No contagion effect seen in SEA from peso fall

Southeast Asia need not fear a 1997-type contagion triggered by the rapid slide of the Philippine peso as the region is protected by strong economic fundamentals and more discerning investors, analysts say.

Political concerns have dragged the peso by as much as six percent from its high in May and the embattled unit is within striking distance of its historic low of 55.75 to the US dollar posted nearly two and a half years ago.

In the regional financial crisis six years ago, a rapid slide of the Thai baht caused a contagion effect and sent the currencies of Indonesia, Malaysia, Singapore and the Philippines as well as those of South Korea and Taiwan into a tailspin.

Analysts said the tumbling peso was not the epicenter of a financial storm similar to the baht-triggered turmoil, which plunged the region into its worst recession in decades.

"In terms of possible contagion because of the peso decline, we are not going to see a herd behavior like that in 1997 when there was panic and both foreign and local investors bailed out of the region," said Pradumna Rana, director of the Manila-based Asian Development Bank (ADB) Regional Economic Monitoring Unit (REMU).

"Investors are more discerning now in a sense that they view countries in the region differently and according to the local problems faced and structural reforms that have been taken," he told AFP.

Even so, the peso’s slide cannot be attributed solely to fundamental problems as the Philippine economy is generally in good shape with positive macro indicators, Rana said.

Unlike the peso, whose weakness has been largely blamed on internal political problems, the currencies of the key neighboring Southeast Asian countries have been stable or appreciating, dealers said.

Rana cited studies by the ADB’s REMU unit on Southeast Asian bond spreads and currency movements to dispel the notion that the peso could trigger a contagion effect.

"Bond spreads in the 1997 crisis or even before the crisis were closely correlated to each other but the correlation has been less now than before which basically shows that markets are starting to differentiate between one Southeast Asian country and another," he said.

"This suggests that the herding behaviour which was evident in the 1997 crisis may not be there now," Rana added.

Citing another study, he said while the peso depreciated by about 0.6 percent against the dollar the past week, the Indonesian and Thai currencies appreciated by 0.7 percent and the Singapore dollar rose by 0.3 percent.

The peso fell to a fresh 31-month low of 55.60 against the greenback on Tuesday, inching closer to its historic low of 55.75. – AFP