Policy continuity, reforms expected under next BSP chief

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Monetary policy settings of the Bangko Sentral ng Pilipinas (BSP) will remain sustainable even with the upcoming change in leadership, but risks brought about by advanced technology and divergent monetary policies in the external environment will challenge the new central bank chief, Nestor Espenilla Jr.

Outgoing BSP Governor Amando Tetangco Jr., who will retire in July, said the BSP has built a strong track record of sound governance processes for policy formulation, adoption and implementation.

“The BSP policy framework is well-articulated, it is data-dependent, grounded on market-experience, and supported by analytical and academic foundations,” he said.

For instance, the BSP marked a formal shift in its monetary operations to an interest rate corridor (IRC) system in June last year, introducing liquidity-mopping tools such as the term deposit facility and the overnight deposit facility.


With the introduction of new facilities and the refinement of existing operations, the BSP has developed an active and more dynamic policy toolkit that is expected to improve its influence on market interest rates and ultimately enhance monetary policy transmission in the economy.

According to its annual report, the BSP said its regulatory reform agenda instituted over the years enabled the banking system not only to prudently position itself against global and domestic headwinds but also to receive positive international reviews for its overall strength and competitiveness.

Challenges
Despite all this, Tetangco said the BSP’s operating environment is shifting with digitization, cybersecurity risks, social media, artificial intelligence, shifting consumer preferences, and enhanced competition at play.

He also pointed to regional integration moves and policy uncertainty from the tendency to retreat from multilateralism, as well as deregulation in other jurisdictions.

“Asynchronous policy responses from other monetary authorities…. These are just a few of the trends that will shape our operating environment going forward,” he said.

Tetangco said the BSP is very fortunate that the President Rodrigo Duterte has chosen Espenilla, an insider to be the next BSP governor.

The outgoing BSP chief said he worked with Espenilla more than his 12 years term on various areas such as market reform, financial inclusion, consumer protection, and financial stability.

“I am therefore very confident that the transition would be seamless. Espenilla will hit the ground running, so to speak, on July 3,” he added.

Going forward
Tetangco said a number of programs initiated under his term could be the focus of the new governor.

Among these are the BSP’s medium-term goal of making monetary operations more market-oriented, formalizing financial stability as an integral element of policy formulation, and leveraging off technology for financial inclusion and for other processes within the central bank, he said.

Tetangco also said there were a number of components to the capital market reform agenda that have yet to take off the ground.

“Of course, we need to continue to push for the BSP charter amendments, and the other bills that are on our legislative priority list,” he said.

Tetangco said Espenilla would be well-supported by committed professionals in the BSP.

Inflation targeting, rate hike
ANZ Reseach economist Eugenia Victorino expects the appointment of Espenilla, to lead to a seamless transition of leadership within the central bank.

“We expect policy continuity with a firm focus on inflation targeting,” she said.

However, she said institutional issues are still limiting the ability of the BSP to effectively regulate financial institutions.

“The strict coverage of the Banking Deposit Secrecy Law has affected the ability of the regulator to guard against certain instances of money laundering. The key is to find a balance between effective regulation while allowing the local markets to develop,” she said.

“We would expect incoming Governor Espenilla to lead the BSP in a renewed push for market reforms, specifically on legislative amendments on the BSP Charter, AMLA (Anti-Money Laundering Act), and Banking Deposit Secrecy Law,” she added.

For Deutsche Bank economist Diana del Rosario, incoming Governor Espenilla will be prompted to hike rates early in his term to respond to multiple inflationary pressures alongside robust economic growth and rapid credit expansion.

“Risks are mainly external, in our view. For one, he will have to deal with the task of ensuring an orderly adjustment in local financial markets amid shifting monetary policies in the advanced economies,” she said.

“But the positive thing is that the economy has ample policy buffers. So the challenge really for the new governor is in how to help steer the economy from strength to strength,” she added.

Del Rosario said the plan to reduce the reserve requirement ratio over the medium term is a step in the right direction, as it is in line with the BSP’s goal of channeling excess liquidity into productive use.

“But the new governor will have to find the right window to do so as the BSP undergoes a rate hike cycle amid elevated inflationary pressures,” she concluded.

Nomura Securities said Espenilla’s appointment bodes well for a seamless transition and policy continuity, noting the incoming governor’s promise to continue to adhere strictly to the BSP’s inflation-targeting framework.
The choice of Espenilla also validates the official rhetoric earlier that President Duterte understands the importance of maintaining an independent and credible central bank, Nomura said.

“Third, apart from preserving Mr. Tetangco’s legacy, a key task for the next governor will be to address reform issues including, among others, amendments to the bank secrecy law, the anti-money laundering act and the BSP charter, as we have argued before,” it added.

BSP, economic team
Nomura believes Espenilla’s track record as deputy governor in charge of bank supervision makes him the best qualified official to tackle these challenges.

“We think he will be able to work well with President Duterte’s technocratic economic team, led by Finance Secretary Dominguez and hence, is positive for the overall reform agenda of the administration,” it said.

Nomura also sees the selection of Espenilla as positive for markets and should address some concerns about outgoing Governor Tetangco’s replacement.

“That said, with upside risks to inflation and a change in interest rates unlikely until after the new governor has taken office, market concerns over the BSP being behind the curve on inflation are unlikely to abate in the near term,” it added.

Dutch financial firm ING Bank Manila said the appointment is a choice for continuity of the monetary and financial system’s policies and direction.

“The appointment also demonstrates the President’s confidence with and trust in his economic team. The decision also displays the strong influence of his economic team, especially Finance Secretary,” ING Bank Manila senior economist Joey Cuyegkeng said.

He sees the BSP monetary policy under the future governor unlikely to change, and inflation-targeting remaining as the central bank’s approach while carrying on its risk-related policy bias.

“Soon-to-be BSP Governor Espenilla hardly talks about monetary policy publicly. He is BSP’s face on financial market regulation but he is still involved in shaping monetary policy, especially when regulatory tweaks are needed to influence monetary policy,” Cuyegkeng said.

“Overall the decision is positive, not only for the monetary system but for the economy – [indicating]continuity and progress and displaying the President’s preference and disposition to economic expertise, [and that of]his economic team,” Cuyegkeng added.

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