The author is the Associate Chair, Department of Economics, Ateneo De Manila University. This piece was published in the Yellow Pad column of Business World, 07 June 2004 edition.
” Good question. The answer is: no. We are not going to be another Argentina.”
The past few months, concerned investors, business leaders, policy
makers and students increasingly ask economists whether the Philippines
is heading towards an “Argentina Crisis.” There are good reasons to
worry. Hence, it is a good question to ask. But the main answer is
“no”. The argument follows.
Two significant intermediate factors led to the “Argentine Crisis.”
First, the Argentine economy suffered 3 consecutive recession years
from 1999 to 2001. There are several arguments that attempt to explain
the cause of recession and why it extended for 3 years. Many argue that
the Asian Currency Crisis spilled over Argentina the same way that it
partially affected the Russian Crisis. Others argue that Argentina’s
“obedience” to follow IMF prescription to cut fiscal expenditure
extended what could have been a short-lived recession. Nonetheless, an
extended recession was a major force that led Argentina to the Crisis.
Second, the Argentine Peso was consistently overvalued during the
intermediate time before the Crisis. The overvaluation had to do with
two factors. The first factor had to do with the steady Argentine Peso
despite the fall of the Brazilian Real. More than anything, this made
the Peso overvalued relative to its important neighbor currency, the
Real. The second factor is simply the failure of its relatively fixed
exchange rate regime (crawling peg) to adjust despite its lack of
international trade relative to its national income.
Immediate conditions follow the intermediate conditions. Extended
recession led to economic uncertainty. Uncertainty led to drastic
increase of interest rate and decrease of investment. The increase of
interest rate increased the cost of servicing its debt. In 2001, net
foreign direct investment decreased by over 70%. These trigger the
crisis. Argentina suspended its external debt service. In 2002, the
economy worsened to the point of making its three years recession look
minor. Conservatively speaking, GDP contracted by over 10%. Annual
inflation was over 30%. And net foreign direct investment decreased
again by over 60%.
So is the Philippines going to be another Argentina? The first half of
the answer is: “Good question.” Before the Argentine Crisis of 2001,
the Argentine external debt to GDP ratio was 51%. In 2003, the
Philippine external debt to GDP ratio is 50%! The ratios are almost
identical. The equivalent amount of foreign debt is half of the total
annual income of the economy. Before the Crisis, Argentine total
(domestic and foreign) debt to GDP ratio was 65%. In 2003, the
Philippine total debt to GDP ratio is 85%! The Philippine ratio is even
worse. To put it in perspective, South Korea’s total debt to GDP ratio
during the peak of its own crisis in 2000 was only 30%. Based on these
numbers, an economist should say “Yes! The Philippines is going to be
the next Argentina.” Yet I say that we should take these numbers very
seriously. The worry is legitimate. And this is exactly why it is a
The second half of the answer is: no. Consider the following numbers.
Before the Asian Currency Crisis (1996), the external debt to GDP ratio
was 48%. This is almost the same as that in 2003. Despite the Asian
Currency Crisis and one of the worst climactic catastrophes ever (El
Nino), the Philippines suffered almost the minimum time of recession.
The standard definition of recession is 2 consecutive quarters of
decrease of GDP. The Philippine GDP decreased for 3 consecutive
Unfortunately, the external debt to GDP ratio increased to 71% in 2001.
Hence, it was already worse than that of Argentina. But despite
internal problems (for example, EDSAs II and III, the Abu Sayyaf, etc.)
and the geopolitical uncertainty (for example, height of terrorism, US
recession, Iraqi war, the SARS outbreak, etc.), the Philippine economy
only slowed to about 3% annual GDP growth.
The Philippines had worse debt to GDP ratios. During which, worse
shocks hit the country. Yet, the Philippines has not had economic
setback of the same magnitude. Not even close. Now, the ratios are
still not good but better. Consider that geopolitical conditions have
improved compared to the past 6 years. Also consider that political
uncertainty brought by the 2004 elections is just about over. The
Philippines is not likely to hit an Argentina type of crisis.
For the sake of convincing, bear in mind of the following additional
numbers. Argentine external debt to export ratio rose from 420% to 470%
from 1990 to 2000. That is: the equivalent amount of their foreign debt
is almost 5 times of annual export earnings. For the Philippines, the
numbers are approximately 120%, 150%, 145% and 200% for 1996, 1997,
2001 and 2003, respectively. The Philippine ratio is not healthy and
worsening, but less than half as bad as the Argentine 10 years before
Argentine Peso was overvalued and less resilient prior to their Crisis.
In fact, the Argentine Peso was fixed at P1/$. The Philippine Peso’s
value is just right, if not undervalued. Some say that the Philippine
Peso should be P59/$. Some even say that it will appreciate to P57/$
after the election. Following the Brazilian Real’s depreciation, the
Argentine Peso remained fixed. Following the Thai Baht’s depreciation
in 1997, the Philippine Peso adjusted from P26/$ to about P40/$. In the
event that another significant depreciation occurs in Asia, the
Philippine Peso is likely to be as resilient. (Give credit to the
Bangko Sentral ng Pilipinas).
The Argentine 3-year recession prior to its Crisis is not close to the
Philippine 4.5% approximate GDP growth for 2003 and 2004. It is not
even close to the Philippine 3-quarter recession of 1998. But suppose
the country for some unexpected and highly improbable reason hits
recession. Given that many including Nobel Laureate Joseph Stiglitz
blame the IMF for insisting expenditure cuts despite the 3-year
Argentine recession. The Fund and Filipino economists will likely be
more open-minded and not as 3-year insistent on cutting expenditure.
However just before everyone breathes a sigh of relief, consider the
“Buts” of the answer. The Philippines is not going to be another
Argentina. But this does not say that the debt to GDP ratio is healthy.
But the total debt to GDP ratio of over 80% is still too much to pay.
But the fact remains that the foreign debt to export ratio almost
double the past 8 years. But it is still important to have fiscal
discipline. But it is not impossible for the Philippines to be the next
Argentina 4 years from now.
Statistics should only increase the sense of urgency to improve these
numbers. Majority of economists believe that the most important part of
the solution to improve these numbers is to increase revenue
generation. Doing this will reduce the budget deficit and ease the
reduction of national debt. It will also allow government to continue
its economic development and growth enhancing programs.