Strong dollar demand sends peso to new low

The peso tumbled to a new historic low of 56.450 to the dollar in early trade yesterday amid continued dollar buying by corporates, including importers who want to hedge their future dollar requirements as the May 10 presidential elections draw closer.

The Bangko Sentral ng Pilipinas (BSP) said there was legitimate demand for dollars but banks said jitters were aggravated by weak regional currencies on top of reports that the government’s foreign reserves could go down to $14 billion in the first half of the year.

Traders said banks were also jittery over reports that the government has missed its February deficit target.

At the Philippine Dealing System (PDS), the peso plunged to an all time low of 56.450 during intra day trading after opening weak at 56.40 to the dollar.

At the close of trading, however, the peso managed to recover by three centavos to settle at 56.420 to $1. Yesterday’s close was still four centavos lower than Friday’s close of 56.380 to the dollar.

Total transactions amounted to $160 million on an average rate of 56.429 to the dollar.

Traders said the peso may test the 56.500 level this week without the BSP’s support for the peso.

Analysts said foreign exchange traders continued to attack the peso on the back of news that the February deficit went over the monthly target, a development that could trigger another round of downgrade by major credit rating agencies.

According to one trader, the government’s fiscal position was the most-watched indicator since it would determine future borrowing plans and ultimately affect the government’s already worrisome debt burden.

National treasurer Mina Figueroa countered reports of a deficit blow-out, saying that based on preliminary numbers, the February deficit was only a little over P19 billion and still below the target.

BSP Deputy Governor Amando Tetangco said there was corporate demand for dollars especially in the early session, particularly from oil firms, power companies, manufacturers and electronics firms.

"They were buying in early trade," " Tetangco said. "But the peso also found support from the dollar sales of exporters and remittances from overseas Filipino workers."

Aside from the dim outlook in the fiscal sector, the market was also making a play for the expected decline in the GIR which the BSP said could go down to $14 billion in the first half of the year.

A recovery back to $15 billion is expected in the second half of the year but market players said that while the BSP had the appearance of not having the firepower to support the peso, the weakness of the currency would persist.

BSP Governor Rafael Buenaventura told reporters that the GIR is expected to range between $14 and $15 billion for the whole of 2004.

"These are seasonal factors, particularly in the OFW remmitances," Buenaventura explained. "It’s also understandable for foreign investments to be jittery since we’re building up towards the elections in the first half."

According to Buenaventura, it would take time for investors to regain confidence once the May elections is over and the new administration takes over regardless of "Obviously, the dynamics would not return to normal until the second semester and by then, we expect some improvements in the inflows," Buenaventura said.

For this year, the national government (NG) has been planning a less aggressive foreign borrowing approach.

According to Buenaventura, the NG has made a commitment to remain flexible in its borrowing program. "Ideally, they plan to get 70 percent from the local market and only 30 percent from foreign sources," he said.