Distinguished officers and members of the pioneering rotary service in asia, the Rotary Club of Manila (RCM), esteemed guests, ladies and gentlemen, good morning.
My father never wanted us to go into public service. To him, public service seems to be a thankless job and not worth the effort. There are better ways to serve your country, so to speak.
Accordingly, I started my professional banking career in the private sector. The stint led me to many places and many cultures. I became the first filipino senior executive at Citibank. I moved on to be president of one of the major commercial banks. I had the prestige, the money and the life my father had envisioned for me.
When I accepted to take the helm of the country's central monetary authority in July 6, 1999, some people asked me if i was a hundred percent sure about leaving my comfort zone as a private banker and taking on the role of a regulator and public policy maker with less pay but more headaches. Looking back, I was only sure of two things: I defied the wishes of my father and I took up the biggest challenge of my life.
Having done so, I am now privileged to stand before you as a central bank governor and most importantly, as a public servant. After the 1997 financial crisis, restoring stability in the financial system was of paramount importance and the road that needs to be travelled was long and winding. I am proud to say that I made the right decision by accepting the invitation to serve my country and having the privilege of working with highly dedicated and dynamic professionals of the Bangko Sentral.
Barely five months short before the end of my term as governor, we are racing against time to complete the enabling reforms we have started. The recent appointment of central bank deputy governor Say Tetangco [as my successor] clearly indicates the continuity of our broad set reform initiatives.
My talk this morning is centered on one of our major key challenges: capital market development as a vital component of the financial reform agenda for sustainable economic growth.
The economy in brief
Let me first give you an overview of the economy to put things in perspective. Overall, we started the year with sound economic fundamentals. The country's gross domestic product (GDP) posted the highest growth of 6.1 percent in 15 years. Our prudent monetary policy, geared towards inflation targeting, kept inflation relatively low at 5.5 percent and the bellweather 91-day treasury bill rates better than target at 7.3 percent for the year ended 2004.
Our peso rallied strongly against the u.s. dollar, trading between p54-55/u.s.$, amidst sovereign rating downgrade jitters and political noise. We have a stable reserve position with our gross international reserves (GIR) maintained at a comfortable level of U.S.$16 billion in 2004.
Moreover, our external sector significantly improved with our balance of payments (bop) deficit 85 percent lower than programmed at u.s.$77 million while remittances from overseas filipino workers (ofws) reaching almost 12 percent growth in 2004 compared to the 6.3 percent growth rate in 2003.
The country's economic performance benefitted directly from improving fiscal discipline and sound monetary policies. We expect to keep the momentum going for 2005 with GDP growth sustained between 5.3 to 6.3 percent, inflation subdued between 5 to 6 percent beginning March 2005.
In the external sector, BOP deficit is projected to stay moderate at u.s.$464 million in 2005 and the GIR level maintained at the same level with expected 6 percent increase in OFW remittances.
Capital market development imperatives
With bright economic prospects, I keep asking myself, 'what keeps us from making the domestic capital market work'?
In the last few years, I have become even more convinced of the necessity of developing the capital market. Thus, I have made rounds with various gatherings such as this, weekends notwithstanding, drumming up support for a cause that I personally believe can benefit all.
Today, my message is the same --- capital market development in the Philippines has long been overdue. I am close to becoming redundant but I will keep on pushing if this can make a difference.
In the race to develop the capital market, our Asian neighbors have steadily outpaced us. As a result, countries like Malaysia and Thailand have much bigger savings-to-GDP ratios than the Philippines. They have left us biting the dust.
While their debt papers are predominantly private, government papers dominate the local capital market with minimal alternative for other financial instruments. A strong financial system with deep capital market does not put the banks out of the picture but rather diversifies their role from just basic lenders to distributors and sellers of various securities.
Compared to them, we are more prone to external shocks due to our excessive dependence on the local banking system. With majority of the domestic credit sourced from banks, borrowing becomes a more expensive endeavor because of the added intermediation cost. With a functional capital market, we can cut down intermediation cost and reduce risk exposure of banks as savings become directly available to investors.
Challenging the status quo
Capital market development complements our current banking reform agenda as it fosters resiliency in the financial system to withstand external shocks while it promotes investment opportunities towards domestic savings and economic stability.
Our core banking reform strategy at the Bangko Sentral is focused on progressive monetary policies, internationally accepted regulatory practices and enhanced bank supervision.
We initiated the asset clean-up of banks to finally restore the credit supply to the economy. Non-performing loan (NPL) ratio improved to 13.7 percent in November 2004. The current NPL ratio will be further trimmed to 10 percent or lower by year end cognizant of the 2005 economic growth projections and the P26.2 billion asset clean-up that prospered in 2004 under the Special Purpose Vehicle (SPV) law.
Other key initiatives aimed at strengthening the banking sector include the upgrading of capitalization and risk management standards, institutionalization of corporate governance and transparency, improvement in consumer protection and enhancement of regulatory information exchange through the financial stability forum. These initiatives are instrumental in aligning our banking practices with globally accepted standards.
We have also designed our banking sector reform package to complement the capital market development, recognizing the necessity for the banking system and the capital market to work in tandem for the benefit of the financial system and the economy as a whole.
The Bangko Sentral issued various circulars aiming to diversify the financial products available in the capital market like the unsecured subordinated debt (as tier 2 supplementary capital), Long Term Negotiable Certificate of Deposits or LTNCDs, documented repos, structured debt, and collaterized debt obligations in order to create market-oriented opportunities for banks and other players. Coupled with existing rules and regulations governing investments in marketable securities, this initiative can further deepen the capital market.
Revitalizing the trust business to boost the demand side and widen investor base was also undertaken with the replacement of the Common Trust Fund (CTF) with Unit Investment Trust Fund (UITF) where the value of investments are marked to market to enhance the credibility of pooled funds to investors.
We are also encouraging the entry of rating agencies to complement the establishment of an exchange traded papers. As a critical player in the capital market, rating agencies ensure investor protection particularly in discovering fair prices commensurate to risk.
Future directions
The task of running the remaining miles in our reform package still requires much work and endurance before we reach the finish line. We have done much of the groundwork. What is needed now is a strong follow through.
Businesses and investors alike require equally functioning bond and equity market to cater to their diverse needs and preferences. Establishing the fixed income exchange, as the enabling platform for fixed income and debt instruments, responds to that need. Moreover, the exchange promotes greater transparency and market-to-market transactions in accordance with globally accepted practices.
Another aspect is setting up of basic market infrastructure that underscores the required legal, regulatory and taxation frameworks including securities trading, clearing and settlement frameworks. We have started with the issuance of guidelines on third party custodianship and the implementation of modern real time gross settlement system or Philpass for large value transactions. These broad frameworks are central to the desired efficiency, integrity and transparency particularly in the elimination of systemic risks in the capital market for greater investor protection. These efforts aim to strengthen market public's confidence in a highly speculative market.
In the same vein, we need to strengthen the existing regime of capital market-inducive regulation through legislative reforms. We have made progress with the passage of the securitization law, SPV and the elimination of documentary stamp tax in secondary trading but these are not enough. The Bangko Sentral is committed to actively join the lobby for the passage of the following measures aimed to promote capital market development: the amendment of the BSP charter, corporate recovery act, revised investment company act, revised corporation code of the Philippines, insurance code of the Philippines and pre-need code of the Philippines.
At this point, we have already stepped our best foot forward with the enactment of the securitization law enabling the launch of asset backed instruments to support housing development with long-term financing at fixed rates.
In addition, a larger pool of institutional investors like insurance companies, mutual funds, UITFs and pension funds can also provide the required boost to the market.
We made progress with the accreditation of Philratings but we need more rating agencies to come in the future. They serve as guides to investor decision and accountants for disclosure requirements.
A well-functioning capital market also need strong issuers to expand the variety and supply of instruments supply that people can invest in. The national government, as the country's largest issuer, did the necessary spadework by creating liquid benchmarks and developing a yield curve. Using these as basis for pricing other long-term maturity issues, I am encouraging big, private corporations whose leaders are present in the audience today, to issue quality papers and support our advocacy on capital market development.
Indeed, meeting life's challenges is always a rare opportunity to test the limits of human endeavor. In hindsight, it gives me great honor that I was given the privilege to initiate change and challenge the prevailing status quo through the Bangko Sentral's sturdy ship of reform-minded professionals. Taking the helm and steering it towards our collective goal comes with ease. In particular, thank you Rotary Club of Manila for coming aboard and sharing with us your enthusiasm on banking reforms and development of the capital market. We need your support as we relentlessly pursue the remaining points in our overall banking reform package.
Thank you and more power!
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