British banking giant Hong Kong and Shanghai Bank (HSBC) sees the peso strengthening to 37.50 against the dollar this year and further to 35.50 to $1 next year as the Bangko Sentral ng Pilipinas (BSP) is likely allow the local currency to appreciate further to cushion the impact of imported inflation brought about by rising global oil and food prices.
“We believe the peso will end the year at 37.50 per dollar. By 2012, it will be 35.50 per dollar. The growth in the Philippines is strong, and the foreign exchange should reflect that,” visiting HSBC economist Frederic Neumann said at a press briefing last Feb. 16 in Manila.
The Hong Kong-based economist sees the peso appreciating steadily at P40.50 to $1 in the first quarter, 39.50 in the second, 38.50 in the third, and P37.50 in the fourth quarter of this year.
Sen. Ralph Recto foresees and even stronger peso at less than P35to the dollar this year once the central bank raises its key policy rates from record lows to tame inflation. The BSP has kept its key policy rates unchanged since July 2009 and will review them when the policy-setting Monetary Board meets in March.
What is good about a stronger peso, Recto said, is that it could offset the impact of higher fuel prices as social and political unrest in the Middle East and North Africa disrupt oil supplies and will likely continue in the coming weeks. A rise in fuel prices will spur inflation higher, he said.
“In layman’s terms, when peso is strong, there would be fewer pesos needed to import fuel which we pay in dollars, and this should trigger similar downtrend in prices of fuel and food,” Recto explained.
eumann explained that strong capital inflows to emerging markets including the Philippines as well as the robust remittances from overseas Filipinos would continue to support the local currency.
Latest data show that the country’s gross international reserves (GIR) surged 36.8 percent to a record level $62.371 billion last year from $45.03 billion in 2009 while the balance of payments (BOP) surplus more than doubled to hit a new record level of $14.4 billion from $6.42 billion in 2009.
Record-high in 2010
OFW remittances likewise grew by 8.2 percent to hit a record-high of $18.76 billion last year from $17.35 billion in 2009, exceeding the revised growth forecast of eight percent set by the BSP.
“I would think that as growth becomes more entrenched, BSP should allow the peso to be determined by the market. Given our forecast for growth and inflation, BSP is likely to let the exchange rate do the lifting,” Neumann said.
The bank recently raised its gross domestic product (GDP) growth forecast for the Philippines to five percent instead of 4.7 percent this year and to 5.8 percent next year. The country’s GDP growth surged to its fastest in more than three decades after expanding by 7.3 percent last year from 1.1 percent in 2009.
Another bright spot
HSBC economist Sherman Chan said in a study that another bright spot is the country’s external position that remained on a firm footing buoyed by rising reserves and steady growth in equity flows.
“That said, the economy remains vulnerable to rising capital inflows and ensuing appreciation pressure on the peso. The former may fuel asset inflation; the latter could hurt export competitiveness,” Chan added.
HSBC sees inflation climbing to 4.4 percent this year and 4.8 percent next year from 3.8 percent last year. The BSP expects inflation to average 4.4 percent instead of 3.6 percent this year and 3.5 percent instead of three percent next year but still well within the target of three percent five percent between 2011 and 2014.
Neumann expresses concern on the possibility that the BSP would keep interest rates at record lows despite the risk of higher inflation in the coming months.
“Every central bank in East Asia, except BSP, has raised its interest rates. Unless interest rates go up, there will be a danger of inflation,” he added.
$1.7-B in December alone
Central bank data showed that money transfers by OFWs also reached a new monthly record of $1.694 billion last December, up 8.1 percent from December 2009, which eclipsed the $1.673- billion record booked last October.
The amount of remittances in 2010 topped the revised 8 percent growth forecast by monetary authorities, with the BSP initially saying the amount would likely grow by 6 percent.
“The 2010 level slightly exceeded the BSP’s forecast of $18.7 billion, or an 8.0 percent year-on-year growth for the year,” said BSP Gov. Amando Tetangco Jr.
Tetangco said remittances jumped by $1.415 billion from the previous record of $17.348 billion in 2009 as the money sent home by sea-based OFWs went up by 11.9 percent while that of land-based workers increased by 7.2 percent.
“The major driving factors that helped accelerate the growth in remittances were the diversity of the destinations and skills of overseas Filipinos combined with the expanding network of bank and non-bank service providers both here and abroad to capture a larger share of the global remittance market,” Tetangco explained.
He cited the steady improvements on the variety and coverage of global remittance networks that have enabled more OFWs to send remittances at a more affordable cost, including web-based services, automated teller machines, as well as reloadable or reusable cash cards.
“The continuing innovation of financial products and services being offered in the market to facilitate money transfers have likewise contributed to the resilience of remittances throughout the year,” Tetangco said. (Culled from newspaper reports)