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___________________________________________________________________________
2015/SFOM/S/012 Session: 4
The Philippines: Promoting Financial Resiliency in Support of Macroeconomic Stability
Purpose: Information
Submitted by: Philippines
Special Senior Finance Officials’ MeetingClark, Philippines
21-22 January 2015
2/11/2015
1
Diwa C. GuinigundoDeputy Governor
Bangko Sentral ng Pilipinas
The Philippines: Promoting Financial Resiliency in Support
of Macroeconomic Stability
APEC Special Senior Finance Officials Meeting“Enhancing Financial Resiliency with Particulars on Macroeconomic Stability”21 January 2015Clark, Pampanga
2
KEY ISSUES
I. Economic growth experience in 2014
II. Sources of resiliency
III. Challenges ahead
IV. Role of the BSP
2/11/2015
2
3
ECONOMIC GROWTH EXPERIENCE IN 2014
1/ Indonesia, Malaysia, Philippines, Thailand, and VietnamSource: IMF World Economic Outlook, October 2014
2012 2013 2014 2015 2012 2013 2014 2015
World 3.4 3.3 3.3 3.8 Russia 3.4 1.3 0.2 0.5
US 2.3 2.2 2.2 3.1 China 7.7 7.7 7.4 7.1
Canada 1.7 2.0 2.3 2.4 ASEAN‐51/ 6.2 5.2 4.7 5.4
Japan 1.5 1.5 0.9 0.8 Mexico 4 1.1 2.4 3.5
(Actual) (Projections)
IMF World Economic Outlook (October 2014)
Growth Projections
(Projections)(Actual)
Uneven global recovery continues
6.4 6.37.3 7.2
7.7 7.97.0
6.35.6
6.45.3
0.0
2.0
4.0
6.0
8.0
10.0
Q12009
Q3 Q12010
Q3 Q12011
Q3 Q12012
Q3 Q12013
Q3 Q12014
Q3
Philippines sustains growth
Positive economic growth for 63 consecutive quarters
4
2/11/2015
3
Incremental Capital-Output Ratio (ICOR)1/
Sustained economic efficiency
Notes:1.ICOR is estimated as the annual average share of investment‐to‐GDP/annual average growth rate of GDP. Thehigher the ICOR , the less efficient is the production process. All basic data used are seasonally‐adjusted.Source: Latest BSP staff estimates
Higher potential of the Philippine economy
5
Data sources: Philippine Statistical Authority (PSA) Labor Force Survey, and Technical Education and Skills Development Authority’s Technical Vocational Education and Training Statistics.
390
446468
273
333352
200
300
400
500
2006 2008 2010
Value Added vs. Compensationper BPO Employee (in thousand PHP)
Value Added Per Employee Compensation Per Employee
37% 35% 33%
12% 12% 11%
51% 53% 56%
0%
20%
40%
60%
80%
100%
2002 ‐ 2007 2008 ‐ 2009 2010 ‐ 2013
Labor by Class of Workers
Self‐Employed Unpaid Family Wage and Salary
51.9 53.6
80.6 83.6
0.0
20.0
40.0
60.0
80.0
100.0
1995 ‐ 2001 2002 ‐ 2007 2008 ‐ 2009 2010 ‐ 2011
TESDA Certification Rate
Certification Rate
Robust labor market dynamics
390
446468
273
333352
200
300
400
500
2006 2008 2010
Value Added vs. Compensationper BPO Employee (in thousand PHP)
Value Added Per Employee Compensation Per Employee
2… 2… 2… 1… 1.8 1.8 1.7 1.8 1…
34.1 33.4 32.8 32.4 31.6 30.5 30.1 29.7 28.9
37.4 38.1 38.4 38.8 38.9 39.4 39.8 39.9 40.3
26.3 26.5 26.8 26.9 27.7 28.4 28.5 24.4 24.7
0%
20%
40%
60%
80%
100%
2005 2006 2007 2008 2009 2010 2011 2012 2013
Employment distribution, by education attainment
No Grade Completed Elementary High School College
Higher potential of the Philippine economy
6
2/11/2015
4
Demographic sweet spot
Philippines has ample stock of young, skilled and educated workers
Youngest population in Asia supports a strong growth outlook
Median age in the Philippines is 22.2 years, below other “young” countries in Asia
UN: In 2015, Philippines will enter its Demographic Window, when proportion of population that is of working age is prominent
Philippines is the last major Asian economy to benefit from demographic dividend, which is typically associated with accelerated economic growth
Average growth over 10‐year period from start of Demographic Window at 7.3%
Challenge is to educate and train them and provide opportunities for gainful employment
Demographic Windows in Asia Average GDP Growth Rate for First‐10 Years in Demographic Window
Philippines has youngest population in Asia Poised for Strong GDP Growth
Higher potential of the Philippine economy
Sources: UN World Population to 2030, UN World Population Prospects (2010 Revision) 7
8
Inflation dynamics remain favorable
Source: BSP
Inflation within target for the 6th consecutive year
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2007
2008
2009
2010
2011
2012
2013
2014
Headline Inflation vs. Target (%)Jan 2007 – December 2014
Headline
Lower bound of target
Upper bound of target
4.1
2/11/2015
5
9
SOURCES OF RESILIENCY
Source: BSP
10
Proactive monetary policy
Source: BSP
Increased policy rates by 50 bps to manage inflationary pressures and expectations
Increased RR to stem strong liquidity growth
Raised SDA rate by 50 bps
Preemptive measures to ensure monetary stability
2/11/2015
6
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
Non‐Performing Loans (Net) and Non‐Performing Assets Ratios (%) of PH Banking System, 2001‐2014
NPL Ratio
NPA Ratio
6
8
10
12
14
16
18
20
Capital Adequacy Ratio (%)*2001‐2014
BSP Standard: 10%
BIS Standard: 8%
End‐Sep 2014NPL 2.04NPA 1.99
CAR consolidated basisJun‘14: 16.7%
CAR Solo basisJun‘14: 15.9%
Sound and stable banking system
Efficient intermediator of funds
11
12
Sound and stable banking system
Source: BSP
Banks are major players in the Philippine financial system
Total Resources of the Philippine Financial Systemas of end‐December 2013
Banks, 81.3%
Non‐banks, 18.7%
Deposit liabilities are the major source of funding and are mostly directed to lending
Total loan portfolio is largely peso‐denominated
Continued profitability
2/11/2015
7
Sound and stable banking system
Prudent financial policies
Implemented the real estate stress test limit
Approval of enhanced regulation on credit risk
management
Increase in the minimum capital requirement for all bank
categories
13
Sound and stable banking system
Prudent financial policies
Approval of guidelines for determining so‐called “D‐SIBs”
Adopted a Financial Consumer Protection Framework
Endorsement of the full entry of foreign banks in the
Philippines
14
2/11/2015
8
Comprehensive approach to financial stability
15
FINANCIAL STABILITY COORDINATION COUNCIL
Mitigate and manage the build up of systemic risks
FINANCIAL STABILITY COMMITTEE
Inclusive financial system
Continue to widen the reach of the BSP’s financial learning
program
Started the groundwork for a National Financial Inclusion
Strategy
Establish more Credit Surety Funds
Reaching more Filipinos
16
2/11/2015
9
Healthy external sector position
Source: BSP
A source of confidence for creditors and investors
17
18
Improvements have been recognized internationally
The only banking system with positive outlook
2/11/2015
10
19
Improvements have been recognized internationally
2014‐2015 real GDP growth forecasts by multilaterals remains high
13 positive rating actions by S&P, Moody’s and Fitch Ratings since June 2010
Baa2
• Upgraded credit rating to Baa2 (December 2014) with stable outlook
• Upgraded credit rating to Baa3 with positive outlook
• Upgraded credit rating to Ba1 from Ba2 with stable outlook (29 October 2012)
• Revised outlook to positive from stable (29 May 2012)
• Upgraded credit rating to Ba2 from Ba3 with stable outlook (15 June 2011)
• Revised outlook positive from stable (6 January 2011)
Notable improvements observed in the Philippines governance and competitiveness indicators lend support to continued bullish investor sentiment
• Zero Based Budgeting to improve expenditure management
• Pocket Open Skies to support tourism potential
• Peace Agreement to unleash Mindanao’s potential
• Sin Tax Law to further strengthen the fiscal position
• Reproductive Health Act to improve family health planning
• Judicial Reform to enhance the regulatory environment and ensure level playing field
Strong political will to
pursue and implement difficult reforms
Third Party Report Latest Previous Change
World Bank’s 2014 Ease of Doing Business Report
108 /189 133/185 +25
Transparency International 2013 Corruption Perception Index
94/175 105/179 +11
World Bank 2013 Worldwide Governance Indicators’Regulatory Quality*
52 45 +7
IMD 2013 World Competitiveness Report
38/60 43/59 +5
Heritage Foundation 2014 Economic Freedom Index
89/186 97/177 +8Thomson Reuters/INSEADAsia Business Sentiment Survey** (Q3 2013 vs Q2 2013)
100 94 +6
Grant Thornton 2013 Global Dynamism Index
21/60 46/50 +25* Percentile Ranking
* * % of Respondents with positive outlook on the Philippines
Improvements have been recognized internationally
20
2/11/2015
11
2121
Year Selected Structural/Policy Reforms in the Philippine Economy
1993 Creation of the Bangko Sentral ng Pilipinas
1994 Liberalization of foreign bank entry
1995 Liberalization of the telecommunications industry
1997 Privatization of water services (MWSS)
1998 Deregulation of the oil industry; Adoption of consolidated bank supervision
2000 Philippine E‐Commerce Act
2001 Liberalization of the power sector (EPIRA)
2002 Inflation Targeting Framework; Special Purpose Vehicle Act
2003 Government Procurement Reform Act
2004 Securitization Act; Adoption of Basel 2
2005 Expanded value‐added tax (E‐VAT)
2006 Wholesale Electricity Spot Market (WESM)
2007 Risk‐based bank supervision
2009Privatization of the National Transmission Corporation (TransCo) and National Power Corporation’s (NPC) assets
2011 Philippine Financial Reporting Standards (PFRS) 9; Phased‐in migration to Basel 3
2013 Revised excise tax rates on alcohol and tobacco
2014Liberalization of Entry of Foreign Banks in the Philippines; Macroprudential measures on real estate exposure
Most important: Long history of reforms
CHALLENGES AHEAD
Significant implications on domestic growth and financial markets
Continued uneven global growth
Monetary policy divergence
Heightened volatility in financial markets
22
2/11/2015
12
Provide a sound monetary policy for a low and stable inflation
Maintain a market‐determined exchange rate aligned with
fundamentals
Continue to develop a responsive supervisory and regulatory
framework for a stable financial system
Continue programs for a more inclusive financial system
ROLE OF THE BSP
BSP strongly adheres to its commitments
23
Diwa C. GuinigundoDeputy Governor
Bangko Sentral ng Pilipinas
The Philippines: Promoting Financial Resiliency in Support
of Macroeconomic Stability
APEC Special Senior Finance Officials Meeting“Enhancing Financial Resiliency with particulars on Macroeconomic Stability”21 January 2015Clark, Pampanga