By MAX ESTAYO

Bangko Sentral ng Pilipinas governor Amando Tetangco Jr. said yesterday "rough patches," particularly external developments, will put the Philippine economy on the edge.

However, Tetangco said "domestic buffers" will allow the domestic economy to "push past the headwinds".

Tetangco said further turbulence in the global financial markets can be expected with the continued roil in subprime.

"The coordinated credit operations by the major central banks and policy rate cuts have helped ease credit tensions, but wider problems in the financial system still persist," Tetangco told a managers' association meeting in Makati.

"At the heart of this problem is uncertainty. There is continued uncertainty about the size of losses from defaults on US subprime mortgages that the global financial system will eventually have to absorb," he said.

'There is uncertainty about where these exposures will end up. This lack of information breeds fear of ratings downgrades, of steep sell-offs and of other unknown consequences," he added.

Tetangco said a potential US slowdown could also wreak havoc on the domestic economy, especially in areas of trade where the US still remains a primary export market while one-third of land-based overseas Filipinos are in the US.

Moreover, Tetangco said risks are emerging from the build-up in food prices, with demand from China and India rising.

"Poor harvests due to adverse weather conditions and increased biofuel production have also ratcheted demand for certain related food items," he said.

Meanwhile, oil prices have again breached the $100-a-barrel level on "geopolitical tensions in the Middle East, refinery bottlenecks, speculative activity, the weak US dollar, and the continued strong demand for crude oil."

Nevertheless, Tetangco said "domestic buffers" such as the improved asset base of the domestic financial system and the country's robust external sector will enable the economy to ride out the storm.

The outlook for the macroeconomy remains favorable, he said, given that inflation is expected to trend down in late 2008 and 2009 despite an acceleration in the first half of this year.

"The emerging scenario is for commodity prices to taper towards the end of this year. This within-target outlook will allow us to maintain a low-interest rate environment," Tetangco said.

Tetangco said the BSP's will remain primarily focused on maintaining stable inflation, to provide ground for economic growth.

"We have built up buffers but we cannot afford to be complacent. Much is yet to be known about the size and depth of the patches that lie on the road ahead," Tetangco said.

He said the "critical task" is to "preserve the momentum for economic reforms to ensure sustained growth in the long run."