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BSP Issues Year-End Report

12.28.2006

The Philippine economy continued to grow in 2006 on the strength of solid economic fundamentals. Economic growth was achieved in an environment of decelerating inflation with the November year-on-year rate of 4.7 percent. The economy drew strength from the favorable performance of the country’s external sector traced to robust remittances and the double-digit growth of exports. The country’s positive external position allowed the build-up of a healthy level of international reserves,which reached a record high of  US$22.6 billion  as of end-November and contributed to the strengthening of the peso, which closed at P49.195 per  US dollar on 27 December. The banking system remained generally sound and stable as shown by  the strong asset expansion on the back of improving asset quality, with the NPL ratio declining to 7.2 percent as of October 2006 and adequate capital position, with the capital adequacy ratio at  19.6 percent on a consolidated basis  as of  March 2006

Headline inflation during the first eleven months of 2006 averaged 6.4 percent, lower than the 7.7 percent eleven-month average a year ago. The decelerating inflation allowed the BSP to keep its policy rates unchanged at 7.5 percent and 9.75 percent, respectively, in 2006, after a round of policy-tightening measures in 2005.The BSP adopted a tiering scheme on banks’ placements with the BSP in November 2006 to encourage banks to use their excess funds for lending and spur business activity.

To further enhance market confidence, the BSP has decided to prepay in full its outstanding obligations to the International Monetary Fund (IMF) before the end of the year. This means that the BSP will be paying the IMF ahead of the scheduled maturities of these obligations, which extend to 2008.This will trigger the country’s  early exit from its post-program monitoring (PPM) arrangement with the IMF scheduled to end in April 2007. With the BSP’s international reserve level at a record high, the prepayment of the IMF debt is expected to send a clear signal to the international community that the structural reform process and macroeconomic prudence  in the Philippines have firmly taken root to allow reduced engagement with the IMF.  Finally, the pre-payment will serve as a watershed event in the Philippines’ relationship with the IMF, since it will mark the end of the country’s use of the IMF resources after nearly four and  a half  decades.

During the year, the BSP continued to pursue its major advocacies in the areas of microfinance, small and medium enterprises (SMEs), export promotion and OFW remittances.

The BSP focused its initiatives for 2006 on increasing the scale and scope of microfinance in the country, specifically within the banking sector. There are now over 200 banks engaged in microfinance—nine micro-finance oriented banks and around 196 rural and cooperative banks with some level of microfinance operations. As of June 2006, these banks reached more than 630,000 micro-borrowers with total loans amounting  to P3.7 billion, 12.6 percent higher than last year’s level.  

The BSP promoted the development of the SME sector by adopting measures to improve access to  financing through lower reserve requirements and  relaxing rules on bank branching, risk weighting, single borrower’s limit, connected lending and documentation for banks that cater to SMEs. In particular, the BIR requirement of the submission of Income Tax Returns (ITS) and  financial statements has been temporarily suspended for two years for small enterprises.

Another BSP initiative was its P10.5 million financial assistance to the Export Development Council which was made available beginning August 2005 to raise export performance and competitiveness. As of October 2006, about 90 percent of the BSP grant has been utilized with seven projects completed. Further, the BSP is prepared to contribute to the Export Promotion Fund (EPF) now in the process of being established for capacity building projects. 

To  improve the remittance environment for OFW remittance flows, the BSP efforts have been focused on the following: (1) facilitating the flow of remittances through formal channels; (2) encouraging banks to reduce remittance charges; and (3) encouraging beneficiaries to channel savings to investment instruments and to enterprise activities, including in SMEs, and microenterprises.

The BSP also simplified further its rediscounting guidelines and launched its e-rediscounting facility to facilitate greater access to credit particularly for borrowers from the countryside.  

The BSP’s policy directions for the mediumterm will continue to be founded on its twin responsibilities of maintaining price stability and a sound banking system. Moving forward, monetary policy will be geared towards addressing the risks to inflation while being mindful of the economy’sgrowth objectives.   In the area of banking supervision, the   BSP will pursue further the implementation of key financial sector reforms needed to maintain a healthy and stable banking system and develop a deeper and efficient capital market.

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