THE PHILIPPINE ECONOMY

SUSTAINING RESILIENCE THROUGH

TRANSFORMATIONAL REFORMS

BENJAMIN E. DIOKNO, PHDGOVERNOR

BANGKO SENTRAL NG PILIPINAS

EUROMONEY INVESTMENT FORUM24 SEPTEMBER 2019

Metric 2013 2019/Latest

Credit Ratings• Moody’s• S&P• Fitch

Baa3/positive

BBB-/stable

BBB-/stable

Baa2/stable

BBB+/stable

BBB/stable

Real GDP Growth Rate (%) 7.1 5.5 (H1)

GDP Per Capita* (USD) 2,768 3,298 (annualized)

GNI Per Capita * (USD) 3,364 3,955 (annualized)

Inflation Rate (2012 = 100) (%) 2.6 3.0 (Jan-Aug)

Fiscal Balance (as % of GDP) -1.4 -0.5 (Jan-Jun)

Tax Revenue (as % of GDP) 13.3 15.6 (Jan-Jun)

Sustained Strengthening of Macroeconomic Fundamentals

Source: BSP’s Selected Economic and Financial Indicators, Department of Finance (DOF), Bureau of Treasury (BTR)

*at current pricesp/ preliminary

Metric 2013 2019/Latest

General Government Debt (as % of GDP) 39.3 36.0 (end-Dec 2018)

National Government Interest Payments (as % of Revenues) 18.8 12.8 (Jan-Jul)

Gross International Reserves (USD bn) 83.2 86.0 (end-Aug)

Overseas Filipinos’ Cash Remittances (USD bn) 23.0 17.2 (Jan-Jul)

Foreign Direct Investments (USD bn) 3.7 3.6 (Jan-Jun)

External Debt (as % of GDP) 28.9 23.8 (end-Jun) p/

Non Performing Loans (as % of total loans, U/KBs) 2.1 1.6 (end-Jul)

Capital Adequacy Ratio (%, U/KBs) 17.7 15.9 (end-Jun)

Sustained Strengthening of Macroeconomic Fundamentals

Source: BSP’s Selected Economic and Financial Indicators, Department of Finance (DOF), Bureau of Treasury (BTR)

*at current pricesp/ preliminary

Selected Structural/Policy Reforms in the Philippine Economy (1993-present)

1993 Creation of the Bangko Sentral ng Pilipinas

1994 - 2001

Harmonization of the BSP’s Business Expectations Survey (BES) with International Practices; Liberalization of foreign bank entry and the telecommunications industry; Privatization of water services (MWSS); Deregulation of the oil industry; Passage of the Philippine E-Commerce Act; Liberalization of the power sector; Introduction of Tariff Reform Program (TRP) III; Accession to the World Trade Organization (WTO)

2002 Adoption by BSP of Inflation Targeting Framework

2003-2009

Launch of the BSP’s Consumer Expectations Survey (CES); Passage of the Securitization Act; Adoption of Basel II; Passage of E-VAT; Establishment of the Wholesale Electricity Spot Market (WESM); Full implementation of risk-based bank supervision; Privatization of the National Transmission Corp. and National Power Corporation

2011-2015Adoption of phased-in migration to Basel III; Liberalization of entry of foreign banks in the Philippines; Implementation of macroprudential measures on real estate exposure; Passage of the Philippine Competition Act

Pursuit of Transformational Reforms Towards Inclusive Growth

Selected Structural/Policy Reforms in the Philippine Economy (1993-present)

2016-2017

Adoption by BSP of Interest Rate Corridor (IRC) Framework; Credit Card Industry Regulation Law; Amendment to Foreign Investment Restrictions; Economic and Financial Literacy Act; Freedom of Information; Further Liberalization of FX regulations; Implementation of Interest Rate Corridor; Financial Inclusion Steering Committee; Implementing Rules and Regulations of the Philippine Competition Act; Designated Casinos as Covered Persons under the Anti-Money Laundering Act

2018Tax Reform for Acceleration and Inclusion (TRAIN) Law Package 1; Ease of Doing Business Act, National ID System; Amendment to the Foreign Investment Negative List (FINL)

2019Amendments to the Bangko Sentral ng Pilipinas Charter; Rice Liberalization Act ; An Act Increasing the Excise Tax on Tobacco Products, Tax Amnesty Act, Extended Maternity Leave Law, Universal Healthcare Law, Revised Corporation Code, Islamic Banking Law

Other Structural Reforms in the Pipeline

Corporate Income Tax and Incentives Reform Act (CITIRA - Package 2), Increase in excise tax for alcohol and e-cigarettes (Package 2+), property taxation system (Package 3), passive income and financial intermediary tax reform (PIFITA - Package 4) , Amendments to Bank Secrecy Law, Amendments to Warehouse Receipt Law, Amendments to Agri-Agra law, Amendments to the Foreign Investments Act, Financial Consumer Protection Act

Pursuit of Transformational Reforms Towards Inclusive Growth

9.5

6.44.2 3.9

1989 - 1992 1993 - 2001 2002 - 2009 2010 - Q1 2019

0.0 0.5

2.0 1.9

1989 - 1992 1993 - 2001 2002 - 2009 2010 - Q1 2019

Expanding Productive Capacity to Support Growth Momentum

Incremental Capital-Output Ratio

Source: BSP, PSA

Trend Total Factor Productivity

Robust labor dynamicsEmployment share by educational attainment

2.0 4.1 8.0

32.8 25.826.0

38.4 41.941.6

26.8 26.7 23.0

0.0

20.0

40.0

60.0

80.0

100.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Jan-19No Grade Completed Post Secondary Elementary (with SPED) High School College

7

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17 Jul-17 Dec-17 May-18 Oct-18 Mar-19 Aug-19

Philippine Headline Inflation (%, 2012=100)January 2015 – August 2019

Peak: 6.7% (Sep. 2018)

Latest (2019):1.7% (Aug 2019)

3.0% (Jan-Aug 2019)

Sources: BSP, PSA, Oxford Economics, IMF, and ADB

Latest forecasts indicate favorable inflation environment in the policy horizon

2019 2020 2021

ROP Inflation Target, % 2.0-4.0 2.0-4.0 2.0-4.0

BSP (Aug 2019) 2.6 2.9 2.9

IMF (April 2019) 3.8 3.3 3.1

ADB (July 2019) 3.0 3.5 -

Oxford Economics (July 2019) 3.0 3.0 -

Maintaining a Manageable Inflation Environment

BSP private sector economists' survey Mean forecast for full year, %

Various third party forecasts

Inflation momentum further eases

1.0

2.0

3.0

4.0

5.0

6.0

Jan

Feb

Mar

Ap

rM

ay Jun

Jul

Au

gSe

pO

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ov

De

cJa

nFe

bM

arA

pr

May Jun

Jul

Au

gSe

pO

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De

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bM

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May Jun

Jul

2019 2020 2021 target range

2020: 3.12021: 3.1

Jan. 2016 to Feb. 2018: 2006=100Mar. 2018 to Jul. 2019: 2012=100

2019: 2.8

Manageable External Payments Position

Balance of Payments

Balance of Payments Components – Quarterly (USD bn)

Source: BSP

1.0

-7.0

-5.0

-3.0

-1.0

1.0

3.0

5.0

7.0

9.0

11.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019Q2

Capital and Fin'l Account Current Account Balance of Payments

9.4 8.7

1.3 2.1

4.7 6.4

2010 2011 2012 2013 2014 2015 2016 2017 2018

Remittances Tourism receipts BPO revenues

1.1

9.8

5.8

3.6

2010 2011 2012 2013 2014 2015 2016 2017 2018 Jan-Jun 2018p/

Jan-Jun 2019p/

Structural Sources of Foreign Exchange

OF remittances, BPO revenues and tourism receipts enjoy sustained growth over the years

Overseas Filipinos' (OF) cash remittances, Tourism Receipts, and Business Process Outsourcing (BPO) Revenues (as % of GDP)

*BOP ConceptSource: BSP

Foreign Direct Investment inflows remain resilient

Net Foreign Direct Investment (FDI) Flows* (USD bn)

18.5

86.0

4.6

7.5

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 end-Aug2019

International reserves Import cover

Solid Buffers Against External Headwinds

Ample level of reserves

International reserves (USD bn) and months of import cover

Source: BSP

61.6

81.3

59.7

23.8

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Q2 2019/p

External Debt External Debt Ratio

Solid Buffers Against External Headwinds

Low external debt burden underscores the health of external finances

External debt (USD bn) and external debt/GDP (%)

Source: BSP

2,195

9,3264.4

1.6

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Jul-19

Total Loans Outstanding (in PHP bn) NPL, Gross ratio (in %)

16.715.3

17.615.9

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Jun-19

Solo basis Consolidated basis

BSP Regulatory Requirement: 10%

International Standard: 8%

Sound and Stable Banking System an Anchor for Greater Economic Activity

Strong capitalization well above international norms

Capital Adequacy Ratio (%) of U/KBs

Improving quality of loan portfolio

Total Loans Outstanding (PHP bn) and NPL ratio (%) of U/KBs

Sound and Stable Banking System an Anchor for Greater Economic Activity

Credit is channeled towards productive sectors

Outstanding Loans of U/KBs

SectorsJul 2019(PHP bn)

Share to Total(Net of RRPs,%)

Growth (%)

Loans to Productive Sector 7,537.0 87.6 9.8

Real Estate Activities 1,544.6 18.0 18.1

Wholesale and Retail Trade, Repair of Motor Vehicles, Motorcycles 1,123.1 13.1 4.5

Manufacturing 1,041.5 12.1 1.6

Electricity, Gas, Steam and Air-Conditioning Supply 971.7 11.3 13.8

Financial and Insurance Activities 834.3 9.7 19.1

Construction 338.0 3.9 38.2

Information and Communication 321.2 3.7 6.2

Transportation and Storage 271.9 3.2 7.5

Agriculture, Forestry and Fishing 196.5 2.3 13.6

Others 894.1 10.4 (3.6)

Loans to Household Consumption 756.8 8.8 23.0

Loans to Residents 8,293.8 96.4 10.9

Loans to Non-Residents 311.1 3.6 15.4

Total Loans to Residents and Non-Residents 8,604.9 100.0 11.1

Investment Grade

March 2013: Upgraded to BBB - / StableResilient economy, improvements in fiscal management,weak governance standards

June 2011: Upgraded to BB+ / StableProgress in fiscal consolidation and a track record of macro stability and favourable prospects

July 2012: Upgraded to BB+ / StableIncreasing fiscal flexibility, signs of improving growth prospects

May 2013: Upgraded to BBB- / StableStrengthening external profile, moderating inflation, and declining reliance on foreign currency debt

May 2014: Upgraded to BBB / Stable

Medium-term longevity of fiscal and

growth gains achieved through a broad

range of reforms

October 2012: Upgraded to Ba1 / StableFiscal revenue buoyancy despite deteriorating global demand, enhanced growth prospects and stable financial system

October 2013: Upgraded to Baa3 / PositiveSustainability of economic performance, ongoing fiscal and debt consolidation and improved governance

December 2014: Upgraded to Baa2 / StableOngoing debt reduction, aided by improvements in fiscal management and continued favourable prospects for strong economic growth

Fitch

Moody’s

S&P

Source: S&P, Fitch, Moody’s

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

A-

BBB+

BBB

BBB-

BB+

BB

BB-

December 2017: Upgraded to BBB / StableStrong and consistent macroeconomic performance, underpinned by sound policies supporting high and sustainable growth rates

April 2019: Upgraded to BBB+/StableStrong economic growth trajectory, solid government fiscal accounts, low public indebtedness, and sound external settings

Rating Upgrades Reflect Stronger Fundamentals and Institutions

National Retail Payment System

50 participating institutions

39 participating institutions

BSP’s Continued Pursuit of Strategic Reforms Underpin Stability of the Banking System

Inclusive FinanceLeverage on Technology Capital Market Reforms

Growth Momentum to be Sustained

2018 Actual2019 2020 2021 2022

Projections1/

Real GDP Growth (%) 6.2 6.0-7.0 6.5-7.5 7.0-8.0 7.0-8.0

Fiscal Deficit (% of GDP) 3.2 3.2 3.2 3.2 3.2

Inflation (%, average) 5.2 2.7-3.5 2.0-4.0 2.0-4.0 2.0-4.0

Dubai Crude Oil (USD/bbl) 69.4 60-75 60-75 60-75 60-75

Exchange Rate (PHP/USD) 52.7 51-53 51-55 51-55 51-55

364-Day T-bill Rate (%) 5.1 5.5-6.5 5.0-6.0 5.0-6.0 5.0-6.0

Balance of Payments (USD, bn) 2/ -2.3 3.7 N/A N/A N/A

Current Account (USD, bn) 2/

% of GDP-8.7-2.6

-10.1-2.8

-11.6-2.9

N/A N/A

OF Cash Remittances (USD, bn) 2/

% growth28.93.1

29.83.0

N/A N/A N/A

Merchandise Exports (% growth)Per BPM6

0.3 2.0 6.0 6.0 6.0

Merchandise Imports (% growth)Per BPM6

11.9 7.0 8.0 8.0 8.0

Gross International Reserves (USD, bn) 2/ 79.2 83.0 84.0 N/A N/A

Sources: 1/ DBM – 176th Development Budget DBCC Approved Macroeconomic Assumptions approved on 18 July 2019 2/ Assumption approved by the MB 13 June 2019NA: Not Available p/: preliminary

17

Impact of US Fed rate adjustments

Infrastructure gaps

Ratcheting up of trade tensions

Global economic slowdown

Disruptive technologies

Extreme weather events

Policy uncertainty and geopolitical tensions (e.g. US-Iran, Brexit,

etc.)

Risks and Challenges

The Philippine economy is expected to remain one of the fastest-growing economies in the region and in the world.

The government is committed to its infrastructure and reform agenda,which will support high, inclusive and sustainable growth

The Philippine economy has built domestic sources of resilience tohelp cushion against external and domestic challenges. The BSP willcontinue to maintain sufficient buffers to shield the economy fromadverse shocks.

Key Takeaways

The BSP will continue to enhance our stress tests, early warning tools,and micro and macroprudential policies to ensure that the financialsystem remains innovative, stable, and supportive of economic growth.

The BSP will to continue to undertake bold and purposeful reforms tomake the financial system more efficient, dynamic, and truly inclusive.

The BSP will remain committed to its core mandate of price stability, andstands ready to use any of its monetary tools, if and when necessary, tomanage inflation.

The BSP shall stay on track and carry out the objectives of its othermandates of financial stability, and efficient payments and settlementssystem.

Key Takeaways