August 24, 2004

MANILA (Dow Jones)--Investors wary of inflation and the specter of higher interest rates sold down Philippine assets Tuesday, a day after President Gloria Macapagal Arroyo spooked markets by saying the country is in a "fiscal crisis."

Finance officials remained on the defensive for the second day, stressing that the Philippines isn't in danger of default or inability to finance its budget deficit.

"Right now, we're not yet in a fiscal crisis," National Treasurer Mina Figueroa said Tuesday. "We're in a painful situation. If we don't push those (tax) measures, then we will get into a fiscal crisis."

Arroyo has proposed tax measures aimed at raising 80 billion pesos ($1=PHP55.975) a year to balance the budget by 2009; the deficit this year is projected to reach PHP197.8 billion. Her remarks Monday were widely interpreted as an attempt to rally support for those fiscal initiatives.

But assurances such as Figueroa's did little to support stocks, bonds or the local currency Tuesday.

"President Arroyo's remarks of yesterday have sent shivers down the spine of many investors," said Astro del Castillo of First Grade Holdings.

Philippine shares closed at their lowest level in a month. The 30-company Philippine Stock Exchange Index fell 34.17 points, or 2.2%, to close at 1542.01, after shedding 0.4% Monday.

Telecom blue chips, having provided a steady boost to the market in recent days, led Tuesday's declines. Shares in cellular telephone operator Pilipino Telephone Corp., or Piltel, fell 8.5%, after rising steadily in the past several sessions. Globe Telecom Inc., the most actively traded stock, dropped 3.5%, while Philippine Long Distance Telephone Co. declined 1.6%.

Meanwhile, the peso closed at its lowest level since July 29, as investors worried about oil-driven inflation and higher interest rates added to momentum from companies buying dollars to pay debts and import products, traders said. The dollar ended at PHP55.975, its high for the day, up from PHP55.85 Monday.

The country's central bank is expected to hold interest rates steady at its monthly meeting Thursday. But some analysts - eyeing Philippine inflation, which accelerated in July at its fastest pace in nearly three years due to high oil prices - expect the bank to tighten monetary policy soon as oil-price rises begin feeding through to broader inflationary pressures.

"I would think that the central bank will raise interest rates by the fourth quarter...given that it has an inflation targeting framework," said Sameer Goel, an economist at Bank of America in Singapore.

Meanwhile, at an auction of four-year treasury bonds, the National Treasury had to reject some bids to temper a rise in the coupon rate, as investors demanded a higher premium amid worries over the fiscal situation. The coupon rose to 11.75% from 11% previously.

The Treasury's Figueroa noted that even before Arroyo made her "fiscal crisis" comment Monday, government securities' yields had been on the rise due to inflation concerns.

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