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June 20, 2001, Philippine Daily Inquirer, Crush Sayyaf and save the peso says Gloria, by Clarissa S. Batino,

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June 20, 2001, Philippine Daily Inquirer, Crush Sayyaf and save the peso says Gloria, by Clarissa S. Batino,


CRUSHING the Abu Sayyaf kidnap gang and rescuing its two dozen-plus hostages in Basilan would help arrest the fall of the peso, President Macapagal-Arroyo said yesterday. The peso hit a low of 52.370 to a dollar in morning trade, its lowest intra-day level in five months, before closing at 52.32. It closed at 51.975 on Monday due to the unresolved hostage crisis. Ms Macapagal told a news conference she believed the kidnapping problem in the South was a "contributory factor" to the peso's weakness. 

"That's why we're addressing the problem with great determination." The self-proclaimed Islamic independence fighters sent a chill down the spines of tourists and investors when they seized 20 tourists and hotel staff from an upmarket island resort in Palawan and then claimed to have beheaded one American. They still hold up to 26 American and Filipino hostages. 

The peso weakened despite an appeal from the Bangko Sentral for banks to release some dollars into the system to prevent the local currency from further depreciating. Traders said the peso would continue to lose value in the coming days unless the Bangko Sentral would intervene and provide much-needed liquidity into the system suffering from a tight dollar supply. Bangko Sentral Governor Rafael Buenaventura said he saw no need to raise overnight interest rates. 

He said the peso's drop was "not interest rate-driven," blaming it largely on weak regional currencies and the unresolved hostage crisis in Basilan. Buenaventura said the central bank's policy-making Monetary Board will probably decide to keep overnight rates unchanged at its weekly meeting tomorrow. 
  
The central bank has cut its key rates by 600 basis points since December with the last cut implemented May 18. It borrows at 9 percent overnight and lends at 11.25 percent. Buenaventura said he expects the peso to recover "when things normalize." 

Buenaventura added that a growing trade deficit was one of the factors hounding the local currency. The government yesterday released its latest external data showing a trade deficit of $447 million for the month of April. Buenaventura said that with the slowdown in exports in recent months, the negative trade balance was likely to continue in June. 

"The trade deficit is putting pressure on the peso because we are seeing a slowdown in inflow of funds," the central bank chief explained. A decline in dollar inflow was partly to blame for the scarce dollars being traded at the Philippine Dealing System, a trader from a local bank agreed. "There is no liquidity, no infusion, no investments. Given all these, there is no reason for the peso to improve," the trader said. 

Another Bangko Sentral official pointed out that the central bank would rather stay away from dollar trading for the meantime to preserve its reserves. Instead, traders claimed the Bangko Sentral had called on banks and tried to use moral suasion for them to unload some of their dollar holdings to solve the shortage. 

Buenaventura, however, denied calling banks and convincing them to sell. "Banks do not have a large position on forex right now and we don't see any speculative outflow," he said. The central bank chief had maintained that the peso's weakness was largely influenced by declining regional currencies as well as by the unresolved hostage crisis. 

He admitted the peso's fall had accelerated in the last few days compared to regional currencies because of the peace-and-order problems. The Abu Sayyaf hostage crisis had been affecting the tourism industry and was also seen to prevent foreign investors from parking their money in the Philippines. A trader from a foreign bank, however, stressed that more than the bad news, what had been pushing the peso down was the liquidity problem in the market. "It is really a question of demand and supply now rather than peace and order," he said. Traders explained that demand for dollars had been increasing in the local market as companies started to settle their mid-year obligations as well as prepare for their inventory in the second half of the year. As demand rose, traders said, the public held on to their dollars expecting a continued peso weakness in the coming days given the unresolved Abu Sayyaf situation. --With a report from AFP

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