Amando M Tetangco, Jr: The Philippines - macroeconomic outlook for
2008
Speech by Mr Amando M Tetangco, Jr, Governor of the Central Bank of the Philippines
(Bangko Sentral ng Pilipinas), at the oath-taking of the officers and directors of the Economic
Journalists Association of the Philippines, Makati, 11 February 2008.
* * *
President Donna Gatdula, other distinguished officers and members of the Economic
Journalists Association of the Philippines, special guests, friends, good evening.
It is a great pleasure for me to address this induction ceremony and this gathering of highly
informed watchers of the Philippine economy. As economic journalists, you continue to be a
major channel for transparency and provider of key economic information for the business
community. From the point of view of the BSP, you have also played a vital role in our efforts
to communicate the basis and implications of monetary policy to the markets and the general
community.
I am doubly pleased because I see many familiar faces, including the relatively new reporters
on the beat and those I met long before I became governor. But don't worry - I will not
disclose how long ago that was.
Instead, I will focus on the topic you have asked me to discuss tonight: the macroeconomic
outlook for 2008.
To put things in perspective and to provide context for our outlook, I will begin my
presentation with a review of the past years.
Economic developments
I am sure you have read or heard in fact some of you have written that the Philippines is now
experiencing the most stable economic environment in more than two decades. This is not
just a "tale". The numbers support this story. The Philippine economy grew at the highest
GDP growth rate of 7.3 percent in three decades in 2007. This growth rate was above the
Government's target of 6.1-6.7 percent set for 2007. This was boosted by the expansion of
services and the impressive performance of both agriculture and industry. On the demand
side, growth was driven by government consumption and investments.
This strong growth was achieved in a period of benign inflation. Headline inflation last year
stood at 2.8 percent, the lowest in 20 years. This is now comparable to developed
economies.
In turn, low inflation has resulted in lower interest rates, again the lowest in 21 years. This
has brought down the cost of money for borrowers, whether personal or corporate.
In this respect, we achieved a good convergence of high growth and low inflation.
In addition, our external position was at its best in 2007. The overall BOP position closed
2007 with a surplus of US$8.6 billion, the highest on record. This reflects improved market
sentiment as evidenced by higher foreign investment as well as continued vibrancy of
overseas remittances and other services receipts. This helped raise the country's gross
international reserves (GIR) to a record high of $34.4 billion as of end-January 2008. And
with the weakening dollar, the peso emerged as one of Asia's stronger currencies.
These developments were matched by positive indicators pointing to a stronger Philippine
banking sector. Bank deposits were up while bank capitalization exceeded both domestic
and international standards. Bank lending to most sectors of the economy expanded last
year and bank asset quality improved with NPL ratio closer to its single digit, pre-crisis level.
Another positive development on the domestic front was the solid gains in the National
Government's fiscal consolidation program. Revenue collections improved while deficit and
debt levels dropped.
Indeed, by many performance measures, 2007 was a most auspicious year for the Philippine
economy.
Outlook and challenges
Looking forward, can we sustain this positive momentum? What do we see in 2008 and
beyond?
Well, we expect economic growth to continue, driven by a broad-based expansion led by the
services sector as well as robust growth in aggregate demand. In fact, as reckoned by the
Development Budget Coordination Committee (DBCC), GDP likely to grow at a healthy pace
of about 6.3-7.0 percent in 2008.
On the monetary front, emerging BSP forecasts continue to indicate a manageable inflation
path. We expect to see average inflation settling within the 2008 target of 4 percent, plus or
minus one percentage point. This target is supported by slowing growth in domestic liquidity,
a strong peso, moderate risks to agricultural production, and well-anchored inflation
expectations. For 2009, we see inflation within the 3.5 percent plus or minus one percent
point range.
Likewise, the external payments position is expected to remain a source of strength for the
economy over the near term. In particular, dollar inflows from remittances and foreign
investments are expected to remain strong. This should enable us to further build up our
cushion of international reserves.
We also expect to see a stronger banking system in 2008 as banks further increase their
capitalization and improve their ability to anticipate and manage risks.
Ladies and gentlemen of EJAP, this general outlook is dependent of course on how we
manage the challenges that we face.
The first is slower world economic growth. This emanates from expectations of subdued
growth in the US due to difficulties in the mortgage market and weaker consumption
spending stemming from high energy prices and falling house prices. For the Philippines, this
could mean weaker exports and lower remittance receipts. However, we expect that
sustained strong domestic demand and increased investments will help temper the impact of
the global slowdown.
The second is volatile and high global prices of oil and other commodities. If these
commodity prices remain high for a protracted period of time, it could threaten our inflation
outlook.
The third is the global financial turbulence. Although the global financial markets appear to
have stabilized, we have yet to see the full impact of the US subprime mortgage crisis. Its
impact on the Philippines has been limited; however, an economic slowdown in a major
trading partner such as the US could adversely affect our export sector, while movements in
interest rates could generate risk aversion against emerging markets including the
Philippines. So far, there has been limited impact on the Philippines but we need to keep
watch of these developments.
The fourth is plentiful domestic liquidity from sustained strong foreign exchange inflows.
While liquidity growth has slowed down as a result of the Bangko Sentral's efforts to siphon
off excess funds from the market, emerging trends in monetary aggregates still need to be
checked, in line with expectations of sustained foreign exchange inflows.
Policy directions
These are serious challenges that we face: the first three are beyond the control of domestic
policy while the last can be influenced by both monetary and fiscal policies. Nevertheless, we
believe that, ultimately, they are manageable.
On the part of the Bangko Sentral our policies will be focused on the following:
A. Monetary policy will remain focused on managing the risks to inflation such as the
likelihood of second-round effects and closely monitoring developments in liquidity
conditions.
B. On the external sector, our policies will be geared toward:
•
ensuring sustainability of the country's external debt;
• maintaining a market-determined exchange rate with scope for occasional
official action in cases of sharp movements in the peso;
• maintaining a comfortable level of reserves; and
•
improving the foreign exchange environment further through forex
deregulation.
C. Banking policy, on the other hand, will continue to focus on three main objectives:
•
promoting a stronger and more stable financial system;
•
developing the domestic capital market to make it more supportive of
investments growth; and
•
providing easier access to funds by small and medium-sized businesses as
well as micro enterprises.
In addition, the Bangko Sentral will continue to foster an environment that will facilitate further
disposal of banks' non-performing assets.
Other key financial reforms will be focused on aligning prudential regulation of the banking
system with international standards and best practices, enhancing our payments system, as
well as strengthening corporate governance standards and market discipline mechanisms.
Meanwhile, microfinance shall continue to be the BSP's program for poverty alleviation, with
collateral-free loans providing the entrepreneurial poor (e-poor) with much needed capital to
start a micro enterprise.
The BSP will also continue to push for the passage of key legislative bills to accelerate the
development of the local capital market and further strengthen the regulatory authority.
In particular, we shall push for the implementation of a centralized credit information bureau
to improve the quality of financial information to investors, expand private sector access to
credit, minimize exposure to risks of financial intermediaries, and lower cost of borrowing.
We will likewise work actively with other government agencies and the private sector for the
completion of critical market infrastructure to enhance system integrity and overall market
confidence.
At the same time, we will intensify our economic and financial education program so that
Filipinos can participate in, and benefit from, our economic gains. In this advocacy, I
earnestly ask for your support. Other Filipinos can participate in opportunities that economic
development brings if such are brought to their attention and they are made to understand its
potential.
This is the reason why we have been conducting nationwide lectures on investment options
for Overseas Filipinos and their dependents. And starting June this year, 11 million public
elementary students will be taught lessons on money management to help them develop the
habit of saving and investing. With this, I hope we can nurture a new generation of financially
literate Filipinos.
Conclusion
Ladies and gentlemen, let me close this message by saying that the Philippine economy is
likely to weather the challenges it faces, both domestic and external. I believe that with the
fundamental strength of the economy backed by the government's firm commitment to
continue to pursue needed reforms, there exists a sound basis for a sustained
noninflationary growth in the country.
Finally, I congratulate EJAP for its continuing program to professionalize business reporting
in our country. I hope your efforts to develop and upgrade the skills of your members will be
successful. In this regard, you can count on us at the Bangko Sentral for support.
Doris, in her introduction of me, referred to my Chinese zodiac sign so let me now complete
that by wishing you all a Happy New year of the Earth Rat! It is my understanding that the
2008 Rat begins a new 12-year cycle as such it promises change, new beginnings and new
attitudes. On behalf of the Bangko Sentral, therefore, I wish all the new officers of EJAP, as
you face a new "year", a fruitful and successful term.
Mabuhay ang EJAP! Thank you all and good night.