PHILIPPINE DAILY INQUIRER - May 20, 2009

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Peso expected to trade well in second half

MANILA, Philippines—The peso is expected to remain relatively stable over the next two quarters, as gradual easing of the global crisis may offset factors that lead to depreciation of the local currency.

This was according to investment bank ING, which projected that the peso would trade well within the range of 47.5 to 48.5 against the US dollar over the next two quarters.

In a recent paper on the Philippines and other Asian countries, ING said “weak BOP [balance of payments] and public finances could limit the downside, while global healing would cap the upside.”

In the first four months of the year, the country’s BOP hit a surplus of $2.198 billion, higher than the $2.14 billion in the same period last year.

Despite the year-on-year increase in the BOP as of April, ING said net outflow of foreign portfolio investments would dampen the likelihood of a sustained growth in the BOP. In turn, this could create dampening pressures on the peso.

BOP, a record of the country’s commercial transactions with the rest of the world, shows the difference between inflows and outflows of foreign currencies into the economy.

A surplus in the BOP helps build up the country’s reserve of foreign currencies, also called gross international reserves. GIR determines a country’s ability to engage in commercial transactions, such as importation and payment of debts denominated in foreign currencies.

ING said the government’s weakening fiscal position could also drag the peso down. The government incurred a budget deficit of P111.8 billion in January to April, higher than the P25.8 billion in the same period last year.

A higher budget gap tends to increase interest rates and, therefore, raise the government’s required spending for debt servicing.

Higher servicing of dollar-denominated debts pushes up demand for the greenback and thus cause the peso to depreciate.

But ING said the impact of weak BOP and fiscal condition on the peso would be offset by the positive effect of easing uncertainty in the global economic front.

Although advanced economies are still seen to be in recession in 2009, some analysts said the crisis could have already bottomed out and a slight recovery could be expected by the end of the year.

Gradual revival of the global economy would benefit emerging economies like the Philippines, analysts said.

The peso is expected to average weaker this year from last year’s P44.47 to a dollar. But ING said the local currency would not likely move past P48.50 to the dollar.