Consolidating Economic Growth
The year 1999 saw encouraging signs that most Asian economies affected by the financial crisis have swung back to growth. The Philippine economy displayed good macroeconomic performance in 1999, a turnaround from the economic slowdown which followed the 1997 crisis. While there was some slippage in the fiscal sector, the overall stance of monetary policy remained consistent with the objective of price stability conducive to economic growth. The immediate challenge for the Philippine economy lies in its ability to strengthen its fiscal position by increasing revenues and streamlining expenditures. This will allow the mobilization of funds for development spending necessary to lift the economy to a higher growth path. Such fiscal consolidation will also help the country reduce any build-up in imbalances involving the interest rate, the exchange rate, and its heavy reliance on foreign borrowing.
Output Growth and Employment Improved. During the year, economic activity expanded at a higher-than-expected rate, with real GNP growing at 3.6 percent, in marked contrast to the 0.1 percent growth in 1998. The recovery was led by a rebound of agriculture, which expanded by 6.6 percent, and the sustained growth of the service sector which expanded by 3.9 percent. The industry sector showed a strong expansion in the fourth quarter to post a full year growth of 0.5 percent, influenced by the 3.1 percent growth performance of the manufacturing sector. On the demand side, growth was driven by consumption expenditures and exports. Investments continued to contract, albeit at a slower pace of 2.1 percent, as manufacturing capacity continued to remain underutilized. The unemployment rate declined slightly due to the creation of jobs fuelled by the improved economic performance.
Continued Downtrend in Inflation. Inflation exhibited a steady downtrend during the year from a full year average of 9.8 percent in 1998 to 6.6 percent in 1999 due primarily to favorable weather conditions which supported the recovery of agriculture. Prudent monetary management which involved keeping monetary growth within program ceilings for most of the year helped in the attainment of a lower-than-targeted inflation rate in 1999.
NG Incurred Deficit. The cash operations of the National Government (NG) posted a P111.6 billion deficit, P26.3 billion higher than the programmed level and P61.7 billion higher than the deficit recorded in the previous year. This developed as revenues fell below target with the slowdown in industrial growth, while expenditures exceeded the programmed level due to the pump-priming efforts of the Government.
Monetary Conditions Eased. Price stability paved the way for lower interest rates. Favorable macroeconomic conditions allowed monetary authorities to adopt measures that would further reduce banks’ intermediation cost and induce a decline in interest rates. These measures included the reduction in banks’ reserve requirements on deposit and deposit substitute liabilities and in the BSP’s policy rates, i.e., BSP borrowing and lending rates under the reverse repurchase (RRP) and repurchase (RP) facilities, respectively. During the second half of the year, the adoption of a neutral monetary policy stance in response to pressures in the foreign exchange market kept policy rates at their July level for most of the months until November.
The reserve requirement on bank deposits and deposit-substitute liabilities was reduced during the year by a total of 5 percentage points from 17 percent (consisting of 10 percent regular reserves and 7percent liquidity reserves) in January to reach 12 percent by July 1999 (9 percent regular reserves and 3 percent liquidity reserves). The BSP’s RRP and RP rates were also reduced. From 13.375 percent (in the case of overnight RRPs) and 15.375 percent (in the case of overnight RPs) at the start of the year, the policy rates declined to 9.0 percent and 11.0 percent, respectively, starting 5 July 1999. The BSP’s RRP rate and RP rate were maintained at these levels until the RRP rate was reduced to 8.75 percent starting 3 November 1999. On 15 December 1999, the RP rate was increased to 12.0 percent to discourage banks from borrowing funds from the BSP following concerns over the millennium transition. The tiering scheme for overnight placements in excess of P500 million, which was introduced on 16 August 1999, also helped in maintaining low interest rates.
With the slowdown in inflation and the decline in interest rates, market demand for fixed-income government securities surged during the period. These developments, coupled with the continued support of the NG in rejecting high bid rates in its auctioned Treasury instruments caused yields on T-bills to decline consistently during the first eight months of the year. From a peak of 13.2 percent in January, nominal interest rates on 91-day T-bills declined steadily to 8.4 percent in August. Rates on Treasury issues, however, gradually moved up beginning September, with the interest rate on 91-day T-bills peaking at 8.9 percent in December amid rising concerns over the fiscal deficit and banks’ preference to stay liquid in anticipation of the Y2K problem. Notwithstanding the uptrend, yields on Treasury issues across maturities in 1999 remained significantly lower than what they were in 1998.
The Financial System Displayed Increased Resiliency. Driven by continuing reforms in the banking system to strengthen the financial sector and the generally strong macroeconomic fundamentals, the system continued to display increasing resiliency and strength in 1999. Some weakening in asset quality was seen during the year due to the lingering effects of the regional crisis. Overall, however, the banking system remained stable and poised to support sustained economic growth.
External Accounts Registered a Surplus. In 1999, the country’s external transactions yielded an overall surplus of $3.8 billion, higher than the $1.4 billion surplus realized in 1998. Behind this increase was the surge in the current account surplus and the net inflow in the capital and financial account. The former was driven mainly by sustained growth in export earnings while the latter was due to higher net inflows of medium- and long-term (MLT) loans.
Exchange Rate Remained Relatively Stable. The peso appreciated in 1999 and continued to gain stability notwithstanding increased pressures in the second half of the year as the U.S. Federal Open Market Committee (FOMC) decided to raise U.S. key interest rates in July, August, and November. The peso-dollar rate averaged P39.09/$1 during the year, an appreciation of 4.4 percent from the 1998 average.
The strengthening of the peso during the first half of the year was influenced mainly by higher capital inflows, particularly loans and proceeds of bond issuances. The strong export performance throughout the year which led to a surplus in the current account was also an important factor behind the relative exchange rate stability.
Rising Foreign Exchange Liabilities Partly Mitigated by Decline in Banking Sector Liabilities. As of end-September 1999, the country’s foreign exchange liabilities stood at $51.17 billion, 7.0 percent higher than the end-1998 level of $47.82 billion. The increase in total outstanding debt was due largely to net loan availments by both the public and private sectors coupled with foreign exchange revaluation arising mainly from the strengthening of the Japanese yen against the U.S. dollar. MLT loans continued to account for the greater bulk of external debt relative to short-term obligations.