Loren questions gov’t projection of peso-dollar rate

Sen. Loren Legarda, chairman of the Senate committee on economic affairs, has questioned the government’s adoption of an exchange rate of P42-P45 to a US dollar, as the basis for the setting of its 2008 spending, revenue and economic targets.

Legarda said the government should explain to the public why it is adopting a higher exchange rate when a number of international finance groups have projected the peso-dollar exchange rate to be between P37 to P41/dollar.

“What is the basis for this new rate assumption? Is this sensible? How practical is this, considering that analysts from global financial institutions seem to be extremely bullish on the peso, and very bearish on the dollar?” Legarda said in a statement.

Based on projections by various global financial institutions, Legarda noted that the peso would likely range from 37-41 to a dollar by the end of 2008.

Banque Nationale de Paris-Paribas sees the peso at 37 to $1 by end 2008; JP Morgan Chase & Co., at 38-39; Citigroup Inc., at 40.75-41.50; Hong Kong & Shanghai Banking Corp., at 41; and The Goldman Sachs Group Inc., also at 41.

Legarda’s remarks came shortly after the Freedom from Debt Coalition revealed the over-allocation of funds meant to cover interest payments on the government debt since 2002.

In a study, the budgetary watchdog said that between 2002 and 2007, there was an average P12.15-billion difference between the programmed funds and actual spending for interest payments on the public debt.

The government saves up to P4.2 billion in debt payments for every P1 appreciation versus the dollar, according to the Department of Finance.

Earlier this month, technical analysts at the Swiss banking giant UBS AG boldly predicted that by April or May 2008, the peso could surge past the 40-mark and climb to as high as 37 to a dollar. The peso closed at 41.28 to a dollar yesterday.

The interagency Development Budget Coordinating Committee adopted the P42-45 to a dollar rate assumption earlier this month.

“Does this mean that the government will defend the dollar at 42-45? Or is this a case of needlessly raising false hopes for our exporters and the families here of our migrant workers?” Legarda added.

“Is this a case of government planners simply setting the stage for some future window-dressing, so that they can later report a larger-than-expected budgetary surplus?”

“Or are they intentionally assuming a much weaker peso to justify a bloated budget for debt servicing, which can later result in bigger savings that can be diverted elsewhere?”

As proposed by Malacañang, the P1.227-trillion national budget for 2008 is based on the assumption that the peso would range from 47-49 to a dollar next year.

However, in view of the peso’s continuing strength against the dollar, the House of Representatives decided to cut by P17.8 billion the allocation for debt servicing.

This prompted Budget Secretary Rolando Andaya Jr. to call for a presidential veto of the budget, unless the cut is restored.

The House and the Senate are expected to reconcile their versions of the budget in January.

The strong peso has put the government in a quandary.

Just last week, National Economic and Development Authority Director General Augusto Santos said the government may have to call off some of the programmed official development aid next year. This is meant to prevent more dollars from flooding the country, and to stem the peso’s continuing rise versus the US currency, he said.

Santos warned that due to the peso’s powerful momentum and the bigger-than-expected surge in the dollars being sent home by OFWs, the local currency could soon hit 35 to a greenback, unless some of the incoming foreign aid, estimated at $1 billion, is canceled.