things main when i am faced with any situation, i follow three simple steps, “ my triple a's ” which will essentially be the outline of my remarks this afternoon : 1 ) appreciate the knowns – what is in my arsenal. 2 ) anticipate the unknowns – what are the risks that my arsenal can ’ t handle now. and finally, 3 ) act on the known, mindful that there are unknowns – or how can i be creative to address the potential impact of what could transpire when the knowns become entangled with the previously unknown? first, let ’ s appreciate the knowns. ladies and gentlemen, the events of the last couple of weeks notwithstanding, these are what we undeniably know : 1. the philippine fundamentals are intact. friends, this is not a cliche. it is not meant to be a bumper sticker. it is a statement that i hope you would not take lightly. on one hand, q1 2013 gdp grew at 7. 8 percent. divorcing from the fact that this was the highest q1 growth in the region ( better even than china ’ s ), this growth was supported by capital formation and public spending on infrastructure. in other words, the economy is being buoyed by expenditures that would cement the growth to a sustainable level. at the same time, year - todate average inflation of 3. 0 percent is at the lower end of our inflation target range. over the policy horizon, the bsp expects inflation to fall well - within the government ’ s official target range of 3 - 5 percent. clearly, the philippine fundamental story remains solid as we continue to enjoy the positive convergence of high growth and low inflation. bis central bankers ’ speeches 2. the philippine banking system is sound. again, this is not to be taken as a trite phrase. the banking system is growing steadily, creating a solid base for domestic retail funding. it is also more than adequately capitalized and the bsp does not foresee any major difficulties for the system to meet the requirements of the early adoption of the capital requirements of basel 3 in january 2014. 3. the philippine external position is robust. the gir at over $ 82b has been supported by strong current account receipts that are not easily affected by changes in the global operating environment. at about 12 months ’ worth of imports of goods and services, the gir provides a hearty cushion to external shocks. 4. the philippines ’ liquid

clearly a limit to how far that can go. but accelerating productivity growth has also increased prospective returns on investment in the us which has contributed to a huge net inflow of capital - in the form of both direct and portfolio investment - which has much more than financed the us current account deficit. the numbers are truly massive. in the 18 months since 1 january 1999 when the euro was introduced the us current account deficit was something over $ 500bn compared with net long - term capital inflows of nearly $ 750bn. meanwhile the eurozone was in small current account surplus but saw net direct investment and portfolio outflows of some $ 275bn. the conventional “ fundamentals ” - which one would still expect to reassert themselves in due course - have been overridden for the time being by these massive international capital flows. to the extent that the capital flows have indeed been driven by an improvement in prospective rates of return in the us associated with the productivity “ shock ” - and i freely acknowledge that this explanation may be oversimplistic - one would expect that at some point it would be discounted through a change in relative asset values, including the change in the exchange rate. the problem is that we simply do not know how close we are to that point - or indeed whether we have already passed it. putting that question to the market was, for me, the real point of the recent g7 intervention. we all need to understand much more about the nature of the capital flows and in particular about what motivates the market participants who initiate them. my immediate point, however, is that on the basis of what we do know it seems unlikely that the euro ’ s weakness in the foreign exchange market is pushed by any obvious macro - economic failure in the eurozone. it is much more likely that it reflects the magnetic attraction of the us at present as a destination for long - term investment. and while that may partly reflect relatively greater flexibility on the supply - side of the us economy, it does not have much to do, as far as i can see, with the introduction of the euro. of course, whatever the cause, the euro ’ s weakness complicates the task of monetary policy within the eurozone. it adds to inflation in itself and amplifies the inflationary effect of the rise in oil prices. the ecb is rightly concerned to ensure that these effects do not feed through into an increase in the rate of core inflation. given the