History of crises,
At first, he tried to downplay the crisis with statements like, “These things happen.” Apparently, this did not work.
Mr. Laya then began to implement an elaborate rescue operation to rehabilitate distressed financial institutions. As reported by the Asian Wall Street Journal on Feb. 13, 1981, Mr. Laya said, “We want (the financial institutions) to survive, but a little bruised.”
It was also in 1983 when a foreign exchange crisis broke out, resulting in the Bangko Sentral’s decision to ask all commercial banks not to pay their loans with international creditors. The announcement of the debt moratorium fell on the shoulders of Mr. Singson, who was, at the time, senior deputy governor to Mr. Laya.
“Oct. 14 was a Friday. The Monetary Board meeting at the time was on Fridays. Governor Laya was already in New York, negotiating with the banks. I presided over the MB meeting as chairman, which was allowed at that time,” Mr. Singson recalled in an interview.
Mr. Singson, however, explained that during the run- up to the declaration of the moratorium, creditors were already very nervous because the central bank’s reserves were almost depleted and it can no longer borrow except short-term money.
“(Mr.) Laya asked me to go to New York in April or May to talk with the banks on getting new loans. First, no bank was willing to lend; second, they told me that if we draw on our standby credit (with US and Japanese banks), it will be a signal to the whole world that we are in trouble,” said Mr. Singson.
As early as two months before his US trip, Mr. Singson said international bankers already told the government the central bank would have no choice but to declare a debt moratorium.
“We had lunch in the (central bank’s) Green Room when one of the bankers took me aside and said, ‘ I predict you are going down and you will declare a moratorium in the fall,’ meaning in October. And that’s exactly what happened,” he said.
The 1980s were considered one of the darkest decades for the Philippine financial sector. The bank restructuring proved to be extremely painful, both for the government and the private sector. Little did industry players know that 13 years later, anybody who’s anybody in the banking system would be grateful to authorities for administering those bitter pills.
Amando Tetangco, Jr., deputy governor of the Bangko Sentral, said the Philippines would have been hit much harder by the financial crisis that broke out in 1997, without the painful experience of the 1983 banking crisis.
1997 CRISIS
“The 1997 financial crisis could have hurt as badly if not for the fact that we were in better macroeconomic footing and we were just coming out of the financial crisis of the ’80s,” he said in an interview.
The 1997 crisis began on July 11, when the Bangko Sentral was forced to “allow a more competitive exchange rate” by widening the trading margin between the peso and the US dollar. This led to massive depreciation of the peso, wild fluctuation of interest rates and severe corporate distress.
But Mr. Singson, who was already the governor of the central bank when the crisis broke out, said the speculation on the peso actually started much earlier.
“Even before July 7, there already were attacks on the currency. (Former central bank treasurer) Boy ( Edeza) and I often had discussions ( about how to manage the exchange rate),” said Mr. Singson.
He said the attacks started in full force after state-owned daily Singapore Straits Times quoted then Finance Secretary Roberto de Ocampo that the peso might follow the Thai baht’s free fall. This was followed by another article in the same daily, this time quoting then Trade Secretary Cesar Bautista that the Monetary Board will discuss a “more competitive exchange rate” in its Wednesday meeting.
“Of course, he (Mr. De Ocampo) denied it. But after that, we already started to meet regularly to talk about the peso. One or two days before July 11, I already got a very confidential letter from (IMF Managing Director Michel) Camdessus (for the central bank) to consider a wider margin,” Mr. Singson said.
But Mr. Estanislao believes the crisis started much earlier than July 11. He was one of those who first raised concerns over the state of the economy at a time when the central bank under Mr. Singson was always intervening in the foreign exchange market. He said the Philippines was not merely caught up in Thailand’s currency woes — or the so-called contagion effect — but that the crisis had domestic roots.
“We had wrong macroeconomic policies,” he said.
Until now, discussions on the real causes of the crisis are still among the longest- running debates in the government and the private sector.
For Mr. Estanislao, many members of the academe and even some of those who work for the government, there was an underlying uncompetitiveness in Philippine exports before the crisis which was not solved by the central bank’s policy of keeping the exchange rate moving at a very narrow band.
“The tendency of the central bank at that time, which I was pointing out and almost every other economist was pointing out, was to keep the interest rate of the Philippines much higher than the comparable interest rate of the dollar, so it was very attractive for investors to come into the country,” explained Mr. Estanislao.
But he added that interest rate differential was not sufficient. The government, in effect, had to give an implicit guarantee that it would not change its exchange rate.
“That’s why the peso was at P26 to the dollar for a very long time and the central bank governor was willing to bet his life on everything and his job on keeping it at P26,” Mr. Estanislao said.
The former finance secretary, also a member of the Eminent Persons Group of the Asia-Pacific Economic Council and a well-respected figure in the international community, said the policies of the central bank, on the surface, appeared to be delivering all the goods for the country.
“You are allowing a lot of money to flow in, and the central bank just allowed all these money to flow into the banking system and therefore, the economic system. That’s why you have a boom,” said Mr. Estanislao.
At the time, Mr. Singson was being lauded as the best monetary chief the country ever had. The level of the country’s international reserves was always beating historic records every month, the stock market was in a boom, real estate projects were everywhere, lending was a lucrative business and the economy was starting to be known as a tiger cub.
“But that is where it stopped. Industry was not moving any faster because the economy in real terms was not moving that much. So it was a balloon that was bloated with a lot of air,” said Mr. Estanislao.
“It was a contagion in the sense that it all started in Thailand but we were adopting exactly the same policies as Thailand and so the reaction to the Philippines was exactly the same reaction to Thailand,” he added.
Meanwhile, at the University of the Philippines, several noted economists were creating waves for writing a study that criticized the country’s exchange rate policy.
Dr. Felipe Medalla, the Estrada administration’s Socioeconomic Planning secretary, Benjamin Diokno (now Budget secretary), University of the Philippines School of Economics professor Emmanuel de Dios, former Socioeconomic Planning chief Solita Monsod, and Dr. Raul Fabella, in a study entitled “Exchange Rate Policy: Recent Failures and Future Tasks,” said that while liberalization and privatization have shown concrete gains, some macroeconomic policies, specifically the Bangko Sentral’s exchange rate policy, needed to be fine-tuned.
Whether the Philippines would have been totally shielded from the 1997 crisis had the central bank adopted these policies, no one would dare hazard a guess. Financial experts wryfully noted that no one has yet succeeded in creating crystal balls that could show “what could have beens.”
Experts say the more important thing to consider is that the crisis should provide lessons that would help the government avoid the next one, which international experts said is sure to come.
One hundred years of experience would surely provide policy directions culled from lessons learned.
CRISES AND REFORMS
Clearly, Mr. Estanislao said, crises are not just opportunities for governments to solve them, but to institute reforms that would put the economy into higher ground.
This early, international experts and organizations that mushroomed after the financial crisis are talking of “early-warning mechanisms,” a new financial architecture and other medicine that would at least lessen the impact of similar crises in the horizon.
In the Philippines, experts believe the lessons are clear and future policy directions obvious. They vote heavily in favor of sound fundamentals, sound exchange rate policies that should go hand in hand with real export competitiveness, stronger banking sector regulation and better coordination among agencies and among governments. Confidence in the economy is crucial.
“It all boils down to confidence. The market, the investor, the businessmen, when they lose confidence in the country, they will convert their pesos into dollars. There will be panic and there will be speculation. The people with dollars will not sell, those who have letters of credit will accelerate. That will put pressure on the exchange rate,” Mr. Singson explained.
But how does one guard against loss of confidence which could be affected by the flimsiest of trends at a time when economic systems are already global?
Sound macroeconomic “fundamentals” are still going to be very important, said Mr. Singson. He stressed that in the Philippines, exchange rate stability is especially crucial since people are scared by huge dollar peso fluctuations more than an increase in interest rates.
Since the Philippines was coming from a boom year and almost every household had one kind of loan or another prior to the 1997 crisis, many were affected when interest rates shot up to more than 30% at the height of the 1997 financial crisis.
“The central bank has been focused on exchange rate stability as though it was the salvation of the Philippine economy. You look at Japan, the US, they never think of exchange rate as though it were a god that needs to be served. Crazy!” said Mr. Estanislao.
While the lessons are clear, Mr. Estanislao said the question is whether Filipinos have the political will to implement reforms at any given time.
The story is still unfinished under the Estrada administration, Mr. Estanislao said. “One of the lessons we’ve learned is that you never make a lending decision on the basis of politics. Well, that’s creeping back in. And that is very expensive; that is very dangerous. And that’s one lesson we learned with our blood, sweat and tears and lots of money,” he said.