Benjamin E Diokno: The Philippine economy - sustaining resilience
through transformational reforms
Speech by Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (BSP, the central
bank of the Philippines), at the Philippines Investment Forum (Euromoney), Makati, 24
September 2019.
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Mr. Tony Shale, Euromoney executives, colleagues in government, stakeholders from the private
sector, ladies and gentlemen, good morning.
I would like to thank Euromoney for inviting me once again to the annual Philippines Investment
Forum. Last year, I addressed the audience as Budget Secretary, and I am happy to speak once
again, this time as Governor of the Bangko Sentral ng Pilipinas.
Today, I will update you on the Philippine economy through the BSP lens and highlight the
favourable performance of the Philippine economy amid external headwinds, aided by a long list
of structural reforms that have transformed it into one of the most resilient economies in the
region and the world.
A summary of basic macroeconomic figures supports the message that the Philippines is on a
very sound footing.
Economic growth is solid and sustainable. Inflation is manageable.
External payments position is comfortable. And, the banking system is strong and stable.
I will expound on each of these four points shortly.
The Philippines has come a long way from being "Asia's sick man." In fact, today the Philippines
is recognized globally as among the fastest growing and most resilient economies in the world
that enjoys even brighter prospects ahead.
The transformation, of course, did not happen overnight. It was gradual and was a product of a
long list of structural reforms that started way back in the 1990s.
I remember in the 1990s, a group of economist headed by Paul Krugman came to the Philippines
and their verdict, the long term growth of the Philippines is at best 3 per cent. We've come a long
way from there. For instance, we have deregulated oil industry, liberalized the power sector,
privatized the water services, and accession to the World Trade Organization-just to name a
few-are some of the reforms in the 1990s that have been followed through in the succeeding
decades and-if I may stress-more aggressively so in the last three years.
Vital reforms from 2016 onwards are expected to unleash more growth potentials for the
Philippines. Among these positive game changers are tax reforms, liberalization of rice
importation, the national ID system, Universal Healthcare, Universal Access to Tertiary
Education, Ease of Doing Business law, relaxation of the Foreign Investments Negative List
(FINL), and the revised Corporation Code-just to name a few.
As far as the BSP is concerned, the newly amended Charter has strengthened the BSP's
capacity to better safeguard price and financial stability, and to promote an efficient payments
and settlements system and public services act, among others.
At the moment, the Philippines is on the verge of becoming an upper middle-income economy.
And with the continued reform momentum, we are paving the way to become a high-income
status economy by 2040.
Now, let me to go back and expound on each of the four points I mentioned earlier.
First, solid and sustainable economic growth. As of the second quarter of 2019, the Philippines
recorded its 82nd consecutive quarter of uninterrupted economic growth. This shows we have
managed to sail through even the toughest external challenges from the Asian financial crisis to
the Global financial crisis.
Our projection is for the Philippines to continue growing. This is consistent with the lofty goal of
becoming a high-income economy in about two decades.
In particular, the incremental capital-output ratio has been on a steady decline, dropping from 9.5
percent in 1992 to just 3.9 percent today.
In addition, the economy's total factor productivity has increased, from only half a percent in the
1990s to about 2.0 percent today. These numbers mean that we are now able to produce more
goods and services with the same amount of input-thanks to the long list of structural reforms
we have implemented in the past.
And with the Build, Build, Build program ushering in the country's Golden Age of Infrastructure,
we have additional solid push for the economy's productive capacity to expand further.
At present, the Philippine economy's potential growth is estimated at 6.5 percent, more than
twice what it was in the early 1990s. The potential growth is projected to rise even further in the
next three years, matching the government's growth target of 7 to 8 percent by 2022.
The ability of the government to invest more for the country's future is well supported by a healthy
fiscal situation. The budget deficit and the public debt are both manageable.
In fact, despite the government's massive infrastructure investment, debt is sustainable, as
reflected by low and declining debt-to-GDP ratio.
The Philippines also enjoys improving labor dynamics, with the labor force becoming more
educated. This bodes well for attracting more investments that generate higher paying jobs.
This means our economy can grow at a much faster pace than decades ago-thereby unlocking
more opportunities to pull more people out of poverty - without the risk of stoking up inflation.
Without such risk, strong economic growth can be sustained over the long haul.
Second, within-target inflation. After being elevated last year due to supply-side factors, inflation
has reverted to within the target range of 2 to 4 percent.
This is credited to a series of monetary actions by the BSP that addressed brewing
secondround effects combined with and non-monetary actions by the government that addressed
bottlenecks to food supply.
With the BSP's amended charter, we will ensure that we maximize its provisions to better fulfill
our core mandate of price stability. Under the new Charter, the BSP is now allowed to issue its
own debt instruments. Being able to issue our own debt instruments allows us to better manage
liquidity in the system.
With my appointment to the BSP last March coming shortly after the signing into law of the
BSP's amended charter - a legislative reform that was decades in the making - I consider it my
primary duty to ensure not just its implementation but also the maximization of its provisions for
the benefit of the economy and the Filipino people.
Third, comfortable external payments position. Based on the latest estimates, the country is
expected to post a US$3.7 billion surplus in its balance of payments this year. Thanks to solid
foreign exchange inflows in the capital and financial account, the deficit in the current account is
more than adequately covered.
Talking about the current account deficit, this is not something out of the ordinary, especially for a
growing economy like ours that is investing vigorously in its future through an aggressive public
infrastructure drive.
With rising public and private investments, importation of rawer materials, intermediate goods,
and capital equipment has also been growing. This explains the current account deficit, which
nevertheless, is financeable, given robust foreign exchange inflows in the financial and capital
account.
Driving the country's BOP surplus are reliable inflows of Overseas Filipinos' remittances,
business process outsourcing (BPO) revenues, and tourism receipts.
Together, the combined amount of these three was equivalent to 17 percent of the country's
gross domestic product (GDP) last year, up from 15 percent in 2010.
Foreign direct investments (FDIs), roughly US$10 billion annually in the last 2 years, also lend
support to the country's external account amid rising investor confidence.
These steady inflows of foreign exchange have built ample gross international reserves (GIR) to
an all-time high of US$86 billion.
As of end-August 2019, the GIR could cover 7.5 months' worth of imports of goods and
payments of services and primary income. It was 5.5 times the country's short-term external
debt based on original maturity and 4.0 times based on residual maturity.
The latest GIR exceeding the outstanding external debt of US$81.3 billion.
Also, external debt as a percent of GDP had dropped to only 23.8 percent as of the second
quarter of 2019 from 60 percent in 2005.
On to my fourth point which is a strong and stable banking system. Needless to say that the
country's banking sector continues to serve as a stable anchor for the economy. It is sufficiently
capitalized, with the capital adequacy ratio (CAR) standing at 15.9 percent in June 2019 on a
consolidated basis compared with the BSP's regulatory minimum requirement of 10 percent and
the international standard of 8.0 percent.
The industry also enjoys low exposure to bad debts, with the non-performing loans ratio at a
mere 1.6 percent as of end-July this year.
The industry likewise exhibits robust lending activity, with credit helping boost not only household
consumption but also business activities, such as real estate, trade, manufacturing, and
construction, among other sectors.
In addition, with BSP's strengthened capability to supervise the financial system, we are also
able to supervise money service businesses, credit granting businesses, and payment system
operators.
Moving forward, we will be even more proactive in promoting a regulatory environment that
enables growth and innovation among banks but at the same time enhances their ability to
manage risks-all with the Filipino people in mind.
These developments and prospects are all recognized by relevant international observers. In
fact, international credit rating agencies further upgraded our credit ratings after giving us the
minimum investment grades in 2013.
We are currently rated one notch above the minimum investment grade by Fitch and Moody's,
while we are just a step away from securing a Single-A rating from S&P Global. We are keen on
hitting the minimum rating within the A territory over the next two years or so.
Of course, higher credit ratings are not an end goal in themselves. It is also a means to generate
greater benefits for Filipinos through translating economic growth to actual poverty reduction.
With higher credit ratings, interest rates on government borrowings drop, which leads to savings
on interest payments and, therefore, more fiscal space to fund infrastructure projects and social
services.
Securing higher credit ratings requires the Philippines to post even better numbers on various
metrics on the economy, parallel to those exhibited by higher rated and richer economies.
As such, aiming for A ratings goes hand in hand with the goal for the Philippines to graduate into
an upper middle income economy over the short term and to a high income economy over the
long haul.
Then again, this is something no institution can singlehandedly accomplish. This requires
concerted effort among all concerned institutions, public and private.
As Governor of the BSP, my personal aim is to bring BSP closer to the people. The primary
means to do so is to vigorously pursue initiatives geared toward greater financial inclusion. We
believe that with easier access to financial products and services, people are accorded more
opportunities to pursue savings, investments, and entrepreneurial activities that help augment
incomes.
We are doing this through the following (1) financial technology, (2) financial education, and (3)
capital market development.
On financial technology, the BSP continues to enable a regulatory environment supportive of the
development of financial technology (fintech), while at the same time ensuring strengthened
relevant risk governance and consumer protection systems.
We want to advance the country's digital financial ecosystem in such a way that every individual
is able to open a deposit account and use digital financial services through simplified
requirements and interoperable payment systems.
Under the BSP's National Retail Payment System (NRPS) framework, we have started
implementation of the two interoperable payments systems, particularly the InstaPay for low
value payments settled in real time and the PESONet for bigger amounts of payments settled
typically within the same banking day.
As of April 2019, there are 50 participants in the PESONet and 39 in the Instapay. We expect
more over the near term.
On financial education, the BSP is partnering with various institutions so that we are able to
teach its concepts and principles to our target audience, which includes students, overseas
Filipinos and their families, recipients of the government's conditional and unconditional cash
transfers, uniformed personnel, MSMEs, and civil servants.
Together with this is consumer empowerment initiatives. Work is now ongoing on the chatbot
functionality, which will enable consumers to submit complaints via SMS, webchat, and
messenger applications. At the same time, the BSP is pushing for the Financial Consumer
Protection bill, which seeks to strengthen regulations that protect financial consumers.
On capital market development, the BSP in collaboration with other financial regulators is
pursuing policy reforms and initiatives that will promote a wider array of and accessibility to
investment products-so that people from various income groups are able to engage in
investment activities.
With these initiatives and those of the government, we have a very solid basis to be optimistic
about the future.
Based on latest government estimates, the country's macroeconomic fundamentals will continue
to paint a positive narrative for the Philippine economy over the next three years. These are led
by an even more robust economic growth, stable inflation, and healthy external payments
position.
Amid this backdrop, we invite the private sector to actively partner with the government by
investing more in the Philippines' future, so that you can ride along the economy's growth tide.
Having said this, there will always be risks to the growth outlook. At the moment, some of the
challenges ahead include global economic growth slowdown, the US-China trade war,
geopolitical tensions, disruptive technologies, infrastructure gaps, and weather disturbances.
Rest assured the BSP will keep a watchful eye on these domestic and external headwinds to
help maintain economic stability for the Philippines.
With a goal of becoming "closer to the Filipino people," the BSP commits to proactively using
monetary, financial, and payments and settlements channels so that Filipinos feel the benefits of
a robustly growing economy.
In closing, allow me to give you some key notes:
First, the Philippines is expected to remain among the fastest growing economies in the world.
Second, the government is committed to its massive infrastructure agenda, which is helping fuel
high, sustainable, and more inclusive economic growth.
Third, the Philippines is resilient to shocks, and the BSP is committed to continue effectively
managing the country's external accounts to help ensure this resilience is maintained.
Fourth, your BSP will continue to maintain a regulatory environment that allows the financial
system to remain stable, to flourish, and to further support growth of the economy.
Fifth, your BSP will continue to pursue initiatives toward an even more efficient, dynamic, and
inclusive financial system.
Sixth, your BSP, will remain committed to its core mandate of price stability, and stands ready to
use any of its tools, if and when necessary, for effective inflation management.
In brief, the BSP will continue to carry out its objectives and mandates for the ultimate benefit of
the Filipino people. Thank you and good day.