Download Dollarization in the Philippines:

Dollarization in the Philippines:
The way in; the way out
Cayetano W. Paderanga Jr.
Okinawa, Japan
8 April 2005
Outline
I.
II.
Determinants of dollarization
Dollarization and the growth of the
financial sector
III. Dollarization, sudden stops & economic
consequences
I. Determinants of dollarization in the
Philippines
Background:
- In 1970 Peso’s exchange rate was allowed to
“float”
- During the late 1970’s, monetary authorities
allowed foreign currency denominated deposits in
offshore banking units of foreign banks and
foreign sections of local banks
- The Philippine Dealing System was introduced in
the late 1980s
- Full deregulation of foreign exchange earnings
was fully accomplished in 1992
The Philippines
has experienced
two large foreign
exchange
episodes in the
last 20 years
Government deficits
were substantial
during the 1980s and
the current account
deficit worsened
Sudden stop: Capital
flowed out of the
ASEAN countries
during the Asian
Crisis. In case of the
Philippines, capital
flows also dropped in
1983.
- Inflation rates rose
substantially during
the 1980s
- Although inflation rate
has dropped significantly,
dollarized deposit ratio
still persist
Almost 50 percent of the total NG debt are foreign currency
denominated, 60 percent of which are in US$ …
National Government Outstanding Debt
(in million pesos)
2002
TOTAL
NG debt as a fraction of
nominal GDP
Domestic
Direct Liabilities
Assumed Liabilities
Foreign
Direct Liabilities
Assumed Liabilities
Source: Bureau of Treasury
2003
2004
2,815,468
3,355,108
3,811,954
66.7%
72.6%
73.4%
1,471,202 52.3%
1,462,950
8,252
1,703,781 50.8%
1,701,484
2,297
2,001,220 52.5%
1,998,926
2,294
1,344,266 47.7%
1,334,451
9,815
1,651,327 49.2%
1,643,342
7,985
1,810,734 47.5%
1,804,942
5,792
Foreign Debt Composition by Type of Currency
(in percent)
2002
2003
2004
US dollar
58.1
58.5
60.1
Japanese Yen
32.9
31.2
29.5
Euro
3.7
5.3
5.5
French Franc
0.5
0.5
0.5
Deutsche Mark
0.3
0.2
0.2
Other Currencies
4.5
4.3
4.2
Source: Bureau of Treasury
• Dollarization accelerated starting 1992
to 1996. This is partly explained by the
full deregulation of foreign exchange
earnings in 1992.
• The post-crisis period saw a steeper
decline in FCDU loans, relative to
decline in deposit liabilities, as domestic
borrowers shifted away from this type
of loan in favor of local currency
borrowings to minimize foreign
exchange risk.
II. Dollarization and the growth
of the financial sector
B a n k in g A s s e ts a n d D e p o s it D o lla r iza tio n
1 0 0 .0 0
1983
1991
1996
8 0 .0 0
1997
1985
Y OY Grow th Rates
6 0 .0 0
4 0 .0 0
2 0 .0 0
0 .0 0
1 982
1 983
1 984
1 985
1 986
1 987
1 988
1 989
1 990
1 991
1 992
1 993
1 994
1 995
1 996
1 997
1 998
1 999
- 2 0 .0 0
- 4 0 .0 0
- 6 0 .0 0
D e p o s it M o n e y B a n k s A s s e ts
" D o lla r " D e p o s its
2000
2001
2002
2003
B S P G IR a n d D e p o s it D o lla r iza tio n
1 4 0 .0 0
1983
1991
1 2 0 .0 0
1996
1997
1985
1 0 0 .0 0
Y OY Grow th Rates
8 0 .0 0
6 0 .0 0
4 0 .0 0
2 0 .0 0
0 .0 0
1 982
1 983
1 984
1 985
1 986
1 987
1 988
1 989
1 990
1 991
1 992
1 993
1 994
1 995
1 996
1 997
1 998
1 999
- 2 0 .0 0
- 4 0 .0 0
- 6 0 .0 0
B S P G ros s Res erv es
" D o lla r " D e p o s its
2000
2001
2002
2003
III. Dollarization, sudden stops &
economic consequences
1.
1.
2.
2.
1.
2.
3.
Effects on the banking & corporate sector
Asset-liabilities mismatch – currency risk masquerading
as credit risk
Sudden stop leads to capital adequacy & balance sheet
effects
Dollarization & government debt
Foreign liabilities of government held by domestic banks
Fiscal deficits, ratings downgrades & balance sheet
effects
Banking contraction leads to credit crunch
Bank Assets and Dollar Loans and Discounts
Growth of Bank Assets vs. Dollar Loans and Discounts T=1984
Growth of Bank Assets vs. Loans and Discounts T=1997
40.0
140.0
Bank Assets g.r.
30.0
Loans and Discounts (Net) g.r.
Bank Assets g.r.
120.0
Loans and Discounts (Net) g.r.
20.0
100.0
10.0
80.0
0.0
T-2
T-1
T
T+1
T+2
T+3
T+4
T+5
60.0
-10.0
40.0
-20.0
20.0
-30.0
0.0
-40.0
-50.0
-60.0
T-5
-20.0
-40.0
T-4
T-3
T-2
T-1
T
T+1
T+2
T+3
T+4
Dollarization and
Capital flow
Internal Public Debt and Fiscal Deficit
50
5
4
3
30
2
1
20
Fiscal Deficit
Internal Public Debt
40
0
10
Internal Public Debt
Fiscal Deficit
0
-1
-2
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Source: BSP and BTr
Debt
Deficit
Current Sovereign Ratings of the
Philippines
Agency
Rating Outlook
Standard & Poor's BB stable
Moody's
B1
stable
Fitch
BB
stable
R&I
BBB - negative
Source: http://asianbondsonline.adb.org
Date
Jan-05
Jan-05
Oct-03
Feb-05
Public Claims in Banks and the Public Deficit -Philippines
10
5
4
3
6
2
1
4
0
2
-1
0
-2
1991
1992
1993
1994
1995
1996
Public claims/total claims
1997
1998
1999
Public deficit/GDP
2000
2001
Public deficit/GDP
Public claims/total calims
8
III. Dollarization, sudden stops &
economic consequences
3.
Dollarization & market bubbles
1.
2.
3.
Dollarization & short-term capital inflow
Stock prices
Sudden stops & credit crunch
PHISIX vs FCDU T=1997
PHISIX vs FCDU T=1984
900.0
2,500.0
3,500.0
16,000.0
Composite Index (end of period)
800.0
FCDU
14,000.0
3,000.0
2,000.0
700.0
12,000.0
2,500.0
600.0
10,000.0
1,500.0
2,000.0
500.0
8,000.0
400.0
1,500.0
1,000.0
6,000.0
300.0
1,000.0
4,000.0
200.0
500.0
500.0
2,000.0
Composite Index (end of period)
100.0
FCDU
0.0
T-3
T-2
T-1
T
T+1
T+2
T+3
Stock market index
T+4
0.0
T+5
0.0
T-5
T-4
T-3
T-2
T-1
T
T+1
T+2
T+3
T+4
0.0
T+5
Growth of REER vs. FCDU T=1984
100.0
REER 2000=100 g.r.
FCDU g.r.
80.0
60.0
40.0
20.0
0.0
T-2
-20.0
-40.0
-60.0
Philippines, 1984 and 1997
Latin America
Adopted from “Unlocking Credit”
T-1
T
T+1
T+2
T+3
T+4
T+5
Dollarization in the Philippines:
The way in; the way out
Cayetano W. Paderanga Jr.
Okinawa, Japan
8 April 2005