It has been a hectic year for central bank governors globally as the twin pressures of managing monetary policy and shoring up the local banking sector have made for many a sleepless night. Amando Tetangco, governor of the Bangko Sentral Ng Pilipinas (BSP), however, has endured fewer than most.

The BSP is regarded by external analysts as one of the most transparent and forward-­looking central banks in the region. Many bankers hold up the sector’s standardised roll-out of Basel II in 2007, years ahead of neighbouring countries, as a critical example of the BSP’s progressive style of governance. This development, combined with the bank’s conservative attitude towards structured products, saw the sector enter the global slump with a chunky system capital ratio of some 15%.

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Even so, the central bank still had to act quickly in the final quarter of 2008 to ensure not only that the financial system was sufficiently liquid, but that this liquidity was evenly distributed, says Mr Tetangco. “At that time, we were travelling back from the International Monetary Fund meetings in Washington and while we were there, in the early part of October 2008, we saw the severe credit crunch as well as the freezing of financial markets in the US and we said that in the Philippines we cannot allow this to happen,” he says. Unlike his Western counterparts, he has been able to successfully deploy conventional liquidity-enhancing methods. These include slashing the base rate by 200 basis points from December 2008 and the enhancement of the BSP’s peso repo facility through the expansion of acceptable collateral.

With the 1997 Asian currency crisis in mind, the central bank also established a US dollar repo facility. “The intention was to ensure that liquidity was sufficient not only in pesos, but also in the dollar market, and that companies that have foreign exchange requirements had the ability to access, if necessary, liquidity from the BSP,” says Mr Tetangco.

Plotting an exit strategy

The BSP’s transition to a liberal monetary policy has been assisted considerably by the favourable inflation outlook. Analysts argue that the benign inflationary environment indicates that the economy may require a further liquidity injection, and the government continues to provide additional stimulus through infrastructure investment projects. “I would say that we are not in an exit mode yet, as far as the BSP is concerned,” says Mr Tetangco. Despite the absence of inflationary pressure, however, the BSP recently determined to shift its policy stance from ‘easing’ mode to neutral. But Mr Tetangco is cautious about making any sudden moves: “We will continue to monitor developments and see if there is a need to modify the stance of monetary policy down the road. It is never too early to start thinking about an exit strategy, but that doesn’t mean to say that it has to be implemented now.”

Exiting a relaxed fiscal monetary policy stance may be trickier than entering it and Mr Tetangco warns that there are risks ahead. As the global economy picks up, inflation is likely to increase in line with rising commodity prices. In addition to commodity price pressure, the resumption of crossborder capital flows in the Asia region may serve to boost system liquidity and increase inflationary pressures, as well as potentially prompting exchange rate appreciation. “We have to be mindful of that and be able to adjust in a timely, but gradual, fashion so that we will not experience the adverse impact of a sharp reversal in policy,” says Mr Tetangco. “The transition will have to be gradual with a clear signal to the market as to where we are going and how we are going to get there.”

Curriculum Vitae

Amando Tetangco

2005Bangko Sentral NG Pilipinas

Governor

1974Bangko Sentral NG Pilipinas

Various roles including deputy governor in charge of the banking services sector, economic research and treasury

1973SGV & Co

Management services division