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BSP AR 2010 with ERM Inputs

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BSP AR 2010 with ERM Inputs C O N T E N T S The Governor’s Foreword Introduction About the BSP Our Vision and Mission The Monetary Board The Management Team List of Acronyms, Abbreviations and Symbols Part One: The Philippine Economy Domestic Economy 1 Aggregate Output and Demand 1 Labor, Employment and Wages 3 Prices 4 Operations of the National Government 5 Box Article 1: Development of Chain-Type Measures of GDP and Price Indices in the Philippines 7 Monetary and Financial Conditions 9 Monetary Conditions 9 Monetary Aggregates 9 Interest Rates 10 Exchange Rates 12 Box Article 2: Coping with Surges in Capital Flows: The Philippine Case 17 Financial Conditions 21 Performance of the Banking System 21 Stock Market Developments 27 Debt Securities Market Developments 31 Credit Risk Assessment 35 External Sector 38 Balance of Payments 38 International Reserves 42 External Debt 43 Part Two: The Operation s and Policies of the BSP Monetary Stability 47 Financial System Stability 48 Box Article 3: Implications of the Global Financial Regulatory Reforms for Monetary and Financial Stability 53 Payments and Settlements System 57 Key Operations of the BSP 59 Loans and Credit 59 Asset Management 61 International Reserves Management 63 International Operations 64 Notes and Securities Printing 65 Mint and Refinery 66 Currency Issuance and Retirement 67 Economic Research, Statistical and Information Dissemination Activities 68 Box Article 4: Reserve Accumulation in the Philippines 76 Supervisory Research Activities 79 Branch Operations 81 Advocacy Programs 82 i Institutional Building 89 Major BSP Infrastructure Projects 100 International Economic Cooperation 101 Part Three: Financial Condition of the BSP BSP Balance Sheet 111 BSP Net Income 112 List of Statistical Tables 113 ii The Governor’s Foreword The Philippine economy emerged from the global economic turmoil with a solid performance in 2010. Sound macroeconomic policies, the sharp recovery of exports, strong external payments position, and upbeat confidence in the new government underpinned the favorable economic performance during the year. Output growth was achieved amid a low-inflation environment. The country’s external payments position remained strong, allowing for the healthy build-up of international reserves, helping ensure external debt sustainability, and strengthening the country’s resilience against external shocks. Continuing reforms in the banking system have sustained its soundness and stability, enabling it to perform a catalytic role for a more dynamic and participatory economic development. Real Gross Domestic Product (GDP) rebounded by 7.3 percent, the highest growth recorded in 34 years. Economic expansion was led by the services and industry sectors. On the demand side, exports and investments were the main growth drivers supported by strong private consumption. Inflation remained low and stable. Headline inflation averaged 3.8 percent, well within the Government’s target range of 3.5-5.5 percent for the year, but higher than the 3.2 percent average in the previous year. Lower food inflation due to favorable supply conditions in the domestic market was more than offset by higher non-food inflation due to the surge in the prices of electricity and petroleum products. The relatively benign inflation environment afforded the BSP the flexibility to keep policy rates steady during the year. The BSP’s main policy lever, the overnight reverse repurchase (RRP) rate, was kept at 4 percent as inflation pressures remained subdued. At the same time, with economic recovery underway and financial markets starting to normalize, the BSP gradually unwound the liquidity- enhancing measures it implemented in 2008-2009 to ensure that ample liquidity was available during the global financial crisis. The peso rediscount rate was aligned with the overnight RRP rate while the peso rediscounting budget was lowered from P60 billion to the pre-crisis level of P20 billion. Requirements for the availment of the rediscounting facility were likewise brought back to their pre-crisis terms. At the same time, liquidity and credit remained supportive of growth. As of December 2010, money supply continued to grow at 10.6 percent and bank lending expanded at the rate of 8.9 percent. Average bank lending rate declined to 7.22 percent as of end-December 2010 from 8.19 percent in end-December 2009 as banks passed on the BSP’s interest rate reductions to their borrowers. The economy’s external sector also exhibited solid performance with the balance of payments (BOP) yielding a surplus of US$14.4 billion in 2010, buoyed by strong overseas remittances and business process outsourcing receipts as well as the notable recovery of exports. Cumulative remittances from overseas Filipinos (OFs) coursed through the banks increased by 8.2 percent to US$18.8 billion providing strong support to domestic demand as it accounted for close to 10 percent of the country’s GDP. Foreign investment and other financial flows likewise contributed to the large external payments surplus. As a result, the gross international reserves (GIR) of the BSP rose to US$62.4 billion as of end-December 2010, a 41 percent iii increase from the previous year. At this level, the end-2010 GIR was sufficient to cover 10.3 months’ worth of imports of goods and payments of services and income, or alternatively, it could cover more than five times the country’s short-term external debt based on residual maturity which include all outstanding short-term debt maturing during the year plus principal payments on medium- and long-term loans falling due in the next 12 months. The strong external liquidity has kept the Philippine peso broadly stable and competitive. In tandem with its regional peers, the peso appreciated by 5.6 percent to an average of P45.12/US$1 in 2010 from an average of P47.64/US$1 in 2009. As measured by the real effective exchange rate (REER) index, the peso maintained its external competitiveness vis-à-vis competitor currencies in the narrow basket (composed of the currencies of Indonesia, Malaysia, and Thailand). Meanwhile, the country’s external debt service capacity remained comfortable, with the debt service ratio dropping to 8.8 percent in end-2010 from 10.4 percent in end- 2009. This was achieved in spite of the increase in the country’s external debt to US$60.0 billion as of end-2010 from the US$53.3 billion posted in end-2009. The Philippine financial system remained fundamentally sound and stable. In its Philippine Financial System Stability Assessment Update in January 2010, the International Monetary Fund described the Philippine banking system as well- capitalized and its asset quality as generally high. Banks’ capital adequacy ratio stood at 15 percent, comfortably above the 10 percent prescribed by the BSP and the 8 percent set by international standards. Non-performing loans remained low at just over 3 percent of total loans. The strength of the banking system was boosted by the BSP’s sustained efforts to enhance the delivery of financial services in the economy by opening further the doors to financial innovation, and by promoting greater market discipline and more competition. The BSP as operator of the Philippine Payments and Settlements System (PhilPaSS ) continued to provide safe, sound and efficient payment and settlement of financial transactions in real time. Both the volume and value of transactions coursed through the PhilPaSS increased during the year as the real sector and financial markets bounced back from the slack in business activity resulting from the global financial turmoil in the previous year. The Philippine stock market index posted a high of 4,397.3 index points in November 2010 while the country’s debt spreads continued to narrow as investors’ risk appetite for emerging market assets increased. Beyond the preservation of monetary and financial stability, the BSP continued its advocacies to promote inclusive growth and help alleviate poverty. The BSP’s proactive stance in microfinance was evident in the implementation of various initiatives to support the development of a sustainable microfinance business environment in the country. It expanded further the access to mainstream financial products and services by the unbanked and underserved population. In recognition of this commitment to promote microfinance, the Philippines earned anew the overall iv best regulatory environment for microfinance, along with Cambodia and Pakistan. 1 In terms of the overall microfinance business environment, the Philippines moved up to number two position in 2010 from the number three slot in 2009. The BSP’s support of the Credit Surety Fund Program (CSFP) was another of its major initiatives to advance financial inclusion during the year. The CSFP provides surety to micro, small and medium enterprise-borrowers that generally are not able to provide collateral to the banks. The BSP assisted in expanding the reach of the CSFP with the launching of the program in Albay, Dipolog City, and Occidental Mindoro, resulting in a total of 14 CSFs launched as of end-December 2010. Meanwhile, through its Economic and Financial Learning Program (EFLP), the BSP continued to promote greater public awareness of economic and financial issues and provide information to enable households and businesses to make well-informed economic and financial decisions. The BSP also extended its campaign to promote a culture of saving among overseas Filipinos (OFs) and their families and encouraged the use of these savings in productive investments. In 2010, nine financial learning campaigns (FLCs) attended by 960 participants were conducted within the Philippines, while two international FLCs attended by 360 participants were held in Bahrain and Qatar. The BSP continued to promote a supportive environment for remittances by encouraging banks to further reduce their remittance charges. As of end-December 2010, 12 banks that handle OF workers’ remittances agreed to use the BSP’s PhilPaSS (the infrastructure support for real time gross settlement) as their link to sending remitted money to the beneficiaries’ accounts in other banks thus reducing transfer costs.
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