Twenty six (26) days. That is what my ENDO counter says. Some of you may have seen this in my office. It was a gift from my children, to help me mark my last day as BSP Governor.
A Good Run Despite Obstacles
It has been a good run, so far, ladies and gentlemen, and so, to start my remarks off tonight, I wish to express my deep gratitude to all of you, for your support and cooperation (well, most of the time, at least).
The financial system has been through a lot in the last twelve years. My term as BSP Governor started quite strong, with the Philippines pre-paying all of its debts to the IMF, becoming debt-free from the Fund in 2006, after four decades of being one of the longest users of Fund resources! We were then called a chronic user of IMF credit facilities. We were riding high, with the peso appreciating almost 20% in 2007.
But then came the Global Financial Crisis and its aftermath. Green shoots (does anyone still remember them?), those green shoots that turned into weeds. The unconventional monetary policies that were adopted by advanced economies (and the acronyms that were created as a result – QE in the US, QQE in Japan, LTROs/EAPP (Long-Term Repurchase Operations/Expanded Asset Purchase Program) in Europe??? And “Operation Twist”!). Shifts in the center of economic power from the West to the East, from advanced to emerging markets.
Now, we are looking at normalization of policy rates in AEs, particularly the Fed as the US economic recovery gains traction. The rise of populism. The threat of a retreat from multilateralism.
Closer to home, we have had our share of natural disasters and three changes in our own political leadership.
Even through all these, the Philippine financial markets have come out better and stronger. Confidence in the financial markets and the banking system has been sustained. Banking system assets tripled from just over P4 trillion in 2005 to P14 trillion as of end-March 2017. Assets under management (AUM), likewise, tripled in growth, from P901 billion in 2005 to P3 trillion as of end-December 2016.
Growth in the capital markets was just as pronounced. The PSE composite stock index grew to 8,001 as of 5 June 2017 from 2,096 in 2005. Stock market capitalization also increased from P5.9 trillion in 2005 to P15.8 trillion as of end-April 2017.
The size of the local currency bond market more than doubled from P 2.2 trillion in 2005 to P4.9 trillion as of end-March 2017.
If we look at trading activity, volume in the Fixed Income Exchange tripled from P437.7 billion in 2005 to P1.3 trillion for the first 5 months of 2017, alone.
FX spot markets have deepened with a general rising aggregate volume. Taken all together, these indicators show that financial markets remain active and that market liquidity has significantly improved.
If we consider just our banks, the Philippine banking system has continued to reap positive assessments from credit rating agencies. In fact in 2016, the Philippine banking system was the only banking system in Emerging Market Asia, which earned a positive outlook from Fitch Ratings. Further, our banking industry is the only one among rated banking systems in ASEAN that has a stable outlook in terms of operating environment, asset quality, capital, profitability, funding and liquidity, according to Moody’s.
In other words, ladies and gentlemen, our concerted efforts have paid off!
Running on Solid Tracks
The positive developments in the financial markets have transpired in an environment of strong macrofundamentals.
Some may ask, which factor brought about the good performance of the financial markets – was it the solid fundamentals? Or did the strong fundamentals result from sound financial markets. The direction in which the “feedback” works is really still an empirical question. Traditional thinking has been that as an economy grows, so does its financial system. However, we all experienced that during the GFC, the effect could go the other way-- weaknesses in the financial system could cripple the real economy.
Thankfully, in the Philippines, our experience so far is that, all the indicators have been strong, and continue to move in the right direction! For over a decade now, we have had a sound financial system alongside continued positive economic growth, in an environment of low and stable prices.
Indeed, we have experienced 73 consecutive quarters of GDP growth. Moreover, our economic growth drivers have been intensifying and improving in diversification. The expectation is that real GDP will continue to grow to within the Government’s target range of 6.5-7.5% in 2017.
Inflation has been manageable. Since 2009 inflation has been below the upper end of the government’s target range. Inflation expectations are well-anchored, and actual inflation is forecast to be within the government’s target inflation over the policy horizon.
Our external liquidity position has been robust. Our GIR level has remained, for many years now, more than adequate to meet our country’s external obligations. (This, by any standard metric!)
Possible game changers in the middle of the course – Look near and look far
The BSP is, however, mindful that notwithstanding these positive developments in the last decade or so, global risks have recently been elevated.
One risk that is close to your hearts (and which the BSP and the market are being watchful of) is the policy normalization at the Fed. We all know that this has knock-on effects on capital flow movement across financial centers, the peso exchange rate and interest rate differentials, that in turn, have a direct impact on your proprietary positions and on the NAVs of the portfolios you manage. The BTR is also closely monitoring this, so the Fed’s actions can impact which bids the BTR would end up accepting or rejecting during auctions. All these can affect the profitability of your clients, their ability to expand their operations and ultimately, their capacity to repay.
But I would say this is not so worrisome because our strong macroeconomic fundamentals should provide the economy with cushion against the short-term impact of this global re-balancing.
But there are longer-gestation risks that are already clear and present, which could affect your business models and how you would position yourselves in this evolving market going forward.
For instance, digitization and financial technology. These are aptly described as both “disruptors” and “enablers”. On one hand, digitization and financial technology disrupt how clients can and wish to receive financial services. But at the same time, such change in preference could also be used to deepen financial inclusion. With these benefits, however, comes heightened cybersecurity risks. These are the threads of discussion under the ambit of the National Strategy for Financial Inclusion (NSFI) and in working groups of the National Retail Payment Systems (NRPS).
You have been supportive of the outreaches of the NSFI. For instance through the Kiddie Savings Program and financial literacy campaigns of the BSP. This is well and good. And we thank you for this. But, I encourage you to be even more engaged during these early stages of the NRPS. The NRPS is already happening and it will be completed soon. You wouldn’t wish to find yourself without a role when the NRPS takes off. Remember our goal – 20% of all financial transactions will be done electronically by 2020! Based on a July 2015 Better Than Cash Alliance study only 1% of the 2.5 billion payment transactions per month is done electronically. In other words, ladies and gentlemen, the pie is huge. There is a lot of ground to cover. You can each partner with others or carve out a niche for yourselves.
Then there is regional integration. While integration facilitates the transfer of technology cross borders, it also heightens competition and increases risk of obsolescence/irrelevance/contagion. Friends, the ASEAN Banking Integration under ABIF will also happen. We have signed bilateral agreements with Malaysia, Thailand and Indonesia. Moreover, under RA 10641, the BSP has already approved nine foreign banks to enter our domestic system, and received expressions of interest from eight other foreign banks. You will definitely need to be strategic in your expansion plans.
Another possible game changer is the Government’s massive infrastructure financing program. The Government recently announced its vision of a “Golden Age of Infrastructure” to support value-added output of certain sectors such as housing, manufacturing, connectivity and agriculture. A vibrant capital market will be key in the mobilization of long-term savings towards the long-term financing requirements of these priority industries.
The discussion on capital market reform has recently received a boost from technical assistance from the IMF. The sequencing of priority areas into a roadmap for capital market development is carefully being studied by the BSP, in collaboration with the SEC, DOF and the financial industry. Clearly, there is growing momentum to take up reforms now because the financing requirements of the Philippine economy and of the National Government for infra spending are enormous.
Other related reforms in the pipeline include further liberalization of our FX regulations, as well as amendments to our derivatives and market risk management guidelines.
Remain in the race… Finish the course
Ladies and gentlemen. The future of the financial services industry is envisaged to be catering to a growing middle-class sector with discriminating customer preferences. It has to be accessible. In the words of millennials – financial services must be “unbundled, virtual and individualized”. In order to remain responsive to your customers’ needs, you will have to demonstrate both strategic and operational agility.
It is in this vein that the BSP shall continue to provide the market with an enabling environment that will advance market-based solution. You must remember, however, while BSP will provide such an environment, we will not compromise financial system stability. Our policy approach will continue to afford you (market participants) with the flexibility to develop a suite of products and services, provided that these are within your individual risk-bearing capacity.
The BSP will also continue to nurture a macroeconomic environment of stable prices, market-determined exchange rates, with strong buffers against external shocks to enable you to plan for the medium and long term with greater confidence.
Passing the Baton
Ladies and gentlemen. The last twelve years can be likened to one leg of a relay marathon, where the end goal of the race is a financial system that is strong against shocks, and capable of being an enabler after any market fall-out.
I am about to complete my “leg” of the marathon and am getting ready to pass the baton on. One important rule of a marathon is that the next runner (the one receiving the baton) must be ready. He must already be running in cadence with the runner passing the baton. As I start a new chapter in my life, I am content knowing that Deputy Governor Espenilla will be at the helm of the BSP. Nesting has been running alongside me all these twelve years. So I am certain the baton exchange will be smooth and successful. He is a man of character and integrity. He is strongly grounded in BSP’s operations and you have heard him speak about his well-considered direction for the BSP.
Another important rule to remember in a relay marathon is that the one passing the baton should not do a sudden stop. Instead, he must continue to run, albeit slowly, until the track has cleared and he can move to the sidelines.
I am looking forward to that time, when I can then watch all of you from the sidelines. Rest assured I will be cheering all of you on.
Let me once again say “thank you” to all of you. For actively partnering with the BSP, particularly in the past twelve years. I hope that you will extend the same cooperative spirit with Nesting.
Friends, these are opportune times. We should dream big and act boldly for the future of our country. We are on a journey, a race, if you may. At times, we would need the speed of sprinters. But always, we need the endurance of marathon runners. If we remain steadfast and persevere, we will be able to look forward to a new and better economic and social frontier for all Filipinos.
Mabuhay ang Pilipinas! Mabuhay po tayong lahat!