Philippines banking crisis of 1981

This contribution pinpoints the liquidity crisis that churned the Philippines' banking sector at the beginning of the 1980s, followed by a balance of payments crisis that erupted in 1983. This crisis brought about a period of economic stalemate and decline in growth that affected the real economy and the banking sector. This situation prompted the authorities to pass a financial reform of the banking system. The contribution first connects the impact of the second energy crisis of 1979 to the turn‐of‐the‐decade decline of the market price for most of the products traditionally exported by the Philippines, which seriously disrupted the country's terms of trade, caused a decline in its growth rates, and set conditions for a prolonged economic slowdown. During the 1970s, notwithstanding the first world energy crisis, the economy of the Philippines had performed relatively well. However, as a result of the second world energy crisis of 1979, the market price for most of the products traditionally exported by the Philippines declined substantially. The effects of the worldwide recession hit the country's terms of trade, initiated a decline in the growth rate, and set conditions for a prolonged economic slowdown. Then, this piece of work outlines the banking reform designed to revert this economic trajectory, based on wide‐ranging deregulation of the internal financial sector revolving around a set of financial liberalization. These measures overlapped with the outbreak of the so‐called “Dewey Dee scandal”, which plunged many financial institutions on the abyss of insolvency. Between 1981 and 1983 the Central Bank and the government intervened vigorously to rescue banks and financial institutions to prevent bank closures: acting in this way caused a surge in the budget deficit. By providing massive rescue funds, the monetary authorities and the government aimed at avoiding a collapse in public confidence in the banking system. However, the financial sector crisis led to increased foreign currency borrowing. Notwithstanding this vigorous government financial rescue operation, the number of failed companies increased between 1981 and 1983. On the other hand, this government intervention triggered a surge in the budget deficit. The twin banking crises and the balance of payments crisis of 1981 and 1983 had prolonged effects on the growth of the Philippine economy, which experienced a period of prolonged sluggishness throughout the 1980s.