Global Finance magazine interviewed Philippines Central Bank Governor Eli Remolona, who earned an “A–” grade in the magazine’s 2024 Central Banker Report Cards. Remolona talks about the country’s early decision on cutting rates, its credit growth, and its pursuit of sustainable economic development.
Global Finance: What is the Philippines economic growth outlook for 2024-25?
The outlook for domestic output growth over the medium term is largely intact. With 6.3% growth in the 2nd quarter, it would likely settle within the government’s target in 2024 as a whole. We expect growth to be supported by robust construction spending and the timely implementation of various government programs.
GF: The Philippines Central Bank (BSP) was the first major central bank in Asia to cut rates following the widespread regional post Covid-19 monetary tightening. Is the bank comfortable acting ahead of the Fed?
Eli Remolona: The BSP takes a data-driven approach to policymaking. The cut in rates in August was driven by our projections of inflation and growth based on the latest data on domestic conditions. The timing of the FOMC’s actions did not play much of a role in our decision.
In fact, about two months before our latest policy rate cut, our forward guidance already indicated that we expected to shift to a less hawkish monetary stance. I also mentioned during an economic forum in early July that the BSP did not need to wait for the US Fed to cut rates before we do.
The rate cut [in August] came amid a favorable inflation outlook. A key factor to this is the recent Executive Order lowering the tariff on rice imports. Rice is the staple in Filipino households, and so changes in rice prices have considerable impact on overall inflation. In addition, core inflation has continued to ease, with a September reading of 1.9%.
Our latest estimates show that even if some risks to inflation materialize, inflation will settle at 3.3 % this year, 2.9% next year, and 3.3% in 2026. These are all within the target range of 2-4%.
With inflation now on a target-consistent path, we have room for a calibrated shift to a less restrictive monetary policy stance.
The reaction of financial markets to the BSP easing its policy rate earlier than the US Fed has been relatively muted, with the Philippine peso weakening only slightly versus the US dollar right after the recent policy decision and has since continued to appreciate.
GF: How has BSP’s prior policy-rate tightening impacted the Philippine’s key economic variables, and what direction are domestic interest rates headed?
Remolona: Previous policy rate increases had some dampening effect on demand, including credit activity. Nevertheless, the impact of tight financial conditions was something the domestic economy could absorb — as indicated by sustained GDP growth and improving employment conditions.
On the domestic interest rate path, the current macroeconomic outlook, including target-consistent inflation, supports a calibrated shift to a less restrictive monetary policy stance. However, the BSP will continue to monitor lingering upside risks to prices, including those coming from higher electricity rates and external factors.
GF: What is the outlook for credit growth and credit quality in the Philippines over the next year?
Remolona: The country’s banking sector has been a reliable source of strength for the economy. Bank lending has consistently grown to support economic activities without compromising credit quality. We attribute this in part to prudent lending standards of banks.
Total loan portfolio of the country’s banking sector amounted to P14.2 trillion ($254 billion) as of end-July 2024, up by nearly 11% from a year ago. Of this loan portfolio, non-performing loans account for 3.58%, which is very manageable.
We expect the trend of robust loan growth and good credit quality to continue in the months ahead.
GF: How significant are ESG considerations and the net zero commitment to the BSP’s modus operandum over the medium term?
Remolona: The Philippines had committed to peak carbon emissions by 2030. At the same time, we recognize that climate change poses challenges to our mandates of promoting price and financial stability. This highlights the urgent need for central banks and supervisors to refine monetary and prudential tools to take account of ESG factors.
Firstly, monetary policy decisions will need to take increasing account of the physical risks of weather events. These threaten to present supply shocks that are more significant than the recent shocks in oil and food prices. In the case of the Philippines, these shocks led to an inflation rate of 8.7% in January 2023, the highest in 14 years. It is evident that we can no longer look through these shocks since they change inflation expectations and lead to significant second-round effects.
Climate change also presents a major challenge to our mandate of promoting financial stability. We think climate risk is the ultimate systemic risk. While we have issued regulations that embed ESG considerations into bank’s risk management frameworks, we must enhance our surveillance tools further.
We are collaborating with relevant government agencies and other stakeholders to leverage available data, models and expertise in order to strengthen our understanding of climate risk and its impact on the financial system. Our efforts to deepen the domestic capital market and provide alternative funding sources aim to channel funds toward eligible green or sustainable projects. In addition, the BSP is pursuing an inclusive sustainability agenda. Our initiatives to increase capital flows and green finance to promote just transition and resilience building are also designed to benefit the most climate vulnerable segments, such as the agriculture sector, and small and medium enterprises.
Moreover, the BSP is committed to incorporating sustainability in its own operations. As a signatory to the UN-supported Principles for Responsible Investments, we are dedicated to integrating ESG considerations into our investment practices.