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The risks of 2017

Bangko Sentral Governor Amando Tetangco Jr. was guest of the Tuesday Club of newsmen, PR men and professionals last Jan. 10, 2017 at Shangri-La Edsa.   He enumerated the risks the economy faces during this 2017. He remains hopeful the strong and resilient economy could weather any storm —financial, economic, and political (what he calls political noise, including President Duterte’s expletives).  Would you believe he counts as among the risk to the economy Metro Manila’s traffic?

After serving two six-year terms as BSP governor, Tetangco bows out this year having done a good job.  His biggest achievement he says is “having stabilized the economy and strengthened its macro economic fundamentals.”  “We did our homework,” he gloats.

Here are his remarks:

Many events that are occurring today are not as we had expected in the first place. Consider, among others: Brexit, the Trump win, victory of populist parties in the Austrian and Italian referenda, and an OPEC agreement on cutting production (that has so far seemed to be enforced).

For 2016, there was sustained economic momentum

1. GDP was strong—7.1% in Q3, 71 consecutive quarters of positive growth (since 1999Q1), one of the fastest in emerging Asia

2.  Inflation—Strong growth occurred in sustained low inflation—1.8 pct. for 2016; looking at mid-range in 2017 and 2018 of 3.3 percent, up 83 percent.

3.   Banking system—sound and stable. Liquid, profitable, strong balance sheets.

4.  External position—robust, with gross international reserves (GIR) at end-2016 of $81 billion, slightly higher than that in 2015, still able to cover over nine months’ worth of imports and payments for services.

Why the resilience?

What allowed the Philippines to continue to be resilient, despite the surprises of 2016? Well, we did our homework and kept our own house in order.

For instance:

1. We had already put in place difficult but necessary structural reforms for over two decades now (e.g., value added tax, GCG (Governance Commission for Government Owned or Controlled Corporations), liberalizing important sectors like banking, and the Bangko Sentral Charter that guarantees BSP’s independence).  In other words, institutions are basically sound.

2.  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.

3.  BSP’s independence has allowed it to focus and deliver on its primary mandate of price and financial stability.

We are therefore entering 2017 with solid buffers.  And we certainly need these, given the risks that we anticipate going forward.

Risks in 2017

1. The biggest immediate threat that we face 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”. In other words, a snuffing up 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 GFC (global financial crisis).

• Immediate financial market volatility in turn comes from:

• Fed policy actions. In particular if actual Fed action and is significantly different from original market expectations.

• If faster rate hike than expected—Emerging market economies (EME) currencies, including the peso can depreciate faster; interest rates could also rise faster.

• If slower—can cause “risk on” so that EME currency depreciation would be slower.

• Asynchronous AE (advanced economies) policy—while Fed is hiking, European Central Bank (ECB) and Bank of Japan (BOJ) continue to provide stimulus.

2.  There are other risks:

• 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 weakening of remittances and slowdown in the BPO sector. While we recognize this is a possibility, we don’t believe the magnitude would 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

• 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.

What can you expect from the BSP?

1. Continue to pursue our mandate of price and financial stability.  We instituted the IRC in 2016 and we will continue to refine this as needed. We have a set of priority reforms on the supervision side, which includes further enhancing the governance of banks. We will also work to push the NSFI and NRPS. 

2. Continue to implement a flexible exchange rate policy. This has served us well during the period of heightened volatility.

3. Continue to enhance our tool kit, which now includes: 

a. Liquidity forecasting

b. EWS, BDI, PCIFS (consolidated index of financial stress)

c. Banks stress tests

d. Macro prudential measures

e. Rediscounting, Repo facilities, and regional firewalls

A period of possible surprises necessitates that we sharpen our surveillance.

4. Continue to coordinate with other agencies of government, knowing fully well that the pursuit of a stable macro economy is a shared goal. We need to coordinate with the DOF (on fiscal developments); BTR (Bureau of Treasury) and SEC (to pursue capital market reforms); FSF and FSCC (Financial Stability Coordinating Council)  on financial stability issues.

Conclusion:

The operating environment has indeed become more difficult. Noise and global economic developments are creating financial market volatility, which is complicating policy formulation and implementation.

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Topics: Bangko Sentral ng Pilipinas , Amando Tetangco Jr. , The risks of 2017
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