Petroleum When the Noise Settle Down

Exchange rate outlook is expected to improve after the national elections

By: Michael D. Mundo

Businessmen generally expect a stronger peso-dollar exchange rate in the third quarter compared to a weaker foreign exchange rate anticipated in the second quarter. The Bangko Sentral ng Pilipinas’ report on the Business Expectations Survey for Second Quarter 2004 attributes this finding to “expectations of more stable political conditions and increased economic activity after the elections.”

Business sentiment on the currency exchange rate in Metro Manila, particularly those in industry sectors, however, remains less optimistic compared to the outlook of those outside Metro Manila in both second and third quarters of 2004. On the other hand, the survey reveals that the construction sector has the most optimistic outlook on the exchange rate for two straight quarters.

Another April 2004 survey revealed that businessmen expect the peso-dollar rate to improve in the next six months. The BusinessWorld-Roper ASW survey for the same period, however, reveals that consumers are more bullish on their outlook on the value of the peso in the next six months compared to businessmen.

POLITICAL NOISE

Yet the peso’s agony against the U.S. dollar lingered after the 10 May elections. A day after the polls, the peso-dollar rate closed 0.6 percent lower to P55.98/US$ from P55.68/US$ last 7 May. The peso-dollar rate has already reached a historic low of P56.425/US$ last 26 March, with strong demand at the Philippine Dealing System (PDS) from manufacturing firms and the state-run National Power Corporation, needing dollars to service maturing obligations.

In the same month, popular presidential candidate Fernando Poe Jr. pledged to restructure the country’s foreign debts, raising concerns among foreign creditors and investors. The following month, the exchange rate started to pick up with an improving 91-day Treasury bill rate. The political uncertainty at the stock marketlikewise eased as opinion polls indicated victory for incumbent President Gloria Macapagal Arroyo. Last 6 May, the exchange rate reached its year-high level of P55.39/US$ during intraday trading at PDS.

OPPORTUNITIES

As of March 2004, the country’s export earnings grew 6.3 percent to US$9.2 billion from US$8.6 billion in the first three months of 2003. On the other hand, imports expanded 6.4 percent to US$9.8 billion from US$9.2 billion. Thus, the trade deficit widened 9.2 percent to US$559 million from US$512 million. John Stuermer of the New York-based securities firm, Bear Stearns, however, reports in his 5 May 2004 “Sovereign Asia and Pacific Rim Update” that the Philippine trade balance for the first quarter could be adjusted to a surplus ofUS$600 million since Philippine exports could be understated, having grown by 12.7 percent during the period, showing higher statistics on Chinese imports from the Philippines.
                                                                                                         
In the same quarter, Overseas Filipino Workers (OFW) remittances increased 4.3 percent to US$1.9 billion from US$1.8 billion due to a weaker foreign exchange rate. While remittances from Asia and the Middle East declined 20.5 percent to US$466.0 million from US$586.2 million, OFW income from the Americas and Europe grew 28.6 percent to US$1.4 billion from US$1.1 billion. Also, Filipino workers deployed abroad likewise grew 18.9 percent to 281,526 from 236,699.

As of April, net foreign portfolio investments jumped 101.5 percent to US$172.3 million from US$85.5 million in the first four months of last year. Inflows of foreign portfolio investments grew 197.4 percent to US$754.0 million from US$253.5 million. On the other hand, outflows of foreign portfolio investments rose to US$581.7 million from US$168.0 million.

Likewise, the balance of payments (BOP) bounced back to a surplus of US$334 million in the same period from a deficit of US$518 million a year ago. The Bangko Sentral ng Pilipinas expects a deficit of US$660 million in the balance of payments by end-2004 from a surplus of US$111 million in end-2003. The country’s BOP position may even end up in a slight surplus by yearend should exports perform better in the following quarters. The electronics sector foresees a 10 to 15 percent growth in exports with increasing demand from the United States.

In end-April, the country’s gross international reserves (GIR) stood at US$16.4 billion, equivalent to 4.5 months worth of payment of goods and services and income, from US$16.2 billion, equivalent to 4.6 months worth of payment of goods and services and income, a year ago. (BSP wants to keep the GIR at US$16.0 billion by end-2004.) This includes US$400 million raised from the international bond market by the national government for the National Power Corporation. For its part, the Bangko Sentral ng Pilipinas borrowed US$500 million through a term loan supported by 21 top international and domestic banks partly to finance maturing obligations and its requirements.