Looking ahead: assessing the vulnerabilities of the Philippine economy through an early warning system
Date
2004-10
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Abstract
With the numerous crises hitting emerging market economies, including the Philippines, there is an increasing need for developing an early warning system (EWS). The study constructed an EWS applying the multinomial logit model to predict an upcoming crisis for the next 12 months. Using the entire sample period January 1980-December 2001, five periods of crisis were identified, using the exchange market pressure (EMP) formula. The periods where the crises started were November 1983, February 1986, September 1990, August 1997, and November 2000. After assessing the vulnerability of the Philippine economy using the different leading indicators from 1980-2001, we find that among the most important variables that can help determine an upcoming crisis are the overvaluation of the real effective exchange rate, current account deficit, and the import and export growth as well as the trade balance. The level of gross international reserves, inflation rates, the spread between RP and US three month t-bill rate, money supply, and the level of domestic credit to the private sector are also reliable signals of an upcoming crisis.
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Economic crisis, Financial crisis, Philippine economy, Vulnerability assessment, Early warning system, Macroeconomic stability