Amando M Tetangco, Jr: The Philippine economy - primes for a
sustainable and solid growth
Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (the central
bank of the Philippines), at the Euromoney Philippine Investment Forum, Manila,
12 March 2013.
* * *
Secretary Cesar Purisima, other government officials, Mr. Tony Shale, CEO of Euromoney
Institutional Investor Asia, distinguished leaders and members of the business and investor
community, honored guests, ladies and gentlemen, good afternoon.
Over the recent period, there has been a welcome spate of rosy and positive commentaries
on the Philippine economy.
We have been described as an emerging Asian tiger.
The venerable New York Times has labeled the Philippines as the economic bright spot in
Asia.
The World Bank has observed that macroeconomic stability is now the new normal in the
Philippines.
The IMF has singled out the Philippines for being the only country whose growth forecast it
has upgraded.
The IMF 2013 growth forecast was set at 4.7 percent earlier on but was revised twice to
reach 6 percent this January.1
The IMF is not the only multilateral financial institution that has upgraded the growth forecast
of the Philippine economy.
The World Bank upgraded its outlook on the Philippines' 2013 economic growth from
5 percent (October) to 6.2 percent (December).2
The Asian Development Bank likewise raised its earlier 2013 forecast of 4.8 percent
(April 2012) to 5.5 percent 6 months later (October).3
These assessments are consistent with the series of sovereign credit rating upgrades
received by the Philippines even as the credit ratings of many other countries have been
downgraded. In fact, it could be said that the financial markets have already voted the
Philippines as investment grade as evident in the pricing of our credit default risk in the same
range as investment grade economies.
All these assessments were driven mainly by the solid performance of the Philippine
economy across various metrics. These include:
•
Robust and broad-based economic growth;
• Low and stable inflation;
•
Strong external payments position;
•
Sound and stable banking system; and
• Much improved fiscal performance.
These macroeconomic conditions did not happen by chance. Far from it. In fact, these trends
are all the more noteworthy in that they are happening against a backdrop of persistent and
strong headwinds in the global economy.
The progress in the economic front is the outcome of prudent and disciplined monetary and
fiscal policymaking. And these conditions are sustainable because of strong and
wellgrounded policy frameworks in place. These include:
1. The government is committed to sound fiscal policy. The government is
appropriately focused on strengthening the quality of fiscal adjustments. It has
increased spending for critical social priorities and economic infrastructures while
keeping a watchful eye on the medium-term objective of fiscal consolidation.
2. The government continues to pursue a reform agenda that is aimed at raising the
economy's flexibility and unlocking the country's growth potential.
3. A forward-looking monetary policy framework that has helped strengthen our
commitment to non-inflationary economic growth. We have met our inflation target
for the past consecutive four years (2009-2012), even as the economy's engines
have powered ahead;
4. An enhanced policy toolkit that is geared to respond to the challenges brought about
by strong capital inflows;
5. Finally, supervisory and regulatory practices that are benchmarked against
international best practices. This is reflected in well-capitalized and better-governed
banks that are able to efficiently perform financial intermediation and risk
management.
There are therefore fundamental reasons to believe that continued macroeconomic discipline
and reforms can push the growth trajectory further to a path that will allow the economy to
not only survive the global headwinds but to adapt and to thrive in a more challenging
operating environment.
As we are aware of the headway that has been made, we are equally mindful of the
challenges and the risks to the favorable economic outlook. I can assure you that there are a
lot of "responsible adults" in the room. These are policymakers who are attentive to the overt
as well as the underappreciated risks to the Philippine growth story.
What are the challenges? What are the latent pressure points in the economy? Let me cite
three major ones, from the BSP's standpoint:
1. Managing capital flow surges - an issue repeatedly mentioned this morning
2. Ensuring financial stability
3. Going the distance with structural reforms
In this challenging period of very strong capital flows and expectations of continuing strong
capital flows, or as one economist has called it the whipsaw of huge capital movements, the
question is - do monetary authorities still have the firepower and yet be market-friendly in
their policy responses?
To this, my response is yes. The BSP has recognized long ago the need to deploy a deep
toolkit in addressing the contemporary challenges confronting emerging market central banks
that are at the receiving end of strong capital flows. It has used a variety of instruments to
achieve low and stable inflation, prevent excessive volatility in the exchange rate and
maintain broad financial stability.
As a result of BSP's signature circumspection, the evidence suggests that the sizable FX
inflows have not led to significant adverse macroeconomic and financial consequences.
• Reserve accumulation in response to the surges in capital inflows does not appear
to have led to excessive money creation.
• The limited impact of capital flows on monetary aggregate growth suggests that
sterilization policies have been broadly effective.
•
Credit growth has not contributed to macroeconomic imbalances, as inflation has
remained low.
A second - and related - challenge is the need to ensure continued financial stability.
The recent global financial crisis showed that sole focus on price stability is not sufficient to
attain macroeconomic stability. Policymakers need to deliver more than stable prices if they
are to achieve sustained and stable growth. Price stability does not guarantee financial
stability. The BSP, therefore, is attentive to pressure points that could impact on both price
stability and financial stability.
To ensure financial stability we have utilized prudential measures to manage capital inflows
and moderate, if not prevent, the build-up of excesses in specific sectors and in the banking
system. Prudential policies are the instrument of choice and employed as the first line of
defense against financial stability risks.
Given the current regime of low interest rates - driven in large part by the surge of foreign
capital into domestic financial markets and the limited absorptive capacity of the economy in
the short term - the BSP is keeping a watchful eye on developments in the asset markets.
We pay particular attention to what is happening in the equity and property markets, as these
markets are interest-rate sensitive and could be prone to bubbly behavior.
We see that while activity in these markets has been buoyant, the key indicators are growing
broadly within trend, reflecting both cyclical as well as structural or fundamental forces. It is
also important to note that indebtedness in the Philippines is still quite low. Domestic
creditto-GDP ratio at 50.4 percent (Q4 2012) still ranks one of the lowest in the region.4
This would
suggest that the risk of excessive leverage is less and the threat to financial stability is
likewise lower, should asset prices correct.
The third challenge involves going the distance in the pursuit of the reform agenda.
1. We are implementing the capital adequacy framework of Basel III in January 2014.
We will also be closely studying the other building blocks of the Basel III reform
agenda to see how and when we can incorporate these into domestic regulatory
environment.
2. Capital market reform will be a priority. This will include ensuring that an appropriate
market infrastructure is in place. The infrastructure will not only improve the quality
of markets, which will help mitigate financial stability risk. But infrastructure will also
promote the absorption of the inflows, which will ultimately lead to an expansion of
the economy. By improving financial intermediation in the system, a well-functioning
capital market will help unlock the economy's productive potential and strengthen its
capacity to withstand shocks.
Right now, we see an economy that is on an even keel, on surer footing, poised for higher
growth, riding on a momentum of change that offers the promise of not only stronger growth
but also one that is more inclusive and more durable.
The challenge is to keep the momentum of positive change strong. The appropriate response
to current favorable winds is not to sit back and relax, not to pop champagne corks as
William asked this morning, but to treat them as an ideal opportunity to strengthen the
underpinnings of the economy's foundations. The BSP will strive to have monetary policy
that will provide an environment where credit and liquidity growth will remain supportive of
economic growth while maintaining price stability. We will also continue to work on reforms
that will deepen the financial system. We will continue to monitor financial and asset markets
and be responsive to emerging risks. We will continue to work with the government in
pushing the agenda for reforms to ensure macroeconomic stability.