The central bank said its disciplined monetary policy stance and the sound banking system will enable the Philippines to withstand the impact of “divergences” in the global economy that create volatility risks.
Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. made that assertion in a speech before the joint General Assembly of ACI Philippines The Financial Markets Association (ACI), the Fund Managers Association of the Philippines (FMAP), Investment House Association of the Philippines (IHAP), Money Market Association of the Philippines (MART), National Association of Securities Broker Salesmen Inc. (NASBI), and Trust Officers Association of the Philippines (TOAP) held in Makati City on Tuesday evening.
Tetangco explained what he described as four “divergences” in the global economy that could have an adverse impact on the Philippine economy, and have partly inspired recent decisions by the Monetary Board to raise banks’ reserve requirements and the central bank’s benchmark interest rates.
Tetangco explained the first ‘divergence’ is the recovery of the US economy, although it has been unsteady, while the other major economies of Japan and the European Union continue to struggle.
The second is the divergence between the actual growth path of emerging economies from earlier growth forecasts. The third divergence is the differing monetary policies of the advanced economies; the US has signaled eventual tightening of policy, while both the Bank of Japan and European Central Bank are in the process of rolling out further stimulus measures.
While the divergence in advanced economies’ monetary policies “is not necessarily a bad situation,” Tetangco said, what is cause for concern is that it is occurring when global interest rates are extremely low. This is creating low volatility in global financial markets, and leads to a possible fourth divergence, “The possible divergence in the ‘true state’ of the global economy and financial system against that which the low volatility in financial markets is portraying,” Tetangco explained.
This can in turn lead to increased investor complacency and risk-taking, and possible asset misevaluations. “Serious episodes of market stress are often preceded by unusually low volatility, which oftentimes signal the gradual build-up in risk-taking,” Tetangco said.
To counter these divergences, Tetangco said the central bank has acted “pre-emptively” against the expected rise in US interest rates and that its decisions have been calibrated to moderate “the buildup of irrational exuberance” in certain market segments. “While we have not seen broad based asset misvaluations, the BSP remains cognizant that keeping rates low for too long could result in mis-appreciation of risks in certain segments of the market, including the real estate sector and the stock market as markets search for yield,” Tetangco said.
In moving to reduce excess liquidity in the financial system, “our policy actions have been aimed at helping you manage your own risk appetites,” Tetangco told his audience.
“The BSP has done a number of things over the past few months. We have raised reserve requirements, hiked the special deposit account [SDA] rate, the reverse repurchase [RRP] rate and then, recently, both the SDA and the RRP rates together,” he said.
Besides a disciplined monetary policy framework, a deep, enhanced policy tool kit, a healthy level of gross international reserves, and ample monetary policy space, the BSP governor added the monetary authorities have built other buffers that enable to the Philippines to withstand the effects of “divergences” in the external environment, such as a resilient banking sector.
“We have had numerous occasions over the last few years to point to the strength of our banking industry. Even before the sovereign attained investment grade, the Philippine banking system had already been cited for its resilience in the midst of global dislocations,” he said.
The BSP governor noted that total assets held by universal and commercial banks increased by a little over P2 trillion from end-2012 to July 2014, translating into an annualized double-digit growth rate of 16.9 percent over the 19-month period.
“What is most impressive is that universal and commercial banks [U/KBs] have continuously strengthened their balance sheet for possible exigencies. The capital account of U/KBs has increased by around P156 billion in the past 19 months, driven by improvements in retained earnings (P94 billion) and paid-in capital (P46 billion),” he added.
“As these numbers validate, there is definitely every reason to believe that we are in a position of strength and finding ways to sustain it,” he added.
Finally, Tetangco said that all of the “position of strength” he mentioned is the result of calibrated reforms.
“The point of the matter is that reforms are inconvenient because they introduce change and change needs to be managed. The strength that we see around us in the industry is the by-product of calibrated change. And as the Central Monetary Authority, we have every intention to continue enabling the operating environment within the context of a pro-active culture of risk management and financial governance,” he concluded.