OF SUBSTANCE AND SPIRIT

Tomorrow, 3 July 2020, is the 27th founding anniversary of the Bangko Sentral ng Pilipinas (BSP).  The BSP is the Philippines’ central monetary authority in charge of monetary policy, financial institutions, and the payments system. It is the great public institution we served for over 41 years. 

We had the privilege of working with nine governors, four under the old Central Bank of the Philippines (CBP), and five under the BSP established in1993.

Many public servants who grew up with the BSP were sent on scholarships to pursue graduate studies in economics, law, and public policy. Harvard, Columbia, Cornell, the London School of Economics, and Cambridge were among the great universities that shaped the minds and hearts of central bankers on Mabini Street. 

For decades, we cut our teeth at the Bank on central banking because no academe could have dispensed practical training and technical know-how for this type of career.

We remember with fondness working with central bank and fiscal counterparts from all over the world, doing regional and global economic and financial surveillance. Together, we proposed value propositions on the best public strategy to address broad issues at hand. We helped formvarious modalities of regional and international safety nets, including the Chiang Mai initiative.

We were challenged by the dogma of the International Monetary Fund which, prior to the Great Financial Crisis of 2008-09, invariably prescribed tight monetary and fiscal policies for almost all macroeconomic problems of developing and emerging markets alike. With no option but to terminate any of our previous adjustment programs, tempering binding conditionalities was the only constructive way forward with the Fund. At that time, the Philippines badly needed the financing attached to the programs and the Fund’s imprimatur for creditor banks to restructure our overdue loans. 

In the early 1980s, during the balance of payments crisis coinciding with the debt moratorium, every dollar counted. We survived by the skin of our teeth. With a large financing gap, we had to ration foreign exchange as our Gross International Reserves (GIR) plummeted to a level of just a few weeks of imports of goods and payment of services.  Today, our GIR level is more than the equivalent of seven months!

In the last 27 years, the BSP in partnership with other economic agencies of National Government and Congress implemented game-changing policy and structural reforms. The outcome is undisputedly strategic with tremendous positive externalities to civil society.

There have been tremendous improvements in investment efficiency and total factor productivity. Demographic factors have worked in our favor as we put in more resources for quality education, and the health and training of our young working population. 

The economy has become more competitive, incentivizing more domestic and foreign investments to set up more factories and plants, contact centers, and software development; expanding our capital markets; and launching domestic branches of international banks.

These achievements underpin the Philippines’ 21 years of uninterrupted economic advance. The BSP  has indeed played a significant role in helping bring this about. 

The BSP is credited with responsible monetary policy that inspires confidence and economic growth. Ensuring that the financial and banking system is strong and stable, and that payments systems are safe and efficient, has also created additional tailwinds.

Since 1993, the design and implementation of monetary policy have seen vast changes. The correlations between monetary aggregates, prices, and output were modified by emerging economic transformations as well as by financial innovations. Thus, in 2002, the BSP adopted inflation targeting (IT). The approach appropriately promotes price stability, the primary mandate of the BSP. This new framework ushered in greater accountability and transparency in monetary policy. The BSP holds itself accountable in achieving its inflation targets and the measures to bring this about.

Some detractors said that the shift to IT was meant to mask the buildup of inflation pressures.  These quartersclaimed that this was achieved by setting the inflation target at higher levels for the first few years of the IT framework, but without realizing that targeting sharp and quick reduction in price movements would have cost us some output losses. By this time, it should be clear to those quarters that subsequent downward adjustments in the targets reflect responsible  monetary policy in that both inflation dynamics and the requirements of a growing economy have been duly considered.

Since 2002, the BSP has kept a good batting average when it comes to achieving its inflation targets. It has also communicated the basis of its data-dependent and forecast-driven monetary actions to the market. This year alone, the BSP hit its monthly forecasts five times out of five months. In the literature, the BSP ranks high on the integrity of its IT framework and implementation, as well as on its communication strategy.

Monetary policy was pursued along three fronts. One, credit enhancements to small businesses through the nationwide Credit Surety Funds were promoted to achieve greater access to bank credit. This approach makes monetary policy more potent. Two, economic and financial literacy was promoted to create an ecosystem of literate market players.  Such an ecosystem produces sufficient familiarity with the workings of the financial markets and an appreciation of various financial instruments.  The goal is to encourage more vibrant economic activities. Finally, regional cash operations were also expanded to bring the grassroots community within the ambit of broader monetary advocacies.

Further, given more cross-border transactions and increasing volatility in the financial markets, the BSP liberalized the foreign exchange regulatory system in more than 11 waves while keeping the exchange rate market driven. 

In 2016, the BSP also introduced the interest rate corridor system to manage volatility and keep market rates closer to the policy rate.  Back then, there was little alternative to relying on term deposits of banks with the BSP as it was only in 2019 that the BSP Charter was amended to authorize it to issue its own debt securities to support its open market operations.

For changes in both the policy rates and level of domestic liquidity to be transmitted to the real economy effectively, the financial system comprising banks and the markets must be stable and robust. 

All these years, the BSP has endeavored to create a regulatory environment to make local banks at par with counterparts abroad in terms of  compliance with international best practices. Erring banks with fictitious borrowers and loans,  those with abusive officers and board members who have breached their fiduciary roles in safekeeping the public’s money have been closed down and administratively dealt with. Compliance with international banking standards has resulted in higher risk-based capitalization, better liquidity coverage, and stable funding ratio. Risk-conscious mindsets among banks now prevail.  

We have also seen the payments and settlements system transformed. The name of the game is disruptive innovation through automation and digitalization. Real-time gross settlement system was first established and operated by the BSP to facilitate safe settlement of business transactions.  Over the years, it has been tweaked for greater relevance and adaptability to new circumstances. Two automated clearing houses were set up under the National Retail Payments System to promote interoperability in bank fund transfers. MSMEs can build their creditworthiness from a series of digital transactions and can now facilitate their access to the formal banking system.

Looking back, we are proud to be around the three BSP governors awarded as Best Central Bankers in Asia during their respective incumbencies –

Gabby Singson, Paeng Buenaventura, and Say Tetangco. 

Many private organizations recognized and continue to recognize the BSP as the best government agency in terms of integrity, performance, and reputation. The BSP has been a strong partner of the National Government in its advocacy for good economic governance through joint appearances before both the House and the Senate. 

With the National Government, for instance, the BSP actively worked towards rice tariffication to address supply side inflation issues.

Working with other economic managers, the BSP actively champions Philippine economic initiatives, and shares the narrative of economic policies and growth to economic analysts, credit rating agencies, foreign and domestic investors.

As a result, the Philippines achieved its initial victory under the banner Road to A when the Japanese Credit Rating Agency upgraded its investment score from Triple B+ to A-. 

During these pandemic times, the BSP threw its strong support behind the National Government’s strategy to manage the health crisis and re-start the economy. Based on the latest reckoning of the IMF, the monetary stimulus done by the BSP is second only to Poland. However, Poland and the others on top of the list, are expected to show much deeper economic declines than the Philippines.

Today, the BSP is also mandated by its new charter to also look after financial stability. But while it can help shake the economy to vibrancy, the BSP can do this only to a limited extent given quarantines, muted economic activities, and a weakening of the global economy. Excessive easing could leave a lot of debris in the aftermath of COVID-19, a challenge when the time comes to clean up.

BSP officers and staff—non-elected and non-political—can always be proud of the institution and its past. The challenge is to see a BSP that stays faithful and focused on its legal mandates, as it helps in economic bounce back. The challenge in this time of COVID-19, and moving forward, is to see a BSP that continues to practice responsible policymaking, as it aspires to inspire confidence and economic growth.