The Philippine peso is expected to lose more value against the dollar toward the end of the year despite the country’s strong macroeconomic fundamentals as an improving United States economy continues to enhance the dollar’s attractiveness to investors.
Although the local currency may show continued firmness in the near term as a strong current accounts surplus and brisk domestic production sustain the momentum from the recent upgrade of the country’s sovereign rating by the Standard & Poor’s, analysts also see some external and domestic factors that could threaten the peso’s strength later in the year.
Standard Chartered Bank said in a report global and domestic events could cause volatility in the peso-dollar exchange rate, “while stretched local asset valuations could counter positives from strong fundamentals.”
StanChart acknowledged that “the current account surplus and strong economic growth are likely to remain supportive of the PHP in the near and medium term.”
The Philippines’ current accounts recorded a $2-billion surplus in the first quarter of the year, while gross domestic product grew by a still brisk, though lower-than-expected 5.7 percent in the same quarter.
The country also enjoyed the benefit of a one-notch credit upgrade to BBB “with a stable outlook” from S&P, the highest the country has received so far from any credit ratings agency.
Before it depreciates later in the year, the peso may continue to be propped up in the meantime by the Bangko Sentral ng Pilipinas’ (BSP) June 19 decision to raise the special deposit account rate by 25 basis points to 2.25 percent, according to the Bank of the Philippine Islands.
“The BSP’s decision to hike [the special deposit account rate]in Thursday’s meeting could temper some of the upward pressure on USD/PHP, which has been compounded by higher global oil prices emanating from geopolitical risks and better-than-expected growth and inflation prints from the US economy,” said Emilio Neri Jr., BPI’s lead economist.
Such support to the peso’s stability is also seen by a local think tank to prevail in the second quarter before the local currency begins to lose steam in the third quarter.
“The exchange rate will tend to be stable to weak for the rest of the second quarter, but renew the depreciation bias in the third quarter, as the US economy’s growth is expected to exceed 3 percent starting the second quarter,” First Metro Investments Corp. (FMIC) and the University of Asia and the Pacific (UA&P) said in the June issue of their Capital Markets Research alliance’s publication, The Market Call.
The report said the improving US economy will attract more funds, especially considering the likely fall in policy rates to near-zero in the eurozone.
Losing some luster
The government has revised its outlook for the peso this year to indicate further weakness than earlier expected on account of a sustained recovery in the US economy.
“As for the exchange rate [assumption], instead of P41 to P44, it is now P42 to P45,” said Socioeconomic Planning Arsenio Balisacan following the meeting of the inter-agency Development and Budget Coordinating Committee on Friday.
Prior to the latest events, the P42-P45 range had been set as the government’s assumptions for 2015 and 2016.
In Friday’s trade, the peso firmed against the dollar to P43.78 to $1, from P43.82 the previous day.
The peso hit its weakest level in more than three weeks at P44.12 to $1 last week, on June 18, dumped in favor of the US dollar by speculators who viewed the US currency as a safer bet against all external risk at the moment.