Nestor A Espenilla, Jr: Returns
Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central
bank of the Philippines), at the joint meeting of the Rotary Club of Makati with the Rotary Club of
Makati North, Makati City, 29 August 2017.
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Mr. Conrado Dayrit, Rotary Club of Makati (RCM) President, President Dennis Pe (RCM North),
President Carol Mercado (RCM Premier District), RCM officers, members, guests, ladies and
gentlemen, magandang hapon po sa inyong lahat. Thank you for the opportunity to keynote this
meeting co-sponsored by RCM North.
I would like to begin with the word, "returns." In this group of distinguished businessmen and
professionals, it could readily mean "return on investment"- a financial metric indicating
efficiency of a commercial venture.
At the same time, to this same group of community builders and philanthropists, "to return" could
also mean, "to give back" and to work for society's improvement and welfare. In this regard, RCM
deserves commendation for its active engagement in public-spirited projects since its
establishment in 1966.
RCM understands that businesses operate more successfully when society and its needs are
considered. It knows that commerce fully succeeds in a society that is also successful. The
reverse is also true.
We at the Bangko Sentral ng Pilipinas share this belief. Established for the public interest, we
believe in first - providing a conducive business environment through promotion of price stability;
banking and financial stability; and the operation of an efficient and reliable payments settlements
system. We also have come to believe in, second, working for greater financial inclusion so that
economic development and progress would be truly meaningful.
I would like to think of the BSP and RCM as partners in these two shared goals.
A positive environment for investment
The BSP cannot guarantee businesses' a return on their investments. As you know, this is a
function of many factors such as prudent management, quality of customer service, innovation,
location, supply and demand and so on.
The BSP's task is to work for a better and more stable operating economic landscape for
commerce, banking and finance.
In that regard, I'm pleased to note, the numbers are quite positive. And my commitment as
Governor of the Bangko Sentral is for there to be continuity in the policies that brought about this
favorable economic environment, with space for improvements through bold and strategic
financial sector reforms.
1. Increasing gross domestic product - Developments in 2017 point to overall economic
resilience. Real GDP rose by 6.4 percent in the first half of this year with stronger
economic activity expected in the second half.
2. Manageable inflation. - Although headline inflation rose to 2.8 percent in July (from 2.7
percent in June), the year-to-date average inflation rate is 3.1 percent. We expect it to stay
that way. We therefore will meet the inflation target of 3 percent, +/- 1 percentage point
allowance for 2017.
Fostering a stable business environment is primordial to the BSP. Keeping inflation low
and stable does away with uncertainty and better enables businessmen and investors (like
yourselves) to plan and make informed decisions about consumption, investment, saving,
and production.
Moving forward, the BSP will continue to fine-tune its monetary policy framework to make it
more market-oriented, while staying focused on inflation control. We deployed the interest
rate corridor (IRC) system in 2016. Its objective is to make market interest rates move
closer to the BSP policy rate. In the long run, this supports Philippine capital markets by
encouraging money market transactions and better liquidity management.
3. Ample domestic liquidity - Latest data also shows ample domestic liquidity. Bank
lending remains upbeat and continues to flow into productive sectors such as real estate;
power and utilities; manufacturing; wholesale and retail trade; and information and
communication.
4. Sound and Stable Banking System - Our banking sector is fundamentally sound. The
reforms put in place by the BSP, along with banks' commitment to manage operational
risks have resulted in significant improvements in the quality of bank assets and loan
portfolios as well as strong capitalization. Also, I am pleased to note that as banks fund the
domestic economy, they remain prudent in their lending activities.
The BSP will continue to review and align regulations with international standards to
improve risk management and improve bank competitiveness in view of ASEAN
integration.
Working towards a stronger and more stable banking system is a practical goal. Banks
support the financing needs of our continuously growing economy and have a role in
efficient allocation of resources.
5. Market-driven exchange rate and adequate GIR - Recent developments in the
exchange rate reflects a confluence of factors. These are: strong import growth, reflecting
a rise in dollar demand given expansion in private and government sectors, and expected
U.S. Federal Reserve rate hikes due to their policy normalization. These factors
notwithstanding, we expect the country's robust growth, stable inflation environment,
strong and resilient banking system, and prudent fiscal position to provide underlying
support to the peso.
It is also worth noting that inflow of cash remittances from overseas Filipinos (OFs) coursed
through banks remain steady reaching US$ 2.5 billion in June. This is a 5.7-percent increase
from the level posted in the same period a year ago. Meanwhile, export growth has actually
picked up to around 13%. As a result, the country's gross international reserves (GIR) as of
endJuly 2017 remains at more than US$80 billion, equivalent to nearly nine (9) months' worth of
imports of goods and services.
Need for vigilance
While the economic backdrop is favorable, the BSP remains vigilant given global and domestic
challenges. An expected rise in US interest rates may drive portfolio capital outflows from
emerging markets, including the Philippines, adding to exchange rate pressures in these
economies. Moreover, US implementation of a conservative policy agenda on immigration,
offshoring/outsourcing, trade, tax reform, labor/immigration laws, and financial and business
regulation could impact exports as well as OF remittances. Finally, the ongoing rebalancing of
the Chinese economy as it transitions from export-led growth to services and domestic
consumption-driven expansion could impact Philippine exports.
Potential Economic fall-out from the ongoing tensions between the US and North Korea, as well
as peace and order issues if not managed are also a source of concern.
These risks notwithstanding, In June 2017, Moody's affirmed its stable outlook on the Philippine
banking system citing our: (1) robust real GDP growth; (2) broadly stable bank asset quality; (3)
high capital buffers and loan-loss provisioning; (4) the banking system remaining fully deposit
funded; and (5) high proportion of liquid assets held by banks. This is a good indication.
At any rate, the BSP has a broad policy toolkit to respond to the risks mentioned. We are also
coordinating with other government agencies and regulators to further enhance our
macrofinancial surveillance capability. The BSP is watchful of shifts in market sentiment along with
trends in commodity prices and other inflation drivers, refreshing its liquidity forecasting and
inflation models so they are in tune with evolving impulses. In the spirit of "continuity plus plus,"
no significant deviation from previous monetary policy approach is anticipated.
Returning to the community
As the country experiences more economic success, it becomes imperative to allow a greater
number of our fellow Filipinos to enjoy the gains. Financial inclusion translates to allowing more
of our countrymen to save and borrow for productive uses...avail of investment and insurance
products and send and receive payments securely and efficiently.
We believe this is the only way for economic growth to be truly meaningful. Filipinos from the
grassroots must be given usage and access to financial services, and be provided with financial
literacy and education empowering them to make informed financial decisions to better their lives
and that of their families.
RCM has, through the years, made positive and lasting change in Philippine communities. We in
the BSP will be glad to partner with you in the transformation of our country, perhaps in launching
Public Information Campaigns and other endeavors. Imagine even our lowest socio-economic
group as a financially literate populace! This is an exciting prospect that we hope you, our
partners in business and industry, would support the BSP in achieving.
On the BSP's part, we have, among other initiatives, implemented the National Strategy for
Financial Inclusion to make the financial system accessible and responsive to the needs of the
entire population.
We are also working with other government agencies for the implementation of a national ID
system. With this system, disenfranchisement will be a thing of the past, with the number of
"unbanked" citizens shrinking faster and with more certainty. Individual biometric identification will
give each one a voice to be recognized, to be heard and to participate in economic growth and
development.
We are also continuously creating a more enabling regulatory environment for the development
of fin-tech and digital finance. The digitalization of finance is essential to achieve significant
inroads against financial exclusion and payments inefficiency. Soon, financial consumers and
investors will be able to make more informed business decisions choosing from a longer, fresher
and more innovative menu of available financial products and services.
We adopted the National Retail Payments System (NRPS), a flagship program for digital finance.
With this, we hope to transition from a cash-heavy economy, where 99 percent of transactions
are done in cash, to a cash-lite economy, with transactions becoming electronic. This move
towards modernization supportive of e-commerce might be of particular interest to business
people such as yourselves. On our part, we see the role innovations play in on-boarding currently
excluded markets into the formal financial system.
But there is still much to be done. We count on you, RCM to help us in our financial inclusion
efforts to collaborate with us towards maintaining a more stable, conducive and stronger
business environment. I am confident that the returns on this, far from just being financial or
proprietary, will be more satisfying and enduring.
I end with a simple but powerful quote from Deepak Chopra " If you want something, give it." .
What one gives out, we know, returns somehow. As we work towards society's positive
transformation, we do not shirk at the possibilities of being at the receiving end.
Thank you for your kind attention.