10/12 11:38 Philippines Boosts Interest Rates by 4% as Political Woes Mount--(Update5) By Roel R. Landingin

Manila, Oct. 12 (Bloomberg) -- The Philippines raised key interest rates by 4 percentage points, the biggest jump since the Asian financial crisis three years ago, as the peso plunged on a political crisis that threatened to bring down the president.

The peso tumbled as much as 2.7 percent today before the central bank raised its benchmark borrowing rate, the rate it pays for deposits from banks, to 15 percent, hoping to stem a stampede of money into U.S. dollar assets. The peso closed at 47.725, down on the day and 15 percent lower this year.

The government's foreign-denominated debt also fell. The J.P. Morgan Composite Index of Philippine debt declined 4.4 percent, its biggest one-day loss since May 12.

The bank's move only served to dramatize the loss of confidence in President Joseph Estrada, whose vice president quit her cabinet post today after a former ally accused him of accepting $6 million in payoffs from gambling bosses. Higher rates may also cripple growth in one of Asia's weakest economies.

``It's definitely a sign of panic on the part of the central bank,'' said Tan Jenn Yee, who helps manage $1.5 billion in Asian stocks at American Express Asset Management Ltd. ``It's a very high price to pay just for the stability of the currency.''

The peso renewed its year-long slide this week as provincial Gov. Luis Singson charged that Estrada accepted payoffs, Roman Catholic prelate Jaime Sin called for his resignation and rivals said they would seek to start impeachment proceedings.

Making matters worse, the government today cut its growth target for next year and raised its forecast for inflation. At the same time, it acknowledged its budget deficit this year is likely to be about a third larger than the target set for the nation by the International Monetary Fund.

IMF officials are in Manila this week to review the country's economic performance and are in ``more of less continuous contact'' with Philippine government officials, according to fund spokesman Thomas Dawson.

``The Philippines is obviously in a difficult situation and the Philippines is trying to deal with it,'' Dawson said, declining further comment.

`Confidence'

The rate increase is the biggest since July 1997, when authorities across the region scrambled to stem a slide in their currencies. The efforts not only failed to arrest the decline in Southeast Asian currencies, they also sent companies borrowing costs soaring and undermined confidence among investors that policy-makers could deal with the crisis.

In the first days of July 1997, the Philippines doubled its borrowing rate to 30 percent to try to support the peso. By the end of the month, the central bank was cutting rates as lending dried up. The rate increases didn't stop the slide in the peso, which lost 9.6 percent in July and half its value by the end of the year.

Socioeconomic Planning Secretary Felipe Medalla today cut the government's 2001 growth forecast to between 4 percent and 4.5 percent from as much as 5 percent.

Philippine government debt fell on concern political upheaval will slow efforts to improve the nation's finances. The government's 2008 bond was trading at 550 basis points more than U.S. Treasuries of similar maturity, up from 528 basis points this morning.

``It's not an issue of interest rates, it's an issue of sentiment and confidence,'' said Warren Mar, head of fixed income research at BNP Paribas SA in Hong Kong. ``There needs to be something fundamentally done to reduce political uncertainty or address market concerns on the budget deficit.''

`Temporary'

Amando Tetangco, deputy governor of the central bank, said the increase ``is in response to the volatility in the exchange rate and the inflationary pressures from this foreign exchange movement.'' Finance Secretary Jose Pardo said the increases are ``temporary.''

The central bank also raised its overnight lending rate, the rate it charges banks that borrow from it, to 15 percent from 11 percent. The rate rises are expected to ripple through to commercial and retail rates, pushing up the cost of business loans, mortgages and credit cards. That should drive stocks lower when the market opens tomorrow.

The central bank also announced a second raise in the amount of money it requires banks to keep on hand as a proportion of deposits by 2 percentage points to 16 percent. That will have the effect of draining money from circulation.

Hunkering Down

As credit tightened, Estrada vowed to fight on. He told a nationwide television audience that he didn't receive ``a single centavo'' from illegal gambling payoffs. In his first public comment since the crisis erupted last week, he said, ``My conscience is clear.''

It may take more than one television appearance for Estrada to shake the taint of corruption, according to analysts.

``There should be a point-by-point rebuttal of Singson's accusations,'' said Mike Gotera, research chief at DBP-Daiwa Securities SBCM in Manila.

Singson's accusations have prompted a number of lawmakers, led by Congressman Heherson Alvarez, to prepare an impeachment case against the president. A member of Estrada's LAMP party, Sen. Ramon Magsaysay, resigned from the party today, saying, ``We have become the laughingstock of the world.''

The business community, typically a strong Estrada supporter, has been largely silent on the controversy.

``There is no basis, and we are still behind President Estrada,'' Philippine Chamber of Commerce and Industry president Miguel Varela was quoted by the Today newspaper as saying.

The Makati Business Club, comprised mostly of chief executives of the country's biggest companies, was less generous in its response. Executive Director Bill Luz said only that members are evaluating the situation.

Religion

Vice President Gloria Arroyo gave no reason today for her resignation, though she referred to ``serious allegations'' made against the president and to Cardinal Jaime Sin's resignation call. Arroyo, once named woman of the year by the Catholic Education Association, is on her way to Rome for a meeting with Pope John Paul II.

She retains the vice presidency, which makes her successor to Estrada should he be forced from office.

Arroyo's defection drew immediate charges of political gamesmanship from Estrada associates. ``The campaign season has started a tad early,'' said Lito Banayo, a political adviser to the president.

The slumping peso is also pushing up consumer prices, Medalla said, as he raised next year's minimum inflation rate to 6 percent from 5.5 percent.

``Obviously with the peso at this level, prices are going to start skyrocketing,'' said Arjuna Mahendran, head of Asian economic research at SG Securities Pte. Ltd. ``Inflation has increased quite substantially in the past two months already. We think inflation can hit 8 percent to 9 percent by the end of December. That will also impact people.''

In a piece of inopportune timing for the government, a team of IMF officials is in Manila this week reviewing the nation's finances and government compliance with loan guidelines. The government admitted today its budget deficit ballooned again last month, putting it 34 percent above the IMF target.

The IMF hasn't shown any inclination to be more lenient. About $314 million in loans hang in the balance.

-- Carl Jenkins (Somewherepress@aol.com), October 12, 2000