Peso forecast to remain strong in next 2 years

Dutch financial giant ING sees the peso remaining strong against the dollar in the next two years on the back of favorable macroeconomic fundamentals.

The local currency would likely trade near the 40 to $1 level in 2013 and 2014, 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 the end of next year.

As of Friday, the peso closed at 41.43 from Thursday’s finish of 41.47 to $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 this year. 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 Filipinos and higher business process outsourcing receipts.

“Local currency borrowing rates are at their all-time low, and the cost of hedging foreign exchange exposures is at the cheapest [level] 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. Doris C. Dumlao