The Philippine peso is expected to weaken this year, possibly approaching the P50 to $1 level, as increased government infrastructure spending and the specter of rate hikes by the US Fed later will maintain downward pressure on the local currency, a lead analyst of a top bank said.
Emilio Neri Jr., Bank of the Philippine Islands (BPI) vice president and lead economist, sees the peso reversing its recent strength and heading toward P50 to $1 this year through 2017.
“Despite the recent appreciation pressure, the peso is expected to revert toward the 50 handle as the Fed raises its rates within this year with more follow-through actions in 2017, despite market expectations for the opposite,” he said.
Neri explained that the most recent dot plots show that all members of the Federal Open Market Committee (FOMC) are in favor or at least one rate hike, which could force the peso to weaken toward the end of the year.
BPI’s Neri attributed his forecast to the plan of the next administration to ramp up infrastructure spending to up to 5 percent of gross domestic product, among other factors.
He said the import bill from an infrastructure buildup would push greater demand for US dollars.
“Furthermore, incoming President [Rodrigo] Duterte’s aggressive infrastructure spending plan will definitely invoke a sharp increase in importation of capital machinery which would lead a bump up in dollar demand, also causing the peso the weaken,” he said.
Neri explained that there would be increased demand for US dollars for infrastructure spending during the term of the new administration, which will likely have a preference for domestic borrowing to fund deficits–which means no US dollar financing flows for government.
The economist said BPI estimates are that about $145 billion will be needed in the next six years to fund this, assuming that three-fourths of the spending is for imported equipment and materials for construction.
Thus, he said traditional sources of dollar liquidity may remain, such as remittances flows and business process outsourcing receipts, but this may not be enough to compensate for the surge in importations.
“Remittances will continue to grow at a healthy and steady pace but will not be increasing as remarkably as they have in the past,” he said, noting that money laundering issues could affect the money transfer industry.
Meanwhile, net BPO proceeds will also help provide dollar liquidity, but these flows would also not adequately compensate for the widening trade deficit caused by the aggressive importation of capital goods for the Duterte-led infrastructure buildup.
ING Bank more optimistic
A more optimistic financial institution, ING Bank, expects the peso to settle within the P46.50 to P46.60 to a dollar.
ING Bank Manila senior economist Joey Cuyegkeng said the forecast reflects the country’s sustained favorable macroeconomic fundamentals, more modest US Fed tightening later this year and in 2017 and soft landing for China.
“Brexit may provide some volatility but as the external environment stabilizes, local economic fundamentals [will]dominate and provide some support for PHP,” he added.