Amando M Tetangco, Jr: Philippines - navigating through the global
financial turmoil
Speech by Mr Amando M Tetangco, Jr, Governor of the Central Bank of the Philippines
(Bangko Sentral ng Pilipinas), at the Australian-New Zealand Chamber of Commerce
Philippines Annual General Membership Meeting, Makati-City, 14 April 2009.
* * *
Introduction
President Richard Barclay, distinguished members of the Australian-New Zealand Chamber
of Commerce, ladies and gentlemen good evening.
First, let me thank ANZCHAM for inviting me to your monthly members' meeting. If I
remember correctly, the last time I graced a similar event of ANZCHAM was in July 2005 -
as I was just beginning my term as central bank governor.
Much has transpired during the nearly four years since then. As this particular slide shows,
our economies have experienced ups and downs - riding on record growth rates, and now
recessionary trends, historic low inflation, and then some episodes of highly unstable prices,
stock market gyrations, as well as periods of volatility in our exchange rates.
Our journey in the last four years has taken us through good roads, so to speak. But we also
went through road blocks and speed bumps along the way. Now, the global financial and
economic turmoil presents our economies with, perhaps, our biggest challenge yet.
The current crisis has been described as a "crisis unlike any we have seen in our lifetime".
We have seen much of the crisis' adverse effect on our economies, but we know that much
is still to unfold. For my remarks tonight, I thought I would follow the outline flashed on the
screen right now. I will begin by quickly running through three themes that I have seen
surrounding the current crisis:
First, that "the law of unintended consequences" has been at work in this crisis. Second, that
a global crisis needs global responses. Finally, that no economy is immune from the effects
of this crisis, but those which have built up buffers are more likely to fare better than others.
I shall then conclude my remarks with a description of the policy actions and initiatives that
the BSP has so far implemented to allow us a less bumpy ride to the not-so-distant period of
economic recovery.
Unintended consequences evident in the crisis
I am sure many of you have heard of the term "law of unintended consequences". Some
have defined this as "the proposition that every undertaking, however well-intentioned, is
generally accompanied by unforeseen repercussions that can overshadow the principal
intention."
Let me illustrate, continuing with my road analogy. In road development, one option to deal
with a traffic-congested road is to build a bypass or an alternate road. Unfortunately, building
a bypass may decongest the existing road, but as often happens, with new developments in
the area of the bypass, we would now have, instead of just one congested road, two traffic
congestions.
Many analysts have said that "the law of unintended consequences" was working
spectacularly in the run up to this current crisis.
One evidence of this is the benign macroeconomic environment created by the low interest
rate regime prevalent during the first half of this decade. This should be a good thing.
However, this environment led to the search for higher yields, that fueled unprecedented
asset price increases and at rates faster than the growth in household incomes. This further
led to a loss of rationality (individuals believing house prices would never fall) and extension
of credit by financial institutions to sectors of the economy that normally would not qualify to
borrow (in other words, the so-called "subprime" borrowers).
Sounds familiar? This was what transpired in the United States - low federal funds rate
fueling a boom in mortgages with borrowers having doubtful credit histories, housing prices
bubbled and burst, with the negative feedbacks affecting both the U.S. domestic economy
and financial markets.
Another example is in line with risk spreading through financial innovations.
The ability to spread risk should also be a desirable goal. However, the fast-paced evolution
of financial products and services, along with the seemingly "loose" financial regulation -
later on gave way to the unfortunate reality that risks were eventually "concealed". Through
securitization and deleveraging, those hidden risks were effectively multiplied in the process.
Thus, while financial innovations have good intentions, they also have some side effects... if
not prudently monitored or given appropriate form of regulation.
These developments, together with a host of other factors, fueled the current crisis, which
from all angles, can be considered our first truly global crisis. From what was first believed to
be a US-centric subprime mortgage problem, the crisis has since transformed into financial
turmoil and further into an economic growth crisis. From the US and Europe, it has spread to
the rest of the world. Economies in the periphery suffered market failures characterized by
sudden stops as sentiment turned, despite sound policies. Even countries that did not have
strong financial links with the core nations are now being affected through real flows and
financial losses on trade activities.
Global crisis requires a global responses
This brings me to my second theme - "A global crisis requires a global response."
When it had become evident that the economic events were not going to remain localized at
the epicenter, advanced and emerging economies implemented policies and strategic
actions, in concert and at the national level. Some economies that have more monetary
space have eased policy interest rates, reserve requirements and credit facilities. Some that
have more fiscal space boosted spending via stimulus packages and prioritization of
important infrastructures. Many have pursued both expansionary monetary and fiscal
policies. Some countries like Australia and New Zealand have implemented unlimited but
temporary deposit guarantees and opened up US dollar swap lines with the Fed.
Finding the right policy mix poses a continuous challenge, as economic managers and
policymakers would have to deal with varying conditions, magnitude and depth of the crisis'
effects. Thus, the worldwide crusade to mitigate the impact of the current global financial and
economic crisis continues its experimentation but with utmost caution for a wrong policy
could eventually take its toll on the economy over the long-term horizon.
No economy is immune, but buffers and cushions help lessen the impact
The crisis has shown that no one is immune. This leads me to my third theme. No economy
is immune but some economies fare better because of buffers built from past reforms and
behavior. While our countries have been affected, it is noteworthy that the cushions we have
painstakingly put in place before the current crisis unfolded have helped us weather the
blows. Allow me to name a few of these buffers.
In the case of Australia and New Zealand, these economies have grown strongly for the past
10 years and inflation has been largely within the 1 to 3% target band; this has resulted in
low unemployment, and a strong fiscal position. They also have good institutions. They
scored highly on measures of ease of doing business, as well as measures of
corruption/transparency. They also have flexible labour markets. They both have an
established track record for transparency in regulatory institutions, sound management of the
public accounts, and a forward-looking monetary policy are well-regarded internationally.
Finally, their banking system remained sound and well-capitalised. The large Australian
banking groups, of which the major New Zealand banks are a part of, are now among the
largest and highest-credit-quality banks in the world. Australian parents of the big 4 NZ banks
are some of the best-rated in the world (4 of the remaining 13 AAs and in the top 20 biggest).
The openness of your economies has indeed left you quite vulnerable during this crisis, but
your strong institutions have certainly helped to mitigate the crisis' adverse impact.
How about in the Philippines? What are the buffers we have built?
With the easing of oil and other non-oil commodity prices in the world market and the
moderation in inflation expectations, inflation is now expected to further decelerate - and be
within the target ranges - in 2009 and 2010. Actual headline inflation has decreased to 6.4
percent in March from 7.3 percent in February 2009. (Core Inflation in March also declined to
5.6 percent from 6.4 percent in February 2009)
These developments opened the opportunity for BSP, during its last three policy meetings, to
cut its policy rates by a total of 125 basis points. The reduction in rates makes more funds
available for lending to corporations, including small and medium business enterprises, as
well as for consumer loans. We will continue to monitor developments to ensure that our
policy settings remain appropriate.
In October 2008, at the height of the uncertainty surrounding this crisis, the BSP
implemented several measures to boost liquidity. We were witnessing at the time the
freezing of credit markets in the major economies. So, even as we were aware there was
ample liquidity in the system then, the BSP took preemptive steps to avert a similar situation
developing here.
These measures, which I will discuss shortly, have helped to raise domestic liquidity and
allowed banks to continue to extend loans. The continued liquidity and credit growth is shown
in this slide.
Demand for money remained strong in February as domestic liquidity or M3 grew by 14.6
percent year-on-year, higher than the 6.8 percent expansion during the same month a year
ago but lower than the 16.1 percent growth in January 2009. The continued strength of
domestic liquidity indicates that there are funds available in the system which could be
tapped for investment and other productive activities.
Outstanding loans of commercial banks including reverse repurchase agreements (RRPs)
increased in February 2009 by 22.5 percent year-on-year, an acceleration from the previous
month's growth of 18.8 percent. Net of RRP placements with the BSP, lending also
increased by 22.6 percent year-on-year in February, slightly slower compared to the 24.5
percent expansion in the previous month.
We have allowed liquidity to grow faster than we would normally tolerate since we see that
these funds are being used in productive sectors. Nonetheless, we are mindful that while
liquidity fuels economic growth, excess liquidity could fan inflation. In view of this, we always
keep in mind that balance is necessary to ensure that we are able to support growth in an
environment of stable prices.
One of the lessons we learned from the 1997 Asian Financial Crisis was the value of
managing external debt and building up FX reserves for self insurance. This chart shows that
we have indeed learned this lesson well.
Based on preliminary data, as of end-March 2009, our reserves have remained broadly
steady and close to record level at US$38.9 billion. This suffices to cover about 6.2 months
of imports of goods and payments of services and income, or alternatively, it could cover our
short-term external debt based on residual maturity about 2.9 times. (What's interesting to
note is this level of reserves is more than fourfold our reserves level in 1997 of $8.8 billion!)
We were able to continue building reserves because our external payments position has
remained in surplus in 2008 (in fact for nearly 5 years now). The healthy external balance
has been supported by remittances of overseas Filipinos as well as higher services receipts
particularly from business process outsourcing. In February 2009, our balance of payments
position posted a surplus of US$ 469 million, resulting in a year-to-date surplus of US$2.2
billion in 2009.
Thus, even as we face a slowdown in external demand and capital flows, the stronger
external liquidity position that we currently enjoy will make us less vulnerable to the moods
and swings of international financial markets.
This slide shows that (1) The banking system's asset base has been expanding steadily,
supported by sustained growth in deposits. Our banks have continued to perform their
central role of efficiently channeling funds to productive uses and managing and distributing
risks; (2) Banks have been offloading their non-performing assets and problem loans. As a
result, the NPL ratio is now at the pre-Asian crisis level of around 4.0 percent.
Furthermore, the profitability of the banking system has continued to increase, although with
some moderation as of late. Banks have remained capitalized at levels above both the
BSPregulatory requirement and the international (BIS) standard. In addition, let me also assure
you that the rural banking industry remains strong and healthy despite the recent closures of
some rural banks which have been found to have been suffering from severe solvency
problems.
BSP initiatives and policy thrusts
Amidst this global crisis, the Philippines has indeed remained resilient and steadfast. How
have we been able to accomplish this?
Let me quickly go over the BSP's initiatives to mitigate the impact of the crisis. And then
conclude with our policy thrusts going forward.
To ensure liquidity in the financial system, the BSP opened the US dollar repo facility to
augment dollar liquidity in the foreign exchange market and ensure the ready availability of
credit for imports and other legitimate funding requirements. The BSP also increased the
budget for the peso rediscounting facility to P60 billion. Regular reserve requirements on
bank deposits and deposit substitutes were reduced by two percentage points. To ensure
continued access to financing of small businesses, the BSP launched its Credit Surety Fund
(CSF) Program which provides guarantee to small cooperatives with good track record but
without credit history.
The BSP was also quick in bolstering confidence in the financial system, through timely
communication with financial institutions and market participants on the minimal exposure of
the banking system to troubled financial assets, such that the impact of the global financial
crisis on the Philippines has not been significant.
Monetary policy in 2009 will continue to pursue prudent rate movements mindful of price
stability as the primary mandate. With the easing in the prices of oil and non-oil commodities
in the world market, inflation is expected to further decelerate and be within the target range
of 2.5-4.5 percent in 2009. This will give some flexibility to monetary policy to support growth.
An accommodative monetary policy stance is expected to help ensure greater availability of
credit and reinforce market confidence. However, given possible upside risks to inflation, a
more measured adjustment of policy rates is appropriate.
Banking sector policies will be geared towards improving the regulatory framework, mindful
of the need to protect consumers and investors. Key financial and banking sector reforms will
be sustained in pursuit of greater efficiency, better risk management, stronger capital base,
improved disclosure and transparency practices, and enhanced corporate governance
standards in the banking system.
The BSP's external sector policy will remain focused on ensuring our external vulnerabilities
are limited. We expect to continue to post a surplus in our BOP, mainly still due to steady OF
remittances and receipts from the BPO sector. This will give us the opportunity to further beef
up reserves for self-insurance. We will continue to pursue a market-determined exchange
rate to allow us to maintain external price competitiveness. We will also engage in policies
that would sustain a manageable external debt profile.
The current turmoil underscored the importance of comprehensive and globally coordinated
policy responses. Recognizing this, the BSP has been actively consulting with its regional
peers to share information and discuss emerging developments and policy alternatives.
Conclusion
As I mentioned when I began my remarks, an overarching theme of this crisis is the law of
unintended consequences. Is it possible to avoid this going forward?
Frederic Bastiat, a 19th century French economic journalist, once said, "there is only one
difference between a bad economist and a good economist: the bad economist confines
himself to the visible effect; the good economist takes into account the effects that can be
seen and those effects that must be foreseen".
It may be difficult to perfectly foresee things but this should not discourage us from trying.
Thus, I encourage all of us in this venue to remain positive, yet vigilant for any circumstances
that could come our way. The BSP, for its part, will remain committed and continue to put
forth monetary policy actions and banking reforms that will allow our economy to withstand
the road blocks comprising panics, crises and other changes in the horizon.
Let us keep our eyes steady on the road ahead and gear up. The BSP looks forward to
continued partnership with the Chamber. This will certainly help enable our economies
navigate the global financial crisis towards an economic recovery of renewed confidence and
regained trust in markets.
Thank you very much.