“Given the robust domestic economic fundamentals — a sharply narrower funding gap, robust remittances inflows and the central bank’s apparent comfort with currency appreciation — we are lowering our three-month dollar-peso forecast to 42.5 pesos to a dollar and our 12-month forecast to 40 pesos,” analysts at Barclays said in their latest Emerging Markets Research.
On Wednesday, the peso closed at 44.26 to a dollar, the highest in two-years.
Barclays noted that the peso has appreciated by nearly 3.7 percent against the dollar since late August.
“The direction of the move has been in line with our expectations, but the sharp move has seen the peso surpassing our one-year target of 44 pesos,” Barclays said.
The central bank said it is ready to act to prevent sharp moves by the peso.
“Our policy is to maintain a market-determined FX rate. Our interest is to ensure that moves are not excessively volatile,” central bank Gov. Amando Tetangco said.
“Of late, even as the general trend has been strength in the regional currencies, the speed of the peso up-move has somewhat increased. We are watchful that this does not become too fast,” Tetangco added.
Barclays said the central bank “cannot continue the current pace of intervention” and it seemed more comfortable with the appreciation. The think-tank said given the robust balance of payments, the Philippines continues to build foreign exchange reserves, which stood at $49.6 billion as of August 2010 versus $44.2 billion as of December.
‘Strong peso is suicide’
Exporters warned that the continued strengthening of the peso against the U.S. dollar is “suicide.”
They said unless steps are taken by the central bank, exports will be endangered and the livelihood of overseas workers and their families will be threatened.
“Let’s not fall into the trap (of believing) that a strong peso means a strong republic,” said Sergio Ortiz-Luis, president of the Philippine Exporters Confederation Inc.
He warned of massive layoffs and closures among small and medium enterprises not only among the exporters but also among domestic-oriented manufacturers and agricultural producers.
Ortiz-Luis said at the current exchange rate of 44 to a dollar, even strong dollar-earning sectors like electronics and business processing outsourcing would begin to hurt as a strong peso translates to lesser value for their dollar-denominated revenues.
He said indigenous exporters with no import component would rather not ship out at an exchange rate lower than 46 to a dollar.
Ortiz-Luis said domestic producers cannot afford to compete with imports that are becoming cheaper with the appreciation of the peso.
“This Christmas, for example, lychees and apples would be cheaper than local fruits,” he said.
Ortiz-Luis warned of the far-reaching impact of a strong peso, especially for families of overseas workers who now have fewer pesos for the same remitted dollars.
“More than half of the economy depends on dollar earners like exporters and overseas remittances. There is a lack of effort to bring peso to its proper exchange rate,” said Ortiz-Luis.
He said the central bank has enough tools under its belt to ease the appreciation of the peso.
One is by paying off dollar debts to stimulate demand for the greenback, he said.
Another measure, although drastic, is to lower the interest rate on peso deposits to encourage people to buy dollars, he added.
“There should be a conscious effort to target an accurate exchange rate and accept that the peso is overvalued,” Ortiz-Luis said.
