Exit Central Bank, Enter Bangko Sentral

The last Central Bank Governor Jose Cuisia Jr. (center)

With the signing of Republic Act 7653 in 1993, President Fidel Ramos replaced the old Central Bank with the Bangko Sentral ng Pilipinas, paving the way for a shift in the central monetary authority’s thrust from monetary stability to price stability, as well as an increase in private-sector representation in the Monetary Board. The following is a summary of a speech delivered before the MBC by Jose L. Cuisia Jr., the last governor of the old Central Bank of the Philippines. It was first published in the July 1993 issue (vol. 13, no. 7) of the MBC Economic Papers.

Outgoing Central Bank Governor Jose L. Cuisia Jr. claimed that the country’s financial system is now in its best shape during his farewell speech as CB governor last 28 June 1993. He was addressing a joint general membership meeting held in his honor by the Makati Business Club, Management Association of the Philippines, and the Financial Executives Institutes of the Philippines.

The Central Bank has put in place key policy initiatives and reforms essential to rapid and sustainable economic growth, said the governor.

Governor Cuisia attributed the sharp fall in inflation levels recently to consistent and substantial cutbacks in monetary expansion since 1990, underscoring the pivotal role of monetary policy in fighting off inflationary pressure. Consequently, a significant drop in interest rates and stable exchange rates followed, notwithstanding a more liberal foreign exchange environment.

External Debt Reorganization

Preserving the country’s good name in the eyes of the international financial community has allowed a workable and efficient trade financing and settlement mechanism that made quicker economic recovery possible. Governor Cuisia pointed out that this mechanism also resulted in continuing access to funds from abroad for present and future needs. This basic strategy has led to a dramatic reduction in external debt burden.
If Filipinos themselves are still skeptical about how well foreign debt is managed, the CB chief cited recent developments auguring well for the country. The final restructuring of commercial banks’ medium- and long-term debt (involving a complex package that cuts the present value of covered debts by nearly half) was completed in December 1992. A maiden Eurobond issue amounting to US$150 million was successfully launched in February 1993. Moreover, the CB preterminated a US$3-billion trade facility last May and has started the shift to less expensive and more flexible voluntary finance.

Financial Liberalization

In discussing key deregulatory initiatives in banking rules, Governor Cuisia enumerated the following steps taken: lifting of the moratorium on the establishment of new banks; relaxation of bank branching regulations; and liberalization of rules covering the establishment of off-site automated teller machines.

On the asset management side, the allowable areas for equity investments of expanded commercial banks have been widened to allow banks to invest in additional undertakings. A step further is a bill that would lift the prohibition on foreign bank branches to accept deposits locally. The bill will also authorize foreign banks’ entry into the Philippines. Governor Cuisia also called the audience’s attention to the foreign exchange liberalization undertaken during his term. By end-1992, virtually all current account restrictions had been lifted and only a few selected capital account restrictions remain, mainly those pertaining to external debt. This has produced good results as exporters and overseas workers have recently channeled remittances through official foreign exchange markets instead of the black market.

Financial System Resctructuring

Taking pride in the CB’s assistance to distressed local banks, Governor Cuisia stated that these local banks (including rural banks) were now stronger. The CB converted eligible investments. It also completed the privatization of four (out of six) previously distressed commercial banks, while arrangements are in place for the disposition of a fifth. Only one relatively small commercial bank remains to be rehabilitated and privatized.
To align the domestic banking industry’s standards with international standards, Governor Cuisia informed the audience that the Monetary Board had approved in principle the adoption of modified Bank of International Settlements capital adequacy standards.

Central Monetary Authority

Shifting to the issue of the day, Governor Cuisia said he believes that the new central monetary authority promises to be more effective in its ultimate objective of price stability. The CMA’s strengthened financial position and capital base and its policy of independence will help it pursue the objectives.

But many challenges also face the organization. These include the confirmation of the governor and the financial burden of redeeming the old Central Bank losses. However, the constitutional validity of the governor’s confirmation is currently being questioned.
With the effectivity of the New Central Bank Act signed 14 June 1993, Governor Cuisia was succeeded by Philippine National Bank president Gabriel C. Singson as governor of the Bangko Sentral ng Pilipinas. Appointed to the Monetary Board were Trade Secretary Rizalino S. Navarro, Manuel L. Morales, former NEDA Secretary Cayetano W. Paderanga, Aurelio Periquet Jr., and Iñigo B. Regalado.