amando m tetangco, jr : the philippines – addressing the challenges. staying the course speech by mr amando m tetangco, jr, governor of the central bank of the philippines ( bangko sentral ng pilipinas ), at the philippine economic briefing, makati city, 17 september 2008. * * * good morning. thank you for joining us in this mid - year economic briefing. i am pleased to speak before you on the developments in the monetary, external and banking sectors. after providing you with an overview of recent economic developments, i will discuss the outlook for the next two years which takes into account the challenges that our economy is facing. then, i will walk you through how the bsp has responded to these challenges. i will close with the bsp ’ s policy thrusts going forward. let me start with the latest price developments. inflation averaged 8. 8 percent for the first 8 months of the year, rising to 12. 5 percent in august from 4. 9 percent in january 2008. core inflation, which measures the underlying trend in inflation by excluding specific food and energy prices, climbed to 7. 0 percent yearon - year in august, from 3. 4 percent in january. price pressures have been building up since early this year. initially the price increases were due to supply - side factors, specifically from elevated international oil and non - oil commodity prices. however, second round price pressures subsequently became apparent, as evident in the rise in core inflation and the adjustments in the pricing of services as well as wages. these have resulted in a more challenging inflation environment. meanwhile, the country ’ s external payments profile remains a major source of strength for the economy. the bop remained in surplus for the first eight months of 2008 at us $ 2. 0 billion. remittances from overseas filipinos continued to boost the bop, reaching us $ 9. 6 billion for the first seven months of 2008, higher by 18. 2 percent relative to the year - ago level. the sustained bop surplus resulted in the continued build - up of the country ’ s gross international reserves ( gir ), which stood at us $ 36. 7 billion as of end - august 2008. at this level, the gir is equivalent to 6. 0 months ’ worth of import cover, 2. 9 times the country ’ s short - term external debt based on residual maturity. the strong external position has allowed both the public and private sectors to prepay some of

ensure that there are effective mechanisms to ensure that these criteria are sustained. the growth and stability pact failed because there was no real sanction involved for countries that transgressed the rules. this points to the need for a single fiscal authority. while this was previously recognised, the political difficulties of achieving agreement on this, and to allow politically sensitive issues such as tax policies, expenditure requirements, and fiscal transfers to be made by a supranational body, would have significantly delayed or even perhaps stymied the implementation of the single currency. it is increasingly apparent that a further weakness in the design of the eurozone was the lack of a lender of last resort. while in principle the ecb can, and has been in bis central bankers ’ speeches effect playing this role and taking a large amount of risky assets onto its balance sheet, it is questionable whether it can continue to do so without intense political pressure from some of the member states who feel that the ecb is operating outside of its mandate. at present it is the individual central banks that stand behind the ecb. there is no unified fiscal authority that guarantees its activities. it would be wrong to think that sorting out the fiscal issues would have prevented the crisis. these issues are a manifestation of a deeper problem of divergent levels of competitiveness. the underlying assumption of a monetary union is that competitiveness will remain constant, i. e. the internal real exchange rates will be unchanged. in the past ten years the peripheral countries have lost competitiveness to varying degrees, in the case of greece by about 30 per cent. there is no internal mechanism to prevent this, and in fact the single currency allowed for automatic and continuous financing of these divergent trends at low rates of interest. italy ’ s problem is not only fiscal in nature. italy is after all running a primary surplus. in the absence of an exchange rate adjustment mechanism, the only way to adjust is through an internal devaluation, implying falling nominal and real wages, and fiscal austerity. this is the classic expenditure reduction case under fixed exchange rates. the inability to change the nominal exchange rate imposes severe adjustment costs. while exchange rate flexibility would ease the burden of adjustment, countries that find themselves with appreciating currencies in response to developments elsewhere find it extremely uncomfortable as well. countries with stable macroeconomic environments are better placed to shield themselves, but it is almost a truism that no country can actually escape the fall out of the global