Fitch unit still bearish on peso

Credit to Author: MAYVELIN U. CARABALLO, TMT| Date: Wed, 09 Jan 2019 16:28:43 +0000

The Philippine peso will continue to lose ground against the dollar in 2019, a Fitch Group unit said, with factors such as country’s trade and current account deficits and still high inflation leading to a P54.13:$1 close by yearend.

“We expect the Philippine peso to weaken slightly against the dollar within the trend channel in the near-term given the persistent twin deficit situation, political uncertainty, and a still-negative real interest rate differential with respect to the US,” Fitch Solutions said in a report released on Wednesday.

It noted that the current account and trade deficits had widened considerably over the past few quarters and were expected to remain elevated going into the new year, partially due to the government’s expansionary fiscal agenda.

A man counts US dollar bills at a money changer in UN Avenue in Manila. PHOTO BY RUSSELL PALMA

Based on latest available data, the country’s current account—a major component of the balance of payments—hit a deficit of $6.471 billion in the first three quarters of 2018.

The shortfall has been attributed to the country’s large trade deficit, which widened by 68.5 percent to $33.918 billion as of end-October as the government’s infrastructure push boosted imports.

With the savings rate in the Philippines unlikely to surge over the near- term, Fitch Solutions remarked that country would remain reliant on external funding.

“This is not an intrinsic bearish factor for the peso, but with global risk sentiment still weak, it is difficult to imagine foreign direct investment and portfolio inflows would recover sufficiently to plug the gap in the near-term,” it said.

President Rodrigo Duterte’s controversial leadership, meanwhile, was also cited.

Fitch Solutions said Duterte’s war on drugs had left over 5,000 people dead since he came to power in June 2016 and that his latest claim of having sexually abused a maid while he was a teenager also caused him to come under fire from women’s rights activists.

The Fitch unit also suggested that the Philippines’ closer relations with China appeared to be facing a domestic backlash as the Duterte administration “is seen as bending over backwards for China, and this could have negative implications for his allies at the upcoming May 2019 mid-term.”

Lastly, it argued that the real interest rate differential vis-à-vis the US remains in negative territory as the Bangko Sentral ng Pilipinas’ monetary policy actions were likely to remain reactive rather than proactive.

This is despite cumulative policy rate hikes of 175 basis points implemented by last year in a bid to address surging inflation, which hit a nine-year high of 6.7 percent in September and October before easing in the last two months of 2018.

The Fitch unit believes inflation will continue to weigh on the peso, which it expects to weaken by 3 percent to P54.13:$1 by the end of this year.

The currency ended 2018 at P52.58 versus the greenback, down sharply from its 2017 close of P49.93:$1. It closed 12.5 centavos stronger at P52.345 to the dollar on Wednesday.

“From a longer-term perspective, we expect the Philippine peso to maintain its multi-year trend of depreciation given that inflationary pressures are likely to remain elevated versus the US,” Fitch Solutions said, estimating inflation to average 4.7 percent through 2020 — higher than the BSP’s 2.0-4.0 percent target.

On a positive note, it said the weakness would be relatively modest compared to 2018 given a decline in oil prices and growing headwinds to broad dollar strength.

“That said, we note that the decline in oil prices in October-November has provided the Philippines with a windfall,” it said, adding that this will likely feed through to a lower trade deficit over the coming months and reduce pressure on the peso.

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