eli m remolona : establishing a benchmark yield curve - why we need it and how can we do it? speech by mr eli m remolona, jr, governor of bangko sentral ng pilipinas ( bsp, the central bank of the philippines ), at the 40th environmental scanning exercise, manila, 7 june 2024. * * * members of the monetary board, bsp ( bangko sentral ng pilipinas ) colleagues, esteemed guests, ladies and gentlemen, good morning. let me add my welcome to mbm ( monetary board member ) annie's ( anita linda aquino ) welcome. welcome to this 40th environmental scanning exercise ( ese ). this year marks a milestone. we are celebrating the 20th anniversary of this exercise. for the past two decades, ese has been fertile ground for policy discussions at the bsp. today our focus is on the topic, " building a benchmark yield curve using interest rate swaps. " i have my own strong views on this topic, but because we have such an excellent lineup of presenters and discussions, i expect those views to change. allow me to share those views. as many of you know, a benchmark yield curve is something we need to strengthen the transmission mechanism of our monetary policy. it is also part and parcel of the goal of developing the country's capital markets. a benchmark yield curve is one that serves to reconcile the diverse views of market participants. this makes it very useful for pricing other instruments including mortgages and corporate term loans. at present, we rely on something called bval ( bloomberg valuation service ) for our yield curve. i have described this curve as a very choppy curve. that choppiness is an indication of a fragmented bond market with liquidity shifting from one maturity to another. perhaps, one way to fix this is to revive our interest rate swap market. i say revive because i was told we used to have such market and i do not understand why it died. in the eurozone, when that economy switched to a common currency in 2000, their bond market was also a fragmented one. the most active ones were the german bond market, the italian bond market, and the french bond market, in that order in terms of turnover. then, an amazing thing happened out of nowhere. the euro interest rate swap market emerged. by 2001, within one year, the turnover in the swap market had surpassed the turnover in those other three

for the economy. loan growth expanded at a faster rate of 10. 1 percent year - on - year in april, up from 8. 9 percent in march. non - performing loans remained manageable at 4. 1 percent of loan portfolio as of march this year. banks ’ capital adequacy ratio of 17. 4 percent remained above the threshold levels of 10 percent and 8 percent set by the bsp and the bank for international settlements, respectively. moving on to our advocacies, two of the bsp ’ s strategic objectives are the transformation of at least 50 percent of all retail payments in the country into digital form and the onboarding of at least 70 percent of filipino adults in the formal financial system. with the enabling regulatory environment complemented by the pandemic that forced people to adopt modern payment systems, we are confident that we can achieve our twin targets by 2023. to further support our digitalization initiatives, the bsp has issued licenses to six digital banks. on sustainable finance, the bsp is at the forefront of promoting sustainability principles in the financial sector. we have issued regulations requiring banks to incorporate such principles into their operations. we are also among the early investors in the bank for international settlements ’ green bond fund and the asia green bond fund. the prospects for the philippine economy are bright partly because of the strong fundamentals i have just mentioned and also because of the solid reform momentum. even as the government was preoccupied with pandemic response, three landmark laws that further open the philippines to foreign investors have been enacted. these are the amended retail trade liberalization act, foreign investments act, and public services act. during the last six years, the duterte administration invested heavily in infrastructure under its build, build, build program. i call the period 2016 - 2021 as the philippines ’ golden age of infrastructure, with infrastructure spending as percent of gdp hitting an average of 5. 0 percent. in contrast, infra spending as a percent of gdp averaged 1. 5 percent from 2001 to 2009 and 2. 5 from 2010 to 2015. the good news is that the incoming administration will inherit a better state of infrastructure to aid its development agenda. a total of 88 infrastructure flagship projects for completion in 2023 and beyond will e up for the next administration to continue. with the economy on the mend from the covid - 19 crisis, macroeconomic prospects are bright. the international monetary fund shares the view about the philippines ’ favorable economic prospects vis - a