RP should let peso fall — analysts

The Philippines has little choice but to let its currency slide given the formidable array of domestic and external forces aligned against it, analysts said yesterday.

And while they agreed it would be futile for the central bank to try to arrest the decline given the limited weapons at its disposal, there were some advantages from a weaker currency. The beleaguered unit slumped again yesterday, sliding to another six-month low of 53.95 to the dollar, passing the previous low of 53.71 on Monday. The unit has now lost almost six percent of its value since the end of last year.

Philippine central bank Gov. Rafael Buenaventura said the central bank had not intervened in the foreign exchange market yesterday and would not alter interest rates to support the peso.

"This is not interest rate driven," he told reporters. "We’re not totally out of line with other currencies."

External factors hurting the peso include weak regional currencies and the Argentine debt crisis, analysts said. Internally, anemic economic growth, worries about the budget deficit and the government’s failure to end the two-month-old Abu Sayyaf hostage crisis were undermining the peso.

The currency’s decline has raised alarm bells, prompting Union Bank of the Philippines president Victor Valdepenas to call on the central bank to intervene. There have also been calls for an interest rate hike to help shore up the peso.

But Rabobank Singapore head of research for Asia/Pacific, Andrew Fung disagreed.

"I don’t think they should be considering either option...with intervention basically you will end up throwing money into the market and it will say thank you very much, while a tighter interest rate environment is not good in a weakening economy," he said.

The overall direction will be determined by the yen, which has dropped more than eight percent this year, he said.

Benefits of weaker peso

Allowing a weaker peso would bring some benefits, although they were limited, Fung said. Export earnings would be bolstered, the central bank would preserve precious international reserves and letting the currency track the weakening economy avoided the danger of misalignment.

But, the cost of imports would rise, such as oil and electronic components, two of the country’s biggest imports. A weaker currency also brings the danger of importing inflation and higher debt servicing costs.

Fung said his bank saw the peso falling to 55 per dollar by the end of the year.

Keon Lee, JP Morgan deputy head of Asian economics, echoed the central bank governor’s comment that an interest rate hike was not the way to go.

"Buenaventura learned back in October 2000 that raising interest rates by 400 basis points does not do anything to the exchange rate if the underlying reason is political," the Hong Kong-based Lee said.

The bank had raised rates four percent in October to try to defend the peso that was reeling from the revelation of corruption charges against the then President Joseph Estrada.

Bleak outlook

On a six-to-12-month view, Barclay’s Capital in Singapore painted a more bearish outlook, saying in a recent weekly strategy report the peso could fall to around 60 to the dollar.

The slump in electronics exports, which makes up to 60 percent of exports, was unlikely to improve. Foreign investment also looked grim given the law and order problems and Southeast Asia’s waning attractiveness as an investment destination, the report said.

In addition, foreign remittances were unlikely to improve due to the economic slowdown in Asia and the Middle East, the main destinations for Filipino migrant workers.

On the plus side, it said allowing the peso to decline meant the central bank would not repeat the mistake of Taiwan and Thailand where targeting strong currencies contrary to the needs of their real economies have deepened economic downturns.

The Philippine central bank was unlikely to use its reserves for the peso, it said.

The bank’s international reserves were $14.58 billion at the end of June, including contingent liabilities at about $1.1 billion and pledged assets of $1.9 billion, the report said.