Trade tensions seen to drag peso down to 56 to $1

/ 05:28 AM July 26, 2018

The peso may weaken to as low as 56 to a US dollar next year—close to the record low seen in 2004—as an escalating US-China trade war heightens risk aversion at the expense of Asian emerging markets, an economist from Swiss investment bank UBS said.

UBS sees the US-China trade tensions gnawing on the growth of Southeast Asian economies, although at a smaller scale in the case of the Philippines.


It expects the peso to stabilize at 54 to a dollar this year. But for 2019, UBS revised its peso forecast to 56 from its earlier outlook of 54 to a dollar.

“Before the heightened trade tensions, we were slightly more positive on the currency, expecting base stability next year,” UBS associate economist Alice Fulwood said in a teleconference with the media.


This weakness, Fulwood said, would be “less of a Philippine problem,” but more as an offshoot of rising protectionism that in turn results in the strengthening of the dollar.

“We expect the imposition of (US versus China) tariffs to be met with some sort of risk-off tension and some strengthening of the dollar against Asian currencies,” she said.

The last time the peso traded at the 56 levels to a dollar was in 2004. At that time, the Philippines was at the brink of a “fiscal crisis,” which was subsequently stabilized by the 2-percentage rise in the value added tax (VAT).
The weakest peso closing in history was recorded at 56.45 to a dollar on Sept. 27, 2004.

But while UBS expects a “meaningful fallout” on growth across Southeast Asian economies with the escalation of US-China trade war, the Philippines would likely see the smallest cut in growth, Fulwood said. (see related story on B3)

The trade war is seen to chop off 20 basis points from the Philippine gross domestic product (GDP) in 2019 versus the 50-100-basis point reduction in growth in the likes of Singapore and Thailand, she said.

UBS sees the Philippine GDP growing by 6.4 percent next year, trimming its earlier forecast of 6.6 percent. This year, growth was projected at 6.8 percent.

UBS expects the Bangko Sentral ng Pilipinas to hike interest rates twice more this year for a total of 50 basis points but likely stay on hold by 2019 as inflation falls back to targeted 2-4 percent range alongside a more muted growth pace. UBS sees Philippine inflation rate easing to an average of 3.8 percent next year from 4.7 percent this year.


UBS also sees further downside for the Chinese renminbi (RMB), which it now projects to end this year at 6.8 and weaken to 6.9 by end-2019. “That matters because the experience so far this year and in 2015 was that when the RMB weakens against the US dollar then so do Asean currencies,” the bank said in a research note.

It expects the US Federal Reserve to pause its monetary tightening in response to weaker growth in late 2018 and early 2019 due to the trade war escalation.
“While markets may be pricing in the escalation scenario, we believe they are not pricing in an all-out trade war. Under a trade war scenario, Asean currencies could easily fall in the order of 5 percent against the dollar,” the research noted.

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TAGS: Peso, US dollar, US-China trade war
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