AFTER REBOUNDING against the greenback in 2019, the peso might weaken this year on the back of a possibly wider trade deficit and as investors wait on the sidelines for the clarity of some business-related rules in the country.

Such pressures could drag the peso back to the P52-per-dollar level, according to an economist.

The peso ended at P50.635 per dollar on Dec. 27 — the last trading day of 2019 — stronger by P1.945 year on year from its close of P52.58 on Dec. 28, 2018.

In a note to reporters on Dec. 12, ING Bank NV-Manila Senior Economist Nicholas Antonio T. Mapa said the recent pause in monetary easing by the central bank could be the key to the appreciation of the local unit, aside from the seasonal flows of remittances from Filipino migrants.

“However, given the projected acceleration of the government’s infrastructure program, we expect the peso to face renewed depreciation pressure in the coming months as the trade balance is forecast to widen further into deficit,” Mr. Mapa said.

The Bangko Sentral ng Pilipinas (BSP) last year slashed key policy rates by a total of 75 basis points (bps) as prices of commodities cooled down, resulting in a benign inflation environment after price spikes in 2018 that triggered the BSP rate hikes.

Meanwhile, latest data from the Philippine Statistics Authority (PSA) showed the country’s balance of trade in goods as of October was at a trade deficit of $3.25 billion, slipping 26.4% from the $4.42 trade deficit seen in the same period in 2018.

UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion also sees that trade recovery would be “critical” for peso trading, specifically the country’s import performance.

He added that perception of the investment climate in the country will also be a key factor for the peso.

“Markets and investors need to see and feel the clarity of the rules and the insurance of proper execution on the side of the government,” Mr. Asuncion said in a text message on Dec. 27.

The Corporate Income Tax and Incentives Rationalization Act (CITIRA) has been approved in the House of Representatives. However, it is still awaiting its verdict in the Senate.

Among the propositions of the bill is the reduction of corporate income tax to 20% from 30% over 10 years to make the country have better competitive advantage in the region where average income tax rate is at 22.4%, according to data from the Philippine Exporters Confederation, Inc.

Meanwhile, the peso may be supported by improved risk appetite in 2020 due to recent positive developments in the trade negotiations between the world’s two biggest economies.

“For 2020, the peso exchange rate could continue to be relatively stable…after the phase one US-China trade deal which could be a step in the right direction to support…sentiment in emerging market economies and financial markets such as the Philippines,” Rizal Commercial Banking Corp. (RCBC) Chief Economist Michael L. Ricafort said in a text message last Friday.

Aside from this, Mr. Ricafort is bullish that the country’s dollar reserves will help prop up the local currency against the dollar.

“The peso exchange rate could also be supported by new record highs in the country’s GIR (gross international reserves) and relatively better BoP (balance of payments) data…as well as continued growth in OFW (overseas Filipino workers) remittances, BPO (business process outsourcing) revenues, foreign tourism receipts, and some pick in foreign investment inflows,” he added.

Central bank data showed the country’s dollar reserves as of end-November stood at $86.23 billion, which is enough to cover 7.5 months’ worth of imports of goods and payments of services and primary income.

Meanwhile, the country’s BoP position was at a surplus of $778 million as of the third quarter, a reversal of the $1.9-billion deficit logged in the same period a year ago. This was on the back of increased net inflows in the financial account paired with a lower deficit in its current account.

For this week, Mr. Ricafort thinks a vital catalyst for peso movement would be US data on employment and new cues “for the direction of the US-China trade talks.” He sees that the peso trading at a range of P50.40-50.80 from Thursday to Friday.

Reuters reported that White House trade adviser Peter Navarro said in a Dec. 30 interview with Fox that the much awaited phase one deal between Washington and Beijing would likely be signed by next week, although he said that the confirmation will come from US President Donald J. Trump or the US Trade Representative.

Mr. Navarro also cited a South China Morning Post report which said that Chinese Vice Premier Liu He would visit the US next week to sign the deal, although Mr. Navarro did not confirm it.

For his part, UnionBank’s Mr. Asuncion expects the local unit to move within the P50.50-50.80 band this week as he expects “the strength to continue until we see imports recovering by at most Q1 2020.”

For the entire year, RCBC’s Mr. Ricafort sees the peso moving around P50-51 versus the dollar. Meanwhile, UnionBank’s Mr. Asuncion believes the local unit will trade from the P51-52.50 against the dollar, with the peso seen to end the year at P52.19. — L.W.T. Noble with Reuters

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