Peso seen weakening

The peso may weaken to about 51.50 to a dollar by the end of this year as weak external payments may resurface and the hike in local interest rates may lag the US Federal Reserve’s pace, a top economist from Dutch banking giant ING said.

ING’s forecast of “milder weakness” in the local currency is slightly weaker than the latest Bloomberg consensus forecast of 50.80 for yearend.

In a research note issued yesterday, ING Philippines economist Joey Cuyegkeng said capital inflows could deliver some peso strength in the interim as foreign investors participate in a fast-growing economy.

This year, ING expects the Philippines to maintain last year’s 6.7 percent growth. The Bangko Sentral ng Pilipinas (BSP), on the other hand, expects foreign direct investment flows to reach $8.2 billion this year from $8 billion last year.

“We expect the peso to show some moderate weakness as the overhang of US dollar from remittances is absorbed by the economy and as demand for US dollar starts to resurface,” Cuyengkeng said.

Recently, the peso has been appreciating like other Asian currencies.

“The overhang of OFW (overseas Filipino worker) remittances accumulated during the holidays and milder demand from importers allowed for strengthening. Implementation of the tax reform package this month was also positive for the peso since the package also delivered financing for the government’s ambitious infrastructure program,” Cuyegkeng said.

“However, inflation pressures from the tax reform may test the upper end of central bank’s target range of 2-4 percent. Central banks sounded more cautious about the path of monetary policy which also supported the peso,” he said.

Overall, Cuyegkeng said the country’s weak external payment position would likely resurface, thereby dragging the local currency.

“We expect the trade deficit to widen to show the worsening capacity of OFW remittances to finance the trade gap,” he said.

ING expects remittances to grow by 4 percent this year to $29.2 billion. However, ING also expects the trade deficit to worsen to $37 billion this year as the 9-percent projected export gain may be outpaced by an estimated 10-13 percent growth in import bill.

“Stronger investment spending would led to a higher import growth,” he said, adding that the difference between remittances and the trade gap would likely worsen to $8 billion to $10 billion from less than $7 billion last year.