Political chaos puts reins on peso

The value of the peso could have settled below the P40 level by now if not for the ongoing political commotion over graft and corruption allegations against no less than the highest ranks in the administration.

“Any political turmoil makes people cautious,” said economist Rolando R. Avante in an economic briefing.

Avante, who is the executive vice president and treasurer of Chinatrust (Philippines) Commercial Bank Corporation, warned that the peso has a huge possibility of strengthening further and settle below P40 level or even at P38 against the US dollar by the end of 2008.

He said because of the political uncertainty these days, the peso is in a very volatile situation, as the market is holding up for their dollars, while some Overseas Filipino Workers (OFWs) may opt to hoard and limit their remittance volume.

He mentioned that during the last two weeks, the Bangko Sentral Ng Pilipinas (BSP) had to buy US$700 million to put a wall on the fragile peso and avoid an abrupt valuation, which is not good for the economy.

If not for this buffer fund, the peso could have settled at a much stronger position now.

“Fast appreciation is not good. Appreciation of the peso ‘per se’ also has its good and bad effects,” he clarified.

He said that the dollar remittances of the OFWs, which is the main backbone of the country’s dollar reserves, is regarded an unstable instrument adding that for the peso “unpredictability is certain, it’s a question of when it will fall.”

While a strong currency is an indication of a strong economy, Avante said it also poses threat to a rapidly growing economy, as well as the fiscal sector.

He said the Business Process Outsourcing (BPO), one of the fastest growing sectors in the country is now trying to find ways to sustain its competitiveness, while others are considering to look at more competitive locations.

Strong peso is one of the threats to the BPO industry, as it is a dollar-earning sector with majority, if not all, of its clients are based in the United States.

Significantly, he said that stronger peso also pose danger to the country’s fiscal sector, saying everytime the peso appreciates, the government stands to lose in terms of foreign debt value.

“Remember, we are only paying the interest of our debt, not the principal,” he said.

Aside from the dollar remittances from OFWs, drivers of strong peso are the country’s sound fundamental, foreign funds coming in, the growth of BPO, and the recession of the US economy.

Although a strong peso could boost the appetite of investors to come, he said the foreign investing community is also carefully looking at the stability of the strong currency.

If the Philippine currency is projected to sustain its strength in long term, the Philippines is expected to attract more foreign investments.