Felipe M Medalla: Onward and forward - the BSP in 2023
Speech by Mr Felipe M Medalla, Governor of Bangko Sentral ng Pilipinas (BSP, the
central bank of the Philippines), at the New Year's Message / First Flag Raising
Ceremony for 2023, Manila, 2 January 2023.
* * *
My beloved colleagues in the Monetary Board, Deputy Governors, officers and
colleagues, magandang umaga po at isang masaganang bagong taon po sa ating lahat!
I hope that the past few days offered some form of rest and respite from the year that
just ended, as well as clarity and purpose for the year that has just started. To say that
we've been through an eventful and challenging year is surely an understatement but I
trust that despite all of these, you-my fellow BSPers-were able to easily bounce back,
find the time to recharge, recover, and spend time with your loved ones during the
holiday season.
Over the past few months, the economy has also returned to some form of normalcy.
Businesses are opening up; the malls are full again; schools are welcoming students
back; and tourists are coming in.
Brighter prospects on the horizon?
After years of holding off purchases, some consumers are spending more. Pent-up
demand, or what is now commonly referred to as "revenge spending" is real and so is
the ensuing economic boost. With oil prices on the decline and diminishing pressures
on the peso-again, thanks to actions taken by the Monetary Board-Filipinos have more
to spend on discretionary items. This year and hopefully beyond, we expect the
economy to sustain this strong momentum.
That said, we recognize that the global environment is not without risk. The global
outlook is dimming, and recession fears are mounting, with the International Monetary
Fund and World Bank sounding the alarm as shown by their consistent upward
revisions of inflation forecasts and consistent downward revisions of global gross
domestic product growth rates. The Fed's actions, of course, will be a key consideration
for us. We're also looking at how China contains the virus without its COVID-zero
policy, the Ukraine-Russia conflict, shifting supply chains, the world's journey to
decarbonization, and mounting geopolitical tensions in different parts of the world.
Staying true to BSP's three pillars
But while the environment is in flux and constantly changing, we look at our North Star,
our three pillars, which remain constant: price stability, financial stability, and an
efficient and secure payments and settlements system.
Let me go over our plans for this year to ensure that we keep delivering on our three
pillars.
On price stability. Based on our inflation projections, inflation may have already peaked
last December. Of course, the [actual] numbers will come out soon. From that point on,
we see inflation slowing down in the first half of 2023 and settling between 2.0-4.0%,
our target range, by the third quarter of 2023. By the fourth quarter, and hopefully for
the rest of 2024, inflation is expected to approach the low end of the target range due to
base effects.
What does this mean for us?
Of course, our monetary settings will continue to be based on and be guided by data.
And of course, we are also ready to explain when our forecasts are quite different from
what actually happened because we can account for them in our models.
By the way, some models do not have this; they use the past [figures] and gut feel on
what inflation will be - and it does [it] quite well. The problem with these models is they
cannot explain itself when it's wrong unlike our [BSP's] models that have very specific
exogenous variables.
Aside from investments in better models, we are now leveraging big data and advanced
analytics to improve further our forecasting and analytical abilities. [Our] investments in
better models, technology, and big data help us ensure that our actions are responsive
to the needs of the time and help us as well in our communications.
Now, our second pillar: financial stability. We look to the strength of our banks as a
barometer of the economy's health. If banks are actively lending to households and
businesses, then the economy is in a much stronger position. And as we all know, when
banks over-lend, this usually is followed by long periods of slower lending and we hope
[that] our regulations, our supervision, prevent that from happening.
Fortunately, the Philippine banking system is on much more solid footing than it was
back then. Both regulators and the regulated institutions learned lessons from past
crises and built their buffers in anticipation of future shocks. So, when we look at all the
indicators at this time, you can clearly see all very good things: rising lending and
actually declining non-performing loans (NPL). Of course, we also learned from the past
that everything looks good until they are not.
As a result, as supervisor of the banks, we aim to strengthen our institutional capability.
For one, we are exploring the use of machine-learning capabilities and as already
discussed, new econometric models. We will also pursue the adoption of Basel III
standards on credit and operational risk capital.
Of course, we can never ignore the effects of climate change on risks for the very
institutions that we supervise. Last month, we launched our 11-point Sustainable
Central Banking Strategy which embodies our three-pronged roles as enabler,
mobilizer, and doer.
Lastly, our third pillar: a safe, efficient, and reliable payments and settlements system.
Among our three pillars, this is the hardest to pronounce and very long. This year, we
are targeting to launch other digital payment streams, such as InstaPay Debit Pull and
Request to Pay. We also aim to issue a merchant acquiring and aggregation licensing
1 2
framework and a cooperative oversight framework.
We have also started the conduct of a pilot wholesale CBDC or central bank digital
currency, a major capacity-building activity for both the BSP and the financial industry.
By the way, we say, "We will not go into retail CBDC. We will be in wholesale CBDC
which, hopefully, will also facilitate cross-border transfers." And of course, the dream is
for any ASEAN citizen can use their phone to make payments wherever he is in ASEAN.
Aside from our vision of a cash-lite economy, we also recognize the role of cash.
Indeed, a big, big puzzle is in spite of all these technological changes, demand for cash
- physical cash - keeps growing. Of course, the explanation is rather simple: as people
cross from informal employment [into formal or salaried employment], like those
employed in farming where kids get fed rather than get wages, as you transform the
economy into something more modern, cash is actually gradually being introduced to
those parts of the economy.
Therefore, we take very seriously our role as the printer of the physical cash, that the
bills look good and they are always returned on time so that the unfit bills are replaced
as quickly as possible.
To preserve currency integrity, we implement the Clean Note and Coin Policy and the
Coin Recirculation Program. Of course, for those of you who are with the BSP for a long
time, this is the bigger bread and butter for many, many decades, and we will get better
and better in this as well.
Readying the BSP's operations for the future
At this point, let me proceed to other aspects of BSP operations: reserve management,
for one. In keeping with our Sustainable Central Banking strategy, we plan to be a
signatory to the United Nation Principles for Responsible Investment.
We also are looking at developing a Responsible Investment Charter, which will guide
the integration of sustainability tests with financial assessments. Although by IMF
metrics-the IMF Assessing Reserve Adequacy (ARA) - our reserves are [assessed as]
"high", we do think that given all the things that are often happening, there is no reason
to be complacent, to let our reserves go down too sharply.
On financial inclusion, which started out as an advocacy to a national strategy and now,
a strategic outcome of whoever is the Governor.
We have several initiatives in this regard. We have launched the Credit Risk Database
Project, which will produce a credit scoring model for small and medium enterprises
[with the aim of reducing dependence on collateral]. Of course, it is of great importance;
[it helps with] the problem when the people who have collateral are not the only ones
who need the loans.
Meanwhile, our Paleng-QR Ph program will be building on the successful launch in
Davao and Baguio and replicated in other parts of the country, namely Pasig, Naga,
Lapu-Lapu, and Tagbilaran.
Now, on financial consumer protection and consumer assistance. Starting this year, we
will exercise the authority conferred by the Financial Products and Services Consumer
Protection Act or FCPA that was enacted last year and will soon issue the Rules of
Procedure for Mediation and Adjudication by January of the current year. We're truly
living up to our label as a quasi-judicial authority.
Financial education is a key component of consumer protection and we are working
with various partners to empower Filipinos with the skills to understand finance. And
with our regulations and our guidance, disputes should be quickly resolved and settled.
On regional operations. We propose adding more gold buying stations so more gold
sellers could access them. We aim to establish these in Butuan, Camarines Norte,
General Santos City, and Cagayan de Oro City.
We will also further carry out our clean note policy and our coin recirculation program
through our coin deposit machine project and we will soon see that these machines will
actually be strategically located given our partnership with the private sector in this
regard.
On the legislative agenda. Our priorities this year are the Bank Deposits Secrecy Bill
and the Financial Accounts Regulation Act. We will also continue to support the
passage of the Digital Payments Bill.
On operational efficiency. We are lining up several systems and initiatives that will help
enhance the BSP's operations and serve our stakeholders better. Let me cite a few
items:
We have the Integrated Financial Management Information System or IFMIS, that will
capture, monitor, and report financial information.
We also target a more streamlined procurement processes.
We also hope to complete the Enterprise HR System, a business solution intended to
be a more agile replacement to the current system, the iHRIS (Integrated Human
Resource Information System). Hindi ko pa nga alam ibig sabihin ng iHRIS, may bago
na! Pero alam ko yung ibig sabihin ng IHRIS, what it refers to but not the individual
letters. (I don't even know what the iHRIS acronym stands for and we're already
developing a new system! Although I know what iHRIS does and what it represents, I
am not familiar with the meaning of the individual letters). By the way, that is the sign of
an acronym-based society.
On internal audit, the BSP meets the elements to achieve the highest rating of
"Generally Conforms." By the way, to accountants like us, those are important:
"generally conforms" to accounting principles, especially with International Standards
for the Professional Practice of Internal Auditing and the Institute of Internal Auditors
Code of Ethics. But for this year, we shall focus on obtaining an independent validation
of this assessment from an external party.
And finally, fostering a research culture. I am glad that Monetary Board Member [Eli]
Remolona has joined us. He has quite a bit of experience in research. He and [Deputy
Governor] Francis [Dakila] and our league of people in research working together will, I
hope, produce a BSP Research Academy that holds true to its name.
We will also come up with a consolidated book on banking laws of the Philippines-which
will be online-with discussions on amendments to the BSP Charter, the National
Payment Systems Act, and other banking laws.
Last but not the least, we will have a continuing strategic engagement with our
stakeholders. The measure of our institutional success lies in how we at the BSP can
explain what we do to the public that we serve, in effect truly bringing BSP closer to the
people.
Onward and forward
So, we have lined up a lot of plans for this year and hope that these won't just remain
on the drawing board. I am confident with all the talent that we have in this institution
that this is the year we kick things off and realize our vision-from our targets under the
Digital Payments Transformation Roadmap to our sustainability objectives to our plans
and process improvements for the organization.
2022 was a good year. Don't you agree? In fact, I will say it was a great year! And with
your support, I am confident that 2023 will be much better for the BSP and the country.
So, this is a very good example of infinite progression: "I love you more today than
yesterday but not as much as tomorrow. It is always increasing, 'no (right) ?
Maraming salamat at mabuhay po sa inyong lahat! Mabuhay ang BSP! At mabuhay ang
ating mahal na bansang Pilipinas! (Thank you very much, everyone. Long live the BSP!
Long live our dear nation, the Philippines!)
1
The licensing framework is expected to support further digitalization of merchant
payments which account for over 70% of the total monthly retail payments in the
country.
2
The cooperative oversight framework will help prevent regulatory arbitrage resulting
from gaps, inefficiencies, duplications, and inconsistencies in the regulations of different
supervisory authorities.