In the Philippines, the Problem Is Too Much Money

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By William Pesek

Amando M. Tetangco Jr. isn't a janitor. Far from it. He's the highly respected central bank governor of the Philippines and one of Asia's most-watched policy makers.

Yet spend an hour with Tetangco and it sure does seem like his job is to hold a giant mop. What he's cleaning up is all the money flooding his way from Washington, Tokyo and Frankfurt. And it's proving quite a feat not only for Tetangco in Manila, but for his peers throughout Asia.

"The problem facing central bankers right now is all that excess liquidity, particularly from developed economies," Tetangco tells me. "And these days, interest rates aren't enough."

Central bankers from the Philippines to South Korea have been forced to get creative to keep that liquidity from fueling domestic inflation and asset bubbles. In the case of the Philippines, that has meant tweaking reserve requirements and raising the capital charged on so-called non-deliverable forwards transactions to reduce speculation in currency markets. Philippine officials also are looking at managing high-yielding deposits.

Conducting monetary policy for a major economy is challenge enough in the best of times. It's considerably harder when the biggest economies have rates anchored at or near zero percent and are going even further with quantitative-easing strategies. Things will get worse if the Federal Reserve tries a third dose of quantitative easing, known in markets as QE3.

The Philippines will receive a disproportionate amount of the largess created by the Federal Reserve, Bank of Japan and European Central Bank. At 4 percent, the country's short-term rates are at an all-time low. Yet they are higher than peers like Malaysia and Thailand. Also, the Philippines is widely expected to be awarded an investment-grade rating in the near future. Investors may see its debt as a great chance to register a quick profit.

All this hot money is making waves in Asia. It's pumping up gross domestic product, real estate and stocks and prompted a rewriting of the "Asia decoupling" narrative. Asia hasn't decoupled from the West so much as mutated into a giant net catching excess money. Or in Tetangco's case in Manila, a huge mop.

(William Pesek is a Bloomberg View columnist. Follow him on Twitter.)


-0- May/23/2012 16:30 GMT