Philippine Peso, Bonds Decline After European Rating Downgrades

The Philippine peso fell the most in more than a week after credit-rating cuts in Europe damped demand for emerging-market assets. Government bonds declined.

The nation’s benchmark stock index declined after Standard & Poor’s downgraded nine euro-area countries including France, increasing concern Europe’s debt crisis will hurt the global economy. Bangko Sentral ng Pilipinas will monitor the situation in Europe, “will be watchful of bank exposures” to the region and ensure policy settings will support inflation and growth targets, Governor Amando Tetangco said in an e-mail yesterday.

“Downgrades in Europe are affecting all markets at this point,” said Rafael Algarra, executive vice president and treasurer at Security Bank Corp. in Manila.

The peso declined 0.4 percent to 43.878 per dollar in Manila, the biggest drop since Jan. 6, according to Tullett Prebon Plc. The yield on the 6.375 percent January 2022 bonds rose three basis points, or 0.03 percentage point, to 5.18 percent, according to Tradition Financial Services.

Bangko Sentral will cut its overnight borrowing rate to 4.25 percent from 4.5 percent on Jan. 19, 11 of 14 economists predicted in a Bloomberg News survey, with three forecasting no change. Policy makers implemented two interest-rate increases and twice raised the reserve-requirement ratio in 2011. The last interest-rate reduction was in July 2009.

“The market has priced in a 25 basis-point cut and if that doesn’t happen, there may be some negative reaction,” Algarra said. “There’s been a significant run on bonds and there’s a tendency for investors to take profit.”

Inflation Risk

Inflation may quicken on possible oil supply disruptions in the Middle East, Tetangco said in a mobile phone message today. Consumer-price gains will still average within target, the governor said. The inflation rate dropped to an 11-month low of 4.2 percent in December, official data showed Jan. 5. The central bank aims to keep the pace of price gains between 3 percent and 5 percent until 2013.

Iran has threatened to shut the Strait of Hormuz, a transit route for about a fifth of global oil trade, in response to international sanctions on its exports. The Philippines imports almost all its oil requirements.

Overseas remittances rose 10.6 percent in November from a year earlier to $1.78 billion, the central bank reported today. Money sent home by more than 8.5 million Filipinos living overseas increased 6.2 percent in October.

The peso will probably strengthen to the “low to mid 43 level” by the end of the first quarter, Algarra said. There are still more dollars coming in than flowing out, he said.

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