2018 challenges are crucial but BSP is up to it – Espenilla

Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla Jr. said 2018 “looks promising and interesting” with a higher inflation than previously estimated but still within the target, and crafting new regulatory measures to ward off threats to the country’s financial stability, particularly from external shocks.

Speaking before the Tuesday Club this week, Espenilla said that while it seemed that “we kick 2018 off in high gear” with record stock market highs and the peso recovering losses due to equity investments and fund flows, there is “still lingering uncertainty on the global spillover effects of fiscal reforms in the US, policy normalization in some advanced economies, the ongoing discussions over the Brexit process in the UK (and) geopolitical concerns add to the uncertainty.”

“These are still the early days of 2018,” said Espenilla. “We have yet to see the full impact of these external developments on the Philippine economy (but) rest assured the BSP remains watchful of challenges. Our mindset is that the economic landscape could shift in any direction. We are at the ready.”

Espenilla reiterated that inflation management is a primary mandate, and the BSP’s primary challenge. “This year, inflation could trend higher than anticipated (due) to possible further increases in global crude oil prices and transitory pressures on prices of the National Government’s tax reforms,” he said. “Nonetheless we expect inflation to remain stable and within our target range over the medium term.” Inflation average closed at 3.2 percent in 2017 which was the same rate predicted by the central bank. For this year and in 2019, the BSP expects the inflation rate to settle above the midpoint of the target range of two percent to four percent.

As for the exchange rate, Espenilla again stated that the prospects of higher US rates which will result to funds migration from emerging economies such as the Philippines will continue to affect capital flow reversals which contributed to the balance of payments deficit and peso weakness.

“The BSP’s first line of defense was to maintain a flexible exchange rate and provide foreign currency liquidity from foreign exchange reserves to manage sharp movements,” the BSP chief said, noting the past year’s exchange rate volatility which depreciated to R51.79:$1 on October 30, 2017. The peso closed at an average of R50.39 last month and below R50 to R49.92 on December 29.

Espenilla said with inflation and external sector management on top of their agenda, the BSP and other government agencies will further ramp up efforts to accelerate capital market development this year to deepen the funds sourcing of both the public and private sectors.

Last November, they launched the Government Securities Repo Program, the first initiatives in the local currency debt market development roadmap. The BSP for its part is expected to issue enhancements to the foreign exchange rules to support capital market development in the next months.

Espenilla said the series of improvements to foreign exchange regulations will continue as in the past. “The principle is that a flexible and market-determined exchange rate can better insulate our economy from external shocks.”

The BSP is currently drafting further changes to the foreign exchange rules on foreign investments, trade and non-trade transactions.

“Over the medium term, the foreign exchange reform agenda aims to encourage innovation, improve transparency, facilitate price discovery and enhance market conduct, towards a deeper and better organized foreign exchange market,” said Espenilla.