Strong peso seen as ‘fly in the ointment’

Published by rudy Date posted on February 20, 2013

THE “ALARMING” appreciation of the peso could erode the sustainability of economic growth, First Metro Investment Corp. (FMIC) and the University of Asia and the Pacific (UA&P) said in their most recent joint assessment.

The strong peso is a “fly in the ointment” since it threatens dollar earnings of exporters, overseas Filipinos and employees of the thriving business process outsourcing (BPO) industry, FMIC and UA&P said in the February issue of The Market Call released yesterday. “These sectors, directly and indirectly, easily represent as much as 80% of the economy,” they stressed.

First, continued appreciation of the peso blunts the impact of overseas remittances on the economy, FMIC and UA&P said.

Overseas Filipino workers (OFW) abroad sent home $1.918 billion in November 2012, 7.6% more than the previous year’s $1.783 billion. Based on peso value, though, the increase was a much smaller 2.2%, they noted.

“The devaluing of OFW remittances means that its stimulative effect on the domestic economy, or its impact on consumption and investment, is weakening,” they explained.

Remittances will likely remain healthy in the medium term with strong demand for Filipino labor, but the peso will also remain on the uptrend, FMIC and UA&P said.

Quantitative easing is ongoing in the United States and recovery in Europe is uncertain, pushing foreign investors to send over their capital to the Philippines, pushing up the value of the local currency.

Moreover, the peso’s strength hampers the recovery of the exports sector, FMIC and UA&P said.

The National Statistics Office reported last Feb. 12 that merchandise exports grew 7.6% to $51.99 billion last year from $48.30 billion in 2011 — slightly short of an official 8% expansion target.

“The outlook for 2013 is more of the same. While electronics exports may continue with its recovery due to healthier consumption spending in the US, the euro zone is likely to remain in recession, and the peso appreciation will pull down expectations,” FMIC and UA&P explained.

They estimated export growth to hit just 6-8% in 2013, well below the 10% goal of the government.

On the flipside, the peso’s appreciation has made imports cheaper, FMIC and UA&P noted.

“Economics works on relative prices, and as we make foreign goods and resources cheaper relative to domestic goods/resources, firms will prefer spending on the former,” they explained.

“Despite high growth, employment of domestic resources will not follow.”

Should imports overwhelm exports, all the gains from OFWs and the BPO industry will be wiped out, and the country “will be back to square one.”

The peso appreciated by nearly 7% against the greenback in 2012, closing at P41.05. It has traded within the P40-to-a-dollar territory, so far, this year, beating the central bank’s exchange rate assumption of P42-45.

The economy grew by 6.6% in 2012, beating market expectations and the official target of 5-6%. The government aims to take growth higher to 6-7% this year.

“Despite the double-edged nature of the peso appreciation, we remain upbeat about the economy for the near term,” FMIC and UA&P said.

Electricity sales accelerated last December, signalling greater production, while pubic spending on infrastructure has been accelerated. Midterm elections this May should also offer a seasonal boost to the economy.

At the same time, “The Market Call” predicted that the Bangko Sentral ng Pilipinas (BSP) could keep policy rates on hold for now, as it waits for clearer directions from the global economy.

“If sluggishness persists in the US and the euro zone, the BSP can afford to slash policy rates further by 25 basis points,” they said.

Policy rates currently stand at record lows of 3.5% and 5.5% for overnight borrowing and lending, respectively. BSP had kept rates steady in meetings of its Monetary Board last month and in December 2012. The next rate-setting meeting will be on March 14.

With influx of foreign capital still strong, BSP could slash special deposit account (SDA) rates further, FMIC and UA&P added. SDA rates were cut by an average of 62.5 basis points to 3% last month to stimulate the economy and temper the strength of the peso.

This move pushed the yield curve of government securities further downward as money flowed out of SDAs and into fixed-income markets, “The Market Call” noted. –Diane Claire J. Jiao, Senior Reporter, Businessworld
– See more at: http://www.bworldonline.com/content.php?section=TopStory&title=Strong-peso-seen-as-%E2%80%98fly-in-the-ointment%E2%80%99&id=66180#sthash.Z5XWzGyY.dpuf

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