JP Morgan sees peso strengthening to 48 to $1

Investment banker J.P. Morgan said yesterday the peso would likely appreciate to 48 to the dollar as the Philippines emerged as best performing market in Asia.

The investment house said the country has outperformed expectations and the only serious threat was whether the Arroyo administration would be able to keep its gaping budget deficit under control.

J.P. Morgan foreign exchange strategist James Malcom said there was a marked pick-up in investor appetite and the steady performance of the peso has made it more attractive as an investment hedge.

According to Malcom, the Philippines was the star performer in J.P. Morgan’s Asian market index, going up by eight percent on currencies alone.

"The peso has been outperforming our own expectations," he said.

Malcom said the peso would likely end up trading within the band of 48 to $1 by yearend mainly due to the country’s "strong leverage" in political recovery.

Although the budget deficit remained worrisome, J.P. Morgan credit and rates research vice president David Fernandez said all the government needed to do was clamp down on expenditures.

"Last year, the government managed to stick to its deficit target and although one year does not make a trend, it has an ace in the hole — clamping down on expenditures," Fernandez said.

Fernandez said that while the government missed its first quarter deficit target by P8 billion, the announcement was not completely unexpected because officials had already said it would "front-load" its expenses in the first quarter.

On the other hand, plummeting interest rates have also worked in favor of the government because it generated savings from declining interest expense.

"The government is paying less in debt servicing, that’s the source of the comfort," he said. "The important thing is that investors have started to come in and more will come."

However, Fernandez said it was crucial for the administration to go out and explain how it missed its first quarter deficit target.

"This administration has been a great communicator so we’re going to be hearing a lot about how they missed the target. If they’re not able to spread out the word, it will have an effect on how investors would perceive this," he said.

J.P. Morgan’s forecast on the foreign exchange rate echoed the earlier projection of Bangko Sentral ng Pilipinas Governor Rafael Buenaventura who predicted the peso would likely improve to 48 to $1 depending on the behavior of the Japanese yen and other currencies in the region.

Buenaventura told reporters the peso was moving along with regional currencies and it would likely appreciate further because the dollar was generally weak.

Buenaventura said dollars continued to flow in from overseas Filipino workers as well as investments on fixed income and equity instruments.

"There is little corporate demand because most of the requirements have already been filled in the last three weeks. Now, obviously some corporations are also cherry-picking," he said.

"I think what happened was that banks started doing their own sort of covering because of concerns that the yen would weaken again," the BSP chief said. "Now, the prognosis is that the yen would appreciate."

Buenaventura said it was possible for the peso to appreciate to 48 to $1 depending on where the yen and other currencies would go. "Suffice it to say that our currency is moving in tandem with the others. It’s just market supply and demand at work at this point," he said.