Peso seen strengthening to 41.50:$1

MANILA, Philippines - British-owned Standard Chartered Bank and American-owned Goldman Sachs see the peso strengthening to as much as 41.50 to $1 this year due to the recovering domestic economy on the back of strong exports as well as higher international reserves brought about by robust overseas Filipino workers’ (OFW) remittances.

In a study entitled “Philippines: Time for showdown,” Standard Chartered said it expects the peso to strengthen to 41.50 to $1 at end-2010 due to the rebound in exports and strong inward remittances supporting the country’s balance of payments (BOP) position.

“Medium-term, the economic recovery and BOP dynamics should support the Philippine peso,” Standard Chartered said.

The British-owned investment bank pointed out that it expects the country’s domestic output as measured by the gross domestic product (GDP) expanding by 3.3 percent this year from 0.9 percent last year.

It also expects the country’s current account surplus rising to 5.5 percent of GDP this year from 5.3 percent of GDP last year.

“We forecast that GDP growth will improve to 3.3 percent in 2010 from 0.9 percent in 2009 and that inflation will be tame. This should support capital inflows into the Philippines. Meanwhile, we expect the current account surplus to rise to 5.5 percent of GDP in 2010 from 5.3 percent in 2009 due to a structural increase in inward remittances and an improving trade balance,” it added.

Standard Chartered GDP forecast was well within the target of between 2.6 percent and 3.6 percent set by the Cabinet-level Development Budget Coordination Committee (DBCC) for this year.

The investment bank said the May 10 elections would run smoothly and should be broadly postive for markets given that the front-runners including Sen. Benigno Aquino Jr. and Sen. Manuel Villar are pro-fiscal consolidation and pro-business.

“Despite near-term risk factors, ample overseas workers remittances will continue to buoy domestic consumption, so the overall economic impact of a potential election disruption should be limited. We maintain our broadly benign post-election outlook. The pro-business platforms of both frontrunners – Aquino and Villar – provide credible approaches to tackling structural impediments to economic development,” Standard Chartered said.

On the other hand, Goldman Sachs said in its Asia Economic Flash entitled “Philippines: Two engine flows power the economy as it steers through elections” that the peso would likely strengthen to 42.50 to $1 within the year and further to 42 to $1 next year asssuming that there would be a smooth government transition after the May 10 polls.

“Favorable flows and our expectation of the central bank raising rates are likely to be supportive of the peso. If the transition to the new president is smooth, it could also support the peso through improved sentiments. Our three, six and 12-month peso targets are at 43.6, 42.50, and 42 respectively, implying around 7.5 percent in appreciation over the 12-month forwards,” Goldman Sachs stated in the study.