Bangko Sentral ng Pilipinas has always been something of a glue-pot.
Created in 1993, the central bank has been the adhesive binding together a chaotic financial system.
It stabilized the Philippine economy as then-President Fidel Ramos plotted a recovery from the Ferdinand Marcos years. It shepherded markets around the 1997 Asian crisis and the 2001 impeachment that ousted President Joseph Estrada. It gave vital help to Benigno Aquino in winning investment-grade ratings a decade later.
Now, the nation's most-respected institution may be facing a moment of reckoning.
At issue is Benjamin Diokno, appointed central bank governor on March 4 by President Rodrigo Duterte. Diokno served, controversially, as the president's budget secretary. Controversial because he made no secret of prioritizing fast growth over inflation -- even in an economy that risked overheating. Diokno, 70, also faced criticism for approving giant infrastructure projects, allegedly without proper checks and balances.
Controversial, too, because Duterte installed Diokno in ways that break the normal chain of succession at the BSP. When Gov. Nestor Espenilla died on Feb. 23 of cancer, the betting was that one of his three wholly-qualified deputies would take the helm.
That is how it worked when Espenilla, a BSP veteran of more than three decades, replaced Amando Tetangco in July 2017. The highly respected Tetangco, it is worth noting, joined the central bank in 1974. And in his short tenure, Espenilla accelerated efforts to broaden financial inclusion in a nation where a fifth of the 105 million population lives in poverty.
Espenilla's gravitas helped him last year to implement 175 basis points of tightening without panicking the markets to curb Asia's fastest inflation. In September, consumer prices hit a nine-year high of 6.7%. By last month, they had fallen to 3.8%. Not a bad legacy for a central banker, not least as it came in the same month as his untimely death at 60.
Why, then, would Duterte be looking to fix what was not broken?
The peso's nearly 1% drop on March 5, the day after Duterte's pick for new BSP leader was announced late at night, suggests markets fear the worst. That slide versus the dollar, the worst daily fall in six months, puts a spotlight on March 21, when Diokno presides over his first monetary-policy meeting.
"Given the Duterte administration's expansionary fiscal policy stance, this signals a bias for more monetary accommodation from the new governor," says economist Noelan Arbis of HSBC.
Dating back to his days as budget chief for President Estrada from 1998 to 2001, Diokno has long been an advocate of robust state spending to hasten gross domestic product growth. As Duterte's budget man since June 2016, Diokno was at the center of the president's "Build, Build, Build" program. That $180 billion infrastructure boom is central to Duterte's push to attract more foreign investment and create new jobs.
After Benigno Acquino's fiscal reforms, Manila returned, at Diokno's direction, to the old days of overshooting budget deficit targets. Last year, the gap widened to 3.2% of GDP from a 3.0% target. Hardly epic backsliding, but this growth-at-all-costs imperative is a sign of how Diokno might run monetary policy. As analysts at Capital Economics put it: "Diokno's relaxed attitude to fiscal deficits as budget secretary suggests he will be dovish as governor."
It seems ominous, for example, that Duterte's team is highlighting opportunities for greater coordination between monetary and fiscal policy. The blurring of such lines, and responsibilities, led to Japan's financial comeuppance in the 1990s and may augur poorly for the Philippines.
Among reasons to worry: Diokno's oft-stated view that higher inflation is tolerable so long as growth is strong. It ignores the well-established trade-off between growth and inflation. The idea that stable prices tend to generate more productive growth has not been controversial in decades. And few economies dramatize the point more than the Philippines.
From 1998 to 2010, Philippine leaders subscribed to the Cult of GDP. Under Estrada and successor Gloria Arroyo, Manila would get growth as close as it could to 5% or 6%, declare victory and court complacency. From 2010 to 2016, President Aquino subscribed to the World Bank view that Manila needed to grow better, not just faster.
Aquino got below the hood. His team strengthened the national balance sheet, attacked graft and increased transparency enough to graduate from junk-debt status. Yet fixing a dysfunctional and graft-ridden system requires more than a six-year presidency. In 2016, voters elected strongman Duterte to take the economy to the next level.
Instead, Duterte pivoted to a ghoulish war on drugs. He prioritized construction cranes over structural retooling to increase innovation and competitiveness. The latter effort is important, of course. Only by upgrading ports, airports, roads and power grids can the Philippines compete with China, Indonesia and other regional trendsetters.
But some serious multitasking is needed. Philippine inflation, for example, is just as much about the supply side as demand. The nation's inflation is as much about bureaucratic bottlenecks that raise costs of food, fuel, power and many imports needed to keep Duterte's construction sites banging away.
The plot thickens, and the risks increase, if a key architect of Build, Build, Build brings a cut, cut, cut dynamic to the nation's most revered institution. Like U.S. President Donald Trump in Washington, Duterte has attacked the legislature, courts and the media. Is the BSP next? Did Duterte just pull a Narendra Modi? India's prime minister recently got his third central banker in as many years. The newest governor recently engineered a surprise rate cut, a boon for the prime minister's party heading into a May election.
The Philippines is gearing up for midterm elections in May. Markets will be extraordinarily sensitive to any hint Diokno might begin cutting the 4.75% benchmark rate. While the odds do not favor a move on March 21, one cannot be ruled out.
History may indeed show such concerns are hyperbolic. Diokno, his fans argue, is a U.S.-trained economist and a seasoned technocrat who knows better than to sully the BSP's reputation for independence. Yet tell that to traders selling the peso amid fears the glue holding the economy together is losing potency.
William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades." He was given the 2018 prize for excellence in opinion writing by the Society of Publishers in Asia for his Nikkei Asian Review work.