Part One
IN 1996 the Tiger Cub of Asia was stopped in its path by the baht.
That year, the Philippine economy, under former military general Fidel V. Ramos, was growing at 5.2 percent. Prices were tamed as annual inflation dropped to 5.9 percent, from its high of 9.1 percent in 1995. By the late-1990s the country’s economic growth gained favorable comparisons with other Asian countries, such as Taiwan, Thailand, South Korea and Malaysia.
Ramos, credited with his “Philippines 2000” vision, was poised to be hailed as the lead healer of Asia’s “Sick Man.” That wasn’t about to happen, as the Asian financial crisis swept the region three years before a new millennium.
With the financial collapse of the Thai baht, the crisis spread to the Philippines that saw its growth by 1998 virtually hit nil. Despite efforts by the monetary authorities to defend the peso, the Philippines’s legal tender dropped from P26 to the greenback at the start of the crisis to P46.50 in early-1998 to P53 by July 2001.
Asia, specifically major members of the Association of Southeast Nations, was a wreck.
Years later, Asean member-nations would show the 1997 Asian financial crisis is only a smudge in its economic growth record.
Recovery
SINCE the Asian financial crisis about 20 years back, the Asean has been able to not only recover from the economic wreckage that was but has also thrived to current volatilities in the international market.
The region, in particular, is projected to grow by 5.2 percent for this year and the next. Both of these growth forecasts are well above the world average growth projection of 3.6 percent for this year and 3.7 percent for 2018, according to the International Monetary Fund’s (IMF) most recent World Economic Outlook (WEO) released this month.
The global monetary authority also said the growth of Southeast Asia is faster than earlier expected, partly because of the stronger-than-expected external demand from China and Europe.
Broken down, the Philippines remains the leader of the pack. The country is expected to lead the group this year with a 6.6-percent growth for the year, followed by Vietnam with a 6.3- percent growth projection, Malaysia at 5.4 percent, Indonesia at 5.2 percent and 3.7 percent in Thailand, the country where the financial contagion germinated.
In 1997, in particular, waves of currency devaluations rocked the region’s economic standing following the failure of currency markets in Thailand due to their government’s decision to force float their baht. Declines in markets have then spread rapidly throughout Southeast Asia, giving birth to fears of a worldwide economic meltdown.
Reserves
THE Philippines has been one of the countries hurt by the slump, as the peso severely fell and its growth numbers dipped from 5.2 percent to a contraction of 0.6 percent in 1998.
This year, however, the Philippines is seen to be equipped with handling a crisis similar to the contagion in 1997 and 1998, owing largely to improved economic metrics across the board.
In an e-mail interview with international global ratings Standard and Poor’s Andrew Wood, he said the Philippines is “better placed” to mitigate the effects of an acute financial crisis than in the late-1990s.
“In particular, reserve coverage is ample, the current account is roughly in balance, and domestic leverage ratios are modest,” said Wood, who is financial services (S&P Global) associate director for the Sovereign and International Public Finance Ratings.
“The government’s fiscal deficits have also been contained over recent years, creating more flexibility on the sovereign balance sheet in the event of a crisis,” Wood told the BusinessMirror.
Data from the Central Bank shows the country’s gross international reserves hit $81.51 billion in August this year, steadily growing from the $15.06 billion in 2000.
At the August 2017 GIR level, the reserves are deemed ample to cover 8.7 month worth of imports of goods and services and primary income. It is also equivalent to 5.6 times the country’s short-term external debt based on original maturity and 3.7 times based on residual maturity.
Fiscal position
THREE years after the Asian financial crisis, the reserves’ import cover was only at about 3.5-month worth of goods and services and primary income.
Two decades later, specifically in August this year, the Philippines’s fiscal position hit a P28.8-billion surplus, bringing down the government’s fiscal deficit to P176.2 billion in the first eight months of the year.
The currency, however, could be at risk should another bout of crisis hits the region, analysts have said.
“Certainly, the peso would be at risk of volatility in the event of an external economic crisis, given the potential for a flight to safety effect and the generally expected decline in emerging market currency crosses against the US
dollar,” Wood said.
The peso has been seeing a bleak picture this year as it is one of the worst-performing currencies in the region with a depreciation rate of more than 4 percent in 2017 based on its real effective exchange rate—along with Vietnam.
In particular, data from the Central Bank showed the peso declined from trading at P48.35 in October last year to an average of P51.15 in October this year.
As the currency remains weak, the country’s external position is expected to shield the economy—should another crisis arise.
“That said, we gauge the Philippines’s external position to be a strength, indicating that external indebtedness and short-term liquidity needs are contained. This state of play would provide some buffer against an acute external crisis,” Wood told the BusinessMirror. “Likewise, the current account is roughly in balance, and the Central Bank has ample foreign exchange reserves to smooth excessive volatility if necessary.”
To be continued
Image credits: Nonie Reyes