Silver lining for the stronger peso

Financial markets are fickle animals. They can turn anytime. Plus, there are too many things that affect them, not just in our country but movements of other markets. So, whenever I hear forecasts especially on the peso-dollar exchange rate, I listen to them but with more than just a grain of salt.

But I’m addicted to asking my sources for their forecast. Picture me with my clunky recorder (I still use that kind, not the minuscule ones newbies carry nowadays), lunging after a financial market expert attending a conference, tugging at his sleeves, stepping on his toes – whatever I can do to catch his attention because I’m not even five feet tall – and asking, “Sir, sir, what’s your forecast on the peso?” with my notepad and big fat ballpen already in front of me. Sigh. Journalists are mixed up persons!

The truth is, I have been trying to get my sources to give me their projections for the peso-dollar exchange rate. So far, the most remarkable forecast is P44 to the dollar. Did that shock you?

This guy is bullish on the economy (sorry, I cant disclose his name) and while I am pessimistic by training being a journalist and all, I must admit that most indicators point to a continuous improvement in the economy and foreign exchange inflows especially with chunky foreign direct investments already committed by companies like Coca-Cola, Texas Instruments, etc.

No doubt about it, the peso will be appreciating for quite some time. Let’s not delude ourselves into thinking we can guess what the rate will be. I think the more important thing is to understand what the peso’s appreciation can mean for us, like some of MoneySmarts’ readers are trying to do.

INQUIRER.net’s personal finance article today answers an OFW’s question on what he can do to cushion himself from the impact of the peso’s rise. I also received an email from Mike who says he is concerned that his dollar bond fund earnings this year may not be enough to cover the loss in value of the dollar.

His concerns are valid. As Citibank points out:

Gone will be the days that a five percent per annum return on US treasury bonds will suffice. For 2007, the peso has already appreciated by about six percent absolute. One’s USD investment should thus be earning about 14 percent to 15 percent per annum to offset the effect of the depreciating dollar and still make money in peso terms.

I understand the panic among dollar earners or those whose investments are in dollars. Those who invested with a five-year time horizon, with this year or next year as the scheduled time to liquidate are probably hit badly. There’s nothing to it but to cut your losses by liquidating now if you need the money in the coming months or next year.

There are other options that the article recommends, mostly for OFWs who send money home regularly:

One option is to explore a “forwards” arrangement with a bank. “Forwards” will allow OFWs and their families to lock in the exchange rate for a future conversion. Inquire from banks regarding policies for foreign exchange transactions and foreign currency accounts.

These are not over-the-counter type arrangements, though. You need to be at a “relationship-level” with your bank to be given this type of option. Talk to your personal banker. The right words may open doors.

Here’s another option:

Other options are dollar global equity funds, global balanced funds, global high yield bond funds, and alternative asset classes such as commodity funds and real estate investment trusts (REITs). These investments may potentially yield a high interest income per annum. But since these investments come with risks, the OFW should determine first if he can handle the risks. Check too, if these investments are easily available and accessible to the OFW and/or his family.

Unfortunately, REITS are not yet available here. We still need an enabling law for it. Global balanced funds, global high yield bond funds and global equity funds are available in other countries, not yet here in the Philippines. Those who are working abroad, I hope you can use this tip. For those who are here, it will not hurt to inquire with your bank.

Special Deposit Accounts have been accessible via the treasury departments of banks since early May, providing another alternative to investors looking for a better rate on their deposits and allowing the central bank to siphon off liquidity from the market.

Unfortunately, SDAs are being apportioned off to a huge market. It may be tough to get an allocation, and some banks have reportedly already used up theirs. But do try. Your banker will know about this, so let him know that you know, too.

So, where does that leave us?

Go back to the reason for your investment. Your investment objectives should guide you on what asset classes you need to have. If your dollar holdings are needed soon in pesos, cut your losses and liquidate before you lose any more from the strengthening peso. If it’s for the long-term, say 10 more years, go back to the drawing board. There are many strategies in between, depending on what your investment objectives are. There is no getting away from the fact that you have to make some tough calls and some assumptions that hopefully will not make you lose sleep. So, let those assumptions be yours, not someone else’s.

When that’s done, keep in mind that there is a silver lining to the peso appreciation.

Half of the country’s debt is denominated in foreign currency. A strong peso means lower interest and principal payments in peso terms, making it cheaper for the government to service debt. When the government makes lower debt payments, more funds are devoted to investments (like infrastructure) and social projects (like increasing social security benefits and building schools). There will also be less pressure to raise taxes.

Lower peso interest rates also mean more affordable housing and car loans. It also means that companies can reduce their borrowing costs. Operating margins should benefit both company workers and owners. This means higher salaries (hopefully) and higher profits.

A strong peso will also help keep prices low since the import component of goods will become cheaper.

Do I hear someone groaning? Is someone rolling his eyeballs? I understand. Enjoy your Kellog’s and imported chocolates.

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