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Philippines: Peso Strengthens Due To Strong Economy

1:45 p.m. Manila, Philippines - The Philippine economy, considered as one of the top performers in Asia, is expected to grow by more than seven percent this year, based on projections made by the World Bank and the International Monetary Fund (IMF).

A combination of increased remittances from overseas Filipino workers (OFWs), increased investment inflows and a strong outsourcing sector will continue to pump more US dollars into an economy that is now regarded as one of Southeast Asia's brightest spots for 2007.

The strong economy has held the peso steady at P41 against the US dollar. Analysts, however, predicted a further strengthening of the local currency and it may test the P37.50 range in the coming months.

Foreign exchange rate could even reach P36.50 in the informal sector or money changers in streets considering the massive inflows for the holiday season and the renewed interest in Philippine outsourcing.

An Asian Development Bank (ADB) study noted that the Philippine peso is now considered Asia's top performing currency. Overall, the peso gained nearly 20 percent this year.

The exchange rate has hit a seven-and-a-half year high of P41.10 during trading last Thursday while informal sector rates are closing in on the P40 pesos to the dollar level.

The peso appreciated on the back of OFW remittances which reached $1.7 billion in October and inflows from the outsourcing and the growing "home-shoring" market. Global hedge funds and bond issues by the Bangko Sentral ng Pilipinas (BSP or Central Bank of the Philippines) were also cited as factors behind the strengthening of the peso.
Subscriptions to the BSP's dollar-dominated bond issues hit new record level in November.

Investors across the globe are seeking stability and gain versus the US dollar. The greenback has weakened largely because of the US subprime mortgage market issues and the Federal government's action on interest rates.

The continuous weakening of the greenback was also due to recession fears in the US economy. Analysts said the decision of the US government to cut lending rates may weaken the dollar further as lower interest rates would drive international investors to high yields and assets in Asia.

The weakening of the dollar, the Philippine Department of Finance (DoF) said, is prompting OFWs to peg their salaries in the stronger Euro or the British pound.

"Our workers are money smart so they are looking away from the greenback. Many are also pegging their contracts for next year in the Euro and the UK pound and away from the US dollar," Finance Secretary Margarito Teves told a Cabinet meeting. This, Teves, said has resulted in an increase in non-dollar dominated contracts.

Frederic Neumann, an analyst from the Hong Kong Shanghai Bank (HSBC), said the BSP would likely cut its overnight borrowing rate by another 25 basis points next week and in early 2008.

"The Philippines is on a roll. Gross Domestic Product (GDP) rose over seven percent in the first three quarters of the year, with more of the same to come," said Neumann in an HSBC briefing to investors.

"The peso, has been among the best performers in Asia this year, rising by over 16 percent against the US dollar in 2007," he said.

Neumann noted that growth in the last year has been fueled by strong inflows and investments in the country's outsourcing business and call center sector. For decades, the country's economy has been supported largely by OFW remittances.

The growth of the business process outsourcing (BPO) sector has fueled a consumption and building frenzy which may be difficult to sustain. Better fiscal management which resulted in lower fiscal deficit has lent stability to Philippine economy.

Next year, analysts said more OFWs may enter into Euro-based and UK pound-based contracts which will bring stability to their earnings. This is expected to stabilize dollar demand and prop up foreign exchange rate to between P38.50 and P40 against the US in the next six months. - Pacific News Center International


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