Peso, stocks fall on fears of rising US interest rates

The local financial market tumbled yesterday on concern higher borrowing costs will curb economic growth in the US, the country’s biggest export market and top source of remittances from overseas workers, analysts said.

At the Philippine Dealing System (PDS), the peso breached the 53-to-a-dollar mark, closing at 53.25 or 33 centavos lower than Wednesday’s close of 52.920 to $1 as regional currencies weakened amid speculation of a rise in US interest rates.

The stock market also tumbled, sending the index to its biggest three-day drop in almost a year.

The Philippine Stock Exchange Index slipped 60.74, or 2.7 percent, to 2157.68 at the noon close, its lowest since March 17. Adding a 3.7 percent slide in the previous two days, the index is down 6.4 percent, its biggest three-day drop since the three days ended July 4.

"There is a strong anticipation that US interest rates will go up this month and that’s hurting stocks," said Grace Bertulfo of Rizal Commercial Banking Corp. "Liquidity and the economy will be negatively affected by higher US rates," Bertulfo said.

Analysts said regional currencies have been losing strength for three straight days, compounded by a sell-off in regional stocks on speculations that US Fed chairman Ben Bernanke’s statements indicated another increase in US interes rates.

Bernanke earlier called for "vigilance against price pressures" in the US which he said was occurring despite signs that the economy was slowing down.

Another increase in US rates would make US instruments more attractive compared with similar vehicles in emerging markets which have been providing yields but were also considered riskier.

Considered most vulnerable to continued US rates hike are these emerging markets, particularly those countries with huge balance of trade deficits and little source of foreign exchange outside of investments.

Jittery investors

Filipinos in the US account for about half the money sent home by overseas workers, whose remittances make up more than a 10th of the economy. The US also buys a fifth of Philippine exports, which contribute two-fifths of the $85 billion economy.

Comments by US central bankers this week fueled speculation the world’s biggest economy may not be through raising rates. The Federal Reserve may add later this month to 16 consecutive increases in its benchmark rate.

"An increase in US interest rates will trigger other central banks to follow and reverse the flow of liquidity that pushed up financial assets in the last two to three years," said Jerome Gonzalez, who helps manage $20 million at Manila’s PhilEquity Fund.

The Philippine stock index has lost 17 percent since May 8, when it climbed to its highest since July 13, 1999. The index climbed 15 percent last year, after advancing 26 percent in 2004 and gaining 42 percent in 2003 as lower interest rates in economies like the US prompted global funds to seek higher returns in riskier assets.

"Once things have stabilized, the Philippines will stand out as among the better emerging markets because of the government’s plan of fixing its fiscal problems," Gonzalez said.

The nation’s main stock index, now just 2.9 percent higher since end-2005, gained as much as 24 percent earlier this year on speculation the government will succeed in narrowing the deficit to its smallest in seven years in 2006. Government debt has nearly tripled to P3.9 trillion since the last time the government posted a surplus in its annual budget in 1997.

Ayala Corp. and Philippine Long Distance Telephone Co. (PLDT) paced declines on expectations that higher US interest rates will draw funds away from emerging markets such as the Philippines.

Ayala fell P25, or 6.8 percent, to P345, its lowest since March 20. The stock has lost 27 percent of its value since May 8, when it advanced to its highest since July 16, 1999. PLDT, the nation’s largest phone company, slid P40, or two percent, to 1,920, bringing this week’s loss to 4.7 percent, set for its third-largest weekly fall this year.