- The Washington Times - Wednesday, February 19, 2003

SINGAPORE, Feb. 19 (UPI) — Philippines' assets are becoming less desirable by the day. The peso has fallen against the U.S. dollar to levels not seen since the crisis caused by former President Joseph Estrada's government while yields on local Treasury bonds have risen so sharply the Bureau of Treasury is considering suspending auctions because of the "unrealistic bids."

Over the past year, investors have been increasingly jittery over investing in the country, as the government kept missing its fiscal target. Last year, the fiscal shortfall reached $3.93 billion (212.6 billion pesos), well above the original target of $2.4 billion (130 billion pesos), as the Bureau of Internal Revenue failed to meet its collection targets.

This year, the government seems to have started on a slightly better footing with the January fiscal gap estimated at $277 million, slightly under the government target for the month. Yet, the government will be facing an uphill battle to keep this year's fiscal gap target at 4.7 percent of gross domestic product or around $3.73 billion, unless it significantly improves its revenue collections.

DBS analyst Philip Wee estimates that apart from carrying last year's fiscal baggage, the latest pressure on Philippines' assets emanates from two sources: the anti-money laundering law deadline and the Iraq war jitters threatening the inflation target.

This week, the peso depreciated beyond 54 against the U.S. dollar, a level not seen since the crisis that eventually toppled Estrada in January 2001. Meanwhile, the yields on the 2-year government bond have also risen sharply to 9.49 percent from 8.22 percent on Jan. 22, prompting National Treasurer Sergio Edeza to say if the market "continues its insanity" the Treasury would stop all treasury bills and bonds auction. The Treasury has had to reject bids 4 times.

Indeed, the peso has been an under-performer in the region since last May, having depreciated steadily even in the face of a weak dollar tone. The spark to the latest sell-off has been fears that the Paris-based multilateral organization the Financial Action Task Force, could recommend sanctions be imposed on Philippines' financial transactions following its displeasure with the watered-down Anti-Money Laundering Act, which was passed last week.

Although Congress approved a stronger law to fight money laundering, it fell short of the standards set by the global watchdog, which was set up in 1989 by major industrialized nations to fight money laundering by militants and criminal groups. The FATF was especially unhappy that under the new law, financial regulators would still need a court order to look into bank accounts, except in cases of kidnapping, hijacking and drug trafficking.

The government is now working to amend the dirty-money bill to meet the March 15 deadline imposed by the FATF.

Sanctions would weaken the balance of payments position and thus slow economic growth by actively deterring foreign portfolio investment, while raising the cost of international financial transactions, analysts said. Of particular concern is the threat to the inflow of foreign worker remittances that amounted to around 10.6 percent of GDP last year. The Asian Development Bank has also tied a $150 million loan aimed at strengthening the non-bank finance sector to the bill.

The California Public Employees' Retirement System, the largest U.S. public pension fund that still invest in the Philippines, has warned that non-passage of the needed reforms in the country's anti-money laundering law would definitely put the Philippines in an even worse situation. The fund could be removing the country from its investment list after a recent negative report from an outside consultant.

Another concern for investors is the impact a war in Iraq will have on the country's inflation target if oil prices soar any further.

The central bank is concerned that its inflation target of 4.5 percent to 5.5 percent for this year will be breached if oil prices soar to $42.70 per barrel. According to its simulation, inflation would be manageable if oil prices stay at $35 or below. Oil prices have now risen to $37 per barrel.

Sentiment has also been weakened by recent data revisions, which notably saw the 2001 current account surplus revised down from a previously announced 5.6 percent of GDP to just 0.7 percent, and which saw the government draw attention to the fact its short-term foreign debt burden as of last November was $7.1 billion rather than the $2.4 billion the market had generally been assuming.

Analysts worry further data surprises may be in the cards as the central bank has announced it will delay releasing revised import data for 2002 until April this year, while 2002 balance of payments data will not be available until May.


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