MANILA - Metropolitan Bank and Trust Co. on Thursday said it may have to go back to the drawing board for a likely cut in its peso-dollar exchange rate given the local currency’s "surprise" performance last Tuesday.
In an interview, Idelmarc C. Bautista, Metrobank head of research, said the peso may strengthen beyond its forecast of 41.75 to the dollar by yearend given current development in the global economy.
The Semiconductors and Electronics Industries in the Philippines recently cut its export growth forecast from a range of 10-15 percent this year to five to seven percent because of slowing demand from the US, China and Japan. Electronics make up about half of the Philippines' total exports, so this gloomy outlook could drag down the country's total shipments of products abroad.
Bautista said this means imports would also weaken, slowing down dollar outflows, which also boost the peso.
He said imports peak during the third quarter, when the peso dips due to dollar withdrawals by importers. So, the peso’s current strength therefore is unusual.
The Bangko Sentral ng Pilipinas on Wednesday said it will tweek some rules to guard against foreign exchange speculation amid robust foreign capital inflows.
"We've always been looking at possible entry points for speculation. Because if the change is caused by fundamental factors, that is something we would allow to continue. But if the appreciation of the peso is due to speculative activity, we do not like that," BSP Governor Amando Tetangco Jr. said.
On Tuesday, the peso hit a four-year high of 41.72 to the greenback, which the BSP has attributed to the attractiveness of the country to foreign investors given the improved fiscal position and strong forex inflows as investors ditch advanced economies wallowing in debt.
Tetangco said some of the entry points for speculation are non-deliverable forwards and the BSP’s special deposit accounts. He said the NDFs as an entry point for speculators was "already established earlier."
"We have to see if additional measures are needed to make sure foreign exchange transactions are conducted basically to meet legitimate requirements," Tetangco said.
"It will be useful to disabuse the minds of foreign investors that foreign exchange transactions would result to a one-way bet in favor of the peso. Because our foreign exchange regulatory system has been liberalized and capital outflows can provide the counterweight to a sustained appreciation of the peso against the US dollar," BSP Deputy Governor Diwa Gunuigundo said.
"As the economy expands for the rest of the year, we expect the demand for imports to go up, particularly coming from the infrastructure side also from our exporters and oil companies. So that will provide some counterweight to an appreciating peso. We expect the economic growth to average between five to six percent or higher," he added.
In October 2011, the central bank increased the market risk weight of NDFs to reflect the potential systemic risk of these transactions as a result of the increased volatility in forex markets.
Banks and other companies use NDFs to hedge their dollar requirements. The holders are allowed to buy a currency at a specified exchange rate in a given time and shield importers from foreign exchange volatilities.
"However, in a situation where the market has increasingly taken a one-way view that the Philippine peso will strengthen over time, NDFs also became attractive vehicles for speculative funding flows," Tetangco said.
At that time, the net open position of NDFs carried a market risk capital charge consistent with a capital adequacy ratio of 10 percent, which the central bank hiked to a risk weight of 15 percent.
The SDA, on the other hand, is an instrument used by monetary authorities to mop up excess cash in the system, helping keep inflation at bay. These are accounts with the BSP where banks park their excess money for an interest rate of 4.5 percent, better than some government securities especially since the latter's supply is becoming more limited.
Funds parked in SDAs stood at P1.6 trillion last May.
"Banks that use dollars in SDAs in effect get paid to hold on to their dollars while waiting for the peso to weaken," Noel Reyes, who writes a stock market column for InterAksyon.com, said.
"Also note that peso interest rate is always higher than dollar rate due to differences in risk profiles. It's dishonest for banks to arbitage on that," he added.
The BSP may use administrative measures when it comes to the identification of these funds by requiring some sort of certification from financial institutions that these are purely domestic money.
The central bank can monitor foreign money if offshore investors use custodian banks operating in the Philippines and these can go to the stock market, used to buy government securities, bank deposits or unit investment trust funds.
But if these offshore investors pull out from the Philippine stock market or liquidate their government securities and put these in the trust departments of local banks, which in turn place these funds in SDAs, then monetary authorities would not have any way of knowing these had taken place.
On the flipside, most foreign funds would rather go for government securities since the SDAs have "pretty stiff" requirements compared with Treasury bonds and bills, Metrobank’s Bautista said.
On top of that, funds in SDAs cannot be withdrawn that easily unlike the government debt papers that holders can immediately liquidate upon maturity. This makes money in SDAs more long-term in nature than "hot money."
source: interaksyon.com
