In a report on Friday, ING Asia, one of the 20 largest financial institutions in the world, said the peso’s improving trend may peg the exchange rate to 45 to $1 over the next two years.
Southeast Asia’s biggest bank DBS, on the other hand, expects a further drop in the country’s fiscal deficit to two percent of the country’s gross domestic product (GDP) this year.
"The peso is reversing the underperformance of 2001-2004. This could take it to 45 versus the dollar in the next two years," ING said.
For its part, DBS said fiscal improvements have outweighed political risks in the Philippines as investors "refocus" on the country’s economic fundamentals.
"The highlight of the first quarter was President Arroyo’s declaration of a state of national emergency. Financial markets were spooked but quickly recovered. The President remains in control and appears unlikely to be forced from office any time soon," said DBS economist Euben Paracuelles in a report.
"GDP growth in 2006 is expected to be steady at 5.1 percent, driven by the usual engines: remittances, ICT (information and communications technology) and mining investments," he said.
Mrs. Arroyo issued Proclamation No. 1017 last Feb. 24, which declared a state of national emergency, after Malacañang said it had thwarted an alleged rightist-leftist coup plot on the 20th anniversary of the EDSA I people power revolt.
A crackdown on the political opposition, rightist elements, communist rebels and even critical media organizations was launched, leaving the Arroyo administration severely criticized here and abroad.
Paracuelles said the government remains in full control due to vast political support.
"Despite several threats to her administration, the President still appears unlikely to be forced from office anytime soon. She commands support from majority of the Congress, the broader military and local governments," he said.
"There are hardly any signs of a convergence to a true People Power combining the religious community, the middle class, the masses, and the military. Violent tactics such as the rumored coup attempt by the disgruntled military personnel in February is not likely to earn any public sympathy."
Fiscal progress outweighs political risks despite the political bickering, Paracuelles said the government managed to make fiscal progress. Credit ratings agencies Standard & Poor’s and Fitch upgraded their ratings outlooks for sovereign debt to "stable" from "negative."
For the first two months of the year, the Philippines’ budget deficit stood at P40.4 billion, below the government’s target of P48.1 billion. The Bureau of Internal Revenue said revenues reached P41.7 billion for February, above its target of P38.7 billion.
GDP growth in 2006 is expected to be steady at 5.1 percent beginning with a slower but more sustainable pace of expansion at 5.3 percent to 5.6 percent year on year in the first quarter versus fourth quarter’s 6.1 percent, Paracuelles said.
The Philippine government has set a GDP growth target of 5.7 percent to 6.3 percent for 2006.
"A moderation in private consumption due to the value added tax (VAT) rate hikes can be offset by overseas remittances which rose 16.6 percent in January, and higher agricultural incomes from a recovering farm sector. Investment, underpinned by IT services and mining could start to improve along with some fiscal stimulus from higher revenue collections," the report added.
After suffering defeat in its impeachment bid last year, the opposition bloc in the House of Representatives said it would file another complaint this year, this time centering on alleged violations of the Constitution when Mrs. Arroyo issued Proclamation 1017.
"The opposition is likely to capitalize on the arrests made during the state of national emergency by eliciting support from those persons who are still in government custody. A revival of impeachment proceedings could also take place sometime in July when Mrs. Arroyo’s year-long immunity from another impeachment trial expires," Paracuelles said. "However, these disruptions are unlikely to have a material impact on Mrs. Arroyo’s grip in office."
The report noted that the President was faced with "greater pressures" last year such as impeachment and election-rigging charges "but she overcame them, thanks to her vast political support, which remains undiminished."
Another source of political uncertainty is the planned constitutional change which is not expected to progress rapidly.
The Arroyo administration seeks constitutional reforms this year through a constituent assembly — or with the House and the Senate sitting as one Charter-amending body — to shift the form of government to a unicameral parliamentary system and remove restrictive economic provisions that hamper the entry of foreign investments.
"Congress is on course to approving legislation but the Senate will likely reject it unless Mrs. Arroyo and the other proponents like former President Fidel Ramos can convince the senators otherwise. This is because there will only be one legislative body in a parliamentary system, so approving the proposal means abolishing the Senate," the DBS economist said. "The debates will rage on throughout the year but we do not expect significant strides to be made."