The Bangko Sentral ng Pilipinas continues to pivot post-pandemic as it aims to bring down prices of goods and services and enable more Filipinos and companies to be financially secure amid high inflation globally, rapid technological advancements, and increasing interdependence between countries all over the world.

During a joint meeting of the Rotary Club of Manila, Rotary Club of Makati, Rotary Club of Makati West and Rotary Club Forbes Park last 4 January 2024, BSP Governor Eli Remolona Jr. shared how the central bank is addressing these challenges starting with slowing inflation.

As a primary inflation control measure, Remolona said the BSP has been announcing its inflation forecast each month to anchor expectations of consumers in the face of possible shortage of commodities.

"We're a country that is prone to supply shocks which often lead to expectations. If they're large enough and frequent enough, that leads to higher inflation and second-round effects," he told members of the four Rotary Clubs at their meeting at the Manila Polo Club in Makati City last Thursday.

Government statistics show that since inflation peaked at 8.7 percent in January last year, it dropped to 3.9 percent last month after prices of rice, sugar and fuels jumped in certain months due to export restrictions, suspected hoarding, and Russia-Ukraine and Israel-Hamas wars.

Hitting inflation targets sans recession

"We've caught up. The test whether we fell behind or caught up is whether we managed a soft landing to get our inflation rates to the target without causing a recession or significant slowdown in growth," Remolona said.

The Philippines remained the fastest growing economy in Asia in the third quarter, with 5.9 percent expansion compared to Malaysia's 3.3 percent and Thailand's 1.5 percent, for example.

Moving forward, Remolona is optimistic that the Philippine economy will stay robust with the help of other government agencies, especially the Department of Agriculture, in ensuring enough food supplies.

"We think we will do better than just a soft landing. We will maintain reasonable growth rates. Europe is far behind the curve. Compared to other central banks, I think we're doing very well," he said.

Search for responsive agricultural credit

Despite the overall inflation downtrend, food prices remained relatively sticky as they slightly slowed to 5.5 percent from 5.8 percent, with rice as the top contributor with 1.7 percentage point, according to the Philippine Statistics Authority. The BSP and economists attribute this to drought caused by El Niño.

While the weather is beyond the BSP's control, Remolona said the central bank is exploring ways to encourage higher funding to agricultural workers so they can buy the efficient farm inputs and tools to increase production and distribute produce nationwide.

These will be different from the Agri-Agra Reform Credit Act of 2009 that requires private banks to lend 25 percent of their funds to the agriculture sector, Remolona said.

"We're trying to reform our regulations to accommodate the value chain in agriculture. We need to design credit for agricultural workers in rural areas so that they are consistent in the value chain of agriculture," he said.

BSP data for the first half of 2023 show agricultural lending by universal and commercial banks comprised only 7.1 percent of their total funds.

Meanwhile, agricultural activities slightly rose by 1.4 percent in the third quarter from the level in the second quarter, the Department of Agriculture reported.

Due to relatively weaker agricultural production, the Philippines mostly imported food from Vietnam, followed by Indonesia and Thailand during that period.

"The experience of other countries suggests that the agri-agra law intervention does not work very well," Remolona stressed.

Boosting digital loans

To provide more accessible financing to the general public, Remolona said the BSP is also gathering data from digital banks through its regulatory sandbox where a BSP regulator is assigned to a financial technology firm to monitor the application of its business idea.

"It can test, discuss the proof of concept and pilot your idea. Next is the regulator can tell you what are the regulatory consequences of bringing your idea to the market," he explained.

"Digital banks have been very successful in raising deposits online. But it seems to be very hard to make loans online and collect on loans online. In the Philippines, it seems that you still need a human being," Remolona said.

According to global business consultancy McKinsey & Company, three out of the six digital banks in the Philippines attracted much higher transactions between January 2021 and January 2023. They were GoTyme, Union Digital Bank and UNO Bank.

McKinsey & Company reported their combined market value reached $3 billion, higher than the traditional banks' $2.2 billion during that period. "Six digital banks have recently launched operations in the Philippines, but none are currently lending at scale," the global firm stressed.

However, the BSP chief is hopeful the digital banks can gain traction in loans. "But maybe there is a way to overcome that. Some banks here are more successful than others and in other countries where digital banks have been successful in making loans," Remolona said.

The three other domestic digital banks are Maya, Overseas Filipino Bank and Tonik Bank.

Exit from FATF gray list

Remolona said the BSP is also collaborating with government agencies to speed up the exit of the country from the gray list of the Financial Action Task Force.

The FATF, an international group that helps countries fix problems in their financial systems, such as money laundering and terrorism funding, placed the country on its grey list in June 2021 after it "found that we have strategic deficiencies" in handling the entry and exit of money that is thought to be illegal, Anti-Money Laundering Council Executive Director Matthew David said.

"We've succeeded in achieving 10 out of 18 requirements. I think we will manage to accomplish the remaining eight by October, hopefully," Remolona said.

The BSP chief said the country's inclusion in the gray list could result in cutting of ties by global financial firms with domestic correspondents in processing funds between corporations and remittances of overseas Filipinos to households.

"These are millions and billions of dollars going into correspondent banks. If we lose these relationships, how will the funds come in?" Remolona warned.

"Myanmar, Iran and North Korea at the moment are on the black list. In those countries, they have to sneak in dollars. We don't want to do that," he added.