[atlasvoice]

[Reuters]

Published date: 1st Dec 1987

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Chaitanya Kalbag, Reuters

MANILA, Dec 1 – Short-term interest rates have shot up in the Philippines as the peso has come under increasing pressure and the central bank has been forced to intervene heavily to defend the local currency, bankers said. 

Bankers’ Association of the Philippines (BAP) figures show the central bank was a net seller of 171.8 million dollars in the foreign exchange market in November, compared with net sales totalling 170 million dollars in September and October. 

The central bank accounted for 83 pct of November’s total interbank foreign exchange transactions of 225.3 million dollars. 

The peso slipped to 20.877 to the dollar at end-November, from 20.725 at end-October and 20.611 at end- September. 

Meanwhile, the cost of banks’ overnight funds, the interbank lending rate, soared to an average 19.19 pct on November 27, from 6.38 pct on November 16, central bank figures show. 

The figures show foreign exchange reserves shrank to a 1987 low of 39.7 million dollars at the end of October from 73.58 million a year earlier and 58.4 million at the end of September. 

“The Philippine economy is in the shallows of a balance of payments crisis,” said Manuel Montes, professor of economics at the University of the Philippines. 

“The central bank has been losing international reserves rapidly in an effort to defend the exchange rate,” Montes wrote in the Financial Post newspaper. “As (local) banks begin to take a position against the peso, current applications to buy foreign exchange are unserviced, damming up significant buying pressure. (The) capability to swamp the system increases as policy action is delayed.” 

Last week the central bank moved to defend its foreign exchange reserves by curbing unofficial dollar trading between banks, easing bank deposit rules for overseas workers and cutting purchases of debt paper with foreign exchange. 

A senior central bank economist said the bank was in the process of recasting its 1987 targets for balance of payments, current account and gross international reserves in light of the dollar’s slide and a rise in the London Interbank Offered Rate (LIBOR).

“Targets we reached in consultation with the International Monetary Fund in August are way off,” the economist added.

Central Bank Governor Jose Fernandez said last month the January/September current account deficit of 219 million dollars was above the forecast deficit of 131 million. 

The central bank economist said the Philippines’ total foreign debt rose to 28.48 billion dollars at end-June from 28.26 billion at end-March and 26.48 billion at end-1986. 

Fernandez told a meeting of financial executives during the weekend the central bank had been rigidly following its policy of establishing the peso’s exchange rate on a market determined basis. 

“Central bank intervention shall be limited to moderating steep short term movements generally fostered by speculation, or by unexpected political events,” Fernandez said.

Local bankers have said an abortive but bloody August 28 coup attempt spawned dollar hoarding, which compounded a seasonal rise in demand for the U.S. currency caused by a surge in imports. 

Fernandez said the principal task of monetary policy was to sustain the country’s economic recovery and accelerate it. 

Latest government figures show that gross national product (GNP) grew by 5.51 pct in the January/September period compared with a 4.8 pct contraction in the same period in 1986. 

GNP grew by a modest 1.5 pct in 1986, after contracting 10.6 pct over 1985 and 1984.