The peso will strengthen in the last two quarters of the year to about P39 to a dollar due to an overall improvement in the country's economy, Standard Chartered Bank officials predicted yesterday.
In a press briefing SCB fixed income strategy head Brian Verlaan and fixed income strategist John Tan said the projected appreciation of the peso could be traced from the "improving economy of the country."
"The Philippine economy is improving, and growth is broadening into domestic demand," they said.
Based on the SCB outlook for the Philippines, the country's gross domestic product is expected to grow by four percent.
In fact, the two officials noted that foreign fund inflows to the Philippines continue to increase though inflows from other emerging markets have slightly subsided.
Aside from this, they said the strengthening of the local currency could also be anchored on other external factors such as the expected volatility of the United States market and the economic recovery of Japan.
They said these factors would benefit the Asian economies as investments would flow into these markets once investors decided to divert some of their funds in the Asian market.
"These factors would help the peso strengthening in the third quarter and fourth quarter of the year to about P39 to a dollar level," they said.
The inflation rate, meanwhile, would settle at 5.5 percent by end of the year or within the government inflation target of five to six percent. SCB expects inflation to rise moderately through the first half of 2000, partly on peso weakness. "However, inflation should remain benign in the second half of softer oil prices, a strong performance in the agricultural sector and a stronger peso later in the later," it said.
Despite jitters in the local banking system, SCB, believes that the Philippine government securities (PGS) market is developing rapidly and liquidity will continue to improve, especially in the bill market where increased supply has been seen.
At the same time, SCB lauded the Bangko Sentral ng Pilipinas (BSP) and the Bankers Association of the Philippines (BAP) in its efforts to develop the domestic capital market.
"PGS supply remains the key to broadening and deepening a benchmark yield curve -- a prerequisite for corporate bond market," SCB said, adding they welcome the forthcoming launch on May 15 of the Philippine bond dealing system and look forward to the greater transparency and market efficiency that this would deliver.
However, SCB said the Philippines needs to continue to develop other forms of market such as the repo market. "Although we have come a long way, the missing ingredients in the Philippine capital markets is the development of a repo market -- the catalyst which will enhance overall market liquidity," it said.
It also noted that corporate bond issuance has been slow year-to-date but should increase as the economy picks up.
"A developed capital market will expedite economic recovery as it increases the number of alternative funding options. This is increasingly important during a period of domestic bank restructuring," it said.