Philippines Central Bank Rallies To Defend Peso: Amplifier

By RITA RAAGAS and ALASTAIR MCINDOE
AP-Dow Jones News Service

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MANILA (AP-Dow Jones)--The Philippine Central Bank Thursday was caught in the crossfire of Thailand's political turmoil, rallying to the defense of the peso as a speculative attack on the currency loomed.

Market watchers believe the monetary authorities will be compelled to tighten interest rates further if the resignation of Thailand's Finance Minister Amnuay Viravan reverberates with more intensity on Southeast Asian financial markets in the coming days.

'The Philippine monetary authorities will do what it takes to maintain exchange-rate stability and investor confidence in the peso,' said Union Bank of Switzerland's (UBS) Hong Kong-based economist Richard Ligon.

Early trading saw the central bank cut its key overnight borrowing rate - its main instrument to quell currency speculation - by 0.25 percentage point to 12.75%, and then abruptly reversed the move as Thailand's political ructions began to be felt across the region.

The central bank was compelled to effectively raise the overnight borrowing rate by opening a special one-day window for its reserve repurchase paper at 15%. Dealers expect the overnight borrowing rate to open at 15% Friday.

Last month, the central bank was forced to raise its overnight borrowing rate to a two-year high of 20% as regional currency volatility, sparked by a run on the Thai baht, threatened a speculative attack on the peso.

With calm returning to currency markets, the central bank has been able to lower the rate in recent weeks.

UBS' Ligon believes the central bank wouldn't hesitate to bring the rate back to 20% to damp speculative volatility in in the peso-dollar exchange rate.

However, Manuel Lim chief economist at ING Barings Bank, sees the central bank keeping the overnight borrowing rate at 15% only for a short duration. This rate, compared to the benchmark 91-day Treasury bill's yield of 10.3560%, is 'fundamentally too high,' said Lim.

Lim noted that the central bank prefers interest rates to be market-driven, and intervenes 'only when absolutely necessary and only for very short periods.'

Dealers noted with approval that the central bank kept the peso on an even keel against the dollar Thursday, with the U.S. currency losing just 0.2 centavo to 26.379 pesos on the Philippine Dealing System in afternoon trading.

But the price was high as the central bank sold some $130 million to satisfy the market's demand for dollars.

Even so, said ING Barings' Lim, the day was won by the central bank, whose defense of the peso resulted in a mere 0.2-centavo loss against the dollar despite heavy trading volume that saw outflows of some $200 million.

The battle, however, is far from over.

'Speculative volatility will remain a feature of regional exchange-rate markets until Thailand sorts its problems out,' said a trader with a local bank.