Peso no Pied Piper for regional monies

Peso no Pied Piper for regional monies

SINGAPORE (Reuters): With its deepening political crisis and floundering markets, the Philippines is putting up a tough fight for Indonesia's ranking as the least sought-after investor destination in Asia.

The peso's almost daily slide to new lows has soured already poor sentiment for other Asian currencies in recent weeks, but analysts see little basis for a widespread knock-on impact.

However, with no shortage of domestic worries and the grim backdrop of high oil prices and jittery U.S. stocks, investors have ample reason to stay away from Asia generally, they say.

"These currencies obviously are still correlated. But people are not saying that if the Philippine peso goes to 50, by default the baht has to go to 46," said Steve Brice, treasury economist at Standard Chartered.

"That may actually happen, but one doesn't lead to the other. There are domestic factors in Thailand that would lead to the baht weakening, and domestic factors in the Philippines."

The peso was hovering around 48.44/50 to the dollar at 0530 GMT, off Monday's all-time low of 49.00, as the threat of another massive interest rate hike held the market in check.

The central bank said on Tuesday it had not yet decided on a further tightening after raising overnight rates by 400 basis points and hiking bank reserve requirements twice in the past two weeks.

Higher rates and repeated central bank intervention have done little to support the peso as jitters about President Joseph Estrada's gambling payoff scandal stoke pessimism about an ever- expanding fiscal deficit and slowing economy.

Manila markets continue to head south as the saga unfolds, and analysts say the central bank's efforts to shore up the peso have assumed an increasingly desperate tone.

"We think the central bank has misjudged market sentiment... Just by imposing higher interest rates, what little foreign investor interest there is around the region may be scared away from the Philippines," said Stanchart's Brice.

Analysts say the peso's weakness is being driven by domestic corporate and retail buying of dollars and higher interest rates are only likely to hurt the fragile economy.

A number of banks have slashed their end-year peso forecasts in the wake of its sharp drop against the dollar and no sign of a let-up in the gloom.

Barclays Capital and JP Morgan are among the more bearish, with an end-2000 forecast of 52. Citibank expects the peso to reach 50.5 on a one-month horizon and Stanchart is looking at 50 over the same period.

So far, the Thai baht has tended to be most susceptible to weakness in the peso as traders link the two currencies due to similarities in their economies.

The baht was quoted at 43.33/36 at 0530 GMT, well off Friday's 28-month low of 43.68.

But apart from some shared difficulties on the political front, large fiscal deficits and similar status on the technology chain, the Thai economy is more than twice the size of the Philippines in terms of gross domestic product.

And Thailand has more than its own share of problems, with elections looming and investors still concerned about the slow pace of financial sector restructuring.

Low interest rates and the Thai central bank's hands-off exchange rate policy have also made the baht a prime funding currency, analysts say.