Ratings upgrade to lift peso to 40.50 by yearend

MANILA, Philippines - The peso is expected to hit new record levels versus the dollar as a result of the country’s promotion to investment grade status by Standard & Poor’s Ratings Services (S&P) last week, economists said.

The local unit could reach 40.50 against the greenback by yearend, surpassing a previous five-year record of 40.57 posted last Jan. 15, Bank of the Philippine Islands economist Emilio Neri Jr. said in a research note.

The peso closed at a one-month high of 40.91 Friday.

“More bond and equity indices that follow S&P more closely are likely to include Philippine-issued assets in their baskets,” Neri said, noting this would benefit the peso in the long run.

The Philippines’ promotion to BBB-, with a stable outlook, under S&P’s metrics was the second of its kind after a similar action from Fitch Ratings last March 27.

Nomura Ltd. economist Euben Paracuelles, in a separate research note, said the upgrade was an indication that S&P is confident results of senatorial elections this month will allow President Aquino to push on with reforms.

Aquino’s Team PNoy would likely have a “solid win” in the coming polls on May 13 and “that event could drive peso towards recent lows of around 40.55,” he said.

In addition, persistent inflows from remittances and earnings from business process outsourcing (BPO) would continue to boost the balance of payments (BOP) toward a surplus.

This, Paracuelles said, could put further pressure on the peso. The BOP surplus hit $1.535 billion as of the first quarter, central bank data showed.

“The fundamentals in the Philippines remain strong from the solid current account surplus (supported by strong remittances and the BPO sector) and robust growth,” he explained.

The peso, Asia’s second-best performing currency last year, has appreciated 0.6 percent in the first quarter, according to figures from the Bangko Sentral ng Pilipinas (BSP).

While the peso’s strong performance is expected to continue, both Neri and Paracuelles warned of additional intervention from the BSP to temper the currency’s rise.

A strong peso, while beneficial to contain inflation, also trims the value of dollar export and remittance earnings. To contain the appreciation, the BSP has unveiled several macro-prudential measures since last year.

These included a cap on non-deliverable forward transactions of banks, expanded coverage on real estate exposures, and prohibiting foreign funds and cutting returns offered by special deposit accounts (SDA).

“BSP will have an additional reason to institute its interest rate corridor mechanism in full effect. This means that the SDA rate will be cut by another 50 basis points on their June 13 meeting,” Neri said.

For his part, Paracuelles said: “We would continue to highlight that as we move towards those (record) levels, expect the noise from the BSP to increase again over potential macro-prudential measures.”