HSBC sees peso hitting 37.50:$1 this year

MANILA, Philippines - British banking giant HSBC sees the peso strengthening to 37.50 against the dollar this year and further to 35.50 to $1 next year as the Bangko Sentral ng Pilipinas is likely allow the local currency to appreciate further to cushion the impact of imported inflation brought about by rising global oil and food prices.

“We believe the peso will end the year at 37.50 per dollar. By 2012, it will be 35.50 per dollar. The growth in the Philippines is strong, and the foreign exchange should reflect that,” visiting HSBC economist Frederic Neumann said at a press briefing yesterday.

The Hong Kong-based economist sees the peso appreciating steadily at 40.50 to $1 in the first quarter, 39.50 in the second, 38.50 in the third, and P37.50 in the fourth quarter of this year.

Neumann explained that strong capital inflows to emerging markets including the Philippines as well as the robust remittances from overseas Filipinos would continue to support the local currency.

Latest data show that the country’s gross international reserves (GIR) surged 36.8 percent to a record level $62.371 billion last year from $45.03 billion in 2009 while the balance of payments (BOP) surplus more than doubled to hit a new record level of $14.4 billion from $6.42 billion in 2009.

OFW remittances likewise grew by 8.2 percent to hit a record high of $18.76 billion last year from $17.35 billion in 2009, exceeding the revised growth forecast of eight percent set by the BSP.

“I would think that as growth becomes more entrenched, BSP should allow the peso to be determined by the market. Given our forecast for growth and inflation, BSP is likely to let the exchange rate do the lifting,” Neumann said.

The bank recently raised its gross domestic product (GDP) growth forecast for the Philippines to five percent instead of 4.7 percent this year and to 5.8 percent next year. The country’s GDP growth surged to its fastest in more than three decades after expanding by 7.3 percent last year from 1.1 percent in 2009.

HSBC economist Sherman Chan said in a study that another bright spot is the country’s external position that remained on a firm footing buoyed by rising reserves and steady growth in equity flows.

“That said, the economy remains vulnerable to rising capital inflows and ensuing appreciation pressure on the peso. The former may fuel asset inflation; the latter could hurt export competitiveness,” Chan added.

HSBC sees inflation climbing to 4.4 percent this year and 4.8 percent next year from 3.8 percent last year. The BSP expects inflation to average 4.4 percent instead of 3.6 percent this year and 3.5 percent instead of three percent next year but still well within the target of three percent five percent between 2011 and 2014.

Neumann expresses concern on the possibility that the BSP would keep interest rates at record lows despite the risk of higher inflation in the coming months.

“Every central bank in East Asia, except BSP, has raised its interest rates. Unless interest rates go up, there will be a danger of inflation,” he added.