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International financial services firm Morgan Stanley has selected the peso as its latest “top pick” currency, citing the favorable economic conditions and significant dollar liquidity of the Philippines.

In its latest report on currencies, Morgan Stanley told its yield-seeking clients that the Philippine peso has so far outperformed other emerging market currencies and was likely to keep appreciating against the dollar over the near term.

It sees the peso strengthening to 40.75 against the greenback by the end of this year and rise further to 39.50:$1 by the end of next year.

“The [Philippine peso] continues to outperform its peers in the region because of its robust fundamentals,” Morgan Stanley said in the report distributed to clients. “Capital inflows [to the Philippines] are picking up as investors are attracted not only by strong growth conditions but also the improving credit position of the [Aquino administration].”

In the first quarter, the Philippine economy grew 6.4 percent from a year ago, faster than the 4.9 percent registered in the same period last year. The Philippines’ growth in the first three months was the second-fastest in Asia after China’s 8.1 percent.

The outstanding debt of the national government as a percentage of the country’s gross domestic product has dropped over the years from a peak of 84 percent in 2004 to only about 50 percent today.

Economic officials said the declining debt burden showed the improved capability of the Philippines to settle its debts to foreign creditors and bondholders.

Morgan Stanley also cited the improving dollar liquidity of the country that has made it more capable of meeting its foreign currency-denominated obligations.

“[The peso] is supported by a positive macro dynamic of above-trend growth and external surplus—no other currency in [the Asian region excluding Japan] has this macro support right now. In addition, the [peso] is supported by a twin surplus,” Morgan Stanley said. The bank was referring to the surplus in the Philippines’ current and capital accounts. A surplus indicates that inflows of dollars and other foreign currencies exceeded the outflows.

The BSP earlier reported that the current account of the Philippines posted a surplus of $882 million in the first quarter. The current account is a record of the inflows and outflows of dollars and other foreign currencies resulting mainly from export earnings, remittances, payment for imports, settlement of foreign debt.

The capital account registered a surplus of $962 million during the period. Capital account covers inflows and outflows resulting from portfolio and direct investments.

The favorable outlook on the Philippine economy by entities like Morgan Stanley has been credited for the increased appetite for peso-denominated portfolio assets, mainly stocks and bonds.

The Philippine Stock Exchange index hit a record high last week, breaking into the 5,300 mark amid optimism on the economy. The rise in demand for peso-denominated portfolio assets was credited for the peso’s rise to a four-year high of 41.68 against the dollar last week.
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