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ViewpointJanuary 2 2018

Nestor A Espenilla, Jr.: problems may be traditional, but solutions cannot be

While the Philipines enjoys a growing economy and stable finances, we do not underestimate the tough challenges of poverty, demographic change, technological advances and geopolitical risks. These can only be countered by looking outside the traditional solutions, says Nestor A Espenilla, Jr, the governor of the Bangko Sentral ng Pilipinas.
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Nestor Espenilla

There is a compelling tension faced by today’s central banks. With the primordial task of preserving monetary and economic stability, ours are traditionally conservative institutions. 

But stability is never tantamount to stagnation. And the world is changing fast. Dynamic methods are demanded of the private sector and of the government. The financial and business landscape is radically being redefined. New best practices are emerging. Digital innovation is disrupting the way things are usually done.

There is an increasing interconnection of markets. Regionalisation and globalisation all at once make the world smaller through ease of communication, connections and transportation. But these trends are also making the world bigger and greater in the light of the immense potential and varied possibilities they present. 

A tech-savvy generation

We also face demographic changes. In the Philippines, there is an increasing population of tech-savvy millennials: 50% of our population is aged 24 years old or younger, and 66% are below 34 years old. This market has distinct consumer preferences: they demand innovation in the form of faster and more streamlined products and services. This truth resonates all the more in the Philippines, which is known as the 'selfie' and texting capital of the world, where more Filipinos have mobile phones than bank accounts. Formal bank account ownership stands only at 31%, with cellphone SIM penetration at more than 120%.

In the face of rapid technological rise (a phenomenon seemingly devoid of emotional undertones), there is parallel escalation of populist sentiment and demand for customer/client-centricity, with the citizenry demanding that the aspirations and wellbeing, certainly not just of the elite, not even just of the collective, but of each individual be valued. There is a demand for inclusion, for broad-based and participatory economic growth.

So has the world changed too for the Philippines? In taking on a challenge, the country's central bank, the Bangko Sentral ng Pilipinas (BSP), draws insight from the past. Lessons from the global financial crisis and the Asian financial crisis have made us aware of the need to anticipate and manage systemic risks. We have learned and have responded with proactive, prudential and strategic reforms that are data driven, data intensive, aligned with international standards and adapted to domestic conditions.

Meeting the challenges

From past crises, we now understand that monetary policy alone will not guarantee financial stability. We have been shown the consequences of market interconnectedness. Interest rate policy has to consider more than the usual parameters espoused by the flexible inflation-targeting framework, even as we continue to refine the implementation of our interest rate corridor system to make it more market friendly.

We adopted Basel III reforms, particularly in the areas of capital, leverage, liquidity and the regulation of systemically important banks. We applied proportionate regulations and supervisory techniques. Major upgrades in the corporate governance and risk management standards in our supervised institutions have also been undertaken.

The Philippines enjoys solid macroeconomic fundamentals. It is one of the fastest growing economies in the world, registering a 6.9% growth in gross domestic product in the third quarter of 2017. Baseline projections indicate that inflation will remain within the target range of 2% to 4% until the end of 2019.

The country’s balance of payments and the exchange rate are firmly under control, and the level of gross international reserves (GIR), at $80.6bn as of the end of October 2017, covers the equivalent of 8.4 months’ worth of imports. At 226% of the reserve adequacy metric of the International Monetary Fund (IMF), our GIR is described as “sizeable” in the IMF’s latest Article IV report. The banking system has also sustained its growth trajectory, supported by strong core earnings, adequate capitalisation and satisfactory asset quality. 

The need for vigilance

Against this positive backdrop, complacency is not an option, however. We stand ready to employ our policy toolkit in light of the policy normalisation of the US Federal Reserve. We are also watchful of geopolitical risks, including protectionist policies in some advanced economies that could pose challenges to our trade, remittances and foreign direct investments. Finally, we continue to closely monitor credit growth and risks to overheating. We are ready to deploy macroprudential measures, if necessary, in a targeted way.

But while the Philippine economy is stable, there is still much more to be done. Amid positive levels, poverty incidence and income disparity are still high. One in five Filipinos is poor: this translated to 21.9 million people in 2015. A significant portion of our population is without access to financial services: 571 out of 1634 cities and municipalities do not have banking offices.

While the banking system serves key sectors, other markets such as micro, small and medium-sized enterprises (MSMEs) and agriculture are left wanting. There are untapped, unserved and underserved markets that must, and can, be actively engaged. When viewed this way, the initiative for inclusion can be deemed as a viable business proposition, rather than a mere socially responsible end.  

To make financial markets more inclusive, we are harnessing the power of digital technology. In addition to increasing access through liberalised branching regulations that build on brick-and-mortar venues, we are leveraging fintech solutions to reach the peripheries at a faster rate and much lower cost. This strategy will aptly bridge an archipelagic divide besetting a geography of 7641 islands (a new island count announced by the Department of Environment and Natural Resources in February 2016).

Inclusion initiatives

Our financial inclusion agenda envisions a universally available basic transaction account in a bank or regulated non-bank financial institution that has the ability to send and receive payments via any electronic device in an affordable manner. We believe this will have the added effect of building people’s confidence to transact within the formal financial system, increasing demand for other value-adding financial products and services such as savings, loans, insurance and investments. 

There are various initiatives to support this vision. We are pursuing an interoperable digital payment ecosystem that will enable convenient, safe and affordable fund transfers between and among accounts using any digital device. This is the National Retail Payment System and the goal is to be a cash-lite economy. We are also working towards the adoption of a biometric-based foundational ID system. Since the lack of a reliable and convenient ID system is a major barrier to access financial services, millions will be able to participate in the digital finance ecosystem and will create new markets.

We are also prioritising development of the Philippine financial markets with focus on the local currency debt market and the foreign exchange (FX) market. Maintaining a bank-centric financial market has its risks and limitations, making it important to develop the capital market to provide a better balance in long-term financing. We need to go back to basics by establishing a transparent and market-determined pricing benchmark. This must come from a government securities market that is deep and liquid. Here, we have drawn a roadmap in collaboration with other Philippine government agencies such as the Department of Finance, the Securities and Exchange Commission and the Bureau of the Treasury.

Increasing FX efficiency

We will continue to pursue further FX liberalisation as we continue to look for ways to pursue greater exchange rate flexibility by deepening the FX market, and making it more resilient to external shocks. We are looking for ways to increase FX market efficiency by streamlining documentary submissions and removing prior BSP approvals for certain transactions. We are implementing a sequenced approach that will enhance market conduct and make FX market rate determination more transparent, consistent with the characteristics of an organised FX market.

This is an ambitious agenda on its own because it requires focusing on both the formal and informal markets, taking out any regulatory arbitrage possibility and promoting transparency. But it is an initiative that I consider critical because the status quo still has impediments to more active cross-border, cross-currency transactions. 

These financial sector reforms will pave the way for more financial innovation, providing financial consumers with more choices and flexibility. These will also allow the creation of hedging instruments that will support risk management of banks, corporates, government units, MSMEs and the general public.

Beyond the traditional

Traditional ways of doing things cannot sufficiently address the issues that beset us. And while our work relegates us to the background – creating an enabling environment for business and commerce – there is no distance between us and our ultimate stakeholder, the Filipino people. What we do affects their purchasing power, their ability to make informed decisions and enlightens them on savings, consumption and investment. 

We count on collaboration with the private sector, and other government agencies, to push the agenda of stability and financial inclusion forward. We rely on the synergies and revel in the dynamic dependencies. Communication is already a hallmark of monetary policy, and we extend this to our financial stability and inclusion agenda.

Our vision is to be a catalyst for a financial system that delivers a high quality of life for all our citizens. This is a traditional agenda. For success, untraditional and transformative methods are required.

Nestor A Espenilla, Jr is governor of the Philipines central bank, Bangko Sentral ng Pilipinas.

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