Peso rise to trim RP foreign debt

MANILA, Philippines - The continued strengthening of the peso against the dollar would help trim the country’s foreign currency debts, the Union Bank of Switzerland (UBS) said in a report on the Association of Southeast Asian Nations.

As such, UBS said that while the peso is the only currency in the region not to have appreciated through its 2008 high against the dollar, its appreciation against the greenback is likely to continue.

 “The government’s large foreign currency debt stock means appreciation might create fiscal benefits. As such, while a pause in currency appreciation is likely, given our view on regional growth, the peso may have further trend upside on a 12 month view,” it said.

UBS now expects the peso to hit 42 against the dollar next year from a previous forecast of 44 against the greenback.

This year, the Switzerland-based investment bank expects the Philippines to appreciate as 44 against the dollar.

It noted that policy rates are already very low relative to history at four percent for the overnight borrowing rate and six percent for the overnight lending rate.

“Policy rates are very low relative to history and credit growth is accelerating, suggesting policy normalization will be warranted at some point. This could encourage the Bangko Sentral ng Pilipinas (BSP) to allow peso appreciation to increase the effectiveness of such a policy, although there is some ambiguity here as capital flows and growth expectations might be somewhat blunted as a result of less loose monetary policy,” UBS said.

Given the BSP’s trend towards administrative liberalization of the foreign exchange market, we doubt administrative measures to control capital flows would come quickly to the agenda, the investment bank noted.

The BSP, for its part, said there is a wide array of policy tools that it can use to mitigate the appreciation of the peso against the dollar.

 “There is a wide array of policy tools that we can call upon in mitigating the peso appreciation. One that indeed we are looking at is the continuous liberalization of the foreign exchange regulatory framework,” BSP Assistant Governor Ma. Cyd Tuano-Amador has said.