Speech of MBM Ignacio R. Bunye before the Bankers Institute of the Philippines
(John Hay Manor, 14 March 2009)
Ladies and Gentlemen of the Bankers Institute of the Philippines, good evening:
The 25th National Convention of the BAIPHIL provides us an opportunity to reflect on the unprecedented events in 2008, in particular, the unfolding of the global financial turmoil. From the lessons of last year, we can review our strategies to build more resilience and flexibility in the economy.
While the Philippines ended 2008 standing on a better ground than most countries in the region, we are fully aware that our economy is not immune to the global financial turmoil.
Nevertheless, as we look beyond the present scenario, we see a window of opportunity.
US President John F. Kennedy once said and I quote: "The Chinese use two brush strokes to write the word "crisis." One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger-but also recognize the opportunity." Unquote.
To achieve this, we need a close partnership between the Bangko Sentral ng Pilipinas and the banks. Such a partnership would not only help mitigate the negative effects of the global financial crisis but also eventually pave the way for moving the economy to higher ground.
Tonight, I will cover the following:
o First, the challenges facing the Philippine economy amid
the global financial crisis;
o Second, the present state of the Philippine banking system;
o Third, the importance of the partnership between BSP and the banks;
and
o Finally, the policy thrusts of the BSP.
For the past months, news and updates about the global financial turmoil and its impact on the Philippine economy have hogged the headlines. NEDA Director General Ralph Recto, in the recently held Philippine Economic Briefing, declared that it is indeed an understatement to say that we are living in very challenging times.
In 2008, developments in the domestic financial markets reflected the volatility in the global financial markets.
Credit spreads for Philippine debt widened, the exchange rate weakened and stock market activity fell sharply.
Although our financial markets showed signs of recovery in the early part of 2009, there are renewed concerns on the health of the global economy following official reports of contraction in the US and Europe.
The Philippines' five-year credit default swap (or CDS) widened to 466.92 bps on 2 March 2009, from 379.9 bps posted on 30 January 2009.
We know that CDS represents the cost of protecting the Philippine bonds against default, and an increase in CDS indicates heightened perceived risk towards the Philippine economy.
Meanwhile, on a year-to-date basis, the peso depreciated by 3.1 percent as it closed at P49.05/US$1 on 2 March 2009.
On the same date, the Philippine Stock Exchange index (PSEi) dropped by 0.3 percent to 1856.43 index points relative to its end-December 2008 level, after dipping to its lowest at 1704.2 index points on 28 October 2008.
A key question is whether or not the situation has bottomed out or are we anticipating continued tough sailing ahead? Is the worst over?
It seems that it is not, particularly for emerging market economies.
The impact on Asian financial markets has come from three fronts: the reversal of capital inflows, the Asian markets' difficulty in borrowing from global financial counterparts, and the rising spreads on credit risk default swaps.
This could lead towards a full-blown regional and - possibly even - domestic "credit crunch".
Increased market apprehension also emanates from the adverse impact of these developments on the real sectors of Asian economies, particularly in terms of reduced production and weaker consumer demand.
As the advanced economies are now expected to contract in 2009, growth in emerging and developing economies is also expected to slow down sharply in 2009, under the drag of falling export demand and much tighter external financing constraints.
Despite the expected slowdown, there is one bright note: growth is still forecast in three emerging economies, China, the Philippines and Thailand.
The strength of the Philippine banking system can be seen through the following developments:
(1) The banking system's asset base has been expanding steadily. Deposit mobilization has risen.
(2) Banks have been offloading their impaired assets and troubled loans, and the NPL ratio is now around the pre-Asian crisis level of around 4.0 percent.
(3) The profitability of the banking system is still there, although some moderation in profit growth has been observed of late.
(4) Banks remained capitalized at levels above both the BSP-regulatory requirement and the international (BIS) standard.
Moreover, the Philippines is relatively well-insulated from key transmission channels of the global financial strains that are affecting other emerging market economies (EMEs). This is so for the following reasons:
Philippine financial institutions have relatively limited exposure to structured credit and related derivative products which were the main cause of the large losses of crisis-affected international banks.
It is helpful to point out that derivatives licenses in the Philippines have been given out prudently.
(5) Lastly,.Philippine banks rely more on traditional banking services such as deposits than on complex products like derivatives as sources of funds.
How can the BSP and the banks partner in creating an environment conducive for growth?
The BSP encourages banks to expand their current credit allocation particularly to the underserved, productive sectors of the economy, such as micro, small and medium enterprises (MSMEs), to curb the rise of unemployment in the country.
The fact that most displaced workers temporarily venture into small businesses such as sari-sari stores to augment their household incomes should seriously be considered.
To ensure security for the loans to SMEs, banks could participate in the Credit Surety Fund (CSF). The Credit Surety Fund-created out of contributions from the associations of cooperatives of provinces that have signified to join the program, the sponsoring local government unit, the National Government's Industrial Guaranty and Loan Fund (IGLF), and the Development Bank of the Philippines -will serve as security for the loans approved by the CSF Oversight Committee.
Banks that will extend loans secured by the CSF can rediscount up to 90 percent of such loans with the BSP.
The BSP also encourages the banking sector to diversify and explore lending opportunities in the business processing outsourcing (BPO) sector, which has been dubbed as "one of the bright spots in the Philippine economy."
The BPO sector is projected to sustain its strong performance as multinational companies cut costs and outsource part of their operations to developing countries, including the Philippines.
The sector's revenue is expected to sustain its growth momentum due to the increase in higher-end outsourcing in the areas of finance, medical transcription, legal services, animation, Web design, software development and shared services.
There are already signs of these positive projections as the Deutsche Bank signified expansion plans in 2009 while the StarTek Corp, a provider of customer care, sales support, order processing and industry-specific services, inaugurated its Makati facility in January.
Mark Watkinson, HSBC country manager, has likewise announced that the London-based financial giant is considering other opportunities in the local BPO sector aside from voice or call centers which he said "the Philippines is known to be very good at."
Finally, the BSP urges banks to re-establish the foundations of confidence in the banking sector, especially amid market uncertainty caused by the global financial turmoil and the recent "noise" on the closure of some rural banks.
Banks should also continue to strengthen their risk management and assessment practices by adhering to the best international standards of due diligence and corporate governance.
The further build-up of capital should likewise improve the resiliency of banks during periods of financial turmoil
Let me now share with you the BSP's policy thrusts.
Monetary policy in 2009 will continue to focus on maintaining price stability. As inflation risks moderate, the BSP will carefully consider opportunities for monetary policy easing .In fact, with the favorable inflation outlook, the BSP has considerably eased monetary policy since 2008.
The BSP will continue to ensure that sufficient liquidity is available to fund the growth requirements of the economy.
Only last month, the Monetary Board approved changes that would further liberalize banks' access to the BSP's rediscounting facility.
These changes would provide more liquidity and credit in the banking system to ensure the orderly functioning of financial markets should global financial conditions worsen.
The liberalized rediscounting guidelines would enable banks to rediscount more loan papers and therefore have access to additional funds that they can re-lend to the public or simply to meet their need for ample liquidity.
Some of more recent BSP policies pertain to the regulation of modern payment schemes such as its recent issuance of guidelines on the use of electronic money or e-money.
In 2008, the BSP implemented several measures including opening of a US dollar repurchase facility, as well as reclassification of financial assets.
The BSP's external sector policy will remain focused on ensuring that the economy's external vulnerabilities are reduced.
We will to continue to work for a favorable Balance of Payments (or BOP) position, and we believe we will achieve this mainly due to steady remittances and receipts from the BPO sector.
This will give us the opportunity to further beef up international reserves for self-insurance.
Banking sector policies will be focused on reinforcing the banking system's soundness.
We will remain committed to sustaining key financial and banking sector reforms that would lead to greater efficiency, better risk management, stronger capital base, improved disclosure and transparency practices, and enhanced corporate governance standards in the banking system.
We will help facilitate the early implementation of the Credit Information System Act (CISA) or Republic Act No. 9510 which was signed into law by President Arroyo on 31 October 2008.
We believe the CISA would allow lending institutions to access a wider base of accurate and reliable credit information, make sounder credit decisions.
This would likewise improve the overall availability of credit, especially to small borrowers, and reduce excessive reliance on physical collateral to secure credit.
Lastly, the BSP will continue to encourage and support financial innovations, such as the Credit Surety Fund (or CSF), that would in turn improve the lives of marginalized Filipinos.
In closing, It will indeed be a tough operating global environment in 2009.
Let me just run very briskly through our strengths and weaknesses, our opportunities and threats.
The Philippine economy is not immune to the crisis but it is entering this period of financial volatility from a position of relative strength.
Our policymakers are proactive and well-prepared and more importantly, are armed with the tools to ride out the storm.
As demonstrated in 2008, the BSP can act preemptively and rapidly.
We have a healthy external position and a sound financial system.
These, and a healthy partnership between the BSP and the banking community, should see us through the ongoing economic downturn.
As an old Russian proverb goes: The sun will shine in our yard, too.
Thank you very much for your attention. God bless BaiPhil!
God bless the Philippines!