Philippine Peso Snaps Five-Day Drop as Remittances Seen Rising

By Lilian Karunungan Nov 26, 2013 5:38 PM GMT+0800

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The Philippine peso snapped a five-day drop on optimism overseas workers will send more

money home in the run-up to Christmas. Ten-year government bonds fell.

Remittances, which increased 5.8 percent in the first nine months from a year earlier, account for

about 10 percent of the nation’s gross domestic product and Filipino workers usually send more

money for Christmas and New Year. Dollar demand has now eased after a recent increase to pay

for imports as the holiday season approaches, according to ING Groep NV.

The peso advanced 0.3 percent to 43.738 per dollar in Manila, prices from Tullett Prebon Plc

show. It touched a 10-week low of 43.935 yesterday, and lost 1.5 percent in the two weeks

through Nov. 22.

“Inflows will be much larger from remittances,” said Joey Cuyegkeng, an economist in Manila at

ING Groep. “The import demand we’ve seen in the past two weeks, which accounted for the

weakness of the currency, is now over.”

One-month implied volatility, a measure of expected moves in the exchange rate used to price

options, increased five basis points, or 0.05 percentage point, to 6.06 percent

The peso near the 44 per dollar level is “attractive” to buy because of the Philippines’ strong

economic fundamentals, Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole

CIB, wrote in a research report today.

The yield on the 11.375 percent notes due October 2023 climbed three basis points to 3.62

percent today, according to noon fixing prices from Philippine Dealing & Exchange Corp.

SUMMARY:

Philippine Peso Snaps Five-day Drop as Remittances Seen Rising

The robust demand for the US dollars, which weakened the Peso for two weeks, has

faded. OFW remittances, which contributes 10% to the total GDP, increased by 5.8% in the first

nine months of the year making expectations higher that it will continue to surge as the Holidays

draw nearer. A decreased dollar demand from importers coupled with positive sentiments on the

remittances advanced the Peso from 43.935 to 43.738.

ANALYSIS:

As the US economy dwindled due to the Asset Bubble Crisis in 2007, the FED started to

pump up its economy by cutting the policy rates to 0%-0.25% effectively weakening its

currency. Simultaneously, Euro zone was also struggling with its debt problems in Greece which

was already spreading throughout other Euro-zone countries. These events pushed investors to

seek opportunities in other regions like Asia and took notice of the Philippines. The Philippines,

a non-investment grade country at that time, had higher interest rates compared to, of course, the

US. Also, its economic fundamentals were trending stronger, despite not being an investment

grade, compared to the debt-burdened Euro zone. In addition to these global events, OFW

remittances had been a sturdy booster of the country’s economy as it contributes approximately

10% of GDP (Gross Domestic Product).

As investors rushed to emerging markets, like the Philippines, inflow of dollars resulted

to an increase in dollar supply in the Philippine economy. Holders of dollars were exchanging

them for pesos for investments and remittances. The result was a depreciation of dollar and an

appreciation of the peso. For instance, from an exchange rate of P43.738/USD, if the price level

falls, peso will appreciate to, say, 43.67. The demand curve for dollars will shift to the left while

the supply curve of dollars will shift to the right as illustrated below.

While appreciation is one indication of an improving economy, it has also its downturn.

The appreciation peso versus the dollar means lesser income for OFW families in the country

who greatly depend on remittances. This, in effect, lessens their purchasing power and decreases

their consumption. A bigger picture of an appreciation of the peso is that it will make import

prices fall and export prices (in foreign currencies) increase. In the long run, when the peso

becomes expensive, Filipino-made products will be less competitive in the world market and so

as in the local market. Lesser consumption means slow inventory turnover for the firms. Firms

will no longer produce in the same pace as they used to and investments, such as expansion, will

fall as well. Appreciating currency, therefore, decreases aggregate expenditure causing GDP (Y)

to fall.

Quantity of USD

 

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Price of USD

 43.738

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 43.670

$

A continuous low price level, however, will eventually attract buyers like importers, to

take advantage of the cheaper dollar and soon demand for dollars will start to pick up again

causing demand for peso to fall. Peso-holders will let go of peso in exchange for dollars. Hence,

there will be a decrease in the supply of dollars and an increase in supply of peso in the system.

This event is now a depreciation of peso and an appreciation of dollar.

Quantity of USD

 

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If an economy needs stimulus, a depreciation of the currency is beneficial as consumers,

especially remittance-recipients, will have an increased purchasing power. As demand for local

goods increases, firms will have to increase production, or even expand, to meet the growing

demands of the consumers. The Philippines’ export products will also appear cheaper in the

world market making it more competitive. If total exports exceed total imports, then the country

will have a trade surplus. An increase in consumer spending and business investments coupled

with a trade surplus, without having to decrease taxes will result to an increase in aggregate

expenditure, thus, an increase in the GDP (Y) of the country.

Drastic movements in a country’s currency can have negative effects to different sectors

of the economy. This is the reason why the Bangko Sentral ng Pilipinas (BSP) closely monitors

the exchange rates to prevents harmful speculations on the part of the market players. When

December came in, USD/PHP exchange rate has been up in the 43.80s-44.30s level. Demand for

dollars rose again as better US economic data continue to come out. Investors are beginning to

shift back to US. There are, however, opposing views regarding the peso. Some analysts view a

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stronger peso towards the end of the year while others claim that it will stay in the 44.00 level.

Many investors were dismayed in the slow government response in the recent calamities.

Also, foreign investors are already saying that the country’s stock market has nothing

much more to offer. They want more Initial Public Offering (IPOs) of new companies to be

more competitively attractive. Furthermore, the Government needs to act on the rising

remittances because it is an implication of a deeper problem in the country -- the lack of job

opportunities with better pay.

T-bills remain at record low

By Zinnia B. Dela Peña (The Philippine Star) | Updated November 5, 2013 - 12:00am

MANILA, Philippines - Demand for short-term debt papers remained strong as the interest rate

for the benchmark 90-day Treasury bills remained at a historic low of 0.001 percent.

The yield on the 182-day T-bills likewise fell to a new record low of 0.001 percent during

yesterday’s auction, down by 89 basis points. Bids amounted to P24.78 billion or four times the

P6 billion accepted by the Bureau of Treasury.

Tenders for the three-month debt paper reached P59.156 billion or more than 14 times the P4

billion on offer.

The interest rate on the one-year papers, meanwhile, rose to 0.278 percent from the 0.190 percent

set in the previous auction. The government accepted only P7.403 billion out of the P8.103

billion worth of bids received, which is P1.9 billion shy of the programmed P10-billion offering.

National Treasurer Rosalia de Leon said the latest auction results show that the bias is on short-

term debt instruments amid the problems in global markets.

De Leon believes that more than half of the investors are foreign as they bet on the rise of the

peso’s value given the country’s strong macroeconomic fundamentals and the Aquino

Administration’s good governance program.

She said the government sees no immediate need to raise funds and is sticking to its P120-billion

borrowing program for the last quarter of the year. The government is issuing P30 billion

worth of seven-year retail treasury bonds in November, and another P30 billion worth of RTBs

in December.

De Leon said the country remains keen on issuing its first inflation-linked bonds to help trim

borrowing costs. The issuance will take place next year, she said.

Inflation-indexed bonds provide protection against inflation and typically have lower coupons

that conventional debt because the principal increases annually at the rate of gains in the

consumer price index.

Aside from this, the government is looking at the possibility of issuing strip bonds, whose

coupon payments and principal repayment are stripped and sold separately. The proposal,

broached by First Metro Investment Corp., is aimed at boosting liquidity.

SUMMARY:

T-bills Remain at Record Low

The yield for the 91-day and 182- day treasury bills remain low. The 91-day t-bill, which

is used as a benchmark for loans, remained at its all-time low of .001%. The 182-day t-bill,

meanwhile, fell to a historic low and the same rate of the 3-mo paper of .001%. Only P6.0

billion of the total P24.78 billion worth of bids was awarded. The 364-day debt paper rose to

0.278% and awarded P7.403 billion out of the P8.103 billion worth of bids. The fall in the yields

of the shorter-term papers is attributed to the interest of foreign investors in the country.

Currently, the borrowing program of the country is seen enough as the Bureau of the Treasury

(BTr) plans to issue a total of P60B of 7-year retail treasury bonds.

ANALYSIS:

As mentioned in the prior analysis, investors switched to emerging markets like the

Philippines for portfolio diversification as the country sustained its resilience to external shocks.

Aside from the equities market, they also took notice of the local bond market of the country. So

what is the local bond market? The Government has several ways to acquire cash. It may raise

taxes, obtain borrowings or print money in worst case scenarios. But for the current economic

environment in the country, raising taxes and printing money are not yet an option. Instead, the

Government raised its domestic borrowings by issuing government securities, like treasury bills

and treasury bonds (fixed treasury notes, and retail treasury bonds) to address financing needs.

The main purpose of these debt securities is to support government spending which includes

building of infrastructures, repayment of debts, financing of sustainable programs that will

benefit the country.

Below is the original schedule of the Bureau of the Treasury (BTr) auction for 2013

taken from its website.

Q1 Q2 Q3 Q4

T-bills 45 billion 40 billion 60 billion 60 billion

T-bonds 75 billion 80 billion 90 billion 90 billion

Total 120 billion 120 billion 150 billion 150 billion

(Source: http://www.btr.gov.ph))

Credit Rating Agencies and economists had prompted the Government to improve the

country’s infrastructures. Before the Bohol/Cebu earthquake and Yolanda, Government’s major

concern was to pump up construction of infrastructures through Public-Private Partnership.

However, government spending only amounted to P751.21B in the first five months of the year,

which is still below target of P945.7B. Borrowings, were then, increased from P120 billion to

P150 billion worth of bonds in the second semester of the year.

Let us assume that government spending increases without changing taxes. If the

Government ramp up, say for instance, construction in different areas of the country, it will have

to purchase materials from construction firms and will have to hire construction workers as well.

Hence, it will have a direct positive impact to construction business and job creation. Increased

number of projects for construction firms means more revenue for them that may translate to

expansion. Expansion will have to require more people being hired and, again, jobs will be

created. After the projects have materialized, efficiency on the part of the citizens will increase.

If roads and bridges connecting provinces to cities were built, transfer of goods will be easier.

Effectively, because of the increase in employment of people, the household consumers will

have more capacity to purchase goods and services. All of these events will increase aggregate

expense and aggregate output of the country.

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Too much spending by the Government, however, without corresponding return on what

they have invested in will reverse all the positive effects. The Government needs to control

borrowing to a certain level of GDP to prevent default on payment of debt like what happened to

Greece. Uncontrolled borrowing will require drastic actions like increase in taxes to increase

revenues of the country. However, increase in taxes will be a burden to firms and, more

especially, to the end-users of goods and services, the household. Higher taxes will decrease

income of the firms resulting to unchanged salaries/wages. The firms, however, will be passing

on to consumers some of the taxes. In addition to this, the taxes withheld from the salaries of

employees will decrease. This will result to a lower level of consumption because of decreased

purchasing power. Lower consumption translates to lower sales which means that firms will be

discouraged to produce more goods since inventory turnover is slow. Government spending will

need to be tempered in order to meet expenses with the capacity of the country. This will pull

down aggregate expenditure and will slow down aggregate output.

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One reason for the historic lows in the T-bill rate is the high demand coming from foreign

investors. They prefer short-term investments because these have minimal risk exposure to

uncertainties. With the developments in the US, it is expected that by next year foreign

investments will swing back to the US market. It was a good thing that the BSP has already

temper hot money inflow by issuing stricter regulation on the SDA (special deposit account) and

cutting the SDA rate to only 2%. At least, effects of the investments going out of the country’s

economy will not be drastic. It is very important for the country to monitor the US economy

because a continuous recovery in the US can prompt the BSP to raise its policy rates to prevent

shoot up of inflation rate.

Philippine Nov. Consumer Prices +3.3% y/y; Median Est. 3.5%

By Max Estayo and Karl Lester M. Yap

Dec. 5 (Bloomberg) – National Statistics Office releases inflation data today in Manila.

Median estimate of 15 economists surveyed was 3.5%. Inflation fastest in 9 months, according

to previously reported data. Nov. core inflation 2.8%. Central Bank Governor Amando

Tetangco announced higher inflation forecasts last month after Super Typhoon Haiyan struck the

country Nov. 8. Inflation is forecast to average 3.2% in 2013, 4.5% in 2014, compared with Oct.

forecast of 3% for 2013, 4% for 2014. Policy settings remain appropriate at this time and there

appears to be no reason to alter stance, Tetangco said Nov. 29. BSP held benchmark interest rate

at record-low 3.5% since Oct. 2012, and cut rate on special deposit accounts 3 times this yr to

2%.

SUMMARY:

Philippine Nov. Consumer Prices +3.3% y/y; Median Est. 3.5%.

November inflation rose at its fastest rate to 3.3% but lower than market expectation of

3.5%. Core inflation, meanwhile, settled at 2.8%. Inflation forecast was raised after Haiyan hit

the Visayas from 3% for 2013 and 4% for 2014 to 3.2% and 4.5% respectively. Currently, BSP

sees no urgency to change interest rates.

ANALYSIS:

Inflation 2013

October November

Headline Inflation 2.90% 3.30%

Core Inflation 2.50% 2.80%

The Bangko Sentral ng Pilipinas (BSP) annually sets a target range for the consumer

price index, also known as “inflation rate”. For 2013, BSP’s target range is between 3%-5%

prior to the calamities that paralyzed most of the provinces in the Visayas region. Average

inflation for the year was at 3% but was revised, after the earthquake and the supertyphoon, to

3.2%. The 3.3% inflation for November is the fastest increase for the year due to increase in the

prices of food and non-alcoholic beverage, utilities and transportation. Core inflation, which

excludes the most volatile components --- food and energy, also increased in November. The

current inflation rate, however, is still within the 3%-5% target range of the BSP and does not

alarm BSP yet.

The increase in the price level, assuming government spending, taxes and money supply

remain the same, decreases real income and may result to borrowing in order to maintain real

income. But since the money supply is constant, there will be more demand for than supply of

money in the system. Hence, cost of money, which is the interest rates, will rise. Borrowing

becomes more expensive for the firms and the households to finance spending activities. It will

eventually result to slower consumption on the part of the households; and lesser expansion and

other forms of investments for the firms. The decrease in the components of the aggregate

expenditure, such as consumption (C) and investments (I) increase, while government spending

(G) remains flat, also decreases aggregate demand which result to a decrease in the aggregate

output of the country’s economy.

To address the fall in the aggregate output, the government will have to increase its

spending. BSP can also cut the monetary policy rates to a tolerable level in order to increase

money supply in the system. By doing so, it will be cheaper for the users of money to borrow

funds from financial institutions to address their spending needs thus increasing aggregate

demand. A low aggregate output will have a little increase in price or no increase at all even if

the aggregate demand rises. The Philippines, although considered as one of the fastest growing

economy in Southeast Asia hitting the 7% level of growth, has not reached its maximum capacity

of aggregate supply. Hence, we can imply from the inflation table in the first part of this analysis

that the increase in aggregate demand, caused by the earthquake and Yolanda, can still be

addressed by the aggregate supply from the firms so the increase in the price level is still

considered within the tolerable limit set by BSP. However, the case would have been different if

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the country is nearing the capacity level of aggregate supply. In such a case, firms will have to

compensate their shortage in production in terms of the growing demand by raising the prices of

their goods and services.

The data below taken from the National Statistics Office explains the rise in the headline

inflation of the country. This means that the demand for these sectors rose after the calamities

occurred and the anticipation for the upcoming Holidays

Sectors with major increase 2013

October November

Food and Non-alcoholic Beverages 3.20% 3.90%

Housing, Water, Light, Fuel 0.80% 1.90%

Transportation 0.50% 0.70%

. With the increase in demand, price level and the aggregate output also increased and

shifted the aggregate demand curve to the right as shown in the graph below. This explains one

cause of inflation called the Demand-pull inflation that is currently happening to the Philippines.

It is expected that the economic data we see now is not yet the whole picture of the

effects of the calamities. GDP for the year is expected to fall to an average of 7% because of the

damage in crops and other goods and services produced by the affected areas. December

inflation is expected to rise not only because of the calamities but because of the Holiday season

as well. Inflation is not a negative phenomenon as long as it remains within the lower range of

the BSP’s target. It has not shown signs of worries and assured that there is no need for a policy

hike at this point.

In 2014, however, rise in inflation will be a very importantly monitored data as the

aftermath of the earthquake and Yolanda will continue to unleash. Furthermore, the plans of US

tapering its bond-buying program will weaken peso versus the dollar and can even heighten

prices of oil and electricity. If inflation continues to rise, BSP may have to raise policy rates by a

 

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quarter to prevent shoot ups or overheating. But, then, of course it will have to weigh other

things such as the US economic actions.