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George Soros

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Marc Andreessen, Founder, Netscape Communications

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Anonymous

Weekend Notes: Peso at P25/US$1

Over the weekend, an article came out in Manila Standard quoting Albay governor Joey Salceda as saying that the Peso will reach P25.0 to US$1.0 in 5 years on the back of strong economic growth and continuously rising remittances. He further said that “I’m thinking [that because of these factors], in five years the peso would go back to the 25 [level]. It’s very clear as sunlight." Please read: Peso seen rising to P25/US$1

The call made by Gov. Salceda might sound like a "Marco Barrera upset" for now, but we should not take this lightly. After all, Gov. Salceda is the chief architect of the country's economic turnaround which saw second quarter gross domestic product (GDP) growth hit 7.5% - the highest level attained in 15 years.

To me, the level as to where the P/US$ rate will settle is immaterial. The most important thing to know is that the Peso is clearly on an uptrend (period). Below are the factors that will sustain the Peso uptrend in the coming years:

1.) Rising dollar inflow. Aside from OFW remittances, revenues from business process outsourcing (BPO) industry is growing at US$1.5bn annually. BPO revenues can potentially be as big as the remittance market. In 2006, total OFW remittances reached US$12.7bn and will likely hit US$15.0bn this year. On the other hand, the BPO industry generates US$4.0 in revenues and is expected to grow by 30% per year. Since BPO is mostly labor inputs, it is safe to assume that 85% of revenues will be kept in the local economy.

2.) Dollar savers no more. The past 10 years saw a massive increase in foreign currency deposit unit (FCDU) held by local individuals. This explains why the Peso remains at 69% below its pre-crisis level of P26.5/US$1. Local "savers" are the biggest hoarders of US dollars. Amidst the specter of a falling US dollar, local "savers" will likely shift their savings to Peso denominated assets. A key break below P44.0/US$1.0 will trigger a massive withdrawal of FCDU accounts.

3.) Compelling relative values. Traditionally, Thai Baht and Peso traded at parity. Currently, Thai Baht is at 34.029 whilst the Peso is at P44.75. This implies that Thai Baht is trading at 30% premium to the Peso. Considering that the Philippines has a much better growth outlook than Thailand, the premium is unjustified. At most, the Thai Baht should be trading at 15-20% premium over the Peso. This suggests that on a relative valuation, Peso should be hovering between P38-P41/US$1.0 levels.

An appreciating currency will definitely generate positive funds flow. To my mind, the movement of Philippine Long Distance Tel. Co. (TEL-P3,100) was driven mainly by the expected appreciation of the Peso. The fundamentals of TEL has not changed since the market bottomed last August 22. The surge in the share price of TEL merely mirrored the movement of the P/US$ rate. TEL is usually a leading indicator on where the P/$ rate is going.

However, in the long-run, the biggest beneficiary of an appreciating Peso will be property values. Property prices will have to adjust versus the value of the currency. Thus, as mentioned, the next big thing in the stock market will be property plays.

For comments, you can send me an email at jack.galt888@gmail.com