OBG talks to Amando Tetangco Jr, Governor, Bangko Sentral ng Pilipinas (BSP)

Interview: Amando Tetangco Jr

How can the central bank facilitate increased liquidity while maintaining sound lending principles?

TETANGCO TETANGCO JR: The BSP believes overall liquidity conditions are appropriate to support the country’s growth requirements. Domestic liquidity grew by 6.3% in December 2011 to reach P4.7trn ($106.7bn).

Given ample liquidity, commercial banks’ loans have been growing at double-digit rates since January 2011 and have been supporting economic activity. Loans for productive activities, which comprise more than four-fifths of banks’ total portfolio, grew by 20.1% in December 2011, led by higher lending to wholesale and retail trade, manufacturing, electricity, gas and water, real estate, among others. We expect this trend to continue as the economy is expected to sustain growth in 2012.

To further boost lending, the BSP relaxed the single borrower’s limit (SBL) rules for exposures of banks to oil companies and infrastructure. In January 2011 the Monetary Board (MB) approved an SBL of 15%, on top of the 25% regular SBL for borrowings of oil companies to finance oil imports for a non-extendable period of two years. Earlier in November 2010 the MB approved a separate SBL for infrastructure and/or development projects undertaken under the government’s public-private partnership (PPP) programme. Under the new guidelines, banks can extend the equivalent of up to 25% of their net worth as loans, credit accommodations and guarantees for infrastructure projects covered under the PPP programme. The separate SBL is being provided within a limited three-year window from the regulation’s implementation. To balance lending with the need to promote sound banking practices, control measures were included in the new SBL guidelines. Lending banks are now required to provide the BSP with a plan for managing the credit risk concentration arising from such exposures to oil companies and infrastructure projects.

While banks continue to be the main funding source, firms have increasingly tapped the equities and bond markets. In 2011, capital-raising activities taking place on the Philippine Stock Exchange grew by 28% to P109bn ($2.47bn). Bond issuances by the private sector, while lower than the previous year, amounted to P184.9bn ($4.2bn) in 2011 – significantly higher than the average volume for the past 10 years. The BSP will work with industry players and other institutions to accelerate the domestic capital market’s development, giving local firms an array of funding options.

How can the BSP help the Philippines avoid investor speculation and market bubbles?

TETANGCO: The BSP has adopted a pragmatic approach in crafting policy to address capital flows. We have adopted what I call our enhanced policy tool kit. We distinguish the flows by their nature. A large portion of inflows are structural in nature, such as remittances from overseas Filipinos and receipts from the business process outsourcing sector. For these we would allow some exchange rate appreciation, balanced by an appropriate build up in reserves. For more speculative inflows, macroprudential regulations are better suited.

Macroprudential measures already in place have so far helped make the country less vulnerable to asset price escalations. These regulations include the statutory limit on the share of real estate loan to banks’ total loan portfolio and the maximum loan-to-value ratio for real estate loans. These are complemented by measures to further liberalise the foreign exchange regulatory regime. In addition, the BSP adopted measures to encourage the development of local currency bond markets and instruments for hedging foreign exchange risk. Given surges in capital flows, the BSP has maintained its policy of a market-determined exchange rate with scope for official action only to smoothen large short-term fluctuations in exchange rate movements. The BSP does not go against the fundamental exchange rate trend. This is a policy the BSP has found both equitable and efficient. The combination of the foregoing measures has allowed the BSP to achieve the government’s inflation target even with large capital flows.