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MARKET BACKGROUND
The Philippines had an unsound monetary system during the period of Spanish occupation as a result of the different kinds of monies in circulation. It had gold barter rings, piloncitos, and Spanish barilla (barya in Tagalog), meaning loose change. Spanish currencies increased when Manila opened to foreign trade in the 19th century. The country had five types of monies at the time of the American occupation: the Mexican silver dollar, the Spanish-Filipino silver peso, the Filipino silver peseta and half peseta, and the Filipino centimo. After the Americans restored peace in many parts of the country, the US Congress passed the Philippine Coinage Act of 1903, or the Gold Exchange Standard, which introduced a new currency, the peso. It was equivalent in value to half a US dollar and was redeemable in gold. Later, the local currency was made redeemable in US dollars when the United States abandoned the gold standard. Its exchange value was fixed at two pesos to one US unit.
The peso was devalued to Ps3.90 to US$1 in 1962. That devaluation marked the beginning of the Philippines' return to the free market by easing up control on the currency. And with the breakdown of the Bretton Woods agreement in 1971, the peso joined the group of currencies under the so-called floating rate regime, but actually was placed under a managed or dirty float: monetary authorities frequently stepped in to shore up its value to help keep order in the foreign exchange market.
The peso floated more freely in the 1980s as market forces played a bigger role in determining the currency's international value. From Ps7 to US$1 in the 1970s, its exchange rate fell to Ps9 to US$1 before the country defaulted on its debt in 1983, as a result of the political and economic crisis, then steadily declined to Ps11, Ps14 and Ps18 to the dollar. Today, the unit's exchange rate hovers round Ps25.60 to the dollar.
Over the years, the Philippine financial system has undergone many changes. The financial scam in 1981 left behind huge debts owed to a number of financial institutions. In turn, the debts sparked the withdrawal of bank deposits and wild fluctuations in interest rates. The assassination of opposition leader Benigno Aquino...