Peso, stocks projected to sustain rise

The move of debt watchdog Standard & Poor’s to raise the credit rating of the Philippines to just one notch below investment grade gathered cheers from the stock market, with the index breaching the 5,300 mark to hit an all-time high earlier this month.

Consequently, with the influx of foreign funds into the local stock market, the peso broke into the 41-to-a-dollar territory and registered a four-year high.

The question, however, is whether the favorable response of portfolio investors would be short-lived or whether it would be the start of a rising trend for the Philippine Stock Exchange index (PSEi) and the peso.

“The latest credit-rating upgrade affirmed claims that the Philippine economy is improving. Now, we have two out of three credit rating firms saying the Philippines is just a notch away from investment grade,” Jonathan Ravelas, market strategist for Banco de Oro, tells the Inquirer.

Fitch Ratings likewise rates the Philippines a notch below investment grade, while Moody’s Investors Services assigns the country a rating that is still two notches below investment grade.

With news swirling in the market that the Philippines was likely to get a credit-rating upgrade from S&P, the purchase of peso-denominated stocks rose and the index climbed to hit the 5,300 threshold. Following the evening of July 4, when S&P announced its move to upgrade the country’s rating, the index increased further to hit a new high of 5,369.98 on July 5.

Foreign investments in local stocks pushed the peso to a new four-year high of 41.68 against the US dollar on July 5.

Traders said the upward pressures on the peso prompted the Bangko Sentral ng Pilipinas to intervene in the foreign exchange market to avoid an even sharper appreciation of the currency, which could drag the export sector’s competitiveness.

Market optimism

The BSP admits seeing significant inflow, and credits this mainly to market optimism on the Philippine economy.

“This is one of the reasons why people are bringing in their (foreign currency) to the Philippines—the economy is fundamentally strong and is expected to stay that way,” says BSP Deputy Governor Diwa Guinigundo.

So, can the PSEi and the peso sustain the strength?

One view is that the positive sentiment pushing the index and the peso may be seen for the long haul. This is anchored on the belief that the market euphoria seen recently is based on fundamentals.

The economy, measured in terms of gross domestic product, grew by 6.4 percent in the first quarter from a year ago. This was faster than the 4.9 percent posted in the same period last year. It was also the second-fastest growth rate in Asia for the period, next to China’s 8.1 percent.

Economic officials claim the Philippines is currently in a sweet spot, where it enjoys both a robust economic growth and benign inflation, which are favorable for business and consumers.

“Structural reforms implemented years back and a sound macroeconomic management have brought us to where we are now,” BSP Governor Amando Tetangco Jr. said.

The BSP takes pride in the fact that the country’s foreign exchange reserves, which indicate the capability to pay for imports and service foreign obligations, now stand at about $77 billion. The reserves are already six times the country’s foreign currency-denominated debts maturing within the short term, and are equivalent to 11 months’ worth of imports.

Declining debts

The government’s debt burden has also shrunk over the years, thanks to budget reforms and measures to shore up tax collection. From a peak of 84 percent in 2004, the outstanding debt of the government now amounts to about 50 percent of the country’s gross domestic product.

Another view, however, is that the index and the peso are up for a correction.

The favorable market sentiment on the Philippines has pushed the index to an all-time high and the peso to registering the fastest pace of appreciation against the US dollar in the first semester of the year.

Correction

According to the BSP, the peso rose by about 4.33 percent against the US dollar from the start of the year to the end of June. This was the fastest pace of appreciation against the greenback among major currencies in the Asia-Pacific region.

BDO’s Ravelas said sustaining the uptrend would be difficult.

“Philippine stocks and the peso have become expensive vis-a-vis their counterparts in the region. The markets are now ripe for a correction,” Ravelas said.

He added that, based on technical aspects, the peso and the index would have to correct to remain attractive to more buyers.

Ravelas says he sees the index going back to the 4,800 to 5,000 range in the months ahead.

“An index of 4,800 to 5,000 will be a good entry point for more investors,” he said.

Based on fundamental aspects, however, he said the index and the peso were also poised for correction.

Although some macroeconomic indicators for the Philippines have substantially improved, Ravelas said there were areas where the Philippines remained inferior compared with other emerging Asian economies.

He cited the inability of the Philippines to compete head-on with its neighbors in terms of cornering foreign direct investments (FDIs), which were vital for job generation.

The BSP earlier said the country registered a $13-million net outflow of FDIs in April.

“The foreign capital flows we are seeing right now are mainly portfolio funds. What we need more are FDIs to generate jobs and help make the economic growth sustainable,” Ravales said.

Developmental institutions led by the World Bank and the Asian Development Bank also have cited low per-capita income in the Philippines, which stood at $2,000 in 2010. This paled in comparison with the more than $3,000 for Indonesia, about $4,700 for Thailand and some $8,400 for Malaysia.

The World Bank and the ADB said the Philippines had to implement measures that would ensure that growth benefits would reach low-income households. Currently, they said, the growth of the economy was benefiting mostly the middle class and the rich.

Up for strengthening

Some market players see the peso rising further given the optimism of the market.

Morgan Stanley, which has chosen the peso as its latest “top pick” among emerging market currencies, sees it ending 2012 at 40.75 against the greenback. Afterwards, it expects the peso to strengthen further to break into the 39-to-a-dollar territory and end 2013 at 39.50:$1.

“The peso continues to outperform its peers in the region because of its robust fundamentals,” Morgan Stanley said in a report. “Capital inflows [to the Philippines] are picking up as investors are attracted not only by strong growth conditions but also the improving credit position of the sovereign.”

But whether Morgan Stanley’s projection of the peso hitting a high of 39.50 against the dollar by the end of next year will materialize will partly depend on the BSP.

The BSP intervenes in the foreign exchange market from time to time if significant upward or downward pressures on the local currency are seen leading to a steep and sudden rise or fall of the currency.

It is believed that, if not for the intervention of the BSP in the foreign exchange market, the peso would have been much stronger now.