Peso seen depreciating to 48-49 to $1 in 2016

The peso, seen to be the most “overvalued” currency in Asia at the moment, is likely to see a “modest” depreciation to the 48-49 levels against the US dollar this year, economists from British banking giant Standard Chartered said yesterday.

In a macroeconomic briefing, economists said they were also seeing the Philippine economy growing by 5.7 percent this year and 6 percent next year despite global headwinds that might gnaw at export receipts and investment inflows.

The election in May is expected to support household spending.

Jeff Ng, Stanchart economist for Asia, said the next president would likely continue the gains of the current administration and sustain a trend growth rate exceeding the performance of his/her predecessors.  “Most certainly, the economy is in a position of strength,” he said.

The gradual depreciation of the peso is seen linked to a slightly slower growth (compared to last year’s full-year expansion of 5.8 percent) and slower remittances.

Diyya Deversh, Stanchart foreign exchange strategist for Southeast Asia and Africa, said the peso was “extremely overvalued” on real effective exchange rate (REER) basis.  He estimated that the peso was on average overvalued by more than 10 percent relative to the 10-year average.

REER refers to the weighted average of a country’s currency relative to an index or basket of other major currencies adjusted for the effects of inflation.

But the depreciation is seen modest and not expected to be a “huge negative” as far as investors are concerned.  “The 2-3 percent depreciation is nothing for the financial market,” said Marios Maratheftis, Stanchart global chief economist.

Stanchart’s contention is that three major factors now scaring global financial markets- the US Federal Reserve (US Fed)’s interest rate increases, China’s economic slowdown and the slump in global oil prices – would become less worrisome later in the year.

Compared to consensus, Stanchart sees the US Fed becoming less “hawkish” or biased for monetary tightening. Maratheftis sees the US Fed hiking interest rates only once—possibly by March this year—instead of four times as expected by most analysts.

The bank also sees the US economy growing by only 1.6 percent this year compared to the 2.5 percent market consensus growth, which meant that the US central bank may resume a “dovish” stance.

For China, Stanchart does not see a hard landing.  It is projecting 6.8-percent growth rate for China this year.