1. www.iro.ph Governor Amando M. Tetangco, Jr. Bangko Sentral ng Pilipinas The Philippines: Making Things Happen Mid-Year Economic Briefing 05 September 2006 Monetary, External and Banking Sectors

2. Presentation Outline I. What has been achieved so far? II. What are the numbers telling us? III. What is the next wave of policy agenda?

3. I. What Has Been Achieved So Far?

4. Introduction of improvements to current inflation targeting framework Development of various disclosure and reporting mechanisms on the conduct of monetary policy Alignment of prudential regulatory framework closer to international standards Intensified efforts towards improvement of asset quality of banks Improvement of the country’s payment and settlement system

5. II. What Are The Numbers Telling Us?

6. Inflation eases further in July 2006 Headline and Core Inflation (%) 2000-Jul 2006 6.4% 5.4% (as of July 2006)

7. The peso has continued to strengthen against the US dollar along with other regional currencies Easing inflation rate, improvement in the fiscal deficit, and positive sentiment towards the economy were behind the peso’s strong performance Dollar inflows from OFWs, foreign direct investments and export earnings likewise supported the peso Peso rises with other regional currencies * As of 31 August 2006 2002 2003 2004 2005 2006* 2002 2003 2004 2005 2006* Year-to-Date Changes in Selected Dollar Rates Appreciation/(-Depreciation), In Percent Korean Won 9.99.90.20.214.514.5 Thailand Baht Japanese Yen Indonesian Rupiah New Taiwan Dollar Philippine Peso 2.82.8 9.79.7 16.516.5 0.90.9 -2.7-2.7 8.88.8 10.810.8 5.45.4 2.22.2 -4.2-4.2 1.41.4 3.93.9 -9.4-9.4 6.36.3 -1.4-1.4 -5.32-5.32 -13.00-13.00 -5.56-5.56 2.172.17 - 3.99 6.016.01 9.249.24 0.420.42 8.02 8.02 5.095.09 -0.22-0.22 4.524.52

8. (US$ M) Jan-Mar 200320042005 2006 Balance of Payments 115-2802,4077822128 Current Account2821,6262,3547331166 Capital & Financial Account 726-1,63086015561451 Strong BOP position underpinned by robust OFW remittances and continued inflows from exports and investment Latest overall BOP position for January-July 2006 yielded a surplus of US$2.17 billion

9. Cash remittances coursed through banks rose by 25 percent in 2005 Robust inflows due to continued demand for OFWs and better capture of remittances First six months of 2006 showed growth of 15.4% to reach US$6.0 billion OFW remittances remain robust */ Cash Remittances coursed through banks Source: BSP OFW Remittances (in US$ M) */

10. Inflows from investments continue */ Based on custodian banks’ report and BSP registration records */ Non-residents’ investments (BOP concept); preliminary Jan-4Aug Growth Rate (%) (US$M) */20042005 2006 Foreign Portfolio Investment, net4872,1031949961-50.7 Jan-May Growth Rate (%) (US$M) */20042005 2006 Foreign Direct Investment, net6881,13248774352.6 Foreign direct investment flows continue to increase Net Foreign Portfolio Investment flows while lower than last year remain in surplus

11. GIR & Reserves Ratios GIR sufficient to cover liquidity requirements GIR reaches all time high at US$21.3 billion in July 20062003200420052006end-July GIR (US$ bil)17.116.218.521.3 Import Cover4.13.63.84.3 GIR/S-T Debt*2.8x3.2x2.9x3.5X GIR/S-T Debt** 1.4x1.6x1.5x1.9X * Based on original maturity ** Based on residual maturity Source: BSP

12. No bunching of maturities Adequate external liquidity to service foreign debt Key debt ratios continue to improve External debt level remains manageable Average Maturity for MLT Debt as of end-Mar 2006 Total External DebtUS$55.3 B Of which: Short-Term US$ 6.1 B % of Total 11.1% Medium-to long-term US$49.2 B % of Total 88.9% Ave Maturity of MLT Debt (years), orig mat.17.6 Public 20.0 Private 10.2 Ave Maturity (years), remaining maturity10.7 Public 12.4 Private 5.5 Source: BSP Debt Ratios External Debt to GDP53.9% DSB to exports of goods, and receipts from services and income 13.2% (Jan-Apr 2006)

13. The banking system remains stable supported by strong asset growth, improving asset quality and adequate capital position Banking System: Asset Growth 1998 – March 2006

14. Universal and Commercial Banks: NPL Ratio (%) January 2004 - June 2006 (June ’06)

15. Commercial Banks: Loans Outstanding (Y-O-Y growth in %) January 2004 - June 2006 (June ‘06)

16. Banking System: Capital Adequacy Ratio (%) June 2000 - September 2005 (Sep ’05)

17. III. What Is The Next Wave Of Policy Agenda?

18. Policy Objectives 1.Maintain price stability 2.Sustain growth in OFW remittances 3.Strengthen external balances 4.Ensure debt sustainability 5.Promote a sound and stable financial system

19. Policy Directions 1.Monetary policy will remain supportive of price stability and domestic economic activity Focus on achieving 4-5% inflation target in 2007 Balance risk of second-round effects while allowing the economy’s growth momentum to continue BSP ready to undertake the necessary monetary action in a timely manner

20. Policy Directions 2.Further innovations will be introduced in the OFW remittance environment Promote further competition in the remittance market Post relevant remittance information on the BSP website for public reference Improve the payments and settlement systems Improve the interconnectivity of remittance service providers in the Philippines with those abroad Review regulations on opening remittance centers abroad Implement a financial literacy advocacy program for OFWs and their dependents

21. Policy Directions 3. External sector policy will focus on further strengthening the external position and ensuring debt sustainability maintain a comfortable level of gross international reserves keep the external debt stock and debt service burden at manageable levels continue to support a market-determined exchange rate

22. Policy Directions 4. Financial sector reforms will be geared towards maintaining a healthy banking system and further developing the local capital market Banking Sector Reforms Improve BSP’s supervision technology and capacity Align prudential regulatory environment with international standards and best practices Strengthen corporate governance principles and market discipline

23. Policy Directions 4. Financial sector reforms will be geared towards maintaining a healthy banking system and further developing the local capital market Capital market reforms Develop a central credit information bureau system (i.e., Credit Information Bureau Bill) Widen the pool of institutional investors (i.e., Revised Investment Company Act) Provide a better debt resolution framework (i.e., Corporate Recovery Act)

24. www.iro.ph Governor Amando M. Tetangco, Jr. Bangko Sentral ng Pilipinas The Philippines: Making Things Happen Mid-Year Economic Briefing 05 September 2006 Monetary, External and Banking Sectors