Philippine peso ends 2012 at P41.05, up 6.5%

STRONGER PESO. The local currency has been appreciating against the dollar. Graph shows average monthly exchange rate from Bangko Sentral ng Pilipinas and PDEX.

STRONGER PESO. The local currency has been appreciating against the dollar. Graph shows average monthly exchange rate from Bangko Sentral ng Pilipinas and PDEX.

MANILA, Philippines - The Philippine peso, the best-performing Southeast Asian currency in 2012, settled at P41.05 against the dollar on the last day of trading in 2012. 

This made the currency 6.53% stronger than the P43.919 it started trading at on January 2. This also brought the average exchange rate to around P42.228 for the entire year and posted the the biggest annual gain since a 19% appreciation in 2007. 

The strongest close of the peso for the year was on December 8 at 40.862 while the weakest was on January 2 and January 17 at P43.919.

While little changed from a week ago, the local currency had a boost from the Philippines' phenomenal growth of 7.1% in the 3rd quarter -- the fastest in Southeast Asia -- as well as expectations that the Phlippines is on track to winning its first investment-grade rating.

However, the stronger peso has been a bane to the following sectors: 

This means less pesos to spend for various needs such as education, basic needs like food and utilities, and other expenses. There is also less room for savings and investments.

Total dollar value of remittances, however, has been resilient, data from the Bangko Sentral ng Pilipinas showed. OFW remittances fuel consumer spending, which is a backbone of the Philippine economy. 

Manufacturers and retailers of products sold abroad are face with Philippine-made products becoming more expensive when the peso appreciates. They either increase the prices of their goods abroad at risk of reducing demand for these items and products, or maintain their dollar prices and suffer losses as their peso-based production costs soar. 

While exports are one of the country's highest dollar earners, along with remittances, they are also a key generator of jobs that are put at risk when the business costs become unsustainable. Export groups said this has caused half of the country's small exporters to close shop. 

University of Asia and the Pacific (UA&P) economist Victor Abola said the government should allow the peso to depreciate by around 20 centavos every month. "I believe that the peso is 20 to 30% overvalued. The peso should be around P50 to the dollar to make the country competitive as India, whose exchange rate is at 55 to a $1," Abola explained. 

A strong peso also encourages cheaper imports, which in turn would threaten local producers, according to Socioeconomic Planning Secretary Arsenio Balisacan.

"We have to be worried by the appreciation of the peso because it affects the lives of ordinary people. It affects employment," Balisacan said, stressing that a strong peso will threaten to erode the country's overall competitiveness.

On the other hand, Balisacan noted that a strong peso also encourages the flow of hot money or investments in stocks and bonds, which help develop the local capital markets.

Cap on hedging

On Wednesday, December 28, the Bangko Sentral ng Pilipinas announced it will impose limits on local and foreign banks' forward positions -- or non-deliverable forwards (NDF) in industry lingo -- to slow down the peso's strength.

Previously, there was only a gentleman's agreement among the banks regarding forward positions on currencies.

Local banks must now limit their NDF transactions to 20% of their capital, while foreign banks are allowed up to 100%. Violations will be dealt with as a supervisory issue.

The new rules will take effect after February 2013 to give banks time to adjust to these new limits.

NDFs, which began as a hedging facility, have attracted speculative flows that have boosted the peso to P40-to-a-dollar territory this month.

The BSP has previously set its exchange rate forecast for 2012 at the P42 to 45 range. - Rappler.com