amando m tetangco, jr : progress and challenges in the philippine financial system speech by mr amando m tetangco, jr, governor of bangko sentral ng pilipinas ( bsp, the central bank of the philippines ), at the general membership luncheon meeting of the american chamber of commerce of the philippines, manila, 3 june 2015. * * * it ’ s a pleasure to address the chamber during your general membership meeting, at a time such as this, when we are seeing us economic growth continuing to gain traction, us labor conditions improving and the usd sustaining its appreciating trend. even in europe, there is emerging optimism that economic conditions are beginning to show improvement. will all these developments, there is indeed much to discuss regarding the implications of recent events for the philippines. i ’ ve been requested to share with you my thoughts on the progress and challenges in the philippine financial system. let me start by saying macroeconomic stability hinges on the strength of the financial system. this is for certain. you cannot have a strong macroeconomy when your financial system is in disarray. in the most basic of modern economics, the financial sector is the lifeforce of any economy. it allocates resources to productive sectors and in the process, promotes investment and job creation. in the advent of increased cross - border transactions and heightened interconnectedness of economies, however, this very same financial system which enables economic growth could also be the channel for transmitting vulnerabilities. financial systems have become a way by which contagion is amplified. indeed, this feedback loop relationship has never been more evident than during the global financial crisis and its aftermath. as we all know, the philippine economy survived the gfc relatively unscathed. that, in large part, was due to our sound and stable financial system. seven years since the gfc, the philippine banking system continues to stand strong. and, since 2012, the philippines has been the only jurisdiction whose banking system has been given a positive rating outlook by moody ’ s investor ratings services. in fact, the only one from among the 69 jurisdictions it rated in 2014. the metrics that describe the banking system which are shown in this slide are among those often cited by credit rating agencies – steady growth of resources, healthy balance sheets with npl ratios for u / kbs down to under 2 percent, capital at 16. 2 percent that more than meets the national requirements of 10 percent and is

usd in trade and external debt financing, and the soft pegs of many em currencies to the usd. as portfolios rebalance, emes, including the philippines, can experience capital flow reversals, strong currency depreciation pressures, and a shake in market confidence. this is the first major risk our financial system faces. second, the possibility of getting stuck in what the imf calls the “ new mediocre ” referring to economic growth. as china has become central in asian trade, any significant slow down in the chinese economy would cast a cloud on its trading partners ’ growth. china ’ s economic slowdown could have a knock - on impact on asia ( including the philippines ) through trade, investment and financial linkages with the region. although the people ’ s bank of china ( pboc ) has announced a series of easing measures, financial conditions in china appear to remain fairly tight due to the effects of reforms on credit growth. third, the uncertainty in the path of oil prices. lower oil prices have provided a boost to asia ’ s overall growth ( including that of the philippines ’ ) because most countries in the region are net oil importers. but a prolonged period of cheap oil combined with an already low global inflation environment begets expectations of increased deflationary risk. such a scenario could render global economic recovery difficult. on the other hand, there is also the risk that oil prices could reverse in the same speed at which they fell. if the reversal is rapid, that could dislodge inflationary expectations. like most economies in asia, the philippines is in a good position to withstand these risks, particularly, should the market respond by way of capital outflows. our mantra in the bsp, particularly since the gfc, has been to “ keep our own house in order ”. to operationalize this, we have kept our ears close to the external world, and our eyes on our primary mandate. in other words, we are mindful of what is happening in our neighborhood, but at the same time vigilant to watch out for stresses within. our improved fundamentals and ongoing reform efforts have anchored investor confidence, and helped us achieve investment grade status. as you can see from the slide, we have been able to manage our external liquidity position. we ’ ve been running current account surpluses for over 10 years now. we have fx reserves that are ample by traditional yardsticks. and short - term external debt -