ABSTRACT
The Philippine peso was one of the first currencies put under intense speculative attack after the devaluation of the Thai baht. Nevertheless, the Philippines has not been hit as hard by the East Asian ‘crisis’ as have Indonesia, Thailand or South Korea. A decade-long process of financial reform and rebuilding, in conjunction with economy-wide liberalisation and deregulation, have been major factors behind the country’s greater resilience. The country’s macroeconomic condition remains fragile, however, partly because the government’s fiscal position is vulnerable to high interest rates because of the country’s large public debt. At the same time, the El Niño phenomenon is wreaking havoc on Philippine agriculture, which remains an important sector of the Philippine economy. The longer currency instability in the region remains, the high domestic interest rate regime continues, and El Niño drags on, the greater will be the deflationary effect. That is, there will be adverse impacts on the investments and operations of Philippine businesses large and small, while the government will have to impose sharp cutbacks on its own discretionary expenditures. Thus it is critical for the Philippines that the regional currency situation stabilise in order that domestic interest rates can ease.
