Philippine peso ends 2012 at ₱41.05 vs. US Dollars, up 6.5%

STRONG PESO. The chart pertains to the average peso-dollar exchange rates for every month of 2012. The chart was based on data obtained from the Bangko Sentral ng Pilipinas and PDEX

The Philippine peso, the best-performing Southeast Asian currency in 2012, settled at P41.05 against the dollar on the last day of trading in 2012.

This made the currency 6.53% stronger than the ₱43.919 it started trading at on January 2. This also brought the average exchange rate to around ₱42.228 for the entire year and posted the biggest annual gain since a 19% appreciation in 2007.

The strongest close of the peso for the year was on December 8 at ₱40.862 while the weakest was on January 2 and January 17 at ₱43.919.

While little changed from a week ago, the local currency had a boost from the Philippines' phenomenal growth of 7.1% in the 3rd quarter -- the fastest in Southeast Asia -- as well as expectations that the Philippines is on track to winning its first investment-grade rating.

However, the stronger peso has been a bane to the following sectors:

Overseas Filipino workers (OFW)

With the strong peso, the purchasing power of the funds that OFW send to their loved ones in the Philippines are diminished. This is because the dollars they send home is equivalent to less in terms of pesos.

In January 2 this year, if an OFW sent $100 to his or her family in the Philippines, this is equivalent to ₱4,391.90. Using the exchange rate for the last trading day of the year, the $100 will only be worth P4,105.

This means less pesos to spend for various needs such as education, basic needs like food and utilities, and other expenses. There is also less room for savings and investments.

Total dollar value of remittances, however, has been resilient, data from the Bangko Sentral ng Pilipinas showed. OFW remittances fuel consumer spending, which is a backbone of the Philippine economy.

Business Process Outsourcing (BPO) firms

An appreciating strong peso strikes at the heart of the industry's -- and the Philippines' -- cost competitiveness as an investment destination. Business Processing Association of the Philippines (BPAP) president and CEO Benedict Hernandez said the appreciation of the peso has made handicapped them as they combat challenges from top rival India.

Hernandez had said they would have still remained competitive if the exchange rate stayed at ₱42:$1, but not beyond that since it widens the cost difference between putting up a BPO firm in the Philippines and India.

"The combination of an appreciating peso and a depreciating Indian rupee has provided India with a meaningful cost advantage," the BPAP had said. The Philippines has already dislodged India as the call center capital of the world.

At stake are about 638,00 direct jobs from the voice-based (call centers) and non-voice-based BPOs. Before the exchange rate issue, the industry players were hoping to double this to 1.3 million direct jobs and hit revenues worth $25 billion by 2016.

Exporters

Manufacturers and retailers of products sold abroad are face with Philippine-made products becoming more expensive when the peso appreciates. They either increase the prices of their goods abroad at risk of reducing demand for these items and products, or maintain their dollar prices and suffer losses as their peso-based production costs soar.

While exports are one of the country's highest dollar earners, along with remittances, they are also a key generator of jobs that are put at risk when the business costs become unsustainable. Export groups said this has caused half of the country's small exporters to close shop.

University of Asia and the Pacific (UA&P) economist Victor Abola said the government should allow the peso to depreciate by around 20 centavos every month. "I believe that the peso is 20 to 30% overvalued. The peso should be around P50 to the dollar to make the country competitive as India, whose exchange rate is at 55 to a $1," Abola explained.

Local firms

A strong peso also encourages cheaper imports, which in turn would threaten local producers, according to Socioeconomic Planning Secretary Arsenio Balisacan.

"We have to be worried by the appreciation of the peso because it affects the lives of ordinary people. It affects employment," Balisacan said, stressing that a strong peso will threaten to erode the country's overall competitiveness.

On the other hand, Balisacan noted that a strong peso also encourages the flow of hot money or investments in stocks and bonds, which help develop the local capital markets. (Read more on Rappler http://is.gd/F07hb8)

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Philippine Peso Set for Best Year Since 2007 on Upgrade Prospect

₱ 100.00 Bill (One hundred Peso Bill)

In the Bloomberg report 27th December 2012,  the Philippine peso is set for its best annual advance since 2007, spurred by the fastest economic growth in Southeast Asia and speculation that the nation is on track to win its first investment-grade rating.

Standard & Poor's raised its outlook on the country's BB+ debt rating to positive from stable last week and said an upgrade is possible in 2013 as public finances improve. The peso reached its strongest level since March 2008 last month after official data showed the $225 billion economy grew 7.1 percent last quarter, the fastest pace in two years. Its rally in 2012, Asia's best exchange-rate performance after South Korea's won, prompted the central bank to impose limits this week on banks' non-deliverable currency forwards positions.

"The Philippines turned into the darling of investors in 2012 as growth exceeded expectations and further upgrades look imminent," said Dalmacio Martin, senior vice president at BDO Unibank Inc. (BDO), the nation's largest lender. "Benign inflation allowed the central bank to cut policy rates four times this year, while a narrowing budget deficit enhanced our allure."

The peso strengthened 6.7 percent this year to ₱41.075 per dollar at 10:37 a.m. in Manila, data from Tullett Prebon Plc show. That's the biggest gain since a 19 percent appreciation in 2007. The currency climbed 0.1 percent today and was little changed from a week ago. Philippine financial markets will be closed Dec. 31 and Jan. 1.

One-month implied volatility in the peso, a gauge of expected exchange-rate swings used to price options, fell to 4.4 percent from 7.75 percent a year ago.

Tobacco Tax

S&P's decision to bolster the nation's credit outlook on Dec. 20 came a few hours after President Benigno Aquino signed into law higher tobacco and liquor taxes, which are estimated to boost revenue by ₱184.3 billion pesos ($4.5 billion) in the first four years of implementation. The credit assessor last raised the rating by a notch in July to the highest sub-investment grade, followed by a similar move by Moody's Investors Service in October.

The country's inflation rate fell to a five-month low of 2.8 percent in November, according to the most recent data. The central bank reduced its benchmark overnight borrowing rate by a total one percentage point in 2012 to an all-time low of 3.5 percent. The government's 11-month budget deficit of  ₱127.3 billion pesos was less than half the 2012 ceiling, according to a report yesterday.

The Philippines will likely reach investment grade in 2013 and managing the currency would become "more challenging" by then, central bank Deputy Governor Diwa Guinigundo said Dec. 21, 2012.

Curbing Forwards

Bangko Sentral ng Pilipinas imposed a ceiling for non- deliverable forwards for local lenders at 20 percent of capital, and 100 percent for foreign entities, Governor Amando Tetangco said in a Dec. 26 briefing. Banks have two months to comply with the regulation, which will be reviewed after six months, Tetangco said.

Earlier this year, Bangko Sentral ordered lenders to provide more funds to cover risks on forward transactions and banned overseas investors from its special-deposit accounts. Capital controls won't be necessary at this stage, Tetangco said this month.

"Excess liquidity and lingering positive sentiment will remain as drivers, but it is difficult to replicate the same results next year as we have become relatively expensive," Martin said. "Regulatory prudential measures will also limit returns." read more in Bloomberg. 

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