The Philippines central bank: Is Duterte’s outsider a governor for the people?
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The Philippines central bank: Is Duterte’s outsider a governor for the people?

When the Philippines needed a new central bank governor earlier this year, no one expected the president to pick an outsider for the job. During his first months in office, Benjamin Diokno has promised – and started – to deliver measures to spur expansion.


Benjamin Diokno, head of Bangko Sentral ng Pilipinas

As budget secretary in the Philippines, Benjamin Diokno had a hand in president Rodrigo Duterte’s pro-growth brand of policymaking, focusing on infrastructure spending to drive economic expansion.

Now that he is head of Bangko Sentral ng Pilipinas (BSP), the central bank, he is expected to wear a different hat, preserving the institution’s independence, and balancing growth and inflationary pressures.

Diokno’s appointment as central bank governor came as a big surprise.

The former governor, Nestor Espenilla, died in February from cancer and it was widely assumed that one of BSP’s trusted lieutenants, the most senior in this case being Diwa Guinigundo, would be appointed to the post.

Instead, Duterte picked an academic-cum-civil servant to take over in early March, prompting a short-lived wobble in the peso on fears that the dovish Diokno would immediately embark on an aggressive monetary easing cycle that would stoke inflation.

There were rumours that Diokno was close to Duterte, the divisive leader of the Philippines, who does not tolerate opposition and whose controversial war on drugs has claimed thousands of lives.

More damaging was the speculation that Diokno had been appointed central bank governor to push though the Duterte administration’s ambitious growth agenda at the cost of the country’s hard-won macroeconomic stability.

“The appointment of Mr Diokno as BSP governor was a big surprise because he was on nobody’s radar,” says Rafael Garchitorena, managing director of research at Deutsche Regis Partners in Manila. “But that is not necessarily a bad thing.”

In Manila’s financial circles, most people had expected a central bank insider to get the job.

“The previous two BSP governors were both long-time central bankers, so in that sense Diokno’s appointment was unusual,” says Minda Olonan, Philippine research head at Maybank ATR Kim Eng Securities. “However, you must remember that he is an economist. He knows what a BSP governor should do.”

So far, Diokno has either promised or pursued policies that, while very much in line with Duterte’s goals, have also been welcomed by members of the financial community: he has started a round of interest-rate cuts and promises more, now that inflation is coming down, plus he has already begun to reduce reserve requirements and plans further dramatic reductions that would generate more liquidity and encourage more lending activity.

garchitorena rafael_300
Rafael Garchitorena,
Deutsche Regis Partners

Of course if Diokno moves too fast, he could fan the flames of inflation, as bankers know only too well. “The biggest challenge facing the BSP over the next 12 months is calibrating further cuts in its key policy rates and banks’ reserve requirements,” says Nestor Tan, president and chief executive of BDO Unibank, the largest bank in the Philippines.

He adds: “It’s a balancing act of ensuring enough liquidity in the system to support economic growth while keeping inflationary pressures under control to prevent the economy from overheating.”

The suggestion that he is a ‘pro-growth central bank governor’ brings out the academic in Diokno.

“I would qualify that,” he instructs Euromoney. “There is nothing wrong with being pro-growth, right. But it has to be strong, sustainable and inclusive growth. And that is entirely consistent with being pro-price stability. Because as we know, it is the poor who bear the greatest burden if inflation is high. Unlike businessmen, they cannot just charge higher gasoline prices to the company.”

As he expands on his views about the importance of financial inclusion, it becomes clear that Diokno’s sympathies lie not with the rich business elites who live in exclusive walled compounds scattered around the capital Manila, but with the vast majority of Filipinos whose average per-capita income is just $3,100, putting them on par with the people of Ukraine and Bhutan.

Diokno is only the fifth governor of the Bangko Sentral ng Pilipinas since it was founded in 1993.

He has a professorial, almost scholarly air about him that is amplified by his precise and disciplined manner.

That’s not surprising given that Diokno was professor emeritus of the School of Economics of the University of the Philippines Diliman. Over more than 40 years, when not working in the public sector, he taught courses on macroeconomics, public enterprises, investment and local government finance.

There is nothing wrong with being pro-growth, right. But it has to be strong, sustainable and inclusive growth - Benjamin Diokno, BSP

Does it make him the right man for the job of BSP governor? Diokno chuckles at the question. For a central bank governor, he is refreshingly open, something that has already made local journalists warm to him.

“I served three presidents [Cory Aquino, Joseph Estrada and Rodrigo Duterte] before I was transferred here, so I am not totally unfamiliar with what the Bangko Sentral is doing,” he says, pointing to his former role as chairman of the Development Budget Coordination Committee, which coordinates fiscal and monetary policy and approves the government’s macroeconomic targets, revenue projections and borrowing levels.

Other members of the committee at that time included the respected finance secretary, Carlos ‘Sonny’ Dominguez, as well as Ernesto Pernia, chief of the National Economic and Development Authority, and central bank governor Espenilla.

“I have been in public service for 50 years, so I am used to it. Am I good under pressure? I think so, yes,” he adds.

As for his move to the central bank, “there was very little adjustment,” Diokno says. “I have been interacting with the finance secretary (Dominguez) and the BSP governor for many years. Plus, I think many of the people here are my former students.”

After the initial bout of jitters that followed his appointment, financial markets have bounced back. By the middle of August, the peso traded at 52.1 against the dollar, making it one of the best-performing Asian currencies since the start of the year.

The new chief has also won grudging approval from Manila’s close-knit circle of bankers and financial analysts.

“It is true that Diokno is not a central bank insider, but it is not fair to call him an outsider,” says Alfred Dy, head of Philippines research at CLSA. “He knows the system and can find his way in the Manila bureaucratic maze. He is competent and after a slightly rocky start, he has settled down.”

Alfonso Salcedo Jr, chairman of the executive committee of Security Bank Corporation, the seventh-largest commercial bank in the country by assets, says Diokno “is doing a reasonably good job.”

But, he is quick to add, “I would prefer him to move faster to bring down bank reserve requirements, but I can see the wisdom of the BSP’s announcements.”

Favourable circumstances

When Diokno took over, he couldn’t have wished for more favourable circumstances. His predecessor Espenilla had a difficult time in 2018 when he had to tackle rising inflation.

High oil and food prices sent average inflation soaring to 5.2%, well above the government’s target range of 2% to 4%. The BSP responded by raising interest rates by a total of 175 basis points on five consecutive occasions, the most recent of which was in November.

Now with inflation slowing (it fell to 2.4% in July from 3.2% in May), Diokno finds himself in the enviable position of being able to lower rates. In May, the BSP cut its benchmark interest rate by 25bp to 4.5%, following up with another 25bp cut in August.

Diokno expects inflation to average 2.6% this year, due to the decline in food prices.

“We are very confident inflation is tapering off and that we will meet our inflation target plus or minus 1%,” he says. “There is a lot of room for monetary easing.”

Still another reason for lowering interest rates may be the slowing economy, which grew at just 5.6% in the first quarter, down from 6.1% a year earlier.

“We had a bad hiccup in the first quarter which surprised everyone, but the economic team says this was because of the delayed budget, which kept infrastructure spending on hold,” says Security Bank’s Salcedo.

Now that the 2019 national budget has been approved by Congress, he says the situation should reverse, and in future, “we expect infrastructure projects to boost the economy.”

Will Diokno’s next move be to lower rates further? Most economists say it is only a matter of time.

Euben Paracuelles, senior economist at Nomura Securities in Singapore, expects another cut.

“We reiterate our forecast that BSP will cut its policy rate by another 25 basis points to 4% at its next monetary board meeting,” he says.

Other bankers also expect further easing of local monetary policy, reflecting the governor’s ‘dovish’ credentials.

Interest rates, however, are just one weapon in the BSP’s armoury. Another is bank reserve requirements.

When Diokno took office in March, the reserve requirement ratio was 18%, among the highest level in the world (BSP pays no interest on these reserves). So the governor smoothed a few feathers with the announcement of a cut of 200bp to be implemented in three phases, the last being at the end of July. And that’s only the start.

“Before the end of my term, the bank reserve requirements will be in single digits,” he tells Euromoney.

The BSP revisions were 20 years in the making. Can you imagine that? Why the delay? Maybe our congressmen did not understand that it was a priority. But we are lucky. This gives us a lot of power and a lot of responsibility. So, if there is a crisis, there is now a strong legal framework to manage it - Benjamin Diokno, BSP

The move makes sense because it will release liquidity into the system, which in recent times has been tight.

“For every 1 percentage point or 100 basis points cut, you release something like P90 billion of P100 billion, or approximately $2 billion, so that will ease up on credit and help to spur economic growth in the country and maybe reach the poorest of the poor,” says Diokno.

Another key task for Diokno is to continue his predecessor’s work of strengthening the regulatory and policy framework.

It helps that Duterte had already signed into law amendments to BSP’s charter, which expands the central bank’s supervisory powers. Coming less than 10 days before the death of Espenilla, this important piece of legislation strengthened the BSP’s mandate in a number of ways.

First, it allows BSP to regulate a broader range of financial institutions such as money service businesses, credit granting businesses and payment system operators to ensure better systemic risk management.

Secondly, it restores the central bank’s authority to issue debt paper as part of its regular operations, in line with current international practices. And thirdly, it raises the BSP’s capitalization to P200 billion from P50 billion, giving the central bank a stronger steadying hand on the tiller in times of crisis.

“The revised central bank charter gives the BSP more elbow room if needed,” says CLSA’s Dy. “And that is very important.”

In Diokno’s opinion, it took too long to make these changes.

“The BSP revisions were 20 years in the making,” he says. “Can you imagine that? Why the delay? Maybe our congressmen did not understand that it was a priority. But we are lucky. This gives us a lot of power and a lot of responsibility. So, if there is a crisis, there is now a strong legal framework to manage it.”


Ratings upgrade

The improving economic picture in the Philippines has attracted the attention of international credit rating agencies. In April, Standard & Poor’s raised its sovereign credit rating for the Philippines by one notch to BBB+ from BBB with a ‘stable’ outlook. That puts it one notch above Indonesia, which had an upgrade from S&P (to BBB from BBB-) in May.

The main trigger for the upgrade appears to be the country’s strengthening growth outlook.

“We raised the rating to reflect the Philippines’ strong economic growth trajectory, which we expect to continue to drive constructive development outcomes and underpin broader credit metrics over the medium term,” S&P noted.

Although equity markets barely reacted to the news, Garchitorena at Deutsche Regis believes this provided a vote of confidence.

“The S&P upgrade was a bit of a surprise, but a pleasant one,” he says. “It will give the authorities greater flexibility to manage the economy.”

Diokno says that the BSP is working on two other important pieces of legislation that could have an impact on future ratings. One is the agricultural law, which, he says, “is a major constraint on the banks’ ability to lend money because it sets aside a big chunk of the banks’ portfolio for agriculture.”

The other is the bank secrecy law.

“If we get these passed, we will probably get an A rating,” he says excitedly, which would help cut the Philippines’ borrowing costs. “And that’s much better than our neighbours here in Asia. I should add that it will reduce the cost of government financing by lowering the debt cost of our bonds. It will also have the extra advantage of reducing the cost of borrowing by the private sector. So that is a win-win for everybody.”

Big break

Diokno, who is 71, graduated from the University of the Philippines in 1968 with a degree in public administration, before continuing his studies to earn a Master’s degree in political economy from Johns Hopkins University in Baltimore and a PhD in economics from the Maxwell School of Citizenship and Public Affairs at Syracuse University, New York.

His first big break came when former president Corazon Aquino appointed him budget undersecretary from 1986 to 1991. His responsibilities included designing the government’s landmark tax reform programme and working on the local government code aimed at decentralizing administrative powers.

Both policies were viewed as critical to reducing rural poverty.

Looking back at those early days, Diokno says he is proud of what he achieved. The 26 tax measures, which included the introduction of value added tax, almost doubled the tax revenues of the government from about 9% to 17% of GDP.

“That was the best thing that ever happened to this country, according to the IMF,” he adds wryly.

Diokno went on to serve a second term at the department of budget and management, this time as budget chief during the administration of former president Estrada, from 1998 to 2001.

True to form, he once again put his name up on the roster.

“I am also the father of the procurement reform law in the Philippines” he says, now starting to enjoy himself.

This piece of legislation aimed to plug the loopholes in the government procurement system by increasing transparency and accountability.

Then he was picked for the same job by Duterte, before moving to the central bank.


The Philippines' former president Joseph Estrada (r) chats with Benjamin Diokno

Build, build, build

To most Filipinos, Diokno is better known as the man who presided over the country’s ambitious ‘Build Build Build’ programme. This flagship government development programme, worth up to P9 trillion over 2017 to 2022, was rolled out shortly after Duterte took office, with the aim of modernizing the country’s creaking infrastructure.

“It was my idea,” says Diokno cheerfully. He leans forward as if addressing a room full of students. “Originally I called it the golden age of infrastructure. The name was well received, but then they gave it to a PR group who said let’s rename it ‘Build Build Build’ because that sounds more sexy.”

If there is one government programme that can change the future course of the Philippines, this is probably it. Among the 75 high-impact projects is the long-delayed $3.7 billion Metro Manila subway, which finally broke ground in February.

Then there is the expansion of Clark International Airport, with a new terminal slated to double the number of passengers to eight million a year, from four million. This should take pressure off the severely overcrowded Ninoy Aquino International Airport in Manila.

How successful has the programme been to date? Diokno says it has made good progress: “I would say right now we have accomplished about 30% of our plans for the entire six years.”

Although still early days, and grappling with such familiar problems as a lack of skilled workers, delays in feasibility and concerns over corruption, most observers have applauded the plans.

“This is the only government that has seriously decided to deal with infrastructure,” says Cezar Consing, president and chief executive of Bank of the Philippine Islands. “If you look at infrastructure investment as a percentage of GDP, it is only in the last one or two years that our ratios have begun to look like the ratios in the rest of Asia.”

Yet the skill set that enabled Diokno to administer complex government expenditure programmes such as the ‘Build Build Build’ scheme is hardly the same set that is required to ensure the stability of the Philippine monetary system.

Some observers also worry about Diokno’s obvious loyalty to Duterte. What is his relationship with the president?

“He (the president) said he knew me when I was under-secretary under president Cory Aquino 30 years ago. I don’t really know him,” Diokno tells Euromoney.

How did he get the job of BSP governor?

“Well, I was at a meeting with finance secretary Dominguez and the planning secretary. After the meeting, secretary Dominguez pulled us aside and said: ‘I want to consult with you about who would be the best candidate for BSP governor’. I suggested any of the deputies. And he (Dominguez) said: ‘Why not you?’

“So I thought about it. And I said: ‘Sure, why not me?’

“And that’s it. That’s how it happened and that’s a true story,” he says laughing.

We have six months to a year to make these structural reforms happen. We are going to push them through - Benjamin Diokno, BSP

Does he believe that his experience working at the department of budget and management will help him as central bank chief?

“The misconception is that you are just working for an institution. But being governor of Bangko Sentral is part of being in public service. So just think of what is good for the economy and the Filipino people. Don’t lose track of that. To me that is how simple it is.”

Persuasive as this sounds, there is of course the flip side of the coin. Expansionary fiscal policy and macroeconomic stability make uneasy bedfellows.

Yes, it helps if a central bank governor can work closely with the department of finance to ensure stability at a time of global volatility.

But being independent is key to ensuring the credibility and integrity of the institution and providing the prerequisite checks and balances.

Asked if he can maintain the central bank’s cherished independence, his response is confident.

“Yes. Definitely,” he says without hesitation. “When the president appointed me, he said: ‘Just do your job, do it well for the Filipino people’. That was it. No other instruction from the president. He knows that the BSP is an independent institution.”

Consumer confidence

Diokno is just one member of the seven-man monetary board committee that makes critical decisions about the future of the country’s monetary policy. The other members comprise two economists, two former bank presidents, a former BSP deputy governor and Dominguez, the finance secretary.

In his first address to members of staff after taking over the governorship on March 7, Diokno went out of his way to assure them that he would maintain the central bank’s autonomy.

“In pursuing policy continuity, let me also assure you that the BSP will sustain its institutional independence, with the monetary board acting as a collegial body,” he said.

“We shall continue to pursue monetary and financial sector policies that are data-driven, evidence-based, and attuned to the evolving market environment.”

While the increasingly acrimonious trade dispute between the US and China makes for a far less predictable external environment, the domestic political situation is now much clearer following the crucial mid-term elections.

The final vote count released a week after the May 13 elections showed Duterte’s allies winning nine of the 12 seats in the Senate.

That gives the president control of both the Senate and the House of Representatives, putting him in a strong position to push through structural economic reforms in his remaining three years in office.

“With inflation on a downward path, there has been a recovery in consumer confidence and that certainly helped the president’s candidates,” explains Maybank’s Olonan. “Duterte connects with the masses. He also attracts support across a broad spectrum of the population because he projects that the government is focused on addressing their primary concerns over security, infrastructure and social services such as education.”

At some stage this period of economic growth will come to an end. The main question remains: will the structural reforms be in place to see us through? - Rafael Garchitorena, Deutsche Regis Partners

Arguably Duterte’s popularity at home seems to grow in inverse proportion to the outrage he engenders internationally. This has much to do with his war on drugs, which has officially claimed more than 5,300 lives, although the real figure could be at least double that.

Then there are his foul-mouthed rants that – with the possible exception of US president Donald Trump – no other leader could get away with.

“Why do people like him? Frankly, I have no idea,” confesses one senior banker.

But the fact that the economy is forecast to grow more than 6% this year before accelerating to between 7% and 8% on the back of infrastructure spending has certainly helped.

Among the most eagerly awaited reforms in the works is the second package of tax measures known as Trabaho or the Tax Reform for Attracting Better and High-quality Opportunities.

This aims to reduce corporate income tax to 25% from 30% and streamline the country’s tax incentives, which at present are governed by 220 different laws.

A further package of tax measures could pave the way for a lower rate of estate tax as well as an increase in alcohol tax.

Some doubt that Duterte’s economic team can deliver on its ambitious reforms.

“History shows that no sitting president has been able to push through structural changes during the second part of his or her term,” says Security Bank’s Salcedo. “It could be the same for Duterte.

“Personally I hope he can push through structural reforms. But it is far from certain,” he adds.

“Older people like myself remember what happened in the 1980s and then the 1990s when the economy was in crisis,” says Garchitorena at Deutsche Regis.

“The Philippines has been on a run since 2002, but at some stage this period of economic growth will come to an end. The main question remains: will the structural reforms be in place to see us through?”

Diokno is confident that the key economic programmes will be passed into law.

“We have six months to a year to make these structural reforms happen,” he says. “We are going to push them through.”

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