Peso seen weakening to 55:$1 by year-end

The peso is seen weakening to 55 to $1 by year-end as the yawning current-account deficit mainly due to strong imports and weak exports continues to put pressure on the local currency, London-based Capital Economics said.

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

Last week, the BSP said it expected the current-account deficit to hit $10.1 billion by end-2019, up by more than 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 United States and China coupled with slowing global economic growth, Capital Economics said it expected 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. With the budget now passed and spending set to rebound, import growth is likely to strengthen,” it noted.

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 in a ballooning current-account deficit as more dollars were being spent for importation.

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