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Philippines central bank focuses on improving dollar liquidity


October 28, 2008

Philippines central bank focuses on improving dollar liquidity
The Philippine central bank is studying a proposal to lower the limit on banks' open foreign exchange position to prevent capital flight and ease the pressure on the weak peso, Reuters quoted the bank as saying Monday.

"It was mentioned but it's not urgent," central bank governor Amando Tetangco told reporters after an informal monetary policy meeting. "There's nothing definite."

Tetangco said the central bank continued to study various measures aimed at improving dollar liquidity in the market.

The proposal aimed to lower banks' dollar overbought and oversold limits, or the ceiling on allowed foreign currency purchases and sales from the electronic dealing system, to $20 million from the current $50 million or 20 percent of unencumbered capital, whichever is lower.

The current ceiling was one of several foreign exchange liberalisation measures imposed by the central bank last year when the country enjoyed hefty dollar inflows that helped the peso end the year as Asia's best performing currency.

But the peso has lost 16.3 percent so far this year and is now the region's third-worst performer as risk averse investors pulled out their holdings from emerging markets.

The central bank has discussed the plan to lower the limit on banks' foreign exchange positions with the Bankers Association of the Philippines, which groups the country's over 40 commercial banks. But the plan has met opposition from bankers, who said the move would only worsen speculative trading in the market.

"Clamping down now will only further scare the market," a treasury official from a foreign bank said.

"The proposed limit is very small," the official said. "If you have a foreign investor wanting to bring out $30 million, instead of sourcing it from one bank, the investor has to use several transactions in several banks and that will exacerbate the foreign exchange pressure."

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