Peso seen strengthening to 40.50 to $1 in 2013

The peso is likely to trade in a tight range against the dollar in the next few months but appreciate toward 40.50:$1 by end-2013 on the back of strong foreign exchange inflow from overseas remittances and business process outsourcing (BPO), an economist from Dutch financial giant ING said.

In a financial market commentary dated October 22, ING senior economist Joey Cuyegkeng said recent growth upgrades by multilateral agencies, upside surprises in China and US economic data and an upside surprise in August remittance flows have recently boosted the local currency.

For the near term, Cuyegkeng said the peso was likely to remain trapped in the new range of 41 to 41.60 to the dollar. As of last week’s close, the peso was at 41.21:$1.

“But a longer-term view targets a stronger Philippine peso by yearend 2013. We still expect a slight appreciation by yearend as a result of inflows partially offset by a low interest rate differential. These net inflows from OFWs [overseas Filipino workers] and IT-BPO [information technology-BPO] would likely see [the peso in] end-2013 at around 40.50 or stronger,” Cuyegkeng said.

The economist said tighter foreign exchange regulations, however, might see more weakness. He added that one policy consideration was tighter regulation of non-deliverable forward (NDF) transactions of banks and a collapse of short-term interest rates into a prolonged period of “negative” rates.

A foreign exchange forward contract refers to an agreement to buy or sell foreign exchange at a specified price but for delivery and payment in the future. In the case of NDFs, only the price differential is settled upon maturity. A “negative” interest rate regime refers to a situation when the interest rate is lower than the prevailing inflation rate.

Cuyegkeng had expected last week’s 25-basis point cut in the Bangko Sentral ng Pilipinas’ overnight borrowing rate to a new record-low of 3.5 percent, noting that some economic indicators were slowing and the strong peso had negated the increase in remittances.

At the same time, he said the “base effect” arising from an accelerated government spending program in yearend 2011 would likely kick in this fourth quarter given that the government had announced it would not implement a similar program this year.

“External concerns would likely keep economic growth at a modest pace in 2013. All these local and external developments would put to risk the 6-7 percent growth target of the government in 2013 without some support also from monetary authorities,” he said.

“We are finding it difficult to see the economic growth by our base case forecast of 5.8 percent in 2013,” Cuyengkeng said.

Meanwhile, the economist said local fiscal conditions remained favorable. Even if the September deficit was large, he noted that the government has raised more than enough to cover a large 2012 gap.