The Philippines has seen strong growth with tame
inflation and a current account surplus, a lot of it thanks to
a well-balanced monetary policy
The Philippines is one of the major success stories in Asia,
with this year seeing strong growth, inflation within target
and the current account and the overall balance of payments
forecast to remain in surplus.
Analysts say the governor of the Philippines central bank,
Amando Tetangco, managed monetary policy well in the face of
the twin threats posed by the eurozone debt crisis and a
slowdown in Chinese growth. Tetangco is a career central
banker, who joined the institution in 1974 and was reappointed
to a second six-year term as governor in July last year.
The bank was one of the last central banks in the region to
begin normalizing interest rates from the extraordinary
accommodative policy seen in the wake of the global financial
turmoil, implementing two 25 basis points (bps) hikes that left
rates at 4.50% in May of 2011. This year it has chopped a
combined 75 bps via a 25 bps reduction to 4.25% in January, a
25 bps cut to 4.0% in March and another 25 bps cut in July,
bringing the interest rate to a record low 3.75%.
The central bank has also done a good job on
communicating what theyre doing and why theyre
acting, says Nigel Chalk, managing director and head of
emerging Asia research at Barclays Capital. Tetangco also
deserves credit for resisting the temptation to introduce
capital controls in the face of speculative inflows, he
Gareth Leather, Asia Economist at London-based Capital
Markets says that there is speculation that further upgrades by
the credit ratings agencies are on the cards, which would
benefit the country. Leather says that efforts at tightening
tax collection and anti-corruption standards helped the
Philippines to attain another ratings upgrade this year, with
an investment-grade status now within sight.
Ratings agency Standard & Poors (S&P) has
raised the Philippines credit rating to BB+ from BB, the
highest level since 2003, taking it one step closer to its aim
to become an investment-grade economy.
After subdued growth in 2011, the economy rebounded strongly
in the first quarter of 2012 to a year-on-year rate of 6.4%
among the best performing in Asia partly
reflecting a spike in net exports and fixed investment.
In its recent Article IV assessment, the IMF said that
growth was expected to stabilize around 4.8% and 4.9% in 2012
and 2013 respectively. The Philippine economy has
sustained its solid momentum, and has the policy space to
support growth if tail risks from the global economy
materialize, the assessment said.
When he accepted his first appointment as Philippines
central bank governor back in 2005, Amando Tetangco thought
that there was no need to reinvent the wheel.
What we need to do, Tetangco remembers thinking
at the time, is to make sure that the wheel continues to
turn in the direction that we had intended it to, smoothly,
with minimum bumps along the way. Fortunately during the early
part of my first term that wheel turned the way we wanted it
But then came 2007, with its subprime mortgages crisis,
which quickly spread and brought on the collapse of Lehman
Brothers and the global recession. So suddenly, given the
developments, not reinventing the wheel, which I thought was
going to be my approach, was no longer going to be
enough, he tells Emerging Markets.
The central bank enhanced its policy toolkit by putting in
place liquidity measures to maintain confidence in the banking
system, expanded its tools for the open market operations,
improved surveillance and modelling. During Tetangcos
second term, which started in the second part of last year, the
banks mandate has expanded, and it started to look at
financial stability as something that should accompany price
If there is more active risk taking in the economy,
this can make that economy more vulnerable than before to asset
bubbles, so we needed to sharpen our monitoring of market
behaviour and be creative in implementing market-based
solutions to reduce, contain or eliminate asset bubbles,
says Tetangco, who adds that there are no indications of
stretched market valuations right now.
Maintaining a sound banking system has been a crucial part
of the central banks strategy and has supported the
countrys economic advance. The banks assets have
been increasing while the ratio of non-performing loans has
been declining. That shows that the banks would not only
be chasing every credit exposure possible, but they also
evaluate and make sure that the credit that they extend would
be good, he says. The liquidity that has been
available in the system has helped finance the economic growth
of the country.
Philippines external position is robust, with the
current account in structural surplus for the past 10 years.
This has allowed us to build up our international
reserves which, as of the end of August, reached about $80
billion from $75 billion at the end of 2011, Tetangco
says, adding that the strong external position has contributed
to the series of upgrades by ratings agencies, as it was seen
as a source of strength for the economy.
Investment grade is in our sight, given the good
performance of the economy, the improvement in the fiscal
position of the country and the low and stable inflation,
he says. This has contributed to the strengthening of the
economic fundamentals, which will help us achieve sustained
growth over the medium and the long term.
The main challenges to the Philippines economy are external,
coming from the eurozone crisis, the weak US recovery, the
slowdown in China and volatile oil prices. But I think
overall we are in a position of strength at this point in
time Tetangco says.
Our interest rates are still significantly positive.
The BSP borrowing rate is at 3.75%, so theres room there.
The national government has a fiscal deficit that is
substantially below the projection for the year, so they also
have room to accelerate spending, and that is precisely what
theyre doing now.