By AMANDO TETANGCO
Bangko Sentral ng Pilipinas Governor
The Philippine economy sustained its growth momentum in 2013 even as the economy experienced pockets of turbulence brought about mainly by uncertainty in the external environment. For the first three quarters, GDP increased by 7.4 percent, higher than the 6.7 percent in the same period in 2012. Growth was boosted by the strong performances of services, manufacturing and construction sectors. On the expenditure side, growth came mainly from consumer and public spending as well as increased investments in fixed capital (i.e., construction activities and investments on durable equipment). Indeed, the economy has continued to run on all cylinders. More important, economic growth has been supported by key policy reforms as well as sound macroeconomic policies. The continuation of structural reforms and prudent economic and financial policies is expected to make a difference in 2014 and beyond.
The stance of monetary policy during the year was consistent with the inflation objective while being supportive of productive activities. The full-year 2013 average inflation rate of 3.0 percent was at the low end of the Government’s inflation target range of 3-5 percent for 2013. This is the fifth consecutive year that the inflation has been kept within the Government’s target range. The BSP also continued to fine-tune its monetary policy toolkit to enhance its effectiveness in maintaining price stability and addressing potential imbalances in the financial system that may disrupt the proper functioning of the monetary and financial system.
The continuing wide-ranging reforms of the BSP to improve its regulatory framework and supervisory oversight over the banking system have been one of the BSP’s major commitments over the years. The BSP has pursued reforms toward strengthening corporate governance, enhancing transparency, expanding financial products and markets, helping develop the necessary market infrastructure, and strengthening banking regulation and guidelines. These policy actions proved to be effective to the extent that banks in the country are now in a much better shape than years ago. In an increasing globally integrated financial market, the transmission of contagion risks has become faster and swifter. At the same time, the BSP has adopted a menu of macroprudential measures to complement the monetary policy toolkit to better respond to challenges of maintaining financial stability.
Furthermore, the BSP has also devised better risk assessment tools to monitor developments in the financial and foreign exchange markets for an early detection of signs of distress. These financial reforms resulted in adequate capitalization and significant improvements in the quality of their assets.
The BSP has also devoted considerable effort in building an inclusive financial system. It formulated a financial inclusion framework that is built on three areas, namely: (1) broad access to credit at reasonable rates through responsible and proportionate regulation that encourages market innovation; (2) timely and relevant economic and financial learning activities; and (3) well-founded financial consumer protection programs.
The BSP has been proactively promoting the development of microfinance since 2000, as a flagship program for poverty alleviation. The BSP has also received international recognition for the significant strides it has made in microfinance. For five years in a row (2009-2013), the Economist Intelligence Unit’s global survey on microfinance has ranked the Philippines as number one in the world in terms of policy and regulatory framework for microfinance and is consistently in the top 10 overall which includes other criteria such as institutional frameworks and stability. Meanwhile, the Credit Surety Fund (CSF) Program is a credit enhancement scheme developed by the BSP which aims to increase the creditworthiness of micro, small and medium enterprises (MSMEs) that are experiencing difficulty in obtaining loans from banks due to lack of acceptable collaterals, credit knowledge and credit track records. The purpose of the CSF Program is to serve as a security for loans of MSMEs from banking institutions by providing a surety cover in lieu of acceptable collaterals. Banks generally require collaterals when extending loans, a requirement that some MSMEs often find difficult to comply. As of 30 November 2013, 29 CSFs have been established in 22 provinces and 7 cities nationwide. Total loans approved under this facility has reached almost P1 billion.
The BSP’s Economic and Financial Learning Program (EFLP) is the flagship program for economic and financial education. This is in line with the BSP’s continuing drive to promote greater awareness and understanding of essential economic and financial issues to help the public acquire knowledge and develop the skills needed to make well-informed economic and financial decisions and choices. Finally, the BSP has also strengthened its financial consumer protection efforts by creating a consumer redress mechanism within the BSP.
Buffer against shocks
The country’s external payment position has likewise remained favorable. This has provided the country substantial cushion to ride out not only the potential headwinds but also the shocks that the external economy could face.
The country’s current account continued to exhibit a surplus as overseas Filipino remittances, BPO receipts and tourism revenues provided steady sources of foreign exchange. This situation allowed the BSP to increase the country’s gross international reserves to reach US$83.7 billion as of end-December 2013, enough to cover 12.1 months’ worth of imports of goods and payments of services and income and equivalent to 8.4 times the country’s short-term external debt based on original maturity and 5.8 times based on residual maturity. The BSP’s commitment to improve further external debt management resulted in the decline in the external debt-to-GDP ratio to 21.9 percent in end-September 2013 from the previous year’s ratio of 25.6 percent.
The solid macroeconomic fundamentals and sound economic management did not escape the attention of the investment community. The country obtained investment credit rating status from the three major credit rating institutions. Fitch was the first to raise the country’s credit rating status to investment grade on 27 March 2013. Standard & Poor’s and Moody’s followed suit on 2 May 2013 and 23 October 2013, respectively. These rating agencies have cited the disciplined fiscal management, declining reliance on foreign currency debt, strong external position, and low and stable inflation levels as the major bases for the credit rating upgrade. In addition, the BSP was recognized as the best macroeconomic regulator in Asia-Pacific Region for 2013 by the Asian Banker.
The BSP recognizes potential risks that could disrupt the economic momentum. The country experienced a trilogy of unfortunate events brought by both man-made and natural calamities: the armed conflict in Zamboanga, the earthquake in Bohol and Cebu, and typhoon Yolanda which affected several regions in the Visayas during the latter part of 2013. The calamities have shown that our “Bayanihan” spirit is a cultural wealth that could be relied upon particularly in times of distress. In this spirit of working together, the BSP also did its part to help ease the impact of Yolanda by putting in place regulatory relief for banks in the affected areas, so banks could extend the same to their customers.
While these natural calamities have caused economic disruption in some parts of the country, the Philippines is expected to weather such adverse effects on the back of strong macroeconomic fundamentals and sustain the growth momentum.
Global headwinds could also cause bumpy rides along the way. While latest report from the International Monetary Fund (IMF) projects a higher global economic growth for 2014, there could be a reversal of economic fortunes between advanced and emerging market economies that could tip the growth momentum toward the former. This could result in portfolio rebalancing away from emerging market economies that may cause short-term imbalances among prices of financial assets. The country, however, has enough ammunition to withstand the adverse impact of a sudden capital flows reversal away from emerging market economies. The BSP can deploy a menu of policy actions similar to those adopted during the recent 2008-2009 global financial crisis such as providing liquidity through the BSP’s standing dollar facilities, preventing excessive volatility in the foreign exchange market, as well as access to regional financing arrangements. Moreover, improving economic conditions in advanced economies could translate to higher exports receipts, foreign investments, tourism receipts and workers’ remittances from these countries.
The outlook on Philippine growth and inflation remains favorable. The economy is expected to grow between 6.5 to 7.5 percent in 2014, with recovery and rehabilitation efforts expected to bolster growth.
For the medium-term, growth would be supported by stronger performance from the construction, manufacturing, business process outsourcing and private services. The country’s attainment of investment grade status could attract not only foreign but also spur local investments that would in turn generate jobs.
Inflation is expected to remain within the target range over the policy horizon. In 2014, inflation is seen to be around slightly higher than the mid-point of the target range of 3-5 percent.
On monetary policy, the BSP is committed to maintaining price stability conducive to a balanced, sustainable and inclusive economic growth.
On financial sector policy, the BSP commits to promote the stability of the financial system by continuing to craft banking regulations that are responsive, consistent with best practices and in line with the international financial architecture reform agenda.
On the external front, the BSP remains supportive of policies that will help cushion the economy from external shocks. We will continue to maintain a market-determined exchange rate and a comfortable level of reserves. The BSP will also continue to promote external debt sustainability by keeping the country’s outstanding external debt manageable and within the economy’s capacity to service its debt in an orderly manner.
In conclusion, the BSP will continue to guard against complacency and remain committed to implement monetary and financial sector policies that are supportive of the country’s economic development. While 2014 is expected to be a narrative of continued economic strength, we will guard against tail events, both domestically- and externally-driven, and stay on the course.