TABLE OF CONTENTS

INTRODUCTION.........................................................................................................................................................2

COUNTRY OVERVIEW.............................................................................................................................................2

THE POLITICAL ENVIRONMENT.........................................................................................................................3

RECENT HISTORY.......................................................................................................................................................3THE PRESENT GOVERNMENT......................................................................................................................................3POLITICAL STABILITY.................................................................................................................................................4OPPOSITION PARTIES..................................................................................................................................................4

ECONOMIC AND FINANCIAL ANALYSIS...........................................................................................................5

TRADE HISTORY & MAJOR PRODUCTS......................................................................................................................5GDP GROWTH PER CAPITA.........................................................................................................................................5UNEMPLOYMENT & PRICE LEVEL CHANGES INFLATION............................................................................................6EXCHANGE RATE INNOVATIONS................................................................................................................................7INVESTMENTS IN THE STOCK MARKET......................................................................................................................7INVESTMENTS IN THE BOND MARKET........................................................................................................................8FOREIGN EXCHANGE RESERVES.................................................................................................................................9STRUCTURE OF INDUSTRIES......................................................................................................................................10THE BANKING SYSTEM.............................................................................................................................................10MONETARY POLICY / MONEY SUPPLY GROWTH.....................................................................................................11FOREIGN DEBT.........................................................................................................................................................12CAPITAL FLIGHT.......................................................................................................................................................12

ASIAN CURRENCY CRISIS....................................................................................................................................13

PHILIPPINES BEFORE THE CRISIS...............................................................................................................................13WHAT CAUSED THE ASIAN CURRENCY CRISIS? THE EFFECT IT HAD ON THE PHILIPPINES AND OTHER COUNTRIES

..................................................................................................................................................................................13

LOOKING INTO THE FUTURE.............................................................................................................................17

PREVENTION AS THE BEST FORM OF MANAGEMENT...............................................................................................17Some Policy Lessons From the Asian Crisis.......................................................................................................17Need for Great Caution About Financial Liberalization and Globalization......................................................17Manage External Debt Well and Avoid Large Debts..........................................................................................17Manage and Build Up Foreign Reserves............................................................................................................17The Need for Capital Controls and a Global Debt Workout System..................................................................18

CONCLUSION: SUMMARY / COMMENTS / RECOMMENDATIONS...........................................................19

WORKS CITED..........................................................................................................................................................21

APPENDIX A..............................................................................................................................................................23

APPENDIX B..............................................................................................................................................................24

APPENDIX C..............................................................................................................................................................25

APPENDIX D..............................................................................................................................................................26

APPENDIX E..............................................................................................................................................................27

APPENDIX F...............................................................................................................................................................28

Introduction

The Philippines were ceded by Spain to the US in 1898 following the Spanish-American

War. They attained their independence in 1946 after being occupied by the Japanese in World

War II. The 21-year rule of Ferdinand Marcos ended in 1986 when a widespread popular

rebellion forced him into exile. In 1992, the US closed down its last military bases on the

islands. A quarter-century-old guerrilla war with Muslim separatists on the island of Mindanao,

which had claimed 120,000 lives, ended with a treaty in 1996 (www.odci.gov).

The Philippines lies off the southeast coast of the Asian mainland. It has approximately

7,100 islands and islets located near the southeastern rim of China. Bordering its coastline to the

west and north is the China Sea; to the east is the Pacific Ocean; and to the south, the Celebes

Sea and the coastal waters of Borneo. The Philippines' location in Asia is strategic since it is

situated on the crossroads of Asia's commerce and transportation. It plays a significant role in

international affairs [Appendix A fig. 1] (www.abisnet.com).

Country OverviewTwo major languages are spoken in the Philippines: Tagalog and English. Ninety

percent of the population are Christians and about 10 percent are Muslims. There is a tropical

and humid climate in the lower land areas, but this becomes cooler at the higher altitudes

(www.odci.gov).

The land area totals 298,170 square kilometers, and the Philippines has a total population

of approximately 80 million people. The capital of this large island country is Manila located on

the island of Luzon. There are numerous islands in the Philippines that are all prone to

earthquakes. Within the Philippines, there lies large mountainous terrain, narrow coastal plains

and interior valleys and plains. There are also vast amounts of dormant and active volcanoes,

notably Mount Pinatubo in Central Luzon (http://lcweb2.loc.gov).

The Political Environment

Recent History

The Philippines has traditionally had a private enterprise economy both in policy and in

practice. The government has intervened through fiscal and monetary policy and in the exercise

of its regulatory authority. Although expansion of public sector enterprises occurred during the

Marcos presidency, direct state participation in economic activity has generally been limited.

The Aquino government set a major policy initiative of consolidating and privatizing

government-owned and government-controlled firms. Economic planning was limited largely to

establishing targets for economic growth and other macroeconomic goals, engaging in project

planning and implementation, and advising the government in the use of capital funds for

development projects.

The Present Government

The present government is conducted under the Freedom Constitution and lead by the

National Union of Christian Democrats. The Head of the State is President Fidel Ramos

working in conjunction with a bicameral congress consisting of a Senate with 24 members and a

House of Representatives with a maximum of 250 members.

Under the Constitution, the government is divided into executive, legislative, and judicial

departments. The separation of powers is based on the theory of checks and balances. The

presidency is not as strong as it was under the 1973 constitution. Local governments are

subordinated to the national government [Appendix B] (http://lcweb2.loc.gov/frd/cs/

phtoc.html#ph0007).

Political Stability

The Philippines has embarked on economic reforms and market liberalization measures

in the last few years. As a result of these measures, the economy started to show signs of

recovery. After a decline of 0.5 percent, the Philippines' real gross domestic product (GDP)

grew by 1.4 percent. The rate of inflation was 7.5 percent. The Philippines' unemployment rate

dropped to 9.8 percent from 10.5 percent. Improvements were also registered in the overall

balance of payments, the current account and the reserve position of the Philippines.

The Philippines government continues to take steps to boost its economy and has

embarked on economic reforms and deregulation. The country has adopted an economic

stabilization program, supported by the International Monetary Fund (IMF), as part of the efforts

to reduce inflation and improve the balance of payments.

The Philippines' main priorities are to improve political stability, restore economic

growth and build investor confidence. Liberalization policies, including abolition of quantitative

restrictions on trade, have been announced to attract foreign investments and to improve the

competitiveness of the Philippines economy. The government also recently announced the

complete liberalization of foreign exchange controls.

Opposition Parties

In 1991, a new opposition party, the Filipino Party (Partido Pilipino), was organized as a

vehicle for the presidential campaign of Aquino's estranged cousin Eduardo "Danding"

Cojuangco. Despite the political baggage of a long association with Marcos, Cojuangco had the

resources to assemble a powerful coalition of clans.

The Liberal Party, a democratic-elitist party founded in 1946, survived fourteen years of

dormancy (1972 to 1986) through the staunch integrity of its central figure, Senate president

Jovito Salonga, a survivor of the Plaza Miranda grenade attack of September 1971. In 1991,

Salonga also was interested in the presidency, despite poor health and the fact that he is a

Protestant in a largely Catholic country.

In September, 1986, the revolutionary left, stung by its shortsighted boycott of the

February election, formed a legal political party to contest the congressional elections. The Party

of the Nation allied with other left-leaning groups in an Alliance for New Politics that fielded

seven candidates for the Senate and one-hundred-three for the House of Representatives, but it

gained absolutely nothing from this exercise. The communists quickly dropped out of the

electoral arena and reverted to guerrilla warfare. As of 1991, no Philippine party actively

engaged in politics espoused a radical agenda (http://lcweb2.loc.gov/query).

Economic and Financial Analysis

Trade History & Major Products

The Philippines major export commodities are electronic equipment, machinery and

transport equipment, garments, and coconut products. The majority of these products are

exported to the US at 22 percent, Japan at 20 percent, South Korea at 8 percent, Singapore at 6

percent, Taiwan at 5 percent and Hong Kong at 4 percent. The Philippines must import raw

materials and intermediate goods, capital goods, consumer goods, and fuels. They receive most

of their imports from the United States, Japan and South Korea.

GDP Growth per capita

In terms of key economic indicators, the Philippines in 1999 had a gross domestic

product (GDP) of $US 265.3 billion (in 1995 $US), a population of 80 million and a GDP per

capita of $US 3,338. In terms of global rankings, this placed the Philippines 24 out of 191

countries in terms of GDP, 13 out of 191 countries in terms of population; and 96 out of 191

countries in terms of GDP per capita [Appendix C fig. 2 & fig. 3] (http://lcweb2.loc.gov).

Unemployment & Price level Changes Inflation

Unemployment, which had averaged about 4.5 percent during the 1970s, increased

drastically following the economic crisis of the early 1980s, peaking in early 1989 at 11.4

percent. Urban areas fared worse; unemployment in mid-1990, for example, remained above 15

percent in metro Manila.

Beyond the unemployment generated from economic mismanagement and crisis was a

more long-term, structural employment problem, a consequence of the highly concentrated

control of productive assets and the inadequate number of work places created by investment in

the industrial economy. The size and growth of the service sector was one indicator.

Underemployment was another.

Underemployment has been predominantly a problem for poor, less educated, and older

people. The unemployed have tended to be young, inexperienced entrants into the labor force,

who were relatively well educated and not heads of households. In the first half of the 1980s,

approximately 20 percent of male household heads and 35 percent of female household heads

were unable to find more than forty days of work per quarter.

Unemployment rates have been very volatile over the past 20 years with periods of

dramatic inflation and over period with normal inflation. One great factor contributing to this the

lack of purchasing power parity in the Philippines is due to weakening currencies and increased

unemployment [Appendix C fig. 1].

Exchange Rate Innovations

The widespread currency crisis in July 1997 prompted the Bangko Sentral ng

Pilpinas(Central Bank of the Philippines to allow the Philippine peso to seek its own level. The

Monetary Board decided to limit BSP's presence in the foreign exchange market and allow the

peso to trade within a wider range, consistent with its market-determined policy. The majority of

foreign exchange turnover is inter-dealer, and the main players include the major banks, foreign

banks and money brokers. Most trading in currencies is spot, although there is a strongly

growing market for forward exchange rate transactions. Currently, the turnover of OTC cross-

currency interest rate swaps and options is still very low as only a limited number of banks and

large corporations engage in the derivatives market. This is primarily due to the absence of

appropriate guidelines as well as the need for licensing by the BSP to engage in derivatives

trading (http://www.pwcglobal.com.au/ asiabcmhandbook/phil_ bank.html).

Investments in the Stock Market

Equities are traded through the Philippine Stock Exchange (PSE), one of the oldest stock

exchanges in the Far East. Its roots reach back to the Manila Stock Exchange (MSE), which was

founded on August 8, 1927. After almost four decades, the Makati Stock Exchange (MkSE) was

established on May 27, 1963 amidst strong oppositions encountered. To consolidate logistics

and to hasten development, the leaders of both bourses agreed in principle to unify their

operation under the new Philippine Stock Exchange, Inc. that was incorporated on July 14, 1992.

Despite the agreement to unify in principle, the two exchanges continued to operate separately

until March 4, 1994, when the Securities and Exchange Commission granted the Philippine

Stock Exchange, Inc. its license to operate as a securities exchange. It simultaneously canceled

the licenses of MSE and MkSE, thus making PSE the sole operating stock exchange in the

country.

Despite its age, the PSE has remained relatively small. Only 224 companies and 303

issues were listed on it as of June, 2000. Of these, only 120 to 140 issues are actively traded.

More importantly, most analysts believe that only thirty to fifty issues can be considered

investment grade. The fifty most traded securities account for over 80% of the total value

turnover. In 1997, when the Asian financial crises began, only five companies' securities were

listed. There were none in 1998 and one each in 1999 and 2000

(http://www.pwcglobal.com.au/asiabcmhandbook/phil_bank.html).

Investments in the Bond Market

The Philippine debt markets include the money market for short-term securities

(including treasury bonds and mutual funds) and the bond market for long-term treasury bonds

and corporate bonds. The debt market still relies heavily on funding from the national

government, which remains as the principal issuer of debt securities in the Philippines. The

national government offers various debt securities from 91-day treasury bills to 10-year treasury

bonds, which could also be either fixed rate or floating rate. As of 28 February 1999, the total

amount of T-bills and T-notes outstanding was P818 billion.

T-bills and T-notes are available from accredited government securities dealers, generally

banks and some investment houses. The PSE has plans to list five-year T-notes and hopes to not

only expand the secondary market for them but perhaps, more importantly, provide a better

benchmark for their valuation by domestic funds and other investors.

On the other hand, bonds issued by the local government units (LGU) are small

compared with other debt securities and total only P96 million, although several LGU bond

issues are in the pipeline. Corporate debt securities are also too small as only about forty local

companies are issuing such securities (http://www.pwcglobal.com.au/asiabcmhandbook/phil_

bank.html).

Foreign Exchange Reserves

The Philippines had turned to the IMF previously in 1962 and 1970 when it had run into

balance of payment difficulties. It did so again in late 1982. An agreement was reached in

February 1983 for an emergency loan, followed by other loans from the World Bank and

transnational commercial banks. Negotiations began again almost immediately after the

moratorium declaration between Philippine monetary officials and the IMF. The situation

became complicated when it came to light that the Philippines had understated its debt by some

US$7 billion to US$8 billion; overstated its foreign-exchange reserves by approximately US$1

billion; and contravened its February 1983 agreement with the IMF by allowing a rapid increase

in the money supply. A new standby arrangement was finally reached with the IMF in

December 1984, more than a year after the declaration of the moratorium. In the meantime,

additional external funds became nearly impossible to obtain.

The Philippine external debt has grown to over US$27 billion. The country's most

immediate concern was with meeting debt-service payments. Reduction in the size of the debt

was a longer-term issue. Debt servicing, US$3 billion in 1986, was a drain on both the country's

foreign-exchange earnings and its investible surplus. Technocrats in the National Economic and

Development Authority recommended declaring another moratorium, this time for two years, to

allow the country a breathing space. Measures were introduced in Congress in 1986 and

subsequent years to cap annual debt-service payments. The Aquino administration and the

Central Bank, however, consistently resisted both tactics, opting instead for a cooperative

approach with the country's creditors (http://lcweb2.loc.gov/cgi-bin/query/D?cstdy:2:./temp/

~frd_GI0E:).

Structure of Industries

The most predominate industry in the Philippines is the manufacturing industry which

accounts for almost all the known production in the country. In 1990, the industrial sector was

inefficient and oligopolistic. Although small and medium-sized firms accounted for 80 percent

of manufacturing employment, they accounted for only 25 percent of the value added in

manufacturing. Most industrial output was concentrated in a few, large establishments. For

example, a six-month Senate inquiry determined in 1990 that eight of the country's seventeen

cement-manufacturing companies were under the control of a single firm. Despite

manufacturing being one of the largest sectors within the Philippines, the country shows a

lopsided and biased approach towards wealthy companies thus showing another example of a

third world, two tiered society [Appendix D] (http://lcweb2.loc.gov/cgi-bin).

The Banking System

The Philippine financial system in the early 1990s was composed of banking institutions

and non-bank financial intermediaries, including commercial banks, specialized government

banks, thrift and rural banks, offshore banking units, building and loan associations, investment

and brokerage houses, and finance companies. The Central Bank and the Securities and

Exchange Commission maintained regulatory and supervisory control. The Philippines had a

relatively sophisticated banking system; however, the level of financial intermediation was low

relative to the size of the economy.

In 1990, the six largest commercial banks earned an estimated P7.9 billion in after-tax

profits, an increase of 42 percent over 1989, which in turn was a 32 percent increase over 1988.

A 1991 World Bank memorandum noted that the extent of bank profits indicated a "lack of

competition" and a "market structure for financial services characterized by oligopoly."

Philippine banks had the widest interest rate spread (loan rate minus deposit rate) in Southeast

Asia (http://lcweb2.loc.gov/cgi-bin/query/D?cstdy:1:./temp/~frd_YnR7:).

Monetary Policy / Money Supply Growth

The Central Bank of the Philippines was established in June 1948 and began operation

the following January. It was charged with maintaining monetary stability; preserving the value

and convertibility of the peso; and fostering monetary, credit, and exchange conditions

conducive to the economic growth of the country. In 1991, the policy-making body of the

Central Bank was the Monetary Board, composed of the governor of the Central Bank as

chairman, the secretary of finance, the director general of the National Economic and

Development Authority, the chairman of the Board of Investment, and three members from the

private sector. In carrying out its functions, the Central Bank supervised the commercial banking

system and managed the country's foreign currency system.

Money supply growth has been highly variable, expanding during economic and political

turmoil and then contracting when the Philippines tried to meet IMF requirements [Appendix C

fig. 1]. Before the 1969, 1984, and 1986 elections, the money supply grew rapidly. The flooding

of the economy with money prior to the 1986 elections was one reason why the newly installed

Aquino administration chose to scrap the existing standby arrangement with the IMF in early

1986 and negotiate a new agreement. The Central Bank released funds to stabilize the financial

situation following a financial scandal in early 1981, after the onset of an economic crisis in late

1983, and after a coup attempt in 1989. The money was then repurchased by the Treasury and

the Central Bank--the so-called Jobo bills, named after then Central Bank Governor Jose

Fernandez--at high interest rates, rates that peaked in October 1984 at 43 percent and were

approaching 35 percent in late 1990. The interest paid on this debt necessitated even greater

borrowing. By contrast in 1984 and 1985, in order to regain access to external capital, the

growth rate of the money supply was very tight. IMF dictates were met, very high inflation

abated, and the current account was in surplus. Success, however, was obtained at the expense

of a steep fall in output and high unemployment.

Foreign Debt

The Philippines owed about US$28 billion to foreign creditors. Borrowed money had not

promoted development, and most of it had been wasted on showcase projects along Manila Bay

or had disappeared into the pockets and offshore accounts of the Marcos and Romualdez families

and their friends and partners. Many Filipinos believed that they would be morally justified in

renouncing the foreign debt on grounds that the banks should have known what the Marcoses

were doing with the money (http://lcweb2.loc.gov/cgi-bin/query/D?cstdy.2:/temp/~frd3aGw).

Capital Flight

Efforts to reduce the external debt included encouraging direct investment in the

economy. In August 1986, the Philippines initiated a debt-equity conversion program, which

allowed potential investors who could acquire Philippine debt instruments to convert them into

Philippine pesos for the purpose of investing in the Philippine economy. Because the value of

the debt in the secondary market was substantially less than its face value, the swap arrangement

allowed investors to acquire pesos at a discount rate.

The Filipinos had a desire to bring their wealth back into the country. Critics questioned

whether those who engaged in capital flight should be awarded a premium for returning their

wealth to the Philippines. There also was the question of the arbitrage possibilities of "round

tripping," whereby investors with pesos engaged in capital flight to obtain foreign currency,

which was used through the swap to achieve a much larger amount of pesos (http://lcweb2.loc.

gov/cgi-bin/query/D?cstudy.3:/temp/~frdOlvV).

Asian Currency Crisis

Philippines before the crisis

In November 1965, Ferdinand Marcos was elected president, and in 1969, he became the

first elected president to win reelection in the Philippines. In September 1972, President Marcos

imposed martial law citing growing lawlessness and open rebellion by the communist rebels. As

a matter of fact, Marcos did this largely in order to perpetuate his regime. During the martial law

period, the democratic institutions were suppressed, and the Marcos regime became a

dictatorship. The martial law ended in 1981, and Marcos was reelected as the president that year

to a six-year term.

However, a democratic country since independence, the Philippines' politics and

economy had been dominated by a small landholding elite who was against social changes. The

Marcos dictatorship further hindered the country's political and economic development. During

the 1970s and 1980s, while most of other Southeast Asian countries were flourishing

economically, the economy of the Philippines was undergoing stagnation with extreme poverty

in some regions (http://www.countrywatch.com/files/137/cw_topic.asp?vCOUNTRY=137&TP=

HISTO).

What caused the Asian Currency Crisis? The effect it had on the Philippines and other countries

Domestic savings were not sufficient to drive all the Southeast Asian economies to

continual rapid economic growth. Thailand and Malaysia ran current account deficits amounting

to 10 percent of GDP funded by net private capital inflow throughout the 1990s. Indonesia,

China and South Korea ran smaller but still substantial deficits in the 3 percent to 4 percent range

[Appendix E fig. 2]. Serious policy mistakes were made. Thailand, Malaysia, Indonesia and

South Korea, along with Hong Kong, attempted to peg their currencies to the US dollar. This

gave these regional currencies an advantage when the yen was strong and the US dollar was

declining against other currencies. Export-led growth was facilitated. In the nineties, however,

US policies that generated a strong greenback set the scene for disaster for those currencies

pegged to it. China devalued its currency towards the end of 1994 and at the same time brought

in export subsidies. Southeast Asian exports in competition with China were hit hard.

The Japanese regulators, including the Ministry of Finance, refused to do anything about

the huge bad debts of around US$366 billion run up by Japanese banks during the asset pricing

bubble of the late 1980s. Supposedly, all the land in Australia could be purchased for less than

the grounds of the Imperial Palace in Tokyo. Low interest rate policies designed to help the

technically insolvent Japanese banks and kick-start the stalled Japanese economy led to massive

capital injections into South- East Asia, attracted by high domestic interest rates.

Officials, often allied with interested parties, believed that they were immune from so

called ‘speculative’ attack when they set rates at levels they knew to be entirely unrealistic. For

example, some years ago the Australian Wool Reserve Price Scheme continued to purchase

virtually the entire Australian wool clip and nearly all private stockholdings worldwide at prices

far higher than any foreign buyer or consumer was willing to pay. Eventually, the Australian

Labor (Keating) Government walked away from it, realizing there were limits to the extent that

taxpayers were willing to pay to bail out such stupidity. The collapse of the Wool Reserve Price

Scheme and the huge stockpile which still overhangs the market are as much due to the actions

of Australian woolgrowers producing wool to satisfy the irrational demands of the Wool Board

as they are a consequence of international speculation.

The guiding hand of the state helped the private sector make huge investments in

Malaysia and elsewhere in Southeast Asia in production facilities for computer chips and

electronics generally. In the last few years, the demand for this kind of production from South-

East Asia has fallen greatly. Similar misguided industry policy in South Korea contributed to a

glut of production facilities in the vehicle industry. Corporate sector borrowing has reached

about 200 percent of GDP with a debt to equity ratio for major companies in excess of 400

percent and bankruptcy rampant. In 1997, 13,971 firms in South Korea went bankrupt. The

debts of eight large chaebol (conglomerates) alone amounted to US$21 billion. Strong union

pressure has contributed to an enormous rise in manufacturing wages, putting them at well in

excess of UK levels, and perhaps double that of some of their competitors.

The Chairman of the US Federal Reserve, Alan Greenspan, has commented adversely on

the turnaround in capital inflows in Southeast Asia from 8 percent in 1996 to minus 2 percent in

1997: the turnaround does not appear to have resulted wholly from a measured judgement that

fundamental forces have turned appreciably more adverse. More likely, it is a process that is

neither measured nor rational. His remarks have been endorsed by the Governor of the Reserve

Bank, Ian Macfarlane (1998). The Deputy Governor, Stephen Grenville (1998), points out that

as often happens in financial markets, euphoria turned to panic without missing a beat.

These charges of irrationality in terms of international portfolio investment are not borne

out by existing research prior to the meltdown that finds such flows reduce the cost of capital in

the recipient country and do not increase the volatility of equity returns. There is no evidence

that uninformed investors produce contagion. Moreover, the currency movements and

turnaround in capital flows seem to be a consequence of more serious underlying problems rather

than causal factors.

A combination of large current account deficits, inflexible over-valued exchange rates,

considerable under-utilized capacity and enormous private sector borrowing underwritten

implicitly by the State were common to Thailand, Indonesia and South Korea. The financial

meltdown contagion spread rapidly, first, from Thailand to Indonesia and then from Indonesia to

Malaysia and South Korea. The mechanism by which it spread appears to have been the

attempted withdrawal of short-term loans by banks once they recognized the similarity in

conditions between those Southeast Asian countries and South Korea. The monetary authorities

were unable to resist the downward pressure on the won, exchange reserves were depleted and in

December 1997 an IMF bailout of record proportions, US$59 billion, was negotiated. By late

January the won was about 40 percent lower than in July 1997 (http://www.cis.org.au/Policy/

autumn98 /aut9802.htm#bioswan).

In 1998, the Philippine economy slowed from reverberations of the Asian Crisis and El

Nino. The Philippines were able to weather the Asian Crisis better than most of their neighbors,

however, due to better starting conditions, early floating of the peso, adaptation of monetary and

fiscal policies, and a successful program to strengthen the banking sector. Tighter standards

were implemented to encourage recapitalization of weaker banks through capital infusions or

mergers with stronger banks. The rehabilitation and full privatization of the Philippine National

Bank is proceeding, with completion slated some time this year. Reforms in the corporate sector,

trade and investment liberalization are continuing, and the government is embarking on a

comprehensive set of public sector reforms, with World Bank assistance. The government has

recently revamped the "action plan" that improves tax administration and remains committed to

strengthening the Bureau of Internal Revenue and improving taxpayer compliance.

Looking into the Future

Prevention as the Best Form of Management

Some Policy Lessons From the Asian Crisis

Developing countries should rethink the benefits and risks of financial liberalization. In

particular, they have to take great care to limit their external debt (especially short-term debt),

improve the balance of payments and build up their foreign reserves.

Need for Great Caution About Financial Liberalization and Globalization

In a rapidly globalizing world, developing countries face tremendous pressures coming

from developed countries, international agencies and transnational companies to totally open up

their economies.

Manage External Debt Well and Avoid Large Debts

Developing countries should not build up a large foreign debt, whether it is public or

private debt, even if they have relatively large export earnings. In good years, these factors can

be offset by large inflows of foreign long-term investment. It is, thus, important to watch the

relation of levels of debt and debt servicing not only, to export earnings but also to the level of

foreign reserves. Reserves should be built up to a comfortable level, sufficient to service debt,

especially short-term debt.

Manage and Build Up Foreign Reserves

The careful management of foreign reserves has thus emerged as a high-priority policy

objective in the wake of the Asian crisis. There are so many factors involved, such as the

movements in merchandise trade (exports and imports), the payment for trade services, the

servicing of debt and repatriation of profits, the inflows and outflows of short-term funds, the

level of foreign direct investment and the inflows of new foreign loans.

As can be noted, these items are determined by factors such as the trends in merchandise

trade, and the external debt situation (in terms of loan servicing and new loans). The

"confidence factor" affects the volatile movements of short-term capital as well as foreign direct

investment. The country may now need inflows of long-term investments and long-term loans in

order to provide liquidity and build reserves. In the past year, there has been the reverse problem

of large outflows of short-term funds caused by the withdrawal of foreign and local funds to

abroad.

The Need for Capital Controls and a Global Debt Workout System

The crisis has also exposed the great lack of an international mechanism that comes to the

aid of a country facing severe problems in external debt repayment. It was assumed that

financial liberalization and private sector borrowing would not pose problems as banks, investors

and companies would have calculated accurately their credit, loan and investment decisions.

Most top-level companies and many banks in the affected East Asian countries are in

trouble or insolvent as a result of having loans and projects gone sour. Most serious are the loans

contracted in foreign currency, for a default in these can bring down the country's financial

standing. In the case of the unrepayable foreign loans in Thailand, Indonesia and South Korea,

the "market failure" was caused by their local banks and companies. At least, the governments

have to consider having stronger regulation to prevent private banks, financial institutions and

companies from making mistakes, especially in relation to foreign-currency loans.

Malaysian Bank Negara's regulation that private companies have to seek its permission

before taking foreign loans, which will be given only if it can be shown that the projects can earn

foreign exchange to finance debt servicing, should be maintained in Malaysia and emulated by

other countries.

Stricter regulatory guidelines implemented by BSP; consolidation and convergence

between insurers, funds managers and banks, and innovative products and services will improve

the quality of bank management. BSP also drew up guidelines on the duties of bank directors.

These stringent requirements are in accordance with BSP's view that better bank governance

means greater transparency and better bank management. The recent passage of the new general

banking law expanded BSP's supervisory and regulatory powers giving it more flexibility in

supervising the banking industry. This new general banking law superseded the half-century old

general banking act of 1949. It now forms the basic legal fabric governing the banking system.

The law also liberalizes foreign participation in domestic banks by increasing the

allowable foreign ownership of domestic banks to 40 percent or a maximum of 100 percent

under certain conditions. It also upgrades the country's banking laws to meet global standards

from teller machines (ATMs) to internet banking.

The new leadership of the BSP sees the current developments in the banking industry as a

trend following the practices of other countries. The early part of the decade saw ten foreign

banks given license to operate in the country, one of which gave up its slot when it merged with

another foreign bank (http://www.pwcglobal.com.au/asiabcmhandbook/phil_bank.html).

Conclusion: Summary / Comments / RecommendationsAs with anything in life, man must take the good with the bad. The Asian Currency

Crisis was not a positive time in Asian history, but many lessons can be taken from the time of

grief in order to strengthen all affected and less affected countries. The Philippines was not hit

hardest by the Crisis, but this by no means indicates they do not have problems. The Philippines

problems have routed back to their leadership and government since the early 1970’s. The Asian

Crisis was just made a little worse by the Philippines due to their large amounts of outstanding

debt, their ignorant growing money supply, and their vast inability to repay any of their creditors.

As I said before, this time of financial grief will hopefully make the Asian continent and the

Philippines stronger in their decision-making and prevention skills. It is known that it is better to

be proactive than reactive, just as we should prevent rather than have to resolve. Life’s lessons

can come in all shapes and forms. This lesson just happened to involve billions and billions of

dollars.

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Appendix A

Appendix B

Appendix C

Appendix D

Appendix E

Appendix F