Amando M Tetangco, Jr: The Philippines - creating opportunities
through effective governance
Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (the central
bank of the Philippines), at the Philippine Mid-Year Economic Briefing 2010, Makati City,
Metro Manila, 18 August 2010.
* * *
Members of the governments' economic team, other Cabinet members, excellencies of the
diplomatic corps, our partners from the private sector and multilateral institutions, our friends
from the media, colleagues from government, ladies and gentlemen, good morning.
Thank you for joining us in this economic briefing.
Over the next few minutes, allow me to share with you the BSP's legal mandate, the key
reforms we have implemented and our assessment of the macroeconomic opportunities that
have been created in the process. I would also like to share with you our thoughts on the
challenges that lie ahead and the BSP's policy strategies to meet these challenges with a
view to creating more opportunities to achieve more durable and inclusive growth for the
Philippine economy.
Let me start with a review of the major reforms that the BSP has adopted in pursuit of its
mandated responsibilities.
First, on monetary policy - the BSP has adopted the inflation targeting framework that has
provided us with a disciplined approach to safeguarding price stability. The forward-looking
perspective under the framework as well as the associated transparency and accountability
practices have helped better anchor the inflation expectations of the markets and the public.
This, in turn, has contributed to improved inflation management and to well-contained
inflation dynamics.
Let us look at the numbers.
Stable food prices have helped temper inflation pressures, despite the occurrence of the
El Niño phenomenon early this year. From January to July 2010, headline inflation fluctuated
between 3.9 percent and 4.4 percent, staying within the Government's target range of
3.5-5.5 percent for 2010.
The benign inflation environment has given the BSP the flexibility to keep policy rates steady.
With stable domestic financial conditions, the BSP also started a measured and paced
unwinding of its accommodative monetary policy stance in the first half of the year.
Second, on external sector policy - the BSP adheres to a flexible exchange rate system and
to an appropriately designed foreign exchange regulatory framework. The BSP also has in
place an external debt management strategy that helps promote debt sustainability. As a
result, we have seen the emergence of strong external payments dynamics, providing
comfortable buffers against external shocks.
Reflecting these prudent external sector policies, the country's balance of payments (BOP)
position posted a surplus of US$3.2 billion in the first half of the year. The resilience of OF
remittances and the sharp recovery of exports contributed largely to the country's favorable
external payments dynamics.
The country's external debt profile continues to improve. Six years ago, our external
debt-to-GDP ratio was around 70 percent. As of March 2010, this ratio was down to
33 percent.
The long-dated maturity structure of our foreign currency debt, helps limit rollover and foreign
exchange risks. The country's debt service burden as percent of GDP, which had previously
hovered around 10 percent [2001-2003], eased to 6 percent as of March 2010.
International reserves have climbed to new highs, providing strong coverage for both imports
and short-term external debt. At end-July 2010, the GIR stood at US$48.6 billion. At this
level, the GIR can cover 9 months of imports and is equivalent to 9.3 times the country's
short-term external debt based on original maturity and 5.1 times based on residual maturity,
thus providing a strong cushion against external shocks.
As a result of the strong external liquidity position, the Philippine peso has remained broadly
stable. The trends in the real effective exchange rate (REER) show that the peso has
generally maintained its international competitiveness over the last ten years. With generally
lower inflation rates, the Philippine peso has accommodated some appreciation, but without
undermining external price competitiveness.
Third, on financial sector policy - the BSP has put in place critical reforms geared toward
maintaining a healthy banking system. The package of reforms includes the disposal of
banks' bad assets, the promotion of good corporate governance and transparency practices,
and the upgrading of risk management standards. As a result, we have today an efficient,
sound, and competitive financial system.
These critical reforms have been successful in steadily expanding and strengthening the
banking system. Indicators of the health of the banking system continue to post favorable
readings, with asset levels and bank earnings continuing to improve. The capital adequacy
ratio remained high at 16 percent and non-performing loans also remained generally low at
less than 4 percent of total loans.
The favorable performance of the domestic financial markets reflects the upturn in the
country's economic prospects. Thus, despite global market volatility following sovereign debt
concerns in Europe and uncertainties regarding the depth and breadth of the global
economic recovery, the spillovers on our domestic financial markets have been limited.
With continued improvements in domestic economic conditions and a broadly favorable
global outlook, we foresee a firmer growth path for the Philippine economy in 2010.
Inflation is expected to stay within the target range of 3.5 to 5.5 percent for 2010. The outlook
for the BOP position and the GIR level continues to be favorable, with the current account
projected to remain in surplus.
While we expect the economy to continue to perform strongly, we remain conscious of the
risks and challenges that lie ahead.
First is the multispeed recovery across the globe. Growth in emerging countries is outpacing
growth in advanced economies. Given global interdependencies and linkages, this could
result in sub-par global growth over the medium term.
Second, the potential heavy inflow of capital into the country, as risk appetites perk up, can
lead to liquidity management problems which could pose inflationary risks.
Third, the rebound of the global economy could create upward pressures on commodity
prices and fan inflation.
The BSP's responses to these challenges are, as always, founded on its primary mandate of
promoting monetary and financial stability.
In particular, our focus in the area of monetary policy will be on addressing the risks to price
stability and re-examining policy settings when warranted.
On the external front, our priority is to promote policies that will help shield the economy
against adverse shocks.
On the financial sector, the BSP will endeavor to maintain a well-functioning banking system
that will efficiently mobilize funds and channel them to productive uses.
The BSP's policy commitments, going forward, are supportive of the Government's agenda
of creating an enabling environment for durable, sustainable and inclusive growth and
broadbased development, including through the pursuit of far-reaching and meaningful structural
reforms and disciplined macroeconomic policies.
Ladies and gentlemen, the fundamental strengths of the Philippine economy, which saw us
through a tough period, provide a huge opportunity for us to consolidate the gains we have
achieved thus far and allow us to create an environment that will propel the economy
forward.
The BSP, together with the other government agencies, are firmly committed to continue
pursuing sound macroeconomic management and structural reforms to address the
challenges ahead.
To this end, let us be guided by our shared commitment to serve the general good and by
our common desire to make better things happen for the Philippines.
Thank you.