Peso breaches 54-$1 barrier

Fueled by massive dollar inflows from overseas Filipino workers (OFWs), the peso rallied yesterday to its highest level in eight months, closing at 53.94 to the dollar, or a gain of 20.50 centavos from Friday’s close of 54.15.

Yesterday’s close was the highest since the peso hit the 53.94 level last March 16.

Market sources said banks were unloading dollars from overseas workers and the increase in supply combined with lackluster demand from corporate buyers continued to boost the peso.

The Bangko Sentral ng Pilipinas (BSP) said the peso has been picking up since last week as OFW remittances flooded the market ahead of the Christmas season.

"The growth in OFW remittances has really been sustained as expected at this time of year," said BSP Governor Amando Tetangco. "There is not much corporate demand either so the peso picked up strength from the supply and demand mismatch."

"The peso gains are remittance-driven," agreed Rovic de Guzman, a senior dealer at the Union Bank of the Philippines. "It’s the season for remittances."

Dollar remittances from OFWs, which make up about a tenth of the economy, will probably rise to as much as 20 percent to $10.3 billion this year, Tetangco said last month.

He said the overall positive market sentiment was also supporting the peso, combined with the momentum that the Philippine currency had gathered in previous weeks.

Dollar remittances have been the magic bullet for the economy this year, fueling an increase in spending as well as the savings rate as banks competed with each other for an increasing share in the remittance business.

During yesterday’s joint hearing of the House and Senate economic committee, Rep. Joey Roxas said even the government budget deficit was being plugged by OFW remittances.

"OFW money is staying in banks, they are not being invested," Roxas said. "Since there is not much economic activity for banks to finance, they use OFW money to buy treasury bills. So this government is being financed by overseas workers."

Yesterday’s performance of the peso came in the wake of reports from the National Economic and Development Authority (NEDA) that economic growth slowed down in the third quarter to 4.1 percent from 4.8 percent in the second quarter.

Despite the disappointing results, markets were optimistic, treasury bill rates are going down and share prices are holding steady.

Earlier, Tetangco said he was expecting the peso to appreciate to as high as 53 to the dollar this year if reforms are sustained as planned.

He added that the peso was gaining enough momentum to even outdo its performance this year, provided that economic reforms are not stalled.

The BSP governor said the peso could trade between 53 to 55 to the dollar in 2006, or P2 better than the BSP’s official projected range for this year of 55 to 57 to the greenback.

"For now, that is what I personally see," Tetangco said. "It can even be better if we outperform our fiscal program like we did this year."

He explained that based on both fundamental and technical factors, there were indications that the peso would be able to sustain its momentum until 2006.

The peso’s sustained improvement, however, hinged on the full implementation of the expanded value-added tax (EVAT), which is due to increase from 10 percent to 12 percent by February 2006.

According to Tetangco, implementing the final portions of the tax reform would significantly improve investor confidence and this has a direct impact on dollar inflows.

"The impact on the peso is not direct but it’s significant and measurable," Tetangco said. "Obviously, additional revenues would improve our fiscal position and showing that kind of commitment to reforms would attract inflows."