(STAR) By Des Ferriols - The economy remains sound despite an unfolding global financial crisis, and domestic liquidity is adequate, with steady inflows of dollars from overseas Filipino workers, Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said.

Wild swings in Philippine markets have been largely contained, helped by the limited exposure of domestic banks to bankrupt Lehman Brothers, Tetangco said.

“The country’s macro fundamentals remain sound and the economy has proven to be resilient,” Tetangco told a Senate hearing. “We have sufficient liquidity from other sources of foreign exchange.”

He said strong remittances averaging more than $1 billion a month from Filipinos working overseas and dollar inflows from foreign parent firms of outsourcing and call center companies are keeping the peso strong.

The recent weakness in the peso was due to market cautiousness on the pending financial bailout plan and high corporate demand from local importers.

“As soon as the details (of the bailout package) come out, that should have a positive impact on financial markets and the peso dollar market,” Tetangco said.

The peso has lost 12 percent so far this year, one of the region’s major laggards, and is reversing its record last year as Asia’s best performer.

Tetangco said. “The market may be experiencing some friction lately in terms of distribution, but I believe the market would be able to sort this out.”

Tetangco declined to say how much liquidity the BSP has so far injected into the system but said the central bank “continues to be in both the spot and swap FX markets, as part of our normal operations to help smoothen volatilities in the exchange rate.”

“We shall also continue to closely monitor developments to see if any further action is necessary on our part,” he added.

In any case, Tetangco said the market’s reaction to the US crisis has been limited so far.

Testifying before the Senate Committee on Banks, Financial Institutions and Currencies, Tetangco said that even during the week when Lehman Brothers collapsed, there was no evidence of either abnormal or sharp reactions in the peso market.

“Among universal and commercial banks, there was a net check deposit of roughly $970 million on September 16 to 17 which was the period when Lehman filed for bankruptcy,” Tetangco disclosed.

“But this was followed by a net check withdrawal of basically the same amount on the 18th,” he said. “Now the effect is that resources were not withdrawn on balance as a result of Lehman’s difficulties. UKBs even closed the week with further additions.”

Tetangco also noted that the peso has already appreciated in reaction to news that the US government was packaging a $700-billion bail-out plan intended to prevent the crisis from spiralling out of control.

“The market today is awaiting the details of the rescue package, which has been called the emergency economic stabilization act of 2008,” he said.

Tetangco also attributed the tightness in the forex swap market to the unusual inflows in 2007 when the Philippines saw huge portfolio investment inflows along with foreign direct investments and dollar remittances.

“There has been some tightness in the liquidity of dollar but this was partly due to what happened in 2007 when we experienced a significant inflow of capital which found itself in the swap market,” he said. “Now that we are not seeing the same amount of inflows — in fact in terms of portfolio investments we have seen an outflow, we have seen tightening dollar liquidity.”

Chief News Editor: Sol Jose Vanzi

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