The stabilizing global economic recovery this year will re-strengthen external positions and allow the central bank to provide liquidity and dollar backup to the public and private sectors.

The International Monetary Fund (IMF) expects the Bangko Sentral ng Pilipinas (BSP) to maintain its current policy stance in the near term. “The weak growth momentum, well-anchored inflation expectations and contained cost pressures suggest monetary policies should remain accommodative,” the IMF explained. The international funding agency, similar with the BSP, sees inflation falling in 2009 but it will rise to 4.3 percent this year as commodity prices and growth recover.

For the external side, the IMF sees further growth in remittances which will boost the country’s foreign exchange stock. They expect fund transfers to grow by four percent this year and six percent next year, mirroring BSP's own projections.

They also expect foreign direct investments will close at $1.5 billion for 2009 and again echoing the BSP’s own forecast of $1.7 billion to $1.8 billion this year.

Central bank officials said that investor sentiment was still “relatively more subdued” because of the still-weak global economic recovery. Investments and short-term inflows came from the US, Japan, Hong Kong, and the Netherlands. The funds were channeled to the manufacturing, real estate, construction, services, financial intermediation, mining, trade/commerce, and transport/storage/communications sectors.

BSP Governor Amando M. Tetangco Jr., quoting an IMF report, said the global economy has reversed its downtrend. Government monetary and fiscal stimulus efforts helped bring in the recovery.
Initial signs of pick up, in varying degrees, are evident in the manufacturing sector, industrial production and retail sales.

In addition to putting up stimulus packages, governments, particularly in advanced economies, crafted measures to avert potential systemic collapse of their financial systems such as deposit and debt guarantees, as well as the recapitalization and clean-up of huge levels of toxic assets held by troubled financial institutions.

“These actions have been broadly successful in providing a much-needed boost to market and business confidence. In fact, latest data from the IMF’s financial stress index show that financial strains in both advanced and emerging economies have receded from historical highs registered in the early months of 2009,” said Tetangco.

As for the local front, the IMF’s outlook for the Philippine balance of payments (BOP) is actually more optimistic than that of the central bank’s. Their estimate is $6 billion for 2009 and $4.5 billion this year.

In its last BOP forecast, BSP Deputy Governor Diwa C. Guinigundo said the emerging number for 2009 is $4.9 billion, near the high end of the $4 billion to $5 billion forecast growth. As for this year, he calls the projection of $3 billion to $4 billion “still conservative.”

For fund transfers, Guinigundo expects these to moderately surpass the target of $17.1 billion for 2009 as remitters increase the amount sent home to fund household rehab efforts after the last two typhoons while the gross international reserves are seen to hit $45 billion, in all.

“Similar in 2009, we need to restock our foreign exchange hoard because the (National Government) have obligations to pay. The fund flows are expected to continue to be strong in the next months as the global front (confirms) the recovery,” the BSP official said.

But while the global growth outlook has turned positive, recovery is expected to be slow as risks to the outlook remain tilted on the downside.

“Financial sector health (although it has started to regain some strength) remains fragile; support from public policies will have to be eventually withdrawn; and households that suffered asset price busts will continue to rebuild savings, which means spending will continue to be moderate,” said Tetangco. “In short, there is recovery, yes, but it will likely be weak and protracted.”

Still fixated on inflation

The BSP’s primary mandate remains price stability.
Tetangco noted that the outlook remains that of manageable inflation expectations or a “within-target” inflation rates for both 2009 and 2010, continuing remittances from overseas Filipinos, a surplus BOP position, market-driven peso value and interest rates that are “responsive to (our) market’s needs.”

“(The) current low interest rate environment provides an interesting market backdrop for this point. Between a fixed coupon rate payable over the long-term and bank credit that is re-priced annually, the current environment appears to favor the former than the latter,” said Tetangco.

The December inflation has yet to be reported but increases in the price of sugar, chicken and other food products are expected to raise inflation. In fact the BSP said inflation will jump to 4.4 percent in the last month of 2009 from just 2.8 percent in November after supply shocks on certain commodities pushed prices up.

The BSP has revised its forecast on average inflation to 3.3 percent for 2009 from 3.2 percent. Inflation averaged 3.2 percent in the first 11 months of last year and the revised forecast suggests a projection of 4.4 percent in December. But, even with the uptick in inflation last month, inflation is expected to remain stable and well within the central bank’s targets and inflation expectations remain well anchored. The target remains at 2.5 percent to 4.5 percent. This year, the target is at 3.5 percent to 5.5 percent and the target for 2011 is three percent to five percent.

The central bank is on an inflation targeting framework which means that any action on monetary policy such as cuts or hikes in the reserve requirement or interest rates and the introduction of new facilities that would mop up money from the system will have to be geared towards meeting the target set with other economic managers.

Sustained low and stable inflation is largely on account of lower oil and non-oil commodity prices in the world market and well-anchored inflation expectations.

This has helped protect household purchasing power and allowed reductions in the policy rate to support the economy. And while commodity prices have been edging up recently, this has been at a tempered pace.

With inflation prospects remaining favorable, the BSP was able to boost liquidity at the height of the recent crisis through several measures.

Tetangco enumerated these actions – first, the BSP implemented a series of policy rate cuts by a total of 200 basis points since December 2008; second, the BSP lowered reserve requirements by two percentage points; and third, the BSP augmented its peso rediscounting budget to P60 billion.

“As a result, domestic liquidity expanded at double-digit levels (in 2009), providing the necessary resources to fuel banks’ lending activities and fund the country’s growth requirements. Outstanding commercial loans exhibited expansion during the year, although the rate of growth has moderated in recent months,” the BSP chief said.

Rediscounting and providing liquidity to banks

The last year showed a BSP providing the banking sector all the assistance it could give not only as a mandatory function of a supervisor but also as the official “helper” in times of need not only due to the global financial upheavals but also as helper when typhoons storm the banking business.

One of the facility for liquidity buffer is the BSP’s rediscounting loans, which have reached P165.35 billion as of the end of November. The facility is open to commercial, thrift and rural banks however in the last months, the BSP has been reviewing rediscounting policy to spread the amount more to the smaller and medium-sized banks since the big banks are taking more than 60 percent of the budget.

In November, of total availments about 61.5 percent went to commercial credits, 3.2 percent to agricultural and industrial credits, and 35.3 percent to other credits consisting of other services including capital expenditures, permanent working capital, housing and microfinance.

Last October, in response to the devastation to local businesses caused by tropical storms “Ondoy” and “Pepeng” the BSP approved an additional budget of P5 billion for the smaller banks as part of relief package. The Monetary Board, sources said, is also considering an additional P5 billion budget as special rediscounting for banks to refinance loans by small enterprises hit by the last two typhoons.

The BSP said 98 percent of the P60-billion rediscounting facility budget for 2009 has been availed of. For several months now the central bank has been reviewing the rediscounting facility to put a ceiling or limit per bank. The objective is to spread the facility to both big and medium-sized banks.

Loans and income

Independent BSP, a government owned and controlled corporation, has been careful in its finances and the managing of its assets so as not to repeat the P86-billion loss it suffered in 2007.

As of the end of the third quarter, the central bank’s total loans and advances amounted to P152.3 billion. Majority of these loans are released to the Philippine Deposit Insurance Corp. (PDIC) and rediscounted financing.

BSP loans and advances reported a marked increased of P22.4 billion in the first half of 2009 and has remained in the high levels until September. The central bank’s total loans to the PDIC amounted to P72.7 billion as of June last year. BSP, under its charter, is disallowed from giving a direct loan to a bank unless it was an emergency loan so all loans including financial assistance are transferred to PDIC.

As of September, the BSP’s total assets were P2.53 trillion from P2.3 trillion the same period in 2008 while total liabilities amounted to P2.23 trillion, also higher compared to year-before of P2.11 trillion. The BSP’s assets include its FX reserves of P2 trillion and domestic securities worth P250 billion.

Based on its latest financial statements, the central bank posted a P4.08 billion income by end of the third quarter, up from the same period in 2008 of P3.68 billion.

BSP also reported a P4.52 billion foreign exchange loss during the period, wiping gains of P2.72 billion of the previous months. In September, the peso depreciated to P47 from a high of P48 but the BSP was able to hoard up to $2 billion in the spot market which they report as swaps.

Independent BSP, the biggest source of GOCC dividends, has a total net worth of P237.96 billion as of end-September, which was lower year-on-year.

For its 2008 income the BSP paid dividends of P6 billion to the primary government. For 2009, sources said the remittance is expected to be higher than the programmed P1 billion.