The local currency the peso was seen to end the year much stronger than earlier believed as reforms help boost economic momentum and capacity for expansion, an international bank said.
In assessing the local markets, HSBC revised the forecast exchange rate to P45 per dollar, from earlier forecast of only P48.5 per dollar.
“One of our main reasons for turning more positive on the currency is because of the new government’s apparent willingness to push ahead with large-scale reforms,” HSBC said, citing President Duterte’s choice of Cabinet men widely regarded as business-friendly.
“[Finance Secretary] Carlos G. Dominquez III, a businessman who has many leadership roles in a variety of major Philippine companies, has been appointed finance secretary. Meanwhile, Benjamin E. Diokno, an economist who specializes in fiscal policy was also secretary of budget and management during Joseph Estrada’s rule, has been named head of the budget and management department,” HSBC said.
Also, the global bank said there had been discussions on lifting the cap on foreign ownership, simplifying the tax system and boosting infrastructure spending.
“This reform story has already been gaining notable traction in the markets. Foreign portfolio flows have surged beyond $1.5 billion following the election and if the Duterte administration is successful in implementing its reform plans, then capital inflows will continue to be supportive for the peso,” HSBC said.
On Wednesday the local currency strengthened to P46.525 dollar, from the P46.46 per dollar the previous day, although the total volume traded was broadly unchanged at $464 million
HSBC said the main risk to their forecast was if the new government fails to deliver on its reform promises.
Also cited as risk to the bullish outlook was the country’s narrowing current-account surplus.
“With exports falling, imports climbing and remittances growth flatlining, the current-account surplus, which has long supported the peso, is beginning to narrow. The government’s plan to significantly increase expenditure on infrastructure products should also keep import growth elevated, weighing further on the current-account surplus,” HSBC added.