Bangko Sentral ng Pilipinas Governor Amando Tetangco hosted breakfast and addressed the Tuesday Club last January 15. The Philippines’ top monetary authority was, of course, upbeat about the country’s outlook.

“The Philippines heads into the new year with a sense of improved expectations,” he began his prepared speech. “Unlike at the start of 2012, the country welcomes 2013 with a bit more optimism,” citing the following factors:

• Global economic activity appears to have gained some traction on the back of timely policy responses around the world.

• The European Central Bank unveiled in September its Outright Monetary Transactions Program, signaling its intention to act strictly within its mandate to attain its goal of price stability over the medium term. The announcement undoubtedly helped calm financial markets across the euro area.

• US lawmakers have managed to avert, albeit temporarily, the so-called “fiscal cliff,” staving off broad tax hikes and substantial spending cuts that could have sent the US economy reeling.

• In emerging economies, particularly in Asia, domestic demand remains a firm driver of growth, supported by monetary accommodation by many central banks, including action by People’s Bank of China and the Reserve Bank of India to reduce their reserve requirements to help stimulate credit activity.
 
Sources of Philippine resilience
In the Philippines, the domestic economy continues to draw strength from home-grown sources of resilience. Monetary policy has helped to keep domestic inflation at an average of 3.2 percent in 2012, closer to the lower end of the target of 3-5 percent for the year.

The year 2012 thus marks the fourth consecutive year that the BSP has been able to keep inflation within the government’s target. With a broadly benign inflation outlook, we hope to see the same in 2013, says Tetangco. At present, the BSP deems its policy stance of low interest rates appropriate.

• The economy has continued to benefit from increased government spending and robust private sector activity.

The country’s fiscal deficit from January to November reached P127.3 billion, P31.0 billion higher than the deficit incurred during the same period last year. Yet, the government continues to enjoy wider fiscal space to sustain public spending and further support economic activity.

• Output in all three major production sectors expanded during the third quarter, led by the services sector. All these have helped propel GDP growth to an average of 6.5 percent for the first three quarters of 2012, exceeding most analysts’ expectations and the government’s own target of 5-6 percent.

Still, Tetangco conceded “some measure of uncertainty remains, as the ongoing fiscal consolidation in advanced economies continues to weigh heavily on prospects for global growth. In many emerging economies, policymakers worry about how to balance the twin concerns of limiting any spillover effects on their respective markets while preventing any domestic imbalances from getting out of hand.”
 
Positive picture in 2013
While Tetangco expects “strong global headwinds,” the governor acknowledges “other reasons to be upbeat about the economy’s prospects,” namely:

• The banking sector remains an efficient intermediary of funds and a prudent manager of risks. “We can only expect our banking sector to remain strong and steadfast in its role as a catalyst of growth.”

• The BSP shall continue its efforts in crafting the appropriate regulatory framework to enhance the stability, transparency, and efficiency of the banking system.

• A steady stream of overseas remittances and robust receipts from BPO and other service exports continue to contribute to the country’s resilient external payments position and accumulation of gross international reserves.

• On the fiscal side, the government has stated that it is ready to increase spending to continue to boost growth.

Concludes Tetangco: “In sum, recent developments provide much reason to be cautiously upbeat. In the months ahead, the country can go forward with the confidence that, given our new found position of strength, the Philippines would stand resilient against external headwinds, with responsive policies and sustained efforts toward making the dividends of economic growth and development shared equitably.”

Indeed, there is very little reason not to be positive. Banks are awash with cash. The whole economy is awash with cash.

There is so much cash that the peso has become strong, worth P40 to the dollar. The BSP has been losing billions defending the peso-dollar rate so as not to antagonize OFWs who will remit $22 billion in income this year.

Despite so much cash and a supposedly strong economy, unemployment keeps rising while poverty incidence has remained stagnant at a quarter of the population.

Bank loans have been rising at double-digit rate, by 15.8 percent since January 2011. Remarkably, while loans are rising, their quality is rising too. Non-performing loans reached 2.0 percent in October 2012, down from 2.54 in October 2011.

Banks have enough capital to cushion them. The capital adequacy ratio of universal and commercial banks, which stood at 16.85 percent and 18.01 percent as of end-March 2012 on solo and consolidated bases, respectively, remain above the Basel Accord’s international standard of 8
percent as well as the BSP’s more stringent requirement of 10 percent.

 At the same time, the country’s balance of payments (BoP) surplus for 2012 stood at $8.9 billion.

The country’s BoP position has been in surplus for a record eight years.

As a result, gross international reserves (GIR) reached US$84.2 billion as of end-2012, sufficient to
finance about a year’s worth of imports. External debt stock has also been stabilized, with its ratio to GDP further declining from more nearly 70 percent ten years ago to just about 25 percent at end-September 2012.

The Philippines has been free from IMF indebtedness since 2006 and is now a creditor to the Fund through its contributions to the Financial Transactions Plan and the New Arrangements to Borrow.

This year, the Philippines has committed US$1 billion to the European Firewall Fund - by far the country’s biggest commitment to an IMF facility.
 
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