The weakening of the Philippine peso against the dollar, caught up in a broader sell-off by investors in emerging market currencies, might be short-lived given the Philippines' strong economic prospects. The sell-off in emerging market currencies has been prompted in part by speculation the US Federal Reserve might slow the pace of its monetary stimulus programme.
Specific economic and political concerns have additionally hurt emerging market currencies such as the Brazilian real, the South African rand and the Turkish lire But that does not mean the Philippine peso should automatically be lumped into the same category. The Philippines economy looks in good shape, suggesting the sell-off in the peso to levels around 42.00, not seen since September 2012, may be overdone.
The Philippine economy grew surprisingly strongly in the first quarter, even outpacing China, driven by robust domestic consumption and government spending. First quarter gross domestic product grew a seasonally adjusted 2.2 percent over the prior three months, compared to China's 1.6 percent quarterly growth.
Capital formation jumped an annual 47.7 percent in the first quarter as the private sector sought to expand capacity to meet strong domestic consumption. The Philippine central bank, will most likely leave its overnight rate steady at 3.5 percent at its June 13 meeting. By contrast, others in the region, such as those in South Korea and Thailand, have cut interest rates to stimulate growth.
The peso also continues to benefit from the repatriation of foreign earnings from the estimated 10 million Filipinos working abroad. Foreign capital flows to the Philippines could increase after Standard & Poor's raised the country's credit rating to investment grade on May 2, the second ratings firm to do so in less than two months.
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