Friday, February 28, 2003
War risks weigh on friendless Philippine peso
Reuters Singapore, February 26
Already burdened by a massive budget deficit and other fiscal woes, the Philippine peso could fall to record lows as it is considered the Asian currency most vulnerable to the risks associated with any US-led war on Iraq.
A thin local currency market is seen as unlikely to cope with a surge in demand for US dollars emanating from any spike in world oil prices or disruption to crucial remittances from nearly one million Filipino workers in the Middle East.
"The link between the Philippine markets and the US/Iraq standoff has intensified," said strategist at DBS Bank in Singapore, Philip Wee. And with the peso already at its lowest levels in two years, a test of its record low of 55.30 per US dollar -- hit as President Joseph Estrada was forced from office in January 2001 -- is expected, and sooner rather than later, as war risks rise.
The worst performing Asian currency in 2002, and staking an early claim for the title again this year, the peso has been in a steep downtrend since last May, falling almost 10 per cent against the US dollar and about 25 per cent against the euro.
On Monday, the peso hit a two-year low of 54.48, and traders say the only buyer recently seems to be the central bank.
"The dollar/peso market is a lot thinner, therefore expensive oil imports could have a significant impact on the peso," said senior analyst at Bank of America in Singapore, Sameer Goel.
Ironically, oil importers became active dollar buyers to comply with a government directive asking refiners to keep a stock of at least 30 days of crude and oil products to avoid any supply disruption in case of war in Iraq.
Bank of America estimated 16 per cent of transactions in Philippine forex markets in recent days were oil related, compared with eight per cent in Korea and four per cent in Taiwan.
David Simmonds, strategist at Royal Bank of Scotland, said oil imports account for 3.4 per cent of Philippine gross domestic product (GDP). Although many Asian countries were big oil importers, there was a bigger question mark in the minds of financial markets over the Philippines' ability to fund such requirements, he said.
The Philippines' gross international reserves stood at $16 billion at the end of December, compared with close of $39 billion in Thailand and around $30 billion in Indonesia.
"In such risk aversion periods, the Philippines is going to be more stretched than others and that is what the market is pricing," Simmonds added.
BUDGET PROBLEMS
The oil worries come as the peso is hobbled by a gaping budget deficit which ended 2002 at a record 212.68 billion pesos, or 5.3 per cent of GDP, and worries of sanctions if tougher laws against money laundering are not introduced this month.
The Philippines has said it needs to raise more than 198 billion pesos this year to finance a projected budget shortfall of 202 billion pesos, about 4.7 per cent of GDP.
But the ability to fund the deficit -- let alone any further blowout -- is under the microscope given the government's threat to suspend domestic debt auctions and the widening of spreads between the government's foreign bond issues and U.S. Treasuries.
With preliminary tax collection in January falling 2.5 billion pesos short of target, the deficit for the month, due to be released later this week, is unlikely to surprise anyone.
The Philippines also has foreign debt equivalent to about 74 per cent of its GDP. The International Institute of Finance estimates short-term debt servicing requirement to be equal to 19.6 per cent of receipts from exports of goods and services and foreign income in 2003, against an estimated 17 per cent in 2002.
The government has already raised about a $1 billion in bond issues and syndicated loans from the international market so far this year, and sovereign bond analysts estimate Manila will tap another $3 billion over the course of the year.
That includes around $2 billion for debt-laden electricity firm National Power Corp, but could go higher if elections in May 2004 prompt Manila to front load some of next year's spending.
"For investors looking across several countries, the liquidity profile both external and internal is not as good as others in the region. So the Philippines is much more vulnerable to higher risk aversion," Goel said.
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