Thursday, 1 October 2009

Philippine peso seen fundamentally attractive against Indian rupee

Erik de la Cruz
Business Mirror

INDIA’S economy may have shown more resilience than the Philippines’ in a recessionary environment, but the peso is considered more fundamentally attractive than the rupee, according to DBS Bank.

In its Asian Currency Research report dated September 24, the biggest bank in Southeast Asia said the Philippine peso in three of the past four years had appreciated against the Indian rupee during the fourth quarter.

It expects the trend to continue this year.

DBS currency strategist Philip Wee pointed to the Philippines’ current-account surplus to explain this behavior of the peso relative to the performance of the currency of its key rival in terms of attracting investments into the booming business-process outsourcing sector.

As India incurred record trade deficits, he said the country had also slipped into the red on its overall current account. The Philippines, on the other hand, recorded current-account surpluses as it has turned itself into an important outsourcing center and attracted investments, he said.

Wee also noted the contribution of money remitted by Filipinos abroad—who account for a tenth of the population of about 90 million—to the country’s current-account surplus.

“The negative savings-investment gap in India has resulted from the government’s pro-growth policy that relied heavily on investment and industry [from 2005],” he said. “In turn, this led to record trade deficits and pushed the current-account overall into deficit.”

Viewed as a negative savings-investment gap, India’s current account deficit is also consistent with its banks having more loans than deposits, he said.

And to continue pursuing its pro-growth strategy led by investment and industry, he said India will need to increase external borrowings to compensate the shortfall in domestic savings.

“Herein lies one important difference between India and the Philippines,” Wee said. “When both countries were achieving high growth rates before the global crisis, India’s external debt was rising and catching up with its foreign reserves, while foreign reserves were rising and closing its gap with external debt in the Philippines.”

Clearly, he pointed out, the Philippines has a stronger international liquidity position than India.

While both countries avoided recession during the global crisis, the Indian economy was more resilient than the Philippines, with the latter’s gross domestic product (GDP) expanding only by 0.6 percent in the first quarter against India’s 5.8 percent.

But Wee said India’s “resilience” is not without cost as its growth was underpinned by a surge in fiscal spending ahead of the general elections in May this year.

“While India is expected to grow faster than the Philippines, this growth will prove temporary in the short run and less stable in the longer run because of the accompanying deterioration in the country’s fiscal finances and its persistently high inflation,” he said.

The Philippines is also seen facing fiscal troubles amid weak revenue and the urgent need to spend heavily to support economic growth, but Wee believes India’s finances are worse.

He said the Philippines has a more manageable budget gap of 2.7 percent of GDP in the second quarter of this year than India’s 7.3 percent.

Wee also noted that unlike many parts of the world after the global crisis, consumer inflation continued to head up instead of down in India, with the July headline annual figure at 11.9 percent, the highest level since 1998.

In contrast, inflation in the Philippines collapsed to 0.1 percent in August from a high of 12.4 percent a year earlier.

The economist also expects India’s central bank to hike interest rates in the first quarter of 2010, before the Bangko Sentral ng Pilipinas likely makes a similar move in the third quarter.

“In three of the past four years, the Philippine peso has appreciated against the Indian rupee in the fourth quarter,” he said, with gains in 2008, 2007 and 2005 of 8.8 percent, 4.4 percent and 8.1 percent respectively.

The 1.5-percent loss suffered by the peso in the fourth quarter of 2006, he said, was small by comparison.

In earlier years, from 2002 to 2004, he noted the rupee was consistently stronger against the peso in the final three months of the year.

“This year, we look for PHP/INR to break out of its four-month range of 0.99 to 1.02 and to move toward its May high of 1.0563. Hitting the March high of 1.0754 will be a bonus,” Wee said. 

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