At the right place, at the right time
When President Rodrigo Duterte asked for a shortlist of candidates to take the helm of the Philippine central bank, Bangko Sentral ng Pilipinas (BSP), there was only one name on that list: Benjamin Diokno.
17 Sep 2019 | Daniel Yu
Diokno, a technocrat with extensive experience in fiscal policy who has served under three presidents – the most recent as the secretary of budget and management – was a surprise choice. Previous governors have either been career central bankers or recruited from the banking industry.
 
But his appointment could well be a sign of the times. Central bankers, including even the world’s most powerful one, the chairman of the US Federal Reserve, are facing the ire of elected politicians.
 
As Raghuram Rajan, the former governor of the Reserve Bank of India and professor of finance at the University of Chicago, wrote recently: “It is no surprise that populist leaders would be among the most incensed at central banks. Populists believe they have a mandate from ‘the people’ to wrest control of institutions from the ‘elites’, and there is nothing more elite than pointy-headed PhD economists speaking in jargon and meeting periodically behind closed doors in places like Basel, Switzerland.”
 
Armed with a PhD in economics from New York’s Syracuse University, Diokno may well be at the right place and at the right time when central bank independence is in the limelight. Indeed, he relates to The Asset in an exclusive interview how attending the Basel meetings, which happen every other month with the participation of about 50 central bankers from around the world, has heightened his appreciation that it is not only monetary policy that is important. “You recognize the interplay between fiscal and monetary policies. That’s what I am. I have an advantage over some people who have been thinking monetary all along.”
 
Some problems cannot be solved by monetary policy alone, he continues. “For example, last year’s spike in inflation was a combination of fiscal and monetary. Monetary is to reduce the inflationary expectation. But there are things we cannot control such as the increase in the price of oil, the increase in food prices. That’s fiscal. As central bank governor, I get to see both.”
 
Reflecting on that time when the inflation rate touched a high of 6.7% in September/October 2018, Diokno says he would have raised the interest rate much earlier. “While both monetary and fiscal policies have a lag time, monetary has a longer lag,” he explains. “Instead of raising the rate by 1.75%, we could have raised it by 1.25% or 1.5%, had we done it much earlier. The advantage (of acting swiftly) is to preempt inflationary expectation. We have to act more boldly. We want to be proactive, not reactive.”
 
Apply and amplify
And he has started to amplify this approach, especially with the speed in which the Monetary Board’s decisions such as the benchmark interest rate and the reserve requirement ratio (RRR) are made. A little over two months into his role, Diokno announced a 25bp rate cut, which was followed by a further cut in August 2019, bringing the benchmark rate for overnight reverse repurchase facility to 4.25%.
 
In the case of RRR for the universal and commercial banks, the announcement of a 200bp cut to 16% last May was launched in stages starting with 100bp at the end of May, another 50bp effective June 28, and the final 50bp on July 26.
 
Diokno, who stepped in this year to serve the unexpired term (which runs for another four years and four months) of Nestor Espenilla, Jr, the previous governor, who died in February 2019, is in a propitious position to carry out his mandate.
 
The new central bank charter was signed into law a few weeks before Diokno was appointed. At the end of 2018, both the Philippine Identification System Act and the National Payment Systems Act were also signed into law by President Rodrigo Duterte. The law on Islamic banking was signed on August 22, and released on August 30. But the anti-hacking bill is still awaiting the President’s signature. “My responsibility is to get these new legislations implemented as fast and as efficiently as possible.”
 
The new central bank charter, in particular, is set to strengthen BSP’s role in fostering financial stability. “This was 20 years in the making,” he reminds The Asset. “With this new charter, we have a bigger capitalization, we have immunity from lawsuits and we now can issue our own instruments.”
 
On financial stability, Diokno believes it is not enough to look at the banks. “You have to look at the whole economy and look for possible threats – be it the real estate market or POGOs (Philippine Offshore Gaming Operators) for example. All these could be risks. That’s why BSP was given subpoena power. We can ask for information from conglomerates and they have to provide us the right information so we can monitor ahead of any potential risk to the economy.”
 
Embracing tech
The national ID and the payment system, on the other hand, are important initiatives in light of the rise of fintechs. “We should embrace technology, not fight it,” he shares. “In many countries, fintech is even bigger than the banks. In the sense that it can promote financial inclusion, we should welcome it. But we also have the responsibility to protect consumers by educating them on the risks of technology. ”
 
Diokno prefers to have oversight on fintech. “We talk with our colleagues in the Asean region. The QR code will be big in the near future. It is important that this is interoperable within the region.” He admits that the Philippines is at an early stage in the adoption of fintech.
 
While lamenting that the Philippines has too many banks, he is sanguine about the health of the industry. “We are stricter than the Basel requirement. The Basel capital adequacy ratio is 8%; the BSP requires 10% and most of our banks are at 15%.” Diokno instead wants to further introduce reform that reduces the friction to credit thereby reducing the cost of credit.
 
“One major problem is the Agri/Agra law, which requires banks to set aside 25% of their portfolio for agriculture and agrarian reform related credits. We want to change that,” says Diokno. A law is being drafted to consolidate the requirements. “The law was instituted many years ago when the agriculture sector contributed about one-fourth of the Philippine economy. Now, it is down to about 8%.”
 
Given the limited areas for lending, Diokno admits the law adds to the cost of the banks. “It is hard for them to comply with this requirement. We want to change it by making it greener such as the use of solar energy for particular projects for particular depressed regions. The draft law will allow for a wider variety of projects including green/blue projects.”
 
Further cuts in the RRR are expected as he aims to bring it down to a single digit by the end of his term. With the inflation outlook for the next 2.5 years – at 2.7% in 2019 and 2.9% in 2020 and 2021 – within the central bank’s target band, he will be carefully monitoring the economy’s absorptive capacity.
 
“Whenever we cut by 1% (RRR), we are releasing something like 90 billion pesos (US$1.72 billion) to 100 billion pesos. That’s a lot of money. Capacity issue is important. The timing (of the cut) is dependent on whether the economy is expanding its capacity,” says Diokno.
 
Reversing the trend
The challenge is the country’s recent economic performance – Q2 growth came in at 5.5%, the slowest pace since Q1 2015 – and given the external headwinds such as the US/China trade war, the global economic outlook is tilted firmly on the downside.  Sounding very much as if he was in his previous role as the head of budget and management, Diokno exudes confidence that the Philippines could weather a downturn better than most. “The first half of 2019 was a blip,” he maintains. “It was due to the delay in the approval of the budget. Had Congress approved the budget in December 2018, the economy could have grown 1% higher. Instead of 5.5%, it would have been 6.5%.”
 
“Because of the lower inflation, consumer spending and capital formation will pick up. A 6% growth rate in 2019 is doable. At 6%, we are still one of the best-performing economies in the world,” he says.
 
As for the external headwinds, he agrees that the US/China trade war is going to hurt everybody. “The effect on individual countries will vary depending on how export-oriented the country is,” Diokno continues. “Fortunately, or unfortunately, we are not export-oriented. We are a big exporter of human services/manpower – and that is not affected. At worst, we are not going to be hit that bad. ”
 
With his firm grasp of the fiscal side – and now as the central bank governor – providing the vital support from the monetary side by accelerating the provision of liquidity, will this tilt towards growth lead to unintended consequences and come at the expense of price and monetary stability in the future? Soon after his appointment, questions were raised about the BSP’s ability to make independent and tough decisions during periods of stress.
 
Diokno insists that the central bank under his leadership remains independent. “The right thing to do is to look at the overall capacity of the economy,” he reiterates. “The most recent study by our foreign consultants indicates that the Philippine economy can grow at 6.5%. Anytime we run above 6.5%, you run the risk of inflation/overheating. Thirty years ago, towards the end of Mrs Aquino’s term (President Corazon Aquino), we brought in Paul Krugman and his team. They made an assessment that at best in the long run, the overall capacity of the Philippines at that time was 3%.”
 
With economic reforms instituted over the years, he says the Philippines is moving to a higher plane. “As long as there is no risk of overheating, we will continue to provide the liquidity needed to support economic growth. If there is overheating, we will have to slow down.”
 
A central banker should be pro-growth, he insists. “You cannot be anti-poor. You set policies that are consistent with what the national government has envisioned. This government wants sustainable, inclusive growth.”
 
Diokno also wants to bring the BSP closer to the people. “People think BSP is so high, so unreachable.”
 
Given the central banking environment globally, that makes sense. In the words of Rajan, the professor at the University of Chicago: “The sooner the public understands that central bankers are ordinary people doing a difficult job with limited tools under trying circumstances, the less it will expect monetary policy to magically correct elected politicians’ errors. Under current conditions, that may be the best form of independence central bankers can hope for.
 
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