The Asian Financial Crisis and Policy Response in the Philippines

Both in country and regional evidence show that the Philippine did not have the symptoms of the ¡°Asian-flu¡± before its outbreak into a full-blown Asian financial crisis. Although cannot be validated (in a counterfactual sense), one can argue that it may have been the early start of crisis elsewhere that now makes the country face less harsh consequences and adjustment. The Philippines is therefore not just an innocent bystander in the confluence of events in the region. This conclusion does not diminish the task of defining policies to address the root cause of crisis and to adjust to the environment it creates. In terms of policy response, it may have been a blessing in disguise that the country did not have sufficient reserves to put up a defense early on. It is this, which paved the way for the actual policy of freeing the exchange rate, rather than conviction that the exchange rate should not be target. Indeed, there are policies which are vestiges of this defense mechanism still in the books (e.g. interest rate cure). On the other hand, there remains a policy vacuum in the area of financial sector reforms, the very area that appears to be where the crisis started in the Asian region.