July 19 (Bloomberg) -- The Philippine peso will strengthen as high as 52 against the U.S. dollar as President Gloria Arroyo makes progress in cutting the nation's budget deficit, central bank Governor Rafael Buenaventura said.

``I see no reason why the peso can't gain to about 52 to 54 a dollar the moment investors start seeing the government is able to achieve things they say they will achieve,'' Buenaventura, 65, said in an interview in Singapore. There's no speculation against the peso ``at all.''

Arroyo, who was elected to her first full term as president in May elections, pledged in her inauguration speech in Manila on June 30 that the government ``will live within its means.'' The nation's currency declined 4 percent against the dollar in the past 12 months amid the presidential polls and as the government battles to end six years of swelling budget deficits.

The currency traded at 55.935 against the dollar as of 4 p.m. in Manila from 55.995 on Friday, which was the weakest close since June 30, according to Bankers Association of the Philippines. The peso dropped to 56.09 on Friday, its lowest daily-trading level since June 30. It last reached 52 against the dollar in May 2003.

The peso gained 0.1 percent in April through June, ending three quarters of declines, on optimism Arroyo would tackle the fiscal shortfall by improving tax collection, cutting spending and selling unprofitable state businesses.

Arroyo's government last March forecast this year's deficit will be 198 billion pesos ($3.5 billion), about 4.2 percent of gross domestic product.

Half-Year Deficit

On July 14, the Bureau of Internal Revenue said it collected 229.2 billion pesos in taxes during the first half of the year, 2.4 percent short of its goal, making it more difficult for Arroyo to rein in the deficit this year. The budget shortfall reached a record 5.2 percent of GDP a year ago. The Philippines' current debt-to-GDP ratio is the third-worst in Asia after Japan and Pakistan.

Buenaventura said the six-month deficit figure that the Department of Finance will report tomorrow will be ``close to'' the goal of 79.6 billion pesos. ``From what I'm told, the government will meet the target or it'll be a very small excess,'' he said.

The shortfall between spending and income probably widened to 85 billion pesos from 77.4 billion pesos in the five months through May, according to the median forecast of seven economists in a Bloomberg News survey.

`Revenue-Raising Measures'

Arroyo, who won a six-year term, wants to raise taxes to boost revenue by 40 billion pesos a year, said Joey Salceda, a lawmaker and presidential economic adviser, in a telephone interview in Manila two weeks ago. The tax on imported oil will be doubled, tax breaks restricted and higher levies charged on tobacco and alcoholic drinks, he said.

Government debt has risen by two-fifths to 3.4 trillion pesos since Arroyo became president in 2001, according to figures from the Bureau of the Treasury. The deficit last year was almost double the 134.2 billion pesos when Arroyo took office.

On June 14, her administration said it will absorb about 500 billion pesos in debt owed by National Power Corp., or Napocor, a state-owned electricity generator, to make the utility more attractive to foreign investors. The government has been trying to sell the company since 2001.

Investors ``would like to see what bills are going to be filed, particularly on revenue-raising measures,'' Buenaventura said. ``If they see measures on that, you'll begin to see an improvement in the peso.''

`Tighten Up'

Bangko Sentral Ng Pilipinas, the central bank, buys and sells pesos in the foreign-exchange market when it seeks to ``smooth volatility,'' Buenaventura said.

``Intervention has been very sparingly used,'' he said. ``When we feel there are excess pesos in the system, we will tighten up. In February this year, we could see there was a bit of pressure on the peso; we decided to tighten up.''

The central bank on Feb. 5 said it would raise the amount of deposits lenders must set aside as reserves to stem the peso's decline, prompting the currency to rise the most since August. The central bank was concerned that rising crude-oil prices would spur inflation amid the presidential elections, he said.

As the peso fell on speculation former actor Fernando Poe Jr. might be barred from running for president in February, the central bank ``just talked the dollar down and it worked,'' Buenaventura said.

The peso closed at a record low of 56.35 on Feb. 20, a day after police dispersed Poe's supporters as the Supreme Court prepared to hear a petition to ban him from running on allegations he didn't meet citizenship criteria.

Diversified Reserves

The Philippines ``diversified reserve holdings'' by buying Japanese yen and euros, Buenaventura said. The country's overseas borrowings are mostly denominated in U.S. dollars, so the majority of reserves are in the U.S. currency, he said.

``We don't like to have a too-large mismatch between our reserves versus our debt,'' he said.

About $4 billion of the Philippines' $30 billion of U.S. dollar-denominated debt comes due in the next two years, according to the Bureau of the Treasury.

Buying euros ``has paid off because the euro has strengthened since,'' he said, declining to disclose when the central bank began its diversification or what its future plans are.

The euro advanced 10.4 percent against the dollar in the past year. The yen rose 9.4 percent in the same period versus the U.S. currency.

Interest Rates

The central bank will probably leave its key interest rates at 12-year lows until year-end as inflation is expected to be below the bank's 5 percent ceiling, Buenaventura said.

Philippine inflation accelerated at a faster pace than some economists expected in June as higher crude-oil prices drove up transport fares. Consumer prices rose 5.1 percent from a year ago, their biggest gain since October 2001, compared with the 4.6 percent median estimate of six economists in a Bloomberg News survey.

Joblessness in the country will curb consumption and prevent higher consumer prices, Buenaventura said. Philippine unemployment, the highest of 14 Asia-Pacific economies tracked by Bloomberg, rose in April to 13.7 percent, a two-year high.

Policy makers on July 1 kept the interest rate at which the central bank lends to commercial banks overnight at 9 percent and the rate at which it borrows from them at 6.75 percent, both the lowest since May 1992. The levels have been unchanged since a quarter-point cut in July 2003.

Buenaventura votes on interest-rate policy at the central bank's meetings held every four weeks.

``We may have to react next year'' if inflation quickens, Buenaventura said. The governor earlier this month said in a phone interview that the central bank will review the inflation limit for next year.

Arroyo doesn't have to worry about re-election because she has six years, so she has a better chance of implementing measures, Buenaventura said.

To contact the reporter on this story: Christina Soon in Singapore at csksoon@bloomberg.net.

Last Updated: July 19, 2004 04:13 EDT