Bangko Sentral Governor Amando M. Tetangco Jr. kept his First Tuesday of the year date with the Tuesday Club yesterday. He did his best to look confident, a must for financial regulators these days. At the very least, the holidays appear to have recharged the BSP Governor. Gov Say, at 56 is not the youngest to bear the heavy responsibilities of being the country’s top financial regulator. Jimmy Laya and Joey Cuisia were younger than Say when they were appointed to the position: Laya was 42, Cuisia was 45, Say was 52.
In an interview before the holidays with Global Source, the New York-based financial think tank, Gov Say said he sleeps soundly these days even as he admitted that during that critical weekend just before the European central banks came out with their concerted program, Bloomberg, CNBC and CNN kept him awake. Like many of us, he found it unsettling that the equities were up as he went to bed, but would be down as he woke up.
Gov Say attributes his ability to sleep well in the knowledge “that the Philippine economy is in a better position to withstand any financial storms that come its way and that our policy framework at the BSP, though not recession proof, contains the appropriate balance between the requisite discipline towards the price stability mandate and flexibility to respond to challenges.”
The world economy may be in grave crisis but unlike our situation in the early 80s during the watch of Jimmy Laya as Central Bank Governor, we are better placed to weather a payments problem these days. Reforms implemented starting with the watch of Paeng Buenaventura and followed through by Gov Say have made our current external payments position manageable despite current pressures from global developments.
“In fact,” Gov Say asserts, “the level of our foreign exchange reserves, over US$36 billion, is more than four times the level we had during the Asian crisis and provides adequate cover for imports, around six months, and maturing short-term foreign debt, about two and a half times. Our balance of payments also continues to be in surplus supported by our growth sectors – overseas Filipinos’ remittances and BPO services.”
But it isn’t as if we can just sit back and do nothing. The BSP has its worries too, given the volatility and uncertainty of the global economic situation. This is why BSP Deputy Governor Diwa Guinigundo urged the National Government to consider increasing its foreign borrowing this year to help build up the country’s reserves amid slowing flow of foreign portfolio investments and export inflows.
The suggestion was made by the BSP because it is worried that the country’s balance of payments (BOP) would fall below the projected $2.3-billion surplus this year. Guinigundo said “given the worsening scenario, there are reasons to believe that this would moderate to a lower level of a surplus.” He could not say how low or how sharply foreign investments are expected to drop and how badly exports are expected to weaken. The BSP is banking on OFWs to save the day for our economy as they forecast six to 10-percent growth in remittances.
“We expect the demand for Filipino workers overseas to continue due to the diversity and quality of skills they offer,” Gov Say told Global Source, pointing out that the higher skilled OFWs we are now deploying earn more and remit more. He told us as much at Tuesday Club yesterday.
Gov Say told us we are like other emerging economies experiencing capital flow reversals and currency depreciation. Thus, the Philippines is facing prospect of slower reserve accumulation or even a decline. Reserves are built up precisely as insurance for rainy days, Gov Say pointed out “and haven’t you noticed, lately, it’s been raining quite heavily!”
Gov Say told Global Source that “it is difficult to predict the extent risk appetite will retreat from the market. But as I said, our reserves continue to be at comfortable levels. We also have buffers to slowing, even reversing, portfolio flows, including foreign exchange in the form of remittances from overseas Filipino workers and foreign exchange receipts from the growing BPO sector, which is expected to remain robust even during this turmoil. Also, as oil prices continue to decline, the country’s requirements for foreign exchange would correspondingly ease. These are why I think that our external position will remain in surplus.”
But surely, someone in Gov Say’s position must have some idea of a worst case scenario for the domestic financial sector. He does, he said, as planning for it is part of his normal risk management responsibility. He describes this worse case scenario in his Q and A with Global Source as follows:
“A freezing of the financial markets with market aversion spilling over into an inability to provide needed financial services to the real economy, resulting in a drastic drop in economic activity, which then further fuels the tightening of financial market conditions. In other words, situations wherein the negative feedback into the real economy from the financial sector that feeds back again to the financial sector.”
It is important, Gov Say said, to understand the symbiotic relationship between finance and growth of the real economy. “We cannot afford a loss of confidence in one to spill over into the other. Such a vicious spiral could take considerable time to unwind because it is often not an issue of structural reforms but more of managing abstract perceptions and expectations.”
Based on what we are seeing in the global environment, Gov Say got it right. Managing a crisis of confidence is probably more complicated than anything else and we can see this problem with the so far futile attempts of US and European economic and monetary officials to get banks to lend again and people to stop hoarding cash or buying treasuries at near negative interest.
This is why Gov Say said the BSP is aware of the importance of timely communication. “We let the markets and other economic agents understand the rationale for our policies, while at the same time we keep our ears to the ground and listen to the market’s requirements. We consider how these needs could be addressed within the framework of our macroeconomic objectives.”
Still, Gov Say worries that “no one yet knows how deep and how long this current global downturn would last. A complication that could arise is if not only foreign investors leave the country but resident investors as well because of regulatory arbitrage opportunities. That’s why we keep monitoring developments in the global regulatory environment to ensure that ours remains appropriate for our investors’ needs and responsive to global changes. We also regularly review the regulatory framework for foreign exchange transactions.”
In sum, Gov Say told the Tuesday Club that “2009 will be a critical year. It could define how we will perform when the markets turn around… No one can say for certain how deep and how long the global downturn would be, nor how far markets would retreat. Therefore it is incumbent upon us to continue to brace for further uncertainty in the global financial markets, recessionary trends that would spread to regions beyond the developed worlds and volatilities in commodity prices, particularly oil.
Gov Say’s advice to financial players on how to cope with these challenging times uses the central bank’s acronym – B, S, P:
Remember the basics, Gov Say admonishes, that’s the B, understand your market and keep to standards. It is worth noting that the root cause of the crisis is the weakening of safeguards in carrying out a very basic lending institution responsibility – underwriting. Even with an expansionary monetary environment, the crisis could have been mitigated had lending institutions observed prudent underwriting standards and regulators undertaken appropriate or corrective oversight.
S, make sense of every financial innovation in the market. What one does not understand, one should not dabble in. This may seem pretty rational but under benign market conditions, exuberance strips the market of any rationality.
P, protect yourselves from market downturns. Have sufficient capital in line with risk exposure, business strategy and possible changes in the economic and market environment.
The wall
Max Ballesteros sent in this one.
As the recession in the US deepens, there is speculation that Mexican authorities are considering building fortified “border fence” to prevent jobless Americans from sneaking into Mexico to look for jobs as farm, construction workers or domestic helpers.
Boo Chanco’s e-mail address is bchanco@gmail.com