Interview: Amando Tetangco

How would you characterise the overall health of the Philippine banking sector?

AMANDO TETANGCO: The Philippine banking system is sound and stable with sustained growth in assets, loans and deposits. Adequate liquidity levels, an improving loan portfolio quality, sufficient capitalisation and profitability are being maintained to support the growing domestic economy.

We are pleased to note that the Philippine banking sector has developed into one of the most resilient in the entire region. This was validated by international ratings agency, Fitch Ratings, when it assigned the Philippine banking system a positive outlook for 2016. What is more, the Philippines was the only jurisdiction in the Asia-Pacific region assigned such an outlook by Fitch.

In addition, the banking sector has kept pace with the robust growth of the Philippine economy. Capitalisation of the country’s banks has stayed above the minimum level required under national and international standards, settling at 16.2% on a consolidated basis for universal and commercial banks as of September 2016. Loan growth remained a healthy 16.9% in 2016, with funds being channelled mostly to the productive sectors of the economy.

Furthermore, despite the acceleration in bank lending, banks have kept their loan quality high as their exposure to bad debts was maintained at 1.9% as of end-December 2016.

What reforms have been implemented to support stability in the banking sector, and what effects have they had?

TETANGCO: The Philippine banking system has performed relatively well due to the adoption of a cohesive, comprehensive and calibrated reform agenda. Among the core components of this agenda is the adaptation of global banking reform initiatives to local conditions, which includes the implementation of Basel III reforms on capital requirements, the leverage ratio, the liquidity coverage ratio, and capital requirements for domestic systemically important banks – known as D-SIBs – among others.

We have also shifted to risk-based supervision. An important component is the series of recent regulations covering the enhancement of risk management – including credit, IT and operational risk, and corporate governance standards for supervised institutions. The BSP has also shifted from purely micro-supervision – or the focus on individual institutions– to macro or system-wide coverage.

The shift to system-wide coverage has necessitated, among other things, that we enhance our supervision and monitoring tool kit to include macroprudential tools, as well as enhanced and expanded stress tests and network analyses.

Moreover, realising that financial stability is a shared responsibility among regulators and the national government – which is the ultimate lender of last resort – we have also formalised inter-agency cooperation through the creation of the Financial Stability Coordination Council.

What has already been done to increase financial inclusion in the country?

TETANGCO: As for financial inclusion, we have issued guidelines to advance this process, essentially mainstreaming inclusion beyond being simply an advocacy or “nice-to-have”. We have expanded microfinance products and services in the market. We have also leveraged technology and approved regulations on e-money banking, micro-banking offices and the use of third-party cash agents.

We have also worked with local government units to create credit surety funds, which are credit enhancement schemes that serve as a way of extending credit to member businesses of cooperatives without the need for collateral. In addition, we have ramped up our financial education and consumer protection efforts.

Moving forward, digital financial inclusion reform initiatives and a more intentional focus on marginalised segments, such as agriculture and small and medium-sized enterprises, are expected to bring more Filipinos into the formal financial sector, thus contributing to broad-based, inclusive growth.

How can the Philippines and other emerging markets better mitigate the effects of volatile global economic forces?

TETANGCO: Emerging markets, including the Philippines, are not immune to shifting tides in the global economic environment. Fortunately, the Philippines has sufficient buffers to ease external shocks and mitigate their effects on the local economy. Our foundation of solid macroeconomic fundamentals and a stable banking system have so far differentiated us from many other emerging markets.

Our buffers include; first, investments in human capital development, physical infrastructure and reforms over the past decades have increased the Philippines’ productive capacity, allowing it to grow in a stagnant global economic environment.

The 6.6% GDP growth in the last quarter of 2016 marks the 72nd consecutive quarter of positive growth. We are one of the fastest-growing economies in the region, with GDP growth averaging 6.3% from 2010 to 2016. For 2017 the government has set an official growth target of 6.5-7.5% and a target of 7-8% from 2018 to 2022.

Second, rapid growth was achieved in a sound and stable inflationary environment. In 2016 headline inflation averaged 1.8%. Inflation is expected to remain manageable and our forecast for 2017-18 is that it will settle within the target range of 2-4%.

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. At the same time we will be working to ensure that prices remain stable across the country, as is BSP’s mandate.

Upside risks to the baseline forecast depend on petitions for adjustments in power rates and the government’s proposed tax policy reform programme. Slower global economic activity continues to be a key downside risk. The BSP, however, still sees inflation expectations to continue to be broadly in line with the inflation target over the policy horizon.

Third, the country’s healthy external payments position – supported by a current account surplus and adequate international reserves – provides a strong buffer against payment pressures and lends support to the domestic currency. Prudent external liability management has resulted in the sustained decline in the Philippines’ external debt ratios. The country’s external debt-to-GDP ratio has significantly decreased from 59.7% in 2005 to 25.5% as of end-September 2016.

Fourth, our stable and secure banking sector is characterised by significantly improved quality of assets, with the non-performing loan ratio registering continued declines and strong capitalisation continuing to fuel the growing economy.

Lastly, through sound fiscal management, the government has had the ability to ramp up capital investment spending. This is in addition to public infrastructure spending which is expected to increase from 5.3% of GDP in 2017 to 7.4% in 2022.

These changes, along with the initiatives developed by the government to pursue further reforms, and a strong emphasis on anti-corruption and reducing red tape and bureaucracy, will further the ease of doing business and boost investment. With a solid economic story and a firm commitment to structural reforms, we are confident that the investment attractiveness of the Philippines remains strong.