Low Inflation Helps Smooth New Philippine Governor's Transition

(Bloomberg) -- After a bumpy start, the new Philippine central bank Governor Benjamin Diokno will get help from a favorable economic backdrop as he eases into his job.

A former budget minister and proponent of fiscal stimulus to spur economic growth, Diokno’s surprise appointment last week jolted financial markets betting on a central bank insider to succeed Governor Nestor Espenilla, who died of cancer.

Diokno, 70, is seen favoring low interest rates and a weaker peso. He told reporters on Friday that a slowdown in inflation provides scope to ease monetary policy after 175 basis points of interest-rate hikes in 2018, but the timing of a move will depend on what the data shows.

Low Inflation Helps Smooth New Philippine Governor's Transition

The new governor “inherits a much more favorable environment, which gives him a lot of policy space,’’ said Trinh Nguyen, senior economist for emerging Asia at Natixis Asia Ltd. in Hong Kong.

Here’s a look at the factors that will help make Diokno’s transition easier:

Policy Space

Inflation returned to the central bank’s 2 to 4 percent target last month, giving Diokno and his fellow Monetary Board members room to ease policy. The new governor has also signaled his desire to reduce the reserve requirement ratio for lenders -- the amount of cash banks are required to hold in reserve -- which is currently at 18 percent, the highest ratio in Southeast Asia. Any policy move will be “data-dependent,” he said on Friday.

“He is expected to favor policies that will support economic growth,” said Jiaxin Lu, an economist at Continuum Economics in Singapore.

Low Inflation Helps Smooth New Philippine Governor's Transition


Stable Peso

An emerging-market rout and soaring inflation took a toll on investor sentiment last year, pushing the peso down 5 percent against the dollar. The currency has recovered in 2019 as the U.S. Federal Reserve pulled the brake on rate hikes and worries about twin deficits on the Philippine current account and budget subsided.

The local currency fell 1 percent against the dollar on March 5, the day after Diokno’s appointment was announced. The governor has taken steps to clarify past comments, saying his supposed bias for a weaker peso is overblown, which prompted the currency to recoup some losses.

Low Inflation Helps Smooth New Philippine Governor's Transition

New Central Bank Act

It also helps that the Philippines has just passed the New Central Bank Act, which equips the monetary authority with bigger capital, stronger powers and wider functions, including the ability to issue its own debt.

New provisions in the central bank’s charter also provide better legal protection to officials and are a step toward greater independence and effective implementation of policies.

Diokno will need to build investor confidence and allay concerns that the central bank’s independence may be eroded. Eurasia Group said Diokno got the role because of his experience as a technocrat rather than his close political ties to President Rodrigo Duterte.

“In pursuing policy continuity, let me also assure you that the BSP will sustain its institutional independence, with the Monetary Board acting as a collegial body,” Diokno told reporters on Friday.

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