Central Banker Sees “Scary” 2017
Barron’s Asia: When you look ahead to 2017, what keeps you awake at night?
Amando Tetangco: Short term, the Fed rate hikes — the timing and the magnitude. Of course, this would be related to the policies that the new U.S. administration will adopt. Medium-to-long term, the retreat from multi-lateralism. That is related to the performance of the global economy – the major and various economies, and emerging markets like China.
“Scary stuff” – that’s not the kind of utterance one would expect to hear from a central banker, but in this interview posted on Barron’s Asia with Amando Tetangco of the Philippines, “scary” is just how the central banker defines the increasingly chaotic global environment. Between Donald Trump’s shock election, Brexit, Italians showing their prime minister the door and fallout from quantitative-easing programs, 2016 has been an unusually unruly year. Will 2017 be a kinder, gentler one? Sadly no, says the governor of Bangko Sentral ng Pilipinas.
Barron’s Asia sat down with Tetangco in his Manila office to hear why “scary” days lie ahead.
Barron’s Asia: Many are so happy to see the back of 2016, a year of epochal political upheaval. It’s been a year when lots of financial relationships broke down, with messages from bond yields to stock prices to how oil prices affect markets going haywire. Is the worst over or are we in for rockier times in 2017?
Tetangco: I think it’s more of the latter. You mentioned politics. I think that’s a major consideration right now because it’s causing some uncertainty with this potential rise in populist policies – uncertainty because it is going to be difficult to frame economic policy when something isn’t clear. Among the important considerations in this regard would be Brexit. We don’t know yet how this is going to pan out.
Q: These populist winds are blowing though the U.S. as much as Europe these days. Has that affected how central bankers operate?
A: Yes, with this rise of populist politics, this talk about protectionism. These are scary developments, it’s scary stuff. As you mentioned, a few European countries are having elections either this year or next year, Italy and Austria just voted out the traditional politicians. Then France in the middle part of next year. And then you have, of course, the pronouncements of the newly elected U.S. president. How will he move from rhetoric to implementation? It is still up in the air and, as a result of that, it’s affecting business planning and financial market behavior.
Q: There’s much talk about the Trump Tantrum. Is the Philippines better positioned to navigate that than Association of Southeast Asian Nation, or Asean, peers?
A: I think so. Our relationship with the U.S. in terms of exports and foreign investments relative to GDP is below the average for Asean. And then you’ve got the buffers that you have built up over the years with structural reforms and our well-articulated policy framework, which should serve us well. One of the things that is often mentioned is that, if Trump actually pursues what he said during the campaign, there could be an effect on the BPO (business-process outsourcing) sector in the Philippines. But the jobs that are being performed here are not in direct competition with America or jobs many American workers want to do. And on illegal immigrants, this may not directly affect remittances significantly because we believe the majority of Filipino migrants of the U.S. are either permanent residents or are legally documented.
Q: But what if the U.S. turns inward, trade-wise, as Trump proposes?
A: While the U.S. is the second-largest destination of Filipino exports, the trade with Asean countries has been expanding significantly. In fact, Asean accounts for about 20% of Philippine exports right now. This is almost the same as the 21% share of Japan in the Philippine exports. And Asean is still a growth area, so we can continue to see some further growth in demand from the Asean countries. For buffers, you’ve got broadening economic growth drivers. It’s not only services now but also manufacturing and construction on the demand side. The growth in the third quarter was 7.1%. Third quarter growth brought to 71 consecutive quarters of uninterrupted growth in the Philippine economy. So 71 quarters, that’s a long time. We also have monetary space in terms of interest rates.
Q: The Philippines has experienced its own political upheaval since the election of President Rodrigo Duterte. Your 10-year stint at BSP ends in July. Do you worry about your successor’s ability to navigate messy politics?
A: So far this administration, just like the previous ones, has essentially left monetary to the central bank and I believe members of the executive have a good appreciation of the importance of independence of the central bank. At the same time, I think the BSP also built up a good reputation and remains credible. To me, being credible and being a competent organization — these are all important ingredients for being able to maintain your independence and so far that’s what we have experienced.
Q: Assuming you don’t serve a third term, which would require a law change, what advice would you give the next occupant of this office?
A: I liken my experience as governor to the captain of the ship. For instance, I must know the course with certainty. I must have an intimate understanding of the vessel and its equipment. I must delegate to and trust the ship’s officers because you can’t do it alone. I have to take care of my crew. I must provide clear and active communication internally within the institution and lead coordination externally with other government agencies and multilateral institutions, and rules and regulations must be complied with because there are certain rules that govern the operations of the central bank. So you have to be familiar with those, and you have to comply with those regulations. The journey must be inclusive.
Q: When you look ahead to 2017, what keeps you awake at night?
A: Short term, the Fed rate hikes — the timing and the magnitude. Of course, this would be related to the policies that the new U.S. administration will adopt. Medium-to-long term, the retreat from multi-lateralism. That is related to the performance of the global economy – the major and various economies, and emerging markets like China.
Q: Have zero-rate policies outlived their usefulness?
A: Perhaps at some point these policies tend to be less effective. But my own assessment is that this will likely continue for some time to come. Rates will stay very low. The thing is we have to be mindful of the financial stability impact of very low interest rates. Corporates and financial institutions can be encouraged to take on more risk. And we will need to monitor that. In fact, a lot of countries are now focusing on the increase in corporate leverage in their economies.
Q: And I guess there’s a question about how the next White House reacts to Fed hikes.
A: Well that’s the other thing. That adds another source of uncertainty – how the Fed is going to react to Trump, too. But at the same time, if these policies that have been indicated by Trump are implemented, then the Fed may have to do something on the monetary side as we see higher spending and higher inflation.
Q: You don’t seem worried about China hitting a wall. What if Trump goes ahead with 45% tariffs?
A: Oh, everybody would be affected, sure.
The whole global economy will be affected and therefore the emerging markets would be affected as well. I think what’s important now is that countries are able to manage their own economies.
Q: So, the new zeitgeist on Asia is “it’s the politics, stupid?”
A: If you look at what you know people like Donald Trump and others are saying, there seems to be a retreat from multi-lateralism, I guess partly because of the lack of economic growth in the global scene. Retreat from multi-lateralism has a lot of implications. Countries will start looking inward. They will look for domestic sources of growth. To this, I think, countries can sort of moderate the impact of a weak external environment.
Q: Is anti-globalization fever here to stay?
A: The question is can this be sustained? How resilient can countries be in this kind of environment? Then, where is the benefit of increasing welfare that can be derived from globalization. Where has it gone? Where is it going? The move towards more inward looking policies is understandable under the current conditions. But there is also a need to expand the sources of growth through technology, through capacity building, through the right policies. So countries have, I think, room to go in that direction. But no one can really tell up to where it can go. At some point, we need to go back to multi-lateralism. Hopefully, not too far off into the future.