Sustainable Development and Financial Responsibility

Diwa C. GuinigundoDiwa C. GuinigundoDeputy GovernorDeputy Governor

Bangko Sentral ng PilipinasBangko Sentral ng Pilipinas

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I. Bleak global scenario

Renewed financial volatility Weaker growth prospects

Growth OutlookProjections

2009 2010 2011 2012

World –0.6 5.1 4.2 4.3

Advanced economies –3.7 3.1 1.8 2.2

US –3.5 3.0 1.6 2.0

Euro Area –4.2 1.8 1.9 1.4

Emerging & Developing Economies

2.8 7.3 6.6 6.4

Developing Asia 7.2 9.5 8.4 8.4

China 9.2 10.3 9.6 9.5

ASEAN-5 1.7 6.9 5.5 5.7

IMF WEO September 2011

3

Daunting debt challenges

Gross General Government DebtG7 vs Emerging and Developing Countries

2000-2016(F), Share to GDPPublic debt in advanced economies substantially up,

exacerbated by Fiscal stimulus package Nationalization of private

sector debt

4

II. Toward a sustainable global growth

Country-specific policy commitments toward: Fiscal consolidation Exchange rate flexibility Financial sector repair and reform Structural reforms

International coordination to: Reform international financial architecture, IFI’s Strengthen regulatory measures

5

Time to rethink growth strategies?US growth model

Current account deficits Sectoral imbalances: financial vs real Income inequality

EMEs growth modelCurrent account surpluses

Precautionary savings Export-orientation

US: Total Debt as Share to GDP

US: Key Sectors as Share to GDPChina: Savings, Consumption and Investment as Share to GDP

Source: In Global Rebalancing, Lim Mah Hui (2011)

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Time to rethink growth strategies…

Deficit economies should Produce more than they consume Stimulate tradable goods industries Pursue fiscal consolidation

Surplus economies should Reduce export dependence Increase intra-regional trade and investment Improve social safety nets Promote regional development in capital markets

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Reforming the international financial architecture

Strengthen policy coordination Formulate coherent solutions to capital flows Regulate shadow banking and systemically important FIs Implement internationally agreed measures Enhance risk management strategies Improve toolkit for global safety nets

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III. Implications for Emerging Market Economies

31-Dec-08 31-Dec-09 31-Dec-10 30-Jun-11 05-Aug-11 07-Sep-11(In basis points)LIBOR-OIS 121.15 8.86 11.98 12.58 18.51 24.96TED Spreads 134.40 19.76 17.78 23.08 26.36 30.765-year CDS

Philippines 386.21 173.07 127.56 138.71 141.22 170.59Indonesia 691.36 192.01 128.25 141.75 142.81 179.34Thailand 255.26 94.60 97.50 132.39 134.86 142.22Malaysia 230.06 88.37 74.51 90.68 100.85 127.00

EMBI+Philippines 541.00 198.00 159.00 156.00 172.00 229.00Global 690.23 273.76 248.02 261.86 297.09 349.34

PSE Index (points) 1,872.85 3,052.68 4,201.14 4,291.21 4,437.55 4,303.08 a/

Php-US$ (in peso) 47.52 46.16 43.80 43.39 42.63 42.41 a/

Source: Bloomberg

a/ As of 6 September 2011

Selected Financial Market Indicators

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05

1015

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Headline Lower Bound of Target Upper Bound of Target

4.3%Jan-Aug

Sustaining growth amid a low-inflation environment

Headline Inflation (2000=100, in percent)

An effective policy balance between containing inflation and supporting economic growth

IV. Recent economic and financial developments

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0

10.0 11.0 12.0 13.0

2004 2005 2006 2007 2008 2009 2010 2010 1H 2011

GDP GNI

Real GDP and GNI(2000 = 100, in percent)

1H 2011 GDP: 4.0%1H 2011 GNI: 2.6%

10

Prudent monetary policyBSP tightens policy stance for effective liquidity management

3

4

5

6

7

8

9

10

11

2007 2008 2009 2010 2011Overnight RRP Rate Overnight RP Rate

BSP Policy Interest RatesIn percent

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011500

700

900

1,100

1,300

1,500

1,700

1,900

2,100

2,300

2,500

2,700

Domestic Liquidity - lhs

Bank Lending (Net of RRPs) - rhs

Liquidity and Bank LendingJan 2002 – June 2011; in Php billion

11

0

4

8

12

16

20

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 May-11

Rat

ios

in P

erce

nt (%

)

NPL Ratio NPA Ratio

68

101214161820

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Rat

ios

in P

erce

nt (%

)

Solo = 16.02%

Consolidated = 16.97%

NPA Ratio (UBs and KBs) = 3.31%

0

20

40

60

80

100

120

140

160

180

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 May-11

Leve

ls

0

2

4

6

8

10

12

14

16

Perc

ent

Levels in US$ bnGrowth rate

ASSET GROWTH2001 – May 2011

RETURN ON ASSETS / RETURN ON EQUITYUKBs, As of end-March 2011

CAPITAL ADEQUACY RATIO (CAR)2001-December 2010

BSP Regulatory Requirement of 10%International Standard of 8%

NPL Ratio (UBs and KBs) = 2.80%

Pre-crisis Level

LOAN AND ASSET QUALITY RATIOSAs of end-May 2011

8.1%

US$165 bn

02468

101214

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Mar-11

Rat

ios

in p

erce

nt (%

)

ROA = 1.50%ROE =13.03%

Philippine banking system is sound and stable

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0

100

200

300

400

500

600

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Jul-11

Sep-11

0

100

200

300

400

500

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Jul-11

Sep-11

40

42

44

46

48

50

J an-09

Mar-09

May-09

J ul-09

Sep-09

Nov-09

J an-10

Mar-10

May-10

J ul-10

Sep-10

Nov-10

J an-11

Mar-11

May-11

J ul-11 Sep-11

Philippine financial markets remain buoyant

Philippine Stock Exchange Index January 2009 – September 2011

Peso –USD Daily Average Exchange Rate January 2009 – September 2011

PhP42.41 /US$1(6 Sept ‘11)

Emerging Markets Bond Index SpreadJanuary 2009 – September 2011

5-year Credit Default Swaps (in basis points ) January 2009 – September 2011

229 bps(7 Sept ‘11)

171 bps(7 Sept ‘11)

100015002000250030003500400045005000

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Jul-11

Sep-11

4303.1 index pts(6 Sept ‘11)

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External payments position continues to support growth

Overseas Filipinos’ Remittances2004–June 2011 (US$ billion)

02468

101214161820

2004 2005 2006 2007 2008 2009 2010 Jan- Jun2010

Jan-Jun2011

0

5

10

15

20

25

30Remittances (RHS)

Growth Rate (LHS)

-6000

-4000

-2000

0

2000

4000

6000

8000

10000

2008 2009 2010 Q1 2010 Q1 2011

FDI Portfolio Investment Flow

Foreign Direct and Portfolio Investments* 2008-Q1 2011 (US$ million)

* BOP Concept

-3000

-1000

1000

3000

5000

7000

9000

11000

13000

15000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Q1 2010

Q1 2011

Current Account

Capital & Fin'l Account

Balance of Payments

Balance of Payments2001-Q1 2011 (US$ million)

01020304050607080

2004 2005 2006 2007 2008 2009 2010 'Jul2010

'Jul2011

0

2

4

6

8

10

12GIR (lhs) Import Cover (rhs)

Gross International Reserves2004-July 2011 (US$ billion)

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External debt dynamics have improved

Short Term11.1%

Medium & Long Term

88.9%

By MaturityBy MaturityAs of end-March 2011As of end-March 2011

11.7 yearsPrivate24.4 yearsPublic22.6 yearsTotal

Average Maturity

• Short-term debt accounts for only about 11% of external debt

• Debt maturities average more than 22 years

• External debt-to-GDP ratio has dropped significantly

45.046.047.048.049.050.051.052.053.054.055.056.057.058.059.060.061.062.0

2004 2005 2006 2007 2008 2009 2010 Jan-May2010

Jan-May2011

0

10

20

30

40

50

60

70

External debt in US$ billion (lhs)External debt as % of GDP (rhs)

Total External Debt2004 – May 2011

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Fiscal outcomes are better

1H 2011 Q1-Q3Actual Program

Revenues 514.8 567.5 578.4 639.7 706.7 816.2 979.6 1,136.6 1,202.9 1,123.2 1,207.9 788.6 1,040.8Expenditures 649.0 714.5 789.1 839.6 893.8 962.9 1,044.4 1,149.0 1,271.0 1,421.7 1,522.4 832.3 1,275.2Surplus/(Deficit) -134.2 -147.0 -210.7 -199.9 -199.9 -146.8 -64.8 -12.4 -68.1 -298.5 -314.5 -43.7 -234.4Fiscal Balance (As % of GDP) -4.0 -4.0 -5.3 -4.6 -3.8 -2.7 -1.1 -0.2 -0.9 -3.9 -3.7 -0.9

2007 2008 2009 2010

National Government Fiscal Performance(In billion pesos)

2000 2001 2002 2003 2004 2005 2006

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ActualActual Projections Projections a/a/

2011 YTD2011 YTD 20112011 20122012Headline Inflation (%) 4.3 (Jan-Jul) 3.0 - 5.0 3.0 - 5.0Dubai Crude Oil (US$/bbl) 101.09 (4 Jan-22 Aug) 90 - 115 90 - 110Exchange Rate (P/US$) 43.28 (3 Jan-18 Aug) 42 - 45 42 - 45364-day T-bill Rate (%) 2.71 (10 Jan-8 Aug) 3.0 - 5.0 3.0 - 5.0LIBOR, 6 mos(%) 0.455 (4 Jan-16 Aug) 0.5 - 1.5 0.5 - 1.5Exports Growth (%) 4.1 (Jan-Jun) b/ 9.0 - 10.0 12.0Imports Growth (%) 15.6 (Jan-Jun) b/ 17.0 - 18.0 18.0a/ Based on projections adopted by the Development Budget Coordinating Committee (DBCC) on 4 July2011b/ Based on NSO data

V. Outlook: Sustaining growth

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Stoke inflationary pressures Lead to asset price misalignments Undermine financial stability

Benefits of capital inflows are well known…

But so are the risks.

Ease financing constraints Contribute to the development of the financial

markets

VI. Challenges ahead: volatile capital inflows

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Structural reforms in investment and financial policies

To improve economy’s absorptive capacity although this takes time

Macroeconomic policies

To guard against macroeconomic risks associated with inflow surges

Prudential policies

To guard against financial stability risks

BSP’s broad contours of policy responses

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V. Role of the BSP

Monetary PolicyThe BSP will continue to keep a close watch against any risks to the inflation outlook and stands ready to adjust its policy and prudential settings as necessary to safeguard price stability.

External Sector PolicyThe BSP will continue to promote policies that will help shield the economy against adverse shocks by building a comfortable international reserve cushion and adhering to market-determined exchange rate. Moreover, the BSP will continue to monitor and improve further external debt sustainability.

Financial PolicyThe BSP will maintain a well-functioning banking system that will efficiently mobilize funds and channel them to productive uses.

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BSP advocacies to promote inclusive growth

Microfinance

Proactive stance in microfinance to support the development of a sustainable microfinance

business environment

Credit Surety Fund Program (CSFP)

Support to the CSFP which provides surety to micro, small and medium enterprise-borrowers

that generally are not able to provide collateral to the banks

Economic and Financial Learning Program (EFLP)

Promote greater public awareness of economic and financial issues and provide information to

enable households and businesses to make well-informed economic and financial decisions

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Sustainable Development and Financial Responsibility