www.iro.phwww.iro.ph

Governor Amando M. Tetangco, Jr. Governor Amando M. Tetangco, Jr. Bangko Sentral ng PilipinasBangko Sentral ng Pilipinas

The Philippines: The Philippines: Making Things HappenMaking Things Happen

Mid-Year Economic BriefingMid-Year Economic Briefing05 September 200605 September 2006

Monetary, External and Banking Monetary, External and Banking SectorsSectors

Presentation OutlinePresentation OutlineI. What has been achieved so far? II. What are the numbers telling us? III. What is the next wave of policy

agenda?

I. What Has Been Achieved So Far?

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

II. What Are The Numbers Telling Us? II. What Are The Numbers Telling Us?

Inflation eases further in July 2006Inflation eases further in July 2006

0123456789

10

Jan'00

Jan'01

Jan'02

Jan'03

Jan'04

Jan'05

Jan'06

Headline Core

Headline and Core Inflation (%)Headline and Core Inflation (%)2000-Jul 20062000-Jul 2006

6.4%

5.4% (as of July

2006)

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 currenciesPeso 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 RatesYear-to-Date Changes in Selected Dollar RatesAppreciation/(-Depreciation), In PercentAppreciation/(-Depreciation), In Percent

Korean Won Korean Won 9.99.99.99.9 0.20.20.20.2 14.514.514.514.5

Thailand Baht Thailand Baht

Japanese Yen Japanese Yen

Indonesian Rupiah Indonesian Rupiah

New Taiwan Dollar New Taiwan Dollar

Philippine Peso Philippine Peso

2.82.82.82.8

9.79.79.79.7

16.516.516.516.5

0.90.90.90.9

-2.7-2.7-2.7-2.7

8.88.88.88.8

10.810.810.810.8

5.45.45.45.4

2.22.22.22.2

-4.2-4.2-4.2-4.2

1.41.41.41.4

3.93.93.93.9

-9.4-9.4-9.4-9.4

6.36.36.36.3

-1.4-1.4-1.4-1.4

-5.32-5.32-5.32-5.32

-13.00-13.00-13.00-13.00

-5.56-5.56-5.56-5.56

2.172.172.172.17

--3.993.99--3.993.99

6.016.016.016.01

9.249.249.249.24

0.420.420.420.42

88.02.02 88.02.02

5.095.095.095.09

-0.22-0.22-0.22-0.22

4.524.524.524.52

(US$ M)

Jan-Mar

2003 2004 2005 2005 2006

Balance of Payments

115 -280 2,407 782 2128

Current Account 282 1,626 2,354 733 1166

Capital & Financial

Account726 -1,630 860 1556 1451

Strong BOP position underpinned by robust Strong BOP position underpinned by robust OFW remittances and continued inflows from OFW remittances and continued inflows from exports and investmentexports and investment

Latest overall BOP position for January-July 2006 yielded a surplus of US$2.17 billion

Cash remittances coursed through banks rose by 25 percent in 2005Robust inflows due to continued demand for OFWs and better capture of remittancesFirst six months of 2006 showed growth of 15.4% to reach US$6.0 billion

OFW remittances remain robust OFW remittances remain robust

*/ Cash Remittances coursed through banksSource: BSP

OFW Remittances (in US$ M) */

5959

10689

8550

75786886

1000

3000

5000

7000

9000

11000

2002 2003 2004 2005 J -J un2006

0

5

10

15

20

25

30GrowthRate

Inflows from investments continueInflows from investments continue

*/ Based on custodian banks’ report and BSP registration records

*/ Non-residents’ investments (BOP concept); preliminary

Jan-4AugGrowt

h Rate (%)

(US$M) */2004

20052005

2006

Foreign Portfolio Investment, net 487 2,103 1949 961 -50.7

Jan-MayGrowt

h Rate (%)

(US$M) */2004

2005

2005

2006

Foreign Direct Investment, net 688

1,132 487 743 52.6

Foreign direct investment flows continue to increase

Net Foreign Portfolio Investment flows while lower than last year remain in surplus

GIR & Reserves Ratios

GIR sufficient to cover liquidity GIR sufficient to cover liquidity requirementsrequirements

GIR reaches all time high at US$21.3 billion in July 2006

20032003 20042004 2005200520062006

end-Julyend-July

GIR (US$ bil) 17.1 16.2 18.5 21.3

Import Cover 4.1 3.6 3.8 4.3

GIR/S-T Debt* 2.8x 3.2x 2.9x 3.5X

GIR/S-T Debt**

1.4x 1.6x 1.5x 1.9X

* Based on original maturity ** Based on residual maturity Source: BSP

No bunching of maturities

Adequate external liquidity to service foreign debt

Key debt ratios continue to improve

External debt level remains manageableExternal debt level remains manageableAverage Maturity for MLT Debt

as of end-Mar 2006

Total External Debt US$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 maturity 10.7

Public 12.4

Private 5.5

Source: BSP

Debt Ratios

External Debt to GDP 53.9%

DSB to exports of goods, and receipts from services and income

13.2% (Jan-Apr 2006)

The banking system remains stable supported by strong The banking system remains stable supported by strong asset growth, improving asset quality and adequate capital asset growth, improving asset quality and adequate capital positionposition

4.3T

1.1%0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

1998 1999 2000 2001 2002 2003 2004 2005 Mar-060

2

4

6

8

10

12Level in Trillion% Growth

Banking System: Asset GrowthBanking System: Asset Growth1998 – March 20061998 – March 2006

Universal and Commercial Banks: NPL Ratio (%)Universal and Commercial Banks: NPL Ratio (%)January 2004 - June 2006January 2004 - June 2006

7.22%

5 %

10 %

15 %

20 %

J an

04

Mar

04

May

04

J ul

04

Sep

04

Nov

04

J an

05

Mar

05

May

05

J ul

05

Sep

05

Nov

05

J an

06

Mar

06

May

06

(June ’06)

Commercial Banks: Loans OutstandingCommercial Banks: Loans Outstanding(Y-O-Y growth in %)(Y-O-Y growth in %)

January 2004 - June 2006January 2004 - June 2006

-0.6%

-4 %

-2 %

0 %

2 %

4 %

6 %

8 %

J an

04

Mar

04

May

04

J ul

04

Sep

04

Nov

04

J an

05

Mar

05

May

05

J ul

05

Sep

05

Nov

05

J an

06

Mar

06

May

06

(June ‘06)

Banking System: Capital Adequacy Ratio (%)Banking System: Capital Adequacy Ratio (%)June 2000 - September 2005June 2000 - September 2005

17.6%

10 %

15 %

20 %

'Jun00

'Dec00

'Jun01

'Dec01

'Jun02

'Dec02

'Jun03

'Dec03

'Jun04

'Dec04

'Jun05

(Sep ’05)

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

Policy ObjectivesPolicy Objectives

1. Maintain price stability 2. Sustain growth in OFW remittances3. Strengthen external balances4. Ensure debt sustainability5. Promote a sound and stable financial

system

Policy DirectionsPolicy 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

Policy Directions 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 abroadReview regulations on opening remittance centers abroad

Implement a financial literacy advocacy program for OFWs and their dependents

Policy DirectionsPolicy 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

Policy DirectionsPolicy 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 practicesStrengthen corporate governance principles and market discipline

Policy Directions 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)

www.iro.phwww.iro.ph

Governor Amando M. Tetangco, Jr. Governor Amando M. Tetangco, Jr. Bangko Sentral ng PilipinasBangko Sentral ng Pilipinas

The Philippines: The Philippines: Making Things HappenMaking Things Happen

Mid-Year Economic BriefingMid-Year Economic Briefing05 September 200605 September 2006

Monetary, External and Banking Monetary, External and Banking SectorsSectors