Bernardo M. Villegas
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Roots of Resilience of Philippine Economy (Part 2)

             Fortunately, there was continuity in policy reforms and institution building from the Aquino Administration to the next, which was led by President Fidel Ramos.  The Ramos government aggressively liberalized trade and started the elimination of quantitative import restrictions.  The most significant reform introduced by the Ramos Government had to do with the energy sector.  To resolve the crippling power crisis in the early 1990s, the Government launched into a pioneering program for Build Operate Transfer (BOT) projects which created new private power capacity within 18 months.    The Government also undertook the privatization of the water (MWSS) concession as among the largest privatizations globally at that time.  This BOT program was the precursor of the Public Private Partnership (PPP) program which has delivered major private infrastructure projects in airports, expressways, urban rail, bulk water, electronic card payments for fares, etc. 

            In PPP projects, there is an appropriate allocation of risks between the government and the private sector, with completion risks for date-certain fixed cost delivery as well as efficient operations borne by the private sector.  The expenditure for the project and debt financing are generally assumed by the private sector.  They do not worsen the fiscal deficit to GDP ratio nor the public sector debt to GDP ratio which, as mentioned above, had been kept at very prudent levels of 3% or less and 30 to 40%, respectively, for more than a decade.

            The removal of foreign exchange controls was significant in resolving the foreign exchange shortages which had plagued the first half of the last 75 years, thus creating ample dollar liquidity in the formal banking system.  In 1992, the Central Bank issued a series of circulars to partially liberalize controls on non-trade foreign exchange and foreign trade transactions.  Many of these controls were considered almost impossible to enforce or too costly to administer or monitor, such as the “surrender requirement” for the sale of residents of foreign exchange receipts to authorized agent banks.    The Central Bank also removed restrictions on exporters in the use of their export receipts.  This removed compelling reasons for “dollar salting” through the under declaration of export receipts and keeping the dollars in accounts abroad.  As a result, more dollars started to flow through the formal domestic banking system.  Additional liberalizations allowed the deposits of foreign currency accounts in the Philippines or abroad and for residents to enter in foreign exchange transactions without the need for Central Bank approval.  All these very favorable developments were witnessed by Dr. Montes at close range as a top executive of Citibank.

            The lifting of exchange controls enabled the increase in OFW remittances flowing through the banking system and the increase in Foreign Currency Depository Unit (FCDU) balances as a form of secondary international reserves.  These institutional and policy reforms have been responsible for the accumulation of large Gross International Reserves (GIR) which have systematically resulted in the increase from practically zero month coverage of imports at the end of the Marcos regime to very comfortable figures of anywhere from 8 to 9 months import coverage which the national economy has been enjoying over the last decade or so.  The continuing balance of trade (BOT) deficit has been more than covered by the foreign exchange earnings from our Overseas Filipino Workers (OFW) and the BPO-IT sector.  As Dr. Montes observed: “The long problematic scarcity of foreign exchange of the last 75 years was finally resolved and the irony was that this coincided when foreign controls were removed.”

            In recent years, the BSP has heeded practical advice proceeding from the monetary theory of the balance of payments as applied to small open economies:  that it is not possible to have at the same time fixed exchange rate, monetary independence, and capital mobility.  These lessons were learned through painful experiences by economies like Thailand, Indonesia and Malaysia during the East Asian financial crisis of 1997 to 2000.   Our own BSP decided to conserve and accumulate GIR and let the peso float rather than defend the peso and lose international reserves. It is of interest to note that GIR was only USD 1.8 billion in January 1991.  With the creation of the BSP as an independent monetary authority, the removal of exchange controls, the attainment of current account surpluses and market-based interventions have resulted in the GIR increasing to a very comfortable USD 110.1 billion as of December 2020.

            Concurrent to the lifting of exchange controls in 1992 was the creation of the Bangko Sentral ng Pilipinas (BSP) in 1993 and the Monetary Board as the independent Central Monetary Authority with a mandate for price stability.  The BSP law also resolved the problem of the non-performing assets of the old Central Bank by transferring them to the fiscal accounts.  The very competent economic and financial technocrats on whom the political leaders relied for policy and institutional reforms after the 1986 EDSA revolution were among the first to adopt what is known as inflation targeting in monetary policy.  Independent central banks and inflation targeting were recent developments in banking and monetary policies during that time.  They were the offshoot of policies in the US, the UK, and other industrial countries which succeeded in defeating double-digit inflation through monetary policies and supply side economics.  These have been recently very visible under the Duterte Administration, thanks to the right competent officials at the helm of the BSP and the Department of Finance.

            Summarizing the lessons learned from Philippine economic development experiences over the last 75 years, Dr. Montes refers to the last 34 years or so as a period in which the country undertook wide ranging reforms, many of which were politically difficult.  It was literally a herculean task to shift from an inward-looking strategy, statist intervention and non-price mechanisms to control and shape economic behavior towards a more outward-looking strategy and relying less on government intervention and control of economic outcomes.

            Since 1986, the market-oriented strategies and reliance on market signals have started to inculcate deeper changes in economic behavior and values which contribute to economic transformation from the bottom up, following the principle of subsidiarity.  Filipino citizens who bore the costs of the market-oriented reforms such as higher taxes, deregulated oil prices, flexible exchange rates, etc. have at the same time benefited from higher economic growth, low inflation, and less volatile foreign exchange rates, among other economic benefits.  These beneficiaries of the market-oriented reforms have become strong advocates for continuing reforms along the same path of market-based policies.  In addition to the natural endowments of the Philippines such as the demographic dividend ( a young, growing and English-speaking population; the strategic location at the epicenter of the most dynamic economic region in the world today, the Indo-Pacific region; and the rich natural resources (agricultural, mineral and tourism-oriented resources), the economic and financial institutions that have resulted from the last thirty five or so years of reforms will guarantee at least a 6 to 7% GDP growth rate in the post-pandemic era (replicating the 6 to 7% that was already achieved from 2011 to 2019.   If greater openness to foreign direct investments and good governance will characterize the post-pandemic period, then annual growth rates of 8 to 10% of GDP will be very much within reach during the next decade or so.  For comments, my email address is bernardo.villegas@uap.asia.