• Amid the Asian financial crisis and global recession, the Philippine economy continues to grow
• The Philippines is investing heavily in public infrastructure in hopes of expanding the capacity of the country’s economy further
• The BSP is looking into standardising the national payment system, wherein Filipinos can use their phones to pay for their rides

Less than a year since the appointment of Benjamin Diokno as the new governor of the Bangko Sentral ng Pilipinas (BSP), the country’s central bank has shifted to easing mode, cutting interest rates and reducing the reserve requirement ratio.

Diokno’s role is to normalise the economy, and with that comes the BSP’s focus on improving the country’s mass transit system and embracing technological innovations through the adoption of quick response (QR) code.

This interview provides a wider view of the BSP’s achievements, current projects and plans to attain inclusive growth in the Philippines.

Foo Boon Ping (FBP): I’m very pleased to be speaking with the newly appointed and the fifth governor of the Philippine central bank, Bangko Sentral ng Pilipinas (BSP), Dr Benjamin Diokno.

You are assuming the governorship of the central bank at this point in the Philippine financial economic history, where you have been enjoying uninterrupted, unprecedented economic growth and prosperity for the last two decades. Going forward, we are living at a time of great change brought on by technology disruption, digitalisation and the network economy.

In the short term, there are some dark clouds – global economic uncertainty and trade tension between the US and China. What do you see as some of the key priorities upon your governorship at the central bank?

Benjamin Diokno (BD): I came in at the right time. I've been in the government for so long, maybe around four decades. In the early 90s, we brought in Paul Krugman (an American economist) and his team, and they looked at the Philippine economy. Their verdict was that the Philippines can sustain a growth of 3% at that time, so we've done a lot of structural reforms. Now we have brought in a new team. They looked at the Philippine economy, and their assessment is that we can potentially grow at 6.5%. That explains the uninterrupted growth.

We went through the Asian financial crisis and the global recession, but we continue to grow. That is the kind of economy I inherited from my predecessor. At the same time, there were many structural reforms that were done recently. In fact, number one is the amendment of the BSP charter. We can now issue our own debt instrument. There's the national payment system, National ID and gold law, which says that we can now buy gold without paying taxes to our gold miners.

There are a lot of reforms, and my primary responsibility is to implement those new laws as efficiently and effectively as possible. My mission is to bring the Bangko Sentral ng Pilipinas closer to the people, because a big chunk of our population remains unbanked. I want them to be part of the formal economy. The payment system will be improved and we will embrace technological innovations.

FBP: Compared to where the war is today, coming out from the global financial crisis and quantitative easing (QE), there is now a very low interest rate, a slowdown globally. In the Philippines, the situation is very different. You have made the transition from a low income nation to a middle income nation. You’ve just recently been upgraded in terms of the sovereign criteria rating or investment grade. Going forward, you have a greater aim to be a high income economy by 2040. In terms of the challenges for your monetary policy, where the war is slowing down, you continue to grapple with growth and inflation.

BD: My predecessor was faced with the elevated inflation, so we hit a bump in 2018. Inflation rose as high as 6.7%. That was way off our target of 2% to 4%. We raised the interest rate by 1.75% or 175 basis points.

When I came in, my mission is to normalise. I've been in office for only seven months when we already cut the interest rate by 75 basis points. We reduced the reserve requirement ratio by 300 basis points. We are now on cutting mode or easing mode. This is not because we want to perk up the economy unlike other countries, but because we want to normalise. But we're still looking at the 6% growth rate.

We hit a bump during the first half of 2019. Growth slowed to 5.5%, because the budget was not approved on time and because of the uncertainty of the tax reform package. We would like to reduce corporate income tax, but at the same time, we want to review the incentives package in the past. That kind of created uncertainty for new entrants to the Philippine market. But that's gone now. The budget has been passed and we have this catch up plan.

We are confident that we will hit 6%. That's impressive if you look at the rest of the world. The International Monetary Fund (IMF) kept on cutting the global growth rate to maybe around 2.2% or 2.3%, and the rest of the world are grappling with these problems. We're in a good shape right now.

FBP: You are in a position where you remain one of the fastest growing economies in the world, especially in the fast-growing Asia.

BD: We are investing heavily right now in public infrastructure, which we hope will expand the capacity of the economy further. We're in good shape. Unlike other countries, we're not export-oriented. We're not affected by this trade war between the US and China. In fact, many studies would show that the Philippines will probably be one of the most resilient among the countries in this part of the world.

FBP: The Philippine economic growth is supported a lot by foreign direct investments.

BD: There's confidence in foreign direct investments. In 2017, we got only about $2 to $3 billion annually. In 2018, we got 10 billion. That's triple the amount we get, plus there’s a constant inflow of overseas Filipino remittances as well as the business process outsourcing income, and our tourism receipts are picking up.

With this combination, we have right now a record high gross international reserves, equivalent to seven and a half months of imports and our payments to abroad. The received doctrine is three months of reserves is good enough. We have seven and a half and it keeps on increasing, so we're in pretty good shape.

FBP: As your economy continues to prosper, the next objective is to spread the prosperity, with the pursuit of greater financial inclusion.

BD: We’re not only shooting for higher growth, but also inclusive growth. In fact, one of the objectives of the administration is to reduce poverty to around 14.5% by the end of this term. From around lower 20s to 14.5%. It's not only growth, but also inclusive growth.

FBP: Up to now, the growth hasn't been as inclusive because of the geography. The Philippines is an archipelago spread out into thousands of islands.

BD: The focus of our infrastructure is to link all the islands. In fact, data would show that growth is happening much faster outside Metro Manila than Metro Manila. We're making a lot of progress in our desire to have inclusive growth. Maybe in a year or two, traffic congestion will be much better in Manila.

FBP: But a great infrastructure is in terms of broadband connectivity, internet, 4G and 5G.

BD: We are in fact introducing a third party. There used to be a duopoly, Smart and Globe. Now we're introducing a third party, so that will provide more competition. But at the same time, the major constraint there is the broadband capacity. And now with Facebook coming in, we will easily quadruple the broadband capacity in the Philippines.

Soon, maybe in a year or two, this problem will also go away. That's the idea, to interconnect the whole country. When we came in 2016, there was a plan, which says that the dream of every Filipino is to own a car. The aspiration is to own a car. I said, “That's wrong”. We should focus on the mass transit system. We are now building more railway systems, subways and improving ports and airports. We need mass transit rather than individual cars. So we changed the plan.

FBP: The world’s economy is also changing into a more digital, more network and more sharing type. Talk to us a little bit about regulation and balancing the need for financial soundness, safety and innovation, especially with the big technology companies that can better serve the needs of the underserved today. Are you pushing for a greater competition, the entry of non-traditional players for the benefits of the general public?

BD: We have to be with the transformation. The whole world is going digital. And so we're keeping up with that promise.

We have to balance these innovations. We have to embrace it, but we have to be very careful to also protect the consumers. But this is going on not only within the government, but also worldwide. It's a risk-based approach. Any innovation would carry some risks, so we want to minimise the risks. We look around for how this is being done in other territories. We're very careful in adopting this. In fact, as part of my position, I get to talk with other governors from other territories and we compare notes.

Some countries are more advanced like China in the use of quick response (QR) code. We are also planning to adopt those. Right now, our objective is to increase the digital transactions from almost practically nil to about 20% by the end of next year, and maybe to about 50% in five years’ time.

We have, for example, adopted the InstaPay and PESONet, and these have actually increased significantly. Almost all the banks, major banks are into it. This makes the payment system efficient and safe, so we continue to adopt this technology

There's a new law, which says that the BSP, the central bank of the Philippines, is going to be the administrator of the national payment system. We would like to standardise, so that every Filipino will now use his phone – because every Filipino has a phone – to pay for a ride for example: tricycle, jeepney, bus, train and at the airport. I’d like to see the day when we will be dependent less on cash, but more on the QR code.

FBP: In terms of technology, there are new technologies that are coming on stream: blockchain, cloud computing and artificial intelligence. We’ve read that the BSP is exploring regulatory technology (regtech) and supervisory technology (suptech), which are employing these technologies.

BD: We are embracing it. We recently got two awards in the use of artificial intelligence, what we call a chatbot. And that will be in full stream by the middle of next year, where we interact with the public. It used to be that the central bank does not interact with the public. Now we do. Using artificial intelligence, we get to interact with them.

Also with data management, there's a machine-to-machine conversation between the BSP and the banks. The reports now are done, usually about maybe a few weeks, now in a few hours. That’s significant. It's more accurate and timelier.

We are adopting all these technologies. I'm sure I haven't seen all of the new innovations yet. New innovations will come. Our position here is, “We embrace innovation, but we also have to think of consumer protection.”

FBP: Do you see a space where you have a separate category for neobank or digital-only bank to compete?

BD: Eventually, there’s got to be one standard regulation for this. But there's another development. There's a recent law, which allows Islamic banking in the Philippines. That would help some of our Muslim brothers, around 10% of them out of the 100 million Filipinos. We are in close touch with Malaysia. We’ll try to learn lessons from them.

FBP: Regarding your own role as the governor, you come from a background that is slightly different from your predecessor, who were under the late BSP Governor Nestor Espenilla, and prior to that, BSP Governor Amando Tetangco Jr, who were career central bankers.

You have been a public servant for most of your career, such as the secretary and undersecretary of budget and management under a few administrations. What are the experiences that you bring to your role to shape your priorities and mission?

BD: I'm known as a public administration and public economics guy, so not monetary. But for the last 40 years, I served as the budget and management secretary under two Presidents and budget undersecretary under one President, so that that's my orientation. At the same time, I am a professional economics professor at the University of the Philippines. My training in public service and the academe prepared me to look at things more broadly. And now with the monetary assignment, that's the best position.

I talked with the other governors from other jurisdictions and I said, “Monetary policy is not the only game in town. We can achieve more if we have coordination between monetary, fiscal and other structural reforms.” In fact, most of the problems now cannot be done through the monetary policy.

For example, the elevated inflation we had last year, that was cut dramatically from 6.7%. Now, it's 0.9%. A combination of monetary policy, we raised the interest rates, but at the same time we did some structural reform. We passed the Rice Tariffication Law. We have close monitoring of food prices and other things. It’s fiscal, monetary and other structural reforms. It's all a government effort. That prepared me, my tenure in the academe and my long experience in government, to be the central bank governor.

FBP: The World Bank, in its latest report raised concerns, especially now with the slowing economic growth and the limited capability of monetary policy about the central bank role, its credibility and independence. It doesn't quite apply in the Philippines because you still have an ammunition, so to speak, on both the monetary side and the fiscal side.

BD: Many studies would show that institutions are also very important in sustainable growth. One of those institutions is the independence of the central bank, recognising that the central bank cannot do it alone. But you have to respect the independence of the central bank. That's not happening in many economies.

We could have prevented this monetary easing, had we not experienced this trade war, which is slowing down the whole economy. You have to have an appreciation of the limits of monetary policy in the overall scheme of things. That's an important lesson.

As a central banker, you should not think that you're infallible, that you can do everything, you have to accept that there are limits to your powers and that the other sectors of the economy should also act in a coordinated way. And it should always be a whole-of-government approach rather than just monetary policy.

FBP: Thank you so much, Governor Diokno for speaking to us.

BD: Thank you.