Peso to weaken to 44:$1, Citigroup says

The peso is expected to trade at 44 against the US dollar by yearend instead of the earlier forecast of 42, amid the dampening effects on the Philippine economy of fiscal concerns in developed markets, according to Citigroup Global Markets.

The investment banking services firm said in its latest research note that the brewing “global fiscal storm” would translate to a “lackluster second-semester growth.”

On Tuesday, the peso closed at 44.08 against the greenback, its weakest level in eight months.

Further, according to the research note, the bleak global scenario would cap domestic output growth at 4 percent this year and in 2012.

Citigroup has thus shifted from a “previous strong peso yearend outlook to a strong US dollar view, with the peso now expected to be closer to 44 by end-December.”

Growth prospects for the Philippines have been handicapped by fiscal underspending, supply chain disruption and weak external demand in the second quarter, Citigroup said.

“Whether consumer (and) business fears materialize and curb spending as risk aversion intensifies will determine domestic demand,” it said.

However, Citigroup said “higher-than-expected fiscal spending coupled with purchasing power gains of remittances from a weak peso as inflation recedes would cushion downside risks to growth.”

The company noted that in the second quarter, foreigners plowed in hot money worth $1.46 billion in local currency assets like global peso notes, local equity securities and bonds issued by local private corporations and banks.

The Philippines’ second-half “current account surplus outlook is intact, with [gross international] reserves at $76 billion muting the risk of a disorderly” withdrawal of such hot money, Citigroup added.

In a separate study on the foreign exchange market situation, Citigroup counts the Philippines, China, Taiwan and Thailand as having the strongest foreign exchange reserve coverage in Asia.

“When we incorporate the forward book, Philippine external liquidity ratio now significantly surpasses that of Taiwan and Thailand,” the company said, referring to the $16 billion that the Bangko Sentral ng Pilipinas has in the currency futures market.

Forward booking is one method that the central bank employs to minimize the risk of volatile exchange rates.

Earlier this year, Citigroup said the peso’s appreciation was “likely restrained,” believing that it was unlikely the BSP wants a strong peso outlook.

Citigroup was amenable to the possibility of a strong direction for the peso provided that there would be strong capital inflows supporting a strong peso.

The company also placed the likelihood of a strong peso on the waning impact of risks from political turmoil in the Middle East and North Africa as well as from the supply disruption in Japan.

Last April, Citigroup said the peso could trade against the dollar at a range of 42 to 42.50 if risks from Mena and Japan do wane in the second semester and if investment inflows strengthen in time with the government’s public-private partnership projects.