Peso weakening seen as imports likely to recover

The peso is seen weakening to 53:$1 next year as imports are likely to recover partly as the government spends its intended budget on time, especially to roll out big-ticket infrastructure, London-based Capital Economics said.

“The peso has rebounded over the past year due in large part to a sharp narrowing of the current account deficit. But with the deficit set to widen again next year as infrastructure spending picks up, the currency is likely to come under renewed downward pressure,” Capital Economics Asia economist Alex Holmes said in a Dec. 9 report titled “Philippines: peso decline to resume next year.”Holmes noted that the current-account deficit—which meant that the dollars spent on importation outpaced export earnings—narrowed to “almost zero” in the second quarter from 4 percent of gross domestic product (GDP) a year ago.

“The shift has been driven mainly by a fall in the trade deficit. A recovery in exports in recent months has been a factor behind the narrowing of the deficit. However, the key reason for the decline in the deficit has been a sharp drop in imports, mainly of capital goods and raw materials. The fall in imports was caused by delays to planned infrastructure spending following the late passing of the 2019 budget,” Holmes explained.

The latest government data showed that import receipts declined for the seventh straight month in October.

Actual end-September public expenditures on infrastructure and other capital outlays of P546.3 billion, meanwhile, fell 8.1 percent short of the P594.5-billion program for the nine-month period.
The delayed approval of this year’s P3.7-trillion national budget stemmed from squabbles among legislators over alleged pork funds.

“While government spending was initially slow to recover, it is now rebounding. As a result, import growth should also pick up strongly over the coming quarters. At the same time, with global growth set to remain weak, exports are likely to struggle. Overall, we expect the trade and current account deficits to widen next year,” Holmes said.

“A wider current account deficit would make the currency more vulnerable to sudden swings in global risk aversion. Our forecast is for the current account to widen to 3 percent of GDP next year. The last time the current account deficit reached this level, the peso fell close to 54 to the dollar. Our forecast is that the peso will weaken from 50.8 to the US dollar now to 53.5 by end-2020,” according to Holmes.Amid easing inflation and manageable foreign-currency debt, Holmes said a weaker peso will not be too much of a concern for the Bangko Sentral ng Pilipinas. INQ