Amando M Tetangco: In pursuit of sustainable and inclusive growth
Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the
central bank of the Philippines), at the MAP General Membership Meeting and First Economic
Briefing for 2017, Makati, 28 March 2017.
* * *
Thank you for inviting me to speak at MAP's General Membership Meeting and First Economic
Briefing of 2017.
"Working Together to Achieve Inclusive Prosperity"
This is MAP's guiding principle for 2017. It is sensitive to recent developments where we witness
moves by nations to leave economic unions; when countries speak of closing off their borders to
neighbors and refugees; when societies are fighting back against public institutions. All in the
hope of raising their own standards of living.
The MAP therefore has to be commended for resolutely putting the themes of cooperation, social
responsibility, and inclusion at the heart of its activities for this year.
The MAP could not have chosen a more appropriate theme.
I say this because the world has taken unexpected turns in the past couple of years, driven by a
general sense of discontentment and a brewing distrust in public policies and institutions. How
did we get to this point?
1
If you look closely at the trend of the Global Policy Uncertainty Index , two things jump out.
The first is that it has been nearly a decade since the global financial crisis broke out. And yet, we
continue to live with high uncertainty and its aftermath of heightened volatility and uneven
economic growth.
The second is that these are truly uncertain times. Rising inequality has given traction to
antiglobalization and populist sentiment across the globe. Even as these protectionist tendencies
have seen some resistance, public policy has become less certain on the whole. This tension
has cast a heavy cloud over global economic prospects.
Indeed, the rise of protectionist pressures reflects a growing belief among countries that the
benefits of growth need to be shared more equally and equitably. For public policymakers, this
means that the goals of inclusivity and growth should always go hand in hand.
This brings us to our theme and challenge today: How do we sustain our growth momentum
while also creating a more inclusive society?
Let me structure the rest of my talk as follows:
I'll continue with the world outlook, and the risks and challenges we see from these global
impulses.
Then I'll discuss our own domestic market dynamics, paying particular attention to the country's
sources of resilience that have allowed us to sustain positive growth and make notable headway
towards greater inclusion.
Finally, I'll relate these developments to emerging challenges for policy and the role the private
sector can play in promoting inclusive growth.
Global outlook and risks
In terms of the world economic outlook, global growth is projected to improve modestly over the
next two years, with upward adjustments to the projections of the IMF for the US, EU, UK and
Japan for 2017. Note, however, that these forecasts are still lower than the actual growth
2
outcomes prior to the global financial crisis.
Meantime, the outlook for emerging markets is still mixed. In particular, economic activity in
China has held firm, while growth projections for India and Brazil in 2017 were cut. A downside
risk to this outlook, however, is potential political discord and heightened inward-oriented
sentiment, both of which could undermine global trade and dampen financial market sentiment.
Meanwhile, an offshoot of the evolving upward momentum in global growth is the possibility of
reflation, or that global inflation may be at a turning point.
This positive momentum is reflected in the shift in policy stances of a number of central banks.
As you all know, the US Fed raised its target Fed Funds rate by 25 bps last week. Furthermore, it
is widely expected to continue on this path, with at least two more hikes anticipated in 2017.
A review of recent monetary policy decisions suggests that central banks have largely turned
neutral-they see less urgency for further accommodation and would rather stay on hold. This
phenomenon has been described as "watchful pause".
The prospect of higher interest rates in advanced economies could cause capital outflows from
emerging market economies (EMEs) as investors search for yield. The retreat of funds away
from EMEs could lead to tighter dollar funding conditions in emerging markets. For firms with
significant dollar-denominated liabilities, these developments could pose a risk to their balance
sheets and profitability, unless of course these exposures have been adequately hedged.
In the case of the Philippines, we have seen some incipient signs of capital flow reversals as
early as last year. Fortunately, the risk to businesses was mitigated by robust domestic liquidity
and credit growth and by an adequate supply of foreign exchange. Debts of nonfinancial
corporations in the Philippines also remain mostly peso-denominated, which provides some
measure of insulation from external shocks.
Meanwhile, with the potential for capital outflows from EMEs, some emerging-market currencies
could also see depreciation pressures and volatility in the near term. We have seen that kind of
depreciation effect on the Philippine peso in recent periods. However, if we take a longer-term
view on the movements of the peso, we can see that the peso has been broadly stable and
competitive over the medium term. Looking ahead, we expect the peso to continue to draw
strength from the steady stream of remittances from overseas Filipinos and of foreign exchange
receipts from tourism and the BPO sector.
One other thing that we must be watchful of is the evolving dynamics of the international oil
market. Oil prices rebounded right after the OPEC members agreed to cut output. However, the
subsequent upswing in supply, due partly to renewed shale oil production in the US, has raised
questions on the sustainability of the oil price rally.
Keeping a close eye on all these developments is crucial because they have direct implications
on business costs and consumer sentiment. On the latter point, we note from the BSP's latest
Consumer Expectations Survey that consumers hold a slightly less favorable outlook for the year
ahead, owing to expectations of higher prices of goods, the depreciation of the peso, as well as
concerns over poor harvests and an overall slowdown in business activity.
For policymakers, tracking these dynamics closely will therefore allow for a pre-emptive
response, if needed, to protect the interests of businesses and consumers. On the part of
central banks, they will need to ascertain the implications on future inflation, and particularly on
inflation expectations, to see if adjustments in the monetary policy stance will be warranted.
In sum, ladies and gentlemen, we see three major trends in the global environment:
1) a modest but uneven recovery in global economic activity;
2) a tentative turning point for oil prices and inflation; and
3) heightened financial market volatility, owing to a hazy outlook on potential shifts in
macroeconomic policies.
Banking on sound macroeconomic fundamentals
With these uncertainties in the external environment, we expect the year ahead to be just as
challenging as the last one, if not more. The good news is that we can bank on solid
macroeconomic fundamentals to keep the economy moving along on its path of robust growth.
We have a broader base for growth, a manageable inflation environment, a sound banking
system, and a healthy external payments profile. How can these buffers sustain the Philippine
growth engine, and how sustainable is the Philippine growth story?
Over the last two decades, the country has weathered just as many financial crises-the Asian
financial crisis in the late 90s, and the global financial crisis in the late 2000s. Throughout this
period, the country managed to register 72 consecutive quarters of output expansion. To put
things into perspective, we are referring to a span of 18 years.
Barring any significant shock, we are on track to extending this streak, as recent indicators of
3
activity point to a strong growth impulse. The National Government expects growth to average
6.5-7.5 percent this year, higher than last year's target of 6-7 percent.
This mirrors buoyant business sentiment, as indicated in our latest Business Expectations
Survey. The optimistic outlook is anchored on expectations of stronger job orders, the potential
expansion of businesses and product lines, as well as the ongoing infrastructure projects of the
government.
One reason for this sustained growth impulse is that growth has become more broad-based.
On the demand side, growth has historically been anchored by robust household consumption.
In recent years, investments have also become a significant growth driver. In 2016, for instance,
the contribution of capital investments to overall GDP growth even outstripped that of private
consumption. Meanwhile, on the supply side, the shares of manufacturing and construction have
also been increasing. This complements the steady contribution from services such as trade,
real estate, and financial intermediation.
In short, the country now has more diversified domestic sources of growth. They should also
serve as ample cushions against external shocks, particularly if protectionist sentiment
continues to gain traction overseas and dampen the country's export-oriented sectors.
It also bears noting that this sustained growth in output was achieved under a stable inflation
environment. Going forward, we see average inflation will be within the target range of 2-4
percent for 2017-2018. A closer scrutiny of the monthly inflation path will show that inflation
imprints will be rising until sometime in Q3 2017, when the monthly rates are expected to be very
close to the upper band of the target range. Even so, our forecast path suggests that monthly
inflation will slow down thereafter, resulting in within-target full-year averages over the policy
horizon or the next two years.
In addition, money supply remains ample. Even at double-digit growth rates, we do not see
overheating in credit conditions, as credit continues to be channelled to key production sectors.
More importantly, the intermediation of these funds is expected to remain safe and efficient,
owing to our sound and stable banking system. Key indicators continue to reflect solid asset
growth and improving quality of loans. Capitalization also remains strong and above prescribed
domestic and international standards.
On the external front, the country's current account has been in surplus for 14 consecutive
4
years, due to the sustained increase in overseas Filipinos (OFs) remittances, as well as
business process outsourcing (BPO) revenues and tourism receipts. We saw a narrowing of the
current account surplus in recent months. This trend may continue, as imports of capital goods
are seen to further pick up. Such importation, we note, is necessary to support the expansion of
the economy in the medium term.
Steady foreign exchange (FX) inflows from OF remittances and BPOs, however, will continue to
allow us to maintain adequate FX reserves. We expect our gross international reserves to
continue to be more than sufficient to meet the country's FX liquidity requirements.
Reaping dividends from growth
To reiterate, our macroeconomic fundamentals remain strong. On the one hand, these give us
enough buffers to ward off the challenges posed by a difficult external environment. On the other
hand, how secure are we against homegrown challenges?
Political noise here as well as overseas is a manifestation that the benefits of growth may not
have trickled down fairly to all sectors of society. The rise in populist sentiment globally suggests
that inequality in society also poses a threat to prosperity.
In essence, what we're saying is that it is not enough for growth to be just fast and sustained. For
growth to be truly meaningful, It must also be inclusive.
We can take heart in knowing that the Philippines has made noteworthy progress and intends to
see more headway moving forward.
For one, labor and employment conditions have shown marked improvements. The
unemployment rate has declined steadily from 7.4 percent in 2010 to 5.5 percent in 2016. The
government aims to reduce it further to between 3 and 5 percent by 2022 through its various
social programs and sustained economic growth.
Poverty incidence and income inequality among Filipinos have also been on an appreciable
downtrend, with the incidence of poor population declining from 49.5 percent in 1988 to 21.6
percent in 2015. The new Philippine Development Plan aims for this to fall further to 14.0 percent
by 2022.
Also, income inequality has been reduced. The Gini coefficient inched down from 0.49 in 1997 to
0.44 in 2015.
Finally, inflation for the lowest 30 percent of households is also lower now than in prior years.
From 5.1 percent in 2009, it has fallen to only 1.4 percent as of end-2016, suggesting that these
households are now less vulnerable to price shocks.
Policy thrusts
All these support the belief that with the right policies and programs in place, it is possible to
achieve sustainable and inclusive growth. But for the engine of inclusive growth to keep running,
both the public and private sectors must share in the responsibility of making sure that no Filipino
is left behind. There is much to be done towards this end, so I reiterate the question I posed at
the beginning: How do we create a more inclusive society?
In this regard, let me provide some highlights of the initiatives for public policy.
On the part of the BSP, we reaffirm our commitment to maintain price and financial stability
conducive to balanced and sustainable growth. Our latest projections indicate that inflation is
likely to settle within the target range of 2-4 percent for 2017-2018-at the moment, our
forecasts are at 3.4 percent for 2017, and 3.0 percent for 2018. Inflation expectations also remain
well-anchored. Therefore, the current stance of policy is deemed appropriate.
The balance of risks surrounding our inflation outlook is, however, tilted toward the upside. The
transitory impact of the proposed tax reform program as well as possible adjustments in
transportation fares and electricity rates could raise the inflation trajectory. However, uncertainty
over the prospects of the global economy and potential macroeconomic policy shifts overseas
continue to pose a key downside risk.
Turning to financial stability, the BSP will remain steadfast in working to strengthen the banking
system, improve risk management standards, and align our financial regulations with
international best practices.
Amid turbulence in the global economy, maintaining a market-determined exchange rate will help
ensure the stability of the Philippine financial system and the economy as a whole. We are an
inflation targeter, and therefore do not target specific exchange rates. That is why the BSP
participates in the FX market only to limit volatility, or when movements are becoming misaligned
with fundamentals.
Other measures include deploying liquidity provision measures to address any potential tightness
in funding conditions; and enhancing macroprudential measures and other surveillance tools in
targeting risks arising from capital flows and other vulnerabilities.
Let me also take a moment to highlight the BSP's ongoing campaign for greater financial
inclusion, an advocacy that I hold close to my heart. As outlined in the National Strategy for
Financial Inclusion (NSFI), our work will revolve around three major areas: enhancing access to
financial services, promoting financial education, and upholding financial consumer protection.
On enhancing access: Only about 64 percent of cities and municipalities nationwide have
5
banking presence . By allowing micro-banking offices (or MBOs) and alternative financial
service providers such as pawnshops to enter underserved markets, 88 percent of
municipalities and cities would have access to financial services. We have also put in place
regulations that leverage on financial technology ("fintech") such as e-money transactions,
6
as well as programs aimed at improving access to financing for our small entrepreneurs .
On promoting financial education: We will continue with our Economic and Financial
Learning Programs targeting OF families, the youth, and entrepreneurs. To date, we have
conducted EFLPs in 79 of the 81 provinces in the country.
On financial consumer protection: We enacted BSP Circular No. 857 to ensure that
BSPsupervised financial institutions (BSFIs) adhere to the highest service standards. We will
continue to promote regulations that will encourage BSFIs to embrace a culture of fair and
responsible dealings with the public.
Finally, we recognize that to enable the country to springboard toward a higher and sustainable
growth path, it needs more infrastructure to increase the economy's productive capacity and to
redistribute the benefits of faster growth. Road networks, air and sea transport systems, facilities
for health and other social services-all these should help address the congestion in Metro
Manila and other urban areas, and in the process help distribute opportunities for employment
and access to other public services to the rest of the regions. There is fiscal space to do all
these, and the National Government has committed to capitalize on that space and ramp up
infrastructure spending.
Concluding remarks
Ladies and gentlemen, I hope that in the last half hour or so, I have been able to paint a fair
picture of the outlook for the Philippine economy. All told, domestic sources of resilience will
allow us to weather a difficult global environment and sustain growth amid a manageable inflation
environment.
We owe this resilience largely to our continued investment in reform. The Philippines has made
significant strides in strengthening its institutions and enhancing its competitiveness over the
past years, and our efforts have not gone unnoticed.
Beyond the recognition, these reforms have also begun to yield dividends for more Filipinos by
encouraging private-sector participation and investments; ensuring fiscal sustainability; and
promoting innovation and competition-all of which, in turn, have helped reduce poverty and
income inequality. But this is not to say that the job is done. Far from it. What it means is that we
have a big job ahead of us.
However, as recent global events have shown us, there is no guarantee that these benefits of
growth will be shared fairly.
The challenge, therefore, remains. Promoting sustainable and inclusive growth will require much
work and the concerted efforts of both the public and the private sector.
As a final remark, let me say that the private sector remains a vital cog in the country's growth
engine through investments, financing, and knowledge transfer. Your role in pursuing sustainable
and inclusive growth is to provide opportunities for employment, and access to finance and
expertise, especially to the sectors and regions where they are most needed.
The MAP, in particular, is moving in the right direction. You have your Top Five Priority Programs
for 2017: Traffic Management, Ease of Doing Business, Entrepreneurship, Employment
Generation, and Women Empowerment. All these initiatives should provide a solid springboard
towards your goal of promoting inclusive prosperity.
As we push forward in 2017, I hope that the MAP and BSP can work more closely together in this
shared responsibility of pursuing sustainable and inclusive growth. Let me also wish the MAP
continued success in its endeavors in the year ahead.
Thank you, and good afternoon.
1
The Global Economic Policy Uncertainty index measures policy-related economic uncertainty using media
coverage and professionals' forecasts of macroeconomic variables. The index peaked in January following the
anti-immigration policy pronouncements of the Trump administration in the US. The rising acceptance of
populism in Europe also continues to cause unease, with upcoming major elections in Germany and France
remaining a source of uncertainty.
2
Compare these to their respective average annual growth rates prior to the global financial crisis (i.e., 1998-
2007: US (3.0 percent); Euro Area (2.4 percent); UK (2.9 percent); and China (9.9 percent). (Source: IMF World
Economic Outlook, October 2016).
3
The average capacity utilization rate of the manufacturing sector stood at 83.8 percent in January 2017.
4
Following the BPM6 format, the current account has been in surplus from 2005-2016. (Current account
surpluses were also recorded in 2003 and 2004, following the BPM5 concept)
As of 2016, 88.2 percent of cities and municipalities have at least one financial service access point, up from 87
percent in 2015. Of this number, 63.8 percent have banking presence in 2016 (63% in 2015). (Source: BSP
Financial Inclusion Initiatives 2016 Report)
6
Republic Act No. 10744 ("Credit Surety Fund Cooperative Act of 2015") was passed into law on 6 February 2016.