As part of The Banker’s 'Banking under pressure' podcast series, Philippines central bank governor Benjamin Diokno outlines about steps the country has taken in response to the Covid-19 crisis and what he anticipates the recovery will look like once the crisis is over.
Benjamin Diokno
Q. The central bank, Bangko Sentral ng Pilipinas (BSP), has been taking steps to protect the economy during [the crisis]. Can you explain some of the processes that the central bank is implementing? And did this speed up the decision to cut rates?
A: The global pandemic has highlighted the fragility of human life and my thoughts go out to all that have been affected by it. In the Philippines, we are taking decisive and necessary actions to protect Filipino lives and livelihoods, especially the most vulnerable.
However, we as a nation have entered into this crisis with armour and buffers that are helping us to manage the impact as best as possible. The BSP has demonstrated boldness in terms of mitigating the impact of Covid-19 on livelihoods through a series of actions.
First, we have cut our interest rate by 125 basis points (bps) to 2.75%. Lower interest rates will mean cheaper loans for businesses and households. Second, we implemented 200bps cuts in the reserve requirement ratios to increase liquidity and encourage banks to continue lending. Third, the purchases of 300bn pesos ($5.9bn) of government bonds in the secondary market gave the government more fiscal space to direct financial help to frontliners, families and businesses who need it most.
Fourth has been the reduction in the overnight reverse repurchase volume offering to provide further stability in lending markets, with loans to micro, small and medium-sized enterprises (SMEs) forming part of the compliance requirements for banks. SMEs account for 63% of the country’s total employment, and this unique policy should encourage even more lending to be directed to these enterprises which are vital to our national economic health.
And then there’s a time-bound relaxation of various regulations pertaining to compliance reporting, calculation of penalties on required reserves and single borrowers limit.
Q. Looking forward, what do you think the recovery will look like for the Philippines once the risk of Covid-19 has passed?
A: The Philippines will likely register a U-shaped speedy economic recovery in 2021. With the decisive and timely measures implemented by the government and the BSP, we will manage a soft landing for the economy and push it to bounce back as soon as the pandemic fades. For this year, we see the economy slowing down in the first quarter and contracting in the second and third quarters, before starting to recover in the fourth quarter.
On an annual basis, gross domestic product (GDP) is expected to grow between zero and -1% in 2020, and then recover to about 7.8% in 2021. The strong recovery, of course, is based on the assumption that the pandemic is contained in the second half of 2020.
We have sound macroeconomic fundamentals, a stable and well-capitalised banking sector, and a fiscal and monetary space that allows us to roll out significant relief measures. These buffers, plus the relief from the BSP’s and national government’s mitigating measures, allow us to look forward to the time when the Philippines will be back as a new, better, safer and more agile economy.
Once this pandemic is over, investors are expected to look for investment destinations that have survived the crisis better than others – I strongly believe the Philippines is among those. Our sovereign debt remains an attractive investment, as evidenced by the recently announced $2.35bn bond issuance. The fiscal and monetary space, which allows us to implement measures to mitigate the impact of the pandemic on livelihoods and lives, bodes well for the ability of the Philippines to attract job-generating investments for Filipinos post Covid-19.
We are working towards a recovery that is a strong, inclusive one which lifts up Filipinos who have been affected. We are resilient people, and we have the monetary and fiscal space and the tools to bring to bear to ensure such a recovery.
Q. This is clearly a difficult time for the country’s corporates but also for the banks. How is the BSP maintaining the health of the banking system throughout the pandemic?
A: Even before the start of the current pandemic, the Philippines’ banks were already adequately capitalised with a healthy liquidity position for absorbing unexpected losses. The central bank has prepared them well, with enough capital and liquidity buffers, as well as very minimal exposure to bad debts. Banks should have the capacity to extend loans and credits to their borrowers.
The regulatory relief measures should help manage non-performing loans, encourage banks and other BSP-supervised financial institutions to grant a temporary grace period for loan payments, or to restructure the loan accounts of their borrowers. Maintaining the health of our banking system is a solemn responsibility and something that will have a material impact on the economic health of the Philippines and the wellbeing of the Filipino people to persevere through this crisis.
Q. Looking towards the future, what trends do you see coming out of this? What will be the world’s ‘new normal’, post-pandemic?
A: I am dedicated to reform and I have been for my entire career as a public servant. I often think that if you know something to be right, it is prudent to act proactively and decisively. That is even more true in a once-in-a-lifetime crisis such as this. Now there are many lessons to be learned from this crisis and it would be a waste if we don’t learn from it.
As a former budget secretary, I advocated for the Budget Reform Bill. I understand the need for reform, and I’ve always been in pursuit of it. These reforms have proven to be foundational to our progress and now they will form the basis of our recovery. As BSP governor, it’s no different. We must move forward with important reforms to continue our progress and further aid our recovery for Filipino livelihoods.
There are a series of reforms I have in mind. First, we need to continue to accelerate our financial digitalisation. The lockdowns have restricted mobility across the globe and, here in the Philippines, many people stand to benefit from electronic payments and fund transfers.
We had set a goal of having 50% of financial transactions done electronically by the end of my term in 2023 but, because of the enhanced quarantine measures, it is likely that we will reach 50% earlier than the target. Electronic means of payment increases the velocity of payments and fund transfers, thereby helping accelerate overall income and economic growth. And it also empowers marginalised low-income earners to be part of the formal financial system. Digitalisation will also help overseas Filipino workers send remittances to their loved ones. Last year, for example, they sent around $33bn. Digitalisation should reduce both the cost and time it takes to remit income.
Second, it is a priority for the Philippines, and to further improve our public services, to push forward with a full implementation and adoption of the national identity (ID) system. An important lesson learned from the ongoing pandemic is that a national ID system would help with the distribution of financial assistance to people working in the informal sector.
I believe the government should put more emphasis on strengthening fiscal health and external positions even after Covid-19. The ongoing crisis requires huge amounts of relief measures, including financial support to the vulnerable sectors. This has highlighted the importance of building up fiscal buffers during normal times, so that governments can provide support to citizens and businesses without suffering from debt frenzy during a crisis. In the case of the Philippines, we have entered a crisis with sufficient armour and buffers; these include a very manageable debt burden, which has allowed the government to implement massive relief measures without fear of fiscal troubles down the road.
Prior to my role as BSP governor, I was on the fiscal side, serving as budget secretary. Before this pandemic, fiscal authorities pushed hard for vital reforms, including tax reforms, which have helped shore up the government’s revenue collection; and budget reforms that have addressed underspending and helped improve capacity of government agencies. All of this has proven to be important, so at the time of the Covid-19 outbreak, the reforms have made the Philippines better equipped to deal with the crisis.
The ongoing crisis likewise presents the risk of market volatility, and so it pays to have a healthy external position from the very start. In the case of the Philippines, our ample gross international reserves, which we expect to reach about $93bn by the end of the year, along with other sound fundamentals, have helped keep the peso fairly stable. Overall, better fiscal health will yield tangible results for the wellbeing – economic and otherwise – of Filipinos.
