Nestor A Espenilla, Jr: Collective and individual competitive
advantages
Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central
bank of the Philippines), at the POWWOW 2017, Cebu City, 17 November 2017.
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PhilExport Cebu Chairman Apolinar Suarez, Jr.; President Mr. Nelson Bascones; officers and
members of PhilExport Cebu; special guests; ladies and gentlemen Maayong Gabii. I am grateful
for the invitation to speak about the BSP's policies and thrusts, my first as BSP Governor, before
this distinguished group of business leaders and exporters.
A major industrial hub, Cebu plays a crucial role in Philippine economic development. With at
least 27 IT Parks and Centers; 7 manufacturing zones; 2 tourism economic zones; and 1 agro
industrial economic zone, Cebu is a dynamic economic hub.
This evening's theme has three action verbs. Individually, the words sound like commands. As a
unified phrase, it is a battlecry. "Create. Innovate. Compete."
Cebu is no stranger to the power of creativity and innovation. Because of efficiency and raw
talent, the level of craftsmanship and creativity of the Cebu furniture industry, for example, allows
it to produce high quality and unique custom-built pieces that cater to medium- to high-end
markets, selling twice or thrice more furniture than competitors from Vietnam and China.
To outperform others - businesses must be creative and innovative. But creativity and
innovation should not be pursued for their own sakes. (This is a reminder I have relayed to the
BSP and the banking and financial sectors many times).
Efforts should be focused and strategic. In the context of business, creation and innovation
should be concentrated on, and mindful of, competitive advantage. This brings about strategic
competitiveness.
The Philippines' competitive sdvantage
Allow me to relay data on the Philippines' positive economic position which enables it to compete
strategically in the global market.
Philippine macroeconomic fundamentals are solid and robust. These support local exporters and
entrepreneurs. We have had uninterrupted GDP growth for 75 consecutive quarters (more than
18 1⁄2 years). GDP expanded 6 percent annually during the past five years.
Prospects are favorable and growth is predicted to be between 6.5 to 7.5 percent this year and
7.0 to 8.0 percent over the medium-term. We are well on track with the recently announced third
quarter GDP at 6.9 percent!
Since the BSP adopted the inflation targeting framework in 2002, inflation has become more
manageable, with latest baseline forecasts showing it will likely settle around the middle of
government's target range of 2 - 4 percent in 2017 to 2019.
Further, Philippine banks continue to be sound, stable and more efficient. The non-performing
loan (NPL) and non-performing asset (NPA) ratios of universal and commercial banks have
significantly declined from around 15 percent in 2001 to less than 2 percent in August 2017.
Meanwhile, the capital adequacy ratios of banks are well above the BSP minimum as well
international norm. Almost double, in fact.
On the exchange rate, the peso is expected to be broadly stable and market-determined, backed
by strong underlying economic fundamentals, ready market access, sustained decline in external
debt position, and robust international reserves. At the current range, export price
competitiveness has improved back to 2008 levels as measured by the real effective exchange
rate (REER) index. The recent controlled and moderate depreciation of the peso from last year is
good for the economy.
As of end-October 2017, our foreign exchange reserves stood at US$80.6 billion, equivalent to
8.4 months of import cover (around 4 times larger than our total external debt). The sustained
structural inflows from overseas Filipino remittances, business process outsourcing sector,
foreign investments, tourism receipts, and the strong recovery in exports, insulate us from
foreign exchange crisis.
Exports on the road to recovery
The past two years have been challenging for our exporters. There was a decline in global trade
and growth. Our goods exports contracted by 5.3 percent in 2015 and 2.4 percent in
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2016 . These difficulties were brought about by a range of factors such as: (1) fragile and uneven
economic growth among major advanced and emerging economies; (2) bouts of financial market
turbulence due to divergent monetary policies adopted by developed countries; and (3) cutbacks
in capital investments because of the plunge in international oil and commodity prices.
But data for the second half of 2016 to the present show increased trade momentum! Goods
exports expanded by 12.2 percent during the first nine months of 2017, owing to improved
external demand from major trading partners such as the United States, Hong Kong, China,
Thailand, South Korea and the European Union.
There is an 8.6 percent increase in outbound shipments of manufactured goods. These include
electronics; machinery; transport equipment; garments and others. Exports of mineral products
and agro-based products also recorded significant year-on-year rebounds of 74.1 percent and
19.9 percent respectively. This resurgence boosts prospects for the exports sector.
Vigilance and leveraging on competitive advantage
Ladies and gentlemen, the Philippine economy is showing sustainable growth momentum. It is
also more resilient, benefitting from years of deliberate structural reforms. But this does not
warrant complacency. We must all stay focused and pursue bolder reforms if we hope to catch
up with our neighbors.
A strategic approach is important given megatrends in the economic landscape. These trends
include demographic changes, rapid urbanization, climate shifts and the rise of disruptive
technologies. Our increasing population of tech-savvy millennials demands innovation as they
expect faster and more streamlined products and services.
The need for businesses and government to "up the ante" has never been more imperative.
As a country, we have unique natural endowments on which we can leverage: a young, skilled
and mobile workforce; a predominantly English-speaking population, distinct and world-class
Filipino craftsmanship and ingenuity. These will set our brand apart. But we have to take action
to transform these to strategic competitive advantage.
BSP's continuity plus-plus achieving competitive advantage
As a central bank, our traditional focus is to maintain price and financial stability. When I was
appointed BSP Governor last July, I committed to the continuity of policies that brought about the
sound macroeconomic stability we now enjoy. At the BSP, we vigilantly monitor vulnerabilities,
formulate and implement monetary and financial sector policies and reforms supportive of
economic development.
Upon my appointment, I also said that continuity will come with a "plus plus." This thrust is
premised on the same factors of rapid technological changes and shifts in the economic and
financial landscape that prompt innovation in the private sector. These "plus plus" initiatives
support national competitive advantage, encourage cost-effectiveness, differentiation and focus.
As part of the "plus plus" agenda, we are pursuing more ambitious foreign exchange (FX)
reforms, consistent with our efforts to reduce the cost of doing business and increase
efficiency. These include rationalizing and further liberalizing foreign exchange rules. Currently,
we are drafting a set of circulars that will remove prior BSP approval for most private sector
transactions. We aim to simplify registration processes, significantly reduce documentary
requirements, and enhance data capture for effective policy decision-making.
The amendments to FX regulations is just part of a broader thrust for a better organized FX
market. Over the medium term, we shall be rolling out a sequence of reforms that will increase
FX market transparency, improve price discovery, and enhance market conduct.
With these reforms, we hope to encourage FX flows from the parallel market to the formal
market. Even as we strengthen oversight over Money Service Businesses (MSBs), we will
streamline FX requirements for the banking system to reduce market fragmentation and increase
FX liquidity. This allows individuals and businesses greater and easier access to foreign
exchange.
Ultimately, a deeper FX market will enhance resilience of our domestic economy against external
shocks. The goal is to increase its ability to absorb large flows even as the BSP continues to
pursue a market-determined exchange rate and allow greater exchange rate flexibility.
We believe competitiveness can also be achieved on the firm and country-level through
development of alternative sources of funding. In this regard, we are collaborating with other
government agencies and private stakeholders to take measures to deepen our domestic debt
market so that you, our esteemed businessmen and exporters can have a viable alternative to
bank borrowing, supportive of economic growth.
Taken together, the FX and domestic debt market development initiatives are game changing
reforms as these will increase availability of more financial products, especially hedging
instruments. This is something that will benefit exporters, since hedging products can help
protect you against interest rate and FX volatility. Hedging allows you to focus on your core
business.
Another major reform we are pursuing is the digitization of the financial system.
Last November 8, 2017, the Philippine Electronic Fund Transfer (EFT) System and Operations
network, also called PESONet, was launched at the BSP. The PESONet is the first Automated
Clearing House (ACH) under the National Retail Payment System (NRPS). The NRPS lays down
the principles that guide BSP's strategic initiatives to modernize our retail payment system and to
shift from a cash-heavy to cash-lite digital economy.
The PESONet will be the electronic alternative to the paper-based check system. Businesses
will be able to conveniently transfer funds maintained with banks and other non-banks such as
electronic money issuers to any other account in our financial sytem. Full inter-operability. Good
for payroll. Good for paying suppliers. Good for paying utilities and other services. In addition to
the convenience of inter-operability, PESONet allows funds to be made available within the same
banking day. This provides better liquidity management opportunities for private businesses.
Moreover, payees receive the transferred funds in full and do not pay fees for electronic credit to
their accounts. Indeed, costs will go down as we move away from a cash-heavy economy.
We are also working on the launch of another priority ACH, the real-time low value push payment
scheme called InstaPay. InstaPay is designed to facilitate small value payments and enable
merchants to accept digital payments from customer on real-time basis using cards or any
digital device, especially a mobile phone scanning a QR code.
At the BSP, we have strategically opened up the banking system to competition. For instance,
since the enactment of the Foreign Banks Liberalization Law in 2014, the Monetary Board has
approved 11 foreign bank applications. Further, as early as 2004, we have adopted a "test and
learn" approach, now called regulatory sandbox, to allow fintech innovations into our
system. This approach encourages competition coming from new players, whether from banks
or non-banks such as fintech companies.
Why is competition important? Healthy competition can make services more affordable, and
expand consumer choices. The bottom line is that competition motivates banks to work harder to
serve their customers. Banks are encouraged to go beyond just serving big blue-chip enterprises
and companies. With greater competition, banks are compelled to be creative, be innovative, and
go deeper into the market to work harder to better serve the public. Ultimately, increased
competition increases financial inclusion. MSMEs will be a big winner.
Concluding remarks
Last Wednesday marked the conclusion of the 31st Association of South East Asian Nations
(ASEAN) Summit and the Special Celebration of ASEAN's 50th anniversary. All throughout the
year during various ASEAN related meetings, collective calls for partnership and greater
economic integration were made. I came to Cebu directly from Singapore wher I signed a fintech
cooperation agreement with my counterpart. Deepening our economic ties, as shown by rising
intra-regional investments and intra-regional trade in final goods within Asia, is critical not only to
cushion the potential negative impact of policy uncertainties from the global market, but also
achieve and maintain our external competitiveness.
Here at home, greater collaboration and cooperation among ourselves - private businesses,
firms and government agencies - will reinforce our competitive position. As you know, the BSP
actively engages exporters through the regular conduct of the Conference on Gearing Up for
External Competitiveness (CGUEC) and the annual Exporters' Forum. We also conduct
consultative one-on-one meetings. These serve as venues for discussing prospects, as well as
plans and initiatives for the sector. In fact, we held one conference here in Cebu last May 2017.
This was followed by a series of consultation meetings with some of Cebu's top exporters of
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furniture, processed fruits, and garments in June 2017. We hope to continue this active
partnership with you.
On behalf of the Monetary Board and the BSP, I congratulate PhilExport for its 25 years of helping
exporters succeed in international trade, and taking the lead in building strong alliances among
export-related industries, government agencies, and non-governmental organizations. Daghang
Salamat at mabuhay tayong lahat!