Fitch Ratings says rate cut may not slow peso’s rise

Fitch Ratings said the 25-point cut in the Bangko Sentral ng Pilipinas’ (BSP)  policy rates may not slow down the peso because foreign investments are expected to continue surging into the equities market.

According to James McCormack, head of Fitch’s Asia Sovereign Group, investment decisions are no longer solely based on the interest differentials between here and other markets.

McCormack said this meant that the rate cut would not work so much as a disincentive towards foreign portfolio investments that normally go to the bonds market.

Monetary officials have been hoping that the cut in key policy rates of the Bangko Sentral ng Pilipinas (BSP) would have the effect of slowing down foreign portfolio investments which would, in turn, tame the growth in domestic liquidity and the appreciation of the peso against the dollar.

According to McCormack, however, the country’s strong economic fundamentals have given listed companies strong growth prospects and they would continue to attract foreign investments.

“If you look at the destination of these investments they are going into equities so the rate cut will not make much of the difference,” McCormack told reporters.

The BSP reported that after a short pause, foreign portfolio investments surged heavily to $274.1 million in October, bringing  the 10-month total to $3.7 billion.

According to BSP Governor Amando M. Tetangco Jr., positive investor sentiment was sustained by the generally upbeat outlook on the domestic economy especially after the International Monetary Fund (IMF) upgraded its growth projection.

Tetangco said the gross investment inflows of $13.4 billion were 118 percent more than the total for the same period in 2006, going mostly to investments in publicly listed shares.

The BSP reported that inflows into the stock market amounted to $11 billion during the 10-month period and accounted for 82 percent of total inflows.

As a result of the steady inflow of foreign exchange from remittances and investments, the peso was expected to pick up even more strength in 2008 and hit levels above 40 to the US dollar, propably at 38 to 39 to $1.