MANILA — The drop in international petroleum prices is seen to give the Philippine peso some lift during the year’s first semester but Fitch Solutions expects the local unit to be in deprecation mode beyond that, ending 2019 at about 54.13 against the greenback.
To date, the local currency is trading at the 52-level against the US dollar.
In a study dated January 9, the research firm said the local unit is generally seen to be weak this year due to deficits in the country’s current account (CA) and trade balance, political uncertainties, and negative real interest rate differential with the US.
“However, we expect the weakness to be relatively modest as compared with 2018, helped by the decline in oil prices and growing headwinds to broad dollar strength,” it said.
The country has been posting CA deficits as it imports more to meet the growing domestic demand, due mainly to increased infrastructure investments.
Preliminary data from the Philippine Statistics Authority (PSA) showed that in October 2018 alone, exports grew by 3.3 percent year-on-year while imports rose by 21.4 percent.
Trade balance in the 10th month last year stood at a deficit of USD4.21 billion, higher than the USD2.59 billion in the same month in 2017.
The report said real interest rate differentials against the US are still at negative territory.
In 2018, the Bangko Sentral ng Pilipinas’ (BSP) policy-making Monetary Board (MB) hiked the central bank’s key rates by a total of 175 basis points as inflation climbed beyond the government’s 2 percent to 4 percent target band for 2018-2019.
To date, the BSP’s overnight lending rate is 5.25 percent.
On the other hand, the Federal Reserve’s key rates are currently between 2.25 percent and 2.5 percent.
The rate of domestic price increases peaked at 6.7 percent last September and October but have declined to 6 percent and 5.1 percent, respectively, in the following two months after supply issues on rice and other food items have been addressed.
The price of rice posted big upticks last year due to lack of supply and this pushed inflation rate up in most of last year.
The supply constraints have been addressed after Malacañang tasked the release of rice stocks from all National Food Authority (NFA) warehouses nationwide and increase importation, among others.
Decline of global oil prices also helped the domestic rate of price increases decelerate.
Amid the slowdown of inflation in the last two months of last year, Fitch Solutions still forecasts a 50 basis points increase in the BSP’s key rates this year.
Relatively, it cited political uncertainties as another factor that is disadvantageous to the peso, citing President Rodrigo Duterte’s preference towards China and Chinese investors compared to Western nations.
“This could have negative implications for his allies at the upcoming May 2019 mid-term elections, and result in further political uncertainty,” it said.
The report, on the other hand, pointed out that risks to its projection for the peso “are tilted to the downside.”
“On the one hand, a recession or sharp economic slowdown in the US could see the US Fed halt or even reverse its rate hiking cycle, which could be broadly negative for dollar strength,” it said.
“On the other hand, more on the downside, the Philippines has been increasing economic linkages and exposure to China (and moving away from the west), at a time when the Chinese economy is experiencing a slowdown and embroiled in a trade dispute with the US. This could result in more downside volatility in the PHP should external financing from China dry up,” it added. Joann Villanueva /PNA-northboundasia.com