, 2010 (STAR) By Lawrence Agcaoili  - The peso fell to its weakest level in 12 weeks after testing the 46 to $1 level yesterday on concerns about the sufficiency of the bailout package put up by the European Community and the International Monetary Fund (IMF) for Greece that could lead to a contagion that would affect emerging markets including the Philippines.

The peso touched the 46-to-$1 level before shedding 37 centavos to close at a 12-week low of 45.99 to $1 from Wednesday’s close of 45.62 to $1.

It opened weaker at 45.730 to $1 before hitting an intra-day low of 46.130 to $1.

A total of $1.322 billion changed hands yesterday at the Philippine Dealing and Exchange Corp. compared to Wednesday’s volume of $918.76 million.

Currency traders said the Bangko Sentral ng Pilipinas (BSP) sold dollars yesterday to support the peso, which was hurt by the eurozone debt crisis, traders said.

The traders pointed out that the central bank sold dollars close to the 46 to $1 level to temper the slide of the local currency.

BSP Deputy Governor Diwa Guinigundo told reporters that the peso movement was a short-term reaction to what is happening in Europe as doubts have been cast about the sufficiency of the package put up by both the European community and the IMF.

“Financial markets are definitely nervous about this particular issue of sovereign indebtedness and therefore we are now seeing potential and possible contagion not only around Europe but even in emerging markets including the Philippines. In fact, if you look at the trends of exchange rate movement yesterday I think there are only one or two currencies which were not affected. All the other currencies were affected including the Philippine peso,” Guinigundo explained.

He said the package put up by the IMF and the European community would be enough to buy Greece and other affected countries time for the next three years.

However, he added that the package would be dependent on the ability of Greece and the other affected European communities to put up a fiscal consolidation program.

“If you look at some of the numbers assuming that they succeeded in putting down or reducing their deficit to gross domestic product ratio from double-digit to three percent in the next few years their debt to GDP ratio will continue to be alarming at more than 140 percent of their GDP so you could just imagine the impact of the possible debt blowout to risk aversion,” he warned.

The BSP official was quick to point out that the strengthening of the peso against the dollar was brought about by the country’s strong external payments position due to strong overseas Filipino workers’ remittances, recovering export as well as robust business process outsourcing and tourism receipts.

“The exchange rate or peso maybe expected to appreciate not only because of market sentiment but also because of fundamental reason. Particularly from bigger inflows coming from the capital account,” he said.

According to him, the steady inflows would come from the capital account particularly from strong foreign direct investments (FDIs) and robust portfolio investments.

“I am not sure if the BSP needs to support the peso because year to date the peso continues to appreciate and the peso reflects the resiliency of the Philippines’ external payments postion. The bsp does not support a particular rate for the peso we do allow market forces to determine the level of the peso. What we want to minimize is the volatility of the exchange rate,” he said.

BIZ OPINION: By Roberto R. Romulo

ASEAN expectations of Europe FILIPINO WORLD VIEW By Roberto R. Romulo (The Philippine Star) Updated May 21, 2010 12:00 AM

Europe’s recent travails have been of keen interest to us in Asia, especially as they triggered talk of a recurrence of the financial meltdown of 2008. So it was with both eagerness and curiosity that I agreed to take part last May 13 in a panel discussion on the subject of “Asian Expectations of Europe’s Role in the Global Economy” at the Asia Pacific-German Conference in Singapore. The panelists included German Minister of Economics and Technology, Rainer Bruderle, Dr. Jurgen Hambrecht, Chairman of BASF, Singapore Minister Lim Hng Kiang, Dr. Surin Pitsuan, ASEAN Secretary General, and the moderator was David Marsh of the London and Oxford Group. The audience consisted of 760 CEOs and businessmen, mostly German. Below, I reproduce parts of my remarks and some other thoughts on the forum subject.

In addition to having an abiding interest in European affairs, I served as the Philippine ambassador to the European Commission in Brussels and later as Philippine foreign minister in the late ‘80s and early ‘90s. During that period of public service, I witnessed first-hand the opportunities offered by the creation of the “Single European Market” even as we, in ASEAN, expressed concern about a potential “Fortress Europe.” And I had the good fortune of having the opportunity to contribute to promoting a closer economic partnership between Europe and the Philippines.

From an ASEAN business perspective, the following bears restating at this time of anxiety about Europe’s role in the global economy:

First, Europe remains a major market and principal source of foreign direct investments (FDI) for ASEAN. It seems fashionable now to talk about a rebalancing of East Asia’s economies as key to global economic stability – in other words they should consume more and export less — so they don’t keep accumulating surpluses. This is already starting to happen, but how fast the process will be will depend on how fast these countries grow more affluent. While the dependency of Asian economies on exports and FDI vary from country to country, all of them need both in large doses. For small economies like Singapore and Brunei, they simply have no choice but to turn to the world market. ASEAN economies have the EU as their leading market and primary source of investments, and for the rest, a significant source of both. The EU needs to keep its markets open so that ASEAN economies could continue to grow and in turn become strong consumers of EU goods and services.

Second, European companies have in effect been instrumental in promoting ASEAN as a single market. The EU is ASEAN’s biggest investor and its third largest trading partner. Even so, the ASEAN-EU relationship has much farther to go to reach its full potential. The business sector, not government, has become the principal actor in this integration, not only between the EU and ASEAN, but within ASEAN itself. Indeed a significant part even of intra-ASEAN trade is driven by multinationals, many of them European. A survey conducted by the European Commission Asia Invest Programme some years ago revealed that European giants like Unilever, Siemens, Alcatel-Lucent, Nestlé, Philips, Daimler Ag, Shell, Thyssen, L’Oréal, and ST Microelectronics have shifted from plant location based on “country-targeted units (one or more production units manufacturing a range of products to be sold locally), to a product-targeted structure, where regional units are producing the same goods (with corresponding economies of scale) in dedicated plants, to be sold across the whole ASEAN market.”

But business can only go so far in playing this role without active encouragement from government through appropriate policies and incentives. The dynamics of global trade now derive from the value chains and network driven operations of multinationals – given the advances in logistics and IT – where location is determined by who does what best. It behooves both ASEAN and Europe to eliminate restrictions on the movement of goods, services and investments at the border and now increasingly more important as tariff barriers go down, to promote ease of doing business through regulatory reform. Transaction costs now account for a greater percentage of the final price now that everything else is going down.

Finally, both sides – ASEAN and Europe – must overcome their trepidation and idealism to develop closer economic partnership. It’s time for both sides to pursue aggressively Free Trade Agreements between them.

There is a precautionary tale in all of this however. It may seem ironic to talk today about Europe’s role in the global economy when up until last Monday it didn’t even look capable of fixing its own economic and financial mess. The situation was so alarming that many thought that the Euro Zone was in peril and that the disintegration of the European Union was imminent.

Rodrigo de Rato, managing director of the IMF, saw the crisis coming five years ago. He said that Europe had to resolve some fundamental structural weaknesses if it was to help – rather than burden – the global economy. He warned of looming fiscal problems arising from an aging population and its generous welfare and employment policies in the midst of slowing growth. He noted the lack of transparency and coordination of fiscal policies. He called for structural reforms that would address supply-side constraints and raise domestic demand. By addressing these issues, he said, Europe would then be able to head off looming fiscal problems, improve employment, and promote social stability.

This did not happen and the rest as we know is history, and one that is still unfolding. But I am a firm believer that Europe will sort itself out and figure a way to get out of this mess. The logic for all European countries to act together for their own individual good remains compelling even to the increasingly skeptical German taxpayers. Emergency measures – of unprecedented magnitude – have stemmed the liquidity crisis in Greece, but its long term solvency evidently calls for greater coordination of economic and fiscal policies – a move which some see as a step closer to common economic governance. In other words this means subsuming national economic prerogatives to the regional interest. Whether there is the political will to carry this out remains to be seen.

For several decades, Europe has been the model for ASEAN in equating regional interest with national interest. Now, many in our region are asking: Will Europe continue to follow this policy? Will it finally have the political and economic leadership that will make the EU a desirable and valued global partner?

The issue of European economic leadership in the global economy is important because our world today has never been more interdependent than it is now. With its innovative companies and affluent consumers, Europe will continue to exert a significant influence on the world economy. A weakened European economy impacts greatly on the rest of the world, Asia especially.

Chief News Editor: Sol Jose Vanzi

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