Finance and the Philippines: Diokno wants an ‘A’ after Covid
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Southeast Asia

Finance and the Philippines: Diokno wants an ‘A’ after Covid

There’s a team made up of staff from Bangko Sentral ng Pilipinas and the department of finance who call themselves ‘the Road to A’. They are tasked with completing a long journey for the sovereign credit rating: from BB- as recently as 2009, through BBB+ today, to achieving an A rating.


“We really want an upgrade to A,” says Benjamin Diokno, governor of the BSP.

Few countries in the world have time to focus on upgrades right now as they are all much more likely to be facing pressure in the other direction.

Clearly, Covid-19 means the Philippines isn’t going to hit A anytime soon. But it’s not as far-fetched as you might think. The Philippines has weathered the crisis well, showing remarkable economic resilience.

Benjamin Diokno
Benjamin Diokno

“We entered into this pandemic from a position of strength, having instituted reforms during the last two decades in response to the Asian financial crisis,” Diokno says. “In the past when we had a crisis, we had to service our debt, interest rates would go up and the peso would be threatened. But now, the peso is one of the only currencies that has appreciated relative to its peers.”

The country’s gross international reserves reached an all-time high of $93.3 billion at the end of June, exceeding external debt, which was $81.4 billion at the end of March. The debt-to-GDP ratio, which routinely used to be about 70%, fell to 39.6% at the start of the year, and this has kept the peso strong.

None of that strength is specifically Diokno’s doing, nor does he claim it; he only joined the central bank in March 2019 and inherited a well-run and respected institution. But the response to Covid-19 has been very much down to him.

“This pandemic is like no other,” Diokno says. “It’s unprecedented. Once in a lifetime.”

The Philippines was one of the first countries to realize just how bad it was going to be, and its central bank acted quickly, reducing rates by 25 basis points as early as February before following with 50bp cuts in March, April and June, the last of them unexpected by the market.

In the past when we had a crisis, we had to service our debt, interest rates would go up and the peso would be threatened
Benjamin Diokno

Diokno expects there will now be “a long pause for a few quarters,” following that cumulative 175bp reduction. But he has deployed other policy tools, too. The most significant is a P300 billion ($6 billion) repurchase agreement with the national government, through which the central bank commits to purchase government securities from the Bureau of the Treasury, allowing the government to finance measures to counter the pandemic. This figure can go up to P500 billion if necessary.

These have been bold moves.

“I’ve seen many crises,” says Diokno. “I’ve seen the Marcos years and the Asian financial crisis, and most recently of course the global financial crisis. You have to gain market confidence, and to reassure the public and the economy that there is liquidity in the system. That’s what I’ve learned,” he says.

“Confidence is important,” he adds, “and giving the impression that you will do everything that is necessary to protect the economy, protect jobs. But the first priority is to protect the lives of Filipinos.”

Early test

It has been an early test for someone whose appointment to the top job at the BSP raised eyebrows.

The bank normally promotes from within, identifying potential governors many years in advance. When Amando Tetangco finally stepped down after 12 years, there was a full bench of experienced options to choose from, and his successor, former enforcement head Nestor Espenilla Jr, would have been expected to serve multiple terms and then promote an internal successor again.

But Espenilla died of cancer last year, and when president Rodrigo Duterte considered whom to appoint to serve the remainder of Espenilla’s term – running to July 2023 – he opted to go outside the bank, to Diokno.

Diokno has worked under three presidents – Corazon Aquino, Joseph Estrada and Duterte – and was moved to the central bank from his position as Secretary of Budget and Management. He is professor emeritus of the school of economics in the University of the Philippines-Diliman, has been a fiscal adviser to the Philippine Senate and has been chairman of the national oil company, PNOC. Many BSP leading lights were among his former students.

But there was a worry that Diokno was a little too close to his president to be independent, and that, as one of the architects of Duterte’s signature ‘Build, Build, Build’ infrastructure programme, he would have more of a focus on growth than stability.

“There were some doubts when I came in, because all my life I’d been a fiscal guy, an economist,” he says. “I’ve served three presidents and was secretary of budget and management, but my entry was met with some doubt, with this reputation that I am pro-growth.”

He told his staff when he joined: “There’s nothing wrong with being pro-growth. Of course, the mandate of BSP is price and financial stability, but to me, that is a means to an end. That can’t be the end-goal of the central bank.”

To him, the goal is price and financial stability consistent with growth.


BSP is a curious institution in some ways, with more responsibilities rolled into it than is commonplace in other countries: monetary policy, bank supervision, financial stability – and, it turns out, employment.

Yes: employment.

“I was surprised myself,” he says. “I came in and read the new bank charter, at a time when they had just passed the law amending the old charter.”

Diokno is referring to Republic Act No 11211, or the New Central Bank Act, which was signed into law in February 2019. One thing he found was that, in the revision of the charter governing the central bank’s powers and responsibilities, the legislators had specifically included employment generation as one of its objectives.

When Diokno spoke to Asiamoney in late July this was a novel approach. It may not be for long. The US Federal Reserve announced in late August that it would put more emphasis on employment, a move that is likely to inspire other central banks around the world.

“It’s unusual,” he says. “But at the same time, really, if the central bank can pursue a fairly stable price regime, that will bring about sustainable growth, and that will create a lot of jobs; it should all be consistent.”

As it happens, inflation has hardly been a worry at all as Covid-19 has swept through the economy; the most recent report showed inflation was 2.5%, well within the targeted 2% to 4% range.

The priority instead has been keeping the economy alive through one of the toughest quarantine regimes imposed anywhere in the world.

‘Build, Build, Build’ was meant to address the infrastructure deficit of the past
Benjamin Diokno

The Philippines economy is likely to contract by between 2% and 3.4% this year, “but we expect a strong rebound next year of 8% to 9%, and then maybe back to normal long-term growth of 6% to 7%,” Diokno says. “We’re OK, as long as there is no second or third wave, and I am optimistic there won’t be any.”

That, of course, is the great unknown, and not everyone agrees with this bold assessment.

Moody’s chief Asia Pacific economist, Steve Cochrane, expects the Philippines to lag the rest of the region because of the length and stringency of its lockdown. Consequently, he expects the Philippines to be the only big economy in Asia that doesn’t have a bounce back in the third quarter of this year. The country’s exposure to tourism – 9% of GDP, which is second only to Thailand in the region – is particularly damaging in a pandemic, Cochrane says.

But, while waiting for progress on the virus, both the government and Diokno are trying to ensure that ‘Build, Build, Build’ gets back on its feet as an engine of growth and employment.

“This is something that we need,” Diokno says. “I look at the numbers for the last 50 years before this administration and we spent less than 3% of GDP for infrastructure. If you’re familiar with the Manila traffic, it’s the worst. So ‘Build, Build, Build’ was meant to address the infrastructure deficit of the past.”

Diokno and Duterte envisage that spending on infrastructure should be between 4% and 6% of GDP; the figure was 5.4% last year. A huge list of projects was linked with the programme, and to thin out the field they have cut out anything with an internal rate of return below 10%. They have also prioritized connectivity.

“We need to connect lagging regions to the centre; we need to interconnect the whole country, and to create lots of industries and opportunities outside of Metro Manila,” he says. “I can vouch for the integrity of the list of projects.”

Diokno calls the resulting programme “a golden age of infrastructure. It is a go at the moment: it won’t be cut as a result of this pandemic, it’s already funded.”

In fact, he says, the aftermath of Covid-19 is “a golden opportunity to accelerate the construction.”

By this he means, with less movement of people, there will be less disruption; the new norm is to house the construction crew on site and put them on alternating 12-hour shifts.

Funding has been a mixture of government spending and grants.

“We need it badly,” he says again.


Espenilla, from his enforcement days, was known as being tough on the banks, although he mellowed as he moved into the top job. How about Diokno?

Right now, the banks like him very much, mainly because he has slashed the reserve requirement.

In fairness this is something that Espenilla had begun; he brought the reserve requirement for universal and commercial banks down from 20% to 18%, still among the highest levels in the world. But Diokno has moved further, and quickly, cutting by 600bp since he took office.

“By the end of my term, the reserve requirement should be single digit, from 20 to less than 10,” he says.

That seems a drastic reduction from an admittedly high rate, but again, Diokno puts this move in the context of a need for growth.

“That latest 200bp cut [at the start of this year] released into the system P200 billion,” he says. “For every one percentage point, we introduce P100 billion to the financial system.”

There’s nothing wrong with being pro-growth
Benjamin Diokno

Clearly, he thinks highly of the health of the banking system.

“You’d be amazed,” he says. “It is unanimous that the banking industry that I found when I came in is pretty sound.”

The industry capital adequacy ratio is about 16%, way ahead of either national or Basel requirements; the NPL ratio, despite having inevitably risen for each of the last five months, is just 2.4%, which is a far cry, he points out, from double digits in the aftermath of the Asian financial crisis.

“I am very comfortable with the state of the Philippine banking industry,” he says. “My relationship with the banks is pretty good,” he adds.

The banks, in turn, praise Diokno and BSP more broadly for the enabling environment that has been set up for digital development.

“Having done fintech and banking in over a dozen emerging markets before, I find BSP to be by far the most advanced regulator in terms of openness to digital technology,” says Greg Krasnov, founder of Tonik, a new digital bank in the Philippines. “They are keen to experiment and find solutions together with the fintech industry, which I find incredibly refreshing as an approach.”

A similar view exists domestically.

“The regulator – both the central bank and the department of finance – are very clear-minded in terms of their objective to drive more transactions to digital,” says Eduardo Olbes, CFO of Security Bank.


Diokno has had other problems apart from Covid-19 to deal with since his appointment, in particular the Wirecard scandal that appeared on his shores.

Wirecard had claimed that billions of euros were being held through Philippine bank accounts when they clearly were not.

Both BDO Unibank and Bank of the Philippine Islands have suspended two relatively junior employees over fears they may have forged documents in order to suggest that the missing funds existed in the Philippines when in fact it appears the money never came anywhere near the country.

“We responded quickly,” says Diokno. “I investigated and talked to the two banks which were implicated, and they both denied having any transactions with Wirecard.”

He quickly concluded that the money had never come in.

“It makes a lot of sense. The Philippines is dollar-centric, we are not euro-centric at all. That amount of money cannot come in without being detected: we have a system in place, with red flags.”

The two individuals at the two banks “will face the full force of the law,” Diokno says. “In the meantime, I continue to advise the banking community to stick to the reforms we have promoted in the past, to ensure that we have good corporate governance and effective risk management systems.”

BSP has promised to cooperate with any international agency that wants to look into it, and has said it will release the results of its investigation soon.

We entered into this pandemic from a position of strength... we will bounce back
Benjamin Diokno

Asked if the banks themselves will be punished for a failure in oversight of their employees, Diokno says: “There is a requirement that they should have good governance and good risk management. In the evaluation of the banks, that will come in.”

At some stage, the pandemic will ease, the economy will bounce, and the Road to A team can get back to aspiring to the finest letter in the ratings alphabet.

“The fact that the major rating agencies maintain their rating on the Philippines is good news,” says Diokno.

JCRA, the Japan credit rating agency, had already upgraded the country to A- earlier this year. The agencies have concluded, Diokno says, that “we will be able to pay whatever debt is built up in the crisis. There will be no debt blowout.”

This is where the drop in the debt-to-GDP ratio below 40%, coupled with the historically low borrowing costs at this moment, has become so important. There are plenty of countries where that debt-to-GDP ratio is over 100%.

“We entered into this pandemic from a position of strength,” says Diokno. “We are confident that after this crisis we will bounce back.”

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