Interview with Benjamin Estoista Diokno, Secretary of Finance (former Governor of the Central Bank), Republic of the Philippines

Oct 2022 Interview with Benjamin Estoista Diokno, Secretary of Finance (former Governor of the Central Bank), Republic of the Philippines

Prisma Reports (PR): Could you please review Philippines economy resiliency amid the ongoing pandemic, assess the recovery plans and illustrate the country’s economic outlook in 2022 and 2023?

Benjamin Estoista Diokno (BED): The Philippine economy’s resilience is best reflected by its rebound from the pandemic-driven recession in 2020 to a solid 5.6% growth in gross domestic product (GDP) in 2021. Worth noting is that the recovery was broad based and included all sectors: agriculture, industry and services. It’s driven not only by government consumption, but also by household consumption and investments. Other indicators show the economy’s resilience. For instance, foreign direct investments reached a record high of $10.5 billion in 2021; this is up by 54.2% from the previous year’s level. Unemployment rate is now down to 6.4%, as of January 2022, from a peak of 17.6% in April 2020, during the height of the pandemic. The country’s manufacturing sector is growing, with the Purchasing Managers Index reaching a three-year high of 52.8% in February 2022. If the index is 50, it’s no change; if it’s less than 50, there’s a contraction, and if it’s more than 50, there’s an expansion. We got 52.8% in February.

The Philippines also managed to keep all its investment grade ratings intact, even as the world witnessed a wave of rating downgrades resulting from the crisis. This shows the confidence among the debt watchers in the Philippines’ ability to bounce back from the crisis over the near term. The Philippines’ banking system has remained sound throughout the pandemic, enjoying ample capitalization and manageable exposure to bad debts and rising assets.

Our outlook is that this year the economy will grow by 7% to 9%, and that in 2023 and 2024, it will grow by 6% to 7%. This growth is driven by recovering global demand (which boosts Philippine exports), improved sentiment among foreign investors and domestic firms, and continually rising government investments in infrastructure and social services.

Prisma Reports (PR): What is your balance on the BSP top initiatives, and the results achieved? Why do you speak about a “strong and resilient banking sector”?

(BED): The BSP’s mandates are price stability, financial stability, and safe and efficient payments and settlements system. On price stability—manageable inflation—shows the BSP’s commitment and favorable performance in managing liquidity as well as adequate conducting of monetary policy. Unlike in other countries, where they are now facing high inflation, our inflation is well within our target range of 2% to 4%. Inflation settled at 3% in January to February of this year. For the full year of 2022, inflation will probably average at 4.3% due to supply factors, but it is expected to slow down to 3.6% next year.

On financial stability, the BSP has helped keep banks stable through prudent regulations. We learned our lessons from the Asian financial crisis, so we have asked them to observe a lot of regulations on our part. The key banking performance indicators show that they have ample capitalization, manageable exposure to bad debt, and growing loan portfolios. One metric is the capital adequacy ratio of universal and commercial banks. It stood at 16.9%. This is higher than the regulatory requirement of 10% and the Bank for International Settlement’s requirement of 8%. Non-performing loan ratio remains manageable at 3.79 as of the end January this year. Outstanding loans of universal and commercial banks grew year on year by 8.5% in January 2022, marking the sixth consecutive month of year-on-year growth after the slowdown during the crisis. The deposits grew by 10% to $2.9 billion as of January 2022. All these numbers reflect the trust and confidence of the public in the banking system.

The key banking performance indicators substantiate this view of a strong and resilient banking sector. Banks in the Philippines have remained profitable even throughout the pandemic. In December 2021, combined net profit of universal commercial banks amounted to $3.1 billion, up by about 45% year on year.

On the third mandate of safe and efficient payments and settlement system, the Central Bank has been promoting financial digitalization, side by side with cybersecurity measures through enabling regulations. When I assumed office three years ago, I made it my goal to transform at least half of the financial transactions from cash to digital form. Because of the crisis, we are close to achieving the goal sooner than later. Trends give us confidence that our goals are attainable. In fact, right now the number of Filipino adults with financial transactions jumped from 22.6% in 2017 to 53% in the first quarter of 2021.

Prisma Reports (PR): Fintech is one of the most exciting and rapidly changing sectors. The national strategy for financial inclusion 2022-2028, the digital payments transformation roadmap of 2020-2023, and other major strategies and plans will be key to strengthening the adoption of digital instruments and the modernization of this sector. Could you share some more information on the above-mentioned plans and would you like to mention any other initiatives?

(BED): The BSP expects banks to remain sound and stable, forward moving, able to support the funding requirements of the recovering and growing economy. Regarding fintech, we expect financial technology to flourish further by enabling regulations and initiatives by BSP. Our digital banking framework has encouraged players in the digital banking space. Since the BSP’s issuance of the regulatory framework for digital banks in December 2020, we now have six purely digital banks in the country: Overseas Filipino Bank, UNO Bank, Tonik Digital Banking Inc., Union Bank, GoTyme and Maya Bank. We expect the digital banks to thrive along with the traditional banks as the economy advances.

We also have an open finance framework, an enabler of digital transformation and financial inclusion. It is a data sharing scheme which adopts greater financial transparency options to consumers through wider access and control over their own data. This allows financial institutions to come up with products and services tailor-fit for specific needs of consumers. They’ve also pushed for programs that advance fintech, such as those that allow expanded use of QR codes for payments, those that allow people to save and invest for their retirement using their mobile services, and those that allow the public to remit payment to various government agencies electronically.

With all our initiatives, we expect to hit our goals under the digital transformation roadmap. At least half of financial transactions will be in digital form, and at least 70% of Filipino adults will have financial transaction accounts.

Prisma Reports (PR): What is the outlook for the Philippines financial and banking, and fintech in particular, this year?

(BED): We expect fintech to increase. We didn’t expect this when we launched this three years ago. My goal is to shift from a cash-heavy to a cash-light society, but little did I know that there would be Covid along the way. Covid has become the catalyst, and there is now an accelerated use of fintech in terms of banking transactions. We have two major vehicles for electronic payment: PESONet and InstaPay. The combined volume of both reaches 52 million transactions, valued at $15.2 billion. This represented growth of 43.8% in volume and 45.8% in value. Definitely, it’s accelerating, and we hope it will continue to accelerate.

Prisma Reports (PR): BSP is developing a new complex in New Clark City. What are the other internal projects aiming at shaping the future image, as well as operations, services and efficiency of the BSP?

(BED): In response to studies, and as a result of climate change, maybe our headquarters here will be affected 50 years from now. As part of the contingency planning, we have approved the installation of a new BSP complex in New Clark City. We plan to make it a green, sustainable building. We look forward to its final establishment, maybe within three years.

Prisma Reports (PR): I’d like to congratulate you since you have won the Banker’s Asia Pacific Central Banker of the year 2022 as well as Global Central Banker of the year 2022. As a leader and inspirational figure, could you please share your views on the world’s economy, finance and banking systems, as well as Central Bank’s role in the short- and medium-term future?

(BED): Thank you for noting that award. It was a real honor and a first for the Philippines. It made me proud of what we, at the BSP, have accomplished over a very difficult year. I’m not the traditional central banker, because the traditional central banker would tend to be deliberately vague in his communication with the public. I believe in transparency. People deserve to know what you’re doing, and you have to explain to them in their own language. That’s been my mantra.

My mantra also, as a central banker, is to bring the Central Bank closer to the Filipino people. We did a survey and asked them what their recognition of the Central Bank was. All they knew was that the Central Bank prints money. To me, it means that the Central Bank must not stay in an ivory tower; it must endeavor to make the public understand what it does and appreciate the impact of its policy actions on their lives. It also means being bold, going beyond traditional banking to help achieve a stronger, more inclusive, and more sustainable economy. In the case of Bangko Sentral ng Pilipinas, we do not keep our focus solely on our price and financial stability mandate. We also actively pursue other advocacy, such as financial digitalization, financial inclusion, and sustainable finance. Central banks can do a lot more beyond its core function of price and financial stability. And by being proactive, the Central Bank can help the economy reach greater heights.

Prisma Reports (PR): What would your final message to the readers of Foreign Policy be?

(BED): Actually, at the height of the crisis, when the virus was still raging, the Philippine government did not sit idly by, but we continued to pursue changing reforms. For example, we amended our retail trade liberalization law which reduces the paid-up capital requirements for foreign retailers significantly. Entrepreneurs coming from Europe or the U.S. can come to the Philippines and establish their shop here. Secondly, we revised the Public Service Act, which allows full foreign ownership in key sectors such as telecommunications, shipping, airlines and railways. Thirdly, we updated the Foreign Investment Act, which allows for investors to engage in micro and small domestic enterprises, and for foreign professionals to bring their practice.

With these recent reforms, there should be enough to attract foreign investors to the Philippines. We had a record year last year as our foreign direct investment increased by 54%. This was before we passed this recent legislation. That makes the Philippines really open for foreign investors. It makes the Philippines a favorite investment destination.