Amando M Tetangco, Jr: Recent market developments - impact on the
Philippine banking and finance sector
Speech by Mr Amando M Tetangco, Jr, Governor of the Central Bank of the Philippines
(Bangko Sentral ng Pilipinas), at the Joint Membership Meeting of MART, TOAP, ACI and
IHAP, Makati City, 3 October 2008.
* * *
Distinguished officers and members of the Money Market Association of the Philippines
(MART), Trust Officers Association of the Philippines (TOAP), Association Cambiste
Internationale (ACI) Philippines, the Financial Markets Association, Investment House
Association of the Philippines (IHAP), esteemed guests, ladies and gentlemen, good
evening.
Thank you for inviting me to be your guest speaker at tonight's joint general membership
meeting. It's always good to engage the prime movers of the country's financial markets in
an open discussion such as this. But especially during these times of great financial turmoil
in major markets overseas. I would certainly welcome the questions and your comments
during the open forum after my brief talk. As you are well aware, the BSP's approach to
supervision and reform has always been consultative.
About the same time last year, if you recall, I was also your guest speaker at your general
membership meeting. At that time, I spoke about the increase in global liquidity and the
temptations that it introduced. I alluded to the changing nature of financial risk and how in
this era of financial globalization, risks have transcended national borders. I also said that the
international rules of the game are changing.
Ah... the time we live in is indeed interesting, isn't it? The rules of the game are further
evolving. This time around, there seems to be a crunch in global dollar liquidity as the US
market has rapidly de-leveraged. And events are showing that the magnitude of financial
risks that have crossed national borders has been beyond most market participants' and
regulators' expectations. Stunningly, we are witnessing rapid turnover in some of the
marquee names in the global financial stage.
In fact, the market developments are moving so fast that the observations that I will be
sharing with you tonight are not the same as those that I would have shared with you, had I
delivered my talk on Tuesday as was originally scheduled.
But I want to assure all of you here tonight, that my overarching message remains the same
- that is,
•
First, our financial system is fundamentally sound and relatively insulated given its
more largely domestic orientation,
•
Second, our exposure to the troubled foreign financial institutions is minimal and
quite manageable from a capital and liquidity standpoint, and
•
Third, our past investments in banking and other financial reforms have helped
shield us from catastrophic fallouts that the other jurisdictions have seen.
How did I come to these conclusions? Let me quickly run through the following points with
you: a) What has just happened? b) How's our banking system faring? c) Is our macro
stability sustainable? d) What are the BSP's thrusts going forward?
I. Recent market developments
We are all in the market, although coming from different perspectives, so I won't delve too
much into the details of the events since mid-September. We have all witnessed that our
domestic markets have followed, albeit somewhat mutedly, the movements in the global
financial markets. What is interesting to note, however, is that our markets' reactions have at
times merely been "knee-jerk". On quite a few days over the last 2 weeks, we saw the peso
and the stock market, for instance, recovering most of any day's trading losses by the close
of the day's trading session.
What I would like to highlight with you, is this - "The rules of the game are changing."
1) Financial markets have become very closely interrelated allowing for contagion to be
easier and speedier;
2) The financial transactions that we thought would diversify risk may be the very same
ones that have led to unhealthy risk concentrations;
3) Information is most critical, when you are least mindful of it ; and
4) As much as many would not want to believe it, regulation and markets must coexist
- the trick is to craft good regulations that would allow markets to work.
Financial integration has allowed the movement across borders not only of goods but also of
funds. The funds market has indeed become global. Yield-seeking by investors as well as
capital raising activities of users of funds ceased to be confined to their own borders because
of globalization. So called "securitization structures" have made it easier to transfer traditional
on-books risks of banks to off-books accounts, therefore freeing up capital which allowed
banks to lend more. "Structured products" have also allowed the enhancing of yield on
traditional investment instruments. With these financial innovations, the objectives of the
investors and the users of funds were therefore seemingly "happily married". But alas, the
party has abruptly ended and the music has stopped playing.
In the flurry of these financial innovations, the value of transparency seemed to have been
understated or even casually brushed aside. And as the market in the US was largely
deregulated, the market grew larger and larger.
Some are predicting that what we may see, as an aftermath of this turmoil, is a highly
concentrated and increasingly regulated financial system in the major economies. Policy
makers and regulators in emerging markets, including in the Philippines, will then have to
evaluate their own market structures to see how they can best position themselves in this
changing environment.
II. The Philippine banking system
Against the backdrop of recent events, how have our banks fared?
You have heard me say that our banks' collective exposure to the failed Lehman Brothers
was 0.3-0.4 percent of the banking system's total assets. We hope that there will be no other
Lehman's type problems down the road, and this seems to be a fair hope given that US and
even European authorities have now boldly stepped in to rescue the other large and
potentially systemic financial institutions in their jurisdictions. Nonetheless, our latest survey
of banks shows the exposure of Philippine banks to potentially "at risk" international financial
institutions is only around 1 percent of total assets at most. And this level of exposure by a
few banks is definitely well within the ability of these banks to absorb should they become
actual losses given their strong capital base and liquidity.
Our monitoring of banks' activities continues to reveal no abnormal actions by or against
banks. In addition, the interbank market continues to function in an orderly manner given
fairly stressed global conditions. Where we have seen some "friction" is in the swap market,
possibly in step with tightness in global dollar liquidity. But as I understand it, that has abated
in the last couple of trading days.
Ladies and gentlemen, our banking system remains fundamentally sound. Capital is still well
above both the BSP 10% minimum prudential requirement and the BIS standard of 8%.
Asset quality is as close to the lowest level seen since the Asian Crisis as it has ever been.
Return on equity has also been improving. And there is ample liquidity system-wide.
This stable banking system has been critical in underpinning a stable macroeconomic
environment. And sustained stability in our macroeconomic environment in the last few years
has also avoided the build up of dangerous imbalances that could have led our banking
system astray.
III. Macroeconomic stability
Now, a question that may be in your minds is this - Is the macroeconomic stability that we
have so far enjoyed in danger, given the global financial turmoil further threatening world
economic growth?
You can't have a more direct question than that, can you? Well, I will also try to be as
forthright. As you aware, we have lowered our growth expectations to a range of 4.4 to 4.9
percent. I believe that given the unfolding environment, such a range would still be decent.
On inflation, our base scenario for a hump-shaped inflation path remains. The inflation peak
may be nearing, if we haven't yet seen it. After that, we see some leveling off, then entry into
single digit territory by Q1 2009. Now, if the downtrend in global oil and non-oil commodity
prices is sustained, we should see the leveling off period shorter, and inflation being within
the target range before the end of 2009.
We are cognizant that the global slowdown could further weaken our exports but possibly
tempered by lower oil prices and other commodity imports. Remittances actually are very
strong and above forecasts so far, but they may also be eventually affected. Prolonged risk
aversion could also change the direction of capital flows. However, we are also keenly aware
that the global economies are not all slowing down at the same rate. In addition, not all the
economies are seen to grind to a halt. There will continue to be opportunities for growth.
There will always be value investors, given all the liquidity that will have been shored up
because of the ensuing "clean up" in the financial turmoil. We are thus expectant that
markets such as the Middle East and China will be resilient. We see these markets as taking
up much of the slack that will be created by the slowdown in the US and Europe. We
therefore still consider our $2 billion BOP surplus target this year as reasonable and doable.
Given all these and as we sustain the reform effort, I believe our macroeconomy stands an
excellent chance of maintaining its stable course.
IV. BSP thrusts going forward
What can you expect from the BSP going forward? We will remain focused on our mandate
of price stability. We believe that inflation at manageable levels is essential to ensuring
sustainable economic growth.
We will maintain our policy of a market-determined exchange rate, with official action only to
keep volatilities at bay. We will stick to the policies that have allowed us to sustain a strong
external position.
We will continue to review our banking reform agenda. The banking system strength that we
have seen thus far has been made possible by the reforms that we have put in place. We will
continue to enhance risk management standards, improve corporate governance and
accelerate compliance with Basel 2 principles.
The recent events in the financial markets highlight the critical importance of efficient price
discovery, transparency and investor protection. In line with this, our issuance of regulations
aimed at further broadening the array of financial products available in the market will
continue to include a review of existing rules to ensure that appropriate risk disclosure and
client suitability procedures are in place for new risk-taking activities.
In addition, the BSP will continue to work together with the private sector and other
government agencies to further enhance both the infrastructure and the regulatory
framework for capital market transactions to further promote efficiency in trading, settlement
and delivery of government securities.
Finally, we will pursue our legislative agenda. As you must be aware, the Credit Information
System Act and the Personal Equity and Retirement Account Act have both recently been
approved. These are two very important pieces of legislation, particularly as we face the
challenges brought about the current financial turmoil. The CISA will help address the lack of
comprehensive and credible credit-related information. This will in turn improve access to
credit and reduce its cost. PERA, on the other hand, is expected to promote voluntary
savings and therewith provide a new base for stepping up capital market development. It is
also expected to be complementary to our public pension system.
The BSP will continue to work with Congress on key legislation that would further enhance
protection for investors, improve BSP's oversight capabilities and minimize costs of
resolutions.
Concluding remarks
Ladies and gentlemen, the challenges that we face are enormous. Although much has
already been revealed in terms of the problem areas of the global financial market turmoil,
we are very much aware that more could be forthcoming.
I said earlier, "the rules of the game are changing". Fortunately, at the UAAP, the rules have
not changed, the best still prevails. I can almost hear some of you say underneath your
breaths - if indeed that is the case, then we should "throw the playbook out the window." My
advice to all of you - instead of doing that, be watchful. At this critical point, it is more
important that we remain focused on the strategy and the reform agenda that have so far
allowed us to be resilient.
On the part of the BSP, we will remain vigilant in our assessment of developments. We will
ensure that we are flexible to promptly and decisively take action when necessary. We will be
forthright in our communication to our stakeholders.
To steer the market from a further and deeper impact of this turmoil, the BSP continues to
look to the active cooperation and support of all of you in the market. As they say, we are in
this game together. I take note of the passionate and unwavering support pledged here by all
the associations present tonight. In order for all of us to finish the course we laid out, we
must work together as a team.
Magandang gabi po sa inyo, at maraming salamat. Mabuhay tayong lahat!