MANILA, September 21, 2005
 (STAR) By Donnabelle L. Gatdula - Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. said yesterday that an interest rate rise is likely as the peso weakened against the dollar ahead of an expected increase in key US interest rates. "We are still not ruling out (a rate hike). We are looking at the overall picture," Tetangco said.

The bankís policy-making Monetary Board is to hold its monthly meeting on Thursday with pressure building for a rate increase. The peso slid closer to its record low of 56.45 against the dollar, hitting 56.37 during intraday trading before recovering to end the trading session at 56.235 to the dollar yesterday.

"The interest-rate differential (the United States) and the growth in liquidity are two factors we are looking at. We are assessing the impact of these factors on future inflation," Tetangco said. He said a narrower interest-rate differential between the Philippines and the US, where the Federal Reserve could raise key policy rates at its meeting later today, could result in a shift in investments in favor of dollar assets. This possibility may then put pressure on the peso, Tetangco added.

Some economists expect the BSP to raise its key interest rates by 25 basis points on Thursday. It would be the second increase this year. The bankís overnight interest rates now stand at seven percent for borrowing and 9.25 percent for lending, after an increase of 25 basis points in April, the first adjustment in five years.

Headline inflation jumped to 7.2 percent from a year earlier in August, exceeding the BSPís forecast range of 6.6-7.1 percent. It brought the eight-month average rise to 8.1 percent, much more than the governmentís full-year target of five to six percent. "We are assessing the implications on future inflation," Tetangco said when asked if the Monetary Board (MB) will come up with a decision on their policy rates within the week.

The BSP chief reiterated their earlier stance that they acknowledged the possibility of adjusting their rates if necessary. "We are not ruling out (moving our rates) between now and before the end of the year," he said.

Another BSP official explained that a rate increase could create a negative impact on the economy. "If the real interest rates will go up, the cost of borrowing will also go up thus, discouraging investments," the official said.

A Merrill Lynch study earlier said that BSP may likely increase its overnight interest rates before the yearend to cushion the possible impact of rising consumer prices. "We expect the BSP to raise its reference interest rate further by the end of the year, which would send a credible signal that the monetary authorities are committed to tackling inflationary pressures," the investment research firm said. Merrill Lynch noted that "while accelerating inflation has been mainly fueled by supply-side factors, including high oil prices, there is a clear risk that price pressures could spread, leading to an upward shift in inflationary expectations."

It said while the BSP has been on the conscious look out for these inflationary pressures, it may also consider using interest rates as a tool to cushion the impact of a rising inflation rate. "The authorities are aware of these risks and the central bank moderately tightened its monetary policy through an increase in the reserve requirement (to 21 percent from 19 percent) following an interest rate hikes in April. This is a step in the right direction, but may not be enough," it said.

RP interest payments jump 20% to P203.5B in first 8 months By Donnabelle L. Gatdula The Philippine Star 09/21/2005

The countryís interest payments rose by 20 percent to P203.5 billion in the first eight months of the year from only P168.9 billion in the same period in 2004, the Bureau of Treasury (BTr) reported yesterday.

Interest payments account for the bulk of the governmentís total expenditures which hit P610.97 billion for the eight-month period.

For the month of August alone, the National Government spent P29.3 billion for interest payments alone, an increase of 50 percent from P19.4 billion in the comparative period last year.

Earlier, Budget Secretary Romulo Neri, in his mid-year economic report, said NG expects a much higher interest payments this year due to the assumption of the debts of the state-owned National Power Corp. (Napocor).

NG decided to absorb all the P200-billion government-backed bond issuances of the cash-strapped Napocor last year.

The move to absorb the Napocor debts is consistent with Executive Order (EO) 370 which authorizes the direct assumption by the NG of a portion of financial obligations of Napocor in accordance with Section 32 of the Republic Act 9136 or the Electric Power Industry Reform Act (EPIRA) of 2001.

The absorption of the said loans was also approved by the Department of Energy (DOE), Department of Budget and Management (DBM) and the Department of Finance (DOF).

This absorption of Napocor debts would likewise pave the way for the formal transfer of Napocorís assets and liabilities to PSALM. PSALM is an entity created under the EPIRA to handle the finances and privatization of Napocor.

The signing of EO 370 is also one of the major conditions being asked by Napocor creditors before they approve the transfer of the debts of the state-owned power firm to PSALM.

As proposed by PSALM to the economic managers, the absorption by the NG will be limited to debts contracted by Napocor and will be repaid in accordance with the original schedule for repayment.

President Arroyo signed EO No. 370 last Oct. 12 to effect the direct assumption of P200 billion of the financial obligations of the Napocor.

EO 370 implements the responsibility assigned by Congress to the Executive branch under EPIRA passed in 2001.

Section 32 of the EPIRA explicitly states: "The national government shall directly assume a portion of the financial obligations of Napocor in an amount not to exceed two hundred billion pesos."

The absorption of the P200 billion debts was mandated by Congress in 2001 in recognition of the need for the government to assume part of the obligations of Napocor.

Otherwise, Napocorís entire debt obligations would have been passed on to consumers in the form of higher rates and would have adversely affected the competitiveness of the Philippine economy as a whole and of the industrial sector in particular.

The government was unable to absorb any of the debts of Napocor since 2001 as it was seeking additional revenues to support the absorption.

Under EO 370, the Development Budget Coordination Committee chaired by the DBM will approve the schedule for absorption. The DOF, in consultation with the DBM and the Commission on Audit have identified the specific debts to be assumed and the levels of annual debt absorption..

Chief News Editor: Sol Jose Vanzi

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