The growth momentum of the Philippine economy in 2007 was sustained on the strength of solid macroeconomic fundamentals, the best in 30 years, which were realized through prudent macroeconomic policies and continued structural reform efforts. Broad-based economic expansion was achieved in a low inflation environment. Inflation averaged 2.8 percent in 2007, well below the 4.0-5.0 percent target range for the year and the lowest annual average in 21 years. The country generated a robust external surplus position of US$8.6 billion in 2007 on the back of sustained inflows of remittances from overseas Filipinos and higher capital inflows. This contributed to the firmness of the peso, which averaged P46.15 per US dollar in 2007, and provided the BSP the opportunity to build up its international reserves, which reached a historic level of US$33.7 billion as of end-December 2007.
The health of the banking system continued to improve with key performance indicators reflecting its overall soundness. Bank lending expanded, while asset quality improved significantly with the banking system’s average non-performing loan (NPL) ratio declining to 5.3 percent as of October 2007. Moreover, banks remained adequately capitalized with average capital adequacy ratio of 19.3 percent as of end-June 2007, which was above the statutory level set by the BSP at 10.0 percent and the Bank for International Settlements’ (BIS) standard of 8.0 percent.
To allow freer and more efficient cross-border movement of foreign exchange, the BSP implemented two waves of reforms in its foreign exchange regulatory framework during the year, first in April, followed by a second wave of liberalization in December. The first phase of reforms was geared towards providing markets greater access to foreign exchange for outward investments and over-the-counter transactions. Meanwhile, the second phase of liberalization aimed at promoting greater integration with international capital markets and risk diversification supportive of an expanding economy with global linkages and at streamlining the documentation and reporting requirements on the sale of foreign exchange by banks.
The BSP continued to pursue its major advocacies in the areas of export promotion, microfinance, small and medium enterprises and financial literacy and other information programs in 2007. More specifically, to assist the export sector, the BSP contributed P50 million to the Export Promotion Fund (EPF) of the Export Development Council’s (EDC). The EPF is envisaged as a public-private sector partnership, which will focus on capacity building projects, to help promote the sustained growth and competitiveness of the export sector. The BSP also organized symposiums for exporters on hedging and the different hedging products offered by banks. Cognizant of the significant economic contribution of remittances to the country, the BSP carried out initiatives to improve the overseas Filipinos’ remittance environment. During the year, the BSP launched the OFW web portal which links web pages on remittance products and services, network, and service fees/charges of participating banks. Transparency in bank charges enables overseas Filipinos to shop for cheaper and better service providers. At the same time, this encourages greater competition among remittance agents and promotes lower remittance fees and charges. Moreover, the BSP in coordination with other institutional partners continued to conduct the financial learning campaign to promote a culture of savings and investments among OFWs and their families by informing them of alternative opportunities for the utilization of remittances, e.g., savings/investments in financial instruments, or savings in small- and micro-business ventures.
The BSP’s policy thrust over the medium term will remain rooted on its twin mandates of maintaining price stability and fostering a sound banking system. Monetary policy will continue to aim at addressing potential risks to inflation to ensure stable prices conducive to sustained economic growth. Inflation is expected to be within the 4.0 percent + 1.0 percentage point target for 2008. The BSP will also continue to push for the implementation of vital financial sector reforms needed to maintain a strong banking system and develop a vibrant capital market that would be able to respond to the emerging challenges of growing global integration.