My presentation this morning will cover the impact of the global crisis on the monetary, external and financial sectors; the risks and challenges facing these sectors; and the opportunities we see amidst this crisis and BSP’s strategy and policy commitments to take advantage of these opportunities.
It has just been over a year and a half since the world became critically aware of the word “subprime” and in this time the crisis has evolved into the first truly global crisis world economies have faced. The impact on the Philippines has so far been limited. In fact, the Philippines ended 2008 better placed than many countries in the region. But we are fully aware that our economy is not immune to the ongoing global financial turmoil.
Risks and Challenges
The way I see it, there are three major challenges that the monetary, external and banking sectors face at this time.
First, risk aversion that follows from continued uncertainty in the global financial markets.
Second, recessionary trends spreading beyond the developed world and into emerging market economies.
Third, risk of the negative feedback loop.
When the crisis broke out (and up to now), our banking system had very minimal direct exposure to the troubled financial institutions. The most visible impact of the global financial turbulence on the Philippines has been volatility in our domestic financial markets, due principally to risk aversion against emerging markets, including the Philippines. The graphs on this slide show that both the peso and the stock market have lost most of their gains from 2007.
This slide, on the other hand, shows that credit spreads on Philippine debt have also widened from their levels in 2007, with 5-year CDS spreads reaching as high as 820 plus basis points at the height of the uncertainty in the global financial markets in October 2008.
Two facts are worth noting at this point: First, these trends have been shared by economies in the region, and, second, there has been some “traction” in the market recently. The peso, PHISIX and credit spreads have been consolidating somewhat.
Nevertheless the global financial markets remain volatile and our own domestic markets remain vulnerable to changes in market appetite and investor risk preferences.
Let me now show you how risk aversion has affected some of the emerging market economies in Asia. – Exchange rates have become more volatile in 2008. The equity capital inflows everyone enjoyed in 2007 were reversed. Sovereign credit spreads have widened during the height of the financial turmoil in the US. -- Nevertheless, our country has fared at par, if not better, than some of our Asian neighbors amidst the global financial crisis.
The second major challenge we face is the threat of global recession.
As you are aware – the US, UK, most of Euroland, Australia, Hong Kong, Singapore, and Japan, to name a few, have all been declared officially in recession. The most recent published IMF projection for 2008 world growth is 3.4 percent and 0.5 percent in 2009, while the World Bank projects world GDP to slow to a meager 0.9 percent in 2009. These forecasts continue to be reviewed as more information about the financial market is known.
Given such an unfolding scenario of weaker global demand, coupled with easing of oil and non-oil commodity prices, the National Government has revised its projections downwards. In particular,
1. Philippine inflation is seen to further decelerate, and will likely fall within the target range in 2009 of 3.5% +/- 1 ppt.;
2. The BOP for 2009 would still be a surplus of about US$ 700 million;
3. The current account is expected to also still be in surplus, supported by remittance flows, which may be flat but not contract, and a smaller import bill due to significantly lower international oil prices.
4. These developments would allow us to keep the GIR in 2009 at about $37.5 to $38.5 billion.
The new NG projections shown in the earlier slide reveal that the macroeconomy is expected to remain broadly stable against the tide of the financial turmoil. But there is a risk -- should the global economy weaken more than expected and cut deeper into the domestic economy, this could also weaken the domestic financial system and result in the latter being unable to provide credit services to fuel the economy – THE NEGATIVE FEEDBACK LOOP, as many refer to it. In some parts of the globe, credit markets are “frozen” due to the economic slowdown.
The Philippines hasn’t come to this… ..and we will make sure that we don’t. How shall we manage that?
Opportunities and Thrusts
Ah…. This is where the “eye for opportunities” comes in.
Even as the Philippines has been characterized as “an island of calm” in these troubled waters, there continues to be that risk of the negative feedback loop. Let me highlight three thrusts relevant to the monetary, banking and external sectors that I believe will help manage the situation.
Going forward, the BSP will:
1. Consider opportunities to further ease monetary policy to help stimulate growth, mindful of potential tightening in credit conditions;
2. Commit to ensure a manageable external payments position; and
3. Continue to buttress the banking system to ensure that it remains safe and functions efficiently.
How shall we do these?
The BSP’s primary mandate is price stability.
However, the recent lowering of the risks to inflation has given BSP greater flexibility to help support growth. With the easing of oil and other non-oil commodity prices in the world market and the moderation in inflation expectations, inflation (as I mentioned before) is now expected to further decelerate—and be within the target ranges—in 2009 and 2010. Actual headline inflation dropped further last January to 7.1 percent from 8 percent in December, the lowest since March 2008.
These developments opened the opportunity for BSP, during its last two Policy meetings, to cut its policy rates by a total of 100 basis points. The reduction in rates makes more funds available for lending to corporations, including small and medium business enterprises, as well as for consumer loans.
We will continue to monitor developments to ensure that our policy settings remain appropriate.
Prior to the twin rate cuts, BSP also moved (at the height of the global financial market uncertainty in late 2008) to ensure there was sufficient liquidity in the system then and to address any liquidity distribution issues. These preemptive moves included the opening of a US dollar repurchase facility; increase in the budget for, and more recently, liberalizing the guidelines of rediscounting facilities; and reduction in the reserve requirements.
Liquidity fuels economic growth. But excess liquidity fans inflation. Balance is therefore necessary to ensure that these twin states are addressed. This slide shows a graph of M3 (on the left) or the amount of money circulating in the economy and credit growth (on the right).
Together, these two charts show that while domestic liquidity continued to grow (latest at 15.6% in December), meaning funds are available in the system for investment and other productive activities, bank lending has also remained robust (latest at 17.5 percent also in December), with loans for production activities driving the expansion with an 18.3 percent growth.
While we have allowed liquidity to grow faster than we would normally tolerate, we see that these funds are being used for productive sectors.
A second thrust is the commitment to ensure a manageable external payments position.
The BSP’s external sector policy will remain focused on ensuring that the economy’s external vulnerabilities are reduced. We will continue to build up our international reserves for self-insurance to reduce our vulnerabilities to the volatilities in international financial markets.
As of end-January 2009, our reserves have risen to an all-time high of US$39.2 billion. This suffices to cover about 5.9 months of imports of goods and payments of services and income, or alternatively, it could cover our short-term external debt based on residual maturity about three times over.
We were able to do this because our external payments position remained in surplus in 2008, supported by remittances of overseas Filipinos as well as higher services receipts particularly from business process outsourcing. In January 2009, our balance of payments position posted a surplus of US$1.7 billion.
We will also continue to pursue our policy of a market-determined exchange rate and implement measures that would ensure external debt sustainability.
A third window of opportunity is the banking system that has remained stable, against the backdrop of ongoing global financial turmoil.
This slide shows that the banking system’s asset base has been expanding steadily, supported by sustained growth in deposit liabilities. Banks have been offloading their non-performing assets and problem loans. As a result, the NPL ratio is now at the pre-Asian crisis level of around 4.0 percent. Further, the profitability of the banking system has continued to increase, albeit with some moderation as of late. Banks have remained capitalized at levels above both the BSP-regulatory requirement and the international (BIS) standard. In addition, let me also assure you that the rural banking industry remains strong and healthy despite the recent closure of some rural banks that have declared bank holiday.
A stable and efficiently functioning banking system allows the banks to continue to perform their central roles of effectively channeling funds to productive uses and managing and distributing risks.
Therefore, the BSP will continue instituting reforms to:
1. Further improve the regulatory and supervisory framework.
2. Promote enhance risk management systems
3. Improve corporate governance structures in banks
4. Strengthen disclosure practices for better consumer protection, and
5. Push for the passage of amendments to the Central Bank Charter.
It will indeed be a tough operating international environment in 2009.
So what is our central message? The Philippine economy is not immune to the crisis but it is better positioned now to face a period of continued economic and financial volatility.
Your monetary policymakers are wide awake at the wheels and, more importantly, we have the tools to ride out the storm –
1. Monetary policy is flexible and has room to act preemptively and swiftly;
2. The discipline of debt management has been ingrained in the policy framework; and
3. There is a deliberate effort to keep the banking system sound and stable.
All these factors should see us through the ongoing economic downturn.
The way I see it, there are two steps to overcome the challenges that confront us.
The first is to see, as American writer Charles Swindoll once said, that behind each challenge lie great opportunities disguised as impossible situations.
The second is to persevere. Quoting an old Chinese proverb, “Without the strength to endure the crisis, one will not see the opportunity within. It is within the process of endurance that opportunity reveals itself.”
Thank you for your attention.