Analysts said a smaller deficit increases the country’s chances of getting a higher credit rating that will lower borrowing costs for the government and companies.
The peso closed at 52.660 to the dollar, posting its strongest finish since the 52.650 on May 21, 2003. It was also 17.50 centavos higher than Monday’s close of 52.835 to $1.
The currency opened strong at 52.780 and gained more ground throughout the day to hit an intraday high of 52.570 to the dollar.
Trading at the Philippine Dealing System (PDS) was brisk all day, with the morning volume hitting $285.5 million. The whole day session recorded a volume turnover of $513 million.
"Expectations of an improved fiscal position this year because of increased revenue generation has helped turn sentiment more positive, so the peso market has been positioning for that," said Rovic de Guzman, a senior dealer at Union Bank of the Philippines.
The deficit narrowed to less than P161 billion in 2005 from a shortfall of P186 billion in 2004, National Treasurer Omar Cruz said earlier.
The country had a shorfall of P200 billion in 2003 and a record deficit of P211 billion in 2002.
Market analysts said sentiments continued to be upbeat, especially following announcements that the Arroyo administration expected its 2005 fiscal performance to be even better than the most optimistic projection made earlier in the year.
Traders said the break past the 53 to $1 level was considered significant, going below the mark for the first time in two and a half years when the peso was last seen at the 52 to $1 level.
"Well, it’s an exchange rate set by the market," said Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr.
Although exporters have begun to complain that the peso appreciation was causing them to lose competitiveness against other exporters in the region, BSP officials said the overall impact was positive.
"For one, the appreciation of the peso will have a positive impact on inflation," Tetangco said.
According to the central bank governor, the lift being provided by continued dollar inflow from overseas Filipino workers will continue to provide this upward momentum since, historically, holiday remittances tended to spill over into January and even until February.
According to Tetangco, the peso is expected to sustain it’s stability, indicating that the projected appreciation against the dollar would be gradual but steady.
"Last year, we recorded the volatility of the peso at only 1.4 percent, one of the lowest volatility rates in the region," Tetangco said. "Yet at the same time, the appreciation was close to six percent, year-to-date."
Ratings woes
Standard & Poor’s, Moody’s Investors Service Inc. and Fitch lowered the outlook on the Philippines’ ratings to negative from stable in 2005 partly as Mrs. Arroyo’s opponents accused her of rigging elections in 2004.
The downgrades also came after the Supreme Court on July 1 blocked the government’s revenue-raising plan.
"The present fiscal performance has been definitely good and expenditure control has been very good,’’ James McCormack, Fitch’s head of Asian sovereign ratings in Hong Kong, said.
The peso also gained on speculation Filipinos working abroad are still sending home money made last year, de Guzman said.
Remittances from about 7.4 million Filipinos working overseas may rise as much as 20 percent to $10.3 billion this year and 10 percent in 2006.
Such funds make up about a 10th of the Philippine economy. The country is ranked third in terms of money sent home, after Mexico and India, according to the Asian Development Bank.