A Danish investment advisor expects the Philippine peso to weaken beyond 55 against the US dollar this year if the Bangko Sentral ng Pilipinas remains “passive” when it comes to adjusting the benchmark interest rates.
“If they [BSP] stay passive, it will be 55.50 a dollar,” Peter Lundgreen, the founder and chief executive of Copenhagen-based Lundgreen’s Capital, said in an interview in Makati City.
Lundgreen, who regularly visits the Philippines to monitor the situation in the Asia-Pacific securities and bond markets, said the Bangko Sentral would be three hikes behind the curve in March, when the US Federal Reserve was expected to implement another round of monetary tightening.
“The last time [November 2017], I said they should catch up and they should do two hikes. And they should also look into the pace of the American central bank [US Fed] which will hike [interest rate] in March. So in March, there is an additional need to add on,” said Lundgreen.
The six-foot-three investment banker said there was a direct link between the level of interest rate and the value of the peso. “The more the US hikes their rates and the Philippine central bank stays passive, the less interest rate spread there is, and the cheaper it is to pay the rate against the peso,” he said.
Lundgreen said the Bangko Sentral’s decision to reduce the reserve requirement ratio of banks from 20 percent to 19 percent indicated that the Philippines was running a loose monetary policy which would affect the local currency. “After the reserve requirement part, there is an even more outspoken need to hike rates as a counterweight measure,” he said.
“It is positive that the central bank is changing the way of conducting monetary policy towards normal markets standards, and the central bank communicated about the intentions in a fine way. Though it’s a further loosening of the monetary policy which is an absolute wrong step i.e. the rate hikes are even more needed,” Lundgreen said.
The peso closed at 52.34 against the US dollar on Feb. 19, the lowest in more than 11 years. It recovered slightly on Tuesday to settle at 52.24 against the greenback. Its all-time low was recorded at 56.45 a dollar in August 2004.
“It is almost unusual from the central bank not to counter measure. They are really, really far behind the curve now. Foreign investors will notice and will take that into account,” Lundgreen said.
He said while the government was using the peso to become competitive in terms of exports, it would not be fundamentally healthy for the economy. “A strong currency is the best, because it indicates the economy is doing well,” he said.
Lundgreen, however, said he remained bullish about the Philippine economy. “My assessment is that a bigger part of economy and the financial market has moved more positive from being upbeat to be bullish,” he said.
“The consequence is that these bullish factors are now all priced in the markets, including the stock market. It could generate a feeling of consolidation in several markets where it will be important to identify the growth sectors – when it comes to the stock market,” he said.
“We will have to live with higher volatility but it’s not a threat to the EM [emerging markets] and PH markets,” he said.
Lundgreen said fears of three more hikes by the US Fed that could push interest rate of 10-year treasures above 3.25 percent would trigger a temporary sell-off in emerging markets and Philippines markets. “Although it would generate a good buying opportunity,” he said.
He said he was also expecting that a higher inflation would pose a risk to the local bond market.