, January 31, 2005
(STAR) By Des Ferriols -  As the peso rallied towards P54 to $1 at the close of last week, the Bangko Sentral ng Pilipinas (BSP) said it was not ruling out the possibility of the peso appreciating to P52 to $1 if the government can deliver key economic reforms this year.

The BSP’s official projected exchange rate is P55 to P57 but BSP Governor Rafael Buenaventura told reporters over the weekend that the exchange rate could go down to as low as $52 to the dollar by yearend.

"If we are able to do everything we said we will do, why not?" Buenaventura said. "We have to lay down these fiscal, financial and capital market reforms."

Buenaventura said it was critical for the government to proceed aggressively with the privatization of its power generation companies as well as to persuade the Energy Regulatory Commission to raise power rates by another 98 centavos in order to improve the balance sheet of the National Power Corp.

"Being able to do all these things will create the ideal condition for more investment inflows, better access to better credit terms when the government borrows and the liberation of a bigger portion of the budget for development spending," he pointed out.

Based on the historical relationship between the Philippine peso and the Thai baht, Buenaventura said the peso should be at around P52 to $1 considering that the Thai baht was already at B40 to the dollar.

"At that exchange rate, we’d still be competitive," Buenaventura said. "Imagine the difference it would make if we didn’t need so much money to service our debts and if we had a capital market deep enough to supply the funding requirements of the corporate sector."

According to Buenaventura, none of the tasks laid down by the Arroyo administration was impossible or even improbable. "The most irritating part about this whole thing is precisely the fact that all these things are doable."

The Arroyo administration, however, has already faltered after failing to reform the excise tax structure on alcohol and tobacco products. In the end, finance officials admitted that the government had to give up its original plan.

Instead, the Arroyo administration had to agree to a marginal adjustment in the existing rate in order to avoid shaking up the market shares of existing market players.

Because of the failure to go for full excise tax reform, the Arroyo administration forced to get its incremental revenue from other tax measures, specifically the increase in the value added tax rate.

Buenaventura, however, said even tax reforms were only one aspect of the whole effort. "We have to deepen the capital market, we have to strengthen our financial regulatory regime, in short, we have to align ourselves with the rest of the world."

Buenaventura said that even with the initial reforms, market reaction was swift. Portfolio investments for the first three weeks of the year surged significantly.

The peso had been on an uptrend all of last week, appreciating to P55.34 in the beginning of the week and on to P55.15 at mid-week before finally closing at P55.09 to the dollar on Friday.

The peso gathered strength all throughout the trading session as the market basked in a series of good news beginning with the successful global sovereign bond issue that raised $1.5 billion for the Arroyo administration, $500 million more than originally planned.

The market was also elated over the passage by the House of a bill that raises the value added tax from 10 percent to 12 percent, a move that was expected to wipe out a considerable chunk of the government’s fiscal deficit.

Reported by: Sol Jose Vanzi

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