MANILA, November 14, 2004 (STAR) By Des Ferriols -The Philippines will have to bank on the crucial seal of good housekeeping from the International Monetary Fund (IMF) as the country moves to step out of a fiscal crisis and heads towards an economic recovery, Bangko Sentral ng Pilipinas (BSP) Governor Rafael Buenaventura said over the weekend.

Buenaventura said the Philippines – faced by slowing growth and budget problems – is being closely watched by creditors, investors and credit rating agencies.

"Any mistake and the resulting negative perception would have a more significant impact than it normally would," Buenaventura said. "That’s why the IMF is more important to us even if we are not borrowing and even when we become a net lender."

The BSP chief pointed out that the IMF’s close involvement in the development of the Arroyo administration’s Medium Term Development Plan would allow the Philippines to benefit from its seal of good housekeeping.

"Creditors, investors and ratings agencies all look at what the IMF has to say even now," Buenaventura said. "We need them because they validate what we say and it makes them more credible."

As an independent third-party observer, Buenaventura said the IMF is providing much-needed support in terms of identifying significant benchmarks showing that despite all the noise, the country’s fundamentals are not as disastrous.

The government, however, is currently facing a serious shortfall in foreign exchange for this year and in 2005 – bigger than previously estimated.

This, in turn, has sparked speculations that the dwindling forex reserves could cause the country’s dollar reserves to go below the IMF benchmark, indicating that the reserves should be at least on a 1:1 ratio with a sovereign’s debt based on residual maturity.

Thus, finance officials are now contemplating the grim possibility that the government might have to borrow emergency reserve funds from the IMF or the Chang Mai facility in case its reserves dip below $11 billion.

It was estimated earlier that if the National Government (NG) would borrow only $1.5 billion from commercial sources in order to refinance its obligations, its forex shortfall could reach at least $3.5 billion in 2005.

However, the actual total forex-denominated financing requirements for 2005 might be bigger than $4.5 billion as estimated by the BSP and could go up to as high as $7 billion, including the obligations of the National Power Corp. (Napocor).

The officials said that even if the NG succeeds in its plan to source at least $1 billion from official development assistance (ODA) and $1.5 billion from commercial sources, the gap would still be significant enough to drain the country’s dollar reserves.

At any one point, the BSP tries to maintain a reserve level of $14 billion to $16 billion, equivalent to at least two times the country’s short-term debt based on original maturity and 1.3 times based on residual maturity.

Short-term debt based on residual maturity refers to outstanding short-term external debt on original maturity plus principal payments on medium- and long-term loans of the public and private sectors falling due within the next 12 months.

At these levels, officials said the reserves could go down to as low as $11 billion from its usual level of $14 billion to $16 billion. If the reserves go down to $11 billion, it would just be equivalent to the country’s maturing short-term obligations.

"At that point, we’re still okay because a 1:1 is a ratio that the IMF considers healthy, it only means we are liquid and able to pay for short term maturities as they come," an official explained.

"But if you’re at that level, you will not have the reserves to shield the peso from attacks," the official added. "Considering the impact of peso depreciation on our foreign obligations, we would have to dip into the reserves anyway and it will go below the 1:1 ratio."

"It means we won’t have the reserves to pay for our short-term obligations and there arises an immediate possibility of default unless we buy our forex requirements from the spot market - and if we have the money to do so," the official said.

Based on elasticity studies, this scenario could bring the peso down from the present $56 to the dollar to as low as $60 to the dollar which in turn would blow up the country’s debt service costs and eat up 60 percent of the national budget.

Reported by: Sol Jose Vanzi

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