Philippine Central Banker Diokno Sees More Easing

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00:00The last time we spoke was actually in the depths of the pandemic, so it's been a long, long time,

00:05and a lot has changed since then. We now have Trade War 2.0. I wonder, given the tariff backdrop,

00:11what is your sense of the Philippine economy? Can it avoid a slowdown next year?

00:18I think it will slow down a little bit because of the uncertainty, due to trade uncertainty,

00:24and, of course, the construction controversy in the Philippines, so there will be some kind of adjustment.

00:32So I see 2026 as kind of a transition period, but I expect the president to fix this quickly and boldly,

00:41because he has three more years in his term, and the Philippine president usually has a six-year fixed term, no re-election.

00:51So, thinking of your legacy, you've got to fix this.

00:54You're alluding there to the government graph scandal, and your colleague, the BST governor, Elie Remelona,

01:00has talked about how that could crimp private investments. Is that what you're seeing as well, and to what extent?

01:07First of all, government construction will slow down, because as they fix this problem,

01:12they have to lay off some people, change some rules, etc.

01:14But also the sentiment of investors has actually changed a little bit.

01:21So I think a big part of 2026 will be a transition period, so we will probably be able to recover from this mess by the end of next year.

01:33And 2027 and 2028 will be good years. We'll be back on track.

01:38What do we need to see for there to be, in your words, recovery from this mess?

01:43Well, he has to strictly enforce the budget rules, because actually Congress mangled his budget, what I call the president's budget.

01:53He has to quickly give signal to Congress, respect my budget.

01:58So I keep saying, the real test will be what they will do for the 2026 national budget.

02:07And then, of course, the implementation.

02:10You need new people, new rules, etc.

02:14And then, of course, with his bold actions, hopefully we'll recover the investment confidence.

02:23So your sense is that this is something that can be fixed.

02:27It just might take time.

02:28And to your point, maybe something that's cleared up by the end of next year.

02:33But in the interim, between now and then, do you see complications for Philippines in terms of raising money?

02:41Does this affect its credit rating?

02:44No, no, no. In terms of raising money, we don't have problems with that.

02:47I think it's really the implementation and the sentiment of investors.

02:54Those who are already invested in the Philippines, maybe they will postpone a little bit their expansion plan.

02:59And for those who are still planning to come in, they may have to evaluate based on what's happening.

03:05But as far as raising money, I think we won't have that problem.

03:10In terms of monetary policy, do you expect to support a December rate cut?

03:19Is that something you would be backing?

03:22We're still on an easing cycle.

03:24So we just cut it 25 basis points last October.

03:29And there will be another meeting in December.

03:32I would expect another 25 basis points cut.

03:36But there are some estimates out there that the Philippines does have more room for easing.

03:43Some say 50, 75 basis points.

03:46Is that not part of your calculus?

03:49That could be part of the calculus, but it depends on the timing.

03:53It could be 25 basis points in December.

03:55And the rest may be sometime next year.

03:58What would it take to trigger that ensuing rate cut?

04:03Well, we love to say that we are data dependent.

04:07And so usually we look at that data on growth and unemployment.

04:12And of course, inflation is pretty much under control.

04:17In fact, we're below our target rates.

04:222% or below 2% right now.

04:25And we expect to be in the middle of that rates up to 2027.

04:29So as far as inflation is concerned, we're okay.

04:33So it's really growth and employment.

04:36What do you see in terms of the tariff impact?

04:38I mean, for the Philippines, maybe it's not the direct impact on exports demand.

04:43It's more about the second order effects.

04:46How are you seeing that playing out in the Philippines economy?

04:48The Philippines is not as open as other Asian economies like maybe Malaysia and Singapore.

04:55So I think trade as part of our growth strategy is not that huge.

05:02We're not a big trader country.

05:05So we're not much affected by it.

05:07We are, of course, affected by the secondary effect, as you mentioned.

05:11But not as much as the other developing countries in Asia.

05:15So not much of an impact.

05:17What about the impact on the currency?

05:18Do you see 59 to the peso?

05:22Some talk out there about potential for the weakness as well.

05:26You know, the BSP does not target a specific rate.

05:30We have adopted a pre-exchange rate, floating exchange rate.

05:36We only intervene if the adjustment is persistent.

05:43And it could affect our inflation target.

05:45But right now we're very comfortable with our huge international reserves.

05:50Something like 109 billion.

05:53That's equivalent to seven months' worth of imports.

05:58The received doctrine is three months' worth of imports is enough.

06:02So we're okay.

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