The peso could regain strength and return to the P45:$1 territory before the end of the year as imports continue to ease and remittance inflows grow more robust, the research arm of Metropolitan Bank and Trust Co. (Metrobank) said in a forecast.
The peso has been declining against the US dollar since the US Federal Reserve began its quantitative easing policy, but the depreciation of the local currency, along with those of other emerging markets in the region, became more pronounced ahead of an anticipated US rate hike soon.
Additional pressure on the peso came from the yuan’s devaluation a couple of weeks ago, driving the local currency to the P46:$1 level, a new five-year low.
Drop in imports seen curbing capital flight
Metrobank Research said the recent declines in the country’s imports should temper pressures on the peso caused by capital flight.
“A further increase in demand for US dollars is not expected amid anemic external trade and low global commodity prices,” it said in a research report.
Data as of May showed that Philippine merchandise imports posted their steepest drop in nearly five years at 13.4 percent. This has caused a 7.4 percent contraction in cumulative imports in the first five months of the year compared with a year earlier.
As a result, the cumulative trade deficit for January to May 2015 narrowed to $1.28 billion from $2 billion in the same period in 2014.
Remittance growth also supports peso
High levels of remittances from overseas Filipino workers (OFW) also provide support to the local currency, the Metrobank Research note said.
“Also, the surge in OFW remittances in time for the holiday season and potentially good second-half GDP [gross domestic product]numbers on election-related spending would support the local currency and could [drive]some reversals and some peso appreciation,” the bank research added.
As of June, personal remittances from the OFWs were up 5.8 percent at $2.41 billion from $2.27 billion recorded in the same month last year. Total remittances for the first half of 2015 grew 5.3 percent to $13.37 billion from $12.7 billion in the year-ago period.
“The coming months will, however, be volatile especially for emerging market currencies like the peso, as depreciation pressure builds up on expectations of US Fed rate hikes starting this year,” Metrobank Research added.
External headwinds hitting PH financial markets
The central bank said it will allow the peso more room to depreciate until the degree of volatility becomes disruptive to the financial system.
Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. said the near-term outlook shows more volatility ahead in financial markets in the Philippines and across the globe.
The country’s financial markets have been greatly affected by external developments, including the shift in the Chinese currency to a more market-influenced foreign exchange system, further declines in international oil prices and market interpretations of the intentions of the US Fed Reserve on the path and timing of its policy normalization, he said.
“With the interconnectedness of global goods and financial markets, the local financial markets are often the first to reflect any external developments onshore,” Tetangco said in an email to reporters after the stock market crash on Monday.
“Given that these are largely outside of our direct control, the BSP will continue to allow the exchange rate to adjust to market conditions, but at the same time carefully provide liquidity in the market should the exchange rate volatilities become 1) excessive, 2) disruptive to business planning, and 3) a trigger for the disanchoring of inflation expectations,” he stressed.
So far, the peso volatility has remained within the middle of the range of volatility seen in other regional currencies, while inflation expectations are still well anchored, Tetangco said.
He said the country’s monetary authorities are keenly aware that they need to also consider these developments with a medium-term lens.
“The calculated opening up of the Chinese markets and the potential increases in the Fed funds target rate are part of the global normalization process. These should, over time lead to more balanced global growth, which could also lead to more normal prices of oil in the international market,” he said.
Tetangco pointed out that during this period of transition in the global markets, it is important to keep the Philippine macrofundamentals sound.
The BSP is set to continue to craft policy that will keep inflation low and stable so as to preserve the consumers’ purchasing power, sharpen the supervision of banks and continue to pursue the banking reform agenda that should help ensure the soundness of the banks.
“Sound fundamentals will help shore market and business confidence. More importantly, these will also provide the lubricant for the national government to step up spending on the infrastructure that are needed to sustain the domestic drivers of growth and keep the economy moving at a respectable pace, even in the face of external volatility,” Tetangco added.