A seasoned economist for BSP governor
ISYU AT BANAT - Boo Chanco (The Philippine Star) - November 30, 2016 - 12:00am

The second most important public service position in the country after the president is the governor of the Bangko Sentral. The President must choose the absolutely most qualified for BSP governor unless he wants to risk the country’s economic outcome given the turbulence of the times.

This is why it is heartwarming to learn that President Duterte wants current BSP Governor Say Tetangco to remain. The President said he is going to convince Congress to pass legislation to make a third term possible.

Indeed, the 40-year veteran of the BSP is a tough act to follow. Gov. Tetangco is internationally credited with strengthening the BSP’s ability to promote growth and stability. Among others, the Philippines, during his watch, has achieved the ideal convergence of higher economic growth and low inflation – for instance, 2015 GDP expanded by 5.8 percent amid an inflation rate of 1.4 percent.

Under his guidance, the Philippine banking system is well-capitalized and supportive of an expanding economy. The payment and settlement system remains safe, efficient and a source of confidence in the growing financial system.  At the same time, a strong external position from the current account surpluses and ample international reserves provide cushion from possible shocks to the economy.

Duterte is wise to play it safe. In a period of extreme volatility in the international financial markets, it is reckless to change an experienced and proven workhorse. An inexperienced appointee, one who got the position because of political connection, can cause untold damage to the economy.

Indeed, there is probably no more important appointment that President Duterte will make during his term than the BSP Governor. Ever the astute politician, it seems Duterte raised the possibility of Tetangco’s third term to ease political pressure on who to appoint as his successor.

There were very disturbing rumors about some of the names we heard aspiring for the position. One is a former commercial banker and former trade secretary with a lightweight reputation, but is highly recommended by former president Gloria Arroyo. The other is a current commercial banker said to have a direct line to President Duterte. And there is a lawyer against whom the BSP has filed a case.

Being the responsible national leader, Duterte is cautious  about making the right choice. And what safer choice than the current BSP governor who has been consistently rated to be among the world’s top Central Bank governors for eight years.

People who are not particularly familiar with the work of the central bank governor may not think much of the job. An ambitious commercial banker with a huge ego may think it is nothing more than a fitting crown to cap his career. It is not.

The regulation of commercial banking is just one of the responsibilities of the BSP governor. And it is even better if the BSP chief has no previous ties with commercial banking because that means no strong ties with the country’s entrenched vested interests.

If one really dissected the important functions of the BSP governor, one would  conclude that a seasoned economist is best suited for the job. Take a look at the last few chairmen of the Federal Reserve, America’s central bank. They are all well respected economists.

Indeed, given the responsibility, it is thought that the Fed chairman must almost be capable of walking on water. He doesn’t have the luxury of making a serious mistake. In a sense, it is a very technical job.

The stock, money and commodities markets worldwide go up or down depending on how a Fed chairman chooses his words in any public forum, or even how he twitches his face in an interview. Not even the US president affects lives of common people all over the world the way a Fed chairman can.

Just look at how our local stock market is bleeding lately. That’s all because the current Fed chairperson has all but acknowledged that they will move up interest rates… that the long years of accommodation is ending. So foreign investors sell out of our market and quickly convert to dollars. That’s partly why the peso breached the 50 to the dollar level before falling back.

We would be in trouble if we did not have a BSP governor who has experience riding such volatility.  A politically oriented BSP governor would have instinctively wasted foreign reserves to defend the peso and never mind the consequences.

Our current BSP governor knows what to do out of experience. He knows his job is only smooth out the volatility of the exchange rate movement to prevent disruptions in the business environment. He has used the good times to raise our international reserves to a record high of over P85 billion, enough to cover 10 months of imports.

Below are the more important functions of the BSP governor aside, from banking regulation:

– Steers monetary policy to create an environment of low and stable prices that would be conducive for sound economic and business planning supportive of economic growth over the medium and long term. This requires a deep appreciation of inflation dynamics and the channels of transmission of monetary policy. It also requires critical surveillance and understanding of the goods and financial markets, including the foreign exchange market.

– Guides financial stability policy – beyond price and banking stability.... requires ability to appreciate interconnections among markets, products, institutions and cross border dynamics...

– Communicates clearly policy intent and informs markets and stakeholders (private and public) in a timely manner current conditions and future risks… to propel market to action or to calm markets in difficult times. Essential here is credibility... must have perspective… must be able to distinguish short term and long term implications of events and economic impulses on inflation.

– Represents BSP and the country in international and regional events (such as IMF WB and ADB ASEAN) ... must have ability to present national, regional and global perspective.

The most important attributes of the BSP governor are credibility and perspective that come from experience and are built from a capacity to understand economic data and how these impact the business environment.

I googled to find out how other countries define the functions of the central bank. What I found out proves my point that we need a seasoned economist for the job rather than a commercial banker or a politician.

A central bank targets low inflation to help create greater economic stability and preserve the value of money and savings. It must also consider other macro economic objectives such as economic growth and unemployment.

It isn’t always black and while. Sometimes the central bank may accept a higher rate of inflation because it doesn’t want to push the economy into a recession.

In recent years, central banks used other monetary instruments to achieve macro economic targets. For example, in a liquidity trap, lower interest rates may be insufficient to boost spending and economic growth.

A good example is the quantitative easing which the US Federal Reserve and the European Central Bank did. This involves creating money and using this money to buy bonds. The aim of quantitative easing is to reduce interest rates and boost bank lending.

It is clear that whoever heads the central bank must be totally equipped with the intelligence, academic training and real life experience to manage the challenges. A mere commercial banker may not have the training, experience and perspective to see the economy in totality and in relation to other world economies.

In case Governor Tetangco is unable to get a third term, any one of the career deputy governors is fully qualified to succeed him.

Another good name to consider is Felipe Medalla, a well respected economist who is now a member of the Monetary Board and was the former economic planning secretary of Erap. Philip, like Gov. Say, has no links with our entrenched ruling elite in business and industry. This Batangueño has a reputation for intelligent straight talk, something President Duterte appreciates.

If all else fails, Finance Secretary Carlos Dominguez should take the job simply because he has the intelligence and reputation that makes him trusted by the business community. It would be easier and less dangerous to get another finance secretary, even from among those who forced themselves in the short list for BSP governor, than risk having any of them to become BSP governor.

As I said, this will be President Duterte’s most important appointment. Usual political considerations should not apply.

Boo Chanco’s e-mail address is bchanco@gmail.com. Follow him on Twitter @boochanco

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