Peso to weaken further as rising oil prices widen trade gap — ING

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By Melissa Luz T. Lopez
Senior Reporter

SOARING world crude prices will further bloat the country’s trade deficit, which in turn could keep the peso under pressure over the coming year, a global bank said.

In a report, ING Bank N.V. Manila said inflation fears have “intensified” as oil prices maintain their ascent and could sustain the weakness of the peso as it trades at a 12-year low.

“Trend of a weaker PHP is likely to continue due to a wider current account gap which may deteriorate with higher oil prices,” ING Bank senior economist Jose Mario I. Cuyegkeng said in the market report published yesterday.

The current account measures fund flows drawn from goods and services trading. A deficit means more funds fled the country compared to what went in.

Heavy importations have kept the trade gap wider this year, which authorities attribute to a greater need for raw materials and capital goods to support the government’s infrastructure drive. In particular, the global bank expects domestic demand to remain robust and grow by 8-9% over the next year, against a continuing slump in the export of goods.

The current account posted a $3.1 billion deficit as of end-June, coming from a $133 million gap during the same period in 2017. This matches the BSP’s full-year estimate at 0.9% of gross domestic product (GDP).

However, ING sees the current account to settle at a $5-6 billion deficit this year, equivalent to 2.3% of GDP. They noted that remittances as well as outsourcing revenues are now “inadequate” to make up for outbound funds in the economy.

Surging oil prices may worsen the trade deficit, the bank added.

“The current account deficit could deteriorate to -3.1% of GDP in 2019, roughly $9-10 billion deficit. The fears of oil at $100 per barrel would exacerbate the condition,” Mr. Cuyegkeng said. “We estimate that a $10/barrel increase in average price of oil would increase the oil import bill by around $2 billion. A $100/barrel of oil would increase the import bill by as much as $6 billion.”

International oil prices have increased for the ninth consecutive week, which would lead to a bigger import bill for the Philippines.

A weak current account would then weigh on investor sentiment towards the Philippines and will add to external pressures towards emerging market currencies like the peso.

The Philippines has been seeing current account surpluses until a reversal in 2017, although authorities said this simply reflected increased domestic economic activity.

Still, ING expects some relief for the peso during the fourth quarter as the BSP maintains a hawkish stance, ready to tighten rates to rein in inflation and peso volatility.

The local currency has depreciated by 8.6% year-to-date, with policy makers having stepped up to introduce a hedging facility for entities with big dollar exposures in order to ease demand while also curbing speculative trades.

Additional foreign investment inflows should also help balance outflows, although it will depend on investor appetite, attractive pricing and a volatile global economy.

“A more favorable EM (emerging market) risk environment could lead to a stronger rally. An oil price at $100/barrel could usher in another wave of significant PHP weakness,” the bank added.

ING said the peso could close at P54.25 versus the greenback, which is beyond the government’s P50-53 estimate.