According to the Oxford Analytica (OA) Monetary Policy Transparency report of 2006, the overall rating of "Compliance in Progress" for the Philippines has remained unchanged from previous years, but there has nonetheless been evidence of significant improvements. For instance, there has been the reduction of the time lag for the publication of Monetary Board meeting minutes from six weeks to four, beginning in 2006. Monetary and financial data compilation standards are currently being reconciled to the standards set out in the International Monetary Fund's (IMF) Monetary Financial Statistics Manual, as well, and it is expected that the standard for compiling government financial statistics will soon be brought into line with those set by the Government Finance Statistics Manual of 2001. The New Central Bank Act of 1993 provides the Philippines Central Bank (BSP) with autonomy as the nation's monetary authority. It provides the mission of the BSP, which is to maintain price and currency stability, and maintain economic growth. Inflation targeting has been adopted by the BSP as its essential monetary policy framework. Long awaited legislation aimed at improving monetary policy transparency in the Philippines is still in the draft stage. The BSP is a subscriber to the IMF's Special Data Dissemination Standard (SDDS).

General Overview

According to the OA Monetary Policy Transparency report of 2006, although the overall rating of "Compliance in Progress" for the Philippines has remained unchanged from previous years, there has nonetheless been evidence of significant improvements. Chief of these has been the reduction of the time lag for the publication of Monetary Board meeting minutes from six weeks to four, beginning in 2006. Monetary and financial data compilation standards are currently being reconciled to the standards set out in the IMF's Monetary Financial Statistics Manual, as well, and it is expected that the standard for compiling government financial statistics will soon be brought into line with those set by the Government Finance Statistics Manual of 2001.

The legislation underpinning the Central Bank of the Philippines (BSP) is the New Central Bank Law of 1993. It establishes the autonomy of the BSP from government control and sets forth the BSP's mission. According to the BSP website, "the primary objective of BSP's monetary policy is to promote a low and stable inflation conducive to a balanced and sustainable economic growth. The adoption of inflation targeting framework for monetary policy in January 2002 is aimed at achieving this objective." The BSP is implementing a Financial Reporting Package to replace the older Consolidated Statement of Condition as the format by which banks submit their own financial reports to the BSP, according to the 2006 OA report. This is expected to harmonize BSP reports to the broader Philippine Financial Reporting Standards and Accounting Standards, as well as to the Basel II Capital Adequacy Framework. According to the OA report, "this will help establish sectorization or delineation of bank assets and liabilities in line with changes in the composition of the different levels of government as recommended by the IMF" (p. 287).

A desire to improve the BSP's oversight of the banking sector has helped to drive these and other reforms. According to the 2006 OA report, the New Central Bank Act was required because, under the old central bank structure, approximately 308 billion pesos in debt had been incurred due to "quasi-fiscal operations carried out on behalf of the government" (p. 288). The extension of greater autonomy to the BSP under the 1993 law has dramatically reduced these activities. The report of the 2006 IMF Article IV Consultation, published in 2007, notes, however, that although "progress is being made in strengthening balance sheets, but the level of distressed assets still remains high" (p. 4). The staff urged that long-planned legislative action go forward to help address this problem, and to increase legal protections for BSP officials and staff in the performance of their duties.

The OA report also notes that the BSP has made progress in its anti-money-laundering legislation, and has moved forward with the introduction of Basel II. The first step in achieving this latter goal was taken on July 1, 2007, when banks were required to standardize their assessment of credit and operational risk, placing higher risk weighting on non-performing loans. The second step, due to commence in 2010, will permit banks to adopt a more advanced internal ratings-based system.

New legislation, including amendments to the New Central Bank Act (NCBA), are contemplated for the near future. These are all aimed to enhance the supervisory power of the BSP and increase protection for BSP staff in the course of carrying out their duties for the bank. In addition, as noted in the 2006 OA report, "the BSP has recently established insurance to protect its officers. It has arranged liability insurance from the Government Service Insurance System (GSIS) to cover members of the Monetary Board, directors of departments and other officers judged to be the most likely subjects of lawsuits. This is expected to help enhance the independence of central bank policy" (p. 287).

The IMF's 2006 Article IV consultation (published in 2007) also found that the BSP had recently reintroduced a policy of tiering, "whereby placements at the central bank attract progressively lower interest rates" (p. 4). The IMF staff expressed concerns that this could raise problems for the successful application of the BSP's inflation targeting strategy by compromising the forecasts upon which it is based. The BSP, however, has stated that the practice of tiering is only temporary, and is being used to address upward pressures on its exchange rates. IMF staff concerns regarding the practice were somewhat allayed by the recognition that the authorities "were, in any case keeping a close watch on incipient inflationary pressures and stood ready to take policy action if necessary" (p. 12). The Philippines is a subscriber to the IMF's Special Data Dissemination Standard (SDDS), and its monetary data meets the requirements of the SDDS in terms of coverage, timeliness, and periodicity, according to the IMF SDDS website.

The Principles

Clarity of roles, responsibilities and objectives of central banks.

CP

According to the 2006 OA report, the Philippines was rated as "Compliance in Progress" for this principle, unchanged from the previous year. The legislative underpinning for the BSP is provided by the New Central Bank Act (1993). The BSP is established as the independent monetary authority of the Philippines, mandated to maintain price stability, monetary stability, and the convertibility of the Philippines currency. Monetary policy formulation and implementation is the responsibility of the BSP, along with its supervisory and regulatory role over the banking sector and non-bank financial institutions. The New Central Bank Act establishes that the BSP is the government's banker and financial advisor, it is the government's representative to the IMF and Bank of International Settlement, and it serves as the depository for all government agencies through the cash account that it maintains for the Treasury. It observes and provides advice regarding the activities of the Investment Coordinating Committee and the Committee on Tariffs and Related Matters, and observes the work of the Development Budget and Coordination Committee. It is also an ex-officio member of the National Economic and Development Agency board.

The OA report asserts that the New Central Bank Act was required because, under the old central bank structure, approximately 308 billion pesos in debt had been incurred due to "quasi-fiscal operations carried out on behalf of the government" (p. 288). The extension of greater autonomy to the BSP under the 1993 law has dramatically reduced these activities. Further legislation is in the works to add to the supervisory authority of the central bank, extending its authority to the examination and sanctioning of bank subsidiaries and affiliates and authorizing closer monitoring of trust and savings-and-loan entities. The OA report suggests that this legislation will also upgrade current supervisory standards, clarify the definition of stockholder control, and waive laws regarding deposit secrecy in the case of bank officers, stockholders, and other interested parties. Amendments are being contemplated that would also extend to the BSP oversight over the payments system and empower the BSP to approve or disapprove share transfers that could affect the composition of a bank's board of directors or shift the control or ownership of the bank in question. The OA report notes that, should these amendments fail, the BSP seeks to implement "a new Prompt Corrective Action (PCA) framework outlined in March 2006" (p. 288). Additional draft legislation will address the Payment System, strengthening the BSP's administrative power in that area, as well.

The provisions of the New Central Bank Act removed from the government the legal authority to formally insert itself into BSP decision-making. However, the president appoints Monetary Board members, and may still dismiss them, although the grounds for dismissal are limited to fraud, illegality, or "unfitness to hold office." The OA 2006 report cautions that, although no dismissals have yet occurred, "the criteria and process for selecting Monetary Board members are not transparent" (p. 289) and cites recent public concern with the possibility that cronyism, rather than professional credentials, have been the primary basis on which appointments have been made.

In the opinion of the OA 2006 report, the New Central Bank Act has had the effect of substantially reducing the BSP's extension of credit to the government. However, the BSP does retain certain rights regarding the purchase and sale of government securities. The OA report states that "the purchase and sale of such debt securities" (in connection with the BSP's open market operations) "may be made outright or using repurchase agreements. The BSP may also issue, buy, and sell its own securities in cases of extraordinary movements in price levels" (p. 289). The BSP may also offer short-term advances to the government if such are needed to fund authorized budget expenditures, when needed. There are, however, limits on the size of these advances, such that, in total, they cannot exceed 20 percent of the borrowers annual income, calculated as an average of the past three years. In practice, this has had the effect of making it very difficult for the government to request such advances, since there is no mechanism as yet in place by which to calculate the three-year average annual income figure on which such an advance would be based.

The BSP reports its monthly analytical accounts (on an approximate 2-month lag) of the monetary board in two publications: the Selected Philippine Economic Indicators and the International Financial Statistics, both of which are accessible on the BSP website. The consolidated data is not accompanied by interest rate or repayment information pertaining to BSP loans to the government. The New Central Bank Act tightly governs the BSP's activities in the non-banking sector. It bars BSP direct or indirect acquisition of any shares in other firms, and forbids BSP employees from employment in firms that are subject to BSP supervision. It disqualifies from appointment to the Monetary Board anyone who has been connected in any way with multilateral banks or private banks until at least one year after leaving such affiliation. Board members are prohibited from concurrent employment in the banking sector or for two years following their participation on the board (OA 2006).

The OA report suggests that these rules could be more clearly stated, however, noting that there have been violations of the law in recent years. The law requires the BSP to provide a monthly statement of its net profits and losses, and to make adequate provision for bad accounts. According to the 2006 OA report, "within the first sixty days of the end of each fiscal year, the BSP is required to transfer 50% of its net profits to the national treasury and retain the remaining 50%, unless otherwise provided under the transitory provisions of the NCBA" (p. 290). The OA 2006 report goes on to note that "any profit or loss arising from revaluation of BSP net assets or liabilities in gold or foreign currencies, with respect to the Philippine peso, is not included in the computation of BSP annual profits and losses but is carried in a special frozen account in the BSP General Balance Sheet under the 'Revaluation of International Reserves' account" (p. 290).

Open process for formulating and reporting monetary policy decisions.

CP

According to the 2006 OA report, the Philippines was rated as "Compliance in Progress" for this principle, unchanged from the previous year. The BSP has adopted an inflation targeting framework, which is expressed as a range, set by the national government and the BSP for a given year. The OA report judged the BSP public information mechanisms for communicating the rational for and functioning of this framework to be adequate. According to the OA, "the BSP regularly disseminates quarterly inflation reports, reports on monthly inflation, and the minutes of its Monetary Board meetings" (p. 291), but the published inflation rates sometimes sharply deviate from those which actually occur. The report also notes that the BSP recently has had recourse to interventions in the foreign exchange market and building reserves.

The BSP website provides public access to the text of its rules, policies, and procedures established under the New Central Bank Act and its own regulatory framework. According to the OA 2006 report, the mechanisms used by the BSP to carry out its policies include special deposit accounts, facility, reserve requirements, transaction rediscounting, and short-term interest rates, "specifically the overnight RREPO (Reverse Repurchase Rate) and the overnight REPO (Repurchase Rate)" (p. 291).

The New Central Bank Act governs the structure and function of the Monetary Board, which is the policy-making agency that exercises the BSP's powers. The seven-member board is comprised of the governor and a cabinet-level official, along with five private-sector individuals. All are appointed by the president. The BSP website provides information on the board, its members, and its activities. By law, at least four members of the Monetary Board (with one being the president or a legitimate representative thereof) must meet weekly. Emergency provisions allow the governor, with the concurrence of at least two other board members, to make decisions outside of the board meeting structure. Standards of accountability for board members, BSP officials, and others involved in monetary policy are clearly set forth in the New Central Bank Act, which makes these individuals financially liable should the BSP or other banks suffer losses due to abuse of power, negligence, or other offenses. An advance meeting schedule for the Monetary Board is published on the BSP website and other BSP publications.

The BSP website publicly releases "highlights" that set out the rationale for the Monetary Board's policy decisions, assessments of the outlook on inflation, macroeconomic conditions, the exchange rate, production and consumption indicators, and other salient macroeconomic information. These are presented alongside a summary of board meeting discussions. The board's votes are reported, but individual voting behavior is not specified. In the past, these "highlights" were published with a time-lag of six weeks but, commencing in 2006, that lag was reduced to four weeks. By law, the BSP must report all regulatory changes or additions to the president and congress, along with comprehensive quarterly and annual reports, which must also contain explanations of the policies and decisions underlying the data and its analysis. According to the OA 2006 report, "a statement on the Monetary Board's decisions on monetary policy is released to the press and posted on the BSP website immediately after Monetary Board meetings on the monetary policy stance" (p. 292).

In addition, the BSP website lists a variety of regular publications relevant to monetary policy. These include weekly summary analytical accounts, a detailed quarterly balance sheet (appearing in the "Report on Economic and Financial Developments,"), an Annual Report, periodic fact sheets, and the monthly "Selected Philippine Economic Indicators," which publishes, inter alia, information on all monetary operations of the BSP. The OA notes that the Annual Report and "Selected Philippine Economic Indicators" provide aggregate data, but often do not break them down into detailed categories. SEC regulations require publicly listed companies in the Philippines to provide quarterly statements regarding their financial condition, and BSP regulations extend that requirement to all banks, even those that are not listed publicly. In addition, the BSP publishes the quarterly "Business Expectations Survey and Consumer Expectations Survey," as well as an advance release calendar (released quarterly on the website) of key statistics, as well as contact information for the sources of the statistical data.

The New Central Bank Law makes no requirement that monetary policy changes be subject to public hearings, but the OA 2006 report notes that the BCP commonly seeks public input in the policy making process. Also, the OA report notes, "the central bank has been conducting a series of public information campaigns as part of the authorities' effort to bring greater transparency to the making of monetary policy" (p. 292).

According to the 2006 OA report, "the BSP has tightened banking supervision in recent years, requiring more extensive reporting, in particular on banks' non-performing loans and transactions with directors, officers, stockholders and related interests" (p. 293). Both the use of external audits (reporting to the BSP) and the implementation of international standards of accounting within banks are a part of this policy. The BSP's legal responsibility to conduct annual reviews of every branch has been frustrated by a lack of resources, given the size of the task, and this situation requires remedy. According to the 2006 OA report, there have been some attempts to modernize and consolidate the sector in an effort to redress the problems, along with the adoption of the IMF's Monetary and Financial Statistics Manual in the compilation of data.

The 2006 OA report asserts that "expanded institutional coverage and uniform conversion of foreign currency accounts began in March 2004 with the publication of the Depository Corporations Survey (DCS) covering all deposit-taking institutions. Initial periods covered were December 2001, December 2002, December 2003, and January to July 2004" (p. 293). The Consolidated Statement of Condition reports that were long employed by banks were set to be replaced by a new Financial Reporting Package, more in line with internationally accepted classification and sectorization standards in January of 2007.

With the consultation of an IMF technical support mission, the Department of Finance, BSP, and other interested agencies have worked in tandem to address classification issues for Government Owned and/or Controlled Corporations (GOCCs), according to the 2006 OA report. In addition, these agencies have worked to bring the broader range of government financial statistics into line with the Government Financial and Statistical Manual of 2001 (GFSM 2001). As a result of this collaboration, significant progress in these areas has been made. The OA report of 2006 also noted that bank financial statements upgraded their accounting standards to comply with the more rigorous International Accounting Standards (IFRS) as of year-end, 2005. As of July 1, 2007, banks began to be required to standardize their evaluation of credit and operational risks, with higher weightings placed on non-performing loans, as phase one of the implementation of Basel II. Phase two, set to commence in 2010, will permit banks to adopt the internal ratings-based approach.

The passage of new anti-money laundering legislation, specifically the Republic Act (No. 9194), and upon confirmation that the new legislation was being appropriately implemented, countermeasures previously threatened by the Financial Action Task Force (FATF) against the Philippines were withdrawn and the Philippines was removed from the FATF's list of non-cooperative countries and territories. The Philippines became a member of the Egmont Group of financial intelligence units in June 2005. Additional steps taken by the BSP regarding the anti-money laundering effort included an expansion of the list of agencies (e.g., pawnshops, moneychangers) to be monitored, and a requirement that all Philippine banks establish electronic monitoring of money laundering transactions no later than October 2007.

The OA report of 2006 also noted that bank financial statements upgraded their accounting standards to comply with the more rigorous International Accounting Standards (IFRS) as of year-end, 2005. As of July 1, 2007, banks were required to standardize their evaluation of credit and operational risks, with higher weightings placed on non-performing loans, as phase one of the implementation of Basel II. Phase two, set to commence in 2010, will permit banks to adopt the internal ratings-based approach.

Public availability of information on monetary policy.

CP

The OA 2006 report rated the Philippines as being in "Compliance in Progress" with this principle. According to the IMF SDDS website, to which the Philippines subscribes, data reporting meets the SDDS standards for financial, and fiscal data in terms of coverage, timeliness, and periodicity. As is clear from the Philippines page of the SDDS website, the BSP has the responsibility for providing access to the following financial data categories: banking-sector analytical accounts, central bank analytical accounts, balance of payments, international reserves and foreign currency liquidity, international investment position, external debt, and exchange rates. The Philippines takes recourse to the flexibility option in the provision of production and producer price index data. The BSP also uses the SDDS site to disseminate the Philippine Stock Exchange's data on the stock market share price index, the PSEi.

According to the OA 2006 report, the Philippines government has improved its statistical reporting, addressing weaknesses that had been identified by the IMF in the past, particularly with regard to balance-of-payments data, which is now consistent with the IMF's Balance of Payments Manual, 5th edition (BPM5). The BSP website regularly publishes technical notes on changes in the data compilation methodology as they occur. The BSP website also makes publicly available an advance release calendar, which is published on the first business day of each month. This information also appears on the website of the National Statistical Coordination Board.

The BSP website lists a variety of regular publications relevant to monetary policy. These include weekly summary analytical accounts, a detailed quarterly balance sheet (appearing in the "Report on Economic and Financial Developments,"), an Annual Report, and the monthly "Selected Philippine Economic Indicators," which publishes information on all monetary operations of the BSP. The OA notes that the Annual Report and "Selected Philippine Economic Indicators" provide aggregate data, but often do not break them down into detailed categories. SEC regulations require publicly listed companies in the Philippines to provide quarterly statements regarding their financial condition, and BSP regulations extend that requirement to all banks, even those that are not listed publicly.

The 2006 OA report judged the BSP's public information efforts as being of high quality, singling out the BSP website for particular note. The OA report lauded the website's provision of "links to a comprehensive database of macroeconomic and financial statistics, reports, press releases, and speeches by the governor," particularly with reference to the focus on the BSP's inflation-targeting framework. The BSP website also regularly reports, and provides text for, new regulations as they are adopted.

Accountability and assurances of integrity by the central bank.

CP

According to the OA 2006 report, the Philippines was rated as "Compliance in Progress" for this principle. The New Central Bank Act is silent on requirements for BSP officials to report to public authorities. However, the BSP does submit quarterly reports on economic and financial conditions and submits its annual report to both the president and the congress. According to the 2006 OA report, the BSP also provides regular briefings to the congress, and its governor frequently attends the presidents cabinet meetings.

The BSP provides a consolidated financial statement on a monthly basis, published in the "Selected Philippine Economic Indicators." The quarterly "Report on Economic and Financial Developments" includes a review of the BSP's financial status, as well. The BSP's Annual Report contains the bank's audited financial statement. According to the 2006 OA report, in 2005-2006, the BSP began a review of the bank's policies regarding financial assistance to ailing banks, and new guidelines were developed to deal with problems disclosed during this review. Further improvements were noted in the bookkeeping, monitoring, and management practices of the Philippines Deposit Insurance Corporation, particularly in the area of computerized loan data.

The BSP undergoes annual external audits by auditors who have been appointed by the Commission on Audit (CoA). The legislation that governs the CoA is the Article IX-D of the Administrative Code of 1987, which grants CoA independent auditing powers over government accounts. The CoA itself does monthly audits of government accounts, publicly available, and is empowered to impose additional audit requirements on deficient agencies. According to the 2006 OA report, "to date, the CoA has never made an adverse finding against the BSP" (p. 297). The CoA's audit findings and other observations arising from the BSP annual audit is submitted to the Monetary Board. Compliance with CoA recommendations is monitored internally by the BSP's Internal Audit Office, which tenders a quarterly report to the Corporate Audit Committee. The audit office and audit committee consult twice a month with the CoA on compliance and other issues. The Internal Audit Office has inaugurated a new Quality Management System to further improve internal audits, according to the 2006 OA report,. Each quarter, the Internal Audit Office follows up on the various departments of the BSP to evaluate progress made in compliance to audit recommendations. These reports are reported to the BSP governor.

CoA Circular No. 91-368 sets the standard for data compilation regarding BSP activities is set by the CoA's own Government Accounting and Auditing Manual (CoA Circular 91-368), while CoA Circular 2002-002, Manual on the New Government Accounting System, sets the standard for accounting procedures. Methodological and source data information are also available on request through the National Statistical Coordination Board. Standards of conduct for BSP officials and staff are detailed in the Ethical Standards for Public Officials and Employees (Republic Act, no. 6713). The BSP also distributes an Employee Handbook to all its staff. The New Central Bank Act sets rules of conduct regarding conflicts of interest. The OA 2006 report, however, notes that violations of conflict of interest rules have been known to occur without legal consequences.

Article 2, Section 15, Subsection (e) of the New Central Bank Act required that members of the Monetary Board and other BSP officials and supervisory staff members be indemnified "against all costs and expenses reasonably incurred by such persons in connection with any civil or criminal action, suit or proceedings to which he may be, or is, made a party by reason of the performance of his functions or duties, unless he is finally adjudged in such action or proceeding to be liable for negligence or misconduct." According to the 2006 OA report, there are amendments proposed to this law that would clarify the individuals eligible for such indemnification, as well as to "expand the coverage of the indemnification of legal costs and expenses to all personnel of the BSP and limit the exclusion for indemnification only to cases of gross negligence and misconduct" (p. 298). Further suggested amendments would require of BSP staff the degree of diligence currently required of individuals serving in other governmental departments, rather than imposing the standard of "extraordinary diligence." Finally, the OA report notes that the BSP now offers insurance to certain of its officers to protect them from liabilities arising from the proper conduct of their duties. There is also the option of self-funded insurance, available to directors and bank officers. Neither insurance option provides protection in the case of claims arising out of fraud, illegality, or abusive acts.