Amando Tetangco, the governor of the Philippines' central bank, Bangko Sentral ng Pilipinas, talks to Stefania Palma about how in a post-financial crisis, globalised world, conventional central banking is no longer enough.

Pre-emption, monitoring and stability are just some of the concepts defining Amando Tetangco’s mandate at the Philippines central bank, Bangko Sentral ng Pilipinas (BSP). 

Flexibility and reactivity have also defined his work so far, which has helped the Philippines get through even the most disastrous calamities – among them the devastating Typhoon Haiyan – arguably unscathed at the macroeconomic level.

Thinking outside the box

BSP’s unconventional monetary policy is what has maintained this macroeconomic stability, according to Mr Tetangco. He says that traditional monetary policy tools are no longer enough in the modern, interconnected world.

“In the case of emerging economies, it used to be that when you wanted to reduce liquidity, you raised interest rates," says Mr Tetangco. "But because of the integration of capital markets and financial systems across the globe and the free cross-border flow of capital, increasing interest rates to address liquidity problems will only attract more liquidity, particularly because of very low rates in advanced economies.”  

Advanced economies’ low growth prospects in the aftermath of the financial crisis, followed by significant inflow of capital into emerging markets, has exacerbated contagion risks.

BSP’s macro-prudential measures, such as the Rest (the real estate stress test), are part of Mr Tetangco’s pre-emptive and unconventional monetary policy. The Rest ensures banks have a sufficient buffer to withstand pressures from the housing market. If banks suffer a 25% write-down in the value of their real property assets, and their capital adequacy ratio drops below the 10% minimum requirement, banks fail the Rest and need to raise additional capital. 

Before doing so, however, the banks can discuss with BSP how risks would be mitigated alternatively. “There is a conversation, it’s not automatic,” says Mr Tetangco.

Inflation kept at bay

Importantly, BSP’s unconventional monetary policy has not come at the expense of macroeconomic stability in the Philippines. In 2014, BSP was able to fend off inflationary pressures following Typhoon Haiyan and kept inflation within its annual 3% to 5% target.

Inflation accelerated to 4.9% in August 2014 as the impact of the typhoons on food supplies pushed up prices. This led to BSP raising policy interest rates from 3.5% to 4% with two 25 basis-point increases in July and September. Inflation was safely at 4.3% in October last year.

“We have been able to deliver on our mandate. Inflation stayed within the target range in 2014, for the sixth consecutive year, and we have been able to maintain the stability and soundness of our financial system,” says Mr Tetangco.

Supporting financial inclusion

BSP’s unconventional central banking also takes in microfinance programmes, which are becoming commonplace in Asia. “We have been working on microfinance for the past 15 years, [and] we have been successful. [As of the third quarter of 2014], we have 179 banks with microfinance operations, more than 1 million clients, and loans outstanding at 9.4bn pesos [$212.3m],” says Mr Tetangco.

Like many of his peers, Mr Tetangco believes financial inclusion initiatives could soon become mainstream globally. “Not all central banks see this but microfinance and financial inclusion are becoming mainstream. They are no longer only an advocacy question,” he says. “It’s not something that you do just as part of your corporate social responsibility. It’s something that you really need in the economy; it is complementary to maintaining stability in the financial system.”

BSP’s regulatory reforms to encourage microfinance have underscored its commitment to these measures. In 2014, the central bank allowed micro enterprise loans, micro deposits and micro insurance products to be introduced in the domestic market.

The microfinance success in the Philippines is demonstrated by growth in micro deposits, which show micro customers’ use of financial services is becoming more sophisticated. Outstanding micro-deposits totalled 4.57bn pesos as of the third quarter of 2014.

“What is important is that micro-borrowers have now become net depositors. This also implies an element of financial literacy; as they go along they learn the importance of financial discipline and become depositors rather than just borrowers,” says Mr Tetangco.

To increase financial inclusion in remote areas further, in 2014 BSP allowed for non-bank financial service providers such as pawn shops and remittance agents to operate in these regions. Before this regulatory change, 37% of municipalities and cities in the Philippines were not serviced by any financial operation. The proportion is now down to 13%.

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