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Nomura forecasts P39:$1 forex rate, 50 bps BSP rate hike this year

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MANILA - The Aquino administration is expected to allow the peso to appreciate some more against the US dollar, albeit at a slower pace, to P39.2 by year-end given that the strength is driven largely by strong economic fundamentals, the Nomura Group said.

Based on the latest country visit of its regional economists, Nomura said it sees the Philippine economy growing by 6.4 percent this year and that its bullish outlook is well-founded.

"Our conviction to be long PHP was also reaffirmed following our meetings, but the pace of PHP appreciation was likely to be restrained. We hold onto our short USD/PHP recommendation and maintain our year-end forecast of 39.2," Nomura said.

The Japanese financial group said one of the reasons the peso would continue to climb was due to the "solid" growth of the Philippine economy, robust current account surplus, continued momentum in reform and liberalization, better governance and political will to increase foreign direct investment.

Moreover, the low inflation environment has led to limited appreciation of the peso on a real trade weighted basis. This translates to policy makers "likely" to be more accommodative to nominal peso appreciation, but gradually. In addition, monetary authorities are likely to have increased tolerance for appreciation because of strengthening productivity growth.

"Productivity should pick up from the government's reform/liberalization/better governance drive, which will raise broad investment," Nomura said.

The capital inflows have a diverse mix and are considered relatively healthy. Even though portfolio inflows in January mostly went to the stock market, this was not unique to the Philippines as this was the same case with the rest of the region. The size of this net portfolio inflow is still "small" compared with OFW remittances and the receipts from business process outsourcing, which average at around $2.8 billion in recent months.

Sharp asset price gains in high-end property sector

Instead of installing capital controls, the Bangko Sentral ng Pilipinas (BSP) may shift more toward macro-prudential controls on the real estate sector, mainly the high-end segment.

"The high-end property sector is seeing relatively sharp asset price gains and may soon be addressed through additional controls such as reducing banks' maximum exposure to property, adjusting loan-to-value ratios, limiting single ownership, etc," Nomura said.

The BSP has already limited onshore bank non-deliverable forwards (NDFs) trading and access of foreigners to the special deposit accounts (SDAs). With these in place, the central bank is unlikely to be hurrying in implementing more foreign exchange-related measures, as authorities still see nothing wrong yet with the inflows.

Nomura also said the BSP is "adamant" that it would not use interest rate policy to manage capital inflows and macro-prudential measures would not be "heavy handed."

The Japanese financial group said that even if the Philippine economy grows within the target of 6-7 percent this year, the BSP told Nomura economists that it still sees inflation would remain benign, at around 3-4 percent for 2013 and still well within its target of 3-5 percent.

BSP had said some of the reasons for the low inflation environment were the decision not to raise power tariffs nationwide, good harvests and healthy stockpile of rice, which would help keep food prices steady.

Because of these, the BSP may keep its interest rates where they are now.

However, Nomura disagrees with this assessment and thinks that inflation would pick up to 4.6 percent this year, which would push the central bank to hike its policy rates by 50 basis points.

Nomura said the BSP is using the favorable economic condition to rationalize its monetary policy framework by cutting the rate of the SDAs to 3 percent. BSP Governor Amando M. Tetangco Jr. recently announced that the central bank would implement the interest rate corridor scheme -- with a lower bound SDA rate of 3 percent and an upper bound overnight lending rate of 5.5 percent.

"The BSP is considering whether to make it a symmetric corridor, where the ceiling and floors and adjusted by the same amount, or asymmetric (like Turkey) where, for example if BSP wanted to signal its moving to a bias to tighten monetary policy it could do so by only lifting the ceiling (or lifting the ceiling by more than the floor)," Nomura said.

 

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