Financial Situation in the Philippines
Joseph Anthony Lim
 The Philippines continued its capital account openness and free
floating exchange rate despite the bad experiences in the Asian
crisis and the global financial crash.
 Massive capital outflows and stock market crash cut the stock
market index by half from late 2007 to mid 2009. The peso
depreciated from P40 to a $1 to more than P48 to a $1.
 Specter of Asian crisis plus export collapse!
 The real economy recovered strongly in 2010 (from 1% GDP
growth in 2009 to around more than 7% growth in 2010).
 The Eurodebt crisis and an inability to pump prime the economy in
2011 brought the growth rate below 4%.
 Then in 2012, the Philippines got a series of investment upgrade
(investments of course improved), the government pump primed
the economy substantially and miraculously Phil exports increased.
This brought Philippine growth to a surprising 6.6% growth rate,
the 2nd largest in Asia, just next to China.
 The investment upgrade was due to the improvement of the
fiscal position, especially with the imposition of taxes on
cigarettes and alcohol (‘sin’ taxes) and declining deficits
 The upgrade was also due to better governance with the current
administration not experiencing exposures of corruption on big
scandals on projects and election-rigging as the previous
administration’
 Business confidence on the new Administration is also high.
 Since then till now, the Philippines is now the darling of the foreign
investors and rating agencies.
 The Philippines got another credit upgrade bringing it to
investment grade this year.
 From 2010 to present, the stock market index doubled. Capital
inflows surged.
 Together with high overseas workers remittances, international
reserves reached $84 billion in May 2013, equivalent to almost 1
year of imports
 The high inflows of ‘hot money’ is such that even the rating agencies
and multilateral agencies have warned of a growing bubble and its
possible bursting. But except for UN ESCAP, none are calling for
capital controls.
 Just recently in early May (2013), the Central Bank Governor
announced that the Philippines will not undertake capital controls.
 Apparently they do not want to risk the current ‘star’ stature of the
Philippines.
 The specter of Thailand attempting to do drastic capital controls on
the equities market must also figure prominently in this decision.
 Stock market is now overvalued and a bubble is growing. It is not
clear if a property bubble is occurring but construction of
condominiums is growing tremendously, its prices are soaring
and loans to real estate is outpacing loans to manufacturing.
Loans are also growing at a fast pace and a financial bubble may
also be forming.
 But what worries the Central Bank and mainstream academics more
is the sharp appreciation of the peso.
 The CB has kept its overnight borrowing rate low at 3.5% and
decreased the rate for the special deposit account (SDA) several
times and is now at 2%. The low interest rates are to discourage
investment on the peso, but the attraction of the foreign investors is
really the stock market that just keeps zooming up.
 Paradoxically the very low interest rate and monetary easing in the
Philippines encourage stock market investments from the locals. The
resulting increase in the stock market index attracts foreign
investors more.
 The CB also put foreign exchange borrowing limits on financial
institutions to limit foreign exchange entry into the country.
 The Department of Finance had been borrowing dollars from the
CB to finance some of its debt payments
 DOF also announced that the Philippines will limit sovereign
borrowing and use more domestic debt. Although stemming the
peso appreciation may be the main objective, it has a beneficial
result of reduce foreign exchange risk on the country’s debt.
 All these partly to stem the peso’s rise.
 The attempt to stem foreign inflows is laudable but massive
capital inflows is due to quantitative easing in the developed
countries, especially the US, and the Philippines’ own low
interest rates contributing to the stock market bubble and
continuing appreciation of the peso. The attraction of portfolio
investors is the stock market prices that just keeps on going up.
 Despite Philippines’ low interest rate, the interest rate due to QE
of developed countries had led to much lower interest rates in
developed countries than the Philippines
 The Philippine CB and national gov’t cannot avoid the capital
controls if they want to stem the massive ‘hot money’ inflows
contributing strongly to the appreciation of the peso.
Other matters
 In the banking sector, the attempt of the Central Bank to
avoid bank failures had resulted in the CB being too strict on
rural and thrift banks. These banks cater more to small
borrowers and SMEs compared to the bigger commercial
banks.
Sovereign Wealth Fund
 There are now much talk in the Philippines of creating a Sovereign
Wealth Fund
 In its charter, the Philippine Central Bank can only invest the
international reserves in safe and non-risky assets like the US
Treasury bills.
 Because of the huge reserves lying dormant, the CB Governor
recently suggested that the National Gov’t purchase dollars from the
Central Bank to create a Sovereign Wealth Fund that can invest
offshore.
 Some suggests that the dollar fund can be used to guarantee loans
for vital infrastructure projects (e.g. telecommunications, toll
roads) as Abu Dhabi Investment Co. had done.
 Some suggest using the money for local development projects
and using the dollars for Philippine projects’ import needs.
 Some suggest that countries in the region can use the dollar
reserves and in a new regional development bank that is more
progressive (Ocampo and Griffith Jones (2006), Limmahhui
(2010)).
Regional Cooperation
 Regional cooperation is needed to protect emerging markets from
global contagion, and to facilitate economic development.
 Regional development funds for fiscal purposes can be accumulated
from the high international reserves of the East Asian countries
with conditionalities less stringent than the current ones of the
multilateral agencies.
 Current regional arrangements such as the Chiang Mai Initiative
Multilitaralisation (CMIM) and bilateral/ multilateral currency
swaps deal only with liquidity currency problems and not fiscal
needs, and 80% of the loans is tied to IMF conditionalities
 A regional stand on capital flow management and controls will also
help in stemming the overflow of portfolio investments causing
risks of asset bubbles, overvaluation of currencies, and harmful
massive reverse flows due to negative shocks – whether external or
internal.