The European Chamber of Commerce of the Philippines organized a luncheon meeting with Bangko Sentral ng Pilipinas Governor Nestor Espenilla Jr. to learn more about BSP’s plans and priorities.
BSP Governor Espenilla delivered a speech with the following key points:
EU is the Philippines’ second largest market, a key trading partner and a major source of (12% in 2016) direct investments and OFW remittances.
Philippines’ investment prospects increase along with the expectation of economic growth.
BSP philosophy of structural reforms based on sound macroeconomic policies to support price stability and economic expansion.
Mentioned several ongoing BSP initiatives such as:
Inflation targeting framework -- keeps inflation within expectations, over time keeps inflation lower and more stable.
Interest Rate Corridor (IRC) system -- supports development of capital market by promoting money market transactions. This higher level of activity means higher price discovery.
The creation of Corporate Governance Guidelines -- good governance comes from the top; includes initiatives to enhance requirements on composition of membership of Board of Directors.
Efforts to keep the Liquidity Coverage Ratio (LCR) in line with Basel III standards.
On Compliance Framework: align risk management guidelines with international guidelines
2017 inflation is at 3.1%, on track with reference to the ±3% projection for the year.
Inflation likely to settle between 2-4% in 2017-2019. BSP also reported a relatively flat non-performing loan (NPL) rate of 13.1%.
The ability to absorb losses is central to Basel III. BSP reported a stable Capital Adequacy Ratio (CAR) at 15.3% on solo and 16% on consolidated bases. This is considered to be one of the results of a long and systematic reform process from the Asian Financial Crisis.
The BSP seeks to continue liberalization and rationalization of financial system to promote healthy competition for the efficient delivery of services
Philippine banks developed ability to absorb losses.
Updates on BSP’s various efforts/initiatives:
Towards its financial inclusion agenda, the BSP is set to deepen local bond market, digitalize finance system, and liberalize the banking system.
This includes the creation of a roadmap (with DOF, SEC, BOT) to develop the domestic debt market and a regulatory framework on financing, prioritizing urgent and foundational issues.
Liberalizing foreign exchange rules is also a priority of the BSP as it will facilitate job creation, enhance transparency and price discovery while a deeper foreign exchange market will insulate the Philippines against shocks.
BSP Circular 976 -- Amendments to the Expanded Report on Real Estate Exposure (ERRRE) and the Submission of the Report on Project Finance Exposures (RPFE) -- issued this month aims to sharpen the Agency’s ability to assess bank exposures.
Gov. Espenilla also discussed his advocacy for financial Inclusion. This seeks to empower Filipinos by including lower income groups into the financial system. Increasing access also means leveraging technology and institutional networks for remittance and payment transactions.
The BSP is also leading initiatives to operationalize the National Retail Payment System (NRPS) to to digitalize retail payments and create a cash light economy in an interoperable platform for moving money around.
The Philippine Payments Management Inc. (PPMI), recently registered with the Securities and Exchange Commission, was formed as a self-governing body to oversee retail payment system.
In pursuing the goal of a digital financial system, the BSP is set to launch the ff. initiatives:
PesoNet -- which will function as an electronic alternative to cash that can be used on several platforms. This is set to be launched this November 2017.InstaPay on the other hand is an initiative to facilitate small value payments from e-money and bank accounts.
US policy, public policy confidence
Although he mentioned a myriad of challenges, Governor Espenilla also cited the fast-paced economic growth of the ASEAN countries as an opportunity for investment. Of the ASEAN countries, Gov. Espenilla states that the Philippines has the highest level of growth which will soon outpace regional growth.
Apart from the economic conditions in ASEAN, the BSP is also committed to ambitious financial reforms.
Advice for financial institutions in supporting stability while also promoting innovation.
Financial Institutions must promote expectations of stability. BSP initiatives towards preventing cybercrime and the promotion of regulations lays out clear-cut standards. This ensures that institutions engaging in unscrupulous activities will also face the reputational risk.
Cryptocurrencies and Financial Technology
The BSP sees that FinTech has the opportunity to achieve our objectives. It enables our system to reach out to banks, non-banks and to the periphery. We can say that the financial institutions in the center are doing well but those in the periphery have a lot of gaps and through FinTech, we have the opportunity to bridge the gap. We remain open to introduction of FinTech into financial system. As long as it doesn’t interfere with regulations already set in place such as anti-money laundering and anti cybercrime then it is up to the businesses to handle it themselves but otherwise we introduce a proportional regulatory system.
As for cryptocurrency such as BitCoin, it poses an opportunity to facilitate remittances however it also has potential risks as a channel for illegal funds. Thus, the BSP created a regulatory framework for cryptocurrency. They also need to keep records and report suspicious transactions. This system allows for financial innovations while analyzing risks and deploying regulations when necessary.
Draft Bill to amend Public Services Act, should the BSP push for it in light of advocacy for financial inclusion
BSP’s philosophy rests on opening up markets, banks and asset management and strengthening the financial system to reflect global reforms.
There is a lot of space to open up the telecom system and the BSP fully supports an initiative to open up the telecommunications, which will benefit the whole financial system.
Regulations to stimulate banks to lend to agricultural sectors and SMEs
Although these regulations are embedded in law, they are resistant to change for political reasons. The BSP then implements the law as best they can. However mandatory credit lending is passe, the new approach of the BSP is encouraging service providers to provide services that are fit to purpose and working with government to provide infrastructure for lending. This approach creates incentives instead of forcing service providers to lend money.
The BSP also works with the legislative to create bills such as the Bill on Movable Collateral Registry, Credit System Act, and a system for Credit Guarantee.
In terms of regulation, big corporations can organize themselves to include small farmers in their production chain and any inclusion of these farmers will be treated as compliance to the law.
BSP’s focus on the exchange rate and interest rate
The Inflation Targeting Framework created by the BSP drives policy interest rates.
We see the exchange rate as a tool not a target. Thus we allow the exchange rate to reflect the volatility of real life. However we expect the Peso to be stable because the financial policies are based on sound principles, and all factors indicate towards stability. We are open to market access, we have a highly financeable credit accounts with nine months worth of reserve..
Reference to secure Transactions Law, Warehousing Receipts. How the BSP helps poor Filipinos borrow from banks.
The BSP is part of a technical working group to advocate for this. We support this intellectually and materially. As far as I know these bills are high in the priority of Congress.
Foreign investments have to be invested with BSP?
Not a requirement to invest with the BSP but it must be registered
BSP is working with a new regulation to do away with the registration process as a necessity to access the financial system (except requirements on transaction reports) -- transactions must be reported to the BSP but no need to screen for source of money and for outcome, also included for foreign borrowing
Tightening requirements on non-banks, liberalizing requirements for banks
Electronic Payments are hampered by the practice of issuing checks to comply with BIR requirements
The BSP has included several other government agencies in this transformation towards digital payments, including BIR. In the next few years, cheques will coexist with digital payments.
Industry players support digital payments for far flung regions so people don’t have to go to physical store branches.
The BSP supports this and is waiting for technologists to step in so they can see which regulations are appropriate.
Digital Payments, liberalization of the economy
Philippines already has electronic payments solutions, what is left is the promotion of interoperability of existing e-payment systems.
Discussions on Electronic ID system now in Congress -- The Foundational Biometric ID System will facilitate digital payments; the BSP pushes for a simpler set of required information (more efficient procedure, less expensive)