The Philippine Economy in the Asian Crisis

Abstract

The Philippines has avoided the worst consequences of a full-scale crisis because it had strong economic fundamentals, including a reformed financial sector at the onset of the regional crisis. This paper gives an account of the response of the Philippines to the baht collapse. The peso was floated shortly after the baht currency crisis. One year later, the Philippine economy was still in relatively good shape, but growth was slowing down and there was concern about the the consequences for the Philippines if the contagion spreads beyond Asia. The new Estrada Government stressed the need for further stringent budget cuts. The stock market continued to decline. The liberalization programme was kept in place, inflation remained moderate, and exports continued to show strong growth However, the economy remains vulnerable if the crisis continues much longer. High Growth Scenario is Cut Short The Philippine economy was cruising towards a higher plateau of growth activity when the Thai authorities floated the baht on 2 July 1997. For more than a decade the Philippines economy had played the growth laggard in ASEAN. Rising from its own economic crisis that was experienced during that decade and, with the help of successful structural reforms, the Philippine economy began to show credible economic achievements measured by growth, exports, investment, and macroeconomic stability. The annual growth of the gross national product (GNP) averaged 5% in 1994 and 1995. The growth of gross national product in 1996 was close to 7%. The export growth achieved by the Philippines was the highest in Asia in 1995, at almost 30% that year, and annual export growth over an extended period up to 1997 averaged around 25%. At US$25 billion, this scale of exports was still low by Asian standards, but the high export growth was announcing the arrival of a new tiger economy, and import growth was fuelled by rising investment. The large current account deficit of about 5% of GNP during 1993 to 1997 was viewed as an indication of rising investment and therefore not a cause for alarm. After one year of crisis, by mid-1998, the situation continued to show the Philippines in relatively good light vis-a-vis worse-affected neighbours, but with a substantial slowdown in real output. In 1997, real GNP grew at 5.4%, a result that already factored in the impact of the crisis. At the outset, it was widely believed that the impact of the crisis on the Philippines would be minimal. As the crisis evolved and became more prolonged, expectations about the future became more bearish. The Philippine experience is essentially one of responding to a major currency crisis that led to a contraction of overall demand, with positive growth remaining an element of the situation. In the other countries -- particularly in Thailand, Indonesia, and South Korea - the experience was one of systemic crisis in the banking and financial sector, and a major foreign debt exigency resulting in measures that led to a major contraction of output. Economic Fundamentals before the Crisis Relatively sound macroeconomic fundamentals underlay the pre-crisis optimism. In 1994, the national government achieved a fiscal surplus. This fiscal performance was sustained for four years in a row. The fiscal surplus of the national government reached almost 1% of GNP in 1994, although this stabilized throughout the period at about one-third of 1% of GNP until 1997. A consolidated fiscal surplus (to include all sources of fiscal operations, including public enterprises) was not attained until 1996 (at one-third of 1% of GNP). The government objective was to sustain a consolidated fiscal surplus to facilitate better management of the growth of public investment. There was also considerable improvement on the external debt front. The Brady debt deal of 1992 helped a lot. The high external debt burden inherited from the problems of the 1980s was gradually reduced. …