Philippines: Tetangco optimistic for 2009

COPYING AND DISTRIBUTING ARE PROHIBITED WITHOUT PERMISSION OF THE PUBLISHER: SContreras@Euromoney.com

By:
Lawrence White
Published on:
Amando M Tetangco Jr, governor of the central bank of the Philippines

Amando M Tetangco Jr: confident in Philippine resilience

This Asian crisis might not be as bad as the last one. For Amando M Tetangco Jr, governor of the central bank of the Philippines, the lessons learnt from the crisis of 1997 and the reforms that followed it mean that the outlook for 2009 is not nearly as gloomy as might be expected. Euromoney speaks to him about the challenges facing the banking sector, forecasts for growth and inflation, and lessons learnt from the 1997 crisis.

It’s been a tough year by any measure, so let’s look forward. What’s your outlook for 2009?

The economy, while definitely affected by the challenges facing global markets, has proven to be quite resilient and has done better in relative terms than many other emerging markets. For example, we saw a respectable growth rate for the first three quarters of 2008 of 4.6%. The banking system has also been resilient, for a couple of reasons.

First, over the last few years we’ve implemented economic, fiscal and financial reforms to strengthen the economy. We also have buffers in place to protect the economy in a downturn, such as strong domestic demand supported by overseas remittances.

Second, local banks’ exposure to foreign financial institutions is fairly minimal, so going into 2009 we are in a better position despite the fact that there will clearly be challenges ahead. The government has revised its estimate for GDP growth for 2009: between 3.7% and 4.7%, down from a range of 4.1% to 4.8%.

What’s helping us is that inflation has started to come down because of declines in food and oil prices, so that gives us more room from a policy standpoint.

You mentioned the overseas remittances that play such an important part in the Philippine economy. Are you concerned by the reports that have been emerging suggesting that there will be a decline in money being sent home as a result of the crisis?

It’s true that remittances play an important role in the economy, accounting for around 11% of GDP. But it’s not true to say they have fallen in the last few months. In the first nine months of this year remittances climbed versus the same period in 2007 to a total of $12.3 billion. So we’re on course to achieve the target of $16 billion total for this year. Thanks to global conditions we expect a slowdown in the growth of remittances, a 6% to 10% increase overall, but certainly no decline in the overall amount.

Why is the flow of remittances resilient? Well the data show that during the first nine months of the year the number of overseas workers increased by 26%, and between January and June almost 91% of those new workers were deployed to the Middle East and Asia, which are obviously less affected by the slowdown.

The other worry must be the dollar outflows that the Philippines, like most emerging markets, is experiencing as investors pull their money out of markets perceived to be riskier. How concerned are you, for example, by the fact that in November alone almost $400 million left the country?

Let me first put that in context: we have a current account surplus and an overall balance of payments surplus. These outflows have been happening everywhere in the emerging markets, the result mainly of investor risk aversion. They still perceive the US as safe.

Whether that’s justified or not?

(Laughs) Well, that’s how they see it. Going into the new year, I share the view of analysts who say that some capital will flow back into the emerging markets.

Let’s turn to the bank sector, where for many economies the struggle at the moment is to persuade banks to keep lending before corporations that are starved of cash get into trouble. Is that your primary concern in the Philippines?

Yes, maintaining the lending environment is important – you need to make sure the credit markets work. We’ve taken a number of measures to ensure liquidity is in the system and that it’s distributed properly.

We’ve enhanced the peso repo facilities, for example through broadening the definition of acceptable collateral. We have established a dollar facility, maintained a presence in swaps, and kept the emergency loan facility open. We’ve also reduced capital reserve requirements by two percentage points, so we’re taking every step we can to make sure liquidity is in the right places.

Commercial banks saw outstanding loans rise 24% in September on a year-on-year basis, about the same rate of growth as in August, so there is still credit growth.

The ratings agencies are concerned by the amount of bank assets that are in government treasuries, something like 25% of the total for the whole sector. That’s been fine in the last few years when yields were good. But now there’s a risk to the value of these holdings. How closely are you monitoring that situation?

We’re always looking at that situation, and it will be a factor in the profitability picture of the banks. They’re not going to see the same profits they saw in 2007. The way I see it, there is still a healthy increase in outstanding loans as I mentioned so banks will realize more interest from lending to compensate in part for any decline in treasury holdings.

There have been slight increases in the NPL ratios on banks’ books as well lately. Is that a trend that’s likely to accelerate?

The NPL ratio is around 4% now, but remember that’s down from a high of 20% in 2002. That reduction was achieved without the use of government funds – in the Philippines we passed a special purpose vehicle act that provided tax and regulatory breaks for the transfer of NPLs, and the whole process was helped by the improvement in property prices. The current figure for NPLs is up from the 3.9% we had before but it’s a marginal increase.

What’s your current thinking on inflation?

Inflation picked up in 2007 as food and oil prices rose, and now it’s started to come down. We forecast an average between 9% and 11% for 2008 and for the first 11 months it’s been 9.4%. For 2009 we think we’ll see a single-digit inflation rate, with a forecast average of 6% to 8%. Towards the end of the year it could be as low as 4% to 5%. We announce targets on a two-year basis, so for 2010 the target is 4.5% plus or minus 1%.

The 1997 Asian crisis has been on many people’s minds recently. From your perspective how is this crisis different, and how can we learn from what was done last time?

There’s no doubt that as a region we’re far better prepared than in 1997, when almost no country went unscathed. Since then the ways Asian countries govern their economies, and the ways people do business, have changed. The events in 1997 proved to be a lesson for Asia, and the reforms that took place as a result have placed us in a stronger position.

The current crisis is different in that last time the turmoil was in peripheral markets, ie, in Asia, so because the other markets were relatively unaffected we could export our way back to growth. With weaker exchange rates we could produce cheaper goods and export them to the world’s major markets.

This time the largest economies in the world are in trouble and the crisis has been transmitted everywhere, so we require a global solution.

Yes, and one challenge facing Asia is in enacting a more coordinated response to the crisis. We’ve seen carefully coordinated policy announcements from your counterparts in the west but is that more of a challenge in Asia where there is perhaps less communication and less of a formalized structure for dialogue?

We are in active dialogues with our counterparts – meetings of central bank governors have been quite frequent. The European banks acted more aggressively and with more urgency but despite the crisis having less of a direct impact in Asia we have stepped up our efforts. I’m referring to the Chiang Mai initiative implemented by the Asean+3 countries.

First, we have enhanced the initiative by accelerating its multilateralization; at the moment it is a series of bilateral agreements between participants. Secondly, we are working to increase the total amount of the facility from $80 billion to something higher, at the same time as we are trying to facilitate access to the facility by minimalizing conditions.