HSBC exec forecasts: Philippine peso will remain strong in Q1

The Philippine peso will remain strong for the first quarter of 2006 due to physiological support on strong dollar inflows, off shore portfolio flows and improved fiscal outlook.

"We see trading range of 52.00-54.00 in first quarter of 2006. Positive fiscal outlook and offshore portfolio flows in February may test 52.00 level and may be poised for takeoff below that level should fiscal discipline be maintained," disclosed Wick Veloso, The Hongkong and Shanghai Banking Corporation Limited (HSBC) Treasurer and Head of Global Markets Philippines during an economic briefing held at the Shangri-la's Mactan Island Resort and Spa last week.

"In the event that the currency will reach the 49.00 level, the credit rating agencies will change the outlook of the Philippines from negative to stable," Veloso disclosed.

Veloso said Fitch Credit Rating Agency is scheduled to release its view/report of the Philippines with a possible change of outlook that is from negative to stable. When that comes about, the international market players would refer to that as an upgrade then will be more in dollar flows in the country that are from foreign portfolio investments and this will really push the currency to appreciate and interest rates will continue to go down.

Going with this is the possible credit upgrade in long-term credit outlook in the fourth quarter that should result from improved economic fundamentals and fiscal outlook in the country today.

The Philippines, according to Veloso has been considered a country that cannot manage its debts. With that perception, people refuse to hold their money in pesos and they buy dollars. With the implementation of VAT, the people's perspective change.

"It goes to show that somebody is working to fix the economy," he noted.

Moreover, improved fiscal outlook due to VAT, savings from peso appreciation and decrease in credit spreads will reduce cost of borrowing for 2006 and a 1% decline in domestic interest rates leads to reduced interest payments of about P19 billion a year.

Veloso believes that the upgrade will come by the end of September or early October this year. But for an upgrade to come about, he said that a consistent performance must come from the side of the government.

"It is important for the government to prove they are doing something on economic policies," Veloso said pointing out that the implementation of the value added tax (VAT), though widely criticized, has been a good move.

"Nobody is into paying higher taxes. But just like any malignant disease, you need chemotherapy to kill the bad cells first," he reasoned.

Veloso stressed that an economy works in a cycle and the Philippines appears to have a short one. "I would rather say that I would review the Philippines on a quarter-by-quarter basis. Just when we think things are doing good and yet suddenly a bomb shell just would be dropped," he said recalling the negative events that shook the country last year adding "it is very important for the government to ensure peace and order and that there is less noise coming from politics. Three years of consistency and I believe the Philippines is poised to take off. As long as they come up with good economic policies, it will be difficult for the Philippines to be pulled down."

For the peso to have more strength, Veloso said the country's revenue figures should be significantly higher than the expenditures.

On the same development, the Philippine exports are still significant sources of dollar inflows. "But the Philippine exports now are not only the usual electronic products. We are exporting overseas contract workers or the OCWs."

He noted that the services sector will remain a significant source and the OCWs will grow annually by 20 percent.

A contributing factor to this development is the median age of Philippine population, which is the lowest compared to industrialized nations. The country's median age is at 22.27, China at 32.26, Japan at 42.64, US at 36.27, New Zealand at 33.65, Australia at 36.56, UK at 38.99, Spain at 39.51, Italy at 41.77 and Germany at 42.64. This Veloso, said implies growth potential in the services sector, and consequently, an increase in USD flows from remittances.

On a breakdown of the sources of USD flows from OCWs, USA posted 61.9% of the overall while Europe comes next at 13.4%, Middle East at 13.2%, Asia at 10.9% and the remaining 0.6% is from the other countries.