1997-1999 Philippine Economic Downturn : A Preventable One

The paper tries to trace the downturn in the economy in 1997-1998 and compares it with the crisis experienced in Thailand, Korea and Indonesia. The downturn was not of the magnitude of their crisis and had different causes. GDP fell by a lower rate from 5.2% to -.5%. The decline was of the same magnitude as in the 1990-1991 recession when GDP fell from the average rate of 5.4% in 1986-1990 to .5% in 1991. Supply shocks were the major cause of both recession- in 1990-91 there were the earthquake, Pinatubo, Gulf War and coup attempt, in 1997-1998, there was El Niño that reduced agricultural output by 6.7% that amounted to 2.41 times the drop in GDP. There was a capital upsurge and reversal as happened in the neighbors but the short-term component was not as large. External flows were largely medium-term and long-term. The banks which were major short-term borrowers were able to absorb the currency losses and so remained solvent. There were no massive bank failures as in the other countries. The central bank exacerbated the difficulties of the external borrowers by cutting liquidity. The resulting rise in interest rate added to the losses of the real sector.