Q What have you been doing to counter inflation, which is running at three times your original target?
A Our inflation target for 2008 was between 3% and 5%, but average inflation rose to 8.8% between January and August and reached 12.5% in August, year on year. Until May, inflation was predominantly due to supply-side shocks, particularly elevated oil and non-oil commodity prices. Supply shocks are best addressed by non-monetary measures, including co-operation among government agencies to ensure sufficient supply.
In March and April, the BSP kept its policy rates steady. At the beginning of June, however, inflation became more generalised, with second-round effects such as wage and transport fare hikes. During the next three policy meetings, we raised our policy rates 100 basis points. We wanted to communicate to the markets that we would not let inflation get out of hand. Oil prices have started to ease and food prices – especially rice, which accounts for more than 9% of the consumer price index basket – have also started to decline. There are no further clamours for wage and transport hikes.
Q What is your forecast for inflation?
A Our forecast is that inflation will follow a hump-shaped path, peaking in September or October at under 13%. We expect inflation to level off before tapering to single digit by the late first quarter or early second quarter next year.
Q What other challenges are you facing?
A Apart from inflation, there is the impact of the global economic slowdown. Originally we were expecting 8% growth for exports, but this forecast has been revised to 5% for the year. What is compensating for this are overseas remittances, which have remained robust. In the first semester, there was a 30% increase in the rate of Filipinos leaving to work abroad and remittances grew by more than 17%. Some 60% of our workers are in the Middle East – including 29% in Saudi Arabia – which has been less affected by the global slowdown.
Q If remittances remain strong, why has the peso depreciated?
A The peso has been affected by the strength of the dollar and risk aversion towards emerging markets, including the Philippines. But the fourth quarter is seasonally a period when we see more foreign exchange inflows, so I believe we will see a recovery in the peso.
Q How are the banks performing?
A The Philippine banking system has not been very affected by the subprime crisis or the credit crunch. As of June, loan growth was 24%, compared with slightly under 10% last year. We have more projects being funded, more consumer loans such as auto and credit card receivables. The system also remains relatively liquid.
Q What about property loans?
A Residential property prices have levelled off, but demand for office space remains strong due to the business process outsourcing sector, [which brings in] $4bn to $6bn in foreign exchange. The government [is aiming to raise] this to some $10bn in three years’ time.
Q What about the banks’ asset quality?
A The non-performing loan [NPL] ratio continues to improve. The NPL is 4.7% for the banking system as a whole and 4.2% for commercial banks. The latter might be down to 4% by the end of the year, which is what it was before the 1997 financial crisis.
Q Do you expect more consolidation in the sector?
A When the merger between Philippine National Bank and Allied Bank [both owned by businessman Lucio Tan] is completed, we should be close to seeing the top five or six Philippine banks, plus the foreign banks, holding 65% to 70% of bank assets. We’ll probably see at least three more mergers in the next few years. The two government banks, Land Bank of the Philippines and Development Bank of the Philippines, are talking about consolidation but they have to change their charters as they’ve been created by law.
Q Why are the banks holding up so well?
A We are benefiting from the reforms implemented for the past four or five years. We have pushed for higher capitalisation, improved asset quality, enhancement of risk management systems, the implementation of international accounting standards and the observance of good corporate governance. We adopted Basel II under a phased approach beginning July 2007. Thus, the banks had time to prepare and are moving along quite nicely. The other source of our resilience is the external position – despite price increases in oil and food, we had a balance of payments surplus of $2.1bn for the first half – and record high gross international reserves.
