Carlo's Think Pieces

Reflections of a Filipino in the Netherlands

Peso will appreciate after May elections

Posted by butalidnl on 7 March 2010

The way things are going now, it seems that the peso is set to continue its upward trend even after the May elections in the Philippines. Why?

Remittances
Remittances again. May-June is peak time for remittances, especially for school expenses, so the peso is sure to gain from this. Add to this the government plans to float $500 million of bonds especially for OFWs, partly to cover the budget deficit. This is an additional $500 million that will be “remitted” at this time.

Elections
No matter who wins in the presidential race, the vice-presidential race seems to have been won already by Mar Roxas, who is viewed internationally as the most business-friendly vice-presidential bet. And Noynoy Aquino and Villar are both perceived to be business-friendly. Foreign investors now though would be holding back on the off-chance of an Erap Estrada or Richard Gordon victory, who almost promise to get the government deficit to skyrocket.

After the elections, foreign investors will be more confident in the Philippine economy and will increase their investments.

Carry over
The prospect of an appreciating peso feeds on itself. With the improving world economy and the end of the Greek financial crisis, the dollar is set to decline against most of the world’s currencies. This,  in turn will push speculators to place investments where it pays more in interest than the US (the Philippines is one of those places). This will show in an increase in “portfolio investments” by foreigners. Which will help to strengthen the peso, and make the effective interest rate differential even bigger, pushing the peso ever stronger.

Another effect is the retention of dollars by foreign companies in the Philippines. If the peso is perceived to be strengthening, foreign companies tend to hold on to their profits (in pesos) for as long as possible, in the hope of getting to remit them later for more dollars. This would also be a self-perpetuating trend, with more companies doing this with time, as they see that other companies are taking advantage of this trend. This, in turn strengthens the peso, etc. Of course, the companies will need to repatriate profits eventually, but they will do it at the end of the year – and cause the peso to weaken around December. But that is still a long way off.

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