MANILA, November 22, 2004 (STAR) By Des Ferriols - Allowing the country’s international reserves to go down would force the peso to weaken to as low as 60-62 to the dollar and interest rates could spring back to double-digit levels, especially if the government’s foreign borrowings do not match its dollar requirements.

The overall impact, according to the BSP, would add another P208.794 billion to the country’s foreign debt which would increase to P2.296 trillion.

If the peso were to fall to 61.9:$1, the combined public and private external debt alone would surge by P317 billion and increase from the current total of P3.171 trillion to P3.488 trillion.

As the International Monetary Fund (IMF) expressed preference for domestic borrowing, the Bangko Sentral ng Pilipinas (BSP) said over the weekend that the decision to adjust the government’s borrowing mix was intended to prevent its debt problem from spiraling out of control.

BSP Governor Rafael Buenaventura said that under ideal circumstances and assuming that every single macro-economic target has been met, the government should be able to raise funds from domestic borrowing.

However, the absence of a significantly large inflow of investments and export earnings did not permit significant borrowing from domestic sources without stressing the international reserves to the breaking point that would lead to drastic peso depreciation.

According to Buenaventura, calculations by different agencies including the IMF consistently agreed on the amount of foreign borrowing that the national government would be required to do in 2005.

"At the 22-78 borrowing mix that was being planned originally, there would have been a forex gap of about $3.4 billion and we would have been forced to get that from our reserves," Buenaventura said. "If we did that, the reserves would have gone down to $11.5 billion and the peso would have started to seriously depreciate."

At this level, Buenaventura said the worst-case scenario put the peso at 60 to the dollar if the BSP did not have the reserves to shield the peso from volatility.

According to Corazon Guidote, the out-going managing director of the BSP’s Investment Relations Office (IRO), a three-percent peso depreciation where the peso would be at 58:$1 would add another P62.638 billion to the government’s external debts alone, in addition to the estimated P6.264 billion increase in the annual interest burden.

If the peso depreciated by five percent to P59.1:$1, Guidote said public external debt would surge by P104.397 billion, while the annual interest burden would be up by P10.44 billion.

At 10 percent depreciation of the peso (P61.9:$1), the public external debt would spiral by P208.794 billion and reach P2.296 trillion while the annual interest burden would increase by P20.879 billion.

"That is assuming the public external debt is constant at the present level of $37.086 billion or P2.087 trillion," Guidote said. "If we undertake any incremental borrowing, these numbers will be even higher."

Including the foreign debts of local private companies, Guidote said the numbers yielded by simulations were even grimmer.

Guidote said peso depreciation would increase the combined public and private external debt by P95.143 billion, P158.572 billion and P317.144 at 3 percent, 5 percent and 10 percent depreciation, respectively.

Reported by: Sol Jose Vanzi

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