The Philippine peso is the only Asian emerging-market currency that forecasters have become more bullish on this year as the nation’s improving economy increases the chance it will win an investment-grade credit rating.
The peso will strengthen 4.2 percent by year-end, according to BNP Paribas, the most positive among 19 analysts surveyed by Bloomberg. The median estimate was for a 0.2 percent advance to 41.60 per dollar. It reached 41.358 on Sept. 17, the strongest level since April 2008, and is Asia’s best-performing currency over the past year. The peso rose 0.2 percent to 41.680 per dollar as of 9:53 a.m. in Manila, according to prices from Tullett Prebon Plc.
Indonesia’s rupiah rallied 20 percent in the three years before Fitch Ratings restored the nation to investment grade in December 2011. The prospect of the peso enjoying a pre-upgrade bump is luring investment and buoying the currency, said Thomas Harr, head of Asia local markets at Standard Chartered Plc, the second-most optimistic forecaster. Foreign funds have pumped $2.2 billion into local stocks this year, compared with $1.3 billion in 2011 and $1.2 billion in 2010, exchange data show.
“We think the Philippines will attain investment grade by 2014,” Singapore-based Harr said in a Sept. 14 interview. “You’ll see capital inflows coming into the country ahead of that.”
The U.K.-based bank predicts the peso will strengthen 2.9 percent to 40.5 per dollar by the end of December from an original estimate at the start of the year of 41.5. BNP Paribas raised its forecast by 8.5 percent to 40 from 43.40. Australia and New Zealand Banking Group Ltd., which had a year-end expectation of 41.50, said it will boost its estimate, without specifying when the revision will be published.
Progress on Deficit
The $225 billion economy expanded 5.9 percent in the second quarter, after growing 6.3 percent in the first three months, as higher public spending and consumption contributed to the best half since 2010. Exports climbed for a fourth month in July, rising 7.8 percent from a year earlier, official data show, while remittances, which make up 10 percent of gross domestic product, rose 5.2 percent to $11.9 billion this year through July. The central bank expects they will advance 5 percent to a record $21 billion in 2012.
“The rest of Asia doesn’t have these remittances, which is a supportive factor for the economy,” Standard Chartered’s Harr said. “The last export number was impressive.”
President Benigno Aquino, who took office on June 30, 2010, has made progress in reining in the budget deficit. The government reported a shortfall of 73.73 billion pesos ($1.8 billion) for the first seven months of this year on Aug. 23, within the 279 billion peso target. That compares with a full-year deficit of 197.8 billion pesos last year and 314.5 billion pesos in 2010. The state aims to narrow the budget shortfall to 2 percent of GDP in 2013 from a goal of 2.6 percent this year.
The country recorded a balance-of-payments surplus of $3.1 billion in July, the most since November 2010, official data show. Inflation has remained below 4 percent since January, after staying at or above that level over the previous 12 months.
Standard & Poor’s raised the Philippines’ debt rating to BB+, one step below investment grade, in July, citing the improved balance of payments and growth prospects. Moody’s Investors Service, which ranks the country at the second-highest junk level, boosted its outlook to positive in May, while Fitch Ratings raised its assessment to one step below investment grade last year.
Aquino’s efforts at fighting corruption, cracking down on tax evaders and repairing state finances have been reflected in international surveys. The Philippines improved 10 levels to 65th in the World Economic Forum’s 2012 Global Competitiveness report released on Sept. 5, the biggest increase among the major Asian economies. The country came in at 129th in last year’s Transparency International Corruption Perceptions Index, compared with 141st in 2008, according to the Berlin-based watchdog’s website.
“What Aquino has done so far is being appreciated by the market, and people are aware that it’s much cleaner politics in the Philippines,” said Irene Cheung, a Singapore-based strategist for Asian foreign exchange and rates at ANZ, said in a Sept. 14 interview. “It will further enhance the image of the Philippines, and we continue to see rating upgrades coming through.”
The Southeast Asian nation’s sovereign bonds are the second-best performing after Indonesian notes among 10 Asian nations tracked by HSBC Holdings Plc in the past year. Peso-denominated securities returned 12.3 percent, compared with Indonesia’s 15.6 percent gain. Malaysian government notes returned 4.5 percent and Thai bonds rose 3.6 percent.
The Philippines’ benchmark 10-year bond yield dropped 52 basis points, or 0.52 percentage point, this year to 4.72 percent. That compares with declines of 23 basis points in Malaysia, 13 basis points in Indonesia and an increase of 37 basis points in Thailand for like-maturity yields over the same period.
“We view the Philippines as a re-rating story, and anticipate an investment-grade rating in the next two years,” Chia-Liang Lian, Singapore-based head of investment management for Asia at Western Asset Management Co., which oversees $447 million globally, said in a Sept. 12 interview. “Fiscal discipline, external surpluses and improving debt dynamics are factors underpinning our view.” The company holds more Philippine notes than the benchmark index recommends, he said.
The country’s improving economic prospects and the likely rating upgrade have already been reflected in the strength of the peso, according to Credit Agricole CIB. The bank, which sees the peso at 41.70 per dollar at year-end, recommends clients sell the currency versus the Malaysian ringgit.
“The peso is overvalued as it didn’t respond to the weakening of the global environment like everybody else,” Dariusz Kowalczyk, a senior strategist at Credit Agricole in Hong Kong, said in a Sept. 14 interview. President Aquino “has surprised on the upside and that’s one of the reasons why the currency and the economy are doing well, but that’s already priced in,” he said.
The peso gained 0.9 percent on Sept. 14, the biggest advance in almost a year, after the Federal Reserve announced a third round of asset purchases the day before. The central bank is ready to make policy adjustments and curb excessive volatility in the currency if needed, Bangko Sentral ng Pilipinas Governor Amando Tetangco said on Sept. 14. The currency fell 0.8 percent in the first two days of this week.
Accommodative Monetary Policy
Credit-default swaps on five-year Philippine government debt dropped 79 basis points this year to 113 yesterday, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices in the privately negotiated market. The contracts pay the buyer face value in exchange for the underlying securities should the issuer fail to adhere to debt agreements. A basis point equals $1,000 annually in a contract protecting $10 million of debt.
Bangko Sentral ng Pilipinas kept the rate it pays lenders for overnight deposits at 3.75 percent on Sept. 13. The decision was predicted by 16 of 20 economists in a Bloomberg News survey, with the rest expecting a quarter-percentage-point reduction.
“We continue to expect the peso to outperform, while the near-term outlook is solid, reflecting the sustained balance-of-payments surplus, credit upgrades and strong demand for Philippine assets,” Thio Chin Loo, a senior strategist at BNP Paribas in Singapore, said in a Sept. 14 interview. “The central bank’s policy will remain accommodative to support growth.”