Recalling the Asian financial crisis

Almost exactly 20 years ago, a financial storm hit East Asia that left the region’s economies reeling in its wake. We largely withstood the worst effects of it, but our then more dynamic neighbors took a bad hit. In 1998, GDP dropped dramatically in Indonesia (-13.2 percent), Thailand (-10.4 percent), and Malaysia (-7.5 percent). While our Asean neighbors took a heavy beating, the Philippines was only mildly bruised, with GDP dipping only slightly by -0.5 percent. Meanwhile, Singapore and the new Asean member-countries Cambodia, Laos, Myanmar and Vietnam managed to maintain positive albeit much reduced rates of growth.

We liked to explain our relative resilience to the worst effects of the crisis then by saying that we already had practice — thanks to our own self-inflicted financial crisis in the early 1980s. The 1983 assassination of former Senator Benigno Aquino Jr. threw the economy into a domestic financial crisis marked by massive capital flight and weakened financial institutions. These had prompted the Central Bank then to adopt significant regulatory reforms to strengthen our banking system, and forestall similar financial pressures in the future. These reforms paid off well for us by the time the regionwide crisis hit us in 1997-98.

We also did not have the same vulnerabilities in the real property and banking sectors that the Thais had, which led to their spectacular slide. The crisis in Thailand was catalyzed by the bursting of a real estate bubble marked by massive overbuilding of office and residential condominiums in the 1990s, heavily financed by bank loans. When the property developers could no longer sell or lease these condominiums, they began defaulting on their bank loans one after another, leading in turn to the collapse of Thai banks one after another. And the rest is history, so to speak.

But real property development in the Philippines was a different animal. Unlike Thai and other Asian property developers who borrowed heavily from banks to construct their buildings, Filipino developers then and now prominently finance their projects by preselling. It was not, and still is not, uncommon for us to be offered condominium units for sale before the developers have even broken ground, or very early in construction, years before the building will be ready for occupancy. Being more segurista (risk-averse) than their other Asian counterparts, our property developers are thus better assured that they will not end up with largely unsold and unoccupied buildings once these are completed. After all, selling a condo unit before it is constructed or completed, at a price lower than its ready-for-occupancy value, is like paying interest for a bank loan. This financing approach was also abetted by limits imposed by the Central Bank on banks’ lending to the real property sector in the aftermath of our own homegrown 1980s crisis. All this provided us safeguards against a possible real-estate-bubble-induced financial crisis by the late 1990s.

Twenty years later, what have we learned from this crisis? Ten years after the crisis, economic analysts, including those at the International Monetary Fund, already knew that the medicine forced on the region then only made the illness worse. To be extended emergency IMF funding support in 1997-98, governments had to raise taxes and reduce spending (i.e., tighten fiscal policy), and raise interest rates (tighten monetary policy) to forestall foreign exchange outflows. The latter didn’t work — foreign exchange stampeded out of the region anyway — and along with the tight fiscal policy, only choked economies into deeper recession, higher unemployment, and wider poverty. And so, when the world financial crisis hit in 2008-2009, the medicine prescribed was the exact opposite: Reduce interest rates and hike government spending, to stimulate and revive economies quickly.

Again, we got out of that crisis lightly, relative to our neighbors. Apart from having had ample practice, we also had a competent Bangko Sentral to deal with it. Thank God the President chose to set politics aside in choosing that critical institution’s new leader.

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