Amando M Tetangco, Jr: The outlook for the Philippine economy and policy
directions in 2006
Speech by Mr Amando M Tetangco, Jr, Governor of the Central Bank of the Philippines, at the regular
membership meeting of the Rotary Club-Makati Central, Manila, 24 March 2006.
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Distinguished officers and members of the Rotary Club of Makati Central, friends, ladies and
gentlemen, good afternoon.
It is a great pleasure to join your regular membership meeting today and speak on the Philippine
economic outlook and its implications for the Bangko Sentral's monetary and banking policies. I know
we share the same goal of economic prosperity for more of our people, but I also realize that we have
different roles to play in meeting that goal. An instructive way to be on the same roadmap is for us to
consider together the recent economic developments and prospects and anticipate potential
challenges along the way.
Recent economic developments
There seems to be a general sense of renewed, although cautious, optimism about economic
prospects for the Philippines at present. I believe this is largely because last year, our economy
continued to prove its resilience and fundamental strength. We had a respectable output growth of 5.1
percent. Although this magnitude compares favorably with what our neighbors in Asia recorded, I
know that this has to be improved to make a dent in combating poverty in the Philippines.
Second, we achieved growth with a relatively subdued inflation rate. The emphasis is on subdued.
Unlike the other countries, we have stopped subsidizing the oil industry since 1998. Our consumer
basket remains dominated by weather-sensitive food commodities. Yet, with real growth of over 5
percent, we average inflation rate in the Philippines was kept at 7.6 percent in 2005. We can compare
this with Indonesia (10.4 percent) and Thailand (4.5 percent).
Third, the government's overall fiscal consolidation efforts have already shown good results. The
National Government budget deficit stood at P146.5 billion for 2005, well below the target for the
period, and certainly lower compared to the year-ago level. The progress made in fiscal consolidation
has continued this year as the government was able to curb the budget deficit for the first two months
of the year.
Fourth, our external payments position achieved a big surplus in 2005. This was made possible by the
sustained dollar inflows from OFWs, foreign direct and portfolio investments, and export receipts.
The significant increase in remittances and investments allowed the BSP to build up its international
reserves to a new record high level of US$20.6 billion. At the same time, with all those big current and
capital inflows, a stronger peso is another natural consequence.
Fifth, the economy continues to improve its external indebtedness picture. Medium- and long-term
debt liabilities comprise the bulk of the country's external debt. Key debt service ratios have also
continued to improve, indicating better manageability and sustainability of the country's external debt.
Finally, another welcome development is the sustained improvement in the soundness of our banking
system. Asset quality of banks continued to improve. Bad loans ratio has declined to single-digit level
and is at its lowest in eight years.
Outlook and challenges
Despite the recent gains in macroeconomic performance and economic reforms, we remain conscious
of the risks and challenges to the economic outlook. On the part of the BSP, we will continue to
address the challenges attendant to our twin responsibilities of conducting sound monetary policy and
banking supervision. The BSP will continue to address the risks to inflation and inflation expectations;
strengthen the external position, and sustain the pace of reforms in the financial sector.
The main challenge for us is to effectively manage inflation and inflation expectations. We see average
inflation exceeding the government's inflation target of 4.0-5.0 percent this year given continued
upside risks. Oil prices are expected to remain high relative to their historical trend while the
implementation of the additional two percentage points in the vat rate is expected to have a one-off
impact on prices. In the second half of 2006, we expect inflation to follow a decelerating trend as the
short-lived impact of the EVAT on prices of goods and services tapers off. Easing food prices, given
improving weather conditions, should also help tame non-food price pressures.
The sustained appreciation of the peso owing largely to strong dollar inflows should also help to keep
the inflation path in check. The continued dollar inflows, however, also imply a risk of a renewed surge
in liquidity growth as inflows are converted into pesos and absorbed by the banking system.We will
need to monitor this closely, together with the expected narrowing of interest differentials, as they can
adversely affect inflation.
All of these risks make monetary policy a difficult task. But we have done our homework much earlier.
The BSP carefully calibrated monetary policy over the past year to be able to establish a balance
between price stability and economic growth. Policy rates were adjusted to guide inflation expectations
downward.
We have also fine tuned our existing credit policies to ensure consistency of BSP credit with monetary
policy. Towards this end, we issued new guidelines on the BSP's grant of rediscount and emergency
loans and other advances to banking institutions. We likewise continue to improve our early warning
systems to effectively manage risks and ensure macrostability.
Monetary policy going forward will proceed on a cautious footing. The BSP will keep a close eye on
incipient inflationary pressures, especially those coming from the demand side, and stand ready to
undertake the necessary monetary action in a timely manner. The public can expect us to be vigilant in
ensuring that these risks do not undermine economic growth.
As a complement to monetary measures, direct action to address supply-side risks should remain a
key policy priority. To this end, the BSP will intensify further representation with relevant government
agencies in support of supply-side intervention measures to: (1) facilitate distribution of basic goods
and services to final end-users; (2) promote energy conservation and efficiency; and (3) support
exploration and use of alternative/indigenous energy sources.
Going forward, external sector policy will focus on further sustaining our strong external position.
Specifically, the BSP will focus on maintaining a comfortable level of reserves and monitoring closely
the country's foreign borrowings. Moreover, we will continue to support a market-determined exchange
rate. We will not lean against the wind but will address short-term volatilities that will affect the
decisions of economic agents.
With respect to the financial sector, we expect the banking industry to be more dynamic, competitive
and stable. With the impending extension of the SPV Law, the BSP aims to further cut down the
banks' non-performing loans by another P100 billion. Over the medium term, we expect the NPL ratio
of banks to be further trimmed to the pre-Asian financial crisis level of 4 percent as we continue to
foster an environment that will facilitate further disposal of banks' non-performing assets. Just this
month, the Monetary Board approved the guidelines allowing banks to enter into Joint Venture
Agreements (JVA) with real estate development companies for the disposition of the banks' foreclosed
real estate property. The BSP hopes that this initiative will provide banks with effective means of
reducing their NPA holdings. The asset clean-up of banks should spur credit and investments,
thereby creating the basis for more sustainable growth in the medium term.
Beyond asset clean-up, financial sector reforms will be pursued. Reform efforts will focus on further
strengthening corporate governance, risk management and capital adequacy in our banks, aligning
prudential regulation with international standards and best practices, and enhancing our payments
system.
With these reforms in place, we foresee further consolidation of banks. Eventually, we hope to see a
banking landscape characterized by a handful of main banks complemented by many smaller banks
with well-defined market niches. Recently, the Monetary Board decided to allow rural and cooperative
banks to engage in FCDU operations. The decision was prompted by the board's desire to enhance
RB's and CB's ability to compete in the remittance business and in the buying and selling of foreign
exchange.
We will also continue to lobby for the passage of key legislations aimed at developing the local capital
market. Specifically, we are working closely with Congress on the creation of a centralized credit
information bureau system and the establishment of credit rating agencies. These should enhance the
quality of financial information available to investors, enhance private sector access to credit, and
minimize exposure to risks of financial intermediaries. Our goal for capital market development is to
build an environment where, on the one hand, savers are provided with varied investment alternatives
to meet their specific risk appetites, and on the other hand, borrowers are accorded choices for
funding longer-term productive projects.
Concluding remarks
There is no doubt that the country has made solid economic gains. However, there is still much to be
done to ensure sustainable growth for the long term. The economic indicators on the past year's
performance give us reason to be upbeat about the year ahead. But we need to continue to work
hard. Let me assure you that the Bangko Sentral remains committed to its strategic role of keeping
inflation low, interest rates at reasonable levels, the peso broadly stable, and the banking system safe
and sound.
However, appropriate policy reforms of government do not by themselves translate into the desired
growth in output and incomes. Active participation of the private sector is equally important in the
growth process. To this end, I would like to see that the partnership between industry groups like the
rotary club and the Bangko Sentral ng Pilipinas continue to prosper. We go forward in 2006 with
greater confidence that, with your continuing support and cooperation, we can achieve broad-based
growth, with the fruits of development shared equitably among our people.
As one thinker once said, "All it takes to open a door of opportunities is to keep pushing". Let us
continue to push until we are convinced all doors of opportunities are opened to us for the taking.
Thank you very much.