Peso will appreciate after May elections

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.

Looking forward to 2010

I am not one to make New Year’s resolutions. So, I will just make projections of what I think will happen in the coming year.

Economic
The Philippine peso will appreciate to around PhP32:$1 by the end of the year. BPO income and remittance will be strong during the whole period, and of course, the elections will help to raise the exchange rate of the peso.

The US economy will not really recover, although it is nominally out of the recession. Unemployment will remain high.

Oil prices will exceed $100/barrel. This will be due mainly to the growth in consumption in places like China and India, but also due to production problems in some other places.

Political
Noynoy Aquino will win in the presidential elections. The CPP and its above-ground organizations will be in disarray, as a result of  internal struggles; perhaps it would split.

No climate-change deal among governments will be made during this year, inspite of valiant attempts at doing so.

Iran will have a change in government, probably into a toned-down theocracy (i.e. much more democratic). Big strides will be made in the Israeli-Palestinian peace process, but peace will not yet be attained.

Peso will appreciate against the dollar till May 2010

The peso is set to appreciate significantly against the US dollar in the next few months. In August, it was hovering almost around Php 49: 1 US$; but slowly, it has gained strength to its present 47.50: 1. But this is just the beginning, the peso will steadily climb in value  from now till at least May 2010.

Remittances
The recent disaster that struck Manila will cause an increase in inward remittances in the coming weeks,  as Overseas Filipinos send money to their relatives who were affected by the flood. And this will be on top of the remittances that are set to come in to pay for school expenses – final exams are coming, and then this will be followed by tuition fees, etc. By the time this wave of remittances are over, there will then be the Christmas surge in remittances.

This surge of remittances is likely to cause the peso to strengthen against the dollar. The school and Christmas surges were expected, but the “Ondoy” relief remittance surge will be an additional factor to strengthen the peso. And in addition, we could expect the national elections in May 2010 to further increase the inflow of money from abroad. This happens every time there is an election, especially during national elections. It seems that money kept abroad by politicians, and by businesses,  is tapped for campaign expenses.

Weaker Dollar
The US dollar is getting weaker. It has weakened against most major currencies, and this is likely to worsen by the end of the year. In addition to the overall lowering of confidence in the dollar, we need to factor in the actions of Central Banks throughout the world. They are likely to lower the percentage of dollars they keep as foreign exchange reserves by the start of 2010. It is but proper that they do so, with the decreased trade with the US and the expectation that the US dollar will weaken.

If the dollar decreases in value against major currencies, it will also decrease in value against the peso.  One factor is the exchange rate effect on remittances – OFs outside the US will remit the same amount in their own currency, but this will result in more dollars/pesos received by their beneficiaries. Similar mechanisms affect trade, investments, and other monetary flows.

Portfolio Investments
The recent disaster will result in a lot of Filipinos drawing down their savings. At the same time, insurance companies need to liquidate a big part of their reserves in order to be able to pay all those who incurred damages during the flood. All these withdrawals of money will tighten the supply of money, and increase interest rates on loans, bonds, money market placements etc. International money managers will take note of this, and bring their funds into the country to take advantage of the widened interest rate differential.  We would note this as an increase in “portfolio investments” by foreigners.  This will add to the already increased net inflow of money into the country, and the resulting appreciation of the peso.

All these will mean a significant strengthening of the peso vis-a-vis the dollar, at least in the period till May 2010. What happens later will depend on the state of the world economy and the Philippine economy by then.

Peso to strengthen

The peso-dollar exchange rate has deteriorated to almost 50:1 in the last week. This is largely caused by the financial crisis that has gripped the world recently. And it is natural for many to wonder if this trend will continue; perhaps even reaching 55:1 or thereabouts.I believe that the trend of the dollar strengthening, vis-a-vis the peso and most other currencies, is about to come to an end. Here are some of the factors behind the coming resurgence of the peso.

Rush of funds to the dollar ending
In the last weeks of panic, US’ stockmarket and other portfolio investments have been divested, and when these investments are taken back into the US, they raise the value of the dollar. As long as the panic continues, the dollar will continue to strengthen.
When the stock and capital markets calm down, this flow of dollars into the US will also slow. This would result in the dollar stabilizing ,and then weakening vis-a-vis other currencies.

Overseas Filipino remittances
An additional factor for the peso is that remittances from Overseas Filipinos is expected to increase in November – December, as it usually does. This Christmas peak in remittances usually causes the peso to strengthen vis-a-vis the US dollar.
The present crisis will not negatively affect the jobs of Overseas Filipinos.

Increased Foreign Investments
The Philippine financial system, and as a result the overall economy will not suffer too much from the crisis. The main negative effect will be a possible decline in exports due to the lower demand from the US and other countries. This makes the Philippines a good destination for foreign investments. Already, Middle Eastern companies are increasing their investments in the Philippines. Companies from other countries will likely follow.

The combination of the above factors will result in the strengthen of the peso vis-a-vis the US Dollar.