This Selected Issues paper analyzes the factors behind the relatively strong performance of the Philippines in recent years (1990s) as well as the remaining reform agenda. The paper highlights that the Philippines has received considerable attention in recent years as it “emerged” in the early 1990s from a long period of slow growth and economic imbalances, and then managed to escape the “Asian crisis” relatively unscathed. The paper examines the public finances for the Philippines. It also analyzes the monetary sector, external sector, and the banking sector reforms.


This Selected Issues paper analyzes the factors behind the relatively strong performance of the Philippines in recent years (1990s) as well as the remaining reform agenda. The paper highlights that the Philippines has received considerable attention in recent years as it “emerged” in the early 1990s from a long period of slow growth and economic imbalances, and then managed to escape the “Asian crisis” relatively unscathed. The paper examines the public finances for the Philippines. It also analyzes the monetary sector, external sector, and the banking sector reforms.

V. External Sector1

A. Overview

1. Although the external sector came under heavy pressure during the Asian crisis, it proved less vulnerable than in the most heavily affected countries. The policy response to crises in the mid-1980s and early 1990s, particularly in external debt management and banking policies, helped contain the buildup of imbalances and manage the crisis as it unfolded. Nevertheless, large capital inflows in the mid-1990s nearly overwhelmed the policy framework and led to sizable overvaluation of the peso, a growing current account deficit, and rapidly rising short-term debt. The de-facto pegging of the peso to the U.S. dollar in late 1995 exacerbated the vulnerability to short-term capital flow reversals. When the tide turned in 1997, the authorities tried to defend the peso for a few months, but then adapted quickly by floating the peso, tightening financial policies, and accelerating structural reforms. These policies succeeded in stabilizing the external position without the severe disruption experienced in the other crisis countries.

2. Analysis of external competitiveness suggests that the peso was overvalued prior to the Asian crisis, then “overshot” in the other direction, and is now close to equilibrium. Analysis based on the methodology developed by the IMF’s Coordinating Group on Exchange Rates (CGER) suggests that prior to the crisis the peso was overvalued by 10–15 percent in real effective terms, Following the float, the peso depreciated by over 30 percent, resulting in undervaluation to the tune of 10–15 percent. Since late 1998, the peso has appreciated, bringing it close to its equilibrium level.2

3. Examination of recent trade developments indicates that a favorable structural change took place in the early 1990s, with exports strongly benefiting from prior investments and regulatory changes. Philippine export market shares increased faster than three of the “Asian-5”, with the exception of Korea’s. The change reflects rapidly increasing exports of electronics and electronic components. Although such growth has come partly at the expense of more traditional exports, it has shown the Philippine’s capacity to partake fully in one of the most dynamic and competitive export markets in the world.

4. Over the medium term, it is expected that the current account (now in surplus of 2 percent of GNP) will return to a deficit of about 2–3 percent of GNP. Such a position would be consistent with a medium-term savings–investment norm estimated using the CGER methodology.

B. Developments in the Balance of Payments and External Debt


5. The Philippine economy experienced major external imbalances over the past two decades. Starting in the early 1980s, the economy slid into a full-blown balance of payments crisis, resulting in default on external debt followed by a severe recession.3 The crisis was the result of earlier policies favoring an expansion of the public sector, import substitution, and easy credit to the private sector financed through external debt. Although efforts to support exports had started as early as 1970 with the Export Incentives Act,4 effective protection remained substantial, especially in import substituting sectors. Large public and private investments initiated during this period were heavily dependent on imports and foreign financing, and eventually proved unable to generate the foreign exchange earnings to service the debt. The resulting vulnerability became unsustainable in the face of large external shocks5 and growing political uncertainty:6

6. From the mid-1980s, reforms produced a gradual improvement in economic performance, but the economy remained vulnerable to a “boom-bust” cycle. The period 1986–89 saw a recovery of growth and investment and a return of foreign capital, supported by policy reforms including a breakup of agricultural monopolies, import liberalization, and tighter debt management. However, import dependence remained high and domestic saving weak, and a strong recovery of growth combined with expansionary fiscal policy resulted in a return of unsustainable current account deficits (peaking at more than 6 percent of GDP in 1990). Thus, a few years of rapid growth were capped by near-exhaustion of reserves, a peso depreciation, and yet another debt rescheduling.

7. In the early 1990s, reforms accelerated and the economy became more resilient in the face of external shocks. Trade liberalization accelerated, with average nominal tariffs expected to fall below 10 percent by 2000 (from over 40 percent in 1980, and 27 percent in 1990).7 In 1991, a new Foreign Investment Act was introduced, which simplified the approval process and allowed foreign ownership of up to 100 percent in many sectors, 1992 witnessed a sweeping exchange liberalization that removed current and most capital account restrictions. These reforms strengthened resource allocation on the economy, boosted exports, and were followed by full restoration of the Philippines’ access to global capital markets—setting the stage for the Philippine’s relatively robust performance during the Asian crisis.

8. Despite severe early pressures from “contagion,” the external position has proved remarkably resilient in the face of the Asian crisis. As for other countries in the region, the crisis first manifested itself in falling equity prices and pressure on the exchange rate, with an acceleration of capital outflows, particularly in the aftermath of the Thai baht devaluation on in July 1997. Contagion was evident in the lack of differentiation in the key foreign exchange bond spread indicators, which initially rose to prohibitive levels for all countries affected by the crisis, with little differentiation between borrowers.8 However, compared with the most heavily affected crisis countries, capital outflows from the Philippines were less severe, and the hemorrhage of reserves was arrested earlier. Unlike in previous crises, external debt service was not interrupted, and the domestic banking and corporate sectors—-while showing signs of stress—were able to withstand severe external shocks better than in the past.

9. Nevertheless, while the crisis was less severe in the Philippines than in some other countries in the region, it revealed underlying weaknesses that remain to be addressed. The trade deficit had widened to well over 10 percent of GNP by 1997, and the peso was significantly overvalued. While capital flows through the early 1990s consisted mainly of longer term (including concessional) lending from both multilateral agencies and other bilateral sources,9 1995–96 witnessed a jump in short-term borrowing. Clearly, macro-economic policies and prudential systems were not fully attuned to the challenges of the Philippines’ emerging integration in the globalized capital markets. Assessment of balance of payments developments was seriously hampered by statistical problems related to transactions through foreign-currency deposit accounts. The following sections explore these developments in greater detail.

Recent developments

10. The Philippine current account has been marked by large cyclical swings in recent years. The current account deficit widened to over 5 percent of GNP in 1997, followed by a surplus of 2 percent in 1998. The trade balance shifted even more sharply, from a deficit of over 13 percent of GNP in 1997 to balance in 1998. This dramatic adjustment reflected the combined effects of weaker growth, peso depreciation, and continued expansion of the most important export market (the United States). Imports contracted sharply (by 19 percent in dollar terms) reflecting lower volumes (13 percent) as well as prices. Part of the improvement in the trade account was offset by weaker services, especially income transfers (which in the Philippines are particularly important given the large number of Philippine workers employed abroad).10

11. Unlike most other crisis countries, the Philippines has benefitted from continued strong export growth. Exports volumes rose by 23 percent in 1997 and by 20 percent in 1998. This reflected the fact that Philippine exports go disproportionately to the United States (which continued to grow fast while Asian growth slumped) and have shown evidence of structural improvement, with strong gains in market shares arising mainly from investments in the electronic sector.11

12. Mirroring the current account, the capital account moved from large-scale inflows in 1995–96 to a sizable outflow in 1997. Like other Asian countries, the Philippines experienced a surge of inflows during 1993—96 (averaging about 6 percent of GNP). Net inflows fell to 1 percent in 1997 and were close to zero in 1998, the first full year following the Asian crisis. The capital inflows included foreign direct investment (which averaged about $1.2 billion during 1993–97 compared with $0.6 billion during the three preceding years), borrowing by commercial banks (with net liabilities up by almost $1 billion per year on average), and medium and long-term loans (which rose from annual net outflows of $1.1 billion during 1990–92 to inflows of $2.3 billion during 1993–97). Trade-related capital and suppliers credits stayed about the same during this period.

13. The growing capital inflows during 1994–96 raised concerns at the time, and policies (especially monetary and exchange rate policies) were searching for ways to contain their effects (see Chapter IV). However, the focus perhaps was too narrowly directed at limiting nominal peso appreciation and/or controlling the monetary impact of the inflows. In hindsight, a more strategic and consistent approach was warranted especially to forestall the large rise in short-term foreign borrowing in 1995–96. By the same token, it is important to note that a significant part of the capital inflows received by the Philippines during that period were medium- to long-term investments responding to the increase in capital productivity resulting from reforms. In particular, there were large foreign investments in the fast-expanding electronics export sector (see below), which rapidly became the dominant export sector in the Philippines.

14. During 1997, capital withdrawals started in the equity markets, followed by turnarounds in commercial bank net foreign assets and capital flight. Trade financing and suppliers credits also declined, although largely in tandem with declining import volumes—there is no evidence of significant cuts in trade lines.12 Likewise, commercial banks’ large foreign currency deposit base proved stable throughout the crisis.13 There was also continued strength in medium and long-term net inflows, and relatively strong foreign direct investment (which in fact rose from 1997 to 1998).

15. Faced with the sudden decline in net private capital inflows, the authorities increased public foreign borrowing, including from multilateral14 and bilateral15 resources. This policy was part of a strategy to allow an orderly adjustment to the shock in private capital flows while containing the underlying vulnerabilities. The strategy to control vulnerabilities centered on a relatively tight monetary policy, a floating exchange rate (with occasional—and limited—intervention to prevent disorderly market conditions),16 measures to strengthen the banking sector, and better monitoring of short term debt.17 The lessons learned from the earlier crises, especially the safeguards put in place to prevent renewed excessive debt accumulation, clearly contributed to the success of this strategy.

16. While the external position remained vulnerable through the summer of 1998, it has since improved. These developments were in line with global market developments, but domestic factors were also at play. In particular, while there was some market uncertainty following the May 1998 elections about the policies of the future government, confidence improved once the government had set out its policies. Since September 1998, the peso has appreciated significantly and gross usable reserves have risen to over 120 percent of short-term debt, up from less than 80 percent in early 1998.

17. Following the steady decline in the debt/GNP ratio through 1996, the ratio has increased again in recent years, to 76 percent, partly influenced also by the peso depreciation. Debt reduction operations, prudent fiscal policies, and rapid growth had reduced debt relative to GNP from 65 percent in 1990 to 47 percent in 1996. In addition, a policy of lengthening debt maturities had reduced the debt-service burden (with the debt-service ratio falling from 35 percent in 1990 to about 13 percent in 1996). Mainly because of peso depreciation, the debt-service ratio, however, has remained low at 13 percent in 1998.

C. External Competitiveness

18. During the period 1993–97, the current account deficit grew to over 5 percent of GDP, and the peso is estimated to have become overvalued by 10–20 percent. The peso appreciated faster in real effective terms than other Asian currencies, and the current account deficit widened significantly beyond the level consistent with medium-term equilibrium even after accounting for the impact of the economic cycle.

19. In 1998, the current account turned into a surplus as output growth fell far below potential and the peso “overshot” to become temporarily undervalued. However, the exchange rate has appreciated significantly since late 1998, virtually eliminating by mid-1999 all of the estimated undervaluation.

External competitiveness indicators

20. Because of recent volatility and data limitations, the usual real exchange rate indicators provide little evidence regarding the adequacy of competitiveness at a certain exchange rate. Because there are no direct measures of an “internal” real exchange rate (prices of nontradeables relative to those of tradeables), the proxy of nonfood prices in the CPI relative to the price of food was used (Figure V.1, top panel). This measure shows sizable real appreciation during the 1990s (some 25 percent from end-1989 to end-1997; 13 percent since end-1995), but is obviously distorted by the larger volatility of food prices.18

Figure V.1.
Figure V.1.

Real Exchange Rate Measures, 1984-99. 1/

Citation: IMF Staff Country Reports 1999, 092; 10.5089/9781451831221.002.A005

Sources: Philippine authorities; IMF INS; and Fund staff calculations.1/ An upward movement indicates an appreciation of the peso.

21. Other measures of competitiveness, such as the real effective exchange rate (REER) index compiled by the IMF, show a much larger appreciation prior to the crisis, followed by sizable depreciation after the float of the peso in mid-1997. Figure V.1 (bottom panel) shows real appreciation of more than 50 percent from the trough in 1990 to mid-1997 followed by a depreciation of about 30 percent. The problem then is to determine an appropriate base period during which the exchange rate was judged to have been in equilibrium. While 1993 has often been cited as a year with broad equilibrium both domestically and in the external accounts, such an assessment inevitably involves a large amount of judgment.

22. Comparison with the “Asian-4” countries (Figure V.2) shows that the Philippine peso has been stronger in real effective terms throughout much of the 1990s. That this relative real appreciation was not reversed during the recent crisis is significant and may indicate that fundamental structural change has been at work. For a more formal assessment, we now turn to an analysis of the medium-term underlying current account position.

Figure V.2.
Figure V.2.

Asian Exchange Rates, 1984-99. 1/

Citation: IMF Staff Country Reports 1999, 092; 10.5089/9781451831221.002.A005

Sources: IMF INS; and Fund staff calculations.1/ An upward movement indicates an appreciation

A predicted current account

23. A regression equation with good explanatory power can be estimated for the current account, based on the REER and the output gap. This equation is able to explain the sharp recent turnaround in the current account relatively well.

To use the CGER methodology, two elasticities are estimated:

  • the change in the current account as a result of the change in cyclical conditions (measured by the output gap); the elasticity allows the construction of a cyclically adjusted current account;

  • the change in the current account as a result of the change in the exchange rate.

24. After a specification search, a simple reduced-form regression was estimated for the period 1982–98 (t–statistics in parentheses):

CAYt= -2.52 - 0.15*Rt -0.13*Rt-1 -0.57*YGAPt,σϵ = 1.97,D.W.=2.04,R2 -BAR=0.62.(4.83)(2.88)(2.33)(2.97)

In this equation, the current account balance (CA_Y) is measured as a percent of GDP; R denotes the logarithmic change in the REER; and YGAP denotes the output gap.19 Figure V.3 suggests that the current account in the Philippines responds significantly to movements in the REER, a finding confirmed by the regression estimates. As Figure V.4, top panel shows, the equation has good explanatory power and captures rather well the dramatic turnaround in the current account from 1997 to 1998.

Figure V.3.
Figure V.3.

Current Account and Real Exchange Rate, 1984-99. 1/

Citation: IMF Staff Country Reports 1999, 092; 10.5089/9781451831221.002.A005

Sources; IMF INS; WEFA; and Fund staff calculations.1/ An upward movement in the exchange rate denotes depreciation.
Figure V.4.
Figure V.4.

Actual, Warranted, and Cyclically-Adjusted Current Account, and Implied Equilibrium Exchange Rate, 1982-98.

Citation: IMF Staff Country Reports 1999, 092; 10.5089/9781451831221.002.A005

Source: IMF RES department, Philippine authorities, EIS, and Fund staff calculations.1/ Predicted current account on the basis of regression estimates.2/ Savings-Investment norm calculated using the CGER methodology.

A “warranted” current account and the equilibrium exchange rate

25. A “warranted” current account can be constructed using the CGER methodology for estimating a savings-investment norm. The CGER procedure was operationalized taking into account the influence of demographic, fiscal, and output variables for the Philippines relative to the equivalent variables in a set of industrial economies. The norm is found to fluctuate, but to be significantly less volatile than the cyclically adjusted current account (estimated using the regression estimated above—Figure V.4, middle panel). For 1998, the norm indicates a deficit slightly above 2 percent of GDP, while the actual current account position was a surplus of 1.8 percent. Using the implied long–run elasticity for the REER estimated above, the analysis indicates that the exchange rate became undervalued by 10–15 percent.20

26. The norm is consistent with the indications from the REER measures that the peso was overvalued during the period prior to the Asian crisis. It is noteworthy that the norm indicates that the actual current account was closest to the “warranted” level in 1991, and not in 1993 as is sometimes assumed. In 1998, the current account overshot its warranted level, as it moved into sizable surplus.

27. The implied exchange rate disequilibrium over the period 1982–98 is shown in Figure V.4 (bottom panel). This computation uses the long–run implied price elasticity estimated above (which, at 0.28, is somewhat higher than the 0.2 that is often assumed in similar studies). Corresponding to the shifts in the relationship between the cyclically adjusted and the “warranted” current accounts, the REER in 1998 overshot the equilibrium level, becoming undervalued by some 10–15 percent.

Exports as indicators of competitiveness

28. Since the early 1990s, the Philippines appears to have experienced a favorable structural improvement in its external trade. Analysis of trade flows can provide useful insights on competitiveness. In particular, structural changes in trade flows and sustained changes in market share can be indicators of shifts in the equilibrium exchange rate. As documented in Chapter II, econometric analysis confirms a structural break in trade performance around the early 1990’s; the ratios of export to import volumes (Figures V.5 and V.6) support a similar conclusion.

Figure V.5.
Figure V.5.

Merchandise Trade Volume, 1984-98.

Citation: IMF Staff Country Reports 1999, 092; 10.5089/9781451831221.002.A005

Sources: Philippine authorities, WEO, and Fund staff calculations.
Figure V.6.
Figure V.6.

Goods and Services Trade Volume, 1984-98.

Citation: IMF Staff Country Reports 1999, 092; 10.5089/9781451831221.002.A005

Sources: Philippine authorities, WEO, and Fund staff calculations.

29. There has been a significant gain in export market share since 1994, following a decade of relatively stagnancy. Figure V.7 shows that the growth of Philippine export market share has outpaced that of all the other Asian-5 countries, except Korea. This is indicative of a favorable structural shift, in particular since it coincided with real appreciation.

Figure V.7.
Figure V.7.

Asian Export Competitiveness, 1984-98.

Citation: IMF Staff Country Reports 1999, 092; 10.5089/9781451831221.002.A005

Sources: WEO, and Fund staff calculations.

Developments in export components

30. The main driving force behind the recent favorable export performance has been the electronics sector, which has experienced rapid growth since 1994 and has become by far the dominant export sector (Figure V.8 and Box V.1). To a large degree, the Philippine’s continued export-led growth is now tied to the success of electronics exports. Food exports (except coconuts) have also kept growing. Other traditional exports, and especially garments, have performed less well. The worst performance has been turned in by minerals exports.

Figure V.8.
Figure V.8.

Selected Export Components, 1984-98.

Citation: IMF Staff Country Reports 1999, 092; 10.5089/9781451831221.002.A005

Sources: Philippine authorities, WEFA, and Fund staff calculations.

31. Some observers have pointed to the risks inherent in over-specialization, and have noted evidence of competitiveness problems in the comparatively weak performance of traditional exports. The local value added in electronics exports is also still relatively low (10-30 percent), as they depend considerably on imported raw and processed materials (especially wafers). The World Bank points out that this situation can only be remedied through the upgrading of local technology and growth of domestic firms that can provide a wider array of ancillary services.21 Support of small and medium enterprises, including better access to finance, should also help in the context. For garments, the key was judged to be better quality of production, distribution, and marketing. Notwithstanding these caveats, it is clear that the dynamism of electronics exports could not have come at a better time for the Philippines, sustaining growth and export earnings at a time of crisis.

D. Medium-Term Outlook and Issues

32. Over the medium term, the current account is projected to return to a deficit that is consistent with the medium-term investment norm (2–3 percent of GDP). The speed with which the norm is reached depends on the projected paths for output and the real effective exchange rate (REER). The extent to which exports continue to gain market share is an additional uncertainty. Given the outlook for continued FDI and rising portfolio inflows, financing the current account deficit and projected debt amortization should not pose a problem. Reserves are expected to continue to increase, to the equivalent of four months of imports by the end of the projection period (2004). Although external debt would continue to increase in absolute terms, it would decline relative to GNP (to 67 percent, from 76 percent in 1998).

33. In support of such a scenario, a challenging policy agenda remains:

  • Macroeconomic policies will need to combine prudent demand management with exchange rate flexibility, to preserve competitiveness and prevent the buildup of excessive leverage and debt (especially short-term). Continued upgrading of prudential and supervisory standards in the banking system will also be necessary for the successful management of the “capital inflows problem.”

  • Continued trade and investment liberalization will be crucial for the Philippines to fully partake in the benefits of globalization. Average import tariffs are set to come down to 5 percent by 2004, an objective that should be maintained. In addition, protection in agriculture should be reduced to enhance productivity growth in that sector, and to permit dynamic export growth in this area of apparent comparative advantage.

  • Support for exports by building up infrastructure, enhancing access to finance for small and medium-size enterprises, and improvements in services (including in the area of public administration) will also be necessary in order to sustain gains in market share.

  • Debt management should continue to be modernized, to keep pace with rapidly evolving financing techniques and, in particular, to keep on top of all forms of short-term exposures.

  • Balance of payments statistics need to improve further to prevent reliable estimates of current account developments. This should include the use of source data on transactions through FCDU accounts (even if provided by banks in appropriate form, to accommodate the laws on bank secrecy), or the development of reliable alternatives (survey methods).

Electronics Exports—Rapid Growth

Although growth of electronics exports took off only in 1994, the sector has long historic roots in the Philippines. This was evident in the continuous upgrading of the capabilities of the sector, which started in the 1970s with basic assembly and packaging of components, added assembly and testing technologies in the 1980s, and expanded to the production of complete computer peripherals, module assembly and component manufacturing in the 1990s. Wafer fabrication and original design is considered as being within the sector’s capabilities within the next five years.

Electronics Exports

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Source: Semiconductor Industries Association.

Despite the Asian crisis, 38 new electronics companies were registered during 1998 (according to BOI/PEZA data), at a total project cost of

article image
15 billion, bringing the total number of companies to 462. Of these, 138 were Philippine (although such companies were relatively small), 133 Japanese, 46 Korean, 39 United States (accounting for about 70 percent of exports), and 20 Taiwanese.

The geographic distribution of electronics exports is well diversified, with 32 percent going to the United States, 22 percent to Europe, 15 percent to other ASEAN countries, 13 percent to Japan, 8 percent to Taiwan, and 10 percent to other destinations. In terms of employment, the sector contributes some 250 thousand jobs in 1998, up from 38 thousand in 1985. Employment in the semiconductor subsector has been growing more slowly than in other electronics subsectors, reflecting its relative capital intensity.

Factors contributing to the sector’s growth include:

  • A high emphasis by local producers on the quality of production, using the latest manufacturing techniques.

  • Wages are higher in the Philippines relative to China and Indonesia, but local labor is considered highly skilled, technically proficient, cost competitive, and well-trained. Philippines has significant numbers of technically trained (engineering and information technology) personnel: with a labor force of 31.2 million, of which 28.3 million are employed, Philippines had 438,988 enrolled students in 1997–98, and graduated 74,750 students per year (in technical fields). In all, there are 1,345 colleges and universities.

  • The strategic location of the Philippines (together with human resources) is often cited as the dominant reason for FDI.

Domestic value added in electronics exports has almost tripled since the 1980s, increasing to almost 30 percent (25 percent for computers) in 1998, from about 10 percent in the early 1990s. This finding, however, does not apply to all manufacturing processes (e.g., packaging is still heavily dependent on imports, especially of wafers).

Non Deliverable Forwards (NDFs): Their Use in the Philippines

An NDF is a forward contract without an exchange of principal; instead, only the difference between the contract exchange rate and the spot rate at maturity is settled, in local currency. The NDF typically -covers the foreign exchange risk (in case of a depreciation; the Central Bank makes a profit when the currency appreciates) of an underlying foreign loan, the maturity of which tends to match that of the NDF. The contract exchange rate is usually determined by the current exchange rate adjusted for the differential between the domestic t-bill rate and LIBOR.

There is little conceptual difference between foreign exchange market intervention through NDFs and intervention through forwards. The main exception concerns the accounting treatment of NDFs, which makes them less transparent (as they are not reflected in reserves when they are contracted):

  • In forward (currency swap) intervention, commercial banks would make a simultaneous spot sale of dollars to the central bank and a forward purchase of dollars from the central bank. The central bank would then sell the dollars in the foreign exchange market. The net effect of these transactions on reserves would be zero (unless reserves were explicitly defined to exclude forward liabilities), but forward liabilities would go up by the full amount of the swap.

  • In intervention through NDFs, commercial banks are encouraged to borrow abroad, selling the dollar proceeds in the foreign exchange market. In exchange, they get an NDF from the central bank, which assures them of having enough pesos to buy the dollars they will need at the end of the contract. When the loan is unwound, the commercial banks repays the foreign dollar loan.

The BSP has used two main types of NDFs: (1) Special NDFs, contracted primarily with local branches of foreign banks. Typically, these borrow foreign exchange from their parent banks, at maturities of up to a year. The banks would sell the loan proceeds in the interbank foreign exchange market (thereby supporting the peso). The NDF in effect covers the downside foreign exchange risk for the bank, with an upside potential for the BSP. (2) The currency risk protection program (CRPP), applied to corporations with unhedged foreign exchange liabilities contracted prior to some cutoff date. The corporation in effect gets a foreign exchange guarantee from a local bank that “off loads” the risk through an NDF with the BSP.

The stock of NDFs rose to about $1 billion in 1998 (mainly special NDFs), following pressures in the foreign exchange market. Since then, the stock of NDFs has generally trended downward.

External Data Issues

External sector data, especially on the trade and external debt side, are generally of high quality and are available in sufficient detail and frequency, but their compilation has become increasingly difficult in recent years. In particular, increased use of Foreign Currency Deposit Units (FCDUs) and of Offshore Banking Units (OBUs) has made it very difficult to correctly allocate the transactions between current/financial account categories, given banking secrecy laws. As a result, the estimates of services arc effected by large uncertainties, and possibly include a sizable amount of capital account transactions.

Significant improvements have been made in recent years. In particular, the BSP has included in external debt reports of several items previously excluded (most notably of credit lines to banks extended from headquarter banks located abroad). A simplified and more informative foreign exchange reporting form has been introduced, and the BSP is working on a number of improvements to the reporting system on derivatives. Much of this is work in progress. However, it is also apparent that the strict bank secrecy provisions prevent substantial progress on improving the estimates of transactions through FCDU accounts.


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Prepared by Charalambos Christofides.


It should be noted that the analysis is based on medium-term estimates of the equilibrium exchange rate, and should not be taken as indicators of imminent short-term movements.


In 1988, debt restructuring agreements were concluded in line with a 1987 Paris Club agreement. In all, almost US$13 billion of debt was restructured, about 136 percent of 1988 exports of goods and services.


R.A. No. 5186 offered fiscal exemptions to exporters of both goods and services to stimulate exports of non traditional manufactures.


Including a jump in world interest rates, recession in the United States, and the Latin America in a Debt Crisis.


Culminating in the assassination of Ninoy Aquino in 1993.


Moreover, all but one quantitative restriction have been tariffied.


See Baig and Goldfajn, “Financial Market Contagion in the Asian Crisis,” IMF Working Paper, WP/98/155 (November 1998).


See Philippines—Background Paper, SM/95/253, Chapter I (September 25, 1995).


Income transfers were probably affected by rate of return considerations and by income considerations. In peso terms, fewer dollars needed to be exchanged to support a given income transfer following the depreciation of the peso.


Described in Box V.1.


This was in contrast to the experience in the early 1990s when most trade lines were not rolled over.


The stability of short-term foreign bank lines may be attributable to the fact that Philippine banks in the 1990s have become net depositors in the Euro-markets, with part of FCDU deposits redeposited abroad.


Mainly the IMF (extension and augmentation of the 1994 EFF, and a new SB A in March 1998) World Bank (a Banking Sector Reform Loan in 1998, and additional program loans planned for 1999), and the Asian Development Bank (with loans for energy sector, capital market and Metro Manila Air Quality development).


Most notably from Japan (OECF and JEXIM), and significantly expanded under the “Miyazawa” initiative.


Intervention during this period was mainly in the form of nondeliverable forward contracts between the BSP and market participants. The use of NDFs in the Philippines is briefly summarized in Box 2.


For a description of efforts to improve external data, see Box V.3.


For example, in 1997–98, reflecting the impact of drought on food prices, the ratio continued rising notwithstanding the large depreciation after the float of the peso in mid-1997.


As estimated using a Hodrick–Prescott filter.


The CGER procedure produces an estimate for a “normal” current account (the so called “savings-investment norm”) by using a panel set of countries that are used as comparators (see Isard and Faruqee (1998)). The procedure allows for a “recalibration” of the result, to introduce a “fixed effect” correction intended to help match the predicted savings-investment norm with some historical average for the country. For the Philippines, the correction was made to match the average current account up to 1993 (later years were excluded so as not to contaminate what should be a medium-term estimate without the effect of recent events).


World Bank, “Philippines: Country Economic Review,” November 1998.

Philippines: Selected Issues
Author: International Monetary Fund