Tetangco: 2011 A PROMISING YEAR
BY JIMMY C. CALAPATI
Malaya Business Insight

As Bangko Sentral ng Pilipinas (BSP) governor Amando Tetangco put it, 2010 was an auspicious time for the economy.

First, the gross domestic product grew 7.5 percent in the first nine months in 2010.

Second, inflation remained at low single digit levels, averaging 3.8 for the entire year in 2010 or at the low end of the government's target range of 3.5-5.5 percent.

Third, the BSP's policy rates have remained at record lows since July 2009: 4 percent for overnight borrowing and 6 percent for overnight lending. As a result, most banks have also clipped their interest rates and kept the cost of money relatively lower.

Fourth, strong external position provides a strong cushion against possible external shocks. Gross international reserves (GIR) as of end-December 2010 is at an all-time high at $62.1 billion, higher by $17.9 billion compared to the $44.2 billion total in December 2009.

Fifth, improvements in the economic performance and prospects have resulted in better credit assessment for the country. In November last year, the Philippines received a credit rating upgrade from S&P, the first in 13 years. And last week, Moody's Investors Service changed the outlook on the Government of the Philippines' Ba3 foreign and local-currency bond ratings to positive from stable, the second positive rating action in 18 months.

Sixth, the Philippine peso has maintained its relative competitiveness with other currencies in the region as effective management of foreign exchange inflows by the Bangko Sentral has allowed the peso to remain relatively stable.

POSITION OF STRENGTH

With these scenarios, Tetangco said the Philippines is entering 2011 from a position of strength.

"2011 for me is a year of promise. The worst effects of the global economic and financial crisis are now behind us," Tetangco said.

Tetangco presented a new list for 2011, "one which paints a picture of our sources of strength going forward."

"Our economic growth continues to have traction. Second, despite the occurrence of the El Niño phenomenon in early 2010, inflation remained subdued," Tetangco said.

He said this will give the BSP elbow room in the conduct of monetary policy, which has remained steady at an all-time low of 4 percent for overnight borrowing since July 2009.

Third, the country's external payments position will continue to be strong. He reported that for the first 11 months of 2010, the country's balance of payments position showed an unprecedented surplus of $13.2 billion, boosted by sustained influx of overseas Filipinos' remittances, receipts from BPO services, sustained export growth, and surging capital flows. "

As a result, the international reserves climbed to new highs, providing strong coverage for both imports and short-term external debt," Tetangco said. He continued that this strong external payments position led to the credit rating upgrade from Standard & Poor's to BB from BB-, the first upgrade since 1997. "

Of course, it is our belief that the markets have in fact gone ahead of the credit rating agencies, as the markets have for some time now been pricing our debt papers the way they do sovereign debts that are rated one or two notches better than ours," Tetangco said. He also stressed that the country's debt service capacity also remained comfortable, with the debt service ratio dropping to 7.9 percent in end-September 2010 from 8.7 percent in end-September 2009.

"This was in spite of the increase in the external debt of the Philippines to $59.8 billion as of end-September 2010 from the $54.7 billion posted in end-September 2009,"Tetangco said. Sixth, the central bank chief said that the peso has maintained its relative competitiveness, with the peso volatility well within the middle of the range of volatilities of currencies in our region. And lastly, Tetangco said that the banking system continued to be stable and remained effective in intermediating credit to the productive sectors of the economy.

RISKS REMAIN

But no matter how great the picture is, Tetangco said that there are still risks. "It is also a critical year that could spell whether we would be able to press on the road to sustained strong recovery.

In 2010, we effectively maneuvered through shifts in both global and domestic market preferences, which allowed us to fortify our strong position," he said. For 2011, he sees the following global risks that domestic monetary policy and banking regulatory reforms have to address: (1) the uneven growth rates among economies, with the advanced countries lagging behind the developing countries, particularly Asia; (2) the shifting investor preferences and their measures of risk; and (3) market reaction to regulatory changes. In the area of monetary policy, Tetangco said that the BSP will continue to improve its institutional and analytical framework. "Specific initiatives to further strengthen the institution include pursuing the full capitalization of the BSP, adopting a more focused approach to policy formulation and enhancing links to financial stability," Tetangco said. In the area of banking supervision, he said that the BSP will facilitate the implementation of other key financial sector reforms needed to maintain a healthy and strong banking system.

Specific priority projects, according to Tetangco, include the enhancement of risk-based supervision technologies, improvement of existing macro/micro surveillance tools, continued alignment of existing regulatory framework with international standards, harmonization of corporate governance standards with other financial regulators, and continuing capital market reforms. "2011 has opened with much hope for our country. To help ensure a more sustainable and durable economic growth in the years ahead, the markets can expect BSP to remain committed to its role as the steward for price and financial stability,"Tetangco said. He stressed that the BSP's policy priority will be focused broadly on exercising continued vigilance over price developments, nurturing a healthy external payments position and manageable external debt, sustaining key financial reforms that will strengthen bank capitalization, supervision and market discipline, and pursuing social advocacies that are supportive of an inclusive economic growth.

ANOTHER UPGRADE SOON?

Moody's Investors Service last month changed the outlook on the Government of the Philippines' Ba3 foreign and local-currency bond ratings to positive from stable primarily on the country's strengthening external payments position. Tetangco said that the move is a "proof of confidence in the resilience of the Philippine economy" and that this brings us "closer to (another) credit rating upgrade." "Moody's has taken two positive rating actions in the last 18 months. This is a clear vote of confidence in our positive credit story," Tetangco said. "With the Philippines' strengthening credit profile and the resilience and strength that the Philippine economy continues to demonstrate in the face of a sluggish global economic recovery, we can expect brighter prospects ahead." Foremost in Moody's reason for upgrade is the strengthening trend in the Philippines's external payments position which has significantly reduced the vulnerability of government finances to external shocks. "

An increasingly strong external payments position and well-anchored inflation expectations have provided the new government an advantageous position from which to pursue its reform agenda," Christian de Guzman, an Assistant Vice President at Moody's and its lead sovereign analyst for the Philippines, said. Moody's also noted the successful conduct of monetary policy which has anchored inflation expectations and helped lower the government's cost of funding; and the improved prospects for economic reform policies which will likely have positive effects on government finances, investor sentiment, and economic growth.

De Guzman also noted that the government has also effected a notable turnaround in fiscal management in its first semester in office. In level terms, the cumulative fiscal deficit over the second half of 2010 is projected to be half the size of that in the first half largely owing to expenditure restraint. "While these developments suggest a likely return to fiscal consolidation, the government's balance sheet is still characterized by a large stock of debt relative to either revenues or GDP as compared with its rating peers," de Guzman said adding that the "heavy burden of interest payments as a share of revenue and expenditure remains much greater than other Ba-rated governments, but the trend has been improving."

Moody's said that its assessment over the near term of the Philippines' credit fundamentals will focus on the national government's ongoing commitment to fiscal consolidation in the context of the improvements in the economic environment. "Most likely, this will require continued expenditure restraint and improved revenue performance," de Guzman said. Another area Moody's will evaluate, according to de Guzman, is whether the government can successfully begin implementation of its public-private partnership program for infrastructure development. "

As this program forms a key pillar of the Aquino administration's economic agenda, successful execution of associated projects would provide a bellwether for an improved business climate and growth prospects in general," de Guzman said. In addition, Moody's will monitor the capability of BSP to continue to dampen inflationary pressures in an environment of higher food and fuel commodity prices and potentially volatile capital flows. Tetangco reiterated the BSP's commitment to ensuring that future inflation remains consistent with the medium-term target while being supportive of sustainable economic growth. "

We will remain vigilant against emerging risks to the inflation outlook as we see to it that the Philippines continues to achieve higher levels of economic growth and at the same time ensure that prices remain stable as is BSP's mandate. Also to this end the BSP will continue to pursue sound macroeconomic management and implement critical reforms to further improve the country's external accounts and strengthen the country's financial system," Tetangco said. Moody's last rating action on the Philippines was taken on July 23, 2009 when the rating agency upgraded the sovereign rating from B1 to Ba3 and assigned a stable outlook.

Last November, Standard & Poor's upgraded the country's foreign currency sovereign credit rating by one notch to 'BB' from 'BB-' "We have upgraded the Philippines based on its steadily improving external liquidity profile and the underlying strengths of its external accounts, which increasingly mitigate the vulnerabilities posed by still high public and external debt, and provide buffer against adverse shifts in terms of trade or investor sentiment," Agost Benard, S&P analyst, said. Benard added that the upgrade also reflects the progress achieved in debt reduction and the underlying fiscal consolidation, which brought public debt ratios in line with many of its 'BB' rated peers.