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REGIONAL FINANCIAL INTEGRATION OF APEC AND ITS IMPACTS ON PHILIPPINE FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH

NIKKI ANN CONSIGNA BERMUDEZ

SUBMITTED TO THE FACULTY OF THE DEPARTMENT OF ECONOMICS COLLEGE OF ECONOMICS AND MANAGEMENT

UNIVERSITY OF THE PHILIPPINES LOS BAÑOS IN PARTIAL FULFILLMENT OF

THE REQUIREMENTS FOR THE DEGREE

BACHELOR OF SCIENCE IN ECONOMICS

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ABSTRACT

BERMUDEZ, N.A.C. 2009. University of the Philippines. Los Baños

REGIONAL FINANCIAL INTEGRATION OF APEC AND ITS IMPACTS ON PHILIPPINE FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH.

(Undergraduate Thesis)

Adviser: Prof. Amelia L. Bello

The study measured the degree of regional financial integration (RFI) of the Philippines with the Asia Pacific Economic Cooperation member economies using price- based measures (i.e., common financial market interest rates). Measurements of the financial integration were the mean differential of APEC member economies in relation to the Philippines and the Coefficient of Variation of APEC member economies. Money market, lending market and domestic deposit market rates were used in the study.

The findings suggest that there is already an increased integration of financial markets of APEC prior to its formation. Also, during the most recent years, there is observed movement of the APEC unit market rate towards a more financially integrated region.

Moreover, the study discussed the RFI’s implications to economic growth (i.e., growth rate of real GDP per capita) and assessed the RFI’s effects on domestic financial development. Measures used in financial development were bank deposits as percent of GDP, value of money and quasi-money supply as percent of GDP, private credit as percent of GDP and stock activity as percent of GDP.

Indicators of the lending market rate and deposit market rate integration were significant in the growth model. However, results of the study showed that financial integration may actually be detrimental to economic growth.

Money market rate integration was found to be significant in relation to the levels of financial development in the country. Contrary to existing economic theories, it was found out that there are adverse effects of increased financial integration with the levels of financial development present in the country.

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TABLE OF CONTENTS

TITLE PAGE i

BIOGRAPHICAL SKETCH ii

ACKNOWLEDGEMENT iii

ABSTRACT iv

TABLE OF CONTENTS v

LIST OF TABLES vii

LIST OF FIGURES ix

INTRODUCTION

1.1Background of the Study 1

1.2Statement of the Problem 4

1.3 Significance of the Study 5

1.4 Objectives of the Study 6

REVIEW OF RELATED LITERATURE

2.1 Regional Integration: The Philippine and South East Asian Experience 7 2.2 Regional/ International Financial Integration Literature 12

2.2.1 Measures and Determinants of

International Financial Integration 12 2.2.2 Regional Financial Integration:

The Costs and Benefits 14

2.2.3 Regional Financial Integration

and Financial Development 17

2.2.3 International Financial Integration-

Economic Growth Nexus 18

THEORETICAL AND CONCEPTUAL FRAMEWORK 3.1 International Financial Integration and

Economic Growth 20

3.2 International Financial Integration and

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4.1.2 Regional Financial Integration and

Financial Development 27

4.2 Measurement of Regional Financial Integration

4.2.1. Domestic Deposit Rate Integration 31

4.2.2 Lending Market Integration 32

4.2.3 Money Market Integration 33

RESULTS AND DISCUSSIONS

5.1 Degree of Regional Financial Integration of APEC

5.1.1 Pre- APEC Formation (1987-1989) 36 5.1.2 Post-APEC Formation (1989-1997) 38 5.2 Regional Financial Integration and Economic Growth 41 5.3 Regional Financial Integration and Financial Development 44

SUMMARY AND CONCLUSIONS 60

LIMITATIONS AND RECOMMENDATIONS 62

IMPLICATIONS 64

APPENDIX 70

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LIST OF TABLES

Tables Title Page

5.1

Coefficient Estimates of Economic Growth and Regional Financial

Integration 42

5.2

Coefficient Estimates of Bank Deposits and Regional Financial

Integration 46

5.3 Coefficient Estimates of M2 and Regional Financial Integration

49 5.4

Coefficient Estimates of Private Credit and Regional Financial

Integration 52

5.5

Coefficient Estimates of Stock Activity and Regional Financial

Integration 55

5.6 Table 5.6 Significant Variables of Equation 1 58

5.7 Table 5.7 Significant Variables of Equation 2 59 A.1 Lending Market Rate APEC Member Economies (Q1 1987- Q4 1992) 70 A.2 Lending Market Rate APEC Member Economies (Q1 1993- Q4 1998) 71 A.3 Lending Market Rate APEC Member Economies (Q1 1999- Q4 2004) 72 A.4 Lending Market Rate APEC Member Economies (Q1 2005- Q4 2007) 73 A.5 Deposit Market Rate APEC Member Economies (Q1 1987- Q4 1992) 74 A.6 Deposit Market Rate APEC Member Economies (Q1 1993- Q4 1998) 75

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LIST OF TABLES

Tables Title Page

A.11

Money Market Rate APEC Member Economies

(Q1 1999- Q4 2004) 80

A.12

Money Market Rate APEC Member Economies

(Q1 2005- Q4 2007) 81

A.13

Quarterly Economic Growth of the Philippines

(Q1 1987- Q4 1996) 82

A.14

Quarterly Economic Growth of the Philippines

(Q1 1997- Q4 2007) 83

A.15

Control Variables for Economic Growth, Philippines

(Q1 1987- Q4 1996) 85

A.16

Control Variables for Economic Growth, Philippines

(Q1 1997- Q4 2007) 86

A.17

Control Variables for Financial Development, Philippines

(Q1 1987-Q4 1996) 88

A.18

Control Variables for Financial Development, Philippines

(Q1 1997-Q4 2007) 89

A.19 VIF Values in Equation 1 91

A.20 VIF Values in Equation 2 (Bank Deposits and RFI) 92

A.21 VIF Values in Equation 2 (M2 and RFI) 93

A.22 VIF Values in Equation 2 (Private Credit and RFI) 94

A.23 VIF Values in Equation 2 (Stock Activity and RFI) 95

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LIST OF FIGURES

Figures Title Page

5.1 RFI (Mean Differential) Pre-APEC Formation (1987-1989) 37 5.2 RFI (COV Values) of Pre-APEC Formation (1987-1989) 37 5.3 RFI (Mean Differential) Post-APEC Formation (1990-2007) 40 5.4 RFI (COV Values) Post-APEC Formation (1990-2007) 40

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