London think tank projects peso to continue slide

London-based Capital Economics sees the peso weakening to 56:$1 next year due to expectations of a widening current account deficit amid an infrastructure spending push.

“The peso has performed well so far this year, helped in large part by a narrowing of the current account deficit. This mainly reflects delays to government infrastructure programs, which has dragged on imports,” Capital Economics said in its Emerging Asia Economic Outlook report for the fourth quarter of 2019.

At the end of the first half, the current account deficit dropped to $1.741 billion from $3.756 billion a year ago.

The government underspent P1 billion daily on public goods and services—including infrastructure—from January to April as squabbles among legislators on alleged pork funds delayed the approval of the P3.7-trillion 2019 national budget.

To reverse the slower 5.5-percent gross domestic product growth posted during the first half, the government had unveiled a “bold” spending catch-up plan, under which major infrastructure agencies such as the Department of Public Works and Highways and the Department of Transportation would speed up implementation of P803-billion worth of projects for the rest of the year.

As goods and services imports—including capital goods for public investments in infrastructure development, among others—were expected to outpace exports, the Bangko Sentral ng Pilipinas had projected a record current account deficit of $10.1 billion by end-2019, bigger than the all-time high of $7.9 billion posted in 2018.

“The [current account] deficit looks set to widen again as infrastructure spending picks up and exports remain weak” amid rising trade tensions and slowing global growth, Capital Economics said.

“The worsening current account position is likely to make the peso vulnerable to sudden shifts in global risk appetite. We expect it to reach P56 to the US dollar by end-2020,” it added.

The peso is currently trading at the 51:$1 level, but Capital Economics projected the domestic currency to weaken to 54 against the greenback by end-2019.

In June, Capital Economics said the peso could slide to 55:$1 by year-end. In April, it said the currency would hit 57:$1 in 2020 before further weakening to 59 against the dollar by 2021.