2nd OECD-AMRO Asian Regional Roundtable

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).