Fitch Solutions predicts further weakening of PH peso

Fitch Solutions Country Risk and Industry Research predicts  the Philippine peso will further weaken this year and next year.

In a commentary released to journalists on Thursday, Fitch Solutions projects the peso to average at P54.30 to a US dollar this year and at P56.40 next year.

Previously, its average peso-US dollar forecast was P52.30 in 2022, and P53.00 in 2023 “The widening of the Philippines’s current account deficit coupled with tightening global monetary conditions will likely exert further downward pressure on the peso,” Fitch’s commentary said.

Fitch Solutions now eyes the country’s CA deficit to increase to around 4.3% of the gross domestic product (GDP) from its previous 2.4% prediction.

Citing Bangko Sentral ng Pilipinas (BSP) data, Fitch Soutions said the country’s CA deficit as of the first quarter of 2022 stood at around 5% of the domestic output, higher than the 3.5% of the GDP in the last quarter of 2021.

It traced this development to the 27.8% year-on-year growth in imports in the first three months this year, higher than the 5.9%  growth of exports during the same period last year.

“Over the coming quarters, we expect the current account balance to remain in a deficit due to elevated commodity prices and strong import demand, especially after the government implemented a slew of tariff cuts in an attempt to tame rising prices,” it said.

These tariff reduction measures include the extension until end-2022 of the lower tariff rate for rice imported outside South East Asia, from 40-50% to 35%; corn, from 35-50% to 5-15%; pork, from 30-40% to 15-25%; and the temporary removal of the 7% duty on coal.

Relatively, it said tightening the monetary conditions likewise contributes to the widening of the country’s CA deficit since it weighs on risk sentiments.

“As major central banks around the world turn increasingly hawkish and continue hiking rates aggressively, capital will likely be diverted away from emerging economies such as the Philippines, and into fixed income assets in developed countries which are considered less risky,” it said.

Interest rate differentials will also come to play, it said, citing that investors’ sentiments will favor US assets.

Fitch Solutions forecasts the BSP to hike its key rates by an additional 75 basis points until end-2022 to 3.25% but the Federal Reserve is seen to announce a more aggressive hike, at around 150 basis points to bring the Fed Funds rate to 3.25%. 

To date, the BSP’s key rates have been hiked by a total of 50 basis points, 25 basis points each last May and June. Similarly, Fed rates have jumped by 150 basis points — 25 basis points last March, 50 basis points last May, and 75 basis points last June.

Both central banks are seen to remain hawkish and announce more rate increases as inflation in their respective countries continues to accelerate.

Fitch Solutions forecasts the domestic rate of price increases to average at 5.1 percent this year while average inflation in the US is seen to be around 6.5 percent.

“The narrowing real interest rate differential between the US and the Philippines will likely lead to hot money outflows,” it said.

For one, inflation in the Philippines has averaged at 4.4% in the first half of the year, with the June level rising to 6.1% from the previous month‘s 5.4%. The domestic inflation rate surpassed the government’s 2-4% target band last April when it rose to 4.9%.

While the peso is seen to depreciate further in the coming months, Fitch Solutions said the pace “will likely be relatively gradual as the BSP has ample foreign reserve to intervene in the FX (foreign exchange) market if necessary to soothe downside volatility.”

“Furthermore, the new BSP governor Felipe Medalla has signaled a more hawkish stance, and stated that the central bank is prepared to hike more aggressively to prevent the exchange rate from “overshooting too much,” it said.

For 2023, the commentary forecasts the peso “to trade broadly sideways” against the greenback. One of the factors seen to support the local currency next year is the easing of foreign ownership restrictions, which is seen to attract more foreign direct investments. (PNA)