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New year calls for diversifying in foreign exchange

An alternative for those seeking better yields and realize potential foreign exchange gains is to place funds in the fledgling dollar board of the Philippine Stock Exchange. File photo

MANILA, Philippines — Many economists think the weakness of the Philippine peso will persist through 2018, no thanks to an expected more hawkish stance by the US Federal Reserve.

Even the Bangko Sentral ng Pilipinas has said it has allowed a modest and gradual depreciation of the peso as part of an adjustment "to protect the economy." Meanwhile, some analysts project that the peso could slide to P55 against the greenback.

Investment managers like Astro del Castillo, managing director of local stockbroker First Grade Holdings, are looking for opportunities to take advantage of the peso's retreat, which could sap some strength from the rallying local stock market.

Shifting funds to US dollars may lessen the currency risk and even result in some exchange rate gains. But foreign currency deposit units pay very little interest while investing in dollar-denominated bonds of the government requires a fairly large amount.

Del Castillo said an alternative for those seeking better yields and realize potential foreign exchange gains is to place funds in the fledgling dollar board of the Philippine Stock Exchange. Such investment products are a good fit for overseas Filipino workers given that their incomes are in foreign currency, he added.

Only food company Del Monte Pacific Limited's preferred shares that offer a dividend rate of 6.625 percent is listed on the PSE dollar board at the moment. Since listing in April at $10, preferred shares of Del Monte has hit a high of $11.10 while the peso has slipped to multiyear lows. Del Monte will be selling more preferred shares.

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Dollar board

By December, Cirtek Holdings Philippines will debut on the dollar board with its 6.125-percent preferred shares. With these preferred shares, the leading wireless and technology company raised $60 million with an oversubscription of $80 million. This bankrolled further expansion and service debts used to acquire Quintel, a top manufacturer of smart antennas in the US.

Meanwhile, interest rate on Foreign Currency Deposit Unit, or FCDU, deposits is around 0.5 percent, Philippine government dollar bond due 2021 carry a 4-percent coupon, and Ayala Corp. recently sold dollar bonds at 5.125 percent interest.

The PSE introduced the dollar board late in 2016 not only to provide another alternative investment avenue but also to provide listed companies an additional source of funding for their capital requirements.

"It is always prudent practice to diversify your investments. And hedging against foreign exchange risk is part of that," said Ricardo Puig, head of research at Wealth Securities.

Investors’ need for a foreign currency denominated investment is evident in the steadily increasing size of banks' FCDU deposits. At the end of June, FCDU deposits have risen 7.3 percent to $37.23 billion compared to the $34.68 billion posted in the same period last year.

This number could only rise in the face of the steady growth in OFW remittance and the earnings of the business process outsourcing industry.

Only around 38 percent of the FCDU deposits have been lent by banks, mostly to local borrowers, leaving a larger chunk of cash that could be mobilized to help spur economic activity.

Bangko Sentral Governor Nestor Espenilla reminded a recent business gathering about the importance of the central bank's effort to further liberalize and rationalize the foreign exchange rules in reducing the cost of doing business and facilitate job creation.

"This forms part of a broader FX market reform agenda to enhance transparency, improve price discovery, and increase the availability of FX products, especially hedging instruments," Espenilla said. 

The deepening the foreign currency market will ultimately brace the economy against external shocks and allow monetary authorities greater flexibility in handling the exchange rate, he added. 

 

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