THE PHILIPPINES IN THE ASIAN FINANCIAL CRISIS

Crisis Performance

Yet, as can be seen in Table 1, the deviation between the Philippines's forecast growth rate in 1998 and its actual performance was by far the smallest of the Asian countries. This was not simply a matter of luck: the forecast revisions were also the smallest, indicating that the forecasters believed that the Philippines was likely to be the least affected of the Asian countries. There are essentially two explanations: first, that the Philippine financial sector was stronger than others around the region, and second, that the Philippines was uniquely insulated from regional contagion. Historically, the Philippines had a relatively repressed and inefficient financial system. Williamson and Mahar surveyed the financial systems of 34 countries, rating them on six dimensions: credit controls, interest rates, entry barriers, bank autonomy, privatization, and international capital flows. In each case the Philippine banking sector of the 1970s received a grade of "repressed" or "partly repressed."7 Hutchcroft further described the Philippine banking sector as characterized by "rampant favoritism" and "inefficient state regulation."8 (This is, after all, the country that gave us the term "crony capitalism.") As a consequence, the country's financial sector did a poor job of mobilizing saving and allocating capital, and was prone to instability, experiencing crises in the mid-1970s, early 1980s, and mid-1980s.9 (Sadly, by experiencing crises under conditions of both capital account openness and closure, the Philippines proved that "hot money" international capital flows may be a sufficient, though not a necessary, condition for financial meltdown.) The formal banking sector was essentially an urban phenomenon-in the rural areas wealth was predominately held in non-monetary forms. Barriers to entry and regulatory forbearance contributed to cartelization of the banking sector and the consequent super-normal profits to those lucky enough to obtain a banking license. The Philippine government undertook a number of significant reforms of the real side of the economy in the 1980s, equalizing incentives across differ- ent activities; this process continued into the 1990s. There had been a number of attempts to change the financial system, but it was not until that decade that significant reform was achieved. Initially, entry barriers were modestly relaxed, with the number of branches increasing from 1,957 at the end of 1990, to 3,175 at the end of 1995.10 This was followed by a period of reform during 1993-95 in which the central bank was rehabilitated, commercial banks were forced to increase their capitalization ratios, new foreign and domestic entrants were allowed to enter the market, and the quality of prudential regulation was strengthened. The result was an increase in competition that eroded some oligopoly profits, promoted the mobilization of saving, and encouraged financial deepening. So, for example, the ratio of money and quasi-money to national income, which had been rising steadily since 1986 accelerated its increase, more than doubling from 23% to 49% between 1986 and 1996 download