Jitters Over PAL Seen Hounding FX Market

Business World

Monday, September 21, 1998

After a dull trading on the foreign exchange market last week, traders are bracing for action this week, largely due to investor jitters over beleaguered Philippine Airlines (PAL).

Traders said all eyes will be on the country's 57-year-old flag carrier which is expected to close down midnight of Wednesday.

At the very least, traders are worried that investor concerns over PAL will add to speculative pressures on the peso, which has been sensitive to developments in the dollar-yen exchange rate and the peso-dollar parallel market.

If PAL stops flying, even more pressure is expected to bear on the currency, given banks' $2.1-billion loan exposure to the airline.

These jitters were already evident in the Philippine Dealing System (PDS), the country's electronic currencies exchange, last Friday, traders said. The peso averaged at P43.891 against the USdollar, down from P43.780 the other day. Volume jumped to $142 million from $97.5 million, previously.

Traders said the peso reached as high as P44 to the dollar last Friday due to concerns over PAL before closing at P43.91 at the end of trading.

There was also weak dollar demand from corporations last Friday, said traders.

One foreign bank treasurer, on condition of anonymity, said there may be increased dollar demand from investors pulling out of the stock market due to worries about banks' loan exposure to the airline. "The demand might come from those getting out of bank stocks that loaned to PAL," he said.

Traders said PAL's troubles may also lead to increased dollar buying by banks, since most of the airline's loans are denominated in dollars.

If the airline shuts down its operations, analysts see more problems for the local economy. In addition to the loss of an estimated 9,000 jobs, PAL's closure will also affect domestic travel and the flow of goods across the country.

"If PAL closes down, it would add further to the gloom-and-doom situation," the bank treasurer said.

But he said these concerns may be mitigated if other local carriers are able to step in quickly enough to fill the void if PAL closes down.

"The competition is there, it's just a question of how fast." he said.

One local bank trader said the PDS will likely react to developments on the secondary market when the difference between the two rates hits 20 centavos or more, as seen last Friday.

"If there is a big difference, banks will start buying dollars and push the peso down," he said.

Analysts said expectations that Treasury bill rates will fall anew at today's auction may not aid the softening peso. - Raymond G. Falgui