High oil prices, PH economic rebound seen to weaken peso
Investment banking giant Goldman Sachs expects the peso to weaken amid skyrocketing global oil prices wrought by the Ukraine-Russia war plus the Philippines’ economic rebound entailing more imports.
In a March 2 report, Goldman Sachs Economics Research recommended going long on trade of the Malaysian ringgit against the Philippine peso with its Brent oil price forecast hitting up to $115 per barrel this month.
“Malaysia stands to benefit from higher commodity prices given it is one of the only net energy exporters in the region. Our analysis on the sensitivity of regional current accounts to oil prices shows that while higher oil prices should reduce current account balances for other regional economies, Malaysia’s current account could improve by 20 basis points (bps) for every $10-per-barrel increase in oil prices. Malaysia could also benefit from a higher palm oil price following the new palm oil export regulation from Indonesia,” Goldman Sachs said.
On the flip side, Goldman Sachs’ estimates showed that the Philippines’ current account or its net dollar earnings would worsen by 25-30 bps whenever oil prices rose by $10 a barrel.
“While there are other economies [such as Singapore, Taiwan and South Korea] where the external drag from higher oil prices could be larger, they are cushioned by large overall current account surpluses, compared to a widening current account deficit in the Philippines,” Goldman Sachs said.
Economic recovery
Last year, the Philippines swung back to a current account deficit as economic recovery meant the country had to spend more dollars to cover imports of raw materials and finished consumer goods, unlike in 2020 when a consumption slump amid the worst postwar recession accumulated foreign reserves. The current account deficit weakens the peso against the US dollar.
“On top of the negative terms of trade shock, a rebound in import-intensive private investment as the Philippine economy reopens, amid an acceleration in public infrastructure spending should boost import volumes further, which on a base of higher import costs should weigh on the current account deficit even more,” Goldman Sachs said.
It estimated that the Philippines’ current account deficit would widen to 2.2 percent of gross domestic product (GDP) this year compared to the 0.9 percent as of end-September 2021.
In 2020, the Philippines posted a current account surplus equivalent to 3.6 percent of GDP.Following last year’s better-than-expected 5.6-percent GDP growth, the Philippines targets 7-9 percent economic expansion this year, on the back of further reopening of more productive sectors as well as sustained infrastructure spending under the Duterte administration’s ambitious “Build, Build, Build” program.
“We expect these dynamics to continue to push the peso weaker, compared to the ringgit this year,” Goldman Sachs said.
