MANILA, December 15, 2004 (STAR) By Des Ferriols - The weakness of the dollar has triggered a slight shift to the euro in the country’s foreign exchange reserves, but the Bangko Sentral ng Pilipinas (BSP) said this is not a unique phenomenon and has been a common practice among central banks.

The dollar’s weakness has been lingering for months now as the US languished in deficit and the BSP admitted that it has reacted by diversifying the country’s international reserves.

"There’s nothing wrong with diversifying your portfolio," said BSP Deputy Governor Amando Tetangco Jr. "This shift has been taking place for quite a while."

Tetangco said the shift could be attributed to two factors, the first was the creation of the euro itself and the dissolution of other European currencies that were subsequently replaced by the euro.

The second and more recent factor, Tetangco said, was the weakness of the dollar itself which naturally triggered some shift into the Euro since central banks would want a prudent mix of currencies in their international reserves.

Tetangco revealed that Euros currently account for about 10 percent of total gross international reserves (GIR) or about $1.5 billion to $1.6 billion worth.

In contrast, the Japanese yen account for about 20 percent of total GIR, Tetangco said.

However, Tetangco said the shift to Euro as a result of the weakening dollar was not likely to be prolonged or exaggerated because the market was expecting some recovery soon.

"Even if there is no immediate recovery, I don’t think there will be any destabilizing weakness in the dollar or sudden volatility," he said.

Tetangco said the mix of currencies in the GIR depends in part on the outstanding obligations of the government and the currency requirements of the private sector.

As of November, the country’s GIR stood at $15.817 billion slightly (0.6 percent) lower compared to the end-October level of $15.919 billion; although monetary officials expressed optimism that the year-end GIR would be around $16 billion.

The end-November GIR level, Buenaventura said, is adequate to cover about 4.2 months of imports of goods and payments of services and income.

Alternatively, this level is equivalent to 2.6 times the country’s short-term debt based on original maturity and 1.4 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.

The BSP said the country is fast using up its reserves for payments of imports as well as servicing the government’s maturing foreign-denominated obligations.

According to the BSP, the drawdown from the international reserves was particularly strong in the wake of the surge in the prices of oil and oil products.

The country’s thinning international reserves has been the primary cause of the prevailing nervousness among the top three credit rating agencies who have already warned that the Philippines is one of a few countries that face possible downgrade in the next few months.

Moody’s Investment Services, Standard & Poors and Fitch Ratings have all expressed concern over the country’s dwindling reserves in the face of growing debt obligations and less-than-impressive export earnings.

Moody’s, in particular, was concerned that much of the country’s reserves was being filled up with government borrowing instead of generated reserves from export and investment earnings.

Reported by: Sol Jose Vanzi

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