Barclays sees peso at 41.50:$1 this year

MANILA, Philippines – London-based Barclays Capital sees the peso strengthening only at 41.50 to $1 instead of 40 to $1 this year due to the continued increase in global oil prices.

Barclays Capital economist Prakriti Sofat said in her latest research note that the investment bank is now expecting a lower balance of payments (BOP) surplus in light of the higher oil prices.

“Although we continue to expect the Philippine peso to appreciate, given broadly supportive fundamentals and dampening impact on inflation, we are lowering our year-end forecast to 41.5 from 40 to $1 currently,” Sofat stressed.

She pointed out that Barclays Capital has already lowered its BOP surplus forecast to $10 billion instead of $13.5 billion due to the rise in oil prices that would weigh on the trade balance and result to lower portfolio flows.

The country’s BOP surplus surged to a record $14.4 billion last year due to robust remittances from overseas Filipino workers (OFWs) and strong foreign capital inflows.

Sofat explained that rising inflation differentials would limit the appreciation of the peso against the dollar this year.

The BSP has set an inflation target of three percent to five percent between 2011 and 2014.

Inflation kicked up to a nine-month high of 4.3 percent in February from 3.5 percent in January due to rising oil and food prices. The BSP raised its inflation forecasts to 4.4 percent instead of 3.6 percent this year and to 3.5 percent instead of three percent next year.

“We believe the BSP will raise its inflation forecasts at the March policy meeting and will maintain a hawkish tone,” she said.

Barclays Capital recently raised its inflation forecast for the Philippines to 4.8 percent instead of four percent this year.

The economist said the BSP is comfortable with the appreciation of peso that is broadly in line with other regional currencies and has a bias to be in the middle of the pack rather than an outperformer.

“Our sense is that BSP monitors the peso’s real effective exchange rate, which it believes is roughly fair at current levels. Recently, low inflation afforded BSP with the flexibility to allow nominal appreciation, but our sense is that rising inflation differentials may limit appreciation through 2011,” she added.

The investment bank believes that the would raise its key policy rates by 25 basis points on March 24 and by another 50 basis points by July.

The overnight borrowing rate currently stands at a record low of four percent while the overnight lending rate at six percent after the BSP slashed interest rates by 200 basis points between December 2008 to July 2009 to cushion the impact of the global financial crisis on the domestic economy.

“The central bank believes that a timely adjustment of policy rates will ensure macro stability. Our sense is that the central bank is becoming concerned about possible second-round effects, given rising wage demands onshore and an uptick in inflation expectations,” Sofat said.

Barclays Capital said the country’s resilient economy after posting its strongest growth in 34 years as the gross domestic product (GDP) expanded by 7.3 percent last year would be able to absorb a rate hike of up to 100 basis points. –Lawrence Agcaoili (The Philippine Star)