Experts discount the likelihood of the peso strengthening beyond P42 per dollar by the end of the year despite the continued flow of foreign capital into emerging markets like the Philippines and the bloated state of the country’s foreign-currency reserves.
The investment-banking firm Barclays Capital, in a paper made available to financial reporters, said while the country’s long-standing balance of payments surplus supports an appreciating peso, the Bangko Sentral ng Pilipinas (BSP) was not likely to support a strengthening beyond P42 per dollar at the Philippine Dealing and Exchange Corp. or Pdex, the local-currencies exchange.
“Our sense is that the BSP believes that robust balance of payments picture is supportive of [the peso’s] appreciation. However, the BSP’s preference remains to be in the middle of the Asian currency spectrum, rather than an outperformer. Our year-end USD/PHP forecast stands at P42 and our 12-month forecast is P41.50,” Prakriti Sofat, vice president and lead economist in Asia at Barclays Capital, said.
In an environment with a steady inflow of foreign capital, the local currency becomes buoyant and local asset prices rise.
But BSP Governor Amando M. Tetangco Jr. has kept the forecast strength of the peso unchanged of between P42 and P45 per dollar.
On Friday the local currency averaged 17.1 centavos weaker to P42.498 per dollar from previous day’s P42.327 even though the volume of trades slowed to only $752.8 million from $1.09 billion the day before.
Sofat, however, anticipates a further strengthening of the peso over the next 12 months to more or less P41.50 per dollar. The lady economist noted that the BSP has sought more transparency in the manner by which local banks engage in nondeliverable forwards or NDF, which are, in essence, a tool to shield themselves and their clients from exchange-rate fluctuations.
Tetangco previously said recent rules mandated the banks to disclose such key elements as volume and direction of NDF transactions so the monetary authorities could better determine that speculative play is not behind any volatility that may be detected.
According to Sofat, the BSP was able to book NDF worth $15.9 billion at end-July, which was lower than similar transactions at the peak of NDF activities in April this year totaling $16.6 billion. The all-time peak NDF activities in the Philippines involved $23.3 billion worth of transactions in October last year.
Meanwhile, the financial services group Credit Suisse ruled out any adjustments in the policy rates of the BSP between now and the rest of the year but acknowledged that one may be adopted early next year.
Its analysts believe inflation, averaging 4.3 percent in the first seven months, would likely edge up in the coming months but in increments that should prove not worrisome or sufficient to provoke a change in the monetary settings.
“An unfavorable base effect in October is likely to mean that year-on-year inflation might move a bit higher from August’s 4.7 percent even if, in month-on-month terms, the CPI increases at a rate not exceeding the historical trend average. In early 2012 we’ve got a 25 basis point hike penciled in since domestic rice prices may move up with a lag in response to the recent surge in global rice prices and there are pending upward adjustments to some transport fares [related to the removal of subsidies for MRT fares and imposition of a 12-percent value-added tax on road toll fares],” Credit Suisse said.
It also said the BSP may adopt liquidity-related adjustments in the name of prudence as domestic liquidity levels continue to be large.
But while the benchmark lending rate may post adjustments in the months ahead, the policy rates of the BSP, set at 4.5 percent for borrowing and 6.5 percent for lending, will not likely be touched, Credit Suisse analysts said.
