1

Francisco G. Dakila, Jr. Bangko Sentral ng Pilipinas

Near-Term Economic Outlook of the Euro-Area and Asia: Prospects for the Euro-area Economies and

Macroeconomic Implications for the ASEAN+3 Economies

26 September 2012

OECD Development Centre-AMRO Joint Asian Regional Roundtable

2

Outline

I. Implications of global economic developments to the region

II. Challenges to monetary policymaking

III. BSP policy responses

IV. Summary

3

I. Implications of global economic developments to the region

Significant events occurring in several fronts:

• Eurozone – sovereign debt crisis and recession

• US – higher unemployment, slow growth and fiscal tightening

• Middle East – geopolitical risks and impact on oil prices

• China – low growth performance

4

II. Challenges to monetary policymaking

1. Impacts on the real economy

Total exports by country of destination Total remittances by country of source

Data for 2011

6

2. Volatility and correlation between global financial indicators

Source: IMF WEO July

2012

6

Equity Indices (Indices; January 1,

2010=100)

Exchange Rate Indices (Indices; January 1,

2010=100) Implied Volatility (percent)

Government Bond

Yields (percent)

Source: IMF WEO April

2012

Source: IMF WEO July

2012 Source: IMF WEO July

2012

II. Challenges to monetary policymaking

7

II. Challenges to monetary policymaking

3. Impact on the financial sector

Philippine banking system exposure to Europe

As of January 2011

As of June 2011

As of October 2011 p/

Level (US$ billion) 4.5 2.1 1.9

Share to total assets (%) 2.9 1.4 1.2

Source: BSP

8

II. Challenges to monetary policymaking

Net private flows to EMEs estimated to be US$1 trillion for 2011 and 2012 • Half of value to Emerging Asia and about half of which is to China

Source: Capital Flows to Emerging Market Economies, September 2011. Institute of International Finance.

4. Capital flows and impacts

10

10

Source: BSP

Current Account Balance (in million US dollars)

1999 – 2012Q2

-5,000

0

5,000

10,000

15,000

20,000

25,000

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

-Q1

Current Account Balance Remittances*/ By custodian banks.

Source: BSP-International Operations Department

Philippines: Portfolio Investment flows*/

(in million US dollars)

2008 – 2012 1H

Capital flows can reinforce the impact of high current account receipts

-5,000

0

5,000

10,000

15,000

20,000

Inflows Outflows Net

II. Challenges to monetary policymaking

3. Capital flows and impacts

11

II. Challenges to monetary policymaking

3a. Implications on the exchange rate

0

40

80

120

160

Jan-

06

May

-06

Sep

-06

Jan-

07

May

-07

Sep

-07

Jan-

08

May

-08

Sep

-08

Jan-

09

May

-09

Sep

-09

Jan-

10

May

-10

Sep

-10

Jan-

11

May

-11

Sep

-11

Indonesia Philippines Singapore Malaysia

Thailand Taiwan South Korea Hong Kong

Exchange Rate Index, Various Asian Countries (monthly average, January 2006 = 100, $/local currency)

Source: ARIC database.

13

3b. Impact of capital inflows on effectiveness of monetary policy

Philippines’ case: Prior to 2010, yield curve tracks movements in policy rates but since then, movements in policy rate & T-bill rates appear to have

diverged

13

II. Challenges to monetary policymaking

14

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

J F MA M J J A S O N D J F MA M J J A S O N D J F MA M J J A S O N D J F MA M J J A S O N D J F MA M

2008 2009 2010 2011 2012

in p

erce

nt

Growth Rates of Domestic Liquidity and Outstanding Loans of U/KBsJan 2008 - May 2012

U/KB Loans M3

May 201214.7 pct

May 20127.9 pct

II. Challenges to monetary policymaking

3c. Implications on credit growth

15

III. BSP policy responses

• Policy rates

• Market-determined exchange rate

• Liberalization of foreign exchange regulations

• Heightened international cooperation

• Macroprudential measures

• Strengthening the financial system

16

16

Inflation dynamics remain favorable.

0

2

4

6

8

10

12

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Headline Lower Bound of Target Upper Bound of Target

2.8%

June

Monetary policy

kept inflation in

2011 at 4.6% --

well-within target

July 2012

inflation at 3.2%;

YTD inflation of

3.1 percent within

target

Inflation

projected to settle

at the lower half of

the target of 3-5

% in 2012-13

17

III. BSP policy responses

• Policy rates

• Market-determined exchange rate

• Liberalization of foreign exchange regulations

• Heightened international cooperation

• Macroprudential measures

• Strengthening the financial system

18

18

Philippines Effective Exchange Rate

Index

January 1998-April 2012

Source: BSP

0

50

100

150

200

250

300

19

98

:01

M

19

98

:07

M

19

99

:01

M

19

99

:07

M

20

00

:01

M

20

00

:07

M

20

01

:01

M

20

01

:07

M

20

02

:01

M

20

02

:07

M

20

03

:01

M

20

03

:07

M

20

04

:01

M

20

04

:07

M

20

05

:01

M

20

05

:07

M

20

06

:01

M

20

06

:07

M

20

07

:01

M

20

07

:07

M

20

08

:01

M

20

08

:07

M

20

09

:01

M

20

09

:07

M

20

10

:01

M

20

10

:07

M

20

11

:01

M

20

11

:07

M

20

12

:01

M

REER Major REER Broad REER Narrow

40

42

44

46

48

50

Ja

n-

09

Ma

r-

09

Ma

y-

09

J

ul-

09

Se

p-

09

No

v-

09

Ja

n-

10

Ma

r-

10

Ma

y-

10

J

ul-

10

Se

p-

10

No

v-

10

Ja

n-

11

Ma

r-

11

Ma

y-

11

J

ul-

11

Se

p-

11

No

v-

11

Ja

n-

12

Ma

r-

12

Ma

y-

12

J

ul-

12

Peso –USD Daily Average Exchange

Rate

January 2009 – June 2012

Foreign

exchange

market

42.776

5

177.87

140.86

89.55

19

III. BSP policy responses

Collaborative initiatives

• Global and regional collaborations

IMF bilateral borrowing facility

ASEAN’s Chiang-Mai Initiative Multilateralization (CMIM)

• Inter-agency initiatives within the Philippines

Financial Sector Forum

Financial Stability Coordination Council

20

III. BSP policy responses

Collaborative initiatives

• Global and regional collaborations

IMF bilateral borrowing facility

ASEAN’s Chiang-Mai Initiative Multilateralization (CMIM)

• Inter-agency initiatives within the Philippines

Financial Sector Forum

Financial Stability Coordination Council

21

21

6

8

10

12

14

16

18

20

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Rati

os in

Perc

en

t (%

)

Solo = 16.44%

Consolidated = 17.43%

CAPITAL ADEQUACY RATIO (CAR)

2001-September 2011

BSP Regulatory Requirement of

10%

International Standard of 8%

LOAN AND ASSET QUALITY RATIOS

As of end-April 2012

Feb.

Dec.

Banking system remains sound and stable

Source:

BSP

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2001 2002 2003 20042005 2006 2007 20082009 2010 2011 2012

Leve

ls in

PhP

Bill

ions

0

2

4

6

8

10

12

14

16

Rat

ios

in P

erce

nt (%

)

Levels in PhP Billions

Growth Rate

ASSETS GROWTH

2001 – April 2012

0

2

4

6

8

10

12

14

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Mar-

12

RETURN ON ASSETS (ROA)/RETURN ON EQUITY (ROE)

UKBs, As of March 2012

0

4

8

12

16

20

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Ra

tio

s in

Pe

rce

nt

(%) NPL Ratio NPA Ratio

ROE =13.09%

ROA = 1.63%

Apr. P7,555.6 6.7%

NPA Ratio (UBs and KBs)

= 2.77%

NPL Ratio (UBs and KBs) = 2.30%

22

There is limited evidence of stretched asset market valuations…

22

Equities market

8.0

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

26.0

28.0

30.0

19

97

M0

1

19

97

M0

7

19

98

M0

1

19

98

M0

7

19

99

M0

1

19

99

M0

7

20

00

M0

1

20

00

M0

7

20

01

M0

1

20

01

M0

7

20

02

M0

1

20

02

M0

7

20

03

M0

1

20

03

M0

7

20

04

M0

1

20

04

M0

7

20

05

M0

1

20

05

M0

7

20

06

M0

1

20

06

M0

7

20

07

M0

1

20

07

M0

7

20

08

M0

1

20

08

M0

7

20

09

M0

1

20

09

M0

7

20

10

M0

1

20

10

M0

7

20

11

M0

1

20

11

M0

7

20

12

M0

1

Price-to-Earnings (P/E) RatioJanuary 1997 - June 2012

P/E Ratio Trend

-

1,000

2,000

3,000

4,000

5,000

6,000

19

87

M0

1

19

88

M0

1

19

89

M0

1

19

90

M0

1

19

91

M0

1

19

92

M0

1

19

93

M0

1

19

94

M0

1

19

95

M0

1

19

96

M0

1

19

97

M0

1

19

98

M0

1

19

99

M0

1

20

00

M0

1

20

01

M0

1

20

02

M0

1

20

03

M0

1

20

04

M0

1

20

05

M0

1

20

06

M0

1

20

07

M0

1

20

08

M0

1

20

09

M0

1

20

10

M0

1

20

11

M0

1

20

12

M0

1

Philippine Stock Exchange IndexJanuary 1997 - June 2012

Philippine Stock Exchange Index Trend

5,246.

41

120

125

130

135

140

145

150

155

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Ratio of Capital to Rental Values: Residential Sector2001 Q1 - 2012 Q1

Ratio of capital to rental values: Residential

Trend

Pe

rce

nt

52

56

60

64

68

72

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Ratio of Capital to Rental Values: Office Sector2001 Q1 - 2012 Q1

Ratio of capital to rental values: Office Trend

Pe

rce

nt

Real estate

market

23

III. BSP policy responses

Responses in the 1990s capital flows episode

• Sterilized intervention

• Liberalization of foreign exchange regulations

• Strengthening prudential measures

• Reduction of exporters’ production costs

24

Other potential policy responses

• Capital flow management (CFMs) measures influence capital flows

• Administrative controls – quantitative limits or prohibitions

• Market-based controls – increase cost of transactions

• Capital controls are CFMs that discriminate on residency

25

Examples from other countries

Instrument Strengths Weaknesses Examples

Tax measures Targeted and easily calibrated to size of risks

Calibration difficult in practice

Reduces investor confidence

Brazil: IOF

Thailand: tax on interest income and capital gains of foreign bondholders

S Korea: withholding tax on interest income of foreign bondholders

Minimum periods

Incentive for long-term investments

Only delay, not eliminate, capital flows

Indonesia: 1-month holding period for BI certificates

Quantitative limits

Control how much capital is allowed entry

Allocation and monitoring of allowance may be difficult

Indonesia: ST external bank borrowing limited to 30% of capital

S Korea: Limits on banks’ FX forward positions and derivatives build-up

Unremunerated reserve requirements

Strong disincentive to investors

Can drive away beneficial investment

Brazil: 60% URR on banks’ FX positions in spot market

Thailand: 30% URR on short-term foreign investment

Sources: 1. Institute of International Finance “Capital Flows to Emerging Market Economies” January 2011 2. World Economic Forum “Financial Development Report 2010”

26

Other potential policy responses

Issues on capital controls

Effectiveness depends on

• Institutional infrastructures in place, and

• Enforcement of controls

Generally temporary measures because market players find ways to circumvent measures in time

27

IV. Summary

• Philippine financial system is sound; banking institutions are equipped with the requisite capital buffers.

• Greater monitoring and information gathering are needed for risk identification and assessment that will allow for timely and appropriate responses.

• Extensiveness of impacts calls for collaboration and coordinated responses.

• There is need to further improve financial regulatory framework to include implementation of OTC derivatives market reform and, if possible, oversight and regulation of the shadow banking system.

Building economy as well as fortifying “defenses” – creating environment for sustainable growth while managing risks

28

Better understanding of nature of FX inflows

Exchange rate flexibility

Reserve accumulation & associated liquidity management

Financial sector reforms to deepen financial markets

Macroprudential measures to strengthen health of banking

system

Reform of the FX regulatory framework

Prepayment of external debt

Adjustments in monetary policy, when necessary

BSP’s toolkit in managing capital flows

28