amando m tetangco, jr : policy challenges amid an evolving investment environment speech by mr amando m tetangco, jr, governor of bangko sentral ng pilipinas ( bsp, the central bank of the philippines ), at the inaugural philippines investment summit, organized by the financial times in partnership with first metro investment corporation, makati city, 19 may 2014. * * * good afternoon. let me first thank the financial times and first metro investment corporation for inviting me to address this inaugural philippine investment summit. the summit couldn ’ t have come at a better time. today, emerging market economies, including the philippines and other asian countries, face a “ new wave of market volatilities ”. in the first quarter of this year, many emes saw large capital outflows, which resulted in eme currencies depreciating, bond yields rising, and equities coming under pressure. although some of these trends have somewhat dissipated in the last few weeks, risks from the underlying reasons for the volatilities remain. i therefore welcome this opportunity to share some of our thoughts on the remaining risks. against this background, i will discuss the outlook for the philippine economy as well as financial market concerns and the bsp ’ s approach to safeguard against financial instability. this new wave of market volatilities let me begin by considering what i see are the principal sources of the impulses for this “ new wave ” of market volatilities. first, the series of fed announcements and actions. go back to may 2013 and the “ taper tantrum ”. flash forward to fed reserve ’ s announcement in december the same year of the start of taper. and then the eventual commencement of the taper in january this year. with additional fed asset purchases now down to only $ 45b from $ 85b at the end of 2013, and the taper seen to be fairly on course, the market has found itself at a stage where the betting has turned to when the “ lift off ” would happen. in other words, markets are speculating when the fed would begin to hike the fed funds target rate. indeed, markets would like to find the next reason to put on a new trade! a second source of impulses is the still - patchy structural reform - dependent growth paths of key trading partner asian economies, particularly japan and china. although growth in japan has picked up as the first two arrows of abeno

pursue structural reforms to strengthen our buffers against external and domestic sources of headwinds. disciplined fiscal policy has also yielded good dividends, as the government now has wider headroom to undertake critical social and physical infrastructure that could in turn improve the investment climate for more enduring growth over the long haul. further, prudent monetary policy has helped safeguard non - inflationary growth and financial stability, creating a predictable environment for growth in consumption and investment, thus fueling the economy ’ s momentum. indeed, the underlying story of the economy ’ s sound growth prospects remains intact. policy prescriptions : how did we get here? in the next few minutes, allow me to briefly describe some of the principles underlying the bsp approach in dealing with the ( external ) volatilities the country faces. first, to avoid policy confusion, we use tools from our enhanced tool kit distinctly. for instance, we carefully calibrate policy rates to respond to inflationary pressures. at the same time, we use macroprudential tools selectively to address financial stability pressures, including those related to potential exchange rate volatility. to illustrate, in our last two policy meetings, we raised the reserve requirements because we needed to pre - emptively address strong liquidity growth that could lead to potential asset bubbles. meanwhile, even as the balance of risks remained tilted to the upside, we kept policy rates steady because the assessment is that inflation over the policy horizon would still be manageable. together, these moves would make any future monetary policy move more effective. second, in addition to keeping our regulations in step with the global regulatory reform agenda, we work with other government agencies, like the sec, to curb market conduct in economic transactions that are not under bsp supervision, such as those by real estate companies, other non - financial entities and asset managers. examples of the latter are the frameworks for good governance of institutions and consumer protection that we have put in place in collaboration with co - regulators under the ambit of the financial sector forum. as for the former, an example is our full shift to basel iii capital adequacy requirements – as with other countries in the region. third, we sharpen market surveillance. for instance, we have refined some of our reportorial requirements to allow us to see things somewhat differently, with emphasis on financial bis central bankers ’ speeches stability implications of specific activities. we recently expanded the definition of real estate exposures that banks would report to us to