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Fueling the Growth Engine

Date: 07.23.2019

Place: Dusit Thani Hotel

Occasion: The Manila Times Mid-Year Economic Report

Speaker: BSP Governor Benjamin E. Diokno

Dante “Klink” Ang II, Ambassadors and members of the diplomatic corps, ladies and gentlemen, good morning. I would first like to thank The Manila Times for the invitation to speak at this morning’s economic briefing. It is my privilege to share with you the Bangko Sentral’s views on recent economic developments and our outlook for monetary policy in the coming months.

Let me begin with a quick observation. According to Google Trends, inflation was the 8th biggest trending news topic in the country last year.  In fact, when headline inflation peaked at 6.7 percent in September, public interest in the keyword was also at its highest.

Since then, inflation has eased to within the target band of 2-4 percent. As we begin the second half of 2019, the conversation has shifted from containing inflation to supporting economic growth.

This is in light of the lower-than-expected domestic growth figures in the first quarter, as well as the observed slowdown in global economic activity.

In the next few minutes, therefore, let me flesh out the conversation and discuss how the BSP can help fuel the country’s growth engine. From the BSP’s perspective, there are three key issues that will require our keen eye: (1) maintaining price stability; (2) ensuring the health of our financial system; and (3) harnessing opportunities for inclusive growth.

We begin with price stability, which is the BSP’s primary mandate. Needless to say that we will continue to calibrate monetary policy to achieve that objective. Ultimately, keeping prices low and stable helps ensure that macroeconomic conditions are conducive for sustainable, balanced, and inclusive growth.

Inflation is projected to average at 2.7 percent for 2019 and 3.0 percent for 2020. With better-behaved inflation dynamics, the BSP has seen some scope to consider easing its monetary policy stance to help sustain the economy’s growth momentum.

This assessment was the basis for the policy rate cut and the phased reduction in reserve requirements that we announced in May, which were are aimed at supporting credit and economic activity while ensuring that inflation stays within the target band.

Looking ahead, I have to emphasize that the BSP prefers to be patient and prudent in calibrating monetary policy. Our decisions will always be data-dependent. Hence, on the question of whether further monetary easing is needed at this juncture, we will first have to see how macroeconomic conditions will evolve in the coming weeks.

The need for further monetary accommodation will depend, in part, on how strongly our growth drivers kick into higher gear. We project a steady recovery in household spending as commodity prices continue to stabilize.

Of course, the BSP will also need to evaluate how our recent monetary policy actions have moved credit, interest rates, and market expectations.

Meanwhile, escalating trade tensions among major economies continue to pose a downside risk to both growth and inflation, as uncertainty over trade policies dampen global demand and temper international commodity prices.

Fortunately, the Philippine growth narrative over the past three decades has been anchored on the strength of strong household consumption and a resilient production base. Years of structural reform also continue to facilitate investments and generate employment.

Together with a financeable external payments position and our sizeable international reserves, the economy should be well-cushioned against significant external shocks.

The second challenge that we see is financial stability.

The BSP continues to channel greater efforts toward preventing the buildup of systemic risks because achieving price stability is no longer enough to secure macroeconomic stability.

In particular, the BSP remains on the lookout for potential shifts in external capital flows amid the more dovish monetary policy stance of other central banks. As investors search for better asset yields, capital could flow into emerging economies like the Philippines as we saw during the recent Global Financial Crisis. However, weaker global growth prospects could also drive risk aversion and heighten financial market volatility.

Nevertheless, we believe that the overall impact on the Philippine economy is manageable due to our sound macroeconomic fundamentals.

In particular, a market-determined exchange rate is the economy’s first line of defense and automatic stabilizer against external shocks.

Regardless, the BSP maintains its option to participate in the foreign exchange market to minimize the volatility of the peso.

Meanwhile, to enable financial institutions to better withstand risks and financial stresses, we continue to refine our rules on capital adequacy and liquidity requirements under the Basel accords. We will also continue to align our supervisory policies with international standards.

Our hope is that these reforms would help level the playing field for our local banks, especially amid increasing financial integration with our Asian peers.

These efforts tie in directly with our third challenge: harnessing opportunities for inclusive growth. We believe that long-lasting growth is one that must also be inclusive. Therefore, the BSP will continue to pursue initiatives toward greater financial learning and inclusion through strategic partnerships with other government agencies and the private sector.

With regard to financial learning, our partnerships with the Department of Education, the Overseas Workers Welfare Administration, and soon, the Armed Forces of the Philippines and the Civil Service Commission, allow the BSP to reach broader and more diverse audiences. In many of these partnerships, we are also working with the private sector in customizing our programs to the needs of our stakeholders.

We also continue to advocate making financial services more accessible to our micro-, small- and medium-scale enterprises (MSMEs) through our partnerships with provinces and cities nationwide under the BSP Credit Surety Fund. These include our efforts to leverage on financial technology (FinTech) to make financial services more accessible and more convenient.

Ladies and gentlemen, let me conclude by reiterating our primary mandate to maintain price stability conducive to sustainable economic growth.

Fulfilling our obligation to the Filipino people will entail (1) ensuring low and stable inflation through prudent and disciplined monetary policy; (2) maintaining a stable and resilient financial system through timely reforms; and (3) making the financial system more inclusive through strategic partnerships and the power of digital technology.

We do see continued economic challenges for the Philippines in the months ahead. Nevertheless, we remain optimistic and believe that the economy stands in a position of strength.

As a final remark, allow me to share that our amended Charter gives us the confidence and the tools we need to deal with these challenges. You can continue to count on the BSP to remain steadfast in fulfilling its mission.

Thank you and good morning.