Topsy-turvy politics dims peso outlook

NEW YORK (Reuters) – Shaky politics and a sputtering economy in the Philippines have dimmed the outlook for its peso currency, analysts say.

The Philippine peso has lost roughly four percent of its value against the dollar since the beginning of May, trading around P56.13 on Wednesday, mostly due to political uncertainty.

Embattled Philippine President Gloria Macapagal-Arroyo, a US-educated economist and daughter of a late president, is facing allegations of fraud in last year’s elections. Two of her family members are alleged to have taken bribes from illegal gambling operatives.

President Arroyo has rejected calls to step down and dared her opponents to impeachment her.

Analysts say prospects for the currency are expected to become bleaker over the next few months as the political situation unravels.

To stem the peso’s weakness against the dollar, the Philippine central bank has had to raise reserve requirements for local banks by two percentage points. The move, aimed at increasing demand for the peso, would siphon off P32 billion in excess liquidity.

But the peso’s survival probably requires more than central bank action, analysts say.

"There is little to suggest that the Philippine peso will be able to buck the strengthening of the US dollar in the near term," said Clyde Wardle, emerging market currency strategist at HSBC Bank USA in New York.

"Short term, we see risks in the peso associated with the political uncertainty. Also, the fiscal outlook looks highly uncertain. So those two conspire to make investors rather nervous," he added.

Some analysts predict the peso could depreciate by as much as 10 percent to 15 percent if the political situation worsens.

"We can envision levels above 60 before the end of the year and in the mid- to high 60s in 2005 if Arroyo’s departure creates even more instability," the Royal Bank of Scotland said in a research note.

Chronic Political Instability, Economic Woes

This is not the first time a Philippine president has come under siege.

The late President Ferdinand Marcos was ousted in 1986 by a "people power" revolt and replaced by Corazon Aquino. In 2001, former President Joseph Estrada, plagued by allegations of graft and corruption, was also forced out of office. He was replaced by then-Vice President Arroyo, whose father, Diosdado Macapagal, was president from 1961 to 1965.

The peso has always borne the brunt of political instability in the Philippines. In the run-up to Estrada’s ouster in 2001, the peso had weakened 7.6 percent against the dollar during seven trading sessions, according to analysts.

The picture isn’t any more pleasant on the economic front.

The Supreme Court decided to freeze an expanded value-added tax, a sales tax that is at the center of Arroyo’s program to ease the country’s fiscal deficit.

Sailesh Jha, research analyst at Credit Suisse First Boston in Singapore, said that every month implementation of the VAT bill is delayed, about P4 billion to P5 billion in tax revenues are lost.

"If the VAT bills are not passed in 2005, our P28-30 billion in additional tax revenues this year becomes a figment of our imagination. Our fiscal deficit forecast of three percent of GDP (gross domestic product) may be too optimistic and may track... 3.5 percent of GDP," Jha said.

What could turn the situation around for the peso?

Sean Callow, senior currency strategist at Westpac Banking Corp. in New York, said the peso could rally against the dollar if President Arroyo stays in office.