Global tempests test Phl resilience

HOW DID the Philippine economy fare in 2015? Can it weather global and domestic challenges in the new year? What lies ahead in 2016, an election year?

Listen to Gov. Amando Tetangco Jr. of the Bangko Sentral ng Pilipinas address macro questions in the minds of consumers, businessmen and policymakers in remarks before the Tuesday Club forum on Jan. 5 at the Edsa Shangri-La in Mandaluyong.

Describing 2015 as a “balancing act between global forces and domestic resilience,” the Central Bank chief said:

“The year 2015 was yet another challenging year for policymakers worldwide. Growth in the global economy remained uneven. Global financial markets gyrated with the market’s reading or mis-reading of the US Federal Reserve’s timing on its policy rate lift-off. Oil prices fell sharply as global supply surpassed global demand, raising concerns over deflation risks in a generally weak global environment.

“On the domestic front, policymakers were confronted with challenges related to lower-than-programmed government spending during the first half of 2015; concerns brought by the intensification of the El Niño phenomenon; the broad decline in exports as a result of sluggish external demand (with positive growth posted only in March 2015), and the weakening of the domestic currency vis-à-vis the US dollar attributed mainly to market expectations of an interest rate lift-off by the US Fed.”

But the Philippine economy showed resilience, he said, despite these global downside risks and domestic challenges. The economy grew 6.0 percent in Q3 2015, making it one of the fastest-growing economies in Asia in the first three quarters.

Tetangco cited these indicators to explain the resilience of the economy last year:

• Government spending made a strong comeback, growing 17.4 percent during the third quarter, from a negative growth (2.5 percent) in the same period in 2014.

• Consumer spending remained robust supported by benign inflation and improving employment conditions.

• The financial system stayed sound, stable, and inclusive, supported partly by sustained banking reforms and “financial inclusion” efforts pursued by the BSP.

• The external current account remained in surplus and improved external payments dynamics helped shield the economy and the financial markets from volatility.

• Current account position sustained its surplus ($5.6 billion or 2.6 percent of Gross Domestic Product in January-September).

• Remittances from overseas Filipinos continued to be strong ($20.6 billion for January-October).

• International reserves remained at a comfortable level ($80.6 billion as of end-November, equivalent to 10.3 months of import cover).

• External debt-to-GDP ratio continued to improve (26.0 percent as of end-September 2015 vs 50.2 percent in 2006).

• Third-party sentiment on the economy’s prospects remained bullish. For example, Fitch upgraded in September its outlook on the Philippine economy to “positive” from “stable.”

The country’s first line of defense against external shocks, according to the BSP governor, is “keeping one’s own house in order” or by sustaining strong macroeconomic fundamentals.”

• Tetangco sees ‘dynamic stability’ in 2016

WHILE indicators point to the sustained resilience of the economy, Tetangco said the BSP will continue to monitor these key risk factors on the global front:

1. Growth prospects in major emerging market economies, particularly China, and major advanced economies, such as the US, Euro area and Japan. “As these economies are our major trading partners, we are cautious of how their economic growth paths will evolve in 2016,” he said.

2. The impact of the speed and magnitude of interest rate adjustments by the US Fed – in particular, the knock-on effects on the direction of global capital flows, movement of exchange rates, and the resulting implications on domestic financial asset valuations and domestic debt as these are re-priced or refinanced.

3. The trajectory of oil price movements and their impact on oil-exporting economies, such as Saudi Arabia, that host a significant number of Filipino workers. This also has implications on global and domestic inflation.

On the local front, Tetangco noted that (a) El Niño is predicted to be harsher and prolonged, and (b) the results of the May national elections could influence global perception of Philippine growth prospects.

While baseline forecasts show that inflation could settle slightly below the inflation target range for 2015 due to low inflation outturns in recent months, inflation is projected to return gradually to the target range of 2 to 4 percent in 2016-17.

The facilitate flow of monetary policy, the BSP will adopt an Interest Rate Corridor for its monetary operations in consultation with market players. Under the IRC, money market interest rates are expected to move within a reasonable range close to the BSP-set level.

For greater financial stability, Tetangco said the BSP will continue with the Basel reform agenda and policies aimed at enhancing bank risk management, improving market conduct and strengthening banking supervision.

He sees the US dollar poised for another strong year. “We will not go against this fundamental trend, but will continue to utilize our presence in the FX market to limit periods of unusual volatility in the peso,” he said.

On “financial inclusion,” he said the BSP will continue to carry out the National Strategy for Financial Inclusion developed with other government agencies, and pursue the National Retail Payments System to make the payments system more inclusive.

Tetangco said: “It is important that we remain nimble and flexible in the face of shifts in our operating environment. We need to work towards achieving what, in aerodynamics, is called ‘dynamic stability.’”

He described “dynamic stability” as how an aircraft behaves when its original flight is disrupted. It refers to the plane’s “ability to oscillate and use inherent restoring characteristics to stabilize.”

In an economy, he said, “sound macrofundamentals always serve as inherent stabilizers.” “For the Philippines, our positive growth prospects and solid macrofundamentals will be the overriding pull factors to keep the economy steady on its course,” he added.

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