Peso dives after freer flotation, RP stocks jump

Sat, 12 Jul 1997 | Source: REUTERS

MANILA (Reuter): The Philippines caved in to unbearable pressure yesterday and effectively devalued the peso, in the process pushing the stock market to its biggest single-day rise in four years.

A central bank announcement that it would allow the peso to move in a wider range against the dollar came after massive speculative selling against the currency in the past two weeks.

This had rapidly drained the country's foreign exchange reserves and forced up interest rates to levels analysts said would hurt the economy.

The move follows Thailand's de facto devaluation of baht last week and repeated denials by Philippine authorities that they were considering a devaluation of the peso.

The peso plunged 11.5 percent to 29.45 per dollar before trades were finally suspended by the Bankers' Association of the Philippines. This is the lowest level since September 1993.

In Jakarta, Bank Indonesia reacted to the Philippine move by further widening its rupiah intervention band from 8 percent set last September to 12 percent or from the range of Rp 2,430-2,622 (Rp 192) to a range of Rp 2,374-2,678 (Rp 304) to the U.S. dollar.

However, the response of the Philippines share market was to soar nearly 7 percent, after a four-day slide.

"The whole pattern has been reversed and the public is back into equities. Unexpectedly, the market went boom. This just goes to show you that the market is not dead," said Irving Ackerman, president at I. Ackerman & Co. Inc.

President Fidel Ramos issued a statement supporting the central bank action. "This exchange rate action reaffirms the government's commitment to do whatever is necessary to sustain our economic growth, control inflation and generate employment through, among others, the protection of our international reserves," he said.

"This decisive action of the Monetary Board protects the well- earned economic gains of the Filipino people from the effects of the current difficult circumstances prevailing in regional markets."

In an explanatory statement the central bank said the move "is expected to remove the incentive for speculation against the peso and allow a gradual reduction in interest rates more compatible with the economy's requirements for sustainable economic growth".

It also conceded that it also could no longer afford to keep dumping dollars in the market.

Based on its latest reported figures, reserves have fallen by US$2.5 billion to just $10 billion since March when the financial crisis in Thailand first began to spill over into the Philippine economy.

Reaction elsewhere was mixed, with businessmen welcoming the end to punitive interest rates while bankers said the central bank had lost all credibility.

"They (the authorities) were very consistent in that they agreed to allow the peso to weaken on a gradual but orderly basis," said Jaime Panganiban, Bank of America head of treasury in Manila. "Today they destroyed that credibility. This will really be a big setback for this market in the eyes of the world."

One drawback could be for Philippine companies which have up to $5 billion in outstanding foreign currency loans. They will now have to find more pesos to pay off those loans.

But the president of the Philippines Federation of Industries, Raul Concepcion, welcomed the move, saying that high interest rates to defend the peso were hurting business.

Overnight interest rates have more than doubled to 32 percent in the past two weeks and prime lending rates hit 21 percent.

"We're pleased that the central bank has decided to allow free market forces to come in...they couldn't continue to defend (the peso) with high interest rates because loans to commercial banks had jumped from 13 percent to 21 percent.

"If this were to continue the penalty to industry of higher interest rates would certainly be far greater than keeping the exchange rate at 26.40," he said.