Peso seen to weaken to 52:$1

MANILA, Philippines - The peso could weaken to as low as 52 to $1 this year as a result of the slowdown in foreign exchange inflows from overseas Filipinos (OFWs) as well as the decline in interest rates.

Hong Kong-based brokerage and investment group CLSA Asia-Pacific Markets said in its second quarter 2009 outlook entitled “Eye on Asian Economies,” that the peso could drop to as low as 52:$1 by the end of this year despite the country’s current account surplus.

“We expect that slowing growth will combine with slowing remittance flows and falling interest to bear down on the peso,” CLSA said.

According to CLSA, the country’s current account surplus could also drop to $6.1 billion or 3.8 percent of gross domestic product (GDP) this year and to $5.1 billion or 3.2 percent of GDP in 2010 from $7.6 billion or 4.6 percent of GDP last year.

“We expect the current account surplus to narrow over this year and next,” CLSA said.

The weakness of the peso is widely expected, however. The Bangko Sentral ng Pilipinas (BSP) had already revised its foreign exchange rate assumption to 46 to 49 to $1 from the previous assumption of 45 to 48 to a dollar.

According to CLSA, it is also expecting consumption to slow down to four percent this year and to two percent next year from 4.5 percent in 2008 mainly due to the decline in remittances from overseas Filipinos.

“Remittance inflows, a key driver of consumption spending in the current business cycle, are slowing,” CLSA said. “Slowing remittance inflows coupled with deteriorating job market prospects and consumer sentiment leaves us forecasting that real spending will slow again this year to four percent.”

On the other hand, CLSA said it is projecting an 11.7- percent increase in government spending this year as a result of the Arroyo administration’s economic stimulus package.

Government spending, CLSA said would be accompanied by a sharp rise in the budget deficit that is expected to swell to 2.7 percent of GDP this year from 0.9 percent last year.

Inflation, on the other hand, is projected to ease to 5.7 percent this year and 4.9 percent next year from 9.3 percent while the yield of the 91-day Treasury bills would decline to four percent from 5.9 percent.

In all, CLSA said it expected the GDP to grow only by 0.8 percent this year and by 0.7 percent next year from 4.6 percent last year due to the global economic slowdown.

“Our below consensus view reflects our bearish global view,” the investment bank said.