Amando M Tetangco, Jr: Sustaining growth while riding the uncertainty
Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (the central
bank of the Philippines), at the Bloomberg's Foreign Exchange Forum, Makati, 13 August
2014.
* * *
Introduction - caution in a time of uncertainty
Good afternoon. Seeing all of you here once again validates my theory that indeed there is a
strong correlation between volatility and attendance in a forum like this one - to listen to the
central bank talk about uncertainty. From a smaller function room downstairs where we used
to hold this forum, we have been kicked upstairs to this ballroom. Holding this discussion
now also shows Bloomberg's knack for getting the timing right.
Your interest confirms that the most common reaction to uncertainty is caution. Think about
it, if you are about to undergo your annual physical, don't you modify your eating habits and
hold off on that last piece of "lechon"? However, how long you feel you need to deprive
yourself depends on your "initial conditions". If you are in fairly good health, maybe you
would only skip one craving for that savory bite and you would still be confident to walk into
the doctor's office.
The same reality applies to the financial market. 1) When market participants sense
uncertainty, they proceed with caution and 2) The impact of uncertainty on your behavior will
depend on initial conditions. If uncertainty finds you at a time of high market volatility, you are
likely to be more nimble, than when uncertainty finds you at a time of low volatility.
Right now we are in a low volatility environment. Some analysts say volatility is "eerily" low.
There is even an assessment that markets have become "too" complacent. Is that the case
among market participants in the Philippines?
I hope not. See, the thing with "uncertainty" is that the degree of uncertainty is itself
uncertain. Therefore, we really cannot, and should not be complacent. Because however
quiet markets seem to be now, risks remain.
Risks remain
What are these risks that we face today? Let me name four that are top of mind:
1) Monetary policy normalization in advanced economies.
The consensus, as I understand it, is that the Fed would continue with its current pace of
tapering. The operative question now therefore is when will the Fed "lift off" be? Will it be
mid-2015, as many market analysts project? Or earlier? The next critical question we must
ask ourselves is - how far should we take the "risk on" trade?
Unfortunately, because of possible spillovers and contagion, the answer to this question may
actually depend on the answer to yet another question, i.e., how far will the global investor
take the "risk on" trade?
As price takers in the global market, we are often at the mercy of how the global asset
managers behave. Indeed, the behavior of global asset managers has caught the attention of
central banks in all jurisdictions, particularly, how their "herd" behavior tends to amplify
volatility. Quite often, because 1) they hold superior information to that of retail investors,
2) they have similar risk management frameworks, and 3) they have a common goal to
outperform their benchmarks, global asset managers are able to (and often do) get out of
trades more quickly and nearly at the same time, leaving the small institutional investors and
retail investors "holding the bag", when the music stops.
If global investor sentiment shifts because of a misappreciation of Fed pronouncements, as
what happened during the "taper tantrum", the current low volatility in the market could
quickly turn to a high volatility environment.
2) We should also consider the monetary policies in the ECB and BOJ. These central banks
have both said they are willing to extend accommodative monetary policy longer than the
Fed. While this asynchronous exit could help assure the market that global central bank
liquidity would not suddenly dry up, a prolonged QE from these two central banks could also
present a drag to global trade, if the QE in these jurisdictions is perceived to be ineffective in
stimulating growth. Furthermore, prolonged QE could create distortions in financial risk
assessments.
3) Geopolitical risks
Happenings in the Middle East, retaliations between the West and Russia - all these could
raise the volatility in commodity prices, affect global trade as sanctions continue to be hurled
from both sides, and quite possibly, economic activity. In addition, geopolitical risks could
lead to "flight-to-quality" trades, which could adversely affect EMEs.
4) Natural disasters
These could affect the domestic supply chain of food and other important commodities and
exacerbate supply of power. These can directly feed into our inflation and growth dynamics.
Normalization of monetary policies in advanced economies, geopolitical risks, and natural
disasters - these are some of the major risks that bring about uncertainty in our operating
environment. How these could ultimately impact all of us, depends on our initial conditions.
Initial conditions and what has the BSP done so far
This snapshot is not unfamiliar to you, so let me just quickly run thru these:
On monetary policy - As you know, the BSP has carried out a series of actions. Each to
address an evolving condition. First to contain domestic liquidity that continued to be very
high in the system through two 100 bps increases in our reserve requirements; then an
increase in our SDA rate of 25 bps to help contain financial stability pressures from the
excess liquidity, and finally 25 bps increase in our RRP rate, to help manage inflation
expectations.
These show our shift to a tightening bias. Our view is that it is important to guide the
market to better appreciate market risk in the context of normalization. Because continued
low volatility in the financial markets may promote further undue risk-taking attitudes. Equally
important, the series of policy actions helps ensure that inflation expectations do not get
disanchored.
Now you may ask, would you be seeing further action from the BSP? Let me just say that all
the tools available to us in our "expanded tool kit" remain on the table. I reiterate that the
BSP is fully committed to the inflation target and is prepared to deploy all policy tools as
warranted.
At the same time, we will continue to coordinate with other agencies of government to
address pressures from the supply side, including the timely importation of certain food
products and tighter price monitoring to prevent speculative trading, to help ease price
pressures. Other measures include: lowering logistics and shipping costs, increasing
agricultural productivity.
On the exchange rate - The exchange rate will continue to be market-determined. But BSP
will not hesitate to come into the market if there is a need to smooth out too much volatility in
exchange rate movements.
On the banking sector - The Philippine banking system continues to maintain a strong
performance. We will remain on track in adopting international standards, taking into account
domestic market conditions, to ensure that the banking system becomes more resilient and
is able to intermediate funds safely, efficiently, and effectively.
On external liquidity dynamics - We will retain a pragmatic approach to handling foreign
exchange so that our current account continues to be in surplus, supported by overseas
Filipino remittances, business process outsourcing (BPO) revenues, tourism receipts and
exports. We will also manage international reserves as appropriate. Our strong external
liquidity position will continue to provide a cushion against external shocks.
All these would help enable the Philippines to remain competitive and be able to hurdle the
challenges as well as reap the benefits from the numerous opportunities of the forthcoming
ASEAN integration of financial and goods markets. Granted, much more needs to be done to
make the ASEAN story "whole", we find the initial conditions and our policy thrusts conducive
to make this story come true.
Assessment:
Given such sound initial macroeconomic conditions, should we/you worry? Would any
uncertainty rock us/you? And the million dollar question - What can you expect from the
BSP?
A tilting in any/or all of the risks I enumerated could tip the balance of volatility from low to
high. For certain, the sound macro conditions we walked through earlier would help to
temper the impact of a significant and sudden shift to greater volatility. But, how each of your
individual bottom lines would ultimately be affected would depend on your specific
circumstances.
Clearly, the Philippines is in a good spot, and the prospects are bright. Our sound
fundamental story is intact. This should not, however, lull us to complacency. I admonish
each of you to use this time of low volatility wisely - take stock of your positions and carefully
reassess these against the risks.
It is a fundamental truth - in everything we face, there are two circles of concern that
confront us: 1) those concerns that are within your control, and 2) those outside of your
control. Quite often, the latter circle is larger than the former. As market practitioners, you
need to be mindful of these two circles. What can you control? Certainly your risk appetite.
Controlling this when greed gets the better of you is very difficult. So in a period of low
volatility such as what we have been experiencing, practice the discipline of setting limits.
This discipline will not only help you to avoid the pitfalls of "chasing the market". More
importantly, this discipline will help you take advantage of the obvious opportunities, as well
as unearth those that are hidden. Discipline set during the sober low volatility period will
guide you when you are confronted with factors that are not within your control, especially
during a frenzied high volatility period.
The BSP practices the same discipline. For the things that are under the BSP's control, the
BSP takes conscious effort to act on these. For those that are not - we sharpen our
surveillance, monitoring and analysis. We also coordinate with other government agencies
which may have influence over the situation and dialogue with our peers in the region and
beyond.
You can therefore expect the BSP to continue to 1) keep our ears on the ground for inflation
impulses and changes in inflation dynamics, 2) act preemptively as appropriate when we see
financial stability pressures rising, 3) keep a market-determined exchange rate, and 4) use all
monetary and macroprudential tools under our disposal to shield the gains we have achieved
so far.
The BSP will also continue to work to strengthen the consumer protection practices of banks.
I believe it is incumbent upon you, particularly those on the marketing side, to fully disclose
the risks of transactions or products to your clients - making it clear that price history is not
necessarily a predictor of future price behavior. Related to this, we are about to roll out a new
comprehensive consumer protection framework, which will cover what is expected of
financial professionals such as yourselves with respect to the public whom you serve.
You have heard me say, on numerous occasions - the best policy is "to keep your own
house in order". This is what you can expect the BSP to do. And that is also what we expect
each of you to do. It is our hope that the BSP's actions and policy intentions are clear enough
to you and that I have helped to articulate these better this afternoon.
The BSP's objective is to help you plan better, prepare and ultimately prosper even in times
of uncertainty. Our vision is for the BSP to be, consistent with our mandate, the "tide that lifts
all boats".