The Service Sector
The Philippine financial system in the early 1990s was composed of banking institutions and nonbank financial intermediaries, including commercial banks, specialized government banks, thrift and rural banks, offshore banking units, building and loan associations, investment and brokerage houses, and finance companies. The Central Bank and the Securities and Exchange Commission maintained regulatory and supervisory control. The Philippines had a relatively sophisticated banking system; however, the level of financial intermediation was low relative to the size of the economy. In the late 1970s and early 1980s, a number of policy reforms were initiated to strengthen the system, but financial crises in 1981 and 1983 short-circuited their full effect. The financial community has undertaken recovery efforts since 1986.
Until the economic crisis of the mid-1980s, the largest commercial bank in the Philippines was the government-owned Philippine National Bank. Created in 1916 to provide agricultural credit for export crops, the Philippine National Bank accounted for 25 percent to 30 percent of commercial bank assets in the 1970s and early 1980s. As the result of the accumulation of nonperforming assets, by 1987 the asset share of the Philippine National Bank had fallen by half. In 1988 there were twenty privately-owned domestic banks and four branches of foreign banks engaged in commercial banking. Since the passage of the General Banking Act of 1948, foreign investment in banking has been limited to 40 percent of domestic bank equity. Total assets of the commercial banking system in 1988 were about P330 billion.
The Philippine government controlled three specialized banks in 1991: the Development Bank of the Philippines, the Land Bank of the Philippines, and the Philippine Amanah Bank. The Development Bank of the Philippines, established in 1946 and initially designed to facilitate postwar rehabilitation, provided long-term finance. It supplied 47 percent of long-term loans and 15 percent of the medium-term loans. More than 70 percent of its loans were allocated to industry. The Land Bank of the Philippines, established in the early 1970s, financed the government land reform program. The Philippine Amanah Bank, organized in the mid-1970s, served Muslims in the southern Philippines. Offshore banking units have been allowed to do business in the Philippines since 1977. Also since 1977, certain domestic banks have been allowed to take foreign-currency deposits and engage in foreign-currency lending.
From its inception in 1948 until 1980, the Central Bank extensively regulated the commercial banking system and engaged in considerable rediscounting activity. Interest rates were set administratively, usually below the market clearing rate. Commercial bank lending tended to be short-term and granted to known, established borrowers. The system had periods of instability with several bank runs and a few failures. In 1980, at the instigation of the World Bank and the IMF, several measures were passed to increase competition in the financial sector, achieve greater efficiency, and increase borrowers' access to long-term funds. Large banks with a net worth of at least P500 million could engage in expanded commercial banking, or "unibanking," combining commercial and investment banking activities. In 1988 there were eight unibanks, including the Philippine National Bank. Further liberalization had occurred in 1983 when interest rates shifted from being administered to being market-determined.
Interest-rate ceilings had led to an excess demand for loans and credit rationing. The Malacañang Palace interfered in loan decisions regarding state-owned banks, weakening the quality of bank portfolios. It was argued that a market-determined interest rate would make such behavior less rewarding and more difficult. However, before the interest rate reform could be initiated and before the expanded commercial bank reform had an impact on the banking industry, a series of crises hit the Philippines, throwing the country's financial system into disarray.
The economic and political crisis that occurred in the aftermath of the assassination of Marcos's political rival, Benigno Aquino, resulted in a virtual collapse of much of the banking industry, particularly the smaller institutions. The larger banks suffered substantial losses from the drastic devaluations of the peso between 1983 and 1985. Commercial bank loans increased slightly in 1984, but then fell almost 30 percent in the following two years - from P116 billion to P83 billion - before turning upward again. Inflation during that three-year period was almost 80 percent. The two largest financial intermediaries, the Philippine National Bank and Development Bank of the Philippines, became insolvent, and a number of financial institutions failed, including the three largest investment houses, three commercial banks, the majority of the more than 1,000 rural banks, and the largest savings bank.
The Aquino government undertook a rehabilitation program for the Philippine National Bank and Development Bank of the Philippines. In 1986 nonperforming assets of the two institutions were transferred to the government, reducing the value of the assets of the Philippine National Bank by 67 percent and that of the Development Bank of the Philippines by 87 percent. The relative importance of these two banks in the financial sector diminished dramatically. The domestically owned commercial banking sector, however, became more concentrated. From the mid-1950s to the early 1980s, the five largest private domestic commercial banks accounted for about 35 percent of total assets of the private domestic commercial banks. By 1988 that ratio had risen to around 55 percent. The combined assets of the five private domestic commercial banks, the Philippine National Bank, and the two largest foreign branch banks accounted for two-thirds of total commercial bank assets, up from 56 percent in 1980.
In 1990 the six largest commercial banks earned an estimated P7.9 billion in after-tax profits, an increase of 42 percent over 1989, which in turn was a 32 percent increase over 1988. A 1991 World Bank memorandum noted that the extent of bank profits indicated a "lack of competition" and a "market structure for financial services characterized by oligopoly." Philippine banks had the widest interest rate spread (loan rate minus deposit rate) in Southeast Asia.
In 1988 there were 157,000 kilometers of roads, 26,000 of which were designated national (arterial) roads. Somewhat less than 50 percent of national roads were all-weather. The PanPhilippine Highway, also called the Maharlika Highway, running from Laoag City in Ilocos Norte to Zamboanga City at the southwest tip of Mindanao, was the country's main trunk road. The highway passed through twenty-one provinces. In the 1980s, the national road system increased by 10 percent, and the portion that was surfaced with asphalt or concrete increased by 20 percent. The planning target for 1992 called for 100 percent of arterial roads to be all-weather, and 95 percent to be paved. Local roads, however, were allowed to deteriorate. The condition of many roads was poor because of low design standards, substandard construction, inadequate maintenance, and damage from over-loaded vehicles. A program of rehabilitation and improvement of the local road system was part of the plan objectives.
In 1988, 1.3 million motor vehicles were registered with the Bureau of Land Transportation. About 22 percent were motorcycles; 30 percent were private automobiles, and 38 percent were utility vehicles. A large number of the utility vehicles were jeepneys, jeeps converted for hire to carry passengers. In the late 1980s, Metro Manila experienced a combination of heavy traffic congestion and a shortage of transportation, reflecting an increasing number of private automobiles and an insufficient number of public conveyance vehicles. A 1989 estimate indicated a shortage of 3,200 buses and 21,700 jeepneys in the Manila area, and many of the taxis and buses in Metro Manila were very old.
In 1991 there were two international airports: Manila's Ninoy Aquino International Airport and Mactan International Airport near Cebu City. Slightly over 1 million visitors arrived in the Philippines by air in 1988. About half of the national airports were served by the main domestic and international carrier, Philippine Air Lines. No additional airport construction was anticipated in the Medium-Term Development Plan, 1987-92. Thereafter, Manila's international airport, which is too small to handle expected increases in air traffic, would need to be relocated. During the talks between the United States and the Philippines in 1990, concerning the future of the two major United States military facilities in the Philippines, there was public discussion of relocating the international airport to the United States facility, Clark Air Base and making Ninoy Aquino a domestic airport.
There was a network of 622 public and 314 private seaports in the Philippine archipelago in the late 1980s. Six ports - Manila, Cebu, Iloilo, Cagayan de Oro, Zamboanga, and Davao handled approximately 80 percent of public port traffic. In 1988 a major construction project was underway at the Manila International Container Terminal. There was an ongoing series of port improvement projects, and plans for a fishing port program and a program to develop roll-on-roll-off capacity in order to link sea and road transportation systems.
In 1987 there were more than 3,000 passenger and cargo ships in the interisland shipping industry, with a total registered cargo tonnage of 417,500 tons. The ships accounted for about 85 percent of interisland cargo movements and nearly 10 percent of passenger-kilometers traveled nationwide. Somewhat less than one-third of the ships were liner vessels; the remainder were tramp ships. Liner ships were generally imported secondhand from Japan and in 1987 had an average age of about nineteen years. Although the industry was highly regulated, it was criticized for moving goods slowly and inefficiently and for safety violations, particularly overloading passengers during peak periods of travel.
The Philippines in 1990 had one main railroad line running north out of Manila 266 kilometers to San Fernando City in La Union Province and 474 kilometers south to Legaspi City in Albay Province. The system had deteriorated over the years, with utilization declining continuously to a tenth of the passenger traffic and a twentieth of the freight carried in 1960. In the first 10 months of 1990, the railroad carried 30,000 tons of freight, down from 48,000 in 1989. During the same period, passenger service turned around, however, climbing from 210 million passenger-kilometers in 1989 to 226 million in 1990.
The Philippine National Railroad began a project in 1990-91 to upgrade its southern track system, utilizing a P1.2 billion loan from Japan. When completed in 1993, travel time from Manila to Bicol would be cut substantially.
In 1984 a Light Rail Transit system began operation in Metro Manila running from Baclaran in the south to Monumento in the North. The fifteen-kilometer system provided some relief from Metro Manila's highly congested traffic network.
Telecommunications and Postal Services
The Philippine telecommunication system in 1989 consisted of some fifty-five telephone companies, seven domestic record carriers, four international record carriers, and two satellite ground stations. Approximately 70 percent of the country's telephone lines were located in Metro Manila. In 1989 there were 4.7 telephones per 100 persons in Metro Manila but only 0.8 telephones per 100 persons in the country as a whole. The country had approximately 380 radio stations broadcasting to 4 million receivers in English and all the major Philippine dialects, and 42 television stations transmitting to 6 million receivers, mainly in Pilipino and English. The mail volume handled by the more than 2,000 post offices in the Philippines doubled from approximately 400 million pieces in 1979 to approximately 800 million pieces in 1988.
Tourism developed rapidly in the 1970s, with visitors numbering 1 million in 1980. Thereafter, the industry went into a slump, reaching the 1 million visitor mark again only in 1988. In that year, the average length of stay was 12.6 days, up from 8.9 days in 1987. Many of the visitors, however, were emigrant Filipinos returning for periodic visits with families and friends. In 1988 an average of 73 percent of Manila's 8,500 hotel rooms were occupied.
Estimates of tourist revenue varied considerably. In 1988 the Central Bank estimated it at US$405 million, 11 percent of the country's nonmerchandise exports. Using a different formula, the Department of Tourism estimated tourism earnings at US$1.45 billion. Most tourists entered the country through Manila, but the city had relatively few amenities and suffered from congestion, pollution, and crime. Intramuros, the colonial Spanish walled city, had not been fully restored since its destruction at the end of World War II. Political instability in the country during the 1980s also was a deterrent to tourism. The Medium-Term Development Plan called for promotion of both domestic and international tourism.