Depreciation seen ranging from P50:$1
Private financial institutions forecast the peso to weaken to a range of P50:$1 to P52:$1 toward the end of the year, with the most pessimistic view seeing a scenario of worsening risk sentiment in case of a hardline trade stance between China and the United States.
The peso closed at P49.72 against the greenback at the end of last year. For the entire 2016, the peso depreciated by 5.35 percent from the year earlier.
Among the four institutions that provided the forecasts, Fitch-owned BMI Research placed the peso-dollar rate at its strongest position at P50:$1 by end-2017.
BMI said a robust economic growth outlook and anchored inflation will offset the drag posed by the yuan’s renewed weakness.
At the other end of the spectrum, ING Bank Manila expects the peso to trade on the weak side for most of 2017, finishing the year at P52:$1.
ING said a “hardline trade stance between China and the US is not our base case. But if such a hardline stance develops, risk sentiment would worsen, leading to an even weaker Philippine peso. A more difficult local political environment would also lead to a significantly weaker PHP.…”
Late last year, US President-elect Donald Trump signaled that he would take a hardline stance against China on trade, in line with his campaign message that he would move to change the balance of trade with China.
The local unit of the Dutch financial institution had said China-US trade relations and geopolitical issues were keeping investors cautious of emerging markets like the Philippines.
P50:$1 with central bank intervention
The government has an exchange rate assumption of P48 to P50 per US dollar in 2017 to 2018.
“We are comfortable with P50:$1 as an upper bound assumption for the exchange rate because we have a steady inflow of dollars. In the past, we had a crisis in our dollar reserves but that is no longer the case,” Budget and Management Secretary Benjamin Diokno had said.
BMI is not ignoring the impact of external and political factors on the currency but sees the strength of the economy and central bank intervention supporting the peso at P50:$1 in the end.
First, over the short term, BMI said it holds a slightly constructive view on the Philippine peso as the Chinese yuan and Japanese yen have temporarily halted their downtrends against the US dollar, and that is likely to provide some respite for the peso in the coming months.
Anchored inflation expectations and a robust economic growth outlook, facilitated by the government’s expansionary fiscal plans, rising foreign direct investment (FDI) and steady remittances inflow are likely to be constructive for the peso, it said.
“Additionally, although strong data releases in the US and a more expansionary fiscal policy under the incoming Trump administration are bolstering market expectations for a steeper US monetary policy trajectory, we are less hawkish than consensus, expecting only two rate hikes rather than three, which should be negative for the dollar,” it said.
For the long term, however, it considered risks that remain tilted to the downside, such as: the risk of a sharper-than-expected devaluation of the Chinese yuan continues to cast a shadow on emerging market foreign exchange; the peso could face more downside pressure if the US Federal Reserve adopts a more aggressive rate hiking cycle than expected; and the peso is likely to suffer a great deal if the incoming Trump administration in the US moves ahead with more a unilateralist and protectionist approach, given that the US is one of the Philippines’ largest sources of foreign direct investments and a key trade partner.
BMI explained that acute weakness in the currencies of the Philippines’ two largest trade partners, Japan and China, had led the peso’s real effective exchange rate (REER) to strengthen quite sharply in the last quarter of 2016 – despite the peso weakening in nominal terms against the greenback – and is looking slightly expensive again.
“We believe that further yuan and yen (to a smaller extent) weakness over the longer-term will likely prompt the central bank to intervene in the foreign exchange market to prevent a further loss of export competitiveness,” it said.
“Over the longer horizon, we expect the peso to pare back some of its short-term gains, and stabilize around the P50.00/USD level,” it added.
Weak throughout the year
Investment bank First Metro Investments Corp. (FMIC) sees the peso trading this year at P51 against the dollar, remaining under pressure as the US economy continues to gain traction, leading to the strengthening of the US currency.
FMIC’s forecast is in line with that of global financial firm UBS, which said in an earlier report that the peso could fall to P51 to a US dollar next year on the back slower economic growth, deteriorating external position and a higher inflation rate.
“We expect growth to slow in the Philippines–while the external balance has deteriorated, removing a buffer to global capital flows as the Fed is due to raise rates.”
UBS forecast Philippine gross domestic product (GDP) to moderate to 5.6 percent in 2017.