“Philippine economy continues to offer a convincing case for investment and sustained growth”

Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), believes that the country’s macroeconomic environment has been marked by solid economic growth and low inflation. It has also shown notable resilience amid global challenges. Going forward too, the country is expected to continue to push forward with appropriate reforms and policies.

Excerpts from the speech of Amando M. Tetangco, Jr, Governor, BSP, at the Euromoney Philippines Investment Forum 2016, Manila, September 6, 2016…

On the macroeconomic front

The gross domestic product has been robust and durable, registering 70 consecutive quarters of positive growth (even through the global financial crisis). In the second quarter of this year, the country grew by 7 per cent – its fastest since the third quarter of 2013.

Quite notably, there has been resurgence in manufacturing in recent periods, and domestic tourism has also been on the rise, creating a broader base for economic growth. Moreover, inflation has been benign and inflation expectations continue to be well anchored. Our latest assessment shows that inflation will be just below the lower end of the government’s target range for this year, but should move to the target range of 2-4 per cent in 2017-18.

The banking system has also been an enabler of economic growth as it continues to channel lending to the productive sectors of the economy. This is without sacrificing credit underwriting standards and the quality of their balance sheets. In the meantime, our external liquidity position has been robust. We have been running current account surpluses for 13 years now, allowing us to beef up foreign exchange reserves to an all-time high of $85.5 billion as of end-July 2016.

The Philippine economy continues to enjoy a position of relative strength. And this has not been unnoticed by global investors. We have had our share of surges in capital inflows in search of yield. And while some of these have “come and gone”, a large portion of the inflows have stayed and remain invested in our domestic assets.

Good institutions are indispensable

For more than two decades now, we have been putting in place structural reforms that have liberalised key industries, including utilities, the power sector, and the banking system. We have adopted legislation aimed at improving governance in government corporations (GCG) and public procurement (GPPB); as well as ensuring fair competition in industry and vital services (PCC). These reforms have helped raise the country’s total factor productivity and are seen to help further reduce incremental capital output ratios. These efforts complement the ongoing reforms to further improve “ease in doing business” and lessen “frictions” for investments in the Philippine economy.

In parallel, the BSP, in collaboration with market participants and other regulators, is continuing to roll out specific market reforms under our capital market reform agenda. The reforms which include, among others, developing a benchmark governance framework and creating a repo market, should further deepen our domestic capital market and align its functioning with global standards. Alongside these, the BSP has also put out banking regulations that will enhance corporate governance and credit and information technology risk management among banks, in tandem with the adoption of the other components of Basel III.

Furthermore, just last month, the BSP embarked on a significant liberalisation of foreign exchange rules. These measures aim to encourage the public to transact their foreign exchange needs more with banks by, among other things, increasing the current limit of allowable foreign exchange purchase from banks without supporting documentation, and allowing payments in foreign exchange for certain transactions between residents.

In an effort to further improve the transmission of the monetary policy, the BSP adopted in June this year, the interest rate corridor framework for its conduct of monetary policy. These monetary, capital market and banking reforms are meant to further strengthen the financial markets so that they could more effectively “marry” the users and sources of funds.

There is enough liquidity in the domestic financial system. What needs to happen is that more and more of this liquidity is pushed to the productive sectors of the economy more expeditiously, not only through bank lending, but also through a robust capital market.

The national government for its part, under the new administration, has committed to a 10-point economic agenda that aims to continue the factors that led to growth in the Philippines: maintaining an orderly fiscal house, investing in human resources and capital development, among others.

Conditions are never static

Externally, we are affected by the policy actions of advanced economies. The most pressing of these are the timing of the next hike of the Federal Reserve and the magnitude of any further easing from the Bank of Japan and the European Central Bank. As the markets digest any pronouncements from AE policymakers, we will continue to experience a toggling between “risk on” and “risk off” market behaviour, which always creates “noise” in financial markets.

The BSP has the tools to address such “noise” in our onshore markets, to calm our participants and keep market behaviour in check. Specifically, we have room to allow the exchange rates to absorb some of these near-term shocks or provide foreign exchange liquidity under a flexible exchange rate policy.

Moreover, we could also adopt targeted macro prudential tools to bring about a more fundamental change in the market behaviour. In addition, given the current benign inflation outlook, the BSP has room to keep its policy rates steady to provide a further anchor for stability.

A second potential source of vulnerability are shifts in Chinese economic policies – firstly, from a growth model that relies on exports and fixed investments to one which is driven by domestic demand, and secondly to a more market-oriented (and weaker) Renminbi. Early expectations were that the shift to domestic demand would result in significant slowing in Chinese growth, which could dampen exports of its trading partners, such as the Philippines.

More recent forecasts, however, show a somewhat less dire outlook on China due to fiscal and monetary support from the authorities, easing risks of knock-on effects on trading partners and demand for commodities in the international market.

On the other hand, the policy of a weaker Renminbi is not expected to lead to stronger competition against our exports because we have a relatively low degree of export similarity with China. Should the policies of the Chinese authorities indeed bring about more sustainable growth, this should be overall positive for us as it reduces global tail risks.

A third risk is Brexit. The direct impact to us of a slowdown in the UK would be minimal, given that our exports to the UK account for only 0.8 per cent of total exports. It is the possibility of second-round effects on the European Union (EU), however, that is of greater concern because exports to the EU account for 11.5 per cent of total exports. We, therefore, need to remain watchful of developments in the UK, particularly during the transition to “exit.” On the domestic front, we have to contend with natural calamities.

The balance – short versus long-term dynamics

On balance, the Philippines continues to forge an economic growth story that puts emphasis not only on strength but also on long-term stability and resilience. The fact that the Philippines has just entered the “demographic window”, in contrast to the ageing population of some neighbouring economies, underpins our long-term resilience. There is fiscal space to pursue infrastructure investments geared towards increasing the productive capacity of the economy.