MANILA, March 1, 2006
 (MALAYA) BY MAX ESTAYO - Analysts warned the longer the state of emergency is enforced the more damaging it is to the economy.

Union Bank of Switzerland said the ‘immediate lifting’ of the rule, which President Arroyo imposed on Feb. 24 to curb opposition to her government, is the only way to bring normalcy to jittery markets.

"A prolonged state of emergency, which some perceive could curtail civil liberties, may lead to an increase in opposition to President Arroyo and could damage the economy," said Jody Santiago, analyst at UBS.

ING Bank said the latest political drama draws parallels to the July 2003 Oakwood mutiny in which investors are left guessing whether the "sorry episode" will result in a "protracted slide in financial assets" or "another short-lived buying opportunity. (quick gains from playing the stock market)."

"The answer depends on how quickly President Arroyo can get things back to normal. That, in turn, requires the speedy lifting of Proclamation 1017 and the President’s subsequently looking firm against conspirators without appearing paranoid," said Tim Condon, analyst at ING Bank.

Analysts said President Arroyo has not fully used the powers made available to her by the presidential proclamation, which invokes a provision in the Constitution allowing the President to suppress rebellion.

But analysts said that instead of quelling the discontent of Anti-Arroyo forces, these moves are further fuelling hostility against her.

"If anything, we think this episode will weaken President Arroyo further," said Jojo Gonzales, analyst at Philippine Equity Partners.

Gonzales said the latest political tension should "galvanize" Congress into moving for the reforms in the Constitution, including the proposed shift to the parliamentary form of government.

But in the meantime, while the issues are not resolved, the markets will remain jittery.

"The markets would remain nervous for as long as the state of emergency is in place and investors will likely be sellers into any bounce," Gonzales said.

ING Bank said the latest political episode justifies the decision of Moody’s Investors Service to retain its negative outlook on the country’s rating, concerned as it is of the unresolved political crisis that may down the line stall the implementation of fiscal and economic reforms.

The imposition of state of emergency, the investment bank said, had the "expected chilling effect on foreigners."

But while analysts are wary of the impact of the emergency rule, they expect the President to sail through the crisis.

"There is a good probability that President Arroyo will weather the storm and lift the state of emergency soon. Therefore, market weakness could lead to opportunities," UBS said.

UBS sees the likelihood of the President staying in power with the military behind her and the middle class not inclined to support any military adventurism at this point.

Moreover, the investment bank said there is no alternative to Arroyo and that the business community sees the economy moving forward under her.

Malacañang said it had planned to lift the state emergency rule early this week but changed its mind after the leader of the elite Marines dropped its allegiance to the President.

Analysts said the imposition of state of emergency shows just how serious the current situation is.

Unlike past coup attempts, analysts said, the latest threats will have more lasting impact and underline the vulnerability of economic reforms to political developments.

Meanwhile Finance Secretary Margarito Teves said that plans to improve the country’s finances would be more difficult after Arroyo invoked emergency rule. "It will probably make it a little challenging at this point in time," M Teves, who took up his post in July as Arroyo’s fifth finance secretary in five years said.

On Monday, the peso fell to its lowest level against the dollar in almost a month at 52.30 before recovering to end at 51.96, stronger than Friday’s close at 52.20.

The currency had hit a 3-½year high of 51.42 per dollar two weeks ago.

The main stock index closed up 0.94 percent regaining nearly all the ground lost on Friday when Arroyo declared emergency rule to confront what she said was a conspiracy by political enemies, communists and "military adventurists".

Chief News Editor: Sol Jose Vanzi

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