In an economic research paper released late last month, Goldman Sachs said that the peso will even slip to 56 to the dollar by end 2002 assuming that the economy does not improve and government continues to overshoot its budget deficit targets.
"Can the government maintain fiscal discipline? The economic downturn and declining customs receipts should make the task more difficult. Failure to keep the fiscal deficit within target will place downward pressure on the currency," the paper said.
Earlier, HSBC expressed fears that Philippine government would fail to hit its P145-billion budget deficit target for 2001, citing the nine-month figure of P122.152-billion, which already exceeded by P1.956 billion the P120.2-billion target for that period.
The study by the Goldman Sachs Economic Research Group indicated that interest rates for the 91-day Treasury bill benchmark would rise to 11.50-percent by the start of 2002. The bellwether T-bill rate remained steady at 9.80 percent last Monday when government rejected all T-bill bids.
Full-year gross domestic product (GDP) is forecast to grow by a mere 1.2 percent by end 2001 with a more positive 2.4 percent next year. The country’s GDP in 1999 registered a 3.3-percent growth and grew by 0.6 percent last year.
The National Government has also scaled down its GDP forecast this year to below three percent from a high of 3.8 percent.
From a low 4.3-percent inflation level last year, Goldman Sachs sees the country’s full-year inflation level to rise to 6.6 percent.
"Financial sector fragility is a growing concern, with the non-performing loans (NPLs) climbing to 20 percent. The soft fiscal position and high inflation are limiting the ability of the authorities to bring interest rates down further," the research paper said. "Thus, the risk premium is likely to rise further."
Goldman Sachs also forecasts that the rest of the Asia-Pacific region will also suffer weak economies.
The global investment house said "the attacks on the United States (by the terrorists) will intensify the (region’s) growth slowdown, with export growth slowing amidst domestic demand weakness. Monetary conditions continue to be tight; real rates are high and rising, and trade-weighted non-Japan Asia currencies have not weakened materially despite their depreciation against the US dollar. Policy tightness, coupled with balance sheet fragility in the banking and corporate sectors, has delayed private credit growth."
It added that "there are four key questions: 1) by how much will weakening profile in the Overseas Economic Cooperation and Development (OECD) growth delay the region's recovery? 2) when will the US technology investment cycle bottom? 3) will Japan implement a credible reflationary policy, and will this be allowed by substantial yen weakening?; and 4) will Asian central banks further ease monetary policy in the face of such sizeable and adverse external shocks?"
Japan, the second leading trading partner of the Philippines, will continue to register weak economic activity. "The current inventory correction has been stronger than previously expected and exports are being hurt by slowing foreign demand. Underlying demand is likely to be weak into next year."
The US economy is seen to register negative growth in the last half of the year. There is little evidence that the Bush administration’s tax rebates had spurred additional spending and that labor market conditions were already deteriorating.