Jose Arnulfo Veloso, HSBC treasurer and head of global markets in the Philippines, added that interest rates for five-year and 10-year notes would likely stay at their current levels of 8.25 percent and nine percent, respectively.
"The ability of the government to manage liquidity and liabilities will be the key in the direction of interest rates in 2006," Veloso added.
He said the underlying key factor that would impact on both interest rates and the peso’s value is political stability.
The peso will range between 50 and 51.50 to the dollar in the first quarter of the year, buoyed by improved fiscal numbers due to the additional value-added tax, as well as the continued entry of remittances from migrant or overseas Filipinos.
Veloso said the peso will strengthen to the 49.50 level by the end of the first semester, taking into account the full impact of the additional revenue base, the main inflow of remittances for tuition expenses, and a stable political front.
The 50.40 level, he said the peso can go anywhere from 40 to 38.50 based on historical data. In 1999, the peso ranged in the 38 to 39 level. Between that time it continually weakened until it settled at the 54.80 level in January 2001.
The HSBC executive said the peso’s weakening beyond 54 were due to extreme political events as evidenced in the second and third quarter of 2005. On the other hand, the foreign exchange rate rallied on strong inflows, offshore portfolio flows, and improved fiscal outlook.
At yesterday’s trading, however, the peso declined, ending a five-day gain, on speculation the central bank sold the currency to help domestic exporters remain competitive.
A stronger peso will make exports, which account for about 40 percent of the $85-billion economy, more expensive to overseas buyers. The peso has climbed 3.9 percent this year in part as OFWs sent more money home in January than last year.
"There’s speculation the central bank is in the market selling the currency," said Rovic de Guzman, a senior dealer at Union Bank of the Philippines. "A strong currency can hurt exporters and we’ve had a good run. There may be efforts to try and smooth the strength."
The peso weakened 51.14 per dollar at the close of trading yesterday after strengthening to 51 per dollar, close to its three-year high of 50.88 reached March 7, according to the Bankers Association of the Philippines.
Filipinos overseas sent home $917 million in January, 16 percent more than the same month last year, the Bangko Sentral ng Pilipinas (BSP) said in a report earlier.
"The early indications of remittances are looking very good and that’s a factor that’s really going to support the peso," said Shahab Jalinoos, head of Asian currency strategy at ABN Amro Holding NV in Singapore.
Remittances account for a 10th of the economy, helping boost consumption in the Philippines and spurring growth. The government expects economic growth of 6.3 percent this year, compared with last year’s 5.1 percent. The central bank forecasts remittances to rise 10 percent this year.
BSP Governor Amando Tetangco Jr. suggested the central bank is prepared to sell its currency should gains go too far, too fast.
"Any participation by the central bank in the market that may happen from time to time is intended to smoothen sharp fluctuations," Tetangco earlier said. "There is no exchange rate target."