Strong peso ‘takes shine off’ remittance growth—DBS group

MANILA, Philippines—Remittances from overseas Filipinos may not provide the usual strong push for the domestic economy in the coming months as the strong peso could dampen domestic consumption, according to the DBS Group.

The Singapore-based financial conglomerate said in a new research note that the strength of the peso was hurting the effectiveness of remittances as a source of income for domestic spending.

DBS said the peso was stronger against the dollar, euro, Saudi rial and United Arab Emirates dinar—which made up more than 70 percent of remittance inflows.

On the other hand, the local currency is weaker against the Canadian and Singapore dollars and the Japanese yen, which make up close to a fifth of inflows.

“By weighting the sources and avoiding the [US dollar] bias, we calculated that the peso has strengthened by close to 6 percent against this basket of currencies since early 2010,” the paper said.

“This takes some shine off the 7-percent year-on-year increase in remittance growth in June,” it added.

Documents from the Bangko Sentral ng Pilipinas showed that remittances coursed through banks reached $1.7 billion in June. This put total inflows for the first semester to $9.6 billion, which meant an increase of 6.3 percent from the year-ago level.

DBS added that with the outlook of the global economy still uncertain and policies negatively impacting on overseas Filipino worker deployment in Saudi Arabia, “remittance is unlikely to provide much tailwind to the domestic economy” in the coming months.

In a separate paper, UBS Securities said Philippine monetary authorities were expected to allow the peso to weaken or resist its strengthening as a way to absorb macroeconomic shocks from advanced economies.

“We expect Asean policymakers to use currency markets to absorb upcoming macroeconomic shocks,” UBS economist Edward Teather said.

According to Teather, the Bangko Sentral ng Pilipinas was expected to either allow currency weakness or resist currency appreciation so long as leading indicators for trade and manufacturing sectors remained weak.

“However, once trade growth has clearly returned to a recovery path—we expect during 2012—then we see more upside potential for [the peso],” Teather said.

Even then, UBS sees the peso trading at 42 to the dollar by the end of 2011.