2%-3% depreciation anticipated, but decline to be ‘contained’ – ING analyst
The Philippine peso is likely to experience a 2 percent to 3 percent depreciation through 2015 and 2016, but strong macroeconomic fundamentals will help to contain the local currency’s weakness, according to an economist.
In his financial market predictions for 2015, ING Bank Manila senior economist Joey Cuyegkeng warned that global uncertainties will play an increasing role in foreign exchange rate movement.
Divergent central bank actions
“This year we could see US monetary policy closer to tightening, with a few US monetary policymakers talking of the first policy rate hike in the first half of 2015. The consensus view still shows the first policy rate hike by mid-2015 to late 2015,” he said.
By contrast, Cuyegkeng added that the European Central Bank (ECB) is expected to at least signal the beginning of quantitative easing (QE) at its policy rate meeting this month, while the Bank of Japan is expected to push through with its enhanced QE in 2015.
He also sees credit risks for some sovereign and energy corporations including corporate oil producers potentially rising, as oil prices have plunged by almost 50 percent year-on-year in the second half of 2014.
The economist added that geopolitical risks related to Russia, Ukraine, the European Union and the US remain, while risks from the terrorist group Islamic State of Iraq and Syria (ISIS) also continue.
“Reversal of capital flows away from emerging markets [EM] remains a risk as long as prospects become dimmer for EM while prospects for developed markets brighten,” he said.
Strong domestic environment
On the domestic side, Cuyegkeng said local political uncertainties will play an increasing role as the economy moves closer to the May 2016 national and presidential elections.
“But unlike some Asian currencies in 2014, the peso’s weakness is contained by favorable external payments position, a healthy monetary sector, a vigilant monetary authority and good economic growth,” he said.
The ING economist said the country’s external payments position will remain healthy on the back of the continued surplus of the current account.
Meanwhile, he said the central bank is likely to address the volatility that the normalization of US monetary policy may deliver.
Cuyegkeng believes that from largely focusing on inflation fighting, the focus Bangko Sentral ng Pilipinas will shift to volatility and its possible impact on the financial markets and the banking sector.
“The volatility would likely be seen with a volatile PHP which make planning for businesses difficult and could also affect the quality of banks’ loan portfolio, even as the share of foreign exchange loans may have dropped recently as a result of very affordable local borrowing rates,” he concluded.