Peso seen to weaken in second half of 2015

The peso may continue to depreciate in the coming months to catch up with its peers in the region, helping the Philippines stay competitive against its export-oriented neighbors.

Singapore’s DBS Bank, Southeast Asia’s biggest lender, said in a recent report that the local currency’s stability might not last long given the central bank’s reluctance to adjust interest rates. It added that it might be time to “reassess if markets (were) overly optimistic about the peso.”

At the start of the year, Philippine markets were on a high. The local stock exchange benchmark reached new record highs while the peso remained broadly stable even as its regional counterparts lost value against the surging dollar.

“Apart from being the fastest-growing economy in Southeast Asia, the Philippines also boasted a record-high stock market,” a DBS quarterly report released this month said. “Lately, there were more disappointments than upside surprises.”

The Philippine Stock Exchange index (PSEi) peaked at 8,127.48 on April 10 and it was up 12.4 percent for the year. Since then, the benchmark fell to a low of 7,469 on May 28. This was the same day the government announced that gross domestic product (GDP) growth slowed to a three-year low of 5.2 percent in the first quarter.

Despite weaker-than-expected data, the government did not abandon its goal to lift growth to 7 to 8 percent in 2015. This will depend mostly on a sharp increase in government spending in the second half of 2015, before the election ban takes effect ahead of the 2016 presidential elections.

Throughout this time, the peso has stayed stable between 44 and 45: $1.

Meanwhile, the Bangko Sentral ng Pilipinas (BSP) seems less likely now to adjust interest rates upwards. Higher interest rates would have helped the peso by attracting foreign investors hungry for better yields.

However, inflation slowed to 1.6 percent in May, government data showed. Interest rates are usually done to combat excessive increases in consumer prices. With inflation at record lows, the need to adjust rates has diminished. Paolo G. Montecillo