Emergency deal sees US$150m injection to Manila loan pool
The Philippine central bank yesterday struck a deal with the country's commercial banks aimed at preventing the peso from following the Indonesian rupiah and South Korean won into freefall.
As part of a package of emergency measures hastily pulled together in the past 36 hours, commercial banks agreed to stop hoarding United States dollars and hand over at least US$150 million a day to a central pool from which companies with dollar needs could borrow.
The peso bounced back to 39.77 pesos to the US dollar in late trade yesterday having plunged to another record low of 41.60 pesos in morning trade before details of the deal arranged by the Philippine Bankers Association (BAP) emerged.
The Central Bank of the Philippines will also contribute from its depleted $10 billion reserves.
Association president Deogracias Vistan said: 'We want to demonstrate to the public that we are also helping the central bank in restoring order in the market.' Other initiatives include halving banks' spreads to 2 per cent to limit their potential profits from speculating against the peso, plus the possible creation of a form of non-deliverable forward contract for dollars to ease heavy corporate spot demand.
It is hoped the peso, which has tumbled 34 per cent since July, will stabilise after the new measures come into effect today.
Before news of the deal, analysts had been predicting the peso could fall to 45 pesos or 50 pesos against the US dollar, a level corporates with high foreign exchange borrowings would have trouble supporting.
Many corporates panicked and scrambled to buy dollars, fearing the peso was heading markedly lower.
Analysts said some started hoarding dollars or speculating against the peso, adding to the country's financial plight.
Central bank governor Gabriel Singson said the 'magic solution' to the peso's plight was to end speculation.
Exceptionally thin volumes had led to high price swings. Turnover was just $9.5 million on Tuesday, of which more than half was central bank intervention funds.
Volume surged back to $96.5 million yesterday as news of a breakthrough spread.
'If you have panic-buying and very thin volume, you will see huge price swings,' Independent Economic Analysism regional economist Mayo Pinto said.
As well as supplying the market with dollars, the central bank's monetary board was meeting last night to discuss an arrangement to insulate US dollar loan borrowers from exchange risks through non-deliverable forward transactions.
Companies would be able to buy forward papers from banks, entitling them to US dollars on a certain date, but only pay the margin or premium, easing pressure on the spot market.
Angping & Associates analyst Warren Chua said: 'These initiatives will hopefully trim the risk of depreciation of the peso, but it cannot be given a complete guarantee of success. The central bank cannot keep on defending the peso out of its reserves without trying some other alternatives.'
