Peso could strengthen by yearend – economist
Higher foreign direct investments (FDI) and continued central bank hawkishness could allow the peso to trade stronger by the end of the year, an ING Bank Manila economist said.
A capital-raising exercise by a San Miguel Corp. unit and the Bangko Sentral ng Pilipinas’ (BSP) push to address above-target inflation may benefit the currency, economist Joey Cuyegkeng said in a report.
The peso’s current weakness—it continues to trade in the P53:$1 level, gaining four and a half centavos on Monday to P53.38 against the greenback—is in line with most Asian emerging market currencies, he noted.
“The effect of the aggressive BSP policy rate hike of the previous week has worn off but the continued hawkish stance moderated any weakness,” Cuyugkeng added.
Inflation risks prompted the central bank’s policymaking Monetary Board to raise its key interest rates by 50 basis points (bps) last August 9, a shift from the 25-bps adjustments ordered in May and June.
Cuyegkeng also pointed to “mid-month demand from importers” and “an unexpected slide of OFW (overseas Filipino workers) remittances for June.”
“[The] shortfall in financing the trade gap with remittances worsened in the second quarter,” he added.
“This is the norm which would keep the PHP (Philippine peso) on the defensive unless capital flows more than cover the trade-remittance shortfall,” Cuyugkeng said.
FDI boost
Market sentiment could change, however, should net FDI inflows increase, particularly from an expected public offering by San Miguel Food and Beverage, Inc. (SMFB).
“Share offering of a large food and beverage conglomerate could generate as much as $2.4 billion worth of additional funds for the conglomerate,” Cuyugkeng said.
“We believe that foreign participation would be significant but we cannot yet estimate the equivalent amount of net inflow,” he added.
SMFB’s plan to sell up to 20 percent of its equity would be the largest capital-raising exercise to date in the history of the Philippine Stock Exchange.
“A significant amount of net inflow could provide some support for PHP similar to the foreign acquisitions of local companies in late third quarter and in early fourth quarter,” Cuyegkeng said.
The share offering this year will likely happen in the fourth quarter, he added.
“A net inflow of more than $1 billion could see some strengthening of PHP but not as strong as last-year’s PHP strengthening on the back of foreign–acquisition related net FDI inflows,” the economist said.
Still, “a large net inflow may lead us to revise our year-end PHP forecast from the current P54 to within the prevailing trading range of P52.80 to P53.55.”
Hawkish BSP
Additional BSP policy rate hikes could also provide support, with Cuyegkeng noting that the central bank has retained “its hawkish stance, not only about reassuring the market that inflation would ease to within the target range of 2 to 4 percent next year but also to reduce concerns of a weak PHP also fuelling inflation.”
ING Bank expects another 25-bps hike as early as the September or during the November policy meetings.
“We continue to see upside risk on the inflation front especially with the latest reports of rice prices continuing to rise while supply-related constraints also compounding the pressures,” he continued.
Cuyegkeng said ING was of the view that inflation would breach 6 percent in the next two reports, which means “further tightening is likelier.”
“We expect growth to slow as BSP addresses the imbalance in the external payments position by moderating private sector import demand,” he added.
Headline inflation rate accelerated to a fresh five-year high of 5.7 percent in July, bringing the year-to-date average to 4.5 percent, above the 2.0-4.0 percent target for 2018.
Flexible exchange rate
For his part, Bangko Sentral Governor Nestor Espenilla has emphasized that monetary authorities remained committed to maintaining a flexible and market-determined exchange rate framework.
“Some would yearn for the day that we’d like the peso to be fixed. If we say P50, its always P50. But that’s a very dangerous path for a small open economy like the Philippines that is constantly being toss and buffeted by the heavy winds of global developments,” he said.
A fixed exchange rate could also result in lower international reserves, over-indebtedness, deficits and an uncompetitive exports sector.
“If we commit to something stubbornly against very strong pressures then we will end up losing our reserves,” he said.
“For example for businesses, if [the]exchange rate is guaranteed, they will borrow and borrow abroad because interest rates seem to be low and that creates a path of over-indebtedness. For imports, we want to consume imported [goods]because it looks very cheap but in the end it creates deficits,” Espenilla added.
Also, “exporters will … have a difficult time growing their businesses if exchange rates are not able to adjust to shifting prices, for example.”
“So for many good reasons, we allow the peso to move in flexible manner. And that is one of the reasons why we continue to be in stable and resilient position today,” Espenilla said.
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