His Excellency Fidel V. Ramos
President of the Philippines
At the Financial Seminar Plenary Session
[Delivered at the Waldorf-Astoria Hotel, New York City, April 7, 1998]
Coping with the
Asian financial crisis
NINE MONTHS AFTER the East Asian currency turmoil broke out, the global financial crisis it triggered seems to be leveling off. The world’s stock markets are starting to soar once again. Even those of South Korea and Thailand have climbed out of the hole they were in last year—under new leaders willing to face up to the rigors of structural reform.
The economist Paul Krugman of the Massachusetts Institute of Technology declared in Manila last fortnight that he expects most of East Asia’s battered economies to return to growth in three years’ time. His Harvard colleague, Jeffrey Sachs, thinks East Asia is likely to re-emerge as the world’s center of economic gravity in the early twenty-first century—regaining the lead it had lost to the West beginning in the early sixteenth century.
There can be no doubt the crisis will be resolved eventually. But we in the Philippines believe its resolution will be slower than its onslaught was. The pace of recovery will vary from country to country. And the first to recover will be those countries which remain resolutely committed to transparency in the conduct of business—allowing the market system to function freely—and generally depoliticizing the economy. There can be no backtracking from reforms that foster competition, efficiency and productivity.
This is our commitment in the Philippines—and it is a commitment mat has enabled us to fare relatively better than the others. This afternoon, I propose to update you on how we are coping with the crisis—in political and economic terms.
The experts have been fairly unanimous in their predictions that the Philippines would be among the first East Asian economies to emerge from the crisis. Let me cite only the most recent of them: The Economist’s survey of the East Asian economies of March 7:
Over the next few years, [the Philippines] could well enjoy the best performance of any Southeast Asian economy. Just like Thailand and Indonesia, it saw a huge inflow of short-term foreign capital. But as a late starter, the Philippines did not have the chance to overstretch itself as much as its neighbors. Its banking sector is also in better shape, with stricter regulations and accounting standards. Moreover, a decade of structural reform, involving deregulation, privatization, and liberalization of direct foreign investment, has greatly improved the country’s longer-term growth prospects. So the downturn there is likely to be shallower than in the other Southeast Asian economies.
While the Philippines has not escaped the contagion, we have avoided its worst consequences. The peso has not fared as badly as some of the Asian currencies. Its depreciation rate is not too far from those of the Taiwan and Singapore dollars—which are among East Asia’s strongest currencies. Our stock market fared better than its counterparts, and while interest rates rose because of the uncertainty, and our industries felt the financial squeeze, we experienced no wholesale closure of corporations and banks.
While some of our neighbors needed billions of dollars in financial bailouts from the International Monetary Fund (IMF), all we needed was to draw on the remaining tranche of U.S. $330 million of our IMF exit program. This was accomplished as scheduled last month after I had approved into law a comprehensive tax reform program and a bill deregulating the crucial oil industry.
Even in the middle of the Asian crisis, some of us could appreciate the irony of our country—once known as “The Sick Man of Southeast Asia”—getting out from under 35 years of IMF supervision while some of our neighbors are entering new rescue programs with the IMF.
Why has the Philippines been better prepared to weather the crisis than some of its neighboring “tiger” economies?
We have put our house in order
Perhaps it is because we Filipinos—having lived longer with crisis—have become adept at dealing with it. While all other East Asian countries shrugged off the foreign-debt crisis of the 1980s, the Philippines, then under strongman rule, was dragged down by it. Effectively our country lost more than a decade of growth.
Since then, we have been taking the bitter medicine to get rid of protectionism, authoritarianism and crony capitalism. Meanwhile, our vigorous neighbors had one by one passed us by. Economic humiliation can indeed be a very effective rehabilitative therapy.
Since 1986—the year we Filipinos recovered our civil liberties by way of a peaceful People Power Revolution—we have been putting our house in order.
My first concern upon assuming the Presidency in 1992 was to deal with endemic instability by bringing three major armed dissident groups back into the political mainstream.
I offered peace with honor to our military rebels (who had mounted seven successive coups against my predecessor, Mrs. Corazón C. Aquino); initiated peace negotiations with Muslim separatists in the southern Philippines; proclaimed a general amnesty for the Communist guerrillas (the New People’s Army); and legalized the Communist Party, which had been banned for 50 years.
In the economy, we began by removing the barriers—erected since we won our independence from the U.S. in 1946—to foreign investment and multinational industry. Foreign exchange we made freely convertible; and we lifted restrictions on remittances of profits or capital. Our investment rules and procedures we liberalized and simplified. And we started reinvesting in human capital and infrastructure devastated by 20 years of economic crisis.
Most important of all, we began dismantling the monopolies and cartels—in telecommunications, electric power, banking, transportation, insurance and the cement industry—from which oligarchic families had drawn their political and economic power. And we opened our markets to competition by bringing down tariffs; lifting quantitative restrictions; and removing regulations that had stifled creativity and penalized export industries.
To oversee the financial system, we created an independent monetary authority—whose policy independence is guaranteed by the Philippine Constitution—and gave it an adequate level of reserves. We also set up an effective debt-management policy: our debt-service ratio is down from 37% of export earnings in 1990 to less than 11% at the end of 1997.
We set up a tighter banking supervision system capable of adding on new prudential banking rules as needs arose. And Government’s fiscal position we strengthened by trimming off the fat from the public sector through massive privatization and a flexible build-operate-transfer law. This policy helped produce fiscal surpluses for four straight years-from 1994 until 1997.
The open society as an aid to stability
We set out to develop as a democracy. We went against the grain of the conventional wisdom in East Asia. It is true that authoritarian governments have brought unprecedented growth to some East Asian economies, but bitter experience has taught us Filipinos that we cannot safely dismantle our constitutional guarantees—even for the briefest period—because suspending these mechanisms makes public administration no more efficient but only more arbitrary.
From the beginning, we accepted that developing as a democracy meant Government’s coping patiently with dissent, delays, filibusters and litigations. It meant that Government had to work double time to reconcile interest groups and political lobbies into a broad national consensus.
Early in 1993, we negotiated a coalition with the political opposition to depoliticize economic policymaking to a marked degree, by way of a Legislative-Executive Development Advisory Council created by law.
The intermediate centers of power in civil society—the business and labor sectors—non-Government organizations and people’s organizations; the media, and even professional, academic and religious groups—were involved in public policymaking through social pacts and “Summit” meetings at which I myself often presided.
That public policy was made so publicly and subjected to sharp private scrutiny—in Congress and in the media—resulted in a transparency of governance. This transparency inhibited the kind of political entrepreneurship and crony capitalism that had flourished under the strongman Ferdinand Marcos.
This openness of Philippine society—which had at times seemed to hinder decisive governance—proved a blessing when the currency crunch came unexpectedly in July 1997.
When the crisis hit East Asia, the Philippines was better prepared for it than our neighbors. Their recent experience had consisted uniformly of decades of high growth. Our corporate sector—acutely aware of history’s recent lessons—had cautiously balanced its risk portfolios. In most cases our bankers and entrepreneurs correctly imputed currency risks in their decisions. Although the “past due” ratio of our banks deteriorated from 3.7% in July 1997 to 4.4% in October, this ratio has remained among the lowest in the region.
A crisis of confidence produced by panic
Our monetary authorities themselves had been forward-looking: they built up international reserves during the time capital inflows were high, so, during hard times, they had the option to draw from reserves.
Even our bank regulators have been circumspect. They had implemented a prudential rule that requires banks to maintain single-industry lending within 30% of their portfolios. These are in addition to single-borrower limits and restrictions on loans to bank directors, owners, stockholders and related interests.
Prudential rules like these—strictly enforced—kept our banks’ exposure to the hazards of property development lending to about 15%, which is modest by East Asian standards.
Perhaps because the crisis began in countries which had been growing at the world’s highest rates, the international community was slow in responding to it. Most players did not realize the turmoil was more than a cyclical downturn until last October’s bloodbath—when even the stoutest international economies saw their stock markets collapsing by percentages reminiscent of the great depressions of the distant past.
Initially industrial-country analysts had shrugged off the turmoil as the result of misguided policies and imprudent investment decisions by developing countries—from whose economies foreign investors were now justifiably pulling out in droves.
But the currency turmoil cannot be dismissed as the product of rational reactions to investments going sour. It was a product of panic—driven by the primeval fear of the unknown. The currency turmoil resulted from a crisis of confidence. Suddenly investors started disbelieving the facts and figures being released by governments. And even IMF programs meant to restore investor confidence were not working.
Investors wanted out—and pull out they did from all the East Asian countries—regardless of national fundamentals; and despite IMF programs and the efforts of individual governments to bring their economies back on track.
Staying afloat through the crisis
I believe we have achieved our immediate objective of staying afloat through the crisis and avoiding deeper and more extensive damage to the Philippine economy. In recent weeks, foreign investment has started flowing back; the stock market has begun to recover; and interest rates are starting to ease.
Best of all we have avoided a systemic banking crisis. (In the aftermath of the crisis, only one major bank has closed.) Banks are working directly with their corporate clients to restructure loans and to reduce interest rates—to make debt-servicing easier for companies in the tough postcrisis environment.
The Central Bank has required banks to increase their capitalization in two rounds—to be completed by the end of this year. It has also set new rules on foreign-exchange transactions: for instance, banks must hold 30% liquid foreign-exchange assets to cover their foreign-exchange liabilities. And it has placed prudential limits on real-estate lending-at no more than 20% of any bank’s loan portfolio.
Rebounding from the crisis
Our problems are far from over: we may still get some unpleasant surprises. The regional situation still is fragile—particularly in Southeast Asia’s largest country Indonesia. But I feel that the most recent trend of exchange rates generally reflects our improved circumstances.
Following recent rallies, the cumulative depreciations of the Malaysian ringgit and the peso have been contained at around 30%; that of the Thai baht to 35%; and that of the Korean won to about 41%. Only the Indonesian rupiah remains very weak—but the Jakarta Government and the IMF seem to have reached agreement on how to deal with that problem.
But surviving the currency crisis is not enough. We must move forward once again. This is why we have drawn up a revised economic program covering the next two critical years—to provide policy continuity through the change of administrations in June. As a precaution, we have asked the IMF to back up this two-year program—up to a total $1.4 billion—if the need should arise.
We expect GNP growth to slow down to about 3-4% this year, before it picks up again moderately in 1999. Average inflation we intend to keep down to around 8%. We also expect a turnaround in the balance of payments which should enable us to rebuild our official reserves back to about $12 billion.
Our urgent priority is to lower bank lending rates to dampen inflation and to lower the costs of funds to the corporate sectors. I have placed the whole of the national Government under an austerity program. We will also be carrying out a program to improve tax administration.
These measures taken together should ensure a P5.0 billion budget surplus for Government in 1998, thus minimizing its need to borrow. We have also just announced a comprehensive package of banking reforms—to remove any residual doubts about the soundness of our banking system.
Lessons to be learned
Among other things, this package increases the minimum capitalization of banks yet again—by 20% to 60% of the prescribed end-1998 levels, in two equal rounds to be completed by December in the year 2000. And we are enhancing bank transparency by compelling banks—starting this December—to publish quantitative information every quarter on their level of nonperforming loans and other risk assets.
Before I conclude, let me turn briefly to the lessons I think we can extract from the East Asian currency crisis.
The East Asian currency crisis came down swiftly, hit the region—and the world—hard, and lingered longer than anyone had expected. Now, as some sense and rationality return to our economies, we realize that this crisis is unlike anything the world economy has ever known. And it cannot be solved simply by each country’s putting its own house in order.
Because all countries are now linked together irrevocably—not just by trade but by tidal flows of capital—the international monetary system must itself carry out some reforms. A new monetary order must be laid down.
First, we need more innovative approaches to regional financial crises as they emerge, in our increasingly interlinked, interdependent globe. The East Asian crisis was unprecedented in its scope, in its very nature and in the speed with which its contagion spread. Prescriptions and formulas that once worked may no longer be appropriate.
The multilateral institutions must heal themselves
The multilateral institutions should develop quick-response mechanisms and new policy frameworks given the near-instantaneous flow of information and capital around the world, to suit new modes of crisis. They should be able to take the initiative quickly once a national crisis erupts—to contain it before it spreads to other economies.
Second, the industrialized countries, particularly the G-7 nations, must take part in bailout programs. After all, emerging economies provide growing markets for the advanced countries. Globalization means everyone has an interest in everyone else’s continuing economic health.
Third, fund managers should begin to have a caring, sharing and daring attitude for the social consequences of their investments in poor countries—where political and social systems are still so fragile that economic crisis can break them.
Fourth, there is obviously a need for more transparency in the disclosure and sharing of economic information. Governments should agree to provide accurate data on their country’s basic economic indicators and those that reflect the health of their banking sectors.
Fifth, but not the least, the crisis has also dramatized the need for more liberalization and deregulation of economies. No bureaucratic mechanism can allocate resources as efficiently as the free market does. Nor is there any mechanism as effective in fostering investment discipline and in rewarding creativity, intelligence and hard work.
In freeing the market, our object should not be merely to encourage the uninhibited pursuit of self-interest. The market system should be tempered by rules that enhance prudent financial management.
Market players tend to discount the risks when their hopes of profit are high. Prudential rules must restrain this tendency. And countries with modern financial systems may need to help transfer the appropriate technologies to the emerging economies. Every developing country will need a more effective way of supervising its banks if it is to succeed in using migratory capital flows to its advantage.
The Philippines is still your smart choice
Now to sum up and conclude. Where people used to be too extravagant about East Asia’s prospects, now they tend to be too pessimistic. I myself remain cautiously hopeful about regional prospects: classify me as an optimist who carries an umbrella. If the East Asian leaderships grasp the nettle of reform, I see no reason their countries cannot become even stronger than before.
And it is plain what reforms are necessary. Markets must be freed from political and bureaucratic interventionism. Political corruption and cronyism must end. There must be more transparency in the conduct of business—by adopting higher standards of accounting and accountability, due diligence and trustworthy legal systems.
I expect future Southeast Asian growth—when it restarts in two to three years—to be slightly lower (5-6%) than it has been these past 10 years (7-8%). But it should also be better-balanced, and therefore more sustainable (but still at rates twice as fast as the average of mature economies).
This year and over the next two years, the Philippines—even at its lowest possible growth rate—should stall grow at more than twice the level of East Asia’s tiger economies (some of which are in recession). Our merchandise exports continue to grow consistently. Over the first two months of 1998, exports rose by 24% over those of the same period last year.
Whoever wins the presidential elections in May, I am confident the country will stay the course of economic reform and liberalization. We of the Philippines accept and implement globalization as a fact of contemporary life.
Indeed the peaceful transition I am pledged to oversee in June should give the Philippine economy a new impetus—by enhancing its underlying political stability. And when you consider, in addition, the reservoir of goodwill in my country for America—and Americans—then you will agree the Philippines still is the smartest choice for your investments.
Source: Presidential Museum and Library