THE PESO’S WEAKNESS is likely to persist amid external headwinds, Fitch Solutions Macro Research said, even as robust domestic growth and a hawkish monetary policy should help buoy the local currency.
“The Philippine peso is looking technically bearish in the near term and we believe that fears of contagion from other EMs (emerging markets) and rising US interest rates will weigh on the currency further despite the Philippines central bank’s policy actions,” Fitch Solutions said in a commentary published on Monday.
The peso has been trading at fresh 12-year lows in recent weeks after it weakened past the P54 mark versus the dollar in September. Fitch Solutions has revised its full-year forecast for the peso, as it now expects the currency to hit P54.80 versus the greenback by yearend, weaker than its previous P54 forecast.
By end-2019, the local unit could weaken even further to P56.33 per dollar.
“[W]e believe that fears of contagion from the financial crisis in Turkey and Argentina, coupled with rising US interest rates, will continue to fuel broader risk-off sentiment in EMs, resulting in further flight to safety by portfolio investors,” the report read.
“Fundamentally, the peso remains vulnerable due to negative real interest rates differentials vis-a-vis the US, but it does not warrant such a sharp sell-off in our view given the strong economic fundamentals and a hawkish BSP (Bangko Sentral ng Pilipinas).”
The central bank has raised rates by a total of 150 basis points (bp) since May, with last week’s monetary policy review resulting in a second 50-bp hike amid expectations that inflation could have clocked a fresh multi-year high in September.
In a related development, yields under the BSP’s rediscount window have been raised to 5.0625% for loans maturing in up to 90 days, while a higher 5.125% rate will be charged for borrowings with 91- to 180-day tenors. The rediscount window allows banks to tap additional money supply by posting their collectibles as collateral. The banks may use the fresh cash — expressed in the peso, dollar or yen — to grant more loans or service unexpected withdrawals.
Fitch Solutions also expects another tightening move of 25 bp in the last three months of 2018, while another 75bp is on the table next year.
Fitch solutions added that the peso can be expected to remain under pressure as Philippine inflation will likely continue to average higher compared to overall price hikes in the US.
“The main drivers of inflation are the sustained rapid credit growth (18.7% year-on-year in August), incremental implementation of fuel excise tax hikes and the expansionary fiscal stance of the Duterte administration,” the research group added.
The aggressive infrastructure spending program of the government will also exert pressure on the peso by way of a worsening twin (budget and current account) deficit, as the construction drive would require more imports of capital goods.
“In the absence of a corresponding increase in FDI (foreign direct investments) and portfolio inflows or higher domestic savings, which is looking increasingly likely as central banks in developed markets turn more hawkish, a wider current account deficit would put downside pressure on foreign reserves and the peso,” Fitch Solutions added.
Closer ties with China could also expose the Philippines to rising trade tensions between Beijing and Washington. “With the Chinese yuan on a weakening trajectory, Beijing could tighten capital controls, leading to a drying up of external financing from China,” Fitch Solutions said. “Furthermore, the outbreak of a full-blown trade war between the world’s largest and second-largest economy would lead to further risk-off sentiment.” — Melissa Luz T. Lopez