Nestor A Espenilla, Jr: Why the Philippines
Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central
bank of the Philippines), at the Philippines Investment Forum, Euromoney Conferences, 27
November 2017.
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Distinguished guests; Ladies and Gentlemen: Good morning! I thank Euromoney for the
invitation to speak at this annual Investment Forum. My message is simple and straightforward.
The Philippines today offers viable and strong investment opportunities. The very topics for
today's panel discussions point to the key reasons. First, our economic outlook is strong and
robust; Second, our capital markets are being deepened and developed; Third, massive
infrastructure building gears us for increased growth and development; Fourth, we can rely on
aggressive trade and industrial development and Fifth, there are untapped markets, the unserved
and underserved, such as MSMEs and the agricultural sector, that present not just the
opportunity to exercise social responsibility, but also to create and deliver new products and
services.
First: The economic outlook
The Philippines is one of the fastest growing investment-grade rated economies in the region.
We realized a better-than-market forecast GDP growth of 6.9 percent in the third quarter of
2017, our 75th consecutive quarter of uninterrupted economic growth since the Asian financial
crisis. We are on track to meet this year's target GDP growth of 6.5 to 7.5 percent. Further
economic growth of 7.0 to 8.0 percent over the medium term is expected.The sustained
economic growth is a product of two decades of structural reforms.
Amidst this rapid economic development, we expect inflation to remain low and stable and within
target. We estimate it will settle at 3.2 percent this year, 3.4 percent in 2018, and 3.2 percent in
2019.
To maintain price stability, the BSP adopted the Inflation Targeting framework in 2002. This has
served us well. We continuously refine monetary policy conduct. The implementation of the
interest rate corridor system in July 2016 is a manifestation of our commitment. More
refinements are coming. These changes are enhancing the transmission channels of monetary
policy.
The country's external payments position remains manageable and we have built up a strong
liquidity buffer against external shocks. At $80.4 billion as of end-October, our GIR level can
cover 8.4 months' worth of imports of goods and payments of services, even exceeding the
outstanding external debt amounting to $72.5 billion as of end-June 2017. We also have in place
substantial regional safety net arrangements.
The banking system is strong and stable. Banks are lending more, and to productive
sectors. Outstanding loans of universal and commercial banks as of end-September 2017 are
up by 21.1 percent year-on-year. But the non-performing loans (NPL) ratio stood at a mere 1.4
percent. As of end-June 2017, the capital adequacy ratio stood 16.0 percent on consolidated
basis, double the international minimum.
Our comprehensive risk-based supervision approach ensure that our banks operate in a safe
and sound manner and that the economy is guarded against shocks that may affect financial
sector stability. Because of bold reforms, the banking system today is very different from the
banking system before the Asian Financial Crisis.
Nevertheless, there are those who raise overheating concerns. Some also worry of a potential
asset bubble in the real estate sector.
Our data and analysis suggest otherwise. And we are vigilant to avoid these risks. The
credit-toGDP ratio of 63.6 percent as of Q2 2017 is still one of the lowest by far in Asia, indicating
relatively low overall leverage.
At any rate, regulations are in place that require banks to manage their exposures to the real
estate sector. Last September, the Monetary Board approved enhancements to bank reportorial
requirements on exposures to the real estate sector and to infrastructure projects. More granular
information are to be submitted for the BSP to better monitor the extent of bank exposure to real
estate and infrastructure projects.
We are ready to implement appropriate macro-prudential measures as the situation may require.
Another concern being raised is the country's current account balance which, after posting 13
consecutive years (2003-2015) of surplus, turned into a small deficit in 2016 (-0.3% of GDP) and
in 2017 (-0.2% of GDP in Jan-June). This concern is misplaced. Indeed, IMF observed that
previous current account surpluses actually reflected low levels of investment.
Behind the deficit is the economy's rapid growth, backed by rising investments. There is an
increase in imports of machineries, capital goods, intermediate goods and raw materials.
Eventually, we expect these to translate into higher productivity and exports, lending support to
the sustainability of the current account and overall external payments position. We also expect
BOP deficits to the mitigated by robust overseas Filipino remittances, BPO revenues, tourism
receipts, and FDI flows.
Recent weakness of the peso is also being spotlighted. We assure that the peso's recent
modest and controlled depreciation is consistent with the economy's structural shift from being
consumption-led to being more investment-led. This is driven by strong imports demand,
residents' increased direct and portfolio investments abroad for expansion and risk
diversification; as well as public and private sector debt prepayments to manage foreign
exchange risks. There is also outflow of hot money. We believe these developments are
fundamentally healthy and help improve price competitiveness.
Second: capital markets
Capital market development also gives more reason to invest in the Philippines. The BSP is
working hand-in-hand with the Department of Finance (DOF), the Bureau of the Treasury (BTr),
and the Securities and Exchange Commission (SEC) on a local currency debt market
development roadmap, where reforms to deepen the market will be undertaken over an
18month time frame. The reform agenda will officially unfold with the launch of the Government
Securities Repo Program later this very afternoon (Nov 27)! Indeed exciting and transformative
times!
The roadmap includes initiatives to 1) increase the volume of treasury bills, 2) provide stable,
predictable and transparent issuance of government securities, 3) develop a systematic set of
obligations, rights and incentives for market-makers, 4) establish a reliable yield curve, 5)
introduce a repo program, and 6) strengthen regulatory oversight over the repo and fixed income
market.
These reforms in the government securities market will translate into increased market
efficiency, lower borrowing cost, more dynamic and increased participation. As the domestic
debt market develops rapidly, there will be more alternative sources of funding for economic
activities besides the banking sector. Risks will also be better managed.
Third: infrastructure building
We are in a period of build, build, build! This will be driven by massive key infrastructure
investments.These will enhance competitiveness, support the economy's rising growth
trajectory, and spread development across the country's regions.
Under the National Government's program, spending for big-ticket infrastructure projects is set
between $160 billion and $170 billion in the next five (5) years. With this, government
infrastructure spending as a share of GDP will rise annually from 5.4 percent in 2017 to 7.3
percent in 2022. Public investments in infrastructure and human capital development, while
observing fiscal discipline, will be a major growth driver.
Sustainable funding sources must support this thrust. Deepening our domestic capital market,
as earlier mentioned, will help in this regard.
BSP will continue to support infrastructure development through enabling regulations. Last
month, the Monetary Board excluded loans guaranteed by multilateral financial institutions (MFIs)
where the Philippine Government is a member or shareholder, from the regulatory limits on
banks' loans to their subsidiaries and affiliates.This will boost available resources for the funding
of big-ticket projects, including infrastructure.
While National Government builds infrastructure, we at the BSP are focused on the
FINfrastructure - (this is a word I coined) referring to the financial infrastructure. We are
encouraging further digitization of the financial sector.
In line with this, the BSP is closely working with the National Government to implement a
biometric-based foundational ID system to broaden the reach, quality, and integrity of financial
services.
We are also working with the industry so that more Filipinos can send and receive payments via
any electronic device under the National Retail Payment System (NRPS). Last November 8, we
launched the Batch Electronic Fund Transfer (EFT) Credit system or PESONet. With PESONet,
businesses, the government, and individuals will be able to conveniently initiate electronic fund
transfers and recurring payments from the sender's accounts maintained in any BSP supervised
financial institution to corresponding recipient accounts in other institutions with full
interoperability. Funds will be made available to the recipient account/s within the same banking day
at full value. In the first quarter of 2018, we will launch InstaPay, another automated
clearinghouse allowing real time, low-value push electronic fund transfers perfect for
ecommerce.
All of these initiatives will help lower the cost of doing business, enable increased e-commerce,
and give wide access to credit and other vital financial services.
Fourth: trade and industrial development
The BSP supports trade and industry development through progressive liberalization of the
foreign exchange market. Building on previous reforms, the BSP will soon liberalize foreign
borrowings by the private sector. This will re-focus the registration process to primarily
datagathering. It will minimize documentary requirements. Down the road, further liberalization of FX
regulations will support ease of doing business and help improve the country's investment
climate.
The banking sector was fully liberalized earlier in 2014 to allow entry of foreign banks under
Republic Act No. 10641. Since the law's enactment, the BSP has already approved the entry of
11 new foreign banks.
Fifth: the agricultural sector
Today's fifth panel discussion will revolve around the Agriculture Sector. And this sector is
indeed an important driver and draw for increased investments.
Recently, the BSP issued guidelines on agricultural value chain financing (VCF) to facilitate credit
to the agriculture sector. This opens up credit provision to all the players in an organized value
chain and promotes VCF as an effective, organized means of channeling funds to the
agrifisheries sector, promoting their financial inclusion. By encouraging linkages among various
players in an agri-value chain, the credit risk of participating smallholder farmers and fisher-folk
can be reduced and facilitate their access to more credit.
But beyond this sector are other unserved, underserved and untapped markets.
To promote MSME access to finance, the BSP has issued comprehensive credit risk
management (CRM) guidelines so that banks can be more flexible, extend more credit, and
implement innovative credit products and lending programs. Also, a wide range of microfinance
services of banks now cover nearly 1.7 million microentrepreneurs with an outstanding portfolio
of P13 Billion.
Empowering these sectors are not just opportunities to exercise social responsibility, but their
inclusion creates viable business propositions.
To sum up, . . .
Why the Philippines?
First, the Philippines is among the fastest growing and most resilient economies in the region.
Second, coordinated efforts towards structural reforms and public sector investments in
infrastructure and human capital development will make the business climate even more
competitive. And Third, you can rely on the BSP's staunch commitment and effectiveness in
delivering on its core mandates of price and financial stability conducive to economic growth.
We are deeply committed to implementing ambitious financial sector reforms.
Let me end on this note. I wish you a very productive Investment Forum ahead!
Thank you!