September 2015

Monetary, External and Financial Sectors

2

Monetary, External and Financial Sectors

Bangko Sentral ng Pilipinas

30 September 2015

3

The BSP’s mandate

Section 3, Republic Act No. 7653 (New Central Bank Act)

“…shall provide policy direction in the areas of money, banking, and credit…”

“ …primary objective is to maintain price stability conducive to a balanced and sustainable economic growth…”

“…shall have supervision over the operations of banks and exercise such regulatory powers… over the operations of finance companies, non-bank financial institutions performing quasi-banking functions, or quasi-banks and institutions performing similar functions…”

Three Pillars of Central Banking

� Maintenance of price stability through the conduct of monetary policy

� Promotion of financial stability through banking supervision and regulation

� Efficient payments and settlements system through operation of real-time gross settlement system

4

Policy/reforms milestones

Policy Impact

Monetary Sector

� Maintained key policy interest rates at 4.0% for the overnight borrowing or RRP facility and 6.0% for the overnight lending or RP facility

� Kept steady interest rates on Special Deposit Account (SDA) facility across all tenors at 2.5%

� Left reserve requirement ratios unchanged at 20.0%

� Price stability and non-inflationary growth

External Sector

� Introduced amendments to the regulations on foreign exchange transactions (BSP Circular No. 874 dated 8 April 2015)

� Adopted enhancements on the reporting framework for Philippine external debt statistics, which took effect starting with the end-2014 report

� Strong external position and stable foreign exchange rate

Financial Sector

� Increased the minimum capitalization requirements for all bank categories (BSP Circular No. 854 dated 29 October 2014)

� Adopted guidelines on sound credit risk management practices (BSP Circular No. 855 dated 29 October 2014)

� Provided the implementing rules and regulations of Republic Act No. 10641, or “An Act Allowing Full Entry of Foreign Banks in the Philippines” (BSP Circular No. 858 dated 21 November 2014)

� Completed the determination of banks deemed systemically important in the domestic banking industry based on the framework released in October 2014

� Approved the implementing guidelines on the Basel III leverage ratio framework (BSP Circular No. 881 dated 9 June 2015)

� Approved the guidelines on salary-based general-purpose consumption loans (BSP Circular No. 886 dated 8 September 2015)

� Efficient, sound, competitive and inclusive financial sector

5

Inflation remains benign

0

2

4

6

8

10

12

2007 2008 2009 2010 2011 2012 2013 2014 2015

Average Bank Lending Rate

Overnight RRP

Inflation remains manageableHeadline inflation vs. Target (%)

2007 - August 2015

Jul ‘15: 5.6%

Aug ‘15: 4.0%

Calibrated monetary policy actions continue to be appropriate

RRP Rate and Average Bank Lending Rate (%)2007 - August 2015

2.9

8.3

4.2

3.8

4.6

3.23.0

4.1

1.7

0

1

2

3

4

5

6

7

8

9

2007 2008 2009 2010 2011 2012 2013 2014 Jan-Aug2015

Inflation Target

Headline Inflation

6

0

2

4

6

8

10

12

14

0

10

20

30

40

50

60

70

80

90

2007 2008 2009 2010 2011 2012 2013 2014 Aug-15

GIR(LHS)

Imports cover (RHS)

-10.4

10.9

-2.9

-15-10

-505

10152025

2007 2008 2009 2010 2011 2012 2013 2014 Jan-Jun14

Jan-Jun15

Jan-Jun 2015C urrent A ccount:

U S D4.7bn(3.3% of G DP )

External sector dynamics continue to be favorableSustained current account surplus supports

the BOP accountBalance of Payments (USD bn)

2007 - June 2015External debt continues to decline External Debt (USD) and External Debt/GDP (%)

2007 - June 2015

05101520253035404550

0102030405060708090

2007 2008 2009 2010 2011 2012 2013 2014 End-Jun

'14

End-Jun

'15

External Debt (LHS)

External Debt/GDP Ratio (RHS)

Q2 2015

USD75.0bn

(25.7% of GDP)

Foreign exchange reserves remain ampleGross International Reserves (USD bn)

2007 - August 2015 USD80.3bn

10.3 months

7

0

2

4

6

8

10

12

14

16

18

NPL Ratio

NPA Ratio

Banking system sustains soundness and resiliency

Continued regulatory reforms help improve banks’ quality of assets and loans

Gross Non-Performing Loans and Non-Performing Assets to Gross Assets Ratios (%) (Philippine Banking System)

2001 – June 2015

Philippine banking system remains adequately capitalized

Capital Adequacy Ratio (%) (Philippine Banking System)2001 – March 2015

- End-period data: NPL ratio (inclusive of interbank loans)- Starting January 2013, figures are computed as prescribed under BSP Circular No.

772. Gross NPL represents the actual level of NPL without any adjustment for loanstreated as “loss” and fully provisioned

End-Jun’ 15

NPL: 2.39

NPA: 2.28

15.1

16.1

4

6

8

10

12

14

16

18

20

CAR solo CAR consolidated

BSP Standard BIS Standard

- 2001 to 2011 data is on the Philippine Banking System; availabledata for 2012 onwards is on U/KBs.

8

Efforts toward financial inclusion continue to yield results

Philippine banks’ presence continues to expandNumber of Banking Offices and ATMs

2001 – March 2015

Growth of ATMs has been sustained since 2009Regional growth

(Philippine Banking System)2009 vs. March 2015

10456

16068

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

No. of banking offices

No. of ATMs

-50

0

50

100

150

200

250

Growth in the number of banksGrowth in the number of ATMs

9

Increased access to financial products and services

370

2012

517

2014

Number of operating

micro-banking offices (MBOs)

archipelagic barriers pose a big challenge to financial access

64 municipalitiesare served by MBOs alone

Note: All data as of end-year 2014

2014

13,435

21

2010

33

2014

Increase in number of e-

money issuers (EMIs)

57%

8,819

2010

Increase in number

of e-money agents

52%

Source: BSP

With at least one banking office

Unbanked

36%

12%

unbanked cities and

municipalities

remain unserved

but if we include other financial service providers…

Increase in adults with a formal account

26.6%

2011

31.3%

2014

4.7%Source: 2014 World Bank Global Findex

10

43% of Filipino adults save money,

but 68% of them place their savings at home

47% of Filipino adults borrow money;

but 62% of them borrow from family members, relatives and friends

National Baseline Survey on Financial Inclusion*Preliminary results

* Preliminary results. A nationally representative survey of Filipino adults aged 15 years old and above

11

Improved usage of financial products and services

No. of deposit accounts47.37mn in 2014 from 45.40mn in 2013

Amount of depositsPHP8.52tr in 2014 from PhP7.61tr in 2013

Amount of loansPHP5.12tr in 2014 from PhP4.25tr in 2013

No. of micro-deposit accounts2.03mn in 2014 from 1.52mn in 2013

Amount of micro-depositsPHP3.97bn in 2014 from PhP2.96bn in 2013

Amount of microfinance loansPHP11.37bn in 2014 from PhP8.70bn in 2013

No. of e-money accounts32.8mn in 2014 from 26.7mn in 2013

No. of e-money transactions273mn in 2014 from 217mn in 2013

Amount of e-money transactionsPHP386bn inflows in 2014 from PHP350bn in 2013PHP385bn outflows in 2014 from PHP346bn in 2013

MICROFINANCEDEPOSITS AND LOANS

E-MONEY MSMEs

Over 1.4mn MSMEs with outstanding loans from banks amounting to PHP438.61bn in 2014 from over 836,600 MSMEs with outstanding loans amounting to PHP385bn in 2013

Note: All data as of end-year 2014

12

Sustained increase of credit flows to small businesses

� Spearheaded the implementation of the Credit Surety Fund (CSF) program which was

launched in the second half of 2008

� The CSF program is a credit enhancement scheme which allows micro, small and medium

enterprises (MSMEs) that are members of cooperatives to borrow from banks even without collateral

� As of 31 July 2015, the total accumulated loans approved by lending banks under the CSF

Program amounted to PHP1.8 billion, of which PHP1.5 billion have already been released to

14,603 beneficiaries nationwide.

� As of 25 August 2015, 43 CSFs in various local government units (LGUs) have been organized covering

622 cooperatives/non-governmental organizations (NGOs).

13

BSP initiatives to promote financial inclusion

Policy, Regulation and Supervision

� In 2014, the Philippines has been ranked third in the world by the Economist Intelligence Unit (EIU) for having the most conducive environment for financial inclusion.

� From 2009 to 2013, the Philippines consistently ranked as one of the best in the world in the provision of regulatory environment for microfinance by the EIU Global Microscope on the Microfinance Business Environment .

� Spearheaded the crafting of the National Strategy for Financial Inclusion (NSFI), which was launched on 1 July 2015

Financial Education and Consumer Protection

� Conducted 12,526 learning events nationwide under the Economic and Financial Learning Program (EFLP), benefitting around 848,000 participants

� Started the preparation of institutional overview reports to initially assess the consumer protection posture of banks, in relation to the Financial Consumer Protection Framework adopted in December 2014

� Introduced a new savings campaign for kids and teens, Project BSP Reaches Out (BRO)

Data and Measurement

� Conducted the nationwide baseline survey on financial inclusion � Mapped out financial service access/distribution points:

- Banking offices went up by 38% to 10,456 as of end-March 2015 from 7,585 in 2001- ATM network accelerated by 314% to 16,068 as of end-March 2015 from 3,882 in 2001

Financial Inclusion Advocacy

� Ensured the smooth flow of remittances through the use of the Philippine Payments and Settlements System (PhilPaSS) REMIT System- Since its implementation in 2010, the PhilPaSS-REMIT System has processed 1,884,309

transactions with a corresponding value of PHP77.5bn, as of end-June 2015

14

Philippines ranked 1st in resilience among selected emerging markets

Source: Center for Global Development

15

Significant gains in other selected country indicators

Projections by global reports

� In its report on “The World in 2050” released in February 2015, PwC Research expects that thePhilippines will rank number 20 in 2050 in terms of GDP in PPP terms.

� In its report on “The World in 2050” released in January 2012, HSBC Global Research projectsthat the Philippines is set to become the 16th largest economy in 2050.

Ranking in competitiveness, governance and transparency

2010 2014

Global Competitiveness Index, World Economic Forum 85th 52th

Corruption Perception Index, Transparency International 134th 85th

Ease of Doing Business, World Bank 144th 95th

Index of Economic Freedom, Heritage Foundation 115th 76th

Sovereign Risk-Country Risk Report, Economist Intelligence Unit BB BBB

Political Risk-Country Risk Report, Economist Intelligence Unit CCC B

2013 2015

Human Capital Index, World Economic Forum 66th 46th

2010 2013

Control of Corruption-Worldwide Governance Indicators, World Bank 22nd 44th*

Regulatory Quality-Worldwide Governance Indicators, World Bank 45th 52nd**percentile rank

16

I. Proposed Legislation for 2015 onwards

� Amendments to the BSP Charter. The proposed bill aims to achieve the following objectives: (a) enhance monetary stability

functions; (b) enhance supervision for financial system stability; and (c) ensure a financially stronger BSP.

� Payments and Settlements System. The proposed bill provides a legal framework to guarantee that payment and settlement

systems in the country are efficient, safe, reliable, affordable and meet global standards. The bill also empowers the BSP to

regulate all types of payment and settlement systems in the country.

� Exemption of Small-Scale Miners from Payment of Income and Excise Taxes for the Sale of Gold to the BSP. The

proposed bill seeks to exempt gold purchases of the BSP from small-scale miners and address the dramatic fall in gold sales to the

BSP by these miners. This is also aligned with Republic Act No. 7076, also known as the People’s Small Scale Mining Act of 1991.

� Anti-Hoarding of Legal Tender Philippine Currency Coins. The proposed bill seeks to maintain the stability of the Philippine

currency by discouraging private hoarding of coins and by encouraging the public to deposit their money in banking institutions.

II. Planned Projects/Activities

� Corporate Sector Database Project. The BSP and the Philippine Statistics Authority (PSA) recognize the need for the

Securities and Exchange Commission (SEC) to develop a corporate sector database given the importance of corporate

data/statistics in policymaking.

� Development of an Administrative Reporting System to Generate Investments Data/Statistics. The administrative

form required under this system is intended for more frequent reporting and more comprehensive coverage of investment

statistics.

� Housing and Real Estate Statistics. The proposed Residential Real Estate Price Index (RREPI) is envisioned as a measure of

the movements in residential property prices, nationwide and across emerging highly urbanized areas in the country, which could

serve as important inputs to the BSP's monetary and financial policies as well as for planning and decision-making by the private

sector and other government agencies.

Enhancing the credibility and integrity of the BSP in achieving its

legal mandate

17

Upside risks:

� Pending petitions for electricity rate adjustments

� Stronger-than-expected impact of El Niño dry weather conditions on food prices and utility rates

Downside risks:

� Slower global economic activity

� Modest rise in food and commodity prices

Key risks to the inflation outlook

18

Actual Targets/Projections*

2014 2015 2015 2016

GDP Growth (%, 2000=100) 6.1 5.6 (Q2) 7.0-8.0 7.0-8.0

Headline Inflation (%, 2006=100) 4.1 1.7

(Jan-Aug)

2.0-4.0 2.0-4.0

Merchandise Exports Growth (%)Per BPM6 conceptPer PSA

7.39.5r/

-12.9 (Jan-Jun)-4.1 (Jan-Jul)

5.07.0

6.08.0

Merchandise Imports Growth (%)Per BPM6 conceptPer PSA

2.34.8r/

-8.3 (Jan-Jun)-2.8 (Jan-Jun)

1.02.0

12.012.0

OF Remittances 1/

Amount (USD bn)Growth Rate (%)

24.45.9

14.2 (Jan-Jul)4.8

25.5**5.0**

26.8**5.0**

Balance of Payments (USD bn) -2.9 1.6 (Jan-Aug) 2.0** n.a.

GIR (USD bn) 79.5 80.3

(End-Aug)

81.6** n.a.

BPM6: International Monetary Fund Balance of Payments and International Investment Position Manual*Targets/projections approved during the DBCC Meeting on 7 April 2015**Approved by the Monetary Board on 21 May 20151/ Cash remittances coursed through banksr/ revised as of June 2015

�18

Macroeconomic outlook/targets for 2015-2016