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Philippine Peso Completes Best Year Since 2007 on Upgrade Bets

The Philippine peso completed its best annual advance since 2007, spurred by the fastest economic growth in Southeast Asia and speculation that the nation is on track to win its first investment-grade rating.

Standard & Poor’s raised its outlook on the country’s BB+ debt rating to positive from stable last week and said an upgrade is possible in 2013 as public finances improve. The peso reached its strongest level since March 2008 last month after official data showed the $225 billion economy grew 7.1 percent last quarter, the fastest pace in two years. Its rally in 2012, Asia’s best exchange-rate performance after South Korea’s won, prompted the central bank to impose limits this week on banks’ non-deliverable currency forwards positions.

“The Philippines turned into the darling of investors in 2012 as growth exceeded expectations and further upgrades look imminent,” said Dalmacio Martin, senior vice president at BDO Unibank Inc., the nation’s largest lender. “Benign inflation allowed the central bank to cut policy rates four times this year, while a narrowing budget deficit enhanced our allure.”

The peso strengthened 6.8 percent this year to 41.058 per dollar at the close in Manila, data from Tullett Prebon Plc show. That’s the biggest gain since a 19 percent appreciation in 2007. The currency climbed 0.2 percent today and was little changed from a week ago. Philippine financial markets will be closed Dec. 31 and Jan. 1.

One-month implied volatility in the peso, a gauge of expected exchange-rate swings used to price options, fell to 4.7 percent from 7.75 percent a year ago.

Tobacco Tax

S&P’s decision to bolster the nation’s credit outlook on Dec. 20 came a few hours after President Benigno Aquino signed into law higher tobacco and liquor taxes, which are estimated to boost revenue by 184.3 billion pesos ($4.5 billion) in the first four years of implementation. The credit assessor last raised the rating by a notch in July to the highest sub-investment grade, followed by a similar move by Moody’s Investors Service in October.

The country’s inflation rate fell to a five-month low of 2.8 percent in November, according to the most recent data. The central bank reduced its benchmark overnight borrowing rate by a total one percentage point in 2012 to an all-time low of 3.5 percent. The government’s 11-month budget deficit of 127.3 billion pesos was less than half the 2012 ceiling, according to a report yesterday.

The Philippines will likely reach investment grade in 2013 and managing the currency would become “more challenging” by then, central bank Deputy Governor Diwa Guinigundo said Dec. 21.

Curbing Forwards

Bangko Sentral ng Pilipinas imposed a ceiling for non-deliverable forwards for local lenders at 20 percent of capital, and 100 percent for foreign entities, Governor Amando Tetangco said in a Dec. 26 briefing. Banks have two months to comply with the regulation, which will be reviewed after six months, Tetangco said.

Earlier this year, Bangko Sentral ordered lenders to provide more funds to cover risks on forward transactions and banned overseas investors from its special-deposit accounts. Capital controls won’t be necessary at this stage, Tetangco said this month.

“Excess liquidity and lingering positive sentiment will remain as drivers, but it is difficult to replicate the same results next year as we have become relatively expensive,” Martin said. “Regulatory prudential measures will also limit returns.”

The yield on the benchmark 10-year peso bonds fell more than 1 percentage point this year. It was at 4.4 percent today, compared with 5.41 percent at the end of 2011, according to fixing prices compiled by Bloomberg. That’s the biggest annual decline since 2010.

There remains “significant challenges” in global economy and the Philippines must address any possible fallout including increased market swings, BSP said in a report e-mailed today.

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