Peso seen on firmer footing

CLEARING of uncertainties from the May 9 national elections and the central bank’s shift to an interest rate corridor system has made the outlook for the peso this year “brighter” in the eyes of The Hongkong and Shanghai Banking Corporation Ltd. (HSBC).

In the Philippine section of the bank’s Aug. 23 Emerging Markets

FX Roadmap report that was emailed to journalists, HSBC analysts said they now see the peso ending at P45 to the dollar by yearend from P48.50 previously.

“The outlook is brighter for the peso as political and monetary policy uncertainty has passed,” read the report’s Philippine section, titled: “Reforming our view.”

“We have turned more constructive on the Philippine peso,” it added of the local currency, which yesterday closed at P46.46 against the greenback, some 1.3% stronger than its P47.06-per-dollar finish at the end of 2015.

HSBC noted that the peso “has overcome two notable risk events, allowing it to move onto a much stronger footing,” namely:

policy uncertainty immediately surrounding President Rodrigo R. Duterte’s victory last May 9 and the central bank’s adoption last June 3 of an interest rate corridor system to better siphon unwanted liquidity and influence market rates besides.

“In the buildup to the election on May 9, uncertainty about the new government and its economic policies weighed on sentiment and the peso,” the report noted.

“However, with Mr. Duterte winning the elections by a comfortable margin, confidence has returned as observed by the fall in the country’s CDS (credit default swaps) and implied volatility in the FX market,” it added.

“Initial signs from Mr. Duterte’s new government that it will pursue a reform agenda could attract FDI (foreign direct investments)” that have otherwise continued to lag behind those going to the country’s comparable Southeast Asian peers.

The report also noted that the Bangko Sentral ng Pilipinas’ ( BSP) trouble- free shift to an interest rate corridor system gave the peso more ground to strengthen.

“The operation went smoothly with minimal market volatility,” the report noted.

“Importantly, the BSP also gave assurances that trust funds (which include foreign investors) will have access to the Overnight Deposit Facilities [component of the new system], thereby easing concerns over foreign outflows.”

It added that while signs that the government will ease foreign investment limits, boost infrastructure spending and simplify the tax system could lure more FDIs, much of the peso outlook now depends on whether the administration will actually deliver on its reform plan.