NY think tank sees peso plunging to 46:$1

MANILA, Philippines - The peso may plunge to the 46-per-dollar level in the coming weeks on the back of low interest rates and capital outflows, GlobalSource Partners said.

But the New York-based think tank noted the local currency may settle between 43 and 44 to a dollar by yearend.

Economists Romeo L. Bernardo and Christine Tang said in a market brief that the peso’s recent depreciation streak has not worried the government as this is still in line with other regional currencies’ movement resulting from the US Federal Reserve’s tapering program.

However, Bernardo and Tang stressed the peso has been weakening more than other Asian currencies, apparently due to the lower yields on peso-denominated instruments as compared to other Asian fixed-income securities.

“Philippine short-term treasury yields were driven to near zero late last year as the BSP (Bangko Sentral ng Pilipinas) closed its SDA (special deposit account) window to trust accounts,” the economists said.

“While interest rates have since risen, they remain rather paltry, especially with the BSP projecting higher local inflation ahead, which analysts fear may climb even higher with the peso’s depreciation,” they added.

Bernardo and Tang noted that the “sticky domestic interest rates” have been a result of funds pushed out of the SDA facility that remain idle in bank deposits. The

scenario pushed domestic liquidity to as high as 36.5 percent in November last year.

At the same time, the economists said expectations the central bank will keep key policy rates steady at least in the first half of the year will allow interest rates to remain low.

“These suggest that interest rates will remain low for a while, perhaps through midyear, which may mean continued currency weakness,” Bernardo and Tang said.

“And to the extent that continuing portfolio rebalancing by both residents and non-residents leads to capital outflows, there may be additional pressure on the peso. We would not be surprised if it tests the 46:$1 level in the weeks ahead,” they continued.