Bangko Sentral Review 2012

Bangko Sentral Review 2012

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BSP VisionThe BSP aims to be a world-class monetary

authority and a catalyst for a globally

competitive economy and financial system

that delivers a high quality of life for all

Filipinos.

Mission StatementThe BSP is committed to promote and

maintain price stability and provide proactive

leadership in bringing about a strong

financial system conducive to a balanced and

sustainable growth of the economy. Towards

this end, it shall conduct sound monetary

policy and effective supervision over financial

institutions under its jurisdiction.


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Measuring the Contribution to the Philippine Economy ofInformation Technology-Business Process Outsourcing (IT-BPO) ServicesMarriel M. Remulla and Grace M. Medina

Tenets of Effective Monetary Policy in the PhilippinesJasmin E. Dacio and Christopher John F. Cruz

An Assessment of the Transparency and Communication Practices in Monetary Policy of the Bangko Sentral ng PilipinasLaura B. Fermo and Raquel A. Silva

Views from Washington: Reforms of the IMF’s SurveillanceErnando S. De Leon

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EDITORIAL BOARD

DIWA C. GUINIGUNDOChairman

NESTOR A. ESPENILLA, JR.JUAN D. DE ZUÑIGA, JR.

MA. CYD N. TUAÑO-AMADORMembers

FELIPE M. MEDALLAIGNACIO R. BUNYE

MAXIMINO J. EDRALIN, JR.Advisers

EDITORIAL STAFF

ZENO RONALD R. ABENOJAEditor

DENNIS D. LAPIDAssociate Editor

ANTONIO B. CINTURAManaging Editor

VERONICA B. BAYANGOSFERNANDO Y. SILVOSA

THEA JOSEFINA NATALIA W. SANTOSARNEL ADRIAN C. SALVA

FAY ANNE P. DE GUZMANMA. MERZENAIDA D. DONOVAN

MA. FE V. REYESBARBARA F. GUALVEZ

Members

DENNIS Q. CATACUTANBEATRICE ANNE T. BELEN

Desktop Artists

MARIVIC P. SERQUIÑACONCHITA V. DE LEONTEODORO F. CASTILLO

Circulation


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Measuring the Contribution to the Philippine Economy of Information Technolog y - Business Process Outsourcing (IT-BPO) Services

Marriel M. Remulla is Bank Officer V and Head of Cross Border Transactions Survey Sub-Group, Balance of Payments Statistics Group of the Department of Economic Statistics. She holds a Bachelor of Science in Statistics degree from the University of the Philippines and earned units in Master of Science in Economics from the De La Salle University.

Grace M. Medina is Bank Officer I at the Department of Economic Statistics. She holds a Postgraduate Diploma in Development Studies from the Institute of Developing Economies Advanced School in Chiba, Japan. She graduated with a degree in BS Agribusiness Management (cum laude) from the College of Economics and Management, University of the Philippines Los Baños.

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Introduction

The expansion in the services sector during the past decade

has been largely influenced by the rapid development in the

information and communication technology (ICT) services,

notably in contact centers and other business process

outsourcing (BPO). Recognizing the industry’s contribution

to employment generation, investments and foreign

exchange earnings, and given the comparative advantage

of the country’s workforce in these type of services, the

government’s thrust to promote the development of ICT-

BPO services was articulated in the Philippine Development

Plan (PDP) 2005-2010 and its successor, PDP 2011-2016.

Government support to the industry is seen to increase, with

the Philippines emerging as the “primary destination of choice

for voice services and the second most preferred destination

for Information Technology-Business Process Outsourcing

(IT-BPO) and global in-house center (GIC) complex, non-voice

services after India.” This is affirmed by the announcement

of Everest Research in January 2011 that the Philippines

surpassed India as the number one voice services center

in the world with US$ 5.7 billion in revenues, compared to

India’s US$ 5.5 billion in 2010 (BPA/P, 2011).On the part of the private sector, the Philippine IT-BPO Road Map 2011-2016 identified five priority activities in order for the Business Processing Association of the Philippines (BPA/P) to support the expansion and development of the IT-BPO industry. These priority activities include:

1. upgrading standards and accreditation to ensure a better match between the skills of graduates with the requirements of the industry;

2. marketing the industry more aggressively to the local talent pool;

3. strengthening awareness of the country’s competitive edge in IT, voice and non-voice BPO services in existing and new markets;

4. advocating high-impact public policies; and

5. strengthening BPA/P’s Public-Private Partnership with government to fund key programs such as study-to-work training programs (BPA/P, 2012).1

1 The Philippine IT-BPO Road Map 2011-2016 was developed through a joint venture between Everest Group and Outsource2Philippines in close coordination with the Business Processing Association of the Philippines (BPA/P), the umbrella association for the IT-BPO and GIC (Global In-House Center) industry in the country, in consultation with BPA/P’s partner associations and key government officials and various executives representing enabling sectors such as telecom, training and recruitment, and real estate management.


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Toward monitoring the progress and impact of government and private initiatives in support of the industry, and for more informed policy decisions by the government, the country’s generation of a comprehensive, reliable, frequent and timely statistics is crucial. This paper presents the data initiatives undertaken by the Philippine Statistical System (PSS), in particular by the Bangko Sentral ng Pilipinas (BSP), to support the demand for ICT-BPO services statistics, which has grown over the years. The paper will also present future directions to enhance the industry’s database that will adequately monitor the developments and emerging trends in the industry, and to institutionalize the generation of ICT-BPO services statistics by an appropriate agency.

The Survey of IT-BPO Services

Background

The Survey of IT-BPO Services (formerly IT and IT-Enabled Services until 2008) started as an initiative of the Inter-Agency Committee on Trade Statistics (IAC-TrS) to provide reliable statistics on the contribution of the industry to the Philippine economy.2 The BSP, in close coordination with the members of the IAC-TrS and the industry associations, spearheaded the conduct of the 2005 benchmark survey in April 2006, the results of which were released in May 2007. With information support from the Philippine Export Zone Authority (PEZA) and the Board of Investments (BOI), it has continued to conduct the annual surveys, while the envisioned institutionalization has yet to materialize.3

Survey Coverage

The survey respondents included companies engaged in the operations of contact centers, medical and legal transcription, animation, software development and other BPO activities. The following highlights the coverage of each category:

Contact Center - Answering and transmitting calls from clients by using human operators, automatic distribution, computer telephone integration, interactive voice response systems or similar methods to receive orders, provide information, deal with customer requests for assistance or address customer complaints, debt collection, collective handling of letters, fax messages, e-mails, postal mail catalogues, website inquiries and chats, and the collection of information from customers during in-store purchasing.

Transcription Activities - Transfer of data from one form (voice/oral) to another (paper or electronic) such as medical history, diagnosis, prognosis and outcome, depositions, hearing and court tapes; data entry services; and scanning of documents.

2 The IAC-TrS is comprised of the Department of Trade and Industry (DTI), National Statistical Coordination Board (NSCB), National Statistics Office (NSO), National Economic and Development Authority (NEDA) and the Bangko Sentral ng Pilipinas (BSP).

3 The Monetary Board (MB), pursuant to MB Resolution No. 1054 dated 14 August 2008, approved the Memorandum of Agreement (MOA) on the exchange of data of companies engaged in IT and IT-enabled services between the BSP and the Department of Trade and Industry (DTI), through its attached agencies, namely, BOI and PEZA. The MOA is expected to improve, over the medium term, the data capture and measurement of the BPO industry’s contribution to the economy.

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Animation - Process of giving the illusion of movement to cinematographic drawings, models, or inanimate objects thru 2D, 3D, or other similar technology; includes 2D animation from layouts to final composing, digital ink and paint service, 3D animation using the latest software like Maya, XSI, 3DStudio Max, among others; pre-production services from storyboarding, character and production design, key backgrounds and layouts, 2D and 3D animation for games, flash animation for animated series (broadcast quality).

Software Development/Publishing - This covers the following sub-categories:

a. Software development - Analysis and design, prototyping, programming and testing, customization, reengineering and conversion, installation and maintenance, education and training of systems software, middleware and application software, software development management;

b. Software publishing - Production, supply and documentation of ready-made (non-customized) software, such as operating systems, business and other applications, computer games for all platforms; and

c. Other software consultancy and supply - Development, production, supply and documentation of made-to-order software based on orders from specific users; web page design and software maintenance.

Other BPOs - Include backroom operations, data processing, data base activities and online distribution of electronic content, and other value-added chain activities—shared financial and accounting services, outsourcing for research and public opinion polling, outsourcing for business and management consultancy activities, hardware consultancy and outsourcing for architectural and engineering services.

Survey Methodology The sampling frame for the IT-BPO survey consists of member companies of the BPA/P, PEZA locators and BOI-registered companies. Questionnaires are sent through e-mail or post to BSP respondents, which are the BPA/P member companies. For companies under PEZA and BOI, submissions are part of the regulatory requirements for these locators. Their inputs are processed and consolidated based on the agreed format, then submitted to the BSP.4 Where companies are covered in both PEZA/BOI reports and the BSP survey, responses to the BSP survey are the ones encoded as these provide more details than those from the PEZA and BOI reports. Estimates for non-response are made based on the following estimation methodology:

For each IT-BPO subsector:

= no. of companies which responded to the BSP survey

= no. of companies whose data were submitted to/available from BOI/PEZA

= no. of non-responding companies whose revenue data were taken from the SEC

= no. of non-responding companies for the reference year, whose data for the previous year are available

4 Starting with the 2009 Survey of IT-BPO services, a common survey form was agreed to be implemented by the BSP, PEZA and BOI to improve the reliability of the survey results. However, details on the country of export and source country of equity were excluded from PEZA and BOI respondents since these information are not available.


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= remaining no. of non-responding companies (including new entrants)

Total number of companies =

For revenue:

= revenue of companies which responded to the survey

= revenue of companies which did not submit survey data but which submitted revenue data to BOI/PEZA

= revenue of companies which did not submit survey/BOI/PEZA data but whose revenue data are available from SEC

= previous year’s revenue of companies falling under , multiplied by the average growth of responding companies with comparable data for the previous year, by IT category

= x average revenue (adjusted for outliers)5 of companies included in and

For exports:

= exports of companies which responded to the survey

= exports of companies which did not submit survey data but which submitted export data to BOI/PEZA

For other variables:

Total Equity:

Foreign Investments:

Employment:

Compensation:

5 Revenue data are considered outliers if they fall outside the range, i.e., value >/< mean+/- 2 standard deviations

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Survey ResultsRevenues

The country’s IT-BPO industry continued to exhibit double-digit positive annual growth rates in revenues generated from 2004 to 2011. The industry posted US$12.1 billion of revenues in 2011, about nine times the US$1.3 billion level realized in 2004.

Amid the global financial crisis experienced in 2007 to 2008, the local IT-BPO industry remained resilient, although growth in revenues was slightly lower compared to previous years. Top officials of different outsourcing companies and associations continued to be optimistic on the prospects of the industry, suggesting that multinational firms keep on outsourcing services to cheaper locations, including the Philippines, to cut costs. The growth in the industry’s revenues further declined in 2009 as most of the industry’s outsourcing clients were from the advanced economies, where recovery remained slow in the latter part of the year. This situation triggered the review and re-calibration by IT-BPO companies and foreign investors of their business plans, which delayed, if not dampened, expansion in the industry.

The industry’s growth over the years was due to the continued demand for offshore call or contact centers. According to the IBM’s Global Locations Trend, the Philippines ranked number one in the shared services and BPO categories in the world in 2010. The country overtook India as the contact center capital of the world, outperforming the latter in terms of revenue and employment generation.6

The Philippines is a favored BPO location due to its workforce, armed with good English conversational skills as well as deeper understanding and appreciation of the Western culture. The multilingual skills of the Filipinos also add to the country’s competitive edge as many call center outsourcing firms in the country capitalize on the multilingual Filipino workforce to serve the Hispanic, Japanese and European population.

Contact Centers remained the biggest contributor in terms of revenues for the years covered by the survey. The sector’s contribution to the industry’s total revenues has increased from 44.4 percent (or US$5.9 billion) in 2004 to 56.5 percent (or US$6.8 billion) in 2010. Other BPOs and Software Development consistently followed as second and third largest contributors, respectively, except in 2006, when Software Development took the spot of Other BPOs. The latest survey in 2011 showed that Other BPOs and Software Development accounted for 21.5 percent and 20.4 percent, respectively.

6 The Philippine call center industry employed about 350,000 compared to India’s 330,000; and generated revenues of US$6.3 billion vis-a-vis India’s US$5.9 billion.

Revenue, by Category, 2004-2011 (in US$ million)

Figure 1


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Over the years, all sub-sectors of the IT-BPO industry recorded expansions in revenues generated. Transcription activities consistently recorded the highest growth rate, except in 2007 and 2008 when Other BPOs took the lead in terms of growth rates. This development showed the shift of the local outsourcing industry towards more value-added chain activities such as financial, research and consultancy services, which are covered under the “Other BPOs” category.

The marked slowdown in revenue growth in Transcription, which expanded by only 4.1 percent in 2008 from 60.6 percent in 2007, was the result of the transfer of some foreign clients from the Philippines to other transcription service-providing countries to trim down costs at the height of the financial turmoil. The Transcription and Animation categories, however, posted dynamic growth in revenues in 2009 due to the expansion of transcription companies and the release of more local animation films in the country. Meanwhile, growth in Other BPOs fell sharply during the same year as many of the companies reduced their charges to retain their clients while others received less job orders, especially from advanced economies.

Contact Centers were the key driver of growth of the IT-BPO industry, except in 2008 when the Other BPOs had the biggest contribution to growth at 19.4 percentage points compared to Contact Centers’ 18 percentage points contribution to the total 44.8 percent year-on-year rise in revenues of the industry.

Revenue Growth Rates, By Category, 2005-2011 (in percent)

Table 2

IT-BPO Category 2005 2006 2007 2008 2009 2010 2011

Contact Center 67.9 47.7 40.9 38.4 48.2 25.0 29.6

Transcription 100.4 140.0 60.6 4.1 66.8 48.8 44.3

Animation 37.6 52.6 11.2 25.5 44.2 20.6 14.0

Software Development 43.2 77.1 55.4 28.6 18.4 31.4 12.3

Other BPOs 32.8 19.1 66.0 73.2 13.3 8.0 5.8

TOTAL INDUSTRY 50.8 45.6 50.3 44.8 30.6 21.8 20.1

Percentage-Point Contribution to Growth in Revenues, 2005-2011

Table 3

IT-BPO Category 2005 2006 2007 2008 2009 2010 2011

Contact Center 30.1 23.5 20.5 18.0 21.6 12.8 15.5

Transcription 0.3 0.6 0.4 0.0 0.4 0.3 0.4

Animation 0.4 0.4 0.1 0.2 0.3 0.1 0.1


Other BPOs 10.9 5.6 15.8 19.4 4.2 2.2 1.4

TOTAL INDUSTRY 50.8 45.6 50.3 44.8 30.6 21.8 20.1

Revenue Percent Share to Total, By Category, 2004-2011

Table 1

IT-BPO Category 2004 2005 2006 2007 2008 2009 2010 2011

Contact Center 44.4 49.4 50.1 46.9 44.9 50.9 52.3 56.5

Transcription 0.3 0.4 0.7 0.7 0.5 0.7 0.8 1.0

Animation 0.9 0.9 0.9 0.7 0.6 0.6 0.6 0.6

Software Development 21.1 20.0 24.3 25.1 22.3 20.3 21.9 20.4

Other BPOs 33.3 29.3 24.0 26.5 31.7 27.5 24.4 21.5

TOTAL INDUSTRY 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

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Exports

Total export earnings of the IT-BPO industry were estimated at US$11.2 billion in 2011, more than twelve times the US$0.9 billion recorded in 2004. The industry’s exports remained on the uptrend since 2004, although at a decelerating rate since 2006. Exports continued to be robust despite the global economic crisis experienced in 2007-2008.

In terms of contribution to growth, Contact Centers sustained top position among all sub-categories of the industry. Based on the latest survey, it accounted for the highest contribution at 15.4 percentage points to the 22.7 percent growth of the industry. The second largest contributor was Software Development, except in 2008-2009 when Other BPOs placed second.

An increasing trend was observed in the total industry’s export-to-revenue ratio, from 67.1 percent in 2004 to 94.2 percent in 2010, but it slightly declined in 2011. The sustained growth of the industry’s exports reflected stronger global demand for shared services and business process outsourcing. Notable increases in export-to-revenue ratios were exhibited by Software Development (35.3 percent in 2004 to 96.4 percent in 2010) and Other BPOs (49.1 percent in 2004 to 93.7 percent in 2011).

Exports, by Category, 2004-2011 (in US$ million)

Figure 2

Percentage-Point Contribution to Growth in Exports, 2005-2011Table 4

IT-BPO Category 2005 2006 2007 2008 2009 2010 2011

Contact Center 43.7 27.4 17.6 21.7 27.4 15.4 11.0

Transcription 0.5 0.8 0.3 (0.0) 0.6 0.3 0.5

Animation 0.4 0.8 0.2 0.2 0.2 0.1 0.1


Other BPOs 4.7 14.6 17.2 21.1 10.1 2.1 1.5

TOTAL INDUSTRY 56.3 64.9 52.5 51.5 45.9 22.7 17.8

Export-to-Revenue Ratio, By Category, 2004-2011 (in percent)

Table 5

IT-BPO Category 2004 2005 2006 2007 2008 2009 2010 2011

Contact Center 95.6 96.3 91.4 84.5 87.7 93.6 97.4 90.4

Transcription 100.0 99.5 92.9 77.1 70.5 96.1 89.0 100.0

Animation 62.4 66.4 87.3 91.9 95.8 87.1 85.0 83.1


Other BPOs 49.1 44.2 66.2 73.9 79.4 93.7 93.3 93.7

TOTAL INDUSTRY 67.1 69.5 78.7 79.9 83.6 93.4 94.2 92.4


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The United States has been the top export market for the country’s IT-BPO industry since 2004, accounting for 76.4 percent (or US$8.5 billion) of the industry’s total exports in 2011. Other major export markets were Europe, Japan and Australia-New Zealand.

Equity Capital Investments7

Equity capital investments in the IT-BPO industry have expanded since 2005. These summed up to US$5.7 billion as of end-2011, almost 12 times the level recorded in end-2005. As of end-2008, the level of equity capital investments in the entire industry amounted to US$2 billion, more than twice the level recorded at end-2007. This developed as many IT business parks or “cyberparks” were completed or were being developed during the period, such as Megaworld’s Fort Cyberpark, UP-Ayala Technohub, Asiatown IT Park in Cebu, and One Asia’s IT Park in Biñan, Laguna, to cater to the expanding outsourcing business in the country. A marked increase in the level of investments was recorded in 2010, supported by a more favorable investment climate owing to the country’s strong macroeconomic fundamentals and growth prospects.

The share of foreign equity participation (or US$0.3 billion) continuously increased from 66.9 percent of total equity capital investments in the industry in 2005 to 93.2 percent (or US$5.4 billion) in 2011. Despite the global economic crisis, foreign equity capital participation more than doubled at end-2007 and end-2008 as acquisitions by foreign investors and expansions of foreign firms were extensive during the period.

7 Refers to the sum of the following: paid-up capital, additional paid-in capital/capital in excess of par value/paid-in surplus, appraisal surplus, retained earnings and other capital, less cost of stocks held in treasury, as of end-calendar year. For branches of foreign companies, it covers head office/home office account.

Foreign Direct Investments in the IT-BPO Industry, By Country of Investor, 2005-2011 Percent Share to Total Equity

Table 6

Source CountryPercent Share to Total

2005 2006 2007 2008 2009 2010 2011

USA 86.0 81.0 73.2 67.6 73.1 80.0 76.4

Europe 7.1 10.1 9.6 9.0 6.9 9.9 10.9

Japan 3.2 3.2 9.6 16.2 14.3 3.6 3.8

Australia-New Zealand 1.3 0.7 0.5 1.1 3.3 2.0 5.1

Others 2.4 5.0 7.1 6.0 2.4 4.5 3.9

TOTAL INDUSTRY 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Total Equity Capital Investments, 2005-2011 (in US$ million and percent share)

Figure 3

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Transcription (in 2007 and 2008) and Animation (in 2008) increased their foreign equity participation to full ownership, buoyed up by investor confidence in the country as an attractive outsourcing destination due to the country’s good manpower skills. During the period, some animation companies also opted to be absorbed by their foreign clients due to issues of confidentiality and piracy.

The US was the largest foreign direct investor in the Philippine IT-BPO industry from 2005 to 2010, consistently capturing more than half of the industry’s total foreign equity capital investments. However, as of end-2011, Europe surpassed the US as the largest foreign equity capital investor in the country’s IT-BPO services industry. Another big source of foreign investments in the industry was Japan.

Employment and Compensation

The IT-BPO industry continued to be a major source of employment for the country. Total employment in the industry in 2011 at 679,464 was more than seven times the 94,488 employed in 2004. Double-digit growth in employment was recorded since 2005, except in 2007 when a sharp slowdown was observed, but which was followed by a dramatic recovery the following year. The acceleration of growth in 2008 was due to the additional demand for employees from the newly opened cyberparks, supported by the increased supply of more qualified IT manpower that was a by-product of government scholarship programs. In 2010, the number of IT-BPO companies expanded in the Next Wave Cities located in Clark, Subic, Tarlac, and San Fernando, Pampanga which created more jobs. Linkages between industry associations and the academe were also established to ensure steady supply of quality manpower.

Foreign-to-Foreign Total Equity Capital Ratio, By Category, 2005-2011 (in percent)

Table 7

IT-BPO Category 2005 2006 2007 2008 2009 2010 2011

Contact Center 87.6 92.0 98.1 96.5 95.9 99.7 98.2

Transcription 52.5 71.0 100.0 100.0 84.1 92.0 97.2

Animation 38.4 95.8 97.2 100.0 63.3 70.9 72.5


Other BPOs 47.5 23.2 93.1 85.6 74.2 97.7 80.4

TOTAL INDUSTRY 66.9 60.4 87.9 93.3 91.8 97.6 93.2

Foreign-to-Total Equity Capital Ratio, By Category, 2005-2011 (in percent)

Table 8

Country of Investor 2005 2006 2007 2008 2009 2010 2011

USA 67.3 71.5 54.2 54.0 57.2 71.8 38.5

Europe 22.1 5.9 23.5 18.6 31.8 7.3 46.2

Japan 1.4 21.5 51.2 20.0 8.9 16.8 9.0

Others 9.1 1.1 (28.9) 7.4 2.1 4.1 6.4

TOTAL INDUSTRY 100.0 100.0 100.0 100.0 100.0 100.0 100.0


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Contact Centers consistently absorbed more than half of the industry’s employment from 2004 to 2011, followed by Other BPOs and Software Development. By 2010, the Philippines already dislodged India as the largest contact center hub in the world. Contact centers located in India also expanded their operations in the Philippines and tapped the local workforce to meet the demand of global clients. In 2011, Contact Centers in the Philippines accounted for 63.8 percent of the industry’s total employment. Contact Centers continued to account for the biggest share of the industry’s employment.

Contact Centers and Other BPOs registered positive employment growth rates from 2005 to 2011. In 2009, Animation and Software Development posted declines of 34 percent and 5.8 percent, respectively, as professional animators from local companies were recruited by animation companies abroad and software development firms continued with their personnel rationalization as a means of cost saving.

In terms of contribution to the growth in the industry’s employment, Contact Centers consistently accounted for the biggest share, except in 2009 when this sub-category’s 12.2-percentage-point contribution to growth was outpaced by Other BPOs’ 13.6-percentage-point share to the industry’s aggregate employment growth of 20.5 percent.

Employment by Category, 2004-2011 (in number of persons)

Figure 4

Employment Percent Share to Total, By Category, 2004-2011

Table 9

IT-BPO Category 2004 2005 2006 2007 2008 2009 2010 2011

Contact Center 68.8 69.7 62.0 62.5 59.8 57.5 61.5 63.8

Transcription 1.0 1.3 2.0 2.4 1.2 1.6 1.7 1.6

Animation 1.6 1.4 1.8 1.6 1.6 0.8 0.7 0.6


Other BPOs 16.0 14.7 17.0 16.9 23.3 29.5 26.9 25.9

TOTAL INDUSTRY 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Employment Growth Rates, By Category, 2005-2011

Table 10

IT-BPO Category 2005 2006 2007 2008 2009 2010 2011

Contact Center 48.1 59.7 10.5 25.1 20.4 28.9 31.4

Transcription 98.1 177.7 33.6 (34.7) 63.4 29.3 21.4

Animation 25.3 140.4 (3.5) 30.8 (34.0) 4.7 1.6

Software Development 48.9 139.3 5.2 11.2 (5.8) 5.4 12.0

Other BPOs 34.1 108.4 8.8 80.2 58.4 9.7 22.1

TOTAL INDUSTRY 46.1 79.7 9.5 30.8 25.3 20.5 26.7

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Aggregate compensation generated by the industry amounted to US$5.8 billion in 2011, about twelve times higher than the US$471.4 million level in 2004. The bulk (more than 50 percent) of total industry compensation came from Contact Centers. This was followed by Other BPOs and Software Development at 22.1 percent and 14 percent, respectively, in 2010.

Average annual compensation per employee in the industry increased by 69.7 percent from US$4,989 in 2004 to US$8,464 in 2011. Declines in average annual compensation were experienced in 2008 and 2009 as cutback in the benefits provided to employees were implemented by IT-BPO firms to sustain their operating costs given the reduction in service charges to their clients in the light of the financial crisis. Software Development has been the highest paying sub-sector in the industry since 2004. This was followed by Contact Centers and Other BPOs.

Employment Percentage-Point Contribution to Growth, 2005-2011

Table 11

IT-BPO Category 2005 2006 2007 2008 2009 2010 2011

Contact Center 33.1 41.6 6.5 15.7 12.2 16.6 19.3

Transcription 0.9 2.3 0.7 (0.8) 0.8 0.5 0.4

Animation 0.4 1.9 (0.1) 0.5 (0.5) 0.0 0.0

Software Development 6.2 18.0 0.9 1.8 (0.8) 0.6 1.1

Other BPOs 5.5 15.9 1.5 13.6 13.6 2.9 5.9

TOTAL INDUSTRY 46.1 79.7 9.5 30.8 25.3 20.5 26.7

Compensation By Category, 2004-2011 (in US$ million)

Table 12

IT-BPO Category 2004 2005 2006 2007 2008 2009 2010 2011

Contact Center 331 556 766 1,090 1,680 1,954 2,805 3,570

Transcription 2 5 12 24 22 35 48 63

Animation 6 8 14 19 27 21 24 27

Software Development 83 120 249 620 536 557 629 849

Other BPOs 49 80 226 377 497 852 997 1,243

TOTAL INDUSTRY 471 769 1,266 2,129 2,762 3,419 4,502 5,751

Compensation Percent Share to Total, By Category, 2004-2011

Table 13

IT-BPO Category 2004 2005 2006 2007 2008 2009 2010 2011

Contact Center 70.3 72.2 60.5 51.2 60.8 57.2 62.3 62.1

Transcription 0.4 0.6 0.9 1.1 0.8 1.0 1.1 1.1

Animation 1.3 1.1 1.1 0.9 1.0 0.6 0.5 0.5


Other BPOs 10.3 10.4 17.8 17.7 18.0 24.9 22.1 21.6

TOTAL INDUSTRY 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0


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Comparison of IT-BPO Data Generated by the BSP, BPA/P and NSO

The BSP is only one of the institutions that generate and release data on IT-BPO. The BPA/P and the National Statistics Office (NSO) also conduct separate surveys of the ICT-BPO companies, resulting in different data sets for the industry. The BSP survey was initiated to provide reliable statistics on the contribution of the industry to the economy in terms of revenues, exports, equity, employment and compensation and covers BPA/P and non-BPA/P members as well as companies registered with BOI and PEZA as survey respondents. Meanwhile, The BPA/P survey is conducted among BPA/P member-companies to generate annual industry statistics on IT-BPO revenues and employment. The NSO also publishes data on the IT-BPO industry’s revenue, employment, compensation, cost, value-added, gross additions to fixed assets, change in inventories and subsidies as part of its Census of Philippine Business and Industry (CPBI) or Annual Survey of Philippine Business and Industry (ASPBI) and Quarterly Survey of Philippine Business and Industry (QSPBI). Included in the NSO’s ASPBI survey are establishments with 20 or more employees; as such, IT-BPO companies are not covered if they employ less than twenty and some that have been covered may be subsumed in other related industry classification.

Annual Average Compensation per Employee, 2004-2011 (in US dollars)

Table 14

IT-BPO Category 2004 2005 2006 2007 2008 2009 2010 2011

Contact Center 5,099 5,772 4,985 6,420 7,912 7,640 8,510 8,240

Transcription 2,295 2,780 2,426 3,644 5,131 4,929 5,206 5,649

Animation 4,172 4,521 3,071 4,305 4,702 5,568 6,157 6,832

Software Development 6,943 6,739 5,827 13,817 10,743 11,849 12,699 15,313

Other BPOs 3,210 3,937 5,345 8,196 5,997 6,493 6,926 7,070

TOTAL INDUSTRY 4,989 5,572 5,105 7,841 7,778 7,686 8,398 8,464

Annual Average Compensation per Employee, 2005-2011 Growth Rates in Percent

Table 15

IT-BPO Category 2005 2006 2007 2008 2009 2010 2011 2011

Contact Center 13.2 (13.6) 28.8 23.2 (3.4) 11.4 (3.2) 62.1

Transcription 21.1 (12.8) 50.2 40.8 (3.9) 5.6 8.5 1.1

Animation 8.4 (32.1) 40.2 9.2 18.4 10.6 11.0 0.5

Software Development (2.9) (13.5) 137.1 (22.2) 10.3 7.2 20.6 14.8

Other BPOs 22.7 35.8 53.3 (26.8) 8.3 6.7 2.1 21.6

TOTAL INDUSTRY 11.7 (8.4) 53.6 (0.8) (1.2) 9.3 0.8 100.0

Figure 5

Note: NSO’s data on BPO activities were taken from the results of the Census of Philippine Business and Industry (CBPI) for 2006 and from the results of the Annual Survey on Philippine Business and Industry (ASPBI) for the years 2005, 2008, 2009 and 2010. No ASPBIs were conducted for 2004 and 2007 while the survey for 2011 is ongoing.

Comparative Revenue Statistics of BSP, BPA/P and NSO Surveys 2004-2011(in US$ million)

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Total revenues generated by the industry based on NSO’s data were consistently very low, representing 32.4 percent and 36.6 percent of the revenues recorded in the BSP and the BPA/P surveys, respectively, in 2010. This may be partly attributed to the coverage of the NSO data for the IT-BPO services industry, compared to the more comprehensive coverage of the BPA/P and of the BSP. Meanwhile, the difference between the BPA/P and the BSP data on total revenues was relatively smaller, with the BSP data higher than those of the BPA/P starting in 2008.

Furthermore, the BSP and BPA/P data showed consistent growth in revenues over the years, while that of the NSO exhibited a decline in 2010. Comparative average growth rates in revenues from 2005 to 2011 were 38.2 percent (BSP), 30.2 percent (BPA/P) and 32.9 percent (NSO). 8

Total employment in the industry showed a similar trend observed in revenues, except that the BSP’s employment data were higher than that of the BPA/P in 2006 but lower in 2008. Nonetheless, differences between the BSP and the BPA/P data for employment were smaller. Comparative average growth rates in employment from these three surveys were 31.2 percent (BSP), 26.3 percent (BPA/P) and 25 percent (NSO).

Policy ImplicationsThe local IT-BPO industry has been growing rapidly over the years with total revenues generated in 2011 contributing 5.4 percent to the country’s Gross Domestic Product (GDP), from its 1.4 percent share to GDP in 2004. Sustained growth in employment and salaries paid by the industry over the years helped boost household consumption and investments. An increasing trend was observed in the share of the IT-BPO industry’s employment to the country’s total employment from 2004 (at 0.3 percent) to 2011 (at 1.8 percent).

It is instructive to note that the surplus in the country’s balance of payments since 2005 has largely been due to structural flows in the current account, particularly IT-BPO services receipts and overseas Filipinos’ (OFs) remittances. The proportion of export earnings of the industry to the country’s total exports of goods and services marked a steady increase over the years, representing 17.4 percent in 2011 and about eight times the 2.1 percent share in 2004. In particular, the country’s exports of services were dominated by export receipts from the IT-BPO industry, accounting for 67.5 percent in 2011 from 22 percent in 2004. 8 Average growth was computed using geometric mean, which only require data for both ends of

the period covered.

Comparative Employment Statistics of BSP, BPA/P and NSO Surveys, 2004-2011 (in number of persons)

Figure 6


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Appropriate policies should be crafted to secure and further enhance the position of the industry as a growing source of foreign exchange receipts. This can be achieved by ensuring the success of the following government and private sector plans and programs:

1. The Philippine Development Plan 2011-2016 included business process outsourcing (BPO) as one of the priority areas with the highest growth potentials and source of employment. To nurture the talent pool, develop the infrastructure and regulatory support, and improve the socio economic environment, the PDP provides that the government shall:

• Enhance investment promotion and industry development strategies by synergizing initiatives and programs of the government and private sector to maximize resources;

• Harmonize the educational system with the changing needs of the industry;

• Advocate talent development through training and opportunity building, creating awareness that BPO provides high-paying jobs/careers, and focusing on expanding the talent pool;

• Sustain government commitment through fiscal and non-fiscal incentives and facilitate the conduct of industry-focused road shows overseas;

• Improve the long-term risk perception and overall business environment; and

• Expand the development of “Next Wave Cities” in partnership with the private sector (NEDA, 2011).

2. The key initiatives identified under the IT-BPO Road Map 2011-2016 must be undertaken by the private sector with the necessary government support to ensure that all the targets are met.

Year IT-BPO Industry

IT-BPO Industry Employment as percent of the Country's Total

Employment

IT-BPO Export Earnings as Percent of:

Total Exports of Goods and

Services1/

Exports of Services1/

2004 1.4 0.3 2.1 22.0

2005 1.9 0.4 3.1 30.7

2006 2.4 0.8 4.3 35.5

2007 2.9 0.8 5.9 35.7

2008 3.6 1.0 9.1 54.4

2009 4.9 1.3 15.9 70.1

2010 5.0 1.5 14.6 67.2

2011 5.4 1.8 17.4 67.5

1/ Balance of Payments (BOP) statistics based on 5th Edition Balance of Payments Manual (BPM). BOP statistics based on BPM 6th Edition is only available for reference years 2011-2012.

IT-BPO Revenues and Employment’s Contribution to the Economy (in percent)

Table 16

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Future DirectionsA reliable set of statistics is crucial in monitoring the developments in the local IT-BPO industry. Recognizing the need for a more comprehensive, up-to-date and single data set as basis for crafting appropriate policies in support of the industry, and for purposes of the National Accounts, Balance of Payments, industry promotion, trade negotiations and sectoral plans and programs, the NSCB approved during its first regular meeting for 2013, held on 14 February 2013, the institutionalization of the generation of data on Information Communication Technology Business Process Outsourcing (ICT-BPO) services under NSCB Resolution No. 2, Series 2013. The data on ICT-BPO services will be generated by the NSO through its CPBI or the ASPBI, whichever is applicable during the year, and the Quarterly Survey of Philippine Business and Industry (QSPBI), starting with 2012 as reference year. The scope and coverage of ICT-BPO Services based on the 2009 PSIC and the variables to be covered were the result of several meetings, including a workshop participated in by the members of the IAC-TrS, TWG-TiS, Inter-Agency Committee on Information and Communications Technology (IAC-ICT) and business support organizations. Necessary refinements were made in the CPBI and ASPBI questionnaire and the sampling design for the purpose. The results of the 2012 CPBI will be available by June 2014. The BSP will still conduct the 2012 Survey of IT-BPO services in 2013 parallel to NSO’s 2012 CPBI.

References

Bangko Sentral ng Pilipinas (2005). Benchmark Survey of Information Technology (IT)-Enabled Services.

Bangko Sentral ng Pilipinas (2006). Survey of IT-Enabled Services.Bangko Sentral ng Pilipinas (2007). Survey of IT- and IT-Enabled Services.Bangko Sentral ng Pilipinas (2008). Survey of IT- and IT-Enabled Services.Bangko Sentral ng Pilipinas (2009). Survey of IT-Business Process Outsourcing

(BPO) Technology Services.Bangko Sentral ng Pilipinas (2010). Survey of IT- BPO Technology Services.Business Processing Association of the Philippines. Overview for Investors.

Retrieved on 5 November 2012, from BPAP website: http://www.bpap.org/.Business Processing Association of the Philippines. IT-BPO Road Map 2011–

2016. Retrieved on 12 November 2012, from http://www.bpap.org/.National Economic Development Authority (2011). “Chapter 3: Competitive

Industry and Services Sectors”. In Philippine Development Plan 2011-2016. Retrieved on 22 April 2013, from http://www.neda.gov.ph.

Outsource Your Call Center. Call Center Outsourcing to India Not Sustainable. Retrieved on 11 October 2011, from http://outsourceyourcallcenter.com/.

Yun, M. & Chu, K. (2011, January 9). Philippines passes India in call-center jobs. USA Today. Retrieved on 24 August 2011, from http://www.usatoday.com/.

Tenets of Effective Monetary Policyin the Philippines

Jasmin E. Dacio is Bank Officer V at the Monetary Policy Research Group, Department of Economic Research. She holds a Masters degree in Public Policy from the Hitotsubashi University in Japan and an MA in Economics from the University of the Philippines. She also graduated Cum Laude in BS Business Economics at the University of the Philippines School of Economics. Before she joined the BSP, she had been involved in projects on Poverty Analysis and Policy Responses for Poverty Reduction by NEDA and the UNDP.

Christopher John F. Cruz is Bank Officer III at the Monetary Policy Research Group, Department of Economic Research. He holds a Masters degree in Statistics from the University of the Philippines and graduated Magna Cum Laude in BS Economics from the same university. He worked in the market research industry prior to joining the BSP.

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Introduction

Tenets are defined as principles, beliefs, or doctrines generally

held to be true by members of an organization or profession.

Both theory and practice of modern central banking point

towards some basic guiding principles for effective monetary

policy formulation. This study aims to encapsulate the

principles critical in the development and review of monetary

policy in the Philippines. It then discusses how each of the

tenets is applied in practice by the Bangko Sentral ng Pilipinas

(BSP).

Price stability is a universal goal shared by monetary

authorities all over the world. If inflation is low and stable,

it is said that there is price stability. Since January 2002,

the BSP has used inflation targeting (IT) as its framework for

monetary policy formulation, joining a long list of countries–

both industrialized and developing–which were able to move

successfully from a regime of high inflation to low inflation

following the implementation of IT in their countries.

Tenet 1: Price stability is the primary objective of monetary policyGood monetary policy assigns to price stability the highest weight in the central bank’s objective function, making clear that price stability outweighs other goals (e.g., exchange rate stability and promotion of high employment) when there is perceived or actual conflict among various policy objectives. McCauley (2006) stresses that multiple policy objectives can overburden monetary policy at the risk of incoherence and loss of credibility. A central bank, after all, cannot consistently pursue and achieve multiple goals with only one policy instrument (i.e., the short-term interest rate). Faced with rapidly rising prices, a central bank would have to reduce the money supply or raise interest rates to maintain internal stability. While such policy action can increase unemployment and fuel financial market volatility in the short run, the trade-off between price stability and the other potential monetary policy goals also diminishes over time. This is because price stability provides economic agents with some degree of confidence when making consumption and investment plans, contributing to the efficient allocation of economic resources and promoting long-term economic growth. At the same time, the cost of disinflation decreases as the central bank builds its credibility for fulfilling its pronouncements.


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The “impossible trinity” also implies that price and exchange rate stability cannot be jointly targeted under an open capital account. The active use of monetary policy in pursuit of domestic price stability implies that the exchange rate must be allowed to float freely or run the risk of undermining the central bank’s commitment to low inflation. While the main idea of the “impossible trinity” continues to hold a powerful sway over the standard analysis of policy trade-offs between monetary policy independence and exchange rate movements amid capital flows, evidence from capital flow-recipient emerging economies shows that a careful balance among the three policy variables is achievable.

At the core of the “impossible trinity”, according to Grenville (2011), is the notion that monetary policy is implemented largely through base money changes. Official foreign exchange intervention is seen to be fully reflected in the base money which, in turn, limits the central bank’s ability to set interest rates. However, modern monetary policy is implemented by setting the policy interest rate directly via announcement. The announcement is supported by liquidity management in the financial system through open-market operations, which also underpin the capacity to sterilize foreign exchange intervention. Thus, a central bank’s ability to set interest rates need not be thwarted by official foreign exchange intervention if it has the instruments to sterilize its foreign exchange operations.

More importantly, the complete disregard of exchange rate movements could prove costlier in economies with severe currency misalignments.1 Strong capital inflows for instance could lead to a large and abrupt appreciation of the local currency above its equilibrium level, resulting in economic dislocations and financial market imbalances, particularly in situations of limited inter-sectoral factor mobility and underdeveloped financial markets. Thus, there appears to be some scope for foreign exchange intervention to help ensure that the exchange rate does not move too far away from its equilibrium level even under an inflation targeting regime. Ostry, Ghosh and Chamon (2012) note that as long as monetary authorities have an additional policy instrument (i.e., sterilized intervention), a central bank need not undermine its inflation commitment when smoothing out foreign exchange movements. However, Ostry et al. also stress that central banks pursuing foreign exchange operations should emphasize clearly that interest rate adjustments are used to achieve the inflation target, while sterilized intervention are aimed at limiting exchange rate movements away from the equilibrium level.

In most of emerging Asia over the recent years, most countries, including the Philippines, have been able to maintain open capital markets, monetary policy autonomy, and a fair degree of control over their exchange rates.2 In particular, the BSP was able to build its reputation as a credible inflation fighter despite occasional intervention in the foreign exchange market to ensure that the nominal exchange rate remains fairly in line with its long-term equilibrium. The BSP has adhered to a policy of limiting sharp fluctuations in the exchange rate to the extent that persistent exchange rate movements are seen to potentially compromise the inflation objective as well as result in damaging economic dislocations. This has resulted in the continued build-up of the BSP’s international reserves along with large carrying costs associated

1 Ostry et al. (2012)2 See Grenville (2011)

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with holding foreign-denominated assets amid rising sterilization costs. This has exposed the BSP to financial losses3 which if sustained could compromise the BSP’s ability to use its policy instruments to pursue its policy objectives.

The passing of the New Central Bank Act in 1993 established the BSP as an independent monetary authority with the primary objective of promoting and preserving price stability conducive to sustainable economic growth. The BSP, like many independent central banks, does not have goal independence as the inflation objective is determined jointly with the national government. However, the Act also conferred on the BSP both fiscal and instrument independence. Fiscal independence effectively insulates the BSP from short-sighted political considerations, including the need to finance government deficits to support a chosen growth path. In addition, the BSP was prohibited by law from engaging in development financing while also setting a limit on the advances that can be provided by the BSP to the national government. The BSP was also divested of its fiscal agency functions which were transferred to the Department of Finance. Meanwhile, instrument independence implies that the BSP can calibrate its various policy instruments to maintain overall macroeconomic stability (price and financial stability) without outside interference.

Tenet 2: Effective monetary policy requires a credible nominal anchorA nominal anchor for monetary policy is a variable or device which the central bank uses to stabilize expectations of economic agents about the nominal price level or its path. It can also reveal the central bank’s policy intention to bring and maintain price levels towards the central bank’s definition of price stability, thus improving the predictability of monetary policy. Khan (2003), however, notes that the credibility of an anchor depends largely on the central bank renouncing all other anchors.

Traditional nominal anchors for monetary policy have included monetary aggregates and exchange rates. However, more and more countries have abandoned these traditional nominal anchors in the 1990s in favor of inflation targets as financial liberalization resulted in the weakening relationship between money and prices, while exchange rate misalignments led to the problem of exchange rate crises. By contrast, inflation targets convey to the public a precise and easily-understood goal for monetary policy that the public can use to anchor their expectations. For example, a publicly-announced inflation target of 3.0-5.0 percent for a particular year sends a clearer policy signal than a pronouncement that states that monetary authorities are committed to maintaining price stability over the long run.

The BSP’s annual inflation target is defined in terms of the average year-on-year change in the consumer price index (CPI) over the calendar year. The BSP has announced a fixed medium-term target of 4.0 percent ± 1.0 percentage point for 2012-2014 to help promote a long-term view on inflation and increase the predictability of monetary policy. For 2015-2016, the BSP set the inflation target to 3.0 percent ± 1.0 percentage point consistent with

3 The BSP has reported continued financial losses since 2010.


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the desired disinflation path over the medium term, favorable trends in the structure of Philippine inflation, and the expected higher growth capacity of the economy under a low inflation environment.

By specifying a numerical definition of price stability and a time frame for achieving it, the public can readily monitor whether the BSP has achieved its inflation target or not, and adjust their inflation expectations accordingly. Whenever the target is not met, the public can also judge whether this was due to justifiable reasons (e.g., supply shocks, higher taxes, etc.) or to policy mismanagement. A commitment to a particular inflation target implies that the BSP is ready to utilize its policy toolkit to keep inflation in line with the announced target.

Tenet 3: Transparency in the conduct of monetary policy and careful communication of central bank intentions help anchor inflation expectations and enhance central bank accountabilityThe thinking among central banks has shifted over the past decade towards greater transparency and the need to carefully communicate central bank objectives, strategy, and decisions. Transparency can be defined as an environment in which the central bank provides in an open, clear, and timely manner all relevant information on its mandate, strategy, assessments, and policy decisions.4 It allows the central bank to build credibility in pursuing its mandate and, in the process, helping ensure that inflation expectations are firmly anchored. It also enhances discipline and accountability in policy formulation as well as predictability of central bank policy actions. Central bank communication has to be clear and well targeted, i.e., devoid of unnecessary “noise” or signals that could be misinterpreted to mean differently, to help shape inflation expectations of economic agents effectively.

By adopting IT and announcing the inflation target, the BSP submitted itself to the judgment of the general public, and faces loss of credibility whenever it fails to meet the inflation target. The BSP’s disclosure and transparency mechanisms allow the public to monitor the BSP’s performance in achieving its inflation target and to assess whether deviations from the target are due to an oversight by the BSP or to factors outside the purview of monetary policy. Documents released regularly by the BSP include the statement on monetary policy decisions (after the policy meeting), highlights of the Monetary Board policy meeting (one month after the meeting), and the quarterly Inflation Report (a month after last month of review quarter), which provides the details and analyses behind the policy actions of the BSP. Key BSP officials appear in budget hearings to provide testimonies on the state of the economy as well as various forums and public conference to speak about the BSP’s policy actions and directions. More importantly, the BSP Governor issues an Open Letter to the President and to the public in cases where the BSP fails to achieve the inflation target, outlining the reasons why actual inflation did not fall within the target, along with the steps that will be taken to bring inflation towards the target.

4 Definition by Oesterreichische Nationalbank (OeNB), retrieved from http://www.oenb.at.

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Tenet 4: Monetary policy should be forward-looking and preemptiveMonetary policy takes effect after a long and varying time lag. Because of these lags, monetary authorities need to be preemptive and set their policy in response to deviations of projected inflation or output levels from their respective targets. In the Philippines, the monetary policy lag has been estimated at 12-15 months based on the interest rate channel of monetary policy. A transmission lag of one to two years typically corresponds to a central bank’s policy horizon (Geraats, 2006).

Fry (2000) notes that it is impossible to achieve desired results by implementing discretionary monetary policy because of monetary policy lags. This argument favors the adoption of rules-based monetary policy frameworks such as inflation targeting and money growth rule (for economies that still have a stable relationship between money and prices). This also addresses the time-inconsistency problem where authorities can attempt to deviate from a long-run target outcome (e.g., an inflation target) to achieve a higher growth path in the short run.

Forward-looking policy formulation also necessitates the use of as much information as is available to get a comprehensive picture of where the economy is heading pending actual data releases. State-of-the-art statistical models, meanwhile, provide authorities with reliable forecasts on the future path of variables of interest, such as inflation and output. Using a suite of econometric models, the BSP projects the inflation path over a three-year forecast horizon. The lengthening of the forecast horizon beyond the usual two years is expected to enable the BSP to take into consideration the longer-run consequences of large movements in asset prices and levels of indebtedness on inflation and output that have been built up over long periods of time (Ingves, 2007). This practice is consistent with the flexible IT approach, and various IT central banks, including the Bank of England, Norges Bank (Norway), and the Riksbank (Sweden) have already done the same.

Tenet 5: Good forecasting tools are critical in the conduct of a forward-looking monetary policyThe inflation forecast is a key element of any monetary policy framework that endeavors to be forward-looking. Policymakers usually employ a suite of models, ranging from large-scale micro-founded macroeconomic models to reduced-form equations, to produce inflation forecasts and policy simulations. They can also look at private forecasts and high-frequency financial markets data (e.g., term structures of interest rates) to get an alternative reading of the inflation expectations of economic agents. In addition, policymakers can use business cycle models and other economic leading indicators to get an idea of where the economy is heading.

In forecasting, central banks can fall into the trap of what Haldane (2009) calls disaster myopia.5 He argues that in the context of risk management, models rely too heavily on recent data samples, potentially underestimating tailrisks. Thus, forecasters must use a sufficiently long time series to help them better understand how risks might evolve in the future. However, they

5 Haldane (2009) likened this myopia to a driver slowing down after seeing a crash but soon speeding up again.


23

should also keep a close watch over potential structural breaks that could affect their analysis. The challenge is to learn from the past and “see beyond risk.” Good forecasts are not merely based on sophisticated econometric methods, but are also honed by expert judgment based on a thorough understanding of economic institutions and the transmission mechanisms. The BSP adheres to the “thick” economic modeling philosophy by maintaining a suite of models for forecasting and policy simulation. This approach recognizes that there is no single superior model that can accurately forecast the path of inflation over the policy horizon nor address all policy issues confronting policymakers. The BSP also periodically reviews its existing suite of econometric models to further improve its forecasting performance as well as develop new tools to keep up with new developments in modern monetary economics. A dynamic stochastic general equilibrium (DSGE) model was developed to complement the Bank’s existing workhorse models (i.e., BSP Single Equation Model and Multiple Equation Model). At the same time, conversion of the BSP Long-Term Macroeconomic Model (LTMM) to a quarterly medium-term macroeconomic model is ongoing. The IMF technical consultation on the development of a semi-structural forecasting and policy analysis system (FPAS) for the Philippines has also been completed in 2012.

Tenet 6: Gradualism is crucial in the conduct of prudent monetary policyGradualism in the conduct of monetary policy implies that a central bank should adjust policy rate settings in a calibrated manner given various uncertainties in its policy environment. Due to structural changes in the economy, the central bank could face a lack of information concerning the monetary transmission mechanism and the parameters linking the macroeconomic aggregates of importance to monetary authorities. It also faces uncertainty in the accuracy of the economic data utilized in policy formulation. Thus, Castelnuovo (2003) notes that prudent, i.e., gradualist, monetary actions can help mitigate the “uncertainty cost” or the volatility induced in the economy by a misinterpretation by monetary authorities of economic trends or of the monetary transmission mechanism itself. Gradualism is particularly important given the tendency to put a larger premium on recent observations in policy assessment and formulation. At the same time, gradualism can help minimize interest rate volatility. Substantial jumps in the central bank’s policy interest rate can precipitate large and sudden changes in the market interest rates which could be damaging to the macroeconomy. By contrast, a smoother interest rate path can enhance financial market stability.

On a related point, monetary policy should be based on the principle of dynamic programming. Each policy move must be viewed as part of a sequence of actions over time aimed at achieving a desired level of future inflation or monetary aggregate. To minimize disruptions in the financial markets, the central bank does not implement drastic policy rate changes to meet its inflation target. Instead, monetary authorities normally implement a series of small rate cuts or hikes (e.g., 25 basis points each) with a given cumulative policy rate change in mind. Thus, policy rate changes could be viewed as part of a packet of measures towards a particular goal. To illustrate, the series of policy rate reductions, along with the various liquidity-enhancing measures introduced by the BSP during the 2008 financial crisis, were

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implemented with a view of providing sufficient liquidity to keep the financial markets functioning smoothly and to fund the growth requirements of the economy amid the global credit crunch.

Tenet 7: The central bank should be flexible in the conduct of inflation targetingThe concept of flexible inflation targeting (FIT) implies that monetary policy aims to stabilize inflation around the inflation target and the long-term growth path of the economy, whereas strict inflation targeting seeks to stabilize inflation without regard to output volatility and other considerations (Svensson, 2009). FIT implies that monetary authorities must accept some inflation variability in order to dampen excessive volatility in growth or unemployment, while also ensuring that inflation is brought back on track over the medium term.6 Flexible inflation targeting can also be described as “forecast targeting.”7 The central bank chooses an interest rate path over the policy horizon that corresponds to a “reasonable” forecast path of both inflation and resource utilization, characterized by inflation approaching the inflation target at an appropriate pace as resource utilization approaches its long-term level.

As with many IT central banks in developed and emerging economies, the practice of inflation targeting in the Philippines has been flexible. The BSP has not been focused on the inflation objective alone. Due attention was given to the short-term consequences of variability in output growth. For instance, the BSP opted to maintain its policy settings in 2004 in the face of supply-side shocks and, instead, actively supported the use of non-monetary intervention measures to address more directly the supply-side inflation risks, particularly in the case of food prices. The BSP chose not to respond to the supply-side shocks because the inflation pressures were outside the purview of monetary action and an increase in policy rates would have had a limited impact in containing price pressures while adversely affecting the overall strength of economic activity during a time of considerable economic uncertainty.

The BSP’s policy of limiting its participation in the foreign exchange market to tempering sharp fluctuations in the exchange rate is likewise consistent with the flexible approach to inflation targeting. The BSP’s mandate is clearly to pursue price stability. However, amid the strong foreign exchange inflows to the country in recent years, the BSP has conducted foreign exchange operations along with the corresponding sterilization measures to help limit the excessive fluctuations in the exchange rate that could create large disruptions in economic activity. The said foreign exchange operations have led to the rapid build-up of the country’s international reserves as well as financial losses for the BSP. The Philippines’ gross international reserves have increased by 254 percent from US$23.7 billion as of end-January 2007 to US$83.8 billion as of end-December 2012. The end-2012 GIR was sufficient to cover about a year’s worth of imports of goods and payments of services and income while the corresponding reserve adequacy ratios were 10.5 times the country’s short-term external debt based on original maturity and 6.6 times based on residual maturity. At said levels, the import cover and reserve adequacy ratios of the Philippines are much higher compared to levels dictated by standard rules of thumb on international reserves. Meanwhile, based on preliminary

6 Roger & Stone (2005)7 Svensson (2009)


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and unaudited data, the net losses of the BSP rose further to P86.3 billion for January-November 2012, as compared to the P32.3 billion net loss incurred during the same period in 2011.

It is also worth emphasizing that while the BSP uses a Taylor rule as one of its guide posts in policy formulation, it does not blindly adhere to this policy rule but takes a more comprehensive look at all data available, providing authorities more discretion in its policy decisions. The BSP is well aware of unobservable quantities that are subject to considerable measurement errors in the Taylor rule.8 In view of this limitation, prescriptions from the Taylor rule are taken to be a rough guide to policy. It is not construed as a rigid, mechanical rule to govern monetary decision-making, nor as a substitute for well-informed economic analysis.

Tenet 8: Price stability is linked to financial stabilityThe 2008 global financial crisis has taught policymakers that price stability is a necessary but not sufficient condition to achieve financial stability. The global inflation environment had been favorable prior to 2007, with both inflation and output gaps generally stable, yet significant financial imbalances developed which triggered major macroeconomic adjustments later on.

It should be reiterated that the BSP has not been dogmatic in its practice of IT and does not slavishly adhere to a policy rule. It is cognizant that keeping inflation low and stable is not the only way to secure optimal economic performance.

The BSP is also mindful of the risk-taking channel of monetary policy. This channel is linked to the notion that financial institutions tend to take on more risks in a low interest rate regime. Asset prices are important in the BSP’s pursuit of price stability for a variety of reasons. The information content of asset prices is vital to the monetary policymaking process because the build-up of asset market imbalances contributes to financial stability risks that can harm economic activity and therefore affect the outlook for inflation. The global financial debacle had a significant adverse wealth effect in advanced economies which impaired the propensity of firms and households to spend, save, and invest with potential negative effects on resource allocation at longer horizons. At the same time, vulnerabilities in the financial sector can have adverse effects on the traditional transmission channels of monetary policy, complicating and potentially reducing the effectiveness of monetary policy.9

The BSP monitors closely developments in the various asset markets in the Philippines and guards against the formation of destabilizing asset price bubbles (APB). Monetary authorities are attentive and alert to excessive credit growth, severe asset price misalignments relative to their long-term averages, and other indicators of financial instability as embodied in the FIT framework. The BSP is cognizant of the very high information requirements in establishing the presence of asset price bubbles. This difficulty, along with the potential broad-based impact of policy rate changes, has led to the

8 These include the long-run equilibrium rate of interest (the “neutral real rate”), the output gap (since the latter is based on the concept of potential output), and the expected inflation rate.

9 Opening Remarks by Dominique Strauss-Kahn, Managing Director, International Monetary Fund, given at the 10th Jacques Polak Annual Research Conference, 5-6 November 2009

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view that other instruments such as supervisory and regulatory measures are more appropriate and more effective in preventing the build-up of asset market imbalances. The best approach to preventing destabilizing asset price bubbles in the Philippines is likely to involve a portfolio of instruments with macroprudential regulations as the first line of defense against damaging financial excesses. It is also important to emphasize that macroprudential measures, because they can be narrowly targeted at specific sectors, can lessen the collateral damage to non-bubble sectors of the economy.

The relative absence of significant APB episodes implies that the BSP’s prudent stance in responding to asset price movements remains sensible. The BSP’s flexible approach to IT allows it to “lean against the wind” by using financial indicators and various asset prices. If asset prices are rising too rapidly along with bank lending growth while consumer price inflation remains manageable, the BSP can try to prevent the formation of asset price bubbles by raising interest rates earlier than expected. While macroprudential regulation serves as the first line of defense against APBs, the BSP will not hesitate to adjust its policy interest rates if conditions indicating a potential overheating emerge. Monetary policy action will likely be too slow as a tool to address the imbalance once asset bubbles have clearly emerged. Increasing policy interest rates too late in the cycle runs the risk of causing damage to the financial sector and the economy as a whole by dealing with the bubble too late.

Going forward, the rapid rise in cross-border capital flows to emerging market economies, including the Philippines, presents additional challenges to macroeconomic management. The BSP is mindful of the risks of strong and sudden surges in capital inflows. Large capital inflows can complicate monetary policy formulation through increased pressures for real exchange rate appreciation or for money supply to expand significantly, generating potential inflation pressures going forward. At the same time, the rapid build-up in the country’s international reserves, resulting from the BSP’s foreign exchange operations, and the corresponding sterilization measures have resulted in financial losses for the BSP. Sustained financial losses could compromise the BSP’s ability to pursue its policy objectives as well as result in a loss of credibility. The influx of hot money can also push up asset prices, thereby creating asset price inflation. There is also a risk that the flow of capital could reverse abruptly, leading to sudden stops that would be costly in terms of economic efficiency and the BSP’s financial and price stability objectives.

In determining the appropriate policy responses, it is important to first determine the nature of the foreign exchange flows. In the case of the Philippines, a large portion of FX inflows are being driven by current account receipts (remittances, export receipts and BPO proceeds), which are structurally driven. Some appreciation of the peso therefore may be warranted. However, a careful balance must be achieved against the potential economic dislocations that could be produced should the peso be allowed to appreciate too strongly.

The BSP’s pragmatic approach to dealing with capital flow surges involves a combination of policies grounded in the principle of flexible IT. This menu of instruments ensures that the BSP is not dependent on a single instrument, minimizing the policy dilemma that would have resulted if interest rate


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action were the only tool available to stem the capital inflows. Specifically, the BSP’s policy toolkit includes: greater exchange rate flexibility; reserve accumulation and associated liquidity management operations; foreign exchange liberalization; macroprudential tools; and calibrations in monetary policy, when necessary. At the same time, the BSP has undertaken some fine-tuning of its policy instruments to improve the effectiveness of its policy toolkit in promoting price and financial stability. In July 2012, the BSP sought to discourage funds from foreign sources from being placed in its Special Deposit Account (SDA) facility. This avoids the situation where BSP instruments for open market operations (OMO) become the magnet for additional capital inflows. The spread of the SDA rates over the RRP rate was also reduced to fine-tune the pricing of the instrument consistent with the decline in global interest rates. In Q1 2013, the BSP likewise decided to rationalize the BSP’s SDA facility and set the interest rates on the SDA facility to 2.50 percent across all tenors. Benign inflation forecasts amid manageable liquidity growth and improving growth prospects provided the present flexibility to fine-tune the SDA facility.

While capital controls in principle may be included in the array of instruments available to the BSP to mitigate the impact of strong capital inflows, the BSP is of the view that the imposition of said controls may entail more costs than benefits for the economy. The imposition of strict capital controls hampers the efficient allocation of capital across countries. At the same time, the imposition of controls would send negative signals to investors and adversely affect the country’s access to international capital markets and ability to attract foreign investments. It is also worth noting that the empirical evidence on the effectiveness of capital flow measures has been mixed. Where these measures had some success in addressing the risks associated with inflow surges, their effect is usually not long-lasting.10 At the same time, administrative difficulties and enforceability of said restrictions are crucial to their effectiveness. A tax on cross-border transactions, if it is to be implemented, should be universally applied to prevent tax arbitrage opportunities. Some difficulties in implementing the tax could also arise over time due to advances in technology and the growing sophistication of financial instruments, which allow investors to eventually circumvent controls and/or taxation. Finally, the imposition of capital controls in one jurisdiction may lead to adverse multilateral effects. The capital inflows that a country may be able to successfully turn away may be merely diverted to its “peer” countries, prompting the introduction of capital controls in these economies as well.

Tenet 9: Sufficient focus should be placed on monetary aggregatesThe observed weakening in many countries of the relationship between money and prices (and output on the other hand) due to continued financial liberalization and innovation has also led a large number of central banks to switch to inflation targeting as an alternative monetary policy framework from the traditional monetary aggregate targeting approach. At present, the European Central Bank (ECB) is the only institution, among major central 10 Habermeier (2011)

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banks, to assign a prominent role to money under its two-pillar strategy.

The importance of money in monetary policy formulation has been rediscovered of late. The 2008 global financial crisis has reminded central banks that inflation is and always will be a monetary phenomenon. The ECB’s second pillar under its two-pillar strategy provides a longer-term perspective to the analysis of inflation risks. This is because the relationship between money growth and inflation is viewed as a long-run phenomenon. Leading indicator properties of monetary and credit developments for potential financial market imbalances likewise underscore the importance of monitoring closely liquidity conditions.

The BSP employed the monetary aggregate targeting approach to monetary policy prior to 2002. However, financial liberalization and financial innovation over the years had weakened this relationship, compelling the BSP to adopt the inflation targeting approach. Consistent with the flexible approach to inflation targeting, the BSP still gives due attention to monetary and credit aggregates in its regular assessment of the monetary policy stance. The BSP ensures that liquidity conditions are consistent with the funding requirements of the economy in line with its price and financial stability objectives. At the same time, the BSP looks at various asset and financial market indicators and compares these with domestic liquidity and credit conditions in determining the possibility of an asset bubble.

Tenet 10: Monetary policy should be complemented by other macroeconomic stabilization toolsMonetary policy alone cannot achieve the broad goals of economic stabilization. To achieve a cohesive program that will promote economic stability, monetary policy must be complemented by prudent fiscal policy (management of government spending and taxation) and an effective financial regulatory mechanism. Moreover, policy coordination has to be supported by institutional and operational arrangements.

The economic downturn resulting from the recent global financial crisis has brought to light the importance of policy coordination in promoting macroeconomic stability. The close coordination of monetary, regulatory, and fiscal policies in many jurisdictions paved the way for business confidence to improve and, ultimately, for economic recovery to take root.

At present, the BSP is responsible for both monetary policy and regulation over the banking sector. This ensures coordination in addressing misalignments in the banking sector that will adversely impact the overall economy. Meanwhile, the representation of the BSP in the Development Budget Coordination Committee (DBCC) helps guarantee the coordination of monetary and fiscal policies.11 Another possible venue for promoting overall coordination of macroeconomic and financial sector policies in the Philippines is the inclusion in the Financial Stability Forum (FSF) of a representative from the

11 The DBCC is an inter-agency body responsible for setting the annual government targets for macroeconomic variables, particularly the Gross National Income (GNI) and Gross Domestic Product (GDP) growth rates and inflation, which are important inputs in the formulation of the revenue, expenditure and financing programs of the NG. The NG, through the DBCC, sets the inflation target two years ahead in consultation with the BSP. The setting of the inflation target through the DBCC ensures that the inflation target is consistent with targets for GDP growth and budget deficit over the medium term.


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BSP’s monetary stability sector.12 Given the importance of the country’s fiscal balance on financial market conditions, the inclusion of a representative from the NG in the FSF could also be explored. It should be noted that closer monitoring of contingent liabilities, including those resulting from public-private partnership (PPP) guarantees, is key to enhancing the management of fiscal risks.13

SummaryThe BSP has made significant gains in establishing the necessary regime for price stability in the 10 years that IT has been adopted in the Philippines. While this period is relatively short to assess the economic impact of IT, the BSP’s experience to date is quite encouraging. Average inflation (2006-based) has declined from 6.9 percent in the seven years before IT was adopted (1995-2001) to 4.4 percent from 2002-2012. During the same period, the coefficient of variation, meanwhile, increased slightly to 0.4 from 0.2 due largely to supply-side shocks–related to food and oil prices–that are outside the control of monetary policy. Nonetheless, the BSP was able to build its reputation as a credible inflation fighter largely through its various disclosure and transparency practices. The BSP has been able to promote better public understanding of the monetary policy process under the IT framework, helping anchor the public’s inflation expectations. In addition, increased public understanding has allowed the BSP to employ greater sophistication in communicating its policy stance, further increasing the effectiveness of its communication strategy. Going forward, the BSP will continue to exercise vigilance to maintain price and financial stability amid the challenges brought on by strong foreign exchange inflows and the present need to support sustained growth in the domestic economy.

References

Blanchard, O., Dell’Ariccia, G. & Mauro, P. (2010). Rethinking Macroeconomic Policy. Journal of Money, Credit and Banking Vol. 42.

Blinder, A., Ehrmann, M., Fratzscher, M., Haan, J. & Jansen, D. (2008). Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence (Centre for European Policy Studies [CEPS] Working Paper No. 161).

Canales-Kriljenko, J., Kisinbay, T., Maino, R., & Parrado, E. (2006). Setting the Operational Framework for Producing Inflation Forecasts (International Monetary Fund [IMF] Working Paper No. 122).

Castelnuovo, E. (2003). Taylor Rules and Interest Rate Smoothing in the US and EMU. Macroeconomics, EconWPA. Retrieved from http://EconPapers.repec.org/RePEc:wpa:wuwpma:0303002.

Dincer, N. & Eichengreen, B. (2007). Central Bank Transparency: Where, Why and With What Effect? (National Bureau of Economic Research [NBER] Working Paper Series 13003). Retrieved from NBER website: http://www.nber.org/papers/w13003.

Fry, M. (2000). Key Issues in the Choice of Monetary Framework. Monetary Policy Frameworks in a Global Context. In Mahadeva, L. & Sterne, G. (eds.), Monetary Policy Framework in a Global Context. London, United Kingdom: Routledge.

12 The main purpose of the FSF is to harmonize policies across its four original member agen-cies (BSP, Securities and Exchange Commission, Philippine Deposit Insurance Corporation, and Insurance Commission) in promoting financial stability.

13 Hence, government-owned and -controlled corporations (GOCCs) will have to watch their bot-tomlines since GOCC financial positions are also included in the consolidated fiscal position of the government.

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Geraats, P. (2006). Transparency of Monetary Policy: Theory and Practice. CESifo Economic Studies, Vol. 52.

Gerdesmeier, D., Reimers, H., & Roffia, B. (2009). Asset Price Misalignments and the Role of Money and Credit (European Central Bank [ECB] Working Paper No. 1068).

Glindro, E. & Delloro, V. (2010). Identifying and Measuring Asset Price Bubbles in the Philippines (BSP Working Paper No. 2010-02).

Grenville, S. (2011). The Impossible Trinity and Capital Flows in East Asia (Asian Development Bank Institute [ADBI] Working Paper Series No. 319). Retrieved from the ADBI website: http://www.adbi.org/files/2011.11.07.wp319.impossible.trinity.capital.flows.east.asia.pdf

Haldane, A. (2009). Why Banks Failed the Stress Test. Speech delivered at the Marcus-Evans Conference on Stress-Testing, London, 9-10 February 2009. Retrieved from the Bank of England website: http://www.bankofengland.co.uk/publications/Documents/speeches/2009/speech374.pdf.

Ingves, S. (2007). Housing and Monetary Policy: A View from an Inflation Targeting Central Bank. Retrieved from Riksbank website: http://www.riksbank.se/sv/Press-och-publicerat/Tal/2007/Ingves-Housing-and-Monetary-Policy---a-view-from-an-Inflation-Targeting-Central-Bank/.

Kahn, G. & Parrish, K. (1998). Conducting Monetary Policy with Inflation Targets. Federal Reserve Bank of Kansas City, Economic Review, Third Quarter.

McCauley, R. (2006). Understanding monetary policy in Malaysia and Thailand: objectives, instruments and independence. In Bank for International Settlements, “Monetary policy in Asia: approaches and implementation,” (Bank for International Settlements [BIS] Papers No. 31).

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Reichlin, L. (2006). Introduction. In Beyer, A. and Reichlin, L. (eds.), The Role of Money – Money and Monetary Policy in the Twenty-first Century. 4th ECB Central Banking Conference, 9-10 November 2006. Retrieved from the ECB website: http://www.ecb.int/pub/pdf/other/ roleofmoneyen2008en.pdf

Roger, S. (2009). Inflation Targeting at 20: Achievements and Challenges (IMF Working Paper No. 236). Retrieved from the IMF website: http://www.imf.org/external/pubs/ft/ wp/2009/wp09236.pdf

Roger, S. & Stone, M. (2005). On Target: The International Experience with Achieving Inflation Targets (IMF Working Paper No. 163). Retrieved from the IMF website: http://www.imf.org/external/pubs/ft/wp/2005/wp05163.pdf

Schaechter, A., Stone, M. & Zelmer, M. (2000). Adopting Inflation Targeting: Practical Issues for Emerging Market Countries (IMF Occasional Paper 202). Retrieved from the IMF website: http://www.imf.org/external/pubs/nft/op/202/index.htm

Stevens, G., Kent, C. and Cagliarini, A. (2010). Fifty Years of Monetary Policy: What Have We Learned? In Christopher Kent & Michael Robson (ed.) Reserve Bank of Australia 50th Anniversary Symposium, Reserve Bank of Australia (RBA) (pp. 9-27), 2010. Retrieved from the RBA website: ww.rba.gov.au/publications/confs/2010/cagliarini-kent-stevens.pdf

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Walsh, C. (2010). Monetary Theory and Policy. Massachusetts: MIT Press.


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An Assessment of the Transparency and Communication Practices in Monetary Policy of the Bangko Sentral ng Pilipinas

Raquel A. Silva is Bank Officer III at the Department of Economic Research and presently assigned to the Office of Monetary Board (MB) Member Armando L. Suratos, providing research assistance on monetary policy matters and other topical issues for the MB meetings. She holds a Masters degree in Business Administration from the Ateneo de Manila University, where she also obtained her undergraduate degree in Economics. Prior to joining the BSP, she was exposed in the evaluation of foreign loans of private companies with build-operate-transfer arrangements. She also worked in a universal bank handling commercial loan approvals and branch banking operations.

Laura B. Fermo is Bank Officer V at the Department of Economic Research and presently assigned to the Office of Monetary Board (MB) Member Felipe M. Medalla, providing inputs and technical research assistance on macroeconomic issues and monetary policy, including but not limited to preparing research papers and conducting statistical and econometric analyses. Ms. Fermo is a PhD candidate in Economics from the University of the Philippines School of Economics (UPSE), where she also obtained her MA and undergraduate degree (cum laude) in Economics. Before joining the BSP, Ms. Fermo worked at the Asian Development Bank and the University of Asia and the Pacific. She has also served as lecturer at the University of the Philippines School of Economics.

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I. Background and Rationale

Transparency can be defined as an environment in which a

central bank provides, in an open, clear and timely manner, all

relevant information on its mandate, strategies, assessments,

policy decisions, as well as its procedures to the public and

the markets. Transparency helps ensure the public’s genuine

understanding of monetary policymaking. This understanding

can be achieved through a clear and effective communication.1

Most central banks, including the Bangko Sentral ng Pilipinas

(BSP), consider transparency and communication as integral

components of their monetary policy framework. Effective

communication and interaction with the public, the media

and the markets enhance the credibility, predictability and

effectiveness of monetary policy.2 Communication is in fact

important not only as a means to convey information about

monetary policy but also as a policy tool for the central bank.

This also allows the public to provide feedback which, in turn,

helps further improve the effectiveness of monetary policy.Transparency not only helps the central bank to carry out its mandate, but also makes the institution more accountable for its actions. When committed to transparency, the central bank has greater self-discipline, and this then helps ensure consistent policy decisions over time. Encouraging public scrutiny of monetary policy actions encourages the central bank to make better policy decisions.3 These basic principles highlight the need to conduct an assessment of the transparency and communication policies of the BSP, in consideration of more than eight years of using inflation targeting as its framework for monetary policy.

As highlighted by Mervyn King in 2005: “Inflation targeting is a framework for making and communicating decisions.”4 Communication is a key feature of the inflation-targeting framework. Since the early 1990s, most central banks have become more transparent, and inflation targeters were relatively the most transparent (Geraats, 2009).5 Dincer and Eichengreen (2007) found 1 OesterreichischeNationalbank (OeNB) Institutional Features, featured in the website

accessed in 2010: http://www.oenb.at/en/geldp_volksw/geldpolitik/merkmale/transparenz/transparency.jsp.

2 Ibid.3 Central Bank Talk and Monetary Policy: Remarks by Federal Reserve Board Chairman Ben

S. Bernanke, delivered at the Japan Society Corporate Luncheon, New York, New York, 7 October 2004.

4 King, M. “Monetary Policy: Practice Ahead of theory,” available at www.bankofengland.co.uk/publications/speeches/2005/ speech245.pdf, 2005 as cited in State of the art of inflation targeting, CCBS Handbook No. 29 - Revised January 2010.

5 Geraats, P. (2009). “Trends in Monetary Policy Transparency,” CESifo Working Paper No. 2584.


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that in their sample of 100 central banks the most transparent were the Reserve Bank of New Zealand, the Swedish Riksbank, the Bank of England, the Czech National Bank, the Bank of Canada, the ECB, and the BSP—all of which are inflation targeters.6

This study aims to conduct an assessment of the BSP’s current transparency and communication policies using the International Monetary Fund (IMF)’s Code of Good Practices on Transparency in Monetary and Financial Policies (TMFP Code) developed in 1999.7 As the focus of this paper is on the assessment of transparency practices relating directly to monetary policy, the discussion will center mainly on the review of the BSP’s transparency practices vis-à-vis Part 2 of the TMFP Code: Good Transparency Practices for Monetary Policies by Central Banks (henceforth, the IMF Code).

II. Methodology of the StudyThis paper uses the IMF Code in assessing the BSP’s transparency practices, which identifies four main principles whereby the transparency practices in the monetary policies of central banks can be gauged, namely: (i) Clarity of Roles, Responsibilities and Objectives of Central Banks for Monetary Policy; (ii) Open Process for Formulating and Reporting Monetary Policy Decisions; (iii) Public Availability of Information on Monetary Policy; and (iv) Accountability and Assurances of Integrity by the Central Bank.

The approach adopted in this paper is to examine the specific regulations under Republic Act (R.A.) 7653, known as The New Central Bank Act, and actual practices under the inflation targeting framework of the BSP and compare these with the detailed guidelines from the IMF’s Code under each of the four main principles. Changes or improvements in these practices affecting the monetary policy decision-making of the BSP over the years since the adoption of inflation targeting in 2002 were also taken into account.

The IMF Code identifies desirable transparency practices for central banks in the conduct of monetary policy in line with the idea that transparency makes monetary policy generally more effective, in part by ensuring that market expectations can be formed more efficiently. More specifically, the IMF Code enumerates the benefits of transparency. First, the effectiveness of monetary policy can be strengthened if goals and instruments of policy are known to the public and if the authorities can make a credible commitment in meeting them. In making more information about monetary policy available, good transparency practices promote the potential efficiency of markets. Second, good governance calls for central banks to be accountable, particularly where the monetary authorities are granted a high degree of autonomy.8

6 As cited in Gill Hammond, State of the art of inflation targeting, CCBS Handbook No. 29 – Revised January 2010.

7 Aside from the IMF’s Code, there is another code of communication practices currently available in assessing transparency and communication practices of central banks: the Centre for Latin American Monetary Studies (CEMLA)’s Code of Principles and Best Practices in Central Bank Communication prepared in March 2004. The IMF’s TMFP Code provides a more comprehensive list of prescriptions that guide the assessment of transparency policies. On the other hand, the CEMLA Code focuses more on general concepts that could help a central bank conduct a more general review of its policies. The TMFP Code also takes a more specific and detailed approach, and encompasses all principles covered in the CEMLA Code.

8 International Monetary Fund (IMF), Code of Good Practices on Transparency in Monetary and Financial Policies: Declaration of Principles and Supporting Document, July 2000.

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There are, nonetheless, potential costs. The IMF notes that in situations where increased transparency in monetary and financial policies could endanger the effectiveness of policies, or be potentially harmful to market stability or the legitimate interests of supervised and other entities, it may be appropriate to limit the extent of such transparency. Similarly, financial stability considerations, for example, may provide justification for limiting certain disclosure practices. It is possible that extensive disclosure requirements about internal policy discussion on money and exchange market operations could disrupt markets, constrain the free flow of discussion by policymakers, or prevent the adoption of contingency plans. Thus, it might be inappropriate for central banks to disclose internal deliberations and documentation, or their near-term monetary and exchange rate policy implementation tactics. Similarly, there may be good reasons for central banks not to make public their contingency plans, including possible emergency lending.9

Theoretical models show that a high degree of monetary policy transparency has the potential to enhance the credibility, reputation and flexibility of central banks. This, in turn, suggests that increased transparency should result in lower nominal interest rates. Intuitively, the advantages of transparency in the form of greater credibility, reputation and flexibility derive from the fact that transparency makes it easier for markets to infer the central bank’s intentions based on monetary policy decisions and outcomes. In addition, transparency makes it clear when monetary policy decisions are intended to offset economic shocks, so it gives greater flexibility for the central bank to stabilize the economy but at the same time keeps private sector inflation expectations well anchored. “Enhanced flexibility would allow a reduction in policy and short-term interest rates without increasing long-term nominal interest rates, and improved reputation would reduce inflation expectations and thereby long-term nominal interest rates.”10 Eijffinger et al. (2006) investigated this theoretical prediction empirically for eight major central banks using a rich data set of transparency measures from 1998 to 2002, and their results showed significant reductions in interest rates for all central banks in the sample, controlling for economic conditions.11 In practice, however, central banks are mindful that transparency should not be carried out as to approach the level of perfect information that is assumed in theoretical models. In the same study, Eijffinger et al. (2006) also found that higher degrees of transparency have actually had an adverse effect on central bank flexibility and/or reputation. In a few cases, the study noted that there appears to be a trade-off between flexibility and reputation.12

It is important to note that the IMF Code does take a pragmatic approach and recognizes that a variety of arrangements can lead to good transparency practices. Information about other transparency aspects, such as how policy is formulated and implemented and the provision of information, can be presented in a more flexible manner. The good practices contained in the Code are therefore to be implemented flexibly and over time to take into account the country’s particular circumstances. These practices are included in the IMF Code in anticipation that countries will aspire over time to introduce such good practices.9 IMF (2000), op. cit.10 Eijffinger, S., Geraats, P., & Van der Cruijsen, C. Does Central Bank Transparency Reduce

Interest Rates? De Nederlandsche Bank Working Paper Series, No. 85, January 2006.11 The eight central banks studied were, namely, the Reserve Bank of Australia (RBA), the

European Central Bank (ECB), the Bank of Japan (BoJ), the Reserve Bank of New Zealand (RBNZ), the Swedish Riksbank (SRB), the Swiss National Bank (SNB), the Bank of England (BoE) and the Federal Reserve (Fed).

12 Eijffinger, op. cit.


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Each of the four principles under the IMF Code consists of several sections, which are further divided into sub-sections, detailing the form or possible manifestations of the transparency practices to make an assessment of the central bank’s performance vis-à-vis each principle. Below are some guidelines which have helped in the current assessment of BSP’s transparency and communication policies directly relating to monetary policy:

i. For the first principle (clarity of roles, responsibilities, and objectives), the objectives of the central bank for monetary policy should be clearly defined, publicly disclosed, and written into law. The institutional relationship between monetary and fiscal policies should be clearly defined, as should any agency roles performed by the central bank on behalf of the government. For financial agencies, their objectives and institutional framework should be clearly defined, preferably in relevant legislation or regulation, and the role of oversight agencies with regard to payment systems should be publicly disclosed.

ii. With regard to the second principle (open process for formulating and reporting policy decisions), the central bank should publicly disclose and explain the framework, instruments, and targets, if any, which are used to achieve objectives. The structure of its decision-making body should be publicly disclosed and its decisions communicated in a timely manner. Periodic public statements should be made on progress towards achieving monetary policy objectives. The conduct of policies by financial/supervisory agencies should be transparent and compatible with confidentiality considerations and the need to preserve effectiveness. Periodic progress reports on the pursuance of policy objectives should be issued.

iii. Under the third principle (public availability of information on policies), the information on monetary policy of the central bank should be consistent with the IMF’s standards for data dissemination and its balance sheet should be publicly available. The central bank should establish and maintain public information services. Financial/supervisory agencies should issue periodic public reports on major developments in the financial system, report aggregate data on a timely and regular basis, make texts of regulations and directives readily available to the public, and publicly disclose special protections, such as deposit insurance schemes and consumer protection arrangements.

iv. The fourth principle (accountability and assurances of integrity) states that central bank officials should periodically appear before a designated public authority to explain the conduct and performance of their policy. The central bank should provide assurances of the integrity of its operations and officials through the release of audited financial statements of its operations and the standards of conduct for its officials. The Code suggests similar practices to hold officials of financial agencies accountable for their actions.

The IMF conducted an assessment of the transparency policies of a number of countries based on its TMFP Code in 2003. Results of the IMF review showed that high-income countries (90 percent observance) fared better than middle- and low-income economies (78 and 72 percent observance, respectively) in terms of observance of transparency practices in monetary

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and financial policies. Observance was weakest in low-income countries mostly because of nascent financial market development. 13

There are other related studies which assessed the transparency and communication policies of central banks. The succeeding section summarizes such studies in the past which, in particular, included the Philippines among the sample of central banks that they reviewed.

III. Review of Related Literature and StudiesThe most recent study on transparency practices in central banks was conducted by the Bank of England’s Centre for Central Banking Studies (CCBS)14 in 2010. According to this study, both emerging and advanced economies have shown improvements in their transparency practices over the years. In particular, 10 out of 18 emerging economy central banks are publishing minutes of their monetary policy decisions, while six out of nine industrialized countries are publishing minutes of their monetary policy meetings as of January 2010. Moreover, the CCBS study examined the key features of the inflation-targeting frameworks in each of the 27 inflation-targeting central banks around the world. The study showed that all inflation targeters (emerging and advanced countries alike) publish details of their monetary policy decisions (usually involving the policy interest rate) immediately after the policy meeting, and it is usual for a press release or notice to accompany the decision (see Annex 1). In addition, 19 inflation targeters hold press conferences to publicly explain their decision and discuss their inflation report in public.15

Another notable paper discussing the transparency and communication practices of Asian central banks is a region-wide survey by the Bank for International Settlements (BIS)16 in 2008. The authors highlighted three reasons for the trend toward greater transparency and better communication in Asia as indicated by the survey respondents. First, the trend towards greater transparency and better communication was driven by monetary policymakers’ increasing recognition that their policy actions would be more effective if the market understood them better. Second, the emphasis on transparency and communication was also spurred by the growing interest in the greater accountability of central banks, with an increasing number of them accorded independence from political authorities. Finally, the adoption of inflation targeting, with its emphasis on the transparency and accountability of the central bank, has also provided additional momentum

13 Assessments using the IMF Code of Good Practices on Transparency in Monetary and Financial Policies (TMFP Code) began in 1999. In a December 2000 Board paper, the experiences of 23 countries with the TMFP Code were reviewed. In a subsequent 2003 Board paper, a follow up of such a review is presented. By considering forward-looking perspectives on the TMFP Code, the 2003 paper embraces the recommendations for streamlining contained in the February 25, 2000 recommendation. Middle-income economies ($736-$9,075) include: Armenia, Brazil, Bulgaria, Costa Rica, Croatia, the Czech Republic, the Dominican Republic, Egypt, El Salvador, Estonia, Gabon, Guatemala, Hungary, Iran, Kazakhstan, Latvia, Lithuania, Mexico, Morocco, Peru, Philippines, Poland, the Russian Federation, the Slovak Republic, Sri Lanka, Tunisia, and Ukraine.

14 Hammond, Gill, State of the art of inflation targeting, CCBS Handbook No. 29 – Revised January 2010.

15 Ibid.16 Filardo, A. & Guinigundo, D. Transparency and Communication in Monetary Policy: A Survey

of Asian Central Banks, paper presented during the BSP-BIS Joint High-Level Conference on Transparency and Communication in Monetary Policy on 1 February 2008 in Manila, Philippines.


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towards improving the disclosure and openness of central banks. The BIS study also noted that questions about what, how and to what extent central banks should communicate with the public remain open as there was no “one-size-fits-all” policy.

Meanwhile, Oxford Analytica (OA)17, an international consulting firm providing strategic analysis of world events, published a report focusing on the transparency and communication practices of the BSP in 2006 using the IMF Code. In this report, the Philippines’ transparency and communication practices were rated overall as “Compliance in Progress” by the OA. The report made an assessment of the practices and continuing efforts undertaken by the BSP relative to the practices outlined by the IMF Code under each of the four main principles. However, some items identified in the OA Report did not accurately reflect actual BSP practices.18 The first item (1.1.6 of Annex 2) refers to the government’s authority to override central bank policy decisions during exceptional circumstances, whereby the conditions under which such authority may be invoked and the manner in which it is publicly disclosed is specified in legislation. The second item (2.5 of Annex 2) mentions that there should be a presumption in favor of public consultations within an appropriate period with regard to proposed substantive technical changes to the structure of monetary regulations. The last item (4.2.2 of Annex 2) states that the internal governance procedures necessary to ensure the integrity of operations, including internal audit arrangements, should be publicly disclosed. There are no provisions in the BSP Charter that stipulates the said three items. For the second item discussed, although the amendment of the BSP Charter can only be undertaken via a legislative process, there is no explicit provision in the charter that specifies such practice.

Another related paper evaluating the communication practices of central banks via inflation reports was conducted by Norges Bank in 2002.19 The inflation reports published by central banks in the sample were evaluated according to the quality of information, clarity of assumptions, quantity of information, decision process (how conflicting objectives are treated), inflation process, and quality of the executive summary and overall assessment. The study ranked the BSP as close to the average (6.3; the average was 6.5), higher than Canada, Switzerland, and Australia.20

IV. Assessment of the BSP’s Compliance with the IMF’s Code and Main Findings The study revealed that the BSP currently observes majority of the practices identified under the IMF Code. An item-by-item assessment of the BSP’s

17 Founded in 1975, OA’s main activities are in the area of geopolitics and economics, and comprise chiefly a consulting practice and a daily briefing service. The company has access to a network of academics and specialists around the world, particularly at the University of Oxford, England, but has no formal ties with the University. Available from California Public Employee Retirement System website:

http://www.estandardsforum.org/philippines/standards/code-of-good-practices-on-transparency-in-monetary-policy.

18 Oxford Analytica, “Philippines Monetary Transparency - Country Report 2006,” December 2006. Details on the OA Study can be found in http://www.estandardsforum.org/philippines/standards/code-of-good-practices-on-transparency-in-monetary-policy.

19 Fracasso, A., Genberg, H., Wyplosz, C. How Do Central Banks Write? An Evaluation of Inflation Targeting Central Banks, Geneva Reports on the World Economy Special Report 2, Norges Bank, April 2003.

20 Note that the study was conducted the same year that the BSP actually began to adopt inflation targeting as its monetary policy framework.

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practices vis-à-vis the IMF Code was conducted based on the BSP Charter and related circulars, memoranda, various BSP website documents and other publications (Table 1). Details of the comparison of the BSP transparency and communication practices with the best practices identified in the IMF Code are presented in Annex 2 while the transparency policies not yet being practiced by the BSP are listed in Annex 3. As presented in Tables 1 and 2 below, there are three (3) out of 35 practices under the IMF Code which are not yet explicitly included in the BSP Charter and monetary policy framework.

Under the first principle (Clarity of Roles, Responsibilities and Objectives of Central Banks for Monetary Policy) there are three sections. Each of the three sections is further divided into sub-sections which specify details on the possible indications that the transparency principle is practiced or not (please see Annex 2 for details on section headings and sub-sections). A total of 14 sub-sections comprise the first principle. The study revealed that the BSP already observes 13 out of the 14 sub-sections under this principle. There is no explicit provision in the BSP charter nor the BSP’s monetary framework

Table 2

Principles Specific Section/Practice

1. Principle #1: Clarity of Roles, Responsibilities and Objectives of Central Banks for Monetary Policy

A. If, in exceptional circumstances, the government has the authority to override central bank policy decisions, the conditions under which this authority may be invoked and the manner in which it is publicly disclosed should be specified in legislation.

2. Principle #2: Open Process for Formulating and Reporting Monetary Policy Decisions

B. For proposed substantive technical changes to the structure of monetary regulations, there should be a presumption in favor of public consultations, within an appropriate period

3. Principle #4: Accountability and Assurances of Integrity by the Central Bank

C. Internal governance procedures necessary to ensure the integrity of operations, including internal audit arrangements, should be publicly disclosed.

As a proportion to Total IMF Code of Good Practices 8.6%

Code of Good Practices in Monetary Policy Not Yet Covered By the BSP Charterand Monetary Policy Framework

Assessment of the IMF Code versus BSP Practices

Table 1

IMF’s Code of Good Practices BSP’s Transparency Practices

Principles No. of sections

No. of sub-

sections

No. of IMF sub-sections practiced by

the BSP

No. of IMF sub-sections not part of the BSP Charter

and BSP monetary policy framework

Not practiced by the BSP

1. Clarity of Roles, Responsibilities and Objectives of Central Banks for Monetary Policy 3 14 13 1

2. Open Process for Formulating and Reporting Monetary Policy Decisions 6 8 7 1

3. Public Availability of Information on Monetary Policy 4 8 8 0

4. Accountability and Assurances of Integrity by the Central Bank 4 5 4 1

Total 17 35 32 3

As a proportion to total IMF Good Practices 91.4 % 8.6%


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for sub-section 1.1.6 which refers to the availability of a specific legislation providing for the government’s authority to override monetary policy decisions by the BSP in exceptional circumstances, including conditions under which this authority may be invoked and the manner in which it is publicly disclosed. The BSP Charter does not provide for such an authority but instead upholds and preserves central bank independence as stated in the 1987 Philippine Constitution.

According to the IMF, if there are clear and publicly disclosed rules governing the conditions and manner in which a disagreement between the government and the central bank occurs, then the transparency of this process is enhanced and concurrently the accountability of both the government and the central bank is improved. The IMF has included this particular practice because of the view that legislation provides an effective means of specifying the rules and procedures that govern these situations and how the public is informed when such situation arises. “Public disclosure of the conditions under which the authority to override may be invoked, and the manner in which it is publicly disclosed, also provide the public with reassurance that there are procedures in place for what is likely to be a rare event.”21

Section 6 of the New Central Bank Act (R.A. 7653) provides that the powers and functions of the BSP shall be exercised by the Monetary Board (MB) of the BSP composed of seven (7) members appointed by the President of the Philippines for a term of six (6) years. The members of the MB include the Governor of the BSP, who acts as the Chairman, a member of the Cabinet (to represent the National Government) and five members from the private sector. Monetary policy decisions are arrived at through discussion and consultation among the members during the MB meetings. The monetary policy stance, in particular, is reviewed eight (8) times a year by a consensus decision. Another important function exercised by the MB involves decisions on domestic monetary stabilization particularly pertaining to the contraction or expansion in monetary aggregates or credit for the attainment or maintenance of price stability (Section 61 of R.A. 7653).

In case of abnormal movements in the monetary aggregates, in credit, or in prices which may endanger the stability of the Philippine economy or important sectors thereof, certain guidelines have been listed under Section 63 of R.A. 7653. In relation to this, the MB is required to submit periodic reports to the President of the Philippines and to Congress until it considers that the monetary, credit or price disturbances have disappeared or have been adequately controlled. There is no specific provision on whether or not the National Government may overrule monetary policy decisions which have been made by the MB. In any case, such a situation where the National Government has tried to overrule the BSP on monetary policy has not happened during the inflation-targeting period. Although not explicitly required under legislation, the MB policy decision is announced via a press conference immediately after the MB policy meeting. The highlights of the meeting are also published in the website after four weeks.

The inflation target and the inflation outlook, as well as other macroeconomic assumptions such as the outlook for the exchange rate, for example, are discussed by the BSP with the National Government through the Development

21 IMF (2000), op. cit.

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Budget Coordination Committee (DBCC).22 Members of the DBCC submit their recommendations to the President of the Philippines for approval on matters involving their respective concerns. In this regard, the DBCC acts as an inter-agency committee that studies thoroughly pertinent policy decisions which are then elevated to the Cabinet before being finally submitted to the Office of the President. Macroeconomic assumptions do not come from a sole authority but from the consensus of the various agencies involved.

Meanwhile, monetary policy decisions by the MB are made upon consultation with the Advisory Committee23 and after several discussions among MB members have been conducted, both in consideration of a wide range of information. The MB, composed of members from the public as well as the private sector, benefits from its members’ diverse backgrounds and expertise that contribute to a comprehensive approach to the review of the appropriate monetary policy stance.

The second principle (Open Process for Formulating and Reporting Monetary Policy Decisions) is composed of six sections and a total of eight sub-sections. For this principle, only sub-section 2.5 (which states that there should be a presumption in favor of public consultations within an appropriate period for proposed substantive technical changes to the structure of monetary regulations) is not explicitly stated in the BSP charter nor practiced under the BSP’s monetary policy framework. Nevertheless, apart from press conferences that discuss the monetary policy stance with the public after each policy meeting and the publication of highlights of each policy meeting, changes to the BSP Charter or on the monetary policy framework are also subject to the legislative process that requires public hearings on any proposed amendment. A series of public consultations, for example, were conducted prior to the shift to the inflation-targeting framework in 2002. In addition, proposed amendments to the BSP Charter are pending in Congress and, in the process, will have to be presented to the public and both houses of Congress. Meanwhile, for monetary regulations not included in the BSP Charter or its monetary policy framework, there are regular consultations with the banking industry via the BSP’s Bank Supervision Policy Committee (BSPC), which is viewed as an essential component of the policy formulation process pertaining to banking rules and regulations.

The third principle (Public Availability of Information on Monetary Policy) consists of four sections and eight sub-sections, and the BSP practices all of the transparency prescriptions under this principle. For example, the BSP

22 The DBCC is composed of the Secretary of Budget and Management, as Chairman; the Director-General of the National Economic Development Authority (NEDA) Secretariat, as Co-chairman; and the Executive Secretary and Secretary of Finance as members, and the Bangko Sentral ng Pilipinas as resource agency. Based on Section 6 of E.O. 230, the DBCC recommends to the President the following: level of annual government expenditures and the ceiling of government spending for economic and social development, national defense, and government debt service; proper allocation of expenditures for each development activity between current operating expenditures and capital outlays; and amount set to be allocated for capital outlays broken down into the various capital or infrastructure projects.

23 The Advisory Committee was established as an integral part of the institutional setting under the BSP’s inflation-targeting framework. Assisted by a Technical Secretariat, it is tasked to deliberate, discuss and make recommendations on monetary policy to the Monetary Board. Starting in 2012, the Committee holds eight (8) monetary policy meetings in a year. The members of the Advisory Committee include: BSP Governor Amando M. Tetangco, Jr. as Chairman, Monetary Stability Sector Deputy Governor Diwa C. Guinigundo, Supervision and Examination Sector Deputy Governor Nestor A. Espenilla, Jr., Monetary Policy Sub-Sector Assistant Governor Ma. Cyd N. Tuaño-Amador, and Treasury Department Assistant Governor Ma. Ramona GDT Santiago as members.


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observes sub-sections 3.2.1 to 3.2.3 which refer to the following: (i) regular public disclosure of summary and detailed bank balance sheets; (ii) monetary operations according to documented accounting standards; and (iii) public disclosure of aggregate information on emergency financial support by the central bank. Under item (iii), the Code prescribes further that this disclosure shall take the form of an appropriate central bank statement, when such disclosure will not be disruptive to financial stability and consistent with confidentiality and privacy of information on individual firms.

The BSP publishes summary and detailed balance sheets in its website and in its annual report regularly, including information on its capital accounts, broken down as capital, surplus and capital reserves items.24 At the same time, the BSP publishes the aggregate amount of emergency loans availed by banks in a given year in its annual report and website,25 including information on the amount of emergency loans per year according to the type of banks—commercial banks, thrift banks, and rural banks. The BSP, however, does not disclose details on the financial assistance or emergency loans extended to specific banks to avoid panic on the part of depositors and investors.26 The BSP believes that too much transparency in this respect could lead to financial stability problems. Information on the emergency loans from specific banks could be misconstrued as an indication of bank failure or be misinterpreted as an imminent industry-wide bank run, rather than what could in fact be a temporary liquidity problem of a generally stable bank or an isolated vulnerability of only one bank. Thus, the BSP treats this kind of information with confidentiality to avoid public speculation.

Lastly, for the fourth principle (Accountability and Assurances of Integrity by the Central Bank) which consists of four sections and five sub-sections, the BSP does not have a specific rule pertaining to sub-section 4.2.2. This sub-section pertains to the public disclosure of internal governance procedures necessary to ensure the integrity of operations, including internal audit arrangements. The BSP’s internal audit arrangements are well in place, with regular reviews being conducted on BSP offices within and outside the Manila head office. However, the existing BSP charter and monetary policy framework do not explicitly include such details for public knowledge. Nonetheless, some initiatives are being undertaken with regard to an internal assessment of the BSP’s adherence to good governance principles. In 2010, a Systemwide Governance Assessment (SGA) was concluded, which paved the way for the BSP to define in concrete terms the institution’s governance principles and standards and at the same time assess if these principles and standards are being practiced in the daily operations of the BSP. The SGA has allowed the BSP to objectively identify its achievements in good governance as well as point out areas that need to be improved upon. Based on the 2010 SGA, the level of integration of the BSP’s governance principles in five

24 Most recent information available at http://www.bsp.gov.ph/about/2008FS/Balance%20Sheet.pdf.

25 Most recent information available at http://www.bsp.gov.ph/about/2008FS/Notes.pdf.26 No provision for this in the Charter. Sec 84 of R.A. 7653 on Emergency Loans and Advances is

silent on the issue of public disclosure. The BSP does not publicly disclose financial assistance to a particular bank since it could create panic and lead to systemic risks. Sections 60 and 61 of R.A. 8791 on Financial Statements and Publication of Financial Statements pertain to submission by the individual banks of financial statements and have no reference to public disclosure of emergency loans or advances from the BSP.

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major areas identified27 were ranging from being generally practiced (slightly positive survey net rating) to being sustainable (highly positive survey net rating).

V. Conclusion and Policy RecommendationsThe assessment of the BSP’s current transparency practices for monetary policy using the IMF Code as a guide revealed that the BSP is currently observing 32 out of the 35 transparency practices, or 91.4 percent of the IMF code based on specific provisions in the BSP’s charter and existing arrangements under the BSP’s monetary policy framework. Meanwhile, the three IMF Code practices not yet covered by the BSP’s Charter and current transparency practices in monetary policy represent 8.6 percent of the total IMF Code practices.

Under its inflation-targeting framework, the BSP recognizes the importance of transparency and communication which serve as key components for effective and credible monetary policy. This allows the BSP to carry out its mandate and policy decisions with greater information, predictability and accountability. The BSP’s transparency and communication practices are broadly aligned with the four core principles of the IMF Code. Nonetheless, this study has identified three practices under the IMF code which are at present not explicitly included in the BSP Charter and monetary policy framework.

Should the BSP then observe these three practices to be in full or 100 percent observance of the IMF’s Code? It may be argued that the BSP’s current transparency and communication practices on monetary policy remain appropriate and, at the moment, serve the objectives of monetary policy and the interest of the economy well. In sum:

A. There is no explicit provision in the BSP charter or the BSP’s monetary framework for sub-section 1.1.6 of the IMF Code; the BSP Charter instead fully supports central bank independence. A legislative provision for government to override monetary policy decisions as prescribed by the IMF for exceptional cases when the government disagrees with a monetary policy action could potentially compromise BSP’s policy independence and in any case will require legislative action.

B. Subsection 2.5 of the IMF Code is not explicitly stated in the BSP charter nor practiced under the BSP’s monetary policy framework. Nonetheless, there are existing institutional arrangements that serve as venues for public consultations for any proposed regulatory changes. For example, the BSP sends out exposure drafts of proposed regulations to industry associations as a necessary step in the introduction or revision of any regulation concerning the financial sector. Meanwhile, any proposed changes in the Charter or the monetary policy framework itself are subject to the normal legislative process which requires public consultation.

C. The BSP does not have a specific rule pertaining to subsection 4.2.2 of the IMF Code. The BSP’s internal audit arrangements are, nonetheless, well in place, with regular reviews being conducted on BSP offices within and

27 Integrity, Fairness and Independence, Accountability and Transparency, Ownership and Voice, Strategic Direction, and Responsiveness. As cited in BSP Governance Report, BSP Systemwide Governance Assessment Board, March 2011.


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outside of the Manila head office. Although the existing BSP charter and monetary policy framework do not explicitly include disclosure of internal governance procedures to the public, there have been important initiatives undertaken with regard to an internal assessment of the BSP’s adherence to good governance principles. In 2010, for instance, a Systemwide Governance Assessment (SGA) was concluded which found that the level of integration of the BSP’s governance principles in five major areas identified is considered adequate, with survey ratings ranging from being generally practiced to being sustainable.

Moreover, the BSP continuously assesses the applicability of its transparency and communication practices. This is in consideration of the overall effectiveness of its monetary policy decisions and in accordance with the specific nature and circumstances facing the Philippine economy at any given policy horizon. The effectiveness and applicability of transparency practices tend to vary for individual economies inasmuch as monetary policy decisions depend on specific country experiences. Central banks need to take a pragmatic view of the degree of monetary policy transparency that they can provide. The benefits of increasing transparency have to be weighed against the potential disadvantages. For example, too much disclosure on internal policy decisions and the specific votes and discussions during policy meetings can hamper both policy flexibility and the free flow of ideas between and among policymakers. In addition, the central bank can provide transparency only with respect to facts which it knows itself. Uncertainty about the monetary transmission mechanisms and the divergence in the perception of central bankers and the markets set limits to achieve perfect information.

Nevertheless, even if a central bank cannot provide perfect information, it can still be transparent on how it formulates monetary policy decisions and the inflation outlook that broadly drives these decisions, its estimates on the transmission mechanism and the forecasting models it uses, and the reliability of the indicators and information that it considers in the process. These help ensure that monetary authorities remain credible and accountable, and that inflation and inflation expectations remain well anchored to the inflation target.

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Annex 1

International Monetary Fund’s Code of Good Practices

in Monetary Policies 1BSP’s Transparency Practices

I. Clarity of Roles, Responsibilities and Objectives of Central Banks for Monetary Policy

1.1The ultimate objective(s) and institutional framework of monetary policy should be clearly defined in relevant legislation or regulation, including, where appropriate, a central bank law.

1.1.1 The ultimate objective(s) of monetary policy should be specified in legislation and publicly disclosed and explained.

Chapter 1, Article 1, Sec. 3 of RA 7653: Responsibility and Primary Objective

1.1.2 The responsibilities of the central bank should be specified in legislation.


1.1.3The legislation establishing the central bank should specify that the central bank has the authority to utilize monetary policy instruments to attain the policy objective(s).

Chapter 4, Article 1 of RA 7653: General Criterion;Chapter 4, Article 4 of RA 7653: Loans to Banking and Other Financial Institutions; Chapter 4, Article 5 of RA 7653: Open Market Operations (OMOs) for the Account of the BSP; Chapter 4, Article 7 of RA 7653: Bank Reserves

Annex 2

Source: Hammond, Gill, State of the art of inflation targeting, CCBS Handbook No. 29 – Revised January 2010.

Table D: Accountability and transparency

Assessment of BSP’s Transparency Practices for Monetary Policy

1 Where the practice is considered observed when explicitly stated under the BSP Charter or the Monetary Policy Framework or manifested in actual BSP practice.


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International Monetary Fund’s Code of Good Practices

in Monetary Policies 1BSP’s Transparency Practices

I. Clarity of Roles, Responsibilities and Objectives of Central Banks for Monetary Policy


1.1.1 The ultimate objective(s) of monetary policy should be specified in legislation and publicly disclosed and explained.


1.1.2 The responsibilities of the central bank should be specified in legislation.


1.1.3The legislation establishing the central bank should specify that the central bank has the authority to utilize monetary policy instruments to attain the policy objective(s).

Chapter 4, Article 1 of RA 7653: General Criterion;Chapter 4, Article 4 of RA 7653: Loans to Banking and Other Financial Institutions; Chapter 4, Article 5 of RA 7653: Open Market Operations (OMOs) for the Account of the BSP; Chapter 4, Article 7 of RA 7653: Bank Reserves

International Monetary Fund’s Code of Good Practicesin Monetary Policies BSP’s Transparency Practices

1.1.4 Institutional responsibility for foreign exchange policy should be publicly disclosed.

Chapter 3, Article 2 of RA 7653: International Monetary Stabilization; Chapter 4, Article 3 of RA 7653: Regulation of Foreign Exchange Operations of the Banks

1.1.5The broad modalities of accountability for the conduct of monetary policy and for any other responsibilities assigned to the central bank should be specified in legislation.

RA 7653: The New Central Bank Act

1.1.6

If, in exceptional circumstances, the government has the authority to override central bank policy decisions, the conditions under which this authority may be invoked and the manner in which it is publicly disclosed should be specified in legislation.

No provision in the Charter

1.1.7The procedures for appointment, terms of office, and any general criteria for removal of the heads and members of the governing body of the central bank should be specified in legislation.

Chapter 1, Article 2 of RA 7653: The Monetary Board

1.2 The institutional relationship between monetary and fiscal operations should be clearly defined.

1.2.1 If credits, advances, or overdrafts to the government by the central bank are permitted, the conditions when they are permitted, and any limits thereof, should be publicly disclosed.

Chapter 4, Article 4, Section 89 of RA 7653: Provisional Advances to the National Government

1.2.2The amounts and terms of credits, advances, or overdrafts to the government by the central bank and those of deposits of the government with the central bank should be publicly disclosed.

Chapter 4, Article 4, Section 89 of RA 7653 but provision does not say whether the limit is based on gross or net income.

1.2.3The procedures for direct central bank participation in the primary markets for government securities, where permitted, and in the secondary markets, should be publicly disclosed.

For BSP participation in the primary market: Chapter 5, Article 2 of RA 7653 which contains provisions on the BSP participation on the issuance and placement of GS. However, said function was already transferred to DOF under memorandum circular no. 2-96 dated 31 May 1996.For BSP participation in the secondary market: Chapter 4 Article 5 provides principles of OMO for the BSP account.

1.2.4

Central bank involvement in the rest of the economy (e.g., through equity ownership, membership on governing boards, procurement, or provision of services for fee) should be conducted in an open and public manner on the basis of clear principles and procedures.

Chapter 4, Article 9, Section 109 of RA 7653: Coordination of Credit Policies by Government Institutions; Chapter 5, Articles 1 and 3 of RA 7653: Functions as Banker of the Government and Functions as Financial Advisor of the Government; Chapter 5, Article 1, Sec. 116 of RA 7653: Remuneration for Services;Chapter 6, Article 2 of RA 7653: Prohibitions

1.2.5The manner in which central bank profits are allocated and how capital is maintained should be publicly disclosed.

Chapter 1, Article 6 of RA 7653: Profits, Losses, and Special Accounts

1.3 Agency roles performed by the central bank on behalf of the government should be clearly defined.

1.3.1

Responsibilities, if any, of the central bank in (i) the management of domestic and external public debt and foreign exchange reserves, (ii) as banker to the government, (iii) as fiscal agent of the government, and (iv) as advisor on economic and financial policies and in the field of international cooperation, should be publicly disclosed.

Chapter 5 of RA 7653: Functions as banker and financial advisor. Note that debt management of domestic and external public debt is under the DOF, although Sec. 123 of RA 7653 requires MB approval for external public debt and MB opinion on the monetary and BOP implications of domestic debt.Chapter 4, Article 2: Operations in gold and foreign exchange.

1.3.2

The allocation of responsibilities among the central bank, the ministry of finance, or a separate public agency, for the primary debt issues, secondary market arrangements, depository facilities, and clearing and settlement arrangements for trade in government securities, should be publicly disclosed.

Chapter 5, Article 2 of RA 7653: The Marketing and Stabilization of Securities for the Account of the GovernmentChapter 5, Article 3 of RA 7653: Functions as Financial Advisor of the Government; Chapter 7, Sec. 129 of RA 7653: Phase-out of Fiscal Agency FunctionsChapter 7, Sec. 130 of RA 7653: Phase-out of Regulatory Powers Over the Operations of Finance Corporations and Other Institutions Performing Similar Functions

II. Open Process for Formulating and Reporting Monetary Policy Decisions

2.1The framework, instruments, and any targets that are used to pursue the objectives of monetary policy should be publicly disclosed and explained.

2.1.1 The procedures and practices governing monetary policy instruments and operations should be publicly disclosed and explained.

Chapter 3 of RA 7653: Guiding Principles of Monetary Administration by the BSPInflation Targeting Primer no. 6

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2.1.2 The rules and procedures for the central bank's relationships and transactions with counter parties in its monetary operations and in the markets where it operates should be publicly disclosed.

Chapter 3, Article 1 of RA 7653: Domestic Monetary Stabilization

2.2

Where a permanent monetary policy-making body meets to assess underlying economic developments, monitor progress toward achieving its monetary policy objective(s), and formulate policy for the period ahead, information on the composition, structure, and functions of that body should be publicly disclosed.

2.2.1

If the policy-making body has regularly scheduled meetings to assess underlying economic developments, monitor progress toward achieving its monetary policy objective(s), and formulate policy for the period ahead, the advance meeting schedule should be publicly disclosed.

The advance schedule of MB meetings on monetary policy stance is posted in the BSP website.Chapter 1, Article 1, Sec. 11 of RA 7653: MeetingsInflation-Targeting Primer No. 13: Process Involved in Making Inflation Targeting Operational

2.3Changes in the setting of monetary policy instruments (other than fine-tuning measures) should be publicly announced and explained in a timely manner.

2.3.1The central bank should publicly disclose, with a preannounced maximum delay, the main considerations underlying its monetary policy decisions.

Press release and press conference after MB policy meetings (8 times a year). The BSP also publishes MB highlights of the monetary policy meeting four weeks after.

2.4

The central bank should issue periodic public statements on progress toward achieving its monetary policy objective(s) as well as prospects for achieving them. The arrangements could differ depending on the monetary policy framework, including the exchange rate regime.

2.4.1The central bank should periodically present its monetary policy objectives to the public, specifying, inter alia, their rationale, quantitative targets and instruments where applicable, and the key underlying assumptions.

Press release and press conference after MB policy meetings (8 times a year)

2.4.2The central bank should present to the public on a specified schedule a report on the evolving macroeconomic situation, and their implications for its monetary policy objective(s).

Press release and press conference scheduled after MB policy meetings (8 times a year)

2.5For proposed substantive technical changes to the structure of monetary regulations, there should be a presumption in favor of public consultations, within an appropriate period.

No explicit provision in the Charter, but the amendment of BSP Charter can only be undertaken via a legislative process

2.6The regulations on data reporting by financial institutions to the central bank for monetary policy purposes should be publicly disclosed.

Sec. 60 of RA 8791:Financial Statements;Sec. 61 of RA 8791: Publication of Financial StatementsChapter 1, Article 4, Sec. 22 of RA 7653: Research and StatisticsChapter 1, Article 4, Sec. 25 of RA 7653: Supervision and Examination

III. Public Availability of Information on Monetary Policy

3.1

Presentations and releases of central bank data should meet the standards related to coverage, periodicity, timeliness of data and access by the public that are consistent with the International Monetary Fund's data dissemination standards.

BSP website (SDDS)

3.2The central bank should publicly disclose its balance sheet on a preannounced schedule and, after a predetermined interval, publicly disclose selected information on its aggregate market transactions.

Article 6 of RA 7653

3.2.1

Summary central bank balance sheets should be publicly disclosed on a frequent and preannounced schedule. Detailed central bank balance sheets prepared according to appropriate and publicly documented accounting standards should be publicly disclosed at least annually by the central bank.

Article 6 of RA 7653

3.2.2

Information on the central bank's monetary operations, including aggregate amounts and terms of refinance or other facilities (subject to the maintenance of commercial confidentiality) should be publicly disclosed on a preannounced schedule.

BSP website

3.2.3

Consistent with confidentiality and privacy of information on individual firms, aggregate information on emergency financial support by the central bank should be publicly disclosed through an appropriate central bank statement when such disclosure will not be disruptive to financial stability.

Chapter 4, Article 4, Sec. 84 of RA 7653: Emergency Loans and Advances Sec. 60-61 of RA 8791: Financial Statements and Publication of Financial Statements

3.2.4

Information about the country's foreign exchange reserve assets, liabilities and commitments by the monetary authorities should be publicly disclosed on a preannounced schedule, consistent with the International Monetary Fund's Data Dissemination Standards.

BSP website, published information on data dissemination standards


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1.1.6

If, in exceptional circumstances, the government has the authority to override central bank policy decisions, the conditions under which this authority may be invoked and the manner in which it is publicly disclosed should be specified in legislation.

No provision for this in the BSP Charter

2.5For proposed substantive technical changes to the structure of monetary regulations, there should be a presumption in favor of public consultations, within an appropriate period.

No provision for this in the BSP Charter; Amendments to the BSP Charter undergo legislative process

4.2The central bank should publicly disclose audited finan-cial statements of its operations on a preannounced schedule.

4.2.2Internal governance procedures necessary to ensure the integrity of operations, including internal audit arrange-ments, should be publicly disclosed.

No provision for this in the BSP Charter

Annex 3

IMF Code of Good Practices in Transparency for Monetary Policy Not Practiced by the BSP


3.3 The central bank should establish and maintain public information services.

3.3.1 The central bank should have a publications program, including an Annual Report.

Chapter 1, Article 5 of RA 7653: Reports and Publications

3.3.2Senior central bank officials should be ready to explain their institution's objective(s) and performance to the public, and have a presumption in favor of releasing the text of their statements to the public.

BSP websitePress Releases

3.4 Texts of regulations issued by the central bank should be readily available to the public.


IV. Accountability and Assurances of Integrity by the Central Bank

4.1

Officials of the central bank should be available to appear before a designated public authority to report on the conduct of monetary policy, explain the policy objective(s) of their institution, describe their performance in achieving their objective(s), and, as appropriate, exchange views on the state of the economy and the financial system.

Congressional Hearings on Budget

4.2The central bank should publicly disclose audited financial statements of its operations on a preannounced schedule.


4.2.1

The financial statements should be audited by an independent auditor. Information on accounting policies and any qualification to the statements should be an integral part of the publicly disclosed financial statements.

Chapter 1, Article 7 of RA 7653: The Auditor

4.2.2Internal governance procedures necessary to ensure the integrity of operations, including internal audit arrangements, should be publicly disclosed.

No provision in the Charter

4.3 Information on the expenses and revenues in operating the central bank should be publicly disclosed annually.


4.4Standards for the conduct of personal financial affairs of officials and staff of the central bank and rules to prevent exploitation of conflicts of interest, including any general fiduciary obligation, should be publicly disclosed.

4.4.1Information about legal protections for officials and staff of the central bank in the conduct of their official duties should be publicly disclosed.

Chapter 1, Article 4, Sec 27 of RA 7653: Prohibitions

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References

Bangko Sentral ng Pilipinas (2010). BSP Governance Report (Unpublished manuscript).

Bernanke, B. (2004, October 7). “Central Bank Talk and Monetary Policy,” speech delivered at the Japan Society Corporate Luncheon, New York, New York. Retrieved from the US Federal Reserve website: http://www.federalreserve.gov/boarddocs/speeches/2004/200410072.

Eijffinger, S., Geraats, P., & Van der Cruijsen, C. (2006, January). Does Central Bank Transparency Reduce Interest Rates? (De Nederlandsche Bank [DNB] Working Paper Series No. 85). Retrieved from the DNB website: http://www.dnb.nl/binaries/Working%20Paper%2085_tcm46-146742.pdf

Filardo, A., & Guinigundo, D. (2008). Transparency and Communication in Monetary Policy: A Survey of Asian Central Banks. Paper presented during a Bangko Sentral ng Pilipinas-Bank for International Settlements (BIS) Joint High-Level Conference on Transparency and Communication in Monetary Policy, 1 February 2008, in Manila, Philippines. Retrieved from the BIS website: http://www.bis.org/repofficepubl/arpresearch200801.3.pdf

Fracasso, A., Genberg, H., & Wyplosz, C. (2003). How Do Central Banks Write? An Evaluation of Inflation Targeting Central Banks. Geneva Reports on the World Economy Special Report 2, Norges Bank.

Geraats, P. (2009). Trends in Monetary Policy Transparency (CESifo Working Paper No. 2584). Retrieved from the CESifo Group Munich website: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2009/wp-cesifo-2009-03/cesifo1_wp2584.pdf.

Hammond, G. (2010). State of the art of inflation targeting (Centre for Central Banking Studies [CCBS] Handbook No. 29). Retrieved from the Bank of England website: http://www.bankofengland.co.uk/education/Documents/ccbs/ handbooks/pdf/ccbshb29.pdf

International Monetary Fund (2000). Code of Good Practices on Transparency in Monetary and Financial Policies: Declaration of Principles and Supporting Document. Retrieved from the IMF website: http://www.imf.org/external/np/mae/mft/code/.

International Monetary Fund (2003). Assessments of the IMF Code of Good Practices on Transparency in Monetary and Financial Policies. Retrieved from the IMF website: http://www.imf.org/ external/np/mae/mft/assess/122303.pdf.

King, M. (2005). Monetary Policy: Practice Ahead of Theory (The Mais Lecture 2005). Speech delivered on 17 May 2005 at the Cass Business School, City University, London. Retrieved from the Social Science Research Network website: http://ssrn.com/abstract=753989.

Oesterreichische Nationalbank (OeNB) Institutional Features. Retrieved from OeNB website: http://www.oenb.at/en/geldp_volksw/geldpolitik/merkmale/institutional_features.jsp.

Oxford Analytica. (2009). Philippine Monetary Transparency - Country Report. Retrieved from Oxford Analytica website: http://www.estandardsforum.org/philippines/standards/code-of-good-practices-on-transparency-in-monetary-policy.


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Views from Washington:Reforms of the IMF’s Surveillance

Ernando S. De Leon is currently on secondment to the International Monetary Fund as Senior Advisor to the Executive Director, Southeast Asia Voting Group. Mr. De Leon holds a Master of Philosophy degree in Economic Development from the Centre for Development Studies, the University of Glasgow in Scotland, United Kingdom.

*Views from Washington is a regular column on relevant issues that is contributed by BSP officials on secondment to the International Monetary Fund in Washington, D.C., U.S.A.

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International Monetary Fund (IMF) surveillance in the run-up

to the 2008 global financial crisis was seen to have suffered

from weaknesses. Some of these shortcomings which have

been documented in the Fund’s internal reviews indicated that

the Fund did not identify sufficiently and warn about mounting

risks, particularly those posed by advanced economies.1 The

internal reviews noted that the Fund also failed to anticipate

the transmission channels of shocks and contagion across

sectors and countries, paying insufficient attention to the

interactions between financial, fiscal and macroeconomic

stability. While some risks that subsequently unfolded were

identified, warnings were not clearly communicated and were

too general to trigger policy responses from member countries.

The Fund has taken action in recent years to strengthen surveillance to respond to a more globalized and interconnected world. The “spillover” reports published by the Fund on 11 July 2011 and 9 July 2012 assessed the impact of economic policies in the world’s five largest economies—China, the euro area, Japan, United Kingdom, and the United States—on partner economies. In particular, the 2012 report examined potential spillovers arising from the euro area crisis, US fiscal policy, a possible slowdown in China and Japan. In both reports, the Fund provided specific policy recommendations. Multi-country thematic reports (e.g., on Interconnectedness and Clusters, Capital Flows, and Global Liquidity) are currently being regularly prepared to analyze common issues facing member countries. Individual country surveillance (or Article IV consultations), as well as the IMF’s World Economic Outlook (WEO), Global Financial Stability Report (GFSR), and Regional Economic Outlook reports are also including more analysis of interconnections. The IMF also collaborates closely with the Group of Twenty (G-20) industrialized and emerging market economies to assess whether their policies support balanced and sustainable global growth.

All these initiatives are meant to strengthen the framework for surveillance, deepen analysis of risks and financial systems, hasten assessments of members’ external positions, and improve the traction of the Fund’s policy advice.

Surveillance framework of the Fund In today’s highly integrated global economy where policies of one country affect other countries, the value of international collaboration cannot be overemphasized. The IMF, given its universal membership of 188 countries, has the capacity to facilitate this international cooperation. There are two

1 “IMF Performance in the Run-up to the Financial and Economic Crisis: IMF Surveillance in 2004-07,” IEO team led by Ruben Lamdany and Nancy Wagner, Washington, D.C., IMF, c2011.


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main aspects to the IMF’s surveillance work, namely: (1) bilateral surveillance or the appraisal of and advice on the policies of individual member country and (2) multilateral surveillance or oversight of the global economy.

Since the global crisis, there have been important practical enhancements to IMF surveillance, such as the introduction of spillover reports.2 However, the legal framework for Fund surveillance, which includes the Articles of Agreement and the 2007 Decision on Bilateral Surveillance (2007 Decision), were seen to continue to suffer from shortcomings. For instance, the framework for bilateral surveillance has been observed to have failed to capture economic realities adequately. There is also the issue of a perceived exchange rate bias. In particular, the asymmetric treatment of exchange rate and domestic policies in Article IV consultations with member countries may tend to undermine the ownership of bilateral surveillance by some members. Moreover, the Fund lacks a clearly defined framework for multilateral surveillance. That is, there is no framework on how to tackle global issues requiring collective action or close policy coordination.

On 18 July 2012, the IMF adopted an Integrated Surveillance Decision (ISD) that provides the basis for more effective and relevant surveillance in a highly integrated world economy. The ISD, which replaces the 2007 Decision, provides Board-approved directions to Fund staff on IMF surveillance and elaborates on members’ obligations as set out in the Articles of Agreement. The ISD allows for more systematic coverage of spillovers from members’ economic and financial policies in Article IV consultations and better integrates surveillance at the bilateral and multilateral levels. The ISD will help the IMF to engage with its members at an early stage on risks and vulnerabilities, and encourage them to be mindful of the impact of their policies on global stability. In particular, the new decision on Bilateral and Multilateral Surveillance contained under the ISD will:

• Help ensure consistency in the Fund’s assessment and views on individual economies and global stability;

• Make Article IV consultations a vehicle for both bilateral and multilateral surveillance;

• Emphasize that the Fund attaches importance to both a member’s exchange rate and domestic policies;

• Ensure appropriate coverage of spillovers from members’ policies that may have an impact on global stability; and

• Clarify the modalities of multilateral surveillance and lay out a framework for possible multilateral consultations.3

The adoption of the ISD is seen to demonstrate strong ownership of the way Fund surveillance is being strengthened as it provided guidance to both the Fund and members on their roles and responsibilities in the surveillance process. The support of the membership to the ISD is expected to lead to greater traction in the Fund’s policy advice to member countries.

2 The spillover report is part of IMF’s effort to strengthen policy analysis by enhancing assessment of interconnections between the world’s economies and how policies in the larger economies affect the rest of the world.

3 Statement by IMF Managing Director Christine Lagarde on Strengthening IMF Surveillance, 18 July 2012.

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Risk AssessmentsThe IMF has been sharpening its risk assessments to allow the institution and member countries to detect at an early stage potential problems and develop appropriate policy responses. One innovation towards this end has been the incorporation of risk assessment matrices (RAMs) in Article IV reports.

Similarly, the IMF conducts a semiannual Early Warning Exercise (EWE) to identify and assess low-probability but possibly high-impact risks to the global economy. It also conducts Vulnerabilities Exercises (VEs) to assess vulnerabilities and emerging risks in individual advanced, emerging market, and low-income countries.

Article IV discussions with authorities are focusing more on risk assessments, drawing on the results of the EWE and VEs, the WEO and the GFSR. The IMF’s multilateral reports are also paying more attention to risks.

Financial StabilityThe development of the Financial Surveillance Strategy is a key recommendation of the 2011 Triennial Surveillance Review and the Managing Director’s Action Plan for Surveillance. In an IMF staff paper entitled “The IMF’s Financial Surveillance Strategy” dated 12 August 2012, a review was undertaken on the various innovations and gaps in financial surveillance by the Fund and outlined strategic priorities for the coming years and proposes recommendations to further strengthen the IMF’s conduct of financial surveillance. This is in support of the Fund’s mandate to ensure the effective operation of the international monetary system and promote global economic and financial stability. An offshoot of this paper is the adoption by the Fund of the three pillars of Financial Surveillance Strategy, namely: (i) improving risk identification and macro-financial policy analysis; (ii) upgrading the instruments and products of financial surveillance to foster an integrated policy response to risks; and (iii) increasing the traction and impact of financial surveillance by engaging more actively with stakeholders.

On improving risk identification and macro-financial policy analysis, the Fund will pursue measures to strengthen the analytical underpinnings of its macro- financial risk assessments and policy advice, particularly in deepening the understanding on the nature and implications of cross-border linkages, vulnerabilities, and spillovers. The ongoing work by the Fund on developing a unified macro-financial framework to study the interdependencies between the real and financial sectors is in support of this strategy. Likewise, the Fund is enhancing its financial sector expertise by intensifying internal training and sharpening analytical tools. It has also assigned financial sector experts to all systemically important and vulnerable economies.

With regard to instruments and products of financial surveillance, the Fund will upgrade its financial surveillance instruments and products and further streamline these products to sharpen key policy messages. Likewise, the Fund shall give priority to strengthening and mainstreaming financial surveillance in Article IV consultations and follow-up FSAP recommendations to concerned members in subsequent Article IV cycles. Given the potential for financial sector developments to rapidly ignite and propagate crises, the IMF presently gives more emphasis to financial sector issues in its multilateral and country surveillance.


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External StabilityAssessing external stability and external imbalances remains a core component of the IMF’s mandate. External imbalances can have a significant impact on the operation of the global economy. Recently, the IMF published a pilot External Sector Report (ESR) covering the world’s largest economies. The ESR contains a multilaterally consistent assessment of members’ external balances, currencies, and policies.

The pilot ESR aims to provide a multilaterally consistent analysis of the external positions of major world economies. Following the recommendations of the 2011 Triennial Surveillance Review and the Managing Director’s Statement on Strengthening Surveillance, the focus of the analysis has been broadened beyond exchange rates to include detailed examinations of the current account, reserves, capital flows, and external balance sheets. It draws upon the IMF’s existing and new methods for assessing current accounts and real exchange rates, and on previous IMF analytical work on exchange rates, capital flows and measures, as well as reserves adequacy. The key conclusions of the pilot ESR are as follows:

• Global external imbalances (current accounts different from those warranted by fundamentals and desirable policies) have added to vulnerabilities by exacerbating domestic booms and busts and amplifying spillovers. The most potent source of spillovers from busts is generally through financial contagion, although trade links can also be important;

• Despite narrowing since the crisis, estimated global external imbalances and associated vulnerabilities are likely to be well above desirable levels without decisive policy actions;

• Policy actions are needed across many countries, as most of the analyzed economies have balances that are to some degree out of line with fundamentals;

• In many advanced economies, large and evenly paced medium-term fiscal consolidations are needed and lowering of current accounts balances is necessary elsewhere. A range of estimates suggests that the US dollar, the euro and the yen are all overvalued compared to fundamentals and desirable policy settings; and

• Many emerging markets are deemed to have adequate reserves for precautionary purposes. Responses to capital flows can include a range of macroeconomic policy adjustments, including greater exchange rate flexibility, but restrictions should not be seen as a substitute for policy adjustment. Structural adjustments, such as product market flexibility, are central to reducing vulnerabilities from external imbalances over time.

Traction For its advice to have the most impact, the IMF seeks to provide strong economic analysis, candid and evenhanded advice--tailored to country circumstances--and clear messages. In this light, the IMF’s major findings in its surveillance products and policy messages are published twice a year in a Consolidated Multilateral Surveillance Report (CMSR). This report highlights the top-line messages from the IMF’s multilateral surveillance products (e.g.,

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the WEO, GFSR, Fiscal Monitor, and Spillover Reports). Other initiatives that are expected to improve surveillance include coverage of macro-relevant social issues (such as unemployment and inequality), consultations with country authorities on relevant policy questions prior to Article IV consultations and systematic follow up on past advice to member countries during consultations with members.

In the area of increasing the traction and impact of financial surveillance by engaging more actively with stakeholders, the Fund underscored the need to continue to cooperate with other institutions and looked forward to further collaboration between the Fund and the Financial Stability Board in line with their respective mandates. Moving forward, the Fund, given its universal membership, envisions itself to be able to serve as a global facilitator on macro-prudential policy in an informal capacity.

THE BANGKO SENTRAL REVIEW is published by the Bangko Sentral ng Pilipinas (BSP).

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