Manila (Philippine Daily Inquirer/ANN) - The peso will likely gain ground against the dollar at a faster pace than most Asian currencies this year as the Bangko Sentral ng Pilipinas starts raising key interest rates to curb rising inflation pressures in the second quarter, European investment bank Credit Agricole CIB said.
In its January economic research titled 'Ball in Asia's Court', Credit Agricole projected that the BSP would start tightening the benchmark overnight borrowing rate by a quarter-percentage point in June from the current 4 per cent, followed by another 25 basis points by September, for a total of 50 basis point this year. The BSP's overnight rate was seen rising further to 4.75 per cent by March next year.
"The Philippine peso is one of our top picks in the region for 2011 as the current account surplus is likely to remain large [nearly 9 percent of gross domestic product] while valuations in the equity market are likely to continue attracting foreign portfolio flows," it pointed out.
"Moreover, as inflation is likely to begin edging up in the second quarter, we expect the rate-tightening cycle to begin concurrently, which would provide further support for the currency," it said.
The peso was forecast to end the first quarter at 43.30 against the dollar before rising to 42.70 by the second quarter, 42.10 by the third quarter and 41.50 by year's end. The local currency closed last Friday at 44.095 against the greenback.
By end-March next year, the peso was seen firming up to 41.20 and further to 41 by end-June 2012.
Most Asian currencies are likely to gain ground against the dollar this year on the back of strong fundamentals. "We favour the Korean won and the Philippine peso as both stand out by having only partially recovered from depreciation during the credit crisis, and present attractive investment destinations on fundamental grounds," it said.
Credit Agricole said recovery in G3, or the world's three biggest economies - United States, Japan and the euro zone - would gather pace this year but still fall far behind Asia. And although growth in Asia would likely moderate this year, the region was seen taking up the challenge well, with China and India leading the charge. Consequently, the investment bank said Asia would remain an attractive destination for investor flows, leading to firmer currencies but also fresh challenges for Asian central banks in the form of asset bubbles and inflation risks.
The Philippines, for its part, was projected to grow its GDP by 5 per cent this year and 6.6 per cent in 2012 while inflation was seen at 4 per cent in 2011 and 4.8 per cent next year.
The firm noted that 2010 was a very good year for the Philippine economy and markets, with GDP growth likely reaching 7.5 per cent for the full year alongside gains in prices across asset classes.
