MANILA, Philippines -The year 2010 emerged as another difficult and challenging year for monetary authorities but the Philippines emerged victorious from the debt crisis that hit Europe after surviving the impact of the global financial crisis that started in the US just two years ago.
During the year, the Bangko Sentral ng Pilipinas (BSP) reaffirmed its commitment to establish a strong and vibrant financial system that would contribute to a more balanced and sustainable economic growth.
Despite the external shocks, the Philippines posted a stronger-than-expected gross domestic product (GDP) growth of 7.5 percent in the first three quarters of the year from 0.7 percent in the same period last year and is on its way to posting a growth of six percent to seven percent.
In 2009, the Philippines barely escaped recession and managed to post a GDP growth of 1.1 percent from 3.8 percent in 2008 due to the full impact of the global economic crisis.
The strong growth prompted the central bank to withdraw the liquidity enhancing measures that were introduced way back in November of 2008 to cushion the impact of the global economic crisis. To date, almost all the crisis-related mesures have been lifted except for the two percentage increase in the reserve requirement for banks to 21 percent from 19 percent.
Measures that were taken since the start of 2010 include the decision to set the peso rediscount rate equal to the overnight borrowing rate instead of 50 basis points lower than the overnight RRP rate; the reduction of the peso rediscounting budget from P60 billion to P40 billion and then back to the pre-crisis level of P20 billion; the restoration of the loan value of all eligible rediscounting papers from 90 percent to 80 percent of the borrowing bank’s credit instrument; and to bring back the non-performing loan ratio requirement of two percentage points from 10 percentage points) above the latest available industry average non performing loans for banks wishing to avail of the rediscounting facility.
On the other hand, authorities kept its key policy rates at record lows on the back of manageable inflation despite the strong economic rebound. The BSP slashed key interest rates by 200 basis points between December 2008 and July 2009, bringing the overnight borrowing rate at a record low of four percent and the overnight lending rate at six percent.
BSP Gov. Amando Tetangco Jr. said the current monetary policy settings represent a sound policy balance that is supportive of both inflation control and economic expansion.
Manageable inflation
Inflation remained manageable averaging 3.8 percent from January to November this year or well within the target of 3.5 percent to 5.5 percent set by the BSP for 2010. Consumer prices peaked at 4.4 percent in March and April before easing to 2.8 percent in October and up slightly to three percent in November.
Monetary authorities see inflation averaging 3.63 percent instead of 3.8 percent for this year and 2.35 percent instead of 2.95 percent for 2011. The BSP has set an inflation target of three percent to five percent between 2011 and 2014.
“Inflation remained manageable, with headline inflation expected to remain at levels broadly consistent with the targets for 2010 to 2012. The slowdown in core inflation and inflation expectations also reflected more benign inflation readings over the policy horizon,” Tetangco stressed.
He pointed out that the favorable inflation outlook against a positive economic background suggests that current monetary policy settings remain appropriate.
He noted that the global context seems to be more challenging as the second round of quantitative easing in the US is expected to lead to increased capital inflows into Asian markets given the still-fragile recovery in advanced economies and robust growth prospects in emerging economies including the Philippines.
Robust external payments position
Tetangco also cited the country’s robust external payments position as capital continued to flow out of advanced economies led by the US and flood emerging market economies including the Philippines.
The country’s balance of payments (BOP) surplus surged to an all-time high of $13.17 billion in the first 11 months of the year from $5.206 billion in the same period last year. For the month of November alone, the country posted a surplus of $3.9 billion, which was a complete reversal of the BOP deficit of $93 million in the same month last year.
The BOP refers to the difference of foreign exchange inflows and outflows on a particular period and represents the country’s transactions with the rest of the world.
Authorities attributed the increase to the strong recovery of the country’s merchandise exports, robust remittances from overseas Filipinos, rising revenues from the business process outsourcing (BPO) sector, improving tourism receipts as well as the higher earnings of the BSP from its investments as well as the surging inflows of foreign portfolio investments or hot money and foreign direct investments (FDIs).
The surplus from January to November already surpassed the revised BOP surplus target of $8.2 billion from $3.7 billion. Originally, the BSP expected the BOP surplus to hit $3.2 billion this year.
The country’s BOP surged to $6.421 billion in 2009 as it reflected the new treatment of allocation of Special Drawing Rights (SDRs) consistent with the guidelines of the BOP manual 6th Edition from $89 million in 2008.
Latest data showed that the amount of money sent home by Filipinos abroad hit a new monthly record of $1.673 billion in October as overseas Filipino workers (OFWs) sent more money to their loved ones in the Philippines in time for the Christmas season. This brought the OFW remittances to $15.456 billion in the first 10 months of the year or 7.9 percent higher than the $14.23 billion recorded in the same period last year.
The projected growth in OFW remittances was upgraded to eight percent instead of six percent this year. In 2009, remittances went up by 5.4 percent to a new record level of $17.348 billion from $16.426 billion in 2008 and exceeded the revised four percent growth forecast set by the central bank.
Net inflows of foreign portfolio investments or “hot money” into the Philippines hit a new record level of $4.18 billion as of end-November or almost 10 times the net inflow of $431.4 million in the same period last year and exceeding the full-year target of $2.9 billion.
This after inflows almost doubled to $11.8 billion from January to November this year compared to $5.95 billion in the same period last year due to the sharp increase in investments in shares of stocks listed at the Philippine Stock Exchange (PSE) while outflows increased by 36.2 percent to $7.413 billion from $5.441 billion.
Meanwhile, the country’s foreign direct investments (FDIs) retreated by 31.8 percent to $1.093 billion in the first nine months of the year from $1.603 billion in the same period last year due to the sharp drop in inflows of large equity capital.
Equity capital plunged 89.5 percent to $185 million from January to September compared to $1.757 billion in the same period last year when large investments in a local and beverage company and a local power corpoation were recorded. The BSP expects FDI inflows hitting $2.0 billion instead of $1.8 billion this year.
On the other hand, the country’s gross international reserves (GIR) – the sum of all foreign exchange flowing into the country – surged 39 percent to hit a new record level of $61.3 billion in the first 11 months of the year from $44.17 billion in the same period last year. This surpassed the latest revised GIR target of $60 billion.
For his part, BSP Deputy Gov. Diwa Guinigundo said monetary authorities are now reviewing the country’s external payments position targets for next year to take into consideration the sharp increases registered so far this year.
“We are still running our numbers because we have to adjust our targets for 2011 although the increase is not going to be as high as this year. We did not expect the improvement to be that strong this year,” he stressed.
He pointed out that 2011 would continue to be strong for the country’s external payments position as it expects the GIR to hit $58 billion and the BOP surplus of amount to $1.9 billion next year.
Record high business and consumer confidence
The Business Expectations Survey for the fourth quarter conducted by the BSP showed that business confidence hit a new all-time high of 50.6 percent in the fourth quarter of the year from 45 percent in the thid quarter on expectations that the Aquino administration would be able to sustain the strong economic rebound fuelled by strong remittances from overseas Filipinos in time for the Christmas season.
The all-time high business outlook for the current quarter was driven mainly by expectations of sustained improvement in the economy on the back of strong domestic demand fuelled partly by the steady stream of overseas Filipinos’ remittances and higher capital inflows.
The confidence index is computed as the percentage of firms that answered in the affirmative less the percentage of firms that answered in the negative with respective to their views on a given indicator. A positive confidence index indicates a favorable view.
Data showed that confidence index steadily improved from 18.4 percent in the third quarter of last year, 22 percent in the fourth quarter, 39.1 percent in the first quarter of the year, 43.9 percent in the second quarter, and 45 percent for the third quarter.
It would be recalled that the confidence index plunged to the negative territory at -12.9 percent in the third quarter of 2008 or during the height of the financial meltdown in the US. The index plunged to a negative territory of -23.9 percent in the first quarter of 2009 before improving to -2.9 percent in the second quarter.
Likewise, the confidence level of Filipino consumers hit a new record high under the administration of President Aquino on the back of favorable macroeconomic fundamentals as well as brighter economic prospects. The 3rd Quarter Consumer Expectations Survey showed that consumer confidence index for the current quarter hit a new all-time high of -14 percent from the -28.7 percent in the second quarter.
Respondents of the survey cited the country’s sound macroeconomic fundamentals that would translate to better employment and business opportunities.
The consumer confidence index for the next three months also hit a new all-time high of 15.3 percent from after reversing from -1.8 percent in the second quarter while that of the next 12 months also hit a record level of 44.3 percent from 22.9 percent.
Resilient banking system
Banks in the Philippines managed to keep their capital levels significantly above international standards as the industry survived the impact of the global financial crisis that started in 2008.
The BSP said the banking system recorded a capital adequacy ratio (CAR) level of 14.9 percent on a solo basis and 15.95 percent on a consolidated basis as of end-March this year.
The central bank pointed out that the Philippine banking system remained well above the international benchmark ratio of eight percent and the BSP’s own 10-percent minimum requirement.
The CAR is a ratio of a bank’s capital to its risk and the central bank tracks this indicator to ensure that banks have the capability to absorb a reasonable amount of loss and that they are complying with their statutory capital requirements.
The number of banks in the country declined by 31 to 773 in the first half of the year from 804 in the same period last year indicating the continued consolidation of banks as well as the exit of weaker players. Data showed that the number of universal and commercial banks was steady at 38 while the number of thrift banks was also unchanged at 74.
However, the number of rural banks fell to 661 from January to June this year compared to 692 in the same period last year due primarily to the closure of a number of banks including several banks under the controversial Legacy Group.
Multilateral lender International Monetary Fund (IMF) has said the local banking system remained resilient after the BSP managed to put in place reforms aimed at containing the effects of the global financial crisis.
IMF mission chief Vivek Arora said in a press conference that the BSP has made substantial progress in banking supervision and regulatory framework.
“The financial sector has remained resilient, owing in large part to the strengthening of the supervisory and regulatory framework in recent years,” Arora told reporters.
He pointed out that banks in the Philippines survived external shocks including the financial crisis in the US as well as the debt crisis in Europe.
“Banks have been not much affected by the global financial turbulence in recent quarters,” he added.
Tetangco said the implementation of tighter capitalization standards under BSP Circular No. 639 or the implementing regulation on the International Capital Adequacy Assessment Process (ICAAP) for major players in the banking industry on January 1further strengthen the country’s financial sector.
Under the ICAAP, banks would be required to provide sufficient capital-or other resources-to cover non-traditional types of risks involved in operating a bank. These include reputation risk, strategic risks, interest rate risks, compliance risks, liquidity risks, and credit concentration risks.
Currently, banks are only required to provide capital cover for common types of risks, mainly credit risk, which is the risk of borrowers defaulting on their loans.
The circular, which would now take effect in January 2011, states that banks must submit to the BSP a detailed report indicating all the risks it is exposed to, quantify these risks, determine the amount of capital they think is sufficient to cover for all these risks, and raise the required capital.
Banks’ total deposits as of end-August 2010 amounted to P3.4 trillion, 8.2 percent higher than the year-ago level of P3.2 trillion due to sustained depositor confidence in the banking system. The total resources of the banking system rose by 6.5 percent to P6.4 trillion as of end-July from the year-ago level of P6.0 trillion due to the growth in currency and deposits.
New generation currency
To wrap up 2010, President Aquino and BSP launched the new generation bank notes or paper bills making history with the P500 bill featuring former President Cory Aquino and the former Sen. Benigno Aquino Jr. signed by their son and current chief executive President Benigno Aquino III.
Tetangco said the release of the new bank notes and paper bills would make it difficult and expensive for counterfeiters to produce fake money.
“This project took us three years from conceptualization to printing. Now we will be able to stay ahead of the counterfeiters,” Tetangco stressed.
All six banknote denominations including P20, P50, P100, P200, P500, and P1,000 have new designs but the old colors were retained.
The blue-colored P1,000 bill still features World War II heroes Jose Abad Santos, Josefa Llanes Escoda and Gen. Vicente Lim; the yellow P500 bill now features the late President Aquino and late Sen. Aquino; the green P200 with the late President Diosdado Macapagal; the purple P100 with the late President Manuel Roxas; the red P50 with former President Sergio Osmena; and the orange P20 with former President Manuel Quezon.
On the reverse side, the P1,000 bill now features the 130,00-hectare Tubbataha Reefs National Park and the South Sea Pearl Pinctada Maxima while the P500 bill features the eight-kilometer Puerto Princesa Subteraranean River National Park in Palawan and the blue-napped parrot known as Tanygnathus Lucionensis.
In the reverse side of the P200 bill, the inaguration of former Presiden Arroyo as the 14th President of the Philippines was transferred to the front side and replaced with the Bohol chocolate hills and the Tarsier. The P100 bill features the Mayon volcano and the whale shark locally known as the Butanding while the reverse side of the P50 bill features the Taal lake and the Maliputo fish. The P20 bill features the Banaue Rice Terraces and the animal Palm Civet in the Cordilleras.
Last year, the BSP announced that it was contemplating a massive face lift for banknotes and coins that were circulated three decades ago to further enhance security features and improve durability.
Challenges ahead
Tetangco believes there is good reason to celebrate 2010 due to the country’s sound macroeconomic fundamentals as evidenced by stronger-than-expected economic growth, benign inflation outlook, robust external payments position, and record low interest rates.
“There is also good reason to celebrate the sound macroeconomic fundamentals that underpin the real value of the Philippine peso. Inflation is at low single digit levels that are well within our target; the benchmark interest rates set by the BSP are at record low levels; we have a sizable BOP surplus; our GIR are at an all-time high; remittances from our modern day heroes are bound to set a new record this year; our banking system is sound and stable; and our surveys indicate strong confidence in the future by the business sector and Filipino consumers,” the BSP chief said.
He pointed out that the economy as a whole would continue to perform well as the government has a growth target of seven percent to eight percent for 2011.
“While the projection is for the economy will continue to perform there will also be certain challenges on the monetary side. We will continue to experience manageable inflation, the projection for inflation is to be well within the target for 2011. The BOP which has been posting surpluses will continue to register positive position next year and the GIR will continue to go up,” he added.
Monetary authorities are looking forward to more upgrades for the Philippines from international credit rating agencies next year on the back of the improving fiscal position of the Aquino government.
Guinigundo said rating agencies led by Moody’s Investors Service, Fitch Ratings, and Standard and Poor’s should take into consideration the country’s improving fiscal position brought about by prudent spending by the Aquino government as well as improving tax take.
“They (credit rating agencies) said the problem is the fiscal position but I guess the fiscal position is also showing significant improvements. So if we can sustain that this year and the next year there will be no other reason for the other credit rating agencies not to grant us an upgrade,” Guinigundo told reporters.
The Aquino government has committed to trim the country’s budget deficit to two percent of gross domestic product (GDP) starting 2013 until 2016 from about 3.9 percent last year.
He pointed out that credit rating agencies should recognize the ability of the Philippine government to survive the global financial crisis as well as the debt crisis in Europe.
Monetary authorities hope that the Philippines would get another credit rating upgrade from New York-based Moody’s after getting a sovereign credit rating upgrade from S&P last Nov. 12.
S&P raised the credit rating for the government’s long-term, foreign currency-denominated debt issuances by a notch, or from three to two notches below investment grade. It cited the country’s rising external liquidity, explaining that growing reserves of foreign currencies improves the government’s ability to service its liabilities to foreign creditors and investors.
Moody’s, S&P, and London-based Fitch Ratings are closely watching the economic and fiscal developments in the Philippines.
Moody’s upgraded the country’s credit rating outlook to positive from stable as early as 2008. A positive outlook means there is possibility for a credit rating upgrade in the short term while a stable outlook means no change is anticipated.
However, Moody’s has yet to upgrade the country’s sovereign credit rating that is currently pegged at three notches below investment grade. S&P and Fitch, on the other hand, rate Philippine debt at two notches below investment grade with a stable outlook. –Lawrence Agcaoili (The Philippine Star)
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