ALMOST three months since he took over the Bangko Sentral ng Pilipinas (BSP) as the appointed governor and chairman of the Monetary Board, former Budget Secretary Benjamin E. Diokno rolls up his sleeves to create his own path as the head of the country’s central monetary authority.
Diokno is the 12th man to lead the country’s monetary institution that was first led by Miguel Cuaderno Sr. in 1949, when the BSP was still known as the Central Bank of the Philippines. Diokno succeeded fourth BSP governor and 11th monetary authority chief Nestor Espenilla Jr., who succumbed to cancer in late February.
Diokno, who was considered as an “outsider” as he had not served the central bank prior to his appointment, holds a Master of Arts in Political Economy from Johns Hopkins University in Maryland and a PhD in Economics from the Maxwell School of Citizenship and Public Affairs in Syracuse University in the United States.
Upon his appointment, the BSP said Diokno “brings with him a special brand of leadership honed from decades of exposure to different facets of government operations.”
In his talk with the BusinessMirror, Diokno shared the direction that he intends to pursue from government budgeting to central banking, and talked about his plans and priorities for the central bank now that he has settled in his seat as the BSP chief.
“Indeed, the transition has come with challenges attendant to moving to a new home. As I now roll up my sleeves as a monetary policy-maker and financial regulator, allow me to emphasize three items that I have been pursuing,” he said.
Among these priority paths that Diokno created for the central bank include: implementation of recently enacted laws, institutional independence and stakeholder engagement.
“Under my watch the BSP shall have strict and prompt implementation of recently approved structural reforms,” Diokno said.
Among the recent pieces of legislation he mentioned are the amendment of the BSP charter, the National Payments System Act (NPSA), and the recently passed gold bill, which encourages more small miners to sell their gold directly to the BSP.
In February this year, President Rodrigo Duterte signed into law Republic Act 11211, or “An Act Amending RA 7653, Otherwise Known as the ‘New Central Bank Act’.”
This is considered a milestone since July 3, 1993; the day the New Central Bank Act took effect.
REPUBLIC Act 11211 aims to embody a package of reforms that will further align BSP’s operations with global best practices, improve the BSP’s corporate viability, and enhance its capacity for crafting proactive policies amid rising interlinkages in the financial markets and the broader economy.
The new law authorizes the increase in BSP’s capitalization from P50 billion to P200 billion, to be sourced from dividends declared by the BSP in favor of the national government. Under the new BSP charter, the BSP is also exempt from taxes on income derived from its governmental functions. RA 11211 also restores the central bank’s authority to issue debt papers as part of its regular operation.
In terms of mandate, the law removes money supply and credit levels as basis for determining monetary policy. Also among the salient points of the new law is the wider coverage of institutions under BSP supervision to include money service businesses, credit granting businesses and payment system operators.
A baseline inventory
The National Payment Systems Act, meanwhile, was passed October last year, with its implementing rules and regulations just passed in April 2019.
The NPSA is the landmark legislation that gives the BSP authority to handle its mandate of maintaining a safe and reliable payment system. In the first phase of their IRR, the BSP said they are looking to prioritize the creation of a baseline inventory of all operators of payment systems (OPS) with the new circular.
This is required under Section 10 of the NPSA, which provides that all OPS shall register with the BSP. This inventory will be used as input to the specific criteria for designating payment systems, as well as the oversight rules to be applied to such systems and the participants.
Also included among the salient points of the first tranche of the IRR are descriptive examples—albeit not exhaustive—of activities to sufficiently guide the stakeholders on which persons are required to register with the Bangko Sentral as an OPS under the NPSA. The IRR also contains a simplified registration process and streamlined documentary requirements.
The most recent streamlining tack includes RA 11256, or “An Act to Strengthen the Country’s Gross International Reserves (GIR),” which was passed just last month. The new law exempts from excise and income tax the sale to the BSP of gold sourced from small-scale mining activities. The measure also covers the sale of gold by small-scale miners to accredited traders for the eventual disposal to the central bank.
RA 11256 seeks to remedy the 99-percent drop in BSP’s domestic gold purchases from more than 900 thousand fine troy ounces (FTO) in 2010 to around 10 thousand FTO in 2019 as a result of the taxation of the sale of gold to the BSP beginning July 2011. Gold holdings are one of the components of a country’s GIR—or the economy’s dollar reserves that will be used to cushion the economy should an external crisis affect the country.
Guesting at the BusinessMirror Coffee Club, Diokno also talked about pending legislation they are waiting for, including the anti-bank hacking law—which was recently passed by the Senate in the final reading, as well as the two bills that they have to refile under the new legislative house: the amendments to the bank secrecy law and the Agri-Agra law.
THE governor said while the Agri-Agra law’s intentions are good, some provisions are outdated and the law really needs to be amended.
“So one possibility is we will just consolidate, consolidate the 25 percent [required lending] and then maybe provide more flexibility in the use,” Diokno explained. “For example, you can issue a bond that will develop some areas that should be compliant with that law. You don’t want to have so many rules that will tie up the banking industry. We want the banking industry to be very efficient the way we want to help the country.”
Diokno said the second agenda is institutional independence.
“In pursuing policy continuity, the BSP shall remain an independent institution under the guidance of the Monetary Board,” he said. “Our policy decisions shall remain evidence-based, data-driven and cognizant of prevailing market conditions.”
Under his leadership, the Monetary Board already slashed its main policy rate by 25 basis points.
“In deciding the stance of monetary policy, the Monetary Board noted the impact of the budget delays on near-term economic activity, but took the view that the prospects for domestic demand remain firm, to be supported by a projected recovery in household spending and the continued implementation of the government’s infrastructure program,” Diokno earlier said.
A decision’s consequence
GROWTH for the first quarter of the year slowed to 5.6 percent—the lowest growth for the country in four years. Government officials blamed this on delays in the approval of the national budget.
While a rate cut is known to be supportive of an economy’s growth prospects, Diokno said their decision is “independent” of the government’s budget issues and that the lower interest rate’s ability to support local growth is more of a “consequence” of their decision rather than the actual goal of the cut.
Diokno has also moved to cut the big banks’ reserve requirement ratio (RRR) from 18 percent down to 16 percent. The implementation of the cut will be in three stages: the first 100-basis-point cut will be effective May 31; another 50-basis-point cut will be implemented June 28; and the last 50-basis-point cut will be effective July 26.
A week after its cut in the universal and commercial banks’ RRR, the BSP moved to cut its deposit requirement again—this time on smaller banks in the system.
Cutting the RRR
The RRR of thrift banks was cut by 2 percentage points—from the current 8 percent down to 6 percent—with the implementation dates as follows: 100 basis points effective May 31, 2019; 50 basis points effective June 28; and 50 basis points effective July 26.
For rural and cooperative banks, the RRR was also cut by 100 basis points—from 5 percent to 4 percent—effective May 31, 2019.
The RRR is one of BSP’s monetary tools. It is the portion of depositors’ balances that banks are asked to keep idle in the BSP’s vaults as reserves. Even at 16 percent, the Philippines still has one of the highest RRRs in the region. This means that a significant chunk of the bank’s funds are kept in the BSP’s coffers instead of being lent out to fuel economic growth.
Aiming for efficiency
DIOKNO said in the BusinessMirror forum that the fresh money from the central bank’s coffers and into the local cash stream will make the banking system more efficient in delivering a more inclusive growth to the economy.
“We want the banking industry to be very efficient. So the way we want to help the country from the rich to the poor and the poorest of the poor, as well as the small-scale industries, is by having a program of reducing the reserve requirement,” Diokno said.
Diokno also said that so far, banks have been “behaving properly” and are seen to be putting their recently freed-up money into the more productive sectors of the economy.
“They are really well-behaved…the banks, they are not using the money for speculative purposes,” the governor said.
“If you want to make the banking system more efficient and become a partner in development, you let them lend more money. At the same time, we cannot direct the banks to invest their money in this or that; that is too much. That is micromanagement,” he added.
Next: Stakeholder engagement
Aside from inflation as the main driver of monetary policy, Diokno said he is also pushing for more considerations under his watch.
“The traditional thing is to look at inflation, but you have to look much broader than that, in fact, I am asking them to look at capacity utilization. They have to look into it. Are we hitting the capacity of the economy? We have to have a handle on that; also, real estate. So it’s going to be much broader than just inflation,” he said.
“Third is sustained stakeholder engagement. The pursuit of our mandate requires effective communication of our policies and programs, as well as the impact on the lives of our countrymen,” the governor said.
Diokno, dubbed by some analysts and economists as a “progrowth governor,” said growth per se is not bad. But now that he is BSP governor, he wants to see a more inclusive growth by keeping the inflation rate of the country at bay.
Developing sustainable growth
DIOKNO said the kind of growth he’s trying to pursue “is sustained, balance and inclusive growth.”
“And to attain that objective, you really need to have stable prices, because the first biggest loser of inflation is the poor. The poor, they are fixed income earners so remember if prices are high, with fixed income they cannot cope, so they have to cut down on spending and consumption,” he explained.
Diokno added that a rise in inflation prices doesn’t bother the rich.
“The rich, not so much. If you are a businessman, if the price of oil goes up you just pass it on to consumers, right? But the poor, they are really the major loser if prices are unusually high. So that is very important,” he said.
The BSP chief further explained he is set to explore more bilateral relations with the greater Asia, citing the benefits of recent bilateral partnerships with other central banks in Southeast Asia.
Diokno has his eyes particularly set on signing more bilateral agreements with their counterpart monetary authorities in China, Japan and South Korea.
This, after the Philippines reaped the benefits from recent regional bilateral agreements among member-countries of the Association of Southeast Asian Nations (Asean).
Some key dates in BSP’s History
3 January 1949
The Central Bank of the Philippines (CBP) was inaugurated and formally opened with Hon. Miguel Cuaderno Sr. as the first governor. (This was three years after the relinquishment of American sovereignty over the Philippine Islands.)
3 July 1993
The New Central Bank Act took effect. The Bangko Sentral ng Pilipinas (BSP) was established to replace the CBP as the country’s central monetary authority.
16 February 2019
President Duterte signs BSP’s Charter Amendments into law. The law strengthens BSP’s capacity to foster price and financial stability6 March 2019
President Rodrigo Roa Duterte administers the oath of office of Benjamin E. Diokno as the new BSP Governor
FOR years now, the country’s central monetary authority has been establishing ties with its counterparts, particularly in the Asean region, as part of the regional banking integration framework. One of the most recent of this is the fintech cooperation agreement signed by the BSP and the Monetary Authority of Singapore in 2017. The signing seals a partnership made in an effort to promote innovation in financial services in both jurisdictions.
With this, Diokno said he plans to touch base with other Asian central banks to create similar bilateral agreements.
“We plan to replicate the cooperation agreement with other regulators, particularly China, South Korea and Japan. And increasing the number of fintech players from this country could offer innovative solutions in crypto currency and digital banking,” Diokno said at the BusinessMirror forum.
“We have to learn lessons from them. To me, it’s good to talk with them and find out how they do it and their monetary policy. Given the technological innovations, the conduct of monetary policy will change. So we have to learn,” he added.
Enabling the industry
While it came as a surprise for the markets, Diokno’s appointment as BSP governor in early March was welcomed by the Bankers’ Association of the Philippines (BAP).
In a statement, the BAP said they are “optimistic that the reformist brand of leadership of the new BSP governor will pave the way in continuing the necessary reforms and policies to strengthen the Philippine banking industry.”
Asked on how he is now as he shifted his career from government budgeting to central banking, Diokno told the BusinessMirror: “I am doing a job; when you do this kind of job you have to think of why you’re doing it: it’s for the Filipino people.”
Bangko Sentral Governors
|Benjamin E. Diokno
|6 March 2019-
|Nestor A. Espenilla Jr.
|4 July 2017- 23 February 2019
|Amando M. Tetangco Jr.
|4 July 2005- 3 July 2017
|Rafael B. Buenaventura
|6 July 1999 – 3 July 2005
|Gabriel C. Singson
|6 July 1993 – 5 July 1999
Central Bank Governors
|Jose L. Cuisia Jr.
|20 February 1990 – 2 July 1993
|Jose B. Fernandez Jr.
|19 January 1984 – 19 February 1990
|Jaime C. Laya
|16 January 1981 – 18 January 1984
|Gregorio S. Licaros
|10 January 1970 – 15 January 1981
|1 January 1968 – 9 January 1970
|Andres V. Castillo
|6 January 1961 – 31 December 1967
|Miguel Cuaderno, Sr.
|3 January 1949 – 31 December 1960
“I do recognize the recent legislation…has really broadened the powers of BSP. In fact, some people say that this is the fourth branch of government, we have the President, Congress, Supreme Court, and the central bank. So I take my job seriously. If something happens to this country, economically—not politically—I am responsible for that. So that’s how seriously I take my job,” Diokno said.
“But I am aided by a very professional staff and the Monetary Board, which I am very proud of,” he added.
Automating the system
THE 12th man to lead the monetary authority also remains optimistic the ubiquity level of electronic transactions would exceed the 20-percent target set by the National Retail Payment System (NRPS) before the year 2020 deadline.
“We will exceed that, I believe, because the 20 percent was done last 2015. So they [monetary officials] are very optimistic we will exceed that [by 2020]. We have commissioned a group to study that,” Diokno said.
The NRPS, which is a regulatory framework of the BSP in line with institutionalizing retail digital payments in the country, includes two automated clearing houses (ACH). One is the “Philippine EFT [electronic fund transfer] System and Operations Network,” or PESONet, while another is InstaPay.
Launched in November 2017, PESONet is a batch EFT credit payment scheme, which can be considered an electronic alternative to the paper-based check system.
InstaPay is an EFT service that allows customers to transfer funds almost instantly between accounts of participating BSP-supervised banks and nonbank e-money issuers in the Philippines. InstaPay was launched last year and allows real-time transactions for individuals, companies and even government agencies to send and receive funds of up to P50,000 per transaction a day.
Based on the BSP’s report, titled “Financial Inclusion in the Philippines,” the number of electronic transaction inflows rose to 9.2 percent in 2017, reaching 73 million from the 67 million transactions recorded in 2016.
“Isn’t that nice? Interest rates are going down [and banks] are lending more money,” Diokno said. “All the stars are aligned for us; we should be happy.”