International Financial Management Report-the Philippines free essay sample

Table of contents Introduction2 Country Overview2 The Political Environment3 Recent History3 The Present Government3 Political Stability4 Opposition Parties4 Economic and Financial Analysis5 Trade History Major Products5 GDP Growth per capita5 Unemployment Price level Changes Inflation6 Exchange Rate Innovations7 Investments in the Stock Market7 Investments in the Bond Market8 Foreign Exchange Reserves9 Structure of Industries10 The Banking System10 Monetary Policy / Money Supply Growth11 Foreign Debt12 Capital Flight12 Asian Currency Crisis13 Philippines before the crisis13 What caused the Asian Currency Crisis? The effect it had on the Philippines and other countries13 Looking into the Future17 Prevention as the Best Form of Management17 Some Policy Lessons From the Asian Crisis17 Need for Great Caution About Financial Liberalization and Globalization17 Manage External Debt Well and Avoid Large Debts17 Manage and Build Up Foreign Reserves17 The Need for Capital Controls and a Global Debt Workout System18 Conclusion: Summary / Comments / Recommendations19 Works Cited21 Appendix A23 Appendix B24 Appendix C25 Appendix D26 Appendix E27 Appendix F28 Introduction The Philippines were ceded by Spain to the US in 1898 following the Spanish-American War. They attained their independence in 1946 after being occupied by the Japanese in World War II. The 21-year rule of Ferdinand Marcos ended in 1986 when a widespread popular rebellion forced him into exile. In 1992, the US closed down its last military bases on the islands. A quarter-century-old guerrilla war with Muslim separatists on the island of Mindanao, which had claimed 120,000 lives, ended with a treaty in 1996 (www. dci. gov). The Philippines lies off the southeast coast of the Asian mainland. It has approximately 7,100 islands and islets located near the southeastern rim of China. Bordering its coastline to the west and north is the China Sea; to the east is the Pacific Ocean; and to the south, the Celebes Sea and the coastal waters of Borneo. The Philippines location in Asia is strategic since it is situated on the crossroads of Asias commerce and transportation. It plays a significant role in international affairs [Appendix A fig. ] (www. abisnet. com). Country Overview Tw o major languages are spoken in the Philippines: Tagalog and English. Ninety percent of the population are Christians and about 10 percent are Muslims. There is a tropical and humid climate in the lower land areas, but this becomes cooler at the higher altitudes (www. odci. gov). The land area totals 298,170 square kilometers, and the Philippines has a total population of approximately 80 million people. The capital of this large island country is Manila located on the island of Luzon. There are numerous islands in the Philippines that are all prone to earthquakes. Within the Philippines, there lies large mountainous terrain, narrow coastal plains and interior valleys and plains. There are also vast amounts of dormant and active volcanoes, notably Mount Pinatubo in Central Luzon (http://lcweb2. loc. gov). The Political Environment Recent History The Philippines has traditionally had a private enterprise economy both in policy and in practice. The government has intervened through fiscal and monetary policy and in the exercise of its regulatory authority. Although expansion of public sector enterprises occurred during the Marcos presidency, direct state participation in economic activity has generally been limited. The Aquino government set a major policy initiative of consolidating and privatizing government-owned and government-controlled firms. Economic planning was limited largely to establishing targets for economic growth and other macroeconomic goals, engaging in project planning and implementation, and advising the government in the use of capital funds for development projects. The Present Government The present government is conducted under the Freedom Constitution and lead by the National Union of Christian Democrats. The Head of the State is President Fidel Ramos working in conjunction with a bicameral congress consisting of a Senate with 24 members and a House of Representatives with a maximum of 250 members. Under the Constitution, the government is divided into executive, legislative, and judicial departments. The separation of powers is based on the theory of checks and balances. The presidency is not as strong as it was under the 1973 constitution. Local governments are subordinated to the national government [Appendix B] (http://lcweb2. loc. gov/frd/cs/ phtoc. html#ph0007). Political Stability The Philippines has embarked on economic reforms and market liberalization measures in the last few years. As a result of these measures, the economy started to show signs of recovery. After a decline of 0. 5 percent, the Philippines real gross domestic product (GDP) grew by 1. 4 percent. The rate of inflation was 7. 5 percent. The Philippines unemployment rate dropped to 9. 8 percent from 10. 5 percent. Improvements were also registered in the overall balance of payments, the current account and the reserve position of the Philippines. The Philippines government continues to take steps to boost its economy and has embarked on economic reforms and deregulation. The country has adopted an economic stabilization program, supported by the International Monetary Fund (IMF), as part of the efforts to reduce inflation and improve the balance of payments. The Philippines main priorities are to improve political stability, restore economic growth and build investor confidence. Liberalization policies, including abolition of quantitative restrictions on trade, have been announced to attract foreign investments and to improve the competitiveness of the Philippines economy. The government also recently announced the complete liberalization of foreign exchange controls. Opposition Parties In 1991, a new opposition party, the Filipino Party (Partido Pilipino), was organized as a vehicle for the presidential campaign of Aquinos estranged cousin Eduardo Danding Cojuangco. Despite the political baggage of a long association with Marcos, Cojuangco had the resources to assemble a powerful coalition of clans. The Liberal Party, a democratic-elitist party founded in 1946, survived fourteen years of dormancy (1972 to 1986) through the staunch integrity of its central figure, Senate president Jovito Salonga, a survivor of the Plaza Miranda grenade attack of September 1971. In 1991, Salonga also was interested in the presidency, despite poor health and the fact that he is a Protestant in a largely Catholic country. In September, 1986, the revolutionary left, stung by its shortsighted boycott of the February election, formed a legal political party to contest the congressional elections. The Party of the Nation allied with other left-leaning groups in an Alliance for New Politics that fielded seven candidates for the Senate and one-hundred-three for the House of Representatives, but it gained absolutely nothing from this exercise. The communists quickly dropped out of the electoral arena and reverted to guerrilla warfare. As of 1991, no Philippine party actively engaged in politics espoused a radical agenda (http://lcweb2. loc. gov/query). Economic and Financial Analysis Trade History Major Products The Philippines major export commodities are electronic equipment, machinery and transport equipment, garments, and coconut products. The majority of these products are exported to the US at 22 percent, Japan at 20 percent, South Korea at 8 percent, Singapore at 6 percent, Taiwan at 5 percent and Hong Kong at 4 percent. The Philippines must import raw materials and intermediate goods, capital goods, consumer goods, and fuels. They receive most of their imports from the United States, Japan and South Korea. GDP Growth per capita In terms of key economic indicators, the Philippines in 1999 had a gross domestic product (GDP) of $US 265. billion (in 1995 $US), a population of 80 million and a GDP per capita of $US 3,338. In terms of global rankings, this placed the Philippines 24 out of 191 countries in terms of GDP, 13 out of 191 countries in terms of population; and 96 out of 191 countries in terms of GDP per capita [Appendix C fig. 2 fig. 3] (http://lcweb2. loc. gov). Unemployment P rice level Changes Inflation Unemployment, which had averaged about 4. 5 percent during the 1970s, increased drastically following the economic crisis of the early 1980s, peaking in early 1989 at 11. 4 percent. Urban areas fared worse; unemployment in mid-1990, for example, remained above 15 percent in metro Manila. Beyond the unemployment generated from economic mismanagement and crisis was a more long-term, structural employment problem, a consequence of the highly concentrated control of productive assets and the inadequate number of work places created by investment in the industrial economy. The size and growth of the service sector was one indicator. Underemployment was another. Underemployment has been predominantly a problem for poor, less educated, and older people. The unemployed have tended to be young, inexperienced entrants into the labor force, who were relatively well educated and not heads of households. In the first half of the 1980s, approximately 20 percent of male household heads and 35 percent of female household heads were unable to find more than forty days of work per quarter. Unemployment rates have been very volatile over the past 20 years with periods of dramatic inflation and over period with normal inflation. One great factor contributing to this the lack of purchasing power parity in the Philippines is due to weakening currencies and increased unemployment [Appendix C fig. ]. Exchange Rate Innovations The widespread currency crisis in July 1997 prompted the Bangko Sentral ng Pilpinas(Central Bank of the Philippines to allow the Philippine peso to seek its own level. The Monetary Board decided to limit BSPs presence in the foreign exchange market and allow the peso to trade within a wider range, consistent with its market-det ermined policy. The majority of foreign exchange turnover is inter-dealer, and the main players include the major banks, foreign banks and money brokers. Most trading in currencies is spot, although there is a strongly growing market for forward exchange rate transactions. Currently, the turnover of OTC cross-currency interest rate swaps and options is still very low as only a limited number of banks and large corporations engage in the derivatives market. This is primarily due to the absence of appropriate guidelines as well as the need for licensing by the BSP to engage in derivatives trading (http://www. pwcglobal. com. au/ asiabcmhandbook/phil_ bank. html). Investments in the Stock Market Equities are traded through the Philippine Stock Exchange (PSE), one of the oldest stock exchanges in the Far East. Its roots reach back to the Manila Stock Exchange (MSE), which was founded on August 8, 1927. After almost four decades, the Makati Stock Exchange (MkSE) was established on May 27, 1963 amidst strong oppositions encountered. To consolidate logistics and to hasten development, the leaders of both bourses agreed in principle to unify their operation under the new Philippine Stock Exchange, Inc. that was incorporated on July 14, 1992. Despite the agreement to unify in principle, the two exchanges continued to operate separately until March 4, 1994, when the Securities and Exchange Commission granted the Philippine Stock Exchange, Inc. ts license to operate as a securities exchange. It simultaneously canceled the licenses of MSE and MkSE, thus making PSE the sole operating stock exchange in the country. Despite its age, the PSE has remained relatively small. Only 224 companies and 303 issues were listed on it as of June, 2000. Of these, only 120 to 140 issues are actively traded. More importantly, most analysts believe that only thirty to fifty issues can be considered investment grade. The fifty most traded securities account for over 80% of the total value turnover. In 1997, when the Asian financial crises began, only five companies securities were listed. There were none in 1998 and one each in 1999 and 2000 (http://www. pwcglobal. com. au/asiabcmhandbook/phil_bank. html). Investments in the Bond Market The Philippine debt markets include the money market for short-term securities (including treasury bonds and mutual funds) and the bond market for long-term treasury bonds and corporate bonds. The debt market still relies heavily on funding from the national government, which remains as the principal issuer of debt securities in the Philippines. The national government offers various debt securities from 91-day treasury bills to 10-year treasury bonds, which could also be either fixed rate or floating rate. As of 28 February 1999, the total amount of T-bills and T-notes outstanding was P818 billion. T-bills and T-notes are available from accredited government securities dealers, generally banks and some investment houses. The PSE has plans to list five-year T-notes and hopes to not only expand the secondary market for them but perhaps, more importantly, provide a better benchmark for their valuation by domestic funds and other investors. On the other hand, bonds issued by the local government units (LGU) are small compared with other debt securities and total only P96 million, although several LGU bond issues are in the pipeline. Corporate debt securities are also too small as only about forty local companies are issuing such securities (http://www. pwcglobal. com. au/asiabcmhandbook/phil_ bank. html). Foreign Exchange Reserves The Philippines had turned to the IMF previously in 1962 and 1970 when it had run into balance of payment difficulties. It did so again in late 1982. An agreement was reached in February 1983 for an emergency loan, followed by other loans from the World Bank and transnational commercial banks. Negotiations began again almost immediately after the moratorium declaration between Philippine monetary officials and the IMF. The situation became complicated when it came to light that the Philippines had understated its debt by some US$7 billion to US$8 billion; overstated its foreign-exchange reserves by approximately US$1 billion; and contravened its February 1983 agreement with the IMF by allowing a rapid increase in the money supply. A new standby arrangement was finally reached with the IMF in December 1984, more than a year after the declaration of the moratorium. In the meantime, additional external funds became nearly impossible to obtain. The Philippine external debt has grown to over US$27 billion. The countrys most immediate concern was with meeting debt-service payments. Reduction in the size of the debt was a longer-term issue. Debt servicing, US$3 billion in 1986, was a drain on both the countrys foreign-exchange earnings and its investible surplus. Technocrats in the National Economic and Development Authority recommended declaring another moratorium, this time for two years, to allow the country a breathing space. Measures were introduced in Congress in 1986 and subsequent years to cap annual debt-service payments. The Aquino administration and the Central Bank, however, consistently resisted both tactics, opting instead for a cooperative approach with the countrys creditors (http://lcweb2. loc. gov/cgi-bin/query/D? cstdy:2:. /temp/ ~frd_GI0E:). Structure of Industries The most predominate industry in the Philippines is the manufacturing industry which accounts for almost all the known production in the country. In 1990, the industrial sector was inefficient and oligopolistic. Although small and medium-sized firms accounted for 80 percent of manufacturing employment, they accounted for only 25 percent of the value added in manufacturing. Most industrial output was concentrated in a few, large establishments. For example, a six-month Senate inquiry determined in 1990 that eight of the countrys seventeen cement-manufacturing companies were under the control of a single firm. Despite manufacturing being one of the largest sectors within the Philippines, the country shows a lopsided and biased approach towards wealthy companies thus showing another example of a third world, two tiered society [Appendix D] (http://lcweb2. loc. gov/cgi-bin). The Banking System The Philippine financial system in the early 1990s was composed of banking institutions and non-bank financial intermediaries, including commercial banks, specialized government banks, thrift and rural banks, offshore banking units, building and loan associations, investment and brokerage houses, and finance companies. The Central Bank and the Securities and Exchange Commission maintained regulatory and supervisory control. The Philippines had a relatively sophisticated banking system; however, the level of financial intermediation was low relative to the size of the economy. In 1990, the six largest commercial banks earned an estimated P7. 9 billion in after-tax profits, an increase of 42 percent over 1989, which in turn was a 32 percent increase over 1988. A 1991 World Bank memorandum noted that the extent of bank profits indicated a lack of competition and a market structure for financial services characterized by oligopoly. Philippine banks had the widest interest rate spread (loan rate minus deposit rate) in Southeast Asia (http://lcweb2. loc. gov/cgi-bin/query/D? cstdy:1:. /temp/~frd_YnR7:). Monetary Policy / Money Supply Growth The Central Bank of the Philippines was established in June 1948 and began operation the following January. It was charged with maintaining monetary stability; preser ving the value and convertibility of the peso; and fostering monetary, credit, and exchange conditions conducive to the economic growth of the country. In 1991, the policy-making body of the Central Bank was the Monetary Board, composed of the governor of the Central Bank as chairman, the secretary of finance, the director general of the National Economic and Development Authority, the chairman of the Board of Investment, and three members from the private sector. In carrying out its functions, the Central Bank supervised the commercial banking system and managed the countrys foreign currency system. Money supply growth has been highly variable, expanding during economic and political turmoil and hen contracting when the Philippines tried to meet IMF requirements [Appendix C fig. 1]. Before the 1969, 1984, and 1986 elections, the money supply grew rapidly. The flooding of the economy with money prior to the 1986 elections was one reason why the newly installed Aquino administration chose to scrap the existing standby arrangement with the IMF in early 1986 and negotiate a new agreement. The Central Bank released funds to stabilize th e financial situation following a financial scandal in early 1981, after the onset of an economic crisis in late 1983, and after a coup attempt in 1989. The money was then repurchased by the Treasury and the Central Bankthe so-called Jobo bills, named after then Central Bank Governor Jose Fernandezat high interest rates, rates that peaked in October 1984 at 43 percent and were approaching 35 percent in late 1990. The interest paid on this debt necessitated even greater borrowing. By contrast in 1984 and 1985, in order to regain access to external capital, the growth rate of the money supply was very tight. IMF dictates were met, very high inflation abated, and the current account was in surplus. Success, however, was obtained at the expense of a steep fall in output and high unemployment. Foreign Debt The Philippines owed about US$28 billion to foreign creditors. Borrowed money had not promoted development, and most of it had been wasted on showcase projects along Manila Bay or had disappeared into the pockets and offshore accounts of the Marcos and Romualdez families and their friends and partners. Many Filipinos believed that they would be morally justified in renouncing the foreign debt on grounds that the banks should have known what the Marcoses were doing with the money (http://lcweb2. oc. gov/cgi-bin/query/D? cstdy. 2:/temp/~frd3aGw). Capital Flight Efforts to reduce the external debt included encouraging direct investment in the economy. In August 1986, the Philippines initiated a debt-equity conversion program, which allowed potential investors who could acquire Philippine debt instruments to convert them into Philippine pesos for the purpose of investing in the Phi lippine economy. Because the value of the debt in the secondary market was substantially less than its face value, the swap arrangement allowed investors to acquire pesos at a discount rate. The Filipinos had a desire to bring their wealth back into the country. Critics questioned whether those who engaged in capital flight should be awarded a premium for returning their wealth to the Philippines. There also was the question of the arbitrage possibilities of round tripping, whereby investors with pesos engaged in capital flight to obtain foreign currency, which was used through the swap to achieve a much larger amount of pesos (http://lcweb2. loc. gov/cgi-bin/query/D? cstudy. 3:/temp/~frdOlvV). Asian Currency Crisis Philippines before the crisis In November 1965, Ferdinand Marcos was elected president, and in 1969, he became the first elected president to win reelection in the Philippines. In September 1972, President Marcos imposed martial law citing growing lawlessness and open rebellion by the communist rebels. As a matter of fact, Marcos did this largely in order to perpetuate his regime. During the martial law period, the democratic institutions were suppressed, and the Marcos regime became a dictatorship. The martial law ended in 1981, and Marcos was reelected as the president that year to a six-year term. However, a democratic country since independence, the Philippines politics and economy had been dominated by a small landholding elite who was against social changes. The Marcos dictatorship further hindered the countrys political and economic development. During the 1970s and 1980s, while most of other Southeast Asian countries were flourishing economically, the economy of the Philippines was undergoing stagnation with extreme poverty in some regions (http://www. countrywatch. com/files/137/cw_topic. asp? vCOUNTRY=137= HISTO). What caused the Asian Currency Crisis? The effect it had on the Philippines and other countries Domestic savings were not sufficient to drive all the Southeast Asian economies to continual rapid economic growth. Thailand and Malaysia ran current account deficits amounting to 10 percent of GDP funded by net private capital inflow throughout the 1990s. Indonesia, China and South Korea ran smaller but still substantial deficits in the 3 percent to 4 percent range [Appendix E fig. 2]. Serious policy mistakes were made. Thailand, Malaysia, Indonesia and South Korea, along with Hong Kong, attempted to peg their currencies to the US dollar. This gave these regional currencies an advantage when the yen was strong and the US dollar was declining against other currencies. Export-led growth was facilitated. In the nineties, however, US policies that generated a strong greenback set the scene for disaster for those currencies pegged to it. China devalued its currency towards the end of 1994 and at the same time brought in export subsidies. Southeast Asian exports in competition with China were hit hard. The Japanese regulators, including the Ministry of Finance, refused to do anything about the huge bad debts of around US$366 billion run up by Japanese banks during the asset pricing bubble of the late 1980s. Supposedly, all the land in Australia could be purchased for less than the grounds of the Imperial Palace in Tokyo. Low interest rate policies designed to help the technically insolvent Japanese banks and kick-start the stalled Japanese economy led to massive capital injections into South- East Asia, attracted by high domestic interest rates. Officials, often allied with interested parties, believed that they were immune from so called ‘speculative’ attack when they set rates at levels they knew to be entirely unrealistic. For example, some years ago the Australian Wool Reserve Price Scheme continued to purchase virtually the entire Australian wool clip and nearly all private stockholdings worldwide at prices far higher than any foreign buyer or consumer was willing to pay. Eventually, the Australian Labor (Keating) Government walked away from it, realizing there were limits to the extent that taxpayers were willing to pay to bail out such stupidity. The collapse of the Wool Reserve Price Scheme and the huge stockpile which still overhangs the market are as much due to the actions of Australian woolgrowers producing wool to satisfy the irrational demands of the Wool Board as they are a consequence of international speculation. The guiding hand of the state helped the private sector make huge investments in Malaysia and elsewhere in Southeast Asia in production facilities for computer chips and electronics generally. In the last few years, the demand for this kind of production from South-East Asia has fallen greatly. Similar misguided industry policy in South Korea contributed to a glut of production facilities in the vehicle industry. Corporate sector borrowing has reached about 200 percent of GDP with a debt to equity ratio for major companies in excess of 400 percent and bankruptcy rampant. In 1997, 13,971 firms in South Korea went bankrupt. The debts of eight large chaebol (conglomerates) alone amounted to US$21 billion. Strong union pressure has contributed to an enormous rise in manufacturing wages, putting them at well in excess of UK levels, and perhaps double that of some of their competitors. The Chairman of the US Federal Reserve, Alan Greenspan, has commented adversely on the turnaround in capital inflows in Southeast Asia from 8 percent in 1996 to minus 2 percent in 1997: the turnaround does not appear to have resulted wholly from a measured judgement that fundamental forces have turned appreciably more adverse. More likely, it is a process that is neither measured nor rational. His remarks have been endorsed by the Governor of the Reserve Bank, Ian Macfarlane (1998). The Deputy Governor, Stephen Grenville (1998), points out that as often happens in financial markets, euphoria turned to panic without missing a beat. These charges of irrationality in terms of international portfolio investment are not borne out by existing research prior to the meltdown that finds such flows reduce the cost of capital in the recipient country and do not increase the volatility of equity returns. There is no evidence that uninformed investors produce contagion. Moreover, the currency movements and turnaround in capital flows seem to be a consequence of more serious underlying problems rather than causal factors. A combination of large current account deficits, inflexible over-valued exchange rates, considerable under-utilized capacity and enormous private sector borrowing underwritten implicitly by the State were common to Thailand, Indonesia and South Korea. The financial meltdown contagion spread rapidly, first, from Thailand to Indonesia and then from Indonesia to Malaysia and South Korea. The mechanism by which it spread appears to have been the attempted withdrawal of short-term loans by banks once they recognized the similarity in conditions between those Southeast Asian countries and South Korea. The monetary authorities were unable to resist the downward pressure on the won, exchange reserves were depleted and in December 1997 an IMF bailout of record proportions, US$59 billion, was negotiated. By late January the won was about 40 percent lower than in July 1997 (http://www. cis. org. au/Policy/ autumn98 /aut9802. tm#bioswan). In 1998, the Philippine economy slowed from reverberations of the Asian Crisis and El Nino. The Philippines were able to weather the Asian Crisis better than most of their neighbors, however, due to better starting conditions, early floating of the peso, adaptation of monetary and fiscal policies, and a successful program to strengthen the banking sector. Tighter standards were implemented to encourage recapitalization of weaker banks throug h capital infusions or mergers with stronger banks. The rehabilitation and full privatization of the Philippine National Bank is proceeding, with completion slated some time this year. Reforms in the corporate sector, trade and investment liberalization are continuing, and the government is embarking on a comprehensive set of public sector reforms, with World Bank assistance. The government has recently revamped the action plan that improves tax administration and remains committed to strengthening the Bureau of Internal Revenue and improving taxpayer compliance. Looking into the Future Prevention as the Best Form of Management Some Policy Lessons From the Asian Crisis Developing countries should rethink the benefits and risks of financial liberalization. In particular, they have to take great care to limit their external debt (especially short-term debt), improve the balance of payments and build up their foreign reserves. Need for Great Caution About Financial Liberalization and Globalization In a rapidly globalizing world, developing countries face tremendous pressures coming from developed countries, international agencies and transnational companies to totally open up their economies. Manage External Debt Well and Avoid Large Debts Developing countries should not build up a large foreign debt, whether it is public or private debt, even if they have relatively large export earnings. In good years, these factors can be offset by large inflows of foreign long-term investment. It is, thus, important to watch the relation of levels of debt and debt servicing not only, to export earnings but also to the level of foreign reserves. Reserves should be built up to a comfortable level, sufficient to service debt, especially short-term debt. Manage and Build Up Foreign Reserves The careful management of foreign reserves has thus emerged as a high-priority policy objective in the wake of the Asian crisis. There are so many factors involved, such as the movements in merchandise trade (exports and imports), the payment for trade services, the servicing of debt and repatriation of profits, the inflows and outflows of short-term funds, the level of foreign direct investment and the inflows of new foreign loans. As can be noted, these items are determined by factors such as the trends in merchandise trade, and the external debt situation (in terms of loan servicing and new loans). The confidence factor affects the volatile movements of short-term capital as well as foreign direct investment. The country may now need inflows of long-term investments and long-term loans in order to provide liquidity and build reserves. In the past year, there has been the reverse problem of large outflows of short-term funds caused by the withdrawal of foreign and local funds to abroad. The Need for Capital Controls and a Global Debt Workout System The crisis has also exposed the great lack of an international mechanism that comes to the aid of a country facing severe problems in external debt repayment. It was assumed that financial liberalization and private sector borrowing would not pose problems as banks, investors and companies would have calculated accurately their credit, loan and investment decisions. Most top-level companies and many banks in the affected East Asian countries are in trouble or insolvent as a result of having loans and projects gone sour. Most serious are the loans contracted in foreign currency, for a default in these can bring down the countrys financial standing. In the case of the unrepayable foreign loans in Thailand, Indonesia and South Korea, the market failure was caused by their local banks and companies. At least, the governments have to consider having stronger regulation to prevent private banks, financial institutions and companies from making mistakes, especially in relation to foreign-currency loans. Malaysian Bank Negaras regulation that private companies have to seek its permission before taking foreign loans, which will be given only if it can be shown that the projects can earn foreign exchange to finance debt servicing, should be maintained in Malaysia and emulated by other countries. Stricter regulatory guidelines implemented by BSP; consolidation and convergence between insurers, funds managers and banks, and innovative products and services will improve the quality of bank management. BSP also drew up guidelines on the duties of bank directors. These stringent requirements are in accordance with BSPs view that better bank governance means greater transparency and better bank management. The recent passage of the new general banking law expanded BSPs supervisory and regulatory powers giving it more flexibility in supervising the banking industry. This new general banking law superseded the half-century old general banking act of 1949. It now forms the basic legal fabric governing the banking system. The law also liberalizes foreign participation in domestic banks by increasing the allowable foreign ownership of domestic banks to 40 percent or a maximum of 100 percent under certain conditions. It also upgrades the countrys banking laws to meet global standards from teller machines (ATMs) to internet banking. The new leadership of the BSP sees the current developments in the banking industry as a trend following the practices of other countries. The early part of the decade saw ten foreign banks given license to operate in the country, one of which gave up its slot when it merged with another foreign bank (http://www. pwcglobal. com. au/asiabcmhandbook/phil_bank. html). Conclusion: Summary / Comments / Recommendations As with anything in life, man must take the good with the bad. The Asian Currency Crisis was not a positive time in Asian history, but many lessons can be taken from the time of grief in order to strengthen all affected and less affected countries. The Philippines was not hit hardest by the Crisis, but this by no means indicates they do not have problems. The Philippines problems have routed back to their leadership and government since the early 1970’s. The Asian Crisis was just made a little worse by the Philippines due to their large amounts of outstanding debt, their ignorant growing money supply, and their vast inability to repay any of their creditors. As I said before, this time of financial grief will hopefully make the Asian continent and the Philippines stronger in their decision-making and prevention skills. It is known that it is better to be proactive than reactive, just as we should prevent rather than have to resolve. Life’s lessons can come in all shapes and forms. This lesson just happened to involve billions and billions of dollars. 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Appendix A Appendix B Appendix C Appendix D Appendix E Appendix F