amando m tetangco, jr : what lies ahead? speech by mr amando m tetangco, jr, governor of bangko sentral ng pilipinas ( bsp, the central bank of the philippines ), at security bank ’ s annual economic forum, makati, 28 february 2014. * * * members of the board and management of security bank, distinguished guests, ladies and gentlemen. what lies ahead? this is a question that unfortunately not too many people ask themselves enough before embarking on an endeavour. some barrel on to action, full speed and then do not ever look back. and yet there are some, like those of you here today, who ask listen and weigh. then those who ask, fall under two categories those who stop and after listening turn back and never move ahead. and then there are those who, having appreciated the consequences of possible actions, move forward nevertheless, while being ready to make adjustments as needed. i hope that those present today, would fall in this second category because it is only from among those in the ranks of “ forward movers ” that the economy can leap ahead. in the case of the bsp, we do ask this question of “ what lies ahead ” many, many times, at every turn and even when we have already acted, we ask again. what lies ahead? the bsp surveys the global environment, i am glad that you have a speaker on this topic. we survey domestic conditions, and we consider the general public and those factors that affect overall welfare. what do we see so far? and i will be brief here. • we see inflation inching up, but still remaining manageable over the policy horizon. • we see credit continuing to go to the productive sectors of the economy, particularly to sectors with strong forward linkages to other sectors • we see improvement in the country ’ s potential output with increased production efficiency. • we see our external payments dynamics continuing to be favorable, with ample international reserves, and current account surpluses driven by structural flows including of remittances, bpo revenues, and tourism receipts. • we see the banking system remaining well - capitalized and able to withstand significant external shocks that could result from global interest rate normalization. • we see ample fiscal headroom for social / economic infrastructure. • there is policy space on the monetary side, albeit slightly narrower than last year, but the bottom line is. there is room to maneuver for us to address the

address crisis legacies and macroeconomic imbalances. in addition, member states should improve their capacity to absorb shocks internally. building such a capacity implies removing rigidities in labour, product and services markets. this will support economic adjustment through price flexibility and facilitate a smooth and speedy reallocation of resources. price flexibility allows for the recovery of any loss in competitiveness, and fosters a faster adjustment of relative prices, which, in the absence of exchange rate adjustment, is crucial for the rapid reallocation of production resources to the most dynamic sectors and firms. according to a european commission study, price flexibility and the rapid reallocation of resources require wage flexibility, ease of market entry of new firms, an effective and efficient insolvency framework including a second chance for entrepreneurs, a friendly environment for doing business, a well - functioning justice system, low levels of corruption, the availability of high quality public services and public infrastructure, and a regulatory framework conducive to competition. such reforms, besides increasing the capacity of euro area economies to absorb shocks internally, increase productivity and long - term growth. furthermore, some structural reforms ( for example, cutting red tape ) raise expectations of future income, and thus boost confidence, investment and domestic demand in the short term, supporting the recovery. in addition, policies that raise labour force participation and reduce structural unemployment are essential to boost future growth and employment. these reforms effectively make markets more flexible. but they can also make individuals ’ lives more uncertain. to this end, it is important to improve social protection – a policy that has come 20 / 23 bis central bankers'speeches to be known as flexicurity. reforms to the institutional setting of emu to improve economic policy coordination, convergence and risk sharing euro area member states should enhance real and cyclical convergence, which requires establishing closer economic policy coordination. improved transparency and predictability in the interpretation and enforcement of fiscal rules ( stability and growth pact ) and ownership and credible implementation of the country specific recommendations are prerequisites for successful policy coordination. furthermore, the adjustment mechanism within emu should be facilitated by ensuring that it works in a symmetric way, i. e. both for countries with sustained external deficits and for those with sustained external surpluses. to this end, the macroeconomic imbalances procedure should be strengthened and foster reforms in countries that have been accumulating large and sustained current account surpluses. crisis stricken countries have improved their external positions on account of both higher exports