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2015/SFOM/S/012 Session: 4

The Philippines: Promoting Financial Resiliency in Support of Macroeconomic Stability

Purpose: Information

Submitted by: Philippines

Special Senior Finance Officials’ MeetingClark, Philippines

21-22 January 2015

2/11/2015

1

Diwa C. GuinigundoDeputy Governor

Bangko Sentral ng Pilipinas

The Philippines: Promoting Financial Resiliency in Support

of Macroeconomic Stability

APEC Special Senior Finance Officials Meeting“Enhancing Financial Resiliency with Particulars on Macroeconomic Stability”21 January 2015Clark, Pampanga

2

KEY ISSUES

I. Economic growth experience in 2014

II. Sources of resiliency

III. Challenges ahead

IV. Role of the BSP

2/11/2015

2

3

ECONOMIC GROWTH EXPERIENCE IN 2014

1/  Indonesia, Malaysia, Philippines, Thailand, and VietnamSource: IMF World Economic Outlook, October 2014

2012 2013 2014 2015 2012 2013 2014 2015

World 3.4 3.3 3.3 3.8 Russia 3.4 1.3 0.2 0.5

US 2.3 2.2 2.2 3.1 China 7.7 7.7 7.4 7.1

Canada 1.7 2.0 2.3 2.4 ASEAN‐51/ 6.2 5.2 4.7 5.4

Japan 1.5 1.5 0.9 0.8 Mexico 4 1.1 2.4 3.5

(Actual) (Projections)

IMF World Economic Outlook (October 2014)

Growth Projections

(Projections)(Actual)

Uneven global recovery continues

6.4 6.37.3 7.2

7.7 7.97.0

6.35.6

6.45.3

0.0

2.0

4.0

6.0

8.0

10.0

Q12009

Q3 Q12010

Q3 Q12011

Q3 Q12012

Q3 Q12013

Q3 Q12014

Q3

Philippines sustains growth

Positive economic growth for 63 consecutive quarters

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2/11/2015

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Incremental Capital-Output Ratio (ICOR)1/

Sustained economic efficiency 

Notes:1.ICOR is estimated as the annual average share of investment‐to‐GDP/annual average growth rate of GDP. Thehigher the ICOR , the less efficient is the production process. All basic data used are seasonally‐adjusted.Source: Latest BSP staff estimates

Higher potential of the Philippine economy

5

Data sources:  Philippine Statistical Authority (PSA) Labor Force Survey, and Technical Education and Skills Development Authority’s Technical Vocational Education and Training Statistics.

390

446468

273

333352

200

300

400

500

2006 2008 2010

Value Added vs. Compensationper BPO Employee (in thousand PHP)

Value Added Per Employee Compensation Per Employee

37% 35% 33%

12% 12% 11%

51% 53% 56%

0%

20%

40%

60%

80%

100%

2002 ‐ 2007 2008 ‐ 2009 2010 ‐ 2013

Labor by Class of Workers

Self‐Employed Unpaid Family Wage and Salary

51.9 53.6

80.6 83.6

0.0

20.0

40.0

60.0

80.0

100.0

1995 ‐ 2001 2002 ‐ 2007 2008 ‐ 2009 2010 ‐ 2011

TESDA Certification Rate

Certification Rate

Robust labor market dynamics

390

446468

273

333352

200

300

400

500

2006 2008 2010

Value Added vs. Compensationper BPO Employee (in thousand PHP)

Value Added Per Employee Compensation Per Employee

2… 2… 2… 1… 1.8 1.8 1.7 1.8 1…

34.1 33.4 32.8 32.4 31.6 30.5 30.1 29.7 28.9

37.4 38.1 38.4 38.8 38.9 39.4 39.8 39.9 40.3

26.3 26.5 26.8 26.9 27.7 28.4 28.5 24.4 24.7

0%

20%

40%

60%

80%

100%

2005 2006 2007 2008 2009 2010 2011 2012 2013

Employment distribution, by education attainment

No Grade Completed Elementary High School College

Higher potential of the Philippine economy

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Demographic sweet spot

Philippines has ample stock of young, skilled and educated workers

Youngest population in Asia supports a strong growth outlook

Median age in the Philippines is 22.2 years,  below other “young” countries in Asia 

UN: In 2015, Philippines will enter its Demographic Window, when proportion of population that is of working age is prominent

Philippines is the last major Asian economy to benefit from demographic dividend, which is typically associated with accelerated economic growth

Average growth over 10‐year period from start of Demographic Window at 7.3%

Challenge is to educate and train them and provide opportunities for gainful employment

Demographic Windows in Asia Average GDP Growth Rate for First‐10 Years in Demographic Window

Philippines has youngest population in Asia Poised for Strong GDP Growth

Higher potential of the Philippine economy

Sources: UN World Population to 2030, UN World Population Prospects (2010 Revision) 7

8

Inflation dynamics remain favorable  

Source: BSP

Inflation within target for the 6th consecutive year

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2007

2008

2009

2010

2011

2012

2013

2014

Headline Inflation vs. Target (%)Jan 2007 – December 2014

Headline

Lower bound of target

Upper bound of target

4.1

2/11/2015

5

9

SOURCES OF RESILIENCY

Source: BSP

10

Proactive monetary policy

Source: BSP

Increased policy rates by 50 bps to manage inflationary pressures and expectations 

Increased RR to stem strong liquidity growth 

Raised SDA rate by 50 bps

Preemptive measures to ensure monetary stability

2/11/2015

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0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

Non‐Performing Loans (Net) and Non‐Performing Assets Ratios (%) of PH Banking System, 2001‐2014

NPL Ratio

NPA Ratio

6

8

10

12

14

16

18

20

Capital Adequacy Ratio (%)*2001‐2014

BSP Standard: 10%

BIS Standard: 8%

End‐Sep 2014NPL       2.04NPA       1.99

CAR consolidated basisJun‘14: 16.7%

CAR Solo basisJun‘14: 15.9%

Sound and stable banking system

Efficient intermediator of funds

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Sound and stable banking system

Source: BSP

Banks are major players in the Philippine financial system

Total Resources of the Philippine Financial Systemas of end‐December 2013

Banks, 81.3%

Non‐banks, 18.7%

Deposit liabilities are the major source of funding and are mostly directed to lending

Total loan portfolio is largely peso‐denominated

Continued profitability

2/11/2015

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Sound and stable banking system

Prudent financial policies

Implemented the real estate stress test limit

Approval of enhanced regulation on credit risk 

management 

Increase in the minimum capital requirement for all bank 

categories

13

Sound and stable banking system

Prudent financial policies

Approval of guidelines for determining so‐called “D‐SIBs”

Adopted a Financial Consumer Protection Framework 

Endorsement of the full entry of foreign banks in the 

Philippines 

14

2/11/2015

8

Comprehensive approach to financial stability

15

FINANCIAL STABILITY COORDINATION COUNCIL

Mitigate and manage the build up of systemic risks

FINANCIAL STABILITY COMMITTEE

Inclusive financial system

Continue to widen the reach of the BSP’s financial learning 

program

Started the groundwork for a National Financial Inclusion 

Strategy

Establish more Credit Surety Funds

Reaching more Filipinos

16

2/11/2015

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Healthy external sector position 

Source: BSP

A source of confidence for creditors and investors

17

18

Improvements have been recognized internationally 

The only banking system with positive outlook

2/11/2015

10

19

Improvements have been recognized internationally 

2014‐2015 real GDP growth forecasts by multilaterals remains high

13 positive rating actions by S&P, Moody’s and Fitch Ratings since June 2010

Baa2

• Upgraded credit rating to Baa2 (December 2014) with stable outlook

• Upgraded credit rating to Baa3 with positive outlook

• Upgraded credit rating to Ba1 from Ba2 with stable outlook (29 October 2012)

• Revised outlook to positive from stable (29 May 2012)

• Upgraded credit rating to Ba2 from Ba3 with stable outlook (15 June 2011)

• Revised outlook positive from stable (6 January 2011)

Notable improvements observed in the Philippines governance and competitiveness indicators lend support to continued bullish investor sentiment

• Zero Based Budgeting to improve expenditure management

• Pocket Open Skies to support tourism potential

• Peace Agreement to unleash Mindanao’s potential

• Sin Tax Law  to further  strengthen the fiscal position

• Reproductive Health  Act  to improve family health planning

• Judicial Reform to enhance  the regulatory environment and ensure level playing field 

Strong political will to 

pursue and implement difficult reforms

Third Party Report Latest Previous Change

World Bank’s 2014 Ease of Doing Business Report

108 /189 133/185 +25

Transparency International 2013 Corruption Perception Index

94/175 105/179 +11

World Bank 2013 Worldwide Governance Indicators’Regulatory Quality*

52 45 +7

IMD 2013 World Competitiveness Report

38/60 43/59 +5

Heritage Foundation 2014 Economic Freedom Index 

89/186 97/177 +8Thomson Reuters/INSEADAsia Business Sentiment Survey**  (Q3 2013 vs Q2 2013)

100 94 +6

Grant Thornton 2013 Global Dynamism Index 

21/60 46/50 +25* Percentile Ranking

* * % of Respondents with positive outlook on the Philippines

Improvements have been recognized internationally 

20

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11

2121

Year Selected Structural/Policy Reforms in the Philippine Economy

1993 Creation of the Bangko Sentral ng Pilipinas

1994 Liberalization of foreign bank entry 

1995 Liberalization of the telecommunications industry 

1997 Privatization of water services (MWSS)

1998 Deregulation of the oil industry; Adoption of consolidated bank supervision

2000 Philippine E‐Commerce Act

2001 Liberalization of the power sector (EPIRA)

2002 Inflation Targeting Framework; Special Purpose Vehicle Act

2003 Government Procurement Reform Act 

2004 Securitization Act; Adoption of Basel 2

2005 Expanded value‐added tax  (E‐VAT)

2006 Wholesale Electricity Spot Market (WESM)

2007 Risk‐based bank supervision

2009Privatization of the National Transmission Corporation (TransCo) and National Power Corporation’s (NPC) assets

2011 Philippine Financial Reporting Standards (PFRS) 9; Phased‐in migration to Basel 3

2013 Revised excise tax rates on alcohol and tobacco 

2014Liberalization of Entry of Foreign Banks in the Philippines;  Macroprudential measures on real estate exposure

Most important: Long history of reforms

CHALLENGES AHEAD

Significant implications on domestic growth and financial markets

Continued uneven global growth

Monetary policy divergence

Heightened volatility in financial markets

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2/11/2015

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Provide a sound monetary policy for a low and stable inflation

Maintain a market‐determined exchange rate aligned with 

fundamentals

Continue to develop a responsive supervisory and regulatory 

framework for a stable financial system

Continue programs for a more inclusive financial system

ROLE OF THE BSP

BSP strongly adheres to its commitments

23

Diwa C. GuinigundoDeputy Governor

Bangko Sentral ng Pilipinas

The Philippines: Promoting Financial Resiliency in Support

of Macroeconomic Stability

APEC Special Senior Finance Officials Meeting“Enhancing Financial Resiliency with particulars on Macroeconomic Stability”21 January 2015Clark, Pampanga