Strong peso, weak peso. Make your bet

As usual, economists cannot agree if the peso will be strong or weak as we close this year. There are those who say the peso will be in the low 40s, in line with developments in world finance and the continuing distress in western economies.

Then there is my former mentor, Dr. Bernie Villegas who is using all the same arguments but is seeing a different outcome. At an economic forum sponsored by Security Bank, Bernie gleefully reports that he “had the temerity to make the fearless forecast that the peso-dollar exchange rate at the end of this year will be closer to P45 to 46 than to P40 to 41.”

And Bernie recalls he “expressed this minority opinion in the presence of Central Bank Governor Amando M. Tetangco Jr., who was his usual prudent and noncommittal self, although I detected a slight inclination toward a stronger peso than I was predicting.” The usually bullish Bernie has turned bearish on the economy, which explains his peso prediction.

Tuesday last week, the Philippine peso broke into the 42:$1 level, the highest in two-and-a-half years. Other than world economic trends, economists attribute this to the continued growth of remittances from OFWs. It is explained that OFW families have pretty inflexible needs that must be met by a rather fixed peso budget. So that if they get less pesos for every dollar remitted, they just have to send more dollars.

My former Manila Chronicle colleague, Ares Gutierrez, who is now based in Dubai sent me a link to a Middle Eastern news website that reported how Filipinos have become the number one debt defaulters among various nationalities working in the Emirates. According to Ares, OFWs there resort to borrowing money to augment what they send home apparently because the needs of their families must be met regardless of the strong peso.

This minimizes one of the reasons Bernie used on why the peso will weaken. The OFW, Bernie says, “are getting more sophisticated in their understanding of foreign exchange rate fluctuations, especially with the advice of our leading banks and remittance companies. It is very probable that a good number of them will postpone remitting their dollars to the Philippines in the hope of a peso depreciation late this year or early next year. For this reason, I do not expect the usual larger inflow of dollars for the Christmas holidays.”

I don’t know if economics will trump Pinoy social obligations as Bernie suggests, but I am willing to concede that indeed, the more sophisticated and therefore more affluent OFWs will probably park as much of their forex abroad and just send the bare minimum back home. But as the story of Ares indicates, the typical OFW will beg or borrow and land in jail in the process just so the financial needs of family back home are met even in the light of their dollar buying less pesos.

Then again, NEDA is getting worried that as the peso continues to appreciate, it will mute the “stimulating impact” of the remittances of migrant workers on the economy. Indeed, Neda Director General Cayetano Paderanga Jr. said he continues to hope the effect of the strengthening peso will not keep migrant worker remittances from encouraging consumption growth.

The “stimulating impact” of migrant worker remittances has significantly contributed to the Philippine economy by boosting domestic demand. “Our growth for most of the previous years really has been consumption-oriented,” said Paderanga.

In other words, he is hoping that remittances will continue to support the economy. Remittances are rising in dollar terms, but are weakening in peso terms thus muting its usual stimulating impact on the general economy.

“We will need to watch what happens …remittances …have been showing signs of resurgence. It’s getting back [but] it may not attain the really high growth rates before,” the NEDA chief added.

This “muting” of stimulating impact will be significant given the recent change in leadership in the US House of Representatives that may lead to a withdrawal of Washington’s stimulus package and with the American economy likely to remain weak. The US is one of the Philippines’ main trading partners so such a situation could hurt our exports. It also cuts into the profits of our exporters.

That’s precisely why Bernie thinks the peso will weaken considerably. “This not so positive outlook about international trade is compounded by the austerity measures being implemented in most of the advanced countries in Europe. The belt-tightening that is inevitable in the PIGS (Portugal, Ireland, Greece and Spain) countries will definitely cut down their imports from emerging countries like the Philippines.”

So Bernie says “we should expect our balance of trade to deteriorate, especially as our imports swell with all the big-ticket importations of machinery, equipment, and raw materials that will be needed in major investment projects under the Private-Public Partnership program, such as those in energy, infrastructure, mining, transport, and telecom.”

Bernie also sees flow of “portfolio investments in the Philippine capital market could slow down as many more countries follow the lead of China that raised interest rates for the first time in nearly three years because of concerns about increasing inflationary pressures in the economy.

“As more countries raise interest rates, they would attract more ‘hot money’ into their respective economies. With inflation at low levels in the Philippines, I do not foresee our Central Bank raising interest rates in the near future. If this scenario of higher interest rates among our trading partners should be fulfilled, I am issuing a word of caution to those who are overly excited about our booming stock market today. Easy come, easy go.”

So it seems Bernie doesn’t think we are competitive to other emerging markets in attracting portfolio investments. That’s why he expects the peso to depreciate closer to P45 to 46 by the end of this year. Only time will tell if Bernie is just being a party pooper or if his prognosis stands on solid ground.

PCGG

Reliable sources told me that the PCGG is now investigating what its new officials call a “midnight deal” involving the sale of about 12 hectares of prime property along C-5 right next to The Grove, the first residential property venture of Rockwell in the Ortigas area. The property had been taken over by PCGG after the Edsa Revolution from a Marcos crony who used to have a meat processing plant there called Pimeco.

According to my sources, a company identified with the SM group clinched the deal from PCGG just before P-Noy took office. I asked my sources at the SM Group to ask Big Boy Sy if he was involved in the deal as alleged to me by my PCGG sources. The response came back that no, Big Boy was not involved. It was another low key company within the SM group that is not publicly listed that dealt with the PCGG.

Anyway, I understand that the new PCGG officials will check if everything is in the up and up, specially the pricing. The property is highly coveted by properly developers because of its location and size. It would be easy for PCGG to check if it was properly priced by just checking with Rockwell how much they bought the five hectare Grove property. It couldn’t be below the Rockwell price because the bigger cut deserves a premium price.

I hope everything turns out well. Another SM mall in the area should be good for those who bought units at The Grove. But the deal is unfortunately tarnished by its last minute nature… specially with a PCGG that was manned by pretty controversial personalities known for excessive perks and no significant wealth recoveries from the Marcoses.

The new PCGG officials should resolve this quickly so development can start.

Cowardly dads

Marilyn Mana-ay Robles sent this one.

KID 1: My Dad’s a coward. He hides under the bed when lightning strikes.

KID 2: My Dad’s so scared when my Mom’s away; he sleeps with the woman next door!

Boo Chanco’s e-mail address is [email protected] <mailto:[email protected]>