a bank's tmimpaired capital.


Chapter 9: Lamberte and Yap

299

Some bankers had pointed out that requiring an examination of all of the borrower's accounts in other banks could affect the banking sector's ability to attract deposits. As a compromise, they suggested that the BSP limit examination of the borrower's account only in the bank where he/she is borrowing from to discourage abuse of DOSRI loan limits. Temporary suspension of giving derivatives license In the Philippines, banks need to secure authorization from the BSP to engage in derivatives activities. Since the issuance in 1995 of the conditions for banks to obtain a license for derivative activities, 11banks obtained authorization to conduct expanded derivatives activities and 1 regular derivatives activity. 1째 The last license given by the BSP to a bank was in March 1998. Since then, the BSP has suspended the granting of expanded derivatives licenses to banks to give applicant banks more time to prepare themselves for trading derivatives. Since the derivatives market in the Philippines is still in its infancy, this BSP policy will have no perceptible impact on the market. BSP,however, will give itself ample time to review the performance of banks in the derivatives market and to determine which ones should be retained before allowing new players in this market. Mark-to-market reporting. The BSP issued a circular stipulating that effective 30 September 1998, banks are required to mark-to-market their trading portfolio in line with existing market conditions, and any unrealized or realized gains and losses thus shall be recognized and reflected in their books. While the mark-to-market scheme is a standard practice among foreign banks, it is new to local banks. Thus, the latter will have to set guidelines for their traders on limits on positions to carry. After 2 months of implementation, the mark-to-market scheme has already significantly affected funding strategies of banks. One of the domestic universal banks recently admitted incurring losses amounting to about half a billion pesos due partly to complying with this new regulation. Policy guidelines in resolving problem bank issues Due to some criticisms lobbied against the BSP by some quarters for lack of clarity in dealing with problem banks as amply exemplified by the case of one commercial bank that had been allowed to declare a bank holiday for 8 months before finally being closed, the BSP issued in August 1998 a circular 10According to the BSP circular on derivatives, derivatives include forward foreign exchange transactions. A regular derivatives license authorizes a bank to deal in currency swaps and forwards, while an expanded derivatives license authorizes a bank to deal in all types of derivatives.


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spelling out its policy in resolving may explore alternatives to bank based on its judgment, the closure a systemic crisis. In making such

crisis... Once more

problem bank issues. In closure within the limits of a particular bank will a judgment, the BSP shall

particular, the BSP aUowed by law if, most likely lead to take into account,

among other things, the size of the bank land its relative importance to the banking community such that its closure could undermine confidence in the system. A possible solution includes rehabilitation of the troubled bank and a merger or consolidation with another financial institution. If there are strong indications that the bank failure may have been caused by wrongdoings of management, the BSP may impose conditions that will operate vis-a-vis the troubled bank and/or its owners and management, including but not necessarily limited to the following: 1. 2. 3.

4.

The principal stockholder(s) in tt,e bank shallbe totally divested of equity interest with the purchase of the share by a new investor; Not a single centavo shallbe given to the present stockholders from the proceeds from the sale of shares; Proceeds of the sale including premiums shall be applied to raise the capitalization of the bank to the minimum required level and to reduce outstanding loans, if any, to the bank's stockholders and their related interests; The bank's stockholders shall not be elected as members of the board of directors bank; and

5.

Criminal â&#x20AC;˘imposed

or be involved

in the management

and administrative

sanctions,

upon erring stockholders,

of the rehabilitated

if warranted,

directors,

shall be

and officers.

If no viable options can be found, the option of placing banks under receivership by the Philippine Deposit Insurance Corporation (PDIC) shall be considered subject to existing laws. In 1997, the BSP closed a total of 14 small banks including I thrift bank. Five of them were closed after July 19971 In 1998, the BSP closed 1 small commercial bank, 6 thrift banks, and 17 rural banks. The deterioration in financial conditions

of these closed banks could not_be mainly attributed

to the recent

downturn in the economy but rather to imprudent management practices. With or without the crisis, these banks could have 'suffered the same fate. Admittedly, however, there were at least three medium-sized thrift banks whose loans were concentrated in the real estate sector that experienced difficulty when the real estate sector plunged following the Asian currency crisis. With BSP's assistance, they were quickly bought out by other banks.i


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Fiscal policy The slowdown in the economy following the Asian currency crisis was expected to adversely affect government revenues, threatening the fiscal position of the government. Thus, the government slapped a 25 percent mandatory reserve on 1998 budgets of all government agencies and a 10 percent cut in the internal revenue allotment (IRA) of LGUs to contain the budget deficit. As the crisis deepened and a recession became imminent, the government changed its stance to that of pump-priming the economy. It targeted a P40 billion deficit in 1998, which was equivalent to 2 percent of the GNP, although the IMF allowed a much higher deficit of P49 billion under the standby loan arrangement. The Estrada administration appeared to be quite slow in disbursing funds in its first few months in office, making many people doubt its seriousness in pump-priming the economy. The last 2 months in 1998, however, saw the budget deficit nearing its target level, indicating that the government had already released funds to finance its pump-priming activities. External

debt management

policy

The ratios of debt service burden and foreign exchange liabilities to GNP deteriorated in 1997 as a result of the sharp depreciation of the peso and slowdown of the economy starting in the second semester of the same year (Table 2). The ratio of gross international reserves to debt service burden, which had been increasing up until 1996, sharply declined in 1997 as a result of the substantial reduction in gross international reserves, which had been used by the BSP partly to defend the peso. In view of its policy to keep domestic interest rate low and, at the same time, finance a higher budget deficit to pump prime the economy, the government had announced that it would intensify its borrowings from official development assistance (ODA) facilities, which are long-term loans carrying highly preferential rates. Before the onset of the financial crisis, the government wrapped up a US$1.44-billion standby loan agreement with the IMF which enabled it to draw down US$280 million in November 1998 and US$135 million in December 1998. The government also secured a US$1-billion pledge from the World Bank, of which a US$600-million loan package was approved in December 1998. The government planned to float bonds in the international capital market, but it temporarily shelved this idea because of the widening spread on Philippine debt papers. It intended to push through with the plan during the first quarter of 1999. In the meantime, the government secured in September 1998 a 1-year US$610-million bridge financing from the FCDUs of domestic banks for budget support. This, however, raised two problems. One was that FCDU deposits, which are typically short-term funds, made the extension of


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such loans at the same interest rate of 8.75 percent difficult to arrange especially during periods of economic instability. The other was the possibility that the government will later on use ODA funds to pay the short-term bridge financing when the loan matures in the next year, leaving a smaller amount of ODA funds to support the rehabilitation and restructuring of the economy. Industrial and trade policy 1 In general, the government is maintaining its policy of moving towards a uniform 5 percent tariff rate by 2004 despite the financial and economic crisis affecting the Asian region. New developments in trade and industrial policies in the country have occurred since July 1997. EO 465 was issued on 13January 1998 modifying the nomenclature and tariff structure of 22 industries identified as "Philippine winners." These are industries which have proven to be competitive or have the potential to become competitive. EO 465 was the result of the review of the pace of tariff reduction under EO 264 in consideration of recent developments in domestic and international economic environments. The review aimed to correct the remaining distortions in the tariff structure and to smoothen the pace of schedule of tariff reduction in deserving industries. The recalibration of the tariff structure was ....... based on the pace of liberalization in other ASEAN countries and on whether or not an industry has potential or has proven to be competitive. The "Philippine winners" include electronics, garments and textiles, metal products, processed foods, marine products, furniture, jewelry, holiday decors, seaweeds and carageenan, ceramics, marble products, basketwork, footwear, leather goods, fresh fruits, oleochemical products, fertilizer, copper products, petrochemical products, motor vehicle parts and components, iron and steel products, and industrial tree plantation products including rubber products. Duty rates for certain tariff lines were either raised or reduced under EO 465. Other tariff lines had the same rate set under EO 264. Table 24 shows the number of tariff lines affected in each category. EO 465, however, was not designed to delay the attainment of a uniform tariff rateby 2004. While it resulted in a small increase in the overall averagen0minai tariff rate from the pre-EO 465 level (Table 25), the overall effective protection rate (EPR) sill went down (Table 26). The government issued on 7December 1998 the implementing rules and regulations (IRR) of Republic Act No.8435 or the Agriculture and Fisheries Modernization Act (AFMA) of 1997. The law provides for the duty-free importation for 5 years from the date of its effectivity of farm and fishery commodities, machinery, and equipment to modernize the agriculture and fisheries sector and enhance the incomes of ifarmers and fishermen. 11Myma Austria, PIDS Research Fellow, provided this section.


Chapter 9: Lamberte â&#x20AC;˘Table 24. Number

and Yap

303

of tariff lines affected

Increase in tariff Decrease in tariff Same rate as set under EO 264 Total

by EO 465, 1998

1999

2000

990

466

694

287 589 1866

485 915 1866

718 454 1866

Source:TariffCommission

The agriculture and fisheries inputs, machinery, and equipment eligible for tariff exemptions are classified into two groups. The tirstgroup, covering 118 product lines, is exempted from the rules on application/certification and monitoring procedures provided for by the IRR. Some of these products include purebred breeding animals such as cows and buffaloes, swine, goats, chickens, â&#x20AC;˘ turkeys and other live animals; bovine semen or sperm; farm tools ranging from knives and cutting blades to tractors and parts, conveyors, refrigerated vans, and hay-making machinery. The second group, the list of which was issued within 30 days from the effectivity of the IRR, covers products that are subject to application and certification procedures, like the certificate of eligibility from the Department of Agriculture (DA) or its deputized agencies.

Table 25. Average

nominal

tariff rates, by sector, 1998--2000 (In percent).

Sector

1998

1999

2000

10.74

10.28

9.00

20.70 3.91

19.01 3.91

18.06 3.13

9.05

8.82

7.45

Overall

11.24

10.21

9.08

Agriculture, fishery, and forestry Mining Manufacturing

19.82 3.89 9.87

17.96 3,84 8.97

16.56 3.21 7.88

Pre-EO 465 Overall Agriculture, fishery, and forestry Mining Manufacturing EO 465

Source:TariffCommission.


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Economic

Table 26. Estimated

average

crisis... Once more

EPR, by sector, 1998 - 2000 (In percent). I

Sector

1998

1999

2000

! Pre-EO 465 Overall

18.01

17.38

Agriculture, fishery, and forestry Mining Manufacturing EO 465 Overali

17.35 0.5 21.25

16.96 0.53 19.44

16.55 0.25 18.73

14.1

13.24

12.48

Agriculture, fishery, and forestry Mining

1.2.64 0.55

12.36 0.58

1.1.72 -0.07

15.48

14.34

13.52

Manufacturing Source:TariffCommission.

19.27

The list under each group will be reviewed at least once per semester until 31 December 2002 by the DA in consultation with concerned private and government institutions. The IRR also provides for the need tr) monitor the domestic market to guard against diversion of imports for resale in the domestic market. Social safety net The 25 percent budget cut on the 1998 budget meant, among others, a reduction in new classrooms by 2,567 affecting 158,265 elementary and secondary public school students; new desks would be reduced by 59,353 affecting 118,706 students; 1,428 classes would not be provided with instructional materials; the malaria control program will cover 27.5 percent less than targeted; the tuberculosis program will cover only about 2/3 of its original targets; and the coverage of the Nutrition Program wopld be reduced by 436,090 target children for vitamin A, 749,893 women for iodine, and 166,667 pregnant women for iron (Virtucio 1998). To mitigate the social impact of the Asian currency on the Philippines, the Estrada administration lifted in July 1998 the 25 percent budgetary reserve imposed on the appropriation for MOOE for critical basic health and social services programs totaling P1.5 billion. This was followed by the lifting and release of the budgetary reserve imposed on national government subsidy for additional operational requirements for four' specialty hospitals, as well as the reserve imposed on their 1998 corporate operating budget. It also partially lifted the reserves imposed on the IRA of LGUs.


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As regards labor relations, DOLE together with the employers' and labor hammered out a social compact called Social Accord for industrial

Harmony and Stability, which commits employers to exercise utmost restraint in laying off, terminating, or rotating employees, and labor to exercise utmost restraint in declaring or going on strikes, slowdown of work, and other forms of Concerted work stoppages. Without this social compact, the number of laidoff workers would have been much higher and there would have been more disturbing labor strikes, making it doubly difficult for firms to make the necessary Political

adjustments

during the crisis period.

stability

The Aquino administration restored the democratic system of government and the democratic institutions in the country to support a predominantly market-oriented, private sector-driven economy. The Ramos administration consolidated these gains and pushed for major and radical reforms, such as squarely dealing with various rebel groups using the Social Reform Agenda (SRA) as an instrument of peace and dismantling monopolies which had great control over the economy and the political system. President Ramos succeeded in arranging a political settlement with right-wing rebel soldiers and the Moro National Liberation Front (MNLF). Moreover, political and economic reforms had virtually reduced cronyism to a minimum. The Estrada administration has been announcing the same basic line. President Estrada's cabinet is a mixture of rightists, centrists, and leftists including former rebels and political detainees. The President is determined to complete the peace process by reaching a political settlement with the communist-led National Democratic Front (NDF) and the separatist Moro Islamic Liberation Front (MILF). Recent events, however, have raised fears that cronyism is back again, which could undermine both the political and economic stability of the country. The personalities that were highly favored during the Marcos regime are now back on the reins of major corporations in the country. Most of them are close friends and were strong backers of the President in the past presidential the government out for to avoid country during

election. Cronyism is one thing that independent bodies within sector, media, and the general public should carefully watch the same damage in the political and economic stability of the the Marcos regime from happening again.

General assessment Most recently, the domestic economy, in general, and the financial market, in particular, have started to stabilize. Interest rate had been going down in the last 6 months and inflation had been tamed. Although unemployment had risen


306

Economic

crisis... Once more

lately, this was not expected to continue for long since the economy grew in 1999, albeit at a modest rate, and was expected to grow more in subsequent years. The return to economic stability couldI be attributed to a combination of , , external and internal factors. Regarding external factors, the regional crisis seemed to have subsided in the last few months and a run on the currencies of most Asian countries similar in magnitude t6 _thesecond half of 1997 is unlikely to occur. Also, the Japanese currency had regained its strength vis-a-vis the US dollar, relieving some pressure off the currencies of Asian countries. Internally, measures adopted by the government in the past to restructure the economy and strengthen the financial system and most recently in response to the regional crisis have cushioned the impact of such a crisis on the domestic economy. Unlike the crisis experienced byl the country in the mid-1980s, this time the country has a much larger export sector which continued

to grow during

the regional crisis period, partly offsetting the decline in output of other sectors of the economy. Indeed, the firm resolve oF the government to continue witld the trade liberalization program and not to !mpose capital controls despite calls from various quarters sends a clear signal to all market players that economic restructuring as envisioned by the government before the regional crisis struck the country will proceed. As the regional crisis seeped into the domestic banking system, the central bank saw the need for introducing additional prudential measures to maintain the safety and soundness of banks. These measures will certainly produce a much healthier and sounder banking system. There are, however, prudential issues that need to be addressed further. For one, the Philippines has yet to adopt the Basle risk-based capital standards, Second, the disclosure requirement should be extended to all banks, not only to fisted commercial banks, to enhance market discipline. Third, some unusual features of the Philippine regulatory system, such as secrecy of bank deposits and examiner legal liability, should be reduced, if not completely eliminated. The social compact between management and labor that was facilitated by the government

seems to be holding

well and has avoided

unnecessary

economic and social costs on both parties. In interviews for this study, several respondent firms adversely affected by thel drop in demand for products said that they resorted to reducing the number of working days rather than to laying off workers. Although

it came after losing a significant

amount

of its reserves,

the

central bank's decision to float the peso in July 1997 was certainly the right response to the currency run. The NDF facility developed by the central bank tO relieve pressure on the spot market, however, needs to be reviewed because


iChapteT"

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307

it could be rendered ineffective in a massive peso run and lead to huge losses that eventually have to be monetized. The initial monetary and fiscal policy response to the regional crisis was a bit controversial. During the first few days of the crisis, the central bank raised the interest rate to defend the peso. A high interest rate was maintained for quite some time to discourage speculative attack on the domestic currency. It cannot be denied that the high interest rate policy adversely affected the real sector including the export sector, which contaminated the financial sector. While the budget cut enabled the government to put the fiscal position under control, uniformly applying it to all sectors was ill advised. The social sectors should have been spared from such a budget cut at the outset. Easing of the monetary policy in recent months and the restoration of budget cuts on basic health and social services programs are steps in the right direction. The interest rate has already reached its precrisis level. While lower interest rate is a necessary condition for relieving the debt service burden of several enterprises, a more important condition is for demand for goods to rebound. Given that the private sector demand has remained sluggish, the decision of the government to pump-prime the economy towards the second half of 1998 was an appropriate response. Securing external funds to finance the pump-priming activities of the government helped relieve pressure on the domestic interest rate. The government, however, needs to carefully manage the country's external debt to avoid repeating the balance of payments problem experienced

in the mid-1980s.

Future direction Short-term

of economic

recovery

and development

More than a year after the Asian currency crisis struck, uncertainty remains as to whether the economy can quickly recover. Although both the government

and the private

sector forecasted

a GDP growth rate of more than

1.5 percent for 1999, still there are downside risks. A second round of sharp currency depreciation could occur if the Japanese economy continues to slide down, putting pressure on the Chinese currency, and if the situation in Russia and some Latin American countries deteriorates further. Because of the slowdown

in global growth,

continuing

uncertain

investment

environment

in

emerging markets, and previous volatility that has made investors more risk averse, financial flows to the Philippines are not expected to return to their historical highs in the 1990s in the very short run. The decline in domestic interest rate in the last few months has significantly reduced indebtedness are expected to decline; obviating

of the corporate sector. The NPLs of banks the need for large resources to recapitalize


308

Economic

the banking

system. Nonetheless,

despite

the recent

crisis... Once more

decline

in interest

rate,

there are still no indications that bank credit will start growing again even moderately. This can be attributed to continuing fears of recession and the possibility of another round of currency instability in the Asian region. The export sector, which had been performing exceptionally well during the crisis, was recently threatened by the appreciation of the domestic currency. Meanwhile, the corporate sector had been increasingly underusing its capacity as it continued to slow down production activities and run down its inventories. The expected rebound of the agricultural Sector in 1999 was not sufficient to offset the potential decline in both industtrial and services sectors if current trends are going to continue. There are, however, positive signs that can create a favorable environment for the economic recovery of the Philippinhs. First, the decline in the interest rate in the US had eased concerns for a global liquidity crunch. The additional benefit to the Philippines was that it partially eased the external debt burden of the country and, at the same time, supported the continued decline in the domestic interest rate. Second, the passage of a series of measures made by the Japanese parliament to address the ailing Japanese economy, in general, and the banking sector, in particular, had significantly abated fears of a Japanese meltdown. Third, the agricultural sector was given a reprieve from the bad weather as E1 Nifio faded away. These positive developments could be exploited to restore confidence in the domestic

economy

and spur economic

recovery in the short run. Aggregate

demand must be pushed upward through a combination of expansionary monetary and fiscal policies. The recent decline in the domestic interest rate did not create pressure on the exchange rate, suggesting that there is some scope for a looser monetary policy. The large pool Ofunemployed, underused capacity of the corporate sector and low commodity prices in international markets can help cushion the impact of an upward shift in aggregate demand on domestic prices. prevent

More than ever, the export sector needs to be supported. The BSP must further appreciation of the peso to maintain the competitiveness of the

export sector. It could a comfortable level, maintaining a flexible liquidity must not be The government

start purchasing dollars to rebuild its reserves, bring it to and avoid using it tO defend the peso. This requires exchange rate policy. The resulting increase in domestic sterilized to support ailow domestic interest rate. had programmed a :P17.9 billion deficit for 1999. This

may not have been enough to support a raach-needed increase in aggregate demand. It should, therefore, have allowed aimuch higher fiscal deficit for 1999, possibly bringing forward the P9 billion theiIMF was willing to add to the P40 i billion deficit the government had programmed for 1998.


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This expansionary policy could easily reverse the currently positive current account position of the country. Since private capital flows are expected to remain weak in the short run, the growing current account deficit resulting from the expansionary policy could create huge pressure on the exchange rate, possibly causing more currency instability that could undermine recovery efforts. To forestall the occurrence of this situation, the financing gap must be filled by official flows. Imports for the agriculture sector are expected to rise partly as a result of the newly passed Agriculture and Fisheries Modernization Act. Agricultural growth will have beneficial economic and social impacts as most of the poor reside in rural, agricultural areas. The government, therefore, has to secure additional ODA for balance of payments support to finance the gap. The higher budget deficit could exert pressure on the domestic interest rate and crowd out the private sector if much of it is financed by borrowing from the domestic market. The government can avoid such a situation if it can secure more ODA for budget support. It must also continue its program of lengthening the maturity of its debt instruments to reduce volatility in the domestic interest rate whenever it goes to the market to borrow. The additional government expenditure can be directed to the social sector to make up for the effects of budget cuts in the past and to make up for past backlogs, such as construction of classrooms. Aside from the education and health sectors, housing also needs a boost. The sharp slowdown in bank credit in the last few months has severely affected SMEs' access to the credit market. Part of the additional government expenditure could be used to beef up resources of government banks for onlending to SMEs, which could lead the way for private banks to open their lending

windows again to SMEs. The relatively low NPLs of the banking system can allow banks to quickly resume lending to the private sector. As the banking sector resumes lending to the various sectors of the economy, however, there is a need to improve

prudential regulations for and effective surveillance of banks to maintain their financial health and avoid past mistakes. This calls for the immediate reform of laws and regulations covering entry and operations of banks. become

Mergers, consolidations, and acquisitions in the banking system will more intense in the next few months as banks try to strengthen their

capital base. The BSP could take a more proactive stance to facilitate and speed up mergers, consolidations, and acquisitions. This, together with the further liberalization of the banking system to allow foreign banks greater participation in the domestic banking system, could be addressed in revising the general banking

act.


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Economic crisis... Once more

Some corporations have already started raising long-term funds from the capital market. Others are waiting for the right time to raise long-term funds from the capital market. Some investors have already learned to put their money in the capital market. More investors, however, could have invested in the capital market if they only had stronger confidence in the market. This, therefore, calls for a reform of the securities act to boost investors' confidence in the capital market. This should be accompanied by reforms in the mutual fund system to raise more long-term funds and, at the same time, give small savers greater access to the capital market. Medium and long-term Monitoring of capital [lows While the government continues its policy of allowing a free flow of capital, it should, however, continuously monitor capital flows, particularly, short-term capital because these flows highly depend on changes in sentiments or market perceptions of foreign lenders or!investors. Nowhere is this problem more clearly demonstrated than in the differences in the report prepared by the World Bank and the Bank for International Settlements (BIS) on short-term foreign liabilities of the Philippines. In 1996' for instance, the World Bank reported that short-term liabilities of the Philippines constituted 19.3 percent of its total foreign liabilities, while the BIS reported 58 percent. Information on external liabilities of the Philippines that truly reflect real conditions can greatly help policymakers and the private sector make informed decisions and avoid sudden changes in sentiments or perceptions of the market, which are eventually reflected in the volatility in the exchange rate and the domestic interest rate. Once the domestic and international markets have stabilized and better prudential regulations for banks are put in place, the government should continue liberalizing the capital account of the balance of payments. Fiscal management Economic recovery can only be sustained in the long run if the government manages its finances weU. This underlines the need to improve the government's revenue effort, which requires a two-pronged approach: improvement in tax administration and further tax reforms. Improvement in tax administration can yield high pay-off for the government. In 1996 alone, Manasan (1998) estimated that uncollected revenue from individual income tax amounted to P48.5 billion, which was equal to 13.2 I percent of the national government tax reverlue for the same year and 2.1 percent of GNP. The level of corporate income tax _vasion for the same year reached P43 billion, which was equivalent to 11.7 plercent of national government tax


Chapter 9: Lamberte and Yap

311

revenue or 1.7 percent of GNP. As regards the VAT,the level of VAT evasion hovered around P79.7 billion in 1996, which was equivalent to 21.6 percent of national government taxes or 3.4 percent of GNP. The recently instituted Comprehensive Tax Reform Program (CTRP) cannot make a substantial difference unless tax administration is considerably improved. The CTRP has left out several items that could further improve the government's revenues. One of the most important items is the rationalization of fiscal incentives and subsidies. In 1997 alone, the Department of Finance estimated that various fiscal incentives cost the government about P28 billion. Fiscal incentives should be scaled down and sharply targeted to economic activities that need them most. The potential revenue from these reforms can easily close the budgetary fiscal deficit and provide the government more resources to finance worthwhile activities. In this regard, Manasan (1998) recommended that capital outlays and government expenditures on MOOE as a percentage of GNP be restored to their former levels before the 1984-85 crisis. The amount can be adjusted to account for the increased involvement of the private sector, but it is most likely that only government capital outlays will be affected. The government must emphasize MOOE because the adverse effect of underspending on the upkeep of infrastructure :is cumulative and manifests mostly in the medium term, creating severe disruptions and damage to the economy. Capital market development Tosupport the development of the capital market, taxation of the financial sector to minimize distortions and transaction costs must also be reformed. The two important taxes are the documentary stamp tax (DST)and the gross receipts tax (GRT).The cascading effect of DST on highly traded financial instruments has reduced the attractiveness of these instruments, thereby undermining the development of the securities market. The GRT,on the other hand, tends to raise the cost of credit. The abolition or reduction of DST and GRT rates can have large implications on government revenues, thus, reforming these taxes should be done in tandem with tax and tax administration reforms so as not to blow up the government deficit out of proportion during the recovery period. Industrial restructuring The Estrada administration's decision to push through with the policy of moving towards a uniform tariff rate by 2004 can lead to more restructuring of the industrial sector and improvement in microeconomic efficiency. The sharp depreciation of the peso provides domestic-oriented industries with enough


312

Economic crisis... Once more

time to make the necessary adjustments to survive in a more competitive environment. Improvement in productivity will be a key factor for the survival of these industries. Technology and human resource development This area should focus on bridging the dichotomy between the export sector and the domestic manufacturing sector. The key is the development of technological capability. While technology transfer is important, it is not possible without the appropriate level of human capital. There are four key areas for policy reform: (a) technology transfer mechanisms must be made more effective; (b) R&D effort must be more focused and integrated; (c) human resource development must be oriented to improve factor productivity; and (d) the functions of the Department of Science and Technology (DOST) must be streamlined. Technology transfer mechanisms. The government must first set clear strategies for technology development whether adoption, modification, or generation by industry. This recommendation hints of industrial policy but given that technology does not have the standard characteristics of a commodity (in economic jargon, it is "nontradable") government intervention may be justified. Government intervention can be effective if carefully designed, sparingly granted, strictly monitored, and offset by measures to force firms to aim for world efficiency standards. Four advanced technology areas for aggressive supply push strategies have been identified: microelectronics, materials science, information technology, and genetic engineering. The private sector must be encouraged to practice "mirroring" in their ventures with multinational corporations. As explained in other studies, regardless of the initial arrangement of technology transfer, the Koreans instituted incremental changes to absorb technology, like replacing expatriate personnel with local people, substituting local engineering for foreign engineering, doing forward and backward integration, and others. Similarly, multinational corporation-local enterprise technology transfer programs similar to what Singapore and Malaysia did musl be encouraged. I

RdrD effort. R&D capability must be enhanced to eventually achieve technological self-reliance. Linkages among the government, private sector, and academe on specific technological programs must not only be strengthened but at the same time, their roles must be c_early delineated. For example, the responsibility for developing advanced technologies will rest primarily with the public sector. There should also be investment in industry-linked R&D institutions and university-linked basic re _earch in selected areas.


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313

For this to succeed, there should be greater investment in R&D. This can be achieved through larger government appropriations for this purpose. Private investment in R&D can be _encouraged with greater competition, by strengthening laws related to patents and intellectual property fights (IPR) and by implementing incentives (e.g., tax breaks) to increase fund allocation toward R&D. Finally, institutional gaps that weaken the linkage among technology generation, adaptation, and use must be addressed. For example, the government can support pilot testing of inventions to determine their commercial and technical feasibility. Human resource development (HRD). A well-educated labor force is the sine qua non of technological development. The government can start by strengthening education in the primary and secondary levels. The proposal of some experts to teach mathematics and science in the regional language at the elementary phase to ensure that basic concepts are well assimilated must be considered seriously. At the tertiary level, government support for science, engineering, and other laboratory-intensive courses must be emphasized. To remedy the incentive system, salaries of professors in centers of excellence must be exempted from the salary standardization law. At the same time, a strict accreditation system for the faculty must be instated. The country should train its human resources for the higher stages of production?not only so prime qualified skilled workers could work in developed countries but also to prepare them for future shifts toward higher skill-intensive domestic production activities. This should complement rising labor costs relative to countries like Indonesia, China, and Pakistan. This can be supported by government and private sector investments in industry-linked polytechnics and HRD programs. Infrastructure Infrastructure development economic chain in the Philippines.

has been described as the weak link in the During the 1980s, infrastructure expansion

in the Philippines lagged behind other Asian countries in terms of paved roads, electricity generation capacity, electricity production, telephone main lines, railroad tracks, and access to sanitation. Privatization, deregulation, and liberalization of the various infrastructure sectors were recently undertaken to spur development. Overall, sectoral reforms had been beneficial, resulting in increased supply, lower water rates, and better quality of service. Reforms should continue, particularly in areas where government presence is still strong and is not producing desirable results, such


314

Economic

as good-quality

service and revenues.

For instance,

crisis... Once more

the government-owned

National Power Corporation (NPC), which continues to lose money heavily, needs to be privatized. Other issues in the power sector, such as pricing and consolidation of various regulatory functions into a single agency, need to be studied. The experience of Metro Manila in transferring responsibility for water supply and sanitation from the government to the private sector has to be examined carefully other cities.

so that a similar, if not better, scheme can be promoted

Rural infrastructure

projects,

such as small irrigation

systems,

in

farm-to-

market roads, drinking water supply system, etc., must be given top priority by the government in its budget and/or development assistance program. Other issues in the infrastructure sector must be addressed by the government. These include, among others, the creation of a competitive environment in the infrastructure sector, equipping agencies with the necessary capacities to effectively deal with the demands of a market-oriented policy regime, organizing lead agencies to facilitate coordination and strategic planning, exercising prudence in assuming contingent liabilities, and properly delineating national-local government roles. Agriculture

sector

The primary focus in this area should be the restructuring of agriculture tariffs. The recent depreciation of the peso presents an opportunity to correct the high protection rates of major commodities such as rice, corn, sugar, livestock and poultry, and other minor crops. At the same time, a market-based approach, i.e., auctioning, must replace the current system of in-quota imports of these commodities, as specified by minimum access volumes, to transfer to the general public the rents received by quota holders. Aside from increased public expenditures for agriculture, more efficient allocation and streamlining of the bureaucracy are required to strengthen support services to agriculture. A greater proportion of the budgetary allocation for agriculture must be spent for productivity-enhancing investments, especially agricultural research, development and extension, market infrastructure, and irrigation

support.

streamlining governments

Institutional

reforms

should

and strengthening of coordination in delivering better quality support

aim at facilitating

the

between local and central services to the sector.

Action plans This section outlines specific action plans that the government should adopt to stage rapid economic recovery in the short run and sustainable growth in the long run. Although some of these aCtion plans may not be new or are


Chapter 9: Lamberte and Yap

315

currently being contemplated by the government, they are, nevertheless, discussed here to emphasize their importance in resuscitating the economy. The action plans are grouped into two categories: short term and medium to long term. Action plans in the short term are those that the government must immediately initiate and complete within 2 years. These are essentially confidence-building measures to spur economic growth in the short run. It is to be noted, however, that some of these actions have very specific purposes and have short-run impacts on the economy, while others have long-run impacts. Action plans faUing under the medium- to long-term category include those that the government ought to immediately initiate, although they may not necessarily be completed in 2 years and/or those that can only be done after completing some prior actions. These actions are aimed at restructuring the economy or specific sectors of the economy and, therefore, they have implications on the long-run sustainability of economic growth that is expected to occur in the short run. Short term Pump-priming measures The government should continue its pump-priming activities weU into 1999. The 1999 government budget, which was passed by Congress, however, did not clearly reflect this program. There was, therefore, a need to request for a supplemental budget so that pump-priming activities of the government can be completed within 1year. Pump-priming measures should focus on the critical sectors of the economy, specifically agriculture, which has the most extensive linkages with the rest of the economy, thus generating the highest multiplier effect; SMEs, because of their insufficient access to formal credit and modern technology and the fact that they are going to be the shock absorbers for those who are going to be negatively affected by corporate restructuring; and social sectors, because the poor do not have the resources to protect themselves against the adverse effects of the economic crisis and because of their long-term impact on productivity. Agricu#uresector. The devastating effects of E1Nifio and La Nifia weather phenomena on the agricultural sector should have already convinced the government of the need for directly confronting these problems by accelerating the provision of much-needed infrastructure for the agricultural sector, such as irrigation, postharvest facilities, farm-to-market roads, etc. Unfortunately, however, the President's proposed 1999 budget for the agricultural sector in nominal terms was even lower than the 1998 general appropriations act, and in real terms much lower than the 1997level. Government expenditure on irrigation


316

Economic

crisis... Once more

t

has been declining

in real terms over the years, making it difficult

to maintain

existing facilities and doubly difficult to construct new ones to make up for backlogs due to several years of neglect. Mindanao, which has long been neglected by the government in terms of infrastructure programs and was hardest hit by E1Nifio, must be given priority when allocating additional budget. Between capital outlay and MOOE for the irrigation system, the latter must be given a higher allocation to restore the efficiency of existing irrigation systems. The DA should identify irrigation facilities that need rehabilitation and give these priority. Together with the Department of Public Works and Highways, it must also identify facilities and give them priority.

agricultural

farms that need new irrigation

Social services sector. The President's proposed 1999 budget for the education and health sectors was also lower in real terms than their corresponding 1997 and 1998 budgets. This has immediate implications on the poor's access to basic services, especially those who have been laid off because of the ongoing crisis. This will also impact negatively and labor productivity competitiveness.

on human

in the long run, which can undermine

development the country's

For the health sector, priority should be given to increasing the budget for MOOE. Also, timely releases of these funds are important. As regards education, both MOOE and capital outlay must be increased significantly. For capital outlay, however, priority must be given to areas in the country that need them most. The Department of Education, Culture and Sports can easily identify these areas. Housing is another sector that must be given additional attention by the government especially because it has direct economic impacts in the short run. Although the President's 1999 budget for this sector increased in real terms relative

to 1998, it was far below

the 1980_i levels, making

it hard

to meet a

sizable proportion of the existing housing backlogs. A substantial part of the increase in budget allocation for the housing sector must be used for the I following activities: 1.

To build up resources for one-time capital grants. This grant, proposed by Llanto et al. (1998_ as an alternative subsidy scheme that will not distort housing credit markets, will provide better incentives for private sector participation, especially banks, and is transparent to the public and policymakers;

2.

To transform the National Home Mortgage Finance Corporation (NHMFC) into an institution mainly active in secondary mortgage


Chapter 9: Lamberte and Yap

3.

317

and provide resources for it. NHMFC can play a big role in the development of asset-backed securities; and Tobeef up resources of the Home Insurance Guarantee Corporation (HIGC) to provide guarantees to bonds to be issued by LGUs for financing mass housing projects in their respective localities.

Credit prosrams. The rise in NPLs of banks in recent months has constrained them from aggressively lending to sectors they normally serve. The deceleration in credit flow was also affected by the slowdown of the economy because it adversely affected banks' efforts to mobilize deposits. Worst affected among banks were the thrift banks and rural banks, which cater to SMEs and the agriculture sector. Also, rural banks were hardest hit by the sharp contraction of the agriculture sector in 1998 caused by E1 Nifio. Other than deposits and relending windows of government financial institutions, thrift banks' alternative source of funds were commercial banks. This fund source, however, had dried up due to the high cost of maintaining funds and the cautious attitude adopted by commercial banks during the crisis. The government has been giving attention to the SMEs' and the agriculture sector's credit needs as shown by several special credit programs created for these sectors. Most of these credit programs, especially those that were administered by nonfinancial government agencies, however, had been ineffective and inefficient (Lamberte et al. 1997 and 1998). All this suggests that the SMEs' and the agriculture sector's access to credit will likely be impaired in the next 2 years?a situation that will hamper economic recovery efforts. To address the liquidity problem faced by SMEs and the agriculture sector, two actions are proposed to the government. First, the government's various credit programs to SMEs and the agriculture sector must be rationalized to improve their effectiveness and efficiency. Second, resources of government financial institutions (GFIs), specifically the Development Bank of the Philippines (DBP) and Land Bank of the Philippines (LBP) for SMEs and the agriculture sector must be beefed up to provide liquidity to these sectors. Private banks that want to resume or increase their credit to SMEs and the agriculture sector could tap the wholesale windows of these GFIs. Resource mobilization measures RenegoOating the short-term bridge financing loan. The government must try to renegotiate the 1-year US$610-milllon bridge financing it obtained from domestic banks' FCDUs a few months ago for a longer period, say 3 or 5 years, so that it can save resources for pump-priming activities for 1999.


318

Economic

crisis... Once more

Privatizatibn. Due to the cyclical doWnturn of the economy, government tax revenues are likely to decline during the crisis period. On the other hand, the rebound in tax revenues will not immediately happen when the economy starts to recover due to lag effects. This suggests that the government must look for other ways to raise resources in the short run to fund its pump-priming activities. Privatization can be a good solution. There are still several so-called "big-ticket items" that can be privatized to substantially increase the nontax revenues of the government in the next 2 years and partly make up for the cyclical decline in tax revenues. Examples are the government's remaining shares in PNB and Petron, Food Terminal Inc. (FTI), Philippine National Oil Corporation's Corporation--and the NPC.

subsidiary--Energy

Development

If needed, the legal instrument for privatizing these "big-ticket" items should be completed within a year so that privatization can proceed; for example, the Omnibus Bill on the Electric Power Industry. The final draft should take account of increasing playing field for all.

the efficiency of this industry

by establishing

a level

Financialsector re[orms. The financial sector must continue to improve its effectiveness and efficiency in mobilizil_g and allocating funds to meet the growing demands of the economy, especially the new challenges posed by the recent trend towards globalization and greater international integration of financial markets. The antiquated legal frameworks governing the banking system and the capital market in the Philippines must be overhauled to modernize the domestic financial system, raise confidence of both local and foreign depositors and/or investors in the financial mobilization and allocation of savings.

system, and facilitate the

Banking sector. The General Banking Act was formulated in the late 1940s and was slightly amended in the 1970s and 1980s. Since then, the financial sector environment has changed a lot, exposing banks to greater competition and new types of risk. This is compounded by the freer flow of capital, which was mostly intermediated by the banking system. Indeed, the large swings in capital flows experienced in recent years by the Philippines underline the close relationship between the degree of economic stability, and the safety and soundness of the banking system. ,, The General Banking Act must, thus, be vigorously implemented, taking into account the ability of financial institutions to create a wide variety of financial instruments, bringing the prudential regulations of the Philippines up to internationally accepted standards, adopting modern approaches to bank


Chapter 9: Lamberte and Yap

319

supervision, and strengthening disclosure rules to make banks more transparent to the public, among others. Substantially amending the Deposit Secrecy Act will strengthen the effectiveness of bank supervision and examination and reduce insider abuse, which has been the major cause of many bank failures in the past. Capital market. Despite the boom in the securities market recently experienced by the Philippines up until the Asian currency crisis struck, the resources raised by the capital market still fell far below its potential due to inefficiencies of and lack of confidence of the public in the market. Increasing public confidence in this market can be partly addressed by having an effective regulatory framework. Unfortunately, however, the present legal framework cannot respond to this need and als0 does not measure up to the challenges posed by a fast-evolving capital market that is becoming closely integrated with the rest of the world. The existing securities act, therefore, should be amended to develop a more orderly, transparent, and effective capital market that can inspire confidence among investors. Modem approaches to securities development, such as shifting from merit regulation policy to full disclosure, allowing securities associations to become self-regulatory organizations, separation of broker-dealer roles, improved protection of minority shareholders, tighter provisions on insider trading, etc., must be expressly incorporated in the new law. Also, the regulatory body, i.e., the Securities and Exchange Commission (SEC), must be reorganized for greater flexibility to respond to requirements for effective supervision and regulation of a fast-evolving capital market. The mutual fund industry, which can be a good investment vehicle in the capital market for small savers, has been lagging behind that of other countries in the region. One of the reasons for this is the antiquated, controloriented legal framework called the Investment Company Act, which was passed more than 35 years ago to address the collapse of some mutual funds. For example, it does not give mutual fund managers sufficient flexibility in determining investment objectives. Also, the stringent seed capital requirement discourages the registration of mutual funds with multiple investment objectives. The Investment Company Act must thus be amended. Bond issuance. Issuing government bonds in the international private capital market is one way of quickly mobilizing resources. In fact, the government has already drafted a concrete plan on this. The government, however, must resort to this only if the premium placed by international investors on emerging market issues has returned to normal levels.


320

Economic crisis... Once more

Medium and long term Monetar]_ banking, and exchange rate policies Monetary and exchange rate policies should aim at providing an environment that is conducive to wholesome economic growth. Since July 1997, the BSP is committed to a flexible exchange rate. This policy should be maintained, and the signals the BSP gives to the market must be consistent with this policy. Monetary policies, on the other hand, need to be reviewed in the light of rapid financial innovations brought about by the liberalization of the banking sector and foreign exchange market. Although the BSP has started doing this recently,however, it must intensify its efforts to maintain the effectiveness of its monetary policies. Given that a major economic crisis, including the most recent one, strikes the Philippines almost every 7 years, it is _indeed worthwhile to develop an early warning system, for balance of payments and financial crises similar to that developed by Yap (1998). Such an early warning system could be made part of a wider system of monitoring and surveillance of the economy. In view of the increasing financial market integration, the BSP must improve its information system on capital flows, especially short-term capital flows which are highly volatile and largely intermediated through the banking system. Also, given the contribution of increasing corporate debt to the recent crisis, the BSP must include the level and structure of corporate debt in its monitoring system. To complement proposed legal reforms for the banking system, the BSP needs to upgrade its capability to supervise and examine banks which are operating in a more liberalized regime. Competition policy framework Tobe resilient and dynamic especially with the current trend towards globalization, the economy must have a competitive market structure. The government should work towards accomplishing this goal by developing a coherent national policy framework on competition. As demonstrated here and elsewhere, liberalization alone does not necessarily lead to effective competition. A good antitrust law and an agency capable of enforcing laws and regulations on competition are required. Unfortunately; the current legal, regulatory, and institutional framework for competition!is highly diffused and weak in preventing anticompetitive behavior. The itrend towards bigness achieved through merger, consolidation, or acquisitipn needs to be watched closely so that no dominant player can set up antico_npetitive barriers. Recent events, such as the alliance made by three dominant shipping companies and the acquisition by a dominant player in the cellular phone subsector of another


Chapter 9: Lamberte and Yap

321

dominant player in the telephone subsector have left the general public wondering whether liberalization without any effective regulations to make markets competitive will be beneficial in terms of excellent and prompt services at prices affordable to a great majority of the population. Estab/ishin 8 competitive infrastz_cture sectors J_ The infrastructure system in the Philippines is inadequate and highly inefficient, which raises the cost of doing business in the country and lessens the competitiveness of the economy as a whole. Sachs et el. (1998) have proposed increased private participation in the infrastructure sectors (i.e., electric power, telecommunications, water supply and wastewater, and transport) as a way of meeting the demands for infrastructure and of improving their efficiency. This, however, requires a legal and regulatory framework to support competitive infrastructure sectors. Policy-induced barriers to entry must be identified and dismantled. For example, it takes a long time to obtain a public utility license from the legislative and executive branches of the government. The dual role played by the government (i.e., as a regulator and an operator) in infrastructure sectors as in the ports subsector discourages private sector participation. Regulations that tend to distort the market must be changed. For example, the tariff setting based on rate-of-return method gives utility firms incentives to overinvest, inflate costs, and engage in cross-subsidization. Aside from a good legal and regulatory framework for increased private sector participation in the infrastructure sectors, the technical capabilities of regulatory agencies must be strengthened to effectively deal with the complex demands of a market-0riented policy regime (Serafica 1998). Improved tax revenue To improve tax administration, Manasan (1998) suggests the following measures: Improved monitoring of stop[ilers. Available data show that only 78 percent of all VAT registrants filed returns in 1994.While no comparable figures were available for other types of taxes, key informant interviews suggested that this was a problem common to all types of taxes. The importance of and the inadequacy of the present system of monitoring stopfilers are exemplified by this little story on how the recent and highly publicized tax diversion scam was uncovered. Apparently, the scam was first noted when one Regional Development Office (RDO), which has a functioning manual taxpayer monitoring system in place, noticed that some taxpayers had failed to pay their 12This complements

the discussion

in the previous

section.


322

Economic crisis... Once more

taxes. After fonow-up calls were made to these taxpayers, the RDO was informed that the taxpayers had already paid their taxes. The rest is history. Even with the large amount involved in the scam, it took a while before nonpayment was discovered. This shows that many RDOs have weak monitoring systems in place. To enhance monitoring of stopfilers, it is critical for the BIR to have a taxpayer master list. The absence of such a list has been a persistent problem to date. The full implementation of the BIR computerization program (or the integrated tax system) in 1999 is expected to address this lack. The installation and use of manual systems in the meantime, however, is imperative. Also, under a computerized regime, it is important that RDOs learn to use the system properly so that they can fully maximize its capabilities. Initial reports in the pilot rollout areas showed that some RDOsistill request the BIR Data Center to print out lists of stopfilers and generate reminder letters even if the system allows them to do these tasks themselves. : Installation of selective audit policy and procedures. In principle, the objective of tax audits is not so much to increase or enforce filing of revenues as to improve voluntary c0mpliance. The BIRIs audit function is not only central to its effectiveness as an institution but als0 key to its poor public image. Within the BIR, the audit function is a highly debated subject treated with ambivalence even by its key officials. On the one hand, many revenue officers request authority to examine all tax returns even if this is beyond their ability to complete and are outside their capability to quality audit. At the same time, while some taxpayers have not been examined at all, others have been subject to annual tax audits despite high tax compliance. This has led to the widespread perception that tax audits are being used to systematically harass many taxpayers. On the other hand, some key Officials from time to time have tended to disregard this audit tool. Thus, sometimes there are protracted periods when the issuance of Letters of Authority (LA) (for the conduct of audit) was suspended. While the BIR officially supports a program of selective audit, there appears to be some inconsistency between! policy pronouncement and actual practice. For instance, Revenue Memorandum 26-94 prioritizes the audit of large taxpayers. This not only prejudices these large taxpayers but also sends the wrong signal about being big and successfUl. The experience in countries with modern tax administration tends to show that tax audit is not an all or nothing proposition. In fact, it is the opposite. One of the principal ingredients in enhancing the effectiveness of tax audits is the implementation of a selective audit program. The key to these programs is a means of selecting taxpayers who are shown to have the highest probability of underreporting their tax liability. Usually this is aided through the use of


Chapter 9: Lamberte and Yap

323

statistical analysis. The computerized BIRtax system, when fully implemented, is expected to have this capability. However, it is one thing to know that there are provisions in the integrated tax system for the incorporation of a selective audit program, and it is another thing to find out "whether the selection system fulfills the requirements of the Bureau before it becomes operational" (TAAP Memorandum, 30 May 1997). Third party information (TPI). Evasion estimates of the income tax tend to show that the bulk of the problem stems from underreporting receipts/ income. Third party information is one way of addressing this issue. Initial efforts to collect and analyze TPI have focused on oil/gas dealers. This work has been well received by BIR officials. It has also generated interest in extending its application to other sectors. There has been some disagreement, however, on whether the TPI should be used to assess additional taxes through the issuance of LAs or whether concerned taxpayers should simply be encouraged to file amended returns. There has been some apprehension that the first approach may lead to harassment of taxpayers. In either case, it is important that a good internal control system be put in place to keep track of how data from TPI are used and to ensure that the same are not used to harass taxpayers. Also, it is important that data generated from the TPI be used to develop audit procedures and techniques, standards, and norms specific to concerned sectors/industries. Improved performance evaluation system for revenue officers. There is a general agreement that one of the most serious problems facing the BIR has to do with its personnel. For one, the public image of the BIR is one of inefficiency, if not corruption. Coupled with the low pay scale, this has resulted in the low morale of BIR personnel. To deal with this problem, it is important that an appropriate performance evaluation system for revenue officers be developed and put in place. It is essential that good performance is rewarded in the same manner that bad performance is sanctioned. In this regard, it is noted that while the reshuffling of revenue officers once every 3 years might be justified in that it discourages special arrangements/relationships between revenue officers and taxpayers, the current practice of reassigning revenue officers to far-away posts as "a disciplinary device only transfers inefficiencies from one place to another in the revenue service." t

Trainingfrontlinepersonnelfora computerized regime. There are many expectations from the ongoing computerization program of the BIR. It has been pointed out that "automated systems do not collect taxes; they only provide


324

Economic

crisis... Once more

the supporting framework, which can maximize the productivity of people." As such, it is essential that human aspects of the shift towards the more computerized regime be carefully managed. In this regard, the very first step is to provide computer literacy training to frontline personnel. Undeniably, the degree of computerization in the Bureau prior to this change is low. As such, revenue officers view computers and the accompanying system with some trepidation, if not resistance. It is essential that this problem be dealt with immediately even before training on the specifics of the new integrated tax system is conducted. CzeatJon oddata centers.

The creation of data centers is already proposed

in the continuing streamlining effort at the BIR which is under review by the DBM. Data centers are important in ensuring timely and consistent data input. They are the heart of a computerized

system's quality assurance

Taxes on the financial sector There are three taxes that must be reviewed. loan-loss tax.

provisions

of banks, documentary

Since general loan-loss provisions

system.

These are: tax treatment

of

stamp tax, and the gross receipts

and the restructuring

of specific loan-

loss provisions, which will compel banks to set aside more resources to comply with the new schedule of allowance for probable losses, have been introduced, there is a lively discussion on tax deductibility of loan Iosses. Countries all over the world vary in the method of tax deduction for l¢)an losses that they use. Some use the charge-offmethod, which requires that a debt be uncollectible and written off at the time the tax deduction is claimed, while others use the provisions method, which allows the tax deductibility of eligible provisions for bad and doubtful debts without requiring a book write-off of the underlying asset (Escolano 1997). Concerning the latter, the tax-deductible provisions may be general (general provisions method) or specific (specific provisions method). A particular design for tax treatment of loan losses can have a strong incentive for prudent or imprudent bank behavior. It can also have a sizable impact on government revenue. Thus, thisi issue must be carefully studied before drafting the necessary legislation. There is now a growing consensus on the need to abolish the documentary stamp tax for highly traded financial instruments to support the development of the capital market. Instead of immediately abolishing the DST, however, it could be gradually reduced from the present level to zero over a 4-year period to give the government adequate time to improve tax administration and put other tax measures in place. This way, the negative revenue impact of the DST


Chapter 9: Lamberte and Yap

325

abolition can be mitigated. The legislative framework for this measure must be drafted and passed soon so that it can immediately be implemented. The government must complete its study regarding the possible substitute for GRT and its impact on government revenue so that the legislative framework could be passed in 2000 and implemented in 2001. Pension fund system reform The pension fund system, particularly the government-sponsored pension funds namely the Social Security System (SSS) for private sector employees and Government Service Insurance System (GSIS) for government employees, needs to be reviewed so that it can be more effective. One of the issues that must be addressed is whether the two systems need to be merged or maintained separately but their benefits made portable to promote labor mobility. Enhanced labor mobility is needed to make the economy more resilient. Another issue is the need to improve funds of both systems by possibly employing external private fund managers as is done in other countries like Chile. Together with this is the need to liberalize the investment of pension funds in foreign assets to minimize exposure to country-specific risks. This, of course, requires some prudential standards and supervision. A thorough review, therefore, of the pension fund system is recommended; the results of this review can serve as a basis for drafting the necessary legislative framework to reform the system. Industria] restructuring The govemment must remain firm in maintaining the policy of moving towards a uniform 5 percent tariff rate by 2004. The BSP should complement this by maintaining a flexible exchange rate policy and preventing any overvaluation of the peso. A more competitive industrial sector is expected to emerge. To further enhance the competitiveness of the industrial sector, the govemment must continue addressing infrastructure bottlenecks (e.g., major highways linking industrial and commercial areas, farm-to-market roads, fishing ports, airports, etc.), which have raised the cost of doing business in the Philippines, through an appropriate level of public expenditure in infrastructure and appropriate policies for private sector involvement in infrastructure investment. The government must also provide an "enabling environment for the private sector to purchase technologies that it views as profitable" (Sachs et al. 1998). Finally, the government must increase its investment in education, particularly science and engineering education, and improve science education at all levels.


326

Economic

crisis... Once more

Agricultural development TO support agricultural development, the government must act on the following issues: First, to encourage long-term investments in land improvement and tree crops and develop an efficient land market, the government must change its policy of retaining ownership of lands with a slope beyond 18 degrees and prohibiting sale of lands transferred to agrarian reform beneficiaries under the Comprehensive Agrarian Reform Law. Second, rural transportation infrastructure must be substantially improved to reduce transport cost and bring farmers closer to their markets for farm produce and inputs. Third, investment in agricultural research, which will have a very high return in the long run yet is grossly underfunded by the Philippine government compared with those of developing countries, needs to be increased substantially. This, however, should be accompanied by a reform of the agricultural research and development system. Fourth, agricultural trade policy must be reviewed especially in the light of the huge depreciation of the domestic currency vis-a-vis the US dollar. More specifically, the huge peso depreciation can allow for a significant reduction of the currently high import tariffs of major agricultural commodities, which will bring benefits to exportable commodities as well as to the hog and poultry industries without necessarily hurting the import-competing commodities.


Chapter 9: Larnberte

and Yap

327 Appendix

Financial

sector restructuring

A

in the 1980s and early 1990s _

The history of the Philippine financial system is littered with institutional failures, which are not only limited to small institutions but to large ones as well. During times of rapid economic growth, financial institutions relaxed their lending criteria and took on more risks. This was done under an environment of weak regulatory framework and supervision. As often the case, a slowdown of the economy exposed the weaknesses of financial institutions and eventually led to the collapse of many of them. By far, failures of several financial institutions in the 1980s were the worst in Philippine history. The country entered the decade of the 1980s with an economy that started financial system in obligations to several houses and finance

to slow down. Then, a severe liquidity crisis struck the 1981 when a large borrower failed to honor his huge banks and nonbank financial institutions (i.e., investment companies). Although signs of weaknesses of several

financial institutions started to appear, the central bank took time to quickly resolve them, hoping to restore their financial health. But as the financial sector started to recover, a devastating balance-of-payments problem hit the economy, aggravating the problems of many financial institutions. The government tried to rescue five commercial banks by injecting more funds into them. When this strategy failed, the government eventually ended up owning the closed banks. The nonperforming assets of these banks were cleaned up and the government sold the rehabilitated banks back to the private sector. Apart from the rehabilitated commercial banks, the government closed 3 commercial banks, 32 thrift banks, and 138 rural banks during the 1981-87 period. It launched a massive rehabilitation program for the rural banking system, in which about half of the remaining 1,000 rural banks participated. Others opted out, anticipating that they would no longer meet the stringent requirements of the rehabilitation program. Several large finance and investment houses, which borrowed heavily from the market, were also closed. Saddled by huge nonperforming assets, the two large government-owned banks--the Development Bank of the Philippines (DBP) and the Philippine National Bank (PNB)--also collapsed in the mid-1980s. The government came to the rescue by cleaning these banks, resulting in worth of nonperforming shares of PNB is already

up nonperforming assets and contingent liabilities of the transfer to the government of about P108 billion assets. Presently, 43 percent of the outstanding owned by the private sector.

_3A more detailed discussion of this issue can be found in "Assessment of the problems of the financial system: the Philippine case. PIDS Working Paper Series No. 89-18 (December 1989).


328

Economic The central bank's financial

assistance

to troubled

crisis... Once more financial

was by no means small. It went up to as high as 47 percent during the first quarter of 1986.

institutions

of reserve

money

Several causes could be attributed to the collapse of several financial institutions in the 1980s. The most important, however, was insider lending or lending to bank directors, officers, stockholders, and related interests (DOSRI). Usually, a bank, which is part of a conglomerate, lends to its DOSRI or affiliates, which, in turn, use the funds for very risky ventures. If the investment succeeds, then the DOSRI and/or affiliates reap all the benefits. If it fails, the bank may not report the losses so that bad loans will not be reflected in its books. Or it may understate the losses arising from such loans to prevent a bank run. In any case, the bank would not be reporting its real financial position until the problem turns into a crisis. Most often, DOSRI ceilings were violated by failing banks. While insider abuse was committed by some private bankers, fraud was committed at the highest level in government in the case of the financial collapse of DBP and PNB. These financial institutions were saddled with behest loans and credit guarantees that went sour. Behest loans and guarantees were accommodations which could not have been granted by these banks to President Marcos' relatives, "cronies," and d associates werit not for pressure from him and/or his personal endorsements. Weak regulation and supervision contributed to insider abuse. The central bank examines banks only once a year, and most violations of DOSRI loan ceilings were made in between examination periods. Also, although central bank examiners might have seen violations of DOSRI loan ceilings, which they promptly brought to the attention of banks concerned for correction, in cases where dummies were used, they usually found it difficult to prove the flow of funds from the dummies to the DOSRI (when made through deposit accounts) because they could not examine any deposit account. The Secrecy of Bank Deposit Law prevents them from doingthat. Since 1986, several measures were introduced to liberalize and, at the same time, strengthen

the regulatory

framework

for the financial

system (see

Appendix A - Table 1). For instance, the central bank raised the minimum capital requirement for banks three times during the 1986-94 period, forcing undercapitalized banks to merge with other banks. Although the Secrecy of Bank Deposit Law was left intact, the central bank tightened regulations on DOSRI loans. More importantly, the central bank made it clear in a written policy that it would refrain from sustaining weak banks. The Philippine financial system entered the i990s better capitalized and with a much healthier balance sheet. In fact, none of the banks went under during

the 1991-92 economic

slowdown

and the Treasury

bill scam in 1993 that


Chapter 9: Larnberte and Yap

329

caused a run on some banks. It cannot be denied that the policy of bank closure, which was applied to several ailing banks in the past, has kept pressure on bank owners and managers to be more prudent in managing their banks. Because of liberal bank entry and bank branching policy espoused by the central bank in the 1990s, the number of commercial banks increased from 29 in 1990 to 54 in 1997, while the number of commercial bank offices rose from 1,863to 4,078. Thereis now greater participation of foreign banks in the domestic banking system as can be seen from the entry of 4 subsidiaries and 10branches of foreign banks. Intermediation has also greatly improved as shown by the rise of M3/GNP ratio from 27.9 percent in 1990 to 42.2 percent in 1997. With more banks and bank branches opened in the country, the general public's access to a variety of financial services at more favorable terms has greatly improved. But all is not well, however. Most recently, a newly opened small commercial bank collapsed primarily due to mismanagement and insider abuse. This shows that the existing regulatory and supervisory framework for dealing with insider abuse remains weak. Indeed, the General Banking Act needs to be amended to strengthen internal governance of banks, impose greater market discipline, and improve the oversight of banks. Also, the Secrecy of Bank Deposit Law must be amended to give more teeth to bank supervisors and examiners.


330

Economic

Appendix

A - Table 1. Financial

Policy measures

crisis... Once more

sector reform in the Philippines,

Before reform

After reform

1986-94. Date

L Selective credit control 1. Central Bank rediscount window

Z Central Bank special credit pro grams

Rediscount rate: varies by type of economic activities (allowable spread: 1-11%)

Uniform floating rata for all; no prescribed spread,

November 1985

R_discount value: varies by type of aconomlc actlvlti_ (value: 60-100%)

Uniform: 80°/,,

November 1985

Directly managed special credit programs

Central Bank-managed special credit programs transferred to govermnent financial institutions

1987-1988

New commercial banks i moratorium since 1980; Other banks -- no moratorium,

New commercial banks -- moratorium lifted

1989

1_n foreign banks allowed to have 6 branches each; foreign banks may acquire or establish a bank up to 60% of the total equity of each bank.

1994

II, Bank competition, 1, Bank entry

Foreign banks -- no entry since 1949.

!. Branching

3, Government banks

Restrictive branching Branching was liberalized but the policy--the country was Central Bank retained discretionary divided into fiw service â&#x20AC;˘ power in opening branches in certain areas: heavily areas considered "overbanked." overbranched areas; overbranched areas; Banks may open branches anywhere ideally branched ames; they like provided they meet the underbranched areas; and required minimum capital requlmm,_nt. encouraged branching ames. Largdy doing retail lending that directly competes with private banks

More focus on wholesale lending using private banks as conduits.

May 1989

May 1993

since 1987

4. Interest rates a. DeposJ t rates

No cap since 1981

b, Lending rates

No cap since 1983

same

Private banks

Cap on end-user rata

i No cap on end-user

1987

Special credit programs

[If. Prudential measures

Deposits of insiderborr'owers war protected by the Secrecy of Bank Deposits Law,

Prohibited concurrent officerships betweeaa banks or between a bank and a nonbank financial in_rm_diary except with prior approval of the Monetary Board. Required each bank to cause an annual financial audit to b_ conducted by an external independent auditor not later than 30 days after the close of the calendar year. Required all banks and nonbank financial intermedlari_s to adopt the Statements of Financial Accounting Stendards.

September 1986

December 1986

December 1987


Chapter 9: Lamberte Appendix

and Yap

331

A - Table 1. continued...

Policy measures

Before reform

After reform

Date

The Central Bank declared a policy that it shall refrain from sustaining weak banks,exceptintimesofgeneral financial emergency or when sp_:ific banks face problems of liquidity rather than solvency.

May 1989

Included contingent lJabiliti_ in determining lending limits to a single borrower or group of affiliated borrowers.

Jurm1993

Insider-borrower shall waive the s_crecy of tl'mirdeposits for examination purposes, Increased the minimum capital requirements for banks, Increased th_ minimum capital requirements for banks,

l_posits of insiderborrowers were proud by the S_crecy of Bank l_posits Law.

V, Foreign Exchange Markets 1.Foz,eign exchange trading

On-floor

Off-floor through an electronic screenedbased network for sharing information and undertaking transactions.

D_-_mher 1992

2, Export receipts

Mandatory surrendm" of foreign exchange receipts,

Foreign exchange earners may retain 100%of total receipts and can u_ them freely without prior Central Bank authorization,

,_pt_mber 1992

3. Foreign exchange purchases

Limits on foreign exchange purches_a such as travel, educational expen_sretc,

No limit.

September 1992

4. Repatriation and remittances of inv_tments

Staggered from 3 to 9 years subject to Central Bank approval,

Full and immediate repatriation without Central Bank approval for foreign investments duty registered with th_ Central Bank or custodian bank.

September 1992

5. Outward investment by residents

Not allowed.

Allowed initially up to US$1Mr but lately increased to US$6M.

1992 - 1994

6. Access to domestic FCDU loans.

None.

Direct exporters allowed access.

September 1992

Indirect exporters allowed access

}'uly1994

Source:MarioLamberte.1995.Recentfinancialstructurereformand macroeconomicmanagement in the Philippines. Paper presented at the Conference on Financial Reform in Asian Countries,3-4 February,Kyoto, Japan.


332

Economic crisis... Once more References

Bangko Sentral ng Pilipinas. 1998. The Philippines: onward to recovery. Bangko Sentral ng Pilipinas. David, Cristina C. 1998.Towards an efficient path to food security: the Philippine case. PIDS Discussion Paper Series No. 98-39. Makati City: Philippine Institute for Development Studies. Harrigan, F. 1996. Saving transitions in Southeast Asia. EDRC Report Series No. 64, Asian Development Bank. Lamberte, Mario B. 1995. Managing surges in capital flows: the Philippine case. Journal of Philippine Development XXII, 1. Makati City: Philippine Institute for Development Studies. Leung, S.E. 1996.Capital flows, monetary policy and exchange rates in the Asian region. Manuscript. Australian National University. Llanto, Gilberto M., Aniceto C. Orbeta, Jr., Ma. Teresa C. Sanchez, and Marie Christine G. Tang. 1998. A study of housing subsidies in the Philippines. PIDS Discussion Paper Series No. 98-42. Makati City: Philippine Institute for Development Studies. Manasan, Rosario G. 1998. Fiscal adjustment in the context of growth and equity, 1986-1996. PIDS Discussion Paper Series No. 98-11. Makati City: Philippine Institute for Development Studies. Medalla, Erlinda M. 1998. Trade and industrial policy. PIDS Discussion Paper Series No. 98-05. Makati City: Philippine Institute for Development Studies. MedaUa, Erlinda M., G.R. Tecson, R.M. Bautista, J.H. Power and Associates. 1995. Catching up with Asia's tigers. Makati: Philippine Institute for Development Studies. Medalla, Erlinda M. 1998. Trade and industrial policy beyond 2000: an assessment of the Philippine economy. PIDS Discussion Paper Series No. 98-05. Makati City: Philippine Institute for Development Studies. Sachs, Jeffrey, Richard Goldman, Nilgun Gokjur, Steven Radelet, Vijaya Ramachandran, Eli Remolona, Donald Snodgrass, and Jeffrey Vincent. 1998. Promotion of broad-based economic growth in the Philippines. Philippines: National Economic and Development Authority/Harvard Institute for International Development/United Nations Development Programme. Serafica, Ramonette B. 1998. Beyond 2000:I an assessment of infrastructure policies. PIDS Discussion Paper Series No. 98-07. Makati City: Philippine Institute for Development Studies.


Chapter 9: Lamberte and Yap

333

Virtucio, Felizardo K., Jr. 1998. Social implications of the Asian financial crisis: the Philippine case. Paper presented at the Regional Conference on the Social Implications of the Asian Financial Crisis held at Seoul, Korea on 29-31 July 1998. Yap, Josef T. 1998. Beyond 2000: assessment of economic performance and an agenda for sustainable growth. PIDS Discussion Paper Series No. 9828. Makati City: Philippine Institute for Development Studies. Yap, Josef T. 1999. Developing an early warning system for BOP and financial crises: the case of the Philippines. PIDS Discussion Paper Series No. 98-40. Makati City: Philippine Institute for Development Studies.


10 Social Safety Net Programs in the Philippines Ma. Melanie

R.S. Milo

net is a broad term that encompasses

all informal,

family-based

arrangements (or private safety nets), and all social security programs and poverty-targeted interventions (or social safety nets). It includes all cash and in-kind transfers. Social safety nets, in turn, can be defined as those instruments that are specifically aimed at mitigating potential adverse effects of reform measures on the poor (Chu and Gupta 1998). In the Philippines, measures to ease transitional problems during stabilization and structural reform, and to protect the well-being of the poor focused primarily on three types of safety net programs: â&#x20AC;˘food subsidies, public employment programs, and credit-based livelihood programs (Subbarao et al. 1996). The following sections discuss some of the specific measures that the Philippine government implemented under these programs Asian crisis on the poor.

to alleviate

the social impact of the East

Food subsidy programs The National Food Authority (NFA) launched the Enhanced Retail Access for the Poor Sari-SarfStore 1 (ERAP-SSS), Palengke ng Bayar_ (ERAP-PB), and â&#x20AC;˘ Rolling Store (ERAP-RS) program to ensure the availability, accessibility, and affordability of basic food commodities such as rice, coffee, sugar, cooking oil, milk, sardines, and noodles in depressed and/or remote areas of the country. Under the ERAP-SSS, the NFA accredited community stores owned and operated either by private individuals, cooperatives, or organizations to sell basic food commodities at subsidized prices. The ERAP-PB is similar to the ERAP-SSS, except that the former covers stores located in wet markets. The i I.e., _mall community store. I.e., community wet market.


336

Economic

ERAP-RS

stores

the number incidence outreach.

are owned

operated

by the NFA using vans.

of ERAP stores all over the country

Of the estimated

as of July 1999, around

1. Number

Region

Total

4.7 million

70 percent

and distribution

more

Table 1 gives

to give an idea of the stores' Region (NCR) or Metro Manila

total customers

were

Once

as of July 1999. The 1997 poverty

and 1995 population are also shown The bias in favor of the National Capital

is evident.

Table

and

crisis...

served

by the ERAP-RS

from Metro Manila.

of ER_Pi

stores

as of July 1999.

ERAP-SSS

ERAP-PB

ERAP!RS

1997 poverty incidence (%)

Unemploymenl rate (Oct. 1998)

3,219

683

410

37.5

9.6

12.9

19.3

9.6

15.1

By region

Percent distribution

NCR

10.8

CAR

5.3

2,3

2.4

49.4

8.9

I

7.1

14.6

4.9

44,7

8.2

II

6.2

7.5

3.4

38.0

4.1

IiI

15.0

9.1

10.$

20.1

11.9

IV

10.5

10.7

12.4

30.0

9.4

V

8.8

7.2

5.4

57.5

9.4

VI

2.7

0.7

3.9

48.2

8.0

VII

6,4

11.9

7.6

39.5

11.2

VIII

6.6

5.7

6.!

49.0

7.8

IX

4.1

4.4

3.7

45.5

7.1

X

7.4

2.3

5.4

53.2

6.8

XI

4.6

5.1

6.3

44.6

8.7

XII

2.9

5.3

5.9

55.4

6.6

ARMM

1.6

0.3

2,9

63.8

4.8

b

Sources: National Food Authority, National Statistic_ Office, National Statistical Coordination Board,

The government January

1998,

both

weather

patterns.

also implemented in response

The program's

a rice subsidy

to the financial primary

and quality rice to the subsistence threshold. The program specifically

crisis,

objective

program as well

beginning

was to provide

poor those families targeted identified

in

as the adverse affordable

living below the food Comprehensive and


Chapter 10: Milo

337

Integrated Delivery of Social Services (CIDSS) areas 3 that were also highly vulnerable to adverse weather patterns. Beneficiaries were given rice discount cards which they used to purchase rice at stores identified as rice retailers for the program. Cardswere nontransferable and could only be used by immediate family members. The amount of the subsidy was P2.50 per kilo regardless of the variation in the prevailing price of rice. Furthermore, a special action program for displaced sugar workers was instituted in the form of an emergency loan package of P100 million. Sugar workers were also given rice subsidies and other benefits. More than 15,000 sacks of rice worth around P10 million were distributed to almost 77,000 sugar workers and their families from August to November 1998 (Reyes et, al 1999). While it is still too early to assess the impact of the food subsidy programs, the NFA's past performance may prove instructive. In particular, the NFA's past food subsidy programs were found to have had little impact on the poor's consumption and nutrition, and the low impact was achieved at a high cost. Furthermore, the poorest income groups and regions did not receive their share of benefits from the NFA's past food subsidy programs. This was due to substantial leakages as a result of poor targeting. Thus, it had been recommended then that the NFA eliminate consumer subsidy without adversely affecting the poor's nutritional status. The resources saved by doing so could then be used for a better-targeted in-kind transfer program such as a food stamp or nutrition program (Subbarao et al. 1996). Public employment programs The Rural Works Program under the Department of Labor and Employment (DOLE) was established to fund various small infrastructure projects. These projects aimed to generate employment in selected depressed, rural communities, particularly those affected by company closures and retrenchments, and adverse weather conditions. Regions in Mindanao (Region IX-Caraga) were initially targeted because of the severe drought in those areas. The program was eventually expanded to cover the Luzon (CAR, Regions I-IV) and Visayas regions (Regions V-VIII) as well. As of the first quarter of 1999, more than P20 million of project funds had been released, which benefited more than 4,800 displaced workers (Table2). The Rural Works Program was part of the DOLE's Comprehensive Program for Displaced Workers. Under this program, DOLE was also tasked to monitor trends in firm closures and lay-offs, assist in job loss prevention, and provide training and placement assistance for displaced workers. Thus, DOLE, through its regional offices and the National Conciliation and Mediation Board, 3That is, the barangays in the two lowest classes municipalities that were the targeted beneficiaries of the Flagship Program on Comprehensive and Integrated Delivery of Social Services (CIDSS).


338

Economic

crisis... Once more

Table 2. DOLE's rural works program as of I st quarter 1999. Region

Project cost (million P)

1. Project ,fund released

Workers benefited (no.)

vs,

Workers perrnanenfly laid off in 1998 (no.)

20.4

CAR

4,0

322

483

Region I

1.4

351

543

Region III

1.0

223

8,390

Region IX

1.0

782

277

Region X

0.6

263

1,647

Region XI

0.8

682

3,439

Region XII

5.6

665

399

Caraga

5.9

1,549

1,032

Region II

0.6

111

356

Region IV

2.7

289

7,816

Region V

1.5

i na

849

Region VI

7,2

1562

3,242

Region VII

1.8

239

7,062

Region VIII

1.0

na

290

2. Project for evaluation/ approval/implernentation

na = data not available. Source:

" .

Bureau of Labor and Employment

Statistics.

conducted dialogues with distressed companies to avert or minimize job losses. In cases where firm closure was inevitable, assistance was given to facilitate the release of separation pays and to help displaced workers avail of loans that were made available especially for them. DOLE also established a registry of displaced workers for employment assistance. Finally, the Technical Education and Skills Development Authority (TESDA)i provided various training courses. Table 3 gives a summary of the number of !workers that benefited from these various schemes across regions. In April 1999, a clean-up to provide immediate casual

drive, the Linis Bayan program, was launched employment, and at the same time address

environmental concerns. Although the clean-up drive was a government initiative, private businesses were encouraged to participate by hiring casual workers at the minimum wage rate to be assigned to the program.


c_

°.

Table

3. Workers

benefited

T_pe of assistance

by DOLE's

U

for Displaced

All

NCR

UI

IV

8,984 4,285

4_580 1.871

126_ 442

1,830 1,249

5

separation

4,699

2,709

826

581

5

18, 98l

°,,053

373

1.008

3,569

183

68

449

322

361

223

1,800

250

Z Employment Registration

t

Program

1, Job loss prevention Job saved Fa cili_f_o_ o f pay

CAR

Comprehensive

V

VI

Workers,

VII

Vm

923 fi84

1998" IX

X

86 40

36

).I 26

XII

Cam_

O

Z_2

0

239

0

46

35

26

0

232

5,841

585

189

12

552

380

1,071

2,770

1. 707

306

52

97

87

15

739

1,573

263

682

665

1,549

1,404

3,364

assistanc_

Job placem_t 3. Rural works program

4,837

410

71Y2

(as of 1a quarter) g TESDA

_ail_hlg _

1_r'_9

5. (_hers Special

action program

/or sugar workers issuance ot veaificalien ce:_ifiostion

for

emergency

[oarks

Fokal dizx.ct assistance total no. of permanent

2,308

34,177

_ lay-oOs

28,580

90

21,247

4,763

390

1,800

79,308

43,480

483

raO

1,058

5,108

356

286

2046

1,830

5

8,390

7,816

849

52 3,242

94

11

1,020

1,058

868

385

7,062

290

277

1,647

7_ 3,439

399

1,0132

"Except for the Rural Works Program; _No reg/ona] breakdown; ¢Computed as the sum of (1)-(4), plus Special action program for sugar workers. Source: Bureau of Labor and Employment Statislics.

ba k.a xO


340

Economic

crisis... Once more

Public works programs can serve as an employer of last resort to the poor, address the problem of seasonal unemployment, create assets for the poor (such as schools), or provide disaster relief. In particular, public works programs can play a major role in shifting the demand for labor and developing the infrastructure base in rural areas where most of the poor live. The Rural Works Program, in that sense, was a step in the right direction. But, as in the food subsidy programs, the concept of targeting is crucial. If programs are targeted to the poor, employment should be restricted with poverty targeting indicators, means-tests, or self-targeting measures such as low wages (Subbarao et al. 1996). Thus, the government's current use of geographical targeting in allocating funds may not be enough to achieve the objective of generating employment for the poor. Credit-based

livelihood

programs

Of the government's three main forms of social safety nets, probably the most developed and extensive were its credit-based livelihood programs. One of the flagship programs of the Social Reform Agenda was the expansion of credit to the poor. The implementing agency was the People's Credit and Finance Corporation (PCFC), a government nonbank financial institution. The PCFC was established in February 1995. It was mandated to be the lead institution in the wholesale delivery of microcredit funds to nongovernment organizations (NGOs), people's organizations (POs), and rural banks for relending to the poor or marginalized sectors. It is wholly capitalized by the National Livelihood Support Fund (NLSF), which was another entity established earlier to finance credit*based livelihood programs Under the supervision of the Land Bank of the Philippines (LBP) and the Department of Finance. Accredited conduits or partners of the PCFC may obtain funds through its two credit programs--the Helping Individuals Reach their Aspirations through Microcredit (HIRAM) Lending PrOgram, and the Asian Development Bank-International Fund for Agricultural Development Rural Microenterprise Finance Project (ADB-IFAD/RMFP). The HIRAM program was initially funded at P100 million in 1996 by the NLSF. The NLSF also turned over to the pCFC a loan portfolio of 63 active program partners worth around P103 milllon in 1995. For NGOs and POs to become eligible conduits, they needed to l_ave a minimum track record of 3 years; a working

capital of at least P250,000; at least 500 clients; past due rate of

not more than 20 percent on its lending operations; and no loan arrears with other lending institutions. Eligible financial institutions, on the other hand, should have capital to risk assets ratio of 10 percent; past due rate of not more than 20 percent on loans; no legal reserve deficiencies application; and at least 500 clients.

for the year preceding

its


Chapter 10:Milo

341

The RMFP, on the other hand, is funded by a US$34.7 million loan from the ADB and the IFAD, which was contracted by the government through the LBP.The loan was specifically intended for the replication of the Grameen Bank Approach (GBA) in the Philippines. It has a maturity of 40 years, although PCFC was given 20 years to repay the LBP following a grace period of 6 years from 1997. The loan from the LBP consisted of P1.2billion for investment credit and P22.56 million for institutional credit, at lending rates of 5.25 percent and 1 percent, respectively. Eligible partners under this program must be experienced in the implementation of the GBA or other social lending schemes, in operation for at least 2 years, and with financial resources of at least P500,000 and a minimum net worth of P250,000. Both programs offer investment and institutional credits. The former is used for relending to target borrowers, whereas the latter can be used by conduits to finance start-up costs, training of staff, and preparation/training of target borrowers. Lending rates are currently at 12percent and 3 percent, respectively. Pass-on rates to end-users, on the other hand, range from 14 to 30 percent, depending on the conduit's spread. There is no ceiling on the amount that conduits can borrow under HIRAM, but there is a ceiling of P3.5 million per annum per branch under the RMFP. For end-borrowers, on the other hand, maximum loanable amounts are P25,000 and P14,000 under HIRAM and RMFP, respectively. Table 4 shows PCFC's total number of active Conduits and end-clients served as of April 1999, whereas Table 5 presents its cumulative lending under its two credit lines over the period 1997-April 1999. The PFCF has disbursed a considerable amount for lending to the poor since it began to operate--over P1.18 billion, which benefited a total of almost 120,000 borrowers. There has also been a rapid increase in the number of active conduits of PCFC. Most of the conduits, however, were located in Luzon but outside of Metro Manila. This was because PCFC is based in Metro Manila and has no regional offices. In terms of performance, the PCFC's HIRAM program was found to be effective in reaching its target borrowers, whereas its RMFP program had a low outreach capability. In terms of cost recovery, however, both programs failed to fully recoup their full costs of implementation (Larnberte et al. 1998). PCFC's reported collection rate was a high 98.5 percent. PCFC is not the only government agency involved in lending to the poor, or directed credif programs in general. When the Asian crisis broke out, there were 86 directed credit programs operating in the Philippines, which were being administered by different departments/line agencies, government financial institutions (GFIs), government-owned and controlled corporations (GOCCs),


342 Table 4.

Economic PCFC's cumulative served, 1997-99.

number

of active

conduits

crisis... Once more and end-clients

1997

1998

April 1999

16 10 10 1 58

20 28 20 18 1 87

18 37 30 20 2 107

5 3 7 0 15

9 9 9 14 41

70,175 1,550

99,921 19,649

Active conduits HIRAM NGOs Rural banks Cooperatives Cooperative banks Thrift banks Total

21

RMFP NGOs Rural banks Cooperatives Cooperative banks Total Clients served (no.) HIRAM RMFP

39,962 0

Source:People's Credit and FinanceCorporation. and nonbank financial institutions (NBFIs).* These programs are directed toward specific sectors, such as agriculture and rural sector, low income and poor communities, disadvantaged groups, and small and medium enterprises. They are primarily funded by government budgetary allocations, special funds, and official development assistance from bilateral and multilateral donor organizations through grants or loans. The basic rationale for these programs is that the target sectors have inadequate access to formal credit sources, which in turn impairs their capacity to generate employment and income. Many of these programs, however, do not just provide credit but also include technical assistance in the form of institution and skill building and support services, especially those that are being administered by various government departments such as the Departments of Agriculture, Trade and Industry, Labor and-Employment, and Social Welfare and Development.

Credit-baSed

livelihood programs, for instance,

were introduced to expand self-employment opportunities for the poor. The provision of subsidized credit, training, and other services to promote self4Lainberte et al. (1997,1998)present a comprehensive review and assessment of these directed credit programs.


Chapter 10: Milo Table 5. r_r|,

â&#x20AC;˘ Rm

343

PCFC's cumulative approved 99 (In thousand pesos).

credit lines and loan releases,

1997-

t

Cumulativeamount

Cumulativeamountreleased

approved HII_M

RIVlFP

HIRAM

RMFP

Investment credit 1997

388,600a

0

345,299a

0

1998

527,450

117,500

732,026

8,500

April 1999

681,650

327,800

1,039,491

108,147

1997

32,782_

0

19,197

0

1998

35,902

18,595

22,816

0

April 1999

49,587

40,252

25,155

Institutional credit

. 8,624

Amounts included loans that PCFCabsorbed from the NLSFin 1996. Source:People'sCredit and FinanceCorporation.

employment was thought to be the answer to the Philippines' slow economic growth and labor absorption. In fact, livelihood programs became the cornerstone of the Aquino and Ramos governments ' poverty alleviation schemes, with many of these programs conceived after 1986. Of the existing programs, at least 13 directly target the poor and disadvantaged sectors, while around 24 directly target the agriculture and rural sector. In general, the results of Lamberte et al. (1997, 1998) showed that credit programs administered by government financial institutions, which consist of the LBP and the Development Bank of the Philippines (DBP), were more effective in reaching target borrowers, and efficient in terms of cost recovery, relative to the GOCCs, NBFIs, and nonfinancial government agencies. While the latter agencies generally performed fairly well in terms of outreach, they did so very inefficiently. But sustained inefficiency will ultimately affect a credit program's effectiveness because it will hinder its expansion and sustainability. Credit programs run by the different government departments/line agencies were â&#x20AC;˘found to be even more inefficient. This was attributed to the supplementary nature of such programs, which made performance standard setting and independent assessment difficult. Hence, their emphasis was only on effectiveness. Government departments were also more prone to politicians' interventions. Cost inefficiency of most of the government's directed credit programs had to do with their social preparation component (involving prelending


344

Economic crisis... Once more

activities such as institution and capacify building, and various forms of training), which represented unrecoverable costs for the government. Moreover, since the loans were either interest-free or carried subsidized rates, the programs did not recover operations, administrative, and other costs, making them insufficient and unsustainable, and/or dependent on budget donations and allocations. But it must be pointed out that credit is not welfare, and loans from the government are not dole-outs. Thus, Lamberte et al. (1998) recommended that the management of all the government's directed credit programs be transferred to GFIs, which have clear guidelines and accountability, and are directly supervised by the BSP.This would allow the other government agencies to focus on their primary functions and save on scarce government resources. The PCFC's abolition, notwithstanding its fairly good performance, was also recommended because it only added another administrative layer. A consolidation of the government's directed credit programs is clearly warranted because of the many overlaps. The fungibility of credit also requires strictly targeted interventions. Finally, a reorientation of directed credit programs towards cost recovery, which in turn would help make them viable and sustainable, is justifiable because it is often claimed that the poor's problem is not cost but access to credit. The indirect mode of credit delivery was also found to be more effective. This involves the use of conduits, especially those that are closely connected to end-borrowers, such as community-based and group-lending methods. An earlier study of microfinance institutions (MFIs) in the Philippines (Llanto et al. 1996) also affirmed the effectiveness of the targeting mechanism used by MFIs in identifying poor clients. However, weak institutional capacity, lack of a viable and extensive delivery system, small financial base, and huge investments in training clients hamper most MFIs' attempts to reach more of their target clientele. In the short run, MFIs may be able to expand their present reach, but because they are not viable or sustainable financial institutions, the effort cannot be sustained. Hence, their reliance on financial assistance from the government and donor funds for continued operation. The experience of other countries on MFIs, particularly in Latin America, shows that they need to be financially viable so they can provide credit to an increasing proportion of significantly large numbers of poor people on a sustained basis (Christen et al. 1995). Vihbility can be achieved through an appropriate interest rate policy, administrative efficiency, and volume. Microfinance should not be treated as charity because if it is, then it will lead to many problems, as shown by earlier directed credit programs of the government. In addition to demonstrating the credit Worthiness of its own borrowers, an MFI must likewise demonstrate its own v!ability.


Chap_rlO:Mi_

345

The principal objectives of livelihood programs are to open up credit lines for the poor, which could help them create sustainable livelihoods. Sustainability is critical. The subsidy can be rationalized if a family is permanently lifted out of poverty. On the other hand, the subsidy would amount to atransfer if the benefits are short-lived or if the borrower defaults in payments. Such programs, then, need to be evaluated based on targeting, costs and benefits, and sustainability. Studies, however, have shown that the income and employment effects of livelihood programs are only short term. That is, they provide only temporary financial relief rather than create sustained livelihood (Subbarao et al. 1996). Thus, while such programs may prove useful as shortterm tools, for instance, to alleviate the adverse effects of stabilization and structural adjustment measures, and economic shocks on employment, they cannot be relied upon to permanently address poverty. Therefore, they should not be used as the cornerstone of any poverty alleviation scheme. Furthermore, there may be more efficient ways of effecting the transfer rather than through subsidized credit. Overall, given the issues in managing the various social safety net programs in the Philippines, and the necessity of rendering such programs fiscally sustainable, the focus of public policy should be on redirecting resources and effecting design changes rather than on simply providing additional resources. Furthermore, transfer programs must not be seen as substitutes for basic social services. Even if cash and in-kind transfers are maintained at generous levels, but access to health care and education is eroded, then the poor will not benefit in the long run (Subbarao et al. 1996). Addressing poverty requires that government be pragmatic in its use of scarce resources. In essence, this should entail greater allocation of thenational budget for basic social services such as health and nutrition, education and training, and housing and social welfare, all of which should be efficiently designed to reach the poor. But again, ultimately, the focus should still be on broad-based economic growth to generate and sustain gainful employment and livelihood opportunities for the poor. Other safety nets Safety nets can also be coursed through formal social security arrangements, although the coverage of the latter is often limited to a small portion of the formal sector that is less likely to fall into poverty as a result of periods of unemployment, sickness, or accidents. As such, they cannot protect broad groups of the population from the effects of economic shocks. Nevertheless, existing social security arrangements can be a useful component of future social safety net programs. Also, as a country becomes more developed, social security programs can have a substantial impact in preventing or lessening poverty among particular groups, for example, the elderly. As per capita GDP


346

Economic

crisis... Once more

increases, attempts should be made to broaden the coverage of social security programs to include; for instance, workers employed by small firms and the self-employed, such as farmers and fisherfolk. Over time, retirement, survivors, and disability protection also need to be extended to lower income workers. And if phased in slowly and with financial caution, health insurance could also help to protect the poor, who are least able to self-insure against illness (World Bank 1996). There are two primary social security programs operating in the Philippines--_e Government Service Insurance System (GSIS) and the Social Security System (SSS). These provide payments for old age, disability, death, worker's injury, sickness, medical care, and maternity for public and private employees, respectively. About 60 percent of workers in the formal sector of the economy and all government workers are members. There is, however, a wide discrepancy between membership figures and the number of actual contributors, particularly for the SSS. In 1997, the SSS had almost 19.08 million members, of which only around 6.26 million were paying members. As a response to the employment and income effects of the Asian crisis, the SSS implemented an emergency loan program for displaced workers in March 1998. The maximum loan amount per displaced worker was P12,500. The interest rate charged on the emergency loan was 6 percent, deductible in advance. The loan had a 12-month grace period and was payable in 2 years. At the end of 1998, the SSS granted a total of 17,379 emergency loans, which amounted to around P188.7 million. This amount, however, represented only around 3.5 percent of the total loans granted by SSS for 1998, which reached almost P5.4 billion. DOLE's assistance in certifying that a worker had been terminated or had suffered income losses due to job rotation Or reduced working hours was crucial in facilitating the release of emergency loans. Most of the recipients, however, came from Metro Manila. Despite the existence of various social safety nets, they are still considered highly inadequate. Thus, private safety nets, particularly family-based arrangements, have historically been the most important in helping Philippine households cope with financial difficulties.: This was again evident during the 1997 crisis. For instance, in the 1998 APIS, more than 18 percent of families belonging to the lowest 40 percent income brackets reported receiving assistance from relatives or friends to help them cope with the crisis, in contrast, only around half of that number received assistance from the government. In particular, remittances from abroad and domestic private transfers have been crucial in augmenting household incomes in the Philippines. Furthermore, most overseas remittances went to upper income households, whereas domestic private transfers were more important for poorer households (Subbarao et al. 1996). Reyes et al. (1999) found that househOlds with migrant workers especially


Chapter 10: Milo

347

benefited from their relatives" remittances,

which remained stable in dollar terms

but increased significantly in peso terms because of the depreciation. Credit was also another source of funds for households. This was used primarily for consumption rather than for production. Informal lenders continued to be the predominant source of credit for households, particularly relatives and friends, and moneylenders. On the other hand, the SSS and the GSIS, pawnshops, and cooperatives were among the most common sources of formal credit for households in the Philippines (Reyes et al. 1999). Conclusions Various social safety nets were in place when the crisis broke out, which helped to alleviate its adverse social impact. However, they were generally inadequate both quantitatively and qualitatively. Overall, the main issues in managing the government's various social safety net programs were targeting and efficiency. Thus, the focus of public policy should be on redirecl_g resources and effecting design changes, rather than on simply providing additional resources. But the issue of efficiency in the use of resources pervades in all government programs, and not just in its social safety net programs. The issue has become even more critical as the government's fiscal position worsened as a result of the crisis. In fact, a recent study noted that in addition to the fiscal crunch, some long-identified structural weaknesses in resource allocation have persisted and even worsened (Pineda 1999). The World Bank even estimated the cost of corruption in the Philippines, and placed it at around US$48 billion over the past 20 years. In that sense, the World Bank and the IMF's recent focus on the government's fiscal position was warranted. The lynchpin, however, should not be the level of the fiscal deficit per se, but improved revenue performance and greater efficiency. Ideally, fiscal adjustments toward greater efficiency in using public resources should cut across the different departments and types of expenditures. But if they cannot be done simultaneously, then inefficiencies elsewhere should first be dealt with before inefficiencies in the social safety net and social expenditure programs. Otherwise, the more vulnerable members and sectors of society may be hit from both sides, with the private sector still undergoing a period of adjustment as a result of the crisis. Also, there is a growing body of literature that seeks to characterize and measure the adverse impact of globalization,

particularly

of financial

markets,

on labor and on the

poor (e.g., Diwan 1999, Rodrik 1997, 1998). Thus, the importance of an adequate system of social protection cannot be overly emphasized, especially since the social safety net is quite minor when compared with the financial safety net. Two years after the crisis broke out, President Estrada launched his own antipoverty program, which had an allocation of P2.5 billion. Doubtless some


348

Economic

crisis... Once more

of his pronouncements were overambitious, even unrealistic. For instance, there was the declaration to liberate 10 million Filipinos from poverty, which is around a third of the Filipino poor, over the next 5 years. The program would initially target the 100 poorest families in each of the 1,600 cities and towns. They would then receive integrated and comprehensive services from the government. Around 160,000 households or about 1 million Filipinos were expected to be reached. It was a start, albeit a small one, considering that there were already over 4.5 million poor families prior to the crisis. But the strategy was criticized for being narrowly focused and simplistic. It was also pointed out that its design and implementation were full of leakages. Furthermore, the program did not address the key issues involving poverty in the Philippines. It has been noted that poverty in the Philippines was a "structural" problem. Thus, longer-term solutions must go beyond dole-outs and addressthe key issues.


Chapter 10: Milo

349

References Christen, R.E, E. Rhyne, and R.C. Vogel. 1995. Maximizing

the outreach

of

microenterprise finance. USAID Program and Operations Assessment Report No. 10. Washington, D.C. Chue, K.Y. and S. Gupta. 1998. Social safety nets: issues and recent experiences. Washington, D.C.: international Monetary Fund. Diwan, I. 1999. Labor shares and financial crisis. Paper presented at the Global Development Network Forum, 5-8 December 1999, Bonn. Lamberte, M.B., M.S. Casuga, and D.C. Erfe. 1997. Assessment of the role and performance of government nonfinancial agencies in implementing directed credit programs, Manuscript. Credit Policy Implementation Program Philippines. Lamberte, M.B., M.S. Casuga, and D.C. Erfe. 1998. Assessment of the performance of GFIs and GOCCs/NBFIs in implementing directed credit programs, Manuscript. Credit Policy Implementation Program, Philippines. Llanto, G.M., E. Garcia, and R. Callanta. 1996. An assessment of the capacity and financial performance of microfinance institutions: the Philippine case. Discussion Paper Series No. 99-30. Makati City: Philippine Institute for Development Studies. Pineda, V.S. 1999. Impact of the financial crisis on social services financing and delivery. Discussion Paper Series No. 99-30. Makati City: Philippine Institute for Development Studies. Reyes, C.M., R.G. Manasan, A.C. Orbeta, and G.G. de Guzman. 1999. Social impact of the regional financial crisis in the Philippines. Discussion Paper Series No. 99-14. Makati City: Philippine Institute for Development Studies. Rodrik, D. 1997. Has liberalization gone too far? Washington, D.C.: Institute for International Economics. Rodrik, D. 1998. Capital mobility and labor. Draft report. Washington, Institute for Intemational Economics.

D.C.:

Subbarao, K., A.U. Ahmed, and T. Teklu. 1996. Selected social safety net programs in the Philippines. Discussion Paper Series No. 317. Washington, D.C.: World Bank. World Bank. 1996. A strategy to fight poverty. Philippines. World Bank.

Washington,

D.C.:


Lg_

en

_ll

m

m

_

"0

mm

_

ill


11 Currency Crisis: Where Do We Go from Here? Maz_oB. Lambe_e _

other Asian countries. Indeed, the quickness and magnitude of the havoc he financial fluflu that started in Thailand ineconomies July 1997 quickly spread to inflicted by the virus on emerging Asian are unimaginable. Just a few months before the regional crisis struck, most pundits considered some Asian economies such as Korea,Thailand, Malaysia, Indonesia, Singapore, Taiwan, and the Philippines, good investment havens. Currently, these economies are going down under the weight of massive corporate and banking bankruptcies, causing untold economic, social, and political problems. Even international credit rating agencies failed to comprehend theemerging problems facing East Asian economies and to anticipate the timing of the currency crisis} Their emphasis on traditional country risk indicators, such as debt service payments, fiscal deficit, etc., totally missed the balance sheet problems facing banks and the nonbank corporate sector. Many have pointed out thatthe Asian flu virus already existed longbefore July 1997, but it was just waiting for a sign of weakness in Asian economies to make its move. There were vital signs of the existence of such a virus. More specificaU_ the emerging Asian economies had pegged their currencies to the US dollar either formally or informally. They benefited from this policy in terms of rapid export growth when the US dollar depreciated against the Japanese yen. Growth in corporate earnings attracted huge inflows of foreign capital, which was facilitated by a more liberal policy on capital mobility. But when this situation reversed in 1995, currencies in emerging Asian economies became * The author is grateful to Ms. Ma. Chelo Manlagnit Tolentino for secretarial assistance.

for research assistance

and Mrs. Juanita

1 It would be worthwhile to point out Wyplosz's (1998) observation that past crises often occurred without warning signals and came as a big surprise. Indeed, some observers like Young (1992) predicted a slowdown in Asian economies, but not a crisis.


354

Economic

crisis... Once more

overvalued, making their exports less competitive internationall_ The sharp devaluation of the Chinese yuan in 1994 further aggravated this situation. With imports becoming cheaper and exports becoming less competitive, most emerging Asian economies began to run h_ge current account deficits. Thus, it was just a matter of time for these economies to make the necessary correction for the overvaluation of their currencies. When the correction came, however, it i came in a big way with short-term foreign investors rushing to the door. Devaluations ranged from 36 percent to 76 percent for emerging economies that ran huge current account deficits in 1996 and 1997 (Table 1). Surprisingl_ even the currencies of Singapore and Taiwan, which have been running huge current account surpluses, were dragged down by the sharp devaluations experienced by their neighboring countries, prompting some quarters to howl at currency and stock market speculators.

Table 1. Southeast

Asian current account balances and currency movements. I

Country

Cu.rrent account balance as perce_t of GDP 1996 1.997 â&#x20AC;˘ .|.|

Currency decline Relative to US dollar 7/1/97 - 2/2/98

t

Indonesia

-3.4

-4.5

-76

Malaysia

-6.3

29.9

-39

Philippines Singapore S. Korea Taiwan Thailand

-4.5 15.2 -4,9 4.0 -7.9

_2.9 16.2 -2,7 1.8 -4.2

-36 q6 -43 -17 -49

Source:J.P.Morgan, World Financial Markets,1998fit'st quarter.

In spite Ofthe high interest rates pursued

by these countries,

and backed

by the International Monetary Fund (IMF) bail-out packages, capital still continued to flow out, suggesting that cUrrencies of these countries would remain unstable for quite some time. Krugman (1998a) suggested temporarily imposing currency controls as a way out fox crisis-hit Asian economies. Indeed, Malaysia took this route Ostensibly to isolate itself from currency and stock market speculators, while the rest of crisis-hit Asian economies resisted this temptation. The continued weakness of the Japanese economy and a Chinese yuan devaluation could lead to another round of currency instability in the region before Asian economies can fully recover from the recent currency crisis, making the imPosition

of capital controls

more tempting.


Chapter 11: Lamberte

355

Should the Philippines give way to this temptation? This paper argues that the Philippines does not have to reimpose currency controls, in general, and capital controls, in particular, which it already substantially dismantled in the past few years, to deal with the ongoing economic crisis. Instead, the paper offers some measures to minimize the vulnerability of the economy to a crisis similar to the present one. To put the debate on capital controls on a broader perspective, section reviews issues on the sequencing of economic liberalization.

the next This is

followed by a discussion on forms of controls imposed by two countries on capital flows and the extent of their effectiveness. The fourth section describes economic liberalization measures the Philippines has implemented since the 1980s and existing foreign exchange regulations. The sixth section discusses some indicators that point out the vulnerability of the Philippine economy to a crisis similar to the current regional crisis and recommends some measures so that the economy can better handle concluding statement.

such a crisis. The last section provides

a

Sequencing of liberalization The current currency crisis in Asia is not entirely new. Corbo and de Melo (1985) documented similar problems in the Southern Cone economies of Latin America in the late 1970s and early 1980s. To the surprise of many observers, this problem occurred at a time when the Southern Cone countries were liberalizing their economies to achieve a respectable growth rate. This same condition existed in Asian countries when the currency crisis struck. Unwittingl_

liberalizing the Latin Cone economies facilitated the buildup

of foreign debt, which eventually led to banking panics and massive corporate failures. This had prompted authorities to reintroduce some controls on economic activities to save failing banks and corporations. The dismantling and subsequent reintroduction of some controls to address unanticipated and emerging problems led some analysts to think that apart from instituting appropriate reform measures, proper sequencing of implementation procedures of these reform measures mattered a lot. To maximize gains from reform measures, McKinnon (1991) suggested the following order of economic liberalization: Fiscal control should precede financial liberalization, followed by liberalizing domestic trade and financial markets. Next is liberalizing the current account of the balance of payments (BOP). Liberalizing the capital account of the BOP should be the last stage.


356

Economic

crisis... Once more

As suggested by McKinnon, gradual economic liberalization will eventually lead to full convertibility of the capital account of the BOP. Needless to say, the three elements mentioned abo_e are preconditions to liberalizing capital account. 2 The IMF recognizes the need for _properly sequenced and careful liberalization so that more countries can benefit from access to international capital markets (Fischer 1998). In this regard, the IMF is currently working on an amendment of its charter that will make liberalization of capital movements a purpose of the Fund. Not all, however, subscribe to the order of economic liberalization put forward by McKinnon. As Johnston (1998) pointed out, one view holds that early capital account liberalization can play an important catalytic role in broader economic reforms, and can help overcome entrenched vested interests that otherwise postpone necessary reforms. The close linkage between political and economic power is pretty common in developing countries, weakening political will to implement much-needed reforms. Accordingl)5 an open capital account can exert pressure on authorities to institute reforms. â&#x20AC;˘ Others hold the opposite view. No less than Keynes himself said that "it is widely held that control of capital movements, both inward and outward, should be a permanent feature of the post-War system. "_ Bhagwati added that if one believes in free trade, he / she does not necessarily believe in capital account convertibility. He suggested that countries that have not yet liberalized their capital account should be left alone and should not be enticed by donor agencies to do so. 4 Some economists (e.g., Roubini 1998, Sachs 1998) would rather go for selective capital control. More specificall_ they want some controls to be applied on short-term capital inflows (i.e., short-term loans and portfolio inflows) but not on foreign direct investment (FDI) and long-term loans. This is called the "sand-in-the-wheals" policy targeting short-term capital flows, which are perceived by authorities as volatile and destabilizing. Controls are applied on inflows, not on outflows, of capital. Accordingly, the objective is to prevent the problem from arising, rather than to attempt to clean up afterwards. One way of doing it is to impose a Tobin tax on shore-term capital to make short-term speculation more costly while having little effect on long-term investment. At the other end of the spectrum are economists, like Greenspan and Dornbusch, who go for unfettered out that "free flow of short-term

capital capital

mobility. Greenspan (1998) points facilitates the servicing of direct

2Many authors echoed the same idea. For example, see Wyplosz (1998)and Johnston (1998). s Takenfrom Grenville (1998). 4Takenfrom the IMFEconomicForum on Capital account liberalization: what's the best stance? held on 2 October 1998.


Chapter 11: Lamberte

357

investments as well as the financing of trade. Indeed, it is often difficult to determine whether certain capital flows are direct investments or short term in nature." There are practical problems associated with designing capital controls when short-term capital flows cannot be clearly distinguished from long-term capital flows. The standard BOP table, which classifies capital inflows into various categories, is less useful in distinguishing which capital is short term or long term. For instance, foreign capital invested in short-term time deposits or government securities can actually be rolled over several times. On the other hand, foreign capital invested in long-term instruments can be withdrawn on short notice if there is an active secondary market providing liquidity to those instruments. Controls imposed on the secondary market of such instruments can certainly affect the primary market for long-term securities. Dornbusch (1998) argues for the simultaneous liberalization of both current and capital accounts. He points out that "Since gradualism and sequencing are more likely to be hijacked by political pressures adverse to the best utilization of resources and a persuasive case for gradualism has never been made, full steam ahead is the right answer." He also thinks that the Tobin tax on capital flows will be ineffective in preventing capital outflows, especially if the tax rate is much less than the rate of currency devaluation. Dornbusch points out that "Anyone who contemplates 30 percent depreciation will happily pay 0.1 percent Tobin tax." According to him, the same result would emerge-massive corporate bankruptcies. Capital controls in action There are several types of capital controls imposed by countries. In this regard, Malaysia is chosen because it is the first, and perhaps, the last country in the Asian region, to reimpose controls in response to the regional currency crisis. The other country is Chile because it has a long experience with various forms of capital controls. Also, its recent capital control program has often been cited by many observers as a good example of how to deal with surges in capital inflows, which emerging_economies in Asia experienced a few years before the regional currency crisis struck. When Malaysia started to feel the pain of the Asian regional currency crisis, authorities tried to implement a textbook approach to address the problem; that is, they tightened monetary policy and slashed government expenditures by postponing implementing mega projects. As the economy continued to plunge and the exchange rate remained unstable, Malaysia abandoned its original program and adopted in July 1998 the National Economic Recovery Plan, which relaxed monetary policy and increased fiscal spending. Together with these measures was the imposition of controversial currency controls, which


358

Economic

crisis... Once more

were more sweeping than anticipated. Prime Minister Mahathir justified the currency controls on the grounds that the free market had failed disastrously because of abuses perpetuated byinternational currency speculators. Malaysia's recovery program has two primary objectives: 1. to eliminate speculative flows that had battered the Malaysian ringgit and the stock market for more thana year; and 2. to allow a progressive reduction in interest rates (without the risk of a deterioratition in e exchange rate or capital flight) to encourage increased investment and consumption, and thus a reactivation of the economy. The program includes fixing the exchange rate to 3.8 ringgit per US$1; repatriation by I October of all ringgit held abroad; ending offshore trading in ringgit instruments and domestic credit facilities for overseas banks and stockbrokers; retaining proceeds of the sale of Malaysian securities in the country for a year; payment in foreign currency for imports and exports; and central bank approval for converting the ringgit into foreign currency. It is still too early to assess the impacts of these currency controls on the Malaysian economy. Krugman (1998b), however, quickly cautioned Malaysia that its recently imposed currency controls should only be temporar_ say 3 years or less, to buy space for economic growth and mus_be regarded as an aid to reform, not an alternative. Chile has a much longer experience with capital controls. But unlike earlier capital controls that were aimed at limiting capital flight, the Chilean capital control program aimed to change the composition of capital inflows in favor of long-term capital. Like other emerging economies, Chile was experiencing surges in capital inflows in the 1990s. it imposed capital controls to support its tight monetary policy without necessarily undermining its export competitiveness. Its capital control prograrn has three major components', first, the central bank has engaged in a sterilized intervention in the foreign exchange market to prevent the real exchange rate from appreciating excessively, purchasing dollars in exchange for local currency to maintain the exchange rate within a 12.5 percent band around a doUar-DM-yen reference rate. Second, capital investment was subject to several laws and restrictions specifying minimum entry amounts and the time which must elapse before capital can be repatriated: 째

Decree Law 600 requires f째reign capital to enter Chile through a foreign investment contract with a specified minimum duration, which varies according to the industrial sector concerned. Capital cannot be repatriated until 1 year after entr_ although there are no restrictions on the repatriation of profits.


Chapter

11: Lamberte

359

â&#x20AC;˘

Law 18,657 creates Foreign Capital Investment Funds. Foreign investment in public securities and equities is allowed, subject to a minimum amount of 1 million dollars, which must be invested within I year. Capital invested in these funds cannot be repatriated for a minimum of 5 years. Profit repatriation is not restricted. Third, the central bank has imposed a 1-year reserve requirement of 30 percent on short-term capital inflows. This unremunerated reserve requirement (URR) effectively serves as a tax on short-term inflows, s The government has used other policy instruments to restrict the speculative inflow of capital, including minimum conditions for external bond and equity issues, and reductions in availability and increases in the cost of swap facilities at the central bank. Several studies evaluating the effectiveness of the Chilean capital control program were already made. s Results of these studies generally showed that the effectiveness of the program in reducing short-term capital flows is ambiguous. At best, its effectiveness in changing the composition of capital inflows is very limited and short lived. 7 The private sector eventually found a way of circumventing capital controls and succeeded. Chile imposed the same URRin the 1970s and early 1980s, but unlike in the 1990s it failed to prevent the major banking and currency crisis in 1982. Edwards (1998) attributes the stability Chile has achieved in the 1990s to the much-improved banking regulations after introducing banking reforms in 1986 rather than to capital controls. This was the same point stressed by Dornbusch (1998) in his critique on capital controls. In their study using the general equilibrium model, Reinhart and Smith (1997b) found that for capital control to be effective in reducing capital inflows, tax rate on capital inflows must be punitive. They also found that the benefit of capital inflow taxes is small and tends to vanish very quickly, suggesting that any capital control should only be temporary and must be removed shortly after the shock to the world real interest rate. Chile has started recently to relax its capital controls to encourage more capital inflows.

s Let rbe the urtremunerated reserve requirement, and lithe nominal foreign interest rate, then the effective cost of foreign borrowing to a resident after imposition of the reserve requirement, _+, becomes: ei_ = i I/(1 -r). '_ For a good review of these studies, see IME International Capital Markets: Developments, Prospects, and Key Policy Issues (September 1998). 7 Brazil's capital controls also failed to achieve the objective of limitIng the volume of inflows or changing the composition of capital inflows. In fact, it abolished the 1 percent tax levied on foreigners investing in the stock mm'ket in 1995 in the wake of the Mexican crisis to encourage inflows. Colombia's capital control program failed to reduce net capital inflows but succeeded in changing the composition of inflows (see Reinhart and Smith 1997a).


360 Economic

Economic liberalization

crisis... Once more

in the Philippines

This section discusses the economic reforms implemented by Philippine authorities since the 1980s and existing foreign exchange regulations. Economic

reforms

The Philippines has been affected by the Asian regional crisis, albeit less than its neighboring countries. GDP growth rate for 1998 will likely be flat, which can be mainly attributed to the poor performance of the agriculture sector that was badly hit by E1Nifto and the slowdown of the industrial sector. But the Philippines is no stranger to economic crisis. A BOP crisis, the worst in Philippine history, hit the country in 1983-84. Another one occurred during the 1990 Gulf war. In spite of these crises, Philippine authorities have continued restructuring the economy through a series of reform measures. Although some of these reforms were made under certain adjustment programs supported by multilateral agencies, however, many were unilaterally done by Philippine authorities. These are discussed below. A comprehensive tax reform program aimed at raising more government revenues and, at the same time, addressing equity and efficiency concerns was implemented in 1986. it consisted of the following: (1) a shift from schedular to a more global approach in taxing individual income from compensation, business, trade, and exercising a profession; (2) increase in personal and additional exemptions; (3) separate treatment of income of spouses; (4) increase in final withholding tax rate on interest income and royalties to a uniform rate of 20 percent; (5) phase-out of final withholding tax previously levied on dividends; (6) unification of the earlier dual tax rate levied on corporate income to 35 percent; (7) introduction of value-added tax (VAT) in place of sales/ turnover tax and many other taxes; (8) conversion of unit rates formerly used for excise taxes to ad valorem rates; (9) abolition of export taxes; and (10) further reduction in tariff rates? Between 1990 and 1997, some tax measures were introduced to fine-tune earlier tax measures and also to raise more revenues to support the fiscal adjustment program. In 1997, another round of comprehensive tax reform program was implemented for: (1) widening the tax base; (2) simplifying the tax structure to minimize leakages from undeclared revenues, overstated deductions, and corruption; and (3) making the system more elastic and easier to administer to ensure adequate revenues in the future. Aside from these tax measures, the government program, contributing a substantial

seriously started in 1986 its privatization amount to government revenues.

Because of tax reforms, the tax effort increased from 11 percent in 1986 to 16.3 percent in 1997, which is comparable w_th those of its neighboring countries. As a result, the share of tax revenue in total: government revenues rose from an Taken from Manasan

(1998).


Chapter 11: Lamberte

361

average of 82 percent during 1986-91 to 86 percent during 1992-96. A large chunk of the nontax revenue came from the privatization program. The 1983-84 BOP crisis taught the government a good lesson on fiscal management. Since 1986, fiscal policy was aimed at prudently managing the government fiscal position to support strong economic recovery and sustainable growth. By 1994, the national government achieved its objective of running a budget surplus (Table 2). In 1996, the consolidated public sector account recorded a surplus for the first time in two decades. The deregulation of the domestic economy started in the mid-1980s. Price ceilings on all basic commodities, except oil products, were removed. More recently, the oil industry was deregulated. The highly protected sectors of the economy, such as telecommunication, transport (air, water, and land), and energ_ were opened up in the early 1990s. The build-operate-transfer (BOT) scheme was introduced to allow greater private sector participation in financing and implementation of government projects. The Foreign Investment Act was passed in 1991, liberalizing entry of foreign investors within the provisions of the Philippine Constitution. As a general rule, there are no restrictions on the extent of ownership of export enterprises (defined as those exporting at least 60% of their output). As for enterprises oriented to the domestic market, foreigners are allowed to invest as much as 100 percent, unless the participation is prohibited or limited to a smaller percentage by existing laws and/or the provisions of the Foreign Investment Act. All these measures have significantly improved the efficiency of the domestic economy as can be seen from the variety and favorable prices of goods and services being offered by players in each industry. The 1983-84 BOP crisis revealed weaknesses in the banking system, eventually resulting in weeding out of weak and poorly managed banks. Since then, the financial sector has undergone a massive restructuring (Table 3). Starting in November 1985, banks have been weaned away from the cheap rediscounting window of the central bank so that they could be motivated to mobilize funds. Authorities sought to enhance competition in the financial system by decontrolling interest rates, lifting the moratorium on opening new commercial banks, and by substantially relaxing rules on branching. Government-owned bank participation in credit markets was reoriented towards supplementing the private banking system's initiatives rather than supplanting them. This was done by having the government financial institutions concentrate on wholesale lending rather than on retail lending and using private banks as credit conduits. The latest reform measure in the financial sector was the liberalization of the entry and scope of operations of foreign banks. The law encourages foreign banks not only to go into wholesale banking but also to engage in retail banking


h_a No

Table 2. Consolidated

Percent

public

sector financial

(In percent

of GNP).

1986

1987

1988

1989

199(}

1991

1992

1993

-5.9

-6,6

-1,8

-3.1

-3.8

4.7

-2.0

-1.9

-1.7

-3,0

4.3

-1,3

-1,9

-2.7

4,1

-1,3

-1,5

-2.2

-5.2

-2.5

-2.9

-2.1

-3.4

-2.1

-1.2

-1.4

-1.1

0.0

0.4

-0.3 -0.9

-1.8 49.1

-0.6 0,8

0.6

1,8 0.3

1.5 -0.3

0.8 -0.2

0.5 0.1

0.5 0.7

-3.0

-2.3

-0.5

-1,2

-1.1

1.0 -2.7 -3.3 0,1

0,1 -3,1 -2-1 0.1

0.8 -1.6 0.1 0,i

0.6 -2.1 0,2 0.I

0,8 -2.3 0.3 0,2

1994

1995

1996

199P

_5

-0.1

0.2

-0,9

-3,7

4],4=

-0,8

-0,6

-1.6

-0.8 0.4

-1.5 -I,0 -1.7 49.5

0.9 -1.4= 4).6 0.I

0.6 -1-.0 -0.1 -0.5.

0.3 43.6 -0.5 0.2

0.1 -1.8 -0.7 0.0

0.5 0.0

0,2 -0.1

0.8 0.2

0.4

0.I

0.I

. 0.1

-0,6

-0.7

_.4

2.0

0.0

0.7

0.8

0,7

1,0 -2.0 0.3 0,2

{).6 -1.7 0.2 0.i

0,6 -1.6 0.3 0.1

0.8 -0.1 0.4 0.4

-0.7 0.3 0.2 0.3

{),0 0,2 (}.3 03

{),4 -0,1 (}.4 0.2

{).2 0.1 0.2 0.2

0.2 0.O

-0.1 0.0

03 0.0

to GNP

Consolidated

public

sector surplus/(deficit)

Public sector borrowing

requirement

National government CB restructuring Monitored GOCCs OPSP Adjustment of net lending Other adj'ustments Otherpublic

and equity to GOCCs

sector

SSS/GSIS BSP GYIs LGUs Timing adjustments Other adjustmen_

of interest

Consolidated

sector primary

Source:

position

1985

public

Department

payments

to BSP 1.9

of Finance.

surplus/(deficit)

-2.8

2.5

-1,5

0.i

0.0

-0.1

5.1

3.9

3.0

(}.0

0.0

0.2

0.5 0,0

-0.1 0.0

2.5

4.6

4.5

4.3

4.8

4.3

4.1

_Yl ,,_

c_

_. _)


Chapter 11: Lamberte

363

to provide more competition with local banks. As of December 1997, there were 20 domestic universal banks, 16 ordinary domestic commercial banks, 1 branch of a foreign bank with a universal bank license, 13 branches of foreign banks, 4 subsidiaries of foreign banks, 117 thrift banks, 832 rural banks, 12 nonbank financial institutions with quasi-banking licenses, and 6,935 nonbank financial institutions without quasi-banking functions. The Central Bank introduced some measures to strengthen prudential regulations. These included, among others, improvements in bank reporting requirements and specific guidelines for asset valuation and loan loss provisions to tighten, standardize, and apply criteria uniformly to all banks; regularly reviewing and increasing the minimum capital requirement; and several measures to curb insider abuse. The process of deregulating the foreign exchange market started in mid1991 and has continued to the present. In some cases, the Central Bank phased in the relaxation of some rules to test the reaction of the market. In other cases, it was done immediately;

A very important measure

done by the Central Bank

was to lift the prohibition on off-floor trading. The creation of the Philippine Dealing System, which started operating in April 1992, was the response of the Bankers Association of the Philippines (BAP) to the lifting of the ban on offfloor trading. The creation of a new central bank, i.e., the Bangko Sentral ng Pilipinas (BSP), is a major institutional measure initiated by the government in 1993. It addresses two closely related issues: independence of the central bank and absorption by the national government of loss-inducing liabilities of the old central bank incurred in the early 1980s. This reform was facilitated by two factors. One was in response to the excessive use by the Executive Branch of the central bank to do quasi-fiscal functions, and the other was the growing sentiment in other parts of the world to make central banks a trulyindependent entity. Trade liberalization in the Philippines was done over a long period? The first phase of the tariff reform program, which was implemented during 198185, reduced all tariff ranges within 50 percent from highs of 100 percent. This was followed by an import liberalization program implemented during 198688, which brought down the percentage of import-restricted items to less than 10 percent. Another round of tariff reform program was implemented during 1991-95, which narrowed the tariff range to mostly within 30 percent. The last and ongoing tariff reform program, which commenced in 1996, aims at further narrowing down the tariff range to within 3 and 10 percent (excluding some agricultural products) by 2000. The Philippines uniform 5 percent tariff by 2004. 9Basedon Medalla (1998).

is committed

to implement

a


364

Table

Economic

3. Financial

sector

reform

in the Philippines,

crisis...

Once

more

1986-94. L

Policy measures

Before reform

After reform

Date

I, Selective credit control

1, Central Bank rediscount window

Rediscount rate: varies by

Uniform floating re_e for all; no

type of economic activities (allowable spread: ld1%)

p_rlbed

November 1985

Rediscount value: varies by type of economic activities

Uniform: 80%

November 19B._

Directly managed special

C.entral Bank-managed special credit

1987-1988

credit programs

programs transferred to government Financial institutions

New commercial banks -

b/taw commercial banks - moratorium

moratorium since 1980; Other hanks - no

lifted

spread,

(value: 60-100%)

2. Central Bank special credit programs

II, Bank competition

1. Bank entry

1989

moratorium.

Foreign hanks - no entry

Ten foreign banks allowed to have 6

since 1949.

branches each; foreign banks may

1994

acquire or establisha bank up to 60% of the total equity of eachbank,

2. Branching

Restrictive branching policy

Branching was liberalized but the

-the country was divided

Central Bank retained discretionary

into five service areas: heavily overbronched areas;

power on the opening of branches in certain areas considered "overbanked."

May 1989

overbranched areas; ideally

3, Government banks

branched areas; underbranched areas; and

B_nks may open branches anywhere they like provided they meet the

encouraged branching ames.

_tulmd

Largely doing retail lending that directly competes wlth private banks

May 1993

minimum capital mqoirereent.

i Mbre focus on wholesale lending using private banks as conduits.

Since 1987

4, Interest rates a, Deposit rates

No cap since 1981

b, l._nding rates

No cap since 1983

Private banks Special credit programs

r

Cap on end-user rate

,

same N Ocap on end-user i

i

1987


Chapter 11:Larnberte

365

Table 3. continued... Polic_ measures

Before rdonn

After reform

Date

IIL Prudential measures IV, Foreign exchange markets On-floor 1. Foreign exchange trading

Off-floor through an electronic

Deomnber 1992

_ereened-based network for _ha ring information and undertaking transactions.

2. Export receipts Mandatory surrender of forei_ exchange receipts.

Foreign exchange camera may _'_in 100% of total receipts and can use them

September 1992

freely without prior Central Bank authorization. 3. Foreign exchange purchases Limits on foreign exchange

NO limit.

September 1992

Fulland immediaterepatriation

September 1992

purchases such as travel, educational expenses, etc.

4.Repatriation and remittances Staggered from3-9years of L_vesIvnents

5,Outwardh'tvestment by

subject to Central Bank

without Central Bank apprOval for

approval,

forelgn investn'tents duly registered withtheCentraIBank orcustodian bank.

Not allowed.

AllowedinRially up toUS$1M, but

residents

6,Accasstodomestic PCDU loans No access.

Source:

1992-94

lately increased toUS$6M.

Direct exporters allowedaccess,

Sept_'nber 1992

Indirect exporters allowed access

]'uly1994

Mario Lamberte. 1995. Recent financial structure reform in the Philippines. Paper presented at the Conference Countries, 3-4 February, Kyoto, Japan.

and macroeconomic management on Finandal Reform in Asian

After the 1983-84 BOP crisis, Philippine authorities tried to improve its management of external debt with some success. As Table 4 shows, the ratios of debt service burden to export shipments, exports of goods and services, current account receipts, and GNP had been declining during 1986-96. The ratio of foreign exchange liabilities to GNP had also been declining, while the ratio of gross international reserves to debt service burden had been increasing during the same period. Existing foreign exchange regulations in the Plfflippines It may be worthwhile to discuss at this point existing foreign exchange regulations of the Philippines to see where the country is now in the spectrum of capital account convertibilit)_


o_ o_

Table 4. Selected

external

debt ratios (Amount

Item I. Debt service burden Total Principal Interest

in million

US dollars;

ratios in percent).

1986

1987

1988 _

1989

1990 6

1991

1992

1993

1994

1995

1996

1997

3,091 1,117 1,974

3,005 1,092 1,913

3,002 994 2,008

3,139 915 2,224

3,547 1,712 1,835

2,828 1,140 1,688

2,942 1,607 1,335

3,229 1,791 1,438

4,188 2,647 1,541

5,032 2,853 2,179

5,026 2,820 2,206

5,597 3,029 2,568

4,842 8,633 9,078 29,250 28,256 2,459

5,720 9,174 9,749 32,616 28,649 1,959

7,074 10,666 11,444 37,546 27,915 2,059

7,821 12,407 13,239 41,958 27,616 2,375

8,186 13,028 13,745 44,073 28,549 2,048

8,840 14,464 15,292 45,656 29,956 4,526

9,824 17,267 18,093 53,889 30,934 5,338

11,375 18,872 19,618 55,321 34,282 5,922

13,483 24,033 25,074 65,742 37,079 7,122

17,447 31,821 32,968 76,180 37,778 7,762

20,543 39,,549 40,734 87,084 41,875 11745

25,228 48,063 49,733 85,742 45,433 8,768

63.84 35.8 34.05 10.57 96.6

52.53 32.76 30.82 9.21 87.84

42.44 28.15 26.23 8 74.35

40.14 25.3 23.71 7.48 65_82

43.33 27.23 25.81 8.05 64.78

31.99 19.55 18.49 6.19 65.61

29.95 17.04 16.26 5.46 57.4

28.39 17.11 16.46 5.84 61.97

31.06 17.43 16.7 6.37 .56.4

28.84 15.81 15.26 6.61 49_59

24.47 12.71 12.34 5.77 48.09

22.19 1.1.65 1t.25 6.53 52.99

79.55

65.19

68.59

75.66

57.74

160.04

181.44

183.4

1.54.25

233.68

(19513)¢

Export shipments Exports of goods & services Current account receipts Gross national product Foreign exchange liabilities (end-of-period} Gross international reserves (end-of-period) H. Ratios DSB to ex_ort_ments DSB to exports of goods and services DSB to current account receipts DSB to gross national product Foreign exchange liabilities to gross national product Gross international reserves to debt service burden

â&#x20AC;˘Exdudes interest rebate of $33 million. b Based on the revised methodology from 1990 onwards. e Debt service burden represents principal and interest payments Source:

Bangko Sentral

ng Pilipinas.

170.06

156.66 _' __"

after rescheduling, 9


Chapter 11:Lamberte

367

Sale and purchase of forei8_ exchange In general, anybody may sell foreign currency for pesos to a bank without restriction. The purchase of foreign currency from the banking system, however, is subject to certain restrictions and documentation. Residents may purchase foreign exchange from a bank up to $10,0001° or equivalent, without documentary evidence of the underlying transaction over a 15-banking day period. Nonresidents may only buy foreign currency from the banking system equivalent to the amount previously sold by them to a bank. Nonresident individuals departing from the Philippines may convert unspent pesos up to a maximum of U55200 at airports or other ports of exit without proof of previous sale of foreign currency. Pesos may not be taken into or out of the country in an amount exceeding PIO,O00without authorization by the BSP. Trade-related foreign exchange transactions Exporters of goods and services, and overseas Fi_pino workers (OFWs) are given complete freedom in disposing of their foreign exchange earnings. They may deposit their foreign exchange receipts in foreign currency deposit units (FCDUs). Exporters can hedge by selling expected export receipts forward in the foreign exchange market. Banks may sell foreign currency to importers, without prior approval from BSP,for letters of credit, documents against payment, documents against â&#x20AC;˘ acceptance, open account arrangements, and direct remittance. All of these, however, require presentation of documents evidencing the underlying import transaction before foreign currency can be sold by the bank. Loan-related foreign exchange transact_ons In general, loans to enterprises that are serviced using foreign currency purchased from the banking system must have prior BSP approval, except for the following: short-term export advances from buyers abroad; short-term loans to exporters, if these are used to purchase export-related goods from abroad; short-term loans to manufacturers, if these are used to purchase production-related goods from abroad; certain trade-related loans; and loans granted by foreign companies to their local branches. In these cases loans must be registered with BSP even though prior approval is not required. Applications for loan approval must be filed with the BSP at least 15 working days prior to the target completion of negotiations. Loans must be registered with BSP at least 15 working days prior to loan draw down. t

_oThe ceiling was $100,000 before the currency crisis.


368

Economic crisis... Once more

Any Philippine enterprise planning to borrow an amount equivalent to at least US$10 million must advise BSP of their plans at least 6 months prior to negotiations or mandate awards for medium- and long-term loans, and at least I month for short-term loans. The BSP usually grants approval only for foreign currency loans for export- or investment-related projects. Issuance of securities in international capital markets All issues of peso-denominated instruments in international capital markets require prior BSP approval. The transaction should not involve the import or export of Philippine currency, either physically or electronically. Foreign invesOnents Foreign investments need to be registered with BSP if the foreign exchange needed to service the repatriation of capital or the remittance of dividends, profits, and any earnings that accrue, is to be purchased from the banking system. Proof of an actual transfer of assets into the Philippines is needed for the investment to be registered with the BSP. All investments are classified into direct foreign equity investments, foreign investment in government/listed securities, and foreign investment in money market instruments. Repatriation of capital may be made any time upon presentation of appropriate documents. Any proceeds (i.e,, profits, dividends, etc.) from an investment can be immediately repatriated in full. They may, however, be temporarily deposited in a bank prior to repatriation and any interest earned on the deposit can be remitted automatically without further registration. Reinvestments of proceeds of an investment must also be registered with BSP. Outward in vestmen t Philippine residents may purchase up to US$6 million foreign currency per investor per year from the banking system to invest abroad without BSP approval or registration. Whether BSP approval is required or not, every application submitted to a bank to purchase foreign exchange for outward investment must be accompanied by a project feasibility study and a written undertaking to remit and seU for pesos, through the banking system, the dividends and profits earned from the investment. Any dividends or profits must be remitted to the Philippines within 1_ days from receipt and converted into pesos within 3 working days after remittance. Forward foreign exchange All banks wishing to engage in forward exchange dealing must secure authorization from BSP. The BSP has prohibited banks from entering into


Chapter H: Lamberte

369

nondeliverable forwards (NDFs) with nonresidents where the bank sells foreign currency without prior BSP approval. Overbought/oversold foreig_ exchange positl"on of banks The BSP limits the open foreign exchange position of banks. The maximum amount a bank can be overbought in foreign currency against pesos is equal to 5 percent of its capital or U5510 million (whichever is smaller), and the oversold ceiling is equal to 20 percent of its capital. The BSP has changed these ratios several times in the last 5 years to prevent banks from using their dollar resources for speculation. Most recently, it has required banks to consolidate their accounts with subsidiaries and affiliates when computing their net foreign exchange positions. The foreign exchange exposure of the bank must be revalued on a monthly basis. The foreign exchange deregulation allowed the country to attain the Article VIII status of the IME This means that the Philippines has already achieved current account convertibility. The same, however, cannot be said for capital account. Although the capital account of the balance of payments has been substantially liberalized in the last few years, it is still far from being fully convertible. In fact, some of the controls were tightened in response to the crisis. It should be pointed out, however, that the remaining capital controls in place are milder than those recently imposed by Malaysia and Chile. Earlier discussions show that the Philippines has already undertaken wide-ranging policy reforms to restructure the economy in the last 20 years. Economic restructuring, however, is far from being complete and more reforms are expected in the coming years. It is clear though that the implementation of reforms did not show a pattern close to the optimum order of economic liberalization proposed by McKinnon. Although liberalization of the capital â&#x20AC;˘account started much later than liberalization of the current account, it, however, was done much faster than the latter. Should the Philippines impose additional capital controls? It is worthwhile to review briefly some factors that would show the vulnerability of the Philippine economy to a currency crisis and the effects of the huge peso depreciation on corporate debt and bank balance sheets. After a lackluster performance in the 1980s, the Philippine economy showed marked improvements in the 1990s. GDP growth rate had been increasing during 1992-96, peaking at 5.8 percent in 1996. Concomitant with this was the rapid expansion of the business sector. To finance growth, the business sector had been borrowing heavily from the banking system. Thus, the total outstanding loan of the commercial banking system to the business sector rose to 52 percent of GDP in 1996, which was double that of 1993, and


370

Economic

crisis... Once more

which peaked at 58 percent in 1997 (Table 5). There were indications that the proportion of business sector loans denominated in foreign currency had been increasing in the 1990s. For instance, total loans of FCDUs of the banking system rose from 4.4 percent of GDP in 1993 to 13.1 percent in 1996 and peaked at 17.4 percent in 1997 (Table 5). 11 The business sector, particularly the "blue-chip" companies, had also been relying increasingly on foreign loans. Its share in the total foreign exchange liabilities of the country rose from 15.5 percent in 1992 to 21.8 percent in 1996, and increased further to 27.5 percent in 1997 (Table 6). The share of domestic banks in the total foreign exchange liabilities of the country had also been increasing--from 2.6 percent in 1992 to 12 percent and 11.8 percent in 1996 and 1997, respectively. This suggests that the domestic banking system had been actively intermediating foreign loans most probably for less reputable corporations that could not directly access foreign capital. Banks then undertook both maturity and currency transformation, opening up to additional sources of weakness. amotmt

One indicator of vulnerability of the country to a currency run is the of short-term loans and debt-service payments that could be covered

by the gross international

reserves available

at the Bangko Sentral ng Pilipinas.

Foreign creditors may not renew their short-term foreign loans the moment they see a marked deterioration in the domestic economy. Although the outstanding short-term foreign loans remained relatively stable during 199295, it declined when expressed as a percent of total foreign exchange liabilities of the country (Table 7). In 1996 and 1997, however, short-term foreign loans, both in terms of outstanding amount and as a percent of total foreign exchange liabilities of the country, rose markedly. Based on the ratio of debt-service payments plus short-term debt to gross international reserves, the Philippines' vulnerability to a currency run had declined substantially since 1992. The ratios, however, were still high even when compared with those of Thailand. The ratio of M3 to gross international reserves, which also indicates the degree of financial vulnerability of the country as residents may try to obtain foreign currency for their domestic currency holdings during periods of economic instability, has been very high in the 1990s. Meanwhile, net portfolio inflows increased significantly in 1995 and 1996, making the country more vulnerable to a currency run. In fact, it became negative in 1997 as a result of currency instability. Increased reliance on foreign currency-denominated loans and rise in portfolio inflows, particularly in the 2 years immediately preceding the July 1997 currency crisis, could be attributed tO a combination of two factors: the relative stability of the exchange rate especially in 1995; 1996, and the first 6 'I 11These are foreign cun-ency-denominated of banks.

loans fi'om!the foreign currency

deposit

units (FCDUs)


Table 5. Structure of loans of the commercial banking system (In million pesos). 1990

1991

1992

1993

1994

2t5,631.86

230,783.61

278,040.32

376,176.66

483,937.94

42.02

41.63

44.46

48.69

49.57

53.34

4,265,97

4,920.54

8,433.57

9,252.72

8,386.55

1.98

2.13

3.03

2.46

2,992.22

3,323.01

4,317.45

%of total loans

1,39

1.44

4. FCDU loans (US $ Million)

879 20.54

1. Total loar_, net " % of total assets b Z Res_ctured

loans, net

% of total loans 3. ROPOA, net

% of total FCDU assets

1995

1996

678,679.98 1,117,966.31

1997

Apr-98

t,400,081.67

1,378,635.33

58.06

54.58

55.57

5,289.13

13,257.97

14,271.35

t5,624,68

1.73

0.78

1.19

1.02

1.13

7,860.50

8,913.08

8,762.05

10,898.42

18,406.90

23,018.98

1.55

2.09

1.84

1.29

0.97

1.31

1.67

741

1,697.00

2,344.00

3,478.00

5,323.00

10,811.00

10,547.00

9,317.00

16.42

29.36

32.98

35.62

43.17

54.65

46.25

45.82

â&#x20AC;˘ Excluding interb_k loans. _"1994, 1997, and 1998 were based on unadjusted total assets. Source: Baxlgko Senualng Pih'p/m,s. t.,,a "..4


L,o

Table 6. Total foreign

exchange

liabilities:

by borrower

14.67 7.28

Bangko Sentral Commercial banks

2,372

739

1,288 2,010

3_62 5.66

855 3,288

2.21 8.49

1,212 4,240

3.00 10.77

1,415 . 7,217

3.38 1723

2,499 8,165

5-50 17.97

3,275 7,811

7.17 17A1

Goverv, ment banks b Private banks

924 1,448

2.88 4.51

1,489 521

4.19 1.47

2,308 980

5.96 2.53

2,240 2,000

5.69 5.08

1,838 5,379

4.39 12.85

2,187 5,978

4_1 13.16

2,162 5,649

4.73 12.37

603 845

1.88 2.63

422 99

1.19 0.28

376 604

0.97 1.56

259 1,741

0.66 4.42

348 5,031

0_ 3 12_1

609 5,369

1.34 11.82

686 4,963

1-50 10.87

27,381 22,406 22,406

8533 69.82 69_2

4,975

15,50

32,236 26,940 25,293 1,647 5,296

90.72 75.81 71.18 4.63 14.90

34,580 27,721 26,015 1,706 6,059

89.30 71.59 67.18 4.4I 17.71

33,9t5 26,664 25,172 1,492 7,251

86.15 67.73 63_94 3.79 18.42

33,244 24,132 22,943 1,t89 9,112

7939 57.63 54.79 2_4 21.76

34,768 22,271 21,39_ 878 12,497

76-53 49_02 47.09 1.93 27-51

34,575 22,063 21,227 836 12,512

75.72 48.32 46.49 1.83 27.40

1,053 32,089

3.28 100.00

1,097 35,535

3.09 100.00

508 38,723

1.31 100.00

426 39,367

1.08 100.00

421 41,875

1_)1 I00.00

496 45,433

1_9 100.00

498 45,662

1.09 I00.00

a

Foreign banks Domestic banks Public and private Public Public-NGO & others C_ BOL Private of w/c: Red dause Advances / exportadvances Total

1993 3,298

9.28

4,143

uS dollars).

4,709 2,337

Banking system Central Bank

1994

% of total

in million

1992

Item

% of total

(End of period,

% of total

Effective 3 July 1993, accounts o[ old CB were split between Accounts of the Development Bank of the Philippines have Source: Bangko Sentral ng Pilipinas.

1995

% of total

1996

% of total

1997

% of total

March 1998

% of total

10.7

5,452

13.85

8,632

20.6l

10,664

23.47

11,086

24.28

Bangko Sentral been reclassified

ng Pilipinas & Central Bank - Board from public nonbanking to banking

of L/quidators. sector liabil/ties

-_)

_. starting

1996. _

._. O t_ _o


,째

Table7.Debt-service, short-term foreign loans, andnetportfolio inflow(Inmillion US dollars). Year

Short-term (ST)foreign loans Outstanding % of total foreign loans

Debt-service payments

GIR

M3

Exchange rates: P/$ (end-of-period)

(Debt-service + ST foreign loans) G IR

1992 1993 1994 1995 1996 1997

5,256.00 5035.00 5,197.00 5,279.00 7,207.00 8,439.00

16.379 14.169 13.421 13.41 17.211 18.575

2336.00 3,973.00 2,892.00 3,458.00 5,047.00 7,207.00

5,218.14 5,801.47 6,994.62 7,632.62 11,620.04 8,649.63

15354.18 17329.24 24881.65 29051.13 33526.06 26663.58

25.10 27.70 24.42 26.21 26.29 39.98

1.455 1.55_ 1.156 1.145 1.055 1.809

Jurt-98

8,162.00

17.830

3,641.00

10,448.02

25726.02

42.09

1.130

Jan-Jun 1998. Source: Bangko Sentral ng Pilipinas.

Net po_olio inflow Levels % of GNP

M3/ GIR

155 897 901 1,485 2,101 -406

0.29 1.62 1.37 1.95 2.44 -0.47

2.94 2.99 3.56 3.81 2.89 3.08

0.56

2.46

389 _


3 74

Economic

crisis... Once mo_re

months of 1997, and the fairly large spread between domestic and foreign exchange rates (Table 8). The peso was pegged to the US dollar, albeit informall3# even though its trade with the US was roughly 25 percent of its total trade. When the dollar appreciated sharply against the yen and European currencies after 1995, the Philippine peso also appreciated sharply against these currencies. Although the peso looked stable at P26.20-26.38 until June 1997, it actually appreciated against the yen and other major European currencies, except for the British potmd3: The Bangko Sentral had engaged in sterilized intervention during this period to meet monetary targets of the government and IMF. This occurred against a background of a relatively open capital account. Because of the wide spread between domestic and foreign interest rates, several domestic corporations resorted to borrowing in foreign currency abroad or from FCDUs of domestic banks. In many instances, banks encouraged their clients to borrow in foreign currency. Most of these loans were unhedged on the expectation that the exchange rate would remain the same. Also, most corporations were unfamiliar with hedging instruments. Because of the sharp depreciation of the peso in July 1997, many corporations became more heavily indebted. Table 9 shows that most of the debt-to-equity ratios of the top 1,000 corporations in the country classified by sector inched up in 1997, suggesting that they had a fair amount of foreign currency-denominated debts. The subsequent risein domestic interest rate and slowdown in demand had further weakened the financial conditions of many corporations. 13 The sad plight of the corporate sector contaminated the balance sheets of banks. Nonperforming loans of the banking system rose from 4.0 percent of total outstanding loans in June 1997 to 10.11percent in May 1998, and slightly went down to 9.7 percent in June 1998 (Table 10). One small commercial bank and six thrift banks were closed by the Bangko Sentral, while two mediumsized thrift banks were rescued by large commercial banks during the first 10 months of 1998. Should the Philippines then impose additional capital controls to mitigate the impact of the regional crisis on the domestic economy and avoid encountering similar problems in the future? The answer is no for several reasons. First, let us take the sequencing of liberalization argument for imposing capital controls. As mentioned earlier, the Philippines did not adhere to the optimal sequence of liberalization suggested by McKinnon, which might have contributed to the currency crisis. Thus, imposing additional capital controls is u Wyplosz (1998) calculated that the real exchange rate :appreciated by 47 percent during 1990-97. 1_ Admittedly, some companies would have collapsed anyway even in the best of economic environments.


Chapter H: Lamberte

375

Table 8. Nominal exchange rate and interest rate spread. Year

1992

1993

1994

1995

1996

'1997

Nominal exchange rate (S/P)

91-day T-bill

Interest rate spread 90-day LIBOR

Spread

19922 1992.2 1992.3 1992,4 1993.1 1993.2 1993,3 1993,4 I.994, l 1994.2 1994.3

25.38 25.58 25.1.2 25.10 25.51. 27.27 29.81 27.70 27.57 26.91 26.(.10

18.74 i5.08 15.62 14.77 13.31 10.75 10.88 14.36 15.05 14.74 !1.45

4.39 4.00 3.28 3,63 324 334 3.12 336 3.89 4.64 .5.12

14.35 H.08 12.34 11.14 10.07 7.41 7.76 11.00 11-16 10.10 6.33

1994.4 1995.1 1993.2

24.42 25,99 25.58

9,64 11.24 14.14

6,38 6.27 6.01

3.26 4,97 8.13

1.995.3 1995.4 1996.i 1996,2 1996.3 1996.4 1997./. 1997.2 1997.3 1997.4

26.07 26,21 26.20 26.20 26,26 26.29 26,37 2638 33.$7 39,98

[0.05 1/),94 12.76 12.91 12.10 11.59 10,54 1.0.45 13.90 16,70

5.86 5.75 539 5.56 5.62 5.55 5.61. 5,80 5.72 5.91

4,19 5,19 737 7.35 6,48 6.04 4,93 4,65 828 10.79

Sottrce: Bangko Sentral

ng Pilipinas.

Table 9. Average debt-equity ratio of top 1000 corporations Philippines, by sector. Sector

in the

1996

1997

Agriculture, Hunting, and Forestry Fishing Mining and Quarrying Manufacturing Electricity, Gas, and Water Corkstl_action Wholesale and Retail Trade Hotels and Restaurants

1.6404 2.4864 0.4409 1.2381 2.3791 1.7279 2,2953 0.7628

1.7116 3.2378 0,7239 1.6124 3.1262 2.2961 2.7589 1.0447

9 Transport, Storage, and Communication 10 Financial Intermediation

1.7208 2.7735

2.8850 2.9234

0.7065

0.8708

0.2827 0.3435

0.1898 0.2408

0.6025

0.7071

0.8429

1.1038

1 2 3 4 5 6 7 8

11 Real Estate,

Renting,

and Business

12 Public Administration 13 Education 14 Health 15 Other

and Defense;

Activities Compulsory

Social Security

and Social Work Community,

Source: BusinessWofld

Social, and Personal

Top 1000 Corporations

Service

Activities

1997-98.


376

Economic

Table

10. Nonperforming - latest

loans

available

Year

loss

provisions,

of total

loan).

NPL

annual

more

data:

Loan loss provision TBs RBs

1980

TBs

RBs

Total

KBs

1980 1981 1982

10,966 13.440 15,352

5.623 16,530 7.281

26,976 26.290 20.204

11.288 14.106 15.203

2.062 0.933 1.270

0,168 0,358 0.475

1.783 2,516 1.954

L950 0.964 1.265

1,983 1984

12.072 21,013

7.961 15.070

2Z215 36.272

12.232 21.245

1.327 2.537

0.472 0,667

2.301 2.905

1.319 2.465

1985 1.986

22,637 20.442

15.478 1.4.358

42.752 41.811

23.057 20.879

3,452 22.228

1.137 1.115

3.315 3.638

3.345 20.591

1987 1988 1.989

13.71.4 10.797 8.236

9,895 8.030 6.684

37.295 34,906 31.239

14.492 11.618 8,941

8.035 5.966 5.424

0.837 0.854 0.691

3.990 4_078 4_181

7.308 5.483 4.968

1990

7.175

7.238

28.502

7.863

4,683

1.403

4.252

4.417

1991 11992

6.612 6.1.32

7.605 7,870

26,331 24.426

7.308 6.837

4.008 3.395

1,792 1.724

4_160 3.765

3.829 3.266

1993 1994

4_708 3.931

6.017 8.359

21,327 18.166

5.267 4,711

2.628 1.883

1.365 3.077

3.281 3,219

2.546 2.027

1995 1996 1997

3,233 2_799

7.894 7.741

1.6.068 14,139

3.983 3,513

1.591 1.240

2.665 2.685

2.758 2,036

1,718 1,387

Mar

3.294

7.434

14.858

3.946

1..319

2.271

2.022

1.422

Jun

3,373

7,742

1.4.633

4.030

1.305

2.106

1_941

1..393

Sep Dec

3,962 4.688

10.091 110.633

14,950 16_177

4,756 5.433

1.435 2,211

2,166 3.119

1_847 1.953

1.509 2.275

1,998 Mar

7,420

14.321

16.177

8,167

2.590

3.564

1,953

2.651

Apt May June

8.595 9.441 8.947

16.263 16.090 16.760

16.177 16A77 1,6.177

9,371 10.127 9,710

2.678 2.744 2.744

3.658 3.492 3.949

1.953 1.9,K3 1.953

2.737 2.784 2.818

Sentral

ng Pilipinas,

justifiable

until

be argued

the other

is still

fully

not

reforms

accelerate

sectors

however;

convertible,

could

Experience many

sectors

in the

Philippines

maintain

taxes

whose

the status

quo

in other

areas

on financial

â&#x20AC;˘

are completed.

sector is still a highly protected trade sectors. Some tax measures

financial

Total

It could

capital

account

on the capital

account

of the

economy.

For

sector. The same is true also need to be reviewed

instruments

create

substantial

market.

clearly

shows

of the economy. is that

economy

is, the, Philippines,

of reforms

For instance,

in the

of the

that

implementation

rationalized.

distortions

in other

way,

instance, the agriculture with utilities and retail and

loan

percent

Once

KBs

Source: Bangko

but

and

(In

crisis...

The

it could

that

it is very

danger be viewed

difficult

of imposing

to introduce additional

a_ a weakening

capital

reforms controls

in the government's

in


Chapter 11:Lamberte

377

resolve to continue with or to hold on to reform measures already in place and could open the floodgates for reregulating many sectors of the economy. In fact, there has been strong clamor from certain industries for more protection from competing imports since the onset of the crisis. The same sectors are asking for rationing of available foreign exchang e in their favor. In the end, the cost of imposing additional capital controls just to abide by the proposed proper sequencing of reforms could be more costly to the economy. The liberalization process outlined by McKinnon should take into account the starting condition of the country Cer tainl)5the Philippines is already far advanced in terms of liberalization. That there is yet no persuasive case for gradualism as pointed out by Dornbusch should make us extra cautious in imposing additional capital controls. Second, let us take the argument that the Philippines should impose selective capital controls similar to those of Chile, favoring long-term capital and discouraging short-term capital, which is very volatile. As pointed out earlier, some studyresults do not show persuasive evidence that Chile's selective capital control policy had been effective. Market participants can always find ways to circumvent regulations. The danger is that, to avoid controls, capital flows are channeled through riskier, less regulated financial institutions and instruments. Before the 1990s, the Philippines had rigid capital controls; still, a massive capital flight occurred during the 1983-84 balance of payments. The timing of imposing selective capital controls is also awkward because of the present direction of capital flows. More importantly, Chile's recent decision to relax its controls on capital to attract more foreign capital during this lean period signals to other emerging economies that this is not the right time to impose such measures to prop up a sagging economy. If the Philippines opts not to impose capital controls, then how can it reduce its vulnerability to a crisis similar to the ongoing East Asian currency crisis? If we look at the analysis made earlier, we can identify three factors that greatly contributed to the vulnerability of the Philippines to such a crisis: inappropriate exchange rate policy, poor corporate governance, and inadequate prudential regulations for banks. These three interrelated factors must be addressed squarely As shown earlier, the exchange rate was relatively stable, especially in 1995 and 1996, which co_d be attributed largely to the sterilization measures adopted by the Bangko Sentral. 14This could have been taken by market players as a signal that the country preferred to have a fixed exchange rate, at least informall_a The defense of the peso made by the Bangko Sentral during the first few days of the crisis merely reinforced this view. Given the wide differential 14Lamberte(1995)foundthispolicytobeineffective.


378

Economic

crisis.,. Once more

between domestic and foreign interest rates, the relatively stable exchange rate made it attractive for domestic corporations and banks to borrow abroad. Were a more flexible exchange rate policy adopted, domestic corporations and banks could have been made aware of the risks they were facing when they contracted foreign currency-denominated debts. Related to this is the lack of awareness of the corporate sector to hedging instruments. Exporters had a natural hedge, but domestic-oriented corporations, which contracted foreign currency-denominated debts, lacked that natural hedge. Instruments for hedging and managing risks, therefore, need to be developed and fully understood by market players. Hedging instruments can redistribute risks and assign them to those who can manage risks very well. Borrowers need tO understand that acquiring hedging instruments comes with a price, which increases the effective cost of borrowing. In fact, ff borrowers had only hedged their foreign currency-denominated loans, the interest rate differential could have been smaller than if their borrowings were unhedged. The difference, however, is that the price borrowers have to pay for buying hedging instruments could be lower than the losses they incur if the exchange rate moves against their position. In any case, borrowers have to weigh heavily this factor before deciding to borrow in foreign currency. In this modernworld, the private corporate sector serves as the principal engine of growth of the economy. The Philippines can attest to this, especially when the corporate sector grew significantly in number and asset size in the 1990s. The sector, however, needs good corporate governance to sustain its growth. Corporate governance is the assurance by a corporation that its assets will be managed in the best interests of owners and stakeholders. Corporate governance, however, had been weak in many Philippine corporations. There are many cases in which management and controlling owners of corporations misused corporate assets (e.g., expanding plant capacity without rigorous feasibility study, buying or establishing subsidiaries, etc.), often appropriating for themselves hefty salaries and bonuses despite deteriorating corporate financial conditions. This is because existing governance instruments did not provide corporate owners and management with the incentive to use resources efficiently. For instance, disclosure of material information is not given emphasis. Even publicly listed corporations have remained opaque to most investors, especially foreign investors. Foreign investors, such as those on !mutual interested in the management control of corporations

funds, are usually not but in the value of their

stocks. When the controlling majority and management of a corporation pursues objectives other than profitability, such as expansion of market share and diversification,

which

are financed

through

excessive

borrowing,

foreign


Chapter

11: Lamberte

379

investors will likely divest themselves quickly to preserve the value of their money Indeed, the 1990s witnessed the expansion of many corporations well beyond their core competencies. While lack of transparency yields opportunities for making huge profits that warrant taking large risks, it, however, can make the market susceptible to herd behavior--that is, once doubts start, a crisis can be self-fulfilling (Sachs 1998). Overoptimism based on lack of information about conditions of corporations could easily change to overpessimism. A culture of transparency and timel3_ accurate information, however, can restrain the boom by enabling investors to assess risk more accuratel3_ and it can cushion overreaction once a downward slide begins (Reisen 1998). Finally, it is important to point out that a currency problem may originate from the banking system or from the corporate sector, which can affect the banking system and ultimately affect the entire economy. A safe and sound banking system, however, will be resilient even with sudden changes in investor sentiments. This, of course, requires effective prudential regulations to ensure that banks lend and invest safely, and that owners put enough of their own money at risk to discourage them from gambling with depositors' money. The Philippine banking system entered the 1990s with a much healthier balance sheet because weak banks were weeded out in the wake of the BOP crisis in the mid-1980s. With the deregulation of the financial sector in the 1990s, however, new banks entered the banking system, enhancing its competitiveness. This occurred against a weak regulatory system. For example, the "fit-andproper rule" was not applied in licensing new banks, allowing new investors with little background and experience in banking to establish banks. Risk-based capital standards were not put in place. Best practices in loan loss provisioning to ensure that banks' financial capital is intact were not applied. The lack of transparency and inadequate disclosure requirements of publicly listed banks did not encourage the establishment of good internal governance. A system of prompt corrective action that specifies actions for regulators as bank conditions deteriorate was not put in place. Delays in taking action on ailing banks had weakened the public confidence in the banking system. Given this background, destructive competition would naturally arise. Newly established banks took on more risks without adequate capital backing, encouraging other banks to do the same. Some banks even encouraged their clients to borrow in foreign currency without explaining to them that they will be exposed to currency risk, aside from the interest rate risk. Admittedl3_ a good banking regulatory system will take some years to develop. Aside from overhauling the General Banking Act, the capacity of supervisory staff of banking systems needs to be upgraded. This is a propitious time to start reforming the regulatory system for banks and upgrade the capacity


380

!I

Economic

crisis... Once more

1

of supervisory agencies because short-term capital inflows will unlikely reach the level of that achieved before the currency crisis in the next few years. Foreign investors are now more cautious when _t comes to investing in emerging economies, not to mention the fact that yields on financial instruments in the US and European countries have lately beeome very attractive to investors. Conclusions This paper reviewed the arguments for and against imposing additional capital controls in the Philippines and discussed the liberalization process undertaken by authorities since the 1980s. The conclusion arrived at is that the country does not need to impose selective capital control as Chile did. To make the country less vulnerable to a currency crisis like the East Asian currency crisis, however, three major measures are !recommended: adopting a flexible exchange rate; improving corporate governance; and strengthening the banking system by improving prudential regulations to make the economy more resilient to sudden changes in investors' sentiments.


Chapter 11:Lamberte

381 References

Corbo, V. and J.de Melo. 1985. Liberalization with stabilization in the Southern Cone of Latin America. World Development Report. Corsetti, G., P.Pesenti, and N. Roubini. 1998. What caused the Asian currency and financial crisis? Unpublished paper (September). Dornbusch, R. 1998. Capital controls: an Idea whose time is gone. MIT (March). Edwards, S. 1998. Capital flows, real exchange rates, and capital controls: some Latin American experiences. A paper presented at the National Bureau of Economic Research Conference on Capital Flows to Emerging Markets, Cambridge, Massachussetts (February). Fischer, S. 1998. Economic crises and the financial sector. A paper prepared for the Federal Deposit Insurance Corporation Conference on Deposit Insurance, Washington D.C., 10 September 1998. Greenspan, A. 1998. Testimomy of Chairman Alan Greenspan before the Committee on Banking and Financial Services. US House of Representatives. 30January. Grenville, S. 1998. The Asian crisis, capital flows and the international financial architecture. A talk delivered at the Monash University Law School Foundation (May). Griffith-Jones, S. 1998. How to protect developing countries from volatility of capital flows? A paper prepared for the Commonwealth Secretariat for the Expert Group Meeting, London, 15-17 June 1998. Johnston, B.H. 1998. Sequencing capital account liberalization and financial sector reform. IMF Paper on Policy Analysis and Assessment (July). Krugman, P. 1998a. Saving Asia: it's time to get radical. Fortune Investor (7 September). Krugman, P. 1998b. An open letter to Prime Minister Mahathir (1 September). Krugman, P. 1998c. What happened to Asia? Massachusetts: Massachusetts Institute of Technology [cited January 1998]. http://web.mit.edu/ krugman/www/disinter.html Lamberte, M.B. 1995. Managing surges in capital inflows: the Philippine case. Journal of Philippine Development, No. 39, Vol. XXII, First Semester. Manila, Philippines. Manasan, R.G. 1998. Fiscal adjustment in the context of growth with equity, 1986-1996. PIDS Discussion Paper Series No. 98-11 (December). McKinnon, R.I. 1991. The order of economic liberalization: financial control in the transition to a market economy. Baltimore: The Johns Hopkins University Press.


382

Economic

crisis... Once more

I

Medalla,

E.M. 1998. Trade and industrial policy beyond 2000: an assessment of the Philippine economy. PIDS DiscUssion Paper Series No. 98-05 (May). Radelet, S. and J. Sachs. 1998. The onset of the East Asian financial crisis. A paper presented at a seminar at USAID, 29 January 1998, and at the National Bureau of Economic Research (NBER) Currency Crises Reinhart,

Conference, 6-7 Februar)_ C.M. and R.T Smith. macroeconomic (20 March).

1997a.

_roo much I

of a good

effects of taxing capital inflows.

thing:

Unpublished

the

paper

Reinhart, C.M. and R.T. Smith. 1997b. TempOrary capital controls. Unpublished paper (August). Reisen, H. 1998. Domestic causes of currency crises: policy lessons for crisis avoidance. Technical Papers No. _136, OECD Development Centre (June). Roubini, N. 1998. Asian crisis: an interview With Nouriel Roubini (27 January). Sachs, J. 1998. Creditor panics: causes and r_medies. A paper prepared for the Cato Conference on Money in the New Millennium, 22 October. Wyplosz,

C. 1998. Globalized financial markets and financial crises. Geneva: Graduate institute of International _tudies (April). Young, A. 1992. A tale of two cities: factor a_cumulation and technical change in Hong Kong and Singapore. NBER Macroeconomics Annual, MIT Press.


12 A Second Look at Credit Crunch: The Philippine Case Mario B. Lamberte*

wo years after the East Asian financial crisis struck, the Philippines

is

finally seeing a light at the end of the tunnel. Gross domestic product (GDP) grew by 1.2 percent in the first quarter of 1999 and by 3.6 percent in the second quarter. Inflation rate fell to a 23-month low of 5.7 percent in July 1999. Meanwhile, the bellwether 91-day T bill rate dropped to 8.5 percent on 6 July 1999, the lowest in the last 12 years. In June, gross international reserves reached a record high of US$14 billion, which covered more than 4 months of imports. A dark

cloud, however,

seems to be lurking

at the end of the tunnel.

Despite an improving Philippine economy in the past few months, recent statistics still show that bank loans have continued to shrink. The seeming reluctance of banks to lend has worried policymakers and some analysts because this could undermine the strength of the economic recovery. In fact, many people are now ganging up on banks for not expanding their loans fast enough to support the expected economic turnaround, screaming "credit crunch!" Is there really a credit crunch? If so, what factors have caused it? These were the questions that the Economic Monitoring Group (EMG) attempted to answer when it called representatives from the business sector, bankers associations, and academe to a meeting at the Bangko Sentral ng Pilipinas (BSP) on 25 June 1999. Although there was a lack of consensus on the issue about the existence and causes of a credit crunch since the onset of the East Asian financial crisis, participants of the EMG-led meeting forwarded some recommendations to encourage financial institutions to increase the flow of credit to the private sector. "Theauthor wishes to acknowledge the research assistance provided by Ms. Chelo Manlagnit and Ms. Hope Gerochi and the secretarial assistance of Ms. Juanita Tolentino.Thanks are due to the participants ofthe seminar held on 25 August 1999,wherein the draft of this paper was discussed.


384

Economic

crisis.., Once more

This paper attempts to revisit those questions and amplifies some of the points made in an earlier paper on the credit crunch issue in the Philippines during the East Asian financial crisis. 1 To pu i this issue in a proper perspective, the next section briefly discusses literature o_ the credit view and credit crunch. The third section presents a conceptual definition of credit crunch and a simple theoretical framework for detecting its exisfence. The fourth section discusses the necessary and sufficient conditions for its existence, while the fifth section provides an empirical analysis of its existerlce in the Philippines using macro and firm-level data. The sixth section briefly! discusses what can be expected in the near future, while the last section makes some policy recommendations. Credit view and credit crunch At first look, the credit crunch problem

looks like a simple operational

problem. It, however, actually forms pant of the literature on monetary transmission mechanisms and business cycle.Z The traditional Keynesian view, whic h is also referred to as the money vlewor the textbook I$-I, Mmodel, consider_ only two financial assets, namely, money and bonds. All nonmoney assets, stlch as bonds, commercial papers, stocks, bank loans, etc., are assumed to be p_rfect substitutes. Thus, monetary policy is transmitted to aggregate demand _hrough a single interest rate, the bond rate. It can be summarized as follows: M t _i

_ I t aY[

(1)

where Mis money supply; ir, real interest rate;/, investment; and Y, output. That is, an expansionary monetary policy reduces the real interest rate, which leads to increased investment, which is a component of aggregate demand, and to a rise in output. Variants of this model include exchange rate and equity prices as channels. The effectiveness of monetary policy depends on the elasticity of the demand for money. The money view does not have a banking sector, and therefore, credit movements do not exert an independent influence on economic activity. The money view has been challenged by the so-called credit vie_. 3 This new view assumes that there is imperfect substitution among nonrrtoney assets. For example, bonds and bank loans are not perfect substitutes. Another example is that credit instruments available to large corporations are different from those available to small corporations. Likewise, savings instruments available to large savers are different from those available tO small savers. The credit view,

See chapter 5 of this book. Neumann (1995) and Mishkin See Brurmer

and Meltzer

(1996) provide

(1988); Bernanke

an excellent review.

and Blinde_ (1988); Bernanke

(1993), among

others.


Chapter 12: Lamberte therefore,

emphasizes

385 the interplay

between

credit and economic

activity. The

implication of this view is that disruptions in credit markets can have significant effects on output and employment. Therefore, monetary authorities must use other tools to influence the credit supply. The credit view suggests two new channels of influence for monetary policy, which arise as a result of information problems in credit markets. One is referred to as the "balance sheet channel," which emphasizes the effects of changes in monetary policy through balance sheets of consumers and firms. More specifically, an increase in money supply leads to a rise in equity prices; hence, the net worth of firms improves. This reduces adverse selection and moral hazard problems,

which encourages

process can be summarized M t _ Pet

banks to lend to firms. The whole

as follows:

* adverse selection

_ moral hazard _ _ lending

t _ I t * Y ? (2)

P refers to equity prices. Adverse selection refers to the problem of distinguishing good-risk borrowers from bad-risk borrowers before making a loan, while moral hazard reflects the lenders' difficulty in monitoring borrowers after making a loan. The other variables are defined as above. The other channel of influence is referred to as the "bank lending channel," which states that changes in monetary policy affect bank deposits and, hence, banks' loanable funds. The increased supply of bank loans encourages investment,

which, in turn, affects output. That is, M ? =_bank deposits

t _ bank loans

Accordingly, monetary policy will have different firms. More specifically, loan-dependent firms, affected more by changes in monetary policy than to alternative fund sources, such as the securities

t _ I _ _ Y t (3)

impacts on different types of such as small firms, will be large firms, which have access market.

What is a credit crunch? The rapidly growing literature on the "credit crunch" has emerged with the debate between money view and credit view providing a backdrop. According to Kliesen and Tatom (1992), the phrase "credit crunch" first appeared in mid-1966 when the US Federal Reserve Board instituted a restrictive monetary policy to slow the growth of demand for goods and services in order to fight inflation. Since then, credit crunch had been used to describe credit contraction associated with high interest rates? The character of a credit crunch in the US, 4In its 7 August 1999 issue, The Ecoaomistwarns of an impending credit crunch in the US as demonstratedby thewideningin spread ofcorporate-bondissuesandmortgage-backedsecurities.


Chapter 12: Lamberte

393

with that of the credit ratio since the first quarter of 1997. After rising in the third quarter of 1997, the spread tended to narrow in subsequent quarters. In fact, the spread became much thinner in 1998 when the growth in bank loans became severely negative compared with the previous year. Results, therefore, do not satisfy this particular condition for the existence of a credit crunch.

Figure 5. Percent change in the ratio of commercial bank loans to GDP and spread between lending rates and 91-day T-bill rates, 1997.1 - 199912. Growth

ratas

Spread

30

5.0

10

3.0

200

__ 1997.1

1997.2

"1997,3

1997,4

1998.1

-I0

_ 19.t8_,1

I

I

_

|

1

1

I 1999,2 J

4.0 2,0 1.0

-20

0,0 Period

I

--C_o_thR._

--- sp_aa J

The third condition that was examined was the unwillingness of banks to lend caused by the tightening Of regulatory standards, which could result in widening the intermediation spread. It appears from Figure 6, however, that bank intermediation spread has not widened since the onset of the East Asian financial crisis, except during the first quarter of 1998. Thus, this condition for the existence of a credit crunch has not been satisfied. Evidence from firm-level data A survey of 541 firms was recently conducted by the National Statistics Office (NSO) with financial support from the World Bank to determine the impacts of the East Asian financial crisis on the manufacturing sector. '4 Of the total number of firms surveyed, 69percent claimed to have experienced a decline in output since July 1997. Some of the data can be used to answer the question of whether the information asymmetry problem was aggravated in the Philippines during the crisis period from the point of view of firms.

_4See Chapter

5 of this volume.


394

Economic

Figure 6. Percent

change

in the ratio of commercial

and spread between -1999.2. Growth

lending

bank loans

rates and time deposit

to GDP

rate, 1997.

rates

30 25

crisis,,. Once more

Spread

I _

:7

I

10 -4

5

15 -5 -10

_ 1997.t

i__._1 1997.2

i_

1997.3

1997.4

1998.1

.5 1998._998,3

I998.4

-]5

1999-1

1999.2

_

.. 2 â&#x20AC;˘ 1

-20

0 Period

I

--

Growth Rates

_

Spread

]

For pure credit rationing, survey results show that the proportion of firms denied bank credit rose from 6.4 percent before the onset of the Asian financial crisis, i.e., January to June 1997, to 13 percent during the crisis period (Table 1). Although the percentage of those who admitted having been denied loans by a bank or finance company had doubled during the crisis period, it was still much smaller than what was generally expected considering the economic uncertainty brought about by the East Asian currency meltdown. A great majority of the sample firms still have continued access to credit from a bank or finance company during the crisis period.

Table 1. Enterprises

denied

of bank loans (In percent). 1 Januar 30 June 1997

1 Jul 31 December 1997

So fa in 1998

A Enport orientation 1. Enporters 2. Nonex.porters

6,61 6.28

11.98 12,56

14.34 11.61

B By finn siz 1. Small 2, Larg

5.24 7.56

8.66 15.68

11.16 14.77

C Total

6.42

12.21

12.98

Source: Surveys of Philippines Industry and the Finar_cialCrisis (1998).


Chapter 12: Lamberte Before admitting

395 that pure credit rationing

intensified

during the crisis

period, it is important to find out if banks have a good basis for denying loan applications of some firms during the crisis period. Heavy debt exposure of firms could be one of the reasons for denying loans. Survey results show that the average debt-equity ratio of firms that were denied bank loans increased from 3 in 1996 to 5.1 during the first half of 1998, whereas the debt-equity ratio of firms that were able to access bank credit declined from 3.5 to 2.7 in the same period (Table 2). This means that banks were able to sort out risky from less risky borrowersbased on customers' debt exposure. These results do not support the view that pure credit rationing intensified in the recent past. In sectoral credit rationing, it is generally expected that during periods of economic uncertainty accompanied by sharp currency depreciation, banks will discriminate against small firms and nonexporters and favor large firms and exporters. Survey data in Table 1, however, do not support this view. The proportion of exporters denied bank loans during the crisis period had increased more than that of nonexporters (beginning vs. end period), is Both small and large firms saw a doubling in the proportion of firms denied bank loans during the indicated period. 16 Indeed, results do not confirm the existence of a credit crunch during the crisis period. Rather, it is argued that the decline in the quantity of bank in the most recent past merely reflects normal cyclical phenomenon; that decline can be mainly attributed to the decrease in demand for credit due economic downturn. First, economic growth rate already slowed down before the East Asian financial crisis hit the Philippines. More specifically, Table 2. Debt-equity Period

loans is, the to the even after

ratios (In percent). Denied

bank

loans

Given bank loans

Median

Mean

Median

Mean

1996

2.06

3.00

2.32

3.51

199

3.18

4.43

2.36

3.52

1998: first hal

4.03

5.10

1.96

2.68

Computation of meansexlude outliers. Source:Surveys of PhilippinesIndustryand theFinancialCrisis(1998).

1._There is anecdotal evidence that some exporters ran into financial trouble right after the sharp depreciation of the peso in _uly 1997 because they contracted dollar-denominated loans to finance their nonexporting businesses. _6Small firms are those with employment in 1996 of less than 150.


396

Economic

crisis... Once more

peaking at 6.1 percent in the second quarter of 1996, GDP growth rate declined in subsequent quarters. Second, the average capacity utilization of the 541 firms surveyed declined from 78 percent in 1996 to 69 percent during the first half of 1998 (Table 3). As expected, nonexporters and small firms experienced a larger decline in capacity utilization than exporters and large firms during the crisis period. The average capacity utilization rate of sample firms, however, already started to decline tO 75 percent during the first half of 1997. All these could have affected the firms' demand for credit in the most recent period. Credit slowdown has been associated with recession. Results

of the

analysis suggest that the recent credit slowdown episode is due to the economic downturn. To further boost results, we examined the behavior of the credit ratio and real GDP from a longer period,

say from the first quarter

of 1982,

when quarterly data on GDP started to become available, to the second quarter of 1999 (Fig. 7). During this period, there were three episodes when growth in credit ratio became negative for at least two successive quarters. The shortest occurred in the early 1990s (3 successive quarters) and the longest in the mid1980s (17 successive quarters). The first and third episodes were associated with a recession; that is, GDP shrank for at least two successive quarters. 17 The two variables----GDP growth rate and growth in credit ratio----depicted in Figure 7 seem to move together during the indicated period. Which one precedes or causes the other? Did weaknesses in bank loans lead to a recession or vice-versa?

To answer this question, Granger-causality

Table 3. Capacity Period

utilization

All sectors

tests were performed28

(In percent). Export orientation Exporters Nonexporters

Firm size Large Small

1996

78

78

77

79

76

1997 1st half

75

76

74

79

72

1997 2nd half

73

76

71

77

70

1998 1st half

69

72

65

73

65

Source:Survey of Philippine Industry and the FinancialCrisis (1998).

1_In this case, the GDP is used instead of the GNP.


Chapter 12: Lamberte

397

Figure 7. Percent change in the ratio of commercial bank loans to GDP and real GDP growth rates, 1982.1 - 1999.2. G_r_vth rat_; KB Lt_ns (as % of GDP)

Growth rate5 I_al GDP

8O

_0

15

A

_

_4_

" 10

40 _0 , I)

-40

, -10

-60

' -15 Period I '-m-Cnowthra_es:KBLL_l_s (as%ofGDP)

_Cmwthra_esRealCDP

I

Results of causality tests shown in Table 4 suggest that declines or increases in GDP growth rate preceded declines or increases in bank loans, and not the other way around as many expected. Bank loans were further categorized according to economic sectors receiving loans. For brevity, only three large borrowing sectors, namely, manufacturing, retail, and real estate sectors, were considered in this paper. The ratio of commercial bank loans to the sectoral value-added was used as the credit ratio for each of the three sectors. Results in Table 4 indicate that GDP growth rate Granger-causes or precedes manufacturing and retail loan growth rates. Such a pattern, however, is not observed in real estate loans. Additional results from the same survey also confirm the observation that the recent credit slowdown originates from the demand side as a result of depressed economic activity. Table 5 ranks the various reasons for the decline in output. The effects of the peso depreciation on the cost of raw materials and interestratewere the top two reasons for the decline in output. Firms, regardless of export orientation and size, consistently ranked decline in demand higher â&#x20AC;˘ than insufficient credit available from banks, either for working capital or for expansion, at the prevailing rates of interestas a reason for reduced output. Expectations in the near term Given such results, what then can be expected in the next few quarters? The data series in Figure 7 are quite instructive. In the 1980s, bank loans continued to decline, albeit at a decreasing rate, long after the GDP growth rate became positive. If past experience can be used as a guide to the future, then there is a possibility that the pattern just described can be repeated in the next


398

Table

Economic

4.

Results

crisis...

Once

of causality tests (1 Lag). Direction of causality

more

Results

A. GDP growth rate does not cause loan growth rate (F=4_20) Loan growth rate does not cause GDP growth rate (F=0.03)

Reject * Accept

B.GDP growth rate does not cause manufacturing loan growth rate (F=8.69) Manufacturing loan growth rate does not cause GDP growth rate (F=0.10)

Reject ** Accept

C. GDP growth rate does not cause retail loan growth rate (F--8.69) Retail loan growth rate does not cause GDP growth rate (F=0.80)

Reject** Accept

D, GDP growth rate does not cause real estate loan growth rate (F=0.13) Real estate loan growth rate does not cause GDP growth rate (F=1.12)

Accept Accept

Notes: • 5% level of significance. •* 1% level of significance. Figures in parenthesis are F-statistics.

Table

5.

Reasons crisis

for the decline in July

Reason

a, Decllne in domestic

I All responden_

demand

b, Decline h_ foreigl_ demand c, Insu ffieient o_edlt extended d. Ato, ln_ntlnlL_restrat,_

by suppliers

s, insufficlentcredb

available b'om bank__I'or working e, Atcurrentinterestrates,

in output

since

the onset

of the financial

1997. I

Exoort orlenta Hon Ex!ocxters None×rotter3

334

3

2,49

6

322

2.28

8

3,21

3

1,45

2,17

10

1,98

10

2,(_0

$

2,6_

254

7

[

/

Firm size Small

Large

2

3.,'_

2

2.85

4

10

1.96

10

2,69

5

2,_

7

2.34

9

1,96

9

8

2,_4

5

2.68

5

2.50

6

2.40

7

2.29

9

2.50

7

2,14

8

capital

insufficientcredit

available from banks fo,r expansion f.

3.24

2

3,26

2

3,23

3

3,19

4

3,31

2

g. Higher clr_l'of raw matenals due _o dapreclation of the p_r_

3.78

]

3.66

]

3.88

1

3.94

1

357

]

h, Increases ha labor cost

3,10

4

3,08

4

311

4

3,21

3

2.96

3

L Shortages

2.45

6

2.38

8

250

6

2.66

6

2,19

7

2.Zg

9

2.15

9

2._)

8

2.48

8

],92

]0'

j.

Hi_v,h[uw!l 0flr_tex_:St rate_q

in raw materials

Nondullvery oFgo0ds because suppliers hurt by crisis

Score ranges from i to 5, I being the highest and 5 the lowest. Source: Survey of Philippine Industry and the Financial Crisis (1998).

few quarters: growth in bank loanswill lag b_hind GDPgrowth or GDPgrowth will become positive before growth in ban k loans does. In fact, this already happened in the first two quarters of 1999.


Chapter 12: Lamberte

399

Are the firms hard pressed for funds? Survey results show that about three-fourths of total sample firms claimed to have adequate liquidity to finance production (Table 6). This proportion is higher among firms without loans than among those with existing loans. In both cases, a smaller proportion of exporters and large firms face liquidity constraints than nonexporters and small firms. Liquidity constraint should ease up as demand for goods picks up because survey results show that income from sales covers 36 percent of the short-term financing requirement and 38 percent of the long-term financing requirement of firms.

Table 6.

Enterprises percent).

with adequate Allfirms

liquidity

to finance

Firmswith loans

production

(In

_'Firmswith no loans_

A. Exportorientation 1. Exporters 2. Nonexporters

79.8 72.2

73.5 62.9

90.4 84.6

B. Firmsize 1. SmaU 2. Large

74.4 78.2

67.1 70.1

82.3 96.0

C. Total

76.2

68.7

87.5 rr

Source:Surveyof PhilippineIndustryand the FinancialCrisis (1998).

Conclusions and policy implications Study results generally do not support the claim that the country has been facing a credit crunch since the onset of the East Asian financial crisis. On the contrary, they tend to show that the current slowdown in bank loans merely reflects a depressed economic activity. Therefore, bank loans are expected to rebound once economic activity picks up. This should serve as a warning that loosening up lending policies recovery. 19It was not very long was blamed for the present measures that were recently maintained.

may endanger the sustainability of economic ago when the aggressive lending stance of banks economic crisis. At the very least, prudential put in place by the Bangko Sentral must be

19The problem of small and medium enterprises' (SME)lack of accessto bank credit,which is a structuralone, should not be confused with the issues discussed in this paper.


400

Economic

crisis... Once more

In terms of macroeconomic policy, policymakers should concentrate on raising aggregate demand. Both monetary and fiscal policies should support this stance. There is, however,â&#x20AC;˘ a limit as to how much monetary policy can push aggregate demand. Since monetary policy has already been substantially relaxed in recent months, it must now take a neutral stance. Raising interest rate to defend the exchange rate must be avoided, especially since there is a reason for allowing the nominal exchange rate to depreciate. Figure 8 shows that the Philippines' real effective exchange rate has recently returned to its precrisis level, suggesting that the peso has been appreciating in real terms in recent months. It likewise shows that the Philippines has been losing its international competitiveness in the region in recent months--bad news for both the country's domestic- and export-oriented industries. Exports, which are a major component of aggregate demand, â&#x20AC;˘need to be sustained during the recovery period. The other reason for maintaining a low interest rate is to allow loan work-outs done by some firms and banks to proceed in a less costly and orderly manner. Figure 8. Real effective

exchange

rate, 1997,1 - 1999.6

140 120 i00 80 60 40 20

I_Philippines

_Malaysia

-°--Indonesi_

_Singapore

_Thailand]

On the other hand, fiscal policy must remain expansionary for the rest of 1999. Indeed, the government announced in 1998 a set of pump-priming measures for this year. There are, however, some doubts as to whether real pump-priming measures have been effectively activated this year. The budget figures net of accounts payables seem to suggest that fiscal policy has not taken a strong expansionary stance after all. Whether the recent bulge in accounts payables is purely technical in nature (i.e., due to accounting and auditing procedures) or is a result of an attempt by the past administration to use it as a fiscal instrument needs to be seriously examined. Next year, however, it may not be prudent measures.

on the part

of the government

to implement

pump-priming


Chapter 12: Lamberte

401

References Anonymous. 1999. Crunch time, again? The Economist. 7-13 August. Bernanke, B.S. 1993. Credit in the macroeconomy, Federal Reserve Bank of New York Quarterly Review, Vol. 18, No. 1, Spring. Bernanke, B.S. and A.S. Blinder. 1988. Credit, money, and aggregate demand. American Economic Review, Vol. 78, No. 2, May. Brunner, K. and A.H. Meltzer. 1988. Money and credit in the monetary transmission Process. American Economic Review, Vol. 78, No. 2, May. Cantor, R. and J. Wenninger. 1993. Perspective on the credit slowdown. Federal Reserve Bank of New York Quarterly Review, Vol. 18, No. 1, Spring. Cecchetti, S.G. 1995. Distinguishing theories of the monetary transmission mechanism. Federal Reserve Bank of St. Louis Review, Vol. 77, No. 3, May/June. Council

of Economic Advisers. 1992. Economic report of the President. Government Printing Office. Ding, W., I. Domac, and G. Ferri. 1998. Is there a credit crunch in East Asia? World Bank. Hadjimichalakis, M.G. and K.G. Hadjimichalakis. 1995. Contemporary money, banking, and financial markets: theory and practice. USA: Richard D. Irwin, Inc. Hubbard, R.G. 1995. Is there a 'credit channel' for monetary policy? Federal Reserve Bank of St. Louis Review, Vol. 77, No. 3, May/June. Ito, T. and L.A. Pereira da Silva. 1999. The credit crunch in Thailand during the 1997-98 crisis: theoretical and operational issues the JEXIM Survey. Exim Review, Vol. 19, No. 2. Kliesen, K.L. and J.A. Tatom. 1992. The recent credit crunch: the neglected dimensions. Federal Reserve Bank of St. Louis Review, Vol. 74, No. 5, September/October. Mishkin, ES. 1996. The channels Ofmonetary transmission: lessons for monetary policy. NBER Working Paper Series No. 5464, February. Neumann, M.J.M. 1995. What do we know about how monetary policy affects the economy? Federal Reserve Bank of St. Louis Review, Vol. 77, No. 3, May/June. Waiquamdee, A., S. Krairiksh, and W. Phongsanarakul. 1999. Corporate views of the constraints to recovery. Unpublished paper, March. Yoshitomi, M. and K. Ohno. 1999. Capital-account crisis and credit contraction: the new nature of crisis requires new policy responses. ADB Institute Working Paper No. 2, May.


13 Recent Developments in Corporate Governance in the Philippines Mal"Jo B. Lamberfe

z

I ike the rest of crisis-hit countries in the region, the Philippines is now in /the process of recovering from the crisis that hit East Asia in 1997. GDP _growth rates for the first two quarters of 2000 were higher than _ose for the same quarters of 1999 (Figure 1). Inflation rates have been kept at lower levels, although they have been observed to be inching up since January 2000 â&#x20AC;˘partly as a result of the successive increases in the price of oil and depreciation of the peso (Figure 2). The current account balance has posted a surplus of US$1.8 billion for the first four months of 2000 while the gross international reserves have risen to US$15.3 billion in June 2000, which can cover more than 4 months of imports: Exports have continued the height of the East Asian financial crisis. Figure 1. Quarterly

to grow impressively

even during

real GDP growth rates, 1996.1 - 2000.2 (In percent).

8 7

6 .,/

_

-3

Source: National Sta{@licalCoordinationBoard. 1Theauthor thanks Ms. Sharon Thea Vitaland Ms. JuanitaTolentinofor their excellent assistance in preparing this paper.


404

Economic

Figure 2. Monthly

inflation

crisis... Once more

rates, 1996.1 - 200.7 (In percent).

14.0 12.0 10.0 8.0 6.0 4.0 2.0

...................................................

0.0

.........

Source: National

Statistics

1 â&#x20AC;˘

Office.

Weak corporate governance was found to be "one of the major contributors to the building-up of vulnerabilities in the affected countries that finally led to the East Asian financial crisis in 1997" (Zhuang et al. 2000). In the last two years, Asian economies have tried to address this problem. This paper provides a brief discussion of the recent developments in financial and corporate governance in the Philippines. The second section focuses on recent developments in corporate governance of banks while the third section discusses the measures adopted of nonfinancial firms. Corporate

governance

by the government to strengthen corporate The fourth section Contains the conclusions.

governance

of banks

Having gone through a crisis in the mid-1980s that resulted in the weeding out of weak banks, the Philippine banking system faCed the East Asian financial crisis with a much healthier balance sheet than those of its crisis-hit Asian neighbors. However, not all banks were able to weather the crisis. In 1998, one small commercial bank was closed by the Bangko Sentral ng Pilipinas (BSP), the Philippines' central bank. In 2000, ithe collapse of a medium-sized commercial bank caused a bank run on some small commercial banks. Both banks were brought down by their heavy exposure to the real estate sector, which went into a slump since 1997. Timely intervention of the Central Bank had calmed the market. While the first closed bank is being liquidated, the second closed bank was recently taken ove_ by another commercial bank. During the crisis, a number of large and medium-sized nonfinancial enterprises 2See related

that were highly leveraged discussion

in the succeeding

pages.

went bankrupt. 2 This had adversely


Chapter 13:Lamberte

405

affected the balance sheet of banks. As Figure 3 shows, the total nonpefforming loans (NPLs) of the commercial banking system rose from P59.4 billion in the third quarter of 1997 to P218.6 billion in May 2000. Since outstanding loans had remained fiat throughout this period, the ratio of NPLs to total loans outstanding rose from 4 percent to 14.4 percent. Because of the rise in NPLs, banks had worked out arrangements with distressed borrowers to engage in loan restructuring. In some cases, banks went into foreclosure proceedings, which led to the rise in their balance sheets' real and other properties owned and acquired assets (ROPOA). Thus, commercial banks' ROPOA rose from P14.6 billion to P102.8 billion during the same period. As a percent of total loans outstanding, it increased from 1 percent to 6.8 percent during the period indicated. If the ROPOA were added to the NPLs, then the total NPLs of commercial banks should have already be around 21 percent. Although high, it is still lower than the NPLs of commercial banks during the height of the crisis in the mid-1980s and compares favorably with those of crisis-hit countries in the ASEAN region. Moreover, commercial banks have been raising their loan-loss provisions since the onset of the East Asian financial crisis. Figure 3. ROPOA, total loans, loan loss provisions and NPL of KBs, 1997.3 - 2000.2. N'_L & ROPOA as %of Total Loans 2O

Loan Loss Prov. as % of NPL 5O 30

5 0

0

re e r_

re ¢

NPL as % of Total Lo,'ms

e $

ROPOA as % of Total Loans

Lom_ Loss Prov. As % of NPL Source: Bangko Serttral ng Pilipinas.

The BSP gained formal independence with the passage of the new Central Bank Act in 1993. Aside from conducting monetary policy, the BSP is also given the responsibility of regulating and supervising banks. Since the onset of the financial crisis, the BSP has introduced a number of measures to strengthen corporate governance of banks. In April 2000, the President signed


406

Economic

crisis... Once more

into law the new GeneralBanking Act of 2000 (GBA 2000). The long delay in the passage of said Act turned out to be a blessing in that the framers of the law were able to take into account the major lessons brought about by the recent crisis. Thus, the law includes several provisions aimed at strengthening corporate governance of banks. The following discUsses the key measures adopted by the Central Bank and some provisions of th e GBA 2000 that have a direct bearing on corporate governance of banks. There is now widespread acceptance of the important role independent directors can play in enhancing good corporate governance. GBA 2000 recognizes this and explicitly provides for an inclusion of independent directors in a bank's board Iof directors? It also broadens

that The two and

strengthens the authority of the Monetary Board to prescribe, pass upon and review the qualifications and disqualifications of individuals elected or appointed bank directors or officers and disqualify those found unfit. In the past, the "fit-and proper" rule was hardly given any importance in the selection of board of directors or officers of banks. _Under the new law, the Monetary Board is mandated to constantly monitor_ the performance of bank directors and officers to ensure that they make prudent decisions for their banks. It can disqualify, suspend or remove any bank director or officer who commits or omits an act which renders him unfit for the position. The financial marketis very fluid. Naturally, the true financial position of banks changes frequently. It is, therefore, crucial that the board of directors frequently meet to monitor and assess the financial position of their banks. In this regard, the new GBA allows banks to avail of modern technologies, such as teleconferencing and video-conferencing, in conducting board meetings, which could be more convenient and less costly. Bank loan s and credit guarantees tO its directors, officers, stockholders and their related interests (DOSRI) was a major contributory factor to past bank failures and undermined the banks' role in monitoring corporate governance. In this regard, the new GBA has tightened the rules and ceilings on connected lending and stipulates that such lending be done in an arm's length manner as banks do with their ordinary clients. Violation of this regulation is enough ground for the remox/al of a bank director or officer. The BSP has been regularly increasing the minimum capital requirements of banks. In 1998, it mandated another round of increases in the minimum capital requirement of banks toibe gradually implemented over a two-year period. Universal banks or banks With expanded commercial banking functions, are supposed to raise their minimum capital by 20 percent and ordinary commercial banks by 40 percent Iluring this period. The GBA 2000 enjoins the Monetary

Board

in using inter'nationally

accepted

The number of board of directors of a bank can be between 5 and 15.

standards

in


Chapter 13:Lamberte

407

determining risk-based capital adequacy of banks. Thus, it is not enough for banks to identify, quantify and manage risks, but that their owners must be ready to put extra capital to cover additional risks they want to take. As part of its effort to improve the transparency of banks, the BSP issued new rules on reporting the quality of the assets of banks to reflect their true financial conditions. Loan classification system has been improved and appropriate specific loan loss provisions have been prescribed for the different loan classifications. In addition, the BSP has required banks to put a 2 percent general loan loss provision. The definition of past due loans has also been tightened aligned with international standards. Toenhance transparency, the BSP started to require listed and nonlisted banks to disclose to the public more detailed information relevant to their financial health in a manner understandable to laymen. This includes vital information such as nonperforming loans, total classified loans and other classified risk assets, loan loss reserves, connected lending and return on equity (Espenilla 2000). These are supposed to be reported together with the banks' balance sheet and off-balance sheet conditions to the general public every quarter. Market discipline can exert pressure on banks to improve corporate governan