The foreign exchange rate will be at about R56.10 to $1 by December 31, 2005. That’s my fearless forecast. Some careless journalists have spread the inaccurate information that I had forecasted a R61 to $1 by yearend of 2005. If they had looked more closely at the report from which they quoted the figure they would have realized the figure R61.30 was the forecasted average for a four-year period ending in 2010. In a word, the model from which I took my forecast assumes a 3 to 4 percent annual depreciation of the peso for the next five years, hardly an alarming trend.
Why don’t I expect any significant deterioration of the peso-dollar exchange rate between now and the end of the year despite the politically turbulent environment? Let me quote from the most recent forecast of Peter Lee U, Dean of the School of Economics of UA&P: "Despite the markedly higher PesoDollar exchange rate observed in September relative to the rest of the year, expect the Peso-Dollar rate to remain at current levels of about R56.10/$1 and move sideways for the rest of the year to reach a full-year average of R55.60/$1 for 2005. This is due to the lack of any significant change seen to occur in international transactions in both the current and capital accounts along with the still high levels of dollar reserves.
"A depressed global demand for the year has been reflected in the slowdown of both exports and imports as well for the Philippines. However, strong remittances keep the current account in surplus with no slowdown in sight. Thus, no pressure on exchange rates is expected from the current account as a whole.
"In capital markets, foreign investors have exhibited a strong resilience to the political shocks and surprises of the year as evidenced by the steady inflow of portfolio investments although no longer at the same levels as the first four months year wherein monthly portfolio investment inflows average US$715 million as against the US$378 million monthly average for May to August. As of the end of the 1st half of the year, net portfolio investments have reached US$2.0 billion. Furthermore, foreign direct investments are trickling in and are expected to reach the billion-dollar levels in 2006. Lastly, the national government seems to have fulfilled its borrowing needs for the year and thus significant additional loans are not expected for the remainder of the year. Barring any reversal of attitude with regard to foreign investors and their portfolio investments, there should be no adverse pressure on the exchange rates coming from the capital account.
"The BSP’s Gross International Reserves (GIR) are still at high levels with the August figure at US$17.85 billion or 3.99 times the month’s import costs. And, except for the month of July, the GIR has been continually increasing on a monthly basis. A slight dip in our dollar reserves is expected by November as the BSP has announced that it may use its dollar reserves to finance part of its borrowing costs to revolve maturing obligations."
An exchange rate at P56.10 by yearend will be to a great extent due to more than $10 billion of remittances from Overseas Filipino Workers. Although exports growth will remain positive, it will be far from being doubledigit because of a global slowdown precipitated by the spiraling costs of oil. It may be providential, though, that the strengthening of the peso that we saw at the beginning 2005 has been reversed. Our exporters, especially in the semiconductor and electronics sectors, need a slightly depreciating peso to compensate for the worst infrastructures, especially energy costs, in East Asia. We should continue to learn from our Chinese neighbors. Despite more than US$700 billion in international reserves, the appreciation of the yuan has been insignificant. The Chinese continue to count on a weak currency to promote their exports. It will require more dramatic improvement in our infrastructures before we can emulate the Thai baht. For comments, my email is HYPERLINK mailto:bvillegas@uap.edu.ph bvillegas@-uap.edu.ph_.
