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Oecd amro s1 13_philippines mr zeno ronald r abenoja

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2nd OECD-AMRO Asian Regional Roundtable

2nd OECD-AMRO Asian Regional Roundtable

Published in: Economy & Finance, Business

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  • 1. Policy Challenges for Asian Economies amid Global Liquidity Infusion: Some Philippine perspectives* ZENO RONALD R. ABENOJA Director, Department of Economic Research Bangko Sentral ng Pilipinas 2nd OECD-AMRO Joint Asian Regional Roundtable Singapore 19 July 2013 *The views expressed in this presentation are solely the responsibility of the presentor and should not be interpreted as reflecting the views of the Bangko Sentral ng Pilipinas (BSP).
  • 2. 2 I. Magnitude and impact of capital flows II. BSP policy responses to capital flows III. Early unwinding of QE in advanced economies IV. Key take-aways Outline
  • 3. I. Magnitude and impact of capital flows What drives capital flows? • Push factors in advanced economies Quantitative easing and low interest rates Fiscal concerns • Pull factors of emerging market economies Favorable growth prospects Higher returns 3 Official interest rates %, GDP-weighted average Source: IIF, January 2013
  • 4. Capital inflows for EMEs expected to remain strong 4 Source: Institute of International Finance, June 2013 in million US$ -4500 -2500 -500 1500 3500 5500 7500 2004 2005 2006 2007 2008 2009 2010 2011 2012 Q1 2012 Q1 2013 Direct Investment Portfolio Investments Other Investments Foreign Portfolio, Direct and Other Investments (in US$ million) Q1 2013 FDI: US$1,303 M FPI: US$2,352 M Other Inv:-US$1,347 M
  • 5. Foreign capital inflows to PH remain strong amid credit rating upgrades in million US$ -4500 -2500 -500 1500 3500 5500 7500 2004 2005 2006 2007 2008 2009 2010 2011 2012 Q12012 Q12013 DirectInvestment PortfolioInvestments OtherInvestments Foreign Portfolio, Direct and Other Investments (in US$ million) 5 Q1 2013 FDI: US$1,303 M FPI: US$2,352 M Other Inv:-US$1,347 M
  • 6. 6 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 Gross Foreign Portfolio Investments (InUS$ million) QE1 announcement, Nov 2008 QE2 announcement, Nov 2010 Op. Twist, Sep 2011 QE3 announcement, Sep 2012 QE4 announcement, Dec 2012 Successive QE rounds have been accompanied by a broad increase in gross portfolio inflows
  • 7. What has been the impact on the economy of strong capital inflows? • Liquidity – M3-to-GDP ratio has trended upwards – M3 level is 35% higher as of end-May 2013 vs. end-2009 • Credit/loans – KB loans up by more than 50% relative to end-2009 – Indebtedness is relatively low: 52% credit-to-GDP ratio 7
  • 8. Equity price indicators have trended upward 8 May :21.80 8.0 10.0 12.0 14.0 16.0 18.0 20.0 22.0 24.0 26.0 28.0 30.0 1997M01 1997M07 1998M01 1998M07 1999M01 1999M07 2000M01 2000M07 2001M01 2001M07 2002M01 2002M07 2003M01 2003M07 2004M01 2004M07 2005M01 2005M07 2006M01 2006M07 2007M01 2007M07 2008M01 2008M07 2009M01 2009M07 2010M01 2010M07 2011M01 2011M07 2012M01 2012M07 2013M01 Price-to-Earnings(P/E)Ratio January1997 - May2013 P/E Ratio Trend • But have corrected lately following signals of scaling down of QE measures from advanced economies - 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 1997M01 1998M01 1999M01 2000M01 2001M01 2002M01 2003M01 2004M01 2005M01 2006M01 2007M01 2008M01 2009M01 2010M01 2011M01 2012M01 2013M01 PhilippineStock Exchange Index January1997 -June 2013 PhilippineStock ExchangeIndex Trend
  • 9. II. BSP policy responses to capital flows 9
  • 10. Enhanced policy toolkit that includes macroeconomic policies, reform measures, … • Understanding the nature of FX flows • Greater exchange rate flexibility • Accumulation of reserves and sterilization operations • Liberalization of foreign exchange regulations • Financial sector reforms • Intensified macroeconomic surveillance and monitoring • Further strengthening of capitalization of banking system Implementation of Basel III capital requirements in 2014 10
  • 11. …as well as macroprudential measures Caveats on macroprudential policies • Not a substitute for sound macroeconomic policies • Activities could be driven outside the regulatory envelope • Unintended effects on growth or financial sector development 11 • Imposed higher capital charge on NDFs • Set a cap on NDF transactions • Disallowed placements of foreign funds in SDA facility • Intensified monitoring of banks’ real estate exposures • Approved reference standards for real estate activities
  • 12. Results of BSP measures 12 0 2 4 6 8 10 2007 2008 2009 2010 2011 2012 2013 YTD2013ActualInflation:2.9percent Steady inflation 18.5 23.0 33.8 37.6 44.2 62.4 75.3 83.8 76.1 81.6 3.8 4.2 5.8 6.0 8.7 9.5 12.1 11.9 0 2 4 6 8 10 12 14 0 10 20 30 40 50 60 70 80 90 2005 2006 2007 2008 2009 2010 2011 2012 Jun '12 Jun '13 FX Reserves (LHS) Import Cover (RHS) in billion USD no. of months More than adequate GIR 0.0 5.0 10.0 15.0 20.0 25.0 30.0 2008 2009 2010 2011 2012 2013 May 2013 13.1 pct Continued provision of credit Growth of KB loans Strong external payments position
  • 13. III. Early unwinding of QE in advanced economies 13 Possible adverse effects • Higher debt servicing costs • Correction in asset valuation • Credit crunch • Risk aversion and financial market volatility
  • 14. Recent volatility suggests that QE exit and higher US interest rates could have significant ripple effects 14 586.0 -305.3 183.7 333.4 106.3 -7.7 962.8 387.4 402.4 40.2 1,008.8 213.3 1,270.3 211.7 -395.1 1,131.1 -640.8 -23.0 -1000 -500 0 500 1000 1500 BSP-RegisteredNet ForeignPortfolioInvestments inmillion USdollars (20.0) (10.0) - 10.0 20.0 30.0 40.0 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 NetForeign Transactions NetForeignTransactionsinthePSE (inPmillion)
  • 15. Peso weakened amid heightened risk aversion On a year-to-date basis, the peso weakened against the USD by 5.5 percent to close at P43.34/US$1 on 15 July 2013 15 Peso per US dollar Exchange Rate (As of 15 July) Year-to-date Changes in Asian Currencies against US$ (In percent, as of 15 July)
  • 16. PHL equity price indicators corrected while spreads widened following Bernanke QE statement 16 Philippine Stock Exchange Index (PSEi) (In index points, as of 16 July 2013) Bernanke’s Congressional Testimony (22 May) -> FOMC meeting (19 June) -> Price Earnings Ratio of ASEAN Countries (As of 16 July 2013) EMBIG Spreads of ASEAN Countries (In bps, as of 16 July 2013) 5-Year CDS Spreads of ASEAN Countries (In bps, as of 16 July)
  • 17. Riding out the turbulence: Sources of strength of the Philippine economy • Policy space • Buffers Strong domestic growth Benign inflation environment Robust liquidity and credit growth Sound banking system Strong external payments position Ample FX reserves Strong external debt dynamics • Communication will be key 17
  • 18. • Liquidity provision measures Raise rediscounting budget; Reduce BSP’s reserve requirement, if inflation outlook allows; Lengthen the maturity of BSP lending instruments; and Enhance existing peso and US dollar repo facility. • Communication and coordination measures Engage in timely communication with financial institutions and market participants; Encourage firms with FX exposure to avail of hedging facilities; and Continue cooperation with other central banks for information sharing. Possible contingency measures against outflows 18
  • 19. IV. Key take-aways Philippine economy stirred but not shaken by the impact of capital flows • Global spillovers manageable given homegrown sources of resilience 19 There is policy space/flexibility to ride out headwinds • Macro stabilization through timely and calibrated monetary policy responses • Prudential measures in place to prevent financial imbalances • Recent corrections have adjusted risk premia • Contingency measures in place against possible outflows, tightness in financial markets
  • 20. Policy Challenges for Asian Economies amid Global Liquidity Infusion: Some Philippine perspectives* ZENO RONALD R. ABENOJA Director, Department of Economic Research Bangko Sentral ng Pilipinas 2nd OECD-AMRO Joint Asian Regional Roundtable Singapore 19 July 2013 *The views expressed in this presentation are solely the responsibility of the presentor and should not be interpreted as reflecting the views of the Bangko Sentral ng Pilipinas (BSP).