Post-Lehman World Tests Philippines

Manila is experiencing too much of a good thing -- too much money racing in to chase too few productive investments. Central bank governor Amando Tetangco is on the front lines. 
Manila's man of the moment, central banker Amando Tetangco. Photographer: Julian Abram Wainwright/Bloomberg

Few policy makers face more challenges as the Federal Reserve tapers, Chinese growth slows and fresh geopolitical landmines appear everywhere than Amando Tetangco.

The Philippines is the 42nd biggest economy in the world, barely ahead of Greece. But central bank governor Tetangco finds himself on the firing line, as the various forces buffeting markets nowadays all slam into the country at once. He's not alone among developing-nation central bankers. India's Raghuram Rajan has perhaps been most vocal about the spillover effects of ultra-low rates from Washington to Frankfurt to Tokyo. People's Bank of China Governor Zhou Xiaochuan can't find a mop big enough to handle all the liquidity causing bubbles in Chinese real estate and money supply.

Tetangco, meanwhile, can't seem to escape what he calls "the bubble question." Everywhere he goes, he's queried about whether his nation's asset markets are about to crash. No, he tells them all, we're on top of things at the Bangko Sentral ng Pilipinas. I have no reason to doubt Tetangco, a man who since 2005 has served as the de facto backbone of an economy staggering from one political crisis to the next. That was until President Benigno Aquino came along in 2010 and, with Finance Secretary Cesar Purisima, cleaned up Manila's balance sheet, won investment-grade credit ratings and wowed global investors.

Still, Manila is experiencing too much of a good thing -- too much money racing in to chase too few productive investments. While Philippine shares have risen in recent years, the gains of the last five months lifted equity valuations to the highest levels in more than a decade versus regional peers. Bubble, anyone?

In a more perfect and predictable world, Tetangco would just hike rates once or twice to remind speculators who's boss and restore sobriety. In the post-Lehman Brothers world, though, smaller central banks are in uncharted waters. Raising rates now might only create a huge magnet to pull even more hot money Manila's way. In a world where near-zero rates and excessive volatility are the norm, investors are hungry for yield.

Instead, Tetangco has been acting more like a monetary surgeon than market bully: raising reserve requirements on financial institutions and focusing on what he calls "pre-emptive macroprudential measures,” which refers to regulations and tax tweaks aimed at controlling money flows. He limited foreign funds' access to domestic special deposit accounts and took other steps to reduce their attractiveness. Limits also were imposed on banks’ non-deliverable forwards transactions. “Tweaking policy rates," Tetangco explains, "could produce unintended consequences and only fuel financial stability pressures, so it may not be the best instrument to use.”

Tetangco has also learned from post-Lehman Washingtonand Frankfurt; he's increasing his surveillance tools and ordering stress tests to discern vulnerabilities at banks and in the broader economy. Here's how he put it in Manila last week: "What we are telling markets is that we are prepared to take early and measured action. This the preferred approach, rather than having to take chunky actions in response to developments later on."

It's always possible the central bank will hike official rates if inflation pressures accelerate (or slash them if Manila and Beijing come to big blows over disputed islands). With the benchmark rate at a record-low 3.5 percent since October 2012, there's plenty of latitude to move. But at what cost in a nation where a quarter of the population lives on $1.25 a day? The balancing act for Tetangco is deciding how much more hardship a 25 or 50 basis-point rate hike would foist onto the nation's impoverished masses.

This is a challenge forAquino's team, too. After a great start stabilizing an economy more used to being a punchline than an investment darling, Aquino must accelerate efforts in his last two years in office to reduce unemployment and spread the benefits of 6.5 percent growth. The best way to avoid bubbles in Philippine asset markets is to ensure economic reforms keep up with investor exuberance.

In the meantime, unprecedented financial times call for unconventional measures. Just ask the global economy's man in Manila.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.