P42-45 to $1 in next 2 years, says Philippine central bank
Philippine Daily Inquirer
First Posted 19:50:00 05/11/2008
MANILA, Philipines--The Bangko Sentral ng Pilipinas (the Philippine central bank) has revised its assumption on the peso-dollar exchange rate for this year and the next to a range of 42 to 45 to $1 given the more volatile external market conditions caused by the global downturn.
The latest assumption, which was presented to the policy-making Monetary Board during its meeting Thursday last week, was a weaker peso range against the dollar from the old assumption of 40-43.
The local central bank, whose foreign exchange policy allows a free float, does not target any peso-dollar rate but merely recommends certain assumptions to the national government for macroeconomic and fiscal planning.
The assumptions, which are updated regularly, takes into account the latest market trends. The peso's sharp appreciation over the last two years has recently been halted by combined risk aversion from the looming US slowdown as well as rising inflation in Asia.
The BSP has also assumed that oil prices based on Dubai crude would average higher at $95-$105 a barrel this year, from the old forecast of $88-$98.
Higher cost of importation, particularly of oil and rice, exerts downward pressure on the peso by creating bigger demand for dollars at the foreign exchange market.
The BSP has also assumed a higher interest rate range of 4.5-6.5 percent based on the average 91-day treasury bill rate, from the old forecast of 3.5-5.5 percent for this year.
The lower exchange rate assumption also took into account lower growth in export earnings this year given the weakening demand.
Given the weaker exchange rate assumption, the BSP no longer sees the peso as a mitigating factor to rising consumer prices.
In 2007, the peso closed at 41.28, appreciating by nearly 19 percent against the dollar to become Asia's best performing currency.
As of Friday, the peso finished at 42.48, weaker by 2.8 percent than its level as of end-2007.
Unlike last year when Asian currencies were rising across the board, the trend in the region is mixed this year.
The South Korean won is so far the region's worst performing currency, having shed 10 percent from year to date, due to the perceived reluctance of the central bank to raise interest rates. The Indonesian rupiah has fallen by about the same magnitude as the peso.
On the other hand, other currencies have gained against the greenback, including the Singapore dollar (12 percent), Taiwan dollar (6 percent), Thai baht (13 percent) and Malaysian ringgit (10 percent).
With the expected end to the US Federal Reserve's interest rate easing cycle, the BSP is bracing for volatility in the flow of "hot money" or foreign portfolio investments into local stocks, bonds and trust products.
In the past, hefty cuts in US interest rates drove more funds to seek higher yields in Asia's emerging markets, thus lifting regional currencies.
In its latest quarterly inflation report, the BSP said: "Going forward, the value of the peso will be affected by several factors. On the upside, the projected strong dollar inflows from overseas Filipino remittances, export earnings and foreign direct and portfolio investments could prop up the peso."
The report said a more diversified base of overseas Filipino workers was likely to sustain the growth in remittances while the investment outlook remained upbeat given the strong performance of the domestic economy.
Doris C. Dumlao
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