Monetary tightening ‍seen in 2022

The Bangko Sentral ng Pilipinas (BSP) may embark on a new monetary tightening cycle next year with interest rate hikes likely to sum up to 50 basis points as the domestic economy regains ground, UK-based think tank Fitch Solutions said.

This hawkish bias in 2022 is seen to come before the US Federal Reserve’s own monetary tightening cycle, thus providing some support for the peso, Fitch Solutions said in a research note dated June 17.

The think tank expects the peso to trade sideways in the near term before weakening over the longer haul. As the country’s current account flips from surplus to deficit over the coming quarters, it is projecting the peso to depreciate modestly, with downside pressures somewhat offset by the BSP’s policies and the rebounding economy.

Healthy dollar reserves

Fitch Solutions forecasts the peso to average at 48.10 against the US dollar this year and 49 to $1 next year, stronger than its earlier forecasts of 48.40 to $1 this year and 50:$1 next year.

The think tank is expecting the BSP to raise its benchmark overnight borrowing rate by 50 basis points to 2.5 percent next year. This was scaled down from its earlier forecast of a total of 75 basis points in interest rate increases in 2022.

Fitch Solutions expects the BSP to draw down from its foreign reserves to ease depreciation pressures on the local currency as import billings rise. It forecasts the country’s import coverage ratio to fall from 12.1 months of foreign exchange reserves in 2020 to 10.6 months in 2021 and 8.7 months in 2022. However, these are still way above the minimum of three months worth of import coverage recommended by the International Monetary Fund.

“We also expect foreign investments to pick-up as the Philippine economy gathers strength, outpacing global growth at 6.5 percent versus 4.2 percent in 2022,” the research note said.

The passing of the Corporate Recovery and Tax Incentives for Enterprises Act which lowered corporate income tax is also seen to boost foreign investment inflows.

Peso may weaken

The peso may strengthen further in the near term if commodity prices begin to cool and the US dollar trades weaker, the think tank said. These trends are seen to play out in the coming quarters but a more aggressive and sooner turn will only favor the local currency, the research said.

“We at Fitch Solutions expect the Philippine peso to trade sideways in the near term before weakening over the longer term,” the research said.

In the near term, Fitch Solutions sees the peso trading between a range of 47.50 and 49.15 against to $1 as coronavirus infections continue to threaten the country’s economic recovery. Until the pandemic uncertainty begins to recede and outbreaks domestically and externally occur less frequently, Fitch Solutions said the peso would likely stay within this narrow range.

“With the Philippines lagging in regards to vaccinations and still recording around 6,500 cases daily, the potential for further domestic outbreaks remains high. As such, we do not expect flows from foreign investors to return in the near term,” the research said.

However, Fitch Solutions expects any volatility to be limited given the low share of foreign ownership of Philippine local currency bonds and reserves accumulation by the BSP. Relative to its peers, foreign ownership of peso-denominated bonds in the Philippines stood at only 2.3 percent of total in the first quarter, keeping peso volatility below the emerging market average. INQ