1
Francisco G. Dakila, Jr. Bangko Sentral ng Pilipinas
Near-Term Economic Outlook of the Euro-Area and Asia: Prospects for the Euro-area Economies and
Macroeconomic Implications for the ASEAN+3 Economies
26 September 2012
OECD Development Centre-AMRO Joint Asian Regional Roundtable
2
Outline
I. Implications of global economic developments to the region
II. Challenges to monetary policymaking
III. BSP policy responses
IV. Summary
3
I. Implications of global economic developments to the region
Significant events occurring in several fronts:
• Eurozone – sovereign debt crisis and recession
• US – higher unemployment, slow growth and fiscal tightening
• Middle East – geopolitical risks and impact on oil prices
• China – low growth performance
4
II. Challenges to monetary policymaking
1. Impacts on the real economy
Total exports by country of destination Total remittances by country of source
Data for 2011
6
2. Volatility and correlation between global financial indicators
Source: IMF WEO July
2012
6
Equity Indices (Indices; January 1,
2010=100)
Exchange Rate Indices (Indices; January 1,
2010=100) Implied Volatility (percent)
Government Bond
Yields (percent)
Source: IMF WEO April
2012
Source: IMF WEO July
2012 Source: IMF WEO July
2012
II. Challenges to monetary policymaking
7
II. Challenges to monetary policymaking
3. Impact on the financial sector
Philippine banking system exposure to Europe
As of January 2011
As of June 2011
As of October 2011 p/
Level (US$ billion) 4.5 2.1 1.9
Share to total assets (%) 2.9 1.4 1.2
Source: BSP
8
II. Challenges to monetary policymaking
Net private flows to EMEs estimated to be US$1 trillion for 2011 and 2012 • Half of value to Emerging Asia and about half of which is to China
Source: Capital Flows to Emerging Market Economies, September 2011. Institute of International Finance.
4. Capital flows and impacts
10
10
Source: BSP
Current Account Balance (in million US dollars)
1999 – 2012Q2
-5,000
0
5,000
10,000
15,000
20,000
25,000
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
-Q1
Current Account Balance Remittances*/ By custodian banks.
Source: BSP-International Operations Department
Philippines: Portfolio Investment flows*/
(in million US dollars)
2008 – 2012 1H
Capital flows can reinforce the impact of high current account receipts
-5,000
0
5,000
10,000
15,000
20,000
Inflows Outflows Net
II. Challenges to monetary policymaking
3. Capital flows and impacts
11
II. Challenges to monetary policymaking
3a. Implications on the exchange rate
0
40
80
120
160
Jan-
06
May
-06
Sep
-06
Jan-
07
May
-07
Sep
-07
Jan-
08
May
-08
Sep
-08
Jan-
09
May
-09
Sep
-09
Jan-
10
May
-10
Sep
-10
Jan-
11
May
-11
Sep
-11
Indonesia Philippines Singapore Malaysia
Thailand Taiwan South Korea Hong Kong
Exchange Rate Index, Various Asian Countries (monthly average, January 2006 = 100, $/local currency)
Source: ARIC database.
13
3b. Impact of capital inflows on effectiveness of monetary policy
Philippines’ case: Prior to 2010, yield curve tracks movements in policy rates but since then, movements in policy rate & T-bill rates appear to have
diverged
13
II. Challenges to monetary policymaking
14
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
30.0
J F MA M J J A S O N D J F MA M J J A S O N D J F MA M J J A S O N D J F MA M J J A S O N D J F MA M
2008 2009 2010 2011 2012
in p
erce
nt
Growth Rates of Domestic Liquidity and Outstanding Loans of U/KBsJan 2008 - May 2012
U/KB Loans M3
May 201214.7 pct
May 20127.9 pct
II. Challenges to monetary policymaking
3c. Implications on credit growth
15
III. BSP policy responses
• Policy rates
• Market-determined exchange rate
• Liberalization of foreign exchange regulations
• Heightened international cooperation
• Macroprudential measures
• Strengthening the financial system
16
16
Inflation dynamics remain favorable.
0
2
4
6
8
10
12
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Headline Lower Bound of Target Upper Bound of Target
2.8%
June
Monetary policy
kept inflation in
2011 at 4.6% --
well-within target
July 2012
inflation at 3.2%;
YTD inflation of
3.1 percent within
target
Inflation
projected to settle
at the lower half of
the target of 3-5
% in 2012-13
17
III. BSP policy responses
• Policy rates
• Market-determined exchange rate
• Liberalization of foreign exchange regulations
• Heightened international cooperation
• Macroprudential measures
• Strengthening the financial system
18
18
Philippines Effective Exchange Rate
Index
January 1998-April 2012
Source: BSP
0
50
100
150
200
250
300
19
98
:01
M
19
98
:07
M
19
99
:01
M
19
99
:07
M
20
00
:01
M
20
00
:07
M
20
01
:01
M
20
01
:07
M
20
02
:01
M
20
02
:07
M
20
03
:01
M
20
03
:07
M
20
04
:01
M
20
04
:07
M
20
05
:01
M
20
05
:07
M
20
06
:01
M
20
06
:07
M
20
07
:01
M
20
07
:07
M
20
08
:01
M
20
08
:07
M
20
09
:01
M
20
09
:07
M
20
10
:01
M
20
10
:07
M
20
11
:01
M
20
11
:07
M
20
12
:01
M
REER Major REER Broad REER Narrow
40
42
44
46
48
50
Ja
n-
09
Ma
r-
09
Ma
y-
09
J
ul-
09
Se
p-
09
No
v-
09
Ja
n-
10
Ma
r-
10
Ma
y-
10
J
ul-
10
Se
p-
10
No
v-
10
Ja
n-
11
Ma
r-
11
Ma
y-
11
J
ul-
11
Se
p-
11
No
v-
11
Ja
n-
12
Ma
r-
12
Ma
y-
12
J
ul-
12
Peso –USD Daily Average Exchange
Rate
January 2009 – June 2012
Foreign
exchange
market
42.776
5
177.87
140.86
89.55
19
III. BSP policy responses
Collaborative initiatives
• Global and regional collaborations
IMF bilateral borrowing facility
ASEAN’s Chiang-Mai Initiative Multilateralization (CMIM)
• Inter-agency initiatives within the Philippines
Financial Sector Forum
Financial Stability Coordination Council
20
III. BSP policy responses
Collaborative initiatives
• Global and regional collaborations
IMF bilateral borrowing facility
ASEAN’s Chiang-Mai Initiative Multilateralization (CMIM)
• Inter-agency initiatives within the Philippines
Financial Sector Forum
Financial Stability Coordination Council
21
21
6
8
10
12
14
16
18
20
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Rati
os in
Perc
en
t (%
)
Solo = 16.44%
Consolidated = 17.43%
CAPITAL ADEQUACY RATIO (CAR)
2001-September 2011
BSP Regulatory Requirement of
10%
International Standard of 8%
LOAN AND ASSET QUALITY RATIOS
As of end-April 2012
Feb.
Dec.
Banking system remains sound and stable
Source:
BSP
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
2001 2002 2003 20042005 2006 2007 20082009 2010 2011 2012
Leve
ls in
PhP
Bill
ions
0
2
4
6
8
10
12
14
16
Rat
ios
in P
erce
nt (%
)
Levels in PhP Billions
Growth Rate
ASSETS GROWTH
2001 – April 2012
0
2
4
6
8
10
12
14
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Mar-
12
RETURN ON ASSETS (ROA)/RETURN ON EQUITY (ROE)
UKBs, As of March 2012
0
4
8
12
16
20
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Ra
tio
s in
Pe
rce
nt
(%) NPL Ratio NPA Ratio
ROE =13.09%
ROA = 1.63%
Apr. P7,555.6 6.7%
NPA Ratio (UBs and KBs)
= 2.77%
NPL Ratio (UBs and KBs) = 2.30%
22
There is limited evidence of stretched asset market valuations…
22
Equities market
8.0
10.0
12.0
14.0
16.0
18.0
20.0
22.0
24.0
26.0
28.0
30.0
19
97
M0
1
19
97
M0
7
19
98
M0
1
19
98
M0
7
19
99
M0
1
19
99
M0
7
20
00
M0
1
20
00
M0
7
20
01
M0
1
20
01
M0
7
20
02
M0
1
20
02
M0
7
20
03
M0
1
20
03
M0
7
20
04
M0
1
20
04
M0
7
20
05
M0
1
20
05
M0
7
20
06
M0
1
20
06
M0
7
20
07
M0
1
20
07
M0
7
20
08
M0
1
20
08
M0
7
20
09
M0
1
20
09
M0
7
20
10
M0
1
20
10
M0
7
20
11
M0
1
20
11
M0
7
20
12
M0
1
Price-to-Earnings (P/E) RatioJanuary 1997 - June 2012
P/E Ratio Trend
-
1,000
2,000
3,000
4,000
5,000
6,000
19
87
M0
1
19
88
M0
1
19
89
M0
1
19
90
M0
1
19
91
M0
1
19
92
M0
1
19
93
M0
1
19
94
M0
1
19
95
M0
1
19
96
M0
1
19
97
M0
1
19
98
M0
1
19
99
M0
1
20
00
M0
1
20
01
M0
1
20
02
M0
1
20
03
M0
1
20
04
M0
1
20
05
M0
1
20
06
M0
1
20
07
M0
1
20
08
M0
1
20
09
M0
1
20
10
M0
1
20
11
M0
1
20
12
M0
1
Philippine Stock Exchange IndexJanuary 1997 - June 2012
Philippine Stock Exchange Index Trend
5,246.
41
120
125
130
135
140
145
150
155
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Ratio of Capital to Rental Values: Residential Sector2001 Q1 - 2012 Q1
Ratio of capital to rental values: Residential
Trend
Pe
rce
nt
52
56
60
64
68
72
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Ratio of Capital to Rental Values: Office Sector2001 Q1 - 2012 Q1
Ratio of capital to rental values: Office Trend
Pe
rce
nt
Real estate
market
23
III. BSP policy responses
Responses in the 1990s capital flows episode
• Sterilized intervention
• Liberalization of foreign exchange regulations
• Strengthening prudential measures
• Reduction of exporters’ production costs
24
Other potential policy responses
• Capital flow management (CFMs) measures influence capital flows
• Administrative controls – quantitative limits or prohibitions
• Market-based controls – increase cost of transactions
• Capital controls are CFMs that discriminate on residency
25
Examples from other countries
Instrument Strengths Weaknesses Examples
Tax measures Targeted and easily calibrated to size of risks
Calibration difficult in practice
Reduces investor confidence
Brazil: IOF
Thailand: tax on interest income and capital gains of foreign bondholders
S Korea: withholding tax on interest income of foreign bondholders
Minimum periods
Incentive for long-term investments
Only delay, not eliminate, capital flows
Indonesia: 1-month holding period for BI certificates
Quantitative limits
Control how much capital is allowed entry
Allocation and monitoring of allowance may be difficult
Indonesia: ST external bank borrowing limited to 30% of capital
S Korea: Limits on banks’ FX forward positions and derivatives build-up
Unremunerated reserve requirements
Strong disincentive to investors
Can drive away beneficial investment
Brazil: 60% URR on banks’ FX positions in spot market
Thailand: 30% URR on short-term foreign investment
Sources: 1. Institute of International Finance “Capital Flows to Emerging Market Economies” January 2011 2. World Economic Forum “Financial Development Report 2010”
26
Other potential policy responses
Issues on capital controls
Effectiveness depends on
• Institutional infrastructures in place, and
• Enforcement of controls
Generally temporary measures because market players find ways to circumvent measures in time
27
IV. Summary
• Philippine financial system is sound; banking institutions are equipped with the requisite capital buffers.
• Greater monitoring and information gathering are needed for risk identification and assessment that will allow for timely and appropriate responses.
• Extensiveness of impacts calls for collaboration and coordinated responses.
• There is need to further improve financial regulatory framework to include implementation of OTC derivatives market reform and, if possible, oversight and regulation of the shadow banking system.
Building economy as well as fortifying “defenses” – creating environment for sustainable growth while managing risks
28
Better understanding of nature of FX inflows
Exchange rate flexibility
Reserve accumulation & associated liquidity management
Financial sector reforms to deepen financial markets
Macroprudential measures to strengthen health of banking
system
Reform of the FX regulatory framework
Prepayment of external debt
Adjustments in monetary policy, when necessary
BSP’s toolkit in managing capital flows
28