A Realistic Reformer in the Philippines

I don't like the word intervene, says central banker Rafael Buenaventura. We're trying to keep volatility at a minimum

Rafael Buenaventura, governor of the Central Bank of the Philippines, is a rock of stability in his country's turbulent economy. The Central Bank has been making major strides toward improving the transparency of its policies. At the same time, the 64-year-old Buenaventura has pushed through some notable reforms (see BW, 6/9/03, Stars of Asia: Rafael B. Buenaventura).

A landmark bill that will make it easier for banks to get bad debts off their books passed the Philippines Congress, and inflation has plummeted to less than 3%, its lowest level since the 1980s. Despite a deteriorating fiscal deficit, the peso has remained relatively stable. And interest rates have continued to fall, spurring a pickup in loan growth. Tough new legislative restrictions on money laundering enabled the country to narrowly escape sanctions by the international Financial Action Task Force.

Buenaventura has the right credentials for the job. He worked as a commercial banker for 34 years, including almost a quarter-century stint with Citibank (C ). He finished his career at Citi as head of the Southern Europe division, in charge of Spain, Portugal, Greece, and Turkey. For a decade before taking over as the Central Bank's head in 1999, Buenaventura was CEO of the local PCI Bank. He spoke recently to BusinessWeek's Hong Kong-based Asia Regional Editor, Mark L. Clifford. Edited excerpts of their conversation follow:

Q: Are you intervening to keep the currency strong?


I don't like the word intervene. We're trying to keep volatility at a minimum. It creates uncertainty if the peso depreciates or appreciates too fast. Importers and exporters get panicky. We're not setting any specific exchange rate. If there's really a stronger demand for the dollar, we'll let the peso seek its level, but not so it goes to 55 tomorrow.

Q: What has been the impact on your policy of President Gloria Macapagal Arroyo's statements that the currency should trade at 50 pesos to the dollar?


When she talks of 50 being a good number, she tries to talk about it as a stable exchange rate, not a volatile one. We don't necessarily mean we can achieve 50. If the numbers are good, it will get there.

We also look at the exchange rate in the context of other currencies. The Thai baht is now at 42, and we're fairly comfortable. If we go to 50 and the Thai baht goes to 44, we're appreciating faster, and we may not be as competitive. We would rather see our currency work in concert with other [regional] currencies.

Q: What can you do to manage fiscal deficit?


It continues to be our biggest concern. It's an issue of debt sustainability. If the national government isn't able to meet its fiscal target, it puts pressure on our borrowing rates and our ability to borrow, as well as international reserves and exchange rates. It's always an area of constant discussion with the national government.

We're able to be accommodative as long as the fiscal deficit is at reasonable levels. Failing that, we may have no alternative but to counteract [fiscal deficits]. With the present Secretary of Finance we have been able to work things out.

Q: What have been the bank's most important recent accomplishments?


No. 1 is finally getting an anti-money-laundering law that's acceptable to the Financial Action Task Force.

On the economy -- being able to keep inflation at these levels, which are the lowest in the last 10 to 15 years. Interest rates are low, and the foreign-exchange rate is relatively stable despite a number of uncertainties, ranging from the impact of the Iraqi war on remittances to oil prices.

Q: What progress have you made on resolving the bad-debt problem?


We finally managed to get an acceptable asset-management law passed. The impact hasn't yet been felt. The feeling is, "Why are we bailing out the banks?" We were able to show to our legislators it's good for everyone. We're not providing the bailout funds, but just foregoing taxes.

A number of companies are working to help package the loans. [Total nonperforming loans] are now $10 billion, or 500 billion pesos, about 16% of total loans. NPLs plus [foreclosed] assets total about 26% to 28%.

Edited by Patricia O'Connell