Peso in for battering on Fed, Trump policy moves

Economic managers see the peso weakening on the back of anticipated US Fed rate hikes, while uncertainty brought about by the Trump administration’s economic policies also poses risks.

In its Fiscal Risks Statement 2018 report released last week, the Development Budget Coordination Committee (DBCC) said “the timing and pace of policy normalization in the US could influence trends in the peso-dollar exchange rate.”

The government’s budget overseer said the rate hikes could lure money back to the United States as a form of “portfolio rebalancing,” leaving in its wake foreign exchange pressures in markets from where it had stayed for a while.

Thus, the Fed’s move could subsequently “contribute to higher domestic and foreign interest rates in 2017 and 2018” as a form of response from these markets, the DBCC added.

The US Fed raised interest rates three times last year, and the market expected the same number or more this year.

The peso strengthened and returned to the 49:$1 level before 2017 ended, although it again weakened to breach 50:$1 this month.

In December, the Cabinet-level DBCC raised its peso-dollar exchange rate assumption for the medium term: Economic managers said the peso could play around 49-52:$1 for the years 2018 to 2022. The previous forecast was forecast at 48-51:$1.

Budget Secretary Benjamin E. Diokno had said this was not a concern as “peso depreciation is favorable to our fiscal position.”

The DBCC was also concerned about the impact of “the potential shift to inward-looking trade and investment policies” in the United States, specifically on foreign exchange, the business process outsourcing industry, remittances and trade.

For foreign exchange, “short-term volatilities may continue to arise from perceived policy uncertainties,” it said.

Trump’s goal to keep firms from outsourcing their needs could also heavily impact the Philippines’ BPO sector, it said.

Also, “tighter immigration policies could affect [overseas Filipino] remittances from the United States which account for about 33.1 percent of total remittances from January to June 2017,” it added.