Peso tumbles on rising political turmoil

The peso retreated yesterday back to the 55 to a dollar level yesterday as investors dumped the local unit due to rising political concerns.

At yesterday’s trading at the Philippine Dealing System (PDS), the peso weakened sharply by 25 centavos to close at 55.20 to the dollar from Thursday’s close of 54.950 to $1.

Trading volume was heavy at $435.35 million, indicating that more corporates are hedging their requirements early on because of growing uncertainty.

Traders said there was growing nervousness that a recent drumbeat of graft allegations against the President could destabilize the government. Rumors of coup plots have also hurt sentiment.

The Bangko Sentral ng Pilipinas (BSP), however, said it is closely monitoring the foreign exchange market to smoothen the volatility in the peso-exchange rate should it become necessary in the coming days.

The BSP warned that the longer the political uncertainty lingers, the more adverse the impact on the peso which has slowly been regaining lost ground for the last two months until the market was hit anew by a series of scandals involving top officials of the Arroyo administration.

After last week’s announcement that June 13 was a regular working holiday, the Arroyo administration decided late Thursday night to declare it a non-working holiday after all.

The decision spurred fresh speculation in the market that the Arroyo administration was not as secure as it purported to be and had begun to take destabilization threats more seriously than it was publicly admitting.

According to monetary officials, however, the on-going political uncertainty would be a problem only if it lasted longer than usual.

Tetangco said the country’s economic fundamentals have been improving significantly in terms of growth, foreign exchange flows and the record level of gross international reserves.

"We are doing quite well," Tetangco said. "Especially after the approval of the increase in value added tax."

According to Tetangco, the tax measures were viewed by the market "very positively" since these were long-term measures that would impact on the government’s fiscal problems.

"These measures are exactly what we need to stabilize our fiscal position," Tetangco said. "Since that has been the major concern of our investors, a large chunk of their worry has already been addressed."

"The market does not like uncertainty," Tetangco said. "More often than not, it matters little to them how situations are resolved as long as they are resolved immediately and with finality to remove those uncertainties."

Tetangco said the BSP has not found it necessary to intervene in the peso-dollar market but he said the mandate was the same.

"We’re watching the movement of the exchange rate," he said. "As in the past, the policy has always been to smoothen the volatility. We don’t go against economic fundamentals."

According to Tetangco, the movement of the peso and overall market reaction to the on-going controversies of the Arroyo administration would be ultimately determined by how long the uncertainty lasts.