The Philippines: Vision Toward Sustained Rapid Growth
Place: Manila Polo Club, MAIN LOUNGE, McKinley Road, Forbes Park, Makati
Speaker: BSP Governor Amando M. Tetangco, Jr.
Officers and members of the Rotary Club (RC) of Manila (led by your president, Gert Gust), RC of Chinatown Manila (led by your president, Rosie Lim), RC of Forbes Park (led by your president, Peter Kawsek, Jr.); Cong. Roilo Golez, special guests, ladies and gentlemen, happy New Year and good afternoon.
It is always a pleasure to touch base with the Rotary Club. But this year, I am especially pleased to join your meeting because this year’s joint meeting is one among three RC chapters. If I recall correctly, last year it was the RCM and the RCFP together. This year, the RCCM is also participating in this joint meeting.
I find speaking before the Rotarians during this time of the year, when we traditionally set our sights on the future, most worthwhile. Why do I say this? The RC has always been known for leadership and service in both public and private endeavors. I am certain you will also agree with me that Rotarians are distinguished, not only for your capacity and courage, but more importantly, your desire and drive to move our country forward and upward.
It is my hope therefore that in the next few minutes as I share with you my thoughts on how I see our country’s economic and financial landscape going forward, I would succeed in encouraging you to an even stronger engagement and partnership as we sail through both the challenges and the opportunities that the unfolding operating environment offers.
2011 - A year of Promise
Let me begin by saying, I firmly believe 2011 is a year that offers much promise for our country. When I was here last year, I spoke about the global economy being at the cusp of recovery. This time, numbers from the first semester of 2010 show that the worst effects of the global crisis are behind us.
Domestically, I believe we have surpassed most expectations. Indeed, the Philippines has entered 2011 from a position of strength.
Let me illustrate. . .
Our economy sustained its dynamism and grew robustly in 2010—7.5 percent in the first three quarters—on the strength of solid macroeconomic fundamentals, timely and effective policy responses, and purposeful reforms.
At this rate, our economy is poised to grow at a rate faster than the government’s target of 5.0 to 6.0 percent in 2010.
Strong output growth was realized in a low inflation environment. Full year inflation averaged 3.8 percent in 2010, well within the government’s target range of 3.5 to 5.5 percent.
The country’s external payments position continued to strengthen. We posted an unprecedented surplus of US$13.2 billion in the first 11 months of 2010—allowing for the healthy build-up of international reserves and helping ensure external debt sustainability.
Both of these have strengthened our resilience against external shocks and consequently led to a credit rating upgrade for the country from Standard and Poor’s (S&P). This morning, Moody’s upgraded the Philippines’ credit rating outlook from stable to positive. Again, this is reflective of our strong external position.
International reserves stood at an all-time high of US$60.6 billion as of end-November 2010, considerably higher than the end-2009 level of US$44.2 billion. The preliminary figure for December is US$62 billion, before revaluation. The end-November GIR level could cover close to 11 months’ worth of imports of goods and services and is 6 times the country’s external debt based on residual maturity. The strong reserves position provides a hefty cushion against external shocks.
Exchange rate stability has been maintained, even as the peso has retained its competitiveness.
Meanwhile, an increasing deposit base, steady profitability, adequate capitalization (above BSP regulatory standards), and solid asset quality with low non-performing loan ratios continue to characterize the banking system. Its soundness has enabled the banking system to perform a catalytic role for a more dynamic and participatory economic development.
In other words, ladies and gentlemen, all our economic indicators are pointing in the right direction. Quite a few have even surpassed targets.
The Ideal Combination
Strong growth in an environment of low and stable inflation is what we experienced last year – that is the ideal combination. With the New Year, we turn over a new leaf. And with our recent solid economic performance, there is basis for us to set our sights to sustained rapid growth.
We must aim high and indeed we can aim high. Goal determines destination. If we set a high enough goal . . . we can only see higher and better things for ourselves.
It’s similar to when one plays video games. When playing these games you do so with much intensity and passion . . . because you want to go to the next level and then the next . . . and then the next. . . .
Ladies and gentlemen, only sustained rapid growth can help bring significant improvement in the lives of ordinary Filipinos. That should be our vision.
Risks to our Vision
To be able to reach our goal, we must be keenly aware of our surroundings. What are the challenges and possible risks to this vision? From the BSP’s perspective, we see a number of challenges in the global arena that could affect domestic monetary policy and the banking regulatory environment. Let me just cite four.
First, global growth is still expected to be subdued this year.
Although fears of a double dip have receded, recovery has been uneven across countries, with advanced economies lagging behind developing ones. The massive non-traditional monetary and fiscal stimulus packages put in place by advanced economies have not produced quickly enough the desired effects on domestic jobs creation. That said, export-dependent developing economies are at risk should G-3 economies continue to lag. We would therefore be well-advised to review trade partnerships. In the specific case of Asia, we could consider increasing trade among our economies to better tap the demographics or the internal demand of our own region.
There is no major threat to global inflation at this time.
As I see it, inflation is only developing as an idiosyncratic risk factor in emerging markets, in light of above-potential growth for EMs and higher commodity prices. Now, whether these become more generalized among emerging markets remains to be seen.
In the Philippines, the manageable inflation outlook has accorded the BSP room to keep our policy interest rates steady since July 2009. Nevertheless, developing economies, including the Philippines, should still be mindful of changes in the monetary policies of advanced economies.
Second, foreign exchange is likely going to continue to flow into economies that have better growth prospects. If investor risk appetite continues to improve, then emerging markets, including the Philippines, will likely continue to be recipients of foreign exchange.
As we have experienced in the past, these inflows, if disorderly, could complicate monetary policy, create strong currency appreciation pressures, and potentially result in asset bubbles.
So far, the BSP has been successful at taming the ill effects of the surge in capital flows on domestic liquidity, exchange rate volatility and inflation expectations. The BSP achieved this by employing a mix of policy instruments, instead of simply depending on the policy interest rate alone. In addition, the risk of a bubble over the near term for us appears limited for a number of reasons, including the conservative prudential framework we adopted in the aftermath of the Asian financial crisis.
That said, investor sentiment could quickly shift and therefore BSP monetary policy should always be vigilant and nimble.
Third, the international financial regulatory landscape is changing with the implementation of Basel III. As regulators across the globe consider how to adopt Basel III to their own domestic financial systems, regulated entities may take on a wait-and-see attitude with regards their credit operations. This could weaken real growth prospects.
For the BSP, we have always taken a phased-in approach to banking reform. Therefore, it is expected that the transition into Basel III for Philippine banks would be relatively smooth. Nonetheless, BSP should remain sensitive that adoption of international standards to our own setting must be in line with the objective of meeting the economy’s peculiar financial service requirements.
Fourth, the resolution of the debt crisis in Europe could be protracted. If indeed the road to its resolution would deepen the gap between the high interest deficit countries (PIIGS) and the much lower core interest surplus countries (e.g., Germany) in Europe, the process could adversely affect any or all of the three foregoing challenges I cited.
I’ve limited my discussion to these four (challenges), which are inherently interrelated and whose adverse impacts are shifting. The shiftiness of these challenges reminds me of a quote from actor James Dean (He was not simply the guy with the suave hair and cool jacket. It appears he was also smart).
He said, “I can’t change the direction of the wind, but I can adjust my sail to always reach my destination.” My take away from this quote is this . . . there will be things beyond our control, but for as long as our goal is clear, we can still get to our destination if we make timely adjustments along the way.
Given these possible risks, what must we do to stay on track?
1. BSP will keep its eye on the inflation ball. To sustain rapid growth, we need to maintain a low-inflation environment. For 2011, we forecast inflation to be 3.6 percent, well within the government’s target range of 3 to 5 percent. This favorable inflation outlook gives BSP elbow room in its conduct of monetary policy.
Over the next four years till 2014, the BSP has committed to an inflation target of 3-5 percent. The longer target horizon is expected to support consumption and investment by fostering greater predictability in economic decisions.
2. BSP will endeavor to keep the financial system stable.
This is essential in ensuring efficient intermediation credit to the productive sectors of the economy.
Toward this end, the BSP will further enhance risk-based supervision technologies, improve existing macro/micro surveillance tools, and continue aligning the existing regulatory framework with international standards (including the Basel III reform package).
3. BSP will ensure confidence in the country’s payments and settlements systems. Therefore, the BSP will continue to benchmark its systems and processes against international best practices.
4. BSP will sustain an environment that will support a healthy external position. The BSP expects the BOP to remain in surplus in the near-term, and will work towards an orderly build-up of international reserves, an essentially market-determined FX rate, and a sufficiently flexible FX regulatory environment.
5. BSP will continue to help create an environment of growth where no one is left behind. As such, we will continue to pursue advocacy programs in microfinance, financial literacy, consumer protection, and the improvement of the overseas Filipinos’ remittances environment.
Given all that, I think we have our work cut out for us. I hope I have made this point clear -- only sustained robust growth can help bring significant improvement in the lives of ordinary Filipinos. That is our vision. . . .
I hope also that I have painted not just a picture of where we want to go, but also a map of how I propose we get there.
Business and economics are sometimes likened to a game. There are players, contenders . . . there are rules . . . there are best strategies . . .then, there is a prize.
In the past few minutes, I’ve tried to lay out our strategy, so to speak. As I close, I’d like to share words from Albert Einstein (Unlike James Dean, Albert’s hair was often out of whack, but he was undeniably one of the smartest who ever lived). . . . Albert Einstein said, and I quote: “You have to learn the rules of the game, and then you have to play better than anyone else.”
It is my hope that I can count on you to join us in our strategy to stay on the path of rapid economic growth.
Thank you and have a good day.