Amando M Tetangco, Jr: Pushing ahead through headwinds
Speech by Mr Amando M Tetangco, Jr, Governor of the Central Bank of the Philippines
(Bangko Sentral ng Pilipinas), at the regular membership meeting of the Rotary Club of
Manila, Manila, 3 January 2008.
* * *
Distinguished officers and members of the Rotary Club of Manila led by your President
Benny Laguesma, my colleagues from the Bangko Sentral led by Monetary Board Member
Raul Boncan, friends from the media, ladies and gentlemen, good afternoon.
Thank you for this opportunity to address your group on your first Membership Meeting in
2008. I know it is customary, having just moved into a new year, to begin a speech like this
by looking back at the year past and taking stock of the positive outcomes that we had
achieved. But for today's remarks, I thought I would begin by considering instead the year
ahead and anticipating the challenges we face amidst the uncertainty in the global arena. I
liken this beginning to how one would probably wish to commence a round of golf on a
course one has never played before. (I hope you would pardon my reference to golf. But I
know many here share my passion for the game.) "Know your course. What hazards are
around the corner? At midday, in which direction does the wind blow? etc, etc. In other
words, let's first consider the "lay of the land" ahead of us.
Then, after a quick review of these challenges, which I see to be manageable, let me put
forward reasons why I believe the Philippine economy would be able to ride out the
headwinds that threaten to confront us and the steps we have taken and intend to take
toward this end.
Challenges
Since the third quarter of last year, a good deal of attention has been focused on the turmoil
in the financial markets in the US and Europe and the sudden plunge in credit market
confidence triggered by the US sub-prime mortgage crisis. Since then portions of the
underlying forces at work have been revealed - the complex nature of derivatives used, the
high degree of leveraging on poor (or even absent) collateral, the underestimation of risk that
had been prevalent in the financial markets and the surprisingly sizeable exposures of large
financial institutions to some of the debt instruments and derivatives in question such as
CDOs. Much, however, still needs to be uncovered for the general public to appreciate the
full import of these recent events.
What has been evident so far, however, is that this crisis has been more financial than
macroeconomic in character and effect. Let me illustrate. In the US, despite all the concern
with the subprime woes, the real GDP growth in 2007 looks to be 2.6%, the same as in 2006.
In Asia (ex India and China), the region is expected to grow at 5.9 % in 2007 compared to
5.7% in 2006. And in the Philippines, as you know, we are expecting 2007 full year GDP
growth to be around 7 percent, our highest rate in three decades. The financial impact of the
crisis, on the other hand, has been increased volatilities in ALL the equity markets and
spread widening ACROSS credit markets.
Nonetheless, more market analysts now believe that the risks are tilted to an outcome in
2008, particularly in the US, wherein the financial market volatilities would begin to more
noticeably filter through to the non-financial portion and non-housing portion of the economy.
As the real sector becomes affected, this is an event that could prove to be critical to the
Asian growth story. The region has become less dependent on the US, but it is still not
immune to a US slowdown. Clearly, intra-Asian trade has grown, but most of the growth in
intra-Asian trade has been an increase in trade with China and India, a portion of whose
imports from the region are also re-exported to the US.
The success of the US, and the other major economies, in avoiding a prolonged economic
slowdown therefore becomes of particular importance to Asia. The concern goes beyond
merely whether the major economies succeed in containing the slowdown, but also the
speed and manner in which this is accomplished - whether this is done through market
prices or through structural reforms. Which instruments are chosen could, in turn, impact
whether there would be an orderly adjustment in capital flows and exchange rate movements
as well as the behavior of asset and equity prices. As you must be aware, the region,
including the Philippines, has been grappling with the impact on exchange and interest rates
of the tipping of liquidity into our region. In the Philippines, the BSP had to put in place our
own policy package (that includes the build up of reserves, prepayment of external debt and
the liberalization of the foreign exchange system) to contain the impact on the peso of the
strong foreign exchange inflows into the country.
A further challenge from the global front is the elevated price of oil and other non-oil
commodities. Several market analysts share the belief that inflation this year would be higher
than in 2007, primarily because of volatilities in global commodity prices due to supply
constraints.
Impact on the Philippine economy
The unraveling of the impact of subprime on financial markets, the growing prospect for a
slowdown in the US and other major economies, the uncertainty of how monetary authorities
will react to arrest the economic slowdown, volatilities in oil and commodity prices. These are
just a few of the potential challenges that could determine the complexion of macroeconomic
policies in the Philippines this year. The manner by which we will calibrate our response to
these challenges will define how much the economy will grow, how much we will be able to
limit inflation and up to what extent we can maintain the stability of our financial markets. Are
we up to these tasks? I certainly believe we are.
For two reasons. First, while the challenges appear staggering and mainly beyond our
control, the Philippines is in the best macroeconomic shape it has been in two decades as a
result of the significant structural and policy reforms undertaken over the recent years,
making it more resilient in the face of global challenges.
Inflation has been on a trend decline, with average headline inflation for the first 11 months of
2007 at 2.7%, way below last year's 6.2% as well as the target of 4-5%. The external position
is in substantial surplus of around $8.5 billion, more than double last year's level, due mainly
from the continued strength of the current account. The GIR, at an all-time high of $32.7
billion, remains adequate and within internationally accepted benchmarks. The peso,
supported by the strong external position, has been one of the top performing Asian
currencies. The banking sector in the meantime continues to improve as evidenced by near
pre-crisis NPL and NPA ratios, double-digit growth in assets and profitability, and capital
adequacies way above the international standards, even after we implemented Basel II in
July last year.
Economic outlook
Is the recent performance a short-term phenomenon? Is the country's reduced vulnerability a
passing episode? I don't believe so. Our model on the Philippine business cycle shows that
the downward phase of the country's business cycle reached its turning point in the last
quarter of 2006. Thus, we are now in the continuing upward phase of the business cycle, as
validated by the strong growth of the economy posted in the first three quarters of 2007.
Moving forward and barring any unforeseen risks, economic growth is expected to continue.
This will be driven by the combined acceleration of the industry and services sectors on the
production side and consumption and investments, both private and government, on the
expenditure side.
Average inflation was below the target of 4-5 percent in 2007, is projected to fall within the 4
percent ± 1 percentage point target for 2008 and within the 3.5 percent ± 1 percentage point
target for 2009. This benign inflation outlook would in turn allow us to maintain an
environment of low interest rates. The external payments position is seen to remain as a
source of strength for the economy over the near term. Dollar inflows particularly from
remittances and foreign investments are likely to remain robust. This should enable us to
further build up our cushion of international reserves, and continue to provide support to the
peso.
We also envision a more resilient and profitable banking system as banks improve their
ability to anticipate and manage risks, perform their functions of intermediating funds to the
broadest set of users, and providing alternative investment vehicles to savers.
Policy directions
This brings me to the second reason why I am convinced we are up to the task - Ladies and
gentlemen, we are focused on our reform agenda. The BSP's main policy thrusts in 2008 will
involve nurturing a resilient economy by ensuring that this is anchored on sound
macroeconomic fundamentals and building a strong financial system that is flexible in the
face of growing global integration and innovation.
Managing risks to inflation and inflation expectations will remain the key policy priority of the
BSP. In this regard, the BSP will maintain an appropriately prudent monetary policy stance
supportive of non-inflationary growth. This will require relentless environmental scanning,
continuous surveillance of key macroeconomic variables and regular sharpening of our
inflation forecasting models.
On the external front, our policies will be geared toward: (1) ensuring sustainability of the
country's external debt, (2) maintaining a market-determined exchange rate, with scope for
occasional official action in cases of sharp movements in the peso, and (3) maintaining a
comfortable level of reserves as market opportunities will allow.
Reforms in the financial sector will be aimed at maintaining a strong banking system and a
vibrant capital market, with the support of other government agencies and the private sector.
This should help spur credit and investments, and contribute in providing the basis for a more
sustainable economic activity in the medium term. I am confident that when the National
Government goes full swing into the implementation of its "Ready to Go" infrastructure
projects, the banks would be at the center of that endeavor.
We will also continue to push for the passage of key legislations intended to develop a deep
and efficient capital market, including the Credit Information Systems Act. This will make
credit more accessible to a broader set of users and ensure a more efficient mobilization of
resources.
Ladies and gentlemen, the biggest challenge before us is to sustain the country's strong
economic performance. And we will be able to do this by continuing to focus on our reform
agenda, while at the same time ensuring that this agenda remains relevant in the face of the
changing global landscape.
We are aware that headwinds from the uncertainties in how the global financial market
volatilities would unravel still remain. To help contain these, the Monetary Board approved,
just last month, two important reform packages. First, the second phase of reforms in the
foreign exchange regulatory framework, aimed at promoting greater integration with
international capital markets and enhancing risk diversification in support of an expanding
economy with global linkages. The idea is to ensure that both corporates and individuals are
given more latitude in accessing foreign exchange and expanding their portfolio of options.
By making the FX environment more open, some of the pressure on the exchange rate could
also be alleviated.
The other set of reforms approved by the Board covers the amendments to BSP regulations
governing derivative activities of banks and trust entities, including the guidelines on risk
management and sale and marketing of derivatives. The amendments seek to provide a
framework whereby banks could expand opportunities for financial risk management and
investment diversification through the prudent use of derivates. It would also help promote
growth in the domestic capital market by expanding the range of available derivatives which
a bank can originate, distribute or use, without need for prior BSP approval.
Both these reform packages are intended to help make the domestic market more able to
quickly adapt to any further changes in the global financial markets.
Concluding remarks
In closing, our experience in the past year has demonstrated that sound monetary and fiscal
policies, complemented by key structural reforms, have a salutary effect on the economy.
Today, the Philippine economy stands on solid fundamentals that have been strengthened in
recent years. These will serve us well in withstanding the "pockets of vulnerability" coming
from the global financial markets.
The key challenge will be to lock in the recent gains while steering the economy in riding out
the current uncertainties, and then moving on to a higher and more sustainable growth path.
The commitment to fiscal prudence and appropriate monetary policies and the intention to
tackle policy challenges boldly through purposeful reforms should ensure that this path is
sustained. This we hope to eventually translate to a reduction in poverty and improvement in
the living standards of our people.
I began these remarks by saying that a good strategy in playing a golf course for the first
time is to know the "lay of the land". But information about it is not sufficient to ensure that
you win the game. To secure victory, you must play well. Nay, you must play consistently
and hopefully, better than others. All winners know that to have a consistently good golf
swing, there are two important things to remember - 1. keep your eye on the ball, and, 2.
follow through. Don't lose sight of your objective and make sure you execute a good follow
through to deliver a successful outcome. Do this throughout the game and you could
guaranty a victory (or at least a pleasing outcome).
2006 was a good year, 2007 was an even better year. What do we foresee in 2008? I predict
that we will continue to push ahead, despite significant headwinds. We have shored up an
ample buffer in terms of our sound macro fundamentals and stable banking system that we
are now more resilient and able to meet challenges.
In the last few minutes, I hope I have been able to show you our roadmap for the new year
and into the medium term. We hope to ride out this route together with you, confident that
with solid economic fundamentals, we will prevail in our journey to a higher ground.
Thank you and good day.