Peso seen hitting 37:$1 level next year

MANILA, Philippines - The peso is seen strengthening to 37 to a dollar by next year on the back of favorable investor sentiment, strong remittance inflows and sustained reform efforts by the government, an investment bank said.

“Our overweight position is based on the (peso’s) undervaluation, strong remittance inflows, improved macroeconomic stability and sustained reform efforts,” Bank of America-Merrill Lynch (BofA-ML) said in its latest report released yesterday.

“Bangko Sentral intervention will remain a risk to our view, but in our view, there are some limits to aggressive intervention,” it added.

Strong foreign inflows have allowed the peso to appreciate by roughly seven percent against the greenback this year, making it one of Asia’s best performing currencies. It closed at 41.02 to a dollar yesterday, the weakest since Nov. 23.

While a strong peso gives more purchasing power to consumers and importers, it also trims the value of dollar export and business process outsourcing earnings as well as remittances from overseas Filipinos. All three are considered growth drivers.

To temper a rising peso, BSP has kept its presence at the foreign exchange market by buying up dollars to boost the latter’s demand and strength. However this could not continue for so long, BofA-ML said, especially with the central bank incurring losses.

“(R)educed seignorage and (foreign exchange) valuation losses, arising from intervention, are stressing the central bank’s balance sheet,” it explained.

As of September, BSP’s losses ballooned to P68.36 billion, more than double last year’s level as dwindling revenues failed to keep pace with rising costs. By buying dollars, BSP shells out pesos from its own coffers.

Nonetheless, BofA-ML said a strong peso “should dampen inflationary pressures” next year, along with lower interest rates that should boost bank lending.  This, in effect, could boost growth to as much as 5.5 percent.

For this year, the bank has forecast a 5.7-percent uptick on local gross domestic product (GDP). Philippine GDP grew 6.5 percent for the first nine months of the year. GDP is sum of products created and services rendered in an economy used to gauge economic growth.

“Our 5.5 percent GDP growth forecast for 2013 implies the Philippine economy would record its 15th straight year of growth, easily the longest growth streak the economy has sustained in its history,” BofA-ML said.

Risks however remain, BofA-ML said, citing failure to raise taxes which may “constrain” government spending, necessary for boosting economic expansion.