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MR. Renato A. Ampil, president of the Rotary Club of Manila, other officers and members of the Rotary, friends, ladies and gentlemen, good afternoon.

I welcome this opportunity to dialogue with you about our economy from our vantage point at the Bangko Sentral. As community business leaders in your own right and as concerned citizens, we are all stakeholders in what is happening around us.

Let me begin with our assessment of the current economic environment, and then the key challenges ahead, and BSP?s policy initiatives.

What?s the big picture? Despite the generally weak global environment, the country continued to post favorable economic performance.

For the first quarter of 2003, GNP growth stayed robust, benign inflation reigned, low interest rates and a relatively stable peso exchange rate prevailed.

Real GNP and GDP grew by 5.6 percent and 4.5 percent, respectively, propped up across the board by the strong performance of the services, industrial and agriculture sectors.

Economic growth has been fostered in a low-inflation environment. The slower increases in the prices of both food and energy-related items caused average inflation rate for the first four months of 2003 to settle at just 2.9 percent. Consequently, average inflation for 2003 is expected to be well below the original government target of 4.5-5.5 percent.

During the first four months of 2003, the 91-day treasury bill rate averaged 6.1 percent, slightly higher than a year ago but still quite low by historical standards. The slight uptrend in T-Bill rates mainly reflected market uncertainty over the impending war in Iraq. However, with that issue now resolved, the T-Bill rate has settled at 5.5 percent as of the latest auction.

The balance of payments (BOP) as of the first two months this year remained in surplus of US$55 million. As a result, the country?s gross international reserves reached $16.1 billion as of end-May 2003. This is sufficient to cover 4.5 months imports of goods and services. The country preserved its favorable foreign exchange liquidity position due to sustained export growth and steady flow of workers remittances.

As far as the Philippine Banking System is concerned, it continued to manifest overall stability in the face of many uncertainties in domestic and global conditions.

Key financial indicators of the Philippine Banking System in 2002 reflected overall soundness: Steady growth of deposits, resumption of lending, increasing capitalization, and improving profitability.

Total resources aggregated R3.5 trillion as of end-December 2002, up by 6.6 percent from a year ago. The banking system also recorded 7.0 percent increase in deposits, 2.5 percent loan growth, 4.6 percent increase in capitalization, and near doubling in Net Income After Taxes (NIAT).

However, the large holdings of Non-Performing Assets (NPAs) remains a major issue. At end-year 2002 total NPAs stood at R504.2 billion, equivalent to a little over 14 percent of total Banking System Assets. Two-thirds comprised non-performing loans and the balance represented acquired assets or ropoa. This overhang of NPAs continues to put pressure on affected banks and poses a major obstacle to full resumption of lending activity. It is imperative to reduce the stock of NPAs to more manageable levels.

After more than a year of painstaking work with Congress, the special purpose vehicle (SPV) act was finally enacted last January. This would pave the way for the creation of privately owned Asset Management Companies (AMCs). It is our major initiative to resolve the NPA problem.

The implementing rules and regulations (IRR) of the act became effective on 9 April 2003. This sets in motion the sale of NPAs with fiscal incentives to special purpose vehicles and, in the case of residential loans and foreclosed assets, to individuals. Through this approach, we expect to mobilize fresh private investments, especially foreign investments, to resolve the NPA problem.

We have also issued a memorandum to all Banks/NBQBS containing procedural guidelines for the sale of such NPAs to fast track the regulatory approval process while maintaining full transparency. The BSP is working closely with other regulatory agencies, such as SEC and BIR, in implementing the act.

Last week, the monetary board decided to allow banks to also defer recognition of losses arising from such NPA transfers subject to full disclosure and dividend restriction. This is intended to provide further incentive to banks to get rid of their NPAs soonest.

Despite a generally improving outlook for the economy, there is a pressing need to address a number of challenges.

At the forefront is the critical task of containing the budget deficit primarily through better revenue collection. The success in achieving fiscal stability will greatly assure sustained economic growth with low inflation and peso stability.

We all need to fully support the government in its drive to improve revenue collection and rationalize fiscal expenditures without compromising the need to address social and development objectives.

As a monetary authority, we will also stay firmly committed to our basic mandate of sustaining low inflation. Since last year, we have adopted an explicit inflation targetting framework to ensure that BSP stays focused and accountable on inflation performance.

Moving on to the banking system, our basic agenda is to ensure basic safety and soundness of the system as a whole and to promote greater efficiency of the financial system. Key reforms involve: (1) The strengthening of the regulatory and supervisory framework in line with international standards, (2) Promotion of better corporate governance in banks, and (3) Development of critical financial market infrastructure and systems.

We are actively promoting corporate governance reforms it the financial system through empowerment of the board of directors collectively and as individuals. We started by more clearly defining their duties and responsibilities. We followed through by requiring all bank directors to go through a mandatory orientation course or else face disqualification as directors.

Supporting more training on specific aspects of corporate governance, particularly with regard to the proper functioning of banks? audit committees, risk management committees, and governance systems, in compliance with global standards.
Encouraging professional certification of bank directors to raise the standards and maintain the professional and ethical practice of bank directors.
Supporting objective monitoring of progress in corporate governance practice.

In the area of financial market development, the BSP has sustained the initiative to improve our basic infrastructure. In November last year, we launched the Philippine Payment System or PHILPASS. This is a real time gross settlement system compatible with international standards designed to minimize settlement risk for high value payments between banks and reduce possible contagion should a crisis occur.

We are also strongly supportive of a BAP project to develop a fixed income exchange which will allow the efficient secondary market trading of government securities and other securities that may be issued by banks and other private issuers. The development of local bond market is a critical goal that will promote a healthier and more efficient financial system. We are presently too dependent on the banking system for financing developmental needs leading the unnecessary fragility as banks try to meet long-term financial requirements with essentially short-term funding sources.

We are likewise signing a memorandum of agreement with the Philippine Clearing House corporation to establish a world-class cash management center, a facility that will provide an efficient and cost-effective system of handling and processing currency notes for circulation.

These reforms all form an integral part of the BSP?s broader banking reform agenda that is geared towards further strengthening the financial sector, reducing our overall vulnerability and promoting a high level of efficiency.

But we also recognize that the basic building block of a strong financial system is the quality of human resources behind it. As a modest contribution, we will be launching today on the occasion of our 10th anniversary ?Money and Banking in the Philippines ? Perspectives from the Bangko Sentral ng Pilipinas.? This is intended to be a textbook for collegelevel students.

Finally, let me end by highlighting our efforts to develop a banking system that is also responsive to the needs of the many enterprising poor in our society by actively promoting the concept of sustainable microfinance. This is not a doleout program but a means of providing access to savings and credit to the poor so that they can help themselves and live a life of dignity that they deserve.

The number of banks involved in microfinance lending has steadily risen since 2000. Presently, a total of 119 banks are engaged in microlending. As of May 2003, microfinance loans amounted to R2.2 billion spread out to 394,613 borrowers.

I would like to end my talk by expressing my gratitude to the officers and members of the Rotary for this opportunity to share with you our plans for securing sustainable growth for the country.

We are strongly committed to pursue these initiatives in keeping with the spirit of the BSP vision: ?To be a world-class monetary authority and a catalyst for a globally competitive economy and financial system that delivers a high quality of life for all Filipinos.?