Nestor A Espenilla, Jr: Good governance in the pursuit of mandates
Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central
bank of the Philippines), at the Institute of Corporate Directors 2018 Mid-Year Economic Briefing
Fellows' Breakfast Roundtable, Manila, 17 July 2018.
* * *
ICD Chairman Francis Estrada, Chief Executive Officer Dr. Alfredo Pascual, business, industry
and government leaders, vanguards of good governance, ladies and gentlemen, good morning.
I thank the Institute of Corporate Directors (ICD) for this opportunity to share the corporate
governance initiatives championed by the BSP for itself as an institution, in delivering on our price
stability mandate, in setting an example and in giving guidelines to those under our supervision.
A plethora of literature on central banking emphasizes the importance of credibility in shaping
monetary policy and in guiding the market. Credibility too is important for effective regulation.
It is notable that even in everyday personal relationships, credibility is built on established
competence and character. On consistency. On integrity. On good self governance.
At the BSP, we believe that good governance should flow from the top. By this, I am not only
espousing decisive leadership. Rather I emphasize that to elicit good governance, we must
ourselves practice good governance.
For it is only then that we will have the credibility and moral ascendancy to elicit the public's and
the market's trust and guide expectations, and it is only then that we could effectively require
good governance from our supervised entities.
Good Governance in the BSP
As early as 2009, the BSP adopted a principles-based governance framework.
In 2015, the BSP was recognized as an Island of Good Governance by the ICD and as of 2017
[vetted by the Development Academy of the Philippines (DAP)], two out of our five governance
principles: Accountability and Transparency and Strategic Direction were assessed at "High
Integration." Three of our other principles - integrity, ownership and voice; and responsiveness
- were rated at "Sustainable".
These principles are set forth in our 3-year Governance Roadmap for 2017 to 2019 and are
integrated into the BSP's decision-making systems, processes, and work ethic so that we can
give the best possible service to our country and to our fellow Filipinos.
In the BSP, we affirm that good governance is not just about compliance with laws and
regulations. Rather, good governance must frame and ground our intent so that our actions,
initiatives and policies add value. Good governance results in breakthroughs in the effective
delivery of our mandates of maintaining price stability, financial stability and an efficient and safe
payments system.
Good Governance and Breakthroughs for The Philippine Economy
The BSP's commitment to its primary mandate of price stability has brought about a balanced
and sustainable growth of the economy. Through the years, this required a delicate and
courageous balancing act demanding the neutrality of monetary policy- without favoring any
1
sector over another . It required and requires the exercise of an independence that can only be
achieved by a commitment to good governance.
Through the years in the exercise of this delicate balancing act - together with the country's
economic managers, we have achieved 77 quarters of uninterrupted economic growth since the
Asian Financial Crisis.
Our six-year consecutive growth of above 6 percent makes the Philippines one of the fastest
growing investment-grade economies in the world. This growth streak is projected to continue for
the medium term despite challenges in the global and domestic economic landscape.
This growth assumption is feasible due to the confluence of various factors: First, the current
progress has broader support. While traditionally, the services sector has mainly pushed growth,
the industry sector is emerging as a reliable source of growth, anchored on the manufacturing
sub-sector's renaissance.
On the expenditure side, consumer spending is a key growth engine. This is aided by the
improving employment climate, pegged at 94.7 percent of the labor force as of the first quarter of
2018. Public spending is likewise rising on the government's increased delivery of social
services.
Second, our young population places us in a demographic sweet spot that enables higher
productivity as a large percentage of our young population joins the labor force.
Lastly, our sound macroeconomic fundamentals and growth prospects continue to attract foreign
investments. Record foreign direct investments - USD 8 billion and USD 10 billion - entered the
country in 2016 and 2017, respectively.
Domestic liquidity continues to expand, in line with the BSP's outlook for inflation and economic
activity. Such expansion is driven by lending to key production sectors adding further navigational
mileage to the Philippine growth story.
Our external position remains manageable and we have sufficient liquidity buffers against global
headwinds. We note that the country's balance of payments position has been posting deficits
since 2016 on account of strong foreign currency outflows. This is a reversal from previous BOP
surpluses accumulated from the large inflows due to quantitative easing since the global financial
crisis. With the normalization of US monetary policy and rising global interest rates, we see
significant corrections in capital flows that are affecting our BOP and exchange rate. This is
compounded by uncertainties posed by the trade war and geopolitical risks.
Nevertheless, we view these as short-term macro-stability challenges. Over the medium-term,
our sound fundamentals should serve us in good stead.
First, strong imports are driven by capital goods, raw materials, and intermediate products to
support infrastructure development that can raise potential output.
Second, foreign investments by Filipino corporates and residents are increasing. Blue-chip
companies continue to search for profitable ventures abroad.
Third, Filipinos are prepaying their foreign loans reflecting tempered risk appetite for foreign
exchange exposures. These outflows indicate sound risk management.
Further, the balance of payments is reliably supported by strong structural foreign exchange
inflows, specifically revenues from the IT-BPO industry and overseas Filipino remittances, as
well as rising foreign direct investments.
Finally, gross international reserves continue to provide ample external liquidity buffer. The
endJune 2018 GIR of USD 77.7 billion is equivalent to 7.5 months' worth of import of goods, and
payments of services and primary income.
Good Governance and Credibility in our Commitment to Price Stability
Amidst headwinds brought about by domestic and global factors, we remain strongly committed
to our primary mandate of price stability.
Average headline inflation as of June 2018 is above target at 4.3 percent. While we expect this to
return to within target band in 2019, we nevertheless treat the inflation outlook as a concern given
elevated inflation expectations and increasing risks of second-round effects from ongoing price
pressures.
In achieving price stability - clear and open communication - the announcement of an explicit
inflation target is central... to this, credibility is the bedrock. It reflects not only a commitment to
the goal, but also to ownership of the inflation target.
Since 2002, we have been committed to the inflation targeting framework. The framework
demands that monetary policy decisions be forward-looking and data-dependent. As an
inflation-targeting central bank, we allow foreign exchange flexibility so that we can conduct
independent monetary policy primarily focused on assessment of domestic conditions, and is
thus not based on actions of the Fed. Nevertheless, we consider external factors and exchange
rate movements if these will materially impact the pursuit of domestic objectives especially
inflation. This approach is most appropriate for a small open economy like the Philippines.
Further, since the adoption of the interest rate corridor (IRC) system in 2016, the BSP has
gained sufficiently flexibility in relying on auction-based instruments for liquidity management to
complement the overnight reverse repurchase borrowing rate as the policy rate signal. The IRC
also allowed the BSP a channel to provide guidance to short-term market interest rates. Thus, in
this manner, the BSP has reinforced its options to maintain firm monetary control.
We assure that our monetary policy responses to elevated inflation pressures were, and are,
timely and appropriate.
Early this year, inflation forecast over the two-year policy horizon, as informed by a wide set of
economic data, suggested no adjustment in policy rate was warranted at that time. This was
because data showed that the uptick in prices was driven mainly by supply-side factors - which
could not be influenced by policy rate hikes. Moreover, our forecast continued to show inflation
upticks as transitory and moderating within the target in 2019.
Nevertheless, recognizing increasing volatilities in world oil prices and global interest rates, the
BSP responded to changing monetary environment conditions by adjusting auction volumes and
allowing the term deposit facility (TDF) rates to rise, creating effective tightening in the market.
There were material changes towards the end of the first quarter and the beginning of second
quarter of 2018. On the global front, the attractiveness of the US economy was highlighted by
both its fiscal and monetary policy adjustments, including rising interest rates. This caused a
migration of portfolio investments seen in the decline in ASEAN 5 equities markets leading to
increased market volatility. This likewise contributed to elevated exchange rate pressures. In
addition, the continued rise in global oil prices and the price effect brought about by scarcity of
the NFA rice provided key impetus for higher levels of inflation.
Our two successive rate hikes in May and June were measured and deliberate responses to the
evolving economic environment and dynamic market conditions meant to help anchor
inflation expectations and temper second-round effects, firmly signalling our commitment to
ensuring price stability. These were undertaken even as we await full implementation of
appropriate policy response to supply shocks such as the National Government's social safety
net programs.
We reaffirm our strong commitment to ensure that inflation returns to target by 2019. We stand
ready to take decisive action in a timely manner to address emerging risks that could threaten
the attainment of this target.
Good Governance in Bringing About a Sound and Stable Banking System
As earlier mentioned, while we internally practice good governance principles, we require this too
for our supervised and regulated entities. But in doing so we are mindful of the importance of
their buy-in and of prior consultation. Good governance cannot be dictated. This is why we
rollout our regulatory proposals and value industry feedback prior to their implementation. This
makes for successful implementation.
In August 2017, we yet again raised the bar of corporate governance for the banking industry.
Aligned with the Securities and Exchange Commission's (SEC) Code of Governance for Publicly
Listed Companies (PLCs), we enhanced requirements on the membership composition of
financial institutions' Board of Directors (BOD) to ensure that a collective mix of individuals who
possess expertise and competence effectively manage the institution.
These initiatives help maintain the soundness and stability of the financial system. This is
validated by various reports from stakeholders and multilateral institutions such as the IMF and
the recent upgrade in the S&P Global Banking Industry Country Risk Assessment (BICRA) of the
Philippine banking system.
The outlook for the banking system remains positive given the robust macroeconomic outlook,
rising credit provision coverage, adequate liquidity and rising capital buffers. Bank lending is
expected to sustain its strong growth. The trajectory for profit growth will continue, driven mainly
by strong growth outlook, upbeat lending activities, product innovations, and more cost-efficient
and technology-enabled operations.
Good Governance in Managing Our Mandates: Price Stability and the Financial System
It is noticeable that our Charter - Republic Act. No. 7653 - puts a premium on the mandate of
price stability. We are mindful, though, of lessons from the past, the Global Financial Crisis... we
note the increasing interconnectedness of markets and financial systems... From this, it is also
clear that price stability must not be pursued in a vacuum. Indeed, price stability is a
macroeconomic goal which can be promoted via a sound and stable financial system.
Again, it is a balancing act necessitating good governance, wisdom and courage.
Safe and sound financial institutions contribute to a resilient financial system, which in turn,
anchor the sustained stability of the economy. The financial system provides a framework for
carrying out economic transactions and transmission mechanisms for the BSP's effective
conduct of monetary policy.
We recognize that monetary policy must evolve in the context of a more sophisticated and
complex financial system. Thus, all our current reform actions - reducing reserve
requirements, liberalization of FX markets, deepening the debt market, as well as our macro- and
micro- prudential measures do not diverge from our goals of price stability.
These are all strategically pursued to systematically build the country's resilience amidst an
evolving landscape.
In this regard, we are committed to more market-based monetary operations. Our move to
reduce reserve requirements ratio (RRR) supports the shift towards a more market-based
implementation of monetary policy and more efficient financial intermediation. We started with
20 percent RRR, one of the highest in the region, if not the world. By default, the economy is
shouldering a de facto tax burden. By slowly lowering RRR, we are reducing friction costs. This
should help curb shadow banking given the rise of strong alternatives offered by fintech and
financial innovations.
The BSP is deliberate in the timing of the reduction of reserve requirements. It will be gradual,
moderate, and phased over the medium term with the objective of eventually bringing RRR to
single-digit levels in line with regional peers. The BSP waited for alternative mechanisms to be
developed before embarking on the reduction. Prior to the RRR cuts (in recent months), we
have seen a firm anchoring of market rates to the IRC. Thus, there is now room for BSP to
reduce its operational reliance on reserve requirements for liquidity absorption and management.
The BSP has enough market-based tools to make this operational adjustment policy neutral.
The RRR cuts are not without compensating action. Excess liquidity is reabsorbed through our
open market operations and significant FX operations. There is no evidence to indicate that the
cut is expansionary. On the contrary, market rates have trended upwards, validating tighter
market conditions.
A Call for Cooperation
Ladies and gentlemen, the BSP has been and will always be a vigilant captain of the financial
system to deliver a high quality of life for all Filipinos. We value the partnership with the ICD
which similarly aspires for sustainable and inclusive development through broad-based
economic growth led by corporations adhering to good corporate governance principles.
Together we must leverage on the strength of the economy. This is an opportune time for
government and the private industry to continuously coordinate efforts to ensure the continuity of
the policy reforms that helped guide the economy and our banking system to being among the
world's most resilient.
In closing, we at the BSP thank ICD for promoting corporate governance reforms from the
topdown to bring the country to greater economic heights translating to a better quality of life for our
countrymen.
Thank you very much for your kind attention!
Mabuhay ang Pilipinas!
11 See S. 1235, 9th Cong. Record of the Senate 641 (May 19, 1993, enacted)