Foreign banks see P47.50-to-$1

Foreign banks are optimistic that the peso will appreciate to 47.50 to the dollar while dramatic improvements are expected in domestic bond yields as both local and offshore investors become increasingly upbeat over the prospects of the Philippine economy.

Bankers appear unfazed by the failure of the Arroyo administration to meet its first quarter deficit target, saying that internal and external factors support the prospects of further peso appreciation and improvements in interest rates.

According to John McGowan, treasurer at the Hong- kong and Shanghai Banking Corp.-Philippines (HSBC), the peso has appreciated by 4.5 percent since the beginning of the year and there is still room for the currency to appreciate further depending on the behavior of the Japanese yen.

The peso depreciated yesterday but McGowan said this was a knee-jerk reaction to the Luzon-wide power outage and, mainly, the depreciation of the yen against the greenback.

McGowan said missing the first quarter deficit target is "obviously a tiny concern" and could be an aberration. "If the target deficit is overshot substantially and repeatedly, then it will be a concern since it would have an impact on domestic yields," he said.

This early in the year, McGowan said no trend would be apparent. Moreover, he said that remittances from overseas Filipino workers also bolstered the general optimism over the country’s improving reserves which he said is one of the main factors supporting the currency.

Reserves were estimated at $15 billion at the beginning of the year and this has now improved to $17.05 billion. This means the Bangko Sentral ng Pilipinas (BSP) is in a good position to support the currency should the need arise.

In terms of external factors, McGowan said the appreciation of the yen had triggered a domino effect in most Asian currencies. The Japanese currency had appreciated by 5.09 percent since the beginning of the year and the peso tracked this appreciation, going up by 4.54 percent over the same period.

On the other hand, the Indian rupiah had appreciated by 13.09 percent since January while the Thai baht appreciated by 3.6 percent and the Singapore dollar by 3.4 percent.

"Also, there are now more dollars in the Asian equities market on the theory that an uptick in the US economy would mean a corresponding uptick in the region," he said.

In a week, McGowan said that around $582 million flowed into Japan while South Korea absorbed $150 million. He said the dramatic improvement in domestic bond yields was a major draw for the Philippine market.

McGowan said spreads are improving by leaps and bounds. Bonds maturing in 2024, he said, have improved their spreads from 8.8 percent to only 7.05 percent while those maturing in 2025 have likewise improved from 10.722 percent to 9.523 percent.

"Provided there are no local shocks and provided the Japanese yen does not exceed ¥130; $1, we see the peso doing 47.50 to 48.50 to the dollar," he said. McGowan said there is still a lot of interest in the Philippine market among local and offshore investors, particularly among pension funds and institutional funds that prefer long-term instruments.

"Of course the caveat is that as we get towards the end of the year, we have to look closer at the US economy," he said. "If it picks up and shows signs of overheating, the US Fed will raise interest rates and the BSP has to consider a similar move just to maintain the spread between dollar and peso assets."