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January 25, 2008

PHILIPPINES/CURRENCY
Peso to hit 37.2:1 against greenback in 2008

Investment lender HSBC expect the Philippine peso to surge to as high as 37.2:1 against the U.S. dollar this year, due to strong foreign exchange inflows from overseas Filipinos and investments, reports said on Thursday.

However, the strong local currency will accompany a slowdown in the country's economic expansion, local TV network GMA News reported, citing HSBC economist Frederic Neumann.

The Philippines' gross domestic product will only grow 5.9 percent in 2008, after expanding more than 7 percent in the first three quarters of 2007, the economist said, adding that the average inflation for the year will be 4.1 percent.

"We are quite bullish about foreign investments this year particularly in the services sector such as business process outsourcing and tourism development," Neumann said.

The peso is likely to see more upside this year as the economy still has room for a stronger local currency, Neumann said. In face of surging foreign exchange inflows following drastic cuts in U.S. interest rates, the economist said the Philippine central bank will likely tolerate further appreciation of the peso.

The U.S. Federal Reserve's 75 basis-point rate cut, and successive cuts across the globe resulting from that move, is expected to release even more liquidity into the financial market and Neumann said these funds would go straight into Asia.

"We are looking at a process where foreign exchange would flood into Asia because of lowering interest rates in the US," Neumann said.

Neumann said the inflow of remittances from overseas Filipino workers would also be sustained this year and this would support an even stronger peso.

"That would put the pressure on the peso and we believe that the central bank would take a very pragmatic view," Neumann said.

However, the economist said that an appreciation of the local currency to 36:1 or even higher to 35:1 against the greenback would be a burden to the economy.

But Neumann said the peso's strength is more if a political issue than an economic one, seeing that overseas Filipinos, the main contributors to the local economy's growth, are the hardest hit by a stronger local currency.

Courtesy Xinhua

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