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
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
posted by jack galt at
10:49 PM
6 Comments:
Won't the pesos appreciation increase the cost of real estate in US Dollar terms which in turn could turn off prospective investors planning to set up shop here? If rental costs here go up in US Dollar terms, then how do we compete with nearby countries? Not to put down the future of our country, but just being practical when thinking that our political environment is not exactly as stable as Singapore, Hong Kong, China or even Thailand to put us on top of the preferred investment destinations so that the cost of rent is secondary. (Moreover, our country risk is branded as unstable as big concern weighs heavily over the rich getting richer and the poor getting poorer and that this situation is largely due to inefficiencies in the system created by high occurrence of government corruption.)
Another worry of mine why the pesos appreciation may not be good for the property sector is that remittances from OFW will be reduced in pesos terms hurting their amortized obligations on local assets they acquired.
By
Unknown, at 6:06 PM
peso at 38 looks too optimistic, actually many masses are doubting the accuracy of the gnp data, they dont feel it. If peso is too strong, it might be bad for property sector since the OFWs will need to send more dollars to pay their amortizations....right?
The prudent thing for our central bank is build up their reserves, so that when time comes, they will have enough ammo to sell....
Be cautious on overly optimistic projections on the phil. economy, especially from the likes of J. Salceda....in his stock market days he had too good assumptions and later turned out to be a fluke...
By
evergreen, at 9:06 AM
What will drive property values will be excess savings that will be diverted by local "savers" to the property sector.
Local savers tend to keep a portion of their savings in US$. On the back of a falling US$, local savers will look for other alternatives. This is the reason why the stock market is buoyant. We have seen significant funds flow from local investors into the market. In due time, savings will move to the property sector.
OFW purchases alone cannot trigger any meaningful revaluation of property values. They have done a lot in stabilizing property prices. However, you need money from local savers to push property prices further.
Also, property prices are inversely correlated to the country's exchange rate.
Property prices in the Philippines peaked in 1997 when the Peso/US$ rate is at P26.5. Prices dropped by as much as 60% in the next 10 years as the US$ appreciated to P55.0 to US$1.0.
In the US, we are seeing the same phenomenon. As the G7 and Asian currencies appreciate against the US$, property prices have dropped by an average of 15% since it peaked in mid-2006.
By
jack galt, at 3:27 PM
Joey Salceda will be Joey Salceda. People can say what they want to say against him ...but people still listen to him. He has the stature, credentials to give these predictions.
It is unfair to compare his predictions during his stock market days. That was in 1997, when everyone, even the taipans and the tycoons were caught off-guard by the Asian Financial Crisis.
By
jack galt, at 3:36 PM
dont these people see the upside of an undervalued currency? why not follow the yuan ?
By
xoutdeyes, at 3:57 PM
I have huge investments in the USD, which, for the longest time, was my safe haven for its stability. Obviously converting USD to Peso will result in a HUGE loss for me. What can I do in order to minimize this loss? Would converting to other currencies or even gold be a good move?
By
Den, at 7:28 PM
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