Demand for Financial Assets in the Philippines in the 1980s: The Impact of Liberalization to Date and Future Issues

Abstract

Financial libera]ization in the early 1980s freed Philippine domestic interest rates to market determination. During the subsequent eight years, financial deepening proceeded with the ratio of financial asset holdings to GNP climbing to 40 ~・ However, the structure of demand for financial assets underwent considerable change over this period. A regression analysis of demand for principal financial assets in the Philippines since liberalization reveals the following : Change in the ratio of financial assets to GNP can be explained by domestic inflation rates and two foreign-related factors, the rate of change in the foreign exchange rate and overseas interest rates. Change in nominal interest rates on various domestic financial instruments, along with the rate of infiation, are important in explaining the structure of financial asset holdings. Accordingly, further progress in accumulation of domestic financial assets for capital mobilization requires that inilation be restrained and, even more importantly, that the exchange rate be stabilized.