New BSP chief to tread in predecessor’s footsteps

Amando Tetangco has big shoes to fill when he takes over as Philippine central bank governor tomorrow, and he could hardly have a more hazardous path ahead. Markets are unnerved by a political scandal that has enveloped President Arroyo and which threatens to overshadow her limited success in reforming the economy and wean it off foreign debt.

But analysts and market players are confident that Tetangco, with nearly 30 years’ experience of central banking through uprisings, coups and currency crises, can take the pressure.

The career central banker has won a reputation for technical competence and market savviness under the tutelage of respected predecessor Rafael Buenaventura, on sick leave since March. Tetangco has effectively been running the central bank since.

"Our policy over the next two years will emphasize continuity and consistency," Tetangco, whose term as governor runs for six years, said at a business forum this week.

It is not the most scintillating agenda but comments like that are music to the ears of markets, which came to see the central bank under Buenaventura, twice named as among the world’s top central bankers, as the country’s most competent institution.

"The market is very comfortable with this governor, primarily because he’s been around. He’s not a new face in the world of banking and definitely not a new face as far as regulators are concerned," said a treasurer at a foreign bank in Manila.

"The new governor is viewed as being more open in terms of taking in market views."

Political Distractions

The most pressing problem for the 52-year-old Tetangco, who lists golf and shooting as hobbies, is keeping a lid on inflation which has been driven to 8.5 percent in recent months by the surging price of oil imports.

The central bank’s stance is that since nearly all the pressure on prices is from oil and other costs rather than rising demand, higher interest rates are not the answer.

Accordingly, it has only changed its key rates once in the past two years – a quarter-point hike on April 7 this year. The central bank’s overnight borrowing rate stands at seven percent and its lending rate at 9.25 percent.

George Worthington, chief Asia-Pacific economist for IFR Thomson Financial, said the central bank had kept interest rates too high under Buenaventura, unnecessarily squeezing the economy.

"I think what the Philippines was lacking in the past few years was a spur from monetary policy. Real interest rates were running at four to five percent," he told Reuters.

But a gathering political storm over allegations of corruption and electoral fraud against President Arroyo is threatening to upset the central bank’s policy.

The peso slumped close to its record low of 56.45 to the dollar this week as markets fretted that the Arroyo government was being undermined by constant opposition attacks.

"Excessive currency weakness owing to the current political uncertainty could prompt the Bangko Sentral ng Pilipinas (central bank) to announce additional and earlier hikes," JPMorgan said in a note on Thursday, after the bank announced it was keeping rates on hold.

Tetangco’s other main challenge is to revive a banking sector that has staged only a slow and incomplete recovery from the 1997-98 Asian financial crisis and whose P207-billion ($3.7 billion) in bad loans is still acting as a drag on the economy.

Banks’ non-performing-loan ratio fell to 11.3 percent in March from 12.7 percent at the end of last year, but remains well short of the central bank’s end-2005 target of 7.5 percent.

Tetangco has urged banks to consolidate in order to better tackle their bad loans or risk facing more painful changes.

"We prefer that this consolidation process occurs through voluntary market decisions rather than a far more painful and costly involuntary process if banks wait for a crisis first before acting," he said.