Peso value eroded by 20 centavos

Posted at 07/24/2012 8:14 AM | Updated as of 07/24/2012 10:43 AM

MANILA, Philippines - The local currency, the peso, lost 20 centavos at the close of trading on Monday to P42.06 per dollar as President Aquino delivered his third State of the Nation Address or Sona, driven lower by externally driven news rather than by domestic macroeconomic events, which remained positive.

Its eroded value, a domestic currencies trader said by telephone, was more the result of the risk-on risk-off attitude adopted by market players apprehensive of the impact of the latest turn of events in Spain. There, for instance, the cost of borrowing has risen above 7 percent instead of 6 percent that was earlier considered the threshold.

Spain’s significantly higher cost of borrowing multiplies the apprehension of fund managers over the economic prospects of countries in the euro zone in general and its impact on such countries as the United States, also the largest trading partner of the Philippines.

The local currency now averaged a little over 18 centavos lower to P42.026 from P41.845 per dollar on Friday, according to the Philippine Dealing and Exchange Corp., the local currencies market.

But according to analysts at Barclays Capital, the problem is not so much the deterioration of the peso but its forecast appreciation over time as consequence of continued foreign-fund inflows.

In his latest readings of the macroeconomic numbers, Barclays analyst Prakriti Sofat said the central bank, or the Bangko Sentral ng Pilipinas (BSP), was seen actively participating at the foreign-exchange market as and when needed to keep the peso from appreciating as quickly as it already has.

“The strong fundamental backdrop for the peso—a robust balance of payments position, improving sovereign credit-ratings trajectory and increased political stability—has justified the currency’s outperformance versus other regional currencies. However, we believe the central bank’s preference is for the peso to be in the middle of the Asian currency pack and it is uncomfortable with the peso’s recent rapid appreciation, especially given the uncertain global growth outlook,” Sofat added.

The peso averaging P42.026 at present has appreciated by 4.3 percent from year-to-date, still the fastest-rising currency in the region no matter that is moved back from a four-year high of P41.68 per dollar only recently.

The Barclays analyst said a stronger peso will only erode the purchasing power of worker remittances apart from denting the competitiveness of the country’s exports.

Barclays said this was the reason the BSP disallowed the participation of foreign funds in its special deposit account window and tasked local banks and financial institutions to prove their compliance with the stricture.

BSP Governor Amando M. Tetangco Jr. reduced the yield on SDA placements as part of the larger goal of encouraging the investment community to go somewhere else to satisfy its need for investment returns.

“We expect the above measures, together with continued verbal intervention, to temper speculative flows into the country. However, given the currency’s strong fundamental story, we expect appreciation pressures to persist. This suggests the BSP will have to resort to more FX [foreign exchange] spot intervention and possibly additional macro prudential measures in coming months. Such measures could include: [1] further reductions in SDA rates to align them with the reverse repo rate; and [2] further increasing the capital charge for local banks’ NDF positions,” Barclays said.

Tetangco earlier raised the capital charge on the banks’ dollar forward positions to 15 percent from 10 percent beginning January 1 this year to make it more expensive for the industry to engage in an activity tending to weaken the peso’s value and make for more complicated monetary management than was warranted.