Department of Budget and Management (DBM) Secretary Benjamin Diokno is the new Governor of the Bangko Sentral ng Pilipinas (BSP) effective March 4, 2019.
The BSP community and bankers were surprised by the announcement as they were expecting that another central bank insider would be appointed (The Philippine Star March 5, 2019). BSP deputy governors Cyd Tuaño-Amador (already designated as BSP officer-in-charge when Gov. Espenilla passed away on February 23), Diwa Guinigundo, Deputy Governor for Monetary Stability (a contender for BSP governor with Espenilla in 2017, when Gov. Amado Tetangco’s second six-year term expired) and Chuchi Fonacier, Deputy Governor for Supervision and Examination were “waiting” in the line of seniority succession.
Yet Presidential Spokesman Sal Panelo said Diokno “has competence and has integrity” to bring into the BSP (Manila Standard March 06, 2019). Yes, competence, because Diokno has a PhD in Economics, just as the contending “insiders” are all seasoned economists with PhDs and MSc’s as well, and were not just theorists of academe. But the mention of integrity must have been called forth by the still-unresolved accusations on Diokno by House appropriations committee chairman Rolando Andaya Jr. of supposed anomalies in the DBM, including alleged corruption and conflict of interest involving Diokno’s in-laws in the Bicol region. Diokno has denied any wrongdoing (The Philippine Star March 5, 2019). Andaya also accused him of allegedly orchestrating “insertions” in the P3.757-trillion proposed national budget for 2019 (PNA Visayan Daily Star March 5, 2019). Perhaps Diokno has been effectively exonerated of these accusations by his appointment as BSP Governor.
Diokno has served the government on the fiscal side, twice as Budget Secretary, under the Joseph Estrada administration and under Duterte before Duterte’s appointing him BSP Governor. He was also undersecretary of DBM during the time of former president Corazon Aquino.
But fiscal policies of the government (revenue generation like taxes, and output planning, e.g., the TRAIN law, regulation of public utilities/corporations; budget for expenditures) proceed from grand economic plans idealistically forecasting positive effects on the economy. Fiscal policies can be at odds with monetary policy. As recently experienced from the fiscal reforms of TRAIN and exacerbated by the rising world price of oil, prices soared to inflation of up to 6.7% last year, and the peso depreciated. Monetary policies and operations, bank/credit regulation and industry guidance as the main responsibilities of the central bank are real-time, on the ground reactions, remedies and solutions to the economic environment created directly or indirectly by fiscal policy and the over-all political governance, as well as the interacting and intruding extraneous environments of other economies and their politics. Central bankers, monetary economists, are the fund managers of the country — they must know exactly what’s going on — and what must be done — now.
Diokno said “I know exactly what’s going on. That cannot be said of other BSP governors… I don’t buy that concept as if the central bank governorship is the prerogative of those from the inside” (ABS-CBN News March 6, 2019). “What is bad is when you appoint a banker… You don’t want a banker to be central bank governor because then you appoint one of the boys to the central bank and that’s bad for the economy,” he said (Ibid.)
Regulatory capture is what an economist would refer to, by those words excepting bankers from being BSP Governor. But what would really be bad for the economy would be a central bank that was not independent from the political governance. The BSP should be able to assess economic dilemmas and immediately act on remedies within its control to maintain a comfortable slack on that healthy push and pull between fiscal and monetary policy to keep the economy less volatile. Case in point: why was the BSP so hesitant to raise interest rates (to contract money supply by dampening borrowing) in the frenzy of high prices and rising inflation last year?
“Our BSP is supposed to be independent, but that does not mean it has to be against. It has to understand what the administration is trying to do. If you have to be supportive, you support but without losing your independence,” Diokno said (Ibid.).
President Rodrigo Duterte has appointed six of the seven-man rate-setting Monetary Board (MB): Felipe Medalla (ex-Secretary, National Economic and Development Authority [NEDA] under the presidency of Joseph Estrada); Peter Favila (ex-banker, former Secretary of Trade in the presidential term of now House Speaker Gloria Arroyo); Antonio Abacan Jr. (ex-banker); V. Bruce J. Tolentino (ex-IRRI/International Rice Research Institute); including Finance Secretary Carlos Dominguez III, ex-officio Vice-Chair (BusinessWorld June 8, 2018). And now Diokno is Chair of the Monetary Board as BSP Governor. Their terms will expire beyond Pres. Duterte’s six-year term ending in 2022: Medalla, Favila, Abacan and Diokno in 2023 and Tolentino in 2024. Sec. Dominguez will be co-terminus with Pres. Duterte. The seventh MB member, Juan D. De Zuñiga (ex-Bank of Commerce) was appointed by then President Benigno S.C. Aquino III in 2014, and continues to serve his six-year term, which will expire in 2020, after which time Duterte will have appointed all seven MB members.
Business groups chorused welcome and support for Diokno as the new chief of the BSP (philstar.com March 6, 2019). The Management Association of the Philippines (MAP), the Makati Business Club (MBC), Philippine Chamber of Commerce and Industry (PCCI), American Chamber of Commerce of the Philippines (AmCham), the Bankers Association of the Philippines (BAP) and the Financial Executives Association of the Philippines (FINEX) expressed confidence that Diokno will ably carry out necessary reforms and policies to strengthen the Philippine banking industry,” (Ibid.). Better to be on his good side?
Diokno comes to a well-feathered nest (prepared by the late Gov. Espenilla and carried through by Deputy Gov. Guinigundo) with Republic Act No. 11211, The New Central Bank Act that fortifies the central monetary authority (BusinessWorld March 5, 2019). The new law signed by Pres. Duterte on Feb 14 amended RA 7653 or the BSP Charter passed 24 years ago.
Amendments center on the BSP’s monetary tools to preserve appropriate levels of liquidity and ensure stable prices. It can issue its own debt in open market operations, buying or selling government securities from banks and financial institutions to expand or contract the supply of money. Authority to put up reserves against sharp foreign exchange fluctuations and the cost of liquidity management would allow the BSP to smoothen its presence in both the foreign exchange and money markets (The Philippine Star Feb. 17, 2019).
But the bonanza under R.A. 11211 is the increase in the BSP’s capitalization to P200 billion from P50 billion, also to enhance its powers of controlling liquidity. The P200 billion amount looks familiar. “From a global high of 20%, the central bank slashed the required reserves rate (RRR) in two moves last year and now requires universal and commercial banks to hold on to just 18% of deposits, leaving them with more or less an additional P200 billion that they can lend to borrowers” (BusinessWorld March 7, 2019). Expansionary monetary policy seems to be the direction of the BSP, only that from the released P200 billion RRR, the universal and commercial banks that the BSP regulates will be able to enjoy more profits (from borrowers and investors) to the disadvantage of the general public, as the BSP will now effectively carry out liquidity mechanisms from its increased capital — money of the Filipino people.
“We should be less of a crybaby,” then Budget Secretary Diokno said of fears of inflation amid rising prices of fuel and widely used goods last year (philstar.com May 31, 2018).
Amelia H. C. Ylagan is a Doctor of Business Administration from the University of the Philippines.