Amando M Tetangco, Jr: Vision for resilience and growth
Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the
central bank of the Philippines), at the General Assembly of the Bankers Association of the
Philippines (BAP), Makati, 21 November 2016.
* * *
Let me begin by congratulating you on this industry-led initiative of formalizing a vision for the
banking system.
"To support the national goal of catalyzing growth in the country." - That vision evokes a level of
maturity in your appreciation of the relationship between the real and financial sectors. It tells us
that you are now not merely existing for yourselves and the firms you represent, but that you
would also actively do your part to positively raise overall economic welfare in the country.
Banks are well-positioned to take on the Vision
In the end, we know it will cut both ways. A growing economy provides you with the incentive to
build your franchise, and the stronger franchise provides opportunities for businesses to grow.
It's a virtuous cycle.
Indeed, the banking system is well-positioned to help catalyze and sustain economic growth. In
just the past 11 years or so, the total resources of the banking system have grown almost three
times from P4.5T to P13.1T. Bank capital has continued to be above national standards. Credit
growth has been robust. Non-performing loan ratios have continued to decline. You have
expanded your financial footprint beyond brick and mortar facilities to e-banking. And throughout
all these, you have remained profitable! This performance tells me that you have been able to
adjust effectively to the challenges of your operating environment.
This performance has been accompanied by our strong constructive collaboration. Together, we
have worked on and put in place, reforms that have helped improve your ability to absorb shocks
and contain imbalances, both at the firm and the industry levels. We have emphasized
governance and placed more responsibility on the boards of directors. We have embarked on a
series of frameworks for enhaced risk management and sound market conduct. We have
adapted global reforms and standards and made sure these are in tune with our own domestic
needs and requirements.
I know many of the reforms have not been easy to appreciate at first, as you might have
perceived that these reforms tended to curtail innovation. But through consultations and
persistent dialogue, I know we are on the same page. Innovation will only positively flourish when
it occurs in the context of sound business operation and consumer protection as the underlying
threads.
The timing of your initiative for an overall banking system vision and roadmap could not have
been more opportune. Q3 GDP was announced just last week - 7.1 pct growth, bringing to 71
the number of consecutive quarters of positive economic growth! Domestic aggregate demand
continues to be the driver of economic growth. On the supply side, manufacturing remained
strong, services showed reasonable growth, and the agriculture sector showed signs of
recovery. In other words, our economic growth drivers are diversifying! Demography is also on
our side. The median age of the population is now 24.4 years old and we are projected to reach a
median age of only 31 years old by 2045. All these have transpired without fuelling inflation.
We are certainly living in exciting times that are rife with opportunities. But even as I say this, we
must also be aware that there are challenges to this operating environment. Let me focus on
just three. One, Fed normalization. Two, weak and uneven global growth outlook. Three,
disruptive technology.
Turning Challenges into Opportunities
The anticipation of the timing of the Fed's next move creates near-term financial market volatility.
The question whether markets will perceive the next Fed pronounement as "risk on" or "risk off"
matters for daily traders. The era of low US dollar interest rates is ending soon. That brings with it
certain collateral actions, including a stronger US dollar and global portfolio rebalancing.
We all know that making money on financial assets in a low/declining interest rate environment is
a "no-brainer". All fixed income assets you hold rise in value as interest rates fall. The test for
bank presidents and treasurers alike therefore is how to translate these daily movements and
market expectations into an overall strategy, as the tide of global monetary conditions change.
This is undoubtedly tricky and timing strategic moves is critical.
A second challenge to the operating environment is the continued weakness in global growth
prospects. Related to this is the trend among policy makers to look inwardly and tap domestic
sources of demand. China is an example. The Chinese authorities have shifted from trade to
services as driver of growth. Brexit is another example of the populace wanting to break away
from trade. The protectionist-tendency of the pronouncements of US President-elect Trump is
yet another example. All these comprise what is now being termed by some as a "retreat from
multilateralism".
While we are seeing that this global trend of growing through domestic aggregate demand can
break the downward economic spiral for a number of economies, the question is whether such
inward perspective is sustainable for global economic growth.
For the Philippines, strong domestic aggregate demand, particularly private consumption, has
long shielded us from external shocks. Even during the Asian Financial Crisis, we were not as
affected because we were not as open as others in the region. However, there is a need to
explore ways of broadening the domestic economic base. Infrastructure is key to this. Human
capital is another important element. We need to be able to connect our domestic markets
through networks of roads, airports, seaports, etc. But we also need a smart population to find
solutions to natural disasters and to find ways of improving efficiency, among others.
Fortunately, for the Philipines we have both monetary and fiscal space to allow the government to
ramp up spending on infrastructure and put in place projects to raise human capacity.
Another factor to reflect upon is the integration of ASEAN, which is certainly underway. The BSP
has already signed the Heads of Agreement with Bank Negara Malaysia. And I am pleased to
report that we are about to initiate formal discussions with the Bank of Thailand and with the OJK
of Indonesia under the same ABIF guidelines.
As we consider supply chains and regional integration, we must be mindful of the trend of
"disruptive innovation". In other words, finding new ways of doing old things. Technological
improvements are helping define new ways for you to "enter" into and be integrated in the supply
chain. While there are many of you who will continue to be on the big loan origination side, a
number of you can find value in generating economic activity through retail banking. Still a
number of you will be able to find a niche in providing alternative digital solutions. In doing so,
there is a need to be mindful that using financial technology could lead to new and unanticipated
financial, business, consumer protection risks as well as cybersecurity risks. This is why, even
as we encourage technology solutions, we also admonish banks to do so with caution and
without sacrificing financial stability and the protection of your ultimate customer, the consumer.
Is there a role for monetary policy in your vision?
The BSP will partner with you to achieve your vision. As I have said, we have put in place what
we see as a balanced regulatory environment - one that encourages innovation, practiced under
safe and sound business models.
We have also endeavored to create a monetary environment of stable inflation and a
marketdetermined exchange rate to help you plan better for the medium-term.
At the moment, our view is that inflaton will be manageable over the policy horizon. In 2016,
inflation will average below the lower end of the target band, but in 2017 and 2018, we see
fullyear inflation averaging closer to the middle of the target range of 2-4 pct. For the BSP, this
means there is no compelling reason to adjust the stance of monetary policy.
You may ask, will this view be affected should the Fed hike in December? Perhaps, if other
factors also move. But we don't necessarily have to move in sync with the Fed.
On the exchange rate, I've been asked lately whether the BSP is worried about certain exchange
rate levels being breached. Our view here is that for as long as movements in the exchange
rates are not "out-of-line" against fundamentals and if these are not exaggerated to dislodge
expectations, the BSP can allow for the exchange rate to move (either up or down). Otherwise,
we reserve scope for official action to stem excessive volatility. Right now, we don't see a need
to veer away from this FX rate policy.
Our Journey on the Roadmap
You have set a clear vision for the banking system, with interlocking outcomes of Access,
Efficiency, Growth, and Stabiliy. The tools the BSP will take with it on this journey with you are
the tried and tested tools of: an enabling environment that benefits from the collaboration
between the market and regulators, clear but reasonably high standards for governance and risk
management, and that commitment to clearly communicate policy intent in a timely manner.
The GFC has taught us that attaining price stability does not ensure financial stability. At the
same time, the GFC also taught us that banks operating individually in a safe and sound manner
will not be enough. We need to take a holistic view of risks, specifically those that comingle and
cut across markets, institutions, transactions and agents.
Our proposed amendments to the BSP Charter would greatly help the BSP in this regard,
particularly in its macroprudential surveillance and network analysis role. We therefore continue
to solicit your support for our proposals, including those for more relevant data. I encourage you
to look more closely at the proposed amendments where sufficient safeguards and checks and
balances are incorporated.
Concluding remarks
Let me conclude by urging all in this Assembly to remain focused on financial stability and the
well-being of our ultimate stakeholder - the financial consumer who entrusts upon banks their
hard-earned savings or looks upon banks to have a better future. After all, it is for him that we
are laying a foundation to enable/capacitate him today, so he can build a better tomorrow for
himself and his family.
Thank you for your continued support throughout the years at Mabuhay po kayong lahat!