Davao blasts send peso, stocks reeling

The local financial markets suffered heavily yesterday with the peso tumbling to its lowest level in two years and the stock market wiping out almost all the gains of the previous three sessions following the bomb blasts in Davao which analysts said could deepen the problems facing the economy.

Twenty-one people died, including an American, and over 140 others were injured when bombs exploded at Davao City airport and the nearby town of Tagum on Tuesday evening.

"This is going to have a lasting impact on our economy for months," said Jose Vistan, a senior analyst at AB Capital Securities.

At the Philippine Dealing System (PDS), the peso closed at 54.750 to the dollar, a level last seen in Jan. 18, 2001 at the height of former President Joseph Estrada’s impeachment trial.

Yesterday’ close was 25 centavos lower from Tuesday’s close of 54.50 to the dollar.

At the Philippine Stock Exchange (PSE), the composite index closed 16.31 points, or 1.59 percent lower at 1,009.68 as jittery investors bailed out of the market. Turnover reached P265.38 million from Tuesday’s P153.86 million.

Suspicions of terrorist activities in Davao and other cities in Mindanao shook markets as far as the US mainland where the Dow Jones Industrial averages plunged by 133 points to end at 7,704.87, its lowest so far for the year.

Analysts said the security worries may add to the difficulty of the Philippines in attracting vital foreign exchange from tourists and foreign investors, which the country needs to pay for a rising energy bill and to fund its large budget deficit.

"Obviously the bombing is having an effect on investor sentiment but we also saw the impact of the slump in US.(stock) indices last night and exports contracting two months in a row," said Andrew Long, research head at ATR Kim Eng Securities.

IMF encouraged

But the International Monetary Fund (IMF) said that while the Philippines needed to control its budget deficit – which reached 5.6 percent of gross domestic product (GDP) last year – its recent economic performance had been encouraging.

"The situation in the Philippines is pretty comfortable," David Burton, the IMF’s director for Asia-Pacific, said in Singapore, in response to a question about whether the Philippines might need to turn to the IMF for help.

Philippine sovereign bonds due in 2010 weakened relative to comparable US Treasuries, although they managed to pare some of their losses in afternoon trading.

The spread between the yields on Philippine and US bonds – a measure of risk – widened by five basis points to 505 points, after widening by 10 points in early trade.

Dealers expect foreign bond investors to stay away from the Philippines on rising uncertainty and heightened risk-aversion.

"You are going to see volatility in Philippine bonds, the most vulnerable sector among Asian bonds," said Michael Fung, senior regional credit analyst at BNP Paribas in Hong Kong. Dealers said the peso was only stopped from falling further by the central bank.

"People don’t like the peso anyway and this is just another reason for being concerned," said Simon Flint, currency strategist at Bank of America in Singapore.

Ready to intervene

The Bangko Sentral ng Pilipinas (BSP) said it stood ready to intervene if the peso was extremely volatile.

"This is just temporary. This is due to the bombing," BSP Governor Rafael Buenaventura said.

"Of course there are still concerns on the Middle East war and on the anti-dirty-money bill until we pass the law. If there is extreme volatility, we will provide liquidity."

The bombings overshadowed news that legislators and officials from a global dirty-money watchdog had agreed on a formula to amend the country’s law and help it escape financial sanctions – which had been weighing on financial markets.

Analysts said the bombing would serve as a reminder of security risks in Southeast Asia, although it did not hurt other markets in the region.

"I don’t think it’s going to have too much of a contagion impact, because in the Philippines it’s quite a separate issue where they have been having this insurgency problem in the south for some time, " said Thio Chin Loo, a senior currency strategist at BNP Paribas in Singapore.

Negative market sentiment

Most index-linked large cap issues bore the brunt of the negative market sentiment. The country’s largest telecom firm, Philippine Long Distance Telephone Co was down P7.50 or 2.5 percent, at P287.5, while mall developer SM Prime finished 20 centavos lower at P5. on top turnover of P74.6 million.

Ayala group counters were also dumped with Bank of the Philippine Islands down 50 centavos at P31 and Ayala Land off 10 centavos at P4.50.

With the market nearing psychological and technical support levels, traders said further losses may be muted.

"The market is very low at these levels, foreign funds have sold out, turnover is low so who is going to sell more?" Vistan said. – With Des Ferriols