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Sunday, December 17, 2017 | MANILA, PHILIPPINES
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Date posted: Monday, May 29, 2017 | Manila, Philippines

The art of ‘sandbox’ central banking (Q&A with BSP Gov. Amando M. Tetangco, Jr.)

IN THE last 12 years, the Bangko Sentral ng Pilipinas (BSP) has cemented its position among the world’s best central monetary authorities, in turn helping establish the country as one of the most promising emerging market economies. Under the leadership of Mr. Tetangco, the BSP was credited for minimizing the impact on local banks of the Global Financial Crisis. In its aftermath, Mr. Tetangco’s BSP put in place reforms to insulate the banking system from future crises, and to make it more responsive to a shifting environment marked by disruptive innovation and evolving consumer demands. For all of the above (and more), Mr. Tetangco has received numerous accolades, including recognition as a grade-A central banker by the New York-based Global Finance for eight straight years. An old hand at the BSP, Mr. Tetangco worked his way up to the top post in 2005 and was reappointed in 2011, making him the only governor to have served for two terms. As he prepares to hand over the reins to his successor, BusinessWorld Research sought out Mr. Tetangco’s thoughts on the future of the BSP, the banking sector and the Philippine economy. Below are excerpts of his e-mailed response:

Would you say that the economy is on a stronger footing -- and in better hands -- by the time you step down, as compared to when you first assumed the governorship?
The numbers speak for themselves. Inflation has been contained. It was 7.2% at end-first half 2005. The average was 1.8% in 2016, and has gone up to 3.2% year-to-date 2017. The 2017 outturn while higher is still well within the national government target range of 2-4%. Our forecast over the policy horizon is that inflation would slowly rise until third quarter 2017, but then taper off such that the full year averages for 2017-2018 would be within the national government target range of 2-4%.

The banking system has tripled in asset size, been consistently capitalized at levels above both the national requirement of 10% and the BIS (Bank for International Settlements) standard of 8%, with NPLs (non-performing loan) steadily decreasing to less than 2% [of total loan portfolio] from close to double digit at the start of my term.

The external liquidity indicators have also been good. GIR (gross international reserves) is now able to cover about 9 months’ worth of imports of goods and payment of services, a multiple of three times compared to the standard reserve adequacy metric. And external debt-to-GDP (gross domestic product) is now less than half of what it was in 2005.

The BSP is stronger as an institution now, in terms of governance, with our targets and output founded on a vision -- to be a world-class monetary authority that delivers a high quality of life for all Filipinos -- and a mission -- to conduct sound monetary policy and effective supervision over institutions under our jurisdiction. We have strategy themes that give our actions and initiatives direction: these are principles of good governance, operational excellence, engaged stakeholders and organizational readiness. I believe that now, more than ever, BSP officers and staff -- a continually improving competent and committed team of professionals -- have a strong sense of identification with our goals and our brand.

Moreover, our policy framework is well-articulated and we have an enhanced policy tool kit. We have improved surveillance methods. Further, we do not craft policies in a vacuum as we continually engage and consult our stakeholders. We take market comments into consideration.

While challenges still remain, I believe that in the near term, the Philippines will continue to enjoy a strong and sustainable growth momentum because of the solid macroeconomic fundamentals in place. These buffers -- which I deem as homegrown sources of resilience -- serve to preserve our GDP growth despite external shocks. Without any significant shock, I believe we are poised to extend our streak of 72 quarters of uninterrupted GDP growth. We can rely on broad-based economic drivers, a well-managed inflation environment, sound external sector dynamics, and a stable banking system.

Amid our newfound economic gains, is there scope for monetary policy in the near term? Why or why not?
At the height of the Global Financial Crisis (GFC), monetary policy was called the “only game in town.” Now that the worst of the GFC is over and global prospects -- as forecast by international financial institutions, including the IMF -- are better, monetary policy still has an important role to play, although no longer as dramatic as it had during GFC.

With global recovery expected to improve, inflation may also be turning a corner. What had earlier been seen as global deflationary pressures may now become inflationary pressures. Thus, monetary policy must continue to be well-calibrated, to ensure stability in the operating framework. Monetary policy cannot be tightened too quickly, else it could stifle any nascent recovery. It cannot remain loose for too long, else it could stir undue risk-taking market behavior.

For the BSP, we have the analytical framework for monetary policy and the requisite tools. As I have said on numerous occasions, BSP monetary policy will continue to be highly data-dependent. BSP will monitor shifts in market sentiment, changes in global growth prospects and trends in commodity prices, particularly petroleum products. It will refine existing early warning systems, distress indices and stress tests, and create new ones to make sure these are responsive, effective and efficient. It will refresh its liquidity forecasting models and inflation models to make sure these remain sensitive to evolving impulses.

The BSP has always been vigilant against risks and will adjust policy settings as necessary so that inflation remains within the medium-term target, mindful of the need for sustainable economic growth.

What reform/s that the BSP pursued under your leadership do you consider to have the biggest impact on the country’s financial sector (if not the economy at large)?
Improved communication of BSP’s policy intent and the closer engagement with the market and other stakeholders, including other regulators. That has had great impact on how the markets work, and has helped ensure effectiveness of BSP policy.

The better the market understands BSP’s policies and the impact of these on the markets’ business models, the more efficient markets can plan and move, and therefore the more effective the BSP’s policies would be; minimizing any unintended consequences.

Throughout my tenure, I have made it a point to reach out to all stakeholders; that is, bankers, other regulators, legislators, members of the judiciary, the general public, in the metro area and in the regions as well. A policy may be good, but if it is not communicated well and in a timely manner, its execution will likely be less than effective. Let me cite examples.

BSP adopted inflation targeting in 2002. Part of that was a communication plan that included pre-announced national government inflation targets over the policy horizon; set policy meeting dates, accompanying press releases and inflation reports; and predetermined timing for release of the minutes of the policy meetings. The plan also included writing the President should inflation breach the national government targets. The result? Inflation expectations have been well-anchored, and broadly in line with the BSP forecasts. During 2009-2014, inflation was within the national government target. It was slightly below target during 2015-2016. Well-anchored expectations help businesses better plan for medium- to long-term expansion.

Over the years, BSP adopted risk-based supervision, including the institutionalization of effective examination and off-site monitoring processes; higher governance standards for banks; and the key capital requirements under Basel 3. All these, in close consultation with the banks. The approach to these reforms has been phased in. BSP allowed parallel run periods for banks to gain familiarity with the way BSP would now be conducting supervision. BSP also allowed time for banks to build up capital as required under the new Basel standards. The result -- better-run and adequately capitalized banks that perform credit intermediation soundly.

Part of the changes in our regulatory environment is the thrust towards leveraging off technology. An approach we have taken towards this end -- with respect to financial inclusion -- is the “regulatory sandbox approach,” in which we engage market participants -- including those not directly regulated by the BSP such a telcos -- to explore ways to actually utilize technology and then learn from each other in a controlled environment -- just as children would interact in a sandbox. This consultative approach has been helpful in providing BSP with information so that the regulations we would put in place would create the intended effects.

In the twelve years I have been governor, the world has changed at such a fast pace. The interconnectedness of markets has implications on how financial stability is secured. BSP has endeavored to communicate to stakeholders that the overarching principle to policy would now be financial stability. Thus, we enhanced our existing framework for macro-financial surveillance. BSP is constantly working to improve its capacity to pre-emptively deal with brewing systemic risks. Within the BSP, there is an established Financial Stability Committee to conduct macroprudential surveillance and to detect signs of financial instability. We coordinate and collaborate with other agencies through the Financial Stability Coordination Council (FSCC) to identify, manage and mitigate any build-up of systemic risks. The FSCC is a voluntary interagency council comprised of the BSP, DOF, IC, PDIC and SEC.

During your tour of duty, which period within those 12 years was the most challenging? How satisfied were you with how the BSP responded to that challenge? What would you have done otherwise if given a second chance?
The most challenging period would be the height of the 2007-2008 Global Financial Crisis (GFC) and the period immediately following it.

The GFC has been described as a “black swan” event by a number of analysts, in other words a very, very rare event. When GFC hit us, the global financial markets were coming from -- what many have since called -- the Great Moderation, when everything seemed to be just right -- low inflation, sustained growth, particularly for the advanced economies. Then suddenly over a weekend, marquee names on Wall Street were collapsing one by one.

Following the first outbreak of the subprime crisis in the US, I headed a BSP delegation to the IMF-World Bank Annual Meetings in Washington DC. The general environment there was very bleak. Financial market indices were falling each day. You watch the late news in the US, and wake up to find out Asia had reacted overnight, and US markets would again be lower from where they closed the day before. Because of such negative sentiment, I cut that trip short. With global financial markets tumbling then, it was very clear to me that the first order of business for us -- for our own markets -- was to make sure confidence in our own financial markets was intact. Immediately, upon returning from DC, I called bank presidents of a cross-sector of banks and key officials of the BAP (Bankers Association of the Philippines) to a dialogue. I shared the BSP views on the global situation, and what the BSP was prepared to do -- at that time -- to make sure there was sufficient liquidity -- both peso and dollar -- for those who would find themselves in a tight fix. You will recall that at the time, advanced economies’ central banks were already talking about unconventional monetary policy tools. The BSP did not have to adopt unconventional monetary policy tools, but it opened its peso and US dollar repo windows, increased its rediscounting budget and eased on collateral valuation. Banks needed to be assured of the availability of liquidity, so they could, in turn, assure their clients, and avert any market panic. It was clear also that the cooperation of key market players was necessary. In other words, that dialogue with bankers was very critical. Because the GFC and the EU debt crises that followed were uncharted territory for all of us, ensuring market confidence was key to keeping the market stable at that time.

In the end, those liquidity windows were not availed of in any major way. In part, because there was ample liquidity in the system, and in part, because our bankers were conservative and had maintained very minimal exposure -- less than one-half percent of total assets -- to subprime-type assets and derivatives. Moreover, bank lending standards were not compromised entering the GFC. Nevertheless, that dialogue helped secure market calm.

I don’t think I would have done anything differently. In any time of crisis, shoring up market confidence is always central.

But mere talk will never be enough; this must be followed by concrete actions. For instance, in the months that followed, global investors became attracted to the yields in emerging market economies, including the Philippines. The country then experienced large capital inflows. To minimize the adverse effects of financial market volatility, strong appreciation pressures on the peso and potential dislodging of inflation expectations, the BSP calibrated monetary policy, managed its foreign-exchange reserves as appropriate to ensure foreign-exchange rate volatilities were kept at bay, adopted macroprudential measures, expanded stress testing on banks and enhanced its tool kit to target areas that could not be addressed by traditional policy instruments.

As you leave office, what remains to be done at the BSP by your successor?
The pursuit of our mandates of price and financial stability must continue with more fervor. That is imperative.

The BSP has built a strong track record of sound governance processes for policy formulation, adoption and implementation. But the operating environment is shifting -- digitization, cybersecurity risks, social media, artificial intelligence, shifting consumer preferences, enhanced competition, regional integration moves for certain regional groupings, and policy uncertainty from retreat from multilateralism for other jurisdictions. The pursuit of the BSP mandate -- going forward -- must therefore -- to have these new trends in mind.

There are some reforms in how we do central banking that were started during my term, including institutionalization of financial stability as integral to the mandate of the BSP, pursuit of more market-oriented tools for monetary policy implementation, the retail payments infrastructure and governance framework, institutionalization of financial inclusion -- access, fin lit, consumer protection. It is my hope that these will continue to be pursued by my successor.

I hope my successor will also push forward the BSP charter amendments and other bills on our legislative agenda, including those we are working on in coordination with other regulators, such as the Payment Systems Act and the review of the Bank Deposit Secrecy Act and AMLA (Anti-Money Laundering Act). I think the BSP charter amendments have moved the most in [the House] and the Senate in the last two congresses than they ever had in the past.

Also while there have been some advancements in the capital market reform agenda, there is a long way to go towards achieving a more responsive capital market. For this endeavor, my successor must more strongly improve coordination among the regulators of the different segments of the financial market.

The BSP has been a thought leader on a number of initiatives in the international arena, such as financial inclusion and on financial de-risking. The BSP should continue this, and consider new advocacies of relevance to the country and to other jurisdiction in our region.

Of course, continued enhancements in capacity building of officers and staff of the BSP is key to the success of the institution.

Can you give us your two-cents (or more) on what it takes to be a central bank governor? What is that one trait above all others that a central banker should have, especially at this juncture of the Philippine and global economies?
It is essential that the central bank governor has a clear knowledge and understanding of the BSP’s mandate… upon having this lucid appreciation, he must then be fully committed to it. It may sound like a given, but it is much trickier than it appears to be.

For instance, as governor, I have often been asked about how the BSP can alleviate poverty. It might surprise many to know that this task is not directly in our mandate. What the BSP can do in this regard is to help foster an environment to support poverty alleviation -- to issue policies both in the monetary and financial environments that will allow businesses to plan, expand, increase employment, and thereby raise the quality of life for all Filipinos. This vision has also led to our financial inclusion initiatives.

A central bank governor must have very close familiarity with the job and with the considerations that go into monetary policy and banking regulation formulation… I refer also to a necessary familiarity with the specific and internal working of the BSP, such as departmental and committee work, including coordination meetings with international bodies and other governmental agencies.

While a central bank governor must be decisive, he should also have patience as some of the results we desire have long gestation periods. Closely related to the need for patience is to have the wisdom, faith and forbearance to know when and how to leave the market alone to correct itself -- it usually does. One cannot be reactionary. He must be calm. He must also possess a mix of theoretical knowledge and a keen appreciation of real life, of market trends. He must know and appreciate that policy should not be made in a vacuum.

To commit to BSP’s mandates requires clarity of direction. It requires courage. It is easy to be sidetracked by many competing objectives and even by possible external influences. I cannot tell you how many times our commitment to our mandates have incurred criticism and has even invited the risk of -- and actual -- lawsuits. Courage requires one to do what needs to be done.

It is this courage that will lead to true independence, and independence is crucial in central banking. Our charter clearly identifies independence as a necessary ingredient for us to function as intended. While this independence is enriched in assurance of fiscal and administrative autonomy, independence really requires more than that… it all goes back to commitment to the fulfillment of our mandate.

In the BSP, employees are made to memorize and take to heart, five core values. These are integrity, excellence, patriotism, dynamism and solidarity. It may sound cliché, but if one is to lead, inspire and motivate this 5,000-plus strong institution, one must necessarily embody these very traits.

Having these values will make it easier for the head to consult with people within the organization, engage stakeholders to understand what they feel and think about policies adopted. Being the best example one can be is the best way to lead.

Also, since the market, the international community, the nation, and employees pay close attention to what the central bank governor does and says it is important to anchor oneself on core values. All the values boil down to credibility. Credibility is most valuable in times of uncertainty where central banks are seen as bastions and guardians of stability.

Where do you see yourself years after leaving your post as BSP governor? What’s next for Amando M. Tetangco, Jr.?
The governorship of the BSP is a position I have held for the last twelve years -- almost. It has been a joy, an honor and privilege, an opportunity to serve the nation to the fullest of my abilities.

At the very core, this is how I have, and always seen myself: as one engaged in the continuing pursuit to be excellent in endeavors I chose to pursue. This is what has defined me since I was a student from grade school to grad school… since I was a starting statistician at the central bank and while going up its ranks.

I will, no doubt, have more time on my hands. But I see this again as an opportunity to pursue excellence: excellence as a husband, spending more and better quality time with my wife… as a father and grandfather, bonding with my children and granddaughter…. As you can imagine, in the last 12 years, I had to sacrifice a lot of family time because of the demands of the governorship. So I am thankful for this opportunity.

I can also be excellent in travelling… My wife and I have a bucket list of places we want to visit. I can have excellence in getting more sleep too!

Levity aside, I have always been interested in the arts, so perhaps this is something I can try my hand at. I also want to do something that will require me to use my hands, like gardening or farming, something that will help in community sustainability…. I can attempt to become a chef, at least for family and friends. I will have more time to play golf, enjoy nature…hone my skills at target practice.

I believe that when one is prepared and consistently does his or her best, the opportunities that present themselves are exactly those that are meant to be taken, at precisely that perfect time… I will always have the desire to make a contribution to society, so I’ll still be following developments and can be expected to engage in discussions of important current events. I can teach. Perhaps I can do some advisory service. So, as to what’s next, time will tell. But I am, as always, looking forward to the days to come.

Of all the accolades that you have garnered in your years as BSP governor, which is the one you’re most proud of? Why?
The various recognitions and awards we have received affirm the quality of work we continually put in the BSP. They are testaments to our being at par with the best internationally, and that we have been faithful to our mandate of maintaining price stability, a stable banking and financial system, and a safe and reliable payments system. I cannot single out any particular accolade.

And while there are awards granted by institutions and associations, the recognition that matters for me -- which may or may not be engraved on a plaque, trophy or medal -- is any sincere acknowledgement of what I have achieved as head of the 5,000-strong world-class institution that is the BSP. Recognition received for successfully leading and uniting the BSP to accomplish our mandates is always a proud and fulfilling moment. This is because the work we do could only be achieved by all of us in the BSP, working together.

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