Philippine peso loses top status in Asian currencies

This is from the Inquirer . Given the importance of exports and off remittances from oversease Philippinos often in U.S. dollars it may be just as well that the value of the peso not increase too much or too quickly. However, given the weakness of the U.S. dollar some increase is probably inevitable.



ANALYSIS : Asian star Philippine peso loses pole position
By Melissa ChiaReuters
Posted date: January 25, 2008
SINGAPORE -- The Philippine peso, Asia's best performer in 2007, may struggle to retain the top spot this year as it faces slowing exports and a drop in its hitherto attractive yields.
That said, the peso is still primed to gain anywhere between 5 to 12 percent against the US dollar this year, with the blessings of one of the most tolerant central banks in emerging Asia and the backdrop of flagging growth in developed markets.
The peso had a lot going for it in 2007 when it raced ahead of the Asian pack with a 19 percent gain, including a high yield, a cheap stock market and the central bank's hands-off policy towards the currency.
Most of those factors have changed. Philippine interest rates have fallen 2.25 percentage points in the past 12 months and foreign investors, smarting from a US mortgage-related crisis, are fleeing risky markets.
"The more uncertain growth environment, higher oil prices and slower remittance growth should mark the pace of the peso gains lower," said Yen Ping Ho, a strategist at JPMorgan Chase Bank.
The peso has already surrendered its pole position this year, with a 0.5 percent rise so far compared with gains of more than 1.0 percent in the Chinese yuan and Malaysian ringgit. It hit an eight-year high of 40.5 on Jan.15, but has since retreated to 41.10.
Citigroup forecasts a nearly 12.0 percent rise in the peso to 37.4 per dollar by the end of 2008, and HSBC is even more optimistic with a forecast of 37.2, but there are less bullish forecasts such as Standard Chartered's of a 5.0 percent rise to 39.5 and JPMorgan's estimate of 38.5.
"The yuan will outperform the peso. We expect a 9.0 percent appreciation in the yuan," said Thomas Harr, a strategist at Standard Chartered.
TURNING TIDE
So far, Philippine authorities have shown little resentment at the peso's steep rally, a rarity in export-dependent Asia where currency appreciation is anathema to monetary authorities.
Exporters say the rising peso is partly to blame for a sharp drop in exports in November and the widening trade deficit.
The outlook is not any brighter given that the Philippines' main trading partners, the United States and Japan, are slowing, and the prospects for the electronics sector, which forms two-thirds of Philippine exports, are still bleak.
But the Bangko Sentral ng Pilipinas, the country’s central bank, is concerned about the impact of an appreciating peso on remittance flows from millions of Filipinos working overseas, particularly as global growth slackens.
These remittances, totalling $13 billion in the first 11 months of 2007, drive most of the local spending and comprise about 10 percent of economic output.
The central bank plans special deposits and retail bonds as alternate investments for foreign workers, arguably to compensate them for the rising currency and falling yields.
It still forecasts a reduction of 65 percent in the balance of payments surplus for 2008 due to a widening trade deficit from high import prices and a slowdown in exports growth despite planned sales of state firms to foreign investors.
More importantly, yields on Philippine debt are set to fall further as the central bank pursues a growth-friendly policy.
TUMBLING YIELDS
The overnight borrowing rate is already at a 15-year low of 5.25 percent after the four rate cuts in 2007.
After the Federal Reserve's steep 75 basis point monetary easing this week, analysts expect a further reduction in Philippine rates when the central bank reviews policy on Jan. 31.
"With the borrowing rate at 5.25 percent and biased downward, it will potentially erode the peso's status as a high yielding currency," said Christy Tan, a strategist at Bank of America.
Peso yields are already far below Indonesia's 8.0 percent policy rate and India's 6.0 percent borrowing rate. Soon they could be on par with South Korea's 5.0 percent benchmark.
Unless the central bank is serious about its intent to let the peso rise to temper the effects of rising oil and food prices, without slamming the brakes too hard on an economy expanding at nearly 7.0 percent, foreigners have little incentive to buy the currency.
The consumer price index climbed 3.9 percent in December from a year earlier, taking inflation to the middle of the central bank's 3.0-5.0 percent target for 2008.
"It is probably best for (the) BSP to continue to allow market forces, including solid remittances, to play out, while always standing by to smooth markets if needed," said Sean Callow, a currency strategist at Westpac Banking Corporation. Editing by Vidya Ranganathan and Tomasz Janowski
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