BSP Governor Amando Tetangco briefs FOCAP on inflation and the Philippine economy

Again, notes on a press briefing. This time, Bangko Sentral ng Pilipinas Governor Amando Tetangco briefs the Foreign Correspondents’ Association of the Philippines (FOCAP) about what to expect for the Philippine economy this year and next year. Reminder, these are notes. These are not the exact quotes and are intended only for background information, and not for quotation, or publication.

Q: when you said that in the last two years policy has been neutral bec of what’s happening, in last two months very aggressive in addressing inflation yet many analysts say that rp, along with other asian central banks, are still behind in addressing inflation.
A: we have followed the prudent approach at the bsp and this has been communicated to the markets. earlier this year what we were seeing was inflation basically caused by supply side factors. the increase in inflation was not unexpected. in latter part of last year we said inflation bound to tick up. but no one…anticipated the virulence and the length of the price spikes in oil and food. in the earlier part of this year we maintained our policy rate. we were reducing interest rates up to january and then we paused. we wanted to observe further developments in terms of inflation picture. when we started to see that core inflation was rising, and inflation was becoming more generalized, plus second round effects were beginnign to seep in, the bsp acted promptly by increasing interest rates. we increased in jun by 25 basis points and again in july by 50 basis points. to put this in the proper context, first round effects of supply shocks would normally be accomodated by monetary policy. monetary policy has limited impact when inflation is mainly coming from supply side. but if inflation starts to spread – and we are looking at the commodities at the cpi whose inflation rates was beyond 5% – target last year was 4% plus or minus. and what we have seen, in late first quarter and second quarter, a number of commodities rising…the current set would include elements from preceding set…the number was increasing, and the commodities where the inflation rate in excess of 5% were also there. it became quite clear that there was a more generalized increase in prices. and then of course the second round effects, wage increases and transport fare hikes. the initial increases factored in…in case of wage increase timing anticipated…we can see that the sentiment of labor is for further wage hikes…and more fare hikes…monetary board acted…decision in june plus decision in july showed that monetary board is prepared to really address issue of inflation which is at top of bsp policy of priority.
Q: will you be willing to sacrifice growth in process of controlling inflation?
A: what we want to establish is price stability…consistent and supportive of sustained econ growth. there may be costs in the short run, but the way we analyze it…sources of growth as i mentioned on the production side is services, and services is not as capital intensive…on expenditure it’s consumption, driven by the continuing increase in overseas filipino remittances. the impact of this policy move by bsp is not going to be large on output, the impact on outputs not going to be that large. looking ahead, really important that low inflation envt is established. cost to econ of prolonged high inflation could be even higher. so we have to act now. it has always been inflation…there are concerns on how impact on econ growth.
Q: comments that it is in asia where epicenter of inflation located…thoughts about suggestion from indon central bank gov of coordinated response to inflation?
A: made comment earlier that if markets saw concerted effort among central banks to tackle inflation, effort would have more effective impact on inflation. if central banks together move to fight inflation, would have bigger impact on inflation environment. epicenter…hard to say because global inflation is being caused by a number of factors. immediate causes high oil and food prices. what is behind high oil, food prices?many things. it it not just demand, but it is also what is happening in financial markets. and what is happening in financial markets is clearly not taking place in asia, it’s taking place in other parts of the world. so i would not see that characterization as accurate and this is because inflation has many causes, and these causes are from different parts of the world.
Q: what kind of concerted action needed?
A: seeing that now, in fact already started. central banks have shifted to tightening bias. markets are beginning to recognize this, there is now a serious steps being taken by central bank to address the problem of inflation.
Q: just tightening monetary policy not enough?
A: that will then lead us to areas outside the jurisdiction of central banks. if you focus on monetary policy the picture will not be complete. there’s a menu of option that will include supply side measures in order to address this problem of inflation which in our case is from abroad, global in character,and addressed mainly supply side factors. there’s a need to improve productivity, distribution systems so goods can be efficiently delivered to proper markets. there’s a need to improve overall financial conditions in the economy including the health of the banking systems in the different countries.
Q: measures implemented by different countries underway?
A: in the case of rp, we have the monetary policy actions, at the same measures that had been pursued by depts like the dept of agri to improve farm output…that will contribute to easing…
Q: we’ve already passed first half of year…initial estimates on first half of gdp and inflation figures for 2008…give us some forecast for 2009?
A: let me talk about inflation. as i mentioned earlier, inflation projected to average between 9-11%. so far up to the first half of 2008, average 7.6%. this would indicate that inflation will likely tick up some more in the months ahead. and last week we announced it could peak at around 12%. on a year to year basis for certain months this year. but average for whole year, jan to dec 2008, is projected at bet 9-11%. if you look at trend of inflation, further uptick to slightly 12%, stay there for few months before starting to go down towards 4th quarter of this year. that downtrend in inflation will continue in 2009. likely that we will see year on year inflation at double digit levels up to first quarter of 2009. for whole year of 2009 the average inflation now projected at between 6-8%. gdp…that’s the area of neda but we expect that because of the buoyant econ conditions, econ will continue to grow… different forecast of agencies and institutions, almost all forecast gdp of more …anything between 5-6% respectable growth given prevailing conditions (2009) that would depend on a number of factors including what happens to inflation. right now we’re saying there’s going to be a downtrend…lot also depends on what happens to export markets, particularly US. domestic demand continues to be quite strong, that should support sustained growth in 2009. we continue to forecast an increase in overseas remittances which should buoy consumption next year plus bpo sector continue to be robust.
Q: in terms of ofw remittances…growth rates?
A: for this year the projection is at 10% growth. so far for the first 5 months, 14.7% actual so it’s slightly above. for 2009 also projecting a 10% growth for overseas filipino remittances. there continues to be demand for filipino fact the poea issued report showing the number of
deployed workers in first half of 2008 up by 33%. that’s the first reason. the second is there are filipinos willing to work abroad so there’s a demand and supply condition that should provide for the expectation that remittances will continue to grow. in terms of demand, people asking whether affected by subprime and credit crunch far we haven’t seen that happen. think there are also other sources of demand that tend to upset possible slowdown in some of our labor markets. there continues to be strong demand from middle east.the middle east countries benefitted from high price of oil and there’s lot of construction, lot of econ activity. some countries (have) aging population…
Q: no softening?
A: yes, that’s right.
Q: how crucial are remittances to econ overall…if that disappears, or halved, how much would we suffer?
A: remittances…account for about one tenth of gdp, one tenth of econ. it’s significant…merchandise trade deficit but current account surplus, meaning the trade deficit is being covered by remittances. 17.4b expected in remittances this year. significant from balance of payments, foreign exchange point of view. about 1.4b every month. this fuels consumption. and there is normally a lag between inflow of remittances and transformation of remittances into actual demand or consumption. so if you see an increase in remittances now, impact on domestic econ would be later, maybe
following quarter. given this robust growth in remittances, this should help support sustain econ growth.
Q: fight against inflation more impact..we belong to asean, have econ cooperation…regional steps like in 1997 crisis…meeting, systematic cooperation to fight?
A: there are regular meetings of asean central banks and during these meetings current policy issues are being discussed. there is continued discussion among central banks in region and how to cope with increase or acceleration.
Q: not one game plan for region…?
A: i think we see a trend. among the central banks in the region, the trend is towards tightening. but there is no specific plan that each and every central bank is supposed to…there are differences in econs of different countries. these differences have to be taken into account in reaching a decision in monetary policy by central banks.
Q: have these meetings become more regular?
A: we have regular meetings. the central banks in the region are now closer in terms of exchange of info, in terms of discussions, important policy issues or topics. sometimes we don’t even have to set up formal meeting, you just pick up phone and call up counterpart…
Q: have you done that?
A: calling, something that central banks, not only governor, even central bank officials and staff also call their counterparts in other countries. closer cooperation now..
Q: why would inflation go down?
A: start coming down during fourth quarter. what will bring that about? we have seen some moderation in increases in food prices. while oil has continued to be volatile, it’s still elevated, but it is not rising as fast as have seen in the past, at some point clearly the market mechanism will have to kick in, certain price level consumption will have to decline. impact prices in the future..if global slowdown, moderate future increase in oil prices. other thing is statistical base effects…we had low inflation rates last year…and then it picked up starting first quarter. now you’ll have the reverse, base effects going to latter part of this year and 2009. trend in headline inflation, bet dec 2007 and jan 08, pick up of one percentage point. as i mentioned earlier, that was assessed to be due to supply side factors so we had to wait for other information, wait to see other indications of where inflation rate is going, effects on supply side would be..we stopped cutting interest rates when that happened. as soon as we saw inflation spreading…even if oil prices increase, not as fast as increase we have seen in the past. good if oil prices decline, that’s also a possibility, because today at 126. they went down again…the market has got to adjust…just reading the reports coming from the us, car industry…even manufacturers have adjusted no longer producing the gas guzzlers. the market mechanism will have to kick in at some point.
Q: impact on inflation of suspended vat on oil?
A: if that leads to reduction in domestic oil prices, or deceleration in increase, that would be positive for inflation. it intends to maintain vat. and there are other measures implemented by govt to help address high oil prices like suspension of import tariffs and then to help marginalized sectors there’s also targeted cash subsidy…it’s supposed to be a well-focused program, targetting poorest of poor. important that fiscal consolidation is maintained. has to be clearly demonstrated. an increase in revenue collection can provide flexibility to govt to help those most affected by global factors.with more resources govt in better position to provide assistance to those who help it most. collect taxes, and pursue infrastructure programs and at the same time have resources for extending assistance to poorest of poor.
Q: what is helping econ growth is strong bpo industry and remittances..banking system remains strong…these are main factors, what are the other factors…projections for bpo industry?
A: if you look at national income accounts for first quarter, services grew fastest. in services you have bpo, and then you have tourism..sector with huge potential. that has to be developed. there’s still a great deal of potential in tourism. infra is required to develop. idea is to make access easier to beautiful places in phils…national income accounts from expenditure side, it’s consumption. consumption contributor even in 1997. during that period, countries showed negative growth rates. we did not and that’s because consumption continued to grow. and consumption is significantly driven by remittances, demand for merchandise, by beneficiaries of overseas filipinos. increase in
remittances now will support consumption in the future. those are the things that contribute to buoyant demand conditions…
Q: were you saying the central bank limited to tightening monetary policy because that is your province…nothing more that can be done to help inflation now?
A: in the short term, monetary policy would be basically geared towards controlling inflation. it’s monetary policy that’s the main tool for controlling inflation by central bank. in terms of how it’s done, also important to manage the public’s inflation expectations. bec if inflation expectations become unhinged, that can lead to expectations of higher inflation and demand for wage increases, transport fare hikes,and can lead to vicious cycle. we have to be able to manage inflation expectation properly and avoid a disanchoring of inflation expectations. on supply side, there’s scope for banking policies that would encourage more credits and more loans to agriculture and other sectors of the econ…and this we have been pushing..more credits to sme sector. pretty soon we’re going to launch a credit surety fund, next month. that will encourage banks to lend more to micro, small and medium enterprises. surety fund that will be put up by well ranked coops with local govt in area where these funds will be put up. provide surety or a form of insurance to the loans that will be provided by the banks to micro and small medium enterprise. in case of a default, the bank can collect very quickly from the surety fund. it’s a guarantee. bank will have to demonstrate exhausted all means of collected before guarantor. surety fund is very quick, you don’t have to wait very long. pilot it in one of the provinces, in cavite. working now with the prov of cavite and a number of cooperatives from the place. no amount yet, at this point in time
Q: loan amount?
A: would be the regular average amount one normally gives to micro or small enterprise. micro up to 150k. average loan more like in the 20k. smes bigger. smes no definition of how much loan
is…defined in terms of total amount of assets…could be for any sector that would have a requirement for this type of loan…
Q: where will money come from?
A: from their own fund. hopefully able to replicate in other parts of the country, as soon and as fast as we can. what is important here is there are well-run cooperatives in the province and the local govt is interested in participating. we have those ingredients in province of cavite.
Q: those taking on loan won’t be required to have collateral?
A: still except micro. tried to simplify documentary requirements, in fact micro enterprises don’t have to have collateral so no need for documentary…micro also don’t have to submit itrs, another simplification of documentary requirements…exemption from submission of itrs in province of bir, time bound, supposed to expire oct this year. plans to request for extension…
Q: oil prices…how much drained from econ by higher oil prices?
A: import about 110m barrels of crude oil products every year. for every dollar increase that’s 110 m dollars. rp also able to diversify energy sources, oil accounts for 36% in energy mix. geothermal, hydro, natural gas. we’ve been able to reduce dependence of phil econ in imported oil over the years. the 36% is there mainly because the transport sector still almost 100% dependent on oil.
Q: liquidity?
A: have to see when we get the final numbers. liquidity is one of the indicators that we look at to judge whether there is enough money in the system. the other one is credits, and credits have been
going by 10-12%. so the companies that require financing have access to credit, continue to have access to credit market. in addition to this…can also raise funding from bond and equity market. not limited to credit market have other options. this is because financial markets have improved in phils.
Q: on inflation…peak in oct?
A: the peak..the numbers we’re looking at for third quarter start of 4th quarter, tend to cluster. there is basically a levelling off…looking at specific figures, there can be some moderation already in early part of fourth quarter. oct. but slight moderation…peak is not oct, earlier than that but moderation starting october. the trend…we can just focus on trend…still uptick, then levelling off. it will flatten…the curve, and start coming down in the fourth quarter.
Q: conditions after hike how much tightening?
A: have to asses that.
Q: foreign exchange…weakness longer or temporary?
A: we have seen the hikes..peso recovered since that time in reaction to policy of monetary board. reacting positively again to lower oil prices, opened at 44…below the close…there’s fundamental
support coming from the balance of payments.
Q: fdi how look compared to 6months ago?
A: we think that fdi by non residents in phils would be approximately the same as last year.
slightly lower but in vicinity of figure that we saw last year. there are investments in pipeline particularly mining, bpo, manufacturing. if you look at companies that plan to invest in phils this year, more or less get the same amount.


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