MANILA, JULY 18, 2006
(STAR) By Des Ferriols - The continued rise in oil prices, triggered by the escalation of violence in the Middle East, caused another disruption in the local financial markets as trading in stocks and foreign exchange turned bearish yesterday.

The peso closed 36 centavos lower at 52.75 to the dollar yesterday, its weakest finish since hitting 52.85 to $1 last July 5.

Trading was edgy, with the local currency opening weaker at 52.45 to the dollar and continued to descend to close at the day’s lowest level.

At the Philippine Stock Exchange the composite index shed 34.94 points to settle at 2,175.21 points.

Following Israel’s attack on Lebanon, oil prices went sky-high once more and it was enough to put a cloud over what could have been a positive impact of the government’s budget surplus in June as well as the decision of the Bank of Japan to raise its own rates.

Crude oil rose for the fifth day, gaining 0.5 percent to $77.40 a barrel in after-hours trading in New York. It rose above $78 a barrel for the first time on July 13 as violence flared up in the Middle East and reports of disruption in Nigeria posed a threat to supplies.

Although the Israeli-Palestinian conflict is very old, indications of Israeli retaliation against Iran and Syria made investors wary that oil shipments would be severely disrupted and cause a spiraling and prolonged round of increases in oil prices.

"The peso reacted just as other currencies increases in oil prices.

"The peso reacted just as other currencies did," said Bangko Sentral ng Pilipinas Governor Amando M. Tetangco Jr.

Stock prices likewise ended lower, hitting a two-week low on growing concerns that record high oil prices will slow economic growth.

Dealers said the downside was supported, however, after news of a budget surplus for a third consecutive month in June encouraged some bargain hunting.

The composite index lost 34.94 points at 2,175.21 after trading between 2,151.26 and 2,208.07. Yesterday’s close was the lowest finish since June 29, when the index ended at 2,084.62. Volume was 1.28 billion shares worth P1.35 billion.

The broader all-shares index fell 16.25 points to P1,364.17.

Losers outnumbered gainers 54 to 23, with 48 stocks unchanged.

The June budget surplus of P12.7 billion helped narrow the budget deficit for the first half of the year to P31.5 billion, much better than the government’s target of P90.4 billion.

This news and the greater flexibility it allows the government in managing its finances helped but overall sentiment was still hit by record oil prices, which threaten to dampen consumption, hurt corporate profits and slow economic growth, dealers said.

"Investors are more distracted with what is happening outside the Philippines, particularly the tension in the Middle East and its impact on oil prices," said First Grade Holdings managing director Astro del Castillo.

"Every time oil prices reach new record levels we see stocks drop,’’ said John Padilla, who helps manage the equivalent of $2.8 billion at the trust department of Metropolitan Bank & Trust Co. "With new developments in the Middle East, we’ve become bearish again.’’

The peso had been appreciating steadily as the US Federal Reserve Board changed its stance and indicated that it would base its future actions on developing macro-economic numbers.

Although the peso is averaging well below the projected 52-54:$1 exchange rate, the BSP has not changed its assumptions precisely in anticipation of disruptions in the world oil market.

The Philippine peso is tagged as the best-performing currency in Asia and one of the best performers in the world but it is still vulnerable to geopolitical disruptions, Tetangco said.

In 2005, the volatility of the peso was recorded at only 1.4 percent, one of the lowest rates in the region.

The BSP said early in the year that the peso would test levels above 53:$1, particularly since OFW inflows would continue to come in during the first quarter of the year and toward the year-end ahead of the Christmas holidays.

At the Philippine Stock Exchange, PLDT, the nation’s largest phone company, fell P55, or three percent, to P1,805, following a three-day, 5.3-percent loss. Ayala Corp., owner of the nation’s biggest builder, largest lender by market value and No.2 mobile- phone operator, lost P10, or 2.6 percent, to P382.50, a two-week low.

The Philippines is among the Southeast Asian nations that stand to lose the most from rising oil prices, according to a note by Macquarie Bank Ltd. released yesterday. The Philippines buys almost all its crude oil from abroad, and a rising import bill may hurt the $98-billion economy.

"The Middle East conflict has increased downside risks," Macquarie economist Roland Randall said. "If this surge in the oil price persists for more than a week or two, it could potentially shift the economic landscape significantly.’’

The Philippine government wants to boost the economy by between 5.5 percent and 6.2 percent this year. Consumer spending, which slowed in the first quarter due to higher taxes, accounts for about two-thirds of the economy.

Bank of the Philippine Islands, the nation’s second-biggest lender by assets, fell P1, or two percent, to P48.50, following a 2.9-percent loss on July 14. SM Prime Holdings Inc., the largest shopping mall operator, lost 30 centavos, or 3.9 percent, to P7.40, its biggest slide since June 13.

Chief News Editor: Sol Jose Vanzi

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