Peter Lundgreen, the chief executive of Copenhagen-based investment advisory firm Lundgreen’s Capital, sees more risks emerging in the Philippines where the peso could end 2018 at a 20-year low of 55 against the US dollar.
“Since the start of this year, we forecasted that the peso-dollar should reach 55. And there is no reason to change that. I think this is where we could be at yearend. Part of the explanation this year is that the dollar, in general, has gone up, not only against the peso. But there is also some capital outflow from the Philippines,” Lundgreen says in an interview in Makati City.
The peso closed at 53.475 against the greenback Friday. The six-foot-three investment banker says there is a direct link between the level of interest rate and the value of the peso.
Lundgreen says the tightening liquidity in the US would further affect Asian emerging markets such as the Philippines.
“Based on last year, the Philippine central bank was behind the curve. So what the central bank has done so far with 100 basis points [increase] is just to compensate for what was missing at the maximum. But the US central bank has hiked as well this year. There are still hikes to come, to follow,” he says.
The Bangko Sentral ng Pilipinas, he says, needs to do more adjustments with the overnight borrowing rate of 4 percent still much lower than the 5.7 percent inflation rate reported in July.
“If they want to show sort of they are on top of things, the work is not done yet,” he says.
Lundgreen’s Capital is regulated by Danish financial authority ‘Finanstilsynet’ and has a license to offer individual investment advice and risk management consulting in the European Union. It also has an office in Fort Bonifacio, Taguig City which Lundgreen visits three or four times a year, to monitor the situation in Asia, including China.
Lundgreen says the Brexit, or the impending exit of the United Kingdom from the European Union, the US-China trade war and the tightening US dollar liquidity are some of the external threats that could affect emerging markets such as the Philippines.
Lundgreen says with the general strength of the US dollar against most currencies, investors were looking at the Bangko Sentral to defend the position of the peso through interest rate hike.
“I have argued that the BSP has been behind with hiking rates. Now all of a sudden they have been very busy. But the thing is the US has been continuously hiking as well. I know that the Philippine economy is not a slave of US monetary policy. But any emerging market has a bigger dependency on US dollar liquidity. It just means so much more on Asian emerging markets on their currency,” he says.
“The Philippine central bank, in my perspective, was too weak, in particular, last year. They were too afraid of the government. They should have shown the strength at that time. That would have comforted investors. And we see what happens,” he says.
“I have sort of raised my concert a bit since early this year. We are seeing more bits and pieces that could lead to a currency crisis. It does not mean that the Philippines is on its way to a crisis. It is just we are seeing the risks as different, from being sort of a lower risk going to a more below moderate to moderate risk,” says Lundgreen.
“This is partly due to the central bank being too slow. That’s my view,” he says.
He says while the interest rate hike would not have a significant impact on taming inflation, this could slow government spending which is partly stoking inflation.
“Can rate hikes sort of be a counterweight to inflation that is rising to sky high. Basically, it cannot because most of the inflations pressures come from higher food prices. Domestic monetary policy cannot really change this. Still, the Philippine central bank needs to counterweight towards government spending program. If they do not, the economy can become too hot,” says Lundgreen, who regularly visits the Philippines to monitor the situation in the Asia-Pacific securities and bond markets.