Amando M Tetangco, Jr: The constellation of monetary challenges and
responses
Speech by Mr Amando M Tetangco, Jr, Governor of the Central Bank of the Philippines
(Bangko Sentral ng Pilipinas), at the Philippine Economic Briefing, Makati City,
12 September 2007.
* * *
I. The current economic constellation
Both the domestic and international business communities affirm that the Philippines is now
experiencing the most stable macroeconomic environment in a decade.
The inflation rate has been low and stable, with the outlook for inflation benign. This has
allowed monetary authorities to maintain interest rates at low and stable levels also.
Our balance of payments remains in surplus, bolstered by the current account, which is also
in surplus, in fact for four (4) consecutive years now. We have built up our international
reserves to a record-high of $30.3 billion, adequate to more than cover our short-term
liquidity requirements. Our strong external position enabled the BSP and the NG to prepay
foreign debts amounting to US$ 2.1 billion in 2006 and another $0.9 billion in the first half of
2007. These have markedly improved our external debt ratios. Included in these payments
was the prepayment in full of the country's outstanding obligations to the IMF in December
2006, a milestone in the Philippines' relationship with the IMF since it effectively ended the
country's use of IMF resources after nearly four and a half decades.
Our banking system is growing at double digit rates in both asset size and deposit base,
improving in profitability and continues to be capitalized well-above international standards.
Investor attention and responses to the current constellation of economic data have been
significantly positive as evidenced by the following developments, particularly during the first
half of the year:
•
The stock market reached seven-year highs
• The peso appreciated on account of strong export earnings and sustained overseas
remittances.
• Our sovereign credit spreads compressed.
•
Yields on domestic securities fell to record lows.
The questions, however, that may be in your minds now are: Can these gains be sustained?
Will the economic momentum be able to weather the recent domestic and global market
adjustments and volatilities?
My quick answer is yes.
Our macroeconomic fundamentals are sound. Because our underlying fundamentals are the
result of the fiscal, macroeconomic, banking and financial sector reforms that have been
undertaken vigorously and continue to be pursued, I believe we are resilient and therefore
less vulnerable to domestic and external uncertainties.
II. The challenges to monetary policy formulation
On the part of the BSP, we formulate monetary policy against an assessment of global and
domestic economic issues and developments.
We are mindful of the range of circumstances in recent times which draws important
challenges for Philippine monetary policy. Plentiful global liquidity. The strong foreign
exchange inflows into Asia. The build-up of international reserves. The marked appreciation
of regional currencies against the US dollar. Financial innovations. Yield-seeking activities of
agents, and now more recently, a reassessment of risk appetite and repricing of risks. A
possible further tightening of global credit conditions. The fragility of US growth. Volatile oil
and commodity prices.
All these challenge us as we endeavor to provide a sound monetary policy environment,
while advancing reforms that promote growth and respond to changes in global financial
conditions. Our resolve to follow good governance and international best practices in our
reform agenda has provided us the discipline necessary to craft appropriate responses and
avoid steps that could distort rational market behavior.
III. The courses of action
Let me put forward three essentials in response to these challenges.
One, we will remain focused on achieving our inflation target. Our monetary policy will
continue to be responsive and forward-looking. Our inflation targeting approach has proven
to be effective as a monetary anchor and provides us with an array of policy tools against
turbulent economic and financial conditions.
Two, we will maintain our market-determined exchange rate policy, while complementing this
with a liberalization of our foreign exchange regulations to allow greater access to foreign
exchange for outward investments. We have already put out the "first wave" of FX
liberalization measures, a "second wave" will be implemented before the end of the year.
Third, we will continue to undertake steps to strengthen the domestic financial system and
help manage risks attendant to financial market developments.
In the banking sector, we are focused on good governance, asset-clean up, capital build-up
and industry consolidation. We want to see stronger, well-governed, better-capitalized banks
that would be effective channels of monetary policy. In other words, stable financial
institutions that perform the intermediation function between the sources and users of funds,
fully cognizant of the risks attendant to this role.
As driven by the changing profit dynamics brought about by our adoption of international
accounting and the Basel II capital adequacy standards, we are encouraging banks to look
for ways to capture economies of scale. This would make them more capable of investing in
the required technologies (i.e., risk-based technologies) thereby making them more
competitive in an increasingly challenging local and global environment.
These and other long-term structural reforms will continue to support a favorable investment
climate and enhance productivity through investments in our growth sectors.
IV. The clever response from you
We are aware that the core investor is always in search, not just of higher and higher returns,
but rather of "quality" returns. We are also aware that countries with good governance
frameworks, wide-ranging structural reforms and appropriate macroeconomic policies are
always on such investors' shortlist in their search for high effective returns.
I believe, the Philippines' macroeconomic fundamentals as well as the reforms that have
been instituted in the banking sector make us a clear choice for the core investor.
The recent volatilities related to the US subprime mortgage market are not likely to have a
direct significant impact on our banking system. Philippine banks' exposure to the CDO
market is a minuscule 0.2 percent of the total banking system's assets, none of which have
subprime mortgages as underlying assets.
Apart from this, sufficient liquidity in the domestic financial system, as well as the increased
tapping by corporates of long-term domestic funding for their expansion needs, will help
reduce the influence or effects of external developments on our markets. As always, should
there be need for more liquidity in the system, the BSP will act to maintain order and stability
in the markets.
As the country pursues further reforms that support growth and reduce our vulnerabilities to
external shocks, I ask investors to focus on our fundamentals. I am confident that this pattern
of strong macroeconomic fundamentals will be sustained and favor a constellation of bullish
opportunities and expectations for the Philippine economy.