Peso seen revisiting 50:$1 levels in 2021 as imports pick up

The peso may slip back to the 50 levels against the US dollar next year as import activities pick up pace with the reopening of the Philippine economy after months of the coronavirus pandemic-induced lockdown, think tank Fitch Solutions said.

But the pace of the peso’s depreciation through next year could be more modest than earlier expected. Fitch Solutions now forecasts the peso to average at P49.78:$1 this year and P50.10:$1 next year, revising its previous average forecast of P50.58:$1 this year and P51.80:$1 next year.

The think tank sees headwinds for the local currency over the near term.

“Firstly, the US presidential election could result in an increase of risk aversion if the result is contested, which we view as increasingly likely. In such an instance, risk aversion toward emerging market assets could result in reduced foreign exposure to peso-assets, weighing on the unit. Secondly, our core economic scenario envisages the Philippine economy gradually reopening through late-2020 and early-2021, allowing domestic activity to pick up,” Fitch Solutions said in a research note dated Sept. 10.

As such, Fitch Solutions said the improvement in the Philippine current account balance, from an annualized deficit of $500 million in December to a surplus of $1.3 billion in March, would likely reverse as import demand rises. It forecasts the current account to post a surplus equivalent to 0.4 percent of gross domestic product (GDP) this 2020.

In the longer term, the think tank expects the peso to reverse its appreciation trend as the current account shifts back into a widening deficit and demand-side inflationary pressures pick up. As domestic restrictions measures are eased, it forecasts the Philippines current account shifting to a deficit of 0.9 percent of GDP in 2021. However, this is still slower than its forecast deficit of 1.8 percent previously.

“Import demand will be driven by a ramp-up in infrastructure and other fixed capital investment during 2021, while a recovery in oil prices will also add to the import bill,” the research said.

Fitch Solutions expects oil prices to average at $51 per barrel next year and $53 per barrel in 2022 compared to $44 per barrel in 2019. “This will also feed through to price pressures. A pickup in oil prices will combine with a surge in demand-side pressures to lead inflation higher through 2021,” the research said.

Philippine inflation rate was forecast to average at 3 percent in 2021, from 2.7 percent in 2020. In response, Fitch Solutions said the Bangko Sentral ng Pilipinas (BSP) would not likely tighten its key policy rate quickly. Instead, it expects the BSP to let the peso weaken and support exporters and also allow for credit conditions to remain loose and support the growth rebound.

“However, we do not foresee the peso sharply depreciating, as it did in 2018 when inflation overshot the BSP’s target,” Fitch Solutions said.

Despite its expectation for a widening of the current account deficit in 2021, Philippines’ net external creditor position, low exposure to foreign investor holdings of local currency debt, and ample foreign exchange reserves are seen to temper external financing risks.

“We expect the BSP to hike once in late 2021 and overall signaling to become more hawkish towards the end of the year. This, alongside a slower pace of economic growth relative to 2017-2018, should ease fears of an inflationary spiral and keep depreciation modest,” Fitch Solutions said.

“In 2022, the Philippine elections will play a greater role in the peso’s trajectory, with a populist front-runner for president weighing on the unit and a moderate reformer likely driving a rally in the peso. We cannot rule out increased volatility in the peso through 2022 as the elections approach,” it added.

This year, the peso has been cited as “star performer” among emerging market currencies despite the heavy economic toll extracted by the coronavirus pandemic.