Benjamin E Diokno: Economic and financial developments and
Bangko Sentral ng Pilipinas' policy responses
Speech by Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (BSP, the central
bank of the Philippines), at the Joint Foreign Chambers of the Philippines 10th Anniversary
Forum "Arangkada Philippines; Pathways to a Better Future", virtual, 30 November 2021.
* * *
Officers and members of AmCham Philippines and the Joint Foreign Chambers of the
Philippines, my fellow speakers, everyone who are with us virtually, good morning. Thank you for
inviting me to deliver a keynote address in your Tenth Anniversary Forum entitled "Arangkada
Philippines: Pathways to a Better Future."
Arangkada comes from the Spanish word arrancada which means accelerate. My talk will focus
on economic and financial developments and BSP policy responses to ensure that the Philippine
economy will continue to accelerate towards a better future.
After five quarters of economic contractions, the country's real GDP grew by 12 percent in the
second quarter of 2021 followed by a 7.1 percent growth in the third quarter. For the first three
quarters of 2021, the Philippines' economic growth averaged at 4.9 percent, within the
government's target of 4 to 5 percent for the year.
In September 2021, however, the country's unemployment rate increased further to 8.9 percent
from 8.1 percent in the previous month. This result is not surprising, given the extension of strict
lockdown measures during the month. What is notable here, however, is that some of the jobs
lost at the start of the pandemic have been gradually recovered, with the number of workers
employed in September exceeding that of pre-pandemic level.
The re-imposition of stricter lockdown measures, particularly in the National Capital Region,
contributed to lower business confidence in the third quarter survey, although businesses are
more optimistic for the last quarter of the year and in the next 12 months. On the other hand,
consumer sentiment continues to improve due to expectations of availability of more jobs,
additional or higher income, and effective government policies and programs, particularly in
addressing COVID-19-related concerns.
The country's year-on-year headline inflation decreased further to 4.6 percent in October 2021
from 4.8 percent in September, bringing the year-to-date average inflation to 4.5 percent. This is
above the Government's inflation target of 3.0 percent ± 1.0 percentage point for 2021. Based on
latest data, we expect point inflation for November to range from 3.3 to 4.1 percent.
The latest CPI outturn is consistent with the BSP projections that while inflation could remain
elevated in the near term, it would start to fall within the target range by the end of the year.
Meanwhile, inflation expectations remain firmly aligned with the baseline projection path for
20222023. Results of the BSP's survey of private sector economists for November 2021 showed an
elevated mean inflation forecast of 4.4 percent for 2021, 3.5 percent for 2022 and 3.2 percent for
2023.
Liquidity in the financial system remains ample, expanding by 8.2 percent year-on-year in
September 2021. This was faster than the 6.9-percent growth recorded in August on a
monthon-month seasonally adjusted basis, M3 rose by 1.3 percent.
Credit activity increased 2.7 percent in September 2021, faster than the 1.3-percent expansion in
August. The continued growth for the second month in outstanding loans of universal and
commercial banks reflects the modest recovery in banks' overall lending attitudes along with
improved economic prospects.
As of end-September 2021, gross non-performing loan ratio of the Philippine banking system
(PBS) stood at 4.4 percent, higher compared to 3.5 percent a year ago. The uptick, however,
was accompanied by loan-loss provisioning with a non-performing loans coverage ratio of 84.4
percent.
The Philippine banking system remains well-capitalized. As of the second quarter of 2021, its
capital adequacy ratio is at 17.2 percent, well above the 10 percent minimum threshold set by the
BSP and the 8 percent set by the Bank for International Settlements.
On the external front. The sustained rebound in key economies has spurred external demand.
The country's exports and imports of goods increased by 21.3 percent and 31.6 percent,
respectively. Cash remittances from overseas Filipinos grew by 5.6 percent in January to
September 2021, from a 1.4 percent contraction in the same period in 2020. Meanwhile,
business process outsourcing services in the first half of 2021 remained strong despite the
disruption in business activities around the world.
Net foreign direct investments for the first eight months of 2021 increased due to positive foreign
investor sentiment on the country's macroeconomic fundamentals and strong growth prospects.
The country's outstanding external debt also remains at a prudent level as its ratio to GDP
slightly eased to 26.5 percent in end-June 2021. Notably, a large portion of the country's external
debt has medium- and long-term maturity profile and carry fixed interest rates. These two factors
make the servicing of foreign debt less susceptible to volatilities in global interest rates or foreign
exchange fluctuations.
The gross international reserves stood at US$108 billion as of October. This is equivalent to
almost 11 months' worth of imports of goods and payments of services and primary income. The
conventional wisdom is that 3 months' worth of imports is sufficient. The GIR level is also about
7.8 times the country's short-term external debt based on original maturity, and 5.4 times based
on residual maturity. The gross international reserves continue to be augmented by improving
inflows of cash remittances from overseas workers and receipts from business process
outsourcing.
On MSMEs:
The BSP recognizes the crucial role of micro, small, and medium enterprises in the Philippine
economy. Let me discuss the wide range of policies and regulatory and relief measures that the
BSP has deployed to support MSMEs.
- One is allowing the new peso-denominated loans to MSMEs and critically impacted large
enterprises that do not belong to a conglomerate as eligible instruments for compliance with the
BSP's reserve requirement. The use of MSME loans as allowable alternative compliance with the
reserve requirement shall be available to banks and non-bank financial institutions with
quasibanking functions from 24 April 2020 to 29 December 2022, subject to early closure of the
eligibility window by the Monetary Board, if warranted and with prior notice.
- For the week ending 31 October 2021, the banking system allocated an average of P202.2
billion loans for MSMEs as alternative compliance with the reserve requirements. This level
marks a substantial increase from the P8.7 billion average MSME loans that were reported for
the week ending 30 April 2020. The latest level is equivalent to 13.6 percent of the total required
reserves, from 0.6 percent on 30 April 2020.
- The Monetary Board also approved prudential measures to assist MSMEs. The regulatory
capital treatment of MSME exposures was amended to temporarily reduce the risk weights of
loans granted to MSMEs. The implementation of the revised risk-based capital framework for
banks was also deferred from end-2021 to end-2022
- The period of relief on the reporting of past due and non-performing loans of borrowers affected
by the pandemic was also extended to 31 December 2021 from the original timeline of 8 March
2021 subject to reporting to the BSP.
- These policy issuances reinforce earlier pronouncements of the BSP that relax the
Know-YourCustomer requirements for retail clients to facilitate their access to formal financing channels.
Given a manageable inflation path, the BSP has kept the key policy interest rate at 2.0 percent in
its latest Monetary Board meeting. The BSP's policy and liquidity-easing measures have injected
into the financial system a total liquidity equivalent to around 13 percent of the country's full year
nominal gross domestic product for 2020 as of November 11, 2021.
Moving forward, the BSP's actions and policy thrusts will continue to be anchored on its core
mandates of promoting price and financial stability. Towards this end, the BSP will continue to
pursue appropriate policy actions responsive to the needs of the time.
On monetary policy: the BSP will remain vigilant over the current inflation dynamics to ensure
that the monetary policy stance continues to support economic recovery to the extent that the
inflation outlook would allow. It will carefully scan the operating environment with a
forwardlooking perspective to move in a pre-emptive fashion to address any risks to our price stability
mandate.
On the financial sector: the BSP will intensify its monitoring and surveillance over its supervised
institutions to ensure that they remain resilient to emerging risks and continue to be sound,
stable, and inclusive, particularly through the pursuit of enhanced digitization.
Finally, on the external sector: the BSP will remain supportive of policies that will help strengthen
the economy's resilience to external shocks, including that of maintaining a market-determined
exchange rate, keeping a comfortable level of reserves, and keeping the country's external debt
manageable.
More recently, the country has managed to successfully reduce the number of COVID-19 cases.
As of the other day, the Philippines logged 425 new COVID-19 cases. This is the lowest since
July 2020.
Considering the recent economic developments and significant improvement in vaccine rollout,
we are optimistic that there is sufficient support for the country's recovery this year and in the
near term. The management of risks through the calibrated reimposition of lockdown restrictions,
the expected revitalization of key industries due to government policy support and structural
reforms, and an improving global economy should help the Philippine economy to recover in
2021 and accelerate in 2022.
Finally, allow me to end my presentation with these key points:
• The country's macroeconomic fundamentals remain sound.
• The latest GDP growth suggests that economic rebound is underway. Strong growth is
expected in 2022.
o The currently elevated inflation is due to transitory factors. Inflation remains well-anchored.
o Banks remain sound and while non-performing loans has increased, banks remain highly
capitalized.
o External position is strong, supported by more than adequate external liquidity buffer and
improving inflows from overseas Filipinos' remittances and receipts from business process
outsourcing.
o Economic activity is vastly improving. Yet, the overall momentum of the economic recovery
remains foggy as long as a big part of the population remains unvaccinated and there is still a
possible emergence of more virulent variants. Nevertheless, the sustained implementation of
targeted fiscal initiatives, as well as the acceleration of the vaccination program, should help
boost market confidence and economic recovery.
The BSP is committed to an accommodative monetary policy stance supportive of infusing
liquidity in the financial system and recovery of the economy.
The BSP's actions and policy thrusts will continue to be anchored on its core mandates of
promoting price and financial stability. Thank you.​