It is a big factor, especially on timing. Our constant challenge is to assess whether we are pushing above the limit. The current capacity, which is actually shifting, this is really where from time to time we have to step on the brakes, so to speak. For a central bank, that comes in the form of tightening monetary policy.

Today, fiscal policy is largely expansionary up to a point. The aspiration is a GDP deficit of 3%. It's a justifiable and defensible position considering that we have those kinds of aspirations and we have a certain capacity to finance them.

We are pursuing tax reform because otherwise how would we be able to finance these long-term investments? They cannot be funded by foreign borrowings because that gets you into trouble further down the road. You will soon hit a wall. It has to be a combination.

We are carefully managing our risk rating and over the years we have achieved investment-grade that allows more availability of funding from commercial sources. Of course, diplomacy also plays a role in securing official development assistance, which is also very important.

Foreign direct investment (FDI) is one area that we can do much more, although recent data suggest that we are doing much better on FDI. We certainly need to do more. These are the funding sources from outside, but you also need to mobilize domestic savings.

 This is where the central bank’s contribution can come in by helping to develop the domestic capital market. We create avenues where people can save and those savings can be mobilized to finance investments.

Reserve requirement reduction falls into that concept by making financial intermediation more efficient because reserve requirement is essentially a tax on savings. It has to be reduced down the road. But you have to manage it in such a way so that it doesn't create uncontrolled liquidity expansion. We're not saying that we're going to pursue reduction in one year or even two years. It wouldn't be bad if during my term, I am able to steer the reserve requirement down to the single digit level. That's an aspirational goal. I have a six-year term. I've done one year already, so it is an opportunity.

These are the elements that we have to combine and balance. While you're doing all of that balancing there's a lot of balls being thrown from the outside. This affects the pace and that's really where you need to be constantly monitoring and be ready to adjust. You cannot single-mindedly keep forging ahead. Sometimes the best way forward is to take two steps back and one step forward.

 

I always think of sound policies as buffers. For example, for foreign exchange management we have a fairly thick layer of foreign currency reserves right now equivalent to 7.4 months. But at the same time, we have not pinned ourselves down with a commitment to a fixed exchange rate. By keeping the exchange rate flexible, we are able to adjust to the winds.

Some would criticize the peso and put a negative light on its fall for being one of the most depreciated. To me, its movement reflects the flexibility that we have allowed to happen so that the economy will bend with the wind – but not break. The fundamentals are quite clear: we are running a current account deficit, which is less than 1% of GDP. Some analysts tend to frame that against random surpluses in earlier periods.

But what were the drivers of those surpluses? Two things: from the outside, there were many spill-overs from those advanced economies that weren't growing; capital was flowing out of these economies and into the emerging markets, setting the stage for further problems down the road; we were also in surplus because we were not undertaking much investments.

It wasn't a healthy set of surpluses. In fact, this situation is almost anomalous. Surpluses mean you are giving savings to the world. For a developing economy fundamentally short of savings, you need savings from the world. It was also unsustainable.

Our policy response was to keep those savings in reserves. That's why you saw a more than doubling of the gross international reserves (GIR) from pre-GFC (global financial crisis) levels of US$30-US$40 billion, to over US$80 billion. We could have let that run into the economy and create asset bubbles. But we've learned enough from the Asian financial crisis that that's not the way to go.

 We dammed up the spillover into our GIR and when the time comes – as the time seems to be coming now – when the hot money starts heading home, you can use what you have built up by way of reserves to attenuate the volatility that the situation creates; using the reserves right now and some exchange flexibility is but the mirror image of what we experienced a few years ago when, at best, the peso was appreciating to almost 40 pesos to US$1 in 2008 even as FX reserves were doubling.

 

That is again a story of managing the short term while not forgetting the long term. What we have been doing on the banking front is fundamental and also a buffer. We have steadily built up measures during the good times of the last couple of years, despite the push back from banks, to encourage them to improve the quantity and quality of capital, to improve their liquidity, to enhance the risk management processes and improve their governance along the lines of accepted international reforms.

 We have pushed banks into that zone against the day that the system will be tested. My view is that the banking system today is not going to be an originator of crises as it had been in previous years in some areas where the crisis was either there, or because of its weakness, propagated the crisis.

Our investments in a safe and sound financial system are going to serve us in good stead. Instead of being a point of vulnerability, we expect it to continue its intermediation role, mobilizing savings for our aspiration in investments.

I also preoccupied myself with capital market reform because you cannot finance development purely from the banking system, which inherently focuses on the short-term, intermediating shorter-term money. You need to have long-term sources. The analogy is like an aircraft firing on at least two engines.

 It's not so much technology. The technology is actually there. It's a mindset change. We had to work with the industry to re-examine the business models. Because many start from the point that this is disrupting what has been the good business model for them. It is a cozy one where you have your own ecosystem and closed loops.

While it might be working for some but it's not working for the whole economy as manifested by the large segments that are underserved. The cities are well served but the areas outside the cities don't get much provision in the way of financial services. In remittances, they are expensive; in small businesses, they are not getting the opportunity for financing. It was not a sustainable system. At the same time, you have to consider the challenging geography of the country, the lack of infrastructure and the young population.

This suggested to us that if you wanted to create a more inclusive system, you’ve got to go digital. Digital is important because it creates affordable, scalable solutions that resonate with this kind of market. Previously, part of my role as deputy governor was to get people to focus on this. But what we were grappling with was while they were pursuing digital they were maintaining the close loops – the silos. We then redefined the challenge of promoting interoperability.

In other jurisdictions, you see a single or two dominant players covering all markets. In the Philippines, we already have a lot of players. Rather than go in the direction where you encourage a few dominant players who take over everything, we created an ecosystem of interoperability where banks open up their gateways so that transactions can flow across the system – big and small entities, banks and non-banks can participate. This is the national retail payment system (NRPS).

So in a way, it's different from the way it has evolved in the other jurisdictions. The art is in organizing the private sector getting them to accept that there are areas where we can cooperate and there are areas that we compete. The dialogue was for them to see the reason and the advantage to all of us of agreeing to create the utilities – the clearing and settlement systems – which serve all, allowing them at the customer-facing end to innovate whatever kinds of products they can think of that cater to their chosen markets. That was the balancing that we had to do – promote interoperability, allow cooperation with competition.

 

I would say we're halfway there. We have already created the NRPS framework. We have the banks and the non-banks sitting together in a governance body called the PPMI (Philippine Payments Management Inc), a non-profit entity that's designed to self-govern, create standards and drive development in the payment’s industry. We've already created two priority automated clearing houses: PESONet and InstaPay – real time, low-value push payments and batch credit-push payments, which would potentially supplant the antiquated cheque-based system and create the opportunities in merchant payments.

We are hard at work at creating a national QR code standard that will create interoperable QR codes replicating the successful experiences of other countries such as China. Half of the battle is organizing the providers such as banks and non-banks to create these digital payment highways. But you've got to get the merchants to accept the digital payments en masse. By merchants, I'm not talking about the large establishments. I'm talking about the sari-sari stores (neighbourhood stores). Until that happens, people will receive electronic values, but then cash out and go to the ATM (automated teller machine) and use that cash to pay merchants. You have to close the loop. Merchants have to accept digital payments and use of QR code – here might be the solution.