Nestor A Espenilla, Jr: Investing in sound policies towards
sustainable growth
Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central
bank of the Philippines), at the 2018 Economic Briefing of the American Chamber of Commerce
of the Philippines, Inc. (AMCHAM), Manila, 24 April 2018.
* * *
Ladies and gentlemen, good afternoon! I thank the officers and members of the American
Chamber of Commerce of the Philippines (AMCHAM) for the invitation to speak today. My
message has two parts. First, I will give an update on the economy and its prospects over the
medium term. Second, I will talk about the government's policy directions, focusing on the BSP's
initiatives to sustain the growth momentum and make the Philippines a preferred option for
business and investment.
Let me pose a question you may have asked yourselves at some point: Is now a good time to
invest in the Philippines?
Conventional wisdom tells us that investing requires right timing. If you get it wrong, you may fail
to maximize the return on your resources, or you could be staring at significant losses.
Given the rational desire to avoid loss and reduce risk, it is easy to fall into the trap of being overly
cautious and missing out on profitable opportunities. Indecision and unnecessary waiting can
also be costly.
Investing will always carry some degree of risk, and we can never fully anticipate how surprises
can disrupt or influence the market. The key is to not make decisions blindly. Indeed, information
on potential risks and returns, as well as knowledge gained from prior experience, can be
sources of confidence for any prudent investor.
So, is now a good time to invest? Do we have information to make the right call? The balance of
information that we have suggests that it is indeed an opportune time.
Betting on the Philippines
We at the BSP remain optimistic about the Philippine economy's prospects, especially as
economic activity continues to gain traction across the globe. According to the latest figures
released by the IMF, global GDP growth reached 3.8 percent in 2017, the fastest pace since
2011 as investment and trade continued to pick up. The IMF now forecasts the global economy
to grow by about 3.9 percent in 2018 and 2019, as accommodative policies support the stronger
growth impulses in advanced and emerging economies alike.
However, we continue to monitor developments that could dampen this growth momentum.
These include increased trade protectionism, rising geopolitical tensions, and the possibility of
heightened financial stresses owing to the onset of monetary policy tightening in a number of
economies especially in the U.S.
Even with these downside risks, we remain confident about our own prospects. The Philippine
economy is coming off another banner year. Real GDP expanded by 6.7 percent in 2017. This is
the sixth consecutive year that the economy had grown by over 6.0 percent.
The IMF also shares our optimism, as it forecasts the Philippine economy to expand by about 6.7
percent in 2018 and 6.8 percent in 2019. This is not far from the National Government's target of
7.0-8.0 percent growth over the next three years. All these paint the Philippines as one of the
more dynamic and fastest-growing economies in Asia.
We have also observed that growth has become more broad-based over the years. Along with
the services sector, manufacturing and construction have emerged as potent drivers of output.
On the demand side, increased capital investments and public spending, especially since the
past year, have complemented robust private consumption in stimulating economic activity.
Meanwhile, amid rapid economic growth, the inflation environment has remained manageable.
Except for 2015 and 2016 when the decline in international oil prices tempered inflationary
pressures, inflation has settled within the announced target ranges since 2009. Thus far in 2018,
headline inflation has averaged 3.8 percent (using the new 2012 Consumer Price Index series).
For 2018, our latest forecast estimates average inflation at 3.9 percent. This is near the high end
of our target range of 2-4 percent for 2018-2019. So this bears careful watching. Nevertheless,
we see inflation moderating and reverting to around 3 percent by 2019, the midpoint of the target
range.
We expect the confluence of strong growth and stable inflation being sustained over the medium
term. Specifically, as the National Government pours in more investments into physical
infrastructure and increases expenditure in soft investments in our young population to provide
them with higher quality education, skills development and better health services, the economy's
productive capacity will improve further. These will help boost productivity and we can expect
further accelerated growth in potential output.
Meanwhile, various safety net programs to mitigate the impact of recent tax reform measures,
especially on the vulnerable sectors of society, should also help moderate inflationary pressures
in the immediate term.
We also believe that these public investments in physical infrastructure and human capital are
sustainable because they are supported by prudent fiscal management. The first wave of tax
reforms under the TRAIN Law, in particular, should help generate additional revenues to finance
the Government's programs. Reforms to encourage tax compliance, improve revenue
collections, and plug regulatory loopholes, among others, are also in the pipeline to further
strengthen the country's fiscal position.
At the same time, the country's healthy financial system has also continued to fuel the growth
momentum, as domestic liquidity remains ample to satisfy the requirements of our growing
economy, including the solid demand for loans across key economic sectors. Amid the robust
expansion in credit, financial institutions have enhanced their liquidity and risk management
practices to prevent buildup of systemic risks, as reflected in their improved asset quality, firm
liquidity position, and strong capitalization.
The rise in investments and increase in infrastructure spending have been accompanied by
stronger demand for imports. This is expected. Over time, these investments will bear fruit in
the form of better infrastructure and improved domestic competitiveness. This will support high
and sustainable economic growth.
Moreover, despite posting an overall balance of payments (BOP) deficit of US$863 million in
2017, the country's external position continues to be manageable with the deficit at less than 1%
of GDP. Rising inflows of foreign direct investments as well as sustained overseas Filipino
remittances and BPO receipts provide resilience against external shocks. Moreover, the ongoing
global economic recovery bodes well for our merchandise exports. Meanwhile, the movement of
the peso remains market-driven. This exchange rate flexibility will promote self-correction
mechanisms and avoid dangerous build-up of unsustainable imbalances. These elements
should all keep the balance of payments well under control.
Finally, as a sturdy external liquidity buffer, we have built up gross internal reserves of over $80
billion equivalent to nearly 8-months worth of imports of goods and services. We likewise have
access to market financing because of our hard-earned solid investment grade rating. We have
likewise developed secondary liquidity buffers from various regional safety net arrangements we
have worked out with our neighbors.
To summarize, the Philippines continues to be a good bet for investing because of sound
macroeconomic fundamentals. Factors in its favor are its broad-based growth, within-target
inflation, prudent fiscal management, sound financial system, and manageable external
payments position.
These strengths did not materialize overnight. These are well-earned dividends of our sound
commitment to timely policy actions and to necessary and bold structural reforms over the
years.
With this in mind, it is easy to see good policymaking as akin to investing in the country's
wellbeing. As with any investment decision, getting the timing right requires mindfulness, vigilance,
and flexibility, as economic conditions could shift at a moment's notice. Prudence also requires
policies to be grounded on a reasonable assessment of pertinent information on potential costs,
benefits, and tradeoffs.
Clouds on the horizon
Nevertheless, in spite of a generally favorable economic climate, there are a few clouds on the
horizon that require us to be especially vigilant. There are two particularly key developments that
could challenge the country's position of relative strength. We intend to address these with
timely and well-informed policy responses.
One revolves around dealing with inflation and potential overheating. At our most recent
assessment of the monetary policy stance last March, we determined that our prevailing
monetary policy settings continued to be appropriate. Inflation has been evolving in line with our
projections, as the first-round price effects of the recent tax reforms appear to have been limited.
We also considered that prospects for domestic economic activity continue to be firm and within
economic potential that in itself is being bolstered by investments in both physical infrastructure
and social capital.
At the same time, the BSP has always been patient in analyzing data and calibrating scenarios in
assessing the monetary policy stance. Our latest readings do show that the risks to inflation
remain weighted toward the upside. Our surveys indicate that inflation expectations have started
to rise. These could contribute to potential second-round price effects. Nevertheless,
nonmonetary measures such as targeted subsidies are expected to mitigate these second round
inflationary pressures. We shall see. And we shall act accordingly.
Today, the BSP has many options to maintain firm monetary control. Since the adoption of the
Interest Rate Corridor (IRC) system in 2016, we have gained sufficient flexibility to rely on
auction-based instruments for liquidity management to complement our workhorse overnight
reverse repurchase borrowings at our declared policy rate. We can adjust monetary conditions
by adjusting auction volumes to move our market-determined term deposit facility (TDF) rates.
This has effectively allowed us a channel to provide guidance to short-term market interest
rates. In recent months, we have seen a firm anchoring to the BSP's interest rate corridor as
market rates strongly trended upwards. (Note: For example, the 91 T-bill rate has increased by
more than 100bps since December 2017).
Our active domestic open market operations interact in close coordination with our foreign
exchange market operations, adjustments to reserve requirements, systemic macro-prudential
measures and risk-based supervision of individual banks.
In sum, BSP actions remain timely and appropriate to dynamic market conditions. These
actions help regulate the economy and control inflation. The signal will be continuously
reinforced by other BSP actions, as deemed necessary by developments.
Looking ahead, the BSP remains watchful against signs of inflation becoming more broad-based.
We stand firm on our intent to take immediate and appropriate measures to ensure that our
monetary policy stance supports our price and financial stability objectives. The coming task of
the Monetary Board is to carefully evaluate the appropriateness of a measured policy response to
firmly anchor inflation expectations in line with our forecast that inflation targets will continue to be
met in 2018-2019. Toward this end, we also note that economic growth remains solid enough to
absorb some policy tightening, if warranted.
The other issue pertains to keeping the financial system sound and stable amid constant shifts in
the economic landscape. In particular, we cannot ignore how so-called megatrends have
changed the way businesses operate. These megatrends have made policy making more
complex. These include demographic changes and the rise of disruptive technologies.
To address these challenges, the BSP trains its sights on implementing game-changing financial
sector reforms to allow the financial system to be more flexible, market-driven, and innovative.
At this point, let me focus on some of the major reforms that we have already put in place.
The effective implementation of the IRC has allowed us to initiate the gradual and phased
reduction of reserve requirements consistent with efficient absorption of any excess liquidity. We
began with a one percentage point cut effective in March this year. Subsequent reductions - in
the nature of liquidity-neutral operational adjustments - will be done with the proper pace,
magnitude, and timing and will largely depend on the liquidity absorbing capacity of our open
market operations.
We would like to reiterate that as with the operational shift to the IRC system, the reduction in
reserve requirements is not intended to materially affect the prevailing monetary policy settings.
Think of it as the BSP shifting from one instrument of liquidity management to another, as liquidity
released to the market by the cut in reserve ratio will be re-absorbed through offsetting
adjustments in our open market operations, as informed by our updated and comprehensive
liquidity forecasts.
Another vital pillar in our financial sector reform agenda is the acceleration of financial market
development and deepening. We have rolled out various initiatives to further develop the local
currency debt and foreign exchange (FX) markets, including the launch of the Government
Securities Repo Program in November 2017.
As part of this coordinated government endeavor, the Bureau of the Treasury released the
implementing guidelines for the enhanced Government Securities Eligible Dealers (GSED)
Program last February 2018. Further, the SEC is set to issue its exposure draft of the rules on
administration of government securities benchmarks, consistent with recent global benchmark
reform initiatives and international standards for interest rate benchmark design.
We have also undertaken various FX reforms towards a deeper and better organized FX market.
This includes further liberalizing FX rules to reduce the cost of doing business and improve data
capture. The latest initiative involved the removal of the prior approval requirement for private
sector foreign borrowings. Instead, there is a post-transaction regulation requirement for the
primary purpose of capturing data.
Over the medium term, we also plan to enhance FX market governance and oversight to improve
transparency and price discovery. Ultimately, we want to see a more liquid FX market that
supports a flexible and market-determined exchange rate.
Finally, the BSP aims to foster an enabling ecosystem where competition and responsible
innovations in the financial sector are encouraged to thrive. We have strategically opened up the
banking system to encourage competition, particularly from new players and fintech companies.
This is because we believe that leveraging on safe and innovative financial institutions can also
drive business and industry growth, and likewise open gateways to greater financial inclusion.
We have also set our sights on the digitalization of the financial system. We are working closely
with the industry in implementing the National Retail Payment System (NRPS) to establish a
safe, reliable and affordable retail payments system, with an increase in the share of electronic
payments to at least 20% by 2020. Just yesterday, the BSP launched InstaPay, the latest
automated clearing house (ACH) under the NRPS, which allows for safe and affordable retail
electronic payments in real time.
The BSP remains mindful of potential risks to financial stability and integrity, including those
emanating from cyber-attacks, money laundering, and terrorism financing. We find that our
"testand-learn" approach remains useful as we continue to deal with increasing digital innovations
and more complex threats to the financial system.
Final Thoughts
Ladies and gentlemen, as I close, let us return to the question I posed at the beginning. Is now a
good time to invest?
A quick look at the current economic landscape certainly provides a compelling argument.
Standing on a position of strength, the Philippines presents tremendous and worthwhile
opportunities for business and investment.
While there are clouds on the horizon, the BSP continues to be vigilant and invests in the crafting
of sound policies and disciplined reforms to guarantee the continuity of our economic prosperity
and to further strengthen our domestic sources of resilience.
We will intensify our efforts to safeguard price stability as well as the health and stability of our
financial system. At the same time, we will continue to provide a conducive operating
environment for the financial sector to help fulfill its role as catalyst of economic growth.
Thank you, and good afternoon.