Philippines May Lure Funds as Rate Gap Widens, Guinigundo Says

By Karl Lester M. Yap

Aug. 6 (Bloomberg) -- A widening gap between U.S. and Philippine benchmark interest rates will help the Asian nation attract portfolio investments, central bank Deputy Governor Diwa Guinigundo said.

``Risk aversion seems to be keeping foreign capital in so- called safe havens like the U.S. market,'' Guinigundo said in a mobile-phone text message today. ``We expect good fundamentals plus this rate gap to start bringing in foreign capital.''

The Philippine Stock Exchange Index has slumped 26 percent this year and the peso has declined 5.8 percent as investors sold Asian assets on concern accelerating inflation in the region will weigh on economic growth. The gap between U.S. and Philippine interest rates has widened after the Southeast Asian nation raised its benchmark twice in the last two months.

``More foreign funds coming in will help strengthen the peso,'' said Tynee Tan, who helps manage about $1 billion in assets at Rizal Commercial Banking Corp. in Manila. ``A wide rate differential will help keep the attractiveness of Philippine assets.''

The peso jumped 0.7 percent today to the highest in three months.

The Philippine central bank may raise borrowing costs a third time, and that would further widen the gap between U.S. and Philippine benchmark interest rates from the current 3.75 percentage points, Tan said.

The Federal Reserve kept its benchmark interest rate at 2 percent yesterday, and had lowered the measure from 5.25 percent in August 2007 to the current level in April.

Bangko Sentral ng Pilipinas, which next meets to decide on monetary policy on Aug. 28, raised the overnight borrowing rate by half a percentage point to 5.75 percent on July 17 to fight inflation running at the fastest in more than 16 years.

To contact the reporters on this story: Karl Lester M. Yap in Manila at kyap5@bloomberg.net;