MANILA, Philippines – Global financial giant Hong Kong and Shanghai Bank (HSBC) sees the peso strengthening against the dollar later this year as the Philippines has gotten over the hump of a tricky political transition and monetary policy uncertainty.
In its latest Emerging Markets foreign exchange report titled "Rags to Riches," HSBC noted that the local currency hurdled two risk events: the presidential elections in May 2016 and the implementation of the interest rate corridor (IRC) system by the Bangko Sentral ng Pilipinas (BSP).
"With the Philippine peso managing to escape these events relatively unscathed, we have turned more positive on the currency and have revised our year-end forecast for US dollar – peso to 45 from 48.5," the report read.
The peso closed at P46.46 to $1 on Tuesday, August 23, from Monday's P46.58 to $1, with steady volume at $440.35 million.
The BSP shifted to the IRC in early June in a bid to steer money market rates towards the central bank's target rates.
HSBC said that the implementation "went smoothly with minimal market volatility" and highlighted the fact that the BSP also gave assurances that trust funds, which include foreign investors, have access to the Overnight Deposit Facilities, thereby easing concerns over foreign outflows.
Attracting foreign interest
The bank also cited the Duterte administration's apparent willingness to push ahead with large-scale reforms as another reason for turning more positive on the currency, noting that foreign portfolio investments, or hot money, have surged to over $1.5 billion following the elections.
While the country is now in the top 10 destinations in Asia for FDI, long term-inflows still lag far behind neighbors like Thailand, Vietnam, Malaysia, and Indonesia.
FDI has picked up this year though, already standing at almost $4 billion as of May, which is more than double the level seen in 2015 from the same time last year.
While FDI results have been good, domestic consumption, boosted by election spending, was the main driver behind resurgent economic growth so far this year, which hit 7% in the second quarter on the way to 6.8% for the first half of the year.
"This suggests to us that the Philippines' domestic demand story is more insulated from the global economic slowdown which should help keep portfolio inflows – especially into equity market – buoyed and be a solid drive for the peso," HSBC said.
Unlike many other Asian currencies, HSBC added, the peso is less affected by external developments while domestic consumption is bucking regional trend by remaining strong and supporting corporate profits.
"In a time when yields are low and uncertainty about growth is high the peso looks increasing attractive. Although foreign exchange policy could smooth some of the upward pressure on the peso, there should be some comfort with the currency being a laggard in the region this year," the report concluded. – Rappler.com