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Philippines loses its shock absorber

Uncertainty for investors as respected central bank chief steps down

| Philippines
The departure of the Philippines' central bank governor Amando Tetangco will test investors' patience with President Rodrigo Duterte's policies. (Photo by Keiichiro Asahara)

Throughout the first year of Rodrigo Duterte's reign in the Philippines -- the extrajudicial killings, policy chaos, verbal barbs at world leaders, rape jokes, authoritarian impulses -- one man stood firm against investors fleeing.

That man, Amando Tetangco, has run Bangko Sentral ng Pilipinas, the most respected institution in Southeast Asia's third-biggest economy, since 2005 with great distinction. Neither coup plots, nor the jailing of past presidents nor Duterte's exploits precipitated a violent run on the peso. It is down, but not crashing. For that, Gov. Tetangco gets considerable credit. His steady hand kept an economy he often calls "event rich" from veering off the road to greater prosperity for 100 million Filipinos. But in some 20 days, this human guardrail of a policy maker is retiring.

Time to panic? The good news is that Duterte has tapped Tetangco's deputy Nestor Espenilla, a career central banker who could ensure a smooth handover. But Espenilla, 58, is now Duterte's man. Tetangco was untouchable -- too respected and cagey for Duterte's team to corrupt. It's not an exaggeration to say Tetangco was as immune to political interference as Alan Greenspan in Washington in the 1990s. Espenilla will have to fight to protect the central bank's independence from this president's dictatorial leanings.

The central bank handover is also an opportunity for a report card on "Dutertenomics" one year in; it is not pretty. Duterte's mandate was to accelerate and broaden the successes of his predecessor Benigno Aquino. Largely forgotten in the last event-rich year is how Aquino had morphed the "Sick Man of Asia" into something of a recreational runner during his term. He strengthened Manila's finances, increased transparency and took on the powerful Catholic Church's aversion to population control to win Manila's first investment-grade rating. Tens of billions of dollars of foreign direct investment came to the Philippines to finance giant infrastructure projects aimed at raising competitiveness.

Duterte's job starting June 30, 2016 was simple: to turn up the volume on Aquino's reforms. Instead, Duterte focused more on guns than butter, both literally and figuratively. While many countries in Asia -- and the West -- have drug problems, Duterte decided they were an existential threat. He deputized bands of roving gunmen to kill dealers and users without due process, resulting in thousands of deaths. While human rights groups pound the table, markets are left wondering where the Aquino boom went. Among the casualties of the shooting is Manila's status as an investment darling.

Fortunately for Duterte, some Aquino-era inertia is still supporting growth. The economy advanced by 6.4% in the first quarter from a year ago. Slowing demand, though, is an ominous sign for an economy increasingly driven by household expenditure. Spending in the first quarter was the weakest since 2014, and it is likely there is deeper weakness to come as consumer and business confidence decline. The chilling effect which Duterte's policies are having on the national psyche deserves considerable blame.

The same goes for investors wondering if Duterte will declare martial law, Ferdinand Marcos-style. He has already done so in Mindanao, where terror group Islamic State appears to have secured a foothold. Duterte almost seems to relish the Marcos comparisons. After sidelining Vice President Leni Robredo, Duterte hinted at replacing her with Ferdinand Marcos Jr. Terrible optics for a nation that had just recently moved past the epic corruption and violence of that era.

There might be less concern if Dutertenomics was firing away in the background. On the plus side, Duterte's can-do ethos has reduced the lag times for starting giant construction projects. One minus: he is relying more on government-led projects than private-sector ones, which could blow up the national debt and see a return of the previous era of corruption. The Philippines already ranks behind Peru, Niger and Indonesia in Transparency International's corruption perceptions index.

Nor is the external sector working in Manila's favor. China, to which Duterte is increasing turning for cash, is slowing. Any trade war precipitated by U.S. President Donald Trump could savage the business process outsourcing sector employing millions and imperil the overseas remittances on which Manila relies to support domestic demand.

Tetangco, 64, may yet have a future as a hedge fund manager -- talk about leaving at the top tick. Espenilla, 58, should not expect much of honeymoon when he takes the reins on July 2, with consumers spending less. Might Duterte try to strong-arm a governor he sees as owing him loyalty to cut the central bank's 3% key interest rate? What if a president who has proven no less unconventional or unpredictable than Trump curtails the central bank's autonomy or demands it directly finance new roads, bridges and power grids?

Markets in the U.S., after all, live in semi-constant fear that Trump might fire Federal Reserve Chair Janet Yellen, James Comey-style, at any moment. Investors in peso assets may be turned off by a similar risk in Manila.

I have met Espenilla several times over the years and he has always seemed thoughtful and credible. During my last chat with Tetangco in December in Manila, I asked about challenges his successor might face. He said: "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."

That framework served the Philippines well when the president left its most respected institution alone. What happens if Duterte tries to bully its new central banker? Investors may be about to find out.

William Pesek is a Tokyo-based journalist and author of "Japanization: what the world can learn from Japan`s lost decades". He is a former columnist for Bloomberg.

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