But HSBC expects the currency to grow stronger
Secretary Carlos Dominguez 3rd prefers a “slightly weak” local currency, which could help boost ex-ports and enhance the purchasing power of overseas Filipino workers (OFWs).
In a forum on Thursday, Dominguez recalled that the previous administration had always wanted a strong peso, but he noted that a strong currency would have a negative impact on exporters and OFWs buying power.
“When you have a too strong peso, two things will happen. One, fewer exports cost more, so your exporters here earn less. Secondly, your OFWs who earn in dollars will get less pesos,” he explained.
With this, the finance secretary said that the present administration is trying to find a balance that would give an advantage to 10-12 million OFWs and exporters.
“For me, I would prefer a peso that is slightly weak . . . P46-47 [to a dollar],” he said.
Banking giant HSBC holds a different view: a stronger peso supported by the current government’s large-scale reforms, could ramp up foreign direct investments (FDI), it said in a report.
The report said, the local currency could cap 2016 at a stronger level of P45 to a dollar. This new projection represents a significant departure from its year-end forecast of P48.50 to a dollar.
“Back in February we had mentioned the Philippine elections and the Interest Rate Corridor as two sources of volatility and weakness for the PHP. With the PHP managing to escape these events relatively unscathed, we have turned more positive on the currency…,” it explained.
One of HSBC’s reasons for turning more positive on the currency is the Duterte administration’s apparent willingness to push ahead with larg e-scale reforms.
For instance, it said President Duterte’s Cabinet announcements have been widely perceived as being business friendly.
“Carlos Dominquez, a businessman who has many leadership roles in a variety of major Philippine companies, has been appointed Finance Secretary.
Meanwhile, Benjamin Diokno, an economist who specializes in fiscal policy and was also Secretary of Budget and Management during Joseph Estrada’s rule, has also been named Head of the Budget and Management Department,” it noted.
HSBC said, additionally there have been discussions on the new government lifting caps on foreign ownership, simplifying the tax system, and hiking infrastructure spending up to 5.2 percent of gross domestic product (GDP) from 2.7 percent currently.
This reform story has already been gaining notable traction in the markets, it said, noting that foreign portfolio flows have surged over $1.5 billion following the election and if the Duterte government is successful in implementing its reform plans, then capital inflows will continue to be supportive of the peso.
“In our opinion, lifting caps on foreign ownership and significant infrastructure spending could have the most important implications for the PHP,” HSBC said.
The banking giant pointed out that both of these measures could spur FDI into the Philippines.
According to the Organization for Economic Co-operation and Development (OECD), restrictions on foreign ownerships have been the major cause for the Philippines lagging its regional peers in attracting FDI, it noted.
“For example, for many sectors, such as transport, telecom, media and electricity, foreign investment is restricted to 30 percent to 40 percent,” it added.
HSBC said FDI could also see a boost thanks to proposals for a big pick-up in infrastructure spending, noting that the announcement of a 3 percent budget deficit this year is both manageable and appropriate.
If the additional government spending is focused on necessary infrastructure products, then this would provide a large fiscal impulse to the economy, it said.
The lender stressed that addressing the infrastructure shortage and providing essentials, such as reliable access to power, will be imperative for attracting FDI.
“Of course the main question is whether the new government can succeed where previous governments have struggled. Over the last few years public spending has consistently been below target–undershooting on average by around 7 percent since 2010,” it pointed out.
“As such, it will be important for Mr Duterte to present a credible strategy to ensure that funds are spent efficiently,” it concluded.