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 they’re doing and why they’re 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 says.
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 & Poor’s (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.
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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 to.”
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 Tetangco’s second term, which started in the second part of last year, the bank’s mandate has expanded, and it started to look at financial stability as something that should accompany price stability.
“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 bank’s strategy and has supported the country’s 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 there’s 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 they’re doing now.”