Peso may weaken anew on rate cuts, CA deficit

WHILE THE PESO could strengthen against the greenback in the short term on the back of the phase one deal between the US and China, it may weaken later in 2020 up to 2021 due to further monetary easing and the widening of the current account deficit, according to analysts.

For Fitch Solutions Macro Research, the peso, like other Asian currencies, will reap the benefits of risk-on sentiment from the upcoming phase one deal between Washington and Beijing.

“In the near term, unless geopolitical risks quickly flare up in the Middle East, optimism around a US-China trade deal and somewhat stabilizing global macroeconomic data should see some bids for risk assets,” the firm said in a note sent to reporters on Tuesday.

With this, Fitch Solutions said they see the peso averaging at P51.70 per dollar in 2020, better than its previous forecast of P53 a dollar.

The local unit closed at P50.635 on Dec. 27 — the last trading day of 2019 — rising P1.945 year on year from its P52.58 finish on Dec. 28, 2018.

The report also took note of the peso’s strong finish in 2019 relative to its performance in 2018. With this, Fitch Solutions expects “further appreciation will prove modest and be tapered somewhat by our forecast 25 bps (basis points) cut by the BSP in early 2020.”

Meanwhile, Mitsubishi UFJ Financial Group (MUFG) said in a note sent to reporters on Jan. 7 that the local unit is likely to be on a “bearish” trend after a recovery in 2019 on the back of a swing back to current account (CA) deficit in 2020.

“This is on expectations of the current account balance swinging back to a deficit, largely due to wider trade deficits driven in part by a surge in import of capital goods as the government ramps up infrastructure spending,” the report said.

The country’s current account was at a deficit of $992 million in the January to September 2019 period, narrowing by 83% from the $5.837-billion deficit in the same period the year prior.

The BSP expects a CA deficit of $5.6 billion for 2019 and $8.4 billion this year.

With this, MUFG’s analysts said they expect peso to range from as strong as P49.50 to as weak as P53.25 per dollar this year.

MUFG noted that the peso bounced back in 2019 as it saw annual gains of 3.4% against the dollar after a cumulative loss of 24% since 2013.

An analyst from The Hongkong and Shanghai Banking Corp. (HSBC) is also of the view that the peso will likely depreciate to as low as the P53-per-dollar level in 2020.

“On currency, expected policy rate and RRR (reserve requirement ratio) cuts by the BSP (Bangko Sentral ng Pilipinas) would reduce the relatively high carry buffer of the peso,” Cheuk Wan Fan, Chief Marketing Strategist for Asia at HSBC, told members of the media at a briefing in Taguig City on Tuesday.

Ms. Fan said the peso’s weakness will be due to the “loosening monetary and fiscal policy, fading foreign direct investment (FDI) inflows, and re-widening of the current account deficit.”

The BSP in 2019 cut key rates by 75 bps, reducing the yields on the overnight deposit, overnight reverse repurchase, and overnight lending facilities to 3.5%, four percent and 4.5%, respectively.

BSP Governor Benjamin E. Diokno has said the central bank is looking to slash benchmark rates by at least 50 bps this year to continue reversing the 175 bps worth of hikes implemented in 2018.

Meanwhile, lenders’ RRR has been cut by 400 bps last year, reducing reserve requirement for big banks to 14%, five percent for thrift banks, and three percent for rural lenders.

On the other hand, latest FDI data released by the BSP showed inflows slipped 2.9% year on year to $566 million in September from $582 million from the comparable year-ago period. This marked the seventh straight month of decrease in the country’s FDI flows. — L.W.T. Noble