Entrepreneurial Farmer

Ambrosio R. Villorente

Peso Shifts From Strong To Weak Vs. Dollar In 2013

(The Entrepreneurial Farmer yields this space  to the GMA News article which follows.)

 
Financial institutions now see the peso ending 2013 weaker against the dollar compared to last year, a development that bodes well to exports, business process outsourcing (BPO) and overseas Filipinos who send money back to the Philippines.

 
This paradigm shift was brought about by an improving United States economy, which made US assets more attractive to investors, particularly after the Federal Reserve in late May hinted at trimming its bond-buying stimulus as the economy further improves.

 
“A deprecation trend may not be avoided” on stronger dollar sentiment, Bank of the Philippine Islands lead economist Emilio Neri Jr. noted in an e-mail to GMA News Online.

 
HSBC “called for USD-PHP (dollar-peso exchange rate) to move to 43.50 by the end of the year” from a revised 40.2: $1 in May, Dominic Bunning, the British bank’s associate director for Foreign Exchange Strategy in Hong Kong, said in a separate e-mail.

 
Ayala-led BPI revised its 2013 exchange rate projection to P41.50:$1 from P40.50 by year-end, while the Metrobank group’s investment vehicle First Metro Investment Corporation lowered its forecast to P41.43 from P39.50.

 
The peso appreciated by 6.36 percent to end 2012 at 41.05: $1, but Southeast Asia’s best performing currency last year erased gains and has now gone back to the P43 per dollar territory.

 
The prospects of the Fed cutting its $85-billion stimulus as early as this year increased appeal of the US dollar and stunted the appetite emerging market currencies like the peso, Neri explained.

 
“[R]ecent developments have been a reaction to the Fed’s recent comments, rooted in the uncertainties of a sharp pullback of financial stimulus by the Fed,” according to a June 27 research note, “Sit Tight,” authored by Neri and fellow BPI economists Nicholas Antonio Mapa and Robbin Ivory Brillantes.

Positive Effect

Socioeconomic Planning Secretary Arsenio Balisacan said a weaker peso is positive to local industries and families of overseas Filipino workers.

 
“That is good for our competitiveness, by the way... it’s not only good for exports but even for our local industries that compete with imports,” Balisacan noted. “Imports now become expensive than local [products], so there would be more local production and that will create jobs,” he added.

 
Increased purchasing power of OFW-dependent families will spur consumer spending and, in turn, drive economic growth, Balisacan noted.

 
“To a degree the recent weakness in PHP does allow BPO to remain competitive,” Bunning noted.

 
The peso’s weakness, however, highlighted volatility-or sudden ups and downs-in the exchange rate.
But analysts said short-term volatility should not be a cause for worry as the country’s foreign reserves—recorded at $82.9 billion as of end-May—provided Bangko Sentral ng Pilipinas elbow-room to cushion upside risks.

 
“Currently, I would put long-term fundamentals as more important than short term volatility,” Singapore-based economist at Standard Chartered Jeff Ng said in a separate e-mail message.

 
“We still maintain our view that the BSP will take a neutral policy stance over the next few monetary policy meetings. Recent comments from BSP also point to a neutral stance,” he added.

Inflation is not in focus

Analysts see the central bank intervening only to smooth out volatility.

 
“The BSP has likely been smoothing the movements in the PHP and the size of reserves suggests it will be well placed to limit excessive volatility in either direction for the PHP,” said HSBC’s Bunning.

 
Currency traders at local and foreign banks, who requested anonymity to protect their positions in the spot market, said the Bangko Sentral intervene in the market when peso moves by over 15 to 20 centavos—win or lose—within the day.

 
For example, the central bank unloaded almost $600 million when the peso traced a losing streak and hit the 44 per dollar level, one trader said Bunning said adjustments in monetary policy will only be employed should a weaker peso “significantly” stoke inflation or a rise in consumer prices.

 
“At the moment this does not appear to be the case,” he noted.

 
A weaker peso may increase costs of commodity imports like fuel and food. But inflation was unchanged at 2.6 percent in May, pulling the five-month average to 3 percent—or at the lower end of the Bangko Sentral’s 3 to 5 percent target.
Benign inflation has allowed the Bangko Sentral to position policy at an expansionary stance since October, which helped buoy the economy.

 
Any volatility, Neri said, will be short-lived. “We might be in for a bumpy ride but when the tempest is over, the Philippines will be in a better position to rebound quicker, given our recent upgrades and solid consumption based growth,” he said in the research note. — VS, GMA News /MP