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The Challenge of Being the Governor of Bangko Sentral ng Pilipinas

Date: 06.17.2003

Place: Shangri-La Hotel, Makati City

Occasion: June Networking Event, British Chamber of Commerce of the Philippines

Speaker: Governor Rafael Buenaventura

Chairman Geoffrey Short, Mr. Simon Morris, officers and members of the British Chamber of Commerce of the Philippines, friends, ladies and gentlemen, good evening.

Alan Greenspan of the U.S. Federal Reserve once said that few modern institutions in a democratic society receive greater public scrutiny than the central bank.

This should come as no surprise. The unique powers of the central bank provide it with the ability to affect the economic life of a country.

Its ability to influence interest rates, the exchange rate, and the general functioning of the banking system affects not only financial intermediaries, depositors and borrowers, but also businesses and ordinary consumers.

Congressman Jose Roy, the author of the law which created the Central Bank of the Philippines in 1948, correctly described it as an institution which affects the very life of every man, woman and child.

In the Philippines, one out of three Filipinos live below the poverty line. Taken in this context, you can imagine the weight of responsibility and challenges that a central bank governor has to contend with.

Having spent my career as a banker in the private sector for 34 years, a third of which was in the Philippines, you could say that I was an old hand in terms of dealing with central banks. I believed, it was a matter of shifting perspective: from regulated to regulator. Easier said than done, of course.

I came on board as BSP Governor in 1999, just when banks and economies were dealing with the fallout from the Asian financial crisis. Since then, we had to deal with the consequences of natural and man-made disasters, including New York’s 9-11, the Middle East conflicts, SARS, and the skirmishes in Mindanao.

Given this scenario, how did we, at the Bangko Sentral ng Pilipinas, fare?

The mandate of the Bangko Sentral ng Pilipinas is to ensure the stability of prices and the banking sector. Our overriding objective: to provide the proper environment for sustained long-term economic growth of our country.

To me, all things considered, Bangko Sentral ng Pilipinas has been effective, insofar as delivering on its mandate is concerned. Let me be more specific.

  1. First, prices have stabilized. Statistical data bear us out on this: in the 10-year period covering 1983 to 1992, inflation averaged 14.2% in the Philippines. In 1993 to 2002, the first ten years of Bangko Sentral ng Pilipinas, average inflation dropped to 6.8%. In the first five months this year, average inflation had slowed down further to 2.8%.

  1. Now, about the banking sector.

Even in the face of prolonged tough and uncertain domestic and global conditions, good news prevailed in the banking sector.

Thus, while there were some banks that were having difficulties, key financial indicators of the Philippine banking system in 2002 reflected overall soundness.

In 2002, we saw steady growth of deposits, resumption of lending, increasing capitalization, and higher bottom line figures. In more concrete terms, the Philippine banking system recorded a 7 percent growth in deposits; a 2.5 percent loan growth; a 4.6 percent rise in capital; and a 98% percent improvement in net income after taxes. In fact, consolidated net income of the banking industry in 2002 was its highest in five years at p28 billion.

Capital adequacy ratio of the sector also remains well above international standards.

It is fair to say that a sound supervisory and regulatory environment, the implementation of a broad set of financial reforms, and the generally proactive stance of Philippine banks have helped foster growth and sustain viability in the banking industry.

Basically therefore, BSP has responded well to the challenges coming its way, in the four years that I have been there. Throughout this period, it has stood strong and remained resilient in discharging its twin responsibilities of keeping prices stable and of keeping the banking system sound and healthy.

In turn, this helped provide an operating environment conducive to sustained economic growth. The advent of lower inflation has allowed BSP to pursue a growth-supportive monetary policy that has encouraged a downtrend in market interest rates.

For instance, the benchmark 91-day treasury bill rate averaged 5.4% in 2002, down from 12.3% in 1993.

Key economic indicators validate that we are well and truly on the right track.

In the first quarter this year, our economy grew better than expected. In fact, the Philippines ended up among the highest in Asia. Our GNP was up 5.6% while GDP expanded by 4.5%.

I am not saying, it will be easy sailing for us from now on. But what we have accomplished so far gives us the confidence to proceed with the reforms we have started.

Going forward, the key to sustained viability of the banking system over the medium and long term depends on sustaining reforms that enhance corporate governance structure, improve operating efficiency, strengthen risk management and build up capital base.

The passage of the Special Purpose Vehicle (SPV) act of 2002 should go a long way in addressing non-performing assets (NPAs) which have been a millstone around the neck of the banking sector. Through asset management companies, we expect a lowering in impaired assets of banks. This should enable them to undertake new lending and resume their primary role in fund intermediation.

Asset clean-up is a very important first step; but right behind it are the challenges of replenishing bank capital and of achieving fundamental operational restructuring to achieve better efficiency, competitiveness, and risk management in the much tougher banking environment ahead.

All three issues are closely inter-linked with the quality of corporate governance.

Even as banking reforms and adherence to good governance strengthen the banking system in the years to come, I expect we will have less, but bigger and stronger banks; weak banks would have been merged or absorbed by healthier and vibrant banks.

With the liberalization of the entry of foreign banks, Philippine banks, under the reciprocity rights specified in R. A. No. 7721, can do business in other countries, subject to certain requirements. In this regard, I look forward to seeing a greater number of our banks expanding their operations abroad and competing in the global financial arena. I foresee that a number of our banks will be at par with their foreign counterparts in terms of resources, efficiency, and solvency, offering a full range of services as a financial supermarket.

I also foresee that microfinance will be a regular item in the lending portfolio of most banks. So far, response to BSP’s call for bank’s greater involvement in microfinance has been good, especially from the thrift and the rural banks.

Indeed, microfinance is an advocacy BSP is committed to promote as the sector’s contribution to alleviating poverty in the country. Others see microfinance as a purely social responsibility; to me, sound banking and microfinance go together. Microfinance, with its extremely high repayment rates, is a viable undertaking.

On our part, we at the BSP will continue to apply the appropriate mix of monetary policy instruments and sector reforms to enhance the long-term growth and stability of our banking system. Our objective is to make sure banks deserve the public’s confidence and that the banking system effectively performs its role as an engine of economic growth.

Thus, while it is inevitable that certain individual banks will continue to face difficulties, I am confident that the Philippine banking system as a whole will continue to grow and serve the country well.

The remainder of my term as Governor will be devoted to preserving the BSP’s standard of excellence, and continuing our efforts in applying international best practices to the conduct of monetary policy and banking supervision by the Bangko Sentral.

I am pleased to tell you that our efforts to align BSP with international standards have been recognized here and overseas.

BSP has frequently figured among the top performing government agencies in the surveys of the Makati Business Club. In October last year, New York-based magazine Global Finance chose me as one of the top four central heads in the world. They gave me a grade “A” rating along with the central bank chief of Sweden, Australia and the Bank of England.

And last week, BusinessWeek magazine ranked me among the 25 Asian leaders at the forefront of change. I was the only central bank governor who made it to the list.

Now you ask me: How is it being Governor of the Bangko Sentral ng Pilipinas? My answer is this: it is such an honor to serve as Governor of the Bangko Sentral ng Pilipinas for the distinct privilege it gives me to serve my country and our people.

And it is also such an honor for me to work with the people of BSP who are so committed to high standards of excellence.

Just to give you an idea of what I am talking about. In January 2002, BSP shifted its monetary policy framework from monetary aggregates to inflation targeting.

Since then, we have been receiving very positive feedback from various institutions, such as the Bank of England and the IMF, on our successful shift to inflation targeting.

Recently, I came across a study by noted European economists which rated the inflation reports produced by 20 inflation targeting central banks. The rating was based on quality and comprehensiveness of the information provided and how convincing the inflation report is judged to be.

This is important as it serves as the main document for articulating the central bank’s monetary policy strategy.

I am very pleased to tell you that the BSP inflation report scored fairly well in the ranking, placing ahead of more experienced inflation targeters such as Canada, Australia, Israel and Peru.

Of course, the number one on the list is the Bank of England. Still, for a relative newcomer such as the BSP, a rank of number 11 in a field of 20 is not bad.

Give us more time and BSP will be higher up there. After all, the Bank of England is older than Bangko Sentral ng Pilipinas by at least 300 years.

I have been asked how heavy my burden is as Central Bank Governor. I am telling you, it is heavy; but because of the excellent support I get from my co-workers at BSP, I still have time in fact to improve my golf swing.

In other words, it is a job that I love to do, challenges and all.

Thank you and good night.

(Note: British Chamber of Commerce of the Philippines, June Networking Evening, June 17, 2003, Shangri-La Hotel, Makati City)