I posted this information in response to a question posted in Yahoo!Groups, "LivingInThePhilippines3." I thought that it would be appropriate to share here. Enjoy!
The peso and dollar should fluctuate within a narrow range for the rest of this year, at least through the time of the American election. The worst of the sub-prime mess is over now, but corrections continue in the real estate sector. Housing prices bottomed-out in many traditional markets in November, but other areas are still seeing fallout. The main reasons that real estate is still falling in certain areas, and will have a long climb back in others, is due to the high vacancy rates of homes (bank owned), tightly enforced requirements on borrowing (which are starting to ease), and a general credit crunch that is now shifting towards consumer borrowing. Average credit scores of Americans are dropping due to foreclosures, short sales, and Deeds in Lieu thereof, as well as people renegotiating their upside-down mortgages.
Higher interest rates, higher fuel prices, and an increase in unemployment are causing more credit card defaults as well, while banks are trying to raise interest rates into the stratosphere on credit cards (up to 30% or more)! Bankruptcies are also on the rise, and this trend will continue into the foreseeable future. Some banks will still incur multi-million or multi-billion dollar write downs (B of A/Countrywide $2B for renegotiations), and a couple of major bank mergers are on the horizon yet. All of this will eventually settle down, and we will have an American real estate economy again. This total recovery will take at least two years to get back to the price levels of 2006, but five to seven years to get back on track to long-term average year-on-year returns. Real estate is still a great investment if you are a buy-and-hold investor with enough liquidity and good enough credit to qualify for a mortgage.
The rental market prices are increasing, due to high numbers of recently-displaced families, so CAP rates in the multi-family housing sector remain low (gradual increases in CAP rate, but good increases in cash flow), in spite of the recent fall-out in values. Commercial credit is still surprisingly easy to attain for real estate or unsecured obligations.
In addition to the sub-prime mess, the peso has enjoyed certain benefits over the past couple of years. First, the economy has improved, so rather than the cheese heads in government taking all the money for themselves, they have chosen to try to balance the budget. This still doesn't help that poor family of 16 on the corner who can't afford rice, but the country looks better (on paper) to the rest of the world.
The improved credit rates achieved by the Philippine government have allowed fewer pesos to go farther with regard to reducing debt. The BSP's (Bankgo Sentral Philippines - Central Bank of the Philippines) policy of hoarding dollars has created an effective, although limited, hedge against fluctuations, but has put the country in the position of having to reverse itself in order to reduce inflation. In other words, they over-bought dollars, and inflation is already starting to affect the average Filipino. Over the past two years, only we (who get paid in dollars) have noticed the double-digit inflation rate, as peso-denominated prices didn't change, but our purchasing power dropped like a rock!
The improved credit rates achieved by the Philippine government have allowed fewer pesos to go farther with regard to reducing debt. The BSP's (Bankgo Sentral Philippines - Central Bank of the Philippines) policy of hoarding dollars has created an effective, although limited, hedge against fluctuations, but has put the country in the position of having to reverse itself in order to reduce inflation. In other words, they over-bought dollars, and inflation is already starting to affect the average Filipino. Over the past two years, only we (who get paid in dollars) have noticed the double-digit inflation rate, as peso-denominated prices didn't change, but our purchasing power dropped like a rock!
The Federal Reserve Boards' actions in keeping interest rates low (2.00% as of today - Don't expect it to fall any farther), as a hedge against both inflation and a total meltdown in financial markets, has fueled an exodus from investments in the dollar, as higher interest rates are to be found elsewhere. Just look in the newspaper at the difference in interest rates offered by banks for the dollar vs. the peso. European banks give higher rates for Euros as well. If the demand for dollars was higher (usually meaning a lower trade deficit and/or more foreign investment streaming into the country), interest rates would have to rise, and the currency would do the same. (Side Note: Local banks have now adjusted CD rates on peso and dollar accounts to about the same rate, whereas the peso paid much more for the past few years This is an indication that the dollar and peso are expected to hold steady for the next year.)
If not for the sub-prime mess, we probably would have seen the dollar recover to at least 45:1 by now, with a target of 50:1 possible within the next 12-18 months. As it stands, 42:1 or 43:1 is the best it is likely to get by the year-end, unless some major breakthrough happens in the world. Unfortunately, big news is usually negative, so don't hold your breath for this one. The good news is that the dollar is unlikely to fall any lower against the peso, as Malacanang is not going to be able to balance the budget this year. Rising gas prices, a worldwide food shortage, and tightening of financial markets have served to rein in the currency exchange markets, and reduce volatility. In English, this means the exchange markets should be pretty stable the rest of the year, and trade in a narrow range.
Barring any terrorist attacks on US soil, the nuking of any rogue state, global warming putting us under water, or the Lord returning to take over, the exchange rate should be within 41:1 to 43:1 the rest of the year. In sum, a peso:dollar rate of worse than 40:1 is highly unlikely, as is 45:1, in the next six months. We could get to 45:1 by this time next year, if the world economy improves and fuel prices drop (they actually should), but don't expect to see a ratio of 50:1 or better anytime soon (perhaps never).
If you are looking for ways to increase the total return to your portfolio without taking on aggressive risk, please contact me regarding solid investment opportunities in the Philippines.
Received this the other day from a client. (Thank you, Samantha!) I think you might enjoy it:
I had a bunch of Canadian dollars I needed to exchange, so I went to the currency exchange window at the local bank. Just one lady in front of me, an Asian lady who was trying to exchange yen for dollars and she was a little irritated.
She asked the teller, "Why it change? Yesterday, I get two hunat dolla fo yen. Today I get hunat eighty? Why it change?"
The teller shrugged his shoulders and said, "Fluctuations". The Asian lady said, "Fluc you white people, too"
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