gir can cover 6 months of imports of goods and payments of services, way above the global standard. similarly, the country ’ s major external debt ratios have been improving, an indication of the country ’ s enhanced capacity to service its maturing foreign obligations. these positive indicators make us confident about the prospects for our economy in general and our banking sector in particular. moreso, if we are to continue our efforts to strengthen the banking sector and our economy. it is in this context that i find baiphil ’ s theme for this occasion as a most appropriate rallying point : “ turning challenges into opportunities. ” i believe we are in a position to continue to fortify our buffers by remaining proactive in our response and deeply committed to pursue our reform agenda. in this connection, our key policy thrusts at the bangko sentral ng pilipinas are as follows : first, our monetary policy will continue to focus on our core mandate of maintaining stable prices. we will keep our eye on the inflation ball, being mindful that as we do this, we are able to foster an environment conducive to sustained economic growth. in recent months, we have seen inflation moving up steadily on account of record high oil and food prices, hitting 11. 4 % in june this year, the highest in more than 14 years. this brought the year - to - date average inflation to 7. 6 percent. although this is still consistent with the bsp ’ s view of a hump - shaped path for inflation in 2008 and 2009, we cannot afford to underestimate this old adversary of central banks. inflation is at the very top of the bsp ’ s policy priorities. we will continue to intensify environmental scanning and surveillance of key macroeconomic developments to ensure that our assessments of the inflation outlook and the risks to inflation remain fresh. the monetary board will take the necessary and decisive action to address the threat of high inflation. second, on the external sector, our policies will be geared toward ensuring the sustainability of the country ’ s external debt and maintaining a comfortable level of reserves. in recent months, we have witnessed a depreciation in the peso ’ s value. this has not been unexpected, given the significant upmove last year and the changing environment we operate in this year. we believe that the current exchange rate levels reflect a healthy correction in the market, and market players should take advantage of this. as we expect to still have a surplus in the

##3 billion as of end - march 2006. our banks have also issued p79 billion in tier 2 capital as allowed under our regulations consistent with international practices. car ( capital adequacy ratio ) stood at 19. 4 percent as of end - march 20061 while loss provisions, which serve as cushion for expected losses have been significantly boosted from just 1. 44 percent of total assets in end - december 1997, to 2. 72 percent as of end - june 2006. bsp ’ s risk management initiatives now, let me guide you through the important historical highlights of bsp ’ s risk management initiatives. in 1995, the bsp recognized the greater risk exposure in the system brought about by derivatives activities. to mitigate this, the bsp issued circular no. 102 prescribing the minimum standards for risk management of derivatives. this was probably the first bsp regulation that specifically focused on banks ’ market risk taking activities and risk management practices. prior to this, risk management regulations were largely confined to basic credit risk management and to internal control issues. in 1997, the thrust of bank supervision started to shift its focus towards a more forward - looking view of risk management and whether a bank has the infrastructure to manage its own risks, instead of just mainly performing financial audit and compliance review. the objective was to address weaknesses in management and internal controls before financial performance suffers rather than being satisfied with identifying what went wrong after the fact. the bsp ’ s effort to focus on risk management is ultimately intended to give banks greater flexibility to respond to changing opportunities and challenges in the face of global competition under a more deregulated environment and at a time of rapid technological advances. traditional bank supervision tended to micromanage banks to avoid risks that seem too high. the new approach to supervision is now more focused on the assessment of the quality of risk - management practices and generally allows banks to take on greater risks so long as the banks demonstrate the ability to identify, measure, manage and price for those risks. this more liberal approach to supervision, which allows banks more opportunities for success, entails that the bsp emphasize the responsibility of the banks ’ board of directors and senior management to ensure the soundness and stability of their respective banks. the regulators ’ role is primarily to evaluate the quality of oversight and management provided by these critical actors – that is, the quality of corporate governance. strengthening banks ’ corporate governance has thus been the theme of a number of bsp regulations. in june 1997, circular