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Tetangco warns of perils in 2017

WHILE the Philippine economy performed well in 2016, risks lie in wait in 2017, including global financial market volatility, the rise of populism and a retreat from multilateralism, according to Bangko Sentral ng Pilipinas Gov. Amando Tetangco Jr.

Rendering a report Tuesday before media and businessmen at the Edsa Shangri-La in Mandaluyong, Tetangco called for “turning uncertainty into opportunity.” His summary:

“The operating environment has become more difficult. Noise and global economic developments are creating financial market volatility, complicating policy formulation and implementation. Nevertheless, our underlying growth story remains intact, and the support of economic policies continues to be strong as well.”

Tetangco, 64, on his third term as BSP governor, was first appointed by President Gloria Arroyo in 2005 and reappointed in 2011 by President Noynoy Aquino. On Nov. 22, 2016, President Rodrigo Duterte selected him to serve an unprecedented third term.

He noted many unexpected events referred to by economists as “tail events” or “fat tails.” (A “fat tails” distribution of events is one where the bell curve, normally nicely shaped, is skewed. This indicates that unusual events have been occurring more frequently.)

Some “fat tails” in 2016: Brexit (British exit from the European Union), Trump’s election as US president, the victory of populist parties in the Austrian and Italian referenda, and an OPEC agreement on cutting production.

Despite the “tail” events, Tetangco remarked, the Philippine economy continued to perform well in 2016. He cited some figures:

• Gross Domestic Product – Strong: 7.1 percent in the 3rd Quarter; 71 consecutive quarters of positive growth (since 1999 1st Quarter), one of the fastest in emerging Asia.

• Inflation – Strong growth occurred in sustained low inflation: 1.8 percent for 2016; looking at mid-range in 2017 and 2018.

• Banking system – Sound and stable; liquid, profitable, strong balance sheets.

• External position – Robust, with Gross International Reserves at end 2016 of slightly higher than that in 2015, still able to cover over nine months’ worth of imports and payments for services.

Tetangco said the Philippine economy continued to be resilient despite the surprises of 2016, because its managers “did our homework and kept our own house in order.” He added:

“We had already put in place difficult but necessary structural reforms for over two decades now (e.g., VAT, Governance Commission for GOCCs, liberalizing important sectors like banking, and the BSP Charter that guarantees BSP’s independence). In other words, institutions are basically sound.

“Demography is on our side. This makes domestic consumption a natural driver of growth. Even so, we also diversified sources of growth. Manufacturing has been gaining and agriculture turning around.

“The Bangko Sentral’s independence has allowed it to focus and deliver on its primary mandate of price and financial stability.”

• ‘Phl has buffers for 2017 risks’

“WE ARE, therefore, entering 2017 with solid buffers,” Tetangco said. “And we certainly need these, given the risks that we anticipate going forward.” He explained:

“The biggest immediate threat is financial market volatility, because this has many second-round implications. Agents can incorrectly perceive risk, and misprice this, which can result in overshooting in rates and have adverse intermediate effects on balance sheets of corporates and banks. This can also lead to financial stability pressures.

“Volatility can strike fear among investors. If this is uncontrolled, it could significantly dampen ‘animal spirits’ or a snuffing out of ‘exuberance’. When animal spirits are curtailed, innovation and further investments can also be stalled.

“The impact of financial markets on the real sector can have long and serious implications. This is the negative feedback loop that we saw during the Global Financial Crisis. Immediate financial market volatility in turn comes from:

“Fed policy actions -- In particular if actual Fed action is significantly different from original market expectations. If rate hike faster than expected, Emerging Market Economies currencies, including the peso could depreciate faster; interest rates could also rise faster. If slower, it could cause ‘risk on’ so that EME currency depreciation would be slower.

“Asynchronous Advanced Economies policy – While Fed is hiking, ECB and BOJ continue to provide stimulus. (The US central bank or Federal Reserve increased interest rates last December and announced more increases this year, but the European Central Bank and the Bank of Japan are providing stimulus to their economies.)

“There are other risks, such as the rise of populism and retreat from multilateralism (Brexit and Trump are manifestations). This can lead to inward-looking economic growth policies, shrinking of trade, and further weakening of the already tentative global growth outlook.

“Another possible knock-on effect closer to home is the weakening of remittances and a slowdown in the Business Process Outsourcing sector. While this is possible, we do not believe the magnitude will be significant, because our remittances have been more diversified in terms of jobs and geography. The quality of our workers and the cost of setting up and doing business here ensure that the BPO sector is supported.

“Oil price direction: Will OPEC agreement hold for the expected six months? Will US shale production fill in gap in supply? The developments bear watching.

“Domestic risks: Traffic. Lack of infrastructure. Weather. Political noise and the need to develop more discernment, so we can distinguish what is noise and what needs to be pursued.”

Anticipating more surprises and risks, Tetangco said the BSP will continue to:

• Pursue its mandate of price and financial stability; refine the Interest Rate Corridor instituted in 2016, enhance the governance of banks, and push the NSFI (National Strategy for Financial Inclusion) and NRPS (National Retail Payments System).

• Implement a flexible exchange rate policy that has served the country well during heightened volatility.

> Enhance its tool kit, which includes: Liquidity forecasting; EWS, BDI, PCIFS (Consolidated Index of Financial Stress); Banks stress tests; Macroprudential measures; and Rediscounting, Repo facilities, and regional firewalls.

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