Despite repeated assurances from the Manila government that the financial system remains sound, there are persistent worries that the Philippines could see a meltdown in the banking industry similar to what happened in Thailand. At the very least, the peso is overvalued and is likely to come under attack from speculators, analysts say. The majority of brokers believe stocks are pricey in comparison to their Thai equivalents and offer less stability than those in Indonesia. As such, Philippine shares may suffer as fund managers shift money to Bangkok and Jakarta. Opinions on the Philippines range from moderately bearish to dire. Ajay Singh Kapur, at Union bank of Switzerland, took an extremely negative view. 'Exposure to Philippine stocks should not exceed zero,' he said, predicting that a crisis in the banking sector could prompt Manila's benchmark index to plunge 30 to 40 per cent in the next 18 months. Mr Kapur based his outlook on an amalgamation of factors threatening the banking sector: accelerating credit growth, rising loan-to-deposit ratios, a weakening trade balance, slowing industrial production and an over-valued currency. 'The Philippines financial system is closer to a meltdown than at any other time in the last two decades,' Mr Kapur said. There was a consensus among analysts that the peso is overvalued and vulnerable to attack from currency speculators. Having prompted the Thai Government to float the baht, causing a depreciation of about 15 per cent, speculators may now turn their attention to the peso. If the Philippine Government is forced to defend the peso through raising interest rates and selling its US dollar holdings, the rest of the financial sector could suffer, they said. Eric Sandlund, at Prudential Portfolio Management, said: 'If it was the peg that caused the problems for Thailand, the same could happen for the Philippines.' While less bearish on the Philippines than most analysts, Mr Sandlund recommended that investors select stocks that are more immune to currency fluctuations. These include Philippine Long Distance Telephone, which gets much of its revenue from overseas, and domestic consumption related companies. SBC Warburg analyst Joven Babaan defended the soundness of the Philippine banking system. 'The problems in the Philippine banks have been apparent for only a year. In Thailand, the problems were there for five years before the market crashed.' He said the peso needed to fall in value before equity prices regained their upward momentum. A devaluation of the currency of about 3 per cent would be healthy for the economy, he said. 'If this happened I would not be surprised if we reach our high by the end of the year.'