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InterviewsApril 29 2016

Philippines CBG at ease in midst of emerging market volatility

The Philippines has weathered the emerging markets storm that began in 2015 relatively well, meaning that its central bank has not needed to follow global trends and ease monetary policy. How has central bank governor Amando Tetangco achieved this? Stefania Palma finds out.
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The Philippines has stood out as one of the most stable emerging markets in Asia in the past 16 months – the peso did not drop against the US dollar, as in the case of other Asian currencies, and the country did not experience large capital outflows as a result of the US Federal Reserve rate rise in late 2015.

Much of this was due to the Bangko Sentral ng Pilipinas (BSP), the Philippines' central bank, which managed capital flows efficiently, kept inflation and the currency in check, and raised interest rates as far back as 2014. This strong performance means Amando Tetangco, the BSP governor, is now free to set his own monetary policy without having to follow global trends.

Coping with uncertainty

In 2015, a number of countries in Asia experienced substantial capital outflows and currency depreciations owing to nervousness regarding a US Federal Reserve rate rise and China’s economic slowdown. China’s stock market crash in mid-2015 and the subsequent downward revision of the renminbi exacerbated volatility.

“There has been some uncertainty in the markets of late, causing some weakness in the regional currencies and equity markets. This uncertainty has been, in part, due to the markets not fully appreciating the Chinese authorities’ policy intention and direction,” says Mr Tetangco. 

While China recorded capital outflows as high as $1000bn in 2015 (trade surpluses and inbound investment flows included), the Philippines’ net capital outflows in 2014 totalled $9.6bn, but dropped to $2.5bn in 2015. The Philippines’ reserves are also solid, totalling $80.7bn as of January 2016, which is equivalent to more than 10 months-worth of imports of goods and services. 

Stable peso

The Philippines has also shone due to its currency’s stability. While currencies such as the Malaysian ringgit dropped by 18% versus the US dollar in 2015, the peso appreciated overall in the same time period, hitting a high of 47.5 pesos to the dollar in December 2015.

And although peso depreciated at the beginning of 2016, by the end of February it had already reverted to approximately its value at the end of 2015. Mr Tetangco attributes this reversal to stronger risk-on sentiment in global markets after the Chinese government announced steps to support the economy. “On February 29, the Chinese authorities announced a further reduction of the reserve ratio on top of earlier announcements of intensified efforts to stimulate the Chinese economy,” he says.

But the stability of the peso has also been down to strong economic fundamentals in the Philippines. “We have low inflation, a healthy external payments position, a stable banking system that continues to provide the necessary funding for economic activities in different sectors, and a positive economic growth outlook,” says Mr Tetangco.  

Strong fundamentals

The Philippines has recorded consecutive current account surpluses since 2003 thanks to a strong flow of remittances from overseas Filipinos and a sturdy business process outsourcing sector. These two sources of foreign exchange account for about 16% of the country’s gross domestic product, according to Mr Tetangco. 

The Philippines’ banking sector has also been key in supporting the economy. Thanks to the BSP’s efficient monitoring of the local banking industry, this sector is now widely recognised as one of the healthiest and most advanced in the region.

And while some banking sectors in Asia are perceived as following protectionist policies — as in Indonesia’s case, where foreign banks can only own up to 40% of a local lender — the Philippines has opened up its banking industry to the world. “If you can increase the efficiency of the banking system via greater competition, why not let foreign banks in if you have a regulatory framework in place to do this properly?” says Mr Tetangco.

Two years ago, the Philippines passed a law allowing foreign banks to own up to 100% of a Philippines lender or to set up a branch in the country. Today, the BSP has accepted six foreign banks’ branch applications, and this year, Japanese megabank Bank of Tokyo Mitsubishi bought a 20% stake of the Manila-based Security Bank. “We want to see more stable banks, but we also want to open up to competition to improve efficiency and benefit from the transfer of technology associated with the entry of foreign banks,” says Mr Tetangco. 

No rate cuts

Confidence in the Filipino economy and in its currency has also been fuelled by BSP’s work in maintaining stable inflation. The latest forecasts indicate Filipino inflation will stay within the 2% to 4% target range, at 2.2% in 2016 and 3.1% in 2017. “We are an inflation-targeting central bank, so our primary consideration is to make sure we hit our inflation targets,” says Mr Tetangco. The increase to 3.1% in 2017 will be caused by dry weather, which could raise food prices as well as energy costs since there are many hydroelectric power plants in the country, he adds.

Being a central bank focused on inflation also means the BSP is not forced to follow global interest rate trends. “We don’t necessarily have to move in sync with other central banks,” says Mr Tetangco. China, Thailand, Indonesia, Malaysia, Australia and New Zealand are all dropping interest rates at present, but Mr Tetangco is adamant about keeping rates still. “Right now, there is no compelling reason to adjust policy,” he adds. Indeed, the Philippines’ economy is strong enough not to require cheap money to grow. “Also, people tend to become complacent with prolonged low interest rates,” says Mr Tetangco.

The BSP’s luxury of adjusting interest rates independently of other central banks is also due in part to its pre-emptive moves in 2014. “We raised interest rates and reserve requirements in 2014 in anticipation of the US Fed rate rise, to remind the markets that low interest rates do not last forever and to make sure the market priced risk appropriately. In a way, we were prepared for the Fed rate rise in 2015. We had already made our move more than a year earlier,” says Mr Tetangco. 

Capital market deepening

While the BSP has navigated a tough year for emerging markets in 2015, work still needs to be done to deepen local capital markets. “We are doing our share, but we are only one of the agencies [involved in] this development,” says Mr Tetangco. Other Filipino institutions include the Securities Exchange Commission and the Capital Market Development Council, among others. 

Having a more standardised legal framework for this sector is key to developing local capital markets, according to Mr Tetangco. “You need coordination among all different bodies, including the internal revenue service, because there is the issue of taxation of financial instruments. We are still moving towards a standardised taxation system to try to avoid or minimise arbitrage across different financial products,” he says.

Building the yield curve across all tenors is also essential. “If you look at the yield curve, some sectors are liquid but others are illiquid – it is not a complete yield curve,” says Mr Tetangco. This means banks do not always have benchmarks to refer to when arranging and pricing deals. However, the BSP is trying to populate the yield curve through the overnight index swap and the zero-coupon yield curve on which market interest rates and loan rates can be based, adds Mr Tetangco. 

Presidential elections

Although local capital markets still have room to grow, the BSP has been key in ensuring stability in the Philippines during turbulent times for emerging markets in the past 16 months. So much so that Mr Tetangco is confident not even the upcoming presidential elections in May will shake up the economy. Sitting president Benigno Aquino III, who is widely associated with the country’s strong economic performance, is not allowed to run for a second term under Filipino law. Some analysts argue this will increase political risk in the Philippines.

However, Mr Tetangco disagrees. “When you talk to the banks, they say it will be business as usual because the reforms are there, embedded in laws and regulations. They cannot be changed simply," he says. "Also, the policies of the Aquino administration have achieved a certain degree of success and therefore the new government will not let them go away. Government officials are aware of this. It is likely there will be no change in the direction of policy, even under a new administration.” 

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