Other forecasts range from P48 to P50
PRICING IN higher US interest rates and heightened political uncertainty in the Philippines could bring the peso down to breach the P50-to-$1 level by yearend, an analyst said, while his peers mostly forecast a P48-to-P50 range.
Rajiv Biswas, chief economist at IHS Markit, said the Philippine economy continues to show strong economic growth supported by buoyant domestic demand, but the peso faced some downward pressure against the US dollar in recent months.
“The peso has already depreciated against the USD from around 46.2 in early August to 49.1 by mid-November. This reflects a number of factors, including foreign portfolio capital outflows from the Philippine stock market since August,” he said.
Given that the US Fed expected to tighten US policy rates in December and the new Trump administration expected to boost US economic growth through corporate tax cuts and infrastructure spending, support for a strong greenback in 2017 is a sure deal, he added.
“With the USD expected to appreciate further against many emerging market currencies, the peso is expected to depreciate further against the USD, falling through the 50 level against the USD by the end of 2016,” Biswas noted.
On Wednesday, the peso fell to a new eight-year low, losing 18 centavos to close at P49.35 to $1 from P49.17 on Tuesday.
“On the domestic front, the peso will remain under pressure as we wait for the December [US] Fed policy meeting, with a hike potentially on the table,” Metrobank Research analyst Pauline Revillas said on Wednesday.
The global markets had thrown a “Trump tantrum,” just a week after Donald Trump’s shock win in the US presidential race, with stock markets going in different directions and US bond rates spiking while the dollar is on a rally against most emerging market currencies, Revillas said.
“Mr. Trump is expected to cut taxes dramatically (seen further increasing the US budget deficit), while also spending more on infrastructure and defense. The worry is that this expansionary policy could fuel inflationary pressures – a significant rise in inflation is not something the US Federal Reserve is too excited about,” she said.
“High inflation means a rise in interest rates. A faster-than-expected pace of monetary policy tightening by the Fed will surely cause a wave of volatility in the global financial markets,” Revillas added.
Due to Trump’s avowed policies, the market is expected to continue digesting the impact of significant developments in the world’s largest economy through the end of the year and the start of 2017.
“We reiterate that if the peso goes beyond the P49 level this month, our yearend forecast will likely be revised above our current P48 level,” she said.
Nevertheless, Metrobank Research expects strong remittance flows in December to support the peso and cushion a sharp depreciation, perhaps even providing a rally back to the P48:$1 level.
As of end-September, personal remittances totaled $22.10 billion, while cash remittances reached $20.02 billion, central bank data showed.
“For sure, expect a volatile exchange rate for the rest of the year,” she added.
Duterte policy shift
Meanwhile, HSBC forex analysts said the administration of President Rodrigo Duterte has unveiled a notable shift in government policy that could impact the peso-dollar exchange rate.
HSBC analysts initially believed the politics of change espoused by the Duterte administration – promising large-scale infrastructure spending, economic reforms and reduction of crime – could be positive for the peso with reforms paving the way for foreign direct investment (FDI) inflows.
“However, we underestimated Duterte’s change in foreign policy: he has criticized the US – a long-time ally of the Philippines – and has pivoted to China despite previous tension surrounding the South China Sea,” they said.
“This, as well as his off-the-cuff comments, have unsettled investors and led to portfolio outflows hastening
since August,” they noted.
At the same time, the election of Donald Trump is seen possibly marking a slight U-turn in US-Philippine relations, with President Duterte appointing Trump’s business partner as the new trade envoy to the US.
“Still, we believe heightened political uncertainty could delay FDI inflows coming into the Philippines. And with the current account surplus narrowing, there is now greater room for PHP weakness and/or volatility. We forecast USD-PHP at 49.4 for year-end 2016 and 50.7 for year-end 2017,” HSBC pointed out.
Justino Calaycay Jr., head of research and marketing at A&A Securities Inc., sees the peso settling between P49 and P50 against the greenback on a Fed rate hike, which indicates a stronger traction for the US economy.
“There are tempering influences, however – rising risks in light of the emerging anti-Trump protests, the lingering questions on what a Trump leadership brings, as well as the expected increase in remittances from our OFW [overseas Filipino workers]and other overseas Filipinos,” he said.
Calaycay said a weak peso will benefit exporters but hurt industries that are dependent on imported goods as throughput in their manufacturing and production cycles.
It also puts pressure on oil and utility prices: thus, coupled with a rise in holiday-driven demand, inflation.
“We may also find companies with a heavy dollar-denominated debt feeling some pressures on their margins,” Calaycay added.