BSP chief Espenilla faces mounting challenges on his second year in office

Bangko Sentral ng Pilipinas (BSP) Governor Nestor Espenilla Jr. faces mounting challenges as he begins his second year in office.

The 59-year-old central banker is set to miss his inflation target while the peso wallows near a 12-year low, spurring criticisms that he took his time in raising interest rates. As he starts the second of his six-year term in office plagued by other worries including trade war and current account gaps, Espenilla needs to better communicate his strategy to rein in prices and stabilize one of Asia’s worst performing currency and stock markets.

“It’s been a difficult environment for the Bangko Sentral ng Pilipinas,” said Joey Cuyegkeng, economist at ING Groep NV in Manila. “It tried to respond to the challenges, but the challenges remain.”

Espenilla had raised the key rate twice this year to curb consumer prices accelerating at the fastest pace since 2013 and kept the door open at the June 20 meeting for more increases.

That he started tightening only after inflation began hitting a five-year high in March and coming two months following a cut in banks’ reserve requirement confound regional analysts from Continuum Economics and Natixis Asia Ltd. Espenilla is aiming to trim the reserve ratio to below 10 percent by 2023 and had put markets on notice in February that forthcoming reductions should not be interpreted as a monetary policy adjustment.

Headwind Bangko Sentral “continues to send mixed signals by raising interest rates and cutting required reserves ratio,” said Charu Chanana, economist at Continuum Economics in Singapore. “It is the uncertain policy making that is the biggest headwind to peso as of now, and their focus on domestic conditions looks inappropriate.”

The Philippine peso is vying with the Indian rupee as Asia’s worst performing currency, with both down more than 6 percent against the dollar this year. Indonesia’s rupiah isn’t too far behind even after a surprise 50-basis-point hike last week following two rate increases in May.

The benchmark Philippine Stock Exchange Index entered the bear market last month and has lost 16 percent this year.

Continuum’s Chanana suggests that Espenilla take the lead of Bank of Indonesia chief Perry Warjiyo whom she thinks “raised the bar on central bank communications, which has possibly helped retain the trust of foreign investors.”

One-Size-Fits-All “There shouldn’t be a one-size-fitsall formula when dealing with emerging markets,” said Noelan Arbis, economist at HSBC Holdings Plc. in Hong Kong. “The Philippines has a fairly low foreign participation in its bonds and stock markets so it can afford to focus on more domestic factors. Indonesia’s large foreign positioning makes it more susceptible to capital outflows.”

The same is true in “overall financing” in the two countries, said Moody’s Investors Service analyst Christian de Guzman, adding that since Indonesia is more “externally-dependent” than the Philippines, it’s under greater pressure to keep the local currency stable.