Why Tetangco glows with optimism for 2010

FAITH, HOPE, CHARITY: When a buoyant majority of Filipinos polled recently said they awaited the New Year with optimism, I suspected that they were mostly expressing Hope.

And when a few opinion writers and political economists conceded that 2010 could turn out better than the year just past, they sounded like they were saying that out of Charity.

But when Gov. Amando Tetangco Jr. of the Bangko Sentral ng Pilipinas gave an upbeat economic prognosis of 2010 before the first breakfast forum of the year of the Tuesday Club at the Shangri-La Edsa the other day, I found it as a sign of boundless Faith.

Analyzing the prospects and challenges of the incoming year, the career (spanning more than three decades) central banker noted that “while 2009 started with much uncertainty and gloom, 2010 brings with it more hopefulness.”

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WHY THE OPTIMISM: Trotting out facts and figures, Tetangco (known to many as “Say” (pronounced “sigh”) gave several reasons for his optimistic outlook for 2010.

He noted that the global economy appears to have “turned a corner” and that global inflation is expected to remain low.

During the last quarter of 2008 multilateral agencies like the International Monetary Fund and other major financial institutions were downgrading growth forecasts almost monthly. These downgradings have stopped. Their action then was to upgrade their forecast for 2009 global growth from their July forecast of -1.4 percent to -1.1 percent, and their global growth forecast for 2010 from 2.5 percent to 3.1 percent.

Tetangco said the coordinated global monetary measures have eased the international financial strains, enhancing the effects of the monetary and fiscal stimulus programs undertaken by central banks and governments.

Although recovery seems to be under way, he said this is expected to be modest and global inflation to remain low. Relatively weak global demand, he added, should keep commodity prices in check.

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CONSUMER DEMAND: The domestic economy “continues to dispel recessionary fears and defy market expectations,” he said.

The economy continued to grow by 0.7 percent in the first nine months of 2009. The rebound in consumer demand was supported by the sustained rise in remittances from overseas workers, fiscal and monetary stimulus measures, and a marked decline in inflation.

For 2010, the BSP sees an increase by 2.6 – 3.6 percent of the real gross domestic product. The domestic inflation environment promises to continue to be manageable. Inflation eased to a year-to-date average of 3.2 percent till November, lower than the 9.3 percent for the entire 2008.

The BSP forecast for December 2009 inflation is 3.7 – 4.6 percent. This is near the midpoint of the target of 3.5 percent +1.0 percentage point. Latest forecasting indicates that inflation will settle within the 4.5 percent + 1.0 percentage point target range for 2010.

Tetangco said such a subdued inflation environment provides BSP monetary policy space to support economic growth.

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MANAGED LIQUIDITY: Domestic credit has been growing, which should boost economic activity. Tetangco said banks continue to intermediate funds effectively because the banking system remains sound.

He noted that even at the height of the crisis in the fourth quarter of 2008, domestic credit continued to flow. At that time, BSP endeavored to prevent a meltdown in local financial bourses and a freezing in the credit markets, as what was then happening in other countries.

Ensuring accommodative monetary policies, the BSP made sure there was sufficient and evenly distributed liquidity in both the peso and dollar funding markets.

A key function of the Bangko Sentral is liquidity management, which it does by formulating and implementing monetary policy aimed at influencing money supply, consistent with its primary objective to maintain price stability.

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CREDIT GROWTH: As lender of last resort, the BSP extends discounts, loans and advances to banking institutions to achieve desired liquidity levels.

Remaining fundamentally sound, the banking sector has been strengthened further by important reforms adopted before the crisis. Reforms have boosted the system’s performance in terms of higher asset growth, enhanced asset quality, improved profitability and better capitalization.

Tetangco reported that credit growth is slower now from the double digit growth registered till mid-2009. This is so, he said, because economic agents tend to assess the markets more carefully during a crisis. Banks’ continuing to intermediate funds to the productive sectors has helped spur growth.

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FINANCIAL MARKET: Tetangco cited other quality improvement in the financial market.

“The bond market was fairly active in 2009 as an alternative source of funding for corporates,” he said. “It was also a healthy alternative use of funds for those with appetite for longer term issuances. There are several bond issuances and private placements in the pipeline for 2010.”

“In general, the financial markets have returned to some normalcy,” he added. “Bond credit spreads have narrowed, the peso has stabilized and the stock market has been consolidating.”

Another reason for optimism, he said, was that the external payments dynamics have remained favorable, and are expected to continue to be positive.

The healthy external liquidity has allowed the country to build up its international reserves to a record level of $44.2 billion as of end-November 2009. The overall balance of payments is projected to continue to post a surplus of $3-4 billion, boosting the gross international reserves level to $47.0 – 48.0 billion at end-2010.

The BSP’s disciplined approach to monetary policy (under inflation targeting) allowed it to carry out a fine-tuned accommodative policy at the height of the crisis. The economy continues to attract foreign investments and to grow even during the deep global crisis, Tetangco said. –Federico D. Pascual Jr. (The Philippine Star)