Image from https://www.ing.com
MANILA, Philippines–Dutch financial giant ING sees the peso remaining strong against the US dollar for the next two years on the back of favorable macroeconomic fundamentals.
The local currency will likely trade near the 40 to $1 level for the next two years, said Johnson Sia, head of financial markets at the Manila branch of ING. The bank’s official forecast is an exchange rate of 40.10:$1 by end of next year.
As of Friday, the peso closed at 41.43, stronger than Thursday’s finish of 41.47 per $1.
Sia cited events such as Standard & Poor’s move lifting the Philippines’ debt rating to BB+ (one notch below investment grade) in July, improvement in the balance of payments, a relatively benign inflation, a record-high stock market, all-time-low government bond yields, and stronger growth prospects.
“There’s no question that the continuous appreciation of the peso is based on solid economic fundamentals and there is a growing expectation that this trend will continue. This means exporters need to face the reality that having a strong peso is now inevitable and they must know how to adapt to remain competitive in the global markets,” he said.
The Philippine peso remains one of the best-performing Asian currencies year-to-date. Sia estimated that at least 80 percent of the currency’s strength had underlying fundamentals such as “having a good Philippine story” and the continuous influx of foreign flows, including those from overseas Filipino remittances and higher business process outsourcing receipts.
Some companies may also want to take advantage of the strong peso outlook by leaving their foreign exchange exposures un-hedged or by borrowing in US dollars although this is not something that Sia encourages.
“Local currency borrowing rates are at their all-time low, and the cost of hedging foreign exchange exposures are at their cheapest as well. Companies should, therefore, just borrow in pesos. For those with existing dollar obligations, lock-in the forex gains by hedging or redenominating these into pesos,” Sia said.
“Forex exposures translate to swings in a company’s income and that is not something that equity analysts like. At the end of the day, companies should focus on their core enterprise and areas of expertise, and have to realize they are not in the business of forex speculation,” he added.
The banker said market players see the much-anticipated investment grade rating for Philippine credit happening “sometime by the middle of 2013.” While some felt this has already been factored in by investors, Sia said this could still result in a further rally in the Philippine markets.
“There are a lot of funds out there that only invest in investment-grade debt or are allowed to invest only on an index of investment-grade instruments,” he said.
“Two years is a safe bet that the market trend we have now would persist,” he said.
Established in 1990, ING Manila is the first foreign bank to be granted a universal banking license. It provides multi-product financial services to international and local clients.