Capital Economics: Peso to weaken to 55:$1 by end-2019

MANILA, Philippines — The peso is seen weakening to 55:$1 by yearend as the yawning current account deficit mainly due to strong imports yet weak exports continue to put pressure on the domestic currency, London-based Capital Economics said.

Citing the latest Bangko Sentral ng Pilipinas (BSP) data, Capital Economics Asia economist Alex Holmes noted in a June 17 report titled “Worsening external position to weigh on currency” that the first-quarter current account deficit of $1.2 billion was equivalent to 1.5 percent of gross domestic product (GDP).

Last week, BSP said it expects the current account deficit to hit $10.1 billion by end-2019, up by over a fourth from $7.9 billion or 2.4 percent of GDP last year.

“Looking ahead, we expect the current account deficit to widen further, and that it will average 3 percent of GDP for 2019 as a whole. The trade balance is by far the largest component of the current account and looks likely to fall further into deficit,” Capital Economics said.

With merchandise exports down 2.1 percent year-on-year as of end-April amid a trade war between the US and China coupled with slowing global economic growth, Capital Economics said it expects Philippine export sales to “remain in the doldrums throughout 2019.”

While imports slipped in April, Capital Economics was of the view that goods sourced from abroad were “likely to rebound on the back of an increase in infrastructure spending.”

“Delays in passing the 2019 government budget held up spending on infrastructure, which in previous quarters had driven a surge in imports of raw materials and capital goods. With the budget now passed and spending set to rebound, import growth is likely to strengthen,” it explained.

At the end of the first four months, the trade-in-goods deficit stood at $13.3 billion, up 12.4 percent from $11.8 billion a year ago.

The wider trade deficit had resulted into a ballooning current account deficit, as more dollars were being spent for importation.

Economic managers had said that with the Duterte administration’s ambitious “Build, Build, Build” infrastructure program in full swing, demand for imports of mostly capital goods would remain strong in the near term.

As bigger current account deficits make currencies “more vulnerable to sudden shifts in global risk appetite,” the ongoing global trade tensions seen weighing on invest sentiment would put the peso “under renewed downward pressure over the coming months,” according to Capital Economics.

As such, Capital Economics sees the peso sliding to 55 against the greenback towards the end of the year from its present level of about 52:$1.

“The poor outlook for the currency is one of the reasons why we think the central bank is likely to tread cautiously as it continues to loosen monetary policy over the coming months. We expect just two more 25-basis point rate cuts over the remainder of the year, with the next cut likely to be on Thursday,” it said.

In an earlier report last April, Capital Economics projected the peso to hit 57:$1 in 2020, before further weakening to 59 against the dollar by 2021.

It did not help that the growth in dollar remittances from Filipinos living and working overseas was also slowing such that these inflows could not offset the trade gap.

BSP data released last Monday showed that cash remittances growth eased to 4 percent year-on-year in April from the average of 6.1 percent during the first quarter.

“Looking ahead, remittances are likely to be held back by slower economic growth in the Middle East and the US, which combined account for around 50 percent of total remittances to the Philippines. We expect the dollar value of remittances to grow by an annual average of just 3 percent over the coming year. This would be roughly half the average rate recorded over the past decade,” Capital Economics said.