Interview: Benjamin E Diokno

Which monetary policy tools can be used to ensure inflation stays within the central bank’s target?

BENJAMIN E DIOKNO: With a primary mandate of price stability, the BSP has a wide range of tools to ensure inflation stays within the target range. In addition to overnight facilities, term deposit facilities (TDFs) – through which banks may park excess funds and earn interest on seven-, 14- and 28-day tenors – serve as a key tool for mopping up liquidity. The BSP may also use macro-prudential measures – such as regulations on banks’ real estate lending – to address specific price pressures, as well as issue its own debt instruments after the signing into law of its amended charter. Among other changes, the legislation provides the BSP with the authority to issue, place, buy and sell freely negotiable instruments of indebtedness. Based on BSP forecasts as of June 20, 2019, inflation in 2019 and 2020 will settle at 2.7% and 3.0%, respectively, within the official target of 2-4%.

How is the BSP working to increase e-payments?

DIOKNO: The central bank’s flagship programme to transform and digitalise transactions is the National Retail Payment System, which aims to increase e-payments from the 1% of total retail sales seen in 2013 to a minimum of 20% by 2020. The system launched two automated clearing houses to facilitate e-transfers from one BSP-supervised financial institution to another: the Philippine Electronic Funds Transfer System and Operations Network, which allows batch fund transfers and InstaPay, which offers real-time, low-value transfers. To encourage prudent innovation, the BSP assesses potential risks and regulates accordingly to ensure that technology supports financial inclusion with safe digital solutions.

To what extent can a cut in the reserve requirement ratio (RRR) increase access to credit and liquidity?

DIOKNO: The reduction of RRR for universal and commercial banks from 18% to 16%, and for thrift, savings and cooperative banks from 8% to 6%, frees up funds for credit that support productive activities. It is good policy to gradually bring down the RRR – a friction cost for banks – since the Philippines has one of the highest in the region. It improves accessibility to credit and allows the BSP to shift towards more market-based tools for managing liquidity, such as TDFs and new debt securities. The central bank estimates that between P90bn ($1.7bn) and P100bn ($1.9bn) of liquidity is released for every percentage point cut in the reserve requirement. Nevertheless, the central bank is mindful of excess liquidity and will work to contain it.

In what ways are the volatility of international finance conditions and the tightening of global liquidity affecting capital inflows into the system?

DIOKNO: Even as external factors weigh on portfolio flows, the Philippines remains robust in terms of attracting foreign direct investment (FDI) due to its macroeconomic fundamentals, massive infrastructure projects and an improved perception of the country as an investment destination. In the first quarter of 2019 alone, FDI yielded net inflows of $1.9bn.

What actions are being taken by the central bank to ensure that the Philippines’ external payments position remains sustainable and healthy?

DIOKNO: The country’s external payments are supported by structural foreign exchange inflows, specifically remittances, revenues from the IT and business process outsourcing industry, tourism receipts and FDI. In order to maintain the country’s strong external position, we promote the appropriate use of foreign exchange reserves and participation in the market only to the extent that it tempers destabilising swings in the exchange rate and encourages prudent management of external debt. Additionally, the BSP reactivated the Currency Rate Risk Protection Programme and monitors all relevant developments that could affect inflation.