Amando M Tetangco, Jr: The Philippine economy - facing up to the
challenges
Speech by Mr Amando M Tetangco, Jr, Governor of the Central Bank of the Philippines
(Bangko Sentral ng Pilipinas), at a meeting, Makati, 11 August 2009.
* * *
Executive Director Robert Sears, executives of the American Chamber of Commerce of the
Philippines, distinguished guests, ladies and gentlemen, good morning to all of you.
It is a pleasure to be here this morning to share with you the experience of the Bangko
Sentral ng Pilipinas in responding to the challenges posed by the recent global financial
crisis, taking into consideration the current global and domestic scenarios and emerging
outlook.
My short presentation will basically cover three parts:
•
First, a quick look at the global and domestic economic situations;
•
Second, the latest outlook for the economy and some key challenges; and
•
Lastly, the responses that the BSP undertook to mitigate the impact of the crisis and
the BSP's policy directions moving forward.
Let me start with a quick review of what is happening globally and domestically.
In its latest World Economic Outlook (WEO) Update released in July 2009, the International
Monetary Fund reported that the world economy is stabilizing, helped by unprecedented
macroeconomic and financial policy support by fiscal and monetary authorities worldwide.
However, the recession is not yet over and the recovery is likely to be sluggish.
As a result, global economic growth during 2010 is now projected to be about 0.5 percentage
points higher than projected in the April 2009 issue of the WEO. However, the advanced
economies as a group are projected to show a sustained pickup in activity only beginning the
second half of 2010.
A closer examination of some high-frequency indicators like industrial production and
merchandise exports point to a return to a modest growth in global GDP beginning in the 2nd
quarter of 2009.
Similarly, we also see a favorable outlook for prices in general. The continued weakness of
the global economy for the past several months has put a downward pressure on prices.
Measures of both headline and core inflation are on a downward trajectory, for the global
economy as a whole as well as for advanced economies and emerging market economies.
Although there are stronger disinflationary forces in some regions of emerging economies,
the risk of a sustained deflation is expected to be small, as core inflation and inflation
expectations in most major economies are still holding in the 1-2 percent range.
Any sharp movements in commodity prices bear some watching if sustained. To date, food
prices have been subdued so far, oil has been range-bound but metal prices are still surging.
Based on a composite index which captures credit conditions in three financial market
segments (banking, securities markets, and exchange markets), there has been a marked
decline in financial stress for advanced and emerging economies since the beginning of
2009.
Across Asia, output growth performance was mixed, with more open economies - such as
Taiwan and Singapore - experiencing the brunt of the global economic downturn.
Domestically, the story has been that of economic resilience. The slowdown in economic
activity in the Philippines thus far has been moderate relative to that of some other
economies in the region.
This resilience has been acknowledged by ratings agency Moody's Investors Service when it
upgraded the Philippines' credit rating by one notch, citing the country's healthy financial
system and resilience against the impact of the global recession. The country's outlook was
also changed to "stable" from "positive."
The slowdown in the growth of domestic output to 0.4 percent, in the first quarter of 2009,
was due to lower growth in private spending, coupled with a contraction in exports and
capital formation (year-on-year).
Inflation has continued to ease. The slowdown in global demand has led to lower
international oil and food prices, which have dampened inflation pressure domestically as
well.
Headline inflation had fallen to 0.2 percent in July, the lowest since March 1987. This brings
the year-to-date average down to 4.3 percent which is within the target range for 2009.
Similarly, core inflation, which excludes specific food and energy items to measure broader
price pressures, also declined to 3.6 percent (July 2009) from 6.9 percent in January 2009.
The downward trajectory of inflation was driven primarily by two factors: (1) base effects due
to record-high prices of commodities last year and (2) relatively subdued demand. This trend
may have reached its trough in July, as inflation is expected to rise gradually during the
remaining months of this year and the next, but still remain within target ranges for the policy
horizon.
Our external payments position continues to be manageable. The healthy external balance
has been supported by steady levels of remittances of overseas Filipinos as well as higher
services receipts, particularly from business process outsourcing. In turn, this has allowed us
to build up our dollar reserves. One of the lessons we learned from the 1997 Asian financial
crisis was the value of building up our international reserves for self insurance.
Based on revised data, as of end-July 2009, our reserves have risen to US$40.0 billion. This
is enough to cover about 6.9 months of imports of goods and payments of services and
income, or alternatively, it could cover our short-term external debt payments about three
times over.
Thus, even as we face a slowdown in external demand, the stronger external liquidity
position provides us some cushion against shifts in capital flows.
Our financial markets are showing some signs of recovery. Credit spreads have narrowed,
the peso has stabilized and its volatility has decreased, and the stock market is on an
upswing.
Our banking system has remained sound and stable.
The banking system's asset base has been expanding steadily, supported by sustained
growth in deposits. As of end of April 2009, the total resources of the banking system stood
at P5.8 trillion.
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 remained resilient, although with
some moderation of late.
Banks have remained adequately capitalized at levels above both the BSP-regulatory
requirement of 10 percent and the international (BIS) standard of 8.0 percent.
Bank lending growth has remained healthy, in part reflecting the easing of monetary policy
since the fourth quarter of 2008. Credit flows continued to support the productive sectors of
the economy even against the backdrop of tight liquidity conditions in global financial
markets.
It is the BSP's commitment to ensure that liquidity conditions are supportive of the spending
and investment needs of firms and households, while keeping a watchful eye on price
stability.
The recent lowering of the risks to inflation allowed the BSP to cut its policy rates by a total of
200 basis points since December 2008. The BSP's decision to ease the monetary policy
stance was based on the Monetary Board's assessment that inflation would stay within target
over the course of the policy horizon.
This 200 basis-point cumulative reduction in the policy rate will help stimulate economic
growth or help moderate the slowdown by bringing down the cost of borrowing and reduce
the financial burdens on firms and households. This will help us avoid or at least mitigate the
negative feedback loop from weakening economic conditions to the functioning of the
financial sector. Lower policy rates would also have the effect of shoring up business and
consumer confidence.
The latest inflation forecasts continue to show subdued price pressures, with headline
inflation expected to settle at around the middle of the target range for 2009 and at the lower
bound of the target range for 2010. On balance, downside pressures on prices predominate
due mainly to expectations of a marked deceleration in global economic activity, which is
expected to continue to dampen imported inflation and inflation expectations, and weaker
domestic demand conditions.
In addition to the reduction in its policy rates, the BSP also moved to ensure that there is
sufficient liquidity in the system. The BSP:
1. Enhanced the existing peso repurchase agreement (repo) facilities through relaxed
valuation and a broader list of acceptable collaterals;
2. Established a 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;
3. Reduced the regular reserve requirement by two percentage points on 14 November
2008;
4. Liberalized rediscounting guidelines which include increasing the rediscounting
budget to P40 billion in 14 November 2008 and to P60 billion on 02 March 2009,
aligning rediscounting rate with the RRP rate, easing the NPL ratio requirement and
increasing loan value of all eligible papers; and
5. Launched the Credit Surety Fund (CSF) Program which provides guarantee to small
cooperatives to ensure continued access to financing of small businesses.
The BSP has also acted swiftly to bolster confidence in the financial system, through timely
communication and greater transparency.
Moreover, to safeguard the confidence in the banking system, the Monetary Board approved
on 30 October 2008 the guidelines allowing financial institutions to reclassify financial assets
from categories measured at fair value to those measured at amortized cost. Financial
institutions were allowed to reclassify their investments in debt and equity securities from
their Held for Trading or Available for Sale categories to the Held to Maturity or the Unquoted
Debt Securities Classified as Loans.
The BSP also allowed banks not to deduct unrealized mark-to-market losses in computing
for the 100 percent asset cover for FCDUs, effective until 30 September 2009). This reduced
the need for banks to source dollars from the foreign exchange market.
What lies ahead for the Philippine economy? In the succeeding frames, we examine the
outlook for this year and the challenges ahead of us.
This table shows the domestic outlook for 2009, based on the macroeconomic assumptions
agreed upon by the Development Budget Coordination Committee.
With the bottoming out of the crisis, the economy is forecast to grow moderately at a range
between 0.8 and 1.8 percent in 2009 (GDP) to provide the backdrop for the improvement in
growth prospects in the coming year.
As mentioned earlier, inflation is expected to further decelerate in 2009. This has given some
flexibility to monetary policy to support economic activity, as long as inflation remains on
target.
In 2009, the BOP is expected to again post a surplus, supported in part by three factors:
•
Remittances which are expected to stay at the 2008 level, or possibly even surpass
it a bit;
•
Revenues from BPO services which will also provide some lift to the current
account (actual revenues for 2008 reached US$6 billion). The BPO industry is poised
to grow on account of strong demand for back office, engineering and financial
services; and
•
Export revenues, while still expected to contract, are showing some signs of life, i.e.
the book to bill ratio has increased since February 2009.
The GIR as of end of July 2009 has already surpassed the target range for 2009.
The peso which is assumed to stay at an average of between P46 to P49 per US dollar will
be supported by the favorable external payments position.
Inflation expectations remain well-anchored.
The BSP survey of private economists indicates that the mean inflation forecasts to be at 3.5
percent for 2009, 4.8 percent for 2010 and 4.8 percent in 2011. These were all lower than the
forecasts in the previous quarters.
Broadly, similar numbers are yielded by the Asia Pacific consensus forecasts: at 3.6 percent
for 2009 and 4.4 percent for 2010.
Given this scenario, what are the likely directions of the monetary policy going forward?
The BSP's policy thrusts will continue to be aimed at ensuring that the headway achieved in
nurturing a resilient economy and a sound banking sector will be sustained even in the face
of the challenges.
First, on monetary policy, we will maintain vigilance over price developments, since this is the
BSP's primary mandate. As the risks to the domestic economy move away from inflation
toward economic growth, we have had more flexibility in our policy settings. The BSP will
continue to pay close attention to signs of global demand recovery as well as to a possible
build-up in commodity price pressures over the medium term, with a view to undertaking
timely action towards a non-inflationary recovery in economic activity.
Moreover, the BSP stands ready to undertake policy actions that will strengthen the public's
confidence in the financial system. We will sustain key reforms that will strengthen
capitalization, supervision and market discipline for greater efficiency, more effective risk
management, stronger capital base and improved corporate governance standards in the
banking system.
In the external sector, our policies will continue to be directed at maintaining a
marketdetermined exchange rate with scope for occasional official action to address sharp
movement in the exchange rate; maintaining a comfortable level of reserves as
selfinsurance; and ensuring the sustainability of our external debt.
Let me add a few notes on the likely path of monetary policy in the near term.
As the global economy recovers, the eventual strengthening in domestic economic activity
will require a controlled shift in the direction of the policy stance from the current easing
mode.
The timing and speed of the shift to a tighter or less accommodative policy stance will
depend on the inflation outlook as well as on the sustained pick-up in real sector activity, as
the full impact of prior fiscal and monetary stimulus takes effect.
It is important to remember that the type of monetary easing undertaken so far by
emergingeconomy central banks like the BSP has been more conventional compared to that by the
central banks of advanced economies. Central bank balance sheets in advanced economies
have grown more sharply in the past year as a result of unprecedented "quantitative" easing
and significant credit measures. By contrast, we relied largely on conventional easing
measures such as lower policy interest rates and reserve requirements - although we did
implement liquidity enhancing measures as well.
Looking further ahead, however, one important risk that we are seeing for monetary policy -
apart from the volatility of commodity prices - is the potential resumption of cross-border
capital flows, which may complicate the shift to a tighter policy stance.
The emerging signs of stabilization of global financial markets and economic conditions are
expected to encourage the gradual return of capital flows to Asia. With the ongoing
realignment in risk perceptions, flows to emerging economies - particularly those with sound
macroeconomic policy and good growth prospects - are expected to improve in the second
half of 2009 and in 2010.
Capital inflows help relax the foreign exchange financing constraint of the domestic
economy. For this reason, they can have a positive impact on the external accounts,
contribute to liquidity expansion and help lower domestic interest rates. However,
policymakers will also need to be prepared to face the possibility of exchange rate
appreciation and increased liquidity growth, along with associated concerns. The key
challenge is to conduct monetary policy so as to ensure that the additional resources
provided by rising foreign capital inflows do not lead to inflationary pressures or to asset price
bubbles.
As economic conditions improve and we enter another phase of the business cycle, policy
imperatives come into the fore.
The challenge is to address the inherent procyclicality of the financial system by
strengthening the macro-prudential framework for monetary policy. The long-term
commitment to price and financial stability imposes the need to require better risk
management within the financial system. On its part, the BSP has already issued its Internal
Capital Adequacy Assessment Process (ICAAP) guidelines which aim to strengthen the risk
culture within banks. Likewise, the BSP is in the process of beefing up its macro-surveillance
capabilities. Mindful of the lessons brought by the global financial turmoil, the BSP has
stressed the need to operationalize the guidelines on liquidity risk management. Moreover,
the BSP will continue to monitor proposed further enhancements* and adjustments in the
Basel II framework to make capital requirements countercyclical.
Another challenge is to sharpen the central bank's communication toolbox to include not only
management of expectations but also management of risk aversion. The key point is to
maintain and enhance the credibility of the monetary and financial policies such that
expectations are well-anchored and concerns of risk aversion do not become self-fulfilling.
Finally, I want to conclude my presentation by emphasizing that:
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The full recovery of the global financial system may take some time;
•
With the global economy likely to be going at a sub-par rate for some time, the key
challenge is to continue to provide support domestic demand. As monetary policy has
eased, fiscal policy will also play a key role in sustaining domestic economic activity.
•
The BSP will continue to calibrate its actions appropriately to help achieve faster
recovery of the domestic economy always taking into consideration the inflation
outlook.
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- Moody's Investors Service upgraded the Philippines' foreign and local currency
government ratings to Ba3 from B1, the country ceiling for foreign currency bank
deposits to Ba3 from B1 and the country ceiling for foreign currency bonds to Ba1 from
Ba3. The change in the foreign currency bond ceiling is based on a revised assessment
of the risk of an external payments moratorium to low from moderate.
- The outlook on the ratings is stable. The upgrade was prompted by the relatively high
degree of resiliency exhibited by both the country's financial system and external
payments position in the face of the global financial and economic crises. International
reserves of the central bank are at a historic high and exceptional policy measures have
not been required to shield the banking system from global shocks.