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Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 3rd Business Forum of The Manila Times, Manila, 23 February 2016.
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Amando M Tetangco, Jr: Philippines in 2016 – sustaining resilience amid headwinds Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 3rd Business Forum of The Manila Times, Manila, 23 February 2016. * * * I am pleased to join you this morning for the 3rd Manila Times Business Forum. There are quite a number of fora that tackle economic outlook and issues of the day, but I don’t know of any that is organized by a private institution, which dates itself to the time the country became independent from Spain! 1 In addition, The Manila Times President & CEO Mr. Dante Ang said earlier that this forum gathers various speakers, including those officials from institutions such as IMF, WB and BSP to present their prognosis for the economy this year. Very few institutions stand the test of time – technology, innovation, and more recently, social media, among others; change the way we do things, how we perceive events, and therefore how we react. Central banking in the Philippines is just 67 years old and yet the events of the last two decades have dramatically changed how we do things. I am sure many, if not all of you, have heard of central banks lowering their policy rates to negative territory, of quantitative easing (QE), and of macroprudential measures. In reality, the central banker’s tool box now contains other implements beyond the traditional interest rate and on-site supervision. But, I am getting ahead of myself here. I’ve been asked to speak on the Philippine economic outlook for 2016. While that seems much focused, our conversation today will certainly touch upon global events of the last few years and our expectations beyond 2016. For me to speak of 2016 however, I need to take a step back. A newspaper lives or draws interest from its public through its headlines. And since this Forum today is being hosted by The Manila Times, I thought I would frame my talk today as a series of headlines. My first is this – The Philippines entered 2016 from a position of relative strength. The country grew 5.8 percent for the full year 2015. If we take Q4 alone, the country grew at 6.3 percent, making us the 4th fastest growing economy in Asia, following India, China and Vietnam. That Q4 performance also brings to 68 the number of consecutive quarters of positive economic growth. The services sector remained the biggest driver of output while the resurgence of manufacturing also helped to strengthen our base for growth. Growth also continued to be buoyed by strong private spending, aided by the increase in domestic employment and the steady inflow of remittances from overseas Filipinos (OFs). The “catch up” in fiscal spending in 2015 also helped to raise domestic output. We experienced this strong economic growth together with low and stable prices. For the full year 2015, the average inflation rate stood at only 1.4 percent, the lowest registered since the BSP adopted the inflation targeting framework in 2002. In the BSP, we characterize this “sweet spot” as – the positive convergence of strong growth and low inflation. For certain, the country’s healthy banking system founded on years of judicious reforms, including financial inclusion initiatives, aided the country’s economic expansion. Our banks’ The tagline of The Manila Times – “Trusted since 1898”. BIS central bankers’ speeches balance sheets have remained strong. In particular, our banks maintain high capital, with capital adequacy ratio above national regulatory and international standards and the quality of their assets continues to improve, with declining NPL and NPA ratios. The country’s external liquidity position has also continued to be robust and helped shield the economy and the domestic financial markets from the worst effects of the global shocks. Our current account has been in surplus since 2003 supported by steady remittances and, in more recent years, strong receipts from the business process outsourcing sector. For the full year 2015, the overall balance of payments (BOP) position yielded a surplus of US$2.6 billion, a reversal from the US$2.9 billion deficit in 2014. Last Friday, we released the balance of payments position for January 2016. It was a deficit of $0.81 billion, which was due to the payment of National Government (NG) debt service and the BSP’s foreign exchange (FX) operations that were only partially offset by FX inflows from deposits of the NG and BSP income from abroad. We see this deficit as temporary and we expect a turnaround in the BOP position later this year, similar to what we experienced in 2015. Our gross international reserves continue to grow. At end 2015, our gross international reserves (GIR) stood at US$80.7 billion, over US$1.0 billion more than that registered in 2014. This level of reserves can cover 10.3 months’ worth of imports of goods and payment for services and income. These encouraging developments have helped elevate third-party assessments on the domestic economy’s progress and prospects. Several indices of the country have moved up. These indices include those on transparency, governance and ease of doing business, among others. In September last year, Fitch upgraded its credit outlook on the Philippine economy to “positive” from “stable.” This is important because it raises the prospect that Fitch would upgrade the country’s credit rating in the next 12–18 months. Ladies and gentlemen, the facts and figures that I just discussed provide evidence to support the first headline, that is, that the Philippines entered 2016 from a position of relative strength. My second headline: The Philippines is SEEN to SUSTAIN resilience in 2016. Resilience is a word that many use, but it is important to remember that this is a word that holds meaning only when it is taken in context. In other words, in a specific circumstance. Clearly, resilience cannot be tested if one is sailing over calm seas. For us, 2015 was not at all calm. It was a challenging year. The markets and other policy makers were cautious. We were all waiting for the Fed “lift off” (or when the Fed would begin to raise its target rate). We weren’t sure where oil prices were headed. We didn't know how to fully interpret the actions by Chinese authorities, including the devaluation of the Renminbi (RMB). And yet, in the face of all these uncertainties, the country stood its ground in 2015. 2016 was off to a bumpy start. While, we foresee the same risk factors in 2016 as those in 2015, it may be more difficult to predict how these factors would play out in 2016. Policy makers are being more sensitive to spill overs and spillbacks to their economies. And market sentiment continues to be “shifty.” Let me quickly go through how we see each challenge evolving in 2016. Let me begin with China. When the global financial crisis (GFC) started in 2007/2008, global growth remained afloat because the emerging markets, the largest of which is China, were growing. This time around, China’s growth prospects are not as clear-cut as then. There is now debate whether China could experience a hard landing. This is creating market uncertainty, because in addition to contraction in global trade, a significant slowdown in China could also put downward pressure on global commodity prices. Furthermore, the markets are carefully watching the Chinese authorities’ next moves to liberalize their markets. You may recall the stock market rout in China in August last year. That was precipitated by the surprise RMB devaluation. That led to a sell-off in equities across the globe. Analysts say that to avoid a recurrence of such adverse reactions, markets need to see BIS central bankers’ speeches more cohesiveness in the policy measures from Chinese authorities, as well as clarity in their communication. In the US, the Fed, in December 2015, determined that the US labor market conditions and inflation outlook already warranted “lift off”. Based on the assessment of the FOMC members then, the Fed was projected to raise its target rate by 100 basis points in 2016. But more recent statements of some Fed governors now reveal less conviction in terms of the speed and magnitude of normalization of its policy. Even Fed Chair Yellen indicated in her latest testimony to the US Congress that foreign economic developments could pose “risks to economic growth.” Some analysts have taken these recent statements to mean that the Fed may delay its next tightening moves. This uncertainty is heightening market volatility – yet again! Turning to oil – oil price is now at about $30 per barrel (pbl). In mid-2014, it was about $108 pbl. While the rate of decline has decelerated, the price is now at levels that have triggered major oil producers to “come to the table” to discuss the possibility of “freezing” production to specific output levels. Global oil supply has overtaken demand since 2014. Oil importers such as the Philippines benefit from low oil prices. Low oil prices feed positively towards lower inflation and encourages domestic economic activity. But low prices are doubleedged in that significantly low oil prices could lead to oil-exporters cutting back on capital expenditures. This in turn may trigger a decline in global trade and growth. The uneven global growth prospects, the differences in the policy actions across the globe, and the uncertainty in oil price movements are triggering global portfolio rebalancing. As market players flesh out their interpretation of these developments, volatility in financial markets is heightened. According to the Institute of International Finance (IIF), emerging market economies (EMEs) experienced strong net capital outflows in 2015. It forecasts that further net outflows from China are expected to continue in 2016. These net movements of funds from EMEs in 2015 have been reflected, among others, in a decline in ASEAN stock market values and an increase in the volatility of currencies in the region. How could these developments impact the Philippines? I already spoke earlier about the positive impact of low oil prices on the Philippines – which it helps reduce inflationary pressures while encouraging domestic consumption. We could, however, be adversely affected if the low oil prices cause export destinations of our OFWs in the Middle East to cut back on employment. As for the divergent growth prospects in the US and China, we could be affected via the trade channel. If US growth will continue and gain further traction, this could mitigate the impact of a slowdown in China. Furthermore, our domestic financial markets have not been spared from the market volatility that these external developments have stirred. The Philippine Stock Exchange index (PSEi) fell, credit default swaps (CDS) and bond spreads widened, and the peso depreciated. To complete the picture, I should mention that we have our own domestic considerations in addition to these external challenges. Most prominent of our domestic risks are the prospects of a prolonged El Niño and the persistence of the infrastructure gaps. Ladies and gentlemen, this is the operating environment expected in 2016. As I said, while it’s the same factors, how these factors will play out may not necessarily be the same in 2016. To paraphrase the title of the book of Reinhart and Rogoff, “This time it COULD BE different.” You may ask – How can we claim (as a second headline) that – “the Philippines will sustain its resilience in 2016?” First, because we have come into 2016 from a position of relative strength. This was my first headline. Second, from the point of view of the BSP, we have been focused in our policy thrusts. BIS central bankers’ speeches We are forward-looking in our policy formulation. Let me illustrate using our monetary policy. In 2014, we moved pre-emptively, in anticipation of the Fed lift off. Markets had been talking about “lift off” since the Fed “taper tantrum” in May 2013. But because until 2014, the Fed had only moved to end QE and not actually raise rates, markets kept on “pushing the envelope,” so to speak, in terms of maximizing the benefits of low interest rates. Through a series of tightening measures, we communicated to the market then that players should begin to take stock of how they were assessing and pricing risk. In a way, the BSP was reminding banks (and the general public) that interest rates would not remain low forever, and that there is need to re-think business models and investment strategies. We also ensured that our tightening measures were consistent with the inflation outlook at the time. Because our actions were early enough, our markets were well-positioned when the Fed finally raised its target rate in December 2015. We are not only forward-looking; we are also calibrated in our actions and mindful of the idiosyncrasies of our domestic economy. Let me illustrate using our approach to banking reform. In the aftermath of the GFC, the global financial market reform agenda was thick and heavy-handed, primarily because there was much fear of a recurrence of crisis from slack regulation. The Philippine banking system was not as affected by the GFC. In part, because our bankers are inherently conservative. Therefore the BSP adopted the global reforms in a calibrated manner and only as appropriate to our domestic conditions. We were an early adopter of the capital requirements under Basel 3, and we are now phasing in the rest of the components of Basel 3. In addition to adopting global reforms that are suited to our particular requirements in a timely manner, we also put out regulations and guidelines that are intended to raise bank governance standards, strengthen credit, operational, IT risk management and internal control frameworks, and improve market conduct. Our approach to regulatory reform is anchored on Financial Stability. This is an important lesson we learned from the GFC. Most policy makers have now come to realize that having strong individual banks, while that is necessary, is NOT sufficient. Policy makers need to consider the strength and soundness of the system as a whole. Our regulations benefit from consultation with the banking industry and are evidence-based. We meet with industry associations and groups – 15 in all – through the BSP Supervisory Policy Committee. Putting all these together, you can see that our approach to regulatory reform and adoption is comprehensive and strategic. Our goal is not only to grow strong domestic banks but also banks that can compete in the global arena, particularly when ASEAN integration comes to full swing. BSP policy formulation is forward-looking. It is calibrated and consultative. It is also based on solid academic foundations and strong market surveillance. In policy formulation, the BSP uses various econometric and macro- models. To help ensure that these tools are current against the latest economic research, we constantly fine tune our forecasting models, stress-tests parameters; recalibrate early-warning systems and distress indices. You may have also heard about our implementation of the interest rate corridor (IRC) in Q2 2016. As we’ve emphasized in our public briefings, the implementation of the IRC is an operational change. It is not a shift in our monetary policy framework. We will continue to be an inflation targeting central bank. The objective of the operational shift is to allow BSP to better steer short-term market interest rates towards the BSP policy rate. This should make the transmission of changes in the monetary policy stance to the rest of the economy more effective. Ladies and gentlemen, while we are improving how we do things, there will be no change in our primary mandate – we will keep our eye on inflation. At our most recent policy meeting, we BIS central bankers’ speeches kept policy rates steady (at 4 percent for the reverse repurchase rate). Our view was that domestic demand continues to be quite robust and there is no urgent need to provide further monetary stimulus. Our models showed that even as inflation is currently below our target range of 2-4 percent (i.e., 1.3 percent in January 2016), inflation will slowly move to within target in 2016 (i.e., 2.2 percent) and 2017 (i.e., 3.2 percent). Going forward, we will continue to closely monitor the inflation process. We will also keep our FX policy of allowing the exchange rate to be determined by market forces. We are mindful that the peso is sensitive to external developments, so we will have scope for official action to limit excesses in exchange rate movements. Ladies and gentlemen, let me reiterate, we have the policy space to respond to uncertainties in the external and domestic environment. We will therefore make adjustments to the stance of policy as conditions warrant. Headline number 3: A stable macroeconomy should be inclusive. Some of you in the audience may be wondering why the Central Bank Governor would speak about inclusiveness. With the many macroeconomic and banking concerns it already has, should the central bank still be involved in inclusion. Our response in the BSP is YES, we should. We cannot ignore the financial consumer. When all is said and done, the purpose of a stable macroeconomic environment is ultimately to improve the consumer’s well-being. In the BSP, we have institutionalized financial inclusion in our strategic agenda. We put in place banking regulations that leverage on technology to increase access to financial products for the underserved and unbanked, strengthen financial consumer protection, and raise financial education and awareness to these new financial products and modes of delivery. We will also pursue the development of our National Retail Payments System or NRPS. The NRPS should move the country from being cash-heavy to being “cash-lite”. The NRPS is expected to improve transparency, security, and efficiency and reduce costs in financial transactions. Ladies and gentlemen, I presented three headlines. First, the Philippines bucked the trend in 2015. Next, we will continue to be resilient in 2016. And, finally we will endeavor to share the fruits of a strong macroeconomy to a broader cross-section of the economy. These three should be sufficient to make a full page of news. Indeed, our country has continued to expand despite the difficult external and domestic operating environment. It has been said that difficulty or adversity BUILDS character. In a way, we can say that the challenges our country has faced so far, and continue to face, have helped BUILD our character. We have also built buffers in the interim. And have become stronger as a nation. But, I also believe difficulties or adversities REVEAL character. The challenges and difficulties we have faced have revealed that we, as a nation, have what it takes to be resilient. However, ladies and gentlemen, these sources of resilience and buffers, the gains that we have attained so far, all these can only be fully harnessed if YOU in the private sector will continue to do your part as well. YOU turn the wheels of industry and business. YOUR actions will help solidify these gains. I hope to see YOU make headlines of your own. Headlines that will help ensure the Philippines sustains resilience in 2016 and beyond. Thank you. BIS central bankers’ speeches
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Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Chamber of Thrift Banks Convention, Makati City, 18 March 2016.
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Amando M Tetangco, Jr: Sustaining the momentum for inclusive growth Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Chamber of Thrift Banks Convention, Makati City, 18 March 2016. * * * In preparing for my remarks, I considered your theme and two words leapt at me. The first word is “momentum”. As you may know, this takes its roots from physics. Some may remember its formula -- “Mass x Velocity”. In other words, “mass in motion”. The second really, is a phrase -- “inclusive growth”. Picture this then, an object, say, a truck called “the initiatives and programs towards inclusive growth”, that is on the move and it will take some effort to stop it. That is what this conference is all about. First -- how can we ensure a critical mass of initiatives to keep us moving towards the goal of inclusive growth. And then, how can we make sure that we will continue in motion. Our current operating environment In gathering my thoughts for today’s event, I could not help but reflect on how the last seven months or so have affected our operating environment. Global growth has slowed. Developments out of China have surprised markets. The US Federal Reserve finally raised its target funds rate (Although just yesterday the Fed turned dovish, retreating on their initially indicated four rate hikes in 2016 to just two). Risk aversion was causing a de-risking. And oil supply was significantly much larger than demand. The net result has been a volatile financial market. And while it felt good to see a full tank’s worth of fuel cost significantly less, we remain cognizant of what this was doing to our countrymen working in oil-generating economies. Without overlooking these emerging developments, we should also not lose sight of the fact that our macroeconomic and financial market fundamentals remain solid and intact. We have now had 68 quarters of continuous growth, finishing 2015 at a full-year growth of 5.8 percent. Inflation was recorded at 1.4%, the lowest rate since the BSP adopted inflation targeting as our monetary policy framework in 2002. Our Balance of Payments position for 2015 was at a surplus of USD2.6 billion, a turnaround from the USD2.9 billion deficit in 2014. And with our gross international reserves still over USD80 billion, this is sufficient to service more than 10 months’ worth of imports of goods and payment for services. The exchange rate has sustained its relative competitiveness as it has moved in line with currencies in the region. Based on our assessments, therefore, the current stance of monetary policy remains appropriate, but we have flexibility to address developments should there be reason to adjust our policy levers. Certainly, the banking industry remains a clear pillar of strength. According to S&P, and I quote, “Philippine banks are looking forward to another solid year in 2016, thanks to the economy’s good growth prospects and banks’ healthy capitalization and asset quality.” Our favorable economic prospects are also noted by Fitch Ratings, which, for its part, gave the Philippines the only positive outlook among Asia Pacific banking systems for 2016 . I am happy to note that thrift banks continue to contribute to the strength of the overall banking industry. The collective assets of TBs reached Php961.13 billion as of November 2015 after growing annually by 10.71 percent for the past five years. Over the same period, deposit balances have been expanding at nearly 11 percent per annum [Php773.37 billion as of BIS central bankers’ speeches November 2015] while loans have grown just below 15 percent annually [Php 681.41 billion in November 2015]. Quo vadis? Given all of these developments, where do these take the thrift banking industry? The textbook answer, is to follow your mandate under the Thrift Bank Act. Under this law, TBs are expected to: 1. promote economic development and expand industrial and agricultural growth; 2. place within easy reach of the people the medium to long-term credit facilities to agriculture, services, industry and housing at reasonable cost and 3. encourage industry, frugality and the accumulation of savings among the public. While all of you are well aware of these, we all also recognize that these are not trivial tasks and targets. These speak of thrift banks as an enabler of economic development by encouraging retail savings and extending credit to targeted sectors. Your mandate makes no distinction of where you are based or the environment within which you operate. This, I feel, is important to highlight because your own business strategy appears to reflect the more “inclusive” track of the industry. By this I mean that your branching footprint has clearly extended beyond cities. Specifically, the number of thrift bank branches located in cities actually grew by 26.3 percent (from 991 to 1252) between 2010 and 2015 but your branches in 1st to 5th class municipalities grew by 37.5 percent (from 304 to 418). Certainly, the bulk of your branches are still in 1st and 2nd class municipalities but I am encouraged by the expansion elsewhere. What were just 35 branches in 3rd to 5th class municipalities in 2010 are now 73 branches as of end 2015. The numbers may be modest in absolute terms but the pace of growth is not trivial. Which brings me back to your conference theme: “Thrift Banks: Sustaining the Momentum for Inclusive Growth”. Now, a critical question comes to mind-- How can/do thrift banks contribute to inclusive growth? I think with some pragmatism and humility, we would be well-served to “scope” the response to this and say that thrift banks play a role in financial inclusion, which promotes inclusive growth. Inclusive growth and the role of the thrift banks There are several policy issues which are being considered in the space of financial inclusion. For thrift banks, I think two of these are most relevant. First, we would want to ensure that there is symbiotic relationship between financial inclusion and financial stability. Certainly, it defeats our prudential purposes if the attainment of one comes at the expense of the other. Here, your expanding footprint strategy is a critical element. As banking services are offered outside of the traditional city-centers, the expectation is that the dynamics between inclusion and stability can very well change. The BSP and the BIS are currently writing a paper on the relationship between inclusion and stability to explore the empirical linkages. The preliminary results suggest that information between a bank and its clients as well as the relationship between a bank and other banks in the vicinity do matter. This sounds rather straightforward but the implications on the operations of banks are not simple. In practice, this means each bank must maintain a continuing dialogue with its stakeholders. This kind of transparency is not just “another disclosure regime”. Rather, it is communication that prevents surprises and allows stakeholders to make informed decisions, avoiding the sharp spikes that often create and/or exacerbate evolving issues. BIS central bankers’ speeches Furthermore, banks must be cognizant that stakeholders do look at the localized community of financial service providers. In this day and age of electronic communication and affordable channels, financial consumers demand “banking services”, which may no longer be necessarily supplied by the traditional “brick-and-mortar banking institutions. This leads me to my second policy area which I often refer to as the “totality of the client experience”. As far as financial consumers are concerned, we live in a digital age and financial services are expected to be delivered and are in the form defined by financial technology. The digitization of financial services, more popularly labeled as fintech, requires innovation and support. The BSP has put in place both its e-money and IT Risk framework to enable this environment. Financial consumers who need to transfer funds from one branch to another of the same bank (let’s say from Manila to relatives in the province OR between two branches here in Metro Manila) must be able to do so with as less friction as possible. In the event that something unexpected happens to such a transaction, this is where “support” comes into play. Here, the BSP issued its Consumer Protection Framework that focuses on pro-active interventions such as financial literacy initiatives and the necessity of having remedial recourse by way of redress. The issues I just discussed are certainly relevant to thrift banks because you are the ones defining your target audience and by extension, you will have to provide for the “totality” of your clients’ experience, regardless of where they may be. Final thoughts Ladies and gentlemen, we spoke of the links between financial inclusion and financial stability; of how, as an industry, you would need to harness fintech to enrich your clients’ total experience. We also spoke of how your strategy of expanding branching footprint is helping to reach the underserved. These support our belief that we are (well) on our way towards creating a critical mass in our collective initiatives towards inclusive growth. Importantly, this mass is moving. By definition therefore, we have momentum. But, that is not enough, we need to sustain it. As the banking regulator, we will enable the environment with a commensurate regulatory framework and calibrate as may be necessary. But the form and substance of the banking products and services, including the means of delivery and distribution, are choices that only the banks can make. Thrift banks will have to define your market niche, as individual institutions that compete with others and as an industry that collaborates with the whole. Competition and collaboration may be flipsides of each other but the end goal will have to be the totality of the experience of the financial consumer. Absent such a positive experience, the financial consumer simply drifts to the shadows (i.e., shadow banking) or chooses to be financially excluded. I trust that no one in this room will find that to be an acceptable outcome. The National Strategy for Financial Inclusion (NSFI) has been launched, and we now have to focus on its execution. I therefore look forward to your active participation in this endeavor. Ladies and gentlemen, the work of financial inclusion is enormous. If we pursue this individually, we are likely to only hardly make a dent. But collectively, and forming a critical mass, who knows where our efforts will take us? We could just very simply turn out to be unstoppable! Thank you for your attention. Good morning. BIS central bankers’ speeches
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Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 2016 Presidential Conference on WASH in Schools hosted by Rotary International, Pasay City, 18 March 2016.
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Amando M Tetangco, Jr: Tapping into our strengths - opportunities, threats and challenges for 2016 and beyond in the Philippines and Asia Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 2016 Presidential Conference on WASH in Schools hosted by Rotary International, Pasay City, 18 March 2016. * * * It is always a pleasure to speak before Rotarians, a group very much involved in key and critical issues affecting communities, especially children and the youth. You may wonder why a central bank governor, whose primary mandate is price and financial stability, would be speaking at a Conference on “water, sanitation and hygiene.” I wondered this at first, when your Conference Chair and Past Governor Sid invited me to speak today. But as I thought about it, I realized that your goal of providing water, sanitation and hygiene to schools is not that unrelated to our own goals as a central bank. Let us consider a fundamental tenet in economics – Scarcity value determines the price of a resource. Often, scarcity is only perceived. This occurs when the source of supply is not sufficiently connected to demand. When supply meets demand, there is price equilibrium. This is the goal. On this premise, I realize we are looking at the same problem but with different lenses. In the BSP, we look at the issue primarily from the price stability angle, in your case, the convergence of supply and demand is the end view. Ultimately, we are both looking at the scarcity problem with welfare enhancement – improving the quality of people’s lives – as our overarching goal. Another similarity is that we – Rotarians and the BSP – both embrace the value of partnership and collaboration. Sid invited me to give an overview of opportunities in 2016. In my message, I will identify areas where collaboration is possible. I shall also mention how we can harness the potential of evolving consumer patterns and technology toward our shared goal of national development. Eliminating the perception of scarcity The Philippines has abundant water resources (421 principal rivers, 59 natural lakes, 4 major groundwater reservoirs, and numerous individual streams1). One would think that making water readily available to its populace should not be a problem. Theoretically, per capita water availability is twice as much as the rest of Asia, and about six times above the global scarcity threshold2. But, over 400 of our municipalities3 remain waterless. 7.5 million Filipinos do not have access to improved water supply facilities. Inequalities in access are starkest and most persistent for rural areas. 93% of the richest rural households have access to improved sanitation, as compared to only 27% among the poorest quintile. 69% of the richest quintile enjoys piped water house connections, while only 4% of the poorest quintile does4. There is a disconnect between availability and the quality of, and access to water services. Moreover, an estimated 55 Filipinos die every day because of waterborne diseases5 – a tragedy entirely preventable by providing adequate sanitation facilities, education and Llanto World Resources Institute 1,634 municipalities as of end 2015 Data source: USAID USAID BIS central bankers’ speeches promotion of good hygiene habits. I believe this is the essence of the WASH in schools program. We face a parallel challenge as central bankers. How do we enable a greater trickle-down effect so that opportunities and benefits of a healthy and growing economy are cascaded to the grassroots? Harnessing opportunties The motivation to address this compelling need is behind the BSP’s push on financial inclusion. Increasing financial services access is a challenge for an archipelagic country where nearly 600 municipalities6 remain unbanked. The BSP has institutionalized financial inclusion following a three-pronged approach, namely: access and usage, financial literacy and education, and increased financial consumer protection. To push access and usage, a regulatory environment is being created to encourage innovation and maximize safe technology use. In particular, an ecosystem is being created where the unbanked are granted financial services through alternative providers, without need for brick and mortar bank branches or facilities. Recognizing, however, that the task of financial inclusion is so great, last year, the BSP engaged twelve other government agencies to launch the National Strategy for Financial Inclusion (NSFI). The NSFI aims to unify various initiatives on financial inclusion into a coherent platform so we can exploit economies of scale and expertise across various government agencies. Many private sector agents have come to work with us under the NSFI – including telcos. We also hope to elicit interest from those here in the room. We are convinced financial inclusion is one of the ways to make economic growth more broad-based and inclusive. That said, we also recognize that inclusive growth will only be realized if our countrymen are given sustainable access – not just to finance- but also to basic human necessities: including safe and clean water. Here, public-private partnerships are a feasible solution to the low level of investments in the water supply sector. ASEAN integration is another area of opportunity. With the passage of Republic Act No. 10641, full entry of foreign banks into the Philippines is now allowed. Qualified ASEAN banks can enter the local market. We recently signed an agreement with Malaysia under the ASEAN Banking Integration Framework. The BSP Monetary Board has also approved the application of six foreign banks to set up Philippine branches. This liberalized regime should further enhance the quality of competition among our banks. This environment will result in promising opportunities to encourage innovations that will ultimately benefit the economy and the general public. Another source of opportunity is the country’s large, young and highly literate population. In the Philippines, the median age of the population is 247. In Japan, it is 47. In the U.S., it is 38. We are entering a “demographic window” historically proven to be the most prosperous years of a country, where millennials comprise a significant consumer segment. As the largest portion of the workforce, they are identified to play a key role in driving growth and economic development. It is an exciting time and the future is bright with possibility! This young generation will also make adoption of cutting-edge technology more likely. This can lead to opportunities for greater innovation including for the water supply chain industry in terms of safeguarding water sanitation, waste water management and protecting the environment. 594 out of a total number of municipalities of 1,634, as of end 2015 CIA World Factbook BIS central bankers’ speeches For the banking industry and suppliers of goods and services, this can be significant. Modern digital financial services and changes in how we make payments and money transfers will be provided. Related to this, the BSP is developing a National Retail Payment System (NRPS). Through the NRPS, we aim to establish a safe, efficient and reliable means to transfer value built upon an effective and interoperable interface of various electronic payment channels. This is an integral reform given that of 2.5 billion payment transactions per month, only 1% is made through electronic means. The NRPS will expand the reach of financial services and will promote efficiency, transparency and development of business models improving economic competitiveness. The backdrop of the economy I hope I have encouraged you to consider some opportunities to help us achieve our shared goal of economic development. Let me round off my remarks with views on our operating macroeconomic environment moving forward. This may help guide you to take advantage of these prospects. The Philippines entered 2016 in a position of relative strength. In 2015, average full year GDP growth was 5.8%. This is among the highest in Asia. The 4th quarter 2015 growth of 6.3% brought the number of consecutive quarters of positive economic growth to an astounding 68 quarters. The Philippine banking system continued to expand. Over the past six years, total assets roughly doubled owing to a steady growth of deposit liabilities. Bank loans also doubled and nonperforming loans continued on a downward trend. Philippine banks are well-capitalized, with capital adequacy ratios above national and international standards. Our external liquidity position is strong. Our end- February GIR of US$81.3B is sufficient to cover 10.4 months of imports and payments of goods and services. That said, in 2016, there are still challenges to our positive position. These will come mostly from the external side. There is divergence in the monetary policies in the advanced economies. The US Fed is poised to raise rates (albeit now at a slower pace in 2016 than the Fed first indicated in December 2015), while ECB and BOJ are in negative interest rate territory. This may raise near term financial market volatility. But we are hopeful that the policies adopted would result in a sustainable growth trajectory for these countries and would create positive ripples to our own trade and growth prospects. Another cause of concern is the Middle East, where oil prices fell sharply. While oil importers like the Philippines benefit from the price drop, low oil prices are double-edged. Oil exporters may cut back on capital expenditures. This may have an adverse effect on the Philippines in general, and on overseas Filipinos, should oil producers cut costs and trim staff. There is need to manage the near-term impact on financial market volatilities and the government should consider more long-term solutions to possible disruptions. Domestic considerations include intensification of the El Niño phenomenon (a very clear concern we share) and the persistence of infrastructure gaps. Results of the upcoming national and local elections may also influence global perception of Philippine growth prospects. These risks, notwithstanding, we expect to see the country continue on the path of low inflation, steady growth. Our confidence stems from the buffers we built: a strong commitment to price stability, a stable banking system, a robust external liquidity position and a safe, sound and efficient payments and settlements system. Closing I began with the issue of the perception of scarcity, owing to the disconnect between supply and demand of resources. I then shared some opportunities to scale up services and further improve the quality of people’s lives; create and nurture innovative partnerships; recognize BIS central bankers’ speeches and value our common and significant consumer segment; leverage on technological innovation and increase our efforts for development of our respective nations. These are consistent with the Rotary Club's mottoes of “Service Above Self” and “One Profits Most Who Serves Best.” It is incumbent on us to make the connections, technological, mechanical, and regulatory. As solutions to a problem: water scarcity and security, access to financial services and achieving overall inclusive growth are ultimately, solutions for all. May we commit to an even stronger engagement and partnership as we face challenges and opportunities the unfolding operating environment offers. Thank you and good evening. BIS central bankers’ speeches
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Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the "National Strategy for Financial Inclusion Tactical Plans Exposure to the Private Sector" event, Manila, 11 April 2016.
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Amando M Tetangco, Jr: National Strategy for Financial Inclusion tactical plans – working together with the private sector Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the “National Strategy for Financial Inclusion Tactical Plans Exposure to the Private Sector” event, Manila, 11 April 2016. * * * In May last year, in this same hall, we consulted many of you on the National Strategy for Financial Inclusion (NSFI). In July, we eventually launched the NSFI, enriched with your inputs, in the presence of Her Majesty Queen Maxima of the Netherlands, the United Nations Secretary General’s Special Advocate for Inclusive Finance for Development. Those who witnessed the Launch may remember that the BSP and 12 other agencies signed a Memorandum of Understanding (MOU), signifying our commitment to implement actions aligned with NSFI strategies. We promised to continue working together with the public and private sectors in NSFI implementation. Today, we gather again to keep that promise. Financial inclusion is a multidimensional objective that can be achieved only through our combined efforts. Thus in this event, we emphasize the significance of your role as NSFI partners and co-implementers. We have three objectives: (1) Update you on what transpired since the Launch, particularly the Tactical Plans prepared by NSFI agencies; (2) Identify possible areas for collaboration, partnership, or support; and (3) Provide the venue for networking with like-minded advocates and workers in the financial inclusion space. Updates since the launch With respect to our first objective, we are pleased to share that after the Launch, the Department of Agrarian Reform (DAR) and Department of Science and Technology (DOST) decided to commit as NSFI agencies. We now have 15 agencies altogether, including the pioneers: • Department of Finance (DOF) • Department of Education (Dep-Ed) • Department of Trade and Industry (DTI) • Department of Social Welfare and Development (DSWD) • Department of Budget and Management (DBM) • National Economic and Development Authority (NEDA) • Insurance Commission (IC) • Commission on Filipinos Overseas (CFO) - Sec. Nicolas is with us this morning and will address the audience • Securities and Exchange Commission (SEC) • Philippine Statistics Authority (PSA) • Philippine Deposit Insurance Corporation (PDIC) • Cooperative Development Authority (CDA), and • Bangko Sentral ng Pilipinas BIS central bankers’ speeches These agencies each crafted Tactical Plans, a set of specific, measurable, achievable, realistic and time-bound (SMART) actions that contribute to the achievement of NSFI objectives, in line with their mandates. These Plans, together with a proposed measurement framework, were submitted to the President in December 2015. In that submission, the NSFI agencies also proposed formalization of a Financial Inclusion Steering Committee to provide strategic guidance, strengthen coordination and facilitate efficient implementation of initiatives enrolled under the NSFI. Some of you raised a similar suggestion during the NSFI consultations, with the intent to ensure sustainability of initiatives and accountability in progress monitoring. The proposed Executive Order (EO) is with the Office of the President for consideration. While we wait for – hopefully – some good news on the EO, we persist with the work already begun. In today’s program, co-chairs of the NSFI Inter-agency Working Groups (WGs) will present a thematic overview of the Tactical Plans. The detailed description of policies and programs contained in the Plans were earlier provided to all participants. Each initiative, classified under key focus areas of the NSFI – Policy and Regulation, Financial Inclusion and Consumer Protection, and Advocacy Programs – is described in detail. At a glance, you can see the objectives, target market, timeline, status of implementation, implementing partners, and measurable indicators of success. The inter-agency WGs worked on these Plans right after the Launch, and are working even harder to implement and monitor milestones. We acknowledge the WG members who joined us today. Do take advantage of this opportunity to engage with them. The WGs are open to your constructive feedback on ongoing measures, and bright ideas on future action plans that we can all work together under the NSFI “umbrella”. This brings me to the next objective. Identification of areas for collaboration, partnership or support We hope that the information on the Plans can already inspire development partners and private sector representatives present today to contemplate possible ways of supporting the NSFI. The Plans contain measures already in operation, but there is always room for convergence with private sector actions. This is not meant to pressure you, but let me share some examples of private-led programs categorically designed to support NSFI: International research institutions like Ideas42 and Innovations for Poverty Action (IPA) – respectively known for using behavioral sciences and randomized control trials in financial inclusion research and program design – are helping us find pioneering solutions to increase access and usage of financial services by financially excluded markets. PayMaya, Inc. (formerly Smart E-Money Inc., a BSP-licensed e-money issuer) launched the PayMaya Card with NSFI in mind. It is now working with Dep-Ed to find ways to encourage savings among K-12 students. Globe Telco is also currently working with the Financial Sector Forum’s Consumer Protection and Education Committee to facilitate information dissemination and enhance consumer protection. Two weeks from now, BPI Foundation and ASKI Global Ltd. (non-profit engaged in entrepreneurship coaching for migrant workers) will conduct a financial inclusion summit on the role of remittances and migrant workers in inclusive growth. All these initiatives were coordinated with the BSP, and purposely linked with NSFI objectives, or facilitated thru the NSFI collaborative platform. We are also pleased to share that the Asian Development Bank (ADB) and the World Bank (WB) have committed resources to support various NSFI elements. For example, ADB will focus its technical assistance on strengthening microfinance NGOs; deepening agricultural value chain financing; and promoting e-payments, digital financial services and microinsurance. BIS central bankers’ speeches Meanwhile, the WB will focus on SME finance, financial education, consumer protection, and data and measurement. In fact, the BSP and WB technical teams will meet this week to define a practical approach for monitoring and measuring progress of NSFI implementation. Your inputs today in this particular area would be most helpful in that meeting. Aside from the afore-mentioned initiatives, a variety of private businesses and entities have reached out to BSP, wishing to determine how they can engage in NSFI implementation. These entities include technology providers, financial education program implementers, and even a consumer goods manufacturer. Their expression of interest to contribute to financial inclusion is clear proof of boundless possibilities for public and private sectors to work together. Thus, we designed this event with the third objective in mind. Networking opportunity This is a networking opportunity, and we encourage everyone to get to know key NSFI stakeholders and industry players. We have a good mix present – NSFI agencies, development partners and donors; bank and non-bank financial service providers and their associations; technology companies and other service providers. Among yourselves, there is a wealth of complementary experience, expertise and resources that can be matched to generate beneficial alliances that can result in greater financial inclusion. The program designates lunch (of course you can stay on) for everyone to mingle and network, talk about common interests, and catalyze concepts for potential collaboration. This event is the first of many, and merely whets the appetite for greater engagement and collaboration among us. We plan to make this a regular activity to ensure continuity and synergy of public-private sector actions in financial inclusion. Conclusion The success of NSFI is dependent not only on the effectiveness of policy and program implementation by NSFI agencies. Success is also largely anchored on the private sector’s response to NSFI initiatives. With your support and commitment as NSFI co-implementers, we can be assured of future successes. The BSP remains committed to lead and support the NSFI process. On behalf of all NSFI agencies, we look forward to future productive partnerships. Thank you and good morning BIS central bankers’ speeches
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Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Financial Inclusion Summit 2016, Manila, 28 April 2016.
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Amando M Tetangco, Jr: Building inclusive growth for migrant workers through multi-sectoral partnerships Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Financial Inclusion Summit 2016, Manila, 28 April 2016. * * * As host partner, we at the Bangko Sentral ng Pilipinas are pleased to welcome you to the Financial Inclusion Summit 2016. This summit is yet another milestone in our journey to improve the lives of our people through financial inclusion, under the collaborative platform of the National Strategy for Financial Inclusion or NSFI as our roadmap. With this Summit, we focus on “Building inclusive growth for migrant workers through Multi-Sectoral Partnerships.” SFI: A collaborative platform for financial inclusion Drafted by 13 government agencies including the Bangko Sentral ng Pilipinas, the NSFI provides the platform for public and private sectors to work together toward expanding access to financial services to all Filipinos. With such partnerships, there is a wealth of complementary experience, expertise and resources that can be matched to generate alliances that will result in greater financial inclusion. Ladies and gentlemen. As we move forward together, let us always keep the NSFI vision in mind: We aim for a financial system that is accessible and responsive to the needs of Filipinos. Among our primary targets are what we now call our modern-day heroes: Overseas Filipinos (OFs) and their families. Their remittances have been a dependable source of strength for the Philippine economy. In the last 10 years, from 2005 to 2015, they have sent over $228 billion in remittances (personal and cash) to our country. In 2015, more than 10 million OFs sent over $28.5 billion in personal remittances, higher by 4.4% than the 2014 figure of over $27.3 billion. This is equivalent to roughly 10% (9.8% actually) of our GDP 1 In fact, sustained increases in family and work-related migration of Filipinos have resulted in the steady growth in remittance flows into the country.2 As a result, the Philippines has been consistently ranked among the top recipients of remittances. Early this month, a World Bank report on 2015 remittances said the Philippines ranks third among the top remittance-receiving countries, next to India and China, both of which have over a billion in population. Financial inclusion and remittances Indeed, there are many challenges – and opportunities – in providing access to financial services to migrant workers and their families. The remittances sent home are mostly used for consumption expenditures – 97.3% of OF households used the remittances to purchase food and other household needs. This helps drive our economy. BSP Department of Economic Statistics More than 10 million OFs sent $25.8 billion worth of cash remittances in 2015, up by 4.6% from $24.6 billion in 2014. BIS central bankers’ speeches Another positive development, as indicated by a BSP survey (CES), is the rising proportion of households directing remittances received to savings – from 7.2% in 2007 to 43.4% in the first quarter this year. This is one of the many reasons why Philippine bank deposits have been hitting record high levels - it was P8.5 trillion in December 2014 and over P9.2 trillion as of December 2015. Nevertheless, the challenge and the opportunity is to encourage more investments by OF households; it continues to lag way behind savings. As indicated by our survey, households that allocated part of their remittances for investments, increased from 2.3% in 2007 to only 6.5% in the first quarter this year. That is over a period of nearly nine years! For institutions, the challenge is to develop and promote products suited to the needs of OFs. Financial education is essential for OFs to realize the opportunities - as well as possible pitfalls - in investments. Equally important, financial institutions should consider it their responsibility to inform OFs of their rights and protection as financial consumers. The importance of remittances for enhancing the financial stability of OFs and the economic growth of our country cannot be overemphasized. As part of the BSP’s program to develop a more inclusive financial system, we have put in place policies and programs to enable the development of a wide range of products that can cater to the needs of OFs and their beneficiaries. We also continue to implement a nationwide Economic and Financial Learning Program where we have a special focus on OFs. In fact, the BSP won the Global Forum on Remittances and Development Public Sector Award for 2015 in recognition for what it described as outstanding commitment, innovation and impact in promoting remittances for social and economic development through our Economic and Financial Learning Program. Challenges However, while we have positives, there are concerns that we need to address. Foremost is the adverse impact on remittance costs and flows of the closure of accounts of several money transfer operators (MTOs) by correspondent banks who are limiting their exposure to possible channels for money laundering and other financial crimes. This is a derisking strategy largely driven by business decisions of foreign banks, weighing the risks and benefits of dealing with remittance companies. This has been going on in recent years and has not been helped by the present money laundering case here. Since the closures limit the players that can competitively operate in the remittance market, this has the potential to reverse the steady gains we have made in reducing remittance costs. De-risking may also result in movement by OFs toward informal remittance channels and subsequent financial exclusion. In the end, this may exact an even larger toll on the OFs and their families in terms of deprivation of access to safe and reliable financial services. We are therefore addressing this issue. As early as 2014, we started raising our concerns on the adverse impact of de-risking with relevant international institutions. This includes the Financial Action Task Force, Alliance for Financial Inclusion, the Global Partnership for Financial Inclusion of the G20, the US Department of Treasury, the Financial Stability Board, and the World Bank. In addition, we are gathering data and closely coordinating with concerned stakeholders for a more evidence-based response. Among others, we have an ongoing National Risk Assessment (NRA) which is an inter-agency effort to evaluate the country’s money laundering and terrorist financing vulnerabilities and weaknesses. This will enable us to sharpen our focus in ensuring effective enforcement of international standards against money laundering and terrorist financing. BIS central bankers’ speeches On the other hand, there is a silver lining: technological innovations from the market promise more cost-effective remittance channels. In today’s language, these are called “disruptive innovations”, the act of creating new value chains from existing markets or value chains. The advent of more affordable smart phones has encouraged new players (e.g., financial technology companies or FinTechs) and new business models to address the problem of cost. There are now online money transfer services that are linking international remittances to Facebook.3 Customer acceptance of these developments seems likely. In a recent global survey that studied 7 remittance corridors including US-Philippines, it was gathered that 83% of consumers are willing to shift to mobile money for international transfers.4 Indeed, the BSP will continue to create enabling and proportionate policy and regulatory space for these innovations while balancing inherent operational risks – such as business interruptions, network vulnerabilities, as well as concerns related to data privacy and security. We are also working on the creation of a National Retail Payment System where all commercial electronic payment channels can effectively inter-operate through appropriate clearing and settlement arrangements. With this in place, the delivery of remittances to the beneficiaries will be safe, convenient and affordable. When such balance of policy objectives is achieved, it is exciting to imagine the acceleration of global uptake of technology-enabled remittances that can ultimately drive down the cost of remittance while providing a faster and safer channel. Conclusion Ladies and gentlemen. This Summit is a unique opportunity to increase awareness, catalyze multi-sectoral partnerships, and promote financial inclusion for our migrant workers and their families. And I congratulate BPI Foundation and ASKI Global for organizing such an important venue to further our financial inclusion initiatives. I hope therefore that we will generate practical solutions and tangible steps to address its challenges and to seize its opportunities. Together, let us make the lives of our migrant workers and their families better through multisectoral partnerships to financial inclusion. Let our National Strategy for Financial Inclusion serve as our roadmap to a better future for all. Thank you all and Mabuhay! Examples are Azimo and fastacash. See CGAP (2014). Does Facebook Represent the Future of International Remittances? Entitled ‘Mobile Financial Services Consumer Survey: International Remittance,’ the survey questioned nearly 3,000 members of migrant communities in the US, UK, and Germany. The survey was conducted by Juniper Research on behalf of Amdocs. BIS central bankers’ speeches
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Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the MOA Signing for the BSP s Interest Rate Corridor System, Manila, 16 May 2016.
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Amando M Tetangco, Jr: Strengthening the monetary transmission mechanism through the BSP’s Interest Rate Corridor System Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the MOA Signing for the BSP’s Interest Rate Corridor System, Manila, 16 May 2016. * * * Magandang hapon sa inyong lahat! I am pleased to see all of you here at the signing of the Memorandum of Agreement on the Monetary Operations System (MOS). Today’s simple signing ceremony is a milestone that ushers in a new framework for the way that the BSP conducts its monetary operations. Since we first broached the idea to the public in 2013, we carefully laid down the groundwork for the adoption of the Interest Rate Corridor or the IRC this year. This included drawing up an operational framework through consultations with the banking community; establishing the MOS as an IT platform for auction-based monetary operations; and developing a model for domestic liquidity forecasting to guide our daily monetary operations. In other words, years of preparation culminate in today’s MOA signing. And in a few weeks’ time, on June 3, 2016, 1 we will bring these operational elements together to implement the IRC system. Our motivation is simple. We would like to further strengthen the relationship between the BSP’s policy rates and money market interest rates. This, in turn, will enable the BSP to better manage inflation and promote long-term sustainable growth. By providing an operating framework for money market rates to move more closely with the BSP’s policy rate, the IRC will help enhance the link between the stance of BSP monetary policy and the real economy. In order to establish the interest rate corridor, the BSP interest rates will be re-calibrated as follows: First, the current overnight RP rate of 6.0 percent will be reduced to 3.5 percent when the RP window is converted to the overnight lending facility. Second, the overnight RRP rate of 4.0 percent will be adjusted to 3.0 percent. And third, the SDA rate of 2.5 percent will be kept steady when it is transformed to the overnight deposit facility. The new configuration effectively sets a ± 50 basis-point width around the BSP’s policy interest rate. While there is no international consensus on the appropriate width of the corridor, a narrow corridor provides clearer guidance for the market and also helps to limit volatility in short-term interest rates. By introducing auction-type instruments, the IRC system is intended to ensure more equitable access for all participants. In addition, we hope to ultimately aid in the development and deepening of the country’s capital and money markets. Over time, as more liquidity is absorbed by the BSP, market participants will be encouraged to be more active and more prudent in managing their own day-to-day and short-term liquidity positions. It is our hope that, in the process, we will encourage counterparties to reduce their reliance on central bank facilities and instead transact more with each other through interbank markets, in order to meet liquidity requirements. The more immediate benefit of the new auction-type instruments under the IRC is that the price discovery process will be facilitated by the bids we receive from market participants, which will By June 3, all RRPs under the current facility would have matured and all term placements under SDA would have been wound down to give way to the new facilities under the IRC. BIS central bankers’ speeches provide information for the BSP and for the market on the prevailing cost of and demand for liquidity. In turn, better price discovery will allow the industry to establish more accurate interest rate benchmarks in the future. Ladies and gentlemen, let me emphasize that the new IRC system is not a departure from the BSP’s current monetary policy framework. In fact, the IRC system is envisioned to further support the inflation targeting framework by reinforcing the BSP’s policy stance as represented by the overnight reverse repurchase rate that will remain our key policy rate. More importantly, the shift to the IRC system does not represent a change in the BSP’s stance of monetary policy. The IRC reforms are primarily operational in nature and will not materially affect prevailing monetary policy settings upon implementation. At the same time, short-term liquidity conditions are expected to remain broadly unchanged, as funds will continue to be absorbed through monetary operations under the new IRC system. Moreover, the rate adjustments in the BSP’s instruments under the IRC system remain consistent with the outlook for inflation and growth. Our current domestic environment of manageable inflation, a stable financial sector and firm economic growth prospects affords us the flexibility to implement these IRC-related reforms at this time. The successful implementation over time of the IRC system will also allow for recalibrations in other monetary policy tools, including possible adjustments in reserve requirements in line with international norms. Ladies and gentlemen, I have often said that while our mandate remains the same, the environment in which we operate in remains dynamic and continues to evolve. We therefore continue to rise up to the challenge of rethinking the status quo and finding ways to further improve as a central monetary authority – a central monetary authority that promotes stability and fosters sustained economic growth. As we strive to constantly be better and to build on our strengths, we hope to be able to count on the continuing support of the banking and financial sectors. Indeed, for our IRC system to succeed, it is important that we move forward together and cooperate in making it work as envisioned. I am pleased therefore that we have with us today the Bankers Association of the Philippines represented by its President Nestor Tan; the Money Market Association of the Philippines with its President Raul Martin Pedro; the Investment House Association of the Philippines with its President Manuel Tordesillas; the Trust Officers Association of the Philippines with its President Angel Maria Pacis; the ACI Philippines, the Financial Markets Association represented by its Treasurer Anthony Paul Yap; and the Chamber of Thrift Banks with its President Rommel Latinazo. I would challenge our industry associations to undertake your day-to-day liquidity management more actively, to strive for greater participation in the interbank market and reduce reliance on central bank facilities, and to continue efforts towards establishing appropriate price benchmarks for financial markets. Finally, we also thank the media for their continuing coverage that keeps us connected with our stakeholders and our people. Maraming salamat sa inyo. Mabuhay ang ating mahal na bansang Pilipinas! Mabuhay po tayong lahat! BIS central bankers’ speeches
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Keynote message by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 14th Citi Microentrepreneurship Awards (CMA), Manila, 17 May 2016.
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Amando M Tetangco, Jr: Developments in the Philippine microfinance sector Keynote message by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 14th Citi Microentrepreneurship Awards (CMA), Manila, 17 May 2016. * * * It is a pleasure to be with you today as we launch the 14th year of this nationwide microentrepreneurship swards with our partners – Citi Foundation, Citi Philippines and the Microfinance Council of the Philippines, Inc. (MCPI). Yes, 14 years and counting. To me, what has kept this awards program relevant and meaningful year after year are the changes and enhancements that have been introduced in response to developments on the ground. For indeed, the environment for the development of the microfinance sector continues to improve based on sustained coordination and cooperation with industry players and stakeholders. This includes microentrepeneurs, banks, microfinance institutions, agencies of government, stakeholders from civil society, the private sector as well as multilateral institutions. Industry figures mark our progress. In December 2002, for instance, there were 390,635 microfinance borrowers from 119 banks. By 31 December 2015, the number of banks providing microfinance loans had increased by nearly 43% to 170 while the number of borrowers had increased by 277% to roughly 1.47 million. Overall, microfinance loans increased by 333% from P2.6 billion in 2002 to P11.3 billion in 2015. If we base it on their savings, we can say that microfinance has improved the financial standing of these microentrepreneurs. Together, they have accumulated savings of about P4.5 billion as of December 2015. We have no comparative data for 2002 deposits; compared however to the deposits of as December 2011, this represents a 22% growth. Ladies and gentlemen, we are fully aware that we can do so much more to lift more Filipinos from poverty through microfinance. Nevertheless, we are encouraged by global surveys that indicate that the Philippines has one of the world’s best environment for promoting the quality of life of people through sustained development of the microfinance sector. For instance, in recognition of the BSP’s work, the Economic Intelligence Unit’s 2015 Global Microscope on Financial Inclusion ranked the Philippines first in Asia and the third in the world in terms of regulatory environment for financial inclusion. And together, we are committed to continue to find better ways to grow microfinance. One such strategy is through mentoring of our microentrepreneurs under the CMA program. The mentoring is aimed at improving their enterprises by providing support suited to their specific business needs. It covers, among others, helping products and services become more competitive in local and/or international markets; providing guidance in identifying critical processes and areas for improvement; offering technical advice on infusing innovation into enterprises; and facilitating the development of business competencies. The end goal is for microenterprises to eventually transition into small and even medium enterprises. This mentoring program was piloted last year. This year we plan to fully refine the program based on lessons learned from the engagement of the University of the Philippines Institute for Small-Scale Industries (UP ISSI) which mentored 13 past CMA winners for about 7 to 8 months. Let me share some key lessons. BIS central bankers’ speeches One is the challenge of informality – this is where the informal status of microenterprises or their lack of legal personality to conduct business limits their capability to expand and market their products. Another is the limited capacity of microenterprises when it comes to financial recording and documentation which makes them susceptible to poor accounting and planning. This affects their ability to make sound business decisions. At the BSP, we recognize that informality and lack of capacity remain major hurdles that impede the growth of microenterprises. As a response, the BSP has issued guidelines on sound credit risk management practices (Circular 855) that provide an empowering approach to support small businesses. For instance, microfinance loans and other credit accommodations not exceeding P3 million are exempted from the submission of financial documents such as Income Tax Returns (ITRs) and other supporting financial statements. Similarly exempted are start-ups during the first three years of their operation or banking relationship. The objective here is encourage microenterprises to build banking relationships that will help them grow for the long term. Broader government initiatives converge with this way of thinking. For instance, the Go Negosyo Act and Negosyo Centers provide support for MSMEs such as facilitation of business registration and training in finance and marketing. Negosyo Centers can also link MSMEs to value chains that will enable them to access secured and sustainable markets to keep them more viable. We also have the Barangay Micro Business Enterprises (BMBEs) Act that seeks to encourage the formation and growth of micro business enterprises by intergrating them with the mainstream economy through incentives, marketing assistance, as well as training programs in production and management. In addition, microfinance institutions (MFIs) and other financial service providers support MSMEs through financial products and other services critical to the entry, survival, productivity, and growth of enterprises. I am happy to share that the ISSI diagnostics also highlighted positive findings. For instance, ISSI found that especially when faced with high market demand, microenterprises are resilient to operational issues – in Filipino we describe them as “madiskarte”. This indicates that given appropriate training and mentoring as well as adequate funding support, our microentrepreneurs can favourably respond to business opportunities. In other words, ladies and gentlemen, we stand to gain more benefits by having an increasingly nurturing environment for microenterprises. Given this, I am confident that the nomination process for CMA that we are launching today will generate an even better harvest for this year. In this connection, we all look forward to meeting more successful and innovative microenterprises that have the capacity to grow as well as the readiness and the desire to contribute to making lives better not only for their families but also for their communities. Indeed, we want MSMEs to develop to their full potential and to help drive economic growth that is broad-based and inclusive. Mabuhay ang microentrepreneurs! Mabuhay ang ating mahal na bansang Pilipinas! Mabuhay po tayong lahat! BIS central bankers’ speeches
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Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 63rd Annual National Convention and General Membership Meeting of the Rural Bankers Association of the Philippines (RBAP), Manila, 23 May 2016.
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Amando M Tetangco, Jr: Rural banks – making a difference in financial inclusion Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 63rd Annual National Convention and General Membership Meeting of the Rural Bankers Association of the Philippines (RBAP), Manila, 23 May 2016. * * * Thank you for inviting me to this annual gational gathering of RBAP. The theme you have chosen for this year: “Rural Banks: Making a Difference in Financial Inclusion” speaks well of your important role in increasing access to financial services, a role which you have been performing even before the term financial inclusion itself gained attention. Rural banks and the changing environment Let us briefly go back in history. The very reason for the creation of rural banks in 1952 when Republic Act 720 was enacted – was for them to be the key local financial institutions providing credit to farmers and people of rural communities, thereby promoting and expanding the rural economy in an orderly and effective manner. This was the original raison d’etre for the establishment of rural banks. After six decades, there have been significant shifts in the financial system landscape. There are now many other financial service providers – banks and non-banks, formal and informal – that are already in or are planning to enter your space. The demands of your market and the conditions in which you operate have also evolved. Simply put, the operating environment now is very much different from before. Change is inevitable. What matters is how we respond to change. Charles Darwin, who is best known for his theory of evolution, said and I quote “It is not the strongest or the most intelligent who will survive but those who can best manage change.” Indeed, adaptability or the ability to change to fit new circumstances is crucial to survival. Without the ability and agility to adapt, we will stagnate or lose our relevance. In other countries, community banks are also struggling to find their rightful spot in a rapidly evolving environment, especially because of tough competition with other market players. But I believe that small banks can still thrive in this changing environment and remain relevant. Today, let me highlight two key existing factors that you can capitalize on to adapt to change: one is your current reach and immersion in the countryside, and the other one is the current enabling regulatory environment. Reach and immersion in the countryside BSP data as of December 2015 show that there are 524 rural banks with a network of 2,086 branches and other offices. Rural banks are present in 59% of the country’s 1,634 cities and municipalities, which is more than double the reach of universal and commercial banks (23%) and thrift banks (28%). While bigger banks are concentrating in highly urbanized and densely populated regions such as NCR, CALABARZON and Central Luzon, rural banks are thriving in regions where there is less access to financial services. For instance, Cordillera, Cagayan Valley, MIMAROPA, and Caraga are among the regions where there are more rural banks than other bank types. Noteworthy to mention is that rural banks are the frontrunners in the establishment of microbanking offices (MBOs), which enable banks to set up presence in areas where it is not economically feasible to establish a full blown branch. Out of 540 operating MBOs, 78% are owned by rural banks. These MBOs are present in 338 municipalities, of which BIS central bankers’ speeches 66 municipalities are served by MBOs alone. Looking at previously unbanked municipalities which gained banking presence, most of them are now enjoying banking services because of MBOs. The numbers that I have presented just show that rural banks are truly more accessible in the countryside. You are still in areas where other players are not. Take advantage of this position to strengthen your foothold so that you will be more resilient when competitors come. While you already have a wide presence, there are also still untapped opportunities in terms of unbanked municipalities whose level of economic activity is not necessarily low. For instance, 15% of unbanked areas are 1st to 2nd class municipalities. These areas will surely benefit from financial intermediation to sustain local economic growth and boost consumption and productivity. Admittedly though, some of you may be already satisfied with the current market that you are serving. If geographical expansion is not part of your game plan, you can always improve your products and services in terms of design and delivery. As rural banks, what sets you apart from bigger banks is that you are more relationships driven. You have an intimate knowledge of the local economy and close ties with the community. Use this to be more responsive to the needs of customers as well as to market trends. You can also introduce improvements in your operations. According to our National Baseline Survey on Financial Inclusion, more than 50% of adults who have transacted with banks are just “somewhat satisfied” with their transactions. The average waiting time before being served in a bank is 33 minutes which is twice the waiting time in pawnshops and e-money agents. There is certainly room for you to improve the quality of your services in order to enhance customer experience and satisfaction. They say that technology is changing the way banks do their business. Some do not have to ever set foot in a bank branch if they have a fully enabled smart phone. Emergence of financial technology companies or “Fintechs” are also dramatically changing the delivery of financial services in payments and even in the underwriting of credit. While you can use these technologies to your advantage – to improve your efficiencies and value proposition – I believe that the value of person-to-person contact will never fully go away. For instance, if you call a customer service hotline, isn’t it that you still prefer to talk to someone rather than hear default call answers from the other end of the line? The point is, even in the face of technology, you can still build on your strength – which is the relationship that you have established with your community. It is possible for technology to enhance relationships rather than replace them. If you are able to effectively nurture the confluence between the two, you will be able to not only increase but also cement your customer base. Finally, to be better positioned to serve your clients, always keep in mind that only sound and well-managed institutions can take advantage of new opportunities and have scope for more innovations. Promoting financial inclusion should not be at the expense of safety and soundness of operations. This is the reason why the BSP always emphasizes the importance of strengthening your bank’s governance structure and institutional capacity, and continuously upholding best practices and performance standards. Enabling regulatory environment On the part of the BSP, not only as your regulator but also your partner, we remain committed in providing an enabling regulatory environment that will support rural banks in overcoming emerging challenges and provide you with various opportunities to be more responsive to the markets that you would like to serve. Our regulations allow you to partner with non-banks to offer new products and adopt new channels and technology. Many of you have already benefitted from establishing partnerships BIS central bankers’ speeches with institutions that can assist you in the delivery of services which before were not offered by rural banks. For example, 39 rural banks have been given the authority to cross-sell microinsurance and 50 additional rural banks have already obtained a “no objection notice” from the BSP and are in the process of getting approval from the Insurance Commission. Based on RBAP data, there are almost 2 million insured clients of microinsurance, some of whom are purely microinsurance clients. They can naturally develop into loyal customers of your other products. There are 52 rural banks with electronic banking facilities and e-money money services. I understand that there is still room for improvement in terms of maximizing the use of these platforms in your operations, but your openness is encouraging. Our hope is that our efforts on the establishment of a National Retail Payment System (NRPS) will be able to address some of the limitations that have impeded the scaled uptake of e-money and electronic payments in general. Our regulatory environment also encourages rural banks to look for new markets, or serve old markets in new ways. A good example is the agricultural sector and the recent BSP circular on agri-value chain financing. This regulation provides you with more opportunities to finance the agriculture and fisheries sector. By encouraging the linking of various actors or players in an agricultural value chain, the credit risk of participating farmers or fishermen can be reduced, thereby facilitating increased access to credit. This unlocks the potential for financing at all levels from production to marketing. Rural banks can be ideal channels for such type of financing. The BSP also looks forward to continue working with you in addressing the gaps in SME access to finance. Our guidelines on sound credit risk management (Circular 855) support lending to SMEs, wherein start-ups during the first three years of their operation or banking relationship are exempted from the submission of Income Tax Return (ITR) and other supporting financial statements. The objective here is to encourage SMEs to build banking relationships that will help them grow. However, available data shows that only 31% of our SMEs borrow from banks. Our experience in microfinance has proven that serving a low income segment can still be a viable and profitable undertaking, and we hope that we can apply the learnings in microfinance in serving the SME market. In summary, our regulatory environment already offers many opportunities. This is the reason why the Philippines is ranked by the Economist Intelligence Unit (EIU) as the first in Asia and third in the world with the most conducive environment for financial inclusion. The challenge to rural banks is how to maximize these opportunities within the framework of the regulations that we have so far put together. Closing Ladies and gentlemen of the rural banking sector, in an environment that is rapidly evolving, adaptability is key. But adapting to change does not necessarily mean changing your core and losing your relevance. In fact, as the push for financial inclusion continues to intensify, the role of rural banks today is even greater than it was then. You remain to be a key channel to deliver financial services to the countryside especially the unserved and underserved markets. Embrace this mission and role which you have been given more than 6 decades ago and nurture it by evolving and adapting to the demands of the times. On our part, we will remain your partner in this important task. This partnership is integral as we work on our shared goal of a stronger, more competitive and more inclusive rural banking sector that can make a positive difference on the lives of the Filipino people. I wish everyone a fruitful convention. Thank you and good day. BIS central bankers’ speeches
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Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the BSP-BIS Research Conference of Financial Inclusion and Central Banks, Cebu, 3 June 2016.
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Amando M Tetangco, Jr: Mainstreaming financial inclusion as a strategic objective Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the BSP-BIS Research Conference of Financial Inclusion and Central Banks, Cebu, 3 June 2016. * * * Good morning everyone. On behalf of the Bangko Sentral ng Pilipinas, I welcome all of you to Cebu. This conference, which the BSP is privileged to co-host with the BIS, is actually the result of a discussion in the Asian Consultative Council (ACC) of the BIS. It was early 2014 in Sydney, if I am not mistaken, when BSP suggested to the ACC governors, that a possible area of research for the BIS Hongkong Office (under the ACC process) could be the relationship between financial inclusion and financial stability. In particular, we suggested that the BIS Hongkong Office investigate whether increased financial inclusion contributes to or detracts from financial stability. Necessarily, Dr. Remolona and his team would also have to determine the possible transmission mechanism for this linkage. That suggestion came at a time when revisions to the G20 Financial Inclusion Action Plan (FIAP) were being undertaken during the Australian G20 Presidency. By that time also, the United Nations had already underpinned the importance of financial inclusion as an imperative in the attainment of a wide range of targets under the Sustainable Development Goals. The UNSGSA, Her Majesty Queen Maxima of the Netherlands, had also by then already conducted intensive meetings on financial inclusion with the Standard Setting Bodies that included the BCBS, CPMI, FATF, IADI and IAIS. Clearly, the once-peripheral issue was then becoming mainstreamed in the global discourse. The BSP Experience At that time, we were also trying to better understand this issue for our own policy work in the BSP. You see, by 2014, the BSP already had over a decade of experience with microfinance as a flagship program for poverty alleviation. Our efforts started as an advocacy, with the belief that creating an enabling policy and regulatory environment could catalyze market players to see microfinance as a sound and viable undertaking. We endeavored to create a supervisory and regulatory framework that recognized the peculiarities of microfinance while striving to maintain alignment with international standards. Such balance allowed the entry of banks into the microfinance market by reducing barriers and providing incentives, while at the same time, ensuring that players act, and their operations conducted, in a safe and prudent manner. In particular, we put in place the needed measures that cover the full credit cycle of microfinance from loan application to full repayment. Following the principle of proportionality, we allowed less documentary requirements and enabled the use of group support or liability arrangements, cash flow based and character lending, and high frequency amortizations. We balanced that with demanding and timely loan review and loss provisioning. We also provided a mechanism for unregulated microfinance institutions to formalize themselves into banks. Regulations were likewise established to leverage off technology to more efficiently and costeffectively reach out to more microenterprises across our archipelago of 7,107 islands. And in 2007, we created a full-time unit in the BSP to look into financial inclusion issues. BIS central bankers’ speeches This approach enabled over 170 banks – mostly our rural banks – to deliver microfinance services to nearly 1.5 million microentrepreneurs. The outstanding loans to these microentrepreneurs are at PhP 11.3 Billion, a 333% increase from the 2002 levels of PhP 2.6 Billion. The banks have also enabled these clients to save for the first time in their lives. At present, these microentrepreneurs have accumulated savings of around PhP 4.5 Billion. Moreover, the generation of related new business opportunities that cater to the low income and the unbanked, e.g., micro-insurance, micro-housing loans and remittances, has enabled them to expand their markets and client base without compromising, in fact in some cases, even strengthening their institutional stability. While these numbers were encouraging, and as we were getting more microenterprises into the formal financial sector, we also knew that we needed to better appreciate how these newly on-boarded enterprises would affect (in the long run) the financial markets they were entering. Fortunately, the rest of the ACC governors went along with our suggestion in 2014, and so we are here today. But, as you can appreciate from the topics of our conference, the BIS has pushed the envelope further on that research agenda. For the next day and half, we will be covering the full mandate of central banking, not just financial stability but monetary policy and the growth objective as well. This agenda certainly reflects that financial inclusion is multi-faceted. Implications of Financial Inclusion Indeed, financial inclusion cuts across multiple macroeconomic goals. Financial inclusion has been seen to contribute to broad-based economic growth and development; as well as complement other policy objectives such as reducing inequality and promoting financial stability and integrity. Financial inclusion also has important implications for monetary and financial stability policy. These are bold claims, yet the work of many of you in this room have strengthened these convictions through your academic work in collecting and analysing evidence, some of which we will have the opportunity to discuss in this conference. (e.g., from Professor Beck’s early work in looking at financial intermediation and growth (2000) and more recent ones on finance, inequality and the poor (2007) to Dr. Hannig’s discussion on financial inclusion and financial stability (2010) and Professor Karlan’s numerous work on looking at impact of credit (2007) or other financial services in households.) In no small measure therefore, you have contributed to what could be likened to an evolution: a gradual – yet almost natural – advancement of financial inclusion as a widely-accepted policy objective. In this conference, we hope to further enrich the discourse through exchanges among central bankers and our select group of experts and see how we can pursue financial inclusion as a complement to our primary responsibilities as central bankers. A good way of achieving this is, to keep in mind that while financial inclusion has benefits, it also brings changes to the nature of the risks we face. Two that come top of mind are: 1) changes in the behavior of market participants; and 2) changes in the design and delivery of financial products. Related to these is a third, that is, the potential changes in the reaction function of policy makers. To illustrate the first kind of change – the change in market behaviour. Newly-included agents may not necessarily behave in the same manner as those who are “already served” and “have been served” for some time now. Because banks are more familiar with the latter, the melding of the two client bases may create new operational challenges for the banks’ frontline staff. Change in agent behavior also affects monetary policy. Mehrotra and Yetman (2014) argue that when more clients are able to smooth consumption, authorities have more monetary policy space to concentrate on fighting inflation. The underlying principle is that smooth BIS central bankers’ speeches consumption patterns help reduce the cost of output volatility. [I will leave this for James to further explain during his presentation tomorrow.] For the second type of change: on ways to design and deliver products to improve access to financial service. Financial product providers need to be mindful that, while most of the new entrants (generally the poor) have had to be savvy to deal with their unpredictable cashflows to “survive”, they are not (necessarily) as capable in dealing with a whole array of new financial products. Moreover, banks must also be careful to extend certain types of credit to certain clients. This could just expose lenders to higher risks and it can also expose illinformed borrowers to increased risk of debt distress. These concerns related to product development highlight the need for proportionate regulation that adequately balances the need for flexibility and openness to innovation, on one hand, with that of mechanisms to ensure that risks are properly managed, on the other. This will allow market contestability and the development of market-based solutions to serve markets that were traditionally unserved or underserved. We’ve already seen innovative market-based approaches to improve credit access for microfinance borrowers. We’ve witnessed the move from brick-and-mortar offices to alternative Financial Service Providers such a micro banking offices and e-money issuers. Addressing Technological Innovation: Thru Financial Education, Consumer Protection and Proportionate Regulation Innovations, particularly through financial technology, can indeed be the catalyst for greater financial inclusion. Technological innovation has the potential to reduce costs and accelerate the on-boarding of currently excluded markets into the formal financial system. In addition, technology solutions promise to enhance regulatory capacity and tools to supervise the market, and facilitate regulatory compliance and reporting of financial institutions. Some examples of these include: 1. Big data analytics and algorithms that can be used to address information assymetry in financial service provision (e.g., analytics of social media behavior can predict financial behavior of target clients); 2. Crowdfunding platforms that may be utilized for generating funds for SMEs, start-ups and innovators. (e.g., peer-to-peer lending or equity crowdfunding) 3. Digital currencies. (When this is safely managed, this may facilitate payments, money transfers and e-commerce.) 4. RegTech or using technology to enhance regulatory capacity and enable regulators to analyze data to ensure timely supervision and intervention. As traditional players (such as banks) interconnect and engage new players (such as fin tech companies - which are often not within central bank supervision), there is a greater need to look at the entire chain of financial services being offered. The challenge for central banks and regulators here is to stay abreast with emerging business models and innovation, to understand the inherent risks of these new models, and to know how to proportionately manage the risks. This will require capacity to undertake the said functions. A number of central banks, including the BSP, have turned to the “test and learn” approach, more recently known as the “regulatory sandbox” to address this gap. The “sandbox” approach presupposes a dialogue and collaborative relationship between the central bank and the industry innovators. It acknowledges that financial inclusion solutions often arise from these innovators because the latter have greater flexibility and technical capacity to create products and generate systems to deliver them. Essentially, the sandbox provides an opportunity for innovators to connect to banks and other financial system players with clear authority from the regulators. Providing a sandox for BIS central bankers’ speeches these players gives the regulators a “ring side” seat that helps them assess potential risks to guide them in deciding when and how to regulate the new market, if needed. The ultimate objective is to be aware of the risks, employ mitigating actions as needed, but in a manner that also enables financial inclusion. While we need to allow ample space for the market to create cost-effective solutions that work for financial inclusion, prudence dictates that regulators must also be on the lookout for activities that impact financial integrity and consumer protection negatively. We need to have market conduct and consumer protection regulations that are infused with the philosophy that all financial consumers, including the less sophisticated and often low-income clients must be treated with dignity and respect, their consumer rights upheld and their financial well-being protected. The regulators must act as the “honest broker” between the clients and the financial institutions. In addition, we should also make the deliberate decision to provide financial education to financial inclusion clients with the view of anticipated positive returns over the long-run. Finally, the changes that increased financial inclusion brings calls for greater coordination among regulators. Coordination could positively help harmonize regulations, address regulatory gaps and level the playing field. Financial Inclusion as a Policy Priority Mindful therefore of these risks but also aware of the benefits that financial inclusion offers, can there be too much financial inclusion? Is financial inclusion a worthy policy objective to pursue? My response here would have to be – that as in all things, there must be balance. (Like in the fairy tale Goldilocks – not too hot, not too cold… not too big, not too small…. but just right!) To achieve such balance, there should only be financial inclusion, to the extent that there is sufficient quality capacity to supervise. There should only be financial inclusion to the extent that the players can be properly incentivized and are able to process financial information. There should only be financial inclusion to the extent that the regulator is able to provide adequate financial consumer protection. When these conditions are present, we can say we have responsible financial inclusion. Clearly, this balance would have to be jurisdiction-specific. But a common framework and a set of working principles for implementation could be derived. The framework and principles could then be the bases for closer dialogue among stakeholders, including central banks, other regulators, the standard setting bodies and the private sector. Much has already been done to bring us closer to that common understanding of these things. But much remains. In this dynamic and ever evolving pursuit of financial inclusion, we must continue to strengthen our evidence base to inform our policies, stay abreast with developments and ensure that our actions remain relevant, constantly challenge and question our positions if only to ascertain that they are the right ones. I believe this conference can largely contribute to this important exercise. The work of pushing forward responsible financial inclusion is huge. And it is important that the pursuit of financial inclusion would not be to the detriment of other policy objectives. Hopefully, after today, we have more clarity in what we need to do as central bankers. Central banks who believe that a strong and stable economy and financial system is only truly relevant if it benefits the majority of our population. On that note, I look forward to our discussions in the next day and a half. Thank you for your attention. BIS central bankers’ speeches BIS central bankers’ speeches
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Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 2016 Awards Ceremony and Appreciation Lunch for BSP Stakeholders with theme "Sustained Partnership, Sustained Economic Growth", Manila, 13 July 2016.
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Amando M Tetangco, Jr: Great significance and consequences Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 2016 Awards Ceremony and Appreciation Lunch for BSP Stakeholders with theme “Sustained Partnership, Sustained Economic Growth”, Manila, 13 July 2016. * * * I am particularly pleased to welcome all of you to this 2016 Annual Awards Ceremony and Appreciation Lunch for BSP Stakeholders. This is the 13th year we are hosting this annual gathering. Our objective is simple, but to us, quite significant. Ladies and gentlemen, we want to thank all our partners and stakeholders who support and work with us in the pursuit of the BSP’s mandate, policies, and programs. We want to celebrate and strengthen our partnerships that have resulted in the formulation of appropriate monetary and banking policies; the dissemination of information that protects and empowers our people; and the implementation of financial inclusion programs across the country that support good money habits and spur economic activities for more inclusive growth. This month marks the 23rd anniversary of the Bangko Sentral ng Pilipinas. In other words, our Annual Awards Ceremony and Appreciation Lunch for BSP Stakeholders is a highlight of the BSP’s anniversary celebration. Indeed, the BSP values its stakeholders and partners. In 2004, we started this ceremony with 10 awards. Today, we are giving 35 awards in the National Capital Region alone; a total of 93 awards will be given in other parts of the country. This is because support for the BSP continues to expand and deepen across the country. Thus, even as we face national and global challenges, we continue to move forward, traverse uncertainties, and achieve positive results. For this year’s celebration, our theme is “Sustained Partnership, Sustained Economic Growth.” We want to underscore that mutual commitment to our continuing partnership helps us sustain economic growth; growth that generates jobs and improves the lives of Filipinos. As you know, our partnership comes in various forms. Among others, the submission by our survey respondents of timely, accurate and complete information helps the BSP craft and calibrate effective monetary and financial policy decisions. These are important as they affect our economic fundamentals. More specifically, our partners who provide information keep us abreast of perceptions on price movements, help us monitor the country’s transactions with the rest of world, assist us in evaluating emerging economic trends, and help us assess our vulnerability to external shocks. And it is our collaboration with banks that help us operate an efficient payments and settlements system that keep our financial system stable and facilitates the safe transfer of billions of remittances from overseas Filipinos across the globe. But more than providing valuable support, our partners give us feedback on the effectiveness of our policy actions. This is an important facet of our partnership. Thus, the BSP invests resources in engaging our stakeholders in policy formulation and regular consultation. We know that if we do not listen, we can lose our grounding and in the process, our policy actions may lose potency. It is important therefore that we sustain and continue to nurture our partnership. We count on this as one of the anchors that provide guidance and credibility to our decisions. BIS central bankers’ speeches Moreover, our common vision of making lives better through our partnership have led us to cooperate in pushing for advocacies that matter. For instance, our campaign to protect our people against counterfeit banknotes led us to introduce New Generation Banknotes that have many new security features. We thank all of you therefore for helping spread information on these new security features and the demonitization of our old-design banknotes. As scheduled, our people have until December this year to exchange old-design banknotes with banks or the BSP. By 2017, old-design banknotes will no longer be accepted by banks; an exception to this rule are Overseas Filipinos who have up to next year to exchange their old-design banknotes. In particular we thank the banks, malls, stores, public offices and transport groups for helping us spread the message of demonitization and the security features of our new banknotes across the country. Another advocacy we are giving priority to is the development of an inclusive financial system. In particular, we have leveraged on our initial gains in microfinance and financial inclusion to develop and implement the National Strategy for Financial Inclusion in partnership with other government agencies, the banks, the private sector, the academe and the NGO community. We are heartened by our continuing progress in scaling up our efforts to bring more Filipinos into the financial mainstream – where sound financial management is developed, where the cost of money is more affordable, where savings are encouraged and protected, and where investment products provide opportunities for growth. In other words, ladies and gentlemen, through our collaboration, we have become agents of stability and of positive change – change that improves the system to be more accessible, safer, more equitable and more beneficial to every Filipino. Indeed, the Philippines has registered uninterrupted economic growth for 69 quarters now. Real GDP growth averaged five percent since 1999 and there are indications that growth is getting more broad-based. This gives us a level of confidence that we can address challenges that lie ahead. In this connection, I wish to share the report released yesterday by the IMF mission to the Philippines. It said strong macro fundamentals and improved governance provide a solid foundation to meet remaining challenges. Such challenges include addressing poverty, underemployment and ensuring that economic growth benefits the broader population. According to the IMF, the Philippines continued to register solid growth in 2016, despite external headwinds, due in part to fiscal stimulus and supportive monetary conditions. It added that our initiatives to strengthen systemic risk monitoring in the financial sector have helped maintain financial stability in a challenging global environment. Ladies and gentlemen. This is a credible third party assessment of the gains we have made together. In addition, the BSP continues to receive awards and recognition in the pursuit of its mandate to ensure low and stable inflation, maintain a sound and stable financial system, and operate an efficient payments and settlements system. As partners and stakeholders of the Bangko Sentral ng Pilipinas, you rightfully share credit for this as well. Thank you for your continuing support and confidence in the BSP! Moving forward, we see potential risks that can elevate volatility and challenge our policymaking. Nevertheless, our domestic sources of resilience will help us manage possible spillovers from global challenges such as weak and fragile growth, geo-political tensions, continuing uncertainty over US Fed interest rates and Brexit. And our economy remains on track as the new Administration under President Rodrigo Duterte sets its priorities to achieve growth and a better life for our people. BIS central bankers’ speeches Let us therefore continue to collaborate and work together so we can help overcome roadblocks to growth and prosperity in our country. On behalf of my colleagues at the Monetary Board and the BSP family, I thank all of you and look forward to making our partnership grow and our collaborations deeper and more meaningful. Ladies and gentlemen. The African-American poet and Pulitzer Prize winner Gwendolyn Brooks once wrote… and I quote: “We are each other’s harvest; we are each other’s business; and finally… we are each other’s magnitude and bond.” End of quote. And so today, let us commit together to be the best we can be in the service of our country and our people. Congratulations to all our awardees and thank you once again to all our partners and stakeholders. Mabuhay ang ating mahal na bansang Pilipinas! Mabuhay po tayong lahat! Marami pong salamat! BIS central bankers’ speeches
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Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the International Conference and the ASEAN University Network for Business and Economics' (AUN-BE) 16th Annual General Meeting, Quezon City, 14 July 2016.
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Amando M Tetangco, Jr: ASEAN integration, change and collaboration Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the International Conference and the ASEAN University Network for Business and Economics’ (AUN-BE) 16th Annual General Meeting, Quezon City, 14 July 2016. * * * Introduction It is with great pleasure that I take part in celebrating the centennial year of business education in the Philippines. There is no doubt that business education has had a significant contribution to our country and it is therefore most fitting that the business school of the University of the Philippines is named after no less than a man whose imprint on the Philippine economy is unquestionable. Certainly, there are many highlights one can identify in a century of business education, particularly with a dynamic and colorful history such as ours. But I think these are best considered in the context of your conference discussions as a fuller perspective is warranted beyond what I can share in the few minutes of my remarks. Instead of looking back then, allow me to focus on something that is already looming in the horizon. I refer to the integration of ASEAN which is an initiative whose extent is comprehensive and whose ramifications are far reaching. Certainly, this will reshape the landscape of business within ASEAN and as such, call for a re-focusing of business education so that generations today and of the immediate future are well-positioned to operate in this market. Stepping back: the road to integration – lessons learned However, as we gear up for the possible changes that regional integration could create in our markets moving forward, it would be instructive to step back and consider the learnings from our experience on this road to integration. A road that takes us back to December 1997. From the standpoint of the financial market, the lessons that we take heart are those arising from the 1997 Asian Financial Crisis and the 2008 Global Financial Crisis. There are many details, but let me just highlight two: 1) The 1997 AFC reminded us that cross-currency and gapping risks can give rise to systemic dislocations; and 2) The 2008 GFC taught us – painfully in hindsight – that no one was monitoring the unseen risks of interconnectedness in the economy. The GFC surfaced the “not-so-apparent” changes in the nature of macrofinancial linkages, including, among others: 1) the strength and causation of the feedback loop between the domestic real economy and its financial markets; and 2) the importance of the risk-taking channel of policy transmission. These linkages were not much considered or thought of as systemic, but they (in reality) are. Learning from these lessons, policy makers are now focused on the “systemic-ness” of risks and how the global reform agenda could be structured to mitigate the re-emergence of such risks. During both crises, banks played a central role in defining and disseminating the risks that nearly collapsed the financial markets. Interestingly, however, economic textbooks continue to depict banks in their “traditional” role of mobilizing savings and intermediating credit. In practice, banks are much more dynamic. They adapt to new opportunities that arise, innovating and creating new products that are seen to increase the value of their individual franchises. We only need to be reminded of our experience from both the AFC and the GFC. As regulators, we also have had to make adjustments and broaden our perspective in bank monitoring and supervision. While our objective remains to ensure that banks operate in a BIS central bankers’ speeches safe and sound manner, we now know that it is no longer sufficient to simply hold individual banks to that standard of “safe and sound”. We have learned that we need to be cognizant of how things affect one another. This is the specific purview of the financial stability agenda. Such a holistic view addresses the weakness brought about by the fact that banks can only see their own balance sheet and remain oblivious to how they affect the rest of the system. The global reforms that we have seen post-2008 are premised entirely on mitigating systemic risks. The Basel 3 agenda formally covers many more risks than the previous standards and requires banks to have “higher-quality” capital. Information asymmetries will be addressed by uncompromising standards on transparency and one can see this in the reforms for OTC derivatives and repos, among others. New standards on Board responsibilities, in financial market infrastructures and in financial literacy ensure that stakeholders are aware of the issues and act accordingly. Looking forward: global reforms and what these mean for ASEAN integration All of these standards are discussed and finalized at the global level but they will invariably affect our approach to regional integration. This is precisely because a single market could be a source of contagion, the very same risk that became apparent in the crises of 1997 and 2008. This is not to say, however, that integration should no longer be pursued in light of the global reforms. This is not the point. The advantages of integration are clear. Transforming 10 ASEAN jurisdictions into a single market consolidates the strength of a growing region that saves more than the rest of the world and has the vast potential of a young population. The AEC will facilitate the mobility of labor and capital among the members, Banks that are designated as QABs under the ASEAN Banking Integration Framework (ABIF) will effectively extend the reach of one jurisdiction by having “outposts” outside its national borders but still within ASEAN. The ABIF should also provide a financial highway that can harness the potential of ASEAN by developing the capacity to clear and settle intra-ASEAN trade and investments without depending on traditional correspondent banks. All these should hasten regional commerce and provide the means to parlay the growth of ASEAN, its young and dynamic retail market with high disposable income and unparalleled saving potential. But we should also be cognizant of possible downside risks. In this regard, the logical mitigating factor is effective cross-border surveillance and the ability to take collective but pre-emptive actions. Unfortunately, that is not as easy as it sounds. ASEAN member states are at different stages of financial market development. Furthermore, the 10 jurisdictions may very well respond differently to the same risk due to idiosyncratic factors in their local markets. Effectively then, “information” becomes the commodity and how we handle it becomes the value proposition of the product. Managing information has its own set of challenges. In this day and age of financial technology, we take advantage of the expediencies that fintech offers but we still have to be wary of the cyber-security issues that arise, such as the increasing trend of phishing and identity theft cases. Cross-border commerce is literally consummated in a few keyboard strokes, which highlights how the human intervention part of fintech can possibly compromise prudential standards and create trouble. Ladies and gentlemen, this is a rich area where business education can take an active role. Here I refer to your potential in developing and preparing market participants who would have the requisite financial integrity, which is so crucial to keeping individual financial institutions and the overall financial system, safe and sound. In addition, it would be beneficial if you turn your economic research towards deepening our understanding of the human behavior side of markets. This should help us be more adept at finding the BIS central bankers’ speeches convergence points among policy intent, market expectations and the eventual outcomes of market behavior. The business environment today is certainly dynamic not only because of the usual evolution of the markets. Instead, the dynamism of the markets is driven by a fundamental shift in the market architecture. While we all recognize the importance of an enabled environment for the business community, we cannot afford to concede the overall stability of financial markets. BSP Initiatives on FS and regional integration This shift towards financial stability – both as the prudential norm and as it affects regional integration – requires a broader mindset from all of us. At the Bangko Sentral ng Pilipinas, we have invested a lot towards the pursuit of financial stability. We created a high-level Financial Stability Committee at the BSP and thereafter collaborated with the DoF, BTr, SEC, IC and PDIC to establish the Financial Stability Coordination Council. Within this ambit, a formal definition of financial stability has been adopted and there is a continuing assessment of regional integration as a financial stability issue. Parallel initiatives are meant to strengthen market governance and risk controls. We raised the standards on bank capital, clarified supervisory expectations on the management of risks and enhanced board and management governance protocols. We have actively advocated financial inclusion and consumer protection, crafting a national strategy in the former and establishing a formal bank framework for the latter. New guidelines on credit and operational risks have been issued, with the IT Risk Framework issued several years ago, long before concerns regarding cyber security came about. Our active participation in regional forums is with a clear view of pursuing financial stability. We welcome the challenge of being the incoming Chair of the Working Committee on ASEAN Banking Integration Framework (WC-ABIF) as well as executing the ABIF Learning Roadmap which the BSP led in crafting. In addition, we make time to be engaged at the FSB Regional Consultative Group for Asia (FSB-RCGA) and the EMEAP Working Group for Banking Supervision (EMEAP-WGBS). Both of these are principally platforms for calibrating global reforms into the regional context. I would be remiss if I do not share with you our involvement in the best-practice process of the OECD International Network for Financial Education (OECD-INFE). It is clear to us that financial education can better anchor financial stability by providing financial consumers the means to be well-informed of their financial opportunities. Our work with INFE has in fact led to the creation of the BSP’s Consumer Protection Framework which is a milestone in many respects. Final thoughts On the whole, market conditions remain fluid and this requires constant diligence in monitoring, evaluating and responding to developments. While there is much that a century of business education has taught us, we also have to accept that the change in the market is more than just its landscape. More fundamentally, the market’s dynamics and its architecture– how products, transactions, institutions and industries affect one another directly or indirectly – have evolved. The very nature of risks and how regulators approach these risks have likewise seen significant change thru the years. All these were the focus of our attention even before the Chinese economy showed weakness, the US Fed’s decision to raise its benchmark rates in December, the subsequent tightening of market liquidity and well before Brexit. The integration of ASEAN as a single BIS central bankers’ speeches production base and a harmonized market for banking, securities and insurance products adds a further layer of market evolution that all of us need to fully appreciate and prepare for. Indeed, there are many challenges ahead. A century of experience and learnings in business gives us a solid foundation. But now is the time too to shift gears. We accept that we do not know everything ahead but we can count on a century of collaboration to move us forward. Let us not forget that strength is not granted. Rather it is achieved. Reforms such as the integration of ASEAN allow us to position ourselves within an evolving market, not just for today but more so for the foreseeable future. The changes that reforms instigate may not always be convenient, but with the right mix and a healthy dose of collaboration, they will make us better. I am confident that we have the capacity and the commitment to build a better foundation for the future. We accept that change is the norm. Thru cooperation and collaboration, I am optimistic that the uncertain future can be managed, putting us in an excellent position to face risks and allowing us to reap benefits. Thank you and good day. BIS central bankers’ speeches
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Speech by Mr Amando M. Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the FMAP 2016 Awards and Fellowship Night, Makati City, 21 July 2016.
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Amando M. Tetangco, Jr: Recognizing Success and Managing Black Swans, Elephants in the room and Grey Rhinos Speech by Mr Amando M. Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the FMAP 2016 Awards and Fellowship Night, Makati City, 21 July 2016. * * * I am pleased to join you tonight as we recognize those whom the industry has chosen as the best in 15 award categories. To the awardees, allow me to extend my early congratulations for a job well done. I know that being “recognized by peers” is one of the strongest motivations for anyone to be the best that he can be at his chosen craft. So, keep up the good work! Tonight’s celebration is also about the fund management industry itself, which has grown consistently over the years. If we count only the trust institutions that report to the BSP, assets under management as of end March 2016 stood at P2.7T. FMAP estimates that if the other asset management companies are included, this figure will grow to almost P4T, covering 174 peso-denominated fixed income and equity funds and 52 foreign denominated funds. The BSP expects these numbers would continue to grow moving forward. The Philippines’ strong economic growth nestled by a stable inflation environment, robust external liquidity position, and a sound banking system, could only further boost the market’s confidence in our domestic financial markets. The global investors have now become more discriminating, their search for yield during this extended period of low global interest rates is balanced by the need for stability of returns. The local investor is also becoming more selective and growing in sophistication, gaining more willingness to try newer products to meet specific needs. With this operating framework, the FMAP and its members must certainly evolve with the changing needs of your constituents. It was “Uncle Ben” (Ben Parker, the step-uncle of Spiderman) who said that “with great power come great responsibility”. I cannot think of a greater responsibility for a market practitioner than to be entrusted with managing the hard-earned funds of others. Funds that will allow your clients to raise and educate their kids, buy their dream home, care for aging parents, go on that much awaited vacation or save for a stress-free retirement. There are many issues that we could discuss at length with respect to this “greater responsibility”, but for tonight, allow me to only (and briefly) raise just two of these issues. First, financial consumer protection is not simply a popular advocacy, it is one which is central to prudential oversight. Several studies have shown that the disruptions of the Global Financial Crisis were particularly costly because investors found themselves unprepared for the market reversal. In many cases, these investors were enticed by the returns promised by agents without necessarily understanding the risks that they were taking. In other cases, financial products were so novel that the industry itself did not fully envision how and thru which channels the risks would materialize. To be fair, our technical models were imprecise. But we must also admit, with some dose of humility in hindsight, that, collectively, the markets underestimated the risks and their consequences. Because of the agency nature of your business, the industry cannot thrive without considering the specific needs of each client. Your clients must also be empowered so they could better define their requirements and how their financial resources could be optimized to meet these needs. Such symbiotic relationship therefore necessitates that we adhere to the standards on financial literacy as a pro-active initiative and consumer redress as a remedial measure, where warranted. BIS central bankers’ speeches The second issue I wish to cover is this – the asset management business has systemic implications. Consider the two basic types of agency agreements 1) the passively managed funds, performance of which mirrors or closely tracks that of a specific benchmark, and 2) the actively managed or specialist funds, which are not linked to a specific benchmark. There are positives to this dichotomy. Actively managed funds have the advantage of potentially higher yields while passive funds provide lower costs. The downside however is that shifting towards higher-yieldbut-illiquid exposures exacerbates the vulnerability of financial consumers towards market risk, while the ease of passive funds also nurtures “herding” behaviour as well as correlated market movements. These notions are confirmed by empirical work at the BIS, 1 among others, that have shown that “asset managers in EME asset markets tend to behave in a correlated manner and that investment flows to asset managers and asset prices amplify each other’s fluctuations”. This is why my second message for the industry is this: Do not be oblivious to financial stability issues. Ladies and gentlemen, we “live” in an industry where “change” is literally a minute by minute phenomenon (i.e., not only in financial rates and prices but also in market sentiment). But there are also those tail risks, the “Black Swan” risk, as popularized by Taleb. 2 Moving from “the elephant in the room”, Wucker recently talks of the “grey rhino” as the highly probable high impact but neglected threat. 3 I am not sure how swans, elephants and rhinos come together, but I am certain that we do not want any of what they represent to come true. We can look towards regulation to manage market conduct within acceptable norms, but, in the end, it will have to be the market practitioners who need to be committed to upholding the standards. Ladies and gentlemen, the recognition announced tonight confirms my view that FMAP and its members cherish the higher goals we set for ourselves and your chosen business. On the part of the BSP, we recognize that investors and fund managers should have the leeway to invest in alternative instruments across jurisdictions or in different currency denominations. Within the bounds of client suitability and effective management of risks, we are prepared to revisit existing regulations and make the needed changes. This will not only deepen the capital market but more so provide investors with more choices within the perimeter of tolerable financial risks. The BSP will always be your partner and I am sure FMAP stands ready to always join us in the journey for professional excellence, for consumer protection and for financial stability. Congratulations to the asset management industry. Congratulations to the awardees. Thank you and good evening. Ken Miyajima and Ilhyock Shim. “Asset Managers in Emerging Markets”. BIS Quarterly Review. September 2014. Pp. 19-31. N. Taleb. The Black Swan: The Impact of the Highly Improbable. New York: Random House. 2007. Michele Wucker. The Gray Rhino: How to Recognize and Act on the Obvious Dangers We Ignore. St. Martin’s Press. April 2016. BIS central bankers’ speeches
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Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the First General Membership Meeting of the Bankers Institute of the Philippines (BAIPhil), Makati City, 15 July 2016.
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Amando M Tetangco, Jr: Leveraging capabilities and synergies for banking excellence Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the First General Membership Meeting of the Bankers Institute of the Philippines (BAIPhil), Makati City, 15 July 2016. * * * It is always a pleasure to be at the general assembly of the officers and members of BAIPHIL, the training arm of the Philippine banking industry, one of the most important pillars of our economy. Given that the environment within which we operate is far from static and is in reality, quite dynamic, BAIPHIL’s role is quite challenging. I am glad therefore that BAIPHIL is up to this challenge. Under the leadership of its immediate past president Rhoneil Fajardo, BAIPHIL adopted for its theme “Building Capacity Towards Financial Inclusion and Integration.” This reflected the industry’s efforts in support of the BSP’s thrust to develop an inclusive financial system to promote inclusive growth and long-term stability. And you walked your talk. We also saw this in the way BAIPHIL escalated its increasingly popular financial education program for teachers and parents and for other marginalized sector groups. Congratulations! This time, with BAIPHIL President Liza Ortiz at the helm (from July 2016 to June 2017), your theme is “Leveraging Capabilities and Synergies for Banking Excellence.” Indeed, this is the call of the times. The dramatic changes we have been seeing in the financial system are unparalleled. We are witnessing a sea change via global reforms, regional initiatives and domestic developments. The market’s underlying architecture is being re-shaped and this has also changed what we expect of bankers as professionals. Global best practices continue to evolve and the bar set to ever higher standards. But beyond standards, what all these really mean is that it is no longer enough for financial professionals to focus only on their own institutions. Proper planning requires a more holistic view of market developments and how these changes can create and possibly lead up to system-wide dislocations. It is the identification and mitigation of these system-wide dislocations that now drive the efforts of financial regulators. The build-up of systemic risk should be a collective concern because we have seen the extent of dislocation and the high costs that it can bring. This is the mindset for the pursuit of “financial stability” as the new global prudential norm -our efforts are organized towards preventing another systemic collapse of the financial markets. This is very apparent in the global reform agenda where containing “too-big-to-fail” financial institutions and addressing the consequences of inter-connectedness are prominent objectives. Basel 3 runs under the mantra of “making banks stronger”. It does so by institutionalizing better quality capital, introducing loss-absorbency parameters for capitalcompliant instruments, improving market transparency and setting prescriptive caps/floors for prudential purposes. On the other hand, new standards completely redefine the risk governance for Financial Market Infrastructures or FMI. This is done with an increased appreciation for contagion risk and the need for stronger IT security protocols. Consumer protection and financial literacy are now considered prudential norms rather than as optional add-ons. This is because the decisions BIS central bankers’ speeches and behavior of informed financial consumers are itself effective stabilizers against market shocks. From the perspective of the market, these reforms increase the cost of doing business. Granted, these regulatory premia have cost implications; but it would be costly to have yet another crisis. We should also factor in, that new standards now cover more risks and look at the same risks at a higher prudential bar. The “new market landscape” is defined not only by tighter regulations but by wider coverage of risks and a more definitive handling to mitigate further build-up of known risks into systemic proportions. It can be said that new norms change our understanding of the market -- from allocating scarce resources into one that allocates risk capital. By extension then, the key commodity is information that drives decisions across various options. It is important that reforms are put in place and safeguards continuously updated to uphold the integrity of that information so that it is not abused. Excellence starts from core competencies Ladies and gentlemen, it should be apparent that the preferred market architecture today is substantially different from what we had in the past. If we aspire to excellence in banking, it must start from developing core competencies. However, let me be clear -- the need for continuing education has not changed; what has changed is the mindset for achieving “banking excellence”. We still need to know about market, credit and operational risks; but beyond these, we now need to also appreciate risks that are not so apparent -- like contagion, concentration, leverage and liquidity. These four risks -- of 2 Cs and 2 Ls -- are important. At the BSP, we refer to them as “CL-2 risks”. These CL-2 risks are systemic because exposures to them are formed through a chain of bilateral transactions. Once any single point of the chain is compromised, the entire chain is weakened. Monitoring this chain of counterparty dealings is a challenge for each institution, but it is precisely the basis for systemic risk that concerns regulators. An added challenge is that financial stability cannot be defined in absolute terms. Building core competencies therefore will be an exercise not only of “what is” but increasingly more of “what can be”. This is where judgment, perspective and collaboration play a critical role. While the market may be more complex and empirics-based, in the end, it is still the human factor that will be needed to execute transactions. In many ways, the task of achieving banking excellence thru synergies is no different from operating a dragon boat. • There is a sweep whose task it is to steer the boat with an oar and to protect the safety of the crew by avoiding collisions. • There is a drummer whose rhythmic pounding of the drum establishes synchronicity. Considered the heartbeat of the dragon boat, the drummer decides when it is appropriate to increase or decrease the pace of the team. • And there are the paddlers whose collective and coordinated strokes move the boat. If the dragon boat crew does not work together, the boat itself will not move. But as a team, one can see that the beauty of cadence and the commitment to collaborate will propel the dragon boat to move with direction, purpose and urgency. Final thoughts Ladies and gentlemen, all these simply reiterate that financial markets warrant a strong framework for risk governance because of the network of linkages between transactions, BIS central bankers’ speeches stakeholders and product lines. Thus, the reform agenda has instigated a tighter framework that now recognizes new risks and treats old risks in a different light. The responsibility of achieving financial stability and sustaining the strength of the financial market rests on all industry stakeholders. We are all in this together, and therefore, we should work together. Like wisdom, strength cannot be granted; strength must be earned. To move forward stronger and better requires that we all collaborate and work on a common vision and policy direction. To me, this is the essence of your theme: “Leveraging Capabilities and Synergies for Banking Excellence.” I see BAIPhil scaling up its role within the banking industry. You can serve as the dragon boat drummer, be the heartbeat of the industry thru trainings, calibrating coverage and content to what is needed most at any point in time. And BAIPHIL’s role should continue to go beyond addressing gaps in technical skill sets. It is important for BAIPHIL to broaden and deepen its coverage of human behavior, values, ethics, and the need to maintain financial integrity at all times. In particular, BAIPHIL can address the need to cascade governance standards across banks to levels below Directors. And through BAIPHIL, the banking industry stands to benefit even more, from having global experts you can learn from and benchmark with, in your conferences and training courses. Ladies and gentlemen. It has been said that we can have a good future only if we prepare ourselves today. We need the cadence and rhythm of a dragon boat to navigate uncertain waters that challenge stability and the pursuit of excellence. Under its new set of officers, I am confident that BAIPHIL will continue to be a positive force in the banking industry. Mabuhay ang BAIPHIL at ang ating banking industry! Mabuhay ang ating mahal na bansang Pilipinas! Mabuhay po tayong lahat! Maraming salamat! BIS central bankers’ speeches
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Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 16th Bloomberg FX Summit, Makati City, 16 August 2016.
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Amando M Tetangco, Jr: Anchoring confidence in an era of radical uncertainty Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 16th Bloomberg FX Summit, Makati City, 16 August 2016. * * * Ladies and gentlemen, good afternoon! It is indeed a pleasure, as always, to address traders and industry experts in this 16th Bloomberg Foreign Exchange Summit. It’s interesting that Bloomberg chose for this Forum, a date in the middle of what is traditionally called the “ghost month” of August. Could it be because they thought this time would be quiet enough and we could get more of you traders and bank and corporate treasurers to participate in the Forum? Maybe, but if one were to gauge it by the price action in the markets since the beginning of August, one would need to be careful to characterize it as a “ghost” month. For the Phisix crossed the 8000 point mark again and continues to flirt very close to it; the peso changed big fig and broke the 47 level, reflecting foreign monies that have returned to our markets post Brexit, with current market buoyancy somewhat surprising given that the underlying issues remain unresolved; the TDF auctions continue to be oversubscribed even as we have already raised the auction size; and bank lending has remained brisk. In other words, it hasn’t been all that quiet. But it is precisely when something is behaving not quite the way it is expected to, that the market should be watchful and regulators even more so. Global developments I don’t have to deal lengthily into the global events that have gripped us this year. You know the issues quite well, the list of challenges has been daunting and, in fact, has become even longer: 1. Global monetary policy divergence between a previously hawkish US Fed and accommodative advanced economies (AEs) elsewhere; 2. Growth slowdown in big emerging markets (EMs) such as China; 3. The collapse and the recent see-saw in oil prices; 4. More recently, the unfolding of Brexit; and then, 5. The global portfolio rebalancing that accompanies these challenges. Clearly, we are all trying to divine a number of things, like: what the next move of the Fed would be; when the stimulus packages of the BOJ and ECB would finally provide traction to Japanese and European economic growth; how the heavy corporate debt levels in China would be affected by continued weak global trade prospects; when the inflection point for oil prices would come about and how would any turnaround happen; and finally, whether we have really seen the worst of Brexit and what would transpire during this two-year period of transition. Eight years after the GFC and still a clear definition of “new normal” remains elusive. Even so, one thing is emerging – the period of global low economic growth, heightened volatility 1 and “lowflation” as the IMF calls it, seems to be quite enduring, despite massive stimulus from policymakers in many parts of the world. El-Erian, M. (2016). “The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.” BIS central bankers’ speeches A number of explanations have been put forward to help us understand why nothing seems to be working as fast and as effectively as we have been hoping for. From economic theory, secular stagnation (as most recently advanced by Larry Summers) – where there is an increasing propensity to save and a decreasing propensity to invest, the result of which is that excessive saving acts as a drag on demand, reducing growth and inflation, and keeping interest rates low. 2 From behavioral finance, we are taught that we must contend with animal spirits that must be appropriately incentivized to look towards long-term sustainable projects. This is important so that flighty, search-for-yield herd behavior is minimized. And from demographics, we are seeing shifts in working age population and productivity. A position of relative strength Fortunately, the Philippines is not in the same situation as other jurisdictions find themselves in. We had survived the GFC generally unscathed and we continue to enjoy the healthy combination of strong growth and low inflation. To cite some indicators: • The Philippines’ gross domestic product (GDP) has been resilient, registering 69 consecutive quarters of positive growth. In the first quarter of 2016, the country grew by 6.9 percent, its fastest since the third quarter of 2013. • The sustained benign inflation environment over the past years continues to support economic growth. • The sound and stable condition of Philippine banks and robust external sector dynamics have also been among the anchors of the robust performance of the domestic economy. In addition, the domestic economy has sufficient buffers that help weather the external headwinds: • The BSP’s foreign exchange (FX) reserves currently stands at US$85.5 billion as of end-July 2016, more than enough to meet the country’s FX liquidity requirements for trade and short-term debt obligations. • The country’s current account has been in surplus for 13 consecutive years now, supported by the sustained increase in overseas Filipino (OF) remittances, as well as business process outsourcing (BPO) revenues and tourism receipts. Current stance of monetary policy This position of relative strength has allowed us to keep our policy rates at 4% since September 2014 until we reduced it to 3% in June this year, following the operational adjustment when we adopted the Interest Rate Corridor. However, even with the 100 bps adjustment in the headline rate, 3% is still over 250 basis points higher than the Fed funds target rate. That gives us significant wiggle room, in this environment where some jurisdictions have gone into negative interest rate territory. At our policy meeting last week, we again kept the policy rate steady at 3%. While our assessment showed that inflation would be slightly below the NG target range for 2016, we expect that inflation would be within the target of 2–4% in 2017–2018, with an upside bias for 2017. In addition, our credit growth suggests favorable monetary conditions, and aggregate demand remains firm. Therefore there was no strong impetus for us to move policy levers or adjust the stance of monetary policy. Summers, L. (2016). “The Age of Secular Stagnation.” Foreign Affairs. February Issue. BIS central bankers’ speeches In other words, ladies and gentlemen, we have monetary policy space and our current monetary settings are appropriate. Triggers to shifts in policy stance You must have heard me say this on a number of occasions already. But you may ask, what would cause us to change the stance of policy? My answer to that would be: our next move would be data dependent. Which then begs the question, what data are we looking at? Data dependence sounds almost trite. Some may say this is veiled “central bank speak”, given that nearly all central bankers today seem to say this in unison. But in truth, when we speak these words, we do so with great thought and much humility. For we do not know everything. It would be foolish to say otherwise. And to even be so definitive as to say which one single data point we are looking at would not be prudent at this time, given how the financial and the goods markets are so globally interconnected. There are indeed many moving parts that we look at when we consider the stance of policy. Of course, the first is the inflation forecast relative to the target. That’s the primary consideration. We would also consider any significant shift in any of the domestic macro variables I mentioned earlier. We would look at any strong misalignments in interest differentials with external trading partners. This is important to consider especially if such misalignments would significantly endanger domestic financial markets and produce knockon effects on the real sector. We would also make a move when market confidence and expectations threaten to be forcefully dislodged. Impulses vs policy tools But even as I narrate those possibilities, you must be cognizant that the BSP has an array of tools. Since the GFC, our tool kit has deepened. We are no longer limited to the policy rate alone to address these impulses. For instance, under the IRC, the auction size of the TDF is one tool that we could use. Under a financial stability framework, we can put in place macroprudential measures, as we did when we raised the capital risk weight of NDF transactions. We can consider liberalizing the foreign exchange regulatory framework, as we did last week. And just on this last point, as you know, the Monetary Board last Friday approved a significant liberalization of foreign exchange rules. These measures aim to encourage the public to transact their FX needs more with banks. Briefly, the recent liberalization involves increasing the current limit of allowable FX purchase from banks without supporting documentation by as much as 4 times for individuals and 8 times for corporations, and allowing payments in FX for certain transactions between residents, among other measures. Moreover, we have the flexibility to allow the exchange rate to absorb some of the shocks from capital inflows, or if the flows go the other way, we have ample reserves, to keep exchange rate volatility in check, consistent with our inflation targeting framework. Learning from our previous experience during the Asian and global financial crises, the limitation imposed by the impossible trinity 3 could actually work to our advantage. First, flexible exchange rates act as an automatic stabilizer and contain wild swings in the financial markets. Second, this also allows us to focus our monetary policy on maintaining price stability in tune with the developments in domestic demand, particularly with the considerable reduction in the exchange rate pass-through to inflation. Furthermore, during periods of The impossible trinity states that a central bank can only pursue two of the following objectives: fixed exchange rates, independent monetary policy, and open capital account. BIS central bankers’ speeches stress, flexible exchange rates and independent monetary policy allow us to idiosyncratically respond to shocks in line with domestic economic conditions, which is crucial in calming markets. Not monetary policy alone Ladies and gentlemen, we have monetary policy space to keep prices stable. But price and financial stability are but one component of a vibrant economy. We need the other cylinders of the economy to be working, too. We would need the fiscal authorities to ramp up infrastructure spending. And we need the cooperation of the private sector to find feasible long-term projects that would help raise the absorptive capacity of the economy. In this whole process, we need you to facilitate the movement of funds from savers to users, in a safe, efficient and sound manner. The BSP will continue to pursue its mandate of securing price and financial stability through an appropriate policy stance and relevant measures. We trust that this will help anchor your confidence, so you could in turn do your part. We need treasurers and market participants to go beyond mark-to-market gains on your financial assets. We need you to translate those financial assets to gains in the real sector that can help create jobs. Conclusion It is my view that in this post-GFC era, when we are in the midst of what former BOE Governor Mervyn King calls a period of “radical uncertainty”, we can secure a path of sustainable growth by keeping economic confidence up. I trust that the BSP can engage you – in the financial markets – to work with us in anchoring confidence among all our economic stakeholders. In the process, we hope to be able to lay a solid bedrock of sustainable economic growth. Thank you very much and I wish you a productive summit. BIS central bankers’ speeches
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Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Development Budget Coordination Committee briefing to the Senate Committee on Finance on the FY 2017 Proposed National Government Budget, Manila, 30 August 2016.
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Amando M Tetangco, Jr: Building on progress, bringing in changes Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Development Budget Coordination Committee briefing to the Senate Committee on Finance on the FY 2017 Proposed National Government Budget, Manila, 30 August 2016. * * * Senator Loren Legarda, chair of the Senate Committee on Finance, Committee members, members of the economic team, colleagues, ladies and gentlemen, good morning. As a resource institution of the DBCC, the BSP is pleased to provide this Committee with an update on the emerging trends in the monetary, external and financial sectors of the economy, and to present the overall rationale behind the macroeconomic assumptions underlying the 2017 budget. Let me highlight the key themes of the BSP’s presentation. First, the country’s macroeconomic fundamentals remain strong and its underlying story of resilience continues. The economy has sustained its growth above the historical average. Inflation is expected to be within the Government’s target in 2017, supported by favorable supply conditions and well-calibrated monetary policy. Second, we acknowledge that the economy faces external risks from the weak world economic outlook, uncertainty and divergence in global monetary policy settings, and volatility in oil prices. In the domestic front, weather disturbances could exact a toll on both growth and prices. Nonetheless, policymakers have sufficient space to address these risks. Higher yet responsible fiscal spending targeted at further enhancing economic potentials could support sustained growth. Timely implementation of supply-side measures would also help keep prices manageable. The country’s banking system remains healthy and fundamentally sound, serving to effectively intermediate funds to finance the needs of the various economic sectors. The BSP continues to guard against potential risks to price and financial stability, and remains prepared to implement further policy actions, as needed. Finally, let me point out that the way forward calls for sustaining the economic gains by continuing to pursue reforms that will help boost the economy’s flexibility and productivity. For its part, the BSP will remain firm in its commitment to price and financial stability through forward looking monetary policy and purposeful reforms in the financial system, as we continue to build on our progress while we bring in the needed changes. I will end my brief presentation by sharing the legislative priorities of the BSP under the current administration. Madam Chair, this chart shows that compared with the average performance from 2007 – 2014 and 2015, the Philippine economy remains strong and resilient. We have seen the following: • Higher growth; • Lower inflation; • Lower-than-target fiscal deficit; • Ample liquidity and credit (12.4% M3 growth and 17.6% credit growth); • Good loan quality and capital base of banks; and • Robust external payments position characterized by BIS central bankers’ speeches • Current account surplus; • Comfortable GIR; and • Manageable external debt profile and debt burden We will be discussing in some detail the factors that influenced the outturn for these macroeconomic variables in the next few slides. Let me clarify that the transformation of the Philippine economy is a product of a series of policy and structural reforms in the last two decades, disciplined macroeconomic management, and improvements in governance. The selected list of critical reforms helped us in: • expanding the role of market forces in key sectors of the economy; • encouraging investments; • ensuring fiscal sustainability; • strengthening the banking sector; • promoting innovation and competition; • encouraging stronger private sector participation; and • finally, inspiring business activity An important consequence of these structural reforms is an improvement in the economy’s productive capacity. Potential output growth has been steadily rising alongside improvement in the share of total factor productivity (TFP) growth. This is consistent with a declining incremental capital-output ratio (ICOR) as well as the observed structural shift in employment and production structures that require higher levels of skills and knowledge. It is no small measure that the country’s macroeconomic progress has been achieved despite a very challenging global economic landscape. Some of the recent adverse external developments that triggered episodes of financial market anxieties and volatilities in capital flows, exchange rate, and stock market include the following: • First is the on-going rebalancing in the Chinese economy from export-led to services and domestic consumption-driven. While this could result in slower economic growth for China, such is believed to be more sustainable. As a key trading partner, a slower growing China could, however, affect our exports. • Second is the uncertainty in the timing of policy rate normalization in the US. The Fed Reserve first raised its target fed funds rate in December last year from 0– 0.25% to 0.25–0.50% for the first time since the Global Financial Crisis. Markets have been speculating when the Fed’s next move would be. The comments of Fed Reserve Chair Janet Yellen over the weekend, however, signalled that the Fed could raise rates sooner rather than later, stating that the case for a rate hike has risen in recent months. Market expectations are currently seen as too low. Nonetheless, until that next move actually happens there could still be market volatility. • Third is the significant drop in global oil prices due to abundant supply and weak demand in the international oil market. The decline in oil prices could affect our imports in a positive way but cash remittances in a negative way. • Fourth is BREXIT. While some of the initial negative impact on financial markets has dissipated, there is still need to see what will transpire during the transition to full implementation of the exit. If recession holds sway in the UK, global economic prospects could be diminished. BIS central bankers’ speeches Despite these external headwinds, Madam Chair, the economy has exhibited notable resilience. Latest GDP outturn exceeded market expectations and those of other highperforming Asian economies including China, Indonesia, and Malaysia. It bears noting that the drivers for our growth have been broadening. • On the production side, industry, supported by manufacturing and construction, has added more growth impulses. • On the expenditure side, higher public spending and private investments are additional growth drivers together with personal consumption. Inflation remains benign. Headline inflation averaged 1.4 percent in January – July 2016, driven largely by supply side factors such as lower domestic rice and petroleum prices, downward adjustment in electricity rates, and the provisional rollback in jeepney fares. Meanwhile, core inflation, which excludes certain volatile food and energy items, averaged 1.7 percent in January – July 2016. Inflation expectations continue to be broadly in line with the inflation target over the policy horizon. Inflation forecasts by International Financial Institutions, particularly, the IMF and Institute of International Finance also indicate benign inflation readings for both 2016 and 2017. On the country’s monetary conditions, ample domestic liquidity and the healthy growth in bank lending continue to support economic growth. Domestic liquidity grew by 12.4 percent in June 2016, reflecting robust domestic credits. Bank loans, which increased by 17.6 percent, continue to flow into the country’s productive sector. Data as of June 2016 show that one-fifth of the total bank loans went largely to wholesale and retail trade; motor repair; transportation and storage; and information and communication sectors. The Philippine banking system has remained strong and stable, supporting growth across various sectors of the economy. Key banking indicators continue to indicate solid assets growth, improving quality of loans, and capitalization above international norms. As of March 2016, the capital adequacy ratio of universal and commercial banks (15.8% on consolidated basis and 15.0% on solo basis) remained well above the standards set by the BSP (10%) and the Bank for International Settlements (8%). With adequate capitalization above international norms, and the sustained positive performance of the banking system, we believe that our banks are prepared for the entry of regional and international banks under the ASEAN economic and financial integration. The BSP will continue to build on its enhanced regulatory framework to maintain a sound and stable financial system. Moreover, the country continued to build up its foreign exchange reserves. As of end-July 2016, the gross international reserves (GIR) stood US$85.5 billion, adequate to cover 10.5 months’ worth of imports of goods and payments of services and income. It is also equivalent to 6.0 times the country’s short-term external debt based on original maturity and 4.3 times based on residual maturity. These FX indicators compare favorably with our counterparts in the Asia Pacific region. What are the implications of these external payments numbers? Madam Chair, the country’s favorable external payments position has mitigated the adverse effects of external shocks. The flexibility of the peso has been our first line of defense against the uncertainty and volatility of the global market. Our high FX reserves have provided greater confidence to business and investors on the country’s liquidity position. However, we recognize that the Philippines is not completely insulated from the volatilities in the global market. The Philippine peso would occasionally weaken against the US dollar, BIS central bankers’ speeches moving in sync with other currencies in the region on account of sentiment change or developments outside our national borders. Nevertheless, the country’s firm macroeconomic fundamentals, investment grade status, ample GIR, and steady foreign exchange inflows (including from OF remittances and receipts from the BPO sector) could support a broadly stable real effective exchange rate. Given our assessment of current developments, what are the proposed key macroeconomic assumptions for the 2017 national budget? • Inflation is projected to average slightly below the low end of the 2.0 – 4.0 percent target range in 2016, and to approach the midpoint of the target in 2017. Risks to the inflation outlook are broadly balanced. Downside risk could come from slowerthan-expected global economic activity while pending petitions for adjustments in electricity rates could pose as an upside risk. • In the global oil market, the per barrel price of Dubai crude oil is expected to trade within US$35 – 50 range in 2016 and to pick up slightly to US$40 – 55 band in 2017. These assumptions are consistent with current prices in the spot market as well as futures prices and forecasts of multilateral institutions. • In the foreign exchange market, we expect that the peso would remain sensitive to concerns over global economic and financial developments. Nonetheless, steady foreign exchange inflows and the country’s firm macroeconomic fundamentals could continue supporting a broadly stable peso. • In the primary market, the 364-day T-bill rate could settle at 2.0 – 4.0 percent for 2016 – 2017. While higher fiscal deficit targets may, to a certain degree, raise domestic interest rates, we expect that the liquidity in the system could sufficiently fund requirements of households and investors and keep interest rate movement within the target range. • Foreign interest rate could likewise remain low for 2016 – 2017. The 180-day LIBOR could range at 0.8 – 1.8 percent for 2016 and 1.0 – 2.0 percent for 2017. Many central banks and IFIs believe that prolonged period of low interest rates will continue. Lastly, despite the weakness in external demand, we expect merchandise trade to show some modest improvements in 2016 – 2017. To help in the attainment of the targets, the BSP is fully committed to ensure stability in the monetary, financial, and external sectors of the economy. On price stability, the BSP will closely monitor domestic and external developments to ensure that the monetary policy is appropriately calibrated. On the financial sector, the BSP will strengthen the framework for risk governance and align supervisory policies with international standards to enhance banking reform agenda and foster greater financial stability. On the external sector, the BSP will remain supportive of policies that moderate the impact of external shocks such as maintaining a market-determined exchange rate, maintaining ample foreign exchange reserves, and keeping the country’s outstanding external debt manageable. Besides its core mandate, Madam Chair, the BSP has pursued and will continue to pursue financial inclusion as a strategic objective. 1. Our general framework is provided by the National Strategy for Financial Inclusion. 2. We shall continue to communicate information to our general public on key economic and financial developments, to guide them properly in making financial decisions. BIS central bankers’ speeches 3. We shall continue to broaden the access of low income households to financial services. 4. We shall continue to address the financial needs of small businesses by allowing them access to bank credit without collateral. 5. We shall continue to ensure that our financial consumers are well-protected against financial fraud. Finally, the BSP will continue to push for legislative proposals and issuances that further enhance its implementation of appropriate monetary and credit policies and strengthen its oversight functions in fostering safe, efficient, and reliable financial system. The chart shows the legislative measures by BSP. We are prepared to discuss these with appropriate committees. Madam Chair and Honorable members of the Committee on Finance, we would like to underscore that our country has achieved significant economic strides in recent years and has shown notable resilience amid global challenges. Despite the potential obstacles in the road ahead, we remain optimistic that our country will continue to push forward with appropriate reforms and policies. Consistent with the 10-point economic agenda of the Government, we shall continue to build on the progress we have achieved so far while implementing structural changes critical to attain sustained and inclusive growth. Thank you very much. BIS central bankers’ speeches
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Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Euromoney Philippines Investment Forum 2016, Manila, 6 September 2016.
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Amando M Tetangco, Jr: Sustaining relative strength in a dynamic environment Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Euromoney Philippines Investment Forum 2016, Manila, 6 September 2016. * * * It is my pleasure to join you today, and share the views of the Bangko Sentral ng Pilipinas regarding the investment landscape in the Philippines. I wish to thank Euromoney for organizing this Philippine Investment Forum, which is an annual event started in 2012. It’s always about relative value Investing is always about weighing relative values – among asset classes, across points in a yield curve, across industries and types of credit. In our highly interconnected global environment, investment choices now also include weighing relative values across geographical markets and currencies. In other words, good investing is never done in a vacuum or in absolutes. In making relative value judgments, prudent investors ask themselves three questions – (1) Is there upside potential? (2) Are the returns sustainable? and (3) Are the downside risks manageable? In the case of the Philippines as an investment destination, my answer to these questions would be YES. I believe the Philippine economy continues to offer a convincing case for investment and sustained growth. I say this with confidence because the Philippines has a good solid track record! The Philippines’ macroeconomic environment has been marked by solid economic growth and low inflation. Our gross domestic product has been robust and durable, registering 70 consecutive quarters of positive growth (even through the Global Financial Crisis!). In the second quarter of this year, the country grew by 7.0 percent, its fastest since the third quarter of 2013. Quite notably also, there has been a resurgence in manufacturing in recent periods, and domestic tourism has also been on the rise, creating a broader base for economic growth. Moreover, inflation has been benign and inflation expectations continue to be well-anchored. Our latest assessment shows that inflation will be just below the lower end of the government’s target range for this year, but should move to within the target range of 2–4 percent in 2017–2018. The banking system has also been an enabler of economic growth as it continues to channel lending to the productive sectors of the economy. This, without sacrificing credit underwriting standards and the quality of their balance sheets. In the meantime, our external liquidity position has been robust. We have been running current account surpluses for 13 years now, allowing us to beef up FX reserves to an all-time high of US$85.5 billion as of end-July 2016. All-told, ladies and gentlemen, the Philippine economy continues to enjoy a position of relative strength. And this has not been unnoticed by global investors. We have had our share of surges in capital inflows in search of yield. And while, some of these have “come and gone”, a large portion of the inflows have stayed and remain invested in our domestic assets. But what I wish to emphasize this morning is that the Philippines is a destination not only for flighty capital. The Philippines is, more importantly, a destination for serious investment. I am able to say this with conviction because we do not only have a solid macroeconomic track BIS central bankers’ speeches record, we also have the institutions that are critical to sustaining such a strong economic performance. Good institutions are indispensable For more than two decades now, we have been putting in place structural reforms that have liberalized key industries, including utilities, the power sector, and the banking system. We have adopted legislation aimed at improving governance in government corporations (GCG) and public procurement (GPPB); as well as ensuring fair competition in industry and vital services (PCC). These reforms have helped raise the country’s total factor productivity (TFP) and are seen to help further reduce incremental capital output ratios (ICOR). These efforts complement the ongoing reforms to further improve “ease in doing business” and lessen “frictions” for investments in the Philippine economy. In parallel, the BSP, in collaboration with market participants and other regulators, is continuing to roll out specific market reforms under our capital market reform agenda. The reforms which include, among others, developing a benchmark governance framework and creating a repo market should further deepen our domestic capital market and align its functioning with global standards. Alongside these, the BSP has also put out banking regulations that will enhance corporate governance and credit and IT risk management among banks, in tandem with the adoption of the other components of Basel 3. Furthermore just last month, the BSP embarked on a significant liberalization of foreign exchange rules. These measures aim to encourage the public to transact their FX needs more with banks by, among others, increasing the current limit of allowable FX purchase from banks without supporting documentation, and allowing payments in FX for certain transactions between residents. Also, in an effort to further improve the transmission of monetary policy, the BSP adopted in June this year the Interest Rate Corridor (IRC) framework for its conduct of monetary policy. These monetary, capital market and banking reforms are meant to further strengthen the financial markets so that they could more effectively “marry” the users and sources of funds. There is enough liquidity in the domestic financial system. What needs to happen is that more and more of this liquidity is pushed to the productive sectors of the economy more expeditiously, not only through bank lending, but also through a robust capital market. The national government for its part, under the new administration, has committed to a 10-point Economic Agenda that aims to continue the factors that led growth in the Philippines: maintaining an orderly fiscal house, investing in human resources and capital development, among others. Ladies and gentlemen, we put these institutions in place because our operating environment is not static. We know that the macrofinancial stability we now enjoy can only be sustained if we have sound institutions on which to anchor any further reform efforts. Conditions are never static To complete therefore the discussion of the Philippine investment landscape, allow me now to briefly speak on the risks that could possibly unsettle us. These risks impact us in the short-term through financial market volatility and in the long-term possibly through aggregate demand dynamics. Externally, we are affected by the policy actions of advanced economies. The most pressing of these are 1) the timing of the next hike of the Fed and 2) the magnitude of any further easing from the BOJ and ECB. As the markets digest any pronouncements from AE policy makers, we will continue to experience a toggling between “risk on” and “risk off” market behavior, which always creates “noise” in financial markets. BIS central bankers’ speeches The BSP has the tools to address such “noise” in our onshore markets, to calm our participants and keep market behavior in check. Specifically, we have room to allow the exchange rates to absorb some of these near-term shocks or provide FX liquidity under our flexible exchange rate policy. Moreover, we could also adopt targeted macroprudential tools to bring about a more fundamental change in market behavior. In addition, given the current benign inflation outlook, the BSP has room to keep its policy rates steady to provide a further anchor for stability. A second potential source of vulnerability are shifts in Chinese economic policies – 1) from a growth model that relies on exports and fixed investments to one which is driven by domestic demand, and 2) to a more market-oriented (and weaker) RMB. Early expectations were that the shift to domestic demand would result in significant slowing in Chinese growth, which could dampen exports of its trading partners, such as the Philippines. More recent forecasts, however, show a somewhat less dire outlook on China due to fiscal and monetary support from the authorities, easing risks of knock-on effects on trading partners and demand for international commodity prices. On the other hand, the policy of a weaker RMB is not expected to lead to stronger competition against our exports because we have a relatively low degree of export similarity with China. 1 Should the policies of the Chinese authorities indeed bring about more sustainable growth, this should be overall positive for us as it reduces global tail risks. A third risk is Brexit. The direct impact to us of a slowdown in the UK would be minimal, given that our exports to the UK account for only 0.8 pct. of total exports. It is the possibility of second round effects on the EU, however, that is more concerning because exports to EU account for 11.5 percent of total exports. We therefore need to remain watchful of developments in the UK, particularly during the transition to “exit.” On the domestic front, we have to contend with natural calamities. While no one can fully prepare for the wrath of nature, the country has put in place policies that will help ensure we have adequate supply of staple foods, particularly rice. In short, ladies and gentlemen, the Philippines is not immune to risks but our view is that these risks right now are manageable. The balance – short vs. long-term dynamics On balance, the Philippines continues to forge an economic growth story that puts emphasis not only on strength but also on long-term stability and resilience. The fact that the Philippines has just entered the “demographic window”, in contrast to the aging population of some neighboring economies, undergirds our long-term resilience. We have a young and vibrant population that is both a steady employment and consumer base, that opens up a lot of possibilities for investment. Many industries are already burgeoning and seizing the opportunities the demographics present. There is fiscal space to pursue infrastructure investments geared towards increasing the productive capacity of the economy. And the new administration has promised to ramp up infrastructure spending. On the part of the BSP, we will continue to be steadfast in delivering on our mandates of maintaining price and financial stability in the economy, thereby serving as the wind at the back of our stakeholders, including investors like you. Based on the UNCTAD’s Export Similarity Index. BIS central bankers’ speeches The Philippines presents excellent relative value Ladies and gentlemen, the Philippines means business. While the challenges to the investment environment appear formidable, our collective vigilance and prudence will help us achieve our objectives of sustainable growth, as well as stability. I trust that the BSP can further engage you in pursuing the economic agenda of the Philippines. At the top of my remarks, I said investing is all about relative values. I hope that in the time that had been given to me, I have been able to show you that the Philippines presents excellent relative value, an investment choice that will allow you to achieve your target risk/return and more. Thank you very much and I wish everyone a productive Forum. BIS central bankers’ speeches
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Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the General Assembly of the Bankers Association of the Philippines (BAP), Makati, 21 November 2016.
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Amando M Tetangco, Jr: Vision for resilience and growth Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the General Assembly of the Bankers Association of the Philippines (BAP), Makati, 21 November 2016. * * * Let me begin by congratulating you on this industry-led initiative of formalizing a vision for the banking system. “To support the national goal of catalyzing growth in the country.” – That vision evokes a level of maturity in your appreciation of the relationship between the real and financial sectors. It tells us that you are now not merely existing for yourselves and the firms you represent, but that you would also actively do your part to positively raise overall economic welfare in the country. Banks are well-positioned to take on the Vision In the end, we know it will cut both ways. A growing economy provides you with the incentive to build your franchise, and the stronger franchise provides opportunities for businesses to grow. It’s a virtuous cycle. Indeed, the banking system is well-positioned to help catalyze and sustain economic growth. In just the past 11 years or so, the total resources of the banking system have grown almost three times from P4.5T to P13.1T. Bank capital has continued to be above national standards. Credit growth has been robust. Non-performing loan ratios have continued to decline. You have expanded your financial footprint beyond brick and mortar facilities to e-banking. And throughout all these, you have remained profitable! This performance tells me that you have been able to adjust effectively to the challenges of your operating environment. This performance has been accompanied by our strong constructive collaboration. Together, we have worked on and put in place, reforms that have helped improve your ability to absorb shocks and contain imbalances, both at the firm and the industry levels. We have emphasized governance and placed more responsibility on the boards of directors. We have embarked on a series of frameworks for enhaced risk management and sound market conduct. We have adapted global reforms and standards and made sure these are in tune with our own domestic needs and requirements. I know many of the reforms have not been easy to appreciate at first, as you might have perceived that these reforms tended to curtail innovation. But through consultations and persistent dialogue, I know we are on the same page. Innovation will only positively flourish when it occurs in the context of sound business operation and consumer protection as the underlying threads. The timing of your initiative for an overall banking system vision and roadmap could not have been more opportune. Q3 GDP was announced just last week – 7.1 pct growth, bringing to 71 the number of consecutive quarters of positive economic growth! Domestic aggregate demand continues to be the driver of economic growth. On the supply side, manufacturing remained strong, services showed reasonable growth, and the agriculture sector showed signs of recovery. In other words, our economic growth drivers are diversifying! Demography is also on our side. The median age of the population is now 24.4 years old and we are projected to reach a median age of only 31 years old by 2045. All these have transpired without fuelling inflation. 1/3 BIS central bankers' speeches We are certainly living in exciting times that are rife with opportunities. But even as I say this, we must also be aware that there are challenges to this operating environment. Let me focus on just three. One, Fed normalization. Two, weak and uneven global growth outlook. Three, disruptive technology. Turning Challenges into Opportunities The anticipation of the timing of the Fed’s next move creates near-term financial market volatility. The question whether markets will perceive the next Fed pronounement as “risk on” or “risk off” matters for daily traders. The era of low US dollar interest rates is ending soon. That brings with it certain collateral actions, including a stronger US dollar and global portfolio rebalancing. We all know that making money on financial assets in a low/declining interest rate environment is a “no-brainer”. All fixed income assets you hold rise in value as interest rates fall. The test for bank presidents and treasurers alike therefore is how to translate these daily movements and market expectations into an overall strategy, as the tide of global monetary conditions change. This is undoubtedly tricky and timing strategic moves is critical. A second challenge to the operating environment is the continued weakness in global growth prospects. Related to this is the trend among policy makers to look inwardly and tap domestic sources of demand. China is an example. The Chinese authorities have shifted from trade to services as driver of growth. Brexit is another example of the populace wanting to break away from trade. The protectionist-tendency of the pronouncements of US President-elect Trump is yet another example. All these comprise what is now being termed by some as a “retreat from multilateralism”. While we are seeing that this global trend of growing through domestic aggregate demand can break the downward economic spiral for a number of economies, the question is whether such inward perspective is sustainable for global economic growth. For the Philippines, strong domestic aggregate demand, particularly private consumption, has long shielded us from external shocks. Even during the Asian Financial Crisis, we were not as affected because we were not as open as others in the region. However, there is a need to explore ways of broadening the domestic economic base. Infrastructure is key to this. Human capital is another important element. We need to be able to connect our domestic markets through networks of roads, airports, seaports, etc. But we also need a smart population to find solutions to natural disasters and to find ways of improving efficiency, among others. Fortunately, for the Philipines we have both monetary and fiscal space to allow the government to ramp up spending on infrastructure and put in place projects to raise human capacity. Another factor to reflect upon is the integration of ASEAN, which is certainly underway. The BSP has already signed the Heads of Agreement with Bank Negara Malaysia. And I am pleased to report that we are about to initiate formal discussions with the Bank of Thailand and with the OJK of Indonesia under the same ABIF guidelines. As we consider supply chains and regional integration, we must be mindful of the trend of “disruptive innovation”. In other words, finding new ways of doing old things. Technological improvements are helping define new ways for you to “enter” into and be integrated in the supply chain. While there are many of you who will continue to be on the big loan origination side, a number of you can find value in generating economic activity through retail banking. Still a number of you will be able to find a niche in providing alternative digital solutions. In doing so, there is a need to be mindful that using financial technology could lead to new and unanticipated financial, business, consumer protection risks as well as cybersecurity risks. This is why, even as we encourage technology solutions, we also admonish banks to do so with caution and without sacrificing financial stability and the protection of your ultimate customer, the consumer. 2/3 BIS central bankers' speeches Is there a role for monetary policy in your vision? The BSP will partner with you to achieve your vision. As I have said, we have put in place what we see as a balanced regulatory environment – one that encourages innovation, practiced under safe and sound business models. We have also endeavored to create a monetary environment of stable inflation and a marketdetermined exchange rate to help you plan better for the medium-term. At the moment, our view is that inflaton will be manageable over the policy horizon. In 2016, inflation will average below the lower end of the target band, but in 2017 and 2018, we see fullyear inflation averaging closer to the middle of the target range of 2-4 pct. For the BSP, this means there is no compelling reason to adjust the stance of monetary policy. You may ask, will this view be affected should the Fed hike in December? Perhaps, if other factors also move. But we don’t necessarily have to move in sync with the Fed. On the exchange rate, I’ve been asked lately whether the BSP is worried about certain exchange rate levels being breached. Our view here is that for as long as movements in the exchange rates are not “out-of-line” against fundamentals and if these are not exaggerated to dislodge expectations, the BSP can allow for the exchange rate to move (either up or down). Otherwise, we reserve scope for official action to stem excessive volatility. Right now, we don’t see a need to veer away from this FX rate policy. Our Journey on the Roadmap You have set a clear vision for the banking system, with interlocking outcomes of Access, Efficiency, Growth, and Stabiliy. The tools the BSP will take with it on this journey with you are the tried and tested tools of: an enabling environment that benefits from the collaboration between the market and regulators, clear but reasonably high standards for governance and risk management, and that commitment to clearly communicate policy intent in a timely manner. The GFC has taught us that attaining price stability does not ensure financial stability. At the same time, the GFC also taught us that banks operating individually in a safe and sound manner will not be enough. We need to take a holistic view of risks, specifically those that comingle and cut across markets, institutions, transactions and agents. Our proposed amendments to the BSP Charter would greatly help the BSP in this regard, particularly in its macroprudential surveillance and network analysis role. We therefore continue to solicit your support for our proposals, including those for more relevant data. I encourage you to look more closely at the proposed amendments where sufficient safeguards and checks and balances are incorporated. Concluding remarks Let me conclude by urging all in this Assembly to remain focused on financial stability and the well-being of our ultimate stakeholder — the financial consumer who entrusts upon banks their hard-earned savings or looks upon banks to have a better future. After all, it is for him that we are laying a foundation to enable/capacitate him today, so he can build a better tomorrow for himself and his family. Thank you for your continued support throughout the years at Mabuhay po kayong lahat! 3/3 BIS central bankers' speeches
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Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 14th Citi Microentrepreneurship Awards (CMA), Manila, 6 December 2016.
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Amando Tetangco: 2016 outstanding microentrepreneurs – leading the way to success Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 14th Citi Microentrepreneurship Awards (CMA), Manila, 6 December 2016. * * * It is always a pleasure to be in the company of microentrepreneurs and fellow advocates of the development of the microfinance industry in our country. I look at this annual event as a gift — an early Christmas gift. The finalists and the winners of the Citi Microentrepreneurship Awards give us many reasons to celebrate — their courage, their creativity, their tenacity and their success. In so many ways, you inspire confidence and serve as role models among those who are just starting their own micro ventures. And from you, the other stakeholders of the microfinance industry learn how we can help sustain your viability and growth — this includes the Bangko Sentral ng Pilipinas, the Microfinance Council of the Philippines, the banks including Citi, NGOs and other service providers. In the process, we are able to craft better policies and programs to keep the microfinance industry strong and healthy. This synergy between microentrepeneurs and other industry stakeholders has produced solid results. On our part, the BSP, since 2000, has been nurturing a policy environment that enables the delivery of commercially sustainable microfinance in the banking sector. We liberalized regulations by reducing barriers and providing incentives while balancing them with risk management measures. In particular, we took into account the unique characteristics of microfinance such as the use of group liability arrangements, cash flow based and character lending, high frequency amortizations, and having less documentary requirements. Our policy is working as intended, as banks get more involved in microfinance. Let me share some highlights. As of June 2016, there were 169 banks involved in microfinance – most of them rural banks in the countryside. Combined, they have more than 1.6 million microentrepreneur clients (from 391,000 in 2002) with aggregate outstanding loans of P11.7 billion, an almost five-fold increase from the levels in the early 2000s (P2.6 billion in 2002). The banks have also empowered these clients to save, many of them for the first time. At present, these microentrepreneurs have accumulated savings of P 5.2 billion. In addition, the microfinance sector has become a market for microfinance products like micro-insurance and micro-housing loans. Because of the significant strides we have made together, the Philippines is considered a global leader in microfinance. For five years in a row – between 2009 to 2013— the global survey on microfinance by the Economist Intelligence Unit (EIU) ranked the Philippines as number one in the world in terms of regulatory framework for microfinance. EIU has since amended its survey to measure financial inclusion. In this survey we also rank as a global leader: in 2016, the EIU ranks Peru and Columbia as the top two, while the Philippines and India are third in the world and first in Asia with the most conducive environment for financial inclusion. 1/3 BIS central bankers' speeches Improvements in overall access to financial services in the Philippines is also reflected in the World Bank Findex, the global database for financial inclusion. It said formal account ownership among Filipino adults increased from 26.6% in 2011 to 31.3% in 2014, with higher growth among low income and less educated segments of our population. Ladies and gentlemen. Our CMA awardees for this year are among the most diverse set of winners, coming from a range of industries.1 But they have two things in common: 1) they demostrate how financial inclusion and microfinance can unlock opportunities and 2) they serve as catalysts for the development of their ventures in various areas. Indeed, our efforts to build an inclusive financial system result in better access to financial products and services that empower individuals and enterprises to seize economic opportunities. And we continue to develop enabling policies and regulations to reach unserved and underserved markets. Last March, for instance, we issued BSP Circular 908 or the Agricultural Value Chain Financing Framework which aims to address agricultural credit risks by shifting the focus of lending from individual farmers and fisherfolks to the whole value chain . This will benefit microenterprises that are involved in value chains as it provides an opportunity to open up credit to all the players in the chain.2 As designed, the AVCF Framework not only addresses financing constraints of small players but also allows them to take on other challenges such as access to markets, business development, and technology. In other words, it is a response by the BSP to various issues that hamper the potential for growth of MSMEs. Given the multiplicity of challenges, a collective and collaborative approach is the most ideal strategy to promote inclusive growth. Closer coordination of various players will ensure that complementarities and synergies are identified among and across efforts and unnecessary duplications minimized. On a broader scale, this coordinated approach is also the value proposition of the National Strategy for Financial Inclusion (NSFI), the platform for public and private sector coordination to ensure synergy of efforts for a systematic approach to countrywide development through financial inclusion. This is exactly the type of coordination that has made the CMA a success. For 14 years now, we — the BSP, Citibank, Citi Foundation and Microfinance Council of the Philippines, Inc. (MCPI), together with the members of the National Selection Committee and the Country teams, and other microfinance advocates – have worked together to constantly improve the design and implementation of the program. Thank you everyone! And most of all, we thank and congratulate our CMA winners and finalists, as well as the other microentrepreneurs across the country for your steadfast and dedicated efforts that make lives better not only for your families but also for your communities. Maraming salamat sa inyong lahat! Mabuhay ang CMA Winners natin! Mabuhay ang Filipino microentrepreneurs! Mabuhay po tayong lahat! 1 National winner Honie Navor (granite and tiles), Luzon winner Richiel Vargas (gloves, bonnets, and armbands), Visayas winner Angelita Dagoc (guitars), Mindanao winner Marcelina Occena (herbal oils). Others are special awards for agri (organic fertilizer), community leadership (pastries and candies), green/sustainable business 2/3 BIS central bankers' speeches (recycled rubber tires), and youth (tablea and coffee). 2 A value chain is defined as a set of actors, suppliers, processors, and aggregators who conduct linked sequence of value-adding activities involved in bringing a product from its raw material stage to the consumers. 3/3 BIS central bankers' speeches
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Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Joint Meeting of Rotary Club of Manila (RCM) and Rotary Club of Forbes Park (RCFP), Manila, 5 January 2017.
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Amando Tetangco: Marking time - anchoring strengths amidst uncertainties Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Joint Meeting of Rotary Club of Manila (RCM) and Rotary Club of Forbes Park (RCFP), Manila, 5 January 2017. * * * I am pleased to join you today as speaker for your first general assembly of the year. It’s become a tradition of sorts between the BSP and the Rotary Club of Manila. And today marks the 12th consecutive year that we are doing this together. We are, as they say in a game of sport, 12 for 12. For the Rotary Club of Forbes Park, on the other hand, our relationship is somewhat younger. Nevertheless this does not detract from the significance that we put on engagements with stakeholders such as yourselves. As I have done in my past appearances in your meetings, I shall share with you today the BSP’s views on the economic landscape going forward and what you may expect from the BSP in terms of policy thrusts. I hope you will find this time well spent and the information I will share useful. A surreal 2016 in a nutshell Last year, I opened my remarks by saying that if we were to use the first seven days of the year as an indicator, 2016 was going to be “far from boring”. In particular, I said that it could be “riveting and challenging”. Well, that was just what had come to pass. In fact, Merriam-Webster Dictionary suggested that surreal is a word that describes the events of last year. Webster defines “surreal” as being “marked by intense irrational reality of a dream”1, also “unbelievable” or “fantastic”. Being the most searched word, surreal was declared the “word of the year” for 2016. The dictionary publisher further explained that word searches surge around specific news events. For many market observers, surreal aptly captures the occurrence of the unexpected and seemingly irrational extreme events of 2016. While there were risks and uncertainties that persisted throughout the year, such as the worry over the possibility of a hard economic landing in China; the anxiety over the direction of oil prices, and commodity prices in general; and the market meandering due to the uncertainty in the timing, pace, and magnitude of the US Fed’s policy rate normalization, there were specific events that shocked the market. These include the unexpected outcome of the Brexit referendum in June, and the upset in the close race in US Presidential election in November. Financial markets did not get both of these right. Trading positions betted on the other side of the table, so to speak, and underestimated the underlying political sentiment. The surprise resulted in episodes of elevated financial market volatility. We are mindful of these global market volatilities because the Philippines is not immune to the repercussions of global headwinds. In addition, we also have home-grown risks and “noise” to deal with. Indeed, the evolving nature of uncertainty in both the global and local environments requires that we be vigilant. Vigilance: mapping the risks for 2017 For this afternoon therefore, let me highlight three risks and describe how the BSP sees these panning out in 2017: 1/4 BIS central bankers' speeches First, the global economy is seen to remain tentative. Growth prospects for advanced economies continue to be weak. Among emerging economies, the growth outlook in China is also a concern. As you know, China has moved away from dependence on exports to more domestically-oriented sources of growth such as services and consumption. While this move has helped stave off a hard landing for China, it remains to be seen whether this rebalancing is sustainable over the medium term. In the meantime, we are seeing the rise of populist sentiment around the globe. Brexit and the Trump win are manifestations of this trend. In addition, both of these events reflect a preference for protectionist policies. Some analysts have called the latter a “retreat from multilateralism”. With continued global growth weakness, this retreat from multilateralism is encouraging countries to also look more towards domestic sources of growth. If the shift to “inward-looking policies” gains traction, this can potentially further shrink global trade, which could lead to even lower global growth. In economics, this is a classic case of the Prisoner’s Dilemma, wherein because of the absence of cooperation, the simultaneous actions of economic agents lead to sub-optimal outcomes. Closer to home, the “retreat from multilateralism” could dampen the country’s OF deployment and remittances, as well as cause slowdown in the BPO sector, thereby hurting domestic consumption. Before I move on to the next risk, let me just say that on the more specific issue of Brexit, the direct exposure of the Philippines to the UK is relatively limited. The bigger concern, however, is whether the other EU economies will follow the UK’s lead; given that our trade exposure to the EU is larger at around 12pct. As for the Trump election, we will need to see how his campaign rhetoric translates to actual policy. Our eyes and ears are tuned to January 20, when he actually takes over the White House. The second risk comes from the US Fed’s future policy rate actions. At its meeting in December 2016, when the Fed raised its target rate for the first time for the year, the Fed indicated that it would raise rates three more times in 2017. If the Fed veers from this, volatility in both the global and domestic FX and fixed income markets could rise. A steeper than expected hike in US interest rates could lead to a faster rise in domestic commercial and government securities interest rates also, as well as stronger depreciation pressures on EME currencies, including the peso. Such price movements may adversely affect the balance sheets of domestic corporates and banks, especially of those that have FX and floating-interest rate obligations. This adverse result would be magnified if the markets panic, overreact, and thus amplify the initial increases in interest rates and weakness of the peso. Moreover, a tightening in domestic financial market conditions could also dampen domestic credit activities in the near-term. However, if the reason for Fed tightness is that the underlying US economic growth has become stronger, then that may offset some of the near-term negative impact of the Fed tightening and lead to over-all support for global growth in the medium-term. On the other hand, if the Fed turns dovish (i.e., fewer or no further hikes in 2017), then that could encourage “risk on” market behavior, stall domestic interest rate increases and dampen depreciation pressures in emerging markets. But such result is unlikely, as Trumponomics, which is reported to focus on increased fiscal spending, is widely expected to be inflationary. Third. In addition to these external risks, we also have risks emanating from the domestic front such as political noise and adverse weather disturbances. Moreover, while the administration has committed to ramp infrastructure spending, they could be forced to cut back on this, should 2/4 BIS central bankers' speeches revenues from the proposed tax reform package fall short of expectation as indicated by the Secretary of Finance. If critical infrastructures are not built in time, this could hold back the country’s current economic growth momentum. A sound basis for optimism Given this outlook, how do we expect the Philippine economy to fare in 2017? For the reasons I will share shortly, our view is that the economy should be able to weather 2017 relatively well barring surprises that are more surreal than those in 2016. Economic growth remains impressive. Q3 GDP growth was reported at 7.1 percent, making the Philippines the fastest-growing among major South East Asian emerging economies. We clocked in 71 consecutive quarters of positive economic growth, and we are upbeat about Q4 outcomes given the boost from holiday spending. We also emphasize the quality of growth. Economic expansion is driven by broad-based factors. On the supply side, while services has remained the key driver of growth of the Philippine economy, the share of industry output has been expanding. On the demand side, growth has been historically buoyed by robust private consumption. This is complemented by strong capital formation as contribution of investments to overall GDP has been increasing. Moreover, the positive alignment between growth and inflation has been a sustained narrative. Headline inflation stands at 1.8 percent for full-year 2016. While average inflation is below the Government’s target range, inflation is projected to rise toward the midpoint of the target range in 2017 and 2018. In other words, inflation is seen to be manageable. The sound and stable condition of Philippine banks has also been one of the anchors of the sustained robust performance of the domestic economy. Moreover, we have put in place reforms to further strengthen governance and risk management in banks. Given the external headwinds, our defense system is reliable. Our flexible exchange rate policy provides us with a tested tool to shield the economy from temporary gyrations, while our adequate reserves and sustained current account surplus fundamentally anchor our external position. Each of these strengths is a cornerstone that we stand upon. We can therefore conclude that the economy continues to enjoy a position of strength. An arsenal to manage the risks Indeed, the economy performed well in 2016 even amidst evolving economic and financial conditions. But having strong fundamentals is just the first step, we also need to implement the structural reforms already in the pipeline, including capital markets reforms, to unleash further productivity and enhance the efficiency of intermediation. Should the risks I mentioned earlier materialize, we have ample policy space to respond. There is enough room for monetary policy to support the economy. Consider, for example, the prospects of monetary policy in the midst of US Fed normalization. The present and future stance of domestic monetary policy remain data-dependent. We will therefore act on (global) developments only to the extent that it alters the domestic inflation path. Our assessment now is that the current policy settings remain appropriate. Thus, we do not need to adjust in sync with the Fed’s rate hikes. The BSP also has a deeper policy toolkit now. This includes: (i) macroprudential regulations that can be targeted to specific sources of risks, (ii) contingency measures such as liquidityenhancing facilities, and (iii) rediscounting windows and regional firewalls that boost the flexibility 3/4 BIS central bankers' speeches and effectiveness of our actions. We intend to further refine these tools as appropriate. In terms of supervision, we continue to review and align our financial regulations and policies with international standards to improve risk management as well as ensure the competitiveness of our banks in view of ASEAN integration. We intend to further enhance our macro-financial surveillance capability by, among others, improving coordination and cooperation with other government agencies and regulators. There is also elbowroom for fiscal authorities to further boost public spending and accelerate aggregate demand and productivity growth. Concluding remarks: strength in cooperation In sum, ladies and gentlemen, the global operating environment today is certainly challenging. But we have built buffers over time. In addition, the BSP remains committed to its mandate of price and financial stability. I am sure that with a good appreciation of risks and the right amount of vigilance, the partnership between the public sector and private stakeholders (such as yourselves) would push the economy upward and forward even in the face of the downside risks. At the beginning of my remarks I mentioned that this is the 12th consecutive year we are doing this together. The number 12 has different meanings in various cultures and religions. But more universally, 12 is a number that is used to mark time. There are 12 hours on a traditional clock, and there are 12 months in a traditional calendar year. As we begin a new year, I wish to encourage everyone to mark time judiciously. Time is an equalizer. Whether you are rich or poor, in public or private sector, each of us has been given the same 24 hours each day. What we do with it, is up to us. Time is precious. You cannot take it back, if you have spent it. And you cannot recover it, if you waste it. Furthermore, if you simply stand idly by, time will also just pass you by. As you prepare for 2017, I hope that the time that we just spent together this afternoon has been useful. Once again, on behalf of the Bangko Sentral ng Pilipinas, I wish Rotary Club of Manila and the Rotary Club of Forbes Park, a prosperous, successful and hope-filled 2017! Mabuhay po tayong lahat! Maraming salamat po! 1 “Surreal named Word of the Year.” An article in Washington Post dated 20 December 2016. 4/4 BIS central bankers' speeches
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Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 2017 Annual Reception for the Banking Community, Manila, 10 January 2017.
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Amando Tetangco: The Philippine banking system - the past, the present and the future Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 2017 Annual Reception for the Banking Community, Manila, 10 January 2017. * * * It is a tradition that we host this reception at the beginning of the year, when we commemorate the anniversary of central banking in the Philippines. For the information of those among us who are too young to remember, the Central Bank of the Philippines or the CBP opened for business for the first time on January 3, 1949; that’s 68 years ago. And while the country’s central monetary authority is now the Bangko Sentral ng Pilipinas — whose 24th anniversary we will celebrate on July 3, 2017 – we maintain the tradition of holding this annual event at the beginning of the year. To us, this is the perfect time to reflect on the past, the present, the future and how we can make things work even better, moving forward as one community. 2016 has been described as a year like no other – it started off with a bang, with China’s stock market on a seeming free fall that shook global markets; we saw for the most part of the year global anxiety over the timing, pace and magnitude of the US Fed policy rate decision; by midyear, the unexpected Brexit results shocked us; then came the surprise victory of US Presidentelect Donald Trump. 2016 ended with the world uncertain over global politics and policies and how these would impact on economies and people. Indeed, 2016 brought volatility, uncertainty and other threats to growth and stability. In the Philippines, strong fundamentals borne out of the continuing pursuit of a reform agenda, kept our economy going… and growing. And once again, we achieved convergence of low inflation (below 2%) and healthy growth. The Philippine economy grew by a 7.0 % in the first three quarters of 2016, giving us the distinction of being among the fastest growing economies in Asia. And it is broad-based growth we can be proud of: it was supported by a strong services sector, a resurging industry and manufacturing sector, a rebounding agriculture sector, and robust consumption and capital formation. Our external position also provided additional support to the economy. The peso remained in line with regional movements, while our current account continued to register a surplus. Our international reserves as of end 2016 stood at US$81 billion, adequate to cover over 9 months’ of imports of goods and payment of services, as well as to cushion us from unexpected external shocks. The Philippine banking industry played a significant role in helping sustain the pace of growth of our economy. Bank lending continued to expand by double-digit rates and went mostly to productive sectors. As of November 2016, consolidated bank loans reached P7.4 trillion, almost 19% (18.5%) higher than the year-ago level. Indeed, the banking sector kept pace with the growth of our economy. Total assets of the banking industry reached P13.2 trillion, over 12% (12.4%) growth from the November 2015 level, while deposits increased by more than 13% (13.5%) to P10.1 trillion, an all-time high. Significantly, asset quality improved further with non-performing loans at 2.0% while capitalization 1/3 BIS central bankers' speeches remained comfortably above the minimum required under national and international standards. And the banks continued to report profits. In other words, ladies and gentlemen, the Philippine banking sector not only survived 2016, it continued to thrive. And more than these, our stress tests indicated that our banks can withstand extreme shocks in both credit and market risks. Third party analysts also have positive reviews concerning our banking industry. For instance, the Philippines is the only banking industry within Asia Pacific that was given positive outlook by Fitch Ratings in 2016. Meanwhile, Moody’s recognized our banking industry as the only one within ASEAN that has a stable outlook on all rating factors — operating environment, asset quality and capital, profitability, funding and liquidity. Indeed, our banking sector is sound, stable, and continues to be a source of strength for our economy. The Philippine economy has recorded 71 quarters of uninterrupted growth. Our banks helped nurture this virtuous cycle for our economy. Let us therefore congratulate the leaders of our banking industry for making this happen. Let us also thank other institutions that support our banking system. Of course you and I know that it was not easy getting here. Together, the Bangko Sentral ng Pilipinas and the banking sector worked together to continue to strengthen our banking system, raise risk management standards, and align governance standards with international best practices. The process of collaboration has been challenging but our performance does speak for itself. Today, we find ourselves in a strong position to ride out the waves of change. Nevertheless, we are fully aware that past success does not guarantee immunity from future challenges. Ladies and gentlemen, there is irrational exuberance, just as there is radical uncertainty, with periods of calm in between. This is our present reality and we must constantly work for balance and re-balance, managing the pace and the content of foreseeable change in our own spheres of responsibility. As market stakeholders, we must see change in the factors that reshape the markets and their participants. The core agenda of the BSP and the past 12 years provide a rich canvass from which we can draw some highlights. We shifted to a risk-based supervisory framework so that we can assess the behavior of bank management against standards of safety and soundness; obviously, mere paper compliance is not acceptable. This behavioral focus was enriched by other complementary reform strands such as the governance standards of the Board of Directors and bank Senior Management, the amendment to the compliance framework, as well as several other reforms on risks related to credit, market, operations, and IT management. We introduced higher bank capital thresholds so that banks can navigate a more interconnected and sophisticated financial market system. The BSP likewise enhanced its cooperation and coordination efforts. The Financial Stability Committee (FSC) was set up with a mandate to conduct effective macro-prudential surveillance of the financial system, detect signs of instability, and coordinate policy responses with other regulatory agencies. With the sovereign elevated to investment grade, the Philippines needed to re-position to better manage cross-border commerce. In this connection, we thank Congress for its full support of initiatives liberalizing foreign entry into the banking system. This eventually became law, 2/3 BIS central bankers' speeches specifically RA10574 and RA10641. On the latter, we are happy to report that nine banks have entered the Philippine banking industry thus far, with six more banks expressing interest. Moreover, to guarantee that our monetary policy actions are better transmitted into market pricing, we introduced the Interest Rate Corridor last year. Having market rates better aligned with the BSP policy rate ensures a better transmission of monetary policy into the real economy. This has also set the stage for the progressive roll-back of high reserve requirements as we develop the sophistication of our policy instruments. Meanwhile, the emergence of fintech in a market, driven by the needs of millennials is also expediting a shift in products and the delivery channels for services. The BSP facilitated this thru innovative and responsive regulatory changes of its own. While all these changes were happening in the banking system, our continuing focus on developing a more inclusive financial system resulted in more concrete gains – in terms of providing access to financial services, consumer finance education and stronger consumer protection. The intentional parallel thrust ensures that the growth of the banking system would be truly responsible and responsive. And we have received awards and international commendations for these efforts and initiatives. Indeed, we have seen a sea change, a significant transformation in the banking sector. As governor of the Bangko Sentral ng Pilipinas for 11 1/2 years now, I have had the privilege of managing, with you as partners, the content and the pace of change for the banking industry, seeing it evolve to where it is today, and moving it forward to help secure a better future for our economy, for our people. As we prepare to handle the challenges of this new year, allow me to call on stage my colleagues in the Monetary Board. Their collective wisdom enables us to craft policies that have secured for us the stability of the past and the present, and the promise of an exceptional future. It is an honor working with them. May I call : MBM Alfredo Antonio MBM Felipe Medalla MBM Armando Suratos MBM Juan D. De Zuñiga and MBM Val Araneta. Indeed, time flies. I end my second term as Governor of the Bangko Sentral ng Pilipinas on July 2, 2017. I take this opportunity therefore to thank the leaders of our banking industry and the BSP’s partner institutions for working with us through the worst of times, the best of times, and all the time in between. Together, we have nurtured a vibrant and dynamic banking sector that is sound, stable and globally competitive. Indeed, it is a banking industry we can all be proud of. Ladies and gentlemen, let us offer a toast. To blessings of peace and prosperity for everyone, for our people and our country. Mabuhay ang Pilipinas, Mabuhay po tayong lahat! Cheers! 3/3 BIS central bankers' speeches
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Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Signing of the Memorandum of Agreement for the Banking on Your Future (BOYF) Kiddie and Teen Account Program and the Awarding Ceremony of the 2015-2016 Guro ng Pag-Asa, Manila, 7 March 2017.
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Amando Tetangco: Financial inclusion Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Signing of the Memorandum of Agreement for the Banking on Your Future (BOYF) Kiddie and Teen Account Program and the Awarding Ceremony of the 2015-2016 Guro ng Pag-Asa, Manila, 7 March 2017. * * * Fellow advocates of financial education and financial inclusion, special guests, good afternoon and welcome to the Bangko Sentral ng Pilipinas! On behalf of the Members of the Monetary Board and our fellow central bankers, we thank you for joining us to celebrate two milestones in our continuing program to develop an inclusive financial system to promote inclusive growth. Today, our focus is on two complementary programs that we are implementing in partnership with the Department of Education and our banking industry. Our goal is to raise financially responsible Filipinos starting with our schoolchildren and to promote good money habits such as saving regularly by providing our youth access to childfriendly deposit accounts and other bank products. We are honored therefore that Secretary Leonor Briones of the Department of Education is with us, along with our outstanding finance education teachers whose achievements we celebrate today, bank industry leaders including Bankers Association of the Philippines President Nestor Tan of the BDO, Bank Marketing Association President Ann Marie Ducanes of China Bank, Bankers Institute of the Philippines President Liza Ortiz, and representatives from the Chamber of Thrift Banks and the Rural Bankers Association of the Philippines. Our first milestone is the signing of a Memorandum of Agreement where the depositor-friendly Kiddie Account Program for children up to 12 years old is amended… to now include teens up to 19 years old. Under this program, Filipinos 19 years and below can open a savings account with 17 participating banks with a minimum deposit of one hundred pesos (P100.00), with no maintaining balance required. The MOA is timely as it is aligned with the DepEd’s program to include financial lessons in the new curriculum of K to 12 students. Aside from targeting a wider market of savers, we also wish to help those who have started the habit of saving to sustain it until they graduate and start working. Before the MOA amendment, Kiddie deposit accounts reverted to regular accounts once the depositor reached the age of 13 years. The depositor-friendly accounts were introduced as part of the Banking on Your Future program of the BSP and the banking sector. That the number of participating banks has increased from 10 (in 2012) to 17 today is a good sign – rightfully, our banks are taking the long view that this is a developmental undertaking that will ultimately benefit not only young depositors but also our banks and our economy as a whole. Let us therefore acknowledge the participating banks who have welcomed more than a million kiddie savers. The top three banks with the highest number of kiddie savers are BDO, BPI and PNB, followed by RCBC Savings, Security Bank, PSBank, EastWest Bank, Veterans Bank, Development Bank of the Philippines, and China Savings Bank. Let us also acknowledge the additional banks under our new Memorandum of Agreement: BPI 1/3 BIS central bankers' speeches Family Savings Bank, RCBC, Maybank, UCPB, UCPB Savings Bank, Sterling Bank and Metrobank. We look forward to higher numbers under this expanded Kiddie and Teen Account Program. Our second milestone this afternoon is the awarding of our outstanding teachers for financial education under the DepEd-BSP’s Gantimpala Para sa Ulirang Pagtuturo ng Pag-iimpok at Araling Pansalapi, more popularly known as Guro ng Pag-Asa. Using teaching guides jointly developed by DepEd and the BSP, teachers developed creative and effective ways to impart lessons on saving, money management and basic entrepreneurship to their pupils. The common denominator among our awardees is that they have also brought financial education to their communities to help improve lives. In other words, they have become agents of positive change not only in their schools but also in their communities. At the same time, our student-awardee this year for Bida sa Pag-iimpok and Pangkabuhayan is remarkable not only for his good money habits but also for his entrepreneurial drive and social consciousness. He donated a sewing machine to a person with a disability so that she could start her own entrepreneurial venture. Indeed, we are heartened by stories about children who took financial lessons to heart and went on to inspire their families to adopt sound financial habits. Let us give all our awardees a well-deserved round of applause. Let us also thank those who have worked behind the scenes to make our Guro ng Pag-Asa program a success — the Board of Judges, represented by Dr. Marilette Almayda, DepEd Director for Learning Delivery and the Screening Committee who went through voluminous nomination documents and visited each of our Finalists from all over the country. Moving forward, I hope that the ties that bind us to our common goal will continue to nurture a new generation of financially educated and included young citizens. To us at the Bangko Sentral and the DepEd, financial education is important and necessary. The ability to handle one’s finances properly is a lifelong skill one must have to be a responsible and successful adult. The ideal place to start is in schools where children are learning and developing what could be lifelong habits on spending, saving and earning money. We all know the phrase, “our children are the future of our nation.” To us, this is not rhetoric. It is a truth and it gives us a sense of purpose and urgency. This has given impetus to our joint programs. In fact, our efforts have caught the attention of finance education advocates in other countries. In 2013, the Netherlands-based Child and Youth Finance International which is at the forefront of a global campaign to promote finance education and savings gave us the country award for having the best finance education and savings program. They were curious and actually wondered how we were able to work with our Department of Education to teach financial lessons as part of the curriculum as well as to inspire our biggest banks to welcome kids to open accounts with them with deposits of less than US$3.00 at that time. Let us therefore thank the DepEd and our banks for their strong support and for being on the same page with us. Ladies and gentlemen. The timing of this year’s awards ceremony is fitting as it falls at the culmination of Global Money Week. This is a worldwide celebration that aims to create greater 2/3 BIS central bankers' speeches consciousness among children and youth about proper handling of money and how it can help them secure a brighter future. I am pleased to share that in November 2016, our participation in Global Money Week was acknowledged by Child and Youth Finance International as among the best in Asia. Under this, pupils interacted with those from other local schools and with their counterparts from Brunei and Russia through video conferencing and social media chats to share their views and practices on saving and handling money. Our students were enthusiastic and proud for being part of a “cool” global community of savers. It is our hope that through our continuing joint programs, millions of young Filipinos will benefit from financial education, being financially included, globally competitive, and being able to contribute to making our economy better, bigger and stronger. Maraming salamat sa inyong lahat! 3/3 BIS central bankers' speeches
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Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the EU-ASEAN Business Summit, Manila, 10 March 2017.
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Amando Tetangco: Advancing cooperation in an increasingly noncooperative world Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the EU-ASEAN Business Summit, Manila, 10 March 2017. * * * For over 250 years, Manila was the port of the Galleon Trade that fostered two-way trade between Asia and Europe via Mexico. And this year, the 50th anniversary of ASEAN, marks the Philippines’ assumption as Chair of the ASEAN, with the responsibility to promote activities related to our regional goals. It is fitting therefore that Manila is hosting this year’s ASEAN-EU business summit, the objective of which is to promote trade and further strengthen our economic relations. A strong history of friendship A strong history of friendship for 40 years now, binds the ASEAN and the EU. This partnership has established many milestones in terms of economic cooperation, enabling us to enjoy the benefits of robust and dynamic trade and investments , with the accompanying positive effects on overall growth. Today, the EU is ASEAN’s second largest trading partner, while ASEAN is the EU’s third largest trading partner outside Europe. In 2016, total trade between ASEAN and EU reached over EUR 200 billion (EUR207.89 billion), having been on a consistent uptrend for the past four years. Opportunities beyond trade The opportunities for stronger economic relations between the EU and ASEAN abound. Amb. Jessen and ECCP President Taus mentioned a number of important areas of cooperation. I will add the following for further cooperation: The first is on the development of micro, small and medium enterprises (MSME) as a platform for promoting inclusive and sustainable growth. Both ASEAN and EU give primacy and importance to MSMEs – in ASEAN, they account from 88 to 99 percent of total establishments, with the large majority of member countries at high 90%, while in the EU they represent 99% of establishments. Closer cooperation can expand market access for both our MSMEs, which is crucial for generating employment and ensuring a competitive and dynamic business environment. We need to support their integration into the supply and value-chain. On the policy level, we need to double our efforts to expand their access to finance and other support services. The second opportunity for cooperation is the development of the digital economy, which has been tagged as the Fourth Industrial Revolution. We see how digital trends such as social media and cloud computing are radically changing the business landscape. With an estimated value of USD19 trillion over the next decade, digitization has the power to enable countries to boost GDP growth, job creation, and innovation. Through enhanced transfer of knowledge and technology sharing, the EU and the ASEAN could potentially be transformed into full-blown digital economies. The third area for stronger cooperation is human resource development. With EU’s population of 510 million and ASEAN’s over 625 million people, we have the potential to develop formidable pools of talent and productivity. We can harness these through policies that support healthy exchange and flow of talent, as well as the development of appropriate education and skills. 1/2 BIS central bankers' speeches Ladies and gentlemen, to me these are imperatives for cooperation to make growth in ASEAN and EU both sustainable and inclusive – the development of MSMEs, the development of a digital economy and advancing human resource development. This is particularly relevant today when the global environment remains confronted with certain challenges. One major risk we face is the growing tendency towards protectionism and populism. Brexit and the potential shift in US economic policies are manifestations of this trend. If these inwardoriented sentiments continue to gain traction, this will undermine cooperation and potentially shrink global trade. This could, in turn, derail the global economy’s already protracted path to recovery. Another challenge is the re-emergence of monetary policy divergence. In particular, the US Fed is signaling a continuation of its normalization path through policy rate increases while other central banks in major economies remain accommodative by keeping a lid on interest rates. This divergence can result in volatility in financial markets and possibly dampen credit activities in the near-term and growth in the longer-term. Given, all these, the challenge is how to achieve economic resilience. In the Philippines, our thrust over the years has been to focus on ensuring sound macroeconomic fundamentals and building these as homegrown sources of resilience. Such focus has yielded considerable gains for us. We have registered 72 consecutive quarters of uninterrupted GDP growth, propelled by broad-based economic drivers, well-managed inflation environment, sound external sector dynamics, and a stable banking system. Headline inflation of 1.8 percent for 2016 reflected the prevailing manageable environment of low and stable prices. Average inflation for the first 2 months of the year is at 3 percent, exactly at the midpoint of the government’s target range. This is consistent with our expectation that inflation will settle within the target range of 2 –4 percent in 2017 and 2018. This environment gives us a sound basis to be optimistic about the Philippine economic outlook. We believe that the economy can attain its GDP growth target of 6.5-7.5 percent for the year, and remain a source of strength for the ASEAN region. Moving forward, our fundamentals will serve as the spring of resilience in the economy amidst the external headwinds. In addition, our young and dynamic work force is teeming with potential as a source of labor productivity and quality. Both our fiscal and monetary sectors also have ample policy space to respond to the materialization of exogenous shocks. We have room to accelerate government spending to build needed infrastructure, generate jobs and support economic growth. At the same time, the monetary authorities have the flexibility to adjust policy, if needed, to sustain price and financial stability without sacrificing economic activity. In other words, investors can expect not only sources of value but also anchors of stability in investing in the Philippines. Thus, our country will continue to provide a conducive business environment and outstanding value to investors. Conclusion Ladies and gentlemen, in this time of uncertainty, better and stronger global cooperation is the best way forward. It is up to us to calibrate, adjust and evolve the means by which we connect our shores and advance our exchanges. I hope therefore that through this summit, the partnership between the EU and ASEAN will work toward achieving collective resilience and renewed growth, amidst diversity and asymmetry in economic conditions. I wish you all a successful and productive summit. Thank you and Mabuhay! 2/2 BIS central bankers' speeches
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Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Annual Reception for the Closing Plenary of the 29th National Convention of the Bankers Institute of the Philippines, Tagaytay City, 11 March 2017.
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Amando Tetangco: Philippine banking in an integrated regional financial market Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Annual Reception for the Closing Plenary of the 29th National Convention of the Bankers Institute of the Philippines, Tagaytay City, 11 March 2017. * * * Good evening everyone! It is a great pleasure for me to join BAIPHIL’s 29th national convention. BAIPHIL is important to us. You are one of the key partners of the BSP in ensuring that the quality of bank personnel meets the rigorous requirements of our banking system. This is crucial — our banking sector has grown into a P13.5 trillion industry in terms of assets and is responsible for deposits that have reached a record high of P10.4 trillion as of December 2016. This is a great responsibility. Given this, and as we consider the way forward, let me take this opportunity to share with you my thoughts about critical developments that will define our financial markets in the years to come. I will take this opportunity therefore to share my thoughts about critical developments that will define our financial markets in the years to come. Ladies and gentlemen. 2017 is bound to bring on a new set of challenges to the global economy with Brexit, policy changes in the US under its new President, the US Fed’s decision to increase policy rates, and China’s decision to pursue stability by moderating economic growth. The IMF sees some softening from Asian emerging markets, but projects a modest growth overall in the world economy. What about the Philippines? Well, you will be pleased to know that quite a number of multilateral agencies and global institutions expect the Philippines to outperform many of our economic peers. Nevertheless, we should not be complacent. Given the sea change unfolding in the global markets, we need to be strategic in our thinking and deliberate in our collective actions if we are to successfully navigate through emerging challenges. One area where we find challenges and opportunities for us, is the ASEAN integration. If we revisit the underpinnings of ASEAN market integration, we find that its vision is premised literally on the concept of building a community. And like all communities, the ASEAN Community is itself built around different components, specifically, developing a Political-Security Community, a Socio-Cultural Community and an Economic Community. With the establishment of the ASEAN Economic Community or AEC in 2015, we are now at that phase of formally consolidating the 10 ASEAN markets into a single economic base. To achieve this, it is necessary that we have an integrated and well-functioning regional financial system. This is defined under the ASEAN Financial Integration Framework or AFIF. Within the AFIF is the integration of the banking markets. This is what we refer to as ABIF and it is being pursued alongside the integration of the other facets of the financial market such as the payments and settlement system, the capital market, and the insurance sector. A proper response to your chosen topic of what ASEAN integration means to Asian and Philippine banking must therefore take a holistic view that considers ABIF in the context of AFIF, which in turn is an essential element of the AEC, which itself is only 1 of the 3 “communities”. There are many moving parts in ASEAN integration but it is clear that the envisioned upside is premised on economies of scale and scope. Latest statistics from the ASEAN Secretariat tell us 1/4 BIS central bankers' speeches that ASEAN represents USD2.4 trillion in combined GDP, making it among the 10 biggest economies in the world. Over the past decade and a half, ASEAN was the 3rd fastest growing economy in the world, behind only China and India. ASEAN has a population base of 629 million, 35% of whom are below 20 years old. Total trade volumes reached a high of USD2.53 trillion in 2014 and FDI inflows, USD120.8 billion in 2015.1 Clearly, these are not small numbers; but they are relevant only if we see ASEAN as an integrated market. Taking full advantage of this aggregate size and collective economic strength is precisely the point of integration so that there is freer movement of goods and services as well as of labor and capital. In ASEAN’s vision, this will allow for the unbundling of distribution from production, so that one can produce in the jurisdictions which have the comparative advantage for the product and have the product sold in other jurisdictions where there is greatest demand. The freer movement of capital is not only for production, it also holds true for the regional financial market. When compared with other regional blocs or other countries in the world, ASEAN is well-documented to have a higher saving rate relative to GDP. Cross-border portfolio flows data confirm, however, that ASEAN minimally invests into ASEAN. Thus, an important opportunity of an integrated ASEAN market is the re-channeling of regional savings back into ASEAN. What do all of these mean for Philippine banks? What do you think? To me, this is a task which is squarely within your sphere of competence. With the path ahead defined, it would be a serious error for one to think that all these remain within the realm of the abstract. For your information, the AEC Blueprint 2025 has been finalized and is freely available for download via the ASEAN website. Within that blueprint are identified milestones that are monitored continuously for their progress. Thus, the different moving parts that I mentioned earlier have been set in motion and working towards the envisioned outcomes. I have talked about the collective advantage of ASEAN integration but is there a specific upside for the Philippines and Philippine banks? From the perspective of macroeconomic activity, there is significant room for the Philippines to move up because we have arguably more stable fundamentals than most, if not the rest, of the region. We have achieved 72 consecutive quarters of uninterrupted growth, a remarkable record considering the market environment over this period. And today, the Philippines is one of the fastest growing economies in the world. In the financial markets, the Philippines can target a larger portion of ASEAN savings. Here we lag behind Indonesia, Malaysia, Singapore and Thailand. The same is true for external trade, another potential growth area for the Philippines. In both portfolio investments and in external trade, Philippine banks have a clear role to play as an intermediary, paying/collecting agent and investment advisor. Of course, the possibilities are not limited to those within the purview of the banking system. Taking in more market share within ASEAN means that we move forward to develop our capital market and to institutionalize crossborder payments and settlement arrangements. The critical elements under the ASEAN Financial Integration Framework are securities, insurance, the payment and settlement systems and finally, banking or ABIF. This is where the Philippines can set specific targets for increased market share in the region. Ladies and gentlemen. ABIF is now unfolding — it provides us with opportunities. The strategic issue therefore is how you will now operate given that regional integration is upon us. Should you choose to be a Qualified ASEAN Bank or a QAB, you have added opportunities in a bigger market but you have to deal with new aspects of competition, different market conditions, and differences in capital requirements, among others. 2/4 BIS central bankers' speeches On the other hand, those who choose to “stay home” so to speak, are not necessarily shielded from heightened competition. Indeed, banks need to have a good competitive strategy even if they are not immediately aspiring to be QABs. We have seen how foreign banks that enter our market reshape competitive forces. Aside from QABs, even outside the ABIF guidelines, foreign banks can still come into our shores under the purview of RA 10641. As you are aware, our strong fundamentals and sound banking system keep the Philippines an attractive destination for investments. Already, nine foreign banks have entered our banking system thru RA 10641 while another six banks are in various stages of talks with the BSP. ABIF makes it imperative that you improve your competitiveness by lowering operating costs, increasing product and service innovations, and improving service quality. This requires more investments in technology and training. Ultimately, this needs more capital and scale to thrive. The changes that come with ASEAN integration, however, will be akin to a process unfolding. While the framework is already approved, the transition will be gradual. Now, then, is the time to consider your options. This is true for non-QABs and for QABs. Whether it is backroom support or frontline services, what is certain and necessary from a classic BAIPhil perspective, is the development and upgrading of skills and training programs not only in banking but also in areas such as market surveillance and regulatory reforms. Preferring the status quo will be a competitive disadvantage. Change is the reality and banking organizations such as BAIPhil have a significant role to play in navigating the banking industry toward a new competitive landscape. Clearly, much needs to be done; but I am positive you will be up to these emerging challenges. Let me assure you — the BSP is working with the banking community to prepare the way for ABIF. Among others, the BSP has been upgrading the supervision framework in line with international standards, especially on corporate governance and risk management; requiring capital build-up and encouraging mergers and consolidations; and opening up barriers to entry. And in accordance with ABIF, the BSP has signed a high-level agreement with Bank Negara Malaysia governing QABs and looks forward to forging at least two more agreements as early as next month. In addition, our Supervision and Examination Sector and the newly-created Office of Systemic Risk Management will engage the banks in discussions to demystify and clarify the concepts behind ABIF and AFIF as you operate in an integrated and more globally-active ASEAN market. But even as you prepare for ASEAN integration, I hope that you will always be mindful and never lose sight of the risks before you. Always make sure that you operate in a safe and sound manner, keeping in mind the interest of financial consumers who have entrusted their resources with you. Finally, I wish to thank the BAIPHIL for its continuing support and cooperation with the BSP in keeping the banking system sound and stable. I particularly thank you for your active participation in the BSP’s financial education program by teaching thousands of parents and teachers sound money management. This has enabled our public school teachers to become excellent financial educators, at least two of whom were chosen National Awardees under the DepEd-BSP’s Guro ng Pag-Asa Awards. The awards were given last Tuesday by Education Secretary Leonor Briones, yours truly, and members of the Monetary Board, in the presence of bank industry leaders and BAIPHIL’s President Liza Ortiz and Marilen Ruiz of your Special Projects Committee. 3/4 BIS central bankers' speeches BAIPHIL, you walk your talk. You train bank employees and share your financial management expertise with the unbanked and underbanked. All of these to make our banking system stable, inclusive and a channel for promoting inclusive growth. I will always remember BAIPHIL for this. Ladies and gentlemen. This is the last time I will join your National Convention as Governor of the Bangko Sentral ng Pilipinas. I take this opportunity therefore to thank all of you and wish that all your efforts will contribute to make our banking system better, stronger, and more responsive to the needs of our people and our country. Maraming salamat! Mabuhay po tayong lahat! 1 Data taken from the “ASEAN Community in Figures 2016” published by the ASEAN Secretariat. 4/4 BIS central bankers' speeches
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Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Annual Convention of the Chamber of Thrift Banks, Makati City, 14 March 2017.
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Amando Tetangco: Philippine thrift banks in a changing environment Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Annual Convention of the Chamber of Thrift Banks, Makati City, 14 March 2017. * * * The officers and members of the Chamber of Thrift Banks under the leadership of President Gregorio Anonas III, distinguished colleagues from the banking industry, special guests, ladies and gentlemen, good morning! It is always a pleasure to be with the CTB for your annual convention. Today, I will discuss macroeconomic developments, the state of the thrift banking industry and how CTB members can redefine themselves in this constantly changing environment. Macroeconomic conditions and prospects The good news is that in the midst of uncertain global economic conditions, our own macroeconomic fundamentals remain solid and intact. The Philippine economy continued its growth story in 2016 with a full-year GDP1 growth of 6.8 percent, higher than the 5.8 percent growth achieved in 2015. This is also at the high end of the National Government’s growth target of 6.0-7.0 percent for 2016. At this rate, the Philippines has one of the fastest-growing economies in Asia2. Our growth was generally broad-based, fuelled by investments and consumption. Strong domestic demand was underpinned by low inflation, a stable interest rate environment, and improving labor market conditions. Over the policy horizon, we see inflation remaining manageable and within the government’s target range of 2 to 4 pct. Meanwhile, our flexible exchange rate policy and adequate reserves3 continue to provide buffers against potential external shocks that can affect the domestic economy. Sound and stable banking system The Philippine banking system has remained a source of strength for our economy. Resources of the banking system continue to grow at a steady pace and fund economic activities, with deposits rising to record levels. This affirms sustained public confidence in our banking system. In particular, the thrift banking sector continues to support the growth of the Philippine banking system. Consolidated assets expanded by 8.3 percent and reached P1.1 trillion as of endDecember 2016. Industry assets breached the one trillion-peso mark for the first time in last year. At the same time, capitalization moved up by 6.1% while deposits increased by a robust 9.7 percent.4 Ladies and gentlemen, you will agree these are good numbers. Asset quality is satisfactory with gross NPL ratio at 4.7 percent as of end-December 2016 (better than the average in the last five years) while capital adequacy ratio (CAR), as a measure of riskbased capital, remains well above the minimum BSP and international standards. For instance, the CAR of stand-alone thrift banks was at 19.7 percent as of June 20165 In terms of profitability, industry figures were also better. Net income for 2016 reached P13.9 billion, higher by 17.8 percent than in 2015. Return on Equity (ROE) improved to 10.5 percent. The Role of Thrift Banks in Countryside Development 1/4 BIS central bankers' speeches In other words, ladies and gentlemen, the thrift banking industry is well-placed to support countryside development moving forward as reflected in your convention theme “Maximizing Opportunities in Countryside Development.” That you have aligned your program with the Government’s 10-point socio-economic agenda of promoting countryside development is both commendable and timely. Just recently, the Government approved the Philippine Development Plan (PDP) 2017–20226. The objective is to reduce overall poverty rate to 14 percent and poverty incidence in the rural areas to 20 percent by year 20227 by promoting inclusive growth. I am glad therefore that you have a special forum on the Philippine Development Plan later today. This will help you determine your roadmap moving forward. Meeting the challenges/pushing MSMEs There are many opportunities to help develop the countryside, particularly within your targeted niche of catering to the MSMEs. The MSME sector is a cornerstone of economic growth. We have seen how successful MSMEs liberate people from poverty by creating jobs and serving as catalysts for growth in their communities. This is the rationale behind BSP’s continuing collaboration with the industry and other agencies of government to create an enabling regulatory environment for increased access to finance, particularly for MSMEs. Among the challenges that we have helped address include: 1) the use of collateral and developing product lines; 2) the difficulty to expand reach, given our archipelagic configuration; 3) the competition from the “big boys” and now the advent of ASEAN integration; and 4) the changing external macroeconomic environment. Addressing collateral On the issue of collateral, the BSP initiated in 2008, the Credit Surety Fund (CSF) Program. This enabled cooperatives, without sufficient collateral, to access bank loans on the strength of a credit guarantee. The Program was institutionalized through the passage of Republic Act No. 10744 also known as the “Credit Surety Fund Cooperative Act of 2015.” This should further enhance MSMEs’ access to credit. Parallel to this, the BSP strengthened credit risk management guidelines for banks. This emphasizes cash flows and the “ability to pay” of a borrower in determining creditworthiness. Through this regulation, the BSP is signalling that collaterals should play a secondary role in credit decisions. The same regulation exempts start-up enterprises from submitting documents evidencing financial capacity and business plans; these documents are usually required from regular borrowers in the first three years of their banking relationship. Moreover, to help channel funds to the agricultural and fisheries sector, the BSP approved the Agricultural Value Chain Financing (VCF) Framework. By encouraging linkages among various players in an agricultural value chain, the credit risk of participating farmers can be reduced and thereby facilitate their access to credit. A study is now being conducted to expand this framework to cover the MSME value chain. In particular, we are looking into potential regulatory incentives to further encourage MSME financing. Ladies and gentlemen. All these are being laid down, so that thrift banks can help meet the financing needs of MSMEs and the agriculture sector, in support of countryside development. This could be for investments, for working capital and for business expansion. 2/4 BIS central bankers' speeches Expanding physical and virtual reach On the issue of reach. Currently, of the 1,634 cities/municipalities in the country, 35.6 percent are still considered unbanked.8 Establishing bank branches in less urbanized areas remains a challenge due to generally low population density, geographic inaccessibility, and prevailing socio-economic situations. These barriers pose a huge challenge to financial access. This is the reason why the BSP has set its sights on digital innovation as the primary catalyst to reaching greater scale. Part of these initiatives is the approval by the BSP of the setting up of micro-banking offices (MBOs), which as you know are low-cost banking infrastructure that can be established where it is not feasible to set up a regular branch. We have also put out regulations on e-money and mobile banking. Recently, the BSP issued regulations allowing banks to use third party cash agents as a costeffective service delivery channel. With cash agents, banks will be able to strategically leverage on innovative digital banking solutions and expand markets, even in the low-income and far-flung areas. While financial innovation is revolutionizing the manner of delivering banking products and services, it has pluses and minuses. The opportunities FinTech brings come with heightened market competition and threats from cyber-attacks. These have significant implications on banks’ risk management and consumer protection frameworks. Being ready for competition Thrift banks should also be ready for competition. Internally, from the larger banks that are expanding their networks into TBs’ traditional market of consumer finance. And, also from the entry of foreign banks. If you recall, the local banking industry has been opened up to foreign competition with the enactment of RA 10641 in 2014 9. So far, two foreign banks 10 acquired existing domestic thrift banks following the passage of the said Law. While these forces may put pressure on thrift banks, competition creates more options for the consumer, in particular, and raises economic welfare, in general. Thrift banks would therefore be served well if they would view competition such as this — as the impetus for “raising their game”. It certainly cannot be business as usual for the industry. Indeed, there are many opportunities to better serve your chosen markets. In pursuing these opportunities, we enjoin you to remain prudent. In this increasingly integrated and globalized financial environment, it is important for thrift banks to always be guided by the tenets of effective risk management and sound governance standards. A changing global environment Thrift banks should fully prepare to address the risks and challenges that will come with growth opportunities in this rapidly changing business environment. In addition, the industry should be mindful that loan exposures to particular market segments — such as consumers, MSMEs11 and agriculture — are vulnerable to market shocks. This is very relevant during this period when the Fed is broadly expected to proceed with its next steps toward interest rate normalization. While you have heard me say that the BSP will not necessarily move in sync with the Fed and that our courses of action remain data dependent, we must be mindful of heightened volatility in the FX market during this transition to Fed normalization. We also need to be watchful of changes in global growth and inflation dynamics. All of these, in addition to our own domestic concerns that include exposures to natural calamities. 3/4 BIS central bankers' speeches Careful and constant monitoring therefore of possible risk escalation from these exposures requires vigilance. Final thoughts Ladies and gentlemen. The CTB’s role as the unifying voice among thrift banks makes you a key partner of the BSP and the National Government in achieving our medium-term development goals. Indeed, thrift banks play a crucial positive role in the transformation of our countryside as areas of growth and development. For this reason, the BSP will continue to collaborate with the CTB to make sure that our reform initiatives will lead to a robust thrift banking sector, a dynamic countryside and a strong economy that fosters inclusive growth. Ladies and gentlemen. Friends. This is the last time I will be addressing the CTB’s annual convention in my capacity as BSP Governor. I take this opportunity therefore to thank CTB members, officers and trustees — past and present – for your steadfast support and cooperation in keeping the thrift banking industry responsive, productive and inclusive. Congratulations and thank you CTB! Mabuhay ang ating mahal na bansang Pilipinas! Mabuhay po tayong lahat! 1 Refers to gross domestic product in real terms 2 Compared to Indonesia’s 5.0 percent, Malaysia’s 4.3 percent (Q3’16), Thailand’s 3.2 percent (Q3’16), and Singapore’s 1.1 percent (Q3’16) (Source: Central Bank websites, Bloomberg, CEIC Data Limited, and International Financial Statistics) 3 As of end-February 2017, gross international reserves (GIR) reached USD81.1 billion. This is sufficient to cover 9.2 months worth of imports (Source: Bangko Sentral ng Pilipinas). 4 Source: www.bsp.gov.ph/statistics/statbskrtb.asp 5 As of end-September 2016, the capital adequacy ratio (CAR) of subsidiary TBs registered at 15.9 percent on solo basis. On the other hand, the CAR of stand-alone TBs recorded at 19.7 percent as of end-June 2016. 6 The PDP was approved on 20 February 2017 during the third NEDA board meeting at the Malacañang. 7 Source: National Economic and Development Authority 8 It include the provinces in Northern Luzon, Central and Eastern Visayas, Northern Mindanao, Zamboanga Peninsula and the Autonomous Region of Muslim Mindanao (ARMM). 9 Refers to the Act Allowing the Full Entry of Foreign Banks in the Philippines on 15 July 2014 10 Refers to Yuanta Commercial Bank Co., Ltd. of Taiwan which acquired Tong Yang Savings Bank and Woori Bank of South Korea which acquired 51 percent of the voting stock of Wealthbank. 11 Refers to micro, small and medium enterprises. 4/4 BIS central bankers' speeches
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Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Signing of the Memorandum of Understanding between the BSP and Local Government Units (LGUs) of Metro Manila to launch the BSP Knowledge Resource Network, Manila, 14 March 2017.
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Amando Tetangco: Empowering Local Government Units with knowledge sharing Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Signing of the Memorandum of Understanding between the BSP and Local Government Units (LGUs) of Metro Manila to launch the BSP Knowledge Resource Network, Manila, 14 March 2017. * * * On behalf of the members of the Monetary Board and my colleagues at the Bangko Sentral ng Pilipinas, I thank the heads and the representatives of the LGUs here in Metro Manila, our fellow workers in government, and other distinguished guests, for joining us today to launch our latest project under our National Strategy for Financial Inclusion. In particular, we thank our LGUs at the NCR for joining the BSP as our partners in the Knowledge Resource Network through your respective libraries. We look forward therefore to share with your libraries, BSP information, reports, publications, research and online research assistance on the subjects of economics, banking and finance. For free. Our objective is to help Filipinos become better informed and empowered with reliable and up-to date sources of information so that they can make better economic and financial decisions. Our plan is to set up partnerships for KRN across the country with other LGUs, national agencies, universities and colleges. This is in addition to the Economic and Financial Learning Centers which the BSP has set up in our regional offices in La Union, Cebu and Davao, as well as in our 19 branches all over the country. The KRN and our EFLCs complement each other: our KRN is based in our partners’ libraries while EFLCs are based in BSP offices and branches. The BSP continues to expand its network to reach out to more people and more areas in our drive to develop a more inclusive financial system that supports inclusive growth. With the KRN, people who need information need not travel to the BSP to access our data. In the process, they save time and resources by using your KRN-partner libraries. In other words, you and the cities you represent are key in building networks of knowledge and communication for your constituents – whether they are MSMEs, government agencies, students or reseachers. Indeed, this is an exciting time to be informed and empowered participants of our country’s economic growth. For your information, the Philippine economy grew by 6.8 percent in 2016, making us one of the fastest growing economies in Asia. This is not the first time that you have partnered with us in our financial inclusion efforts. Most LGUs here have also joined the BSP-initiated Credit Surety Fund or CSF which enables cooperatives without sufficient collateral to access bank loans. We have made great strides in this area. We now have 45 CSFs in 30 provinces and 15 cities nationwide. As of 31 December 2016, cumulative approved loans for 16,310 beneficiaries have reached Php 3.25 billion. Progress in the program’s implementation could not have been possible without your help. Salamat sa inyo! Moving forward, the Philippines is expected to sustain its growth momentum based on our strong economic fundamentals and domestic drivers of growth. We hope that similar to CSFs, the KRN will enhance our economic prospects as more financially knowledgeable citizens participate in 1/2 BIS central bankers' speeches the benefits development brings. Ladies and gentlemen. The English philosopher Francis Bacon famously said “Knowledge is Power.” And to this, American computer chip inventor Robert Noyce added that “knowledge shared is power multiplied.” The launch of the Knowledge Resource Network here in Metro Manila is the beginning. We look forward to the future with confidence that our partnerships under the KRN will generate multiple benefits for our people. Maraming salamat at Mabuhay po tayong lahat! 2/2 BIS central bankers' speeches
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Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Annual Reception for the Closing Plenary of the 29th National Convention of the Bankers Institute of the Philippines, Tagaytay City, 11 March 2017.
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Amando M Tetangco: Philippine banking in an integrated regional financial market Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Annual Reception for the Closing Plenary of the 29th National Convention of the Bankers Institute of the Philippines, Tagaytay City, 11 March 2017. * * * Good evening everyone! It is a great pleasure for me to join BAIPHIL’s 29th national convention. BAIPHIL is important to us. You are one of the key partners of the BSP in ensuring that the quality of bank personnel meets the rigorous requirements of our banking system. This is crucial — our banking sector has grown into a P13.5 trillion industry in terms of assets and is responsible for deposits that have reached a record high of P10.4 trillion as of December 2016. This is a great responsibility. Given this, and as we consider the way forward, let me take this opportunity to share with you my thoughts about critical developments that will define our financial markets in the years to come. I will take this opportunity therefore to share my thoughts about critical developments that will define our financial markets in the years to come. Ladies and gentlemen. 2017 is bound to bring on a new set of challenges to the global economy with Brexit, policy changes in the US under its new President, the US Fed’s decision to increase policy rates, and China’s decision to pursue stability by moderating economic growth. The IMF sees some softening from Asian emerging markets, but projects a modest growth overall in the world economy. What about the Philippines? Well, you will be pleased to know that quite a number of multilateral agencies and global institutions expect the Philippines to outperform many of our economic peers. Nevertheless, we should not be complacent. Given the sea change unfolding in the global markets, we need to be strategic in our thinking and deliberate in our collective actions if we are to successfully navigate through emerging challenges. One area where we find challenges and opportunities for us, is the ASEAN integration. If we revisit the underpinnings of ASEAN market integration, we find that its vision is premised literally on the concept of building a community. And like all communities, the ASEAN Community is itself built around different components, specifically, developing a Political-Security Community, a Socio-Cultural Community and an Economic Community. With the establishment of the ASEAN Economic Community or AEC in 2015, we are now at that phase of formally consolidating the 10 ASEAN markets into a single economic base. To achieve this, it is necessary that we have an integrated and well-functioning regional financial system. This is defined under the ASEAN Financial Integration Framework or AFIF. Within the AFIF is the integration of the banking markets. This is what we refer to as ABIF and it is being pursued alongside the integration of the other facets of the financial market such as the payments and settlement system, the capital market, and the insurance sector. A proper response to your chosen topic of what ASEAN integration means to Asian and Philippine banking must therefore take a holistic view that considers ABIF in the context of AFIF, which in turn is an essential element of the AEC, which itself is only 1 of the 3 “communities”. There are many moving parts in ASEAN integration but it is clear that the envisioned upside is premised on economies of scale and scope. Latest statistics from the ASEAN Secretariat tell us 1/4 BIS central bankers' speeches that ASEAN represents USD2.4 trillion in combined GDP, making it among the 10 biggest economies in the world. Over the past decade and a half, ASEAN was the 3rd fastest growing economy in the world, behind only China and India. ASEAN has a population base of 629 million, 35% of whom are below 20 years old. Total trade volumes reached a high of USD2.53 trillion in 2014 and FDI inflows, USD120.8 billion in 2015.1 Clearly, these are not small numbers; but they are relevant only if we see ASEAN as an integrated market. Taking full advantage of this aggregate size and collective economic strength is precisely the point of integration so that there is freer movement of goods and services as well as of labor and capital. In ASEAN’s vision, this will allow for the unbundling of distribution from production, so that one can produce in the jurisdictions which have the comparative advantage for the product and have the product sold in other jurisdictions where there is greatest demand. The freer movement of capital is not only for production, it also holds true for the regional financial market. When compared with other regional blocs or other countries in the world, ASEAN is well-documented to have a higher saving rate relative to GDP. Cross-border portfolio flows data confirm, however, that ASEAN minimally invests into ASEAN. Thus, an important opportunity of an integrated ASEAN market is the re-channeling of regional savings back into ASEAN. What do all of these mean for Philippine banks? What do you think? To me, this is a task which is squarely within your sphere of competence. With the path ahead defined, it would be a serious error for one to think that all these remain within the realm of the abstract. For your information, the AEC Blueprint 2025 has been finalized and is freely available for download via the ASEAN website. Within that blueprint are identified milestones that are monitored continuously for their progress. Thus, the different moving parts that I mentioned earlier have been set in motion and working towards the envisioned outcomes. I have talked about the collective advantage of ASEAN integration but is there a specific upside for the Philippines and Philippine banks? From the perspective of macroeconomic activity, there is significant room for the Philippines to move up because we have arguably more stable fundamentals than most, if not the rest, of the region. We have achieved 72 consecutive quarters of uninterrupted growth, a remarkable record considering the market environment over this period. And today, the Philippines is one of the fastest growing economies in the world. In the financial markets, the Philippines can target a larger portion of ASEAN savings. Here we lag behind Indonesia, Malaysia, Singapore and Thailand. The same is true for external trade, another potential growth area for the Philippines. In both portfolio investments and in external trade, Philippine banks have a clear role to play as an intermediary, paying/collecting agent and investment advisor. Of course, the possibilities are not limited to those within the purview of the banking system. Taking in more market share within ASEAN means that we move forward to develop our capital market and to institutionalize crossborder payments and settlement arrangements. The critical elements under the ASEAN Financial Integration Framework are securities, insurance, the payment and settlement systems and finally, banking or ABIF. This is where the Philippines can set specific targets for increased market share in the region. Ladies and gentlemen. ABIF is now unfolding — it provides us with opportunities. The strategic issue therefore is how you will now operate given that regional integration is upon us. Should you choose to be a Qualified ASEAN Bank or a QAB, you have added opportunities in a bigger market but you have to deal with new aspects of competition, different market conditions, and differences in capital requirements, among others. 2/4 BIS central bankers' speeches On the other hand, those who choose to “stay home” so to speak, are not necessarily shielded from heightened competition. Indeed, banks need to have a good competitive strategy even if they are not immediately aspiring to be QABs. We have seen how foreign banks that enter our market reshape competitive forces. Aside from QABs, even outside the ABIF guidelines, foreign banks can still come into our shores under the purview of RA 10641. As you are aware, our strong fundamentals and sound banking system keep the Philippines an attractive destination for investments. Already, nine foreign banks have entered our banking system thru RA 10641 while another six banks are in various stages of talks with the BSP. ABIF makes it imperative that you improve your competitiveness by lowering operating costs, increasing product and service innovations, and improving service quality. This requires more investments in technology and training. Ultimately, this needs more capital and scale to thrive. The changes that come with ASEAN integration, however, will be akin to a process unfolding. While the framework is already approved, the transition will be gradual. Now, then, is the time to consider your options. This is true for non-QABs and for QABs. Whether it is backroom support or frontline services, what is certain and necessary from a classic BAIPhil perspective, is the development and upgrading of skills and training programs not only in banking but also in areas such as market surveillance and regulatory reforms. Preferring the status quo will be a competitive disadvantage. Change is the reality and banking organizations such as BAIPhil have a significant role to play in navigating the banking industry toward a new competitive landscape. Clearly, much needs to be done; but I am positive you will be up to these emerging challenges. Let me assure you — the BSP is working with the banking community to prepare the way for ABIF. Among others, the BSP has been upgrading the supervision framework in line with international standards, especially on corporate governance and risk management; requiring capital build-up and encouraging mergers and consolidations; and opening up barriers to entry. And in accordance with ABIF, the BSP has signed a high-level agreement with Bank Negara Malaysia governing QABs and looks forward to forging at least two more agreements as early as next month. In addition, our Supervision and Examination Sector and the newly-created Office of Systemic Risk Management will engage the banks in discussions to demystify and clarify the concepts behind ABIF and AFIF as you operate in an integrated and more globally-active ASEAN market. But even as you prepare for ASEAN integration, I hope that you will always be mindful and never lose sight of the risks before you. Always make sure that you operate in a safe and sound manner, keeping in mind the interest of financial consumers who have entrusted their resources with you. Finally, I wish to thank the BAIPHIL for its continuing support and cooperation with the BSP in keeping the banking system sound and stable. I particularly thank you for your active participation in the BSP’s financial education program by teaching thousands of parents and teachers sound money management. This has enabled our public school teachers to become excellent financial educators, at least two of whom were chosen National Awardees under the DepEd-BSP’s Guro ng Pag-Asa Awards. The awards were given last Tuesday by Education Secretary Leonor Briones, yours truly, and members of the Monetary Board, in the presence of bank industry leaders and BAIPHIL’s President Liza Ortiz and Marilen Ruiz of your Special Projects Committee. 3/4 BIS central bankers' speeches BAIPHIL, you walk your talk. You train bank employees and share your financial management expertise with the unbanked and underbanked. All of these to make our banking system stable, inclusive and a channel for promoting inclusive growth. I will always remember BAIPHIL for this. Ladies and gentlemen. This is the last time I will join your National Convention as Governor of the Bangko Sentral ng Pilipinas. I take this opportunity therefore to thank all of you and wish that all your efforts will contribute to make our banking system better, stronger, and more responsive to the needs of our people and our country. Maraming salamat! Mabuhay po tayong lahat! 1 Data taken from the “ASEAN Community in Figures 2016” published by the ASEAN Secretariat. 4/4 BIS central bankers' speeches
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Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the MAP General Membership Meeting and First Economic Briefing for 2017, Makati, 28 March 2017.
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Amando M Tetangco: In pursuit of sustainable and inclusive growth Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the MAP General Membership Meeting and First Economic Briefing for 2017, Makati, 28 March 2017. * * * Thank you for inviting me to speak at MAP’s General Membership Meeting and First Economic Briefing of 2017. “Working Together to Achieve Inclusive Prosperity” This is MAP’s guiding principle for 2017. It is sensitive to recent developments where we witness moves by nations to leave economic unions; when countries speak of closing off their borders to neighbors and refugees; when societies are fighting back against public institutions. All in the hope of raising their own standards of living. The MAP therefore has to be commended for resolutely putting the themes of cooperation, social responsibility, and inclusion at the heart of its activities for this year. The MAP could not have chosen a more appropriate theme. I say this because the world has taken unexpected turns in the past couple of years, driven by a general sense of discontentment and a brewing distrust in public policies and institutions. How did we get to this point? If you look closely at the trend of the Global Policy Uncertainty Index1, two things jump out. The first is that it has been nearly a decade since the global financial crisis broke out. And yet, we continue to live with high uncertainty and its aftermath of heightened volatility and uneven economic growth. The second is that these are truly uncertain times. Rising inequality has given traction to antiglobalization and populist sentiment across the globe. Even as these protectionist tendencies have seen some resistance, public policy has become less certain on the whole. This tension has cast a heavy cloud over global economic prospects. Indeed, the rise of protectionist pressures reflects a growing belief among countries that the benefits of growth need to be shared more equally and equitably. For public policymakers, this means that the goals of inclusivity and growth should always go hand in hand. This brings us to our theme and challenge today: How do we sustain our growth momentum while also creating a more inclusive society? Let me structure the rest of my talk as follows: I’ll continue with the world outlook, and the risks and challenges we see from these global impulses. Then I’ll discuss our own domestic market dynamics, paying particular attention to the country’s sources of resilience that have allowed us to sustain positive growth and make notable headway towards greater inclusion. Finally, I’ll relate these developments to emerging challenges for policy and the role the private sector can play in promoting inclusive growth. 1/7 BIS central bankers' speeches Global outlook and risks In terms of the world economic outlook, global growth is projected to improve modestly over the next two years, with upward adjustments to the projections of the IMF for the US, EU, UK and Japan for 2017. Note, however, that these forecasts are still lower than the actual growth outcomes prior to the global financial crisis.2 Meantime, the outlook for emerging markets is still mixed. In particular, economic activity in China has held firm, while growth projections for India and Brazil in 2017 were cut. A downside risk to this outlook, however, is potential political discord and heightened inward-oriented sentiment, both of which could undermine global trade and dampen financial market sentiment. Meanwhile, an offshoot of the evolving upward momentum in global growth is the possibility of reflation, or that global inflation may be at a turning point. This positive momentum is reflected in the shift in policy stances of a number of central banks. As you all know, the US Fed raised its target Fed Funds rate by 25 bps last week. Furthermore, it is widely expected to continue on this path, with at least two more hikes anticipated in 2017. A review of recent monetary policy decisions suggests that central banks have largely turned neutral—they see less urgency for further accommodation and would rather stay on hold. This phenomenon has been described as “watchful pause”. The prospect of higher interest rates in advanced economies could cause capital outflows from emerging market economies (EMEs) as investors search for yield. The retreat of funds away from EMEs could lead to tighter dollar funding conditions in emerging markets. For firms with significant dollar-denominated liabilities, these developments could pose a risk to their balance sheets and profitability, unless of course these exposures have been adequately hedged. In the case of the Philippines, we have seen some incipient signs of capital flow reversals as early as last year. Fortunately, the risk to businesses was mitigated by robust domestic liquidity and credit growth and by an adequate supply of foreign exchange. Debts of nonfinancial corporations in the Philippines also remain mostly peso-denominated, which provides some measure of insulation from external shocks. Meanwhile, with the potential for capital outflows from EMEs, some emerging-market currencies could also see depreciation pressures and volatility in the near term. We have seen that kind of depreciation effect on the Philippine peso in recent periods. However, if we take a longer-term view on the movements of the peso, we can see that the peso has been broadly stable and competitive over the medium term. Looking ahead, we expect the peso to continue to draw strength from the steady stream of remittances from overseas Filipinos and of foreign exchange receipts from tourism and the BPO sector. One other thing that we must be watchful of is the evolving dynamics of the international oil market. Oil prices rebounded right after the OPEC members agreed to cut output. However, the subsequent upswing in supply, due partly to renewed shale oil production in the US, has raised questions on the sustainability of the oil price rally. Keeping a close eye on all these developments is crucial because they have direct implications on business costs and consumer sentiment. On the latter point, we note from the BSP’s latest Consumer Expectations Survey that consumers hold a slightly less favorable outlook for the year ahead, owing to expectations of higher prices of goods, the depreciation of the peso, as well as concerns over poor harvests and an overall slowdown in business activity. For policymakers, tracking these dynamics closely will therefore allow for a pre-emptive response, if needed, to protect the interests of businesses and consumers. On the part of 2/7 BIS central bankers' speeches central banks, they will need to ascertain the implications on future inflation, and particularly on inflation expectations, to see if adjustments in the monetary policy stance will be warranted. In sum, ladies and gentlemen, we see three major trends in the global environment: 1) a modest but uneven recovery in global economic activity; 2) a tentative turning point for oil prices and inflation; and 3) heightened financial market volatility, owing to a hazy outlook on potential shifts in macroeconomic policies. Banking on sound macroeconomic fundamentals With these uncertainties in the external environment, we expect the year ahead to be just as challenging as the last one, if not more. The good news is that we can bank on solid macroeconomic fundamentals to keep the economy moving along on its path of robust growth. We have a broader base for growth, a manageable inflation environment, a sound banking system, and a healthy external payments profile. How can these buffers sustain the Philippine growth engine, and how sustainable is the Philippine growth story? Over the last two decades, the country has weathered just as many financial crises—the Asian financial crisis in the late 90s, and the global financial crisis in the late 2000s. Throughout this period, the country managed to register 72 consecutive quarters of output expansion. To put things into perspective, we are referring to a span of 18 years. Barring any significant shock, we are on track to extending this streak, as recent indicators of activity point to a strong growth impulse.3 The National Government expects growth to average 6.5-7.5 percent this year, higher than last year’s target of 6-7 percent. This mirrors buoyant business sentiment, as indicated in our latest Business Expectations Survey. The optimistic outlook is anchored on expectations of stronger job orders, the potential expansion of businesses and product lines, as well as the ongoing infrastructure projects of the government. One reason for this sustained growth impulse is that growth has become more broad-based. On the demand side, growth has historically been anchored by robust household consumption. In recent years, investments have also become a significant growth driver. In 2016, for instance, the contribution of capital investments to overall GDP growth even outstripped that of private consumption. Meanwhile, on the supply side, the shares of manufacturing and construction have also been increasing. This complements the steady contribution from services such as trade, real estate, and financial intermediation. In short, the country now has more diversified domestic sources of growth. They should also serve as ample cushions against external shocks, particularly if protectionist sentiment continues to gain traction overseas and dampen the country’s export-oriented sectors. It also bears noting that this sustained growth in output was achieved under a stable inflation environment. Going forward, we see average inflation will be within the target range of 2-4 percent for 2017–2018. A closer scrutiny of the monthly inflation path will show that inflation imprints will be rising until sometime in Q3 2017, when the monthly rates are expected to be very close to the upper band of the target range. Even so, our forecast path suggests that monthly inflation will slow down thereafter, resulting in within-target full-year averages over the policy horizon or the next two years. 3/7 BIS central bankers' speeches In addition, money supply remains ample. Even at double-digit growth rates, we do not see overheating in credit conditions, as credit continues to be channelled to key production sectors. More importantly, the intermediation of these funds is expected to remain safe and efficient, owing to our sound and stable banking system. Key indicators continue to reflect solid asset growth and improving quality of loans. Capitalization also remains strong and above prescribed domestic and international standards. On the external front, the country’s current account has been in surplus for 14 consecutive years,4 due to the sustained increase in overseas Filipinos (OFs) remittances, as well as business process outsourcing (BPO) revenues and tourism receipts. We saw a narrowing of the current account surplus in recent months. This trend may continue, as imports of capital goods are seen to further pick up. Such importation, we note, is necessary to support the expansion of the economy in the medium term. Steady foreign exchange (FX) inflows from OF remittances and BPOs, however, will continue to allow us to maintain adequate FX reserves. We expect our gross international reserves to continue to be more than sufficient to meet the country’s FX liquidity requirements. Reaping dividends from growth To reiterate, our macroeconomic fundamentals remain strong. On the one hand, these give us enough buffers to ward off the challenges posed by a difficult external environment. On the other hand, how secure are we against homegrown challenges? Political noise here as well as overseas is a manifestation that the benefits of growth may not have trickled down fairly to all sectors of society. The rise in populist sentiment globally suggests that inequality in society also poses a threat to prosperity. In essence, what we’re saying is that it is not enough for growth to be just fast and sustained. For growth to be truly meaningful, It must also be inclusive. We can take heart in knowing that the Philippines has made noteworthy progress and intends to see more headway moving forward. For one, labor and employment conditions have shown marked improvements. The unemployment rate has declined steadily from 7.4 percent in 2010 to 5.5 percent in 2016. The government aims to reduce it further to between 3 and 5 percent by 2022 through its various social programs and sustained economic growth. Poverty incidence and income inequality among Filipinos have also been on an appreciable downtrend, with the incidence of poor population declining from 49.5 percent in 1988 to 21.6 percent in 2015. The new Philippine Development Plan aims for this to fall further to 14.0 percent by 2022. Also, income inequality has been reduced. The Gini coefficient inched down from 0.49 in 1997 to 0.44 in 2015. Finally, inflation for the lowest 30 percent of households is also lower now than in prior years. From 5.1 percent in 2009, it has fallen to only 1.4 percent as of end-2016, suggesting that these households are now less vulnerable to price shocks. Policy thrusts All these support the belief that with the right policies and programs in place, it is possible to achieve sustainable and inclusive growth. But for the engine of inclusive growth to keep running, both the public and private sectors must share in the responsibility of making sure that no Filipino 4/7 BIS central bankers' speeches is left behind. There is much to be done towards this end, so I reiterate the question I posed at the beginning: How do we create a more inclusive society? In this regard, let me provide some highlights of the initiatives for public policy. On the part of the BSP, we reaffirm our commitment to maintain price and financial stability conducive to balanced and sustainable growth. Our latest projections indicate that inflation is likely to settle within the target range of 2-4 percent for 2017–2018—at the moment, our forecasts are at 3.4 percent for 2017, and 3.0 percent for 2018. Inflation expectations also remain well-anchored. Therefore, the current stance of policy is deemed appropriate. The balance of risks surrounding our inflation outlook is, however, tilted toward the upside. The transitory impact of the proposed tax reform program as well as possible adjustments in transportation fares and electricity rates could raise the inflation trajectory. However, uncertainty over the prospects of the global economy and potential macroeconomic policy shifts overseas continue to pose a key downside risk. Turning to financial stability, the BSP will remain steadfast in working to strengthen the banking system, improve risk management standards, and align our financial regulations with international best practices. Amid turbulence in the global economy, maintaining a market-determined exchange rate will help ensure the stability of the Philippine financial system and the economy as a whole. We are an inflation targeter, and therefore do not target specific exchange rates. That is why the BSP participates in the FX market only to limit volatility, or when movements are becoming misaligned with fundamentals. Other measures include deploying liquidity provision measures to address any potential tightness in funding conditions; and enhancing macroprudential measures and other surveillance tools in targeting risks arising from capital flows and other vulnerabilities. Let me also take a moment to highlight the BSP’s ongoing campaign for greater financial inclusion, an advocacy that I hold close to my heart. As outlined in the National Strategy for Financial Inclusion (NSFI), our work will revolve around three major areas: enhancing access to financial services, promoting financial education, and upholding financial consumer protection. On enhancing access: Only about 64 percent of cities and municipalities nationwide have banking presence5. By allowing micro-banking offices (or MBOs) and alternative financial service providers such as pawnshops to enter underserved markets, 88 percent of municipalities and cities would have access to financial services. We have also put in place regulations that leverage on financial technology (“fintech”) such as e-money transactions, as well as programs aimed at improving access to financing for our small entrepreneurs6. On promoting financial education: We will continue with our Economic and Financial Learning Programs targeting OF families, the youth, and entrepreneurs. To date, we have conducted EFLPs in 79 of the 81 provinces in the country. On financial consumer protection: We enacted BSP Circular No. 857 to ensure that BSPsupervised financial institutions (BSFIs) adhere to the highest service standards. We will continue to promote regulations that will encourage BSFIs to embrace a culture of fair and responsible dealings with the public. Finally, we recognize that to enable the country to springboard toward a higher and sustainable growth path, it needs more infrastructure to increase the economy’s productive capacity and to redistribute the benefits of faster growth. Road networks, air and sea transport systems, facilities for health and other social services—all these should help address the congestion in Metro Manila and other urban areas, and in the process help distribute opportunities for employment 5/7 BIS central bankers' speeches and access to other public services to the rest of the regions. There is fiscal space to do all these, and the National Government has committed to capitalize on that space and ramp up infrastructure spending. Concluding remarks Ladies and gentlemen, I hope that in the last half hour or so, I have been able to paint a fair picture of the outlook for the Philippine economy. All told, domestic sources of resilience will allow us to weather a difficult global environment and sustain growth amid a manageable inflation environment. We owe this resilience largely to our continued investment in reform. The Philippines has made significant strides in strengthening its institutions and enhancing its competitiveness over the past years, and our efforts have not gone unnoticed. Beyond the recognition, these reforms have also begun to yield dividends for more Filipinos by encouraging private-sector participation and investments; ensuring fiscal sustainability; and promoting innovation and competition—all of which, in turn, have helped reduce poverty and income inequality. But this is not to say that the job is done. Far from it. What it means is that we have a big job ahead of us. However, as recent global events have shown us, there is no guarantee that these benefits of growth will be shared fairly. The challenge, therefore, remains. Promoting sustainable and inclusive growth will require much work and the concerted efforts of both the public and the private sector. As a final remark, let me say that the private sector remains a vital cog in the country’s growth engine through investments, financing, and knowledge transfer. Your role in pursuing sustainable and inclusive growth is to provide opportunities for employment, and access to finance and expertise, especially to the sectors and regions where they are most needed. The MAP, in particular, is moving in the right direction. You have your Top Five Priority Programs for 2017: Traffic Management, Ease of Doing Business, Entrepreneurship, Employment Generation, and Women Empowerment. All these initiatives should provide a solid springboard towards your goal of promoting inclusive prosperity. As we push forward in 2017, I hope that the MAP and BSP can work more closely together in this shared responsibility of pursuing sustainable and inclusive growth. Let me also wish the MAP continued success in its endeavors in the year ahead. Thank you, and good afternoon. 1 The Global Economic Policy Uncertainty index measures policy-related economic uncertainty using media coverage and professionals’ forecasts of macroeconomic variables. The index peaked in January following the anti-immigration policy pronouncements of the Trump administration in the US. The rising acceptance of populism in Europe also continues to cause unease, with upcoming major elections in Germany and France remaining a source of uncertainty. 2 Compare these to their respective average annual growth rates prior to the global financial crisis (i.e., 1998– 2007: US (3.0 percent); Euro Area (2.4 percent); UK (2.9 percent); and China (9.9 percent). (Source: IMF World Economic Outlook, October 2016). 3 The average capacity utilization rate of the manufacturing sector stood at 83.8 percent in January 2017. 4 Following the BPM6 format, the current account has been in surplus from 2005–2016. (Current account surpluses were also recorded in 2003 and 2004, following the BPM5 concept) 6/7 BIS central bankers' speeches 5 As of 2016, 88.2 percent of cities and municipalities have at least one financial service access point, up from 87 percent in 2015. Of this number, 63.8 percent have banking presence in 2016 (63% in 2015). (Source: BSP Financial Inclusion Initiatives 2016 Report) 6 Republic Act No. 10744 (“Credit Surety Fund Cooperative Act of 2015”) was passed into law on 6 February 2016. 7/7 BIS central bankers' speeches
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Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the National Retail Payment System (NRPS) Event - Signing of PSMB Charter and ACH Agreements, Manila, 31 March 2017.
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Amando M Tetangco: The transformation of the Philippine retail payment system Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the National Retail Payment System (NRPS) Event - Signing of PSMB Charter and ACH Agreements, Manila, 31 March 2017. * * * We are pleased that you have joined us this morning to witness two ground-breaking events that will transform the Philippine Retail Payment System to become truly inclusive and eventually serve all payments transactions across the country. The first is the signing of the Charter of the “Payment System Management Body” or PSMB under the National Retail Payment System framework. The PSMB is a critical and unique entity that will serve as a strong foundation of a modern, digital retail payment system in the Philippines. It is industry-led, bringing together and organizing all direct clearing participants in all important retail payment systems, into a self-governing body that will assist the BSP in overseeing the national payments system. As a fine example of public-private partnership, the BSP and the payments industry will work together to promote the sound development of the payment system based on the principles of cooperation, good governance, healthy competition and consumer protection. The second is the signing of the Expression of Interest to establish and activate within this year two specific Automated Clearing Houses (ACHs) that are being prioritized because of their huge potential to immediately provide digital payment solutions to current payment challenges being encountered by government, by businesses, and by ordinary consumers. The first ACH will be called “PESO Net” which is a batch electronic fund transfer credit payment scheme. This can be the electronic alternative to the paper-based check system but it will also be more inclusive in terms of participants and users. The PESO Net supports bulk payment transactions of various users. For instance, it will enable companies, including the government, to conveniently pay salaries and invoices to the bank account of choice of their employees and suppliers. Employees and suppliers will therefore no longer be compelled to open and manage several accounts just so they can receive and make payments affordably. The second ACH will be called “InstaPay”, a real-time low-value push payment scheme for transaction amounts up to P50,000. This is a new retail payment system designed to facilitate small value payments that will be especially useful for paying for toll fees and tickets, and for ecommerce to enable MSMEs. Payment products can be built on InstaPay that will enable merchants to accept digital payments from both e-money and bank accounts even without a POS. By using digital payments, MSMEs will be able to build a rich digital transaction history which can help establish their creditworthiness and provide them access to credit from formal lending institutions at a price that reflects their good risk profile. This shows that the benefits of using electronic payments especially by MSMEs go beyond convenience and affordability. Electronic payments can even provide greater access to other financial services. These concrete developments mark a significant milestone in our journey towards modernizing the retail payment system in the country —- an accomplishment that would not be possible without the cooperation of the payments industry players with the BSP. We also recognize USAID which has provided the technical assistance for this strategic initiative. 1/3 BIS central bankers' speeches This journey officially began in December 2015 when we launched the National Retail Payment System Project or the NRPS. As a policy framework, the NRPS lays down the principles and necessary elements of our envisioned safe and efficient retail payment system. Let me just highlight for a moment the concept of efficiency. Efficiency in the retail payments is essentially about speed, convenience and affordability. These are features and requirements that can clearly be supported by a shift to electronic payments. And that is why a key outcome of the NRPS is the increased adoption of electronic retail payments. When we decided to embark on this journey, we knew from the get-go that we have our work cut out for us. As it stands, the share of electronic payments in the estimated 2.5 billion monthly payment transactions in the country is a measly 1% based on a baseline survey conducted in 2013. We want to bring this to 20% within the next 3 years, or by 2020. Some might think this as quite an ambitious target. And perhaps it is. But realizing how important a shift to electronic payments is for the country, we knew we had to embrace this target and buckle down to achieve it. So what is at stake? Aside from the considerable cost-savings and productivity that it can generate for businesses, the government and the financial sector at large, a safe and efficient retail payment system can potentially transform the economy by enabling greater financial inclusion. As it facilitates low-cost and convenient transactions, our envisioned retail payment system supports the viable and sustainable delivery of a wide range of financial products that cater to the needs of all users, especially the small-value, high frequency transactors of the lowincome segment. A well-designed retail payment system serves as a pillar of an inclusive and expansive digital finance ecosystem – one that is able to meet the diverse needs of all users in a manner that is convenient, sustainable, affordable and reliable. Just as it is a goal, financial inclusion is also a tool for achieving an efficient retail payment system. As more people participate in this system, greater economies of scale are secured – thereby making the system even more efficient. The unserved market of the payments industry is still huge, considering that based on the latest World Bank Findex report, only 31.3% of adult Filipinos have a transaction account which enables them to participate in the retail payment system. By enabling its user to store funds and use electronic payments, a transaction account can provide the unbanked the means to eventually avail of more sophisticated products, like credit, insurance and investments. Providing a transaction account to the remaining 69% untapped potentially high-volume market therefore presents opportunity for financial service providers to expand their customer base and add new income streams. Clearly, therefore, we cannot overemphasize the importance of establishing a safe and efficient payment system which the NRPS aims to achieve. The NRPS provides the framework for our deliberate approach to securing the promised gains of modernizing retail payments for the benefit of the consumers, the industry and the economy as a whole. This approach is built on three core principles: interoperability, inclusivity and “coopetition”. Interoperability is defined as a state in which customers can transfer funds from their own account to any BSP-regulated transaction account using any device. This means that a customer need only maintain one account – whether a bank or an e-money account – to be able to conveniently and affordably transact with anyone in the system. The inclusivity principle, on the other hand, demands that all qualified financial service providers must be able to effectively participate in the system – regardless of their size and type of transaction accounts offered. This fosters greater competition and spurs innovation to better support the diverse needs of the consumers. The third core principle espoused by NRPS is “coopetition” – a portmanteau (combination) for “cooperation” and “competition”. NRPS promotes both cooperation and competition in the 2/3 BIS central bankers' speeches industry. The industry is expected to cooperate in matters that directly impact on our shared objectives of system efficiency and resilience. This includes clearing and settlement rules and standards, industry governance and risk management. Product features such as end-user fees, delivery channels and customer service fall outside the cooperative sphere and will be used as basis of competition. The formation of the PSMB and the PESO Net and InstaPay ACHs essentially sets in motion the operationalization of these NRPS principles. The PSMB serves as the industry-level cooperation and governance body composed of qualified banks and e-money issuers. By organizing as a formal body, participants can effectively identify and drive strategic initiatives to promote the efficiency and resilience of the system and promote the sustained growth of the industry. The multilateral ACHs, on the other hand, lays down the clearing and participation rules for a particular payment stream to facilitate electronic fund transfers among its participants. Payment streams that are covered by a multilateral ACH promotes greater efficiency, better risk management and interoperability compared to those that are covered by separate bilateral agreements as currently practiced. Our journey towards a modern retail payment systems is just beginning but we can take pride in the significant progress we have made thus far. We couldn’t have gotten to this point if not for the willingness of the key stakeholders present here today to collaborate, dialogue, and commit to the NRPS vision. And so let me conclude by expressing our deep appreciation for your support to the NRPS. With the same commitment and cooperation, we shall move forward with the full implementation of the NRPS and realize its vision of establishing a safe and efficient retail payment system in the country, a vision of a highly digital financial system in the Philippines that serves the interest of all financial consumers. Mabuhay po tayong lahat! 3/3 BIS central bankers' speeches
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Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the FINEX, MAP, MBC, PCCI, AMCHAM Phil, ECCP and CIBI Foundation, Makati, 24 May 2017.
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Amando M Tetangco, Jr: Two sides of the same coin – transforming challenges into opportunities Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the FINEX, MAP, MBC, PCCI, AMCHAM Phil, ECCP and CIBI Foundation, Makati, 24 May 2017. * * * Thank you for taking the time to organize and host this event and thank you for the testimonials! I share the recognition you are giving me today with my colleagues at the Bangko Sentral ng Pilipinas and the Monetary Board whose members include Finance Secretary Sonny Dominguez, former DBP Chairman and CEO Freddie Antonio, former Economic Planning Secretary and Economics Professor Phillip Medalla, former BSP Deputy Governor and General Counsel Andy Suratos, former BSP Deputy Governor and General Counsel Jun de Zuniga, and former PDIC President Val Araneta. This formidable group works together as members of Team BSP. A team that is driven to excel by the singular vision of creating a better life for Filipinos through sound monetary and banking policies. I also wish to take this opportunity to express my deep appreciation for the support and cooperation the leaders and members of your organizations have been extending to the BSP and me. You actively engage us in dialogues, meetings, and conferences to share your insights in the formulation and the implementation of our policies and programs. This is a crucial element in our operation as a central bank. Thank you. Indeed, the most significant achievement for any head of institution is to see the effective implementation of its mandate. In the case of the Bangko Sentral ng Pilipinas, it means providing a stable environment for our economy through inflation management, as well as a sound and stable banking system through effective regulation and policy formulation. Given our mandate, how does BSP measure up? Well, you have been most kind and generous in expressing your opinions about me and the BSP. Now, it is my turn to share certain highlights in the BSP’s performance, the challenges we faced and their ramifications, where we are today, and what we see going forward. Two Sides of the Same Coin Ladies and gentlemen, we often hear economists use the phrase “two sides of the same coin.” The phrase is used to establish a linkage between two seemingly unrelated variables. Today, I use the phrase to illustrate that, in the context of policy making, challenges and achievements are more closely interrelated than we think. As a central banker of over four decades, I have witnessed how significant economic and financial challenges/changes served to catalyze crucial and progressive reforms. Stepping up to the Challenges – Banking Sector: A case in point is the 1997–98 Asian Financial Crisis (AFC) that revealed vulnerabilities in the Philippine financial system. The recognition of these weaknesses firmed up our resolve to formulate measures and implement reforms to address these concerns. The AFC also highlighted the importance of reducing currency and maturity mismatches through the creation of a fully developed capital market. This triggered a whole slew of market reforms that included the development of “organized markets”, where transparency, price discovery, and more reliable benchmarks are essential elements. 1/4 BIS central bankers' speeches Then in 2007, we witnessed the outbreak of what eventually evolved into the worst financial crisis the modern world has witnessed. International financial institutions weighed down by bad debts collapsed or had to be supported by their governments to keep credit flowing to credit-starved economies. Notwithstanding, the global recession that ensued was the worst since the Great Depression. In contrast, the Philippine economy continued to grow through the Global Financial Crisis (GFC) with our banking sector remaining sound, stable and liquid. Indeed, this performance can be attributed to the crucial reforms that had been put in place earlier. In the aftermath of the GFC, the BSP is unrelenting in its pursuit of an even broader reform agenda aimed at further strengthening the Philippine banking industry in terms of capitalization, risk management, and corporate governance. Clearly, the BSP has provided the regulatory framework. In response, the banking industry stepped up the plate and aligned their standards with international best practices. In other words, the synergy worked ! Thus, even in the face of lingering uncertainties overseas, the domestic banking system has maintained a remarkable growth momentum. As of December 2016, total resources and deposits of the banking system have reached historic high levels (P13.8 trillion in resources which increased further in Q1 this year and deposits of over P10 trillion). This allowed bank lending to continue to expand by double-digit rates, most of which financed productive sectors. In addition, asset quality continues to improve with NPL ratio of universal and commercial banks dropping to less than 2% in December 2016, even better than the pre-Asian Financial Crisis levels. Seizing Opportunities – Monetary & External Policies On monetary policy, we adopted inflation targeting in 2002, in response to findings that the traditional macroeconomic relationship between monetary aggregates and prices had weakened. While inflation targeting is a more challenging framework, it represents a better way of doing things – it is more effective, it promotes greater accountability and it engages the public in the process. This is a guiding philosophy at the BSP – continuously developing better ways in terms of process and operations to achieve institutional objectives. Under this framework, BSP has had good success. Since 2009, inflation has been kept below the upper bound of the National Government’s inflation target range. Moving forward, we see inflation remaining on a generally low and stable path and within the target range of 2-4 percent, under our inflation targeting framework. In 2016, we further refined our policy framework by launching the Interest Rate Corridor (IRC) system to align our open market operations with the liquidity needs of the market. This will strengthen the transmission channels of monetary policy, boost domestic money market, foster real price discovery and further improve the intermediation of funds. Low inflation has allowed the BSP to maintain policy rates at similar low and stable levels. This lowered the cost of doing business and the cost of consumer loans, factors that support and encourage economic activities. In the Philippines, household consumption remains a key growth driver of the economy. The Philippine economy is strong. GDP grew 6.4 percent in the first quarter this year, one of the fastest in Asia. This brought our record of achieving uninterrupted GDP growth to 73 consecutive quarters. Meanwhile, we have been able to build our war chest of FX reserves because of strong OF remittanes, export proceeds and BPO receipts. In turn, the presence of such strong buffers has 2/4 BIS central bankers' speeches allowed us to continue with a policy of a market determined exchange rate policy. Building FX reserves to a healthy level and allowing the exchange rate to absorb some of the external shocks are yet another set of responses to past crises. Ladies and gentlemen. Our experiences in the past two decades prove that challenges or difficulties provide compelling reasons to change the status quo. Viewed in this context therefore, challenges and achievements are indeed two sides of the same coin. Indeed, the country’s low and stable inflation, strong banking system and robust external position have not gone unnoticed by credit rating agencies and other third party analysts. The Philippines’ 24 positive credit rating actions since 2010 as well as the distinctions received by our banking system provide strong validation for our economy’s solid performance. As you very well know, the highlight of the Philippines’ credit rating history came in 2013 when we finally achieved investment grade rating from the 3 major credit rating agencies (Fitch, Moody’s and S&P). These were followed by subsequent upgrades from S&P and Moody’s in 2014. The Road Ahead In other words, “so far, so good”. But, what’s in store for us? What new challenges are we likely to face and learn from? Let me name a few. In the near-term, we will continue to face market volatilities from asynchronous monetary policy responses to the uneven global recovery and the resulting reflationary pressures. From a more strategic standpoint, our business models will continue to be challenged by speedy shifts in financial technology, heightened cybersecurity risks, and increased global competition. Overall, however, there is the primordial challenge of remaining a relevant and viable going concern amidst these changes. In the BSP, the development of an inclusive financial system that supports inclusive growth is an institutional imperative. Our objective is to reduce poverty by enhancing access to financial services, promoting financial education and strengthening financial consumer protection. In this connection, the BSP is working with 14 government agencies and other organizations to facilitate the implementation of the National Strategy for Financial Inclusion in a cost-efficient manner. Also clear and present in the pipeline for the BSP is the implementation of a National Retail Payment System that will speed up the mainstreaming of unbanked Filipinos into the financial system. The ultimate goal is to serve financial transactions across the country through a safer and more efficient system that will benefit consumers in particular and our economy in general. These initiatives/thrusts represent the social dimension of our monetary and financial policies. To remain relevant, the BSP has always pursued its primary mandate while being in tune with the social dimension of policy. Moreover, we believe that history must inform our country’s journey; we must learn from the past so that we will be better and stronger for the future. For this reason, the BSP has a continuing program to share information, document its learnings and promote appreciation of our country’s rich culture and history. Tomorrow, the BSP will launch two books: the first is “Philippine Central Banking: A Strategic Journey to Stability” and the second the coffee table book “LIKHA: Enduring Legacies of Filipino Artistry” featuring the Decorative Arts Collection of the Bangko Sentral ng Pilipinas. The book on Philippine central banking should be a good reference for policy makers, those in business and those in school. On the other hand, LIKHA will make you proud of our ancestors who created 3/4 BIS central bankers' speeches these works of art, the oldest of which was crafted 2,000 years ago. Conclusion President Duterte has designated Deputy Governor Nestor Espenilla, Jr., a career central banker with 36 years of experience as the next Governor. We thank the President for this vote for continuity at the BSP. There is no question, Nesting will hit the ground running, having been exposed to many facets of BSP operations. He is highly qualified and a man of integrity and courage. He and the BSP deserve your continuing full support. I also thank FINEX and its Board for launching the FINEX-Governor Tetangco Professorial Chair for Monetary Policies and Financial Sector Development. I see this is an expression of support not only to me but also to the BSP in the important area of financial education. FINEX, you walk your talk. Thank you. Ladies and gentlemen. I stayed on as a career central banker for over 40 years because I have always felt that it is an honor and a privilege to serve our country as a civil servant. Will I miss the BSP? Of course! But I take with me important professional and personal life lessons, foremost of which is to value independence and integrity because these are the foundations for credibility, that in turn, engender effectiveness in purpose. I also take with me the lesson of keeping your eye on the ball (or in our case, the BSP mandate), while making sure you are sensitive to the lay of the land (in other words, surveillance is key). Maintaining the proper “stance”, but retaining flexibility so you can be sure to “follow through” your actions (or be policy nimble). Counting your “balls” and being familiar with your “irons” (in other words, knowing what’s in our tool kit!), play the hand you are dealt (or always be ready!) But wait. Those lessons sound like rules for a golf game. Friends, as it turns out, most of what really matters whether you are in the Board Room or on the golf course is basically the same. With this realization, I suppose I am ready for life after central banking. There are many activities I want to pursue (including possibly more golf with friends) and new adventures to look forward to, after July 2. But today, my heart is full. For this, I thank all of you. Thank you for this testimonial, your kind words, your wishes for my good health and your friendship. Maraming salamat! Mabuhay ang BSP! Mabuhay ang Pilipinas! Mabuhay po tayong lahat! 4/4 BIS central bankers' speeches
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Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the BSP-IFC Mini Forum (and Ceremonial MOU Signing), Manila, 26 May 2017.
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Amando Tetangco: Corporate, environmental governance - continuing capacity building and social Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the BSP-IFC Mini Forum (and Ceremonial MOU Signing), Manila, 26 May 2017. * * * Good morning ladies and gentlemen, and welcome to the Bangko Sentral ng Pilipinas (BSP). Let me begin this keynote with the ending of a paper written by a Professor Emeritus from Harvard1“Good governance is an important condition that we hope all the world can enjoy. There is much to be understood about the concept and how it can be achieved. But like all good ideas, it is not a magic bullet.” This quote poetically captures the three points I wish to share with you today: 1) First… Over the years, the BSP and the banking industry have done much to ensure that good corporate governance (CG) sits at the core of decision making and institutional operations; 2) Second… There is more to learn, for example, concepts like environmental and social governance (ESG) and risk management (ESRM). These principles need deeper exploration and understanding in the context of banking and finance; and 3) Third… Indeed, good governance is not a magic bullet by itself. Practitioners must faithfully practice the principles. Whether it is about CG or ESG, institutions and its employees need to remain well-equipped to demonstrate, embed and practice good governance in daily operations. Good Corporate Governance in the BSP and the Banking Sector To expound on my first point, let me share that the BSP champions good governance within the organization, and as supervisor of the banking system. Internally, we have adopted a corporate governance framework and defined strategic priorities focused on a strong governance mechanism, operational excellence, organizational readiness and engaged stakeholders. We continue to improve our bank-wide risk management system and institute business process improvements. We strive to promote a culture of fair and responsive treatment of all our stakeholders. We have clearly defined and communicated expectations from each employee in carrying-out the BSP mission. We have a performance scorecard that checks our progress and achievements. These efforts have borne fruit. The BSP was recently recognized as an Island of Good Governance by the Institute of Corporate Directors and Institute for Solidarity in Asia. As regulator, we adopted a three-phase governance reform program for BSP-supervised financial institutions. We started with the fit and proper requirements for the board of directors and senior officers, followed by the issuance of standards for checks and balances systems. We are now in the third phase, with the issuance of guidelines on the management of specific risk areas such as credit, information technology and operational risks2, paving way for enhanced guidelines on risk governance. The BSP views good CG as the foundation of a safe, sound and efficient financial system. As keepers of 80 percent of the financial system’s assets, Philippine banks must hold up to high CG standards. Adherence to these standards always start at, and is the full responsibility of, the board and management. This is fundamental in good CG. The “fitness and propriety” of the board and senior officers should pertain to their qualifications and competence, but more so to their integrity, ethics and independence. 1/4 BIS central bankers' speeches Like parenting, good CG behavior that emanates from the board and management gets cascaded down, and modeled by, employees of the organization. Often, organizational values are “caught” by, not “taught” to, the rank and file. On the other hand, checks and balances like internal controls and compliance functions provide the handlebars that steer people and organizations toward greater transparency and accountability. Another fundamental CG element is risk consciousness. The banking environment is always in flux, constantly affected by disruptive technology, competition from non-traditional players, unique consumer profiles and new market niches, or upgraded regulations and international standards. Old risks evolve, new ones emerge and sources of risks multiply. For banking to remain a public trust, it is imperative for banks to effectively protect their depositors, investors and institutions from undue risks. Good risk governance begins with genuine understanding of these risks, and setting the institution’s risk appetite based on objective assessment of its capability to manage them effectively. To do this, the board and management should fully understand the data and evidence that affect the institution’s risk exposures. They should ensure adequacy of capital to absorb both the foreseeable and unexpected losses. Down the line, bank personnel also need to know the risks attendant to their operations, be equipped to mitigate, and be wary of the consequences of weak risk management. The CG fundamentals that I have cited are universal and applicable to all financial institutions. Many of our banks are diligently exercising these principles, yet many are also struggling to do so. Nevertheless, the BSP remains confident that our CG-related regulations will continue to guide the banks toward full compliance, further strengthening and enabling them to serve a wider market. Environmental, Social Governance and Risk Management Let me now move on to my second point. Risk governance may be influenced by other dimensions, for example shared value3, which refers to ways of doing business that gain competitive advantage, while also improving social, environmental and economic conditions, to achieve the double bottomline of profitability and social responsibility. This is when ESG, the set of standards that promote sustainability; and ESRM, a risk management tool that promotes sustainable finance, usually get factored in. And these are areas that we need to explore deeper. Sustainable finance is any form of financial service that integrates ESG criteria into business decisions to benefit the environment and society at large4. Regulators and banks in emerging markets like Indonesia, Bangladesh and Mongolia5 are openly promoting sustainable finance through ESG standards. Around the world, there is increasing evidence that integrating ESG and ESRM in business practices result to positive returns, those that get reflected on financial statements, client retention and organizational reputation. Equally significant, banks also feel good as they contribute to socio-economic and environmental well-being of the communities in which they operate. The BSP believes that ecological sustainability is a key pillar of inclusive growth, and sustainable finance promises to support this objective. It is consistent with the BSP’s drive to establish a responsive, responsible and inclusive financial system that delivers a high quality of life for all Filipinos. While BSP policies and regulations already promote shared value through financial inclusion, we feel the need to deepen our understanding of sustainable finance. We have to bridge the gap between what we know about financing and corporate governance, and how or when ESG should be integrated. Hence in 2013, we began taking baby steps to understand ESG and ESRM. We became a member of the Sustainable Banking Network (SBN) with support from the International Finance 2/4 BIS central bankers' speeches Corporation (IFC). SBN is a knowledge sharing network of banking regulators, industry associations and ESG specialists. We continue to learn and share experiences with like-minded peers and industry players already practicing sustainable finance in other jurisdictions. In 2015, again with IFC support, we completed a scoping study on the extent of industry experience and interest in adopting ESRM. Study results showed moderate awareness, very limited experience, and mixed perceptions about the business case of ESRM adoption among local banks. Still, many believed that practicing sustainable finance can enhance their institutional reputation as good corporate citizens, and may eventually affect their business bottomline. Understandably, profit maximization thru viable opportunities remains the driver for banks to scale-up green investments, and influence their client firms to be more environment-friendly. Banks need to see financial viability and attractive risk-return profiles of green projects and unbundle the mainstream perception of high transaction and compliance costs. In other words, banks, and even regulators like the BSP, need to fast-track learning curves in the area of ESG and ESRM.6 This now brings me to my third point, and the reason why we are all here today. CG and ESG: The Need for Continued Capacity Building The principles of CG and ESG may be constant and universal, but situations and contexts in which they are applied are varied and mutable, and new lessons arise from each application. As markets, regulations and institutions evolve, it is necessary for CG and ESG practitioners to deepen knowledge and continue building capacities. The board and management, employees and the entire organization should not only adopt good governance policies – they need to continuously adapt, upgrade and improve to remain relevant and effective. This is the primary intent of the BSP-IFC agreement which we will sign today, with everyone here as witnesses, and maybe even future partners. IFC will support the BSP in improving its assessment tools to ensure good governance and proper risk management in the banking system. IFC will train and advise the BSP and BSP-supervised financial institutions on a proportionate legal and regulatory framework that enhances corporate governance. In addition, IFC and BSP shall continue to conduct awareness campaigns, capacity-building and peer learning events to deepen the industry’s understanding of ESG and ESRM. In this area, we are mindful that in the Philippines, there is a spectrum of big and small banks with varied capacities, business models and risk appetites. Some will see value in ESG and ESRM; while some will simply not have the right capacity and resources to deal with these standards…for now. For those who can, and are willing, we look forward to further working with you. Today, we have lined-up international and local speakers to jumpstart the knowledge sharing on global developments and domestic experiences on CG and ESG. I hope you all take advantage of this opportunity. Conclusion We thank the IFC and the World Bank for your sustained support to the BSP and the banking industry. Thank you to this community of regulators, government agencies, the banking associations, the sustainability advocates, colleagues and guests, for joining us in this endeavor. We will surely keep you involved in the next steps of the BSP-IFC partnership. Thank you and good morning. ------------------- 3/4 BIS central bankers' speeches 1 Grindle, Merilee S., June 2010, “Good Governance: The Inflation of an Idea”, Harvard Faculty Research Working Paper RWP10–023, Kennedy School of Government. E.g. Circular 855 on Credit Risk Management Framework; Circular 808 on Technology Risk Management; and Circular 900 on Operational Risk Management. Corporate policies and practices that enhance the competitive advantage and profitability of the company while simultaneously advancing social and economic conditions in the communities in which it operates. Shared value is not corporate social responsibility, philanthropy, or even sustainability, but a new way to achieve economic success. (Harvard Business School, Institute for Strategy and Business). 4 Adapted from the Swiss Sustainable Finance Center. Members of the Sustainable Banking Network that have issued regulations/roadmaps/standards that specifically promote ESG standards. Frankfurt School-UNEP Centre for Climate & Sustainable Finance. “Delivering the green economy through financial policy”. Technical paper, March 2014. 4/4 BIS central bankers' speeches
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Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the launching of the books "Philippine Central Banking: A Strategic Journey to Stability" and "Likha: Enduring Legacies of Filipino Artistry", The Decorative Arts Collection of the Bangko Sentral ng Pilipinas, Manila, 25 May 2017.
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Amando Tetangco: Of central banking, art and legacies Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the launching of the books “Philippine Central Banking: A Strategic Journey to Stability” and “Likha: Enduring Legacies of Filipino Artistry”, The Decorative Arts Collection of the Bangko Sentral ng Pilipinas, Manila, 25 May 2017. * * * The Members of the Monetary Board of the BSP thank all of you for accepting our invitation to the launching of two important books. The first book “Likha: Enduring Legacies of Filipino Artistry” celebrates our heritage by showcasing the decorative arts collection of the Bangko Sentral ng Pilipinas which includes artifacts from 2000 years ago. Both functional and aesthetically pleasing, the decorative art pieces include intriguing preHispanic pottery, finely crafted Hispanic gold, expressive religious art, exquisite embroidery and cleverly designed furniture. They provide insights into our evolution as a nation and instills a strong sense of identity as a people. These enduring works of art are testaments to the artistry, creativity, adaptability, strength, competitiveness and tenacity of our people. They make us proud to be Filipinos. This is important. In this time of globalization, it is important that we do not lose sight of who we are as a people, what we have achieved and what we can achieve. The second book “Philippine Central Banking: A Strategic Journey to Stability” looks at the core aspects of central banking from the point of view of professional central bankers with broad and deep experience in the science and the art of central banking. The two books represent very different disciplines. If you look around this hall therefore, you will see that aside from bankers, there are quite a number of individuals from diverse fields. Many would probably think that central banking and the arts share little in common. To us, however, both are linked by their capacity to reflect the story of our past. This is important. At the BSP, we believe that history must inform our country’s journey; we must learn from the past so that we will be better and stronger for the future. For this reason, the BSP has a continuing program to share information, document its learnings and promote appreciation of our country’s rich culture and history across the country. Thus, these two books are the latest in a series of publications under the Bangko Sentral ng Pilipinas. On central banking, our earlier books include “Money and Banking in the Philippines– Perspectives from the Bangko Sentral ng Pilipinas,” the next was “The BSP and the Philippine Economy” followed by Central Banking in Challenging Times. We have also published annotated books on “The New Central Bank Act,” “The General Banking Act” and the “Special Banking Laws.” This latest book on central banking compiles in one volume the challenges we faced over the past decade and how we managed the evolving conditions, all for the singular purpose of coming out better than before. The charts and tables provide us a succinct view of the myriad of details before us but it is the accompanying narrative from our subject matter experts that allow readers a front row view of our operations and our resulting track record. 1/3 BIS central bankers' speeches Central Banking in Perspective Perhaps more than most, central bankers appreciate the dynamics that is inherent with time. After all, the decisions we take with respect to monetary policy will take several quarters to fully take effect. Thus, our actions today are based on the evidence over the recent past, but our policy stance is always directed towards the future. On the part of banking policy, we craft regulations and guidelines to influence prudent behavior within an enabling environment. The actual impact of this regulatory framework will also take time to develop, both on the operating condition of banks and on the well-being of financial consumers. In other words, ladies and gentlemen, this book reflects the outcome of the interaction of the central bank with the banking industry and other sectors of the economy. Simply put, this is our story. Our journey to stability has been challenging but with the support and collaboration of our key stakeholders we continue to reap the benefits from our past actions and decisions that have been strategic. Thus, even as international crises afflicted the global economy and roiled markets with volatility, the Philippine economy continued to grow as sound monetary and banking policies provided a stable environment for our economy – we have low inflation, a sound and stable banking system as well as a safe and reliable payments system. We beefed up our macroeconomic analysis and surveillance tools, introduced crucial and timely reforms such as the Interest Rate Corridor framework, and increased public engagement in our policymaking process. At the same time, BSP and the banking industry continued to pursue a broad reform agenda to strengthen their ranks in terms of capitalization, risk management, and corporate governance. This successful collaborative strategy has given the banking system sustained growth momentum. Indeed, we have made great strides in various aspects of our operations. Ours is a narrative of proactive management and reform to advance our vision for the country. Moving Forward With all that we have achieved so far, are we then set for the future? Well, no environment is ever static. As the central monetary authority, our role is always evolving. This is the de facto norm in central banking amidst the transformation of the global environment, our country’s objectives and its needs. This task is not straightforward, as it has to contend with unexpected financial shocks, political upheavals, and natural calamities. Nevertheless, amidst the tides of change, we will continue to remain focused on ensuring price and financial stability in the country. We will find better ways to adapt the Flexible Inflation Targeting framework to the lessons of the Global Financial Crisis — that price stability, on its own, cannot guarantee overall financial stability. Thus, sustained monitoring and active surveillance of monetary linkages will consider more granular relationships within the financial market. This will allow us the added perspective of identifying pressures that may be quietly building-up. New tools may be considered based on our very own experience to ensure the delivery of the BSP’s mandate. This requires us to organize ourselves, strengthen our ranks, refine our tools and innovate in our 2/3 BIS central bankers' speeches approach to ensure that we secure the interests of our stakeholders and keep pace with the shifts in the environment. We will continue to be strategic in identifying a vision and setting down a framework to achieve it. In this connection, an S&P report on the banking system, dated May 14, 2017 makes us proud of what the men and women of the BSP- past and present – have achieved. The report said: “The central bank has a record of supporting sustainable economic growth and responding appropriately to changing economic circumstances. Its ability to maintain macroeconomic and price stability through an economic cycle has been tested, including a period of exogenous shocks." For this I thank and congratulate everyone under TEAM BSP! The Journey Continues Ladies and gentlemen, my term as Governor of the Bangko Sentral ng Pilipinas ends in July 2 or 38 days from today. I take this opportunity therefore to thank all institutions, individuals, family and friends who have contributed to our continuing success at the BSP. You all deserve a round of applause. At the BSP, we move to great lengths to develop our people to be world class central bankers through a continuous program of staff development, strategic training and effective succession. Thus, we have developed in our midst a highly qualified successor — I refer of course to Deputy Governor Nestor Espenilla, Jr., a career central banker for 36 years now, who will assume the post of BSP Governor on July 3, 2017. Nesting has described his term as “continuity plus, plus.” Indeed, we have a firm pipeline of policies and programs across the BSP that we have identified as critical, moving forward. This includes further refinements of our Interest Rate Corridor, the implementation of our National Retail Payment System, the continuing banking sector reform agenda, and ASEAN integration. We can therefore say that the BSP Journey to Stability continues. Ladies and gentlemen. The Philippine economy is in the cusp of a demographic window of opportunity, with our young population holding so much promise to reset and accelerate the country’s growth and development. We sincerely hope therefore that our books – with their lessons of the past — will serve not only inform but also inspire our readers, academics, and future generations of BSPers to do their share in our continuing journey to stability. Maraming pong salamat! Mabuhay ang Bangko Sentral ng Pilipinas! Mabuhay ang ating mahal ng bansang Pilipinas! Mabuhay po tayong lahat! 3/3 BIS central bankers' speeches
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Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Launch of Wealth Watch Book II, Manila, 6 June 2017.
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Amando M Tetangco, Jr: Financial education and consumer protection – triggering a positive ripple effect Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Launch of Wealth Watch Book II, Manila, 6 June 2017. * * * Thank you for joining us at the launching of the second volume of the Wealth Watch book of the Bangko Sentral ng Pilipinas. This is a special event that marks our continuing program to help improve the lives of Filipinos through financial inclusion, education and protection. In particular, this book provides practical tips on wealth creation and enhancing the readers’ financial well-being through investments management and entrepreneurship. Indeed, the increasing sophistication of financial markets makes continuing financial education necessary. Thus, even as we encourage our youth and the unbanked to develop the habit of saving, we also continue to develop for those who already have savings, guides on how to make prudent decisions to grow and invest their money. The timing is perfect. The Philippine economy has been growing consistently and in recent years at levels regarded as one of the fastest in Asia. In fact, our growth rate of 6.4% in the first quarter this year, brought our record of achieving uninterrupted GDP growth for 73 consecutive quarters now. In other words, our economy has been on a growth track since the first quarter in 1999 or in the last 18 years. To make this economic growth meaningful and inclusive, we should continue to empower our people to prosper and achieve financial security. The link between financial literacy and the economy Ladies and gentlemen. An increasing body of research shows that a financially-literate population can create “economic ripples”. They have higher levels of savings and diversified investments. They manage credit and mortgages well, and make retirement planning a priority. 1 In short, they make good financial decisions that lead to better economic well-being for themselves, their families and eventually, their communities. Very few initiatives have such transformational power. Financial literacy in the Philippines As a people, therefore, we should aspire for the development of a financially-learned citizenry who can protect themselves from fraud, even as they gain from being part of the financial system and a robust economy. In this manner, they can contribute to the sustained growth and strength of our economy. This is the challenge before us. A World Bank survey indicated that, on average, Filipino adults correctly answered only three out of seven financial literacy-related questions. The same survey also found that Filipinos lack specific knowledge required to make informed saving and borrowing decisions.2 Clearly, there is a need for effective financial education interventions. The BSP Economic and Financial Learning Program The BSP has long recognized the importance of economic and financial education and its potential to help improve people’s lives. In 2010, we consolidated all BSP learning events under one umbrella – the Economic and Financial Learning Program (EFLP) to ensure consistency of 1/3 BIS central bankers' speeches messages, synergy of activities, and efficient use of resources. We focused on current economic issues, the role of the BSP in the economy, good money habits, personal finance management and financial consumer protection. EFLP now consists of more than 10 component programs designed for specific audiences: the children, college students, the working sector, investors, overseas Filipinos, and selected unbanked sectors. This is a nationwide program that involves seven departments within the BSP, as well as our regional offices and branches. 3 EFLP participants have rated the programs with an average of 4.5, with 5 as highest possible score. Having said this, we know a lot more needs to be done. In this connection, we will continue to enhance, innovate and diversify our outreach programs to determine the most effective and efficient ways to reach our target audience and attain our education objectives. Financial education, a key component of consumer protection At the BSP, financial education is not just an advocacy — it is integral to the Financial Consumer Protection Framework. This is a set of regulations that promotes consumer welfare and upholds – within BSP-supervised institutions – a culture of transparent, fair and responsible treatment of consumers. This means that financial institutions under BSP supervision will be held accountable for ensuring that consumers are: 1. Provided with correct and understandable information about their financial transactions; 2. Protected from mis-use or abuse of their personal data through risk-based data handling procedures; 3. Treated fairly and professionally, with the consumer’s well-being in mind; 4. Given access to an objective and efficient mechanism for complaint resolution and redress; and 5. Assisted to make sound decisions through objective financial education and awarenessraising methods. Indeed, we remind our institutions that a customer-centric approach to any business, including banking and finance, works well and makes for good business in the end. At this point, I want to share key lessons we have learned along that way: 1. First — Consumer protection and financial education is a collective responsibility. Regulations set in place by regulators such as the BSP could only be as effective as the manner in which these are observed and implemented by financial institutions. At the same time, our people must do their part to become financially-literate. 2. Second — Multi-sectoral partnership and collaboration is critical in promoting consumer literacy and protection. We are a country of over 100 million people, and growing. We have varied demographic, geographic, learning preferences and cultural characteristics, that must be considered when designing and implementing consumer education programs. 3. Third — The efficiency and effectiveness of policies and programs must be monitored and measured using suitable methodologies. Among others, we want to measure changes in consumer behaviour as a result of education interventions and consumer protection measures. Only through fact-based measurement will we be able to calibrate our programs to become more effective and efficient. Conclusion Ladies and gentlemen, while we continue to register gains in the goals we have set for financial inclusion, education and consumer protection, we do need to further broaden and deepen 2/3 BIS central bankers' speeches engagement with our financial consumers. I wish to reiterate therefore that the BSP is open to partner with like-minded organizations that share our vision of a financially-literate citizenry. Together, we can develop a financially secure future for our family, our community and our country. Maraming salamat, at magandang hapon! Mabuhay ang ating mahal na bansang Pilipinas! Mabuhay po tayong lahat! 1 Sources: Lusardi and Mitchell, 2007; Lusardi and Tufano, 2008; Stango and Zinman, 2006; Lusardi and Mitchell, 2007; Alessie, Lusardi and van Rooij, 2007; Hogarth and O.Donnell, 1999. 2 World Bank, 2015, Enhancing Financial Capability and Inclusion in the Philippines: A Demand-Side Assessment. 3 EFLC, FCPD, IFAO, CORAO, DER, DES, CIIO and regional offices/branches. 3/3 BIS central bankers' speeches
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Speech by Mr Armando M Tetangco, Jr, Former Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 24th Anniversary Program of the Bangko Sentral ng Pilipinas, Manila, 3 July 2017.
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Armando M Tetangco, Jr: Central banking and symphonies Speech by Mr Armando M Tetangco, Jr, Former Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 24th Anniversary Program of the Bangko Sentral ng Pilipinas, Manila, 3 July 2017. * * * Happy anniversary Bangko Sentral ng Pilipinas! Ladies and gentlemen, we celebrate the 24th year of the BSP on a high note. Just last month, the Singapore-based publication The Asian Banker named the Bangko Sentral ng Pilipinas as the Best Macroeconomic Regulator in Asia-Pacific. The Asian Banker also presented the BSP Governor with a “Lifetime Leadership Achievement Award”, citing the central bank’s contributions to the Philippine financial system and the economy under his watch. Last May, a report published by the international credit rating agency S&P said our “central bank has a record of supporting sustainable economic growth and responding appropriately to changing economic circumstances.” S&P added that our “ability to maintain macroeconomic and price stability through an economic cycle has been tested, including a period of exogenous shocks.” And last February, the Hong Kong-based publication FinanceAsia named the BSP Governor “Outstanding Achievement Awardee” for excellent stewardship of the BSP, managing the difficult task of keeping inflation under control at the same time as giving the country room to grow and fulfill its potential. FinanceAsia cited our contributions to Philippine economic development and to the improvement of central banking standards in the region. Indeed fellow BSPers, our monetary and banking policies have continued to provide the stability needed by our economy to overcome the humps and bumps, and the twists and turns in the global landscape, including the Global Financial Crisis and its lingering effects on economies and central banks. Here in the Philippines, we did not only survive the GFC, we continue to thrive. Ladies and gentlemen of the BSP, we accomplished this together. BSPers, past and present, lahat may kontribusyon! As I keep saying, the BSP is not a one-man band. The individual and the institutional awards we receive belong to ALL BSPers across the country – mula Luzon, Visayas at Mindanao! Thank you and congratulations BSPers! The way I see it, the role of a central bank governor has a lot in common with that of a musical conductor, who leads people from different disciplines to create beautiful harmonies that add up to masterful symphonies. Of course, there were times we heard some discordant notes. But by and large, we played harmonious and beautiful music together, so to speak, that resulted in benefits for our people! Let me cite some highlights of our performance: We achieved low and stable inflation conducive to sustained economic growth by adopting data-driven and forward looking policies; We have a sound, stable and liquid banking system that is well-capitalized and supports the financing needs of our economy particularly the productive sectors; We operate a safe and reliable payments system that minimizes possible systemic risks and inspires confidence in our financial system; We have nurtured a strong external position that provides buffers to potential shocks to the 1/3 BIS central bankers' speeches economy and the financial system; and We are implementing a comprehensive agenda for financial inclusion to ensure inclusive growth that improves the quality of life of Filipinos. Given these positive outcomes, how do these play out and benefit our economy and our people? The first and most notable positive change is the transformation of the Philippine economy — from being described as the sick man of Asia, we have moved up as a rising tiger economy whose growth is among the fastest in the region. In cooperation with other institutions, we have achieved the ideal convergence of low inflation amid high economic growth. Definitely, the size of the economy has been expanding — from an average GDP growth of 4.9 percent from 2005 to 2010, growth went up to an average of 6.1 per cent in 2011 to 2016 and reached 6.4 percent in the first quarter of 2017. On the other hand, inflation averaged 5.2% in my first six years as Governor (from 2005 to 2010) and dropped to 3.0% in my second term (2011 to 2016). From January to May this year, inflation has remained stable and averaged 3.1%. The second positive outcome of our policies is the strengthening of our domestic banks, particularly in terms of size, capitalization and reach. The banking system has tripled in size over the past decade, with year-on-year growth of 12.6 percent. As of end-April 2017, the total resources of the banking system reached P14 trillion, the highest on record. Parallel to this, banks’ overall capitalization is at levels above both the national requirement and the international BIS standard. As the main provider of domestic credit, the Philippine banking system is seen by international debt watchers as a source of sovereign strength. The third benefit is the continued increase in the volume and value of PhilPASS transactions — from its modest start in 2002 with 5,685 transactions, first quarter 2017 transactions alone already hit 419,455 while value of transactions shot up from P2.4 trillion in 2002 to P78.7 trillion in the first quarter 2017. Indeed, confidence in the BSP’s PhilPass supports the continued growth and development of our financial system. The fourth improvement is the sustained build-up of the country’s foreign exchange reserves— from a GIR level of $18.5 billion enough to cover about 4.6 months’ worth of imports of goods and services in 2005, our import cover had moved up to about 9 months on a GIR of $82.2 billion as of end May 2017. At the same time, the country’s debt management program saw external debtto-GDP improve by more than half — from 59.7 percent of GDP in 2005 to 24.0 percent as of end-March 2017. The fifth benefit is the country’s elevation to investment grade beginning 2013. Major international credit rating agencies (i.e., Moody’s, Fitch, and S&P) uniformly acknowledge the BSP as one of the institutional pillars that generates positive marks for the country. Ladies and gentlemen, the BSP has been able to accomplish all these because, as an institution, the BSP is ready. It is nimble enough to be able to adapt to the changes in its operating environment. We have built capacity among our people, streamlined processes, leveraged off technology as appropriate, and inculcated an overall sense of good governance and accountability in all that we do. In recent years, we have also institutionalized the new norm of financial stability in our organization as well as in policy coordination and cooperation with other financial regulators. This new mindset has allowed us to put on a more holistic lens in the conduct of surveillance and the crafting of policy. So far, so good. Looking ahead, I see the BSP successfully pursuing its mandate to help provide 2/3 BIS central bankers' speeches stability and promote sustained growth of our economy through monetary and banking policies. Ladies and gentlemen. We thank President Rodrigo Roa Duterte for having chosen the path of stability and continuity by appointing veteran central banker Nestor Espenilla, Jr. as our new BSP Governor. With Gov Nesting’s deep knowledge of the BSP — its history, mandate, organization, and corporate culture – he can certainly hit the ground running. I have worked closely with him and I can tell you that Gov Nesting is a top-notch central banker and a man of integrity, who has what it takes to excel as the BSP’s new leader. Let us also welcome the three appointees of the President who will join the Monetary Board for a term of six-years each — former trade secretary and veteran banker Peter Favila who returns to the MB; former economic planning secretary and eminent economist Dr. Phillip Medalla who was reinstated for another term at the Board; and veteran banker and corporate CEO Antonio Abacan. They complete the seven-man MB with Finance Secretary Sonny Dominguez; former general counsel and deputy governor of the BSP Juan de Zuniga, Jr.; veteran banker and former PDIC Head Val Araneta; and Monetary Board Chairman and BSP Governor Nestor Espenilla, Jr. I am very pleased to see therefore that we have with us distinguished guests who can provide crucial support and cooperation to move the BSP’s agenda forward under Gov Nesting’s watch. With us this morning are former Central Bank governors and colleagues, fellow workers in government, representatives from the banking sector, the business community, multilateral agencies, our friends from the media and the members of our families. Indeed, it is fitting that we have multi-sectoral representations today as BSP’s policies ultimately affect all Filipinos, our economy and our country. I hope therefore that Gov Nesting and all the Members of the Monetary Board will receive all the support they need to craft, formulate, innovate and implement effective policies and programs to serve the best interest of our people, our economy and our country. Finally, I want to thank all of you for the unstinting support you have given me during my 43years of service as a central banker, the last 12-years of which was as Chairman of the Monetary Board and Governor of the Bangko Sentral ng Pilipinas. In particular, I am privileged and honored to have worked shoulder to shoulder with members of TEAM BSP—members of the Monetary Board, Management, officers and staff across the country. Your dedication to the pursuit of the BSP’s mandate runs deep and strong, knowing that what is at stake could affect the quality of life of our people and our future as a nation. You are true public servants. Salamat sa inyo! On behalf of my family – my wife Elma, my daughters Eula and Mia, my son Patrick and his wife Miko together with my unica apo Zara, my brothers and sisters— I thank you all. We are grateful that in sickness and in health, you were always there for me giving support, even singing and dancing to cheer us on. Maraming, maraming salamat sa inyo! Today, as I leave the BSP as citizen Say, I will not say goodbye. Instead, I will say … until we meet again. Mabuhay si Governor Nesting at ang Monetary Board! Mabuhay ang Bangko Sentral ng Pilipinas! Mabuhay ang ating Inang Bayan! Mabuhay po tayong lahat! 3/3 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 24th Anniversary Program of the Bangko Sentral ng Pilipinas, Manila, 3 July 2017.
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Nestor A Espenilla, Jr: Continuing the voyage of excellence to a bright tomorrow Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 24th Anniversary Program of the Bangko Sentral ng Pilipinas, Manila, 3 July 2017. * * * Outgoing Governor Amando M. Tetangco, Jr.; distinguished members of the Monetary Board – Finance Secretary and MBM Carlos Dominguez III, MBM Felipe Medalla, MBM Juan De Zuñiga, Jr., MBM Valentin Araneta, MBM Antonio Abacan, and MBM Peter Favila; outgoing MBM members Alfredo Antonio and Armando Suratos; esteemed former Central Bank Governors Jaime Laya, and Jose Cuisia, Jr.; former MB Members – Raul Boncan, Ignacio Bunye, Melito Salazar, and Vicente Valdepeñas; distinguished guests from the banking community, the business sector, and the academe; my co-workers in the BSP in Manila, Quezon City, the regions, and the branches; family and friends, including my wife Tess and my children Jackie, Nikko and Nesty; ladies and gentlemen, good morning! First of all, I wish us all a happy 24th anniversary! Celebrating BSP’s brand of excellence Our chosen theme for this anniversary is “excellence”, highlighting one of the BSP’s core values. Together with patriotism, dynamism, integrity, and solidarity, excellence is the defining imprint in every BSPer’s DNA. These values should describe who we are and what we always aspire to be in our everyday life in BSP. The Japanese equate excellence to the principle of “kaizen” which, in English, means “continuous improvement”. It is an evolutionary process – a daily conscious effort to do better than the day before. In his book “The Story of Philosophy”, American philosopher Will Durant summed up Aristotle’s thoughts on excellence – “We are what we repeatedly do, excellence then is not an act, but a habit.” Similarly, in his book “Outliers”, best-selling author Malcolm Gladwell advocated the 10,000-hour rule. This rule holds that at least ten thousand hours of deliberate practice are required to achieve the level of mastery associated with being a world-class expert. Ladies and gentlemen, BSP’s journey to excellence started 24 years ago. Hard work and dedication have led us to achieve important milestones. First, our effective conduct of monetary policy through flexible inflation targeting has led to a low and stable inflation environment that sustains economic growth. Today, the Philippines is one of the fastest growing economies1 in the region. Second, the domestic banking system continues to be fundamentally sound and stable. Banks are well capitalized and benefit from good asset quality, ample liquidity and healthy profitability. By reliably providing credit to the economy and mobilizing savings, the banking system is a pillar of sovereign strength. Third, the BSP, as a progressive and vigilant issuer and overseer of the currency and operator of the Philippine Payments and Settlements System (PhilPaSS), has consistently provided a safe and efficient payments system that enables our economy to function smoothly. We honor and thank my predecessor, Governor Say Tetangco, and the rest of our dedicated Monetary Board members, and other stewards of our institution before them, for their collective wisdom and for leaving us a legacy of excellence in the BSP. With you at the helm to provide guidance, we were able to sail the rough seas and kept the economy and the financial system on 1/4 BIS central bankers' speeches an even keel for the past 12 years. Please join me in giving them a warm round of applause for a job well done! Governor Say, I am truly grateful for your mentoring all these years. Yours are truly big shoes to fill and I am thankful that I am inheriting such an exemplary and world-class institution. My fellow workers, we have achieved these significant milestones by working together and staying focused on pursuing our collective goals to the highest standards. This is the brand of excellence that is truly the BSP way! Continuity ++ I dedicate my term as BSP Governor to building and leveraging on this legacy of excellence. We shall endeavor to fulfill our core mandates with greater vigour and integrity to ensure that both the economy and the financial system remain strong, stable, and resilient so that they facilitate transformational opportunities for all. The BSP will continue to fine-tune our execution of monetary policy to make it even more marketoriented. We have already started with the deployment of the interest rate corridor (IRC) system. Over time, the IRC is expected to aid in advancing the development of the domestic money and capital markets based on greater reliance on the use of market-friendly instruments. In the same vein, we will work closely with other government agencies and private sector stakeholders to accelerate capital market reforms, including the development of the necessary financial market infrastructures that provide orderly trading, clearing, and settlement of the full range of financial transactions. Leveraging on the much-improved and continuously improving governance and risk management practices of banks and other supervised financial institutions, we intend to further open up competitive opportunities to lower the cost of doing business, provide more customer choices, promote efficiency, and encourage innovation. There are also vital pieces of legislation that we strongly support. We will advocate for their timely enactment. These include the amendment of the BSP Charter, the passage of the Payment System Act (PSA) and the Islamic Banking Act, and the easing of the deposit secrecy laws. We also join the initiative for the further strengthening of the Anti-Money Laundering Act (AMLA) to win the fight against money laundering and terrorist financing and thus secure the integrity of our financial system. We must likewise do our part and remain focused in pursuing comprehensive reforms to enable our economy to position well in the rapidly integrating ASEAN regional economic system. Bringing central banking to the people: towards a truly inclusive growth Yes, the Philippines continues to experience strong economic performance amidst a stable macroeconomic and financial environment. But such growth, to be truly meaningful, needs to be inclusive, to create jobs, and to improve welfare. The BSP has been promoting reforms in the macroeconomic and financial sectors, but we know that these are not enough. We have to push the envelope further. This is why the BSP has been passionate in its pursuit of its financial inclusion advocacy. We need to work on bringing central banking operations closer to the people. This would entail strengthening our commitment to advance our financial inclusion, financial education, and consumer protection agenda to ensure that no one is left behind. As you may know, in 2015, the BSP, together with industry participants and other stakeholders, embarked on an ambitious journey towards modernizing the retail payment system in the 2/4 BIS central bankers' speeches country. The National Retail Payment System (NRPS) project defines the principles and critical elements to bring about a safe and efficient digital payment system. This can potentially transform our economy by enabling greater access to financial services. A well-designed payment system serves as a key pillar of an inclusive and expansive digital finance ecosystem – one that is able to meet the diverse needs of all users in a manner that is convenient, sustainable, affordable, and reliable. Our policy agenda is therefore geared towards a truly inclusive, strong and dynamic financial system that is fully responsive to the needs of the domestic economy in line with the Government’s medium-term development plan and the AmBisyon Natin 2040. The new frontier: voyage to a new season of excellence As we continue our voyage to a new season of excellence, let us examine what is ahead of us… Our sound macroeconomic fundamentals and gains from earlier reforms will continue to support our growth prospects. However, we need to be mindful of potential sources of vulnerabilities. The year 2016 saw the unfolding of unexpected global events that have escalated the level of policy uncertainty and market volatility. We have to be prepared as well for the seemingly imminent wind-down of ultra-easy monetary policies in advanced economies. We need to be mindful of such events and their potentially far-reaching consequences since these could undermine our economic performance and disrupt our carefully-laid plans. Moreover, rapid technological innovations in the delivery of financial products and services are changing business models. Digital innovation is rapidly re-shaping financial services as we know it to serve a new breed of financial consumers who are young, upwardly mobile, technologysavvy, and have exacting demands for the convenient delivery of financial products and services. The role of social media, particularly as an information channel, has likewise accelerated, highlighting the speed at which information, both good and bad news, and perhaps even fake news, can spread at an unprecedented speed. We cannot also be blind to the dark spectre of cyber-crime that can quickly undermine trust in our financial system. There is no substitute for eternal vigilance, timely action, and public education. We are all in this together and have a shared responsibility. As policymakers and financial supervisors, we have to be in tune with these emerging market trends and evolving client needs, including the ‘millennial’ upside of our young population. Indeed, the new frontier presents central banking with challenges that have not been there before. The changing landscape calls for us to be more vigilant, proactive, and dynamic in responding to the needs of our diverse stakeholders. The way forward For a relatively small but fast-growing and open economy such as the Philippines, fulfilling our mandate and advocacies require an open-mindedness and a deliberate reconsideration of the conventional models we use for macroeconomic management, banking supervision, and financial system surveillance. Improving analytical frameworks and processes are critical. Key to this is the broadening of the skills and competencies of staff across the various disciplines within our institution. In order to achieve operational excellence, the BSP has to be appropriately structured and equipped to deliver on our strategic mandates. We need to build on our inherent strengths and earlier gains in terms of instituting enhanced corporate governance, adopting best practices, and instilling greater professionalism and accountability. We need to constantly work together to maintain BSP’s brand of excellence. 3/4 BIS central bankers' speeches We are fortunate that we have a mature organization that nurtures talents and provides an enabling environment for excellence. We are able to offer a competitive compensation and benefits package to attract, motivate, and retain good talents. There is a competency and meritbased system for career development and advancement. We have an established wellness program that fosters “work-life balance” for BSPers. Under my leadership, I will continue to support the aspirations of all BSPers in terms of better facilities, competitive pay and benefits, and capacity building opportunities through training, scholarships and work development interventions. This also includes supporting institutionalized benefits and incentives that reward excellent performance. To me, motivated BSPers will always give their best to the institution. Tama ba?... Concluding remarks: a message of solidarity Circling back, this year’s anniversary theme, “2gether moving 4ward: A New Season of Excellence” is a vivid reminder of the task ahead of us in the next six years. In closing, I share with you a nugget of wisdom from an anonymous sportscaster. He said, “You don’t win with the best talent – you win with the five players who are able to play well together.” Ladies and gentlemen, central banking requires similar exemplary and coordinated ability to navigate the currents of the global financial markets. We need to build on the trust, loyalty, integrity, and dedication to excellence of each member of Team BSP to achieve our given mandates, advocacies and collective vision. This is crucial in order for us to thrive given the evolving demands of modern central banking. My fellow BSPers, I have been given the immense honor and privilege of being your new team captain. Believe me when I say that this is a role that I do not take for granted. However, I need your prayers and support, too. They say that it can be lonely at the top. From that vantage point, national issues and high-level problems may overshadow the needs and concerns of the BSP community. Even when the going gets tough, my fervent wish is that I never lose sight of where I came from. Ako ay laking BSP. Ang aking husay at lakas ay galing sa BSP. I therefore owe it to all of you to stay connected and to continue serving the BSP community even as we all serve our country with skill, honor, integrity, and accountability. Our beloved Philippines has a lot of promise before it, and in your good hands, it will continue to thrive and flourish. It is because of this promise that we must relentlessly seek excellence, not for glory or acclaim, but for the sake of delivering the best possible service to the Filipino people. I thank President Rodrigo Roa Duterte for this opportunity to serve. Mabuhay ang BSP! Mabuhay ang ating mahal na bansang Pilipinas! 1 In 2016, the country’s gross domestic product (GDP) grew by 6.8 percent. It is higher than Malaysia’s 4.5 percent, Indonesia’s 4.9 percent, Thailand’s 3.0 percent, and Singapore’s 2.9 percent (Source: BSP website available at www.bsp.gov.ph/statistics/efs_asian.asp) 4/4 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Awards Ceremony and Appreciation Lunch, Manila, 11 July 2017.
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Nestor A Espenilla, Jr: Turning vision into partnership Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Awards Ceremony and Appreciation Lunch, Manila, 11 July 2017. * * * PDIC President Roberto Tan, National Statistician Lisa Bersales, Members of the Monetary Board, sector heads, fellow BSPers, former Central Bank Governor Jaime C. Laya, guests, a pleasant good morning to all of you. Magandang umaga especially to our stakeholders and awardees. Every year for the last fourteen (14) years we at the BSP have held this annual ceremony traditionally right around this time: our Anniversary month… There is significance in this chosen timing. The message we wish to convey is that, not only do we value you: our stakeholders... More so, we recognize that the BSP would not have achieved all it has if it were not for your partnership. This is why we celebrate with you during our milestone month of July. The theme of our 24th Anniversary here at the BSP is “together moving forward: a new season of excellence.” There is a journey implied, and a needed collaboration and cooperation expressed. This theme includes, not just the members of the BSP family progressing onward in unity, but this includes you too, our esteemed stakeholders, whom we honor today. I have been with the BSP – then, the Central Bank of the Philippines – since 1981… And as a young Central Banker one of my tasks was to draft technical speeches… So even thirty-six years after, I still have a passion for words. Let me focus on this event’s keyword. Stakeholder. It sounds quite ominous. Its origin is consistent with this sense of foreboding. The word “stakeholder” first appeared in the Oxford English Dictionary in 1708. It referred to one holding a wager, a bet. Thankfully, for us now, the word has evolved into a dynamic — even an exciting and active concept, where speculation has no role. As presently understood, stakeholders are partners and can be involved in the successes of an enterprise, from whose accomplishments they too can greatly benefit. The importance of collaboration and partnerships was stressed by Governor Amando M. Tetangco, Jr. in his two (2) terms at the BSP’s helm… Gov. Say repeatedly said that in the BSP, our work could not be accomplished by the BSP working alone, but only through continued discussion and cooperation with others, like government agencies, institutions, other regulatory bodies, private organizations and entities. This is a belief we strongly hold and will continue to hold here in the BSP. This morning we have one-hundred and forty six (146) outstanding partners that we acknowledge. You are government agencies and departments… private businesses… leaders in your respective industries. You, our honorees and stakeholders are here today because you helped the BSP in its programs. But did you know that beyond the altruism you displayed, where you extended assistance willingly and often without expectation of anything in return from the BSP, there was in your actions, a reward that will ultimately redound to the fulfillment of a shared vision and dream? In the BSP, all employees know our vision by heart. Memorize nila ito. Our vision is 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. A high quality of life for all Filipinos. This includes each person here in this Assembly Hall. And with your contribution, with the assistance you gave us, this is precisely what you are helping us achieve. So, for this, we thank you. 1/3 BIS central bankers' speeches Please give yourselves a warm round of applause. This is not rhetoric. For example, the outstanding survey respondents and information partners here who assisted the BSP, helped us in formulating data-driven monetary policy. The responses you gave and the information you provided underpinned enabling decisions that allowed the Philippine economy grow by 6.4 percent in the first quarter of 2017. You helped so that the Philippines continues to be one of the fastest growing economies in Asia. Stakeholder participation is essential so that even amidst confounding global developments such as the Brexit and the United States’ seeming turn to protectionist policy, we can stand resilient and stay calm, with inflation at 3.1 percent in the first half of 2017, well within the government’s inflation target range for the year. Our external payments position remains manageable. Robust remittances from overseas Filipinos and ample receipts from the business process outsourcing sector continue to fuel economic growth. The country’s external debt remains at sustainable levels, with the ratio to GDP improving in Q1 2017 to 24.1 percent from 26.5 percent in the same quarter last year. In addition, the country’s Gross International Reserves remain more than adequate at US$81.4 billion as of end-June 2017, equivalent to nearly 9.0 months’ worth of imports of goods and payment for services and income. These are achievements that were brought about by sound policy-making built on our collective dedication and willingness to cooperate for the sake of something larger than ourselves. In this assembly hall are exemplary partners who have enabled us to carry out programs that reinforce the BSP’s three pillars of central banking. You have contributed to BSP’s initiatives and programs in financial inclusion and education… consumer protection… payments and settlements... overseas Filipino remittances… coin recirculation… the clean note policy… and demonetization of our new design series currency. The banking system today is very robust and is poised for broader reach and better service. The number of operating banks as of March 2017 is 599 (head offices) with an overall branch network of 10,679 units. Assets of the banking sector also grew by nearly 12.42% percent yearon-year as of December 2016 boosted by an increase in deposits, profits, and fresh equity. No less important, assets grew without compromising their quality. The Philippine banking system’s capital adequacy ratio as of Q3 2016 has reached 15.59 percent, almost double the globalminimum. Prudent policy-making has led to a sturdy financial system and a stable economy. The critical contribution of our partners as exemplified through your compliance with the BSP’s various surveys, provision of information, and participation in our diverse programs, advocacies and initiatives, assisted the BSP in fulfilling its mandates. To reinforce the importance of data gathering and increasing our interface with the public, we are pleased to announce the formal launching of the user-friendly BSP e-Survey Portal. This online facility will make it easy and convenient for respondents to participate in the surveys of the BSP. The Coordinated Direct Investment Survey went online last June. The Coordinated Portfolio Investment Survey (CPIS) and monthly Cross Border Transactions Survey questionnaires shall be included in the e-Survey by the end of this month. The launch of the BSP e-Survey Portal aims to improve efficiency in generating the Cross Border Transactions Survey results which are used as inputs for the Balance of Payments and International Investment Position Statistics. These indicators help the BSP craft and assess our policy settings. So as you can see, there are more exciting times ahead, more collaboration planned, and better avenues to make them more successful and productive. We look forward to continuing the journey with you. Congratulations to all our stakeholders. Mabuhay kayo. Mabuhay ang BSP. 2/3 BIS central bankers' speeches Mabuhay ang ating bansang Pilipinas! 3/3 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Induction Ceremony and General Membership Meeting of the Bankers Institute of the Philippines (BAIPHIL), Makati City, 14 July 2017.
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Nestor A Espenilla, Jr: BSP and BAIPHIL moving mountains - new heights in banking excellence Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Induction Ceremony and General Membership Meeting of the Bankers Institute of the Philippines (BAIPHIL), Makati City, 14 July 2017. * * * Distinguished Monetary Board Colleagues, Juan de Zuniga and Tony Abacan, BAIPHIL President Irene Arroyo, immediate past President, Liza Ortiz, other BAIPHIL past presidents, BAIPHIL directors, officers and members, BAP President Nestor V. Tan, bank CEOs, my PDIC colleagues, esteemed guests, friends, fellow BSPers past and present, ladies and gentlemen, good afternoon! It is an honor and pleasure to carry on the tradition of inducting the new board members and officers of BAIPHIL. As new BSP Governor… [I assumed the post eleven (11) days ago]… it is auspicious that I now address the new leadership of BAIPHIL …On behalf of my colleagues in BSP and the Monetary Board, let me extend our congratulations. As new leaders, it is natural for us to aspire greater achievements for the teams we lead. This is why I find your theme: “Scaling New Heights in Banking Excellence” very engaging. The theme is both timely and relevant as we come into our fresh roles and as the financial system evolves. The theme mentions heights. To add imagery to this message, let me take Mt. Everest as a starting point. Everest, known as the roof of the world stands twenty-nine thousand and thirty-five (29,035) feet above sea level. This is the ultimate goal of hard-core mountain climbers, the highest of heights. On 29 May 1953, a New Zealander, Sir Edmund Hillary and a Sherpa, Tenzing Norgay, successfully climbed Mt. Everest in the face of great risk. As documented, they were the very first mountain climbers to reach the summit. Now, sixty-four (64) years later, the peak of Everest is decidedly less lonely and more than 3,500 climbers have already reached the top or “summitted”. A myriad of things have changed since then. But from the time it was first done to the present day, scaling Everest or any mountain, consistently demands: First: intense training and preparation; Second: sensitivity to the environment and possible changes to climate; Third: possession of well-maintained equipment; Fourth: a team of highly trusted and reliable individuals; Fifth: leadership of competent guides; and Finally: tenacity and courage to keep going amidst challenges. Training and Preparation In mountain climbing, each team member has to be skilled, fit, and prepared physically and mentally. This takes years of conditioning if one is to take on the tasks involved. As the banking industry’s premier training arm, BAIPHIL plays an important role in providing required skill sets and competencies for modern banking. BSP commends BAIPHIL for continually being proactive in responding to the training gaps and emerging requirements of the banking industry in line with on-going developments in the regulatory and operating environment. With its expertise, synergy and collaborative partnership with the BSP, BAIPHIL is in the best position to design a comprehensive training program to foster and strengthen expertise, excellence and integrity among banking professionals. 1/4 BIS central bankers' speeches Environmental Sensitivity The conditions for climbing higher look good! The Philippine economy remains in a position of strength. It continues to expand, despite challenges in the external environment. This expansion is increasingly broad-based with notable rebound in agriculture and exports sectors. The sustained strength of the economy in the first quarter of 2017 was underpinned by manageable inflation, more than adequate gross international reserves and a steady stream of inflows from overseas Filipino remittances, revenue from the business process outsourcing sector and tourism income, all contributing to higher consumption spending. Moreover, the Philippine banking system continues to be a stable anchor for the economy with key performance indicators showing double-digit growth in resources, expansion in lending, adequate capitalization, improved asset quality, and profitable operations. These gains driven by our common vision will fuel us to pursue greater heights. Well-Maintained Equipment and Gear As Central Monetary Authority, the BSP has a well-articulated policy framework and an enhanced policy tool kit. Like good and ready mountain climbers, our gear is ready and we have improved surveillance methods. Assessing the mountain, we are thoughtful about weather shifts. For instance, the increasingly clear signal for policy normalization in advanced western economies points to a rise in global interest rates, just a question of timing and pace. Mindful of these, BSP continually strengthens its framework for financial risk surveillance, sharpening assessment of market conditions. We consider the interconnectedness of economic agents, credit concentration and liquidity, and the evaluation and pricing of risks. Our approach is pre-emptive to mitigate any undue risk build-up in the financial system, but we have also built up solid macroeconomic fundamentals that serve as buffers to weather potential external shocks. These safeguards notwithstanding, BSP continues to refine existing early warning systems, distress indices and stress tests. BSP is constantly developing financial and economic models that improve our understanding of how relevant variables move. Trusted and Dedicated Team To be successful in mountain climbing (like facing the challenges of the banking industry) one cannot go up alone. It is not a solitary undertaking. Climbers must learn the basics from other climbers, as well as help each other up from time to time. In our industry, this means we must develop close collaborations and relationships and encourage communication. I am fortunate that I have inherited a very capable and competent team BSP where each public servant contributes to the fulfilment of our mandates. We can also depend on the collaboration and synergies among valued stakeholders like BAIPHIL. Indeed we cannot do it alone. Competent Leadership Ladies and gentlemen, possessing close familiarity with “the mountain and mountains” of banking, we could consider the Bangko Sentral and BAIPHIL as the industry’s ‘sherpas’. We provide guidance and direction to others in the industry as we walk the same path. We guide towards the shared vision of upholding a stable and inclusive banking system. Under my 2/4 BIS central bankers' speeches stewardship, this will be pursued with fervour. As our fellow Sherpa, the BSP counts on BAIPHIL to take on even greater significance in this age of global convergence. Together, we have to prepare the banking community by anticipating harder but more fulfilling climbs ahead. Through continuous training and education, the banking profession will be better equipped and prepared to keep pace with the ever evolving financial services industry. Tenacity and Courage In the book, “The Last Step: The American Ascent of K2” / it is said that, “the courage of mountain climbers is not blind, inexplicable, meaningless; it is courage with ability, brains, and tenacity of purpose.” In this industry, this is the same brand of courage we must have to achieve our goal of banking and financial stability. Our courage is not based on a false sense of security. But we are motivated to always raise the bar of professional excellence and business integrity for banks. We have the determination and passion to excel in our current craft, of pursuing excellence and constantly improving our work so that we could deliver the best financial services to the Filipino consumer and our country. Moving Mountains That I used Mt. Everest in an analogy to illustrate our present and on-going journey together is perhaps ambitious enough… And while I have built parallelisms between the two endeavours, I dare say that in our industry the mountains are not static. Banking is not unmoving like the formidable Everest. There is no final peak to overcome. The Bangko Sentral celebrated its twenty-fourth (24) anniversary last week. I have been a Central Banker for the last thirty-six (36) years. BAIPHIL marked its seventy-sixth (76th) year this June. As veterans in this field, we know that in banking and in central banking, the process of scaling new heights is an active and continuing endeavour. Friends: banking products, financial services and needs, technology and consumer preferences are always levelling up. We have to keep pace. We do this with training and education. We do this with updated and relevant regulations. We do this with partnership as we are confronted with an evolving market landscape of international standards and prudential regulations. Our shared strategy necessitates taking a more holistic view of these developments. We do this too by strengthening corporate governance standards and risk management practices. We at the BSP have raised the bar of prudential standards to promote resilience in the banking system and market discipline for risk-taking activities. Because of growing regional financial integration and the entry of foreign banks, competition pressures have increased. New sophisticated players such as financial technology solution providers have entered the market. This is a good thing as these bring about a notable and gradual unbundling of the traditional value chain in the Philippines and intimately links banks closer to customers. While FinTech provides interconnectivity, convenience, and efficiency in delivery of financial 3/4 BIS central bankers' speeches products and services, we must also be vigilant as it also ushers in cyber-security concerns. In this regard, the BSP has been laying the groundwork on promoting cyber-security and related regulation on technology. But there is still much to be done. Ladies and gentlemen, we know from science that the mountains are moving due to continental drift and that we, BSP and BAIPHIL, must therefore continue to move with the mountains even as we scale the one in front of us. In Closing: Inclusion as We Climb I’d like to think also that there are several summits in banking and central banking… That as one reaches a vantage point, more and more of the surrounds are taken into perspective… As one climbs, one’s view becomes wider. I have heard from mountain climbers that when you reach the top, it is actually quite a humbling experience. I certainly felt that way when I climbed Mt. Fuji as a millennial graduate student in Japan in 1988. At higher heights, one sees the bigger picture more clearly and wishes for others to experience the same. The same holds true as we experience more economic gains and successes. We want more and more people – our countrymen – to be included in the experience. Our goal is for more of our countrymen to save and borrow for productive uses, avail of investment and insurance products, and send and receive payments securely and efficiently. We firmly believe that this financial empowerment is the only way for economic growth to be truly meaningful. We trust in BAIPHIL to help us move this vision forward. BAIPHIL can in turn count on the full support of the BSP for its future endeavours. Mabuhay ang BAIPHIL at BSP! Maraming salamat po! 4/4 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Annual Joint General Membership Meeting of MART, ACI, IHAP, TOAP, NASBI, and FMAP, Makati City, 21 September 2017.
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Nestor A Espenilla, Jr: Invisible to joined hands Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Annual Joint General Membership Meeting of MART, ACI, IHAP, TOAP, NASBI, and FMAP, Makati City, 21 September 2017. * * * The spirit of unity, collaboration and optimism in this Annual Joint General Membership Meeting is palpable. That there are six (6) prestigious financial market associations here in full force in spite of a holiday of sorts is exciting. It sets the tone for our willingness to work hard together, hand-inhand to make our financial markets stronger and better. Historically and ideologically, there has been a divide between the private and the public sectors. There are staunch views that capitalism will take care of itself and government should leave markets alone. As early as the 18th century, Adam Smith’s theory of the “invisible hand” that guides supply and demand toward equilibrium and efficiency was gospel. In the 1930s, the idea of self-correcting markets was debunked by the Great Depression… even recently, by the Global Financial Crisis. That Government can improve market outcomes – to promote efficiency and equity, and address market failures is now accepted principle. That you have consistently been valuable partners of the BSP emphasizes – quite happily – that we are on a higher plane of acceptance. We view each other as indispensable partners in achieving our shared vision of greater economic development … There is resounding acknowledgement that we are on the same side… and it is only when we work together that we can achieve our goals. For this, I sincerely thank you. To the Money Market Association of the Philippines (MART), ACI Financial Markets Association Philippines (ACI Philippines), the Trust Officers Association of the Philippines (TOAP), the Fund Managers Association of the Philippines (FMAP), the Investment House Association of the Philippines (IHAP) and the National Association of Securities Broker Salesmen, Inc. (NASBI), maraming salamat… Thank you for being partners with us in our shared vision of ensuring a more robust financial system… To everyone in this ballroom, esteemed guests, ladies and gentlemen, good evening. Setting context Many of us have witnessed how our country has transformed from being an economic laggard to one of the region’s fastest performing economies. For the past 74 quarters (or 18.5 years), the Philippines has posted uninterrupted GDP growth, backed by strong macroeconomic fundamentals. Inflation today is low and stable with average headline inflation from January-August 2017 at 3.1 percent. The balance of payments is under control despite global shifts. External liquidity is secure. We benefit from prudent fiscal management with the National Government deficit at a manageable level of 2.1 percent of GDP and a relatively low debt-to-GDP ratio of 42.1 percent as of end 2016. And we protect our fiscal space to support economic gains by moving forward with an ambitious tax reform agenda. In the first half of 2017, GDP growth was 6.4 percent. A strong domestic demand and expansive government budget for infrastructure development underpins this growth. Overseas Filipino remittances and BPO sector revenues continue to drive our economy. 1/5 BIS central bankers' speeches Recently, the World Bank affirmed a positive growth path for the Philippines, forecasting the economy to grow even more at 6.8 percent this year, and at 6.9 percent in 2018. Overall business sentiment remains positive as shown by the results of the BSP Business Expectation Survey for the third quarter of 2017. Indeed, it is possible to have both strong economic growth and manageable inflation. For 2017– 2019, we expect average inflation to track the target range midpoint of 2-4 percent… Ample domestic liquidity and broad-based growth in bank lending for production activities continue to support economic growth. While there could be some transitory upside risks to inflation owing to the possible impact of the proposed tax reform program along with pending petitions to raise power rates, inflation expectations continue to be within target over the policy horizon. Over the medium term, as the infrastructure program gets underway, the resulting improvement in productivity and various safety nets are also expected to temper the impact on inflation. Based on these considerations, the Monetary Board decided during its meeting earlier today to maintain the BSP’s key policy rate at 3.0 percent. With respect to the external sector, the Philippines’ current account (CA) balance narrowed during the 1st half of 2017 relative to a year earlier. This was due mainly to higher net receipts in the trade-in-services, and primary and secondary income accounts which mitigated the widening trade-in-goods deficit during the first half. In turn, the strong demand for imports such as capital goods, consumer goods, raw materials and intermediate goods is a result of the sustained and broad-based expansion in the domestic economy’s capital formation, production and consumption. The increased demand for dollars also reflects residents’ investments abroad and prepayments of foreign debt. However, continued strong inflows from overseas Filipinos’ remittances, business process outsourcing receipts, and revenues from the tourism sector, are seen to support the current account. Meanwhile, we continue to watch against financial market volatility as risks emanating from normalization in advanced economies and ongoing geopolitical tensions may dampen investor sentiment. Our financial sector has also demonstrated strength and sustained growth amidst uncertainty. Banks have stronger balance sheets and much improved asset quality. There is double-digit growth in assets, loans, deposits and capital. The banking system’s resources expanded by 14.2 percent as of end-July supported by a stable deposit funding base. In line with the country’s domestic growth, banks’ total loan portfolio grew by 17.9 percent and is diverse across industry sectors. Notwithstanding sustained expansion in credit, banks demonstrate prudence in lending. Banks’ NPL ratios declined to 1.98 percent. Banks also maintained an adequate buffer for loan losses, registering a higher NPL coverage ratio of 113.13 percent. Meanwhile, banks continue to build up their capital position. As of end-March 2017, the capital adequacy ratio (CAR) of universal and commercial banks (U/KBs) registered at 15.8 percent. Continuing need for balance We have much going for our economy that outshines seemingly inherent negativity. What is the role of the BSP and what more can it do to protect and advance our solid gains? Let me share with you some programs of the BSP key reform agenda…these embody what I describe as “Continuity Plus Plus”. The BSP remains committed to its core mandates of maintaining price and financial stability, as 2/5 BIS central bankers' speeches well as an efficient payments and settlement system. These form part of the “Continuity” agenda. Monetary policy To ensure inflation is kept at a manageable level, the BSP follows an established process in its periodic review of monetary policy. The BSP has been successful in keeping inflation low and stable, in this regard, we will continue with our monetary policy approach and inflation targeting mechanism. With the introduction of the Interest Rate Corridor (IRC) last year, we continue to strengthen monetary policy transmission. We have seen some encouraging results in the form of 1) sustained Term Deposit Facility (TDF) demand, and 2) a gradual adjustment in market interest rates. As originally envisioned, we shall continue to improve the IRC system as we move towards a more market-based implementation of monetary policy. Prudential reforms Further, leveraging on the financial system’s current position of strength, we will continue to pursue progressive and proactive prudential reforms to maintain resilience against external shocks. With the evolving trends and changing preferences in financial services delivery, we continue to align with international standards while engaging relevant stakeholders for our policies to remain responsive to local conditions. Last week, our enhanced corporate governance framework took effect. It emphasizes the responsibilities and qualifications of banks’ board of directors and senior management and strengthened requirements for board composition. This essentially serves as the overarching framework that ties in risk management in functional areas of a financial institution. Earlier, the BSP issued regulations to strengthen governance over treasury activities. The BSP expects market participants to behave ethically and with utmost integrity in all its dealings. We recognize that the industry has developed a Code of Ethics. We understand it governs financial market activities as well as market conventions covering a range of financial products. We enjoin the industry to review these standards to ensure alignment with global best practice. We encourage the industry to operationalize arrangements to promote adherence to the Code, not only at an industry level, but down to the institution- and individual-level. In our expanding market, integrity and accountability are vital in sustaining confidence. Strategic financial sector reforms towards inclusive growth Now, let me move on to what is close to my heart. While continuity is about focusing on our core mandates, the “plus plus” agenda pushes the envelope further and focuses on reforms that will foster broad-based inclusive growth. These financial sector and market infrastructure reforms are strategic, complementary, and reinforcing. They aim to 1) deepen our local currency debt and foreign exchange markets, 2) digitalize our payment system, and 3) ultimately enhance access to financial services and products. The world has recently recognized our potential as a promising investment destination. Our capital markets are poised to serve as an important source of funding in support of the National Government’s resolve to shore up infrastructure. A well-functioning local currency debt market, therefore, is critical to the implementation of a sustainable market-oriented debt management strategy. This will likewise support open market 3/5 BIS central bankers' speeches operations of the BSP. This will promote financial stability by diversifying funding sources to support economic growth, and increase the availability of financial products. Many of you were at the BSP last month when the BSP, in collaboration with the Department of Finance (DOF), Bureau of the Treasury (BTr), and the Securities and Exchange Commission (SEC), unveiled the local currency debt market development roadmap. As you know, the capital market reform agenda will initially focus on benchmark markets. The reforms will be undertaken over an 18-month time frame from launch in November with specific targets for regulatory and institutional milestones. Deliberately, we sequenced and calibrated the roadmap to ensure that urgent and foundational issues are prioritized. These include initiatives to 1) increase the volume of treasury bills, 2) provide stable, predictable and transparent issuance of government securities, 3) develop a systematic set of obligations, rights and incentives for market-makers, 4) establish a reliable yield curve, 5) introduce a repo program, and 6) strengthen regulatory oversight over the repo and fixed income market. Even as we pursue efforts to deepen the local debt market, the BSP actively worked on improving access to investment products. For instance, the Personal Equity Retirement Account (PERA) was launched late last year. This was done with the strong support of the industry. The program provides an opportunity for capital market gains to be enjoyed by a wider retail base. Further, we continue to pursue a related legislative agenda such as the Collective Investment Schemes Law (CISL) to provide a harmonized legal framework for pooled vehicles of investments. Given the Philippines’ young demographic profile, these efforts can also translate to the mobilization of a sizeable and sustainable amount of savings towards financing the country’s long-term infrastructure requirements and developmental programs. As part of our holistic financial sector reform agenda, we are pursuing ambitious foreign exchange (FX) reforms. The objectives are to deepen the FX market, increase its efficiency and reduce the cost of doing business. Reforms include removing prior BSP approval for certain FX transactions, simplifying registration processes, further reducing documentary requirements, and enhancing data capture for effective policy decision-making. While the idea is to establish a framework that relaxes FX rules and regulations, we wish to stress that authorized agent banks (AABs) are responsible and are held accountable for faithfully complying with these rules. With these efforts, we hope to encourage FX flows from the parallel market to the formal market. Even as we strengthen regulations over Money Service Businesses (MSBs) to maintain financial integrity and enhance consumer protection, we will streamline FX requirements for the banking system to reduce market fragmentation and increase FX liquidity. The amendments to FX regulations is part of a broader thrust for an organized FX market. The intention is to increase transparency, improve price discovery, and increase availability of FX instruments, including hedging products, to improve risk management capabilities of banks and clients. Finally, we are setting our sight on digital innovations as a catalyst to reach greater scale. Creating an efficient digital infrastructure reinforces our capital and FX markets and financial inclusion agenda. It provides an enabling platform that can transform the way financial services are efficiently delivered and consumed. In this regard, the BSP is committed to drive modernization of the country’s retail payment system, promote electronic retail payments, and facilitate inter-operability for faster settlement of 4/5 BIS central bankers' speeches transactions. The launch of the National Retail Payment System, in partnership with industry stakeholders, will help us achieve this vision of a “cash-lite” economy. From invisible to helping hands At the onset, I expressed how the role of Government in economic markets has shifted from exclusion, to regulation, to cooperation. Adam Smith’s invisible hand, while potent with respect to forces of supply and demand, is now complemented by the helping, collaborating and joined hands of the Government and the private sector. Joining hands is essential for long-term success. This is so as goals must be shared and not merely cascaded. For sustainability, interests of the regulator and regulated must converge. Our objectives are the same but our expertise and experiences are varied… these differences may be harnessed so that we can come up with viable and mutually beneficial outcomes. I have faith that ACI, MART, IHAP, TOAP, NASBI, and FMAP will remain our trusted partners in this regard. I trust that all of you will remain committed to playing a big role in growing our respective markets, in developing professional standards, in delivering value to your organizations and clients, and in forging strong partnerships with regulators such as the BSP. Today is a day of protest. Join me in protest against inefficient and undeveloped financial markets. Tama na! Panahon na! Sama sama tayo sa pagunlad. Mabuhay tayong lahat. Thank you and I wish everyone a pleasant evening. 5/5 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Freshmen Orientation Program and Launching of the University of Phlippines BGC Graduate Business Program, Bonifacio Global City, 4 September 2017.
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Nestor A Espenilla, Jr: Sticktoitiveness Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Freshmen Orientation Program and Launching of the University of Phlippines BGC Graduate Business Program, Bonifacio Global City, 4 September 2017. * * * Dr. Ben Paul B. Gutierrez, Dean, Cesar E. A. Virata School of Business, University of the Philippines, faculty, staff, and incoming freshmen of the Master of Business Administration and Master of Science in Finance programs, ladies and gentlemen, good evening. I understand that eighty (80) new MBA and MS Finance students were admitted to UP-BGC. I am delighted to address this audience. It is one full of promise and potential. Yours is the first batch to learn in these new, world-class halls! What an honor for you! Nostalgia Addressing you today, I am reminded of the thirty-seven (37) years that separate the time when I myself was a freshman of the UP-MBA program. It made me think of my student number (I think, I will keep this a secret). It made me nostalgic for UP Diliman (for fishballs in front of Vinzon’s Hall) and mainly, for how the College of Business Administration building stood proudly (well, still stands) in the center of campus, opposite Quezon Hall. It was the most modern building in the academic oval (at least in my time) with an architecture markedly different from that of Palma, Melchor, and Malcolm Halls. Compare that to where we are now in a state-of-the art building in the heart of the Bonifacio Global City. The imagery of the two structures juxtaposed in my mind is enough symbolism for how fast things have changed (and improved!) in that span of time. Change In the last two to three decades, the world has become a very different place transformed by digital revolution and technological advances in almost every field and industry. Students like you have the advantage of data retrieval in real time! Your connections are wireless, with access points in classrooms, hallways, in the library almost everywhere. You read, communicate, research and are entertained on iPads, iPhones, Androids and laptops these are developments we never would have imagined as we strolled by the sunken garden decades ago! Simple lang kami noon. To run regressions, we punched cards and dashed to the UP Computer Center. We had to come back later for the results print-out which were in outsize continuous forms at least an inch thick. Yes, change is inevitable. But as you begin your journey as graduate students (especially as many of you here are also working students) let me share with you a timeless value that ensures success. Grit. Sticktoitiveness. – yes, this is a real word. Secret formula for success Grit, discipline and diligence are requirements for each of you to successfully hurdle every exam, presentation, case discussion, thesis defense and requirement that you need to earn your MBAs and Masters of Science in Finance. Grit is needed to face life’s challenges. Grit – mental toughness –will set you apart. While the truth of this is borne out of my personal experience, the expression of this idea is not new. Many studies (and I understand, facebook posts) convey that neither intelligence nor talent 1/4 BIS central bankers' speeches ensures success. Rather, it is perseverance that allows one to fulfill goals and make dreams come true. In my long career at the Bangko Sentral ng Pilipinas (thirty-six years and counting!) as a young bank officer and working student shuttling between the CB Campus in Malate to Diliman, Quezon City as Deputy Governor of the Supervision and Examination Sector for the last twelve (12) years to this day as Governor of the BSP, sticktoitiveness has made all the difference in my career. Why? The reason is simple. There are good days and there are bad days. While we are presumably talented and intelligent uniformly each day (at least we hope to be!) – the feeling of wanting to persevere and stay-on, changes. It changes with our moods, and is affected by situations and circumstances. This is why sticktoitiveness commitment is the true formula for success. When I first joined the Central Bank in 1981, I was idealistic. My grit was tested all at once! During the turbulent 80’s, there was political unrest. A debt crisis was unfolding and it forced the country to declare a moratorium on the payment of its foreign debt by 1983. Dollars had to be rationed. Central Bank interest rates shot up to around 40% per annum. Compare that to 3% today. The economy was in recession. In 1986, Senator Benigno Aquino, Jr. was assassinated. What a challenging time for the central bank and a young central banker like me! I certainly had days when I wondered if I should continue. I am glad I did. Grit in central banking In the central bank, grit is always required. Grit is what brings about constancy, continuity, credibility and stability to the financial system. Perseverance is needed to face macroeconomic challenges on both global and domestic fronts. Right now, it is necessary as we face the growing uncertainty of economic policies as more central banks in major advanced economies prepare to enter a tightening cycle. The US Federal Reserve (US Fed) hiked the federal funds rate in June (the second time this year) and there is an expected further rise in US interest rates. The European Central Bank (ECB) is also talking about tapering in Quantitative Easing (QE) Policy in 2018. Vigilance is needed as we remain resolute in our mandates of price stability, and banking and financial stability in the face of global political and economic uncertainties and given domestic challenges such as the ongoing Marawi conflict. Grit translates to us preparing well, committing to the implementation of difficult but necessary and bold reforms. Grit is synonymous to the perseverance needed to cushion the economy from any volatility. Even as we enjoy our current economic sweet spot, we still need to be tenacious, dedicated to the fundamentals of hard work and proactive reform. The same should hold true for each of you here as you begin your graduate studies and face your future. Economic sweet spot And may I say, even as I began with earnest advice of vigilance, that the future looks good. Present numbers indicate it to be so. As Governor of the BSP, I am committed to ensuring continuity in the policies that resulted in this favorable economic environment (with room for improvements through strategic financial sector reforms). I am glad to share that real GDP rose by 6.4 percent in the first half of this year with stronger economic activity expected in the second half. This has been the trend for the last 74 2/4 BIS central bankers' speeches quarters. This shows overall economic vitality and resilience. Inflation also remains manageable. While headline inflation rose to 2.8 percent in July (from 2.7 percent in June), the year-to-date average inflation rate of 3.1 percent is well within Government’s target range of 2-4 percent for 2017, and should remain solidly on-target over the 2018–19 policy horizon. There is ample domestic liquidity. Bank lending is strong but prudent, and funds continue to flow into productive sectors. The banking sector is in sound condition as reforms put in place by the BSP over the last decade, along with banks’ implementation of better corporate governance and risk management have brought about big improvements in bank asset quality, business operations, and strong capitalization. Time of great advancement We are in time of great advancement. Innovation is at the forefront of economic development. And you are the very generation that knows how to leverage on this! In one click, you obtain information that we used to find slowly and tediously in volumes of dusty encyclopedias. Almost in an instant, you send and receive messages that, in the past, took us weeks to give and get. These innovations have produced great strides in communication, finance and commerce. We are in tune with the times. I am also eager to share that the BSP is creating a regulatory environment to encourage innovation and maximize prudent technology use. An ecosystem is being created so that the unreached are granted financial services through alternative providers. BSP is piloting its own “regtech” solutions to address its operational pain points. Our goal is that through technological solutions — financial consumers and investors would be able to make more informed business decisions and choose from a longer, fresher and more innovative menu of available financial products and services. We see the digitalization of finance as essential to achieve significant inroads against financial exclusion and payments inefficiency. We adopted the National Retail Payments System (NRPS) project, a flagship program for digital finance. Its purpose is to establish a safe, efficient and reliable means to transfer money value digitally. Envisioned is an effective and interoperable interface of various electronic payment channels. The NRPS will expand the reach of financial services and will promote efficiency, transparency and development of business models improving economic competitiveness. With the NRPS, we hope to transition from a cash-heavy economy, where 99 percent of retail transactions by volume are done in cash, to a cash-lite economy, with transactions becoming mostly electronic. Collaboration and cooperation In making all these happen, the BSP counts on its partners and stakeholders in the private sector, in the government, and in the academe. We understand that we cannot achieve our goals alone. Especially as we create an enabling environment for Fintech, we have awareness there are several industry regulators with oversight over multiple players. There are multi-layered relationships. We are mindful to guard against policy inconsistency, conflicts and gaps. Otherwise, there is a danger of regulatory arbitrage or a failure of oversight. We know that the best way to prevent this is through constant engagement with Fintech innovators, financial sector players, regulatory agencies and experts. Collaboration and cooperation are required for us to have a deeper understanding of risks inculcate appreciation for financial inclusion goals and to communicate market conduct expectations. Indeed, collaboration and cooperation is very important. These are values you too – dear grad 3/4 BIS central bankers' speeches students – can apply. You will find that your professors and your classmates will contribute to your success and will multiply the possibilities of your hard work. These connections are very important not just as you pursue your studies. You will find these indispensable in your personal lives as well. Relationships, discussion, the expertise and guidance of others will matter and add value. Even Harvard studies confirm that true success and happiness is not determined by material possessions, but by friendships, good communication and camaraderie. Even in this, sticktoitiveness is also needed. In closing As I end, allow me to remind you to consider yourselves blessed to be part of this elite group of graduate students. Congratulations to all of you. Embrace this challenge, persevere in it! I realize that I shared a lot of thoughts and information with you. But I hope, if anything that you remember the main idea I shared this evening. Take the word to heart sticktoitiveness. I promise, it will help you. I wish you all the best and godspeed. 4/4 BIS central bankers' speeches
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Keynote luncheon presentation by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 6th Annual dbAccess Philippines Conference, organized by Deutsche Bank, Makati City, 4 October 2017.
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Nestor A Espenilla, Jr: Continuity and change - not an either/or Keynote luncheon presentation by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 6th Annual dbAccess Philippines Conference, organized by Deutsche Bank, Makati City, 4 October 2017. * * * I thank Deutsche Regis Partners for inviting me to this conference and for the opportunity to speak before capital market players and other members of the business community about BSP’s initiatives for both continuity and change. In this invitation, there is the simple but powerful recognition that new leadership does not necessarily mean the exclusion of either one of these possibilities of continuity and change… there is no need to choose one path over the other. While there are instances when new leaders must re-write organizational strategy, gladly, when I came into the Governorship of the Bangko Sentral ng Pilipinas a little over three (3) months ago, this was certainly not the case. I have been a Central Banker for the past thirty-six (36) years. I am proud to be part of an institution that has consistently helped provide an enabling environment for a robust and stable economy through the effective delivery of its mandates of price and financial stability. Confident of this, when I became BSP Governor, I stressed the value of building on (and working with) the foundations built by my predecessors. This is not to say that no improvements are forthcoming or that things shall be static. Not at all. In the BSP, we value dynamism and constantly seek to level-up in the way we design and implement policy. In the BSP, our objective is for there to be both continuity and change in the pursuit of our mandates. There is no intrinsic contradiction or hint of schizophrenia in this statement. Renowned Harvard Business School educator Michael Porter said, “continuity of strategic direction and continuous improvement in how you do things are absolutely consistent with each other. In fact, they’re mutually reinforcing." The challenge is to find the equilibrium between continuity and change. While change is necessary to remain relevant and to improve … Constant change, unguided by strategy and purpose, and pursued only for its own sake, will result in chaos, confusion and a dearth of direction. This is why there is much value in dialogues such as these. These discussions are venues not only for us to provide latest updates on the monetary, external and banking sectors and our outlook for these sectors, but it also allows for an exchange of ideas, where feedback is welcome, and critical questions can be asked, providing us with additional input when we consider our reform initiatives and policy decisions. I have read that to find equilibrium between continuity and change one must: first have a deep understanding of the operating context; second take a holistic approach, and third, for success and sustainability of policies, work with all facets of the environment. I will present my message following this outline. First, the Operating Context The Philippines is recognized among one of the fastest growing and most resilient economies in 1/5 BIS central bankers' speeches the region and the world, enjoying a sweet spot of high growth and manageable inflation complemented by a strong and resilient financial system. GDP growth averaged 6.4 percent in the first semester of 2017. As of the second quarter of 2017, the Philippines posted 74 consecutive quarters of uninterrupted growth (i.e., Q1 1999 to Q2 2017) or a span of 18.5 years, with growth accelerating in recent years. The government has set a growth target of 6.5 to 7.5 percent for this year, and 7.0 to 8.0 percent for 2018 up to 2022. We believe these targets are attainable, given strong macroeconomic fundamentals, rising government spending on critical infrastructure and human capital development, increasing private sector investments, and strong domestic consumption on the back of rising incomes of the country’s young and educated workforce. This strong economic performance did not happen overnight. Rather, it is the result of meaningful reforms pursued since the 1997 Asian financial crisis. The list of reforms is long and wide ranging. Among its highlights is the adoption in 2002 of the inflation targeting framework. Since 2009, we have consistently achieved our inflation target, except only in 2015–2016 when inflation went below 2% due to unusually low oil prices. This track record has reinforced the credibility of the BSP’s inflation targeting framework. With its sound macroeconomic fundamentals, the Philippines’ economic outlook in the years ahead continues to be promising. Inflation for the first 8 months of this year averaged 3.1 percent, well within the target range of 2.0 to 4.0 percent for this year. We have often been asked why we have not yet raised policy rates given that inflation is trending higher this year and also given the signaling of monetary policy normalization in the advanced economies particularly in the United States. Based on latest estimates by the BSP, average annual inflation in 2017 to 2019 will settle at around 3.2 percent, just above the mid-point of the target band of 2.0 to 4.0 percent. This withintarget inflation outlook essentially drives our policy decision. The independent inflation forecasts of the IMF and the private sector are also broadly in line with our own estimates. We expect the combination of high growth and low inflation to be sustained on the back of the economy’s rising productive capacity and prudent conduct of monetary and fiscal policy. With respect the banking sector, the BSP has implemented reforms to promote financial stability and foster a broad-based and inclusive growth. First – We aligned our financial regulations with international best practices (such as Basel Core principles, and FATF recommendations) while at the same time adopting the global standards to our unique domestic conditions. Second – we implemented macro-prudential reforms that aim to assess and mitigate risks to the financial system as a whole (or “systemic risks”). Third, we pursued financial inclusion advocacies to enable greater access to financial services, strengthened the consumer protection framework, embarked on targeted financial education programs, and provided an enabling regulatory environment for fintech; and Fourth – of significance is the passage of a law in 2014 that allows the full entry of foreign banks. This complements BSP’s other initiatives to further liberalize the industry. These reforms promote healthy competition in the banking system that drives more efficiency and better service delivery. 2/5 BIS central bankers' speeches The Philippine banking system today is on very sound footing. It continues to be a stable anchor for the economy. Again, this is the result of deep and meaningful financial sector reforms boldly implemented. Key performance indicators show double-digit growth in assets funded by sustained growth in deposits; expansion in lending; improved asset quality; profitable operations; and more than adequate capitalization. On the currency – the peso exchange rate is market-determined and flexible. It acts as an effective shock absorber for the economy. Since the beginning of the year, we have allowed a modest and gradual depreciation of the peso which we consider to be consistent with economic fundamentals, complements the Philippines’ gradual shift from a consumption-led to an investment-led economy and bolsters our export price competitiveness. The exchange rate has now stabilized at the present narrow range. Based on our studies, the pass-through effect of this on inflation is very minimal. This development is reflected in the country’s external payments position, wherein rising imports have resulted in a modest deficit in our current account. The country’s overall balance of payments (BOP) position, nonetheless, is very manageable and can stand resilient against external headwinds as we see stable flows from remittances and receipts from BPO services as well as increasing tourism revenues and foreign direct investments in the years ahead. We estimate a moderate BOP deficit of less than one percent of GDP this year. Providing liquidity buffers to the BOP is the country’s international reserves which stand at over $81 billion, equivalent to almost 9 months of imports of goods and payment of services. In fact, the country’s GIR exceeds our gross external debt of USD 72.5 billion, which has reduced to the equivalent of 23.5 percent of GDP. I would also like to emphasize that in view of the country’s strong external payments position, the Philippines has become a creditor to the IMF since 2010 from being a chronic debtor. Strong macroeconomic fundamentals – robust economic growth, manageable inflation, healthy external accounts, and a stable banking system – these are the fruits of the sound economic management and purposeful reforms implemented in the past. Given this very positive backdrop, continuity is not only wise but necessary. Rest assured the BSP shall stay committed to the sound conduct of its core functions – namely monetary policy, banking supervision and improvement of the payments system. As in the past, we will also continue in our practice of crafting meaningful and proactive policy reforms that are aligned with best practices and international standards, but which at the same time are sensitive to our unique domestic conditions. In the process, we will continue to engage relevant stakeholders so that policies are attuned to what is happening on the ground. One example of this commitment in practice is our recent enhancement of corporate governance standards among BSP-supervised institutions. The Monetary Board lately approved revised corporate governance standards, with the BSP expecting board members of its regulated entities to promote a culture of good governance. Another example is the enhancement of surveillance tools on the exposures of banks and other supervised institutions to the real estate sector. The Monetary Board approved enhancements to the prudential reporting requirements for the supervised entities in order to strengthen oversight of their real estate and project finance exposures. Second, our Holistic and Inclusive Approach The economy’s stellar performance does not warrant complacency. There is still an important 3/5 BIS central bankers' speeches task ahead of us. While the Philippines is fast growing, about a fifth of our population still lives below the poverty line. At the BSP, we are passionate about empowering Filipinos, especially those from lower income groups and we strive to include them in the formal financial system. To reshape the financial system, we will leverage on digitization, to make it more responsive to the broader economy, transforming it so that no one is left behind. We encourage digital innovations and fintech solutions through an enabling regulatory environment while raising the bar for guarding against cybercrime and related risks. With digital innovation and fintech, the reach of financial services in the country will expand and at much lower cost, benefitting consumers and providers alike. We launched the National Retail and Payments System, which aids the rise of digital innovation and fintech. With NRPS, electronic fund transfers from one account to any account will be possible, thus easing payments and financial transactions. We intend to achieve greater financial inclusion through further liberalization of our branching guidelines and the introduction of basic deposit accounts. Further, we are closely working with the national government for the adoption of a biometric-based foundational ID system. These proposals intend to broaden financial access points and will bring millions of unbanked to participate in the digital finance ecosystem. Third, Working with the Environment This morning, I understand that Finance Secretary Carlos Dominguez and other ministers talked to this group about the government’s massive infrastructure program and the tax reforms being pushed to fund the huge investments necessary to fund the program. I am pleased to inform that with these national government initiatives in mind, the Bangko Sentral ng Pilipinas has lined up additional game-changing financial sector reforms in the medium-term. Last August, the BSP, together with the Department of Finance (DOF), Securities and Exchange Commission (SEC) and Bureau of the Treasury (BTr), presented the capital market roadmap to hasten the development of the domestic debt market. The initial phase will focus on improving benchmark markets as this is critical in pricing risk assets and other capital market instruments. The reform package aims to: (1) increase the volume of treasury bills, (2) provide a transparent mechanism covering the issuance of government securities, (3) establish a reliable yield curve, (4) develop a set of obligations, rights and incentives of market makers, (5) introduce an efficient repo market, and (6) strengthen regulatory oversight over the repo and fixed income market. We will follow a coordinated and deliberate sequenced approach to ensure smooth implementation of these reforms. I am happy to report that to date, we have seen progress from these initiatives. For instance, since June, the BTr has been sending “report cards” to Government Securities Eligible Dealers (GSEDs) highlighting their performance in the primary and secondary markets. These will serve as basis for future recognition of market makers. We have seen performance of GSEDs improve following the release of these report cards and the unveiling of the roadmap, through improved subscriptions, higher participation in pre-auction surveys, and more GSEDs providing indicative bids. Bid submissions show tighter convergence and presence of outliers are now more limited. From a difference between the highest and lowest bids of 190 bps, spread is now around 25bps. 4/5 BIS central bankers' speeches Soon, the BTr will announce the preliminary market makers and will launch the actual enhanced GSED program early next year. By November of this year, we also look forward to the first trade in the repo market. We are also further liberalizing and rationalizing foreign exchange rules. This is consistent with efforts to enhance the ease of doing business and facilitate job-generating investments. There is also the aim of improving data capture for effective policy decision-making. The amendments of FX regulations are part of a broader thrust for an organized FX market in order to enhance transparency, improve price discovery, and make available more FX instruments, particularly hedging products. Finally, we will further promote competition in the banking sector by welcoming more foreign players that can bring in international expertise in customer service, innovation, and even additional FDIs. Since the full liberalization of the banking sector in 2014 through Republic Act No. 10641, the entry of ten (10) foreign banks has been approved by the BSP. We expect – and we want – more players to come in and serve the growing financial needs of our robustly growing economy. Ladies and gentlemen, the Philippines has come a long way, achieving investment grade sovereign rating status, and becoming an economic outperformer even in the wake of external headwinds. In the next cycle of economic transformation, the BSP will continue to play an instrumental role by staying committed to its mandates of price and financial stability, and by topping this up with the pursuit of additional game-changing financial sector reforms. Thank you very much for your kind attention. 5/5 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the joint meeting of the Rotary Club of Makati with the Rotary Club of Makati North, Makati City, 29 August 2017.
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Nestor A Espenilla, Jr: Returns Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the joint meeting of the Rotary Club of Makati with the Rotary Club of Makati North, Makati City, 29 August 2017. * * * Mr. Conrado Dayrit, Rotary Club of Makati (RCM) President, President Dennis Pe (RCM North), President Carol Mercado (RCM Premier District), RCM officers, members, guests, ladies and gentlemen, magandang hapon po sa inyong lahat. Thank you for the opportunity to keynote this meeting co-sponsored by RCM North. I would like to begin with the word, “returns.” In this group of distinguished businessmen and professionals, it could readily mean “return on investment”— a financial metric indicating efficiency of a commercial venture. At the same time, to this same group of community builders and philanthropists, “to return” could also mean, “to give back” and to work for society’s improvement and welfare. In this regard, RCM deserves commendation for its active engagement in public-spirited projects since its establishment in 1966. RCM understands that businesses operate more successfully when society and its needs are considered. It knows that commerce fully succeeds in a society that is also successful. The reverse is also true. We at the Bangko Sentral ng Pilipinas share this belief. Established for the public interest, we believe in first – providing a conducive business environment through promotion of price stability; banking and financial stability; and the operation of an efficient and reliable payments settlements system. We also have come to believe in, second, working for greater financial inclusion so that economic development and progress would be truly meaningful. I would like to think of the BSP and RCM as partners in these two shared goals. A positive environment for investment The BSP cannot guarantee businesses’ a return on their investments. As you know, this is a function of many factors such as prudent management, quality of customer service, innovation, location, supply and demand and so on. The BSP’s task is to work for a better and more stable operating economic landscape for commerce, banking and finance. In that regard, I’m pleased to note, the numbers are quite positive. And my commitment as Governor of the Bangko Sentral is for there to be continuity in the policies that brought about this favorable economic environment, with space for improvements through bold and strategic financial sector reforms. 1. Increasing gross domestic product - Developments in 2017 point to overall economic resilience. Real GDP rose by 6.4 percent in the first half of this year with stronger economic activity expected in the second half. 2. Manageable inflation. - Although headline inflation rose to 2.8 percent in July (from 2.7 percent in June), the year-to-date average inflation rate is 3.1 percent. We expect it to stay that way. We therefore will meet the inflation target of 3 percent, +/- 1 percentage point allowance for 2017. 1/4 BIS central bankers' speeches Fostering a stable business environment is primordial to the BSP. Keeping inflation low and stable does away with uncertainty and better enables businessmen and investors (like yourselves) to plan and make informed decisions about consumption, investment, saving, and production. Moving forward, the BSP will continue to fine-tune its monetary policy framework to make it more market-oriented, while staying focused on inflation control. We deployed the interest rate corridor (IRC) system in 2016. Its objective is to make market interest rates move closer to the BSP policy rate. In the long run, this supports Philippine capital markets by encouraging money market transactions and better liquidity management. 3. Ample domestic liquidity - Latest data also shows ample domestic liquidity. Bank lending remains upbeat and continues to flow into productive sectors such as real estate; power and utilities; manufacturing; wholesale and retail trade; and information and communication. 4. Sound and Stable Banking System - Our banking sector is fundamentally sound. The reforms put in place by the BSP, along with banks’ commitment to manage operational risks have resulted in significant improvements in the quality of bank assets and loan portfolios as well as strong capitalization. Also, I am pleased to note that as banks fund the domestic economy, they remain prudent in their lending activities. The BSP will continue to review and align regulations with international standards to improve risk management and improve bank competitiveness in view of ASEAN integration. Working towards a stronger and more stable banking system is a practical goal. Banks support the financing needs of our continuously growing economy and have a role in efficient allocation of resources. 5 . Market-driven exchange rate and adequate GIR - Recent developments in the exchange rate reflects a confluence of factors. These are: strong import growth, reflecting a rise in dollar demand given expansion in private and government sectors, and expected U.S. Federal Reserve rate hikes due to their policy normalization. These factors notwithstanding, we expect the country’s robust growth, stable inflation environment, strong and resilient banking system, and prudent fiscal position to provide underlying support to the peso. It is also worth noting that inflow of cash remittances from overseas Filipinos (OFs) coursed through banks remain steady reaching US$ 2.5 billion in June. This is a 5.7-percent increase from the level posted in the same period a year ago. Meanwhile, export growth has actually picked up to around 13%. As a result, the country’s gross international reserves (GIR) as of endJuly 2017 remains at more than US$80 billion, equivalent to nearly nine (9) months’ worth of imports of goods and services. Need for vigilance While the economic backdrop is favorable, the BSP remains vigilant given global and domestic challenges. An expected rise in US interest rates may drive portfolio capital outflows from emerging markets, including the Philippines, adding to exchange rate pressures in these economies. Moreover, US implementation of a conservative policy agenda on immigration, offshoring/outsourcing, trade, tax reform, labor/immigration laws, and financial and business regulation could impact exports as well as OF remittances. Finally, the ongoing rebalancing of the Chinese economy as it transitions from export-led growth to services and domestic consumption-driven expansion could impact Philippine exports. 2/4 BIS central bankers' speeches Potential Economic fall-out from the ongoing tensions between the US and North Korea, as well as peace and order issues if not managed are also a source of concern. These risks notwithstanding, In June 2017, Moody’s affirmed its stable outlook on the Philippine banking system citing our: (1) robust real GDP growth; (2) broadly stable bank asset quality; high capital buffers and loan-loss provisioning; (4) the banking system remaining fully deposit funded; and (5) high proportion of liquid assets held by banks. This is a good indication. At any rate, the BSP has a broad policy toolkit to respond to the risks mentioned. We are also coordinating with other government agencies and regulators to further enhance our macrofinancial surveillance capability. The BSP is watchful of shifts in market sentiment along with trends in commodity prices and other inflation drivers, refreshing its liquidity forecasting and inflation models so they are in tune with evolving impulses. In the spirit of “continuity plus plus,” no significant deviation from previous monetary policy approach is anticipated. Returning to the community As the country experiences more economic success, it becomes imperative to allow a greater number of our fellow Filipinos to enjoy the gains. Financial inclusion translates to allowing more of our countrymen to save and borrow for productive uses…avail of investment and insurance products and send and receive payments securely and efficiently. We believe this is the only way for economic growth to be truly meaningful. Filipinos from the grassroots must be given usage and access to financial services, and be provided with financial literacy and education empowering them to make informed financial decisions to better their lives and that of their families. RCM has, through the years, made positive and lasting change in Philippine communities. We in the BSP will be glad to partner with you in the transformation of our country, perhaps in launching Public Information Campaigns and other endeavors. Imagine even our lowest socio-economic group as a financially literate populace! This is an exciting prospect that we hope you, our partners in business and industry, would support the BSP in achieving. On the BSP’s part, we have, among other initiatives, implemented the National Strategy for Financial Inclusion to make the financial system accessible and responsive to the needs of the entire population. We are also working with other government agencies for the implementation of a national ID system. With this system, disenfranchisement will be a thing of the past, with the number of “unbanked” citizens shrinking faster and with more certainty. Individual biometric identification will give each one a voice to be recognized, to be heard and to participate in economic growth and development. We are also continuously creating a more enabling regulatory environment for the development of fin-tech and digital finance. The digitalization of finance is essential to achieve significant inroads against financial exclusion and payments inefficiency. Soon, financial consumers and investors will be able to make more informed business decisions choosing from a longer, fresher and more innovative menu of available financial products and services. We adopted the National Retail Payments System (NRPS), a flagship program for digital finance. With this, we hope to transition from a cash-heavy economy, where 99 percent of transactions are done in cash, to a cash-lite economy, with transactions becoming electronic. This move towards modernization supportive of e-commerce might be of particular interest to business people such as yourselves. On our part, we see the role innovations play in on-boarding currently excluded markets into the formal financial system. 3/4 BIS central bankers' speeches But there is still much to be done. We count on you, RCM to help us in our financial inclusion efforts to collaborate with us towards maintaining a more stable, conducive and stronger business environment. I am confident that the returns on this, far from just being financial or proprietary, will be more satisfying and enduring. I end with a simple but powerful quote from Deepak Chopra “ If you want something, give it.” . What one gives out, we know, returns somehow. As we work towards society’s positive transformation, we do not shirk at the possibilities of being at the receiving end. Thank you for your kind attention. 4/4 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Bloomberg FX 2017 Forum, Makati City, 30 August 2017.
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Nestor A Espenilla, Jr: The big picture Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Bloomberg FX 2017 Forum, Makati City, 30 August 2017. * * * Distinguished guests, ladies and gentlemen, it is a pleasure to be here at the 17th Bloomberg Foreign Exchange Summit. It is a pleasure too to share the spotlight with Dr. Mark Mobius and Mr. John Lagman, whose insights contribute to making financial markets more efficient and effective catalysts of economic growth. Good afternoon to all. The Exchange Rate Developments in the foreign exchange market and the peso have garnered significant attention of late. For the first time this year, the peso breached the P51/1US$ mark, closing at P51.11/1US$ yesterday. Indeed, if one uses the Bloomberg News Search function, one will discover that the words, “peso” and “BSP” have appeared together 7.5 times a day since May 2017. This is significantly greater compared to the frequency of 2.9 times a day in the first four months of the year. What seems to be the concern? I am here to share the big picture with you – to share the forest for the trees. Under a flexible exchange rate regime, domestic currency fluctuates and acts as an automatic stabilizer to contain swings in financial markets… These fluctuations are not in themselves bad… Rather, they shield the economy from temporary shocks. In fact, there are studies showing that a flexible exchange rate better positions emerging market economies to moderate the impact of global financial and monetary forces. Recent developments in the peso are largely brought about by strong and broad-based imports growth, reflecting the economy’s solid growth momentum. Investments by both the private and government sectors continue to expand. We are also seeing he private sector expanding their businesses overseas and actively managing their financial exposures. Additionally, the expected U.S. rate hikes and possible unwinding of the Fed’s balance sheet by year-end likewise contribute to depreciation pressures on the peso due to portfolio re-balancing. We have responded to these developments by allowing a moderate and gradual depreciation of the peso as part of a healthy defensive adjustment process. Amid these developments, we are confident that the country’s robust growth, stable inflation environment, strong and resilient banking system, and prudent fiscal position will continue to provide fundamental support to the peso. Solid Macroeconomic Fundamentals The developments we have seen thus far in 2017 point to overall economic resilience. Economic performance in terms of GDP growth has been sustained. Real GDP rose by 6.5 percent in the second quarter of 2017. We are one of the fastest growing economies in Asia… Stronger economic activity is expected in the second half of the year due to the robust growth in the services sector and improved external trade conditions….Private consumption demand is expected to remain firm, aided mainly by sustained remittance inflows and low inflation. As more government infrastructure programs get underway, the positive spillover effects on 1/5 BIS central bankers' speeches private capital formation will contribute to economic growth over the medium term… The economy is on track toward achieving the government’s full-year target of 6.5 to 7.5 percent… This extends our streak of uninterrupted growth to 74 consecutive quarters! …Over the past five years, the economy has expanded by an average of more than 6 percent annually, a feat not accomplished since the 1970s. Latest data shows that domestic liquidity conditions are ample to finance the requirements of the growing economy. Domestic liquidity (M3) grew by 13.3 percent year-on-year in June 2017, faster than the 11 percent expansion in the previous month. This expansion in economic activity was sustained without fuelling inflationary pressures… Although headline inflation rose slightly to 2.8 percent in July (from 2.7 percent in June), the yearto-date average inflation rate of 3.1 percent. This is fully in line with our 2017 forecast. This means we will once again be solidly on target. Indeed, our latest baseline forecasts indicate that inflation is likely to settle near the midpoint of the government’s 2-4 percent target range over the 2017 to 2019 forecast horizon. Equally important, our banking sector continues to be fundamentally sound. The many reforms put in place by the BSP, along with the banks’ significantly improved risk governance have resulted in clear improvements in the quality of Philippine banks’ assets and loan portfolios as well as in strong capitalization. These indicate superior ability to absorb risks… Strong balance sheets have allowed bank lending activity to remain upbeat as it continues to flow into the country’s productive sectors such as real estate; power and utilities; manufacturing; wholesale and retail trade; and information and communication. The non-performing loans (NPL) ratio and non-performing assets (NPA) of universal and commercial banks (U/KBs) have significantly declined since 2001, to less than 2 percent by June 2017. At the same time, banks’ Capital Adequacy Ratio (CAR) of 15.8 percent as of March 2017 remains well above the minimum norms. Meanwhile, the external debt situation has also continuously improved. Outstanding Philippine external debt stood at US$73.8 billion as of end-March 2017, equivalent to just 24 percent of GDP. This is a significant decline from 60 percent in 2005. At this stage, the country is seeing a reversal in its overall Balance of Payment (BOP) position which as of July 2017 posted a deficit of US$ 1.4 billion… The balance of payments deficit can be attributed in part to stronger growth in imports and as well as to rebalancing of portfolio capital flows in line with monetary policy changes in advanced economies. This is manageable and sustainable. We shouldn’t forget the positive factors going for the economy. Business Process Outsourcing (BPO) receipts reached US$5.5 billion as of Q1 2017, growing by 9.9 percent relative to the same quarter last year. Remittances from overseas Filipinos (OFs) continue to flow in… The inflow of cash remittances from OFs coursed through banks remain steady, reaching US$ 2.5 billion in June, a 5.7-percent increase from the level posted in the same period a year ago… Merchandize exports grew by 13.6 percent in the first half of 2017, faster than projection. As a result, the country’s gross international reserves (GIR) remained ample as of end-July 2017 at US$81.1 billion. This is more than enough to cover 8.7 months of imports of goods and services and 5.5 times the country’s short-term debt obligations. 2/5 BIS central bankers' speeches Need for Vigilance: Macroeconomic Headwinds Despite this favorable economic backdrop, the Philippine economy, like other economies, continues to face challenges on both global and domestic fronts. After years of protracted subpar growth, the global economy is finally experiencing a “firming recovery.” In its latest World Economic Outlook (WEO) in July, the International Monetary Fund (IMF) projected global output to grow at 3.5 percent in 2017 and further at 3.6 percent in 2018. This is on the back of the notable improvements seen in the Euro area, as well as the robust growth outlook in advanced and emerging Asia. But there are downside risks over the near and medium term that stem from a number of factors. The first is growing uncertainty of economic policies as more central banks in major advance economies prepare to enter a tightening cycle at different speeds. The US Federal Reserve (US Fed) seems set on its path to normalization as it hiked the federal funds rate in June (the second time this year)… It is also set to unwind its bond purchases during the year… The European Central Bank (ECB) has just started pondering on how to taper its Quantitative Easing (QE) Policy in 2018…Similarly, the Bank of England (BOE) has finished its latest round of QE – which it launched after the Brexit referendum last June 2016 – BOE is also considering hiking interest rates. On balance, a well-calibrated adjustment from these major central banks should not trigger dramatic shifts in global capital flows. However, as the accommodative stance from these economies begin to unwind, there could be knock-on effects, both economic and financial, such as the potential for a capital flow reversal in emerging economies including the Philippines. A second risk rises from global political uncertainty. Polarization has intensified owing partly to the growing discontent over globalization and the inequality perceived to have resulted from it… If this trend gains further traction, there is likely to be greater inclination towards “inward-looking” policies. For example, the US government’s efforts to implement a conservative policy agenda on immigration, offshoring/outsourcing, trade, tax reform, labor/immigration laws, and financial and business regulation, could potentially shrink external trade, and even derail the global economy’s path to recovery. Closer to home, it could dampen the country’s Overseas Filipino (OF) deployment and remittances. It can also significantly affect our exports, ultimately hurting domestic consumption. The US remains the second largest market destination of Philippine merchandise exports with an average annual share of 14.8 percent in the period 2013–2016. For our BPO industry, the US remains the largest export market, accounting for nearly 80 percent of industry revenues in 2014. Nevertheless, our local BPO industry leaders remain confident that the cost advantages in the Philippines will remain a key factor in US firms’ decision to outsource. Lastly, the ongoing rebalancing of the Chinese economy as it continues to transition from exportled growth to services- and domestic consumption-driven expansion could also impact on Philippine exports given the expanding bilateral relations between the two economies in recent years. Nevertheless, the expected recovery in both advanced economies and emerging and developing economies, as projected by the IMF in its July 2017 World Economic Outlook (WEO) update, could also compensate for the potential slowdown in China. Challenges on the Homefront In addition to the risks emanating from the external front, we also need to contend with homegrown risks. 3/5 BIS central bankers' speeches Challenges in the near term relate to regional and domestic security issues such as on-going tensions between the US and North Korea as well as the still on-going conflict in Marawi which may have a direct impact on business and consumer sentiment as well as on tourism, if prolonged. Over the medium term, there is also the key challenge of addressing the infrastructure gaps in the economy. To this end, the National Government’s proposed fiscal reform package seeks to increase available resources for needed public capital spending while also encouraging private spending. The DOF is also planning to introduce other tax reforms that will include, among other things, a reduction in the corporate income tax rate, harmonization of capital income tax rates, and rationalization in the valuation of property prices. The tax revenues from the initial package will be used to sustain higher productive investment spending for physical and human capital development, thus ultimately leading to gains for the economy in the medium-to-long run… Given a sustained increase in productive public investment and higher capital income from the gradual reduction in corporate income tax, we can expect a positive knock-on effect on private investment, resulting in a beneficial cycle of higher investment and higher potential output for the economy. This means that the success of the country’s much needed infrastructure investment relies heavily on the passage of the tax reform package. Policy Responses: Managing Risks Fortunately, the BSP has a broad policy toolkit for responding to some of the risks I have outlined. These include: (i) macroprudential regulations targeted to specific sources of risks, (ii) contingency measures such as liquidity-enhancing facilities, and (iii) liquidity provision measures and regional firewalls that boost the flexibility and effectiveness of our actions. The BSP will activate these tools as appropriate. In the context of pursuing our price stability mandate, the BSP will continue to fine-tune its implementation framework for monetary policy to make it even more market-oriented. We have already started with the deployment of the interest rate corridor (IRC) system. Over time, the IRC is expected to aid in advancing the development of the domestic money and capital markets based on greater reliance on the use of market-friendly instruments. The IRC will further align our open market operations with liquidity needs of the market, strengthening monetary policy transmission channels. In terms of banking supervision, we continue to review and align our financial regulations and policies with international standards to improve risk management as well as ensure the competitiveness of our banks in view of ASEAN integration… We intend to further enhance our macro-financial surveillance capability by, among others, improving coordination and cooperation with other government agencies and regulators… We are also working closely with other government agencies and private sector stakeholders to accelerate the development of the domestic debt market, including the development of the necessary financial market infrastructures that provide orderly trading, clearing, and settlement of the full range of financial transactions. Earlier last year, the Monetary Board approved the ninth wave of liberalization of foreign exchange rules. This is to encourage the public to transact their FX needs with banks, enhance market efficiency, and improve data capture. There are more ambitious FX reforms to come. We also continue to enhance and update our financial sector regulations and policies to bring our 4/5 BIS central bankers' speeches financial system at par with international standards…Through the Financial Stability Coordination Council Committee (FSCC) chaired by the BSP, macro-prudential surveillance of the financial system is conducted on an on-going basis to enable early detection of any incipient signs of instability. Our surveillance toolkit consists of a suite of quantitative models that attempt to address one or more aspects of systemic risks. This includes, among others: Early Warning Systems (EWS) that employ aggregate information from various sectors to generate early warning signs of systemic stress and at the same time, allow us to identify potential build-up of stress in specific sectors of the economy. Stress Tests that measure the resilience of the domestic financial system to various stress factors, including shocks from macroeconomic and financial variables like GDP, liquidity, and interest rates. Stability indicators that potentially contain more information on the changes in domestic macro-financial conditions such as Philippine Composite Index of Financial Stress (PCIFS), Bank Distress Index (BDI), and the Residential Real Estate Price Index (RREPI). Philippine Financial Markets Connectedness Indices are also being developed to provide information on the amount of spillovers to the domestic financial markets. We are also looking at tapping new technologies such as big data analytics to further improve and widen the breadth of our surveillance. Lastly, the BSP is reinforcing its model-based assessments with qualitative and informed judgments on current macroeconomic and financial conditions through the conduct of risk assessment initiatives similar to environmental scanning exercises. Concluding Remarks: Strength in Partnership Ladies and gentlemen, both external and domestic developments compel us to remain watchful in guarding against threats to growth and stability. We have sustained reforms that have helped keep the Philippine economy on a steady growth path in spite of external and domestic headwinds. This track record of success provides us the confidence and cautious optimism in meeting the many economic challenges along the way. This, ladies and gentlemen, is the big picture … and I am grateful for the opportunity to share it with you. Please remember it as you trade day-to-day. Thank you for your kind attention. Good afternoon. 5/5 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the General Membership Meeting and Induction of Officers of the Philippine Finance Association, Inc. (PFAI) Makati City, 22 August 2017.
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Nestor A Espenilla, Jr: Truths in lending Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the General Membership Meeting and Induction of Officers of the Philippine Finance Association, Inc. (PFAI) Makati City, 22 August 2017. * * * Philippine Finance Association, Inc. (PFAI) President, Mr. Agerico Verzola; Executive Director, Mr. Romeo Dela Rosa; outgoing and incoming PFAI officers; members; esteemed guests; ladies and gentlemen, good afternoon. Since 1962, PFAI has been instrumental in shaping the landscape for financing and leasing industries. We in the Bangko Sentral recognise your crucial role in economic development. I congratulate PFAI in my own capacity as Governor of the BSP and also on behalf of the Monetary Board, BSP officers and staff. I thank you also for the opportunity and privilege to keynote today’s General Membership Meeting and Induction of Officers. Borrowers and lenders Shakespeare famously warns, “Neither a borrower nor a lender be”. Through the Hamlet character Polonius, the celebrated Bard of Avon gives the didactic rationale, “For loan oft loses both itself and friend (adding that) borrowing dulls the edge of husbandry.” What a pronouncement! Without subtracting from the literary genius of England’s greatest playwright and without discounting (but also without delving into) the moral risks involved in lending and borrowing from friends, we can now acknowledge how the conditions for armslength financing have changed dramatically and have improved since the 17th century. In fact, it is interesting that ninety-one (91) years after Hamlet was published, the Bank of England was founded in 1694, rationalising and influencing the nature and narrative of financing both in Europe and the world. Confident of the benefits of prudent borrowing and lending we those in this room – the PFAI the Bangko Sentral ng Pilipinas and other players in the industry, laud the practices’ crucial and indispensable role in national development. We know the push that responsible financing can give to businesses to industries even sharpening and making more efficient — (to the surprise of Elizabethan playwrights) — the edge of husbandry! Five truths in lending Important to the Philippine financing and leasing industry As you induct your new leaders today, I wish to share and expound on five (5) truths that I believe can strategically move the industry forward. Allow me to divert from old English naysaying and focus on some “truths in lending.” First, economic conditions are favourable and allow for robust lending and leasing operations. Second, a sound legal and regulatory framework greatly ensures prudent and responsible financing practices. Third, to be more successful, industries must recognise markets; seize opportunities; leverage on digital technology; and engage in continuous training and development. Fourth, in doing so, there must be collaboration and cooperation with industry players; Fifth industries must allow open dialogue, and foster a healthy partnership with its regulators. 1/5 BIS central bankers' speeches Let me expound. FIRST TRUTH: Favorable economic conditions are present to allow robust industry operations The Philippines’ positive economic outlook coupled with the Government’s thrust to promote infrastructure spending, favours the country’s financing and leasing industries. While global economic and political conditions remain challenging, the Philippine economy is strongly supported by buoyant consumer and corporate demand. It is projected to grow at 6.8 percent in the medium term. The inflation outlook for the next two (2) years is manageable and within the Government’s three (3) percent ± one (1) percentage point target. Moreover, our international reserves remain at a healthy level USD80.8 billion as of end-July 2017 — enough to cover almost nine months of imports and payments of goods and services. These favourable conditions however do not do away with the need for vigilance on both our parts. Since we are a small, open market economy, the Philippines is vulnerable to abrupt shifts in global investor sentiment. These shifts can result in some volatility in the financial market. Moreover, as the BSP adopts a market-determined exchange rate policy, fluctuations in the peso-dollar exchange rate are expected, as it adjusts to market conditions. Mindful of potential sources of systemic risk, the BSP has strengthened the framework for financial risk surveillance even creating a dedicated unit responsible for tracking and monitoring systemic risks and their channels of contagion. But these concerns will have implications on your operations as well, and it is wise to be watchful. Another key development to be mindful of, is the pace by which the U.S. is normalizing its monetary policy. Even though the Fed has been gradual and relatively predictable in its approach, this nonetheless points to the onset of a rise in global interest rates. From a credit perspective, this can adversely affect borrowers’ (especially highly-leveraged entities) capacity to pay. Our assessment, however shows that domestic corporations remain to be profitable. Corporations maintain interest coverage ratios generally above standard thresholds. SECOND TRUTH: A sound legal and regulatory framework ensures prudent and responsible financing practices In 1998, PFAI spearheaded the passage of The Financing Company Act, today’s legal foundation for the industry’s operations and the bedrock for the regulation and promotion of prudent activities of financial and leasing companies while curtailing acts prejudicial to the public interest. To protect the public interest, the BSP also updated regulations on implementing The Truth in Lending Act four (4) years ago. To promote consumer protection, we have redefined and identified coverage with more certainty. This ensures a more level playing field for credit providers, and allows transparency in lending. Given changing market conditions and increasing sophistication of the financial services industry, the BSP designed a corporate governance framework and issued Basel III-style capital rules. BSP’s comprehensive guidelines on credit and operational risk management, including technology risk and business continuity management are critical to financial institutions’ sound operations. The end-goal is to foster good corporate and risk governance in banks. Recently, the Monetary Board approved enhanced corporate governance standards, aligning BSP regulations with the SEC’s Code of Corporate Governance for Publicly-Listed Companies 2/5 BIS central bankers' speeches and international best practice. The enhancements cover the duties and responsibilities of Boards in establishing corporate culture and values and appointing key officers, among others. Future reforms will further strengthen management of liquidity, cybersecurity and market risk in financial institutions. These intend to increase industry ability to expand, undertake prudential innovation, and participate more actively in market competition while being prepared for emerging risks. And while the BSP adopts a market approach to the exchange rate, it has ongoing efforts to further liberalize foreign exchange regulations. The purpose is to make regulations more transparent, risk-based and data-driven. The amendments will ease the cost of doing business and provide residents (including finance and leasing companies) better access to foreign exchange held by the banking system. Another important regulatory reform initiative is the adoption of the agricultural value chain financing framework. This framework expands the scope of lending from individual farmers. Other actors of the value chain, including MSMEs, the industry’s primary target market are now covered. THIRD TRUTH: The financing and leasing industry’s success depends on recognition of markets and the seizing of opportunities; (2) leveraging on digital technology and constant evolution; and (3) continuous training and development recognise markets and seize opportunities Historically, MSMEs have been the industry’s primary client base. There is economic basis for this commercial partnership. In a report, the OECD cites that asset- and trade-based financing (such as leasing and factoring) appear to be best suited for the operational requirements of MSMEs. Industries would do well to apply their unique expertise in alternative financing models to support MSMEs. While MSMEs constitute a lucrative market base, a higher motivating factor is that MSME success is crucial to attaining broad-based and inclusive growth. MSMEs are diverse across industries, regions and income strata. They account for 99.5 percent of the country’s total establishments. They employ around 61.6 percent of the workforce. They contribute 35.7 percent of value-added output. If provided with technical and financial support, MSMEs have the potential to contribute value-added output at a rate at par with our regional peers! The PFAI is in a strategic vantage point to make this happen! We are glad to report that the institutionalization of a database on key industry statistics, including exposures to MSMEs, will support evidence-based strategic planning for the industry. Information will provide an objective measure of the extent of the industry’s evolution and contribution to the country’s economic growth. leverage on digital technology The dynamism of our operating environment requires us to be strategic, agile and adaptable in our thinking and actions. We must remain open to innovation and emerging trends without compromising on prudential standards and the industry’s underlying vision of being at the forefront of providing greater consumer and corporate credit to accelerate inclusive growth. Digitisation and technological developments in the delivery of services will be felt on many fronts. You will find that as companies shift towards the use of technological and digital solutions to enhance customer platforms and improve their operational efficiency, financing requirements for equipment and software investments will increase. 3/5 BIS central bankers' speeches As your clients migrate to digi-tech, so must the PFAI and its members develop its own fintech in providing services. On this note, I encourage the PFAI to explore ways in how it can encourage its members to leverage off technology. In this connection, I would like to share that through the strong sponsorship of the BSP, various industry players have committed to launch the National Retail Payment System, a digital ecosystem for retail payments. This will result in a safe, fast, convenient and cheaper way of effecting electronic fund transfers for you and your clients. engage in continuous training and development Keeping up with developments, honing skills and increasing knowledge must be a continuing effort. In this regard, we at the Bangko Sentral recognise the importance of PFAI’s seminars, workshops and educational programs. These programs enhance professional development and information databases. We note that PFAI’s “SafeTNet” reinforces the industry’s ability to exercise prudent and responsible lending. FOURTH TRUTH: Collaboration and cooperation among industry players is essential to push the industry forward Collaboration, cooperation and partnerships are central to long-term success. PFAI knows this only too well. We commend PFAI’s efforts to connect with regional counterparts through the Asian Leasing Association. This is a significant step in enabling industry practitioners to dialogue with international experts/regulators, be on top of the latest trends, and benchmark on best practices. FIFTH TRUTH: Continuous dialogue and a partnership between regulators and the regulated result in greater industry support, rationalised regulations and national development I am sure that other co-regulators like the SEC and BIR would welcome active, continuous and open dialogue with its regulated entities. On our part, the BSP’s commitment to the execution of a market-oriented monetary policy supporting continued robust economic growth requires this cooperation. To support a conducive business environment, the BSP works closely with its supervised and regulated entities. It also collaborates with other regulatory authorities. Currently, we are working on the deepening of the local currency bond market. Regulators are about to unveil a proposed capital market roadmap. I encourage the industry to actively provide inputs to the sequencing of priority areas in the plan. A vibrant capital market can serve as an alternative source of financing for the industry and powerfully complements bank lending. In closing As I close, let me reiterate the truths I have shared so far. First, economic conditions are favourable and allow for robust lending and leasing operations. Second, we have in place, a sound and evolving legal and regulatory framework to ensure prudent and responsible financing practices. Third, we urge players in the industry to recognise and serve markets – especially the MSME sector seize opportunities not just for profit but to actively participate in financial inclusion efforts leverage on digital technology and engage in continuous training and development. Fourth, industry players would benefit from collaboration and cooperation. Fifth and finally, continuous dialogue and a healthy partnership between regulators and the regulated would result in greater 4/5 BIS central bankers' speeches industry support, rationalised regulations and national development. We encourage you to help us in this regard. Rounding these points up, I will end with sage advice (again from Shakespeare). The world’s pre-eminent dramatist and poet said, “Our doubts are traitors, and make us lose the good we oft might win, by fearing to attempt.” Given the crucial role we play in economic development and even in financial inclusion. Let us not fear to attempt. It is our pleasure in the BSP to stand with you, friends and colleagues of PFAI, to endeavour to believe in the great strides we can make together for the betterment of the business environment for the credit, financing and leasing industries for MSMEs for our nation. Thank you for your kind attention. Congratulations to your new officers. Mabuhay ang ating mahal na bansang Pilipinas. 5/5 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Local Debt Market Development Workshop, Manila, 25 August 2017.
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Nestor A Espenilla, Jr: Beginning a meaningful conversation - first coordination dialogue on developing the local debt market Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Local Debt Market Development Workshop, Manila, 25 August 2017. * * * The Securities and Exchange Commission, the Bureau of Treasury, and the Bangko Sentral ng Pilipinas are no strangers to coordination and collaboration (Many of our achievements come from working together!) and while this is not our first time to collaborate, it IS the beginning of a new and meaningful conversation. Today, we mark a milestone as we unveil the Philippine roadmap for developing the local debt market. At the same time, we look forward to engaging in an initial discussion with market participants. This is a great time to begin this conversation! Recently, our capital market was recognized as an emerging investment hub in Asia by three major debt watchers – Moody’s, Standard and Poor’s, and Fitch. Robust economic conditions coupled with Government’s thrust to promote infrastructure create favourable conditions for capital market deepening. Government’s vision of a “Golden Age of Infrastructure” to support value-added output to the housing, manufacturing, connectivity and agricultural sectors is a game changer. 1 A deeper capital market will mobilize long-term savings for the financing requirements of these priority industries. Moreover, GDP is projected to grow at 6.8 percent in the medium term, with the inflation outlook for the next two (2) years manageable and within the Government’s three (3) percent ± one percentage point target. Our international reserves are at a level of eighty point eight billion US Dollars (USD80.8B) as of end-July 2017 — enough to cover eight point six (8.6) months of imports and payments of goods and services. As if these are not encouraging enough, our discussion on capital market reform received support via technical assistance from the IMF. The time is right to talk and take up reforms. Colleagues and friends, it is our pleasure to start this conversation with you and to make local history. I am honoured to represent the BSP in this regard. SEC Commissioner Ephyro Amatong, Treasurer of the Philippines, Rosalia De Leon, representatives of the Bankers Association of the Philippines (BAP), headed by President Nestor Tan and BAP Open Market Committee Chairman Wick Veloso, the Money Market Association of the Philippines under President Michael Joseph Delfino Government Securities Eligible Dealers (GSEDs), esteemed guests, on behalf of the Monetary Board and the Bangko Sentral ng Pilipinas, I welcome you to the BSP. Magandang hapon sa inyong lahat. Allow me to share some pointers on how to make common-ground conversations more meaningful. These tips are borne not just out of my thirty-six (36) years of experience as a Central Banker not just as Deputy Governor of the Supervision and Examination Sector for twelve (12) years but these points were learned chiefly in my capacity as a friend and colleague (perhaps even as a husband and father!). 1/3 BIS central bankers' speeches In my experience, a conversation is more meaningful when: First, it is between those with the same goals. In this, there is no issue. As mentioned earlier, the SEC, BTr and BSP have always been partners. For one, together with other institutions,2 we are members of the Financial Stability Coordination Council (FSCC). The FSCC’s key objective is to identify, manage and mitigate the build-up of systemic risks. Our institutions share the prudential objective of financial stability and development. Our being here today is just a step-up an expression and a specific operationalization of our original goals. In this particular case, we share the same vision of developing our local currency debt market to support our growing economy in a sustainable manner. As a result, the Capital Market Working Group of the BSP, the BTR, and the SEC, with the support of the Department of Finance, joined hands in developing the Philippine Roadmap to accelerate the development of the domestic debt market. Three areas are prioritized: deepening the local bond market by adopting reforms to incentivize market-making, increasing supply of short-term debt securities, and developing an effective regulatory framework for the repo and OTC government securities markets; (2) the creation of reliable financial benchmarks and valuation of financial instruments; and (3) the establishment of an integrated financial market infrastructure to promote price discovery, transparency and orderly trading, clearing, and settlement of the full range of financial transactions. Second, the value of a conversation is greater when those who engage in it understand its relevance and importance. Otherwise, discussion is just chatter, intellectual calisthenics or a venturing into hypothetical thinking. Thankfully, we are here not just to engage in an academic exchange. While there are scholarly points to be made and learned, we all agree that debt market development is a pressing concern one that has real-life implications, deserving of our particular attention. We understand there is greater demand for more active debt markets as financial systems require funding sources from outside the banking system. We know that a vibrant capital market can serve as an alternative source of industry financing and act as a powerful complement to bank lending. We appreciate that a developed local currency debt market is essential for efficient fiscal operations, supporting a sustainable market-oriented debt strategy at reasonable costs and desirable mix of maturities. A liquid money market likewise can help strengthen BSP’s monetary transmission mechanism. Development of the domestic currency debt market will also broaden investment opportunities and pave the way for increased availability of financial products, including hedging instruments. This boosts economic resilience to external shocks. My third tip is that a dialogue becomes productive when it is open and honest when even hard questions are respectfully asked and when responses are heard and listened to. This is perhaps the most important tip to follow. When adhered to, this is when real connections are made. And what are some of the hard questions? Perhaps we can begin by asking, “What does it really mean to deepen the bond market, to develop it? What are the barriers to an efficient, transparent and fair market?” How can we enable more people to have access to capital? How do we increase scale and efficiency? Should we take a deeper look at the secondary retail market? It is common knowledge that with bond sales there is not much incentive to serve retail customers. The issue is cost as it is cheaper to deal with institutional investors transacting in large sums rather than with retail 2/3 BIS central bankers' speeches investors, who (despite their potential number) have smaller transaction sizes. The barrier of minimum investment requirements in T-bills and bonds exclude many. Also, there is disparity as while institutional investors could manage the information asymmetries (with respect to price discovery), retail investors are limited to deal only with their own banks. My take away from this is that while a deepening of the financial market might translate to financial inclusion, the two may not be automatically synonymous as they have different policy implications. As a staunch proponent of financial inclusion, I suggest we bear these nuances in mind when crafting regulations, with a commitment to financial inclusion as part of a broader agenda. There is a need to be pragmatic, but we must be open to out-of-the-box ideas, balancing regulation and innovation. We must be mindful of the changes brought about by digitization and technological innovation. We might explore encouraging on-line bond trading even for individuals in the secondary market, perhaps doing away with cumbersome paper work to complete transactions. We can also look into how we can build capacity and acquire the individual and institutional expertise to deepen capital markets. Finally, I have learned that a conversation is only as good as the actions and changes that follow it. Parties must move the dialogue forward, with a clear identification and fulfilment of their corresponding roles to add value to the objectives sought. Winston Churchill said, “to improve is to change; to be perfect is to change often.” This is a good note to end on since this afternoon, SEC, BTr and BSP, will be announcing some changes aimed at improving our local currency debt market. I also like the quote as it implies constant improvement. I hope I have sufficiently set the stage for beginning our dialogue. Although now, I can see from your faces that very little motivation is needed for this group to move forward with excitement. You are excited enough! Looking at the participants – prime movers and stakeholders in our debt market, from both the government and private sectors – it is evident that discussions will be interesting, meaningful and engaging. I wish us all Godspeed in our important task, not just for today, but in the days to follow. Thank you and good afternoon. 1 The Philippine Development Plan. 2017 to 2022. 2 The Insurance Commission, the Philippine Deposit Insurance Corporation and the Department of Finance 3/3 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Philippine Chamber of Commerce and Industry's (PCCI) 43rd Philippine Business Conference and Expo, Manila, 18 October 2017.
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Nestor A Espenilla, Jr: Supporting the backbone as we sprint Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Philippine Chamber of Commerce and Industry's (PCCI) 43rd Philippine Business Conference and Expo, Manila, 18 October 2017. * * * PCCI President George Barcelon; Philippine Business Conference and Expo Chair Joey Leviste, Undersecretary Jonas Leones, co-workers in government; PCCI officers and members, special guests, ladies and gentlemen, good afternoon. Thank you Philippine Chamber of Commerce and Industry (PCCI) for the opportunity to speak during this 43rd Philippine Business Conference and Expo. I am often asked how the BSP addresses wealth inequality and if we support Micro, Small and Medium Enterprises (MSMEs). While this is not directly written in our charter, we approach our mandate with precisely this as a key strategic goal. Maintaining Price and Financial Stability Benefit All Sectors Maintaining price and financial stability are the BSP’s primary mandates. Keeping inflation low and stable benefits everyone, especially MSMEs. A managed inflation and stable financial system allow MSMEs the best foundation to grow. Reduced uncertainty allows expansion. In this regard, I am happy to report that amidst various challenges, the domestic economy continued to deliver on all fronts. Real GDP grew by 6.5 percent in the second quarter of 2017, making us one of the fastest growing economies in Asia. This also extends our streak of uninterrupted growth for 74 consecutive quarters. Let me stress that beyond the nominal numbers, we also emphasize the quality of growth. Economic expansion is driven by broad-based factors with the re-emergence of the industry sector, particularly manufacturing, as another key growth driver. We are optimistic that we will be able to achieve our high growth targets of 6.5 – 7.5 percent this year and even faster beyond, fuelled by the massive infrastructure agenda of the government. Government investment spending, which picked up in Q2, confirms this important direction. The positive alignment between growth and inflation has been a sustained narrative. Maintaining price stability amid a challenging global and domestic environment validates our inflation targeting framework. Inflation expectations continue to be well-anchored. The year-to-date average inflation rate of 3.1 percent puts us firmly on track to stay within the target range of 3.0 percent ± 1.0 percentage point for 2017. In spite of recent inflation pick-up, we project average inflation in 2017 to remain at about 3.2 percent. This is also our forecast for 2018–2019. The sound and stable condition of Philippine banks has also been one of the anchors of sustained performance of the domestic economy. Over the medium-term, we expect the country’s banking system to continue its robust performance based on sound fundamentals. The reforms pursued by the BSP, along with banks’ commitment to improve their ability and capacity to manage risks have resulted in significant improvements in the quality of bank assets and capital. In terms of the country’s overall external payments position, the balance of payments as of the first eight months of 2017, posted a deficit of US$1.39 billion. This is sustainable and represents less than one percent of GDP. This can be readily financed. The balance of payments deficit can be attributed, in part, to stronger growth in imports as the 1/4 BIS central bankers' speeches economy continues to expand rapidly and ramps up investments. The deficit also reflects rebalancing of portfolio capital flows in line with potential monetary policy normalization in advanced economies. Similarly, some residents are pre-paying their foreign debt to manage their risk exposures. We are likewise seeing a pick-up in outward investments both to take advantage of regional business opportunities and to diversify investment portfolios. We look at all these as healthy developments that support economic growth and resilience. In the meantime, we stay calm as the country’s gross international reserves (GIR) remained ample as of end-September 2017 at US$81.4 billion. This is more than enough to cover 8.5 months of imports of goods and services and 5.5 times the country’s short-term debt obligations. As part of the adjustment mechanism we employ to protect our economy, we have allowed a modest and gradual depreciation of the peso. This flexibility makes us more resilient, prevents overheating, and enhances the price competitiveness of our exports of goods and services. Supporting the Backbone Since I began this speech, I have mentioned the word “growth” several times... As the economy grows (AND as we prepare to sprint forward) it is important to support our backbone. MSME sector is the backbone and a crucial driver of our economy. We all know the statistics. MSMEs comprise 99.5 percent of all registered business firms nationwide and contribute the largest share of total jobs generated at 61.6 percent. However, MSMEs account for only 35.7 percent of the country’s Gross Domestic Product! MSMEs are unable to reach their full potential due to a range of barriers, including financial access, characteristic of MSMEs even in other countries. Indeed, bank lending to MSME leave much to be desired, comprising only 6.1% of total loan portfolio.1/ 80% of SME investments are internally financed compared to only 10% that are bank financed. Giant Leaps Bridge Gaps At the BSP, we are troubled by these numbers and take them seriously. We have been hard at work providing the regulatory environment that will create a more inclusive financial system. We strongly believe that the deeply ingrained barriers to financial access – cost, information asymmetry, and lack of infrastructure, among others – are market frictions that can be addressed without compromising on other policy objectives. Enabling Access to MSME Credit To promote MSME access to finance, we have pursued continuing prudential reforms to improve the overall environment for credit allocation in the economy. We implemented the comprehensive credit risk management (CRM) guidelines for banks under Circular No. 855. The rationale is that with robust credit risk management, banks can be more flexible, extend more credit, and implement innovative credit products and lending programs. The intention is for banks to focus on cash flow analysis and ability-to-pay rather than collateral when determining a borrower’s creditworthiness. Collateral (particularly real estate) should only play a secondary role in credit decisions. This addresses a significant issue since MSMEs often lack collateral even if these are fundamentally good businesses. In addition to providing an enabling regulatory environment, the BSP also initiated the Credit Surety Fund (CSF) program as convenor and promoter. The CSF is a credit enhancement scheme to improve the credit worthiness of MSMEs that experience difficulty in obtaining bank loans. 2/4 BIS central bankers' speeches Early this month, the 50th CSF was established in Cauayan City, Isabela and the 51st CSF will be launched in two (2) weeks in Batangas City. The program already covers 31 provinces and 19 cities nationwide. Expanding Network Our progressive regulatory issuances have allowed a wider range of financial products, a more expanded physical and virtual reach of financial services, more competition, easier on-boarding of customers, and more protection for financial consumers. To date, the wide range of microfinance services of banks cover nearly 1.7 million microentrepreneurs with an outstanding portfolio of P13 Billion. Bank’s microbanking offices (MBOs) have allowed cities and municipalities previously with no banking presence to enjoy banking services. There are now 747 MBOs in 434 cities and municipalities all over the archipelago . We expect this to further expand with our recent issuance (Circular No. 940) allowing third party retail outlets to function as bank cash agents. Complementing this is Circular No. 950 on the implementation of the Anti-Money Laundering Act. This allows implementation of reduced Know-Your-Customer (KYC) rules for certain low-risk accounts and the use of technology for face-to-face contact requirements. These amendments aim to facilitate frictionless customer on-boarding which is currently a major pain point for those reaching unserved and underserved markets. The Digital Leap Building on the gains of our policy initiatives over the years, we are setting our sights on digital innovation. Digital solutions not only present opportunities for cost savings and efficiency gains, but also provide potential break-through in reaching the unserved and underserved markets on a massive scale. The BSP’s approach has been to scale regulations according to the risks involved to ensure that beneficial innovations and efforts for financial inclusion are not hampered by unwarranted compliance burden. Currently, the BSP is working closely with various innovators on the launch of additional digital financial services covering mobile financial services via social network, online micro-investment platform, and use of digital cash. Moreover, the BSP has been working closely with the national government for the implementation of a biometric-based digital identity system. The initiative is envisioned to facilitate the provision of more efficient, transparent and equitable government and financial services, especially to those who have been disenfranchised due to lack of an acceptable ID. Finally, the BSP is currently working with the industry towards enabling more Filipinos to have access to a transaction account to send and receive payments via any electronic device through the National Retail Payment System (NRPS). The NRPS, and the payment ecosystem that is envisioned to arise from it, is positioned to be a platform for fintech innovations. This can dramatically lower the cost of doing business for our MSMEs, as well as enable more ecommerce. Work has been ongoing here and we look forward to launching, next month, the Batch Electronic Fund Transfer (EFT) Credit to be called “PESO Net” and following that, the Real Time Low Value Push ACH or “InstaPay”. Our MSMEs will surely benefit from these initiatives by broadening their customer reach, reducing the cost of managing cash, and providing greater access to credit. 3/4 BIS central bankers' speeches Stepping and Leaping Together to Bridge Gaps While much has been accomplished, the figures on MSME financing show that more needs to be done. An MSME finance ecosystem that services the needs of MSMEs at various stages of their growth path must be in place. These services are not exclusively bank credit but involve a mix of providers and products that are suited to the MSMEs needs and capacities. There is an urgent need to develop financial infrastructure to support MSME financing. This includes a credit information system, efficient secured transaction registries and a well-run credit guarantee system. We are also very focused in pursuing ambitious reforms to deepen our domestic debt market and to further liberalize our foreign exchange regime to make doing business generally easier. The BSP is closely working with partners in government, the private sector, and international organizations on all these fronts and will stay engaged and supportive of these important initiatives. However, coordination and collaboration of multiple players is needed. Only through our cumulative efforts will MSMEs be provided greater and affordable access to capital and finance. This will allow them to engage in more productive, innovative, and profitable activities contributing to national development. On behalf of the Monetary Board and the BSP, I am very honored to share this vision of synergy and cooperation with you. Let us take the steps and leap forward together. Thank you and mabuhay tayong lahat! 4/4 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 9th General Membership Meeting of the Financial Executives Institute of the Philippines (FINEX), Makati City, 20 September 2017.
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Nestor A Espenilla, Jr: Optimum navigation Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 9th General Membership Meeting of the Financial Executives Institute of the Philippines (FINEX), Makati City, 20 September 2017. * * * When I was Deputy Governor of the BSP’s Supervision and Examination Sector I had the honor of speaking at some of your membership meetings and the pleasure of participating in your golf tournaments and now, formally, one of you. Today, I thank you for inviting me, and for the opportunity to congratulate FINEX’s new members as Governor of the Bangko Sentral ng Pilipinas…. FINEX President Benedicta Du-Baladad, MBM Val Araneta, MD Jane Chiong, FINEX directors and officers, esteemed guests, ladies and gentlemen, a pleasant afternoon to you all. In the theme, there is reference to a new BSP roadmap… As requested, I am here to talk about some of our plans, in my presentation and in our Q and A. Since the BSP’s establishment on 3 July 1993, our core mandates have remained the same. The target of making the Philippine economy more globally competitive, and its financial system more robust and stable is unchanged. Each and every Governor was focused on reaching this destination… As new BSP Governor, do I have a new roadmap? This is an interesting question and one often asked of me… When I first became Governor, I emphasized the importance of building on my predecessors’ legacies of excellence… This was summed up in the phrase, “Continuity Plus Plus.” In this sense, I can’t say that there is a new roadmap… Rather, what there is, is an on-going journey… a strategic one at that… as we pursue deeper financial sector reforms. Interactive Road Maps Do you use Waze or Google maps? I think these are wonderful apps… Waze relies on community and user reporting… When users report on accidents, blocked roads, weather conditions, this information is collected and immediately analysed. Wazers are then informed of the optimum route to get to their destinations… Google Map on the other hand, is created through collaboration with Google Earth. It depends on images from third-party satellites fed into powerful computers to provide high-resolution images taken from above. Sometimes, mid-journey, these digital maps recalculate and advise when there is a route that is several minutes faster! … I like how technologically powered roadmaps like these are interactive… dynamic, smart, sensitive and are responsive to changing conditions! I am not saying that the BSP is only just now adopting these mapping or planning frameworks. Even under the Governorships of my predecessors, the path of central banking has never been static… We evolve and adapt innovative ways of preserving financial stability as we deal with inter-related transactions, regionalization, globalization, the growing sophistication of interconnected markets, and developing technology. 1/5 BIS central bankers' speeches We Are Here Whether one uses Waze, Google Maps or an ordinary paper roadmap, the first thing one needs to determine is the start point… the “we are here mark” on the map… So where are we? I am happy to report that the Philippines has sustained strong macroeconomic fundamentals… We continue to be one of the fastest growing economies in Asia, registering a 6.5 percent annual growth in gross domestic product (GDP) in the second quarter of 2017… While headline inflation rose to 3.1 percent in August 2017, it is still within the Government’s target range for 2017, and also 2018–19. We have established credibility in hitting our inflation target. Our level of gross international reserves (GIR) is healthy at $81.72 billion as of end-August 2017, which amount can adequately cover 8.6 months’ worth of imports… In June, our foreign direct investments (FDI) have grown by 182.7 percent to $674 million. The banking system is sound and stable with a double-digit growth in resources at 13.5 percent to reach P14.2 trillion as of end-June 2017… Growth is fuelled by sustained inflows of deposits reaching its P11.0 trillion mark… The total loan portfolio likewise grew by 18.0 percent to P8.0 trillion. Our financial market is deepening but domestic credit to GDP is still the second lowest among Asia Pacific countries at 63.6%… Loan quality of the banking system is satisfactory as NPL ratios continue to decline at 1.9 percent… Banks have taken enough buffers for expected and unexpected losses arising from their expanding lending activities. Further, banks maintain ample liquidity and strong core earnings. Recalculating for Faster Route: Deepening Markets There are happy instances when Waze suddenly beeps and an electronic voice announces that it has found a better route… Are you familiar with this? As we have been moving along, there are conditions that indicate room for more growth in the domestic bond market! Outstanding local currency (LCY) bonds represent just 34.2 percent of the country’s GDP. The outstanding LCY bonds amounted to P5.2 trillion (USD102 billion) as of end-June 2017. This resulted in an increase of 10.2 percent year-on-year supported by gains in both the LCY government (P4.2 trillion) and corporate bond (P1.0 trillion) segments. During the same period, outstanding LCY bonds consisted of 81.5 percent government bonds and 18.5 percent corporate bonds. Today the bond market is still largely composed of government-issued debt, but we see a promising performance in corporate bonds given their faster annual growth rate of 18.4 percent as of end-June 2017. In the dollar bond market, early this year, the Government issued a US$2 billion bond with a 25year tenor. The bond offering had a record-low yield of 3.7 percent. Corporate issuers with outstanding dollar bonds are looking to the LCY bond market to refinance foreign borrowings and to cushion the impact of exchange rate volatility. Both reflect prudent liability management amid rising foreign interest rates. The local bourse is also upbeat. The PSE composite index is reaching all time highs. date, the PSEi has gained something like 20 percent. 2/5 Year-to- BIS central bankers' speeches Oh… but wait… like the Waze and Googlemap apps that report possible challenges ahead, we also see downside risks such as uncertainty from monetary policy in advanced economies and geopolitical risks. Seeing these risks, we at the Bangko Sentral, have taken stock of our strengths, and remain vigilant. Medium Term Philippine Development Plan on Capital Market Development This optimum route towards economic development is consistent with the Government’s medium term development plan. In this plan, the administration’s initiative to foster capital market development by promoting efficiency in trading, settlement and delivery of securities is outlined. This underscores the vital role of the capital market to complement bank lending for purposes of supporting long-term financing requirements of corporates and the Government, particularly for its “Build, Build, Build” program. In deepening the capital market, there is need to secure reliability, quality, and integrity in the pricing and valuation of financial instruments. There is also need to establish an integrated financial market infrastructure. These initiatives are significant in promoting price discovery, transparency, orderly trading, clearing, and settlement of the full range of financial transactions. BSP Support for the Capital Market Reform Program The BSP is highly supportive of a capital market reform program. We desire a more balanced financial ecosystem where a well-functioning banking system is complemented by deep and liquid debt and equity markets and where there are viable alternative sources of financing for long-term investments, including the development of necessary financial market infrastructures (FMI). Recently, the BSP in collaboration with the Securities and Exchange Commission (SEC), Department of Finance (DOF), and the Bureau of the Treasury (BTr) unveiled a package of joint and coordinated initiatives to spur domestic debt market development to be undertaken over an 18-month timeframe once we get going. The capital market reform agenda will initially focus on benchmark markets (the money market and the treasury bond market). Improving discovery of benchmark yields is critical in pricing risk assets. Strengthening these foundational elements will facilitate development of the broader capital market. The BSP, on its part, has already implemented various reforms in expanding the depth and breadth of capital market transactions as well as enhancing market conduct. For instance, we have already started the groundwork for project financing under Circular No. 914 last year in support of the Government’s “Golden Age of Infrastructure”. The BSP’s fine-tuning of the Interest Rate Corridor (IRC) system to make it even more marketoriented is also aligned with this purpose. The IRC system will guide market interest rates closer to the BSP’s policy rate. We see this as a contribution to capital market development through better price discovery for very short term interest rates. There is also an initiative to further liberalize foreign exchange (FX) regulations to achieve more efficiency and to facilitate ease of doing business. This includes higher standards of governance and conduct for market participants in the FX market. These elements, in turn, will also support the deepening of the domestic capital market. Equally important is the digitalization of the financial system. Creating an efficient digital platform is complementary to capital and FX market reforms. 3/5 BIS central bankers' speeches In this area, the BSP together with industry stakeholders, launched the National Retail Payment System (NRPS) Framework to facilitate a safe, efficient, and reliable electronic retail payment system that is interconnected and interoperable. The NRPS aims to promote a “cash-lite” economy and ultimately improve the country’s economic competitiveness. While the BSP pursues these reforms, we also stress the value of good corporate governance and the promotion of a risk management culture. As markets continue to evolve, it is important that risks are fully priced to generate reasonable and sustainable returns to the investor. Moreover, we are also working closely with both houses of Congress for the enactment of some critical financial sector reforms. Allow me to provide you a brief overview: Critical Legislative Amendments. These include the amendment of the BSP Charter, AntiMoney Laundering Act (AMLA), and the Deposit Secrecy Law. As a financial supervisor, it is paramount that BSP’s supervisory powers are well-enshrined in the law. This will further enable the BSP to effectively discharge its mandate. Other Legislative Reforms. Other important pieces of legislation in our reform agenda are the Payment System Act (PSA) and Collective Investment Schemes Law (CISL). The PSA intends to formalize BSP’s oversight of the national payment system while the CISL intends to provide a harmonized legal framework for the pooled vehicles of investments. Optimum Navigation – Evolving Roadmaps The interesting thing about the apps I mentioned – Waze and Google Maps – is that they are interactive. When you open Waze, your smart phone automatically shares information with the other Waze users on the road and you are rerouted around potential traffic jams, stalled cars and are even warned of traffic police! Google Maps is similar. It uses other smartphones, which if these have Google Maps open and location services turned on, send anonymous data back to Google to determine how traffic is flowing. In effect, people send information to other people so that they would not make the same mistakes they have made, and also to watch out for hazards they have seen. I have read that Google also combines this new information with historical data from satellites built up through the years! I think this is wonderful! In effect, people help each other make evolving roadmaps! This is what we have been doing as we, the BSP collaborate and cooperate with you, ladies and gentlemen of FINEX. This ensures our continued success. Indeed, together along with various stakeholders: such as the SEC, DOF, BTr, private corporations and other market participants, we have achieved significant inroads in capital market development. Recent financial markets indicators and upbeat investor sentiment validate the point that we are moving and are making progress toward our intended destination. While much remains to be done, we rely on your continued support for our reform initiatives moving forward. These collaboration and cooperation are needed for optimum navigation. On behalf of the Monetary Board and the BSP, I thank FINEX for its invaluable partnership in working towards the development of a fully functioning, deep and vibrant local capital market that can effectively provide another robust source of financing to the domestic economy. Let us continue writing the evolving roadmap together as journey towards our shared desired destination. 4/5 BIS central bankers' speeches Mabuhay ang FINEX, mabuhay ang ating bansang Pilipinas. Magandang hapon sa inyong lahat. I thank you for your kind attention. 5/5 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 60th Charter Anniversary Symposium of the Rural Bankers Association of the Philippines, Manila, 23 October 2017.
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Nestor A Espenilla, Jr: Of BFFs and growth Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 60th Charter Anniversary Symposium of the Rural Bankers Association of the Philippines, Manila, 23 October 2017. * * * There is so much insight in your chosen theme: “Rural Banks: My BFF – My Best Financial Friend”. First, it captures a paradigm shift. It recognizes that for there to be successful delivery of banking services, cultivating personal relationships with clients is not just desirable... it is necessary. To be effective, we must be client-centric... customer centric, sensitive to their needs and even their limitations. Second, the use of the term, “BFF” – an acronym used by the younger generation for “Best Friends Forever,” signifies that RBAP is becoming more hip (nakiki-uso). This may have something to do with the fact that Mr. Giovanni D. Gabriento is one of the youngest presidents ever to lead the association..... The term BFF was first used by millennials when communicating via text and instant messaging. Times are changing and we must adapt to remain relevant and to be successful. I am excited to share with you, the BSP’s initiatives with respect to financial technology and digitalization. Finally, perhaps whether or not you are aware of it... the theme rural banks as “Best Financial Friend” perfectly captures the essence of the industry’s close and unique relationship with the communities it serves. That rural banks can, and are poised to be the public’s best financial friend, speaks much about your role in furthering financial inclusion and growth! This is an exciting prospect and sets a positive tone for the morning. It is my pleasure and honor to greet everyone and express my sincerest congratulations on the 60th Charter Anniversary of the Rural Bankers Association of the Philippines... Dear industry professionals, officers and members of RBAP led by President Giovanni Gabriento, honored guests, ladies and gentlemen, magandang umaga sa inyo. Small but Terrible BFF It is often that we find our BFFs in school – be it in grade school up until college. We share experiences with them, go through storms and the struggles of growing ... trust develops... so much so that even when you part ways and meet again, it’s as if there were never any distance of time nor place between you. This brings me to you... our potent rural banks, our partners in National development. We have gone through many challenges together over the years. Some very trying indeed. But still we stand together. Rural banks take up less than 2% share of the total banking system assets. But with your consistent reliability, close familiarity with your clientele, and extensive regional footprint, you play a very significant role in spurring countryside development and the advancement of financial inclusion. Your clients are comfortable with you, and you are familiar with them. Given your extensive geographical presence, you are indeed better placed to help advance inclusive growth efforts and attend to the financial service needs of our communities. I mentioned that Rural Banks may be deemed small compared to the larger banking system... but throughout the economic and political upheavals which have punctuated Philippine history, the industry has been steadfast in developing rural economies and promoting community 1/5 BIS central bankers' speeches enterprise through good service and sound practices. Over a span of 20 years, the industry registered unprecedented growth in terms of banking office, assets and capital. A year before the Asian Financial Crisis, rural banks had 1,514 offices. Your network has since expanded to 2,667 offices as of June 2017, mostly in the provinces, in spite of many painful bank closures. From P47 billion in resources as of end-1996, rural banking has become a P224 billion industry. Total capital accounts of P7 billion in 1996 has ballooned to P42 billion, underscoring your shareholders’ commitment to rural banking through the years. Not only is the rural banking system bigger, it has also become much better today. Be that in asset quality, liquidity, capital adequacy, or profitability. The industry’s return on assets (ROA) and return on equity (ROE) ratios are comparable to the commercial banking system’s averages. Its average capital adequacy ratio of 18.3 percent is better than the banking system’s 15.5 percent. The industry has demonstrated strength and resilience which have been proven over time. This has in turn fostered deeper and more meaningful relationships with your customers. You can leverage on these critical factors to harness business opportunities in order to serve rural bank clients and reap mutually rewarding benefits. BFFs – There When You Need Them Positioning yourselves as BFFs in your respective communities leverages on your core strength of being a trusted and close banking partner. You have institutionalized sustainable systems and processes to bring about life-changing “BFF” experiences to those whom you serve. Thus, you are a powerful force attracting more Filipinos into the banking system. Through your services, you have allowed families and small businesses to grow, to become more productive, and to reach their dreams. The numbers affirm RBAP’s adherence to your mission of promoting financial inclusion and the general welfare of rural communities: • Almost 97 percent of the industry’s network is based in rural areas providing rural banks with a deeper and more holistic understanding of the distinctive characteristics, conditions and needs of rural clients. • A 2015 report from the Philippine Statistics Authority (PSA) shows that 9 regions of the country posted poverty incidence among families at levels significantly higher than the national average of 16.5 percent. BSP data shows that rural banking offices in these regions are quite significant, with 3 of these regions having RBs as their primary banking presence. • The industry’s commitment to promoting financial access is evident. The number of deposit accounts amounting to P10,000 or less make up 70.6 percent of the banking system deposit accounts. This set of small deposits make up 87.1 percent of your deposit accounts. • Almost half of your loans (47 percent) are extended to assist agriculture and micro, small and medium enterprises (MSMEs). In the process, you are the “go-to” partners of rural borrowers and MSMEs. In fact, RBs exposures to the agricultural sector and MSMEs far exceed that of the total banking system’s over-all compliance with these 2/5 BIS central bankers' speeches requirements. Trust Builds Relationships Relationships are often tested, and when relationships survive potential and actual threats, they rise nearer and nearer to the level of BFF status. Right now, the industry is facing rising competition from large banks, foreign banks and even non-banks. This will impact the way you price your loans and deposit products, and ultimately affect your accustomed net margins. These challenges can and should be met by more determined adherence to sound corporate governance and risk management practices. To earn and keep trust in this business, good governance should emanate from the top, permeate across the organization, and manifest in the actions of all officers and staff. The entire organization has a collective responsibility to ensure that strategic objectives are achieved while controls and risk management systems remain effective. You intimate familiarity with clients provide you with a competitive edge. Rural banks should be proud of their deep understanding of their customers’ financial needs and underlying credit worthiness. This information can be used to design financial solutions to foster mutually beneficial relationships. That’s what BFFs are for, right? You’ve Got a Friend in BSP As the industry faces increased challenges, it can be assured that the BSP has its back. Years of prudence and discipline, something we worked on together, have created buffers and defenses that would stand it in good stead. To boost the resilience of rural banks, the BSP promotes a policy framework geared towards achieving a robust banking system that will foster broad-based inclusive growth. We continue to promote effective risk management, a stronger capital base, and improved corporate governance standards. These are all embodied in an enhanced bank regulatory framework that is responsive to local conditions while being consistent with international best practices. We are mindful that the future of banking entails a change in the way even rural banks interact with clients. Thus, we support responsible and prudent digital financial innovations. In an increasingly virtual and digital environment, your partnership with financial technology firms, coupled with your close client relationships, present boundless opportunities for growth. To further promote common interest and cohesion within rural banks, we encourage pooling of resources among your members to gain access to shared and reliable infrastructures, such as common platforms for technology solutions for the benefit of your members. Finally, the BSP is formulating policies and regulations to guide banks to take on a risk-based approach to cybersecurity management. The BSP has also stepped up a more proactive monitoring of the virtual environment while promoting the resilience of the entire financial ecosystem. BFFs in Credit: Building Viable Ecosystems and Financial Infrastructure Last week, I was in the 43rd Philippine Business Conference and Expo. I was asked about how the BSP encourages banks, including rural banks, to provide relevant financing programs, and to become reliable partners of micro, small, and medium enterprises. This question can very well be extended to include individuals, farmers, and fisher-folk. In the BSP, we believe that to uplift marginalized segments, the answer should not be framed purely from a financing standpoint. Why? For one, these sectors are unable to reach their full potential due to a range of barriers. These involve low productivity and efficiency, the inability to 3/5 BIS central bankers' speeches adapt processes to different stages of business growth, a lack of investments in technology, and challenges in gaining market access. In this regard, we support a whole-of-government approach. For example, the Department of Trade and Industry talks about the 7Ms of successful entrepreneurs. The BSP, given its natural mandate specifically focuses on one of the Ms, which is the money side of it... In this regard, we believe that barriers to financial access such as cost, information asymmetry, and lack of infrastructure can be addressed through market-based policies and cooperative arrangements. This can be done without necessarily compromising our focus on our core mandate of promoting financial stability. We have adjusted regulations to make them friendlier to credit-granting. We have set out comprehensive risk management guidelines under Circular No. 855 precisely to provide the industry the flexibility to reach markets that are not so easily served by “in-the-box” solutions. We encourage you to take full advantage of this flexibility to design customized credit products and reduce the focus on collateral in providing credit. The BSP is not requiring banks to demand collateral from borrowers. Rather, the regulations put forward that banks improve their understanding of clients’ businesses, conduct meaningful credit and cash flow analysis, and use good judgment in gauging ability and willingness to pay. If we get this right, this will address a fundamental issue since small businesses and individual borrowers especially in the agricultural sector often lack real estate collateral even if they have adequate sources of repayment. Another approach we have taken is to support efforts to build financial infrastructure and viable ecosystems that will sustain lending to micro and small businesses. This includes establishment of a credit information system, efficient secured transaction registries and a wellrun credit guarantee system. The BSP is working on all these fronts and will continue to engage and support these important initiatives. Recently, we also issued guidelines on agricultural value chain financing (VCF) to facilitate credit to the agriculture sector. This opens up credit provision to all the players in an organized value chain. This Framework aims to promote VCF as an effective, organized means of channeling funds to the agri-fisheries sector, promoting their financial inclusion. By encouraging linkages among various players in an agri-value chain, the credit risk of participating smallholder farmers and fisher-folk can be reduced and facilitate their access to more credit. The BSP is likewise conducting a VCF study on various SME sectors. The study aims to identify various VCF models for SMEs that work in the Philippines, explore potential regulatory incentives to further encourage SME financing and other types of support to various levels or players in the SME value chain, and enable SMEs to be financially included and enjoy the benefits of participating in the value chain. We continue to pursue financial inclusion initiatives to make banking services more accessible. Part of our strategy is the deepening of financial education and consumer protection initiatives, as well as leveraging technology to have greater scale in banking. Further, we hope that the industry can already take advantage of recent rules allowing banks to use third party cash agents as a cost-efficient service delivery channel. Also, the BSP has reduced the Know-Your-Customer rules for certain low-risk accounts, including the use of technology to facilitate frictionless customer on-boarding. Digital Financial Inclusion As mentioned at the onset, technology is fast changing, with consumer preferences becoming more demanding... In this regard, the BSP is committed to upgrade the country’s retail payment 4/5 BIS central bankers' speeches system, promote electronic retail payments, and facilitate inter-operability for faster settlement of transactions. The launch of the National Retail Payment System (NRPS), in partnership with industry stakeholders, will help us achieve this vision of a “cash-lite” economy. The banking system, particularly rural banks catering to retail clients in distant areas, will realize that the NRPS will provide a strategic highway for providing valuable financial services in all areas – remittance, bills payments, savings, credit, insurance and investments. BFFs and Partners As you toast your decades of commitment to your members, I wish to express the BSP’s continuing commitment to upholding the safety and soundness of the banking system, especially our rural banks... undoubtedly one of our most valuable partners in financial inclusion. I am confident that the RBAP and the rural banking industry will continue to reinforce our efforts towards achieving our common vision of delivering a high quality of life for all Filipinos, and that we would be BFFs in the relentless pursuit of growth and development. Maraming salamat po! On behalf of the Monetary Board and the BSP, I congratulate RBAP on this milestone anniversary. Mabuhay ang RBAP! Mabuhay ang Pilipinas! 5/5 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at The Asset's 12th Philippine Forum, Pasay City, 24 October 2017.
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Nestor A Espenilla, Jr: Build, build, building our FIN-frastructure Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at The Asset’s 12th Philippine Forum, Pasay City, 24 October 2017. * * * I am pleased to be your keynote speaker this morning in The Asset’s 12th Philippine Forum. In the forum briefer, the national Government’s focus on building infrastructure is described as a step towards “defining new dimensions in development”... What a positive theme to build on! Infrastructure development is vital to economic growth. When one looks at the key facilities for the efficient functioning of a nation: transportation, communication, water, energy... it is evident that infrastructure development is all about building networks of viable, productive and meaningful connections. Indeed, the goal of having sound and reliable infrastructure is to include more and more people into development. At the Bangko Sentral, we too are eager to pursue development in inclusive ways. In our role as central monetary authority, as supervisor of financial institutions, and as guardian of the payments and settlements system, our thrust is to ensure that the business and operating environment is sound and stable... and that our policies and regulations encourage the build, build, build of a progressive and inclusive financial infrastructure... I will now coin a word.... “FINfrastructure.” (I googled this and the search did not turn up any results. As far as I know, it’s original). FINfrastructure. :) Strong Foundation for FINfrastructure Building To initiate building any infrastructure project, it is necessary to have a solid and reliable foundation. Key statistics show that we enjoy a strong economic base. The Philippines experienced sustained uninterrupted expansion for the past 74 consecutive quarters, spanning 18 years. The economy is expected to grow within Government’s real GDP growth targets of 6.5-7.5 percent for 2017, and 7.0-8.0 percent for 2018. Strong domestic demand and an expansive government budget for infrastructure development underpin this growth. Overseas Filipino remittances and BPO sector revenues continue to drive our economy. Inflation remains low and stable, and expectations continue to be well-anchored. For the first nine months of 2017, inflation rate averaged 3.1 percent. We remain on track to stay within the target range of 2 to 4 percent for 2017, and inflation is projected to settle near the midpoint in 2017–2019. Despite global shifts, the balance of payments (BOP) is under control. The country’s BOP in September in fact posted a surplus of US$24 million, a reversal from the previous months’ deficit. While we project an overall BOP deficit for 2017, we expect this to remain at less than 1 percent of GDP. This is something that can readily funded given the large level of international reserves, our other external liquidity buffers, and our market access. The emergence of a current account (CA) deficit can be attributed to the strong demand for imports associated with the sustained and broad-based expansion of the domestic economy’s capital formation, production and consumption. The increased demand for dollars also reflects residents’ investments abroad and prepayments of foreign debt. However, continued strong inflows from overseas Filipinos’ remittances, business process outsourcing receipts, and revenues from the tourism sector, help support the balance of payments. 1/5 BIS central bankers' speeches The financial sector also demonstrates strength and sustained growth. Our banks continue to enjoy strong balance sheets and satisfactory asset quality. The banking system’s resources expanded by 15.4 percent as of end-August 2017. Asset growth is supported by a stable deposit funding base. In line with the country’s domestic growth, banks’ total loan portfolio grew by 17.3 percent and is diverse across industry sectors. Notwithstanding sustained expansion in credit, banks demonstrate prudence in lending. Banks’ NPL ratios improved to 2.0 percent as of end-August 2017. Banks also maintained adequate buffer for loan losses, registering a higher NPL coverage ratio of 114.1 percent. Meanwhile, banks continue to build up their capital position. As of end-June 2017, the capital adequacy ratio (CAR) of universal and commercial banks (U/KBs) registered at 16.0 percent. This solid performance did not happen overnight. Rather, it is the result of deep and meaningful financial sector reforms boldly implemented over the years. Today, we continue to promote sound corporate governance standards, a stronger capital base, and improved risk management practices. For instance, just this month, the Monetary Board approved the revision of the guidelines on liquidity risk management, signifying enhancements to our guidelines which were first issued in 2006. This is part of a broader set of BSP reforms on liquidity standards. This initiative was preceded by the issuance of the liquidity coverage ratio (or “LCR”) framework in March 2016. It will be followed by issuances on the implementation of the net stable funding ratio (or “NSFR”), which is part of the Basel III Liquidity Standards; and intraday liquidity reporting requirements. Vigilance as We Build The economic landscape looks good, with conditions ripe for building. However, as we build, we must be mindful and vigilant of challenges. For example, there could be some transitory upside risks to inflation owing to the possible impact of the proposed tax reform program along with pending petitions to raise power rates. This notwithstanding, inflation expectations continue to be within target over the policy horizon. The BSP also continues to watch against financial market volatility emanating from uncertainty in the pace of normalization of U.S. monetary policy as well as geopolitical issues that may have impact on the stability of financial markets, on movement of capital flows, and on continued economic activity. INFRA supports the Superstructure At the BSP, our mandate is to provide policy direction in the areas of money, banking and credit. We do not ourselves build the FINfrastructure. Rather, our task is to promote an environment for those that do (this includes many in this prominent audience).... We do this through implementation of rules and regulations, through the launching of initiatives, and through sound, prudent and progressive banking reforms. As I say this, the fact that what we do in the BSP is slightly invisible becomes apparent. But insight is that the very word itself, “infrastructure” is preceded by the Latin prefix, INFRA... which means “below”... which while underneath and invisible, provides support to the superstructure flourishing above it. In this sense, I am heartened. What an honor for the BSP to serve in this way! 2/5 BIS central bankers' speeches The FINfrastructure Agenda At the BSP, our agenda on FINfrastructure focuses on financial sector and market infrastructure reforms that aim to enhance access to credit and other financial services, deepen local currency debt and foreign exchange markets, and digitalize our financial system. These are strategic and complementary reforms that reinforce sustainable economic growth and push further our financial inclusion agenda. Over the years, our regulatory issuances allowed a wider range, as well as expanded physical and virtual reach, of financial services. For example, we now allow third party retail outlets to function as cash agents as well as the implementation of reduced Know-Your-Customer (KYC) rules for certain low-risk accounts and the use of technology to comply with KYC requirements. Likewise, the BSP supports efforts to build financial infrastructure and viable ecosystems to facilitate a more equitable allocation of credit. Earlier, we talked about the Government’s thrust for infrastructure. Part of BSP FINfrastructure agenda is collaborating with other government agencies and industry stakeholders to deepen the local currency debt market, given its vital role in complementing bank lending to support longterm financing requirements of corporates and the Government, particularly for its “Build, Build, Build” program. As early as June last year, the BSP has started the groundwork for project financing under Circular No. 914. Last month, the Monetary Board approved amendments to streamline requirements of issuance of bonds and commercial papers by banks and quasi-banks (QBs), thereby providing them more flexibility in tapping capital markets as alternative funding source. These amendments, as embodied in Circular No. 975, include the removal of required eligible collaterals. At the same time, just this month, we issued Circular No. 976, which provide enhancements to the prudential reporting requirements over project finance exposures. It is important to sharpen BSP’s assessment of banks’ exposure to project finance, given that demand is expected to pick up and gain traction as the country moves towards its infrastructure goals. Complementing capital market development initiatives, we are also pursuing foreign exchange (FX) market reforms to deepen and increase efficiency of the FX market, and reduce cost of doing business. Building FINfrastucture with FINtech Technological development has significantly changed the business of banking and finance. Financial transactions can conveniently be made on the move, in the comfort of one’s home, using a smart phone. There is a shorter turnaround time for financial transactions. Nowadays, retail financial services are further being digitized via mobile wallets, payment applications, robo-advisors, equity crowd-funding platforms for access to private and alternative investment opportunities, and online lending platforms. These breakthroughs are revolutionalizing the financial landscape. Sound FINfrastructure is needed to support it. The BSP is actively leading industry-wide initiatives to operationalize the National Retail Payment System (NRPS) to enable customers to make payments and transfer funds between and among accounts using any digital device. The goal is for us to transition into a cash-lite economy. We are seeing progress in this area. First, with the establishment of the payment system management body, incorporated as Philippine Payments Management, Inc., there is now an organized governance structure of retail payment systems in the country. We are also currently 3/5 BIS central bankers' speeches working with the industry on the formation of two priority Automated Clearing Houses (ACHs), the Batch Credit Push EFT (called PesoNet), and the Real-time EFT Credit (called InstaPay). The PesoNet is set to launch on November 8, 2017. The BSP is also mindful that fintech also poses technology-related risks. With this in mind, the BSP follows a test-and-learn approach that allows an enabling environment for new collaborations to prosper. We encourage bank and non-bank partnerships with fintech startups to maximize the benefits of innovative digital platforms, efficiency of gains, and cost savings. We are also aware that new entrants may cause disruptions in the financial ecosystem since traditional players may be unable to immediately respond to increasing competition. Hence, we monitor fintech activities to better understand their business models, processes and systems. Moreover, the BSP has enhanced existing regulations to ensure that non-banks such as pawnshops and money service businesses are properly supervised as they compete in delivering bank-like services. Relatedly, we regulate entities that use virtual currency as underlying instruments for remittance. The BSP has also provided guidelines on BSP-supervised financial institutions to ensure that risks resulting from usage of social media are adequately assessed and managed. Lastly, the BSP is enhancing its information security framework to consider cybersecurity controls. While the term, “Financial Infrastructure” refers broadly to a system that allows for the effective operation of financial intermediaries, encompassing even the legal and regulatory framework... I would like to think of FINfrastructure as one that addresses the very heart of why infrastructure exists: to connect people, to enable inclusion and to provide a network for more Filipinos to enjoy the benefits of economic progress and development. Leveraging on Fintech fosters Inclusion The BSP is committed to promoting financial inclusion. (Incidentally, financial inclusion is one of the foundations of the Philippine Development Plan 2017 to 2022, Ambisyon Natin 2040.). The ultimate goal is to reach the unbanked and underserved populace. Fintech can be leveraged to achieve this. Jack Ma, founder and executive chairman of Alibaba expressed this by saying, “Fintech or Techfin is to rebuild the system with technology…to solve the problem of a lack of inclusiveness.” We believe in leveraging on digitization so that it is responsive to a broader economy. This is why we are also closely working with the National Government for the adoption of a biometricbased foundational ID system. Build, Build, Building Together Ladies and gentlemen, this Forum is an opportune time to encourage each one here — pillars of society, movers and shakers in the banking and financial industries, to all work together. The Philippines is increasingly populated by young, tech-savvy ‘millenials.’ This growing customer-base prefers streamlined processes and products and services that can be accessed via electronic services. This market is on the lookout for new offerings. We can therefore capitalize on this opportunity by allowing fintech to come into play. The BSP is supportive of fintech innovations and see much potential in this area. Indeed we are, as the forum’s briefer says, in an “energized backdrop.” I have said in several speeches before that Fintech is borderless with varied and plenty players. This, constant engagement with Fintech innovators, other regulators and industry players is important. This is to foster a deeper understanding of risks, gauge market conduct expectations 4/5 BIS central bankers' speeches and inculcate appreciation for financial inclusion goals. I reiterate this today. On behalf of the BSP and the Monetary Board, I thank the organizers for the opportunity to share our initiatives with you today as we work toward a better Philippines. Mabuhay ang Pilipinas. Mabuhay tayong lahat. 5/5 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the European Chamber of Commerce of the Philippines (ECCP) Membership Luncheon Event, Makaty City, 25 October 2017.
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Nestor A Espenilla, Jr: Maintaining a conducive macroeconomic environment Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the European Chamber of Commerce of the Philippines (ECCP) Membership Luncheon Event, Makaty City, 25 October 2017. * * * Mr. Guenter Taus, ECCP President, distinguished officers and members of the ECCP, special guests, ladies and gentlemen, good afternoon. The European Union (EU) with its 28 member states and 512 million citizens forms the second largest economic market of the world. Closer to home, 15 percent of Philippine total exports go to the EU, making it a key trading partner. A major source of direct investments comprising roughly 12 percent of total gross placement of foreign direct investment comes from the EU. Moreover, nearly 12 percent of total cash remittances from Filipino Overseas workers originate from the EU. ... It cannot be doubted that the EU is a formidable economic partner of the Philippines. With this important relationship in mind, and with a view of building stronger ties, cooperation and collaboration, it is my pleasure and privilege to be your guest speaker at today’s membership luncheon. I thank the European Chamber of Commerce of the Philippines (ECCP) for the invitation and welcome this opportunity to speak about our initiatives at the Bangko Sentral ng Pilipinas which are aimed at promoting a conducive business climate. I am also pleased to share in greater detail how the Philippines offers significant investment prospects as the economy is expected to grow strongly in the next few years. As long-term investors in the country, you may have witnessed how the macroeconomic stability we now enjoy was brought about by significant structural reforms pursued through the years. The list of reforms is long and the scope wide ranging. It is because of these reforms that price and financial stability have been achieved and maintained. Since adopting the inflation targeting framework in 2002, inflation has generally been kept low and stable. This is our source of credibility as a monetary authority. To sustain the positive growth and inflation dynamics in the country, the BSP enhanced the implementation of inflation targeting through the adoption of the interest rate corridor (IRC) system. The IRC enhances the link between the BSP’s monetary policy stance and financial markets, and from there its impact on the real economy. The primary benefit of the adoption of an IRC system in the Philippines is the strengthening of monetary policy transmission by ensuring that money market interest rates are meaningfully influenced by the BSP’s policy rate. Importantly, the IRC system also supports the development of the Philippine capital market by promoting money market transactions and active liquidity management among Philippine banks. The ensuing higher level of activity in the money market in turn helps promote price discovery. For the first nine months of 2017, the inflation rate averaged 3.1 percent. We remain on track to stay within the target range of 3.0 percent ± 1.0 percentage point for 2017. This sustained low and stable inflation lends support to robust household spending, preserves the public’s purchasing power and supports the demand for goods and services. Based on our latest forecasts, inflation is likely to settle near the midpoint of the Government’s target range of 2 to 4 percent in 2017 to 2019. 1/4 BIS central bankers' speeches Carefully-calibrated and well-communicated monetary policy has effectively anchored market expectations. It has enabled us to maintain price stability while providing support to economic expansion. We shall continue to improve the IRC system towards a more market-friendly implementation of monetary policy. The financial sector also demonstrates stability and sustained growth. Domestic liquidity conditions remains ample to finance the requirements of a growing economy. Bank lending is upbeat and loans continue to flow into the country’s productive sectors such as wholesale and retail trade, motor repair; manufacturing; electricity, gas and water utilities; financial services; and real estate. The level of non-performing loans (NPLs) has been relatively flat since 2008 despite the continued uptrend of total loan portfolios (TLP). The Philippine banking system’s non-performing loan ratio (NPL) stayed low at 2.0 percent of total loans as of end-August 2017. This is fully covered as NPL coverage ratios registered at 114.1 percent. Philippine banks have developed a good ability to absorb losses. Data as of end-June 2017 shows that the capital adequacy ratio (CAR) of universal and commercial banks is stable at 15.3 percent on a solo basis and 16.0 percent on a consolidated basis. This is well above the minimum CAR requirements. This robust ability of the banking system to provide credit support to the economy is the result of a long and systematic reform process, boldly implemented since the Asian Financial Crisis. These reforms include asset cleanup, industry consolidation, continuing enhancements of corporate governance and risk management standards, and strengthening of compliance and enforcement frameworks. We likewise pursued liberalization of foreign bank entry and rationalization of branching guidelines in order to promote healthy competition, resulting in greater market penetration and more efficient delivery of financial services. We have further improved financial access through the promotion of various digital banking solutions and service delivery channels. The subsequent increase in the utilization of both traditional and non-traditional banking platforms has boosted deposit generation, resulting in its 14.1 percent expansion, to P11.0 trillion by the first half of 2017. In so doing, the banking system has a stable funding base, as deposits are primarily peso-denominated and sourced mostly from resident depositors. Today, we continue to pursue prudential reforms that promote financial stability. In a series of circulars dated 22 August 2017, the Monetary Board approved enhanced guidelines raising the bar on corporate governance, setting minimum prudential requirements on risk governance, and strengthening the compliance framework. The corporate governance guidelines are anchored on the fundamental principle that the tone of good governance should come from the top and set out enhanced requirements on the membership composition of the board. Further, the risk governance policy framework integrates the principles set out in other risk-related issuances of the BSP under one umbrella. Finally, the compliance framework provides the role of the board of directors in establishing a compliance system, and emphasizes the shared responsibility of all personnel, officers, and the board in managing business risk. We continue to align our risk management guidelines with international standards. This month, the Monetary Board approved the enhancements to BSP’s liquidity risk management guidelines. This is part of a broader set of BSP reforms on liquidity standards. Earlier last year, we have already issued the liquidity coverage ratio (or “LCR”) framework. This will be followed by issuances on the implementation of the net stable funding ratio (or “NSFR”), which is also part of the Basel III Liquidity Standards; and intraday liquidity reporting requirements. Ladies and gentlemen, I have just outlined some of the key initiatives focused on our core mandates, i.e. price and financial stability. In your invitation, I was asked to talk about my 2/4 BIS central bankers' speeches priorities and plans. I now wish to share with you game-changing financial sector reforms we are implementing over the medium-term. These strategic reforms aim to deepen our local debt market, liberalize further the domestic foreign exchange market, digitalize our payment system, and ultimately enhance access to financial services and products. All these complement our financial inclusion agenda. The Philippines has a lot of potential as a promising investment destination. Our capital market is being positioned to serve as an important source of long-term funding, in support of the National Government’s “Build, Build, Build” agenda. Developing the domestic capital market is critical given its role in complementing bank lending to support economic growth. Last August 2017, the BSP, together with the Department of Finance (DOF), Securities and Exchange Commission (SEC) and Bureau of the Treasury (BTr), unveiled the roadmap to hasten the development of the domestic debt market. Deliberately, we sequenced and calibrated the roadmap to prioritize urgent and foundational issues. The initial phase will focus on improving market benchmarks, covers initiatives to increase volume of treasury issuances, promotes market-making and price discovery, enhances the yield curve, establishes an organized repo market, and strengthens regulatory oversight. We look forward to the launch of the first trade in the organized repo market by next month. On the part of the BSP, we have started improving the regulatory framework for project financing starting last year with the issuance of Circular No. 914. Just this month, we issued Circular No. 976, which enhances prudential reporting requirements over project finance exposures. This will sharpen BSP’s ability to assess bank exposures to project finance, and timely deploy macroprudential measures, if necessary. Finally, we issued amendments to provide banks and quasibanks (QBs) more flexibility in issuing bonds and commercial papers. These proactive measures are important as demand for infrastructure picks up and gains traction. Complementing capital market development initiatives, we are also further liberalizing and rationalizing foreign exchange (FX) rules in order to reduce the cost of doing business and facilitate job-generating investments. This forms part of a broader FX market reform agenda to enhance transparency, improve price discovery, and increase availability of FX products, especially hedging instruments. Ultimately, a deeper FX market will increase resilience of our domestic economy against external shocks even as we allow greater exchange rate flexibility. Finally, we come to a topic that is closest to my heart, our advocacy for financial inclusion. We are passionate about empowering Filipinos and we remain focused in our efforts to include those from the lower income groups into the formal financial system. To further help expand the market and provide greater access to more Filipinos, we have been leveraging on technology and institutional networks. Financial technology is being harnessed especially for remittance and payment transactions. The BSP continues to provide an enabling regulatory environment, while raising the bar against cybercrime and related risks. As part of our commitment to the national strategy for financial inclusion, the BSP is actively leading industry-wide initiatives to operationalize the National Retail Payment System (NRPS). The NRPS is positioned to digitize retail payments and facilitate our transition to a cash-lite economy, bringing material benefits for government, businesses and consumers. This will enable customers to make payments and transfer funds between and among accounts using any digital device. We are seeing progress in this area. The Philippine Payments Management, Inc. (PPMI) was recently registered with the Securities and Exchange Commission (SEC). It would act as the self-governing body in overseeing the development and operations of the retail payment system. 3/4 BIS central bankers' speeches We are also working with the industry on the formation of two priority Automated Clearing Houses (ACHs), the batch electronic fund transfer credit payment scheme (called PESO Net), and the real-time low-value push payment scheme (called InstaPay). The PESO Net can be the electronic alternative to the paper-based check system but will be more inclusive in terms of participants and users. InstaPay, on the other hand, is designed to facilitate small value payments and enable merchants to accept digital payments from both e-money and bank accounts without the use of a point of sale terminal. PESO Net is set to launch on November 8, 2017. Our initiatives in the BSP are varied and we remain committed to ensuring that the macroeconomic environment for business is stable. We are vigilant so that the economic landscape will be conducive for business growth and increased investments for engaged stakeholders such as yourselves here at ECCP. At the BSP, we are cognizant that trade, financial and other economic linkages with other economies such as the EU require us to regularly take note of global economic and financial developments. The recently-concluded discussions during the Annual Meetings of the IMF-WB in Washington, D.C. highlighted that despite clear signs of global economic recovery, policy uncertainty remains at a high level and could well rise further. US economic policies, post-Brexit arrangements, geopolitical risks and other events could negatively impact confidence, deter private investment, and weaken global growth. At the BSP, we have to take all of these into consideration in our analysis and in crafting our policy response. Nevertheless, here in the Philippines, we remain positive. Southeast Asia is one of the most economically-dynamic and fastest-growing regions in the world. In the Philippines, economic growth is expected to be sustained and is predicted to outpace regional growth, which is already faster than the rate of global growth. Given shifting market conditions as well as the increasing sophistication of the global financial services industry, ladies and gentlemen, we assure you that the BSP remains strongly committed to the pursuit of ambitious financial sector reforms. That I have had this opportunity to share all of these exciting initiatives with you and share the prospects of growth... on behalf of the BSP and the Monetary Board, I thank the ECCP, its distinguished officers and members. Thank you all for your kind attention. 4/4 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Cocktail Hour: Up Close and Personal with the BSP Governor, Manila, 26 October 2017.
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Nestor A Espenilla, Jr: Thinking out of the Bank Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Cocktail Hour: Up Close and Personal with the BSP Governor, Manila, 26 October 2017. * * * WTCMM Chairman Guilly Luchangco, WTCMM President Pamela Pascua and officers of WTCMM, partners from the private sector, fellow public servants, special guests, ladies and gentlemen, good afternoon. To get up close and personal – This underlines the Terms of Reference for this afternoon’s cocktail hour. .... I think the natural tendency is for people not to disclose too much of themselves... Candor requires courage. Sharing about one’s identity, vision and values, necessitates confidence. I welcome this opportunity to share more about the Bangko Sentral ng Pilipinas, who we are, our policy thrusts and initiatives. To be able to engage our stakeholders in the shared task of national development, we must make ourselves and our mandates more widely known and understood. Getting Past First Impressions With Philippine banknotes issued by the BSP and marked with our logo... with banks making reference to our authority... and with our name mentioned in media fairly often, it is easy for Filipinos to know OF the Bangko Sentral... But KNOWING the BSP is an entirely different thing. Allow me to take us beyond acquaintance... Apart from being a supervisor and regulator of banks and other financial institutions, and apart from being the sole issuer of our currency, most of what we do at the BSP seems esoteric to the general public. This is not surprising as the workings of economics, statistics, data analytics and the like, often do not enjoy public attention (maybe, even public interest). Issuing and implementing policies to promote stability is the crucial work that the BSP does in the background. When one thinks of the BSP, one may have the initial impression that our functions are detached and removed from everyday life... the impression is that perhaps, the policies and regulations we churn out do not have that much impact on the ordinary citizen... I hope very much that we would get past this notion. As businessmen, investors and consumers, you may have seen and experienced that the Philippines has, been enjoying strong economic growth with financial stability. We are seen as one of the fastest growing and most resilient economies in the region and the world. The economy has experienced sustained uninterrupted expansion for the past 74 consecutive quarters — spanning 18 years! Over the past five years, the domestic economy expanded by more than 6 percent annually, providing more opportunities across all segments of society. Traditional Central Banking Let me share an open secret: Central Banks worldwide (and the BSP is no exception) are traditionally conservative institutions and some would argue, boring. Understandably so since stability is our main concern. Thus, doing novel things may not be intuitively consistent with this goal. 1/5 BIS central bankers' speeches In its invitation, the WTCMM asked me to share my plans and programs in the continuity of providing the country a strong monetary and financial system. This is really the traditional part of central banking, focusing on our core mandates of price and financial stability. The BSP adopted the inflation targeting framework in 2002 to achieve low and stable inflation. This was accomplished, providing credibility to what we do as a monetary authority. Inflation continues to remain low and stable with well-anchored inflation expectations. Headline inflation rose to 3.4 percent year-on-year in September, making the resulting year-to-date average inflation rate of 3.1 percent within the Government’s target range of 3.0 percent ± 1.0 percentage point for 2017. We expect to sustain this through 2018 to 2019 based on our forecast. In 2016, we formally adopted the interest rate corridor (IRC) system, which enhances the link between the BSP’s monetary policy stance and financial markets. The primary benefit of the adoption of an IRC system in the Philippines is the strengthening of monetary policy transmission by ensuring that money market interest rates are meaningfully influenced by the BSP’s policy rate. We continue to refine the implementation of the IRC system to make it more marketfriendly. Our financial sector also demonstrates stability and robust growth. Domestic liquidity conditions remain ample to support lending. Banks remain strong, supported by a stable capital base and satisfactory asset quality. The non-performing loan ratio (NPL) is down to just 2.0 percent as of end-August 2017. Actually, it’s negative if we net out the generous allowance for loan losses. As of end-June 2017, capital adequacy ratio (CAR) of universal and commercial banks is very healthy at 16.0 percent on a consolidated basis. Getting Personal The road to a resilient banking sector has not been easy. The Asian financial crisis revealed weaknesses in bank management and also banking supervision. The BSP implemented bold and systematic banking reforms to rise above the crisis and get the financial system and the economy going again. This was a journey I was very personally involved in, being deputy governor for supervision for the last twelve years before I become governor. It was a challenging journey, one which required patience and grit, given the significant implications on the existing set-up. The reforms needed called for substantial improvements in our processes and more challenging, a paradigm shift in the mind-set of bank supervisors, to a risk-based approach that allowed for innovations but also kept a firm handle over risks. We initially adopted a gradualist approach while we worked on the buy-in of major stakeholders. Progress was also very incremental. However, in 2005, the pace of reforms accelerated and the full shift started to happen. This involved improving data collection and storage, reviewing and revising competency requirements for bank supervisors, changing the examination and off-site supervisory processes, and pursuing capacity-building to continuously upgrade the skills of bank supervisory staff. At the same time, we have aligned prudential regulations with international standards. Today, we use a range of tools and techniques in deploying our supervisory resources on a proportionate basis. The BSP’s supervisory process is also underpinned by an enforcement framework that clearly defines principles in deploying enforcement actions, including escalation processes, and the menu of actions available to supervisors. The reforms and transformation of the banking system and how we supervise it is a continuing story. Rather than be complacent because of the success, we see this window as providing the opportunity to further deepen financial sector reforms. 2/5 BIS central bankers' speeches Beyond Traditional Central Banking In being a conservative central monetary authority, we face a significant tension: there are several factors that compel us to become more innovative and creative in our approaches and go beyond traditional central banking. The pervasive problem of inequality, the fast pace of technology and digitisation, the interconnectedness of markets, globalisation, regionalisation, a growing millennial population and other dynamics highlight the need for us to evolve, address issues in possibly non-traditional ways, and be steps ahead. Towards this end, the BSP has woven in financial inclusion to its traditional objectives. As early as 2000, the BSP played a key role in expanding access to financial services to the entrepreneurial poor by mainstreaming microfinance in the banking sector. I was personally involved in these efforts, being part of the Microfinance Committee in my capacity then as Managing Director of the Supervision and Examination Sector. In 2007, we embraced the more ambitious and broader goal of financial inclusion. As far as I know, we were the first central bank in the world to have a unit dedicated to financial inclusion. We also established at the same time dedicated units focused on consumer protection and information technology supervision. These were all deliberate investments that anticipated the digital future of finance. While financial inclusion has been framed as an advocacy, we cannot deny its linkage to financial stability. It has been shown that broader access to bank deposits can have positive impact on financial stability by building resilience of deposit funding base. Thus, in a way, financial inclusion is not necessarily beyond the BSP’s core mandate. We have used several platforms to reach the grassroots and allow more of our countrymen greater access to financial services. These promote increased usage of the full-range of financial products for saving, remittance, payment, credit, insurance and investments, as well as acquire greater financial literacy and awareness. In addition to increasing access through liberalized branching regulations that build on brick and mortar venues, we are leveraging on digitisation and fintech solutions to provide more financial services and reach the unbanked and the underbanked at a faster rate and at much lower cost. We are also closely working with the National Government for the adoption of a biometric-based foundational ID system. We have identified the lack of a reliable and convenient ID system to be a major barrier to access to financial services. This initiative will bring millions of the underserved and unserved to participate in the digital finance ecosystem. Beyond Banking: Fintech Revolution FinTech is altering traditional concepts and the very scope of the financial system itself. Alternative sources of funding have been and continue to be developed. We believe that payments can be a crucial step to financial inclusion. When we provide people the means to pay and receive payments using digital platforms connected to the formal financial system, users become familiar with new procedures. This eventually builds their confidence to transact within the formal financial system, and have access to more value-adding financial products and services like savings, loans, insurance and investments. This is very crucial for our country where access to an account is only around 31% of the population. As part of our commitment to the national strategy for financial inclusion, the BSP is actively working with the industry towards enabling more Filipinos to have access to a basic transaction account in a bank or non-bank financial institution to send and receive payments via any electronic device. Last December 2015, we launched the National Retail Payment System 3/5 BIS central bankers' speeches (NRPS) project. The NRPS, and the inter-operable digital payment ecosystem that it will enable, will make it convenient and affordable to transfer funds between and among accounts using any digital device. NRPS will facilitate our transition to a cash-lite economy. As a key component of the NRPS initiative, the Philippine Payments Management, Inc. (PPMI) was recently registered with the Securities and Exchange (SEC). This will act as the industrydriven self-governing body to drive the responsible development and operations of the retail payment system. We are now also working with the industry on the formation of two priority Automated Clearing Houses (ACHs) that will actually deliver the payment solutions — the batch electronic fund transfer credit payment scheme (called PESO Net); and the real-time low-value push payment scheme (called InstaPay). PESO Net is set to launch on November 8, 2017, less than two weeks from now. Over the years, we have taken a very active role in ensuring that our policy and regulatory environment provide opportunities for innovation while ensuring risks are well-managed. We have learned to be open-minded to change. Among central banks, we are a pioneer in the use of the “test and learn” approach, now called the regulatory sandbox. One of the earliest applications of this was for e-money in 2004, when few people have heard of it. We allowed non-banks to pilot the provision of e-money within defined parameters. We have since then used this test and learn approach to allow piloting of many other fintech innovations in our system. We are doing our own fintech experimentation to improve our own capability. We are exploring an API system to connect financial service providers to the BSP. This would strengthen BSP’s risk-based regulatory and supervisory activities, and may very well be an initial step to building capacity for big data analytics. This is Regtech. Earlier this year, we issued various regulations aimed at mitigating effects of technology-related risks, including AML/CFT and other concerns with respect to fintech. This includes enhanced regulations to ensure that non-banks such as pawnshops and money service businesses are properly supervised as they compete in delivering bank-like services. This also extends to entities that use virtual currency as underlying instruments for remittance. We expect financial access to further expand with our recent issuance allowing technology-enabled third party retail outlets to function as bank cash agents. Complementing these are regulations that allow reduced Know-Your-Customer (KYC) processes for certain low-risk accounts and the use of technology for KYC. These amendments aim to facilitate frictionless customer on-boarding and convenient customer access. In keeping with our mandate to maintain financial stability, soon we shall be issuing enhanced information security framework to strengthen cybersecurity controls in line with a rapidly evolving cyberthreat landscape surrounding financial institutions. It is vital that we preserve the balance between innovation and risk management. Game-Changing Financial Sector Reforms Given the country’s potential as a promising investment destination, our domestic capital market is being positioned to serve as an important source of long-term funding and as a complement to bank lending to support economic growth. In this regard, we are closely collaborating with other government agencies, namely the Department of Finance (DOF), Securities and Exchange Commission (SEC) and Bureau of the Treasury (BTr), and industry stakeholders to deepen the local currency debt market. Complementing this local currency debt market development initiatives, we are also further liberalizing foreign exchange (FX) rules in order to enhance the ease of doing business. This 4/5 BIS central bankers' speeches forms part of a broader agenda for an organized FX market to enhance depth and transparency, improve price discovery, and increase availability of FX products, especially hedging instruments. Mutuality in Relationships Indeed, the economic circumstances today demand fresh and bold approaches. But to succeed, collaboration and cooperation is key — with other government agencies and with you, our stakeholders in the private sector and the Filipino public. Any great innovation effort begins with understanding “the who, what, and whys” of those we serve... In other words, who are our customers? What needs do they have? And why do they have these needs?... This is the true essence of customer-centricity, empathising with the experiences of our stakeholders. We in the BSP cannot answer these questions – who, what and why – ourselves. Our varied expertise and perspectives will need to converge for this purpose to come up with viable solutions. The programs I mentioned – the National Retail Payment System, the biometric-based ID system, even the deepening of the capital market are endeavours that cut across sectors. Their success hinge largely on the buy-in and cooperation of all those involved and all who will ultimately be benefitted. Challenge As I close, let me reiterate what I earlier said about customer-centricity, and also return to the theme – getting up-close and personal... While this was intended to refer to our own interaction and discussions here... to be more effective in what we do, we MUST – by all means – get up close and personal... with our citizens, and you, with your clients and customers. We have an increasing population of millennials who are tech-savvy, somewhat impatient and in need of faster and more streamlined products and services. This group prefers to be on the move and is thus partial to electronic services. Observing this group and exploring their needs will uncover a number of ways in which they may be served. Moreover, in the area of fostering greater financial inclusion, empathy with underprivileged sectors and with sectors challenged with access to formal credit will spur us to become more innovative together. It is time to get personal. Our businesses, our services and our mandates ARE personal. In meeting this challenge so that we can have more inclusive growth, the BSP is here with you. On behalf of the Monetary Board and the Bangko Sentral ng Pilipinas, I thank you for your kind attention. 5/5 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 2017 BSP-DepEd Annual Oratorical Contest, Manila, 27 October 2017.
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Nestor A Espenilla, Jr: Statistical and actual inclusion Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 2017 BSP-DepEd Annual Oratorical Contest, Manila, 27 October 2017. * * * National Satistician Lisa Grace Bersales of the Philippine Statistics Authority, DepEd Undersecretary Victoria Catibog, distinguished members of the Board of Judges, our sixteen contestants this afternoon, their families, friends, fellow public servants and BSPers, a pleasant afternoon to you all. On behalf of the Monetary Board and the BSP, I welcome you — guests, ladies and gentlemen to the Bangko Sentral ng Pilipinas. It is very invigorating to join you this afternoon at the BSP-DepEd Annual Oratorical Contest where the fundamental role of statistics in attaining our collective aspirations is highlighted. There is such a young and promising crowd here today. The presence of our partners in furthering financial inclusion, the Department of Education and the Philippine Statistics Authority, is also very heartening. The Philippine Statistics Authority has played a crucial role in helping us conduct our public perception surveys. These surveys allow us to gauge public awareness of our mandates, our initiatives and advocacies so that we can better serve our citizens, address the issues they deem important and discover their needs. Also the PSA is one of the government agencies crucial to the development and implementation of a national ID system which when launched, we believe will foster a more inclusive financial system, granting the unserved and underserved access to financial services. Maraming Salamat PSA. Aside from the holding of this annual contest, the DepEd and the BSP have worked together in the development, publication and use of very important teaching guides on financial literacy, which is used by different grade levels across the country. The goal is to equip school children with the knowledge and skills to manage their resources at an early age through integration of financial lessons in the elementary curriculum. We have important advocacy projects together such as the annually held Guro ng Pagasa, where outstanding teachers are recognised and awarded for their innovative ways in imparting financial literacy and for conducting lessons on savings and entrepreneurship, markedly changing their communities for the better. The partnership we have recognises the importance of the youth in development and the crucial role that education plays in their development and future betterment... Maraming salamat DepEd. Today, we shall toast the importance, role and indispensable value of statistics in nationbuilding. As a central banker of thirty-six (36) years, I have seen, first-hand, how important statistics is in policy development. As policy makers, we know that statistics provides reliable snapshots of our realities. Statistics allows us to paint a picture of what we hope for so that we could concretely visualize and set our goals. It allows us to form sound policy and quantitatively measure and monitor the progress of our initiatives and programs. In the Bangko Sentral, policy formulation is both data driven and data intensive. Sound statistics point us to issues and vulnerabilities that must be addressed. Statistics and careful statistical analysis are crucial input to our monetary policy actions. Likewise, banking regulations and financial policies must also be grounded on comprehensive banking statistics and an extensive set of financial indicators. These evidence-based policies support monetary and financial stability, so that there would be strong and stable economic growth. Our national vision for development – Ambisyon Natin 2040 itself was crafted based on statistical data – data from a rigorous consultative process involving the conduct and analysis of a national 1/3 BIS central bankers' speeches survey, focus group discussions and technical studies. In the end, the responses and numbers articulate the needs and desires of all Filipinos which were simplified into a vision broadly understood and accepted by all. In Ambisyon Natin 2040, Filipinos express the hope for strongly-rooted, comfortable and secure lives. Sa Filipino, ang hangarin ng bawa’t isa sa ating mga kababayan ay ang magkaroon ng matatag, maginhawa at panatag na pamumuhay. In the BSP, this too is our vision... to be a catalyst for a financial system that delivers a high quality of life for all Filipinos. We believe we are on the right track as the indicators tell a positive story. We are now one of the fastest growing economies in Asia, with an annual GDP growth of more than 6.0 percent since 2012, notably exceeding the long-term average of 4.3 percent. Our external position continues to be favorable, with Gross International Reserves (GIR) of $81.3 billion as of end-September. Inflation is benign and broadly within the BSP’s target range. The Philippine Banking system sustains its growth momentum and remains supportive of longterm economic growth and stable financial conditions. These economic gains are fruits of years of reforms and prudent, evidence-based policy making, where, yes, statistics and statistical analysis played an indispensable part. But amidst these positive numbers, statistics also tell another story. It reveals an issue that we must not ignore. Poverty incidence and unemployment rates are still high. Social inequalities remain with lingering wide disparities in income and quality of life across different sectors of society. At present, one in five Filipinos are poor. This translates to 21.9 million Filipinos in 2015. These Filipino families living in poverty have less than P9,064 a month on average to spend on basic needs. A significant portion of our population remains unbanked and without access to appropriate financial products and services. According to the 2014 Consumer Finance Survey, 86% of households, do not have a deposit account. Meanwhile, the results of the National Baseline Survey on Financial Inclusion rolled out in 2015 indicates that only 43.2% of Filipino adults have savings, 32.2 percent have stopped saving money, and the remaining 24.5% have never even saved. Of those who have never saved, 9.1 percent said that they did not have enough money to start. Clearly, there is much more to be done. In the BSP, we believe that for economic development to be more meaningful, there must be greater financial inclusion... More and more of our countrymen must be granted access to, and usage of, financial services and products, have greater financial literacy and education and increased awareness and consumer protection. This is to empower them to make more informed decisions with respect to savings, investments and credit, so that they can participate in the financial system. In identifying and analyzing existing inclusion gaps, the BSP utilizes statistical tools and analysis. In 2015, a national baseline survey on financial inclusion was rolled out to assess the current financial inclusion landscape to help the BSP respond with appropriate evidence-based policies and regulations. This is part of a comprehensive financial inclusion data framework developed by the BSP to identify and analyse inclusion gaps and opportunities. I believe there is much hope for the future. With the collaboration and cooperation of our government agencies – like the DEPED and the PSA, our partners in the private sector and the 2/3 BIS central bankers' speeches public, accomplishment of our collective vision is forthcoming. After all, a collective vision demands collective action. Together, we can achieve the statistical, actual, and meaningful financial inclusion of our countrymen as we progress economically. I must now wrap this message up otherwise, I might be mistaken for an oratorical contestant.... As I close, allow me to congratulate each of the sixteen (16) contestants here who have won their respective division levels. Just by being part of this elite group of finalists, you have already accomplished a lot. By recognizing and being able to voice your sentiments and reflections on how timely, relevant and sound statistics play an important role in raising the standard of living for all FIlipinos, already, you are all winners. This is such an important principle, from which numerous insights can be culled.... Moreover, I congratulate each one of you for knowing and wielding the power of words to convey transformative ideas, and for your lucid eloquence, which, if you did not possess, you would not be here today... Please, let us give all contestants here a round of applause. I wish each of you the best of luck and Godspeed. We look forward to hearing from each of you. Maraming Salamat sa inyong lahat. 3/3 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 11th ING-FINEX Chief Financial Officer (CFO) Award Ceremony, 20 November 2017.
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Nestor A Espenilla, Jr: Strength without agility is mere mass Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 11th ING-FINEX Chief Financial Officer (CFO) Award Ceremony, 20 November 2017. * * * For the past eleven years, FINEX in partnership with the ING Bank has conducted a methodical nationwide pursuit for the country’s top chief financial officer (CFO). “The Agile CFO” – is a change enabler, one that goes beyond tradition, quickly adapts, thrives and succeeds in the ever evolving financial environment. The search has ended. We will have the distinct privilege of the great reveal in a while. It’s quite exciting. Nevertheless, as I look around this room, I can see many agile leaders of Philippine commerce, banking and finance whose swift and responsive initiatives have contributed to shaping the business environment into the robust and thriving one it is today. FINEX President Benedicta Du-Baladad, ING-Manila Branch Managing Director and Country Manager Hans B. Sicat, Ms. Judith V. Lopez, overall chairperson of CFO of the Year Award Committee…former ING-Manila Branch Managing Director and Country Manager Consuelo D. Garcia, ladies and gentlemen, good afternoon. In the printed format of this message, I placed the following title: “Strength Without Agility is Mere Mass.” This is a direct quotation from Fernando Pessoa, Portuguese poet, writer, literary critic, translator, publisher and philosopher. The quote stirred me as I thought of our economy’s strength. We enjoy today a robust macroeconomy owing to strategic and comprehensive reforms boldly taken through the years. But while we have touted the economy’s strength, and lauded its resilience, we have not said much about its pro-active agility. Ladies and gentlemen, I am pleased to say that our economy is not only strong and buoyant. It is also infused with dynamism and responsiveness. It is not passive. A strong and agile economy The Philippines sustained its strong macroeconomic fundamentals. It is one of the fastest growing economies in Asia, registering a 6.9 percent growth on gross domestic product (GDP) in the third quarter of 2017. The inflation outlook remains manageable. Inflation has averaged 3.2 percent in the past ten months. This in line with the Government’s target range for 2017, and should remain on target through 2019. Our balance of payments and the exchange rate are firmly under control. We have a hefty buffer of gross international reserves (GIR) at USD 80.6 billion as of end-October 2017, covering the equivalent 8.4 months’ worth of imports. The banking system, likewise sustained its growth trajectory through the 3rd quarter of 2017. Total resources of the Philippine banking system expanded by 14.1 percent year-on-year. This was funded by the sustained inflows of deposits which grew by 15.3. 1/4 BIS central bankers' speeches Domestic liquidity and credit dynamics are consistent with our expanding economy. The current pace of credit growth of 19.6 percent is sustainable as credit exposures remain diversified, with 89 percent of going into the production sectors. The country’s credit-to-GDP ratio of 63.6 percent as of Q2 2017 is still one of the lowest by far in Asia. Asset quality is satisfactory as the industry non-performing loans ratio further improved to 1.9 percent, coupled with banks’ prudent provisioning for credit losses. Meanwhile, banks maintained ample buffer of high-quality liquid assets and capital that collectively protect the system against shocks. System-wide capital adequacy ratio recorded at 16.0 percent, is well above the BSP and the international minimum. Against this backdrop of strength, the financial system is also alert and responsive. We are ready to employ our monetary policy toolkit in light of policy normalization of the Federal Reserve which could affect capital flows, domestic interest rates and the foreign exchange rate. We are also watchful of geo-political risks, including protectionist policies in some advanced economies that could pose challenges to the country’s trade, remittances, and foreign direct investments. Need for agile management and leadership ING-FINEX’s theme for this year’s search for CFO of the year resounds. Why? Well, aside from the lingering uncertainties in the global economy, our financial and business landscape is continuously and radically being redefined by evolving international standards, new best practices, disruptive digital innovation, changing customer preferences and demographic changes. For instance, our increasing population of tech-savvy millennials demand innovation and expect faster and more streamlined products and services. To compete and be successful, these changes in the operating environment demand agility. I am certain this year’s awardee displays this required dynamism. BSP’s prudential reform genda As CFOs and industries thrive in the changing business environment, the BSP faces the same challenges. Hence, we have implemented strategic policy reforms to protect the financial system and provide a conducive and more agile macroeconomic environment. Much headway to ensure financial stability has been made with the adoption of Basel III reforms, particularly in the areas of capital, leverage, liquidity and regulation of systemically important banks. Since the start of the year, the BSP continues to build on this theme. For example, we implemented a major upgrade of corporate governance and risk management standards in our supervised institutions in line with the thrust of global best practice. We adopted reforms to strengthen banks’ capabilities to nimbly manage risks related to information technology. Recently, the Monetary Board approved the cyber security risk management framework under Circular No. 982 to further guard against cyber security threats and attacks. Even as we bolster our cyber-security stance, the BSP is determinedly pursuing the digitization of the financial system. Last November 8, 2017, the Philippine Electronic Fund Transfer (EFT) System and Operations network, or PESONet, was launched. This is the first Automated Clearing House (ACH) under the National Retail Payment System (NRPS). We envision PESONet to be an electronic alternative to the paper-based check system, significantly cutting down costs and allowing better liquidity management. It features same day crediting of the full 2/4 BIS central bankers' speeches amount being transferred. Businesses and individuals will be able to conveniently move funds from their own account to any other account in the system. For me, this initiative which depends heavily on the collaboration of our banks and other non-bank financial institutions to achieve full payments inter-operability, is financial agility in action. Forthcoming reforms for greater agility The BSP is also enhancing liquidity risk management guidelines under a four-phased program. The first phase covers enhancing the guidelines on liquidity risk management, including intraday liquidity. This was recently approved by the Monetary Board through the issuance of Circular No. 981. Also in the pipeline are the amendments to the Liquidity Coverage Ratio (LCR) standard and the issuance of the complementary Minimum Liquidity Ratio (MLR), which is a simplified version of the LCR requirement for less complex financial institutions. Third, is the issuance of guidelines implementing the Net Stable Funding Ratio (NSFR) standard. Lastly, the BSP will issue intraday liquidity reporting guidelines to complement the qualitative intraday risk management guidelines under Circular No. 981. Development of financial markets Another major BSP strategic policy reform is to accelerate financial market development with special focus on the local currency debt market and foreign exchange (FX) market. We envision a more balanced financial ecosystem where a well-functioning banking system is complemented by a deep and liquid capital market. There is much room for growth in the domestic debt market. The numbers show that the outstanding local currency (LCY) bonds represent a mere 34.2 percent of the country’s GDP. To hasten local currency debt market development, the BSP, in collaboration with the Department of Finance (DOF), the Bureau of the Treasury (BTr), and Securities and Exchange Commission (SEC), is working on a package of joint and coordinated initiatives. This reform agenda officially unfolds with the launching of the Government Securities Repo Program on 27 November 2017. The reforms are geared towards increasing transparency in the issuance and pricing of government bonds that would translate into increased efficiency, lower borrowing cost, and more dynamic participation. Strengthening the foundational elements would facilitate development of the broader financial market. Foreign exchange (FX) regulations are being overhauled to achieve more efficiency and ease of doing business. The BSP will soon release an exposure draft on the liberalized rules on FX loans and offshore loans of the private sector. This will re-focus the registration process to primarily data-gathering and minimize documentary requirements. The liberalization of FX regulations is embedded in the broader thrust for a better organized FX market. The sequence of reforms aims to encourage innovation, improve transparency, and price discovery, and enhance market conduct. Closing thoughts Thinking about agility made me reminisce about badminton. Badminton is very fast-paced. To play it well, one certainly needs strength. But one also needs to be agile. Because of the speed in which the game is played, a player must be able to change his position nimbly, quickly, efficiently. The movements required are seamless, interconnected with great need for balance and coordination. I believe the same holds true for the industry, for the economy. Strength without agility is mere mass. Mass sits at inertia. We certainly cannot afford to sit at inertia. I have always been grateful for our partnership with the banking industry and the private sector. It 3/4 BIS central bankers' speeches is through our cooperation, our collaboration and constant touching base that we gain greater agility to weather through our fast-paced environment. We at the BSP are uplifted at embracing change and the future with you as our partners. We thank you for your support for the ambitious financial sector reform agenda that impart motion and dynamism to our economy. Like a welltrained athlete, disciplined conditioning is our defense against over-heating and burn out. Congratulations to FINEX and ING. Congratulations to the men and women whose dedication and unwavering efforts have made the continuous holding of this prestigious event possible. Congratulations to this year’s best CFO whose agility has elevated the finance profession to a higher level! Thank you and a pleasant afternoon to all of you! 4/4 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the POWWOW 2017, Cebu City, 17 November 2017.
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Nestor A Espenilla, Jr: Collective and individual competitive advantages Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the POWWOW 2017, Cebu City, 17 November 2017. * * * PhilExport Cebu Chairman Apolinar Suarez, Jr.; President Mr. Nelson Bascones; officers and members of PhilExport Cebu; special guests; ladies and gentlemen Maayong Gabii. I am grateful for the invitation to speak about the BSP’s policies and thrusts, my first as BSP Governor, before this distinguished group of business leaders and exporters. A major industrial hub, Cebu plays a crucial role in Philippine economic development. With at least 27 IT Parks and Centers; 7 manufacturing zones; 2 tourism economic zones; and 1 agro industrial economic zone, Cebu is a dynamic economic hub. This evening’s theme has three action verbs. Individually, the words sound like commands. As a unified phrase, it is a battlecry. “Create. Innovate. Compete.” Cebu is no stranger to the power of creativity and innovation. Because of efficiency and raw talent, the level of craftsmanship and creativity of the Cebu furniture industry, for example, allows it to produce high quality and unique custom-built pieces that cater to medium- to high-end markets, selling twice or thrice more furniture than competitors from Vietnam and China. To outperform others — businesses must be creative and innovative. But creativity and innovation should not be pursued for their own sakes. (This is a reminder I have relayed to the BSP and the banking and financial sectors many times). Efforts should be focused and strategic. In the context of business, creation and innovation should be concentrated on, and mindful of, competitive advantage. This brings about strategic competitiveness. The Philippines’ competitive sdvantage Allow me to relay data on the Philippines’ positive economic position which enables it to compete strategically in the global market. Philippine macroeconomic fundamentals are solid and robust. These support local exporters and entrepreneurs. We have had uninterrupted GDP growth for 75 consecutive quarters (more than 18 ½ years). GDP expanded 6 percent annually during the past five years. Prospects are favorable and growth is predicted to be between 6.5 to 7.5 percent this year and 7.0 to 8.0 percent over the medium-term. We are well on track with the recently announced third quarter GDP at 6.9 percent! Since the BSP adopted the inflation targeting framework in 2002, inflation has become more manageable, with latest baseline forecasts showing it will likely settle around the middle of government’s target range of 2 – 4 percent in 2017 to 2019. Further, Philippine banks continue to be sound, stable and more efficient. The non-performing loan (NPL) and non-performing asset (NPA) ratios of universal and commercial banks have significantly declined from around 15 percent in 2001 to less than 2 percent in August 2017. Meanwhile, the capital adequacy ratios of banks are well above the BSP minimum as well international norm. Almost double, in fact. 1/4 BIS central bankers' speeches On the exchange rate, the peso is expected to be broadly stable and market-determined, backed by strong underlying economic fundamentals, ready market access, sustained decline in external debt position, and robust international reserves. At the current range, export price competitiveness has improved back to 2008 levels as measured by the real effective exchange rate (REER) index. The recent controlled and moderate depreciation of the peso from last year is good for the economy. As of end-October 2017, our foreign exchange reserves stood at US$80.6 billion, equivalent to 8.4 months of import cover (around 4 times larger than our total external debt). The sustained structural inflows from overseas Filipino remittances, business process outsourcing sector, foreign investments, tourism receipts, and the strong recovery in exports, insulate us from foreign exchange crisis. Exports on the road to recovery The past two years have been challenging for our exporters. There was a decline in global trade and growth. Our goods exports contracted by 5.3 percent in 2015 and 2.4 percent in 20161. These difficulties were brought about by a range of factors such as: (1) fragile and uneven economic growth among major advanced and emerging economies; (2) bouts of financial market turbulence due to divergent monetary policies adopted by developed countries; and (3) cutbacks in capital investments because of the plunge in international oil and commodity prices. But data for the second half of 2016 to the present show increased trade momentum! Goods exports expanded by 12.2 percent during the first nine months of 2017, owing to improved external demand from major trading partners such as the United States, Hong Kong, China, Thailand, South Korea and the European Union. There is an 8.6 percent increase in outbound shipments of manufactured goods. These include electronics; machinery; transport equipment; garments and others. Exports of mineral products and agro-based products also recorded significant year-on-year rebounds of 74.1 percent and 19.9 percent respectively. This resurgence boosts prospects for the exports sector. Vigilance and leveraging on competitive advantage Ladies and gentlemen, the Philippine economy is showing sustainable growth momentum. It is also more resilient, benefitting from years of deliberate structural reforms. But this does not warrant complacency. We must all stay focused and pursue bolder reforms if we hope to catch up with our neighbors. A strategic approach is important given megatrends in the economic landscape. These trends include demographic changes, rapid urbanization, climate shifts and the rise of disruptive technologies. Our increasing population of tech-savvy millennials demands innovation as they expect faster and more streamlined products and services. The need for businesses and government to “up the ante” has never been more imperative. As a country, we have unique natural endowments on which we can leverage: a young, skilled and mobile workforce; a predominantly English-speaking population, distinct and world-class Filipino craftsmanship and ingenuity. These will set our brand apart. But we have to take action to transform these to strategic competitive advantage. BSP’s continuity plus-plus achieving competitive advantage As a central bank, our traditional focus is to maintain price and financial stability. When I was appointed BSP Governor last July, I committed to the continuity of policies that brought about the sound macroeconomic stability we now enjoy. At the BSP, we vigilantly monitor vulnerabilities, 2/4 BIS central bankers' speeches formulate and implement monetary and financial sector policies and reforms supportive of economic development. Upon my appointment, I also said that continuity will come with a “plus plus.” This thrust is premised on the same factors of rapid technological changes and shifts in the economic and financial landscape that prompt innovation in the private sector. These “plus plus” initiatives support national competitive advantage, encourage cost-effectiveness, differentiation and focus. As part of the “plus plus” agenda, we are pursuing more ambitious foreign exchange (FX) reforms, consistent with our efforts to reduce the cost of doing business and increase efficiency. These include rationalizing and further liberalizing foreign exchange rules. Currently, we are drafting a set of circulars that will remove prior BSP approval for most private sector transactions. We aim to simplify registration processes, significantly reduce documentary requirements, and enhance data capture for effective policy decision-making. The amendments to FX regulations is just part of a broader thrust for a better organized FX market. Over the medium term, we shall be rolling out a sequence of reforms that will increase FX market transparency, improve price discovery, and enhance market conduct. With these reforms, we hope to encourage FX flows from the parallel market to the formal market. Even as we strengthen oversight over Money Service Businesses (MSBs), we will streamline FX requirements for the banking system to reduce market fragmentation and increase FX liquidity. This allows individuals and businesses greater and easier access to foreign exchange. Ultimately, a deeper FX market will enhance resilience of our domestic economy against external shocks. The goal is to increase its ability to absorb large flows even as the BSP continues to pursue a market-determined exchange rate and allow greater exchange rate flexibility. We believe competitiveness can also be achieved on the firm and country-level through development of alternative sources of funding. In this regard, we are collaborating with other government agencies and private stakeholders to take measures to deepen our domestic debt market so that you, our esteemed businessmen and exporters can have a viable alternative to bank borrowing, supportive of economic growth. Taken together, the FX and domestic debt market development initiatives are game changing reforms as these will increase availability of more financial products, especially hedging instruments. This is something that will benefit exporters, since hedging products can help protect you against interest rate and FX volatility. Hedging allows you to focus on your core business. Another major reform we are pursuing is the digitization of the financial system. Last November 8, 2017, the Philippine Electronic Fund Transfer (EFT) System and Operations network, also called PESONet, was launched at the BSP. The PESONet is the first Automated Clearing House (ACH) under the National Retail Payment System (NRPS). The NRPS lays down the principles that guide BSP’s strategic initiatives to modernize our retail payment system and to shift from a cash-heavy to cash-lite digital economy. The PESONet will be the electronic alternative to the paper-based check system. Businesses will be able to conveniently transfer funds maintained with banks and other non-banks such as electronic money issuers to any other account in our financial sytem. Full inter-operability. Good for payroll. Good for paying suppliers. Good for paying utilities and other services. In addition to the convenience of inter-operability, PESONet allows funds to be made available within the same banking day. This provides better liquidity management opportunities for private businesses. Moreover, payees receive the transferred funds in full and do not pay fees for electronic credit to 3/4 BIS central bankers' speeches their accounts. Indeed, costs will go down as we move away from a cash-heavy economy. We are also working on the launch of another priority ACH, the real-time low value push payment scheme called InstaPay. InstaPay is designed to facilitate small value payments and enable merchants to accept digital payments from customer on real-time basis using cards or any digital device, especially a mobile phone scanning a QR code. At the BSP, we have strategically opened up the banking system to competition. For instance, since the enactment of the Foreign Banks Liberalization Law in 2014, the Monetary Board has approved 11 foreign bank applications. Further, as early as 2004, we have adopted a “test and learn” approach, now called regulatory sandbox, to allow fintech innovations into our system. This approach encourages competition coming from new players, whether from banks or non-banks such as fintech companies. Why is competition important? Healthy competition can make services more affordable, and expand consumer choices. The bottom line is that competition motivates banks to work harder to serve their customers. Banks are encouraged to go beyond just serving big blue-chip enterprises and companies. With greater competition, banks are compelled to be creative, be innovative, and go deeper into the market to work harder to better serve the public. Ultimately, increased competition increases financial inclusion. MSMEs will be a big winner. Concluding remarks Last Wednesday marked the conclusion of the 31st Association of South East Asian Nations (ASEAN) Summit and the Special Celebration of ASEAN’s 50th anniversary. All throughout the year during various ASEAN related meetings, collective calls for partnership and greater economic integration were made. I came to Cebu directly from Singapore wher I signed a fintech cooperation agreement with my counterpart. Deepening our economic ties, as shown by rising intra-regional investments and intra-regional trade in final goods within Asia, is critical not only to cushion the potential negative impact of policy uncertainties from the global market, but also achieve and maintain our external competitiveness. Here at home, greater collaboration and cooperation among ourselves – private businesses, firms and government agencies – will reinforce our competitive position. As you know, the BSP actively engages exporters through the regular conduct of the Conference on Gearing Up for External Competitiveness (CGUEC) and the annual Exporters’ Forum. We also conduct consultative one-on-one meetings. These serve as venues for discussing prospects, as well as plans and initiatives for the sector. In fact, we held one conference here in Cebu last May 2017. This was followed by a series of consultation meetings with some of Cebu’s top exporters of furniture, processed fruits, and garments in June 2017.2 We hope to continue this active partnership with you. On behalf of the Monetary Board and the BSP, I congratulate PhilExport for its 25 years of helping exporters succeed in international trade, and taking the lead in building strong alliances among export-related industries, government agencies, and non-governmental organizations. Daghang Salamat at mabuhay tayong lahat! 1 Quoted actual exports numbers are latest available from the Philippine Statistics Authority. 2 Note: The Cebu-based firms/associations consulted by the BSP in June 2017 were the Cebu Furniture Industries Foundation, Inc., 7D Foods International, and Metro Wear, Inc. 4/4 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Security Bank Economic Forum, 21 November 2017.
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Nestor A Espenilla, Jr: Ready in the age of great convergence Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Security Bank Economic Forum, 21 November 2017. * * * SBC Chairman Alberto Villarosa; President and CEO Alfonso Salcedo, Jr.; Department of Finance Undersecretary Gil Beltran; fellow speakers/panelists, esteemed guests; ladies and gentlemen, good afternoon. It is a pleasure to be here at Security Bank‘s annual Economic Forum, to discuss developments and prospects in the global and domestic economy and to take stock of challenges ahead. At present, four key financial sector issues seem top of mind. First, is uncertainty over the pace, timing, and magnitude of tightening of global financial conditions. The potentially divergent monetary policies of advanced economies (AEs) would likely trigger bouts of volatility in the financial markets. Second, is peso volatility with specific concern over its possible sharp depreciation. Third, is the perceived risk of overheating in the economy. And fourth is the challenge of disruption brought about by fintech. The use of digital technologies challenges the status quo,1 even making an impact on monetary policy. Anchors of stability We can rely on several anchors of stability to manage these pressing issues. The Philippines sustained its robust macroeconomic fundamentals. It is one of the fastest growing economies in the world, with 75 consecutive quarters of uninterrupted and increasingly broad-based growth. Annual growth has been running above 6 percent in the last five years. For the third quarter of this year, GDP picked up to 6.9 percent. Prospects remain bright as growth is predicted to be between 6.5 and 7.5 percent this year and 7.0 and 8.0 percent over the medium-term. Growth will be increasingly investment-led as government and private sector investments ramp up. The stable inflation environment provides support to domestic demand. Inflation has averaged 3.2 percent in the past ten months, in line with the 2017 target. Latest baseline forecasts show it will likely settle around the middle of government’s target range of 2 – 4 percent in 2017 to 2019. We are ready to deploy the full array of our monetary policy toolkit to deal with possible market volatility as policy settings evolve and normalize in the US and other advanced economies. We are also watchful of geo-political risks that could pose challenges to the country’s trade, remittances, and foreign direct investments. Recently, the depreciation of the peso has been a cause of some market unease. Such concern is overdone. The peso‘s moderate and controlled depreciation mirrors bullish economic growth indicated by strong imports demand, residents’ increased direct and portfolio investments abroad for expansion and risk diversification; as well as public and private sector debt prepayments to manage foreign exchange risks. There is also outflow of hot money. We see these as healthy adjustments. 1/5 BIS central bankers' speeches The peso is expected to be broadly stable over the medium-term, backed by strong underlying economic fundamentals, ready market access, and robust international reserves. Our foreign exchange reserve buffer, as of end-October 2017 stands at US$80.6 billion. This is equivalent to more than 8 months’ imports of goods and services and is greater than our foreign exchange liabilities. We have additional liquidity buffer as well from our regional safety net arrangements. Sustained inflows from overseas Filipino remittances, business process outsourcing, tourism receipts, and the strong recovery in exports further support the peso. We can likewise look forward to increased foreign direct investments that are attracted by our growth prospects. With the country’s external debt on a sustainable downtrend and ample fiscal space, there is scope to pursue high quality investments in physical and human capital that will expand potential output. At the current range, the peso’s competitiveness has improved back to 2008 levels as measured by the real effective exchange rate (REER) index. The Philippine banking system is very stable and very dynamic, with good asset quality, sustained profitability, and adequate capitalization. For the third quarter of this year, total banking system resources expanded by 14.1 percent year-on-year, to P14.6 trillion. This was funded by sustained deposit inflows which grew by 15.3 percent, to P11.3 trillion. The non-performing loan (NPL) ratios further improved to 1.9 percent, with adequate and prudent provisioning for credit losses. Bank capital is being beefed up by strong earnings from core income sources particularly lending activities. Capital adequacy ratio, recorded at 16.0 percent on consolidated basis, is well above the BSP and international minimum. The risk of economic overheating has been raised by some analysts. We do not believe we are there yet and we remain very vigilant to avoid it. The current pace of credit growth is manageable . Our credit-to-GDP ratio of 63.6 percent as of Q2 2017 is still one of the lowest by far in Asia, indicating relatively low overall leverage. Bank loans are diversified across economic sectors and are backed by durable economic activity with 89 percent going into production sectors. Moreover, BSP monetary operations indicate just sufficient domestic liquidity to support expansion. Amid the stronger growth in liquidity, inflation dynamics remain manageable. Key indicators of credit expansion likewise are below established international thresholds. Current property prices, as reflected by latest Colliers data and the latest BSP Residential Real Estate Price Index (RREPI), also do not show misalignment from fundamental values. We continue to closely monitor credit growth and risks to overheating, even as we stand ready to deploy macroprudential measures if necessary, to deal with sectoral issues in a targeted way. Staying ahead: new norm, new tools Economist Richard Baldwin published a book in November 2016 on the four phases of global economic evolution. According to him, the fourth phase (1990 to the present) is The Great Convergence, characterized by globalization of knowledge and information resulting from the information and communication technology (ICT) revolution. To stay abreast, we must adopt new tools and policies. As products, services, and processes evolve, the BSP constantly expands its policy toolkit to include macroprudential measures, surveillance tools, and stress indices such as the early warning system (EWS) on currency crisis and the Philippine Composite Index of Financial Stress (PCIFS). We are upgrading our monetary operations framework: The interest rate corridor (IRC) system 2/5 BIS central bankers' speeches was deployed last year to enhance the monetary policy transmission mechanism. The IRC is also compatible with the further development of our capital market. We shall continue to enhance the IRC for a more market-friendly implementation of monetary policy. We continue to pursue progressive prudential reforms to maintain the financial system’s resilience against external shocks. Since the start of this year, the BSP implemented reforms to upgrade corporate governance and risk management standards, and to promote financial system integrity and transparency. Good governance is the backbone of a safe and stable financial system. Consistent with this, we have also enhanced the reporting governance of banks. We have seen significant progress in the adoption of Basel III reforms, particularly in the areas of capital, leverage, liquidity and regulation of systemically important banks. More recently, we have rolled out a four-phased program for liquidity risk management. The first phase, which was approved by the Monetary Board through Circular No. 981, covers guidelines on liquidity risk management, including intraday liquidity. Next in the pipeline are amendments to the LCR standard and issuance of the complementary Minimum Liquidity Ratio (MLR), a simplified version of the LCR requirement for less complex financial institutions. Third, we will issue guidelines implementing the Net Stable Funding Ratio (NSFR) standard to ensure that banks have adequate long-term stable funding. Lastly, the BSP will issue intraday liquidity reporting guidelines to complement the qualitative intraday risk management guidelines under Circular No. 981. In line with the upcoming full adoption of the Philippine Financial Reporting Standards Financial Instruments (PFRS 9), a consultative document on the “expected credit loss” model was released. In 2014, BSP started preparing banks on the use of the expected loss methodology through Circular No. 855. Parallel to this, we will enhance the Pillar 3 disclosure requirements for incorporation in banks’ annual reports. The guidelines on accreditation of external auditors across sectors are also being reviewed. These reforms promote market discipline, transparency, and resiliency. Financial market development Part and parcel of our strategic policy reforms is to accelerate financial market development with particular focus on local currency debt and foreign exchange (FX) markets. We envision a more balanced financial ecosystem where the banking system is complemented by a deep and liquid capital market. This can support the long-term financing requirements of corporates and the Government, particularly with the “Build, Build, Build” program roll out. As you know, the BSP, in collaboration with the SEC, DOF and the Bureau of the Treasury (BTr) is working on a package of initiatives to be rolled out in a sequenced approach to ensure smooth implementation. The reform agenda will officially start with the launch of the Government Securities Repo Program on November 27 2017, in coordination with industry associations. Through nine waves of reforms since 2007, the BSP has undertaken measures to liberalize the foreign exchange (FX) market. Currently, we are pursuing even more ambitious FX reforms aimed at deepening the FX market and increasing resilience of our domestic economy against external shocks, even as we continue to allow greater exchange rate flexibility. This demonstrates a thrust towards greater openness given the country’s increasing integration with global markets. Soon, the BSP will release an exposure draft on the liberalized rules on foreign currency borrowings of the private sector to move away from prior BSP approval, simplify the registration process to primarily focus on information gathering, and minimize documentary requirements. 3/5 BIS central bankers' speeches Other future amendments will address unnecessary friction on investment and other transactions. Over the medium term, we are implementing a sequenced approach that will enhance market conduct, increase FX market transparency, and promote a market-determined exchange rate consistent with the characteristics of an organized FX market. Taken together, the FX and domestic debt market development initiatives are complementary reforms that will deepen market liquidity, establish a more reliable reference yield curve for domestic interest rates, and strengthen market integrity. These reforms will pave the way for more innovation and increased availability of financial products that meet diverse funding requirements with more choices and more flexibility. These will also enable the creation of hedging instruments that enhance risk management capabilities of banks, corporates, government units, MSMEs, and the general public. Dealing with disruptive technology At the BSP, we have a very open-minded approach to Fintech. This means that we take a very active role in ensuring that our policy provides opportunities for innovation that can help advance inclusive growth and deliver more efficient financial services. At the same time, we want to ensure risks are well managed, particularly technology, money laundering/ terrorist financing, and consumer protection risks. As far as I know, we are a pioneer among central banks in using the “test and learn” approach, now known as regulatory sandbox, to allow controlled roll-out of new financial technology. Even as we allow fintech into our system, we are mindful of related risks. Earlier this year, we issued various regulations aimed at mitigating the effects of technology risks, as well AML/CFT concerns. These include comprehensive supervisory frameworks for money service businesses and pawnshops to ensure effective AML compliance. This also extends to entities that use virtual currency as underlying instruments for remittance. To date, there are two virtual currency exchanges registered with the BSP with several more under evaluation. We have also allowed proportionate and technology-enabled Know-Your-Customer (KYC) procedures for low-risk clients to facilitate frictionless customer on-boarding. More recently, the Monetary Board approved the cyber security risk management framework under Circular No. 982. Finally, we are pursuing digitization of the payment system as part of our firm commitment to the national strategy for financial inclusion. The BSP is actively working to make universally available to all a basic transaction account in a bank or regulated non-bank financial institution, to be able to send and receive payments via any electronic device. At the same time, we are working with other government agencies and Congress to establish a biometric national ID system. These two — universal transaction accounts and a digital ID system – are key foundations of a robust and inclusive digital financial system. We are one step closer to achieving the vision of a cash-lite economy with the recent launch of the Philippine Electronic Fund Transfer (EFT) System and Operations network, also called “PESONet” last November 8, 2017. This is the first Automated Clearing House (ACH) under the National Retail Payment System (NRPS). It supports batch payment credit transactions and will eventually replace paper check payments for most applications. Early next year, we will launch “InstaPay”, the ACH for low-value real time push payments ideal for mobile payments in support of e-commerce. 4/5 BIS central bankers' speeches Conclusion Ladies and gentlemen, the heightened convergence of the global and the domestic economy, fuelled by ICT revolution, is a force to reckon with. One has to catch opportunities created by these big changes and adapt to manage new risks. As economic agents seek novel ways of doing things, the role of BSP becomes more critical. In this regard, we assure of our commitment and capability to foster an enabling environment so we are ready in the age of the Great Convergence. Thank you for your kind attention. Manyika, J. et al. (2013). “Disruptive technologies: Advances that will transform life, business, and the global economy”. McKinsey Global Institute, May 2013. 5/5 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Philippines Investment Forum, Euromoney Conferences, 27 November 2017.
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Nestor A Espenilla, Jr: Why the Philippines Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Philippines Investment Forum, Euromoney Conferences, 27 November 2017. * * * Distinguished guests; Ladies and Gentlemen: Good morning! I thank Euromoney for the invitation to speak at this annual Investment Forum. My message is simple and straightforward. The Philippines today offers viable and strong investment opportunities. The very topics for today’s panel discussions point to the key reasons. First, our economic outlook is strong and robust; Second, our capital markets are being deepened and developed; Third, massive infrastructure building gears us for increased growth and development; Fourth, we can rely on aggressive trade and industrial development and Fifth, there are untapped markets, the unserved and underserved, such as MSMEs and the agricultural sector, that present not just the opportunity to exercise social responsibility, but also to create and deliver new products and services. First: The economic outlook The Philippines is one of the fastest growing investment-grade rated economies in the region. We realized a better-than-market forecast GDP growth of 6.9 percent in the third quarter of 2017, our 75th consecutive quarter of uninterrupted economic growth since the Asian financial crisis. We are on track to meet this year’s target GDP growth of 6.5 to 7.5 percent. Further economic growth of 7.0 to 8.0 percent over the medium term is expected.The sustained economic growth is a product of two decades of structural reforms. Amidst this rapid economic development, we expect inflation to remain low and stable and within target. We estimate it will settle at 3.2 percent this year, 3.4 percent in 2018, and 3.2 percent in 2019. To maintain price stability, the BSP adopted the Inflation Targeting framework in 2002. This has served us well. We continuously refine monetary policy conduct. The implementation of the interest rate corridor system in July 2016 is a manifestation of our commitment. More refinements are coming. These changes are enhancing the transmission channels of monetary policy. The country’s external payments position remains manageable and we have built up a strong liquidity buffer against external shocks. At $80.4 billion as of end-October, our GIR level can cover 8.4 months’ worth of imports of goods and payments of services, even exceeding the outstanding external debt amounting to $72.5 billion as of end-June 2017. We also have in place substantial regional safety net arrangements. The banking system is strong and stable. Banks are lending more, and to productive sectors. Outstanding loans of universal and commercial banks as of end-September 2017 are up by 21.1 percent year-on-year. But the non-performing loans (NPL) ratio stood at a mere 1.4 percent. As of end-June 2017, the capital adequacy ratio stood 16.0 percent on consolidated basis, double the international minimum. Our comprehensive risk-based supervision approach ensure that our banks operate in a safe and sound manner and that the economy is guarded against shocks that may affect financial sector stability. Because of bold reforms, the banking system today is very different from the banking system before the Asian Financial Crisis. 1/4 BIS central bankers' speeches Nevertheless, there are those who raise overheating concerns. Some also worry of a potential asset bubble in the real estate sector. Our data and analysis suggest otherwise. And we are vigilant to avoid these risks. The credit-toGDP ratio of 63.6 percent as of Q2 2017 is still one of the lowest by far in Asia, indicating relatively low overall leverage. At any rate, regulations are in place that require banks to manage their exposures to the real estate sector. Last September, the Monetary Board approved enhancements to bank reportorial requirements on exposures to the real estate sector and to infrastructure projects. More granular information are to be submitted for the BSP to better monitor the extent of bank exposure to real estate and infrastructure projects. We are ready to implement appropriate macro-prudential measures as the situation may require. Another concern being raised is the country’s current account balance which, after posting 13 consecutive years (2003–2015) of surplus, turned into a small deficit in 2016 (-0.3% of GDP) and in 2017 (-0.2% of GDP in Jan-June). This concern is misplaced. Indeed, IMF observed that previous current account surpluses actually reflected low levels of investment. Behind the deficit is the economy’s rapid growth, backed by rising investments. There is an increase in imports of machineries, capital goods, intermediate goods and raw materials. Eventually, we expect these to translate into higher productivity and exports, lending support to the sustainability of the current account and overall external payments position. We also expect BOP deficits to the mitigated by robust overseas Filipino remittances, BPO revenues, tourism receipts, and FDI flows. Recent weakness of the peso is also being spotlighted. We assure that the peso’s recent modest and controlled depreciation is consistent with the economy’s structural shift from being consumption-led to being more investment-led. This is driven by strong imports demand, residents’ increased direct and portfolio investments abroad for expansion and risk diversification; as well as public and private sector debt prepayments to manage foreign exchange risks. There is also outflow of hot money. We believe these developments are fundamentally healthy and help improve price competitiveness. Second: capital markets Capital market development also gives more reason to invest in the Philippines. The BSP is working hand-in-hand with the Department of Finance (DOF), the Bureau of the Treasury (BTr), and the Securities and Exchange Commission (SEC) on a local currency debt market development roadmap, where reforms to deepen the market will be undertaken over an 18month time frame. The reform agenda will officially unfold with the launch of the Government Securities Repo Program later this very afternoon (Nov 27)! Indeed exciting and transformative times! The roadmap includes initiatives to 1) increase the volume of treasury bills, 2) provide stable, predictable and transparent issuance of government securities, 3) develop a systematic set of obligations, rights and incentives for market-makers, 4) establish a reliable yield curve, 5) introduce a repo program, and 6) strengthen regulatory oversight over the repo and fixed income market. These reforms in the government securities market will translate into increased market efficiency, lower borrowing cost, more dynamic and increased participation. As the domestic debt market develops rapidly, there will be more alternative sources of funding for economic activities besides the banking sector. Risks will also be better managed. 2/4 BIS central bankers' speeches Third: infrastructure building We are in a period of build, build, build! This will be driven by massive key infrastructure investments.These will enhance competitiveness, support the economy’s rising growth trajectory, and spread development across the country’s regions. Under the National Government’s program, spending for big-ticket infrastructure projects is set between $160 billion and $170 billion in the next five (5) years. With this, government infrastructure spending as a share of GDP will rise annually from 5.4 percent in 2017 to 7.3 percent in 2022. Public investments in infrastructure and human capital development, while observing fiscal discipline, will be a major growth driver. Sustainable funding sources must support this thrust. Deepening our domestic capital market, as earlier mentioned, will help in this regard. BSP will continue to support infrastructure development through enabling regulations. Last month, the Monetary Board excluded loans guaranteed by multilateral financial institutions (MFIs) where the Philippine Government is a member or shareholder, from the regulatory limits on banks’ loans to their subsidiaries and affiliates.This will boost available resources for the funding of big-ticket projects, including infrastructure. While National Government builds infrastructure, we at the BSP are focused on the FINfrastructure – (this is a word I coined) referring to the financial infrastructure. We are encouraging further digitization of the financial sector. In line with this, the BSP is closely working with the National Government to implement a biometric-based foundational ID system to broaden the reach, quality, and integrity of financial services. We are also working with the industry so that more Filipinos can send and receive payments via any electronic device under the National Retail Payment System (NRPS). Last November 8, we launched the Batch Electronic Fund Transfer (EFT) Credit system or PESONet. With PESONet, businesses, the government, and individuals will be able to conveniently initiate electronic fund transfers and recurring payments from the sender’s accounts maintained in any BSP supervised financial institution to corresponding recipient accounts in other institutions with full interoperability. Funds will be made available to the recipient account/s within the same banking day at full value. In the first quarter of 2018, we will launch InstaPay, another automated clearinghouse allowing real time, low-value push electronic fund transfers perfect for ecommerce. All of these initiatives will help lower the cost of doing business, enable increased e-commerce, and give wide access to credit and other vital financial services. Fourth: trade and industrial development The BSP supports trade and industry development through progressive liberalization of the foreign exchange market. Building on previous reforms, the BSP will soon liberalize foreign borrowings by the private sector. This will re-focus the registration process to primarily datagathering. It will minimize documentary requirements. Down the road, further liberalization of FX regulations will support ease of doing business and help improve the country’s investment climate. The banking sector was fully liberalized earlier in 2014 to allow entry of foreign banks under Republic Act No. 10641. Since the law’s enactment, the BSP has already approved the entry of 11 new foreign banks. 3/4 BIS central bankers' speeches Fifth: the agricultural sector Today’s fifth panel discussion will revolve around the Agriculture Sector. And this sector is indeed an important driver and draw for increased investments. Recently, the BSP issued guidelines on agricultural value chain financing (VCF) to facilitate credit to the agriculture sector. This opens up credit provision to all the players in an organized value chain and promotes VCF as an effective, organized means of channeling funds to the agrifisheries sector, promoting their financial inclusion. By encouraging linkages among various players in an agri-value chain, the credit risk of participating smallholder farmers and fisher-folk can be reduced and facilitate their access to more credit. But beyond this sector are other unserved, underserved and untapped markets. To promote MSME access to finance, the BSP has issued comprehensive credit risk management (CRM) guidelines so that banks can be more flexible, extend more credit, and implement innovative credit products and lending programs. Also, a wide range of microfinance services of banks now cover nearly 1.7 million microentrepreneurs with an outstanding portfolio of P13 Billion. Empowering these sectors are not just opportunities to exercise social responsibility, but their inclusion creates viable business propositions. To sum up, . . . Why the Philippines? First, the Philippines is among the fastest growing and most resilient economies in the region. Second, coordinated efforts towards structural reforms and public sector investments in infrastructure and human capital development will make the business climate even more competitive. And Third, you can rely on the BSP’s staunch commitment and effectiveness in delivering on its core mandates of price and financial stability conducive to economic growth. We are deeply committed to implementing ambitious financial sector reforms. Let me end on this note. I wish you a very productive Investment Forum ahead! Thank you! 4/4 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 120th Anniversary of the Bureau of the Treasury, Manila, 27 November 2017.
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Nestor A Espenilla, Jr: Moving the capital markets dialogue forward Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 120th Anniversary of the Bureau of the Treasury, Manila, 27 November 2017. * * * Finance Secretary Carlos G. Dominguez III, SEC Chair Teresita J. Herbosa, PDIC President Roberto B. Tan, National Treasurer Rosalia V. de Leon, Commissioner Ephyro Luis B. Amatong, BAP Senior Associate Director Pinky S. Padronia, MART President Michael Joseph M. Delfino, colleagues from government agencies, friends from industry associations and media, good afternoon. Today is a joyous occasion marked by significant milestones. My heartfelt congratulations to the Bureau of the Treasury (BTr) as you celebrate your 120th anniversary. It is also apt that today, we witness the launch of several initiatives that will deepen the local currency debt market, including especially infrastructure support to facilitate market transactions. ...there are so many occasions of significance on this day! Looking back In a 2006 paper I wrote, I described the corporate bond market as “expanding but nascent”1. While our local currency bond market has grown substantially over the last decade, it still remains one of the smallest in the region. The numbers show that the outstanding local currency bonds represent only 34.2 percent of the country’s GDP, largely composed of government-issued debt. As market participants, you are very familiar with the challenges we face in our local currency debt market. Irregular supply and market fragmentation … Imperfections of pricing methodologies that lead to problems related to an unreliable yield curve… Limited ability of the market to offer hedging instruments… We have seen how these long-outstanding issues limit the growth and development of our debt market. Three months ago at a kick-off event at the Bangko Sentral ng Pilipinas (BSP), we began, what I called then, “a meaningful conversation” among market participants – prime movers and stakeholders in our debt market, from both the government and private sectors. Understanding the importance of a deeper and more active capital market, to complement bank lending and serve as an alternative source of industry financing and to manage risks, we made a bold commitment, and unveiled the Philippine roadmap for developing the local debt market. The roadmap The roadmap was deliberately designed to adopt a sequential approach, where urgent reforms and foundational issues are prioritized over an 18-month time frame. These include increasing the volume and consistency of treasury issuances across the key benchmark posts, organizing the repo market for government securities, and enhancing the government securities eligible dealers (GSED) program to support secondary market liquidity, developing the yield curve, and strengthening the market oversight framework. Moving the dialogue forward Since August, we have been working closely with you to implement the outlined initiatives. Following the endorsement by BTr of the implementation of the Government Securities Repo Program and the grant by the Securities and Exchange Commission (SEC) of a provisional license to MART as a self-regulatory organization (SRO), the Monetary Board approved last 1/3 BIS central bankers' speeches November 23, 2017, the assignment of a zero-percent reserve requirement (RR) on the repo transactions under the Program, issued through BSP Circular No. 983. The zero-percent RR together with the exemption from DST minimize friction costs on repo transactions that conform to international best practices. During last August’s workshop, I remarked that a meaningful conversation is only as good as the actions and changes that follow it. Today, we have a clearer understanding and fulfillment of our respective roles in the capital market reform agenda. Reform agenda operationalized Our capital market reform agenda officially unfolds with the inaugural repo trade under the Government Securities Repo Program. We also anticipate the announcement of the GSED market-makers later on. Our roadmap is being operationalized! Today’s inaugural launch of the organized repo market is a clear manifestation that we have, indeed, moved beyond conversations and plans, and have taken concrete actions to achieve our common objectives. The Government Securities Repo Program The Government Securities Repo Program is a key initiative under the Local Currency Debt Market Development Reform package. The BSP strongly believes that the establishment of an organized repo market is a key element in developing and deepening the domestic financial market. In particular, the organized interdealer repo market is expected to boost market liquidity and enhance price discovery as it gives GSEDs the ability to quote two-way prices. Further, the “deliver-out, true sale basis” feature of this instrument is expected to provide market makers the ability to take positions and provide them greater flexibility in managing their portfolios. We recognize, however, that the reuse of underlying government securities without appropriate safeguards can contribute to increased counterparty and settlement risks, as well as the build-up of excessive leverage in the financial system. The establishment of an organized repo market therefore addresses these concerns through appropriate financial market infrastructure, regulatory oversight, and prudent governance standards. Initiatives of the Bangko Sentral On the part of BSP, last year, we issued reporting requirements on repo transactions designed to capture timely and comprehensive transaction-level data. This will strengthen our financial surveillance, particularly in monitoring market trends and vulnerabilities in the repo market. In turn, this will enable the BSP to formulate effective policy responses to ensure continued stability of the financial system. Strategic financial sector reforms, such as the development of the local currency debt market, are high priority. The foreign exchange market reforms and digitization of the financial system are other critical and complementary reforms. Forward together The task of implementing reforms is fraught with challenges. It is a long journey but we are taking purposeful strides forward, together. To be sure, there is still much work to be done. There are further refinements in operational rules, data access, and monitoring processes. Other aspects of the roadmap need to be implemented. These are challenges that cannot be taken on or addressed by any one regulatory agency, institution, or industry association alone. Our partnership must endure. 2/3 BIS central bankers' speeches Congratulations everyone! Happy 120th Anniversary again to the Bureau of the Treasury! Thank you and good afternoon! 1 The corporate bond market in the Philippines, BIS Papers No. 26, February 2006 3/3 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 19th Inter-Collegiate Finance Competition (ICFC) Finals jointly organized by the Financial Executives Institute of the Philippines, through its Junior FINEX Committee, and JP Morgan Chase & Co., Manila, 28 November 2017.
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Nestor A Espenilla, Jr: The BSP and some ABCs Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 19th Inter-Collegiate Finance Competition (ICFC) Finals jointly organized by the Financial Executives Institute of the Philippines, through its Junior FINEX Committee, and JP Morgan Chase & Co., Manila, 28 November 2017. * * * FINEX President Benedicta Du-Baladad, Junior FINEX Chairman Lofreda M. Del Carmen and Junior FINEX Committee Liaison Officer Benito Soliven III, Members of the Board of Judges headed by Mr. Edwin Fernandez, ICFC auditors from Isla Lipana & Company (Pricewaterhouse Coopers), ladies and gentlemen, a pleasant afternoon to everyone. It is my pleasure to welcome all of you to the Bangko Sentral ng Pilipinas (BSP). The Financial Executives Institute of the Philippines (FINEX), through the Junior FINEX Committee (in cooperation with JP Morgan Chase & Company), has been successfully organizing and holding this inter-collegiate finance competition (ICFC) for the past nineteen years. We in the BSP support this endeavour. Like you, we firmly believe in the importance of promoting financial learning and literacy. We also recognize the transformative power of engaging the youth. his is why we have been a major sponsor of this ICFC event since 2007. I understand that we have here today (advancing to the finals) no less than twenty (20) schools representing Cagayan de Oro, Central Luzon, Central Visayas, Davao, North Luzon, Western Visayas, and the National Capital Region. Some of you have travelled far to compete and represent your schools! I am also very impressed to note that ICFC has gone global! There are two (2) teams from the University of Guam participating in these year’s finals. By besting more than eighty (80) other participating schools, all of you here already deserve to be commended! You have displayed tenacity and strength! In millennial speak – you are all #LODIs. (which I understand means “IDOL.”) Congratulations to all of you. Competitions like these serve as a valuable training ground to foster greater understanding of the various aspects of finance. It is important to create a deeper awareness of why finance professionals are valuable given our rapidly changing and technology-enabled financial services industry. The current global financial landscape is being shaped by digital transformation, evolving regulatory standards, and changing demands from our growing population of young, technology-savvy and upwardly mobile financial consumers (our very participants at the ICFC today make up this dynamic market!). The BSP, for its part, has embarked on a comprehensive financial sector reform agenda to proactively respond to this changing market landscape and conditions, while at the same time remaining committed to promoting the stability and soundness of the domestic financial system. The contestants here are young. You have so much potential. There was a time when I too was your age, an economics major at the University of the Philippines in Diliman. I joined the Central Bank in 1981, right after graduating. I believed that it was through the practice of economics, through the disciplines and sciences of banking and finance that I would be able to make a difference for our country. Now, 36 years later, I am Governor of the Bangko Sentral ng Pilipinas, heading an institution responsible for shaping monetary, banking and financial policies. Perhaps there will be those among you who will one day join our ranks here at the BSP. I realize 1/3 BIS central bankers' speeches that this is not a career fair. But since it is quite refreshing and exciting to be in a room full of so many young people who have shown passion for the financial profession, I will take this opportunity to speak about how fulfilling it is to be part of team BSP. Maybe I can influence you in your future choice of career. In the BSP, we engage in nation building through the formulation of monetary policy, banking supervision and the functioning of an efficient and reliable payments settlements system. We work so that there would be an enabling regulatory environment for businesses, commerce and industry to flourish and so that our citizens and firms could enjoy price stability as a foundation for making sound investment, consumption and savings decisions. Through the BSP’s pursuit of deep and meaningful financial and structural reforms through the years, along with policies and actions of National Government agencies and the indispensable cooperation of the private sector, the Philippines currently enjoys macroeconomic stability. We are currently one of the fastest growing investment-grade rated economies in the region with a better-than-market forecast GDP growth of 6.9 percent in the third quarter of 2017. This is our 75th consecutive quarter of economic growth since the Asian financial crisis! Amid this rapid growth, inflation remains within target, with estimates showing it will settle at 3.2 percent this year, 3.4 percent in 2018, and 3.2 percent in 2019, versus the official target band of 2.0 to 4.0 percent. We have maintained price stability through the BSP’s adoption of the Inflation Targeting framework in 2002. Our banking system is also strong and stable, with banks lending more to productive sectors. The BSP’s risk-based approach (which requires banks to put up more buffers when taking on more risks), regulations on risk management, macro-prudential measures, alignment of regulations with international standards while observing peculiarities of the domestic economy, all ensure that banks perform in a safe and sound manner and that the economy is guarded against shocks that may affect financial sector stability. It is indeed fulfilling (and a source of great pride) to work for an institution that is part of (and that influences) this narrative. Looking back on my journey and how I began like most of you here … full of ideas and brimming with passion, allow me to further share some ABCs which brought me to where I am today: 1. Aspire to achieve. Always have a deep-seated desire to achieve a certain goal. To do this, you need preparation and discipline. I am sure this resonates with all of you here as these are already the finals. All of you are here because of rigorous preparation. Apply the same tenacity, win or lose, as you leave the BSP Assembly Hall today. 2. Build character – have grit. Angela Duckworth, a University of Pennsylvania professor authored a bestselling book titled, Grit: The Power of Passion and Perseverance. She said grit, rather than talent or luck, predicts a high level of achievement. Grit is a combination of passion and perseverance; Finally 3. Chill. It is important to maintain a cool disposition and possess a calm confidence. Otherwise, it is so easy to be distracted, weakening earlier preparation and even knowledge. Sayang naman. Do not let this happen. With the background information I have shared with you on the BSP, and my ABC-tips – Aim to Achieve, Build Character (have grit) and stay Chill, I hope I have inspired you… not just for today’s competition, but even as you complete your studies and as you contemplate on how best 2/3 BIS central bankers' speeches to use your training in economics, banking and finance. Thank you and congratulations in advance to the winners who will later emerge. Again, just by making it this far… you are all #LODIs. A pleasant day and to everyone! 3/3 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Joint Meeting of Rotary Club of Manila, Rotary Club of Makati West, and Rotary Club of Forbes Park, Makati City, 4 January 2018.
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Nestor A Espenilla, Jr: Reflecting and acting on our immediate economic past, present and future Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Joint Meeting of Rotary Club of Manila, Rotary Club of Makati West, and Rotary Club of Forbes Park, Makati City, 4 January 2018. * * * A very happy and prosperous New Year to everyone! Rotary Club of Manila (RCM) President Jimmie Policarpio, Rotary Club of Makati West (RCMW) President Dave Caldwell, Rotary Club of Forbes Park (RCFP) President Edwin Salonga, distinguished officers (past and present), members, esteemed guests, ladies and gentlemen, magandang hapon! It has been a tradition of RCM, for the last twenty (20) years, to invite the Governor of the Bangko Sentral ng Pilipinas (BSP) to speak at its first General Assembly. As the BSP is turning twentyfive years this 2018 (your tradition is only five years shy of our Anniversary), this then makes me the fourth BSP Governor to continue this custom. This year, though, is unique, as I have the privilege of addressing not only members of Rotary Club of Manila but also Rotary Club of Makati West, and Rotary Club of Forbes Park. Time is a curious thing. As it passes, mindful individuals would do well to reflect on one’s past – taking stock of lessons learned and allowing oneself to be heartened by successes in the face of challenges... ponder on one’s present, think of how it has been molded by previous years and at the same time, embrace the future with an openness to change and a willingness to adapt. Historical and contemporary accounts have shown that engagement in reflection such as this accounts for how generations and nations have erstwhile survived and have, magnificently flourished. Sadly, the inverse is also true. We have seen how even in individual lives, a lack of reflection can result in ruin... It is thus my distinct privilege to discuss a tiny but significant piece of the narrative with you, focusing, on what you have requested me to speak about – the Philippine economic outlook given factors in the immediate past, work we are doing in the present, and plans to face challenges of the future. Hopefully this would inspire us and aid us in thriving even more. In doing so, I have structured my message in four (4) parts: (1) recent developments in the global economic environment and its varied effects on financial and banking stability with mention of the BSP’s policy thrusts and initiatives; (2) BSP’s delivery on its mandate of maintaining price stability; and (3) the challenge of digitization and how our payments and settlements system plays a role; and (4) finally, I shall share the BSP’s mindset for embracing the future. It bears noting that in framing the message this way, I have touched on our mandates, and what the BSP regards as its pillars of central banking. The global economy and domestic financial stability 2017 saw increased momentum in global economic growth. Many central banks reverted to more neutral positions, while some signalled the possibility of a tighter monetary policy stance over the horizon. Positive US growth momentum prompted the US Federal Reserve, just last month, to raise its target fed funds rate anew. The European Central Bank continues to ponder on how and when to start tapering its own asset purchase program. 1/4 BIS central bankers' speeches With the prospect of higher home market interest rates, some funds have moved back from emerging markets. Last year, we saw some capital flow reversals. But despite an overall balance of payments deficit, our year ended with a very manageable external position. In 2017, we also saw the peso’s depreciation. Even as foreign direct investments flowed in, a reversal of foreign portfolio investment flows as well as loan prepayments was felt in the financial account. The BSP’s first line of defense has been to maintain a flexible exchange rate while providing foreign currency liquidity from its amply supply of FX reserves to manage sharp movements. But we also saw a recovery in our exports as major markets picked up. This bodes well for our current account in the coming year. This partially offsets the potential increase in imports of raw materials and manufactured goods due to accelerating public investment in infrastructure. Moreover, the steady inflow of remittances from overseas Filipinos, receipts from BPOs and tourism are seen to provide solid buffers to maintain a manageable balance of payments. Despite uncertainties and volatility in the global economy and financial markets brought about by Brexit and inward-looking and populist policies of the US, domestic sources of strength have kept the Philippine economy growing strongly last year. In the first three quarters of 2017, our economy grew by 6.7 percent due to robust production and domestic spending. Market expectations were surpassed and we remained one of the fastestgrowing economies in Asia. A sound and liquid financial system also provided support to Philippine economic activity in 2017. Banks’ balance sheets expanded with a double-digit growth in assets and deposits. Credit continued to flow steadily to productive sectors and sustained efforts by the BSP and the financial sector to enhance liquidity and risk management practices kept threats to financial stability at bay. But we are not resting on our laurels. While banks have provided resilience and support for economic growth, we also believe in developing deeper and more efficient domestic capital and money markets over the medium term. This will reduce the country’s reliance on external funding and help insulate the country from external sources of risks. Diversifying the sources of funding for economic activity also allows for better distribution and management of risks in the entire financial system. We have started this by implementing the Philippine local currency debt market development roadmap towards a more balanced financial ecosystem where the banking system is complemented by a deep and liquid capital market. The reform agenda officially unfolded in November 2017 with the launch of the Government Securities Repo Program. This was supported by enabling policies of zero-percent reserve requirement and exemption from Documentary Tax Stamp (DST) which minimize friction costs on repo transactions under said Program. Over the year 2018, we shall be rolling out, in coordination with other government agencies, industry associations, and market participants, the remaining initiatives under the roadmap. This includes the launch of the enhanced government securities eligible dealers (GSED) program to support secondary market liquidity, enhancements in financial market infrastructure, increase in volume and consistency of treasury primary issuances, and the issuance of improved interest rate benchmark guidelines. Reinforcing our efforts to further build resilience of our domestic economy are complementary foreign exchange (FX) reforms. Maintaining a flexible and market-determined exchange rate can better insulate our economy from external shocks that could disrupt the pace of economic 2/4 BIS central bankers' speeches growth. In this regard, we have embarked on more ambitious FX reforms to achieve more efficiency and ease of doing business. Over the medium term, the FX reform agenda aims to encourage innovation, improve transparency, facilitate price discovery and enhance market conduct, towards a deeper and better organized FX market. The reforms are undertaken in well-calibrated and carefully sequenced phases, considering prevailing conditions in the local and global economy, and ensuring that measures are in place to allow the BSP to continue to capture data on these transactions for analysis of developments, policy review and crafting of appropriate measures. This started with further liberalization of FX rules covering foreign loans which the Monetary Board approved last December 21, 2017. It features the lifting of prior BSP approval for purely private sector foreign loans that can be serviced from the banking system. Further, registration processes were streamlined, registration fees were waived, and documentary requirements were further reduced. A window was likewise opened for six months providing an amnesty period during which private sector loans previously obtained without prior BSP approval can register and be eligible for servicing from the banking system. These changes commence on January 15, 2018. We are currently drafting further amendments to adopt similar measures on trade and non-trade transactions, and on foreign investments. The BSP also closely monitors for signs of excessive credit and leverage. We stand prepared to deploy appropriate measures such as macroprudential policies to prevent economic overheating. In this regard, the BSP intends to build on its existing frameworks for market surveillance and risk management to help identify and mitigate the build-up of systemic risks at an early stage. We have remained vigilant and proactive as we launch new and ambitious reform initiatives. These provide the solid foundation for confidence in our prospects for 2018 and beyond. Just this December, Fitch Ratings upgraded the country’s credit rating anew, noting that sound policies and strong investor sentiment continue to underpin the country’s growth momentum. Price stability: targets and results In 2017, consistent with market expectations and projections, inflation slightly rose due mainly to higher international crude oil prices. Nonetheless, average inflation stayed firmly within the National Government’s target range of 2-4 percent. We expect inflation to remain within target range until 2019. However, further increases in global crude oil prices may result in inflation trending in the upper bracket of the target range. Once the National Government’s tax reforms take effect, there could be some transitory pressures on prices. On the whole, these reforms will result in productivity gains over the medium term. Also with these tax changes in mind, BSP looks out for possible price spirals. You can count on us to timely adjust the monetary policy stance to ward off any threat to our inflation target. Meanwhile, further refinements to the interest rate corridor (IRC) framework, which we introduced in 2016, should ensure more effective transmission of any monetary policy adjustments to the real economy. Payments and settlements system and digitization An efficient, secure, and reliable payments and settlements system reduces the cost of exchanging goods and services. It is essential for the smooth functioning of money and capital markets. The development of accessible payment systems is also crucial towards promoting 3/4 BIS central bankers' speeches financial inclusion. This is why the BSP continues to champion the development of the country’s backbone for payments and settlements. Two years since its launch in December 2015, the National Retail Payments System (NRPS) initiative reached critical milestones in 2017. An industry-driven selfgoverning body was established to drive the responsible development and operations of the retail payment system. Further, the BSP adopted the NRPS framework through the issuance recently of Circular No. 980 which requires BSP-supervised financial institutions (BSFIs) to ensure that the retail payment systems they participate in demonstrate sound risk management and efficient interoperability. One of the two priority multi-lateral Automated Clearing Houses (ACHs) was launched. This is PESONet. Through PESONet, the government, private businesses, as well as individuals will be able to conveniently initiate electronic fund transfers and recurring payments to each other’s transaction account. These are all part of the initiatives for the Philippines to transition from a cash-heavy to a cash-lite economy. Other automated clearing houses will also be launched this year, including “InstaPay”, which enables 24/7, real-time low-value electronic fund transfers that will support e-commerce. The BSP has also set its sights on digital innovation to reach the financially unserved and underserved. For this reason, we support the inter-agency initiative to establish a biometric National Identification system to improve the accessibility and delivery of financial services. We realize this will require a responsive security management framework to help guard our financial system against cyber-threats. In this regard, we have upgraded our preparedness. 2018 and beyond: taking on challenges Characteristics of strength, resilience and the capability to innovate will come in most handy as we navigate through the challenges this year. An alarmist mindset is not necessary as we draw from our experience. At the BSP, we try very hard to be pro-active. We carefully survey the landscape for potential threats. We ensure that our tools to deal with them remain sharp. We strive to stay on top of developments, and to always be prepared, so that we can address risks appropriately and in a timely manner. This mindset motivates much of the BSP’s policy thrusts not just in 2018 but beyond. Our intention is to continue laying down foundations for the economy to withstand potential shocks. In closing, while the coming year is likely to bring continued challenges for the Philippines, we are well-placed to deal with these challenges. The country’s firm growth momentum and manageable inflation environment provide ample space to respond appropriately to evolving domestic and global conditions. On the part of the BSP, we have enough instruments in our expanded toolkit to address the challenges that could arise. On this note, mindful of the past, vigilant in the present and excited for the future, let me wish everyone a happy and fruitful New Year. Thank you, and good afternoon. 4/4 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Signing of the Memorandum of Agreement between the Bangko Sentral ng Pilipinas and the Philippine Payments Management, Inc. (PPMI), Manila, 12 January 2018.
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Nestor A Espenilla, Jr: Committed Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Signing of the Memorandum of Agreement between the Bangko Sentral ng Pilipinas and the Philippine Payments Management, Inc. (PPMI), Manila, 12 January 2018. * * * Fellow members of the Monetary Board, Antonio S. Abacan and Felipe M. Medalla, Chairman of Philippine Payments Management, Inc. (PMMI), Mr. Justo Ortiz, PPMI Board members; guests and leaders of the payments industry; E-Peso team (led by Mr. Mert Tangonan); fellow BSPers, ladies and gentlemen, a very good morning to all of you. In today’s programme, this part – this message – is identified as “the keynote address”... there are various definitions of “keynote”... with its main purpose being, “to arouse interest, unity, and enthusiasm in a group.” But there is no lack of interest, unity and enthusiasm here. There is, and has been ...since the launch of the NRPS initiative in December 2015... great commitment to the vision of creating an inter-operable ecosystem supporting fluid electronic fund transfers and payments from one account to another. It was only on August 30 last year that Philippine Payments Management was incorporated... from then until this day, there was, no doubt detailed preparation, collaboration and discussions between us... We know that all great and worthy goals are reached in sure, purposeful and determined steps. We at the Monetary Board and the Bangko Sentral thank PPMI for taking yet another step with us, manifested by the earlier signing of our Memorandum of Agreement. Thank you for being here today, not only in your individual capacities as distinguished executive officers of the dynamic financial institutions you represent...not in only in your impressive roles as members of the Executive Committee of the Bankers Association of the Philippines... But as members of the Board of the Philippine Management, Inc.... as a collegial body... as chief stewards of a modern, responsive and globally-competitive Philippine retail payment system. The signing of our memorandum of agreement marks certain mutual recognitions and binds us each, to worthy undertakings. On our part, the signing of the MOA cements and formalizes our recognition of PPMI as THE industry-led self-governing payment system management body for retail payment systems in the country. The MOA also expresses our commitment to provide continuing guidance so that the industry’s activities remain aligned and harmonized with the NRPS Framework. We at the BSP thank the Chairman Tito and PPMI for this declaration of support and dedication. We note with gratitude, your acknowledgment of the BSP’s crucial role as primary overseer of the nation’s payment systems. As our reliable and invaluable ally, we have no doubt that PPMI will support the proper implementation of the NRPS framework; ... monitor compliance with its principles; ... conformance to agreements of our automated clearing houses (ACHs) ... and will be powerfully instrumental in strategically driving electronic payments through these ACHs (ACHs that have been, and are yet to be launched). We look forward to how PPMI will seize opportunities presented by technological innovations to 1/2 BIS central bankers' speeches improve operational efficiency... We anticipate that it will engage service providers with robust systems and infrastructures... We are confident it will lead and assist as novel products and services that cater to the evolving needs of clients here and abroad are developed... We anticipate that PPMI will formulate strategies infused with system-wide, and industry-wide perspectives rather than limited and restricting institution-centric approaches. What exciting prospects for us all! More so, what empowering possibilities for so many Filipinos! I believe we are mutually committed to this endeavor because we realize it shall have a great effect on many of our countrymen. We know that widespread implementation of interoperable payments will boost the ordinary Filipino’s confidence to make economic decisions. We hope that capabilities – even of the now unserved and underserved – to execute financial transactions will be increased! Today, this day of Commitment, is indeed another NRPS milestone worth celebrating. I close with the exuberant declaration that we in the BSP, affirm and celebrate our partnership with PPMI. Together, we are allies and catalysts for revolutionary reforms in the payment space and in pursuing NRPS goals. 2/2 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the YPO event "PH Business and Economy: Outlook and Forecasts from the BSP Chief", Manila, 17 January 2018.
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Nestor A Espenilla, Jr: Generativity Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the YPO event "PH Business and Economy: Outlook and Forecasts from the BSP Chief", Manila, 17 January 2018. * * * Good evening. I am very pleased to be here. I thank YPO and YPO Gold Philippines for the opportunity to speak at this important gathering. This is quite a forum of business leaders and dynamic CEOs! I understand that an application to join YPO must be approved before the applicant reaches his or her 45th birthday… Your youth, your energy, your skills, your competence, and the level of resources at your disposal make you a force to be reckoned with…and a significant catalyst for change. What’s so special about the 40 to 45-year old mark? As you know, these years are the gateway to mid-life. You will, or probably already have, discovered that this is a positive thing. For many, it is a time where one has a keener acceptance of self, a greater sense of security… where mental and emotional wellbeing has found equilibrium… and where one is more focused on developing generativity1… Generativity. I like that word. One definition I found on the web is that it is a need to nurture and guide younger people, and contribute to the next generation… It is also defined as the ability to transcend personal interests, a psychological concern for legacy, and desire to expand one’s influence and commitment to family, society, and future generations. In my readings, there was even a warning to middle-aged adults who fail to develop generativity. He or she, who does not transcend oneself, is said to experience stagnation, or self absorption. In this regard, YPO, with its focus on engagement, learning and growth is a strong proponent of Generativity. For this, I congratulate you all whole-heartedly. Generativity is a quality most cherished by the BSP as it pursues its mandates for the benefit of not just the present, but of future generations. As YPO clearly feels the same, we begin on common ground today. …. There is much room for the practice of this trait as we engage in nation building together. The Ripe Groundwork for Greater Nation-Building When I first assumed the Governorship of the Bangko Sentral in July of last year, I knew I had inherited a strong economy and a dedicated institution committed to sound macroeconomic management and prudent financial supervision. I knew that my task was not to rebuild, but to build on already strong and built foundations. And what a blessing this was! The same conditions hold true for each Filipino who desires and is in a position to make an even greater difference for the nation… like you who are in this audience… The current economic landscape is healthy and robust. It is ripe and ready to receive our added investments of time, energy, creativity and resources. It is prepared (and being even better prepared) for us to work together better to include more of our countrymen into the financial system so that they too could participate and eventually contribute to its continued flourishing. The Philippines is one of the world’s fastest growing investment-grade economies. We 1/4 BIS central bankers' speeches registered a 6.9 percent GDP growth in the third quarter of 2017 and we have enjoyed 75 quarters of uninterrupted economic growth. Last December, acknowledging the sustained robust growth and macroeconomic regulatory environment, Fitch upgraded the Philippines to a solid investment grade rating of BBB. We are optimistic that this high growth will continue and we will meet the full-year target range of 7 to 8 percent GDP growth in the medium term, or from 2018 to 2022. Demand for Philippine exports is expected to further increase with the economic recovery of our major trading partners, as well as diversification of our export markets. Foreign investors have shown an increased interest in the Philippines. The Government is actively increasing the country’s competitiveness by building infrastructure, promoting the ease of doing business, and lifting restrictions on foreign ownership for certain industries. Amidst this economic robustness, inflation has remained manageable. In 2017, inflation was at an average of 3.2 percent. It is expected to be within the target of 2 to 4 percent from 2018 to 2019. The balance of payments is manageable and our gross international reserves of USD 81.5 billion as of end-December 2017 stands as strong buffer against foreign exchange volatility. The Philippine banking system is safe and sound, growing rapidly its resources while demonstrating solid indicators of prudence, capital adequacy, liquidity, and profitability. The Philippines is, no doubt, entering a period of immense opportunity. There is a confluence of factors such as demographics, technological advancements, solid macroeconomic fundamentals, plus the Government’s commitment to provide an enabling policy framework to ensure sustainable and inclusive growth. The private sector, equipped with the resources, business acumen and networks to support sustainable business and innovations are in a unique position to make things even better… to engage in acts of Generativity that can uplift the quality of life of all Filipinos. Generativity: We are what survives us Erik Erikson, the Psychoanalyst that coined the term, “Generativity” had a powerful insight: “we are what survives us.” Generativity is creating the very future. In the BSP, this is our goal. First, we envision and are committed to a future of greater economic resilience; of continued price stability; banking and financial stability; and an efficient and effective payments settlements system…. We envision continuity in the implementation and soundness of macroeconomic policies, banking and financial reforms, regulations and initiatives that were carefully put in place years and decades ago. In addition to this, we envision even more. When I became Governor, I articulated my plans in the phrase, “Continuity Plus Plus.”... This refers to the goal of greater, widespread and felt financial inclusion; of a cash-lite society where we can leverage on digital technology and innovation in the delivery of financial services and products; of deeper capital markets; and of targeted FX reforms that make cross-border business easy. Foremost in the BSP’s plus-plus agenda is financial inclusion. Despite the gains reported by the economy, 1 in 5, or 21.9 million Filipinos were considered poor in 2015. Five percent of our working population is unemployed as of October 2017. A lot more are under-employed. 2/4 BIS central bankers' speeches The BSP believes that for progress to be meaningful, more must be included in the workings of the financial system. We advocate broad based growth through financial inclusion. In 2015, statistics showed that 43.2 percent of adults save money, but less than a third of the savings are kept in banks. We need to harness the power of technology to expand the reach of affordable and efficient financial services. The BSP supports banks’ responsible fintech innovations considering their link to financial inclusion, as well as the resultant efficiency in delivering and supporting financial transactions. The BSP is driving the upgrade of the country’s payment system by promoting electronic payments and facilitating inter-operability for faster settlement of transactions. In November 2017, we launched the PESONet, the first Automated Clearing House (ACH) under the National Retail Payment System. The PESONet is envisioned to be the electronic alternative to the paper-based check system. Next quarter, we are targeting to launch with the industry another priority ACH, the real-time low value push payment scheme called InstaPay. It is designed to facilitate small value payments and will enable merchants to accept digital payments from customers in real-time using cards or any digital device especially smartphones. Another thrust under the Plus Plus agenda is the development of domestic debt markets as a viable alternative to bank funding. In August 2017, the BSP, together with the Department of Finance, the Securities and Exchange Commission, and the Bureau of the Treasury unveiled a roadmap on Local Currency Debt Market Development. Operationalization of the roadmap commenced with the launch last November 2017 of the interdealer government securities repurchase program. The BSP is also introducing reforms to our FX regulatory framework. The reforms will promote greater ease in international business dealings; as well as the functioning of transparent and efficient foreign exchange markets compatible with a domestic economy that’s better integrated into the global economy. Generativity in Technology May I encourage you as movers and shakers of the economy, as leaders, to capitalize too on innovation and technology for the efficient delivery of your products and services. Not only is this an act of generativity – as such will engage more people and empower them… But interestingly, there is an exponential force that comes, and opportunities that are created from technological innovation itself. For instance, the internet has acted as a generative force allowing users to create and communicate in previously unimagined ways. This was not foreseen by its creators! Generativity in this context is the ability of a technology platform or technology ecosystem to produce new output… This is precisely our goal in the BSP as we look at technology and its role in financial inclusion. Perhaps through technology, your businesses may also capitalize on opportunities offered by agricultural value chains, both as a viable business and as an inclusive growth strategy. This is an opportunity to improve the lives of 11.1 million Filipinos employed in the agriculture industry alone, as well as MSMEs that are engaged in production and related activities such as 3/4 BIS central bankers' speeches processing, distribution and trading! While there will, no doubt, be rich business opportunities as new markets are tapped by new tools and technology, the ultimate goal is to reach the unbanked and underserved populace. Jack Ma, founder and executive chairman of Alibaba said the goal of “Fintech or Techfin is to rebuild the system with technology…to solve the problem of a lack of inclusiveness.” This is clearly Generativity in action, both in terms of the psychological need to build beyond oneself, but also in terms of how techonology can produce and influence new (and hopefully productive and positive) behaviours. How auspicious! How exciting! We, at the Bangko Sentral ng Pilipinas invite you to share our enthusiasm. Thank you for your kind attention. 1 Coined by the psychoanalyst Erik Erikson in 1950. 4/4 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Annual Reception for the Banking Community, Manila, 19 January 2018.
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Nestor A Espenilla, Jr: Continuity plus-plus, staying ahead of the curves Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Annual Reception for the Banking Community, Manila, 19 January 2018. * * * Good evening. It is my honor and pleasure to welcome you to the BSP’s Annual Reception for the Banking Community. This is the first reception I am hosting as Governor of the Bangko Sentral ng Pilipinas. On behalf of my co-hosts, Monetary Board members, Finance Secretary Sonny Dominguez, Phillip Medalla, Jun de Zuniga, Val Araneta, Peter Favila and Tony Abacan, I thank you sincerely for accepting our invitation, and your presence tonight at our historic Fort San Antonio Abad. In the last six (6) months, I have spoken at various venues. Perhaps most of you have already heard or read about a phrase I coined when I became BSP Governor in July 2017. I am referring to “Continuity Plus Plus,” a catchphrase for our strategic direction. “Continuity Plus Plus” first appreciates that there is an already strong foundation to support a fast-growing economy and the opportunities it presents. Buffers are in place to better prepare us for external risks. In this regard, stability demands continued dedication to the maintenance and strengthening of this foundation and buffers. “Continuity Plus Plus” then also recognizes the need f or additional strategic financial sector reforms to strengthen these economic buffers and pursue broad-based growth. Review of 2017. 2017 was another year in the country’s positive economic narrative. The country’s strong fundamentals, founded on the pursuit of broad-based reforms, provided ample support for sustained expansion. In the third quarter of 2017, the economy grew by 6.9 percent, representing 75 quarters -- the platinum equivalent -- of uninterrupted growth! Inflation averaged 3.2 percent, well-within the target range of 2-4 percent. Our external position is strong. The peso’s movements remained broadly in line with those in the region. International reserves stood at US$81.5 billion, covering more than 8 months’ worth of imports of goods and payment of services. The Philippine banking system is safe and sound, with robust expansion in credit and demonstrating capital adequacy, asset quality, liquidity, and profitability. Outlook and Assurance of Continuity. 2017 ended on a solid footing for the Philippine economy and we kicked-off 2018 in high gear. As we move forward, the BSP remains optimistic and vigilant. Our primary challenge concerns risks to the inflation outlook given external headwinds. The unwinding of accommodative policies in advanced economies could have knock-on effects, contributing to potential capital outflows from emerging economies like the Philippines. Nevertheless, despite some uncertainty in oil market prices, production outages and geopolitical concerns, we expect commodity prices to remain broadly stable in the coming months. Our inflation forecasts are being updated to consider the recent increase in crude oil prices, implementation of the tax reform program and peso movement. We remain vigilant and ready to timely respond to second-round effects and possible shifts in inflationary expectations. 1/3 BIS central bankers' speeches The BSP also endeavors to maintain a sound and stable financial system, monitoring for signs of excessive credit and leverage. We are building on existing frameworks for market surveillance to take appropriate action. We will continue to pursue proactive prudential reforms. Earlier this month, the Monetary Board approved the adoption of minimum leverage ratio requirements. These will take effect on July 1, 2018. We will complete roll-out of the liquidity management framework, including amendments to the Basel III liquidity coverage ratio (LCR) standard; issuance of complementary minimum liquidity ratio and net stable funding ratio standards; and intraday liquidity reporting guidelines. Financial Market Efficiency in a Growing Economy. One theme that you should expect to see from our reform agenda is market efficiency. It is important that markets discover prices on their own and for self-correcting mechanisms to be encouraged. We are confident that this will increase financial markets’ abilities to absorb shocks… so that the BSP can focus on its core mandates. Notably, banks have provided resilience and support for economic growth throughout the years. But we also believe in developing a deeper domestic debt market to support long-term funding needs of the economy and diversify risks within the financial system. This year, in coordination with other government agencies, industry associations, and market participants, we are rolling out remaining initiatives under the Philippine local currency debt market development roadmap. Relatedly, we are closely tying-in the reform of reserve requirements with broader debt market reform to allow efficient absorption of liquidity and their mobilization to support long-term investments. We would also want to see a deeper and more liquid foreign exchange (FX) market that supports a flexible and market-determined exchange rate. This will further fortify our defenses against external shocks. Ambitious FX reforms towards a better organized FX market are being undertaken. Leveraging on the Technological Exponential Curve. Alongside these reforms, we will continue to leverage on digital innovations to expand reach. The challenge to us all is how we can innovate and leverage on this rapid transformation and use it in the efficient delivery of financial services and products. In the BSP, efforts in this area are exemplified in the National Retail Payment System (NRPS) initiative. Two years since its launch, the project has reached critical milestones. An industrydriven self-governing body was established to drive the responsible development and operations of the retail payment system. Recently, the BSP adopted the NRPS framework through Circular No. 980 to achieve a truly interoperable payments system. These milestones are the result of tremendous efforts among market participants and the BSP, a demonstration of cooperation in order to achieve a truly interoperable payments system. Last January 12, 2018, a memorandum of agreement with the Philippine Payments Management, Inc. (PPMI) was signed. Another automated clearing house (ACH) – aside from PESONet – will also be launched this year. “InstaPay” will enable 24/7, real-time low-value electronic fund transfers that will support e-commerce. Pursuing Exponential Financial Inclusion. The wonderful thing about financial inclusion is that once one person is enabled and encouraged by the transformative value of such empowerment, he or she is most likely to share ideas and the experience with others.. Certainly the exponential 2/3 BIS central bankers' speeches curve of financial inclusion is one we pursue and celebrate. We see technology as a tool to achieve this goal of accelerated financial inclusion. The BSP will continue to promote digital innovation and an enabling regulatory environment to reach the financially unserved and underserved. We support the inter-agency initiative to establish a biometric National Identification system to improve accessibility to, and delivery of, financial services. We introduced the framework for basic deposit accounts featuring liberalized onboarding, minimal opening amounts, zero percent reserve requirements, and the waiver of maintaining balance and dormancy charges. We have adopted the “branch-lite” concept to enable banks to further expand their networks. Closing Thoughts While our mandates in the BSP remain the same, our operating environment is constantly changing. There is a need to adapt and to stay ahead of developments… The BSP will continue to provide an enabling environment for sustainable and broad-based economic growth, deploy timely measures to ward off any potential threat to financial stability, strengthen domestic sources of resilience, and leverage on technology and digitization to pursue more inclusive growth. Let us now offer a toast (May I request the members of the Monetary Board to please join me on stage)… Dear friends from the banking and financial industries, industry associations, colleagues from government, the private sector, media and the academe, let us raise a glass to our continued partnership… May we multiply our efforts through greater collaboration and cooperation so we could stay ahead of all curves and bring about exponential returns for our beloved Philippines and our fellow Filipinos. Cheers! 3/3 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Management Association of the Philippines' (MAP) Economic Briefing 2018 and General Membership Meeting, Manila, 6 March 2018.
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Nestor A Espenilla, Jr: Having the foresight to future-ready the economy Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Management Association of the Philippines’ (MAP) Economic Briefing 2018 and General Membership Meeting, Manila, 6 March 2018. * * * President Ramoncito Fernandez; MAP officers and members; special guests; ladies and gentlemen, good afternoon. I am grateful to be here at the Management Association of the Philippines’ First Economic Briefing for 2018. I shall give this message in two parts. First, I will give an update on the Philippine economy and then, I will share our exciting prospects. Updates on the Philippine Economy We at the BSP are optimistic. This optimism is shared. According to the World Bank, “The Philippines will continue to be the fastest-growing economy in the Association of Southeast Asian Nations (ASEAN) [for 2018–2020], despite some stabilization of investment growth.” Moreover, growth projections from third-party assessors are not far from the national government’s target of 7.0-8.0 percent growth in the next three years. We note that growth achieved over the past several years is broad-based and comes from various sources. On the production side, the share of industry output (e.g., manufacturing and construction) has been expanding and is a welcome transformation. On the demand side, growth is buoyed by both robust private consumption and capital investments. Another source of confidence comes from sustained investments in job-creating industries. There was double-digit year-on-year expansion of approved investments for the first three quarters of 2017. Moreover, the favorable inflation environment enables and promotes greater economic activity. For six consecutive years (i.e., 2009–2014), as well as in 2017, headline inflation has been within the national government’s inflation target range. For February 2018, year-on-year headline inflation increased to 4.5 percent from 4.0 percent in January using the 2006-based Consumer Price Index (CPI) series. Likewise, headline inflation rose to 3.9 percent in February from 3.4 percent in the previous month using the 2012-based CPI series. The uptick in headline inflation was traced mainly to higher prices of selected food and non-food items. In particular, rice prices increased due to the end of the harvest season. At the same time, inflation for transport, restaurant, and miscellaneous goods and services also went up. The year-to-date average of 4.2 percent using the 2006-based basket was slightly above the Government’s announced inflation target range of 3.0 percent ± 1.0 percentage point for 2018 while the year-to-date average of 3.7 percent using the 2012-based basket remain within the Government’s announced inflation target range. The first round price effects of TRAIN are evolving more or less as expected. We continue to see the upward inflationary effects as transitory. However, we are carefully assessing next round effects and how inflation expectations could be affected. The various social safety nets 1/5 BIS central bankers' speeches complementing the TRAIN are expected to temper these second round effects. Moreover, the resulting improvement in productivity will likely moderate inflation pressures over the medium term. Nevertheless, the BSP will remain watchful against signs of higher inflation becoming more broad-based and persistent to ensure that inflation expectations remain consistent with the target. Domestic liquidity and credit dynamics remain accommodating to our expanding economy. Credit expansion is accompanied by solid demand for loans across key economic sectors. Further, the Philippine banking system capped 2017 with sustained growth in assets, deposits, and capital. This was accompanied by improved asset quality, firm liquidity position, and strong capitalization. Overall, the Philippine banking system remains sound and stable. We expect these improvements to continue. The Philippines’ external position also continues to be manageable amid global headwinds. The BOP deficit is a reflection of an economy that is growing rapidly in a way that is sustainable. The current account balance also mirrors the saving and investment behaviour of the economy. Our savings investment gap has stayed positive since 2003 (hence the CA surpluses during this period) but has started to converge in 2015 due mainly to the rise in investments and increase in infrastructure spending. Over time, these investment led economic activities will result in the expansion of the economy’s potential capacity. The robustness of the country’s external position is anchored by our large GIR and secondary buffers such as sustained foreign direct investments, remittances and BPO receipts, along with investment grade-rating that guarantees ready market access for any equity and debt financing requirement. Meanwhile, the peso continues to flexibly reflect the day-to-day market operations. Exchange rates act as automatic stabilizer if they move in a way that dampens the effects of shocks on domestic output. In short, the disequilibrium gets corrected automatically with the change in the exchange rate. There will be volatility, runs and corrections, but the peso is not expected to meltdown because the underlying economic fundamentals of the economy are healthy. The depreciation of the peso has mirrored the continued bullish sentiment on the economy’s growth performance and prospects. These are evident in the (1) strong demand for imports, residents’ increased direct and portfolio investments abroad, and (3) debt prepayments by both the public and private sectors. All of these contributed to an increase in the demand for dollars and dollar-denominated assets. Ladies and gentlemen, the Philippine economy enjoys a sustainable growth momentum. Over the medium term, the Philippine economy is expected to expand by above six percent annually in the next three years. But this does not warrant complacency. For both the government and the private sector, disruptive forces must keep us on our toes. Prospects for the Philippine Economy This brings me to the second part of my message as I share our prospects for the Philippine economy. I feel right at home and in my element as I engage in sharing our plans... In this era of technological breakthroughs and radical innovation, MAP could not have chosen a more timely and relevant theme for its activities this year. BSP’s planned game changing reforms and initiatives align with your theme. “Competing in the age of disruption.” I like that. It shows 2/5 BIS central bankers' speeches foresight. Foresight does not necessarily mean being able to predict the future. Rather, I believe it means having insight on relevant factors and to allow for flexibility and optionality as the future unfolds. And the future is already here. It is unfolding. Indeed, the way governments tackle policymaking and the way businesses operate are being altered by megatrends. These include a rebalancing of the world economy, changes in demographics, and the rise of disruptive technologies, to name a few. These trends cannot be ignored. Complexities such as these make it challenging to frame economic policy. Acknowledging this, the Bangko Sentral under my Governorship has set its sights on gamechanging financial sector reforms. These initiatives aim to gear up the financial system to be very efficient, flexible and market-driven so that it can be innovative, competitive, and ready to adjust to the needs of customers. Further, allowing markets to discover prices on their own and encouraging self-correction mechanisms will make our economy more resilient and future ready. First - the BSP, together with other government agencies, industry associations and market participants, have rolled out initiatives to further develop the local currency debt and foreign exchange (FX) markets. The reform agenda on debt markets officially unfolded in November 2017 with the launch of the Government Securities Repo Program. Last February 19, 2018, the Bureau of the Treasury released the implementing guidelines for the enhanced Government Securities Eligible Dealers (GSED) Program. This program aims to improve the primary debt market and increase the liquidity and depth of the secondary market. We are looking forward to further enhancements in the market infrastructure and the issuance of improved interest rate benchmark guidelines toward a more reliable yield curve. We are also undertaking ambitious FX reforms towards a deeper and better organized FX market. This includes further liberalizing FX rules to reduce cost of doing business and improve data capture. Last January 15, 2018, new rules that lifted prior BSP approval and streamlined registration processes for purely private sector foreign currency loans took effect. A window was likewise opened for six months providing an amnesty period during which private sector loans previously obtained without prior BSP approval can register and be eligible for servicing from the banking system. To date, the BSP has received 21 loan registration under this amnesty window covering around USD489 million outstanding balances. We expect captured data to increase further as the simplified rules gain traction. Currently, we are finalizing an exposure draft amending FX rules on foreign investments. Further amendments to adopt similar measures on trade and non-trade transactions shall likewise be undertaken. Over the medium term, we plan to enhance governance and FX market oversight that will improve transparency, price discovery and market conduct. Ultimately, we want to see a more liquid FX market that supports a flexible and market-determined exchange rate. Relatedly, last February 15, 2018, we announced yet another major and bold financial market reform initiative... We began phased reduction of our ultra-high reserve requirement regime to allow efficient absorption and mobilization of liquidity. The Monetary Board approved the reduction in the reserve requirement ratio (RRR) by one percentage point as an operational adjustment to support the BSP’s shift towards a more market-based implementation of monetary policy. This took effect last March 2, 2018. There is a calibrated speed and a purposeful timing in carrying these reductions out. The purpose is to promote a more efficient and level financial system which is less biased against 3/5 BIS central bankers' speeches deposit-taking financial institutions. The purpose is to lessen market distortions which create inefficiencies. The purpose is to shift to market-based monetary instruments for more effective monetary policy transmission. We have heavily relied on reserve requirements for a long time in a situation of underdeveloped banking and financial markets and limited open market operation tools. This is no longer the case for the Philippines. Our financial system is more sophisticated, disciplined, and resilient; our economy is much stronger today. Further, the BSP has attained sufficient progress since the adoption of the interest rate corridor (IRC) framework in 2016 which provides us ample space to mitigate potential liquidity impact of a phased reduction in reserve requirement via off-setting auction-based monetary operations. There is misconception that these phased reductions in the reserve requirement signal easing of the monetary policy stance. This is certainly not the case — and I cannot emphasize this enough — this is an operational adjustment that is part of innovative financial sector reforms that we are currently implementing. Any ensuing excess liquidity is to be siphoned off by BSP’s dynamic open market operations and transactions with the national government. Further, the flexibility of the exchange rate provides additional adjustment mechanism.... Therefore, analysts’ fears that this will fuel more inflation is based on an incomplete analysis of the impact of this operational adjustment. Moreover, to the extent that speculators use RRR reduction as a pretext for peso depreciation, BSP participates in the market to manage excessive volatility. We believe this can effectively drain peso liquidity from the system. There will be self-correction, which is how efficient markets work. Ultimately, the BSP has many options to maintain firm monetary control. Shifts in monetary policy stance will continue to be signalled through changes in the policy rates. Thus, analyst concerns of ensuing looser monetary policy is really unfounded. Second - Regulators like the BSP must foster an enabling ecosystem where competition and responsible innovations are encouraged to thrive. We believe that regulations should not stand in the way of market developments. At the BSP, we have strategically opened up the banking system to competition. For instance, since the enactment of the Foreign Banks Liberalization Law in 2014, the Monetary Board has approved 12 foreign bank applications and 5 representative offices. Similarly, our flexible approach to financial innovation encourage competition from new players, including fintech companies. Leveraging on safe, innovative and affordable financial instruments and channels also drives business and industry growth and serves as the gateway to greater financial inclusion. Professor Klaus Schwab, Founder of the World Economic Forum quipped, “There has never been a time of greater promise, or greater peril.” This given, the BSP seeks to continually build a regulatory environment for innovations to flourish, yet still mindful that risks to stability and integrity – including from cyber attacks, money laundering, and terrorism financing – must be effectively managed. There are three principles that underpin our regulatory approach: First, regulation must be riskbased, proportionate and fair. Second, there is need for active multi-stakeholder collaboration. Third, consumer protection must be upheld and innovation must work for the benefit of consumers. Our “test and learn” approach remains useful as we continue to deal with increasing digital innovations in the market. 4/5 BIS central bankers' speeches The BSP is also on constant surveillance mode for other fintech activities by emerging market players. For example, we are monitoring industry developments on crowd-funding and peer-topeer lending, ready to take regulatory action when necessary. The BSP is working with the industry in implementing the National Retail Payment System (NRPS). Lastly, the BSP is currently closely coordinating with regulators from other jurisdictions for possible information sharing and a referral system focused on fintechs. Under the proposed agreements, authorities will facilitate the entry of potential fintech players from their respective jurisdictions to minimize any duplication of efforts and further promote expansion of fintech innovations in the region. Ladies and gentlemen, with both challenges and opportunities brought about by rapid innovation and technological disruption, economic players must adapt to changes, or else, one may find itself adrift and lost. Rest assured that the BSP is committed to continue to pursue reforms to allow digital innovations to flourish as long as prudent standards are in place, and to ensure a level playing field for all stakeholders concerned – be it the businesses, consumers, or the general public. On behalf of the Monetary Board and the BSP, I wish MAP a productive and collaborative year ahead. Thank you and good afternoon. 5/5 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Shareholders' Association of the Philippines (SharePHIL) General Membership Meeting and Cryptocurrency "The Truth & The Myth Forum", Makati City, 12 March 2018.
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Mr Nestor A Espenilla, Jr: Private cryptocurrencies and lessons from a red paperclip Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Shareholders’ Association of the Philippines (SharePHIL) General Membership Meeting and Cryptocurrency "The Truth & The Myth Forum", Makati City, 12 March 2018. * * * Officers and members of the Shareholders’ Association of the Philippines, guests from the public and private sectors, ladies and gentlemen, good afternoon! It is my pleasure to share the Bangko Sentral’s insights and initiatives on privately-issued cryptocurrencies. I am hopeful that in doing so, we will, as your theme suggests, be able to cut through the “truths and myths” surrounding this fairly novel medium of exchange. Notice though that I make a key distinction as there’s such a thing as central bank-issued digital currency. I’m not going there today as that’s a different conversation all together even as the underlying technology may be similar. But there it is. Cryptocurrencies are a medium of exchange. The Bangko Sentral ng Pilipinas (BSP) recognizes this. We have defined crypto or virtual currency as any “form of digitally stored value created by an agreement within the community of virtual currency users.” As far back as 2014, the BSP advised the public of the features, benefits and attendant risks in dealing with cryptocurrency. We have adopted a regulatory approach to privately-issued cryptocurrency that is balanced, open and flexible. This is to allow the market to promote financial innovation and for the industry to take advantage of all its benefits and efficiencies – with prudence. We have issued (and will be ready to issue more) responsive regulations. Last February 2017, we issued Circular No. 944. We now require businesses engaged in the exchange of privatelyissued cryptocurrency for equivalent fiat money, to register with the BSP as remittance and transfer companies. Moreover, we strongly cautioned the public against unscrupulous individuals or groups who offer virtual currency pyramid schemes disguised as initial coin offerings or investment products. The advisory likewise provided tips on securing virtual currency accounts (I think this thrust is something SharePHIL would appreciate given its mission with respect to consumer education and protecting investors’ rights.) To be clear, we do not endorse privately-issued cryptocurrencies as a medium of exchange. Moreover, given their highly speculative and volatile nature, we do not endorse them as investment vehicles either. Rather, our objective as a central bank is to address any risks that they may pose to the public even as they exist as a fact of life. This is consistent with our goal of increasing consumer protection. It is also in keeping with our advocacy against money laundering, terrorist financing and other crimes (As you know, given cryptocurrency’s reliance on the full anonymity of those who transact in them, there is a propensity for this mode of payment to be used for illegal purposes). In keeping with our mandate to promote financial stability, we also aim to address any risks posed by cryptocurrency to the financial system.These risks are not imagined. They arise as cryptocurrency necessarily interplays with the non-digital world – the regular economy – when they are exchanged into pesos or other traditional currency. It is important to note that privately-issued cryptocurrency is not legal tender. Unlike fiat money, 1/5 BIS central bankers' speeches such cryptocurrencies are not backed or guaranteed by any central monetary authority. Only the BSP has the sole power and authority to issue currency within the Philippines. Under the law, no other person or entity, public or private, may put into circulation, notes, coins or any other object or document which might circulate as currency. Our notes and coins are fully guaranteed by the Government and are legal tender in the Philippines for all public and private debts. While privately-issued cryptocurrencies do not enjoy legal tender status, they are, however, as a matter of practice, used as a medium of exchange and a store of value. But aren’t so many other things? The red paperclip story This brings to mind a story about a red paperclip that went viral. Some of you may be familiar with it. In 2005, a Canadian blogger – Kyle MacDonald began a series of transactions which he posted on-line. He began with a red paperclip as a medium of exchange. He exchanged this for an interesting looking fish-shaped pen, which he traded for an odd-looking doorknob…then a camp stove…so on and so forth. By his thirteenth barter – in a little over a year — MacDonald was in possession of a movie role (a chance to act in a movie), which was finally traded for a two-story farmhouse in a small Canadian town! And it all started with a red paperclip! (It’s an interesting story. You can google it!) This red paperclip story has uncomplicated elements that differ starkly from cryptocurrency’s high-tech world of blockchains, miners and cryptography. I introduce it not just to keep your attention or to refresh you with its simplicity but because there are powerful and common lessons to be learned from it and from the phenomenon of cryptocurrencies. These are: First, additional participants in a transaction exponentially increase value which is defined, measured and transferred through consent. Second, there is power in leveraging on digital technology as a connector of people. Finally, people always count. Using these points, allow me to share not only more insights on cryptocurrency, but also some initiatives in the BSP’s exciting financial reform agenda – initiatives which (unlike cryptocurrencies) we fully endorse. Exponential increase in value through wide consent The first lesson from both the red paperclip story and the phenomenal use of privately-issued cryptocurrencies is that additional participants in a transaction exponentially increase value. This value is defined, measured and transferred through consent. The success of the red paperclip project comes from the fact that its transactors defined and determined what they deemed to be valuable. On the other hand, while privately-issued cryptocurrencies are fast gaining global popularity, we deem their acceptance as still limited. We believe privately-issued cryptocurrencies cannot completely fulfill the roles of money as a store of value and as an independent unit of account. Until such time that such cryptocurrencies are able to fully demonstrate stability, the prospect that they will replace today’s fiat currencies appears to be far-off. They are simply still too volatile. Power of technology to connect people The second lesson is that there is power in leveraging on digital technology as a connector of people. In the red paperclip story, it cannot be denied that the values that were traded were not just in the objects themselves (They were, especially in the beginning, only ordinary objects and might even be considered junk by many). 2/5 BIS central bankers' speeches Rather, the psychic value came from the opportunity to be on-line personalities, from viral exposure as all trades were posted on MacDonald’s blog that had gained quite a following. As with cryptocurrencies, the great socio-experiment could also not have been possible without dynamic computer-to-computer connections. In this regard, the BSP acknowledges the huge potential of digital technology, that includes cryptocurrencies, to transform financial service delivery, specifically in the area of payments and remittance. High-speed digital networks allow funds to move across the globe at a much faster, cheaper and convenient way compared to traditional models. Their use is game-changing for the unbanked, given their affordability and wider reach. As far as the BSP is concerned, this is worth looking into as it is consistent with its financial inclusion advocacy. For this reason, we continue to closely engage with various stakeholders, including fintech players, to better understand varying business models, processes and systems. Our priority is to develop a digital financial ecosystem that supports the diverse needs of all users in a manner that is secure, sustainable, convenient and affordable. For the service providers – whether new or incumbent, this ecosystem enables them to tap into a wider client base, diversify revenue sources and secure new growth opportunities. To us, this line of pursuing financial inclusion is more in keeping with our financial stability objectives. The pillars of such an ecosystem that leverages on technology would include: an efficient retail payment system that facilitates delivery of digital products, especially for small value transactors; an expansive network of low cost touch points to on-board new clients and facilitate the digitizing and disbursing of cash and other financial transactions; and democratized access to a transaction account, wherein every person – regardless of economic and social stature – is able to open an account and use digital finance products. Overall, this inclusive digital finance ecosystem will support the diverse needs of all users in a safe, convenient and affordable manner. It would have the right mix and range of service providers (banks and non-banks alike) and digital platforms to facilitate the sustainable delivery of fit-for-purpose and affordable financial services, especially designed for the low income market. People always count The final lesson in all this is that, “people always count.” This is what drives us in the BSP as we pursue game changing financial reforms to deepen financial markets, foster financial inclusion, increase consumer protection and to basically improve the quality of life of all Filipinos. That being said, I must say that this new frontier of cryptocurrency brings up legitimate concerns that affect people… that affect the public. These issues are being looked into by the BSP and other financial regulators globally. One issue is private cryptocurrency as an investment option. Its value is volatile for starters. Thus, we earnestly caution the public that before speculating or investing their hard-earned money in cryptocurrencies — as with any other type of investment — prospective investors should first know and fully understand the risks involved. Because people matter, we at the BSP, like SharePHIL, value investor education. We have (together with the Department of Finance, Securities and Exchange Commission, Insurance Commission and the Anti-Money Laundering Council) made plans to embark on a nationwide public information campaign on cryptocurrency. The purpose is to inform and educate the public on what cryptocurrencies are, their uses and risks, related policies and regulations in the Philippines, and possible pitfalls. 3/5 BIS central bankers' speeches Another serious concern is cryptocurrencies’ attractiveness to, and use by, money launderers and terrorist financiers. This attractiveness stems from the anonymous and encrypted identities of transactors in private cryptocurrency. It is this very anonymity that cryptocurrency users value most. It enables them to transact in the so-called “dark web.” Allow us at the BSP to offer a contrary idea: There is power in identification. We believe that to significantly catalyze a digital ecosystem, there must be a reliable national digital identification system. This system will address persistent customer on-boarding issues due to lack of acceptable IDs and the highly inefficient paper-based KYC processes which make serving small value transactors unattractive. The BSP therefore strongly supports the passage of the Philippine ID System bill which was identified by the Legislative Executive Development Council (LEDAC) in its August 2017 meeting as an urgent measure. The Lower House has already approved its version on third reading. At the Senate, its version is tentatively scheduled for sponsorship today, Monday, March 12 even as we speak. Truly exciting! The envisioned national ID system will be designed to ensure universal coverage, data integrity and security, and optimum utility. It will serve as an enabling platform for the efficient delivery of a whole range of government and private sector services for all Filipinos – especially the currently unserved. Establishing a readily- verifiable digital identity will enable our people to open accounts and use financial services more efficiently. Closing thoughts This message obviously comes from a Central Bank Governor wary of currencies that do not qualify as legal tender and which are not backed by any monetary authority. But it is a message that comes too from a Central Bank Governor who has been labelled as a “disruptor” – one that leads an institution that is ready to embrace the challenges of a rapidly changing financial and economic landscape. This message is shared with this audience, a staunch advocate of investor rights and investors’ need for information. It is a good match. As I close, to align this message better with your theme… let me summarize the truths and myths of cryptocurrency from the BSP’s viewpoint: Myth: Privately-issued cryptocurrencies are legal tender and shall soon replace fiat currency. Truth: Cryptocurrencies, not backed by any central authority are not legal tender. Moreover, until they fully demonstrate stability, wide acceptability and other economic attributes, they will not replace fiat currency any time soon. Myth: Cryptocurrencies are bad and are only used for illicit activities. Truth: Cryptocurrencies, like fiat currencies, are neither good nor bad. They are neutral. But, no doubt, BSP is mindful of their wide use in illicit activities because of the anonymity of its transactors and is taking action in this regard. Myth: The BSP endorses the use of and/or investment in privately-issued cryptocurrencies. Truth: The BSP allows the market to develop but it has also issued responsive regulations to uphold consumer protection and to maintain financial stability. The BSP does not endorse or promote privately-issued cryptocurrencies but aims to address its risks as it intersects with the financial system. Rest assured, the BSP maintains a forward-looking approach to ensure that regulatory and supervisory frameworks are in tune with emerging trends and developments. Through constant 4/5 BIS central bankers' speeches surveillance and monitoring of the market environment, the BSP stands ready to adapt to future challenges and opportunities ahead. I hope I have delivered on the terms of reference for this forum. You have been a wonderful audience. Thank you for your attention. Maraming salamat sa inyong lahat. 5/5 BIS central bankers' speeches
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Keynote speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Money Market Association of the Philippines, Inc. (MART) MART First General Assembly, Makati City, 22 March 2018.
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Nestor A Espenilla, Jr: Mindfulness and vigilance Keynote speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Money Market Association of the Philippines, Inc. (MART) MART First General Assembly, Makati City, 22 March 2018. * * * Good evening everyone. I thank the officers and members of the Money Market Association of the Philippines, Inc. (MART) led by Mr. Christopher Salazar for the invitation to speak today about the current operating environment, the BSP’s monetary policy actions ... our direction ... and our mindful approach in the implementation of monetary, prudential and financial reforms. Mindfulness. The concept of “mindfulness” has gained so much popularity. It is a buzz word that frequently crops up in online articles, magazines, newspapers, TV programs, podcasts and conversations. But what does it mean? Does “mindfulness” have application in Central Banking and monetary policy formulation? I believe so. “Mindfulness” is not a new idea. The concept is core to Buddhism, traced as far back as the fifth century BC. A widely used definition is by Dr. Jon Kabat-Zinn of the University of Massachusetts Medical School. He defines mindfulness as “paying attention in a particular way: on purpose, in the present moment and non-judgmentally.” What is monetary policy’s “present moment”? Monetary policy stance Just this afternoon, in our latest monetary policy assessment, the BSP maintained its key policy rate steady at 3.0 percent for the overnight borrowing or reverse repurchase (RRP) facility. Corresponding rates on overnight and deposit facilities were also kept unchanged. Our decision is based on our assessment that while recent inflation outturns show elevated path in 2018, latest baseline forecasts continue to show inflation remaining within the target in 2018 and moderating further in 2019. We also considered that prospects for domestic activity continue to be firm on the back of robust domestic demand, strong growth in credit and liquidity, and sustained recovery in global economic growth. As such, monetary policy action is not warranted at this time, at this present moment. Vigilance Tsong-kha-pa, a famous Teacher of Tibetan-Buddhism, wrote in his Great Treatise on the Stages of Path to Enlightenment, that mindfulness is a non-distracted focal attention on the present. Vigilance, on the other hand, is the close monitoring of that very awareness. Practicing vigilance, we at the BSP, note that inflation expectations have started to rise and will therefore need to be closely monitored in the coming months. Remaining watchful, we acknowledge that on balance, risks to the inflation outlook remain weighted toward the upside. With circumspection, we observe that there are potential second round price pressures emanating from pending petitions for adjustments in minimum wages and transportation fares. Nevertheless, non-monetary measures, such as targeted subsidies, are expected to mitigate these inflationary impulses. Proposed tariffication reforms in the rice industry could also positively surprise and help significantly temper price pressures especially in 2019. Looking ahead, we stay alert to any signs of second-round effects and inflation becoming 1/5 BIS central bankers' speeches broader based. We stand firm in our intent to take immediate and appropriate measures to ensure that the monetary policy stance supports our price and financial stability objectives. Economic growth remains solid enough to absorb some policy tightening if warranted. Further, we observe that market mechanisms are working well to enable the economy to automatically adjust to fluid conditions efficiently and avoid serious imbalances, as well as overheating risks. Our decisions on the monetary policy stance will continue to be data-dependent. Focus will be on domestic conditions while taking into account external developments only to the extent that these impact the domestic inflation outlook and financial conditions. Need for vigilance in face of risks Why is vigilance important? English writer J.A. Baker, in his work, “The Peregrine: The Hill of Summer Diaries” wrote that, “Binoculars, and a hawk-like vigilance, reduce the disadvantage of myopic human vision.” We cannot afford myopia. We must always be mindful of the risks all around us. World economic activity finally started to gather speed after years of subpar growth following the Global Financial Crisis. The IMF revised its global growth forecasts for 2018 and 2019 to 3.9 percent, 20 basis points higher than the previous forecast. At the heart of external risks is the US Federal Reserve’s normalization of its monetary policy. Further, other major central banks are also considering exit from expansionary monetary policy. Geopolitical tensions and rising protectionist sentiments further complicate the global operating environment. Zen in the resent: strength of the economy The existence of risks is not a negative thing. Risks will always be present. The good news is that the present reality imbibes confidence in us. The Philippine economy is strong. We continue to deliver gains amidst monetary policy divergence and uncertainty. Our macroeconomic fundamentals are robust and sound. Further, our financial system is more sophisticated, disciplined, and resilient. Real GDP has registered positive growth for 76 consecutive quarters, covering a span of 19 years since 1999! In 2017, GDP grew by 6.7 percent, making the Philippines one of Asia’s fastest and most consistently growing economies. This growth performance is in line with the economy’s potential output, currently estimated at around 6.0-7.0 percent. The improvement in potential output reflects declining incremental capital-output ratio, rising total factor productivity, and improving workforce capacity. As we pour in more investments in physical infrastructure under Build, Build, Build, and more soft investments in our young population to provide better health, high quality education, and skills development, we can expect further accelerated growth in potential output. These investments are sustainable because they are supported by a prudent fiscal position characterized by lower National Government debt-to-GDP ratio of around 42 percent and additional revenues to be generated from the recent tax reform (TRAIN). There is thus strong basis for asserting that the economy can sustain its growth momentum. Likewise, higher output capacity should allay concerns of potential overheating. The country’s external position is manageable despite global headwinds. The country’s overall balance of payments (BOP) for the year 2017 posted a deficit of US$863 million. This is just 0.3% of GDP. The underlying widening of the trade-in-goods gap stems from rising imports of 2/5 BIS central bankers' speeches goods that support domestic capital formation and production. This development is consistent with the country’s growth narrative. One should expect that the economy’s expansion will be accompanied by stronger demand for imports. Over time, investment led economic activities will support needed infrastructure development, raise domestic competitiveness, increase goods exports, and alleviate the trade gap. The sustained resilience of foreign direct investments, overseas Filipino (OF) remittances, and business process outsourcing (BPO) receipts provide additional buffers to the domestic economy. External debt metrics have also improved as reflected in the continued decline in the external debt-to-GDP ratio to around 23 percent. Gross international reserves (GIR) of US$80.6 billion as of end-February 2018 provide ample manoeuvring room to manage shocks. The Philippines’ robust economic growth has been accompanied by manageable inflation. We have established since 2009 a solid track record of meeting our inflation targets. Headline inflation’s year-to-date average rose to 3.7 percent (using the 2012 series) in 2018. This is at the high end of the target range of 3.0 percent ± 1.0 percentage point in 2018. But we expect it to revert to the target midpoint in 2019. The Philippine banking system remains safe and sound, with robust performance and sustained expansion in credit. This is complemented by improved asset quality, firm liquidity position, and strong capitalization. The road to a resilient banking sector has not been easy. Systematic structural reforms were implemented to get the financial system to where it is now. We have seen significant progress in the adoption of Basel III reforms, particularly in the areas of capital, leverage, liquidity and regulation of systemically important banks. We have rolled out a four-phased program for liquidity risk management. We continue to upgrade our corporate governance and risk management standards and remain committed to pursue prudential reforms amid changing market conditions and increasing sophistication of financial services. Today, our comprehensive risk-based supervision approach ensures that our banks operate in a safe and sound manner. We use a range of tools and techniques in deploying our supervisory resources on a proportionate basis, including deployment of calibrated enforcement actions. Indeed, our financial system demonstrates discipline and sophistication. It operates in a regulatory environment that promotes innovation. At the same time, it provides mechanisms to correct misbehaviour. This, together with strong economic foundation, affords us more confidence to forge ahead with bold market-oriented reforms and liberalization efforts. This will allow financial institutions to seize more opportunities to support our growing economy; to be more innovative, competitive and flexible and to adjust rapidly to the needs of their customers. We recognize that transformative reforms are needed to gear up the financial system to be more efficient and responsive to the changing economic landscape. Taking the next (confident) steps – expanding policy toolkit and bold financial reforms As challenges evolve globally and domestically, the BSP continues to expand its policy toolkit, including enhancing price discovery and self-correcting mechanisms. As early as 2016, we have committed to a more progressive and market-oriented framework with the operational shift in our monetary operations to the interest rate corridor (IRC) system. Since then, we have seen the success of the IRC as an effective liquidity management tool. This is evident in the substantial migration of placements in the overnight deposit facility (ODF) to the 3/5 BIS central bankers' speeches Term Deposit Auction Facility (TDF). It has allowed us to provide more effective guidance to short-term market interest rates by promoting healthy price discovery as the BSP calibrates auction volumes. Indeed, for the past months, market rates have seen a stronger anchoring to the BSP’s policy rate. Universal/commercial banks’ time deposit and short term interest rates have trended upwards, aligning with BSP’s IRC. The effective implementation of the IRC now provides the BSP sufficient flexibility to increase reliance on market-based instruments for liquidity management. As a result, we were able to initiate another major financial market reform: the phased and gradual reduction of the reserve requirement ratio (RRR), to allow for more efficient absorption and mobilization of liquidity, starting with a one percentage point reduction effective last March 2, 2018. As with the shift to the IRC system, the phased reduction in reserve requirements is an operational adjustment and will not materially affect prevailing monetary policy settings. Excess liquidity released to the market will be re-absorbed through offsetting adjustments in our open market operations (OMO) that are informed by our updated liquidity forecasts. Initial evidence based on the last three TDF auctions since the first RRR cut took effect are encouraging and indicative of the potency of the IRC facilities for liquidity absorption. We can definitely do more as the system continues to mature. Ultimately, the BSP has many options to maintain firm monetary control. Shifts in monetary policy stance will continue to be signalled through changes in the policy rate. But we can also adjust monetary conditions without necessarily changing the policy rate, by adjusting auction volumes to move the market-determined TDF rates. A flexible exchange rate is another integral part of our policy toolkit to maintain monetary stability and to ensure the sustainability of the balance of payments. We do not target an exchange rate level but we carefully watch out for excessive volatility that can disrupt the economy. Our ideal is a market-determined exchange rate that offers no persistent one-way bets to anyone. Mindful of the potential build-up of systemic vulnerabilities, we have also deployed and continue to develop various macroprudential measures. Currently, we have exposure drafts on the countercyclical capital buffer, the debt-to-earnings borrowers test (DEBT) that is akin to the existing real estate stress test (REST), and the borrowers interconnectedness index. Furthermore, we continue to enhance our surveillance tools. We are also exploring new technologies such as big data analytics to further improve our surveillance. Finally, we are reinforcing our model-based assessments with qualitative and expert judgments on current macroeconomic and financial conditions. Other game-changing financial sector reforms Part of our transformative policy reform agenda is to accelerate financial market development. We give particular focus to foreign exchange (FX) and local currency debt markets. We envision a more balanced financial ecosystem where the banking system is complemented by a deep and liquid debt market. Our bold financial sector reform agenda includes ambitious FX reforms toward a more organized FX market that supports a flexible and market-determined exchange rate. This includes further liberalizing FX rules to reduce the cost of doing business and to improve data capture. 4/5 BIS central bankers' speeches In addition, we will enhance governance and oversight over the FX markets, including the USD/PHP market. This will further improve transparency, price discovery, and market conduct. We are currently drafting the governance framework for FX markets with a set of general principles that shall apply not only to the existing USD/PHP market, but also to any third currency/PHP market that may be established in the future. We have initiated engagement with the industry so that existing trading markets can conform to the new framework within a mutually agreed timeframe. As you know, the BSP is also collaborating closely with other government agencies and industry associations such as MART, to implement the Philippine local currency debt market development roadmap. Immediate focus is on deepening liquidity, enhancing price discovery and strengthening regulatory oversight. Recently, the Bureau of the Treasury released the implementing guidelines for the enhanced Government Securities Eligible Dealers (GSED) Program outlining incentives and accountability of market-makers. We count on your continued support in this endeavour, including providing effective two-way quotes to support market liquidity. Even as we move towards further liberalization and increased market incentives, we likewise expect responsible behavior among market players, by adhering to market standards and rules in order to protect the integrity of the financial markets. We have a collective responsibility to consistently build our markets to rise above the craving for short-term gains. Conclusion Indeed, maintaining mindfulness and practicing vigilance will allow us to manage risks. And even beyond this task of risk management, we are positive that our favorable fundamentals and ample policy tools give us the confidence to pursue proactive and bold financial sector reforms towards a more efficient, flexible, and market-oriented environment. As I close, I leave you with a principle that guides us in the BSP as we fulfil our mandates: With mindfulness, we are aware of the present moment, but with vigilance, we are alert and watchful at all times. It is a good principle to live by, whether in central banking or in all other concerns of life. Thank you and mabuhay! 5/5 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Chamber of Thrift Banks Annual Convention, Makati City, 10 April 2018.
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Nestor A Espenilla, Jr: Navigating the digital frontier Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Chamber of Thrift Banks Annual Convention, Makati City, 10 April 2018. * * * President Gregorio B. Anonas III, officers and trustees of the Chamber of Thrift Banks (CTB), colleagues from the banking industry, fellow Monetary Board Members, fellow BSPers, Deputy Governor Chuchi G. Fonacier, friends from media and financial services industry, guests, ladies and gentlemen, good morning. I am honored to be your keynote speaker in this year’s annual convention and induction of the new set of Officers and Trustees of the CTB. This is my first speech with CTB since becoming Governor last year. A lot of things have changed since then including physical change as well. I assure you that my focus of the heart and mind remains the same. Your theme, “Banking on Disruptive Technologies”, strongly resonates with me because of the BSP’s openness to financial innovation and digital technology. The digital transformation of the financial services industry is the new frontier. New technologies such as mobile banking, social networking, big data, and cloud computing are advancing quickly and causing “disruptions” in the industry. To remain competitive and relevant, and to optimize benefits, banks need to understand the trends, identify growth opportunities and establish synergies with new players and industries and with each other. It is my pleasure to share how we can collectively navigate the opportunities and challenges of disruptive technologies in the age of digital banking. The domestic economy on even keel We confidently face change on the back of strong economic fundamentals. First, the Philippine economy is robust and resilient against internal and external shocks. At present, we are sailing through 76 quarters of consecutive economic growth. In 2017, gross domestic product (GDP) grew by 6.7 percent in real terms. This makes the Philippines one of the fastest growing economies in Asia! Real GDP per capita grew by 5.0 percent in 2017. This economic growth is driven by strong several engines. Sustained growth in consumption spending, strong outturn in exports performance and increased public spending propelled broadbased expansion in the economy. The Government’s “Build, build, build” program leads to higher contribution of social services and public spending. Growing tourist arrivals, rising business process outsourcing receipts, the boom in real estate and construction, a growing trade with partner nations, and the steady stream of remittances from Overseas Filipinos (OF) support current domestic economic expansion. Increasing domestic and foreign investments provide assurance of sustainable growth. We have posted record high foreign direct investments for two years in a row: USD 8 billion in 2016 and USD 10 billion in 2017. On the external front, the country’s balance of payments is firmly under control and is supported by a GIR level of USD 80.1 billion as of end-March 2018. This level assures payment for 7.8 months’ worth of imports of goods and services for the economy under the worst case scenario. 1/4 BIS central bankers' speeches The movement of the peso remains market-driven and supported by sound macroeconomic fundamentals. High demand for the dollar can be attributed to higher import payments, residents’ outward investments, and public and private sector debt repayment. These developments are fundamentally healthy, aid the country’s competitiveness and strengthen the economy in the long run. The latest inflation outturn for March 2018 at 4.3 percent led to an average of 3.8 percent for the first quarter of 2018. This remains within the Government’s target range of 2 to 4 percent. Recent inflation reading shows an elevated path in 2018, with baseline forecast nearing the high-end of the target range before decelerating to the midpoint in 2019. We are closely monitoring the situation. Amidst the pick-up in inflation, we will carefully evaluate the appropriateness of a measured policy response to firmly anchor inflation expectations so that inflation targets will continue to be met in 2018–2019. Thrift banking industry remains an anchor of stability Amidst increased competition and evolving technologies, the thrift banking industry has exhibited sustained stability, resilience and commitment to support inclusive growth – Thrift banks resources stood firmly at P1.17 trillion at end-2017, mostly funded by retail deposits, indicative of continued trust and confidence in the thrift banking industry. Thrift banks continue to support MSMEs, real estate development and consumer financing, with a loan portfolio equivalent to about 71 percent of industry assets. Nevertheless, the industry’s asset quality remains solid, with the NPL ratio at 4.7 percent in 2017 and NPL coverage at 67 percent . Retained earnings boosted the industry’s overall capital position as the capital adequacy ratio (CAR) stood at 16.7 percent as of end-2017. This is higher than the BSP standard and the global norm. This is evidence of the industry’s commitment to build adequate buffers for risk-taking. Net Income of P17.9 billion in 2017 yielded 12.7 percent return to shareholders. This came about from the steady growth in net interest income (NII) and more cost-efficient operations. These performance results should encourage the industry to stay on its healthy course. Fostering stronger partnership for sustainable growth At this juncture, I would like to express gratitude to CTB for its exemplary dedication and commitment in supporting BSP’s mandate and advocacies. Notable is CTB’s pivotal role in the industry’s adoption of the ULAMA and the Lendr platform. For this, CTB was chosen as the Outstanding Strategic Industry Partner in the 2017 Awards for BSP Stakeholders. We reaffirm our continued partnership with CTB in the pursuit of prudential reforms, particularly risk and corporate governance standards. We recently issued the minimum prudential liquidity requirements for stand-alone TBs and other small banks. The Minimum Liquidity Ratio (MLR) will promote resilience to liquidity shocks. To differentiate risks among bank borrowers, we are currently studying adoption of the risk-based pricing framework for bank loans. This will encourage good borrowers to avail of more loans because of the lower interest on account of their good credit standing. Moreover, the proposal aims to reduce potential systemic risk from competitive pressures that may result in lower interest rates even for customers with poor credit quality. 2/4 BIS central bankers' speeches Parallel to this, the BSP fervently hopes to on-board all Filipinos into the financial system. To make banking services more accessible, we issued the framework for basic deposit accounts. We trust that thrift banks will be at the forefront of opening basic deposit accounts. We trust that thrift banks will be at the forefront of opening basic deposit accounts. Part of our strategy is the deepening of financial education and consumer protection initiatives, as well as leveraging on available digital technology to have greater scale in banking. Charting the course towards digitalization A FINTQ Inclusive Digital Finance Report for 2017–2018 highlighted the huge opportunities for financial service providers to innovate financial products and services that offer the greatest potential in transforming the country’s financial landscape. Thrift banks can take advantage of these opportunities. Smaller institutions can leverage on cloud technology and shared services to lower operational costs. A rural bank has already launched a pilot project on cloud-based core banking solution. Thrift banks can certainly leverage on similar solutions. The opportunities are huge. However, the risks have to be carefully considered and managed. On a grander scale, the BSP has set its sights on the digitalization of the financial system. We are working closely with the industry in implementing the National Retail Payment System (NRPS) to establish a safe, reliable and affordable retail payments system. The goal is to enable businesses and consumers to make payments and transfer funds electronically from one account to any other account using any digital device. The envisioned inter-operable payment ecosystem is going to be a platform for fintech innovations. Thrift banks should be part of this! The launch of Instapay, the country’s second retail payments clearing house after the PESONet, is scheduled on 23 April 2018. Industry players are already signing up to provide real time electronic payments to clients. The BSP remains committed to establishing a regulatory environment that allows innovations to flourish. Our ‘test and learn’ approach or regulatory sandbox remains useful in dealing with increasing digital financial innovations in the market. While the BSP is embracing growth opportunities from fintech innovations and related digital transformation for the banking system, we are mindful of attendant risks and any unintended consequences. Thus, we have regulations aimed at mitigating effects of technology-related risks, to promote financial integrity, transparency in financial transactions and consumer protection. Some of these are: An enhanced regulatory framework for pawnshops and money service business (MSBs) to ensure that even non-banks are properly supervised for effective compliance with AML and internal control rules and guidelines. Circular 950 allows covered institutions to implement reduced Know-Your-Customer (KYC) rules for certain low-risk accounts and use technology to facilitate frictionless customer onboarding. Circular 940 allows banks to use third party cash agents as a cost-efficient service delivery channel. With cash agents, banks will be able to leverage on innovative digital banking solutions to on-board clients even in hard-to-serve areas. Under Circular 944, the BSP regulates entities that use Virtual Currency (VC) as the underlying instrument for remittance. Circular No. 949 provides guidelines to ensure that risks resulting from social media use are adequately assessed and managed. 3/4 BIS central bankers' speeches Circular No. 982 provides an enhanced information security framework to consider cybersecurity controls. This calls for a renewed focus on information security in line with technological developments and innovations, dynamic risk profiles, and a rapidly evolving cyberthreat landscape. You can be assured that the BSP is on constant surveillance mode for fintech activities by new market players. We are monitoring industry developments on crowd-funding and peer-to-peer lending. While crowd-funding has the potential to expand financial access for new businesses and MSMEs, there is also heightened risk of investor and consumer abuse. We are ready to take regulatory action if necessary to maintain fair and healthy competition. The BSP is also actively engaging regulators from other jurisdictions for possible information sharing specifically focused on fintechs. Currently, the BSP has a FinTech Cooperation Agreement with the Monetary Authority of Singapore which provides a framework for collaboration by referring promising FinTech firms, sharing of emerging trends and developments, and facilitation of cooperative work on FinTech projects. We ourselves are exploring adoption of RegTech solutions to strengthen BSP’s risk-based regulatory and supervisory activities. We are piloting two RegTech solutions to automate some of BSP’s work, enhance analytical staff capability, create greater accountability and amplify “customer voice” in the policy-making process. These include an application programming interface (API) system to improve supervisory reporting; and an automated complaint-handling system. Finally, to cope with all the rapid change, the BSP is undergoing strategic reorganization to enhance our mission focus, foster better collaboration and promote better accountability. Even in the BSP, disruption is occurring to improve and transform our capabilities, structures and more importantly, our culture. To make the BSP more capable, agile, and stakeholder-oriented, we are reviewing our nautical charts to reach the objectives of becoming a more credible central bank, of having dynamic stakeholder engagement, of achieving organizational agility, and of possessing organizational capability. Closing remarks Ladies and gentlemen, disruptive technology is gradually reshaping the financial services industry. It offers opportunities as well as challenges for all. Let us embrace it. Manage it. And make it work for all Filipinos, and your customers. Anchors away! We are with you in the journey. Again, congratulations to the new set of Officers and Trustees of CTB. Mabuhay ang Pilipinas! 4/4 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 39th National Conference of Employers "The Future is Now: Survive, Compete and Grow Amidst Radical Changes in Labor and Employment Policies", Manila, 18 April 2018.
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Nestor A Espenilla, Jr: Thrive not just survive Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 39th National Conference of Employers "The Future is Now: Survive, Compete and Grow Amidst Radical Changes in Labor and Employment Policies", Manila, 18 April 2018. * * * Atty. Antonio H. Abad Jr., Governor of the Employers’ Confederation of the Philippines, Former Director-General of National Economic and Development Authority Dr. Dante Canlas, distinguished guests, ladies and gentlemen, good afternoon. I am glad to be part of the 39th National Conference of Employers, especially given your theme which is quite compelling. It is bristling with a sense of urgency! Yes indeed, “the future” as we envisioned it (even as we could not then imagine it!) — as it only existed in sci-fi movies — is happening. It arrived yesterday and the days, and the weeks, months and years before that! It keeps arriving and growing at an exponential rate. The swift, sweeping and continuously unfolding changes redefining how businesses are conducted and how we relate to each other are both precursors and products of the fourth industrial revolution. Every day, technical advances, digital innovations and artificial intelligence redefine our needs and wants... our way of doing things... what was before considered as “hi-tech” are becoming mundane, ordinary, usual... Disruptions to the economic and financial landscape are the new normal. And I refer not only to disruptions caused by digital technologies. There are also challenges presented by regionalization and globalization. We are faced with the increasing interconnectedness of markets. There are the demographic demands of a growing millennial population and other dynamics. And we – local industries, businesses and regulators — must constantly keep up. But is survival the goal? Or shall we endeavour to thrive? Concern is raised that these disruptions will aggrevate inequalities among nations. Will we be able to cope? To compete? I believe we will. Technological innovations and the finance industry Significant technological innovations are currently shaping the Philippine finance industry. These translate to improvements in speed, convenience, efficiency and accessibility of value transfers. Technological innovations in the finance industry [commonly referred to as financial technology (fintech)], such as cloud-based solutions and application programming interfaces, are flexible and cost-effective. These allow for interaction between two or more online connected services. Mobile smartphones are game changers. They have led to important changes in the payments system as well as in the behavior of market agents. An industry report puts the number of fintech startups in the country at 60 players in 2017. Mobile payment and alternative finance firms dominate with 26 and 17 players, respectively. The transaction value of the fintech market in the Philippines is estimated to amount to US$5.7 billion in 2018. It is expected to grow at an annual rate of 16.4 percent. By 2022, the fintech market in the country is projected to amount to US$10.5 billion. Digital payments account for the largest share of the market at 98.9 percent. This translated to an estimated total transaction value of US$4.6 billion in 2017. Most of these digital payments are in the form of digital commerce. 1/3 BIS central bankers' speeches Meanwhile, the alternative finance market is estimated to have raised a total amount of US$0.2 million in 2016 and US$0.7 million in 2017. Start-up businesses are adopting financial technological innovations to improve their customers’ payments experience. These fintech businesses lower costs by employing different business models that involve fewer entities. Leveraging on fintech innovations How can we take advantage of these fintech innovations to promote more inclusive growth in the Philippines? For one, the Philippine government recognizes the huge potential of fintech services to lower remittance costs for the country’s over 10 million migrant workers. Transaction costs for remitting US$200 currently average at 7.1 percent of transaction amount globally. This can drop to as low as 2 percent. Aside from lower remittance charges, the Philippine government is likewise seeking to facilitate for overseas Filipinos (OFs) other online-based banking and financial management services. Fintech innovations can also help drive financial inclusion as access and usage of financial services continue to be limited. The World Bank estimates that only 31.3 percent of the Philippine adult population has bank accounts. Estimates show that the country’s GDP could increase by more than 14 percent if the financial inclusion gap was closed. An important part of this solution is digital enablement. Digital applications and related regulatory initiatives are expected to boost Philippine GDP by about 3 percent. They may yield an increase of about 11 percent in the incomes of the population segment earning less than US$2 per day. The widespread use of mobile phones can provide for a broader reach of these financial services. Additionally, rapid development of peer-to-peer (P2P) lending could complement the role performed by traditional finance. Provided such lending platforms are properly managed and regulated, this could lead to a more resilient network and positively contribute to the diversification of risk across the financial system. BSP’s response to fintech On its part, the BSP has established a regulatory environment that fosters innovations while ensuring that risks are effectively managed. It has continuously monitored fintech developments. It has developed a balanced regulatory approach anchored on three pillars: 1) risk-based and proportionate regulation; 2) active multi-stakeholder collaboration; and 3) consumer protection. These principles are pragmatically implemented through the BSP’s flexible “test and learn” approach to financial innovations. This is also referred to as “regulatory sandbox” which provides an opportunity for innovators to participate in the financial system as players in their own right or as partners of more traditional players like banks. This approach has been proven useful since it enables the BSP to strike the right balance between innovation and safety while providing economic benefits to the banking public. The BSP also continues its market surveillance on crowd funding activities in the country to determine if regulatory action is warranted. We are likewise regulating transactions in digital currencies. On 9 February 2017, we issued a circular that established a regulatory framework for virtual currency (VC)-based payments and remittance transactions. Under this framework, VC exchanges are classified as remittance and transfer companies (RTCs). As such, they are subject to the basic requirements for RTCs. Hence, this promotes a level regulatory playing field for financial service providers performing similar services. We have launched a major initiative called the National Retail Payment System or the NRPS, a policy and regulatory framework for institutionalizing retail digital payments in the country. Our goal is to drive the usage of electronic payments from around 1 percent to at least 20 percent by 2/3 BIS central bankers' speeches 2020. We are working hand-in-hand with the industry to realize this. Already we launched PESONET last November 2017. We will soon launch INSTAPAY on April 23, 2018. Both PESONET and INSTAPAY are inter-operable payment systems that enable safe, efficient and affordable account-to-account payments transactions between and among businesses, consumers, and government. Moreover, to allow us to regulate more effectively, we will also coordinate and cooperate with other regulators here and abroad. This is because fintech market players include non-financial firms that operate across borders. We are specifically exploring a possible information sharing and referral system specifically focused on fintechs. The BSP is also piloting RegTech solutions to strengthen our own risk-based regulatory and supervisory activities. The BSP partnered with RegTech for Regulators Accelerator (R2A), a pioneering project that provides technical assistance for financial sector regulators to develop and test the next generation of digital supervision tools and techniques. Ladies and gentlemen, we, in the Bangko Sentral, encourage you, distinguished members of ECOP, not only to adjust to financial technnology, but to leverage on its opportunities. Our goal is not just to survive but to thrive. The democratization of technology enables efficiencies and scale in financial service delivery. Mobile devices are cheaper and now within many’s reach. Social media is pervasive. Rather than a hindrance, digital technology is fast becoming a strategy enabler. Moreover, with rapid digital innovation, new business models and market players will continue to emerge, changing the nature of competition. Digital innovations may also be applied to organizational strategy to improve culture and human resource skills. The Fourth Industrial Revolution has the potential to empower individuals and communities and bring about new opportunities for economic and social development. While leveraging on technology will involve financial and investment commitment, cost-effective approaches such as outsourcing and cloud-based services may be explored. To drive down the cost of IT requirements, strategic industry partnerships, and market utility arrangements can also be considered. We in the Bangko Sentral assure that we shall remain committed to fostering an enabling macroeconomic environment, so that you, our stakeholders – industry players can make the first and necessary steps in our shared digital transformation journey so we will not only survive but thrive and enjoy sustained economic growth over the medium to long term. Thank you and mabuhay ang Pilipinas! 3/3 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the host country event "Past, Present and Future of the World Economy", ADB Headquarters, Manila, 4 May 2018.
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Nestor A Espenilla, Jr: Ancient to modern networks Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the host country event "Past, Present and Future of the World Economy", ADB Headquarters, Manila, 4 May 2018. * * * ADB President Takehiko Nakao, Chair of the ADB Board of Governors and Finance Secretary Carlos G. Dominguez III, distinguished guests and speakers, Good Morning! The compelling theme, the powerful messages, the learned speakers, as well as the lively discussions that ensued will not only be imprinted in our minds, but will inspire us to work harder and closer to fulfill our goals. The motivation to network, cooperate and collaborate is one that is ingrained in our common histories and in our very nature as global citizens. This week, we were reminded of this shared intrinsic drive in the most fortunate way when we revisited the Silk Road discussed (no less) by an outstanding historian who authored a bestseller on the topic. Professor Peter Frankopan impressively granted us greater understanding of the past so that we could make better sense of the present. For me, the discussion served as a reminder that to march on to the future we must wholeheartedly embrace our natural desire and need to continuously develop and grow through the sharing and trading, not only of resources, goods, products and services, but also of precious, innovative and transformative ideas. For instance, the launch of the current Chinese government’s “One Belt, One Road” initiative was inspired by the Silk Road initiative. The billions being poured into a reinvented and modern ‘Silk Road,’ comprising a network of around 60 countries in Asia and Europe will result in physical connections through land bridges, railways, utility grids and maritime highways. It will birth a new ecosystem of integrating networks which will benefit the Philippines and many countries in terms of the global and regional supply chains. The “One Belt, One Road” initiative highlights China’s growing influence. With this and other initiatives and resulting prominence, we ask, “will there be significant changes in rank and order in the brotherhood of nations?” Even now in various multilateral institutions, emerging markets are clamoring for greater voice, representation and engagement. This is consistent with our increasing role and growing importance in the global economy. As we assess the shifts in the international economic order, there is increasing awareness that the rules of the game are changing. Take FinTech as an example. This “Fourth Industrial Revolution” has transformed and is transforming the way people think and do things. Technological advances are changing our needs and wants. Disruptions to the economic and financial landscape brought by innovation and technology are the new normal. These disruptions may aggravate inequalities among nations, putting inclusive growth in peril. Will we be able to cope and compete? With the earlier discussions, I believe we are convinced that we will. In the Philippines, we nurture a regulatory environment that will foster innovation while ensuring risks are effectively managed. We continuously monitor FinTech developments. We espouse proportionate regulation, multi-stakeholder collaboration and consumer protection. We do this because we believe that the democratization of technology enables efficiencies. 1/2 BIS central bankers' speeches This phenomenon of Fintech, while new and exciting, shares commonalities with the Silk Road. Both are powerfully transformative. But like the Silk Road, FinTech’s positive impact can only be sustained if its further development and use are done in an inclusive manner. Technology is our now and our future. To harness its benefits, we must collaborate and leverage on each other’s strengths. Only then will we be able to enjoy sustained economic growth over the long term. I would like to end with this thought. This meeting is one of those opportunities to do just that. The Philippines is honored to have hosted this event and I am privileged to be able to close it. We thank everyone for your commitment that has made this event a success. I look forward to more collaboration and the pursuit of deeper and more meaningful relationships as we move from ancient to modern networks and as we move forward, thriving as co-participants in the journey of digital transformation. Thank you and Mabuhay! 2/2 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the AMRO-BSP Joint Seminar on Asia's Emergence in the New World Order: Growth, Integration and Resilience, Manila, 3 May 2018.
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Nestor A Espenilla, Jr: ASEAN+3 - emergence, sustainability and success Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the AMRO-BSP Joint Seminar on Asia's Emergence in the New World Order: Growth, Integration and Resilience, Manila, 3 May 2018. * * * Fellow Central Bank Governors, ASEAN+3 Macroeconomic Research Office (AMRO) headed by Dr. Junhong Chang, distinguished panelists, ladies and gentlemen, magandang umaga... a pleasant morning to all. On behalf of the Monetary Board and the Bangko Sentral ng Pilipinas, I am pleased to welcome you to Manila and to this Joint Seminar. We proudly collaborate with AMRO and co-host this event. It is an excellent opportunity for open discourse and the exchange of vital insights in economic policymaking and on developments in central banking in the region. This Joint Seminar hopes to provide ASEAN+3 economies with broader insights in dealing with contemporary challenges. It also aims to elicit stronger consensus in fostering deeper regional integration as a critical strategy to reduce external vulnerabilities and sustain our standing as an economic powerhouse in the new world order. Asia’s Economic Emergence The seminar’s theme, “Asia’s emergence in the new world order: growth, integration and resilience” invokes some feelings of nostalgia. Like most of you here, we stand not as passive witnesses, but as active participants in Southeast Asia’s emergence and transition from being a developing-economic region into a dynamic economic powerhouse. At the core of ASEAN+3’s successful growth story is globalization, which paved the way for greater trade openness and deeper economic integration in the region. I believe that member states have positively leveraged on regional integration to retain their collective growth momentum. Integration has also provided the additional impetus for individual country growth. ASEAN+3 has become a major global economic player. In 2016, the region accounted for more than a quarter of the world’s gross domestic product (GDP). With its combined output, the ASEAN+3 region was considered as the richest economy in 2016. ASEAN+3’s unrelenting expansion in recent decades can be attributed to adherence to sound macroeconomic management. There has been a credible and collective commitment to longrun development. The Philippine Economy in ASEAN The narrative of the Philippine economy mirrors the Southeast Asian experience. After the pursuit of strategic, targeted and purposeful reforms over the last two decades, the Philippines now enjoys an economic bright spot, with 76 consecutive quarters of positive GDP growth. Moreover, this sustained economic expansion was achieved in an environment of generally low and stable inflation. The continued stability and soundness of the financial system also contributed to the economy’s resurgence. The external sector has been a pillar of strength for many years. Given expectations of strong growth of 7.0-8.0 percent over the medium term, we expect Philippine contribution to the overall ASEAN+3 output to rise over time. 1/2 BIS central bankers' speeches So, is it time to relax? In fact, the Concept Note prepared for this Seminar comprehensively captures the emerging challenges that confront the ASEAN+3 economies in the new world order and during this time of the fourth industrial revolution. Among the issues that the distinguished panel of speakers will be addressing today include those relating to demographic transition, the rapid rise of disruptive technologies, raising productivity, and accelerating further market integration among the ASEAN+3 economies. The way governments tackle policymaking and the way businesses are operated are being altered by megatrends like those earlier mentioned, along with a rebalancing of the world economy, furious urbanization, climate change, and the adoption of inward-looking policies. These trends cannot be ignored. They contribute to the uncertainties faced by the region and by the individual countries that comprise it. As we confront these challenges, globalization and greater regional integration remain key. However, I believe that for these growth engines to continue to pay off amid global uncertainties, there has to transpire a seamless fusion between conventional growth models and forwardlooking strategies aimed at ensuring sustained economic resilience in a technology-savvy future. This is indeed an exciting time for the region and there is no better venue to discuss our endless potential and possibilities. We look forward to the insights our keynote speaker and distinguished panelists will share with us today. Thank you and welcome once again to the BSP-AMRO Joint Seminar! 2/2 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at InstaPay Go Live, Manila, 23 April 2018.
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Nestor A Espenilla, Jr: In real time Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at InstaPay Go Live, Manila, 23 April 2018. * * * On behalf of the Bangko Sentral ng Pilipinas, I welcome everyone to this important event, another significant milestone in our shared goal of having a safer, more efficient, affordable and reliable payments system. Today, the country launches another priority Automated Clearing House (ACH) under the National Retail Payment System (NRPS). We call it, “InstaPay.” Like the PESONet launched in November of last year, InstaPay is innovative. It is likewise expected to create new markets and add new value. Its launch and operation further improves the Philippine retail payment system and moves us closer to creating a cash-lite economy. Our vision, to create an inter-operable payment ecosystem, allowing seamless electronic fund transfers and payments from one account to another, is not only being articulated. It is becoming REAL now. In real time. InstaPay’s name fully represents what this newest ACH achieves — real time account-toaccount payments or transfers of funds. Instant payments. The interoperability of InstaPay allows users to enjoy seamless transactions between accounts maintained in any of the participating institutions both bank and non-bank. Beneficiaries are assured of immediately receiving transaction amounts in full.... no deductions. Consumers need not leave their homes or places of work to withdraw cash and make over-thecounter payments for bills. Conveniently available on electronic delivery channels through mobile apps and internet banking facilities provided by participating banks and e-money issuers, on a 24 hour basis, 365 days a year, payments via Instapay can be made anytime. Payments can be made even after banking hours, on weekends or holidays. With InstaPay, electronic payments can also be made to the government for taxes, licenses, and other fees in real time. Catering to low value payments, InstaPay safely and quickly moves funds. It produces efficiency in terms of cost and resources. Reduced cash usage will allow banks and the government to minimize security, transport, overhead, and other incidental costs that come with cash handling. With InstaPay, we see greater empowerment of both the public and private sectors. Greater efficiencies of electronic payment channels will also bring about an accelerated velocity of payments, increasing economic activities. We see a rise in public confidence in making electronic payments — this can, and will result in positive culture change! As more and more consumers gain confidence in making electronic payments, we look forward to the market expanding with more innovations. Participating financial institutions are granted greater opportunities to diversify and widen the products and services they offer. Innovation in financial services delivery will thrive. With a more efficient retail payments infrastructure, various services will emerge as the needs of financial consumers evolve and become more sophisticated. We anticipate the emergence of a new competitive space where service innovation is encouraged. New business models, technologies, industry wide collaborations and partnerships will be developed. With the implementation of NRPS and the launch of new ACHs such as 1/2 BIS central bankers' speeches InstaPay, financial institutions will be challenged to develop innovative business models customized to their target markets’ needs, to ensure client loyalty, and to better compete for market share. Our efforts in implementing the NRPS are rapidly providing individuals, businesses and government, additional options on how to complete payments, collections or disbursements, depending on their specific needs and the characteristics of the fund transfers or payments. Right now as we launch InstaPay, we have seven (7) pioneer BSP-Supervised Financial Institutions capable of sending and receiving payments. In addition, another thirteen (13) are able to receive payments. By the middle of this year — in a few months — we expect more financial institutions to participate in InstaPay. In parallel, the BSP is engaging the private sector and the government to encourage their adoption of InstaPay and PESONet to meet their payment system requirements. We now have critical mass. It is only a matter of time before we attain widespread usage. Ladies and gentlemen, the digital transformation of financial services is happening now! The country’s financial services industry needs to evolve to remain competitive and relevant. The steps we have taken to implement the NRPS — the launch of PESONet and now, InstaPay, would not have been possible without constant and close dialogue and collaboration with you, our partners in the industry and with the Philippine Payments Management Inc. (PPMI), an industryled self-governing body and an important ally in pursuing NRPS goals. Our collaboration and cooperation is real, authentic and has produced real results. Working together, I am sure that the PPMI and the BSP can, and will continue to foster economic growth though the promotion of electronic payments. We shall continue to work together in establishing a safe, efficient, and reliable retail payment system to make our country more competitive in this Digital Age. Congratulations everyone on the launching of InstaPay. Maraming Salamat! Mabuhay tayong lahat! 2/2 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the presentation of the New Generation Currency (NGC) banknotes and coins to President Rodrigo R. Duterte, Manila, 9 May 2018.
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Nestor A Espenilla, Jr: Presentation of New Generation Currency banknotes and coins to the President Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the presentation of the New Generation Currency (NGC) banknotes and coins to President Rodrigo R. Duterte, Manila, 9 May 2018. * * * On behalf of the Monetary Board and the Bangko Sentral ng Pilipinas (BSP), we thank President Rodrigo Roa Duterte for this opportunity to present the New Generation Currency (NGC) banknotes and coins. Magandang hapon po. Thank you for having us in Malacañan Palace. Under the New Central Bank Act, the BSP has the sole power and authority to issue currency within the Philippines. The notes and coins put into circulation are liabilities of the BSP and are fully guaranteed by the Government. They enjoy legal tender power. These notes and coins pass from hand to hand, are used as payment for public and private debts, are reminders of significant moments in our history and narrate our peoples’ patriotism and bravery. The NGC banknotes also showcase world heritage sites and iconic natural wonders while the coins feature endemic flora. Today, we are honoured to present all denominations of the NGC banknotes which bear the signature of President Duterte and yours truly as fourth Governor of the BSP. We are also pleased to present all denominations of our NGC Coins which will replace the previous series, which has been in circulation since 1995 or for over 23 years. One of the most serious threats to national security is the destruction of the integrity of our currency. This point was made on 9 June 1993, during the 9th Congressional Bicam-Committee hearing on the BSP’s Charter. In demonetizing the old banknotes series and issuing the new coins, the BSP complies with Section 57 of R.A. No. 7653. It provides that the BSP may call for the replacement of banknotes which are more than five (5) years old and coins which are more than ten (10) years old. The NGC banknotes and coins have enhanced security features. For the coins, the latest minting technology to prevent counterfeiting is used. Microprints and mint marks are among the security features that make them very difficult to counterfeit. The durability of the coins is improved significantly with the use of nickel-plated steel. The coins are also more resistant to discoloration, corrosion, and everyday wear and tear. Mr. President, Ladies and Gentlemen, the BSP is honored to discharge its mandate to maintain currency integrity, to further promote public trust and confidence in Philippine currency. We respectfully present these banknotes and coins. Thank you. Now, we have a short AVP on the NGC coin series. 1/1 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 65th Annual Convention and General Membership Meeting of the Rural Bankers Association of the Philippines (RBAP), Davao City, 21 May 2018.
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Nestor A Espenilla, Jr: Revisiting the role of rural banks in countryside development and financial inclusion Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 65th Annual Convention and General Membership Meeting of the Rural Bankers Association of the Philippines (RBAP), Davao City, 21 May 2018. * * * Davao City Mayor Sara “Inday” Z. Duterte, Secretary of Finance Carlos G. Dominguez, PDIC President Roberto B. Tan, Land Bank President Alex Buenaventura, RBAP President Giovanni D. Gabriento, RBAP members, colleagues from the Bangko Sentral, fellow workers in government, esteemed guests, ladies and gentlemen, a pleasant good morning to everyone! I am honored to visit Davao again, for RBAP’s 65th Annual Convention and General Membership Meeting. It is always a pleasure to see and appreciate the city’s beauty. I also look forward to sampling some durian. And as Mayor Sara said, let us support Davao’s Buy Buy Buy to support the local economy. I commend the outgoing set of RBAP officers and directors for their commitment and exemplary performance to promote a sound rural banking industry. RBAP’s milestones under your leadership are vital to promoting broader countryside development through financial inclusion. Your consistent service to our farmers, fishermen, and MSMEs has become RBAP’s trademark of service excellence. I remember during last year’s charter anniversary symposium in October, we talked about how rural banks have become customers’ best financial friend or BFF 1. Now, we celebrate how rural banks are #LODIs in bringing necessary financial services to the underserved, unserved, and unbanked Filipinos. This term “LODI” is Filipino millennial speak for “IDOL” and takes off from your theme, “Leading onwards to development and inclusion #LODI.” To me, this theme indicates the industry’s willingness to reposition itself to the growing needs of a new breed of financial customers and to leverage on digital financial technology to advance economic development and financial inclusion objectives. That you have one of the youngest RBAP presidents to steer the rural banking industry into this direction is very promising. Rural Banks as #LODIs for Financial Inclusion Rural banks have proven themselves to be LODIs in their own right — exemplary models of customer outreach, demonstrating a genuine commitment to bringing progress to rural areas. Rural banks may be smaller in size compared to commercial and even thrift banks, but they have proven their mettle and invaluable contribution to countryside development through financing of rural communities. With RBAP’s extensive network of 2,745 banking offices nationwide, the industry is strategically positioned to be a catalyst for greater financial inclusion. Your close ties and familiarity with the rural communities you serve make you effective providers of rural financing and other corollary microfinance products and services. Almost 97 percent of the industry’s network is spread across provinces. In fact, one in every three banking offices located in Davao Region and in Mindanao is a rural bank. However, there is much scope for expansion towards countryside development. 554 cities and municipalities, or almost a third of the total, in the country are still unbanked as of December 1/4 BIS central bankers' speeches 2017. Moreover, the 2017 Global Findex by the World Bank showed that only 34.5 percent of Filipino adults have formal accounts, ranging from bank deposits to e-money accounts. Given RBAP’s strategic role and familiarity with rural communities, it is crucial for the industry to leverage on innovative technologies and liberalized branching rules that BSP has initiated. This will further expand market reach and enhance existing service delivery channels in the rural areas. That rural banks enjoy public trust and confidence is evident in your deposit profile. Accounts maintaining less than P10,000 make up 87.3 percent of your retail depositors. As a conduit of rural financing, almost a third of your loans are granted to households. Most of them are salary loans to the working class, with farmers and fisherfolks among the biggest recipients of rural bank loans. No less important, these are quality loans. Because of this, your return on equity was solid at 9.0 percent in 2017, when net profit stood at P3.4 billion for the year. These strengths affirm your status as a dependable partner in helping rural communities and in building a more dynamic and inclusive financial system – a system where there is effective access to a wide range of financial products and services that are appropriate to the needs of the local communities. Consistent with the government’s thrust under the Medium-Term Philippine Development Plan (MTPDP) to spread economic development to the countryside, there are now more opportunities for rural banks to grow and provide the financing needs of their clientele. As the economy grew more than six percent for the last six years (6.7 percent in 2017), the latest GDP data likewise showed that the National Capital Region (NCR), at 6.1 percent, grew less than the national average. This certainly means that economic activities in the provinces are expanding and growing. In recent years, the Davao Region has consistently posted growth above the national average, being the second fastest growing region of the country in 2017, at 10.9 percent GDP growth. We are counting on our rural banks to assist in further bringing about economic progress to the rural communities. BSP’s Reform Agenda for an Inclusive Banking System For our part, the BSP remains strongly committed in providing an enabling regulatory environment for the overall safety and soundness of the banking system. We always emphasize the importance of prudent banking operations, highlighted by strong capitalization and adequate liquidity position as buffers against unforeseen shocks. We also continuously encourage banks to aspire to the highest standards of corporate governance and risk management; to go beyond just complying with banking regulations so you can proactively respond to emerging banking developments and challenges. As part of continuing reforms, the BSP approved the adoption of minimum prudential liquidity requirements (MLR) for stand-alone thrift banks, rural banks, cooperative banks, and quasibanks. These requirements are designed to enhance covered institutions’ resilience to liquidity stress events and is a significant step in aligning our supervisory framework with international standards. It also illustrates the BSP’s commitment to the application of proportionality in our approach to supervision. We also wish to leave no banking institution behind. Together with the Philippine Deposit Insurance Corporation (PDIC) and the Land Bank of the Philippines (LBP), we have re-launched the Consolidation Program for Rural Banks. This will further strengthen the industry through 2/4 BIS central bankers' speeches stronger financial condition, enhanced management and governance, more synergies and economies of scale, and wider market reach. The continuing prudential reforms have given us the confidence to further liberalize our rules to allow more business with operational flexibility. Towards this end, we allowed banks to utilize cash agents as cost-efficient service delivery channels. Rural banks can now establish branchlite units to offer a defined set of services with less regulatory requirements. The framework for basic deposit account further enhances the smooth onboarding of unbanked clients. I am happy to share also that the BSP has made significant inroads with the implementation of the National Retail Payment System (NRPS). The NRPS implements our commitment to upgrade the country’s retail payment system by promoting electronic retail payments and facilitating inter-operability for faster settlement of transactions. The NRPS will facilitate our transition from being a cash-heavy to a cash-lite economy. This will eventually bring benefits to the economy – in terms of speed and efficiency of transactions, reduced costs, improved transparency, enhanced security, and expanded access to financial services. Last April, we launched Instapay, the second automated clearing house under the NRPS following the launch of PesoNet. Via InstaPay, Filipinos can enjoy safe and affordable accountto-account electronic retail payments in real-time. Transactors may send and receive funds or make payments in real time of up to P50,000 per transaction. The transferred funds are instantly received in full as no fee is charged for the electronic crediting of funds to the receiving party’s account in InstaPay participating institutions. There is no reason why rural banks should not want to be part of PesoNet and Instapay. Leveraging on Technology and Value Chains With the digital transformation of the banking system, we, at the BSP, are optimistic that the rural banking industry can emerge as a strong and dependable delivery channel in the provision of banking services. It can do so by taking advantage of available technology. Opportunities for growth may be seized should you cater to the needs of the young generation. Studies show that fintech has great potential to transform financial services given the country’s young demographic profile. According to the World Bank Findex, 23.5 percent of our population are composed of young adults (between 15 to 24 years old). The domestic digital money ecosystem certainly needs players, big and small, to meet the exacting demands of this new breed of clients. On this note, I am happy to report that one rural bank is already pilot-testing a cloud-based banking solution in managing its day-to-day operation more effectively and serving its clients more efficiently, thereby upgrading its competitiveness. Meanwhile, several banks, including rural banks, and non-bank financial institutions are already utilizing the Lendr platform to facilitate credit origination processes. Still others are hooked up with a commercial bank on a block chain pilot. Rural banks can also certainly leverage on technological innovations and value chains to contribute to the growth of the agricultural sector. This sector certainly needs a helping hand from its #LODIs. Rural banks have been entrusted by the law with the vital and noble role of serving the financing needs of farmers, fisherfolks and the people of rural communities to achieve inclusive economic growth. We believe that with an increasing recognition of the necessity for innovation, coupled 3/4 BIS central bankers' speeches with proximity to and intimate knowledge of the market, rural banks can now, more than ever, reinvigorate and blaze new trails for agriculture financing in the country. Innovations enabled by digital technology and value chain approach can not only make agrifinancing more viable but also unlock new opportunities for rural banks to deliver a whole range of financial services catering to the unique needs of farmers and their communities. Tapping these opportunities and backed by a solid culture of governance, rural banks can evolve into these valuable full-service community banks – a true pillar of countryside development. Towards this end, we have been promoting value chain financing through guidelines and incentives (as contained in Circular No. 908). The Agricultural Value Chain Financing Framework provides an opportunity to improve the lives of 10.9 million Filipinos employed in the agriculture industry, as well as MSMEs that are engaged in production and related activities such as processing, distribution and trading. Furthermore, we have been supporting programs that build awareness and capacity, including last year’s 2-day agri-value chain conference and the publication of an ongoing study, as funded by the Asian Development Bank. This study can serve as an important reference and guide for banks wishing to implement agri-value chain financing. The areas where rural banks can incorporate fintech in their operations are wide open. Let us embrace responsible use of technology and innovation to become better bankers. Closing Remarks In closing, I wish to express BSP’s appreciation to RBAP for its enduring commitment to support its members. It is this support that helps enable our rural banks to offer quality banking services to their constituencies. With this mission in mind, the next generation of RBAP leaders can further enhance the rural banking industry’s resilience to meet the challenges of a rapidly evolving financial services industry. Congratulations to the new leaders of RBAP! I trust that RBAP will remain as the BSP’s proactive and staunch partner in expanding touch points and in digitizing more products and services to onboard more of our countrymen into the banking and financial system. Maraming salamat. Mabuhay ang RBAP! Mabuhay ang rural banking! Mabuhay ang Pilipinas! 4/4 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 2018 Economic Briefing of the American Chamber of Commerce of the Philippines, Inc. (AMCHAM), Manila, 24 April 2018.
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Nestor A Espenilla, Jr: Investing in sound policies towards sustainable growth Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 2018 Economic Briefing of the American Chamber of Commerce of the Philippines, Inc. (AMCHAM), Manila, 24 April 2018. * * * Ladies and gentlemen, good afternoon! I thank the officers and members of the American Chamber of Commerce of the Philippines (AMCHAM) for the invitation to speak today. My message has two parts. First, I will give an update on the economy and its prospects over the medium term. Second, I will talk about the government’s policy directions, focusing on the BSP’s initiatives to sustain the growth momentum and make the Philippines a preferred option for business and investment. Let me pose a question you may have asked yourselves at some point: Is now a good time to invest in the Philippines? Conventional wisdom tells us that investing requires right timing. If you get it wrong, you may fail to maximize the return on your resources, or you could be staring at significant losses. Given the rational desire to avoid loss and reduce risk, it is easy to fall into the trap of being overly cautious and missing out on profitable opportunities. Indecision and unnecessary waiting can also be costly. Investing will always carry some degree of risk, and we can never fully anticipate how surprises can disrupt or influence the market. The key is to not make decisions blindly. Indeed, information on potential risks and returns, as well as knowledge gained from prior experience, can be sources of confidence for any prudent investor. So, is now a good time to invest? Do we have information to make the right call? The balance of information that we have suggests that it is indeed an opportune time. Betting on the Philippines We at the BSP remain optimistic about the Philippine economy’s prospects, especially as economic activity continues to gain traction across the globe. According to the latest figures released by the IMF, global GDP growth reached 3.8 percent in 2017, the fastest pace since 2011 as investment and trade continued to pick up. The IMF now forecasts the global economy to grow by about 3.9 percent in 2018 and 2019, as accommodative policies support the stronger growth impulses in advanced and emerging economies alike. However, we continue to monitor developments that could dampen this growth momentum. These include increased trade protectionism, rising geopolitical tensions, and the possibility of heightened financial stresses owing to the onset of monetary policy tightening in a number of economies especially in the U.S. Even with these downside risks, we remain confident about our own prospects. The Philippine economy is coming off another banner year. Real GDP expanded by 6.7 percent in 2017. This is the sixth consecutive year that the economy had grown by over 6.0 percent. The IMF also shares our optimism, as it forecasts the Philippine economy to expand by about 6.7 percent in 2018 and 6.8 percent in 2019. This is not far from the National Government’s target of 7.0-8.0 percent growth over the next three years. All these paint the Philippines as one of the more dynamic and fastest-growing economies in Asia. 1/5 BIS central bankers' speeches We have also observed that growth has become more broad-based over the years. Along with the services sector, manufacturing and construction have emerged as potent drivers of output. On the demand side, increased capital investments and public spending, especially since the past year, have complemented robust private consumption in stimulating economic activity. Meanwhile, amid rapid economic growth, the inflation environment has remained manageable. Except for 2015 and 2016 when the decline in international oil prices tempered inflationary pressures, inflation has settled within the announced target ranges since 2009. Thus far in 2018, headline inflation has averaged 3.8 percent (using the new 2012 Consumer Price Index series). For 2018, our latest forecast estimates average inflation at 3.9 percent. This is near the high end of our target range of 2-4 percent for 2018-2019. So this bears careful watching. Nevertheless, we see inflation moderating and reverting to around 3 percent by 2019, the midpoint of the target range. We expect the confluence of strong growth and stable inflation being sustained over the medium term. Specifically, as the National Government pours in more investments into physical infrastructure and increases expenditure in soft investments in our young population to provide them with higher quality education, skills development and better health services, the economy’s productive capacity will improve further. These will help boost productivity and we can expect further accelerated growth in potential output. Meanwhile, various safety net programs to mitigate the impact of recent tax reform measures, especially on the vulnerable sectors of society, should also help moderate inflationary pressures in the immediate term. We also believe that these public investments in physical infrastructure and human capital are sustainable because they are supported by prudent fiscal management. The first wave of tax reforms under the TRAIN Law, in particular, should help generate additional revenues to finance the Government’s programs. Reforms to encourage tax compliance, improve revenue collections, and plug regulatory loopholes, among others, are also in the pipeline to further strengthen the country’s fiscal position. At the same time, the country’s healthy financial system has also continued to fuel the growth momentum, as domestic liquidity remains ample to satisfy the requirements of our growing economy, including the solid demand for loans across key economic sectors. Amid the robust expansion in credit, financial institutions have enhanced their liquidity and risk management practices to prevent buildup of systemic risks, as reflected in their improved asset quality, firm liquidity position, and strong capitalization. The rise in investments and increase in infrastructure spending have been accompanied by stronger demand for imports. This is expected. Over time, these investments will bear fruit in the form of better infrastructure and improved domestic competitiveness. This will support high and sustainable economic growth. Moreover, despite posting an overall balance of payments (BOP) deficit of US$863 million in 2017, the country’s external position continues to be manageable with the deficit at less than 1% of GDP. Rising inflows of foreign direct investments as well as sustained overseas Filipino remittances and BPO receipts provide resilience against external shocks. Moreover, the ongoing global economic recovery bodes well for our merchandise exports. Meanwhile, the movement of the peso remains market-driven. This exchange rate flexibility will promote self-correction mechanisms and avoid dangerous build-up of unsustainable imbalances. These elements should all keep the balance of payments well under control. Finally, as a sturdy external liquidity buffer, we have built up gross internal reserves of over $80 billion equivalent to nearly 8-months worth of imports of goods and services. We likewise have access to market financing because of our hard-earned solid investment grade rating. We have 2/5 BIS central bankers' speeches likewise developed secondary liquidity buffers from various regional safety net arrangements we have worked out with our neighbors. To summarize, the Philippines continues to be a good bet for investing because of sound macroeconomic fundamentals. Factors in its favor are its broad-based growth, within-target inflation, prudent fiscal management, sound financial system, and manageable external payments position. These strengths did not materialize overnight. These are well-earned dividends of our sound commitment to timely policy actions and to necessary and bold structural reforms over the years. With this in mind, it is easy to see good policymaking as akin to investing in the country’s wellbeing. As with any investment decision, getting the timing right requires mindfulness, vigilance, and flexibility, as economic conditions could shift at a moment’s notice. Prudence also requires policies to be grounded on a reasonable assessment of pertinent information on potential costs, benefits, and tradeoffs. Clouds on the horizon Nevertheless, in spite of a generally favorable economic climate, there are a few clouds on the horizon that require us to be especially vigilant. There are two particularly key developments that could challenge the country’s position of relative strength. We intend to address these with timely and well-informed policy responses. One revolves around dealing with inflation and potential overheating. At our most recent assessment of the monetary policy stance last March, we determined that our prevailing monetary policy settings continued to be appropriate. Inflation has been evolving in line with our projections, as the first-round price effects of the recent tax reforms appear to have been limited. We also considered that prospects for domestic economic activity continue to be firm and within economic potential that in itself is being bolstered by investments in both physical infrastructure and social capital. At the same time, the BSP has always been patient in analyzing data and calibrating scenarios in assessing the monetary policy stance. Our latest readings do show that the risks to inflation remain weighted toward the upside. Our surveys indicate that inflation expectations have started to rise. These could contribute to potential second-round price effects. Nevertheless, nonmonetary measures such as targeted subsidies are expected to mitigate these second round inflationary pressures. We shall see. And we shall act accordingly. Today, the BSP has many options to maintain firm monetary control. Since the adoption of the Interest Rate Corridor (IRC) system in 2016, we have gained sufficient flexibility to rely on auction-based instruments for liquidity management to complement our workhorse overnight reverse repurchase borrowings at our declared policy rate. We can adjust monetary conditions by adjusting auction volumes to move our market-determined term deposit facility (TDF) rates. This has effectively allowed us a channel to provide guidance to short-term market interest rates. In recent months, we have seen a firm anchoring to the BSP’s interest rate corridor as market rates strongly trended upwards. (Note: For example, the 91 T-bill rate has increased by more than 100bps since December 2017). Our active domestic open market operations interact in close coordination with our foreign exchange market operations, adjustments to reserve requirements, systemic macro-prudential measures and risk-based supervision of individual banks. In sum, BSP actions remain timely and appropriate to dynamic market conditions. These actions help regulate the economy and control inflation. The signal will be continuously 3/5 BIS central bankers' speeches reinforced by other BSP actions, as deemed necessary by developments. Looking ahead, the BSP remains watchful against signs of inflation becoming more broad-based. We stand firm on our intent to take immediate and appropriate measures to ensure that our monetary policy stance supports our price and financial stability objectives. The coming task of the Monetary Board is to carefully evaluate the appropriateness of a measured policy response to firmly anchor inflation expectations in line with our forecast that inflation targets will continue to be met in 2018-2019. Toward this end, we also note that economic growth remains solid enough to absorb some policy tightening, if warranted. The other issue pertains to keeping the financial system sound and stable amid constant shifts in the economic landscape. In particular, we cannot ignore how so-called megatrends have changed the way businesses operate. These megatrends have made policy making more complex. These include demographic changes and the rise of disruptive technologies. To address these challenges, the BSP trains its sights on implementing game-changing financial sector reforms to allow the financial system to be more flexible, market-driven, and innovative. At this point, let me focus on some of the major reforms that we have already put in place. The effective implementation of the IRC has allowed us to initiate the gradual and phased reduction of reserve requirements consistent with efficient absorption of any excess liquidity. We began with a one percentage point cut effective in March this year. Subsequent reductions — in the nature of liquidity-neutral operational adjustments — will be done with the proper pace, magnitude, and timing and will largely depend on the liquidity absorbing capacity of our open market operations. We would like to reiterate that as with the operational shift to the IRC system, the reduction in reserve requirements is not intended to materially affect the prevailing monetary policy settings. Think of it as the BSP shifting from one instrument of liquidity management to another, as liquidity released to the market by the cut in reserve ratio will be re-absorbed through offsetting adjustments in our open market operations, as informed by our updated and comprehensive liquidity forecasts. Another vital pillar in our financial sector reform agenda is the acceleration of financial market development and deepening. We have rolled out various initiatives to further develop the local currency debt and foreign exchange (FX) markets, including the launch of the Government Securities Repo Program in November 2017. As part of this coordinated government endeavor, the Bureau of the Treasury released the implementing guidelines for the enhanced Government Securities Eligible Dealers (GSED) Program last February 2018. Further, the SEC is set to issue its exposure draft of the rules on administration of government securities benchmarks, consistent with recent global benchmark reform initiatives and international standards for interest rate benchmark design. We have also undertaken various FX reforms towards a deeper and better organized FX market. This includes further liberalizing FX rules to reduce the cost of doing business and improve data capture. The latest initiative involved the removal of the prior approval requirement for private sector foreign borrowings. Instead, there is a post-transaction regulation requirement for the primary purpose of capturing data. Over the medium term, we also plan to enhance FX market governance and oversight to improve transparency and price discovery. Ultimately, we want to see a more liquid FX market that supports a flexible and market-determined exchange rate. Finally, the BSP aims to foster an enabling ecosystem where competition and responsible 4/5 BIS central bankers' speeches innovations in the financial sector are encouraged to thrive. We have strategically opened up the banking system to encourage competition, particularly from new players and fintech companies. This is because we believe that leveraging on safe and innovative financial institutions can also drive business and industry growth, and likewise open gateways to greater financial inclusion. We have also set our sights on the digitalization of the financial system. We are working closely with the industry in implementing the National Retail Payment System (NRPS) to establish a safe, reliable and affordable retail payments system, with an increase in the share of electronic payments to at least 20% by 2020. Just yesterday, the BSP launched InstaPay, the latest automated clearing house (ACH) under the NRPS, which allows for safe and affordable retail electronic payments in real time. The BSP remains mindful of potential risks to financial stability and integrity, including those emanating from cyber-attacks, money laundering, and terrorism financing. We find that our “testand-learn” approach remains useful as we continue to deal with increasing digital innovations and more complex threats to the financial system. Final Thoughts Ladies and gentlemen, as I close, let us return to the question I posed at the beginning. Is now a good time to invest? A quick look at the current economic landscape certainly provides a compelling argument. Standing on a position of strength, the Philippines presents tremendous and worthwhile opportunities for business and investment. While there are clouds on the horizon, the BSP continues to be vigilant and invests in the crafting of sound policies and disciplined reforms to guarantee the continuity of our economic prosperity and to further strengthen our domestic sources of resilience. We will intensify our efforts to safeguard price stability as well as the health and stability of our financial system. At the same time, we will continue to provide a conducive operating environment for the financial sector to help fulfill its role as catalyst of economic growth. Thank you, and good afternoon. 5/5 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Annual Convention of the Association of Philippine Correspondent Bank Officers (APCB), Puerto Princesa, Palawan, 30 June 2018.
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Nestor A Espenilla, Jr: Providing an enabling environment at the crossroads of digital transformation Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Annual Convention of the Association of Philippine Correspondent Bank Officers (APCB), Puerto Princesa, Palawan, 30 June 2018. * * * Thank you Association of Philippine Correspondent Bank Officers (APCB) for the opportunity to speak and share the BSP’s initiatives. ACPB President Arthur Vincent Chung, members, key players and stakeholders in correspondent banking, ladies and gentlemen, Good morning! Your theme, “Digitalization and the Future of Correspondent Banking”, is very relevant. Digitalization and the integration of finance and technology or “fintech” are fast revolutionizing the banking and the global financial services industries. Digital innovations drive increasing demand for new and better financial products and services. Globally, consumers and clients expect quick and immediate response rates, and faster and shorter transaction and payment processes. There is also a rise in public confidence in making electronic payments and in using digital channels, a clear culture change! So how do we keep up? While correspondent banks are concerned with digitalizing its services and leveraging on technology to facilitate cross-border trade, remittance flows and payment and settlement transactions, the BSP is also on its toes. The BSP under the strategic direction of “Continuity Plus Plus” is committed to providing a strong macroeconomy and an enabling operating environment for you, our regulated and supervised entities and market players. At the BSP, we recognize the potential of new digital technologies. We are keenly aware that financial institutions that leverage on technology are granted greater opportunities to diversify. Technology use allows them to widen the products and services offered. We note that technological change is exponential, allowing the emergence of an even greater variety of services. We anticipate that with greater use, needs of financial consumers evolve and become more sophisticated. We at the BSP anticipate the emergence of a new competitive space where service innovation must be encouraged. We allow room for new business models, technologies, industry wide collaborations and partnerships to be developed. Not only does technological change and digitization facilitate efficient, real-time settlement of financial transactions, but they promote greater financial inclusion as well. As regulators, our primary goal is to provide an appropriate and enabling regulatory environment. We seek to encourage innovation while effectively managing ensuing risks. We continue to design and implement a regulatory framework that will support the market infrastructure and which will also promote market discipline. The safety and integrity of the financial system is our primordial consideration. The Current Fintech Landscape in the Philippines The current fintech landscape is complex. It is characterized by a multitude of payments, insurance, deposit-taking, lending, capital-raising, investment management and financial market infrastructure linkages. As of end-2017, payments had the largest market share of the fintech landscape. Forty-four 1/5 BIS central bankers' speeches percent of players offered innovative solutions to facilitate payments and settlement transactions. Of the recorded 60 players, about 27 percent have direct interactions with the BSP or its supervised financial institutions either as a BSP registered, licensed or supervised entity. We advise that since technology is portable, scalable and cost-attractive, market players and regulators alike must remain vigilant and watchful of the rapidly evolving nature of fintechs and how it is revolutionizing digital banking in the Philippines. The BSP’s Regulatory Sandbox Regulatory policies and standards must evolve alongside emerging technologies and the digital transformation of the banking system. The BSP espouses a flexible “test-and-learn” approach to financial innovation. We call this, the “regulatory sandbox.” Essentially, the sandbox provides a testing ground for new business models to guide us as regulators, in assessing potential risks. The ultimate objective is to be aware of the risks, to employ mitigating actions as needed, and also allow room for market players to leverage on new technologies. Guided by the sandbox approach, the BSP ensures that regulation is calibrated according to the defined activity’s identified risks. The approach also encourages dialogue and multi-stakeholder collaboration among fintechs and various financial sector players. The purpose is to achieve a “whole-of-government approach” to ensure policy consistency and prevent regulatory arbitrage. Ultimately, fintech innovations must work for the benefit of consumers. This would include the underbanked and unbanked sectors. In this regard, digitalization has great potential to promote inclusive growth. With financial inclusion as the goal, as regulators, we need to ensure that the design and deployment of digital financial solutions meet the highest standards of transparency, product suitability, security and confidentiality. With this in mind, we have further refined existing regulations to more effectively respond to digitalization of banking services, fintech developments and emergence of technology-related risks while remaining supportive of financial innovation. Some of these regulations have significant impact on correspondent banking. Staying Competitive in the Midst of Digital Revolution The rapid evolution of digital technology, particularly the widespread use of smart phones at the turn of the new millennium, revolutionized financial product and banking service delivery. Customers now have unprecedented access to a wide array of electronic platforms. Included in these are virtual financial services platforms, which allow customers to perform banking transactions and make payments anytime, anywhere, and at their own convenience. Recognizing that electronic banking expands client reach and improves financial access, as early as 2000, we allowed banks to engage in electronic banking. In parallel, we have implemented a cash agent model. This provides an innovative service delivery channel through combining e-banking self-service online and real-time transactions, with cash-in, cash-out (CICO) provided by third-party cash agents. Emerging digital solutions, products and services, push banks to keep pace with increasing competition posed by even non-bank players. Non-bank players offer financial products and services with thoughtfully designed user interfaces. One recent development with significant impact to correspondent banking is the rise of blockchain or distributed ledger technology (DLT). 2/5 BIS central bankers' speeches Hence, correspondent banks must embrace this wave of innovation and rethink strategies. To grow markets in the midst of competition, new customer solutions through efficient operations should be delivered. Technology-based solution providers suggest that blockchain or DLT could be harnessed to alleviate some correspondent banking issues. This can be achieved by enabling better risk management, reducing costs, and providing an alternative payment platform, especially in terms of transferring small-value payments. In this connection, the BSP is working closely with market innovators and industry players to explore tie-ups of correspondent banks with DLT providers. We believe that collaboration and strengthening partnerships with other fintech players is a way to boost digital capabilities of correspondent banks. We recently approved a project under the test-and-learn approach. The project will facilitate creation of a real-time domestic and overseas remittance corridor without the need to establish a central operator. This will prove beneficial to our remittance sector which relies heavily on correspondent banking for the safe and efficient settlement of transactions. The Bankers Association of the Philippines (BAP) is also spearheading a project to develop digital IDs powered by blockchain technology. Establishing a Safe and Efficient Retail Payments System In 2015, the National Retail Payments System (NRPS) was launched. The NRPS will help create a safe, efficient, affordable, interoperable, and reliable retail payments system in the country. The NRPS and the resulting envisioned payment ecosystem will serve as a platform for fintech innovations. Industry players can utilize fintech solutions and provide services within an organized, commercially-viable and efficient retail payments system. Since its launch, critical milestones reached include: (1) establishment and operationalization of the industry-led payment system management body (PSMB); (2) transitioning of the batch interbank fund transfer service of the Philippine Clearinghouse Corporation (PCHC) into PESO Net, the first multilateral automated clearing hours in the country; and (3) the launch of InstaPay which allows 24/7 low-value electronic fund transfers. Enhancing the Regulatory Environment for Money Service Businesses (MSBs) Meanwhile, the regulatory framework on the operations of money service businesses or Money Service Businesses (MSBs) has been rationalized. Specifically, the customer due diligence requirements to re-balance financial integrity and financial inclusion objectives of policy reform were enhanced. Under our amended anti-money laundering (AML) rules (which covers MSBs) customer due diligence/Know-Your-Client (KYC) requirements were relaxed for low-risk customers/accounts/transactions. This is provided certain conditions are met to ensure that residual money laundering/terrorist financing (ML/TF) risks are adequately managed. Regulating the Use of Cryptocurrencies/Virtual Currencies The rise in cryptocurrency or virtual currency (VC) presents an immediate threat to correspondent banking. This is because it allows peer-to-peer transfer of value without going through intermediaries or central counterparties. The BSP recognizes that VC systems can 3/5 BIS central bankers' speeches revolutionize financial services delivery, particularly for payments and remittances. Thus, we established a framework to regulate VC exchanges and similar entities operating in the Philippines. Under the new framework, VC exchanges are classified as Remittance and Transfer Companies (RTCs). They are subject to registration, minimum capital requirements, internal controls, regulatory reporting and compliance with the anti-money laundering rules and regulations. In particular, we keep close track of the use of virtual currency for trading and fund-raising through initial coin offerings (ICOs) and the emergence of private digital currencies and Central Bank-Issued Digital Currencies (CBDCs). We are collaborating with other regulators for a harmonized regulatory approach on ICOs and VC trading activities. We are also working closely with BSFIs on their respective plans to launch private digital currencies and other pioneering VC technologies. Presently, we are looking into the issue of CBDCs and what it means for the supply of credit and the impact on the financial system. These initiatives take time and warrant thorough consideration. In all this, the BSP is carefully monitoring emerging technologies to balance the rewards of innovation against the overall safety and integrity of the financial system. Promoting Enhanced Cybersecurity in the Philippine Financial System There is also a need to address cybersecurity on a broader scope. This is a must for a digital, financial ecosystem to thrive. To respond to this challenge, we established a framework that provides parameters and best practices to identify, prevent, detect, respond to, and recover from cyber-attacks. In November of last year, we issued information security guidelines. These require BSFIs to manage information security risks within acceptable levels through a dynamic interplay of people, policies, processes, and technologies. In this regard, the board and senior management of BSP-supervised financial institutions (BSFIs) play a critical role. As the ones ultimately responsible for their respective institution’s risk oversight and governance, the board and senior management of BSFIs must safeguard information security. Exploring RegTech Solutions Fintech products and services are susceptible to cyber threats, money laundering, and other fraudulent activities. Cognizant of this, regulatory technology or RegTech solutions have emerged as an important technological supplement to existing regulatory and supervisory tools. This allows the effective address of regulatory challenges in the financial services sector. The BSP is currently investigating and will pilot RegTech solutions to streamline supervisory functions, particularly to address regulatory compliance and reporting requirements of supervised financial institutions. Engaging in Regional Cooperation Agreements Lastly, we are enhancing our cross-border presence through multi-sectoral and regional collaborative engagements. Last November 2017, the BSP entered into a Fintech Cooperation Agreement with the Monetary Authority of Singapore (MAS). Under this agreement, both countries 4/5 BIS central bankers' speeches can share information about emerging fintech trends and developments and work on fintech projects together. Concluding Remarks As key players in the financial system, we trust in the continued partnership of APCB. To fully reap the rewards of financial innovation, we need to strike a balance between optimizing the benefits of digitalization against the overall safety and soundness of the financial system. Digital transformation in correspondent banking is not a future event. It is a present reality. Recognizing this, we need not be apprehensive. Instead, we must start working together, always keeping a positive mind-set. In closing, I emphasize the importance of sustained collaboration among stakeholders. This is needed to create a safe, efficient and reliable digital environment. As new technologies like mobile banking, social networking, big data, and cloud computing advance, so must banks need deeper and wider understanding of trends. Stakeholders would do best to identify growth opportunities and establish synergies with new players and industries and with each other to remain competitive and relevant. I look forward to joining this afternoon’s panel discussion. Thank you very much and good morning. 5/5 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the BSP 25th Anniversary Celebration, Manila, 3 July 2018.
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Nestor A Espenilla, Jr: Navigating the future Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the BSP 25th Anniversary Celebration, Manila, 3 July 2018. * * * Good afternoon fellow BSPers and a happy anniversary to everyone! Today, we celebrate 25 years of the Bangko Sentral ng Pilipinas. It is an honor to share this milestone with everyone here at the PICC. On behalf of the Monetary Board, I warmly greet the entire BSP family, here in Manila, as well as at SPC, and across the regions via live-streaming. For a quarter of a century, the BSP has ensured price stability, strengthened the financial system, and has provided a reliable payments system. Indeed, the institution we proudly serve has achieved remarkable feats over the past twenty-five years. While our mandates have remained the same, our work has continued to evolve and adapt to an ever-shifting economic landscape. The growing interconnectedness of financial markets, coupled with the rapid pace of digitalization and technological advancement, demands that we safeguard the financial system against threats, even as we search for opportunities, through game-changing reforms and appropriate regulations. Thus, it is only fitting that our anniversary’s theme is “Navigating the Future.” It is a meaningful theme, conveying not only a sense of purpose, but one of urgency. How must we navigate the future? The word “navigate” originates from two Latin words, “navis” which means “ship”, and “agere,” which means “to drive.” The art of navigation involves the skillful planning, directing or plotting of a path… it imagines a voyage to a specific destination. Literally, it refers to the “art of ship mastery” but is also used for “finding one’s way”. For the BSP, our destination and mission is clear. It is encapsulated in our core mandates of securing price stability, maintaining financial stability and promoting an efficient and reliable payments system. This is our path. But to continue successfully on it, we must draw inspiration from challenges successfully surmounted. To forge ahead, we must be equally conscious of our identity – who we are… and why we came to be. Our very origins and establishment as a central monetary authority in 1993 were fraught with struggle and was a product of lessons learned the hard way. Perhaps this audience may not remember why there was a need to establish and organize what is now known as the Bangko Sentral ng Pilipinas. BSP. Of our 5,322 work-force today, it is a fact that 84% have been here less than 25 years. Many of you are likely unfamiliar with the Central Bank of the Philippines (CBP), an entity separate and distinct from the BSP, and the events that led to its dissolution. The dissolution of the CBP and the establishment of the BSP and a separate legal entity called the CB – Board of Liquidators (CB-BOL) were premised on the urgent need for an independent central monetary authority… financially strong, enjoying fiscal autonomy, and free from political influence. This independence is constitutionally enshrined. For the last 25 years, we, the BSP, have proudly anchored ourselves on this independence. We protect and uphold its demand for responsibility and accountability. Let me recall some key accomplishments… 1/4 BIS central bankers' speeches In response to the Asian Financial Crisis of the late 1990s, the BSP pursued structural reforms that changed and improved the conduct of monetary policy and financial supervision. In 2002, to better attain price stability objectives, the BSP formally adopted the inflation-targeting (IT) framework. Since then, we have established a solid track record for hitting our inflation targets and for being transparent on how we conduct monetary policy. In 2016, we established the interest rate corridor (IRC) system to enhance monetary policy transmission and reinforce the development of the domestic financial market. This year, we have commenced the gradual phase-down of ultra-high reserve requirements to promote the efficiency of monetary policy. Amid changes in financial market conditions and increasing sophistication of financial services, we recognized a growing need for financial regulations to adapt, or else risk irrelevance. This is just one of the lessons from going through two episodes of financial crises over the past two decades—financial supervision must be proactive instead of reactive. We have thus shifted to a more comprehensive, risk-based approach to banking supervision. This has significantly improved the safety and soundness of individual banks and promoted early identification and effective mitigation of system-wide financial risks. In December 2002, the BSP shifted to a real-time gross settlement (RTGS) system. This made payments and settlements more efficient. Today, we have PhilPaSS, a fully automated and secure payments system. In 2017, PhilPaSS processed nearly P270 trillion worth of transactions. These are only some of BSP’s major milestones. They encourage us to continue the journey even in the face of challenges. Our clear identity, our independence, the lessons we have learned and the expertise we have gained for the last 25 years, assure we are on the right path. A year ago, I took my oath as Governor of the Bangko Sentral ng Pilipinas. At the BSP Assembly Hall, in my message, I said that, “central banking requires exemplary and coordinated ability to navigate the currents of the global financial markets.” On that day, last year, I first laid out my goals for the BSP under my term. Even then, the art of navigation was highlighted. And even then, I expressed that taking a “business-as-usual” stance just simply would not do. Then and now, I emphasize that there is a need to be more agile and proactive with our policies and programs. This is the core of the “Continuity Plus Plus” agenda — our roadmap for navigating the future. “Continuity Plus Plus” is a two-fold strategy. On the one hand, the call for continuity appreciates the frameworks, methods, and buffers we have already put in place. It entails leveraging on our legacy of excellence in fulfilling our core mandates. At the same time, the need for “Pluses” recognizes that we must make our financial system stronger, more dynamic, and truly inclusive through bold and purposeful changes. We intend to accomplish this by implementing game-changing financial sector reforms, especially those that aim to further develop deeper money, debt, and foreign exchange markets and efficient payment systems that systematically build the country’s resilience and promote its competitiveness. Finally, I emphasize that for our initiatives to have meaning, we must ensure that their benefits translate into opportunities for every Filipino to improve their quality of life. This puts financial inclusion squarely at the heart of the “plus plus” agenda. The BSP is a pioneer in this regard. We were probably the first central bank in the world to establish a unit dedicated to promoting financial inclusion. We did this as early as 2007. Today, 2/4 BIS central bankers' speeches we continue to create a supportive policy environment for broadening access to financial services. In the past year, we provided more access points and a broader range of financial products. We introduced the “branch-lite” concept to reach underserved areas; the promotion of “basic deposit accounts” (BDAs) to encourage account ownership among the unbanked; as well as the issuance of guidelines on agricultural value chain financing to increase the flow of credit to the agricultural sector. All these complement our long-standing campaigns to promote financial literacy and consumer protection. Recently, we have begun to harness the power and reach of the digital space to further push this agenda. The digital revolution underscores the importance of innovation and technology to ensure delivery of financial products and services to a wider segment of society. In this regard, digital payment channels have found their way into our payments and settlements infrastructure. Under the National Retail Payments System (NRPS), we aim to leverage on financial technology —or FinTech— to bring about an inter-operable, safe, and efficient real-time digital payments system. Just this April, we launched InstaPay to enable 24/7 low-value electronic transfers. These initiatives should facilitate the shift from being a cash-heavy to a cash-lite economy, a trend we observe happening across the globe. Even as we provide an enabling environment for these technological innovations in the payments ecosystem, the BSP “walks the talk” by exploring ways to digitalize our own payments processes. You may have noticed that all medical reimbursements, regardless of amount, are now being directly credited to the payroll account. Cashless payment options using QR codes are now available at our canteen and cooperative stores. Soon, BSP employees may have the option to open their payroll account with other domestic banks. Digitalization of travel allowances, as well as of our payment collections, are also underway. My fellow BSPers, much has changed since the BSP was established 25 years ago. Today, the momentum for progress and reform has not diminished. I could not be prouder to say that we have done this well and this much because of everyone’s invaluable contributions to the cause. For this, I, on behalf of the Monetary Board, also salute and honor the three Governors who came before me—the late Governor Gabriel Singson, the late Governor Rafael Buenaventura, and former Governor Amando Tetangco, Jr. who joins us today to celebrate with us. Thomas Aquinas said, that “if the highest aim of a captain were to preserve his ship, he would keep it in port forever.” Under the capable leadership of our past Governors, we have travelled far and have reached new points of opportunity. As captain now of our navigating team, I am confident in the course we have charted under “Continuity Plus Plus.” I put my trust in the BSP crew, which has proven itself time and time again to be capable and skilled. We may be going through some strong headwinds today. But we stand undaunted. For BSP, it’s a matter of careful navigation and timely action. The economic ship itself is fundamentally solid and sturdy. We’ll get to better weather soon enough and sail on to destination. As I close, I recall my mission as head of team BSP. It is not only to deliver on our mandates today. Rather, it is to build capabilities to address challenges and develop skills needed to conduct our mission given likely scenarios…. ready to respond where it matters… when it matters. This is the rationale for the bold organizational changes we have embraced thus far. These changes are meant to make the institution and its key officers more agile and resilient, 3/4 BIS central bankers' speeches ready too – as individuals and as an organization – to navigate the future. Let me recognize the crew: DG Diwa Guinigundo and the Monetary and Economics Sector (MES) DG Chuchi Fonacier and the Financial Supervision Sector (FSS) DG Cyd Amador and the Corporate Services Sector (CSS) AG Dahlia Luna and the Currency Management Sector (CMS) Not to forget the Offices directly working with me and of course the Monetary Board: Carlos G. Dominguez III Felipe M. Medalla Juan De Zuniga, Jr. Peter B. Favila Antonio S. Abacan, Jr. V. Bruce J. Tolentino Today, as always, we ready ourselves for more challenges ahead, taking stock of two-and-a-half decades’ worth of lessons and experiences. Maraming salamat team BSP. Happy 25th Anniversary to us all! Mabuhay ang BSP! Mabuhay ang bansang Pilipinas! 4/4 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Institute of Corporate Directors 2018 Mid-Year Economic Briefing Fellows' Breakfast Roundtable, Manila, 17 July 2018.
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Nestor A Espenilla, Jr: Good governance in the pursuit of mandates Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Institute of Corporate Directors 2018 Mid-Year Economic Briefing Fellows’ Breakfast Roundtable, Manila, 17 July 2018. * * * ICD Chairman Francis Estrada, Chief Executive Officer Dr. Alfredo Pascual, business, industry and government leaders, vanguards of good governance, ladies and gentlemen, good morning. I thank the Institute of Corporate Directors (ICD) for this opportunity to share the corporate governance initiatives championed by the BSP for itself as an institution, in delivering on our price stability mandate, in setting an example and in giving guidelines to those under our supervision. A plethora of literature on central banking emphasizes the importance of credibility in shaping monetary policy and in guiding the market. Credibility too is important for effective regulation. It is notable that even in everyday personal relationships, credibility is built on established competence and character. On consistency. On integrity. On good self governance. At the BSP, we believe that good governance should flow from the top. By this, I am not only espousing decisive leadership. Rather I emphasize that to elicit good governance, we must ourselves practice good governance. For it is only then that we will have the credibility and moral ascendancy to elicit the public’s and the market’s trust and guide expectations, and it is only then that we could effectively require good governance from our supervised entities. Good Governance in the BSP As early as 2009, the BSP adopted a principles-based governance framework. In 2015, the BSP was recognized as an Island of Good Governance by the ICD and as of 2017 [vetted by the Development Academy of the Philippines (DAP)], two out of our five governance principles: Accountability and Transparency and Strategic Direction were assessed at “High Integration.” Three of our other principles — integrity, ownership and voice; and responsiveness — were rated at “Sustainable”. These principles are set forth in our 3-year Governance Roadmap for 2017 to 2019 and are integrated into the BSP’s decision-making systems, processes, and work ethic so that we can give the best possible service to our country and to our fellow Filipinos. In the BSP, we affirm that good governance is not just about compliance with laws and regulations. Rather, good governance must frame and ground our intent so that our actions, initiatives and policies add value. Good governance results in breakthroughs in the effective delivery of our mandates of maintaining price stability, financial stability and an efficient and safe payments system. Good Governance and Breakthroughs for The Philippine Economy The BSP’s commitment to its primary mandate of price stability has brought about a balanced and sustainable growth of the economy. Through the years, this required a delicate and courageous balancing act demanding the neutrality of monetary policy— without favoring any sector over another1 . It required and requires the exercise of an independence that can only be achieved by a commitment to good governance. 1/5 BIS central bankers' speeches Through the years in the exercise of this delicate balancing act — together with the country’s economic managers, we have achieved 77 quarters of uninterrupted economic growth since the Asian Financial Crisis. Our six-year consecutive growth of above 6 percent makes the Philippines one of the fastest growing investment-grade economies in the world. This growth streak is projected to continue for the medium term despite challenges in the global and domestic economic landscape. This growth assumption is feasible due to the confluence of various factors: First, the current progress has broader support. While traditionally, the services sector has mainly pushed growth, the industry sector is emerging as a reliable source of growth, anchored on the manufacturing sub-sector’s renaissance. On the expenditure side, consumer spending is a key growth engine. This is aided by the improving employment climate, pegged at 94.7 percent of the labor force as of the first quarter of 2018. Public spending is likewise rising on the government’s increased delivery of social services. Second, our young population places us in a demographic sweet spot that enables higher productivity as a large percentage of our young population joins the labor force. Lastly, our sound macroeconomic fundamentals and growth prospects continue to attract foreign investments. Record foreign direct investments – USD 8 billion and USD 10 billion – entered the country in 2016 and 2017, respectively. Domestic liquidity continues to expand, in line with the BSP’s outlook for inflation and economic activity. Such expansion is driven by lending to key production sectors adding further navigational mileage to the Philippine growth story. Our external position remains manageable and we have sufficient liquidity buffers against global headwinds. We note that the country’s balance of payments position has been posting deficits since 2016 on account of strong foreign currency outflows. This is a reversal from previous BOP surpluses accumulated from the large inflows due to quantitative easing since the global financial crisis. With the normalization of US monetary policy and rising global interest rates, we see significant corrections in capital flows that are affecting our BOP and exchange rate. This is compounded by uncertainties posed by the trade war and geopolitical risks. Nevertheless, we view these as short-term macro-stability challenges. Over the medium-term, our sound fundamentals should serve us in good stead. First, strong imports are driven by capital goods, raw materials, and intermediate products to support infrastructure development that can raise potential output. Second, foreign investments by Filipino corporates and residents are increasing. Blue-chip companies continue to search for profitable ventures abroad. Third, Filipinos are prepaying their foreign loans reflecting tempered risk appetite for foreign exchange exposures. These outflows indicate sound risk management. Further, the balance of payments is reliably supported by strong structural foreign exchange inflows, specifically revenues from the IT-BPO industry and overseas Filipino remittances, as well as rising foreign direct investments. Finally, gross international reserves continue to provide ample external liquidity buffer. The endJune 2018 GIR of USD 77.7 billion is equivalent to 7.5 months’ worth of import of goods, and payments of services and primary income. 2/5 BIS central bankers' speeches Good Governance and Credibility in our Commitment to Price Stability Amidst headwinds brought about by domestic and global factors, we remain strongly committed to our primary mandate of price stability. Average headline inflation as of June 2018 is above target at 4.3 percent. While we expect this to return to within target band in 2019, we nevertheless treat the inflation outlook as a concern given elevated inflation expectations and increasing risks of second-round effects from ongoing price pressures. In achieving price stability — clear and open communication — the announcement of an explicit inflation target is central... to this, credibility is the bedrock. It reflects not only a commitment to the goal, but also to ownership of the inflation target. Since 2002, we have been committed to the inflation targeting framework. The framework demands that monetary policy decisions be forward-looking and data-dependent. As an inflation-targeting central bank, we allow foreign exchange flexibility so that we can conduct independent monetary policy primarily focused on assessment of domestic conditions, and is thus not based on actions of the Fed. Nevertheless, we consider external factors and exchange rate movements if these will materially impact the pursuit of domestic objectives especially inflation. This approach is most appropriate for a small open economy like the Philippines. Further, since the adoption of the interest rate corridor (IRC) system in 2016, the BSP has gained sufficiently flexibility in relying on auction-based instruments for liquidity management to complement the overnight reverse repurchase borrowing rate as the policy rate signal. The IRC also allowed the BSP a channel to provide guidance to short-term market interest rates. Thus, in this manner, the BSP has reinforced its options to maintain firm monetary control. We assure that our monetary policy responses to elevated inflation pressures were, and are, timely and appropriate. Early this year, inflation forecast over the two-year policy horizon, as informed by a wide set of economic data, suggested no adjustment in policy rate was warranted at that time. This was because data showed that the uptick in prices was driven mainly by supply-side factors – which could not be influenced by policy rate hikes. Moreover, our forecast continued to show inflation upticks as transitory and moderating within the target in 2019. Nevertheless, recognizing increasing volatilities in world oil prices and global interest rates, the BSP responded to changing monetary environment conditions by adjusting auction volumes and allowing the term deposit facility (TDF) rates to rise, creating effective tightening in the market. There were material changes towards the end of the first quarter and the beginning of second quarter of 2018. On the global front, the attractiveness of the US economy was highlighted by both its fiscal and monetary policy adjustments, including rising interest rates. This caused a migration of portfolio investments seen in the decline in ASEAN 5 equities markets leading to increased market volatility. This likewise contributed to elevated exchange rate pressures. In addition, the continued rise in global oil prices and the price effect brought about by scarcity of the NFA rice provided key impetus for higher levels of inflation. Our two successive rate hikes in May and June were measured and deliberate responses to the evolving economic environment and dynamic market conditions meant to help anchor inflation expectations and temper second-round effects, firmly signalling our commitment to ensuring price stability. These were undertaken even as we await full implementation of appropriate policy response to supply shocks such as the National Government’s social safety net programs. 3/5 BIS central bankers' speeches We reaffirm our strong commitment to ensure that inflation returns to target by 2019. We stand ready to take decisive action in a timely manner to address emerging risks that could threaten the attainment of this target. Good Governance in Bringing About a Sound and Stable Banking System As earlier mentioned, while we internally practice good governance principles, we require this too for our supervised and regulated entities. But in doing so we are mindful of the importance of their buy-in and of prior consultation. Good governance cannot be dictated. This is why we rollout our regulatory proposals and value industry feedback prior to their implementation. This makes for successful implementation. In August 2017, we yet again raised the bar of corporate governance for the banking industry. Aligned with the Securities and Exchange Commission’s (SEC) Code of Governance for Publicly Listed Companies (PLCs), we enhanced requirements on the membership composition of financial institutions’ Board of Directors (BOD) to ensure that a collective mix of individuals who possess expertise and competence effectively manage the institution. These initiatives help maintain the soundness and stability of the financial system. This is validated by various reports from stakeholders and multilateral institutions such as the IMF and the recent upgrade in the S&P Global Banking Industry Country Risk Assessment (BICRA) of the Philippine banking system. The outlook for the banking system remains positive given the robust macroeconomic outlook, rising credit provision coverage, adequate liquidity and rising capital buffers. Bank lending is expected to sustain its strong growth. The trajectory for profit growth will continue, driven mainly by strong growth outlook, upbeat lending activities, product innovations, and more cost-efficient and technology-enabled operations. Good Governance in Managing Our Mandates: Price Stability and the Financial System It is noticeable that our Charter — Republic Act. No. 7653 — puts a premium on the mandate of price stability. We are mindful, though, of lessons from the past, the Global Financial Crisis... we note the increasing interconnectedness of markets and financial systems... From this, it is also clear that price stability must not be pursued in a vacuum. Indeed, price stability is a macroeconomic goal which can be promoted via a sound and stable financial system. Again, it is a balancing act necessitating good governance, wisdom and courage. Safe and sound financial institutions contribute to a resilient financial system, which in turn, anchor the sustained stability of the economy. The financial system provides a framework for carrying out economic transactions and transmission mechanisms for the BSP’s effective conduct of monetary policy. We recognize that monetary policy must evolve in the context of a more sophisticated and complex financial system. Thus, all our current reform actions – reducing reserve requirements, liberalization of FX markets, deepening the debt market, as well as our macro- and micro- prudential measures do not diverge from our goals of price stability. These are all strategically pursued to systematically build the country’s resilience amidst an evolving landscape. In this regard, we are committed to more market-based monetary operations. Our move to reduce reserve requirements ratio (RRR) supports the shift towards a more market-based implementation of monetary policy and more efficient financial intermediation. We started with 20 percent RRR, one of the highest in the region, if not the world. By default, the economy is 4/5 BIS central bankers' speeches shouldering a de facto tax burden. By slowly lowering RRR, we are reducing friction costs. This should help curb shadow banking given the rise of strong alternatives offered by fintech and financial innovations. The BSP is deliberate in the timing of the reduction of reserve requirements. It will be gradual, moderate, and phased over the medium term with the objective of eventually bringing RRR to single-digit levels in line with regional peers. The BSP waited for alternative mechanisms to be developed before embarking on the reduction. Prior to the RRR cuts (in recent months), we have seen a firm anchoring of market rates to the IRC. Thus, there is now room for BSP to reduce its operational reliance on reserve requirements for liquidity absorption and management. The BSP has enough market-based tools to make this operational adjustment policy neutral. The RRR cuts are not without compensating action. Excess liquidity is reabsorbed through our open market operations and significant FX operations. There is no evidence to indicate that the cut is expansionary. On the contrary, market rates have trended upwards, validating tighter market conditions. A Call for Cooperation Ladies and gentlemen, the BSP has been and will always be a vigilant captain of the financial system to deliver a high quality of life for all Filipinos. We value the partnership with the ICD which similarly aspires for sustainable and inclusive development through broad-based economic growth led by corporations adhering to good corporate governance principles. Together we must leverage on the strength of the economy. This is an opportune time for government and the private industry to continuously coordinate efforts to ensure the continuity of the policy reforms that helped guide the economy and our banking system to being among the world’s most resilient. In closing, we at the BSP thank ICD for promoting corporate governance reforms from the topdown to bring the country to greater economic heights translating to a better quality of life for our countrymen. Thank you very much for your kind attention! Mabuhay ang Pilipinas! 1 1 See S. 1235, 9th Cong. Record of the Senate 641 (May 19, 1993, enacted) 5/5 BIS central bankers' speeches
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Opening remarks by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), for the Q2 2018 BSP Inflation Report Press Briefing, Manila, 20 July 2018.
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Nestor A Espenilla, Jr: Opening remarks for the Q2 2018 BSP Inflation Report Press Briefing Opening remarks by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), for the Q2 2018 BSP Inflation Report Press Briefing, Manila, 20 July 2018. * * * A pleasant morning to everyone. Welcome to the press conference on the BSP’s Inflation Report for the Second Quarter of 2018. Today, we wish to discuss with you the developments and the analysis that underpinned the BSP’s monetary policy decisions during the second quarter of the year. Our objective is to enable market participants and the general public to better understand the underlying developments as well as the reasoning and analysis behind the BSP’s policy actions. We begin with the global economic environment. The overall prospects for global output growth have improved since our last briefing in April, owing to faster rates of expansion in key economies. In particular, economic activity in advanced economies has gained further traction. Consequently, the unwinding of accommodative monetary policy in the US and other advanced economies will likely continue and drive capital flows away from emerging economies, including the Philippines. Meanwhile, global inflation remains elevated in Q2 2018 amid geopolitical tensions between the United States and some key oil producers. Nevertheless, plans by major producers like Saudi Arabia and Russia to boost production, coupled with higher output coming from the US, could exert downward pressure on oil prices. In the Philippines, we continue to feel the weight of supply-side price pressures, as reflected in the uptick in the prices of certain food items and domestic petroleum products. Average headline inflation using the new 2012-based Consumer Price Index (CPI) series rose to 4.8 percent during the quarter from 3.8 percent a quarter ago, bringing the year-to-date average to 4.3 percent. This is higher than the upper end of the National Government’s target range of 2-4 percent for the year. Similarly, core inflation increased to 3.8 percent in Q2 2018 higher than the quarter- and year-ago rates of 3.0 percent and 2.5 percent, respectively. Moreover, inflation expectations of private sector economists also increased during the quarter, with analysts attributing their higher projections to volatile global oil prices, a weaker peso, and the transitory effects of recent tax measures on the prices of domestic goods and services. Meanwhile, domestic output expansion remains robust on account of the expansion in capital formation and household consumption, as well as strong performance of the services and industry sectors. Recent high-frequency sector indicators of economic activity also continue to point to firm growth prospects in the near term. The growth momentum was also supported by a strong and stable Philippine banking system. During the review quarter, banks’ balance sheets exhibited sustained growth in assets and deposits. Furthermore, asset quality indicators remained healthy while capital adequacy ratios continued to be above international standards. Domestic liquidity also remained ample, driven by robust credit growth. However, amid this resilience, the Philippine economy is being tested by external headwinds emanating from the recent and planned interest rate hikes by the US Fed and brewing trade tensions among key economies. These are exerting depreciation pressures on the peso. The country’s current account deficit and higher inflation also dampened investor sentiment during the quarter. 1/2 BIS central bankers' speeches These developments formed the backdrop for the BSP’s policy decisions during the second quarter of 2018. In brief, the BSP raised its policy rate by 25 basis points each in May and June, bringing the overnight reverse repurchase (RRP) rate to 3.50 percent from 3.0 percent a quarter ago. The interest rates on the overnight lending and deposit facilities were likewise raised accordingly. In deciding to hike the policy rate during the quarter, the Monetary Board noted that the increase in inflation expectations and in the risks of possible second-round effects argued for timely and decisive monetary policy actions from the BSP. Although inflation expectations remain within the target range for 2019, elevated expectations for 2018 highlighted the risk posed by sustained price pressures on future wage and price outcomes. Equally important, upside risks continued to dominate the inflation outlook, as various measures of core inflation continued to rise. Meanwhile, the BSP kept a close eye on developments in the foreign exchange market and noted their potential impact on inflation in the coming months. The BSP believes that its monetary policy actions during the quarter signal its strong commitment to safeguard macroeconomic stability in an environment of rising commodity prices and ongoing normalization of monetary policy in advanced economies. The BSP likewise reiterates its support for carefully coordinated efforts with other government agencies in implementing non-monetary measures to help mitigate the impact of supply-side factors on inflation and social welfare. Accordingly, the BSP will sustain its utmost vigilance. In particular, we are taking into account the potential price pressures of excessive volatility in the foreign exchange market. While we believe that our fundamentals remain solid and healthy, sustained pressures on the peso could adversely affect inflation expectations. Further, some demand side pressure may also be already feeding into inflation. All of these warrant a firm and timely monetary response. Therefore, let me say that the BSP is considering strong follow-through monetary adjustment at the next meeting of the Monetary Board in August. The pace and magnitude of policy tightening will necessarily be dependent on our comprehensive and rigorous assessment of all relevant data and forecasts. This is consistent with our long-standing disciplined approach to inflation targeting. We stand by our primary mandate of promoting price stability conducive to a balanced and sustainable growth of the economy. In a moment, we will provide you with a more detailed discussion of the factors behind the Monetary Board’s recent decisions and its assessment of price and output conditions. Also, we will have a brief discussion of the results of the BSP’s latest quarterly loan officers’ survey. We look forward to your questions at the end of these two presentations. Thank you and good morning. 2/2 BIS central bankers' speeches
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Chat with analysts by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), via audio teleconference, Manila, 25 July 2018.
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Nestor A Espenilla, Jr: Opening remarks during the chat with analysts Chat with analysts by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), via audio teleconference, Manila, 25 July 2018. * * * Good afternoon. Whether you are here with us today at the Bangko Sentral ng Pilipinas (BSP) or are participating via audio-conferencing, it is my pleasure to welcome all of you. Thank you for joining this first by-invitation-chat we have organized for economic and financial analysts. Our objective this afternoon is to promote better understanding of the BSP’s policy actions and provide background on developments that have prompted our monetary policy decisions. Let me begin with our mandates. The BSP has three. Our primary mandate is to promote price stability conducive to a balanced and sustainable growth of the economy. We are also tasked with maintaining financial stability and developing the payments system. Since 2002, the BSP has been committed to the inflation targeting framework. This calls for monetary policy decisions to be forward-looking and dependent on comprehensive and rigorous assessment of all relevant data and forecasts. The framework also calls for flexibility of the exchange rate so that we can conduct independent monetary policy primarily focused on domestic conditions. Nevertheless, external factors are always considered. We also react to excessive exchange rate volatility particularly if this affects inflation expectations and poses a risk to the inflation outlook. Our IT framework has been reinforced with the adoption of the interest rate corridor (IRC) system in 2016. With the development of auction-based instruments complementing the overnight reverse repurchase borrowing rate as the policy rate signal, the BSP has expanded its options for maintaining firm monetary control. Early this year, economic data suggested that an adjustment in policy rate was not yet warranted as the uptick in prices was driven mainly by supply-side factors. Moreover, our forecast continued to show inflation upticks as transitory and moderating within the target in 2019. Nevertheless, recognizing increasing volatilities in world oil prices and interest rates, the BSP responded to changing monetary conditions and allowed the term deposit facility (TDF) rates to rise. Market rates have correspondingly risen. Our two successive policy rate hikes in May and June were measured and deliberate responses to the evolving economic environment and dynamic market conditions. These were meant to help anchor rising inflation expectations and to temper second-round effects. The rate hikes were also made in the context of increased traction in the economic activities of advanced economies and the unwinding of accommodative monetary policy in the US and other advanced economies, driving capital flows away from emerging economies. The balance of payments remains manageable notwithstanding significant external headwinds. Recent and planned interest rate hikes by the US Fed and brewing trade tensions among key economies have exerted additional depreciation pressures on the peso even as a flexible exchange rate policy continues to be a stabilizing mechanism against the build-up of unsustainable imbalances. We reaffirm our strong resolve to ensure that inflation returns to target by 2019. We are certainly taking into account the potential price pressures of excessive exchange rate volatility. We remain confident that our fundamentals are solid and healthy. 1/2 BIS central bankers' speeches We recognize that sustained pressures on the peso could adversely affect inflation expectations. Further, some demand side pressures may already be feeding into inflation considering the sustained strong economic growth. These warrant a firm and timely monetary response. We are therefore considering strong follow-through monetary adjustment at the next meeting of the Monetary Board in August. Coming to our second and third mandates, we recognize that monetary policy must evolve in the context a financial system that is fast evolving and is becoming increasingly more sophisticated. Thus, we are pursuing game-changing financial sector reforms – the plus plus of our Continuity ++ agenda. Our current reform agenda – reducing reserve requirements, deepening debt and FX markets, digitalization of the payment system, as well as macro and micro-prudential measures complement our price stability mandate. These are all strategically pursued to systematically reinforce the country’s resilience amidst a dynamic landscape. Now let me talk about our initiative to reduce our ultra-high reserve requirement ratio to align it with other Asian jurisdictions. Reduced reliance on the reserve requirement for managing liquidity conditions signals a shift towards a more market-based implementation of monetary policy. It is an essential element of a broad financial market reform agenda. This will lower friction costs in the banking sector, create more efficient financial intermediation, and help curb shadow banking given the rise of strong alternatives offered by fintech and digital innovations. Moreover, the shift helps support the price discovery process and establishment of more accurate interest rate benchmarks. We are also deliberate in the timing of the reduction of reserve requirements. We waited for alternative mechanisms to be developed before embarking on this journey in order for the reform to be policy neutral. With the recent firm anchoring of market rates to the IRC, we now have room for the reduction of reserve requirements over the medium-term as an operational adjustment, which we started early this year. I would like emphasize that the RRR cuts are not intended to be expansionary as these are offset by compensating actions. Excess liquidity is reabsorbed through our open market operations and significant FX operations. The upward trend in market rates validates tighter market conditions. Finally, I would like to emphasize that the RRR cuts will be gradual and phased over a number of years. We have already achieved significant progress this year. A total of 200 bps reduction in 2018 is in line with our medium-term goal of reducing RRR from 20 percent to single-digit level over a six-year period. Moving forward, the BSP will continue to review and improve the operational features of the IRC system to ensure greater flexibility and efficiency in conducting monetary operations. Indeed, these are important reforms that make us very optimistic about the continued growth of the Philippine economy in a sustainable manner. We thank you for your time and interest in wanting to hear about these initiatives. We will be happy to take your questions. 2/2 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 2018 MCPI Annual Conference, Manila, 26 July 2018.
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Nestor A Espenilla, Jr: Going back to basics Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 2018 MCPI Annual Conference, Manila, 26 July 2018. * * * Honorable SEC Chair Emilio Benito Aquino, Citibank Philippine Country Head Aftab Ahmed, MCPI Chair Fr Jose Victor Lobrigo, fellow microfinance stakeholders, distinguished guests, ladies and gentlemen, it is a pleasure to be with you today for the 2018 MCPI Annual Conference and the launch of the 16th Citi Microentrepreneurship Awards. As we gather here today, the digital revolution is fundamentally reshaping the financial inclusion landscape and traditional financial value chains. Rapid digital innovations in financial technologies have led to the emergence of new market players and more dynamic business models. Given this backdrop, what does your theme “Going Back to Basics” mean to the Philippine microfinance industry? Keeping Things SIMPLE It can be a lot of things. “Going Back to Basics” can be about MFIs fully embracing and welcoming this new operational reality. After all, you were once the original “disruptors” in the delivery of microfinancial services more than 20 years ago! You had pioneered the bold and novel idea that challenged mainstream thinking – that the poor could be as creditworthy as the rich. “Going Back to Basics” can also mean stepping back in order to further strengthen foundations – returning and reinforcing your core values and fundamental objectives. To revisit what has made microfinance work in the first place… to what made it stand the test of time. Going back to basics can also be about keeping things… SIMPLE. And with this I mean having, first, INTEGRITY – by conducting all our dealings fairly and honestly. Mark Twain wrote, “If you tell the truth, you don’t have to remember anything”. Integrity is doing what is right. We should ensure that all transactions with our customers and other stakeholders are open, transparent, fair and ethical. Second, having a SOUND CORPORATE GOVERNANCE. This leads to achievement of our organization’s fundamental goals and objectives and attainment of long-term sustainability. Sound corporate governance is not just about simply conforming to the basic tenets of transparency and accountability. It is about instituting a culture that drives and creates value for our businesses and clients by safeguarding the interests of our stakeholders. Third, we should MANAGE RISKS EFFICIENTLY AND EFFECTIVELY – therefore building trust and credibility in the industry and creating new opportunities for sustained growth. A sound risk management framework allows institutions to deliver competitive and appropriate products and services to its customers as well as assess new growth opportunities. This is especially crucial for MFIs as you virtuously take into account not only your financial performance but also both your social and environmental impact as well. Fourth, it is important to espouse and instil greater PROFESSIONALISM and self-discipline across all levels of the organization. This is necessary to raise the profile of microfinance professionals and the Philippine microfinance industry as a whole. Greater professionalism is also essential to achieve operational excellence and improve sustainability efforts. 1/2 BIS central bankers' speeches Fifth, become financial industry LEADERS in being client-centric. We can gain, build and maintain customer loyalty when we provide products and services that are designed to meet their needs and even exceed their expectations. It is only when we think with our customers’ best interests in mind when we deliver responsive and appropriate products and services, can we achieve industry leadership status. And finally, sixth, by maintaining an enduring commitment towards EXCELLENCE – by benchmarking for success! We must always aim to achieve a standard of excellence in everything we do. Excellence does not happen by default. Creating and cultivating a culture of excellence in our respective organizations is therefore a conscious decision to apply considerable thought and meaningful execution to everything we do. Launching of the 16th Citi Microentrepreneurship Awards At the core of our “going back to basics” mantra are, of course, our clients. Amidst all the talk about innovation, technology, and disruption, at the very heart of it are still, our clients. It is only appropriate, therefore, that we continue to showcase truly inspiring success stories of microfinance clients as we launch the 16th Citi Microentrepreneurship Awards (CMA). The CMA was conceptualized in 2002 by the Bangko Sentral, MCPI and the Citi Foundation. Through the years, it has served as a vehicle that inspires micro entrepreneurs nationwide to achieve greater heights… to believe that by putting in the hard work, anything is possible! May the stories of our clients serve as reminders of the value and nobility of our work. Thank you to our partners, MCPI and Citi Foundation. Our partnership is a significant contribution to the BSP’s Continuity Plus Plus Agenda – one aspect of which is ensuring that our financial system is inclusive and leaves no one behind. While much has been accomplished, I hasten to remind you that much is still expected of us. In this light, we must therefore continue to challenge ourselves to become the best in service to our stakeholders. This requires us to evolve beyond who and what we are; to be innovative and adaptable to the dynamic environment within which we operate; to embrace change with a positive outlook because it presents opportunities for organizational growth and development; and most importantly, to safeguard our reputation and integrity as we continue to reinforce our role in nation building. To the microfinance players, proudly carry along our legacy and identity as the original disruptors! Your capacity “to disrupt” runs deep in your DNA. Continue to “disrupt” in providing better and more efficient products and services to our clients. Maraming salamat at mabuhay ang microfinance! 2/2 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Reception for the Banking Community, Manila, 27 July 2018.
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Nestor A Espenilla, Jr: Of commitments and navigation Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Reception for the Banking Community, Manila, 27 July 2018. * * * Good evening everyone. On behalf of my co-hosts, members of the Monetary Board - Finance Secretary Sonny Dominguez, Phillip Medalla, Jun de Zuniga, Peter Favila, Tony Abacan and Bruce Tolentino... welcome to the Bangko Sentral ng Pilipinas. As you know, the BSP hosts a reception for the banking community annually in January. It is a time of fellowship and networking. It is an opportunity for us to share the economic outlook for the year, and our plans, initiatives and policies moving forward. Tonight’s special event is part of our month-long 25th anniversary celebrations. We sincerely thank you for being a part of it, despite your very busy schedules, braving Friday evening traffic. Last July 3 marked a full quarter of a century’s dedication to the BSP’s mandates of promoting price stability, financial stability and maintaining an efficient payments system. Tonight, I reiterate these commitments in the context of the BSP’s anniversary theme, “Navigating the Future.” Commitment to Price Stability The BSP’s commitment to price stability has supported a balanced and sustainable growth of the economy. We have enjoyed 77 quarters of uninterrupted economic growth since the 1997 Asian Financial Crisis. Our six-year consecutive growth of above 6 percent makes the Philippines one of the fastest growing economies in the world. This growth streak is projected to continue for the medium term despite challenges in the global and domestic economic landscape. Our sound macroeconomic fundamentals and growth prospects have led to positive investor sentiment and have attracted more foreign investments. We gained our investment grade status from international rating agencies in 2013. This year, Standard & Poor’s upgraded our sovereign ratings outlook from STABLE to POSITIVE while both Fitch and Moody’s reaffirmed our sovereign credit ratings with a STABLE outlook. We have record high foreign direct investments — a total of USD 8 billion and USD 10 billion in 2016 and 2017, respectively. Our gross international reserves (GIR) continue to provide an ample external liquidity buffer. The end-June 2018 GIR of USD 77.5 billion is equivalent to 7.5 months’ worth of import of goods and services. Domestic liquidity continues to expand to meet the needs of the economy even as we have demonstrated our resolve to tighten monetary policy whenever the situation calls for it. In the face of rising threats to the inflation target, we hiked policy rates last May and June. We are ready to follow-through to secure our inflation target. The BSP remains firmly committed to its primary mandate of price stability. We stand steadfast and undaunted by the headwinds. Rising global rates. Trade wars. Geopolitical risks. We face unpredictable currents. Distributed ledger. Artificial intelligence. Cyber-threats. We rely on the navigational skills we have honed over the years to manage the constant challenge. Commitment to Financial Stability 1/4 BIS central bankers' speeches Coming to the BSP’s mandate of promoting financial stability, our friends from the industry know that the strong banking system we have proudly nurtured is a product of decades of hard work, commitment to reforms, and decisiveness. Total assets of the banking system increased by 12.2 percent year-on-year (YoY) as of end-May 2018. The expansion was funded by the 12.5 percent growth in deposits mostly deployed to lending activities. Loans were broad-based across various borrower and industry types. The banking system is healthy and profitable. Overall profitability is buoyed by the increase in core income from lending activities. With staunch commitment and consistent dedication, capitalization of the overall banking system is now above the regulatory thresholds. Banks continue to adhere to sound credit underwriting standards as shown by the very satisfactory quality of the banking system’s loan portfolio. Moreover, banks are well prepared to bear credit losses as they have set up adequate provisions for possible defaults. They maintain an NPL coverage ratio of over 100 percent. Moving forward, we expect further expansion of the banking system, sound asset quality, adequate liquidity and rising capital buffers. The trajectory for profit growth will continue, driven mainly by strong growth outlook, upbeat lending activities, product innovations, and more costefficient and technology-enabled operations. As the main provider of credit to key production sectors, the banking system is key to the Philippine growth story. On behalf of the Monetary Board and the Bangko Sentral ng Pilipinas, I personally commend you — leaders of the banking industry for being our staunch partners as we pursue meaningful reforms: raising risk management standards, and aligning corporate governance with international best practices. Through the years, we have built a banking system that is resilient, robust and responsive. Congratulations to everyone. I believe these achievements warrant a round of applause. Navigating the Future with Progressive and Proactive Financial Sector Reforms Truly, there is reason for celebration. But, from experience - and I dare say, out of habit - we shall not rest on our laurels. We are ever mindful of the need to improve to level up. Last 19 January, during the reception for the banking community, I said that market development and efficiency is a theme that will underlie our reform agenda. I said you should expect this. Continuity ++. In my message that evening, I underlined the importance for financial markets to discover prices efficiently and for selfcorrection mechanisms to be encouraged. We have started to deliver. A total of 200 bps reduction in reserve requirements ratio (RRR) this year is consistent with our strategy of the phased and gradual reduction of RRR from 20 percent to single-digit level over a six-year period. At the same time, we were able to neutralize the liquidity impact through our open market and FX operations. Indeed, reducing the RRR to single digit by the end of my term is attainable without compromising effective monetary control. We are ready to resume this initiative next year just as inflation returns to target based on our forecast. We remain firm in our pursuit of structural reforms so that the banking industry remains guided even as you develop your long term strategic plans. As challenges evolve globally and domestically, we continue to improve our open market 2/4 BIS central bankers' speeches operations and expand our policy toolkit. We are currently studying and conducting consultation with the industry for operational refinements meant to further strengthen our ability to guide shortterm market interest rates to move closely with the BSP policy rate and strengthen the transmission of monetary policy to the rest of the economy. We are tying this closely to the broader capital market reforms especially in developing the domestic debt market. Another integral part of our policy toolkit is the flexibility of the exchange rate. Deepening the FX market is therefore another key priority agenda. Our ambitious FX reforms have three core elements: (1) FX liberalization; (2) stronger oversight over non-bank financial institutions; clearer governance arrangements towards a more organized FX trading market. With these efforts, we hope to encourage FX flows from the parallel market to the formal market. We have streamlined FX requirements for the banking system to reduce market fragmentation and increase FX liquidity. We expect responsible behavior among market players. We have a collective responsibility to consistently build our markets to rise above the desire for short-term gains. On the regulatory front, we are pursuing continuous improvement aligned with global standards and best practices. The BSP is rolling-out the enhanced liquidity risk management framework. We are prescribing guidelines on the adoption of accounting standards to promote transparency and fairness in both financial and prudential reporting. The BSP is also continuously working to ensure that financial industry participants are sensitive to, and proactive in, addressing emerging cyber threats. We are enhancing as well our AML-CFT compliance posture. The BSP continues to create a supportive policy environment for financial inclusion. Banks are now allowed to use third party cash agents for increased on-boarding of the unbanked. We allow reduced Know-Your-Customer (KYC) rules for certain low-risk accounts and use technology for face-to-face contact requirements to promote bank account ownership. We have created the framework for opening basic bank accounts. The BSP is also working closely with the national government for the implementation of a biometric-based national identity system to facilitate maximum access to financial services. We are also making big leaps in developing the country’s payment system even as we continuously improve the existing arrangements. Today, we are capable of producing 43 million pieces of high quality currency notes per month, up from just 6.5 million pieces 25 years ago. We also produce 200 million pieces of coins per month. Our real time gross settlement system, Philpass, processes 6,000 transaction valued at Php 1.4 trillion per day. But we are upgrading it further to do more as we roll out the National Retail Payment System that will pave the way for the digitalization of our financial system. Already, we have together launched PesoNet and Instapay. More inter-operable and cooperative payment schemes will follow soon. Closing Remarks As I close, I remind that as market stakeholders, to better navigate a more interconnected and sophisticated financial market system, we must be mindful of changes that are reshaping it. We must embrace the work that needs to be done, to stay ... not only abreast, but ahead of developments. This task of navigation is, and has, never been an easy task. But with collaboration, constant 3/4 BIS central bankers' speeches communication, coordination and cooperation, the challenges we face will be easier to hurdle. We at the BSP thank you — our valued stakeholders for ensuring the continuity of policy reforms to guide the economy and shape our banking and financial system into being among the world’s most resilient. Let us now offer a toast^. Dear pillars of the financial system, fellow public servants, honored guests, friends from the private sector, media and the academe, we at the BSP re-affirm our commitment to our mandates. To Continuity ++. We reiterate our gratitude for your partnership and look forward – jointly and collectively – to navigating the future together. Cheers! 4/4 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the "Providing a Safer, More Efficient, and More Inclusive Philippine Payments and Settlements System" Conference, Manila, 27 July 2018.
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Nestor A Espenilla, Jr: Third pillar of central banking Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the "Providing a Safer, More Efficient, and More Inclusive Philippine Payments and Settlements System" Conference, Manila, 27 July 2018. * * * Friends from the industry, media, fellow BSPers, subject matter experts, esteemed guests, ladies and gentlemen, good morning. The BSP is pleased to host this conference on “Providing a Safer, More Efficient, and More Inclusive Philippine Payments and Settlements System.” There are three pillars of Central Banking. Every BSPer knows this. The first pillar is price stability through the conduct of monetary policy. The second is financial stability through financial system supervision and regulation. The third is an efficient payments and settlements system through the issuance of currency, the operation of the real-time gross settlement system, and oversight over the payments system. The spotlight is often on the first two pillars and we hail the policies and initiatives pursued to achieve them. The importance of the third pillar is often glossed over. The payments system is often compared to the plumbing system. Very important but not very exciting. Lately though, this has been changing. And this change excites us for all the possibilities it brings! Developments are unfolding at a rapid pace and more and more digital payments systems and services are being introduced. In the not-so-long-ago-early-1990s, settlement of interbank transactions was a manual system. Since 2002, the settlement of time-critical and large-value financial transactions has been handled by PhilPaSS, the country’s very modern real-time gross settlement system when it was installed. In its first 5 years, PhilPaSS processed an average of 1,000 transactions daily, valued at Php35 billion per day. In the last 5 years, the daily average is at 6,000 transactions, valued at Php 1.4 trillion per day! Today, we are in the process of upgrading PhilPaSS to replace the system implemented almost 16 years ago. This will further enhance the safety, efficiency, and resiliency of the country’s settlement system. At the same time, we are migrating the communication and messaging systems of the infrastructure to the global standard ISO 20022. This shall prepare our payment and settlement system to be regionally and globally interoperable. Indeed, a safe and efficient payment system is a critical market infrastructure of a stable financial system. The payment system not only provides channels for funds to be transferred among banks and other institutions. It also functions as an essential tool for the effective implementation of monetary policy. It plays a pivotal role in the smooth functioning of money and capital markets. But it is no longer simply the large value payment system – those that has long been recognized as systemically important – that are getting the attention of regulators and policy makers globally. Retail payments are increasingly becoming an important piece of the overall infrastructure that rightly warrants our developmental focus. An efficient retail payment system has the potential to transform the economy through the efficiency it brings to business transactions and the savings generated from a shift from paperbased to digital instruments. It benefits the consumers and businesses in terms of the affordability, convenience and speed of payment services – the most basic and most used financial service. This is financial inclusion. Given these, the BSP is giving the payment and settlement system the attention it deserves. We recognize that having an efficient payment system is not just about operating infrastructure, but 1/3 BIS central bankers' speeches also providing an enabling regulatory environment that promotes interoperability, efficiency, and consumer protection. On December 9, 2015, the framework for the National Retail Payment System (NRPS) to create a safe, efficient, affordable, and interoperable electronic retail payment system was launched. Ultimately, the goal is to increase retail electronic payment transactions to twenty percent (20%) by 2020 and improve the country’s economic competitiveness. Realization of this goal requires an enormous collaborative effort among various stakeholders. We have achieved significant progress to date. Two automated Clearing Houses (ACH) – PESONet and INSTAPAY were introduced last November 8, 2017 and April 23, 2018, respectively. Both ACHs provide digital payment solutions to the current payment challenges encountered by government, businesses and ordinary consumers. We have also issued various operating guidelines that promote level playing field and greater participation of smaller players without compromising safety. Our current efforts include the development of a national QR code standard to prevent the proliferation of closed loop infrastructures and instead promote interoperability of systems, domestically and even regionally. On the legislative side, we are pursuing measures to support reforms in the payments landscape through the enactment of the Payment Systems Act which provides for the clear mandate of the BSP for the regulation and oversight of the payment system. In order for the financial system to reach everywhere even to the remotest access points, we encourage increased use of affordable digital channels for payments, remittances and fund transfers. Our regulations allow banks to prudently service even low-income clients by allowing the participation of convenient, familiar and non-intimidating third party entities like grocery stores, pharmacies and other retail outlets as cash agents. Money service businesses and remittance agents are also now covered by enhanced regulations for anti-money laundering, risk management and consumer protection. We recognize that with digital developments, technology-related risks have and are increasing. In 2017, the BSP issued various prudential guidelines enhancing information security management, as well as anti-money laundering/combating the financing of terrorism (AML/CFT) concerns related with the use of fintech. We continue to pursue policy and supervisory enhancements relevant to cybersecurity. Even as we provide an enabling environment for technological innovations in the payments system, the BSP likewise is internally undergoing transformation by digitalizing its own payments processes and upgrading its organizational resources and capabilities. Recently, a unit dedicated to studying cybersecurity threats was established in the BSP. We are also strengthening the skills, proficiency and capability of IT specialists. Moreover, a new subsector within the Financial Supervision Sector (FSS) has been created to conduct the effective oversight of fintech and other innovative alternatives. We are indeed putting more focus on our third mandate. And part of the journey is promoting awareness and exchanging knowledge about the country’s payment and settlement system. Ladies and gentlemen, in today’s conference, there will be discussions on the Philippine retail payments industry, on the large-value payments and settlement system, on the oversight framework, and the value of measuring cybersecurity risks. These are very relevant issues and from whichever point of view you stand, whether you are from the policy group, whether you are operators of FMIs, or come from support departments… as members of the ever increasingly interconnected financial ecosystem, it is urgent that we know and understand the developments in the industry. 2/3 BIS central bankers' speeches We hope you would take advantage of this time to ask questions and learn from our subject matter experts who have very willingly agreed to be here for us. It is through opportunities such as this that we can enhance our roles in building a more efficient, safe, and inclusive national payment system. Thank you and I wish everyone a good and productive day. 3/3 BIS central bankers' speeches
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Opening remarks by Ms Chuchi G Fonacier, Deputy Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the PESONet Media Forum, Manila, 7 August 2018.
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Chuchi G Fonacier: Opening remarks - PESONet Media Forum Opening remarks by Ms Chuchi G Fonacier, Deputy Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the PESONet Media Forum, Manila, 7 August 2018. * * * PPMI Chairman Justo Ortiz, our partners from E-PESO headed by Chief of Party Mamerto Tangonan, Deputy Governor Chuchi Fonacier and fellow BSP colleagues, representatives from the participating financial institutions, with their pilot corporate users, friends from the media, guests, ladies and gentlemen. Good afternoon and welcome to the PESONet media forum. Three years ago, we had a vision: for every Filipino to have easy access to accounts to safely make payments and receive or transfer funds to other accounts anytime, anywhere, at a reasonable price, from any digital device. Thus, the National Retail Payment System or NRPS was envisioned to create an interoperable payment ecosystem that is safe, efficient, and affordable. Through collaborative efforts of the Bangko Sentral and the industry, we have achieved significant progress. In November 2017, we have transitioned batch interbank fund transfer service of the Philippine Clearinghouse Corporation (PCHC) into PESONet, allowing funds to be received by the beneficiaries, in full amount, within the day. Tagged as a viable electronic payment alternative to paper-based checks, PESONet is one of the ACHs prioritized for implementation by the Bangko Sentral. PESONet holds a lot of promise, given its potential to be an efficient channel for collections and disbursements by government and corporate users. With PESONet, we can achieve lower cost, better liquidity management and increased economic activity through immediate availability of funds. For corporates, in particular, some use cases are supplier payments, payroll and loan and dividend payouts. Since the launch of PESONet, the BSP has turned over the reins to the industry through the Philippine Payments Management Inc. or PPMI, which includes the PESONet Steering Committee. In support, the Bangko Sentral now provides active oversight and guidance through a regulatory environment that promotes the growth of electronic payments and, ultimately, the development of a safe and efficient national payment system. In today’s forum, we shall have the opportunity to listen to progress updates from the industry and learn from the stories of pilot PESONet users, concrete testimonials about the transformative power of embracing change. Recognizing the intended gains we have achieved thus far, we acknowledge that there is, however, still a lot of ground to cover. Based on the 2017 Financial Inclusion Survey, only 18% of Filipino adults with an account used this for payments and 64% cited a preference for cash payments. A significant 20% are not even aware of the electronic payment option. The foregoing statistics reveal where business, as well as financial inclusion opportunities, lie. Our goal is to democratize access to a transaction account, and make every transaction account useful not only as a store of value but also as a convenient and affordable means to pay, remit and receive funds. In this regard, we provide an enabling regulatory environment that encourages increased use of affordable digital channels for payments, fund transfers and remittances. This include allowing the participation of convenient and non-intimidating third parties like grocery stores, pharmacies and other retail outlets as banks’ cash agents. Just yesterday, we have yet witnessed another milestone that can exponentially push forward our financial inclusion digitalization agenda. The Philippine ID System (Philsys) Act was signed into 1/2 BIS central bankers' speeches law by the President. Republic Act 11055 establishes a biometric based, foundational national identification system that aims to provide every Filipino and even foreign residents with a trusted and verifiable digital identity. Philsys, therefore, addresses the key barriers to opening a bank account, particularly the cost of on-boarding as well as the lack of acceptable identification particularly for low-income and vulnerable sectors of our society. Access to this account is an essential requirement to fully participate in and benefit from the digital finance ecosystem envisioned under the NRPS. It can also remove friction points and catalyze key use-cases for digital payments such as government cash transfers. Down the road, it can make possible convenient fund transfer using an individual’s Philsys number as the identifier. Ladies and gentlemen, we often hear the saying that “Change is the only constant”. Change is certainly inevitable as we witnessed and continue to witness evolving trends in technology and digital innovations. Ultimately, these developments cascade to business models and processes, including a consumer’s payment process and behavior, whether that consumer be a government, corporate or individual. Dear friends from the media, we hope that you can be our partners in communicating how PESONet, as well as other ACHs under the NRPS, can be a powerful engine for every Juan and Maria towards a cash-lite Philippines. With your help, we can create more awareness about electronic options in their payments, fund transfers, and remittance transactions so that consumers can make better informed decisions. I am truly excited about the prospects of PESONet and I look forward to a rich discussion in this afternoon’s session. On behalf of the Monetary Board, I welcome you all to the PESONet media forum. 2/2 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at "Perspectives", organized by Citi Markets, Manila, 8 August 2018.
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Nestor A Espenilla, Jr: Central bank evolution in the digital age Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at "Perspectives", organized by Citi Markets, Manila, 8 August 2018. * * * Citi Philippines CCO Aftab Ahmed, Country Treasurer Paul Favila, industry partners, esteemed guests, ladies and gentlemen, good afternoon. Last month, the BSP celebrated its 25th anniversary. Our theme, “Navigating the Future,” was apt and meaningful in a time of digitalization and technological advancement. Your chosen theme for this year’s economic forum tells me we are on the same page. Indeed, digitalization transforms business models. Services must level up to remain relevant and responsive to increasingly demanding needs and to cater to a more sophisticated market. This principle applies also to central banking. The idea that central banks must evolve appears simple. But it is actually quite controversial and fraught with debate. Tradition and Embracing Change The traditional notion is that since central banks are focused on maintaining stability, they must remain conservative. For the cautious mind, the notion of encouraging innovation (of embracing disruption) is not only challenging, it may even be threatening. But all around us are drivers that compel us to evolve. We see the fast pace of technological advancement, the increasing interconnectedness of markets, globalization, regionalization and the growing technically-savvy millennial population. These drivers make the case that to stay ahead even central banks (and not just businesses and firms) must find novel approaches to address shifts in the economic landscape and to protect developing consumer interests. Indeed, old ideas are being challenged. For instance, central banking has historically focused the spotlight on achieving low and stable inflation. Monetary and financial stability were conventionally thought of as two separate goals. Blinders were almost always worn in the pursuit of one over the other. In a hard and devastating way, the global financial crisis taught us that monetary and financial stability policies are inseparable as financial institutions evolve and as economic activities become more complex. Another force that compels us to rethink how we must approach reforms and conduct policy is the advent of the “fourth industrial revolution” – the rise of the digital economy. There is now burgeoning awareness that we must leverage on technology to conduct monetary policy and research. There is a present urgency to develop regtech to address fintech developments and their attendant risks. The rise of digitization also forces us to focus on the third pillar of central banking (which admittedly, has not received as much attention in the past!). With digitalization and technological disruption, the payment system is now seen as an essential tool for the effective implementation of monetary policy and as a critical infrastructure of a stable and inclusive financial system. These are all exciting prospects. Allow me to talk about the BSP’s three mandates in this 1/5 BIS central bankers' speeches context. Evolution in the Pursuit of Price Stability The BSP’s constant commitment to its primary mandate of price stability has led to managed and stable inflation in an environment of high economic growth. The Philippines has achieved uninterrupted growth for the past 77 consecutive quarters despite domestic and global economic challenges. For six consecutive years (in 2009 to 2014), as well as in 2017, inflation settled within the national government’s inflation target range. Amid this resilience, the Philippine economy is being tested by external headwinds emanating from the normalization of monetary policy by advanced economies, and the brewing trade tensions among key economies. These exert depreciation pressure on the peso even as the flexible exchange rate policy continues to be a stabilizing mechanism against unsustainable imbalances. The overall external position of the domestic economy remains resilient. The sustained resilience of foreign direct investments, overseas Filipino (OF) remittances, and business process outsourcing (BPO) receipts have provided additional buffers to the domestic economy. Our external debt metrics have also improved as exhibited in the continued decline in the external debt to GDP ratio. These external transactions yielded positive results in terms of comfortable gross international reserves of US$76.9 billion as of July 2018, covering 7.4 months of imports of goods and payments of services and income. In the meantime, the peso continues to reflect day-to-day market conditions. Over the last ten years, the peso has generally maintained its external price competitiveness against baskets of currencies of all trading partners and trading partners in advanced and developing economies. On the domestic front, the country’s inflation environment is confronted by a confluence of supply-side factors. This posed a challenge as monetary policy instruments more effectively address demand-side driven shocks. This was the case early this year when economic data suggested that an adjustment in policy rate was not yet warranted. Moreover, our forecast continued to show inflation upticks as transitory and moderating within the target in 2019. Nevertheless, recognizing increasing volatilities in world oil prices and interest rates, the BSP adjusted monetary conditions by adjusting auction volumes and allowing the term deposit facility (TDF) rates to rise, creating an effective tightening in the market. This allowed the BSP a channel to provide guidance to short-term market interest rates which have firmly anchored to the BSP’s interest rate corridor. The two successive rate hikes in May and June were measured responses to the evolving economic environment and dynamic market conditions. The two rate hikes signal the BSP’s strong commitment to ensuring macroeconomic stability, which could help anchor inflation expectations and temper further second-round effects. To date, inflation remains elevated as inflation averaged 4.5 percent. The latest inflation reading in July is on the high end of our forecast but remains consistent with the assessment that inflation will remain elevated in 2018 and will converge to the inflation target of 2 to 4 percent in 2019. At any rate, we will consider latest data as we determine the strength of our follow-through response during tomorrow’s policy meeting. 2/5 BIS central bankers' speeches With the development of auction-based instruments complementing the overnight reverse repurchase borrowing rate as the policy rate signal, the BSP has expanded its options for maintaining firm monetary control. We reiterate our strong resolve to ensure that inflation returns to target by 2019. With the recent firm anchoring of market rates to the Interest Rate Corridor, we now have flexibility to move towards market-based monetary instruments. This is one evolutionary aspect as well. We now have the opportunity to significantly reduce the reserve requirement ratio (RRR) over the medium term. To date, we have reduced RRR by 200 bps. The goal of reaching single-digit RRR at the end of my term is attainable without compromising effective monetary control. I emphasize that the RRR cuts are not intended to be expansionary. They are an operational adjustment to promote market development. Data suggests we were able to neutralize the immediate liquidity impact through open market and FX operations. Following the cuts, the level of domestic liquidity actually grew at a slower rate. M3 expanded by 11.7 percent year-on-year (y-o-y) in June 2018, slower than the 14.3-percent growth rate in the previous month. We are ready to continue reducing the RRR next year as inflation returns to target based on our latest forecast. As challenges evolve globally and domestically, we will further improve our open market operations and expand our policy toolkit. We are currently studying and consulting with the industry for operational refinements to further strengthen our ability to guide short-term market interest rates and the transmission of monetary policy to the economy. As we refine our monetary operations, we also recognize that fintech has the potential to alter how central banks conduct monetary policy. Digitalization of the payments system, adoption of new forms of electronic payments and stores of value, and the issuance of digital currency fundamentally affect money demand. In staying ahead, economic information is an integral part of the BSP’s processes to effectively deliver on its core mandates. We are venturing into using big data to supplement our current data needs. We are developing experimental price measures to measure changes in prices paid by consumers as they immigrate to digital economy transactions. Evolution in the Pursuit of Financial Stability Parallel to our positive economic story is the steady growth of our banking industry. Reforms put in place by the BSP along with the banks’ commitment to improve their ability to manage risks have resulted in significant improvements in the quality of banks’ assets and loan portfolios. Reforms through the years have also bolstered capitalization – overall bank capitalization is comfortably above local and international standards. Bank loans (majority of which went to productive sectors) continues to expand at double-digit rates. But this is not enough. As a regulator, BSP supports responsible fintech innovations given its link to increased efficiencies and financial inclusion. We have refined regulations to effectively respond to trends in digitalization, fintech and technology-related risks while still remaining supportive of financial innovation. Innovations are allowed to flourish while ensuring risks are managed and consumer welfare is protected. We also protect the integrity of the financial system. To achieve this, we have issued various regulations. We updated the regulatory framework for money service business to enhance the customer due diligence expectations and to re-balance the objectives of financial integrity and financial inclusion. We established a framework for regulating virtual currency (VC) exchanges. We are also collaborating with other regulators such as the Securities and Exchange Commission (SEC) for a harmonized regulatory approach to 3/5 BIS central bankers' speeches Initial Coin Offerings and VC trading activities. We are discussing with supervised institutions on their respective plans to launch private digital currencies and other pioneering technologies. We recognize that digital finance delivered through mobile technology alone cannot reach everyone. That is why we issued regulations enabling cash agents to provide improved “last mile” delivery of financial services to the unbanked and under-banked. The cash agents themselves can be technology-enabled by fintech solutions. In the meantime, the BSP is likewise piloting Regtech solutions to strengthen its risk-based regulatory and supervisory activities. Our two pilots have to do with using chat bots to effectively handle consumer complaints and Application Programming Interface (APIs) to make supervisory reporting as painless as possible for banks while capturing more information for the BSP. Evolution in the Payments and Settlements System The BSP recognizes the fundamental need to create a secure, reliable and efficient digital financial ecosystem where all these innovations can come together to achieve the greatest synergy. In 2015, we launched the National Retail Payments System (NRPS). It provides a policy and regulatory framework for establishing a safe, efficient, affordable, interoperable, and reliable retail payment system. The payment ecosystem envisioned to arise from this planned platform for financial innovations encourages Industry players, – from big banks to small banks to non-bank electronic money issuers – to utilize fintech solutions and provide services within an organized, commercially-viable, and efficient retail payments system. Since the launch of the NRPS, we have already achieved critical milestones. These include establishing two priority Automated Clearing Houses (ACH) by transitioning the batch interbank fund transfer service of the Philippine Clearinghouse Corporation (PCHC) to PESO Net, and the launch of InstaPay, a new ACH which supports 24/7 low-value electronic push payments among participating member financial institutions. We are now exploring further enhancements to the large value payment system even as the private sector contemplates other ACHs for other useful retail payment schemes. Our current efforts also include development of an inter-operable national QR code standard to accelerate the digitalization of merchants to close the loop on the digital payment system. On August 6, 2018, the Philippine ID System (Philsys) Act was signed into law by the President. Republic Act No. 11055 establishes a biometric-based, foundational, national identification system that will provide every Filipino and foreign residents with a trusted and verifiable digital identity. This milestone can exponentially push forward our digitalization and financial inclusion agenda. Among other benefits, this will democratize access to transaction accounts. Full participation to the digital payment ecosystem envisioned under the NRPS will be within reach. Key barriers to account opening will be removed. This will directly benefit low-income and vulnerable sectors of our society as costs of onboarding are lowered and the need to present acceptable identification forms is addressed. Philsys can also remove friction points and facilitate powerful use-cases for digital payments like government cash transfers. Down the road, it will allow convenient fund transfers with individual Philsys numbers as identifiers. The possibilities and prospects are endless. Concluding Remarks The vision of an ever-evolving central bank in this new digital age is one that comes with 4/5 BIS central bankers' speeches rewards… But it is also one that demands hard work and decisiveness. In the BSP, we are committed to staying relevant and responsive to leveling up as we deliver on our mandates. We staunchly safeguard price and financial stability and aim to provide a safer and more efficient payments system. We do this in partnership with you, our stakeholders, as we are open to fresh and innovative ideas and to collaboration, cooperation and consultation to drive our economy to new heights. Thank you very much. 5/5 BIS central bankers' speeches
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Remarks by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Gala Dinner on the occasion of EMEAP Governors' Meeting and Informal Meeting of EMEAP Governors and Heads of Supervisory Authorities, Manila, 4 August 2018.
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Nestor A Espenilla, Jr: Remarks at the Gala Dinner of EMEAP Governors' Meeting Remarks by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Gala Dinner on the occasion of EMEAP Governors’ Meeting and Informal Meeting of EMEAP Governors and Heads of Supervisory Authorities, Manila, 4 August 2018. * * * Good evening. After a productive day of deep and meaningful discussions on various financial and economic issues, it is wonderful to be able to sit back, enjoy dinner and world-class entertainment — showcasing traditional and modern Philippine music, dances and other performances — here in the beautiful and historic Ayuntamiento de Manila. From the time it was built during the Spanish colonial period in 1607, the Ayuntamiento, has seen many transformations. It possesses a rich and interesting history. On this very site was the Session Hall of the First Philippine Congress. The Building also served as Manila’s first City Hall. It has been, as it still is now, the venue of several historic events and has served as offices of various government agencies. Today, it houses the offices of the Bureau of the Treasury. This Ayuntamiento, the walled inner city of Intramuros and surrounding districts are testaments of the trade linkages between our neighbors in Asia and the other side of the Pacific. This linkage was primarily represented by the round trip voyages that the Galleon ships made between Acapulco, Mexico and Manila’s ports, just about a kilometer away from where we stand right now. This so-called Galleon trade (from 1565 and on for the next 250 years consisted of exports coming from other Asian countries like China and Indonesia) showed not only exchange of goods between countries. It also created a means for cultural exchanges, cross-country cooperation, and dialogue, similar to what we do today among ourselves and with the rest of the world. Like most buildings here in the walled City of Intramuros, the original Ayuntamiento was destroyed in 1945 during the second World War. It has gone through a number of reconstructions after damages brought by fires and earthquakes. Its rehabilitation began in 2009 and was completed in 2013. A long and tedious process. Like Ayuntamiento, our financial markets have seen numerous transformations through time. We have seen economies go through booms and busts. We have experienced financial markets go through peaks and troughs. And like this Marble Hall – renovated, rehabilitated, now strong, beautiful and iconic... It is our taking action, our adoption of decisive policies and our welcoming of reforms through the years — that has helped strengthen our economies. Our actions, our reforms, our regulations and our staunch commitment as policymakers, monetary authorities, central banks, regulators, public servants, have made them resilient. The Ayuntamiento gives us a glimpse of the past. It also reminds us to continue to fortify our pillars and to build on the economic, financial and institutional reforms we initiated. It is when we gather together periodically and openly share our ideas, insights and experiences that we add to the strength and resilience we have. This is what today was about. Our discussions will continue tomorrow. Tonight, this dinner is about celebrating that collaboration. It is about fellowship. As your hosts, we are also proud to share our culture with you – to showcase our talents and also our cuisine which we arranged for you to enjoy tonight. 1/2 BIS central bankers' speeches Thank you very much and have a good evening. Bon apetit. 2/2 BIS central bankers' speeches
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Keynote speech, as prepared for the presentation of Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), Philippine Economic Forum, National Press Club of the Philippines, Intramuros, 17 August 2018.
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Nestor A Espenilla, Jr: What it means – the BSP's mandates and impact on Filipino lives Keynote speech, as prepared for the presentation of Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), Philippine Economic Forum, National Press Club of the Philippines, Intramuros, 17 August 2018. * * * Good morning. It is my pleasure and privilege to speak on the mission of the BSP and its role in the Philippine economy. I thank the National Press Club, Laurelmedia Company and DWIZ’s “In the Heart of Business”, for this opportunity. I realize that to most of the public, the BSP’s mandates are not known. When we first conducted our Public Perception Survey on the role of the BSP, most respondents indicated awareness of our function as issuer of currency. Some identified BSP as the supervisor of banks. Also, to many minds, the BSP’s primary mandate to maintain price stability was, (and still is) largely unknown. It is, maybe, even too abstract and technical. In fact, in conversations with the BSP Press Corps and its “graduates”, invariably, there would be fond recollection of early days struggling with economic data and concepts such as Core Inflation, Gross International Reserves, Balance of Payments and the like. Some of you with such memories are here today. And those of you here would agree that eventually once past the initial challenge of data appreciation and economic analysis is achieved, some passion for the BSP’s goals follows. Why? How does one come to such a conversion – of esoteric wondering at the BSP’s role to an active advocacy for its success? I believe this happens when one realizes that the BSP’s success translates to people’s lives actually being improved…to inclusive and broad-based growth… to stability and to tangible economic development. In this context, allow me to discuss our mandates. Price Stability: What it Means Under Section 3 of Republic Act (RA) 7653, the BSP is primarily mandated to maintain price stability conducive to a balanced and sustainable growth of the economy. What does managed and stable inflation mean for the Philippines? Price stability supports economic growth as it allows households and businesses to plan ahead and make informed consumption, investment, saving, and production decisions. Uncertainty is lowered. Managed inflation also protects the purchasing power of the poor, which is important as the poor are vulnerable without adequate assets to hedge against high inflation. Also, the country’s strong economic fundamentals indicated (among others) by stable inflation, results in positive differentiation by global investors encouraging investments into the country. In 2002, the BSP adopted the inflation targeting (IT) framework for monetary policy. The framework requires monetary policy decisions to be forward looking. It considers the widest set of available and relevant information about the economy. It promotes transparency through announcement of targets and the reporting of measures that the BSP will adopt to attain these targets, as well as the reasons for and outcomes of its policy decisions, increasing accountability on the part of the BSP. In 2016, the BSP adopted the interest rate corridor (IRC) system to further enhance monetary 1/4 BIS central bankers' speeches policy effectiveness. The IRC system guides short-term market rates towards the BSP policy interest rate, enhancing the link between the BSP’s monetary policy stance and financial markets. This impacts the real economy. For six consecutive years from 2009–2014, the inflation target has been met. During episodes when inflation was above or below target, there were external or supply-side developments beyond the ambit of monetary policy. As an inflation-targeting central bank, we are guided by data-dependent and forward-looking assessment. This disciplined and structured approach means that we refrain from reacting to short-term fluctuations or commentaries. Our focus is obtaining comprehensive information and making decisions based on inflation forecasts over a given policy horizon. Further, the BSP follows the standard approach of not reacting to supply shock episodes as these tend to be transitory or short-lived in nature, but monitor conditions for signs of second-round effects. This was the case early this year when data indicate the inflation environment was driven by supply-side factors and our forecast continued to show inflation upticks as transitory and moderating within the target in 2019. Thus, adjustment in policy rate was not yet warranted. Starting in Q2 2018, however, we note that forecasts have shifted higher over the policy horizon. Upside risks also continue to dominate the inflation outlook. Meanwhile, inflation expectations remain elevated. We also recognize that sustained pressures on the peso could adversely affect inflation expectations. Therefore, in response to dynamic economic and market conditions, the Monetary Board raised the policy interest rate by 25 basis points each in May and June 2018 and by 50 basis points effective 10 August 2018. The strong policy actions recently taken by the BSP are meant to rein in inflation expectations and prevent sustained supply-side price pressures from driving further second-round effects. We expect inflation to revert to target over the policy horizon. We enjoy resilient economic growth. While the latest GDP outturn shows a lower figure relative to last year’s and last quarter’s growth figures, we still remain above the long-term average trend of 5.3 percent (for 2000–2017 relative to 6.0 percent for Q2 2018). The economy has achieved uninterrupted growth for the past 78 consecutive quarters even in the midst of the global financial crisis in 2008–2009. We have sustained fiscal discipline. The fiscal deficit is expected to be contained within 3 percent of GDP (2.3 percent of GDP as of the 1st half of 2018). This supports effective government spending and sustainability to meet debt obligations. Our external position is strong. Our gross international reserves (GIR) remains an ample buffer. As of end-July 2018, our GIR of US$76.9 billion is equivalent to 7.4 months’ worth of imports of goods, and payments of services and primary income. It is also equivalent to 4.1 times the country’s external debt maturing in the short term. Likewise, the economy’s key external debt indicators are favorable. As of Q1 2018, external debt-to-GDP ratio was just 23.0 percent. Moreover, the country’s external debt remained largely medium- to long-term in nature (80.5 percent of total external debt). This means that FX requirements for debt payments are well spread out and, thus, more manageable. We are committed to maintaining a flexible and market-determined exchange rate which allows us to conduct independent monetary policy focused on assessment of domestic conditions. This likewise promotes our resilience against external shocks. Recent depreciation of the peso is attributed to both fundamental and non-fundamental factors. Fundamental factors include: (i) higher demand for imports of capital goods, raw materials and 2/4 BIS central bankers' speeches intermediate products in support of our growing economy; and (ii) dollar debt repayments, prepayments, and outward investments. Meanwhile, non-fundamental factors reflect various market sentiments over domestic and external developments adding more pressure on the peso. We remain confident that the Philippine economy’s solid fundamentals will lend support to our flexible peso. Our solid macroeconomic fundamentals and growth prospects are attested to by continued favorable investor sentiment. Foreign direct investments (FDI) continue to grow. Sovereign credit ratings remain favorable. In particular, FDI-to-GDP ratio improved from 1.6 percent in 2005 to 3.2 percent in 2017. For the first five months of 2018, FDI registered growth of 49.0 percent from the comparable period in 2017. Notwithstanding global and domestic challenges, the Philippine economy has cemented its resilience and has built buffers over the years. Financial Stability: What it Means As mentioned earlier, the public is aware that the BSP is supervisor and regulator of banks. The limited notion though is that we exist merely to regulate, to police… Of course, sound rules and regulations implemented by the BSP are expected to be followed to protect the public interest. But more than this, our regulations and policies exist for a higher purpose. The idea is that a well-functioning financial system supports productive expansionary business activities and consumption spending, hence, is crucial to promoting economic growth. Our pursuit of banking and financial reforms in the areas of supervisory policy, banking supervision, financial surveillance and systemic risk, stabilizes and strengthens the domestic financial system and helps grow financial institutions into regionally competitive and economically viable players. The BSP’s role is to ensure that the financial system is able to perform its financial intermediation role despite economic shocks. Likewise, we are cognizant that financial stability is essential for monetary policy to be effective since the fragility of the financial sector can affect the transmission of monetary policy to the real economy. Because of long-term structural reforms, the Philippine financial system, with the banking sector at its core, continues to be a source of strength and stability for our economy. As of end-June 2018, the asset base of the banking industry reached over Php 15.7 trillion, higher by 10.3 percent a year ago. Asset quality remains satisfactory. There is also continuing build-up in capitalization. The risk-based capital adequacy ratio (CAR) of U/KBs as of end-March 2018 stood at 14.48 percent on a solo basis and 15.07 percent on a consolidated basis. We also ensure that appropriate financial products and services are accessible to a greater majority. Our regulatory framework recognizes that there are the deeply ingrained barriers to financial access such as cost, geography, information asymmetry and lack of infrastructure, among others. As such, market-based solutions, innovations and use of technology to address market frictions are encouraged. This approach has allowed the range of products and services to widen with expanded physical and virtual reach, liberalized consumer on-boarding and greater consumer protection. Efficient Payments and Settlements System: What it Means While we have utilized technological progress to advance financial inclusion, we recognize its great potential to also enhance the efficiency of the country’s payments and settlements system. An efficient, secure and reliable payment system reduces the cost of exchanging goods and services. It is also an essential tool for the effective implementation of monetary policy and the 3/4 BIS central bankers' speeches smooth functioning of the financial system. Under the National Retail Payments System (NRPS), launched in 2015, we leveraged on financial technology to bring about an inter-operable, safe, affordable, and efficient real-time digital payments system. In 2017, we launched the PESONet to provide an electronic alternative to the still widely used paper-based check system and to provide an efficient channel for government and private business collections and disbursement. Just this April, we launched InstaPay, which allows for safe and affordable retail electronic payments in real time. Moving forward, we are expecting other automated clearing houses to be transitioned into NRPS system. We are also working on adopting a national QR code standard aligned with global standards, which can accelerate the digitalization of merchants. These initiatives should facilitate the shift from being a cash-heavy to a cash-lite economy, a trend we observe happening across the globe. We are encouraged by the much-awaited passage of R.A. No. 11055 or the Philippine Identification System Act (Philsys). This is a significant legislation that will boost our digitalization efforts and financial inclusion agenda. With its goal of providing every Filipino a trusted and verifiable digital identity, PhilSys can be a powerful tool for on-boarding millions of Filipinos into the formal financial system and providing them access to meaningful financial services. The power of PhilSys lies in its singular function. It only aims to do one thing: to establish and verify a person’s identity, to prove that you are who you say you are whether online of offline. Accordingly, PhilSys only captures very basic demographic information and biometrics sufficient to establish an individual’s unique identity. Focus on our third mandate of an efficient payments and settlements system aims to transform the economy. We recognize that such will bring efficiency to business transactions. Substantial savings will likewise be generated from a shift from paper-based to digital instruments. An efficient payments settlements system benefits consumers and businesses in terms of affordability, convenience and speed of services, promoting financial inclusion. Conclusion Ladies and gentlemen, as I have shared, while the BSP’s mandates are highly technical, our goals address the betterment of Filipino lives. We function to provide a macroeconomic environment conducive to economic growth. We guard against erratic and uncontrolled inflation and work vigilantly to promote confidence in the safety, soundness and strength of our banking and financial system. We are committed too to delivering an efficient payments and settlements system that promotes interoperability of payments, financial inclusion and which will allow us to transition from a cash-heavy to cash-lite economy. At the BSP, we are foremost, public servants, committed to our mandates for the furtherance of the national and public interest. This, is what our work means. It was my distinct pleasure to speak about our role and share our initiatives with all of you. Maraming salamat. 4/4 BIS central bankers' speeches
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Presentation by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), during the Forum of the Economic Journalists' Association of the Philippines (EJAP), Manila, 28 August 2018.
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Nestor A Espenilla, Jr: Ensuring price stability through monetary policy Presentation by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), during the Forum of the Economic Journalists’ Association of the Philippines (EJAP), Manila, 28 August 2018. * * * Secretary of Finance Carlos Dominguez III, DBM Secretary Benjamin Diokno, NEDA DirectorGeneral Ernesto Pernia, DOTr Secretary Arthur Tugade, DPWH Secretary Mark Villar, esteemed guests, ladies and gentlemen, a pleasant morning to all of you. I would like to thank EJAP President Louella Desiderio, the Economic Journalists’ Association of the Philippines for inviting me to share the Bangko Sentral’s views on inflation, as well as our game plan to address it. In the first part, I will dissect the numbers to identify the real drivers of the recent spike in inflation. I will then explain the BSP’s inflation outlook, or how we expect the inflation environment to evolve over the next two years. Casting inflation against this proper context helps put into sharper focus the policy measures needed to address the issue. I maintain that not only have the BSP’s monetary responses been timely and appropriate, but that tempering inflation and its side-effects will require the coordinated efforts of various government agencies as well. Let me begin with the recent inflation numbers. In the first seven months of 2018, year-on-year headline inflation averaged 4.5 percent, well above the government’s target range of 2 – 4 percent for the year. As this chart shows, supply-side factors are the main drivers of overall inflation. These include rising international oil prices, higher excise taxes, and weather disturbances that affected food supply. Meanwhile, in this next chart, we see how supply-side forces drive inflation on a month-on-month basis, with factors such as the recent increase in jeepney fares and utility rates contributing to the July inflation print. There are two important points that I need to highlight in this chart. The first is that the inflation momentum is slowing down, as headline inflation has generally declined in month-on-month terms from 0.9 percent in January 2018 to 0.5 percent in July 2018. In particular, after spiking in the first quarter of 2018, the month-on-month changes for electricity, tobacco, and sweetened beverages are seen to be slowly tapering off as we head deeper into the third quarter of the year. This supports our analysis that the impact of the excise tax adjustments is transitory. The second point is that supply-side factors have tremendous implications for monetary policy. In particular, central bankers generally consider these supply-side forces as beyond the direct influence of monetary policy, which limits the effectiveness of monetary interventions. This is why central banks typically look through commodity price increases in a transitory supply shock episode. Instead, central banks undertake action when there are incipient signs of second-round effects, like when price pressures spill over to the demand side, as we shall also see later. Now, what do all these imply for inflation and monetary policy in the next few months? Our baseline forecasts as of the recent Monetary Board meeting in August have generally shifted higher relative to the forecasts during the policy meeting in June. Inflation is expected to remain elevated in 2018 with the peak occurring sometime in the third quarter. Nonetheless, we expect inflation to revert to the inflation target range of 2 – 4 percent in 2019, as the effect of the transitory supply shocks dissipate. We have seen similar pattern in the past. For example, in 2008, international oil prices and food 1/3 BIS central bankers' speeches prices rose sharply, resulting in a year-on-year average inflation rate of 8.3 percent during the year, before easing sharply to 4.2 percent in 2009. What did the BSP do to ensure price stability during this period? As the rise in prices was primarily supply-driven in origin, the BSP kept its policy rate steady and accommodated the firstround effects. However, supply-side pressures persisted and gave rise to second-round effects in terms of wage and price-setting behavior. The BSP subsequently delivered timely and decisive action by raising the key policy rates by a total of 100 basis points between May and August 2018 while also strengthening its anti-inflation commentary. Similar to what happened in 2008, we see from our assessment that upside risks continue to dominate the inflation outlook, as the sustained increase in core inflation points to a possible broadening of price pressures. Key upside risks include additional wage adjustments; pending petitions for adjustments in transport fares and electricity rates; faster-than-expected monetary policy normalization in advanced economies; and the proposed increase in the NFA’s buying price of rice from farmers. Conversely, the main downside risks to inflation are the following: slower global economic growth due to protectionist policies in advanced economies; geopolitical tensions in the Middle East, along with potentially lower rice prices resulting from the proposed replacement of quantitative restrictions with tariffs and the deregulation of rice imports. At the same time, the BSP recognizes the potential price pressures of excessive volatility in the foreign exchange market and remains vigilant on the impact of sustained peso depreciation on inflation expectations. In sum, the BSP held the policy rate steady in the first quarter of 2018 amid the supply-driven inflation outturn. However, information beginning in the second quarter suggests incipient signs of second-round effects, given the potential broadening of price pressures, the continued dominance of upside risks to the inflation outlook, and the elevated inflation expectations over the policy horizon. These considerations prompted the BSP to raise the policy rate by 25 basis points (bps) in May 2018. To enhance our anti-inflation signal and help bring inflation toward a target-consistent path over the medium term, we followed this up with another 25-bps hike in June, and a stronger 50-bps hike earlier this month. These monetary responses were necessary to help rein in the public’s inflation expectations and prevent sustained supply-side pressures from giving rise to further second-round effects, even as we continue to expect average inflation to ease to within the inflation target of 2–4 percent in 2019. Further, the hikes are meant to ease excessive market pressure on the peso and address the potential impact of excessive peso volatility on inflation. Looking ahead, the BSP’s decisions on monetary policy will continue to be data-dependent and guided by our inflation forecasts. Sustained domestic growth also suggests that the economy can accommodate monetary policy tightening. This growth is broad-based, thereby providing more opportunities across all segments of society. In the meantime, our external position is strong. Gross international reserves of US$76.9 billion as of July 2018 remain more than adequate, covering 7.4 months of imports of goods and payments of services and income. Our external debt metrics are also favorable as external debt to GDP ratio continues to decline. On the current account, the moderate deficit is driven by robust growth of the Philippine economy 2/3 BIS central bankers' speeches which requires higher imports of capital goods. Our imports are mostly capital goods, raw materials, and intermediate products, which are necessary for the economy’s sustained expansion. The peso continues to be flexible and market-determined, which allow us to conduct independent monetary policy focused on domestic conditions. The peso has likewise maintained its external price competitiveness against baskets of currencies of all trading partners and trading partners in advanced and developing economies. Nevertheless, we are cognizant that the peso can also be subject to excessive volatility especially in light of global interest rate and exchange rate developments. We have to take these into account. At the same time, the BSP recognizes that because monetary responses do not fully address the root causes of inflation, addressing inflation will require mitigating measures from other government agencies in order to temper the impact of supply-side forces on prices and social welfare. Before I end my presentation, let me stress out that while the recent inflation outturns are underpinned by factors outside the direct influence of monetary policy such as the higher excise tax, the rise in international oil prices, and adverse weather conditions, the BSP reiterates its strong commitment and readiness to take all necessary policy actions to safeguard the government’s inflation targets and deliver on our primary mandate of price stability. Thank you and good day! 3/3 BIS central bankers' speeches
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Press statement by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), for the 2017 Financial Stability Report Press Briefing, Manila, 28 August 2018.
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Nestor A Espenilla, Jr: Press statement for the 2017 Financial Stability Report Press Briefing Press statement by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), for the 2017 Financial Stability Report Press Briefing, Manila, 28 August 2018. * * * Ladies and gentlemen, good afternoon. Thank you for joining the Financial Stability Coordination Council (FSCC) as we mark an important milestone. Today, the FSCC – composed of the Bangko Sentral ng Pilipinas (BSP), the Department of Finance (DoF), the Securities and Exchange Commission (SEC), the Insurance Commission (IC), the Philippine Deposit Insurance Corporation (PDIC),– is proud to issue the 2017 Financial Stability Report (FSR). The 2017 FSR embodies our firm and collective resolve not only to build-up and highlight the benefits of sustained stability. It also aims to address any emerging or incipient instability. The 2017 FSR is the FSCC’s first publication. While the BSP has in the past, crafted FSRs for its internal use, the 2017 FSR we issue today emphasizes the consultative and collaborative nature of the FSCC. The report is tangible and clear output which leverages on the respective expertise and insights of FSCC member-agencies. The 2017 FSR will be publicly accessible on each of our individual websites. This accessibility supports our unwavering intention to communicate, raise awareness and to help businessmen, financial market players, scholars, as well as the general public to make informed choices about our respective futures. The report is not just a compilation of technical expressions. Rather, it is narrative, and is a compelling one. Thus far, the Philippines has enjoyed 78 quarters of uninterrupted growth. The FSCC is committed to sustaining and encouraging — with policies, initiatives and regulatory frameworks — the Filipino’s innate innovative spirit. Greater use of financial technology is targeted along with the adoption of measures to tap the transformational benefits of credit in the context of evolving and dynamic market conditions and their attendant risks. One of these challenges and risks is that of changing market prices and their impact on the servicing of debt. This issue is a primary focus of this 2017 FSR. As interest rates rise globally and as emerging market currencies depreciate, outstanding debt obligations will have to be repaid, re-priced, and refinanced at higher rates. While financial market interventions are highlighted in this report, the continuing value of sustaining our economic momentum is also emphasized. In the 2017 FSR, there are discussions on the ASEAN integration and on the advent of financial technology applications. The FSCC sees a strong upside in these initiatives. Discussion of these topics contextualizes our shared goal to accrue benefits derived from them while at the same time, remaining vigilant and prepared to intervene should systemic risks develop. Finally, the FSR also explores data gaps and other areas of policy interest. Better data is essential as empirical basis for our actions is required. However, data gathering and analysis are recurring challenges in the field of financial stability. Thus, a strong emphasis is placed on this work to support and address other policy issues along the way. Our Technical Team put considerable effort in completing the 2017 FSR. We expect that future issues will be released in the first trimester of every year. We also expect more engagement 1/2 BIS central bankers' speeches from the public, market players and the media, not just to highlight future content but to raise appreciation for financial stability issues through a concerted communication plan. We have much to look forward to. Thank you again for joining us today and good afternoon. 2/2 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), during the MOA signing of the BSP, DTI, MCPI and APPEND, Manila, 17 September 2018.
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Nestor A Espenilla, Jr: Coming together for MSME development Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), during the MOA signing of the BSP, DTI, MCPI and APPEND, Manila, 17 September 2018. * * * Department of Trade and Industry (DTI) Secretary Ramon M. Lopez; Mr. Kamrul H. Tarafder, Board Trustee of the Microfinance Council of the Philippines, Inc. (MCPI); Mr. Edgardo F. Garcia, Chairperson of the Alliance of Philippine Partners in Enterprise Development, Inc. (APPEND); members of the Monetary Board; co-workers in government; fellow BSPers and advocates of financial inclusion and MSME development; ladies and gentlemen; good afternoon. The MSME sector is a crucial driver of the economy, making up 99.6% of our country’s enterprises or registered business firms. MSMEs generate 61.6% of employment. Thus, developing, empowering, building the capacities of MSMEs and including them in the financial system, fuels the foundation of our economy as the engine for broad-based growth. There are currently many existing initiatives for MSMEs. DTI’s Negosyo Centers, among many other programs, serve as “one-stop-shops” for MSME registration, business development and advisory services, and market exposure, among others. Our network of microfinance nongovernment organizations (MF NGOs) is a significant source of financial products and services for our country’s microentrepreneurs. But despite existing efforts, challenges with MSME development still persist. These challenges include lack of access to resources such as technology, skilled labor, and information. Today, however, we shall focus on the particular issue of financial access. MSMEs are unable to reach their full potential because of difficulty of credit and financial access. Currently, only 6.6% and 9.8% of total loans in the banking system and total businesses comprise investments to MSMEs. This low level of investment in MSMEs translates to capital constraints compelling MSMEs to resort to internal savings or earnings. A World Bank report states that 81.2% of Philippine enterprises rely mostly on internal funds to finance their investments. Only 10.1% of enterprises use bank financing. As a staunch advocate of financial inclusion and of promoting broad-based growth, we at the BSP are very concerned about these numbers. We are committed to providing a regulatory environment to address financial access barriers such as cost, information asymmetry, and lack of infrastructure, among others. At the BSP, we continually undertake prudential reforms to improve the overall environment for credit allocation. We issued Circular No. 855 to encourage banks to focus on cash flow analysis and ability-to-pay rather than collateral when determining a borrower’s creditworthiness. Complementing this is Circular No. 950 on the implementation of the Anti-Money Laundering Act which reduces Know-Your-Customer (KYC) rules for certain low-risk accounts. This is to facilitate frictionless customer on-boarding and reach unserved and underserved markets. The BSP oversees the Credit Surety Fund (CSF) Program, a credit enhancement scheme to improve MSME credit worthiness. Through the promotion of fintech and use of digital payments, we aim to achieve a more expanded physical and virtual reach of financial services, more competition, easier on-boarding of customers, and more protection for financial consumers. Our MSMEs will surely benefit from initiatives to broaden their customer reach, reduce the costs of managing cash, and provide 1/2 BIS central bankers' speeches greater access to credit. There is much to be done but it is only when we work together that we can succeed. Through this event, we forge a partnership which will leverage on the existing strengths, expertise and initiatives of our agencies and institutions so that we could, collectively deliver a responsive and holistic approach to MSME financing. With a more stable and secure source of much needed funds, coupled with access to resources such as technology and capacity building, we hope to catalyze the development of the MSME sector. We envision that each Negosyo Center will be fully capacitated to provide the full suite of services required by our MSMEs, including a referral mechanism to appropriate financing windows. With an institutionalized partnership, financial institutions will likewise benefit from rich insights and a deeper understanding of the market, which will be most useful in customizing financial products and services for their constituents. As a champion for microfinance and financial inclusion, and as Chair of the National Strategy for Financial Inclusion (NSFI), the BSP’s interest lies in bridging existing networks to serve as comprehensive platforms to harmonize initiatives and cultivate sectors in need. This effort is also in line with our vision of synergizing efforts and forging more efficient, collaborative mechanisms to achieve the shared financial inclusion objective. I am sure more partnerships anchored in the NSFI are yet to come. From experience, we know that to effectively address challenges of financial inclusion, a multiagency, multi-stakeholder, collaborative approach is needed. This realization is the driving force behind the NSFI on which today’s partnership and coordinating efforts are founded. While we are starting with microfinance and MF NGOs, we hope to eventually bring on-board, other financial institutions so that the range of available products and services for MSMEs can be completed. While this is our long term goal, our partnership celebrated today, definitely brings us a step towards greater developments in the current financing ecosystem. We extend our gratitude to our partners and look forward to jointly shaping the future of MSMEs. Let this signing ceremony be the start of a fruitful undertaking! Maraming salamat po sa inyong lahat! 2/2 BIS central bankers' speeches
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Speech by Ms Chuchi G Fonacier, Deputy Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), on behalf of Governor Nestor A Espenilla, Jr, during the signing ceremony of the Memorandum of Agreement (MOA) of the members of the Philippine RMB Trading Community; Makati City, 30 October 2018.
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Continuity Plus Plus in the Domestic FX Market 1 Mr. Deng Jun, Bank of China Manila Branch Country Head, Bank Heads participating as initial members of the Philippine Peso - Renminbi trading community, partners in the financial services industry, ladies and gentlemen, good afternoon. I am delivering this message on behalf of Governor Nestor A. Espenilla, Jr. The Governor conveys his sincere congratulations to each one who toiled to bring about today’s landmark signing of the Memorandum of Agreement (MoA) establishing a local Renminbi trading market. He wishes he was here to witness this milestone. Governor Espenilla and the Bangko Sentral ng Pilipinas (BSP) fully support the signing of the MoA. It signals the start of a non-discriminatory and well-functioning trading community. It diversifies currency options and strengthens the FX market governance framework. It builds trust and investor protection mechanisms, supports product innovation and market development. Continuity ++ and BSP’s FX Reforms Part and parcel of the BSP’s Continuity ++ policy reform agenda is the continued liberalization and deepening of the FX market. Our goal is to ensure a more organized and smoothly-functioning local FX market supportive of a flexible and market-determined exchange rate. The BSP acknowledges that a system of governance over the local FX market is key. Accordingly, it has proposed a governance framework where it shall oversee the FX market pursuant to its mandate to determine the exchange rate policy of the country. The framework will allow industry players with legitimate economic reasons to establish a market in any particular currency pair. The framework will ensure compliance with laws, rules and regulations, and market-determined standards to instill discipline, integrity, and accountability among market participants and to uphold orderly market operation. Under the framework, non-discriminatory prudential rules shall cover marketdetermined exchange rates, pre- and post-trade transparency and efficient settlement of the peso leg central bank money. The framework will depend on resilient and reliable infrastructure and will require effective audit and review. The BSP also envisions that there will be effective mechanisms for market participants to handle and respond to any improper practice and behavior. Speech delivered by Deputy Governor Chuchi G. Fonancier, FSS on behalf of Governor Nestor A. Espenilla, Jr. during the signing ceremony of the Memorandum of Agreement (MOA) of the members of the Philippine RMB Trading Community on 30 October 2018 at the Manila A & B, Makati Shangri-la, Makati City Page 1 of 3 This is the goal. The significance of today’s event is that ... it is a bold step towards this goal. Today’s MoA signing between and among initial members of the PHP-RMB trading market is consistent with the BSP’s vision of allowing FX market participants to be involved in the rule-making process to enhance governance and transparency in the FX market. It promotes a level playing field, where participants multilaterally bind themselves to abide by their mutually-agreed upon FX market rules, as well as comply with the applicable laws and BSP regulations. Ultimately, this will uphold fairness and integrity in the local FX market. Why Establish a PHP-RMB Market? The development of a local Renminbi (RMB) trading market in the Philippines is timely and deserves particular attention. ➢ China is the country’s top bilateral trading partner. Total trade is worth USD 14.1 billion or 16.6 percent of total trade as of end-June 2018. Development of a Philippine RMB trading market facilitates greater use of the RMB as a settlement currency, resulting in payment efficiency and less costs for Philippine exporters and importers. ➢ The RMB has been included in the International Monetary Fund (IMF) Special Drawing Rights (SDR) basket as a fifth currency, along with the U.S. dollar, the euro, the Japanese yen and the British pound. Hence, the RMB has become one of the main freely usable currencies of IMF members like the Philippines. ➢ The RMB is now one of the most actively traded emerging market currencies overtaking the Swedish Krona (SEK), the Hong Kong Dollar (HKD), the Swiss Franc (CHF), and the Australian Dollar (AUD) as most used currency for global payments. At present, the Philippine peso and RMB are priced against the US dollar as an intermediate peg. This subjects them to conversion and other friction costs. By establishing the PHP-RMB Trading Market, the Philippine peso can be directly priced against the RMB. Initial participating bank members can streamline their currency conversion costs via a fair, transparent, and resilient domestic FX trading platform. Morever, banks can now manage their RMB liquidity requirements and improve services with RMB deposits dedicated to payment and fund transfer needs. RMB users are allowed better liquidity management, faster conversion, and available hedging facilities for trade-related and payment requirements. The PHP-RMB trading market also enhances price discovery with supply and demand determining FX rates. Page 2 of 3 Establishment of a PHP-RMB Trading Market streamlines currency conversions through a fair, transparent, and resilient domestic platform. This brings about efficiency, lowered costs and encourages investments. Today’s MoA signing is only the beginning. Pending organization of the Central Governing Body, you - initial members of the Philippine RMB trading community - have voluntarily sought to enter into a binding agreement setting a framework and the scope of the RMB Market. We at the Bangko Sentral ng Pilipinas commend and support you in this meaningful initiative. As our conduits in the FX reform agenda, we reaffirm our collaborative partnership with all of you in steering our financial market towards the right direction amid challenges in our economy and financial markets. You are our staunch partners in the shared responsibility of promoting a vibrant domestic financial market towards sustained economic growth for all Filipinos. Congratulations and mabuhay! Thank you for your kind attention. Page 3 of 3
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), delivered by Ms Maria Almasara Cyd N Tuano-Amador, Deputy Governor of Bangko Sentral ng Pilipinas, BSP Christmas Program, Manila, 12 December 2018.
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Nestor A Espenilla, Jr: Speaking through Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), delivered by Ms Maria Almasara Cyd N Tuano-Amador, Deputy Governor of Bangko Sentral ng Pilipinas, BSP Christmas Program, Manila, 12 December 2018. * * * Fellow members of the Monetary Board—Secretary Sonny Dominguez, MBM Philip Medalla, MBM Jun de Zuñiga, MBM Peter Favila, MBM Tony Abacan, and MBM Bruce Tolentino who is celebrating his first Christmas here in the BSP. Our diligent and reliable Sector Heads– DG Diwa Guinigundo, DG Chuchi Fonacier, DG Cyd Amador, and Senior Assistant Governor Dahlia Luna. Family, friends, fellow BSPers, magandang hapon sa inyong lahat! This afternoon, I am so happy to be here amongst all of you. From the PICC entrance proceeding to where I am now sitting, along the way, I was able to greet those nearby to exchange smiles and nods even from afar I was able to acknowledge and let you know through simple gestures that I truly appreciate each of you. I appreciate you individually, and collectively as part of this group that comprises the BSP family. Team BSP. For several events now, I have, for health reasons, requested BSP Officers to deliver messages on my behalf. I have allowed others to speak for me and I have spoken through others. This is not an easy thing for me to do, as I am by heart, a speechwriter and am mindful of the power of the podium. I must admit that allowing myself to speak through others can be a humbling experience as it reminds me of my own limitations. But there are two things that also make it a very powerful exercise. Allowing myself to speak through others emphasizes the value of giving them full and complete trust. Designating others to give messages on my behalf is accompanied by complete confidence that the Officers I have requested to do so will not only read from a sheet of paper. Rather, they do so, fully believing in the messages as well. In so doing, they are not only echoing my words, but are ambassadors and staunch advocates of the BSP’s best interests. When I took a two-week medical leave last September, it was with full confidence that the BSP will continue even in my temporary absence, to work together to carry on with its many projects and to fully implement and sustain the Continuity plus plus strategic agenda. I believe I left the BSP in very capable hands. And so it was. For this, let me express how profoundly thankful I am, to you, my BSP family. Let me add too that I am glad to be celebrating my second Christmas with you as your Governor! The exercise of reposing full trust in the BSP’s officers and in each of you — reminds me that as every person here works to fulfill the institution’s mandates of price stability, financial stability and an efficient payments and settlements system — each one becomes a spokesperson, an ambassador and an advocate of our core values, of our strategic direction of continuity plus plus. We speak through our work and commitment! This empowers me now and it empowers you. I am buoyed by the palpable energy in this room. I contemplate this and am filled with joy as I celebrate the season with you all, and even with 1/3 BIS central bankers' speeches those in the regions and branches through digital means. It is through our cooperative and collaborative efforts through the years and decades that we celebrate our 25th Christmas at the BSP with a sterling reputation that remains untarnished. We are steadfast in our commitment to our mandates. For the past 25 years, through many trials, external disruptions, and challenges to our mandate, the BSP has provided economic stability. Along with other agencies of Government, we have achieved for the Philippines, 79 consecutive quarters of uninterrupted GDP growth! To manage inflation expectations, and address possible second round effects of inflation, we proactively adjusted our monetary policy rates five times this year for a cumulative rate increase of 175 basis points. This is to help ensure that inflation reverts to within target range next year. And this is what we expect. We have not wavered in our commitment to price stability. Even as we deal with disruptions from external and domestic factors affecting the supply side, we have put to good use the monetary tools at our disposal. We will continue to keep our ears to the ground, remain vigilant and prepare to face challenges ahead. Our banking system remains one of our strengths, continuing to strongly support economic growth. Our payments system has been growing steadily in scope, allowing for more efficient processing of financial transactions, spurring more economic activities and development. With all these, I can confidently say that the BSP through the years has firmly demonstrated its staunch commitment to its mandates—our three pillars of central banking. And I attribute this to our dynamic leaders AND TO YOU ALL, my dearest colleagues in the BSP (Applause). Earlier, I mentioned that allowing myself to speak through others is a powerful exercise. Aside from it being an avenue to demonstrate full trust in others.It is also powerful as it multiplies and amplifies the channels of communication. For instance, as Cyd delivers this message, there are now two speakers heralding its points and reinforcing its value. Come to think of it, the Christmas season is one such event where our Lord himself speaks through another. By sending His one and only Son to earth to deliver the message of Salvation, of Love, of Hope and Peace. His message has become the most powerful narrative of all. It is spoken through the decades and generations. It is attested to through transformed lives. For this reason, for the first Christmas, and for the wonderful opportunities it brings to gather and share our blessings with others we are truly grateful. We thank the Lord for speaking through His Son and we keep in our hearts the message of hope and salvation it brings. And let this be your take-away. Let me remind you then that to those whom much is given, much is expected. And in the spirit of Christmas, I enjoin you to share these blessings with those we serve. Let us allow love, hope and peace to speak through us on a daily basis. Once again, on behalf of the Monetary Board and the BSP Management team, I wish everyone a meaningful Christmas and an abundant new year. From my family—my wife Tess, our children and our dear apo— sa buong BSP at sa inyong 2/3 BIS central bankers' speeches mga pamilya—Maligayang Pasko at Masaganang Bagong Taon 3/3 BIS central bankers' speeches
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Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), delivered by Ms Chuchi G Fonacier, Officer-in-Charge, at the Annual Reception for the Banking Community, Manila, 25 January 2019.
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Nestor A Espenilla, Jr: Optimism, commitment and reform Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), delivered by Ms Chuchi G Fonacier, Officer-in-Charge, at the Annual Reception for the Banking Community, Manila, 25 January 2019. * * * The Annual Reception for the banking and financial community celebrates our close partnership over the years. It is our family affair. Rising from 2018’s Challenges 2018 began with guarded optimism nurtured early by a global economic upswing and expansion. There was higher investment and stronger private consumption in emerging market economies. By October 2018, however, the International Monetary Fund (IMF) shifted from using phrases like “Brighter Prospects” and “Optimistic Markets” to highlighting “Challenges to Steady Growth.” The IMF cited escalating trade tensions between the United States and China, elevated policy uncertainty, dampened business and financial market sentiments, financial market volatility, and a slowing down of investment and trade. Global developments caused portfolio adjustments, sharp exchange rate movements, and reductions in capital inflows to emerging markets. Domestically, we had a bout with rising inflation on account of supply-side pressures alongside firm demand conditions and implementation of important fiscal reforms. Average inflation quickly rose above the government target in 2018. In response, the BSP raised its policy rate decisively four times by a cumulative 175 basis points beginning in May 2018 to rein in inflation expectations and prevent sustained supply-side price pressures from driving further second-round effects. Our exchange rate had episodes of sharp depreciation and our balance of payment deficit widened due to the economy’s import requirements while exports suffered from external headwinds. Nevertheless we argued this to be consistent with our strong macroeconomic fundamentals. It is an indicator of a growing economy, reflective of dollar debt repayments, prepayments, and outward investments in the normal course of business. The volatility in the foreign exchange market led to a reduction in our gross international reserves (GIR) as the BSP intervened to smoothen the foreign exchange market. Despite the reduction, the end-December 2018 GIR level of US$ 79.2 billion is more than adequate and continues to serve as an ample external liquidity buffer. It is equivalent to 7.0 months’ worth of imports of goods and payments of services and primary income. To timely ease demand pressures in the foreign exchange spot market, and to provide a hedging facility for those with foreign currency-denominated borrowings, the BSP reactivated the Currency Rate Risk Protection Program or CRPP in September 2018. Yes, indeed we had some challenges. But I believe we rose decisively to meet all of them. The Philippine economy maintains its record of uninterrupted GDP growth for 80 consecutive quarters. This covers an impressive span of 20 years! 1/4 BIS central bankers' speeches We continue to be one of the fastest growing economies in the region! The resiliency of our economy can be attributed to more than two decades of sound and strategic reforms. These reforms have created buffers for the nation to withstand shocks and benefit from a more flexible policy space. The consistently sound and stable condition of the Philippine banking system – a product not only of prudent regulation and risk-based supervision, but of earnest cooperation from the sector itself – is a key anchor of our growing economy. Assets of the Philippine banking system continued to expand to P16.4 trillion by end-November 2018, attributed mainly to deposit growth. Most of these deposits were deployed to lending for productive activities. Loan quality remains satisfactory as banks continue to adhere to sound credit underwriting standards. Meanwhile, capitalization continues to build up, with capital ratios remaining well above national and international thresholds. Overall, amidst the challenges of 2018, the Philippine economy has remained strong and robust. It continues to live-out its growth narrative. Congratulations everyone. But we shouldn’t also overlook the fact that 2018 was also an exceptional year in pursuit of bold financial sector reforms. We introduced several refinements in the Interest Rate Corridor (IRC) system which provided BSP with greater operational flexibility. With the resulting firm anchoring of market rates to the IRC, we were able to reduce reserve requirements ratio (RRR) by a total of 200 basis points as operational adjustments. This keeps us on track of the medium-term goal of a phased and gradual approach in reducing RRR to single-digit level. We also continued to liberalize foreign exchange rules and pursued improvements in the governance framework of the FX trading market. We likewise implemented measures to further develop the domestic capital market. These include enhancement of rules to facilitate bank bond issuance, paving the way for more private bond issuances. The BSP also issued enhanced guidelines on marking-to-market of financial instruments in response to the adoption of a valuation methodology for peso-denominated government securities. This forms part of the domestic bond market development roadmap that aims to promote price transparency by providing basis for the establishment of reliable and market-based benchmarks. Key legislative measures were also passed which support our digitalization and financial inclusion efforts. The Philippine ID System Act establishes a biometrics-based, foundational, national identification system that will provide every Filipino and foreign resident with a trusted and verifiable digital identity. The enactment of the National Payments System Act is vital to the country’s payment systems development agenda. High Hopes for 2019 As we enter 2019, we do so with excitement – initiatives we launched in the last year, and since the beginning of my Governorship in July 2017, shall continue with vigor. Our latest forecasts indicate that inflation will return to the 2-4 percent target this year and in 2020. Nonetheless, we approach the year with utmost vigilance and prudence… mindful of the unfolding global economic landscape. There are still significant lingering concerns and imminent risks particularly on the external front. But we cannot allow these headwinds from deflecting us from our deep financial reform agenda. Another challenge is to adapt to the rapid expansion and reach of technological innovation and deployment of digital financial solutions. These developments need to meet the highest 2/4 BIS central bankers' speeches standards of transparency, product suitability, security, and confidentiality to ultimately serve the public. Lastly, there is the challenge of keeping an eye out for signs of excessive credit and leverage in the financial system. While we continue to see the Philippine banking system as currently being in a position of relative strength... nevertheless, we need to push for necessary financial sector reforms to propel us towards a more sound, stable and inclusive financial system. Commitment Reaffirmed Now, let me suggest to you what you may expect from the BSP in terms of policy direction in the months ahead. First, as we pursue our primary mandate of price stability, we shall continue to carefully examine and be guided by the data and our forecast models in shaping the policy responses so that these are timely and appropriate. Even as we continue to see abating pressures on prices, the BSP will remain vigilant and ready to employ monetary responses to keep prices stable and rein in inflation expectations. We shall carry on with further refinements of the Interest Rate Corridor (IRC) system to align the conduct of BSP’s monetary operations with international central banking practices, encourage active and dynamic liquidity management by banks, and afford the BSP with more operational flexibility. Consultations on the proposed IRC refinements shall continue. We now see scope for further reduction on the RRR as we see inflation returning firmly to within target and with inflation expectations stabilizing. Second, we stay committed to the micro and macroprudential measures we implemented to ensure financial stability. Recently, the Monetary Board approved the adoption of the countercyclical capital buffer (CCyB) on universal and commercial banks, as well as their subsidiary banks and quasi-banks to prevent excessive credit growth. This policy expands our toolkit for systemic risk management. It is specifically designed to provide a steadying hand to counter the common occurrence of boom-and-bust periods within the financial cycle. Banks are to set aside additional capital as reserves during good times to prepare us for bad times. We are also pursuing enhancements on operational risk management standards. Two key reforms in this area include issuance of standards on model risk management and reputational risk management. We will also be issuing guidelines on risk-based approach to pricing to help ensure that exposures of banks/financial institutions to risks associated with lending/financing activities are adequately compensated. Third, the BSP recognizes the fundamental need to create a secure, reliable and efficient digital financial ecosystem where all these innovations can come together to achieve the greatest synergy. As such, after the operationalization of PESONet and InstaPay, the BSP is now exploring further enhancements to the large value payment system. We do this even as the private sector contemplates other automated clearing houses (ACHs) for other useful retail payment schemes. Current efforts also include development of an inter-operable national quick response (QR) code standard to accelerate the digitalization of merchants to close the loop on the digital payment system. In relation to this, we at the Bangko Sentral ng Pilipinas, thank you in the Banking and the Non3/4 BIS central bankers' speeches Bank Financial Community for going beyond just complying with financial regulations. You proactively responded to emerging developments and challenges such as our transition from being a cash-heavy to a cash-lite economy with the implementation of the National Retail Payment System (NRPS)! Salamat sa inyo. Fourth, we remain on course in promoting financial deepening, with measures to further develop the domestic capital and foreign exchange (FX) markets. We will continue streamlining documentary requirements for FX trade and non-trade transactions. The BSP will likewise issue a circular on FX market governance framework, formalizing policies that promote fair, liquid, and transparent FX market. And we shall continue to pursue meaningful initiatives and partnerships to advance financial education and inclusion, and consumer protection. No one is dropping the ball. The BSP is here with you for the long haul. Concluding Remarks As you can see, there is much work to be done. So much work. After decades of hard work, we are now at a point when we are set to update the BSP Charter to keep up with the rapid global challenges. We collectively thank the administration of President Rodrigo Roa Duterte for taking us to the finish line right in time for the celebration of 70 years of Central Banking in the Philippines. This is truly an institutional milestone. Thank you and Mabuhay tayong lahat! 4/4 BIS central bankers' speeches
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Statement by Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), during a press conference, Manila, 8 March 2019.
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Benjamin E Diokno: independence Policy continuity and institutional Statement by Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), during a press conference, Manila, 8 March 2019. * * * Good morning. I am happy to be with you all today at the Bangko Sentral ng Pilipinas. I would like to thank the BSP family for their warm reception on my first day at work in BSP and the Monetary Board for our very collegial discussions yesterday. Invariably, one cannot speak about the BSP without mentioning my immediate predecessor, Nestor A. Espenilla Jr. who spent his career spanning 38 years here. I am sure that he is and will be greatly missed for pushing an agenda centered on financial inclusion, financial learning and consumer protection. Rest assured, I will be adopting this agenda with the aim of making financial services more accessible to our larger population. The BSP has fostered an environment for the ideal convergence of stable prices and high economic growth by implementing much-needed reforms during the past 20 years. This has certainly led to favorable and wide-ranging results, including the country’s maintenance of its investment-grade credit ratings. As of end-2018, the country is rated BBB/Positive by Standard and Poor’s, BBB/Stable by Fitch, and Baa2/Stable by Moody’s Investors Service. A STRONG INSTITUTION I am certain that the BSP would not have been able to pursue such difficult reforms without a highly competent workforce that is led by outstanding, capable and intelligent leaders. Under the BSP’s Strategy Map 2018–2023, I have been duly informed that the officers and staff of this institution are collectively working towards being “recognized globally as the monetary authority and primary financial system supervisor that supports a strong economy and promotes a high quality of life for all Filipinos.” I would say that you have done this with clear results, as I am now joining a Credible Central Bank that enjoys the trust and confidence of the market in pursuing its mandate of price stability, financial stability and efficient payments system. It is also noteworthy that the BSP is committed to promoting Dynamic Stakeholder Engagement to constantly seek ways to improve delivery of mandates; Organizational Agility amid a changing operating environment; and Organizational Capability by constantly developing agile, collaborative, motivated, and skilled BSP workers. While I am still taking stock of the full breath of my responsibilities here at the BSP, I am confident that this strong, professional and well-respected organization will see me through the challenges of governorship. I truly am honored to join this esteemed institution as its fifth Governor. STRONG REGULATORY FRAMEWORK Aside from the quality of this institution, I am also glad to note that the BSP is now better equipped to pursue its path of excellence with the enactment of new laws. 1/2 BIS central bankers' speeches First and foremost, “Republic Act No. 11211, or An Act Amending Republic Act No. 7653, Otherwise Known as the ‘New Central Bank Act’, and for Other Purposes” signed on 14 February 2019 by President Rodrigo Duterte strengthens the BSP’s regulatory framework for pursuing its mandate. The law (a) strengthens policy framework for promoting price stability; (b) enhances the framework for prudential regulation and systemic risk management to foster the safety and soundness of the financial system; and (c) empowers the BSP to oversee payment and settlement systems. Immediately after the signing of R.A. No. 11211, Standard and Poor’s upgraded the Philippine banking system’s Banking Industry Country Risk Assessment (BICRA) score from “6” to “5,” indicating lower risk assessment for our banking system. BICRA scores range from 1 to 10, with 10 reflecting assessment of highest risk. Alongside the New BSP law, Republic Act No. 11127 or the “The National Payment Systems Act” further bolsters the BSP’s capacity to foster the efficiency of payments systems as pipelines of funds in the financial market. These laws bolster the BSP’s capacity to provide a steadying hand to the financial system. Moreover, these payment systems initiatives dovetail with BSP’s efforts to continuously enhance the financial system’s management of cyber risks. Knowing that IT security issues have systemic implications, the BSP, under my leadership, shall continue strengthening the system’s ability to address these threats. Moving forward, I see these multifaceted undertakings ultimately benefiting the Filipino people in terms of stable prices and a sound financial system that ably manages funds entrusted to it by savers and investors. Last year presented a challenge for the conduct of monetary policy. Shocks from high oil and food prices brought average inflation to 5.2 percent in 2018, exceeding the National Government’s target of 2-4 percent. To ensure that we avoid propagating second-round effects and upsetting inflation expectations, the BSP tightened monetary policy by a total of 175 basis points. With inflation slowing down in recent months, authorities have further opportunity to assess the stance of monetary policy. Given the impact of non-monetary measures to relieve food supply bottlenecks, including the implementation of the rice tariffication law, the BSP expects inflation to settle within the target band of 3.0 percent ± 1.0 percentage point for 2019–2020. Inflation expectations have also started to stabilize within the BSP’s target band, while domestic economic activity remains firm. Nevertheless, various risks, both here and overseas, require the BSP to continue to keep a close eye on developments that could affect the outlook for inflation. As always, our decisions on the monetary policy stance will remain data-dependent. INSTITUTIONAL INDEPENDENCE In pursuing policy continuity, let me also assure you that the BSP will sustain its institutional independence with the Monetary Board acting as a collegial body. We shall continue to pursue monetary and financial sector policies that are data-driven, evidence-based, and attuned to the evolving market environment. Thank you very much and have a good morning. 2/2 BIS central bankers' speeches
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Message by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), during the Peso Net Launch, Manila, 8 November 2017.
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Nestor A Espenilla, Jr: Disruptors, enablers and intended consequences Message by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), during the Peso Net Launch, Manila, 8 November 2017. * * * In the September issue of The Asset, the cover depicted a caricature of me as a superhero with the blurb labeling me as a disruptor. I can only chuckle gamely at this obvious hyperbole. If there is a disruptor today, it is us, as we move collectively to radically change our fate. For the better. We know that the things cannot continue on “business as usual” and that great strides to level up, modernize, and innovate should be taken in this fast changing economic landscape. Today we do just that. We launch the first Automated Clearing House (ACH) under the National Retail Payment System (NRPS). It is wonderfully disruptive to the existing status quo. It is innovative and it is expected to create new markets and add new value. Today, we celebrate a milestone in our shared goal of having a safer, more efficient, affordable, and reliable payment system. Today, we move closer to our objective of improving the retail payment system and creating a cash-lite economy.... Indeed, we have made significant strides through constant and close dialogue and collaboration with you, our partners our partners in the industry, and with the other government agencies represented here. In a way, we have united as a proud disruptive league of our own. The Secretary of Finance Carlos Dominguez cannot join us today because he is on his way to Vietnam. His proxy is still on his way. But let me acknowledge him – his strong support for our initiative, and the rest of government, my colleagues in the monetary board ; the Chairman of Philippine Payments Management, Inc. (PPMI), Mr. Justo “Tito” Ortiz, the PPMI Board members, I met all of them yesterday; Mr. Jeffrey Lehrer, Director of the USAID Office of Economic Development and Governance, distinguished guests from the private business sector; let me acknowledge specifically Mr. Domingo Yap, the president of the Filipino – Chinese Chamber of Commerce and Industry, friends from the banking community; many of you here are represented by no less than your president/CEOs. Thank you for your support to this endeavor, our other what we called BSFIs, non-bank electronic money issuers, non-bank regulated entities who are partners of the BSP and the industry as well in this endeavor represented also by your senior officers, ladies and gentlemen, my colleagues from the BSP welcome to the BSP and good afternoon to all of you! Implementing NRPS Three (3) years ago (in 2014) there was a survey conducted by the Better Than Cash Alliance. Remember this? And I keep citing this in some of my earlier speeches. The survey revealed that only one percent (1%) of retail payments by volume of transactions are being done electronically! That was in 2014. The compelling challenge that we all faced was how can this dismal statistic be improved. So we articulated a vision. In December of 2015, the BSP launched the National Retail Payment System or NRPS initiative. Great industry and government collaboration was required to do this. It aimed to create an inter-operable ecosystem allowing seamless electronic fund transfers and payments from one account to another. 1/5 BIS central bankers' speeches Today’s event was actually preceded by several singular acts — accomplishments that built upon one another that ultimately comprise the foundation on which the NRPS is built. Laying the NRPS Foundation: PSMB and PPMI In March of this year, the Charter of the envisioned Payment System Management Body (PSMB) was signed by the industry players. The interim Board of the PSMB – the Retail Payments Consultative Group, is a distinguished group comprising of the Executive Committee of the Bankers Association of the Philippines. The PSMB was subsequently incorporated into a legal entity now known as the Philippine Payments Management, Incorporated (PPMI) and this was incorporated last August 30. The PPMI, the industry-led self-governing body, will assist the Bangko Sentral in overseeing the payments industry while driving innovation and reforms in the payment space. The PPMI shall play a major role in carrying out NRPS principles. PESO NET, Another Step Towards the Goal The pioneer ACH we launch today under the NRPS framework is one of those dynamic and disruptive steps towards our goal. It implements a batch electronic fund transfer (EFT) scheme. The participants have christened it, “The Philippine EFT System and Operations Network”... quite a mouthful but it is shortened to, “PESO Net". And I can see that the logo that they adopted is a combination of green and blue. I don’t know what kind of discussion went in behind the color scheme of this PESO Net. I think I share everyone’s excitement for this initiative. Through PESO Net, businesses, the government, and even individuals will be able to conveniently perform account-to-account payments and fund transfers. It will provide an electronic alternative to the still widely used paper-based check system. PESO Net’s Benefits to Business What’s in it for business? PESO Net will enable e-commerce, open up markets and lower the cost of doing business. As an inclusive platform for electronic fund transfers, business-to-business (B2B) and customerto-business (C2B) payments will become more convenient. Payments will be settled within the day and at full value. Compare this to the next day clearing for checks.... Plus there is no recipient fee, meaning you get the full amount at the receiving end. With PESONet, business enterprises will be able to manage their liquidity better. This will result in increased economic activities. It will also be easier for businesses for example to pay salaries. Businesses can simply issue payment instructions to their banks to credit their employees’ individual bank accounts even if these are maintained in different banks. For the employees, this means freedom of choice in their banking relationships. That’s liberating and truly empowering! PESO Net’s Benefits to the Government and Public PESO Net will also enable the digitization of government collections and payments. This will be realized through the collaboration with various agencies such as the Department of Finance, the Bureau of the Treasury, Bureau of Internal Revenue, Department of Information and Communications Technology, and the Department of Budget and Management and the Commission on Audit. Imagine a significant increase in person-to-government (P2G) payments! Taxes, fees, and other 2/5 BIS central bankers' speeches obligations will be paid more efficiently through the retail payment network! While this is already being partially implemented by some providers, with PESO Net, we foresee greater and wider government agency participation. Increased government-to-person (G2P) and government-togovernment (G2G) payments will lead to more efficient budget administration and will make it easier for citizens and businesses to do business with government. Convenience to businesses, government, the public is the most obvious and foreseeable benefit of PESO Net. Foreseen and Intended Gains from Promoting Electronic Payments Yes, foreseeable consequences are important. But in evaluating government action, wise analysts are always keen to identify the unintended consequences of public policy. These indirect, unintended consequences or unanticipated effects may be positive or negative. But these can be very powerful. The french economist Frederic Bastiat wrote, “...the bad economist confines himself to the visible effects, the good economist takes into account both the effect that can be seen and those effects that must be foreseen.” With the launch of PESO Net (and other ACHs of the NRPS down the road) we in the Bangko Sentral foresee not just the direct and practical consequences to businesses, the government and the public. We see beyond the immediate result of having affordable, fast and efficient payments. We anticipate (and are very excited about) several other benefits. These are: First, increased innovation of financial services; Second, lowered costs for businesses and for government; Third, faster economic development from accelerated velocity of payments; and Fourth, greater financial inclusion. Increased Innovation We envision that with the launch of PESO Net and other ACHs, innovation in the delivery of financial services will thrive. With an efficient retail payments infrastructure, we predict that various services will emerge in response to the rapidly evolving needs of financial consumers. This is how markets work and it is wonderful. The self-interest of disciplined and prudent market players will eventually lead to ingenuity ultimately promoting public welfare! We look forward to the emergence of new competitive space where service innovation is encouraged. New business models, technologies, industry wide collaborations and partnerships will be developed. Lowered Costs Innovation and a greater competitive space can lower payment system costs. The use of electronic payments will also lead to the reduced usage of cash. To businesses, payment system providers such as banks, and the government, this translates to cost savings since cash handling and cash services entail security, transport, overhead, and other incidental costs. Economic Development Greater efficiencies in electronic channels will also bring about an accelerated velocity of payments. This will increase economic activities. When payment beneficiaries are enabled to quickly obtain the liquidity that they need, they are 3/5 BIS central bankers' speeches able to pursue productive activities at a faster rate. Financial Inclusion Perhaps the result of increased electronic payments usage that I personally look forward to the most is of course greater financial inclusion. This is actually what triggered us to move in this direction. Studies show that 98 percent of unbanked Filipinos can be banked through electronic channels. Mobile phones, especially smart phones, of which the country has a very high penetration rate, can be particularly used for this purpose. Enabling Regulations For all these reasons, the BSP is pushing NRPS forward. Our task is to enable you – industry players, stakeholders, payment service providers and end users, to actively participate in the NRPS. We do this through policy formulation and regulations. Keeping our financial stability mandate in mind, we have issued regulations to encourage the growth of financial innovations including those linked to payments. Recently, the Monetary Board approved the NRPS Framework, now issued as BSP Circular 980. This framework sets out the overarching principles that will govern the retail payment system. The objective is to achieve greater interoperability among payment participants so that a wide range of electronically-accessible payment products and services can be made available anytime, at the least possible cost. In support of electronic payments, the BSP will also continue to work with other government agencies in developing a biometric foundational ID system to enable access to government and financial services. Another upcoming regulation pertains to the offering of Basic Deposit Accounts or BDAs which will further support client on-boarding. Designed as a low cost, low friction account, everyone can now aspire to have a transaction account that connects him or her to the digital financial ecosystem that the NRPS is creating. In order to protect our emergent digital financial infrastructure, we are likewise updating our technology risk management guidelines to improve the resilience of BSP-Supervised Financial Institutions against cyber-attacks. The Monetary Board recently approved the issuance of updated cybersecurity guidelines. Payment systems continue to face increasing security threats and industry players need to step up. The string of regulations to improve technology risk management, together with consumer protection, even as we enable, digital payments are collectively aimed toward creating a stable environment for financial services and innovation. Marketing, Collaboration and Cooperation are Key As we offer PESO Net, communication to customers could be a challenge, because people are simply not familiar or used to electronic payments. Every good product or service needs to be promoted. To reach a truly inclusive market, banks and non-banks must understand and connect to their target customers. You have to go out of your way to bring this to the people. Messages that will appeal to their experiences and needs must be crafted. Through effective and sincere communication, customers can be convinced to participate in the formal financial system as we build a critical mass of users. The network effects will draw in even more participants. 4/5 BIS central bankers' speeches It is through these sustained efforts that we can bring about a payment ecosystem that we can all be proud about... an ecosystem that is a symbol of digital ingenuity. In this regard, we are all disrupters and enablers. On the part of the BSP, we remain strongly committed to creating an enabling and supportive environment for our shared vision to come into full fruition. We look forward to working with all of you as we take our leap to bring about a safe, efficient, reliable, and affordable retail payment system supportive of inclusive growth. Congratulations to all of us! Mabuhay ang PESO Net! Mabuhay ang NRPS. Mabuhay ang Pilipinas. Salamat po. 5/5 BIS central bankers' speeches
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Speech by Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 1st Fintech Alliance Summit, Manila, 26 March 2019.
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Benjamin E Diokno: Continuity, collaboration and a better future Speech by Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 1st Fintech Alliance Summit, Manila, 26 March 2019. * * * FinTech Alliance Philippines Chairman Lito Villanueva, Fintech Alliance Philippines members, industry partners, fellow Monetary Board Members, Ms. Tess Espenilla and family, colleagues from the BSP, and workers in government, friends from the media, esteemed guests, ladies and gentlemen, good morning. I am honored to be your keynote speaker during the 1st FinTech 1 Alliance Summit. This is my first time, as BSP Governor, to address the country’s leading companies in the financial technology sector. As such, today is an opportune time to share with you that I FULLY SUPPORT AND WILL CARRY FORWARD OUR FINANCIAL INCLUSION AGENDA so that financial services are made more accessible to a greater number of Filipinos. In fact, I expressed the same during my first press conference as BSP Governor earlier this month. Thus, I am indeed glad that you chose “Inclusion and Digital Transformation” as conference theme because this is truly in line with my policy priorities. Launch of the Governor Nestor A. Espenilla, Jr. Institute for Growth and National Inclusion, Transformation and Empowerment (IGNITE) I understand that most of you here had the great opportunity to work closely with my predecessor, the late Nestor A. Espenilla, Jr., who championed financial inclusion and digital transformation. We are all undoubtedly inspired by the life and work of Gov. Nesting. It is thus fitting that later this morning, we shall witness the launch of the Governor Nestor A. Espenilla, Jr. Institute for Growth and National Inclusion, Transformation, and Empowerment or IGNITE. IGNITE is a multi-stakeholder, research-based and data-driven advocacy. It is a social transformation platform that leverages on technology to empower financially unserved and underserved Filipinos for more inclusive growth. I hope that with IGNITE, we can open a world of new possibilities and better opportunities to the financially excluded. As plans are being finalized, let us continue putting our collective energies behind this project, and to push forward our inclusive growth agenda at full speed. To Ms. Tess Espenilla and family, may you take comfort in knowing that his legacy continues to live—and today it once again speaks to us—urging each and every one of us to do our share to make our society more inclusive. Together, let us leverage on technological innovations to help fuel the financial inclusion movement, just as Gov. Nesting would have wanted. BSP Approach to Digital Transformation We pursue inclusion amid a global financial ecosystem that is in a state of digital transformation. Of course, you are all well aware of that—as fintech firms are a big reason for it. This transformation has completely altered the business landscape and has moved traditional financial institutions to adapt and innovate. Furthermore, increasing consumer demands for better financial products and services have driven digitalization to become a strategic priority for both financial and non-financial corporates. There is no denying it. The digital revolution has 1/4 BIS central bankers' speeches arrived. And it is here to stay. Digitalization is expected to become an essential aspect of how we do business, almost as a matter of routine. Digital transformation should therefore spur a complete change in mindset to allow for continuous and consistent innovation. We should allow ourselves to think differently, to grow in the midst of change. As H.G. Wells, a futurist English writer, said in his timeless quote, “Adapt or perish, now as ever, is nature’s inexorable imperative.” Rightfully so, the same applies to financial regulatory authorities. Today’s rapid digital transformation requires not just new regulations but demands fresh and bold approaches. Ladies and gentlemen, I am proud to say that BSP remains a thought a leader in this regard. To note, in its 2018 Global Microscope report, the Economist Intelligence Unit said the BSP “has been ahead of the curve in identifying opportunities and setting guidelines for financial inclusion.” The research arm of The Economist Group also recognized that BSP’s focus on “creating a digital finance ecosystem has led to the introduction of a sound payments infrastructure that helps various financial sector players to reduce their costs and further their outreach.” Said recognition is a reflection of BSP’s proactive approach to digital transformation. Needless to say that we support responsible fintechs, given their link to increased efficiencies and greater depth of outreach, which are often considered as pain points of legacy financial institutions. We likewise welcome the growth opportunities brought about by the entry of a growing number of fintech firms into the financial services space. In light of these developments, the BSP remains committed to establishing a regulatory environment that allows digital transformations to thrive. At the same time, we are mindful of attendant risks and any unintended consequences that technological innovations may bring, especially when it comes to consumer and data protection. Because of this, a deliberate part of our strategy is to further deepen our financial education and consumer protection initiatives. This balanced regulatory approach is anchored on the core principles of risk-based, proportionate and fair regulation; active multi-stakeholder collaboration; and, consumer protection. These principles are pragmatically implemented through our flexible “test and learn” approach in dealing with increasing digital transformations in the financial system. This provides an opportunity for fintechs to participate in the financial system thru collaborations with banks and other financial industry players to achieve greater scale, within the regulatory environment established by the BSP. In addition, we are likewise coordinating and cooperating with other domestic and foreign regulators for possible information sharing and referral system especially focused on fintech firms. The ultimate objective of our regulatory approach to digital transformation is to be aware of risks and employ mitigating actions as needed, but only in a manner that also allows benefits leveraging on these innovations. In the last three years, the BSP has been preparing the groundwork for an expanded digital finance ecosystem, one marked by diversity of players responding to the varying needs of businesses and individuals, especially those that have been traditionally unserved. We issued rules to open up the electronic payment rails to more players, (Cir. 980 and 1000); provided guidelines on virtual currency exchanges as an emerging alternative remittance business model (Cir. 942 and 944); allowed banks to exponentially expand reach by tapping ubiquitous retail outlets as cash agents (Cir. 940); and provided greater clarity on customer onboarding for low-risk clients who need formal financial services but lack conventional 2/4 BIS central bankers' speeches identification documentation (Cir. 950 and 1022). BSP Legislative Advocacies Bearing Fruit While these issuances have helped create an enabling environment for innovations to flourish, BSP recognizes that ushering the country to a new era of digital transformation and inclusive growth requires new regulatory tools. With the commitment and perseverance of my predecessors as well as the support of our lawmakers and the National Government, our legislative advocacies have borne fruit with the passage of the landmark laws for the financial system. In October 2018, Republic Act (RA) No. 11127, or the National Payment Systems Act (NPSA) was signed into law. The NPSA is a comprehensive legal framework supporting the twin objectives of maintaining a payment system necessary to control systemic risk and providing an environment conducive to sustainable growth. It fosters a level playing field for all participants under a single overarching legal and regulatory framework. This will bring about greater efficiencies, foster digital innovations and promote “coopetition”– a combination for cooperation and competition – in the financial services industry. To cope with all these rapid technological changes, there is clearly a need to make BSP more capable, efficient, agile, stakeholder-oriented and future-ready. We, therefore, cannot overemphasize the critical importance of the amendments to the BSP Charter with the signing of RA No. 11211 just last month. The new BSP Charter embodies a package of reforms that places central banking in the Philippines at the forefront of modern central banking, improves the BSP’s corporate viability, and enhances its capacity to craft proactive policies amid rising interlinkages in the financial markets and the broader economy. Under our new Charter, the BSP shall continue fostering price and financial stability, with a clear view that our efforts are ultimately aimed at enhancing the economic wellbeing of Filipinos. BSP is also working closely with the Philippine Statistics Authority and other government agencies on the successful implementation of the Philippine Identification System, as provided under RA No. 11055 signed by the President in August 2018. PhilSys aims to provide every Filipino a unique and verifiable digital ID and is envisioned to be a platform for innovations in consumer service delivery. With PhilSys, all Filipinos can have the tools to meaningfully participate in the gains of an increasingly digitalized economy. We believe that with these regulatory and legislative initiatives, the requisite foundation for digital transformation has been put in place to support industry players called to respond to the needs of Filipino consumers. Collaborating and Innovating with Purpose Whether you are a market pioneer or a startup, Financial service providers must recognize that tapping into the latest technology will not be enough; greater collaboration and more meaningful partnerships present the best path towards financial inclusion and inclusive growth. Strategic partnerships between agile fintechs and experienced financial institutions in the shared financial space will help unlock doors to new, untapped possibilities. Greater collaboration is therefore needed to help scale innovative products and solutions and enable it to reach previously unchartered territories. While this remains easier said than done, the life-changing impact of technology–especially for 3/4 BIS central bankers' speeches those living in underserved and unserved communities–should be reason enough to drive greater and more meaningful collaboration among firms. As we commend its promised benefits, let us not forget that innovation is not the end-goal, but a means to an end. We must innovate with a purpose to serve the common good and with customer-centricity as a guiding principle. Digital innovations should drive inclusivity, improve customer experience, and deliver real welfare-enhancing benefits for all Filipinos. Only then can we truly say that technology-enabled innovations have delivered on their promises. Conclusion: A Challenge to Provide a Better Future As I come to the end of my talk, I would like to share with you my philosophy that has served me well in my decades-long career as a public servant. And since you will be talking about inclusion and digital transformation extensively later today, I think you will also find wisdom in the Oath of the Athenian City State. I chanced upon it when I went to Syracuse University for my Ph.D. It is a powerful oath of citizenship, engraved prominently in the dignified beauty of the foyer of Maxwell Hall, housing the Maxwell School of Citizenship and Public Affairs. It reads: “We will ever strive for the ideals and sacred things of the city, both alone and with many; we will unceasingly seek to quicken the sense of public duty; we will revere and obey the city’s laws; we will transmit this City not only, not less, but greater and more beautiful than it was transmitted to us.” Though I left Syracuse University in 1981, what I learned at Maxwell remains vital to my life. I saw the words as transcending generations and an appeal to the conscience of every citizen, of our joint responsibility to spend a lifetime to lift the people around us. To take on the challenge to transmit our country, the Philippines, “not only less, but greater, better and more beautiful than it was transmitted to us.” Whatever you do, you do it for the person who comes after you. Gov. Nesting had done his part. Now, the world is your (digital) playground. Go transform it! Together, let us provide our fellow Filipinos a better future! Maraming salamat at mabuhay ang Pilipinas! 1 Fintech (financial technology) refers to the integration of finance and technology in a manner that drives the transformation or disruption of the traditional processes in financial service delivery. New business models driven by fintech can create new risks in different segments of the financial system, or accentuate some existing risks. 4/4 BIS central bankers' speeches
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Speech by Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Chamber of Thrift Banks Annual Convention, Makati City, 29 March 2019.
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Benjamin E Diokno: Beyond conventions - harnessing the BSP multiplier amidst shifting sands Speech by Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Chamber of Thrift Banks Annual Convention, Makati City, 29 March 2019. * * * Introduction Distinguished officers, members, and trustees of the Chamber of Thrift Banks (CTB), ladies and gentlemen, good morning! Thank you for inviting me in this year’s annual convention and induction of CTB’s new set of officers and trustees. I am pleased to be delivering this speech before the members of the thrift bank community. I say this because this industry has been an enabler of economic development by encouraging retail savings and extending credit to crucial sectors of the economy. Shifting Sands Your chosen theme for today’s event – “Expanding New Markets,” reflects the current economic and financial reality we are all facing. As most of you already know, the global economy is in transition. The sands are shifting and we are once again reminded of the constantly evolving dynamics of economics and finance. If you ask me, policymaking in this time of transition requires some rethinking. As Nobel laureate Joseph Stiglitz aptly puts it, there is a need to shift our focus from what is happening on the socalled “average,” and take into account a broader spectrum of the society. In other words, we need to bring our policies closer to the people and aim for long-term stability and inclusive growth. Thus, in my remarks today, I wish to provide you with the BSP’s perspective on these tasks. In particular, I wish to discuss the Philippine economy’s recent developments, potential challenges, and the BSP’s policy thrust going forward. On Solid Footing The good news is that, despite the challenging operating environment, we can rely on the Philippines’ solid macroeconomic fundamentals to provide us with a significant headway towards a more robust and inclusive growth. The domestic economy grew 6.2 percent last year. This extends the country’s growth streak to 80 quarters or roughly 20 years of uninterrupted growth. It should be noted that while the latest figure is relatively lower compared to a year ago, we remain on track to outpace most of our Asian peers in 2019. The economy has been growing robustly at 6.0 percent and better for the last 15 quarters since the second quarter of 2015. Admittedly, we had to deal with a challenging inflation environment last year due to supply-side pressures. The increase in international crude oil prices, supply bottlenecks, and direct and indirect effects of the tax reforms pushed inflation beyond the government’s target range of 2 – 4 1/5 BIS central bankers' speeches percent in 2018. The BSP’s decisive action to raise its policy interest rate by a cumulative 175 basis points beginning in May 2018, coupled with the National Government’s implementation of non-monetary measures to alleviate price pressures, helped rein in high inflation and ensure that it would revert back to its target path. In fact, latest figures are encouraging as inflation declined to 3.8 percent in February this year. This is within the target range of 2-4 percent and is consistent with recent forecasts and market expectations that a manageable inflation environment could be sustained in the near term. While the peso experienced episodes of depreciation, it should be noted that this was partly due to the strong demand for imports of capital goods, partly because of Build Build Build program, raw materials and intermediate products needed to support a growing economy. The country’s external payments position is reliably supported by strong structural foreign exchange inflows. These include remittances from overseas Filipinos, revenues from the IT-BPO industry, receipts from the vibrant tourism sector, and sustained inflows of foreign direct investments. With these inflows, the country’s Gross International Reserves (GIR) now stands at around US$82.90 billion as of end-February 2019. This is roughly equivalent to 7.3 months’ worth of imports of goods and payments of services and primary income. All of these could provide sufficient buffer against external headwinds. A Second Pillar of Strength The sound and stable condition of the banking community, supported too by the thrift bank industry, has also served as a key pillar of strength of the economy. As of end- January 2019, total resources of thrift banks (TBs) rose to P 1.2 trillion, a 7.0 percent increase compared to its level a year ago. Bank lending meanwhile continued to expand and was channeled mostly to production sectors. Both consumer loans (CLs) and real estate loans continued to grow. As of end-December 2018, the level of CLs of TBs expanded to P 561.9 billion, higher by 6.0 percent relative to the level a year ago at P530.1 billion. Meanwhile, loans for real estate activities increased by 8.0 percent to P291.4 billion relative to last year. Sustained by core earnings mainly from lending activities, the TB industry also remained profitable as net profit stood at P15.8 billion as of end-December 2018 returning 10.3 percent to owners’ equity. Asset quality has likewise significantly improved. As of end-January 2019, the gross nonperforming loans (NPL) ratio and non-performing assets (NPA) of thrift banks have significantly declined to around 5.4 percent and 5.7 percent, respectively. These figures were significantly lower compared to their end-December 2001 values of 12.0 percent and 17.0 percent, respectively. Lastly, the TB industry remains well-capitalized. As of end-September 2018, the subsidiary thrift banks’ capital adequacy ratio (CAR), on solo basis, of 15.0 percent remains well above international standards while the CAR of stand-alone TBs stood at 18.2 percent. Ladies and gentlemen, all these numbers I just mentioned reflect, among others, the thrift banking sector’s critical role in supporting the country’s inclusive economic growth. The Three Great Challenges Ahead 2/5 BIS central bankers' speeches Even as I say this, the evolving operating environment is beset with what I refer to as the three great challenges that could potentially derail our growth trajectory. First is the imbalance or great divergence in global growth. According to the International Monetary Fund (IMF), global growth prospects in 2019 remain fragile and uneven as recovery in advanced economies (AEs) is expected to remain steady, while activity in emerging market economies (EMEs) is projected to slow down. This uneven growth trajectory could potentially trigger portfolio rebalancing and capital flow reversal in emerging markets (EMs), including the Philippines. Second is the emergence of what is referred to as the great fragmentation, where policymakers tend to be less able and less willing to collaborate internationally. Populist sentiment continues to gain traction in countries around the world. This, in turn, has fueled a greater inclination among governments towards “inward-looking,” prisoner’s dilemma type of policies. We are in the midst of protracted trade tensions between the US and China. While talks have recently begun between the two countries to potentially outline the exit from the trade tension, unwinding of the tariffs already imposed would still take some time. Third, there is also the risk of great disruption stemming from the so-called rise of the Fourth Industrial Revolution. While technological innovation in itself is not bad, and indeed often brings benefits, the velocity and depth of transformation could have potentially disruptive effects, especially in the short term. Consider for example the impact of financial technology on key areas of central banking such as monetary policy and banking regulation. Digital currencies can potentially alter the organic composition and evolution of money supply and affect how central banks can influence aggregate demand. On top of these external risks, we also have risks emanating from the domestic sphere. These include important challenges such as the impact of adverse weather disturbances- La Nina, El Nino-, infrastructure gaps, implementation bottlenecks, and delay in the passage of the 2019 budget of the National Government, among others. BSP’s Policy Thrust How do we respond to these challenges? To my mind, successfully navigating this time of uncertainty entails a three-pronged approach. Building on Strengths First, there is a need to continue building our strengths. In this regard, I am fortunate to inherit an institution that has a legacy of excellence, credibility, and independence. Rest assured, price and financial stability will remain the BSP’s top priority. On that note, you can rely on the BSP to remain independent and steadfast in safeguarding our primary mandates and implement timely and appropriate policies that are evidenced based. Let me just say a few words about monetary operations. The BSP will continue to use marketbased monetary instruments in its operations. 3/5 BIS central bankers' speeches In particular, the BSP will work to further fine-tune our monetary operations with refinements in our Interest Rate Corridor (IRC) framework. The adoption of the IRC framework in June 2016, has allowed the reduction of reserve requirements by 200 basis points in 2018, from 20 percent to 18 percent, without sacrificing monetary control. The goal of reducing the Reserve Requirement Ratio (RRR) can therefore resume provided that domestic inflation and monetary conditions would allow it. This commitment to a gradual reduction in deposit reserves will lower friction costs in the banking sector, create more efficient financial intermediation, and help curb shadow banking given the rise of strong alternatives offered by fintech and digital innovation. Enhancing Policy Agility This brings me to the second approach. There clearly is a need to make our policies more responsive to the changing environment. Just recently, the amendments to the BSP’s Charter was enacted into law. The new charter amendments restore the BSP’s authority to issue debt papers, providing us greater flexibility in determining the timing and size of our monetary operations. The BSP is also given the authority to obtain information from private individuals and entities for its policy formulation. The law also widens the coverage of BSP-supervised financial institutions to include money service businesses, credit granting businesses and payment system operators. These reforms put the BSP in a stronger position to pursue our price and financial stability mandates amid a rapidly evolving environment. In terms of financial stability, the BSP continues to foster a regulatory environment that is both enabling to emerging trends and effective in managing new risks. The BSP’s policy reform agenda aims to strengthen risk governance in banks by setting out standards that promote continued enhancement of banks’ risk management systems. The BSP is guided by the principle of proportionality while pursuing international best practice in its strategic policy objectives. For instance, the Monetary Board recently approved the extension of the observation period for the Basel III Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) compliance of thrift banks, that are subsidiaries of universal and commercial banks, up to end-December 2019, moving the effectivity date of said ratios to 1 January 2020. This provides covered banks and quasi-banks sufficient time to build up their liquidity position given the combined impact of these liquidity measures. Moreover, enhancements to the LCR and Minimum Liquidity Ratio (MLR) methodologies were also approved as a result of the BSP’s continuing discussions with the CTB and the rest of the banking industry. Starting 1 January 2019, stand-alone thrift banks are already subject to the 20 percent MLR which aims to ensure that covered institutions set aside a liquidity buffer that will enable them to withstand liquidity stress events. To cope with the rapid advances of Fintech, we have upped our “RegTech” game by adopting a regulatory sandbox approach. This allows the BSP to observe and study new products and create appropriate regulations in response. Harnessing the BSP Multiplier Third and the last approach is something I am very passionate about. The magnitude and severity of today’s challenges also call for the BSP to go beyond convention and embark on goals outside the ambit of traditional monetary policy. 4/5 BIS central bankers' speeches I am talking about the need to support inclusive growth. The BSP’s effective pursuit of our primary mandate of maintaining price stability puts the country in a better position to attain inclusive growth. We foster a macroeconomic environment conducive for investments and supportive of job generation and employment. However, maximizing the impact of the BSP’s policies on the lives of Filipinos entails that we tackle the inclusive growth advocacy directly. I am heartened by the thought that the recent Banking Sector Outlook Survey showed that most thrift banks believe that business growth may be maintained by developing new capabilities and by expanding market reach, digitally or through new products and services. This is what I refer to as the BSP Multiplier or the BSP’s ability to improve every single Juan and Maria’s quality of life. Towards this end, you can expect the BSP to continue to focus on this goal and integrate our financial inclusion advocacy with our traditional objectives. The BSP is working hard to bring central banking operations to the people, of course with your help. We are committed to advancing our financial inclusion, financial education, and consumer protection agenda to ensure that everybody is given the opportunity to ride in this economic growth. A BSP that is Closer to the People For us to be able to succeed in a transitioning global environment, we need to build our strengths, be more responsive, and sometimes go beyond conventions. The BSP is aware that our efforts cannot stand alone. To keep the engine running, both the public and private sectors must share in the responsibility of making sure that no Filipino is left behind. I therefore thank the CTB and the thrift bank community for supporting the BSP and its thrust on financial inclusion. Rest assured, you can count on the BSP to walk closely with you in our country’s journey towards inclusive growth. Thank you and mabuhay tayong lahat! 5/5 BIS central bankers' speeches
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Speech by Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 4th General Membership Meeting of the Financial Executives Institute of the Philippines (FINEX), Makati City, 29 April 2019.
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Benjamin E Diokno: Continuing the legacy - key BSP reforms for sustained and more inclusive growth Speech by Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 4th General Membership Meeting of the Financial Executives Institute of the Philippines (FINEX), Makati City, 29 April 2019. * * * FINEX President Atty. Eusebio V. Tan, MAP President Rizalina G. Mantaring, FINEX directors and officers, distinguished guests, ladies and gentlemen, a pleasant afternoon. I would like to thank FINEX for inviting me as your guest speaker in this year’s general membership meeting, and for the opportunity to congratulate the new members of FINEX. It is truly an honor and pleasure to be here. When I was appointed as the new Governor, one of the things that came to my mind is which direction to navigate this strong and well-respected organization. Then, I was reminded that the BSP is backed by dependable partners, whose continuing support and confidence, enable the institution to address challenges in the pursuit of its mandate, programs, and policies. This includes the FINEX. Truly, holding the steering gear is a tough and challenging task but I am certain that I can get through this because I am supported by highly competent workforce and by dedicated partners. For this afternoon, I will first be providing an overview of the BSP’s strengthened mandate as the central monetary authority and supervisor of the Philippine financial system and payments system. Second, I will give an overview of the Philippine macroeconomic developments, followed by a snapshot of the condition and performance of the Philippine banking system based on the latest available data. I will also discuss the evolving banking system landscape and reform agenda. Let me conclude this presentation with some key takeaways. For the past two and a half decades, the BSP has remained steadfast in the pursuit of its core mandates with the end goal of achieving a more globally competitive Philippine economy, and a safe, sound and stable financial system. The BSP’s mandates on price and financial stability and efficient payments system have been strengthened with the signing of Republic Act (R.A.) No. 11211. This journey, relentlessly led by my predecessor, the late Nestor A. Espenilla, Jr., the dedicated members of the Monetary Board, and initiated by the other stewards of the institution before them, has translated in the realization of significant milestones. First milestone is the positive macroeconomic developments. 1. Real GDP growth. The Philippines remains one of the fastest growing economies in the region. Real gross domestic product (GDP) grew by 6.3 percent in the fourth quarter of 2018, leading to an average growth of 6.2 percent in 2018. The expansion in real GDP was supported by similar growths in the industry and services sectors, particularly the construction and retail trade services, as well as sustained government and household spending. 2. Inflation. In March 2019, the country’s headline inflation slowed down to 3.3 percent. The resulting year-to-date average of 3.8 percent is now within the National Government’s announced inflation target range of 3.0 percent ± 1.0 percentage point for 2019. 3. Balance of Payments. The country’s external position is strong as the overall balance of payments (BOP) position yielded a surplus of USD627 million in March 2019, a reversal of 1/5 BIS central bankers' speeches the USD266 million BOP deficit recorded in the same month last year. Inflows mainly came from the BSP’s foreign exchange operations and income from investments abroad as well as the National Government’s net foreign currency deposits. 4. Gross International Reserves. In relation to the gross international reserves (GIR) level, it registered at USD83.2 billion as of end-March 2019. At this level, the GIR represents a more than ample liquidity buffer and is equivalent to 7.3 months’ worth of imports of goods and payments of services and primary income. 5. Exchange Rate – The peso averaged ₱52.34/USD1, appreciating slightly against the US dollar by 0.14 percent from the ₱52.41/USD1 average in March 2019. The peso appreciation is mainly due to risk-on sentiment following the resumption of trade talks between the United States and China. On a year-to-date basis (10 April 2019), the peso likewise appreciated against the US dollar by 1.3 percent closing at ₱51.90/USD1. With the country’s robust and uninterrupted economic growth, the per capita income has been increasing. The Philippines’ per capita GDP and per capital gross national income (GNI) grew by 8.8 percent and 8.5 percent, respectively, from end-December 2017 to 2018. The rate of poverty incidence has also improved to 16.1 percent as of the first half of 2018, from 22.2 percent in the as of the same period in 2015. Another key milestone is the fundamentally sound and stable banking system. Key indicators show further strengthening of banks’ balance sheets with positive growth in assets, loans, deposits and capital. Alongside a growing economy, the total resources of the banking system continued to expand by 10.0 percent year-on-year to P16.7 trillion as of end-February 2019. Consistent with the expansion in the asset base, the gross total loan portfolio of the Philippine banking system increased by 12.3 percent to P9.9 trillion as of end-February 2019, albeit slower compared to the 16.3 percent growth in the previous year. Nevertheless, loan growth remains broad-based across production sectors. The growth in the banking system’s assets was supported by the 6.3 percent growth in deposits amounting to P12.6 trillion as of end-February 2019. The deposits are mostly peso-denominated and in the form of savings account which are considered as stable funding source. Albeit slower compared to the previous year, the decline in deposit growth rate is matched by the increase in bond issuances. As a result, the U/KB-issued bonds payable jumped by 163.1 percent to P316.7 billion as of end-February 2019 from P120.4 billion as of end-February 2018. The banking system’s risk management system remains strong that is backed by capital. The average capital adequacy ratio (CAR) is well above the minimum requirement at around 14.8 percent on a solo basis and 15.4 on a consolidated basis as of end-December 2018. Overall quality of the bank loan portfolio remains satisfactory with low non-performing loans (NPL) ratio at 2.1 percent as of end-February 2019, and average NPL coverage ratio for the past two years at 104.5 percent. Universal and commercial banks (U/KBs) are compliant with the minimum liquidity coverage ratio requirement. The Basel III Leverage Ratio of U/KBs stood at 9.4 percent on consolidated basis as of endDecember 2018, and well above the BSP regulatory threshold of 5.0 percent and the international minimum of 3.0 percent. The Philippine banking system also remains profitable, sustained by strong core earnings. 2/5 BIS central bankers' speeches Banks’ net profit grew by 6.9 percent to P179.7 billion for the year ended December 2018. These figures demonstrate how banks successfully adapt to the challenging external environment and the evolving financial landscape. Another milestone is that the Philippine banking system has become more streamlined, financially inclusive and technologically responsive reaching out to more clients across the nation and addressing their changing needs. In particular, banks are geographically expanding through the establishment of branches and scaled-down branch-lite units. There were also banks which capitalize on electronic solutions or financial technology (FinTech) to reach a greater scale. This move is in line with the BSP’s initiative, in close coordination with industry stakeholders, on the implementation of PESONet and Instapay under the National Retail Payment System (NRPS) framework. The participation and compliance of the supervised financial institutions (BSFIs) to the NRPS requirements have been encouraging. The BSP expects more participation particularly by stand-alone thrift, rural and cooperative banks once the necessary investment in technology is completed. Setting sights on digitalization of the financial system, we are on track with our goal to raising the share of electronic retail payments to at least 20 percent by 2020. Given these milestones, I will continue the legacy of my predecessors with focus on financial inclusion. I am glad that a number of critical laws were passed to support sustained financial inclusion. The enactment of republic Act (R.A.) No. 11055 or the Philippine Identification System (PhilSys) in August 2018 provides Filipinos the means to establish a verifiable digital identity. This will enable them to open accounts, use financial services more efficiently, and gainfully participate in an increasingly digital economy. The BSP sits as a member of the PhilSys Policy and Coordination Council and participates actively in the inter-agency technical working group for the successful implementation of such Law. In the same month, R.A. No. 11057 or the Personal Property Security Act was enacted. This provides the legal and institutional framework to facilitate the use of movable property. The Law expands the range of properties which can be used as loan collateral, particularly by the micro, small and medium enterprises addressing the challenges on accessing credit because of the lack of acceptable collateral. We look forward to the operationalization of the unified collateral registry. Equally important is R.A. No. 11127 or the National Payment Systems Act which was passed in October 2018. This formalizes the BSP’s oversight on the efficiency of payments systems as channels of funds in the financial market benefiting the consumers. The proposed implementing rules and regulations are currently exposed for comments. We are focusing on the implementation of these significant pieces of legislations geared toward achieving greater and broader access to financial services by all Filipinos, especially the financially unserved and underserved population. Parallel to this is our direction towards digital transformation recognizing the wealth of benefits that we could reap, from streamlined delivery of financial services to lower cost of services. With this in mind, the BSP always endeavors to provide a regulatory environment that encourages financial innovation for a more inclusive financial system. While there is increased use of financial technology among financial institutions, the BSP adopts an open and flexible approach through the “regulatory sandbox”, underpinned by three important 3/5 BIS central bankers' speeches principles focusing on proportionate regulation, multi-stakeholder collaboration and consumer protection. Cognizant of the attendant risks, the BSP has issued series of regulations aimed at mitigating effects of technology-related risks, particularly cyber-security threats. These include the following issuances: (1) Circular No. 1019 further strengthens the BSP’s cyber-threat surveillance capabilities by tightening the reporting regime for BSFIs on technology and cyber-risk-related incidents and disruptions; (2) Circular No. 982 sets forth enhanced guidelines covering a holistic framework on information security risk management to address the growing concerns on rapidlyevolving cyber-threats; (3) Circular No. 958 requires BSFIs to implement multi-factor authentication for fund transfers, payments, and card not-present (CNP) transactions, in response to cyber-attacks and threats; (4) Circular No. 951 incorporates cyber-resilience in the BSFIs’ business continuity planning process to adequately capture the potential impact of cyber events; and (5) Circular No. 949 advocates responsible use of social media by BSFIs by instituting the necessary safeguards, governance structure and standards to effectively identify, measure, manage and monitor risks arising from social media platforms. Add to these regulatory initiatives is our continuing market surveillance on industry developments involving crowdfunding and peer-to-peer lending. We recognize that these innovative platforms can potentially expand financial access for new businesses, particularly those belonging to the micro, small and medium enterprise sector. But we also recognize that investors and consumers are exposed to greater risk of financial abuse. We, therefore, stand ready to take regulatory action if warranted to uphold fair and healthy competition. The BSP likewise collaborates with both local and foreign counterpart regulators to ensure consistency in the priorities, prevent regulatory arbitrage, and to promote optimization of digital innovations. Along with digital transformation is our increased efforts towards the deepening of financial consumer protection and education. I believe that we can truly reach financial inclusiveness if Filipinos will become more aware of the varied financial products and services that are available in the system to meet their different needs. In particular, the BSP conducts financial education expos and issues financial advisories towards this end. In 2018, we shifted our approach to financial education – from on the ground delivery of learning sessions to forging strategic partnerships. The BSP has ongoing partnerships with the Department of Education, Overseas Workers Welfare Administration, the Philippine Army, and soon with the Armed Forces of the Philippines and the Civil Service Commission. Learning tools were developed, taking into consideration the profile and learning needs of audiences, as well as institutional set-ups/training delivery mechanisms of our partners. A measurement framework is also being developed to monitor programmatic key performance indicators and measure the impact of initiatives under each partnership. Ladies and gentlemen, let me leave you with some key takeaways. First, Sound and resilient Philippine banking system supports domestic economic expansion. Second, Digitalization and financial technology are re-shaping the future landscape of the Philippine banking system. Third, The BSP stands ready to provide an enabling regulatory environment to keep pace with the evolving developments in the financial system. Fourth, leveraging on the implementation of new laws, the BSP is now in a stronger position to pursue its mandates and advocacy towards broad-based and inclusive growth. 4/5 BIS central bankers' speeches Lastly, Attainment of sustained and inclusive growth of the economy as well as the banking sector is a shared responsibility among various shareholders. It is through our harmonized efforts and partnership that we can accomplish any challenging task and be able to sustain our growth momentum. As our staunch partner, we are always grateful to FINEX for your invaluable support in equipping banking and finance professionals with the necessary skills and knowledge to cope with the demands and challenges of today’s ever changing financial landscape. Again, thank you for your continued support to the BSP’s initiatives towards a globally competitive economy and stable financial system. Mabuhay po kayo! 5/5 BIS central bankers' speeches
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Speech by Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Breakfast Briefing with the Italian Chamber of Commerce in the Philippines, Inc. (ICCPI), Manila, 17 May 2019.
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Benjamin E Diokno: Ensuring price stability through monetary policy Speech by Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Breakfast Briefing with the Italian Chamber of Commerce in the Philippines, Inc. (ICCPI), Manila, 17 May 2019. * * * To the officers and members of the Italian Chamber of Commerce in the Philippines, (ICCPI), led by its President, Mr. Sergio Boero and Vice President Mr. Lorens Ziller, distinguished guests, ladies and gentlemen, magandang umaga/good morning. It is a pleasure to be invited as guest speaker in today’s breakfast briefing to discuss monetary policy and the overall the strategies of the Bangko Sentral ng Pilipinas. The passage of Republic Act No. 11211, or the Amendments to the BSP Charter (Republic Act No. 7653), definitely bolsters the BSP’s commitment to its primary objective of promoting the stability of prices as well as the financial system. The enactment of the said law is both timely and appropriate given notable developments – both in the global and domestic fronts – that have taken place since 1993 when the old BSP Charter took effect. For this morning’s presentation, let me focus on these three discussion points. First, I will provide an overview of the latest developments in the monetary sector by dissecting inflation numbers in the first four months of 2019 and look into the BSP’s inflation outlook for this year and in 2020. Second, I will focus on the monetary measures that have been pursued by the BSP as well as the non-monetary measures put in place in coordination with other government agencies to help anchor both inflation and inflation expectations following a challenging inflation environment in 2018. This will highlight the crucial role of strong inter-agency coordination to address shocks to inflation. Lastly, I want to share the BSP’s policy thrusts moving forward, particularly in the context of the enactment of the amendments to its charter which strengthens its mandate of safeguarding price and financial stability. Let me begin with the recent inflation numbers. It may be recalled that 2018 was a very challenging year for the BSP. Inflation has been on the rise beginning the month of January and peaked in the month of September at 6.7 percent before settling at an average of 5.2 percent for the full year 2018. This inflation rate was 1.2 percentage points (ppts) above the high end of the inflation target range of 2.0 percent to 4.0 percent for the year. Nonetheless, as projected, inflation has gone down significantly, falling toward the midpoint (at 3.0 percent in April 2019) of the target band in the latest inflation print. This is not surprising given that the price pressures in 2018 were driven by cost-push factors. With the abatement of supplyside pressures, inflation has also started falling within target. The contribution of food inflation (represented by the yellow bar) to overall inflation has dropped markedly especially with rice prices easing in recent months brought about by the continued arrival of imports and the onset of the summer harvest season. Looking ahead, we expect inflation to remain on a target-consistent path for 2019 and 2020. The latest baseline forecasts (as of 9 May 2019 MB policy meeting) indicate that inflation is projected to average at 2.9 percent for 2019 while inflation forecast for 2020 is slightly higher at 3.1 percent 1/4 BIS central bankers' speeches due largely to the rebound in crude oil prices. Meanwhile, risks to the inflation outlook remain broadly balanced for 2019 amid risks of a prolonged El Niño episode and higher-than-expected increases in global oil prices. For 2020, the risks continue to lean toward the downside as weaker global economic activity could temper commodity price pressures. Similarly, forecasts of other institutions generally convey the same expectations. Results of the BSP’s April 2019 survey of private sector economists showed lower mean inflation forecast for 2019 at 3.1 percent from 3.3 percent in the previous survey round. The mean inflation forecasts for 2020 and 2021 both declined to 3.3 percent from 3.4 percent. Meanwhile, projections from other institutions also show inflation within target for this year and the next. Analysts expect inflation to continue easing and settle within the government’s target range. However, possible upward pressures are seen to keep inflation from further decelerating. (Upside risks to inflation): potential rebound in global crude oil prices, adverse weather conditions such as El Niño, higher electricity rates, reduction in the BSP’s policy interest rate, and higher domestic demand due to the upcoming midterm elections and school enrollment (Downside risks to inflation): the lower inflation prints, implementation of non-monetary policy actions to increase domestic food supply and stabilize prices such as the rice tariffication law and the mitigating measures put in place by the Department of Agriculture against the lingering weak El Niño condition, lower global crude oil prices, base effects, stable domestic currency against the US dollar, slower global trade and economic growth, and continued monetary impact of the BSP’s policy rate hikes in 2018. While the BSP is tasked with the primary mandate of safeguarding price stability, in certain circumstances, when price pressures are emanating from the supply side, close coordination with other government agencies is critical to rein in inflation. Thus, a combination of both monetary and non-monetary measures becomes the best strategy to pursue. In 2018, the BSP took timely and deliberate monetary policy actions in May, June, August, September and November (with a cumulative of 175 bps hike in policy interest rate) to firmly anchor inflation expectations to the inflation target and to arrest any possible risk of second-round effects. Non-monetary interventions implemented by other government agencies complemented the BSP’s monetary actions in addressing inflation pressures especially in the face of strong supply shocks in 2018. These measures include enhanced surveillance of basic goods and agricultural commodities as well as streamlining administrative procedures to address supply bottlenecks. On 14 February 2019, President Duterte signed Republic Act No. 11203, or the “Act Liberalizing the Importation, Exportation, and Trading of Rice, Lifting for the Purpose the Quantitative Import Restriction on Rice, and for Other Purposes." The law, which became effective on 5 March 2019, replaces quantitative restrictions with tariffs and provides for the Rice Competitiveness Enhancement Fund giving more incentive to farmers to improve productivity and competitiveness. The implementing rules and regulations were issued on 5 April 2019 and were published in the Official Gazette on 8 April 2019. Since then, as shown in earlier slides, inflation has gone down significantly. With inflation returning to the target, the BSP decided to reduce the policy interest rate by 25 bps to 4.50 percent during its 9 May 2019 policy meeting. The MB’s decision was based on its assessment that the inflation outlook continues to be manageable, with easing price pressures owing to the decline in food prices amid improved supply conditions. Latest baseline forecasts 2/4 BIS central bankers' speeches indicate that inflation remains likely to settle within the target range of 3.0 percent ± 1.0 percentage point for both 2019 and 2020, while inflation expectations have moderated further. In deciding this, the MB noted the impact of the budget delays on near-term economic activity, but took the view that the prospects for domestic demand remain firm, to be supported by a projected recovery in household spending and the continued implementation of the government’s infrastructure program. In addition, the MB observed that the global economic growth momentum has slowed down in 2019. Meanwhile, indications of slower growth in domestic liquidity and credit require careful monitoring. At the same time, the MB also noted that the risks to the inflation outlook remain broadly balanced for 2019 amid risks of a prolonged El Niño episode and higher-than-expected increases in global oil prices. For 2020, the risks continue to lean toward the downside as weaker global economic activity could temper commodity price pressures. Looking ahead, the BSP will continue to monitor developments affecting the inflation outlook to ensure that the monetary policy stance remains consistent with its price stability objective. On the other hand, the passage of Republic Act No. 11211, or an Act Amending Republic Act No. 7653, known as the ‘New Central Bank Act’ (signed on 14 February 2019) is a significant milestone for the BSP. Our three pillars of central banking, that of price stability, financial stability, and an efficient payments and settlements system, were further strengthened with the expansion of the BSP’s policy toolkit. The law restored the central bank’s authority to issue its own debt papers as part of its regular monetary operations, establishes a stronger prudential regulatory framework to promote a safe and sound financial system through the expansion of supervisory coverage, and authority to prescribe metrics attuned to international standards and practices. The amendment likewise empowers further the BSP to oversee the country’s payment and settlement systems (PSS), including critical financial market infrastructures that are vital components of the PSS. Additional notes: The amended BSP Charter restores the central bank’s authority to obtain data from any person or entity from the private and public sectors for statistical and policy development purposes in line with the pursuit of our triad mandates. The law authorizes the increase in the capitalization of the BSP from Php 50 billion to Php 200 billion, which shall be sourced from dividends declared by the BSP in favor of the National Government. Under the amended Charter, the BSP is also exempt from paying taxes on income derived from its governmental functions. These reforms place the BSP on a stronger position to pursue its mandate amidst a growing economy and the increasing sophistication of the financial system. Looking ahead, we will continue to vigilantly monitor domestic and global developments to ensure that the BSP is able to sustain the “trend” of achieving its inflation targets. The BSP stands ready to deploy appropriate measures as needed to ensure an inflation environment conducive to a sustainable growth of the Philippine economy. Future policy actions of the BSP will continue to be guided by the following principles: 1) primacy on achieving its inflation objective. 3/4 BIS central bankers' speeches 2) pre-emptively action if the inflation target is considered to be at risk. And 3) policy flexibility using all available tools in our enhanced tool kit, as deemed appropriate to address any threats to our inflation objective. Let me end my presentation with these key notes. Rest assured that the BSP is strongly committed to take all necessary policy actions to safeguard the government’s inflation targets and deliver on its primary mandate of price stability to support the country’s growth trajectory. Maintaining price and financial stability that will minimize systemic risks, as well as provide resilience to shocks to the economy will help foster an enabling macro-environment that is conducive to accelerating economic growth and help expand its productive capacity. Ultimately, the BSP’s conduct of its monetary policy will always be anchored on its price stability mandate in support of our collective goal of a Philippine economy that is continuously expanding and thriving, for the benefit of all Filipinos. Thank you. 4/4 BIS central bankers' speeches
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Speech by Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Rotary Club of Manila centennial year celebration, Manila, 6 June 2019.
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Benjamin E Diokno: Sustaining the Philippine growth momentum Speech by Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Rotary Club of Manila centennial year celebration, Manila, 6 June 2019. * * * President Susing Pineda, fellow rotarians, friends, all the RCM Journalism Awardees special guests, ladies and gentlemen, good afternoon. Thank you for inviting me to be one of your speakers in this historical centennial anniversary celebration of the Rotary Club of Manila. Not many organizations have the distinction of reaching the all-important “century” milestone. Attaining this momentous landmark is certainly not a walk in the park for any organization. That the RCM have lasted this long is a reflection not only of its long-standing commitment to its ideals and goals, but also of its dynamism, relevance, and influence to the community it serves. For this, the men of the RCM deserve our congratulations! (Governor leads applause). I thus consider it a privilege that I stand here before you today to share with you the BSP’s assessment of the country’s growth prospects. The Philippine economy is sound, its prospects are bright. Along many dimensions, allow me to highlight several factors that continue to steer our story of resilience and stability, and to point out some key challenges that need to be addressed in our drive towards sustainable and balanced growth. Let me begin with this slide which shows that overall prospects for the Philippine economy for 2019 and in 2020 remain bright, amid mounting global uncertainties along with emerging domestic challenges. While the Q1 2019 growth of the Philippine economy of 5.6 percent was short of our target of 6.0 to 7.0 percent, it remains one of the highest in the region and perhaps the world. This performance was achieved notwithstanding the delay in the approval of the 2019 national budget which held back the implementation of key programs and projects. Based on the statistics by the National Economic Development Authority (NEDA), the Philippine economy should have grown by at least one percentage point higher, at 6.6 to 7.2 percent in the first quarter, had the 2019 fiscal program been approved on time. Nonetheless, the government has crafted a “catch-up” plan to make up for the lower-than-planned state spending in the first quarter. And the consensus is that we will hit our target of 6-7% growth this year. On the supply side, economic activity was boosted mainly by the services sectors’ robust performance. Meanwhile, the strong expansion in both investments and consumer spending also supported growth on the demand side. With the sustained 81 consecutive quarters (spanning more than 2 decades from 1999 to 2019) of uninterrupted growth, we remain optimistic that the Philippine economy can sustain its growth momentum over the medium term. Third-party assessors share the same optimism. Shown in this slide are the growth projections released by the International Monetary Fund (IMF), the World Bank (WB) and the Asian Development Bank (ADB) in their latest surveillance reports. The World Bank just reaffirmed, they are sticking to 6.4 percent growth this year for our country. These third-party assessments are also not far from the NEDA’s target for 2019. It may be noted that the Development Budget Coordination Committee (DBCC), during its meeting on 13 March 2019, approved a Gross Domestic Product (GDP) growth target range of 6.0 percent – 7.0 percent for 2019, 6.5 percent – 7.5 percent in 2020, and 7.0 percent – 8.0 percent from 2021 to 2022. 1/4 BIS central bankers' speeches In addition, the strength of the Philippine economy was further validated with the upgrade in our sovereign credit rating by Standard & Poor’s to BBB+ with a stable outlook. This is the highest letter grade for the foreign currency and an improvement from the BBB grade for the local currency rating. At the same time, Fitch—another rating agency—recently affirmed the Philippines’ investment BBB rating, also with a stable outlook. Recent demand indicators continue to point to overall firm domestic growth prospects in the near term. In fact, results of the Q1 2019 survey-based consumer and business sentiment showed an improved outlook. The consumer outlook index registered an all-time largest quarter-on-quarter increase since the start of the nationwide survey in Q1 2007. At the same time, the confidence index for business showed marked improvement after declining for four consecutive quarters. Furthermore, with the end of the 2019 budget impasse, the continued implementation of the government’s infrastructure program – which we fondly call “Build, Build, Build” – is envisioned to generate an “impressive multiplier effect” on the economy by increasing its productive capacity, creating jobs, raising incomes, and enhancing the investment climate in the country. Moving on to inflation dynamics, price pressures have gone down significantly, falling toward the midpoint (at 3.0 percent in April 2019) of the target band. This brought the year-to-date (January – April) average to 3.6 percent year-on-year for 2019. This is firmly within the government’s 2-4 percent target range. This is a stark contrast to last year’s rapidly rising inflation figures that was only arrested through the adoption of timely monetary action by the BSP and non-monetary measures by the Executive department. Looking ahead, we expect inflation to remain on a target-consistent path for 2019 and 2020. The latest baseline forecasts (as of 9 May 2019 MB policy meeting) indicate that inflation is projected to average at 2.9 percent this year while inflation forecast for next year is slightly higher at 3.1 percent. This is due largely to the rebound in global crude oil prices. Similarly, forecasts of other institutions generally convey the same expectations. Results of the BSP’s April 2019 survey of private sector economists showed lower mean inflation forecast for 2019 at 3.1 percent down from 3.3 percent in the previous survey round. The mean inflation forecasts for 2020 and 2021 both declined to 3.3 percent from 3.4 percent. Meanwhile, projections from other institutions also show inflation within target for this year and the next. Given prevailing conditions, the BSP decided to reduce its policy rate by 25 basis points (bps) to 4.50 percent from 4.75 percent, effective 10 May 2019. The BSP also pre-announced a phased 200-bp reserve requirement reduction for universal and commercial banks, thrift banks (TBs) and non-bank financial institutions with quasi-banking functions (NBQBs); as well as a 100-bp RR reduction on demand deposits and NOW accounts for rural and cooperative banks. Moreover, long-term negotiable certificates of time deposit (LTNCDs) will have uniformed RR ratio of 4.0 percent. In reducing the BSP’s policy rate and reserve requirement ratios, the Monetary Board recognized the progressive decline in domestic inflation. It was further guided by the target-consistent inflation path with inflation expectations converging with the government’s target. This is also part of the BSP’s ongoing initiative to enhance the effectiveness of monetary policy and deepen domestic money market. Nevertheless, we recognize the uncertainty in the global economic environment, with the IMF further revising down its global growth prospects due to volatilities in commodity prices, uncertainty over advanced economies’ policy normalization, as well as ongoing trade tensions as 2/4 BIS central bankers' speeches a result of the US-China [trade] war. But while the external environment is challenging, I am cautiously optimistic about the current state of the Philippine economy. “Keeping our house in order” remains the first and best line of defense. We are improving economic openness through liberalization of trade and foreign direct investment, we are enhancing external competitiveness by strengthening domestic industries; we are diversifying products and markets to non-traditional growing economies; and we are sustaining domestic economic resilience by building adequate buffers. These are some of the policy actions and reforms that we can pursue or continue to pursue in order to ward off the potential negative effects of external shocks, especially from rising protectionist measures and heightened policy uncertainty. Let me talk briefly about the US-China trade dispute. There was no direct imposition against the Philippines in terms of the country’s exposure to the products imposed with tit-for-tat measures between US and China. But the extent of impact would depend on the industries affected. For instance, the Philippines could possibly boost exports of food and agricultural products to the US, taking advantage of the tariffs imposed on Chinese goods of similar nature. The same goes for US agricultural goods imposed with steep tariffs by China. We see one positive impact that the US-China trade war could have on the Philippine electronics industry. That is if companies on either or both of the countries use the Philippines as an alternative manufacturing site. This scenario, however, would take time and the Philippines would have to compete with other potential relocation sites like Vietnam and Indonesia. The potential upside may not come about for a few years as firms would need to complete the lengthy process of shifting production sites. We also recognize that the continued trade friction could negatively affect overall investment sentiment and increase caution and uncertainty in the global growth prospects. This could take its toll on the country’s external sector. Nevertheless, given that the economy’s growth is mainly driven by domestic demand, the trade friction would have limited negative impact on Philippine exports. Before I close, let me emphasize the importance of sustained collaboration between the government and the private sector in pursuing hard yet necessary structural reforms to fuel the Philippine growth engine over the long-term. Towards the end of the administration of the late president Corazon Aquino, a world class team of economist, headed by no less than Paul Krugman, analyzed the Philippine economy. And they concluded that given the economic conditions at that time, during President Cory Aquino’s time, the long-term growth of the Philippine economy was in the neighborhood of 3 percent. Repeat, 3 percent. We could only grow at 3 percent. That was then. Things are significantly different now. Over the past 25 years, meaningful reforms have helped build and fortify the institutions that facilitate growth by expanding the role of market forces in key sectors of the economy; encouraging investments and private sector activity; removing bottlenecks for doing business in the country; and strengthening the country’s fiscal position and the financial sector, to name just a few. No doubt, the Duterte administration is in a strong position to push for reforms by leveraging on its strong political capital as evidenced by the number of laws enacted in less than 3 years of the current administration’s leadership. These include, among others, recent enactment of the tax reforms, amendments to the BSP Charter and Rice Tariffication Law. These reforms, along with the other structural reforms in the pipeline, will continue to play a significant role in propelling the economy on a path of balanced, sustainable, and inclusive growth. 3/4 BIS central bankers' speeches Let me take the chance to talk about Republic Act No. 11211 which was signed on 14 February 2019. This is a monumental milestone for the BSP. Our three pillars of central banking—price stability, financial stability, and an efficient payments and settlements system—were further boosted with the expansion of the BSP’s policy toolkit. RA 11211 restored the BSP’s authority to issue its own debt papers as part of its regular monetary operations, establishes a stronger prudential regulatory framework to promote a safe and sound financial system through the expansion of supervisory coverage and authority to prescribe metrics attuned to international standards and practices. The amendment likewise empowers the BSP to oversee the country’s payment and settlement systems (PSS) including critical financial market infrastructures that are vital components of the PSS. Looking ahead, we will continue to monitor domestic and global developments to ensure that the BSP is able to meet its inflation targets. The BSP is also ready to use all appropriate measures as needed to ensure an inflation environment conducive to sustainable growth of the Philippine economy. Rest assured that the future policy actions of the BSP will continue to be guided by the following principles: 1. Our primary focus will be price stability. 2. We will be pre-emptive rather than reactive and 3. Our policy will be data-driven and evidence-based. Finally, let me leave you with the assurance that the Philippine economy is sound. It is one of the best performing economies in the world. Its prospects are bright—extremely bright. And if you have money to invest, and I can see, some people here have money to invest, this is the best time to invest, invest, invest in the Philippines. Do not delay, do not waver. Because if you do, you will regret it. To wrap up, let me end my presentation with these key take-aways. The BSP’s monetary policy actions will help ensure that 2019 and 2020 inflation targets are achieved. Nevertheless, the BSP will remain watchful and vigilant, utilizing its analytical and surveillance tools for any potential risks to its monetary and financial stability objectives. The Philippine economy has demonstrated uninterrupted economic expansion and has built domestic sources of resilience to help cushion against uncertainty in external environment and emerging domestic challenges Strategic policy and structural reforms, addressing infrastructure gaps, and leveraging the country’s demographic opportunities have played a significant role and will continue to underpin the economy’s path towards balanced, sustainable, and inclusive growth. Commitment to pursue infrastructure and reform agenda will help promote globally competitive industries in order to sustain the country’s economic growth momentum. Lastly, on behalf of the Bangko Sentral ng Pilipinas, I congratulate all the energetic and irrepressible members of the Rotary Club of Manila, both young and old, for reaching 100 years! Mabuhay ang Rotary Club of Manila! Mabuhay ang Pilipinas! Mabuhay po tayong lahat! 4/4 BIS central bankers' speeches
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Speech by Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Data Governance Seminar, Manila, 14 June 2019.
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Benjamin E Diokno: Data Governance Seminar Speech by Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Data Governance Seminar, Manila, 14 June 2019. * * * To my colleagues here in Bangko Sentral and to our resource persons today, good morning. Welcome to our data governance seminar. As we prepare ourselves with the data governance seminar this morning, let me start with some food for thought: It used to be that the problem of society is not having enough data and computing power. Today, what we are facing is clearly an abundance of data and almost unlimited computing power. In a Forbes magazine article, internationally best-selling author and strategic business and technology advisor Bernard Marr notes that there are 2.5 quintillion bytes of data created each day. Further, 90% of available data across the globe was created only in the last two years.1 On the other hand, according to the World Economic Forum, the entire digital universe is expected to reach 44 zettabytes by 2020, roughly 40 times more bytes than there are stars in the observable universe. Going by this, data is the new currency. Understanding of data as a strategic asset is now quite fundamental to every business and organization—the BSP included. In fact, in my recent policy pronouncements, I always say that the Monetary Board’s decisions are always data driven and evidence-based on market conditions. Despite the significance of data, even highly technical and professional organizations still experience issues in data consistency, quality, and timeliness. This affects an organization’s ability to generate the data needed for high quality decisions and policies. These seem to indicate that many organizations have yet to reach that point of being able to effectively harness the power of their data assets. This is where data governance, our topic for today, becomes most relevant. DAMA, an international organization of professionals and standard setters in data management, defines data governance “as the exercise of authority and control over the management of data assets.” Its purpose is to ensure that data is collected, processed, organized, protected, and consumed properly, according to agreed-upon policies and best practices. 2 It is about determining data strategy and policy, defining standards for data quality and delivery, as well as establishing oversight and issue management processes. This is to ensure that the reliable and actionable data are received by the ones who need it, when they need it, and in the way they need it. Thus, a well-functioning data governance structure should guide decisions made about data and how people and processes are expected to behave in relation to it. Too many times, however, this is left to chance or to operate within silos with different, if not competing objectives, sometimes to the detriment of the organization in general. To establish a data governance program is to be able to exercise authority and deliberate control over data and, as a result, increase the value that can be derived from our data assets. Data governance need not be intrusive or invasive, and neither should it be restrictive. Instead, it should be designed around the best way data processes can support the delivery of our mandates. 1/2 BIS central bankers' speeches Following the global financial crisis of 2007, the Basel Committee on Bank Supervision (BCBS) issued BCBS 239 covering the principles for effective risk data aggregation and risk reporting.3 These principles, issued in January 2013, aim to strengthen banks’ risk data aggregation and risk reporting with a view to improving their risk management, decision-making processes, and resolvability. One of the key takeaways from BCBS 239 is Principle 1. It is entirely devoted to governance, recognizing the importance of having a strong governance framework, risk data architecture and IT infrastructure as preconditions to ensure compliance with the other principles in the guidelines. The rest of the principles outline building data aggregation capabilities, reporting practices, and tools to monitor compliance. While the guidelines are principally intended for systemically important banks, many of the principles may be ported over and applied to how an institution like our own should be governing our data for our purposes, even while we explore the applications of other generally accepted principles and best practices in data governance. Our goal in today’s session is to jumpstart the definition of our data governance strategy. We have invited experts from the industry as well as the most senior data stakeholders in the organization to this workshop in order to accelerate our journey— because it will be a journey towards a more efficient and effective data governance in the BSP. We believe that with active support of the Monetary Board and the Office of the Governor and the strong partnerships among the business users and the IT teams, we will be well on our way towards defining our data governance strategy and practices to address not only our present needs but also to position us well for our future data and information requirements. Thank you. 1 www.forbes.com/sites/bernardmarr/2018/05/21/how-much-data-do-we-create-every-day-the-mind-blowing- stats-everyone-should-read/#3452202160ba; generated-each-day-cf4bddf29f/ www.weforum.org/agenda/2019/04/how-much-data-is- 2 DAMA-DMBOK to the Data Management Body of Knowledge, 2nd ed. DAMA International, 2017 3 Principles for effective risk data aggregation and risk reporting. Bank of International Settlements. January 2013. www.bis.org/publ/bcbs239.pdf 2/2 BIS central bankers' speeches
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Speech by Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Citi MicroentrepreneurshipAwards (CMA) Press Lunch, Manila, 18 June 2019.
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Benjamin E Diokno: Sustained partnerships in financial inclusion Speech by Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Citi MicroentrepreneurshipAwards (CMA) Press Lunch, Manila, 18 June 2019. * * * To my colleagues from BSP, partners from the Microfinance Council of the Philippines and Citi Philippines headed by Aftab Ahmed, microfinance advocates and champions, esteemed guests, and friends from the media, good afternoon and welcome to the launching of the 17th Citi Microentrepreneurship Awards of the CMA. I am pleased to be with fellow microfinance champions and advocates. I am equally honored to be part of the selection committee of this prestigious awards program. While it may be my first time to be part of the CMA, I understand the potential and transformative power of the tools and initiatives for inclusive growth, one of which is microfinance. As a civil servant for more than four decades, uplifting the lives of the poor and low-income households has always been one of my thrusts. And here at the BSP, I am glad to be able to contribute to that in a tangible way. The photo you see now shows the winners of the CMA in 2018. I understand an innovative fishball maker from Bulacan earned him the top spot in the 2018 CMA. Before him, we had a Bicolana finding fortune in pili oil and a public school teacher from Davao turned into a nata de coco manufacturer. With microfinance, we give these people opportunities for success. And the possibilities are endless. Since 2002, the CMA has been instrumental in making the public aware of the opportunities of micro-entrepreneurship and how it impacts on development and poverty alleviation by recognizing outstanding Filipino micro-entrepreneurs. In fact, to date, there are 132 micro-entrepreneur awardees from all over the Philippines. The success of the CMA is such that it has gained international recognition and has been replicated in 34 countries. Now on its 17th year, the CMA continues to build on lessons and successes by offering entrepreneurship training for winners through the Citi Microenterprise Development Center and mentoring through UP Institute for Small-Scale Industries and expanding categories to recognize specific fields and enterprises, namely agri and sustainable/green business, to name a few. For the first time last year, the Start-up Microbusiness Award was given to a microenterprise less than five years old. Year after year, the CMA tells the inspiring stories of Filipinos with great entrepreneurial spirit. This has been recognized by the Bangko Sentral as it began its microfinance work in the 2000s. To this day, the CMA continues to lay the groundwork for initiatives that enable access to muchneeded financial products and services that would empower existing and aspiring microentrepreneurs. And the BSP shall be your partner in formulating and promoting regulations that enable banks 1/2 BIS central bankers' speeches and other financial service providers to reach out to unserved and underserved markets. In recent years, the BSP has issued regulations on agent banking, digital services, basic deposit accounts, branch-lite units, National Retail Payment System, and innovative financing such as agriculture value chain financing. The BSP is also at the forefront of digitization by opening its doors to other notable players such as fintechs. As part of its advocacy work, the BSP launched the Credit Surety Fund (CSF) program in 2008. CSFs have been established in 54 provinces and cities all over the country to increase the credit worthiness of cooperatives, businessmen, and micro, small and medium enterprises (MSMEs). Taken in entirety, the BSP believes that these initiatives are instrumental in accelerating financial inclusion, and ensuring products and services that are affordable and accessible to key sectors for growth. To reinforce our policies, the BSP engages stakeholders within and beyond the industry. The National Strategy for Financial Inclusion has proven its importance as a platform for coordination and collaboration with the public and private sectors. Last year, for instance, the BSP, together with the Department of Trade and Industry, the Microfinance Council of the Philippines (MCPI), and Alliance of Philippine Partners for Enterprise Development entered into a partnership that would expand the financing ecosystem of Negosyo Centers nationwide. These one-stop shops play a critical role in shepherding fledgling MSMEs. Complementing this is our collaboration with institutions on financial education. The BSP has entered partnerships with the private sector on the development of financial literacy programs for the Philippine Army, the Department of Education, and the Overseas Workers Welfare Administration; thus ensuring effective messaging and reach. Of course, the partnership with MCPI and Citi Philippines remains one of the BSP’s cornerstones in stakeholder engagement for financial inclusion. The Citi Microentrepreneurship Awards (CMA), as the fruit of such remarkable partnership, serves as an important platform to convey the message that collaboration with a strong shared vision, coupled with responsive policies and platforms, can bring the best out of the Filipino people. It is thus with great interest that I participate in this year’s CMA. I look forward to the opportunity to discover promising micro-entrepreneurs whose experiences, achievements, and community contributions would serve as an inspiration to everyone. To my fellow NSC members, we indeed have some exciting work ahead of us. May the CMA continue to nurture and empower Filipino micro-entrepreneurs in the years to come. Again, good afternoon and thank you all for coming. 2/2 BIS central bankers' speeches
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Speech by Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 5th Joint Economic Briefing of the British Chamber of Commerce in the Philippines, Makati City, 19 June 2019.
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Benjamin E Diokno: Fueling growth of FDIs in the Philippines - The BSP as an enabler Speech by Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 5th Joint Economic Briefing of the British Chamber of Commerce in the Philippines, Makati City, 19 June 2019. * * * Friends, ladies and gentlemen, good morning. It is my pleasure to address this 5th Joint Economic Briefing of the British Chamber of Commerce and the Dutch, French, German, Italian, and Spanish Chambers. The BSP always welcomes the opportunity to engage current and potential investors and to communicate BSP policy initiatives that impact the operating environment for businesses. While fueling growth of FDIs is not the primary mandate of the BSP as a central bank, we are well-aware that achieving our core objectives of promoting price and financial stability contributes in promoting an investment-friendly Philippines. It is from this perspective that I build on your conference topic, “Fueling the Growth of FDIs in the Philippines.” My presentation will focus on three areas: First, I will present developments on Foreign Direct Investments (FDIs) in the Philippines and prospects moving forward. Second, I will discuss the factors that influenced FDI inflows during the past decade. And third, I will present BSP initiatives that support the government’s overarching goal to further increase FDIs. FDIs in the Philippines have been rising steadily since 2010. It reached record levels in 2017 and 2018, during which FDIs averaged US$10 billion a year on the back of robust macroeconomic fundamentals as evidenced by sustained and accelerating economic growth. Also serving as pull factors for FDIs are the Philippines’ stable inflation, improved fiscal balance, and resilient external position. From January to March this year, the country attracted US$1.9 billion in FDIs. This is lower than the US$2.3 billion recorded during the same period in 2018. This could be partly attributed to increased uncertainty over the US-China trade war, pre-mid-term election jitters, and the legislative proposal to rationalize tax incentives, among others. In the early 2000s, the biggest recipients of equity capital investment have been the manufacturing, real estate and financial intermediation sectors. During the past decade (2009–2018), however – finance and insurance as well as utilities– gained larger shares in foreign equity flows, together with manufacturing. Moving to the first three months of 2019, the table shows that equity capital infusions were mainly invested in finance and insurance, real estate, and manufacturing, among others. In terms of FDI sources, the top five foreign investors over the past decade have been Japan, the United States, Hong Kong, ASEAN, and the European Union. 1/5 BIS central bankers' speeches What is notable in this table is the rising share of FDIs from our ASEAN partners—from just US$19 million in 2009 to US$990 in 2018. While Philippine FDIs flows have substantially increased in recent years, they remain modest compared to our ASEAN peers. This is seen in the size of FDIs relative to the size of the economy as shown in the chart at the left. The same observation applies when comparing FDIs against gross fixed capital formation, the chart on the right. Please note, however, that in the chart at the right, the Philippines caught up with Vietnam and Malaysia in 2016. This chart, meanwhile, shows that the average growth rate of FDIs in the Philippines from 2013– 2018 averaged 22.4 percent. This is higher than the growth in other Asian countries, specifically, Malaysia, India and Vietnam—but lower compared to Thailand and Indonesia. In any case, prospects for FDIs in the Philippines continue to be positive as shown by recent data on investment approvals. In the first quarter of 2019, foreign investments approved by seven investment promotion agencies (IPAs) 1 amounted to PhP46.0 billion. This is more than three times higher than the PhP14.2 billion approved in the same period in 2018. The biggest commitment was from the Netherlands, whose PhP10.1 billion investment pledge accounted for 22.0 percent of total commitments.2 Manufacturing, on the other hand, received the largest share among industries with 76.1 percent of the total pledges, amounting to PhP35.0 billion.3 Please allow me to highlight that the recent credit rating upgrade of the Philippines by S&P to BBB+ is expected to further enhance investor perception of the Philippines. Moving forward, determining the factors that fuelled FDI growth needs an examination of trends that shaped Philippine FDIs. While progress has been made in removing trade barriers and improving logistics, foreign ownership restrictions have been cited as an obstacle in attracting stronger investment inflows. A World Bank report cited the following factors as constraining investment entry into the Philippines. These include:4 Infrastructure challenges; Inadequate investor protection; Laborious procedures required to open and close a business; Poor access to credit among small and medium-sized enterprises (SMEs). The government is well aware of these and have pursued structural reforms over the years to address these bottlenecks. Among these are the passage of the Ease of Doing Business and Efficient Government Service Delivery Act of 2018 (R.A. No. 11032) which aims to facilitate prompt action or resolution of government transactions with efficiency. Aside from recent reform initiatives — the country’s robust economic fundamentals, “Build Build Build” program, and credit rating upgrades are expected to continue supporting positive investor sentiment for the Philippines. This is in addition to the presence of a young, highly-educated, and English-speaking workforce in the country. 2/5 BIS central bankers' speeches In view of these factors, what then is the BSP’s contribution in promoting FDI growth? The BSP’s primary contribution to fueling FDI growth lies in the effective discharge of its mandates and policy thrusts. Fostering price stability, sound external payments position, financial stability, and an efficient payments system will minimize systemic risks as well as provide resilience to shocks to the economy. This will help support an enabling environment that is conducive to accelerating economic growth and, in turn, investment opportunities. Let me expound… First, the BSP promotes a favorable investment environment by ensuring that inflation continues to be stable and that inflation expectations remain well-anchored. Headline inflation increased to 3.2 percent year-on-year in May 2019 from 3.0 percent in the previous month. The resulting year-to-date average of 3.6 percent remains within the Government’s inflation target range of 3.0 percent ± 1.0 percentage point for the year. Looking ahead, we expect inflation to remain on a target-consistent path for 2019 and 2020. The latest baseline forecasts (as of 9 May 2019 MB policy meeting) indicate that inflation is projected to average at 2.9 percent for 2019 while inflation forecast for 2020 is slightly higher at 3.1 percent due largely to the rebound in crude oil prices. Meanwhile, risks to the inflation outlook remain broadly balanced for 2019 amid risks of a prolonged El Niño episode and higher-than-expected increases in global oil prices. For 2020, the risks continue to lean toward the downside as weaker global economic activity could temper commodity price pressures. Maintaining a stable inflation environment, as you know, is very important to avoid increases in operating costs (e.g., wages, utilities, locally-sourced production inputs) and maintaining the competitiveness of your operations in the Philippines. Given these favorable inflation assessments, the Monetary Board (MB), during its last monetary policy meeting, decided to reduce its policy rate by 25 basis points (bps) to 4.50 percent, effective May 10, 2019. The MB’s decision is based on its assessment that the inflation outlook continues to be manageable, with easing price pressures owing to the decline in food prices amid improved supply conditions. In addition, the BSP also recently pre-announced the schedule of reserve requirement reduction for universal commercial banks: 100 bps by May 31 and 50-bps each on June 28 and July 26, 2019. In reducing the reserve requirement ratios, the MB recognized the continued downtrend in domestic inflation with headline inflation averaging at 3.6 percent in the first four months of 2019, which is within the target band of 3.0 percent ± 1.0 percentage point. The BSP was also guided by the benign inflation forecasts of 2.9 percent for 2019 and 3.1 percent for 2020. Inflation expectations have likewise shown increasing convergence with the BSP’s inflation target. This is part of the BSP’s ongoing initiative to enhance the effectiveness of monetary policy and deepen domestic money market. Second, further enhancing BSP’s monetary policy transmission is one way of promoting more efficient financial intermediation conducive for investments. The interest rate corridor system (IRC) of the BSP has put in place incentives for active interbank trading and financial market development by reducing short-term interest rate volatility and aiding systemic liquidity management. 3/5 BIS central bankers' speeches The IRC also helps in developing benchmark short-term market interest rates (for bank loan and deposit pricing). Encouraging market development through market-based monetary operations unlocks investment capital as it ensures market efficiency. Third, the BSP’s continuing pursuit of foreign exchange reforms is aimed at supporting investments. The BSP is committed to continue implementing various FX liberalization reforms to make the country friendlier to investors and attract bigger and better FDIs both in value and quality. To date, there have been ten waves of FX reforms implemented since 2007. The most recent set of reforms took into consideration the country’s strong macroeconomic fundamentals as well as the increasing needs of a growing economy. The country’s external payments position remains resilient and sustainable as it enjoys support from different fronts. These include remittances from overseas Filipinos (OFs), revenues from the IT-BPO industry, receipts from the robust tourism sector, and sustained inflows of foreign direct investments. For 2019, the BSP sees a BOP surplus of $3.7 billion equivalent to 1 percent of GDP. The current account deficit, on the other hand, has been revised upward to USD 10 billion, equivalent to 2.8 percent of GDP. We continue to see this as financeable given support from structural inflows. The country’s Gross International Reserves (GIR) now stands at around US$85 billion as of endMay 2019. This is roughly equivalent to 7.5 months’ worth of imports of goods and payments of services and primary income. In addition, the passage of R.A. No. 11256 or the Gold Law would allow the BSP to increase its purchases of domestic gold to further build up the level of the Philippines’ GIR, which serves as the country’s primary buffer against external economic shocks. The law exempts from excise and income tax the sale to the BSP of gold sourced from small-scale mining activities. Fourth, the BSP’s implementation of capital market reforms facilitates easier funding access. The BSP is a long-standing advocate of reforms to further deepen the country’s capital market. Capital market development helps finance infrastructure projects and limits concentration risks in the banking system, thereby facilitating investment in long-term government bonds, lowering borrowing costs, and improving monetary policy transmission. At the same time, this allows the private sector to tap into a broader market or avail themselves of alternative financing opportunities for infrastructure projects. The BSP continues to enhance the regulatory environment (e.g., refinement of benchmarks and trading rules) by allowing banks to offer instruments that help hedge risks and provide ways of portfolio diversification. On the other hand, the liberalization of the banking system, which allowed the entry of new foreign banks into the country, enhances the quality of competition in the banking system, expands the array of financial products and services at competitive rates, encourages more foreign direct investments (FDI), and opens alternative financing opportunities to fund infrastructure projects. Before I end my presentation today, I would like to highlight key structural reforms that will help the BSP to more effectively perform its mandates. 4/5 BIS central bankers' speeches Under my watch, the BSP shall have strict and prompt implementation of recently enacted laws namely: 1. Amendments to the BSP Charter 2. National Payment Systems Act, 3. National ID System, and 4. The Gold Law The BSP also advocates these bills that have been passed in Congress, which needless to say, we shall strictly implement upon their passage. 5. Islamic Banking Bill and the 6. Anti-Bank Hacking System Bill which places harsher penalties for hacking of bank systems and skimming of ATMs or the Anti-Bank Hacking legislation. Taken together, these laws will help enhance the macroeconomic environment, promote growth, and improve investment prospects in the country. As we all know, investments are fundamental to economic growth and development, especially amid an increasingly integrated global economy. It is for this reason that we are glad to engage the British Chamber to share our views on “Fueling the Growth of FDIs in the Philippines.” This is in line with the goal of strengthening the position of the country as one of the favored destinations for FDIs. On the part of BSP, please rest assured that we stand ready to support efforts to fuel further FDI growth in the Philippines within the bounds of our mandate. It is my view that pursuing business opportunities in the Philippines will indeed be mutually beneficial for both foreign investors and the domestic economy. Thank you very much and a pleasant day to all. 1 i.e., Board of Investments (BOI), Clark Development Corporation (CDC), Philippine Economic Zone Authority (PEZA), Subic Bay Metropolitan Authority (SBMA), Authority of the Freeport Area of Bataan (AFAB), BOIAutonomous Region of Muslim Mindanao (BOI-ARMM), and Cagayan Economic Zone Authority (CEZA) 2 Japan came in second pledging PhP9.4 billion or 20.5 percent of the total and Thailand taking the third spot with pledges amounting to PhP8.5 billion or 18.4 percent of the total approved FIs. 3 Administrative and Support Service Activities came in second with investment commitments valued at PhP3.5 billion or 7.7 percent of the total FI. Accommodation and Food Service Activities followed with PhP2.9 billion or 6.4 percent of total FI commitments. 4 World Bank “Philippines – Discussion Notes: Challenges and Options for 2010 and Beyond.” June 2011. 5/5 BIS central bankers' speeches
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Speech by Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Wallace Business Forum, Makati City, 19 June 2019.
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Benjamin E Diokno: The Philippine economy - a story of cautious optimism Speech by Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Wallace Business Forum, Makati City, 19 June 2019. * * * Wallace Business Forum (WBF) Managing Director Gary Teves, distinguished officers and members of WBF, esteemed guests, ladies and gentlemen, good morning. I am pleased to address you in this forum organized by the Wallace Business Forum. Your continued interest in the Philippine economy has greatly helped in shaping the quality of information provided to the international community. Events such as this offer the BSP an excellent opportunity to engage with various stakeholders in policy dialogue and discuss the developments in our core mandate of promoting price stability and financial stability as well as our views on the current challenges we are facing. Let me begin my speech with the concept of a Goldilocks economy, a state of having a “just right” mix of high growth and low inflation. Has the Philippines entered this state? The answer is DEFINITELY YES. Allow me to clarify. There has been an encouraging development in the decelerating trend in inflation. This has allowed us to reduce the interest rate on the BSP’s overnight reverse repurchase (RRP) facility by 25 basis points to 4.5 percent in our latest policy meeting held last May 2019. This decision was aimed at helping inflation move towards the middle of the target range and give due consideration to growth, in line with the BSP’s flexible approach to inflation targeting. In addition, although the country experienced lower-than-expected growth for Q1 2019 at 5.6 percent, growth is expected to pick up in the second half of 2019 with the catch-up government spending plan. Let me emphasize that the country’s economic expansion streak is now 81 quarters, which translates to more than 20 years of uninterrupted growth. In terms of the BSP’s outlook for inflation, our latest baseline projections in May indicate that inflation will likely settle within the target range of 3.0 percent ± 1.0 percentage point for both 2019 and 2020. This positive alignment between growth and inflation has been a constant narrative and is expected to further lend support to the country’s long-run growth momentum. Both liquidity and credit conditions in the country continue to be in line with the country’s overall economic growth. As of end-April 2019, bank lending and liquidity grew by 12.7 percent and 7.0 percent, respectively. Other aspects of the economy offer a sound basis for optimism. The country’s external payments position remains manageable and sustainable as it enjoys support from different fronts. These include remittances from one, overseas Filipinos (OFs); two, revenues from the information technology – business process outsourcing (IT-BPO) industry; three, receipts from the robust tourism sector; and four, sustained inflows of foreign direct investments. As a result, the country’s Gross International Reserves (GIR) now stands at around US$85.0 billion as of end-May 2019—the heftiest level of GIR ever. It is roughly equivalent to 7.5 months’ worth of imports of goods and payments of services and primary income. In other words ladies and gentlemen, the Philippine economy continues to fire on all cylinders and is expected to see steady economic growth without possible risks of overheating. 1/3 BIS central bankers' speeches In terms of financial stability, we want to maintain a “Goldilocks economy” by not allowing markets to create new risks and vulnerabilities. This means that we do not only concern ourselves with growth and price stability, but also take into account resiliency. Implementing measures that would further enhance the existence of flexible systems and develop financial markets remains a policy imperative. Toward this end, the BSP’s policy agenda has endeavored to promote greater market efficiency and transparency by relying on market-based instruments in our operations. For instance, the BSP continues to refine its Interest Rate Corridor (IRC) framework. The IRC is expected to support capital market development by fostering more active liquidity management by individual financial institutions. This, in turn, could strengthen the price discovery process and facilitate the effective and efficient pricing of financial products in the domestic market. This operational reduction in reserve requirement (RR) is also part of the BSP’s broad financial sector reform agenda to promote efficiency in the system by lowering intermediation costs. This is in line with the BSP’s medium-term objectives of enhancing the effectiveness of monetary policy and deepening the domestic money market. Over time, the IRC system will also help reduce the country’s reliance on RR for sterilization purposes, shift to market based instruments, and allow the BSP in the future to bring the RR in line with regional norms. The BSP is also committed to foreign exchange (FX) reforms toward a more organized FX market that supports a flexible and market-determined exchange rate. This includes further liberalizing FX rules to reduce the cost of doing business and to improve data capture for FX transactions. Overall, our commitment to lowering friction costs in the banking sector will foster more efficient financial intermediation, which will be further enhanced by the availability of alternatives offered by fintech and digital innovation. Towards a more internationally integrated financial sector, BSP has been supportive of the ASEAN financial integration process and has actively cooperated and collaborated with ASEAN central banks through responsive regulations and measures to support regional financial integration and capital market development. Likewise, the BSP has recently put in place various enhancements in its arsenal of macroprudential tools. These include the recent approval to impose counter-cyclical buffers (CCyB) and the approval of the extension of the observation period for the Basel III Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR), among others. These tools allow the BSP to manage the build-up of systemic risk in the financial system by setting aside additional capital as reserves during good times and as insurance or buffers for bad times. Despite all these positive developments, there are still challenges on the horizon. As International Monetary Fund (IMF) Chief Christine Lagarde aptly puts it, “the global economy is at a delicate moment”—as we see uncertainty as well as lack of trust and confidence by the business community as to what the global economic landscape is going to be. Under such condition, markets and economies, including the Philippines could possibly become more susceptible to risks. Allow me to identify some of the key challenges that we need to address. First is the risk of a sharper-than-expected global economic slowdown. In its most recent World Economic Outlook (WEO), the IMF revised its global growth forecast for 2019 downward from 3.7 percent last October 2018 to 3.3 percent this April 2019. Second, with global growth slowing, advanced economies have shifted from a restrictive to a 2/3 BIS central bankers' speeches more accommodative stance of monetary policy. While this could be beneficial for emerging economies like the Philippines, it could also potentially provide the impetus to a cycle of capital flow surge and sudden stop. Third, we are observing the tendency in some economies to move away from globalization towards the rise of protectionist policies such as the protracted trade tensions between the US and China. While the Philippines is not directly affected with the tariff impositions, the continued trade friction could take its toll on the country’s external sector. Fourth, there is also the so-called rise of the Fourth Industrial Revolution. While technological innovation in itself is not bad, and indeed often brings benefits, the velocity and depth of transformation could have potentially disruptive effects, especially in the short term. In fact, rapid technological innovation has already ushered in broad structural economic changes that policymakers are only just beginning to understand. Certainly, this would have significant impact in the conduct of economic policy and the way we do business. On top of these global risks, we also have to deal with the infrastructure gap on the domestic front. Nonetheless, despite these risks, we are cautiously optimistic that the Philippine economy is poised to sustain its growth momentum amid lingering global headwinds. Let me close by assuring everyone that the BSP will continue to adhere to sound policies and remain focused on its mandate. You can continue to count on us to remain steadfast in our primary objective of price and financial stability, factors that reinforce the vibrant investment environment. Having said all these, I am looking forward to a productive, open, and stimulating discussion with you and will be receptive to your insights. Thank you and mabuhay. 3/3 BIS central bankers' speeches
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