The Philippine peso, Asia's best performer in 2007, may struggle to retain the top spot this year as it faces slowing exports and a drop in its hitherto attractive yields.
That said, the peso is still primed to gain anywhere between 5 to 12 percent against the US dollar this year, with the blessings of one of the most tolerant central banks in emerging Asia and the backdrop of flagging growth in developed markets.
The peso had a lot going for it in 2007, when it raced ahead of the Asian pack with a 19 percent gain, including a high yield, a cheap stock market and the central bank's hands-off policy towards the currency.
Most of those factors have changed. Philippine interest rates have fallen 2.25 percentage points in the past 12 months and foreign investors, smarting from a US mortgage-related crisis, are fleeing risky markets. "The more uncertain growth environment, higher oil prices and slower remittance growth should mark the pace of the peso gains lower," said Yen Ping Ho, a strategist at J.P. Morgan Chase Bank.
The peso has already surrendered its pole position this year, with a 0.5 percent rise so far compared with gains of more than 1 percent in the Chinese yuan and Malaysian ringgit. It hit an 8-year high of 40.5 on January 15, but has since retreated to 41.10.
Citigroup forecasts a nearly 12 percent rise in the peso to 37.4 per dollar by the end of 2008 and HSBC is even more optimistic with a forecast of 37.2, but there are less bullish forecasts such as Standard Chartered's of a 5 percent rise to 39.5 and J.P. Morgan's estimate of 38.5.
"The yuan will outperform the peso. We expect a 9 percent appreciation in the yuan," said Thomas Harr, a strategist at Standard Chartered. So far, Philippine authorities have shown little resentment at the peso's steep rally, a rarity in export-dependent Asia where currency appreciation is anathema to monetary authorities.
Exporters say the rising peso is partly to blame for a sharp drop in exports in November and the widening trade deficit. The outlook is not any brighter given the Philippines' main trading partners, the United States and Japan, are slowing and the prospects for the electronics sector, which forms two-thirds of Philippine exports, are still bleak.
But the central bank is concerned about the impact of an appreciating peso on remittance flows from millions of Filipinos working overseas, particularly as global growth slackens. These remittances, totalling $13 billion in the first 11 months of 2007, drive most of the local spending and comprise about 10 percent of economic output.
The central bank plans special deposits and retail bonds as alternate investments for foreign workers, arguably to compensate them for the rising currency and falling yields.
It still forecasts a reduction of 65 percent in the balance of payments surplus for 2008 due to a widening trade deficit from high import prices and a slowdown in exports growth, despite planned sales of state firms to foreign investors. More importantly, yields on Philippine debt are set to fall further as the central bank pursues a growth-friendly policy.