Dutch financial institution ING Bank expects the Philippine peso to weaken further this year from the current P50:$1 levels as the import season approaches, interest rates rise and the domestic political environment fails to impress foreign investors.
On average, the peso may weaken by 3 percent to 4 percent this year, and 1 percent to 2 percent in 2018, ING Bank Manila senior economist Joey Cuyegkeng said at the bank’s Mid-year Economic Briefing held in Makati City on Tuesday.
“Definitely, there will be some weakness in the exchange rate. Whether it tests P51:$1 – that is a likely possibility,” Cuyegkeng said in a presentation to the ING Bank clients.
The local currency depreciated by 5.35 percent against the US dollar in 2016.
“In the near term, we [will be]in the import season. Normally, the import season is mid-October, so imports are just going to rise, and that’s going to create pressure demand for US dollars,” he said.
Expectations of further increases in US Federal Reserve interest rates amid pronouncements by other developing economies that monetary policy will be tightened as early as September this year are also seen boosting dollar demand from investors.
“Rising US interest rates, with steady local interest rates in the shorter end of the yield curve means your differentials are going to narrow. Meaning, why hold on to the peso while the dollar yields are rising?” Cuyegkeng explained.
He said these views are creating a more bearish outlook for local yields and bonds, which in turn, pushes dollar demand not only from importers but also from investors.
‘Headline-sentiment-driven foreign press’
“Then, of course some politics – but these are the more headline-sentiment-driven foreign press covering all these developments locally and creating some caution for offshore investors, despite the fact that there is good growth,” he said.
While the economy has been growing above 6 percent since the start of the Duterte administration, the President’s war on drugs, his foreign policy’s pivot to China and threats to declare martial law across the country have been generating negative headlines worldwide.
On Tuesday, the Philippine peso regained some ground against the US dollar, closing 2 cents stronger from its Monday level that was near an 11-year low.
The local currency closed at P50.52:$1 on Tuesday from P50.54 on Monday, which was the weakest finish in almost 11 years, or since settling at P50.55:$1 on September 12, 2006.
The peso first touched the P50:$1 level on November 24 last year as bets on interest rate hikes in the US, which actually happened in December, favored the dollar.