Amando M Tetangco, Jr: Sustaining relative strength in a dynamic
environment
Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the
central bank of the Philippines), at the Euromoney Philippines Investment Forum 2016,
Manila, 6 September 2016.
* * *
It is my pleasure to join you today, and share the views of the Bangko Sentral ng Pilipinas
regarding the investment landscape in the Philippines. I wish to thank Euromoney for
organizing this Philippine Investment Forum, which is an annual event started in 2012.
It's always about relative value
Investing is always about weighing relative values - among asset classes, across points in a
yield curve, across industries and types of credit. In our highly interconnected global
environment, investment choices now also include weighing relative values across
geographical markets and currencies. In other words, good investing is never done in a
vacuum or in absolutes.
In making relative value judgments, prudent investors ask themselves three questions -
(1) Is there upside potential? (2) Are the returns sustainable? and (3) Are the downside risks
manageable?
In the case of the Philippines as an investment destination, my answer to these questions
would be YES. I believe the Philippine economy continues to offer a convincing case for
investment and sustained growth. I say this with confidence because the Philippines has a
good solid track record!
The Philippines' macroeconomic environment has been marked by solid economic growth
and low inflation. Our gross domestic product has been robust and durable, registering
70 consecutive quarters of positive growth (even through the Global Financial Crisis!). In the
second quarter of this year, the country grew by 7.0 percent, its fastest since the third
quarter of 2013. Quite notably also, there has been a resurgence in manufacturing in recent
periods, and domestic tourism has also been on the rise, creating a broader base for
economic growth. Moreover, inflation has been benign and inflation expectations continue to
be well-anchored. Our latest assessment shows that inflation will be just below the lower
end of the government's target range for this year, but should move to within the target
range of 2-4 percent in 2017-2018.
The banking system has also been an enabler of economic growth as it continues to channel
lending to the productive sectors of the economy. This, without sacrificing credit underwriting
standards and the quality of their balance sheets.
In the meantime, our external liquidity position has been robust. We have been running
current account surpluses for 13 years now, allowing us to beef up FX reserves to an all-time
high of US$85.5 billion as of end-July 2016.
All-told, ladies and gentlemen, the Philippine economy continues to enjoy a position of
relative strength. And this has not been unnoticed by global investors. We have had our
share of surges in capital inflows in search of yield. And while, some of these have "come
and gone", a large portion of the inflows have stayed and remain invested in our domestic
assets.
But what I wish to emphasize this morning is that the Philippines is a destination not only for
flighty capital. The Philippines is, more importantly, a destination for serious investment. I am
able to say this with conviction because we do not only have a solid macroeconomic track
record, we also have the institutions that are critical to sustaining such a strong economic
performance.
Good institutions are indispensable
For more than two decades now, we have been putting in place structural reforms that have
liberalized key industries, including utilities, the power sector, and the banking system. We
have adopted legislation aimed at improving governance in government corporations (GCG)
and public procurement (GPPB); as well as ensuring fair competition in industry and vital
services (PCC). These reforms have helped raise the country's total factor productivity (TFP)
and are seen to help further reduce incremental capital output ratios (ICOR). These efforts
complement the ongoing reforms to further improve "ease in doing business" and lessen
"frictions" for investments in the Philippine economy.
In parallel, the BSP, in collaboration with market participants and other regulators, is
continuing to roll out specific market reforms under our capital market reform agenda. The
reforms which include, among others, developing a benchmark governance framework and
creating a repo market should further deepen our domestic capital market and align its
functioning with global standards. Alongside these, the BSP has also put out banking
regulations that will enhance corporate governance and credit and IT risk management
among banks, in tandem with the adoption of the other components of Basel 3.
Furthermore just last month, the BSP embarked on a significant liberalization of foreign
exchange rules. These measures aim to encourage the public to transact their FX needs
more with banks by, among others, increasing the current limit of allowable FX purchase
from banks without supporting documentation, and allowing payments in FX for certain
transactions between residents.
Also, in an effort to further improve the transmission of monetary policy, the BSP adopted in
June this year the Interest Rate Corridor (IRC) framework for its conduct of monetary policy.
These monetary, capital market and banking reforms are meant to further strengthen the
financial markets so that they could more effectively "marry" the users and sources of funds.
There is enough liquidity in the domestic financial system. What needs to happen is that
more and more of this liquidity is pushed to the productive sectors of the economy more
expeditiously, not only through bank lending, but also through a robust capital market.
The national government for its part, under the new administration, has committed to a
10-point Economic Agenda that aims to continue the factors that led growth in the
Philippines: maintaining an orderly fiscal house, investing in human resources and capital
development, among others.
Ladies and gentlemen, we put these institutions in place because our operating environment
is not static. We know that the macrofinancial stability we now enjoy can only be sustained if
we have sound institutions on which to anchor any further reform efforts.
Conditions are never static
To complete therefore the discussion of the Philippine investment landscape, allow me now
to briefly speak on the risks that could possibly unsettle us. These risks impact us in the
short-term through financial market volatility and in the long-term possibly through aggregate
demand dynamics.
Externally, we are affected by the policy actions of advanced economies. The most pressing
of these are 1) the timing of the next hike of the Fed and 2) the magnitude of any further
easing from the BOJ and ECB. As the markets digest any pronouncements from AE policy
makers, we will continue to experience a toggling between "risk on" and "risk off" market
behavior, which always creates "noise" in financial markets.
The BSP has the tools to address such "noise" in our onshore markets, to calm our
participants and keep market behavior in check. Specifically, we have room to allow the
exchange rates to absorb some of these near-term shocks or provide FX liquidity under our
flexible exchange rate policy. Moreover, we could also adopt targeted macroprudential tools
to bring about a more fundamental change in market behavior. In addition, given the current
benign inflation outlook, the BSP has room to keep its policy rates steady to provide a further
anchor for stability.
A second potential source of vulnerability are shifts in Chinese economic policies - 1) from a
growth model that relies on exports and fixed investments to one which is driven by domestic
demand, and 2) to a more market-oriented (and weaker) RMB. Early expectations were that
the shift to domestic demand would result in significant slowing in Chinese growth, which
could dampen exports of its trading partners, such as the Philippines. More recent forecasts,
however, show a somewhat less dire outlook on China due to fiscal and monetary support
from the authorities, easing risks of knock-on effects on trading partners and demand for
international commodity prices. On the other hand, the policy of a weaker RMB is not
expected to lead to stronger competition against our exports because we have a relatively
low degree of export similarity with China.1 Should the policies of the Chinese authorities
indeed bring about more sustainable growth, this should be overall positive for us as it
reduces global tail risks.
A third risk is Brexit. The direct impact to us of a slowdown in the UK would be minimal, given
that our exports to the UK account for only 0.8 pct. of total exports. It is the possibility of
second round effects on the EU, however, that is more concerning because exports to EU
account for 11.5 percent of total exports. We therefore need to remain watchful of
developments in the UK, particularly during the transition to "exit."
On the domestic front, we have to contend with natural calamities. While no one can fully
prepare for the wrath of nature, the country has put in place policies that will help ensure we
have adequate supply of staple foods, particularly rice.
In short, ladies and gentlemen, the Philippines is not immune to risks but our view is that
these risks right now are manageable.
The balance - short vs. long-term dynamics
On balance, the Philippines continues to forge an economic growth story that puts emphasis
not only on strength but also on long-term stability and resilience. The fact that the
Philippines has just entered the "demographic window", in contrast to the aging population of
some neighboring economies, undergirds our long-term resilience. We have a young and
vibrant population that is both a steady employment and consumer base, that opens up a lot
of possibilities for investment. Many industries are already burgeoning and seizing the
opportunities the demographics present.
There is fiscal space to pursue infrastructure investments geared towards increasing the
productive capacity of the economy. And the new administration has promised to ramp up
infrastructure spending.
On the part of the BSP, we will continue to be steadfast in delivering on our mandates of
maintaining price and financial stability in the economy, thereby serving as the wind at the
back of our stakeholders, including investors like you.
The Philippines presents excellent relative value
Ladies and gentlemen, the Philippines means business. While the challenges to the
investment environment appear formidable, our collective vigilance and prudence will help us
achieve our objectives of sustainable growth, as well as stability. I trust that the BSP can
further engage you in pursuing the economic agenda of the Philippines.
At the top of my remarks, I said investing is all about relative values. I hope that in the time
that had been given to me, I have been able to show you that the Philippines presents
excellent relative value, an investment choice that will allow you to achieve your target
risk/return and more.
Thank you very much and I wish everyone a productive Forum.