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

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

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

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 2013FDI: US$1,303 MFPI: US$2,352 MOther Inv:-US$1,347 M

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 Q1 2012 Q1 2013

Direct Investment Portfolio Investments

Other Investments

Foreign Portfolio, Direct and Other Investments(in US$ million)

5

Q1 2013FDI: US$1,303 MFPI: US$2,352 MOther Inv:-US$1,347 M

6

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Jan

-08

Ma

r-0

8

Ma

y-0

8

Jul-

08

Sep

-08

No

v-0

8

Jan

-09

Ma

r-0

9

Ma

y-0

9

Jul-

09

Sep

-09

No

v-0

9

Jan

-10

Ma

r-1

0

Ma

y-1

0

Jul-

10

Sep

-10

No

v-1

0

Jan

-11

Ma

r-1

1

Ma

y-1

1

Jul-

11

Sep

-11

No

v-1

1

Jan

-12

Ma

r-1

2

Ma

y-1

2

Jul-

12

Sep

-12

No

v-1

2

Jan

-13

Ma

r-1

3

Gross Foreign Portfolio Investments

(In US$ 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

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

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

19

97

M0

1

19

97

M0

7

19

98

M0

1

19

98

M0

7

19

99

M0

1

19

99

M0

7

20

00

M0

1

20

00

M0

7

20

01

M0

1

20

01

M0

7

20

02

M0

1

20

02

M0

7

20

03

M0

1

20

03

M0

7

20

04

M0

1

20

04

M0

7

20

05

M0

1

20

05

M0

7

20

06

M0

1

20

06

M0

7

20

07

M0

1

20

07

M0

7

20

08

M0

1

20

08

M0

7

20

09

M0

1

20

09

M0

7

20

10

M0

1

20

10

M0

7

20

11

M0

1

20

11

M0

7

20

12

M0

1

20

12

M0

7

20

13

M0

1

Price-to-Earnings (P/E) Ratio

January 1997 - May 2013

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

19

97

M0

1

19

98

M0

1

19

99

M0

1

20

00

M0

1

20

01

M0

1

20

02

M0

1

20

03

M0

1

20

04

M0

1

20

05

M0

1

20

06

M0

1

20

07

M0

1

20

08

M0

1

20

09

M0

1

20

10

M0

1

20

11

M0

1

20

12

M0

1

20

13

M0

1

Philippine Stock Exchange Index

January 1997 - June 2013

Philippine Stock Exchange Index

Trend

II. BSP policy responses to capital flows

9

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

…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

Results of BSP measures

12

0

2

4

6

8

10

2007 2008 2009 2010 2011 2012 2013

YTD 2013 Actual Inflation: 2.9 percent

Steady inflation

18.5 23.033.8 37.6

44.2

62.4

75.383.8

76.181.6

3.84.2

5.86.0

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

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

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-Registered Net Foreign Portfolio Investments

in million US dollars

(20.0)

(10.0)

-

10.0

20.0

30.0

40.0

Jan

-11

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Jun

-11

Jul-

11

Au

g-1

1

Se

p-1

1

Oct-

11

No

v-1

1

De

c-1

1

Jan

-12

Fe

b-1

2

Ma

r-1

2

Ap

r-1

2

Ma

y-1

2

Jun

-12

Jul-

12

Au

g-1

2

Se

p-1

2

Oct-

12

No

v-1

2

De

c-1

2

Jan

-13

Fe

b-1

3

Ma

r-1

3

Ap

r-1

3

Ma

y-1

3

Jun

-13

Jul-

13

Net Foreign Transactions

Net Foreign Transactions in the PSE

(in P million)

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)

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)

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

• 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

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

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).