Peso seen weakening to 54 to $1
The peso may slip to the 54 level against the dollar by the third quarter of this year as the US Federal Reserve may not turn out to be as dovish as expected by global markets while the country’s trade deficit continues to worsen.
This was the view of ING Philippines economist Nicholas Mapa, who projected the peso to reach 53.09:$1 by the end of the second quarter, weakening to 54.64 by the end of the third quarter and close the year at 54.04 to a dollar.
The local currency is seen to remain at the 54 levels against the greenback in the first two quarters of 2020.
While the peso has strengthened recently, Mapa said this was due to foreign portfolio flows to local stocks, driven by expectations of a dovish US Fed.
But Mapa said the Fed might not remain as dovish. “That can have a negative impact on the peso. That’s why we think the dollar will eventually move higher for the rest of the year,” he said.
“The second reason is the trade deficit will continue to outpace traditional flows of foreign currency,” Mapa said, noting that remittances would not be enough to fill the gap.
In previous years, the Philippines enjoyed a current-account surplus because large remittances from overseas Filipinos offset trade deficits.
These days, however, the import bill has widened as the government strived to build much-needed infrastructure. Mapa referred to the importation of raw materials such as iron and steel for the “Build, Build, Build” program as well as capital formation with the purchase of new airplanes and machinery.
The Philippines’ main exports, electronics, are likewise affected by the US-China trade tension. Against such backdrop, Mapa said exports of other products such as tuna and mangoes were not enough to offset the adverse impact on the trade position.
Meanwhile, ING is expecting the US Federal Reserve to raise interest rates by the second quarter of this year, citing the US’ “red-hot” labor market.
Robert Carnell, ING head of research for Asia-Pacific, suggested that global markets seemed overoptimistic at present. He noted that Fed Chair Jerome Powell’s comments at the latest Federal Open Market Committee meeting were interpreted as signaling rate cuts.
“The Fed will still hike in 2019 and the best we can hope from the [US-China] trade discussions is a cessation of additional hostilities, not a rewind of existing tariffs,” Carnell said. —DORIS DUMLAO-ABADILLA
