MANILA, Philippines — The peso may depreciate further to 55 to $1 next year amid medium-term challenges as evidenced by widening trade and current account deficits, according to Standard Chartered Bank.
Chidu Narayanan, economist for Asia at StanChart, expects the local currency to further depreciate against the greenback, although at a slower pace in 2019.
“We expect further peso depreciation in 2019, although the pace is likely to slow relative to 2018. The peso faces medium-term challenges including twin deficits, still-elevated inflation and low real rates,” he said.
Narayanan said the volatility in the foreign exchange market would be contained next year compared to this year. “However, the peso-dollar volatility may be relatively contained amid the central bank’s increased focus on FX. We target USD-PHP at 55 at end-2019,” he said.
According to Narayanan, the trade deficit would continue to persist next year, but narrower relative to 2017 and 2018 due to strong imports of capital equipment, raw materials, and intermediate goods to support the growing economy.
Data from the Philippine Statistics Authority (PSA) showed the country’s trade deficit swelled by nearly 69 percent to $33.92 billion from January to October compared to $20.13 billion in the same period last year.
Imports rose by 16.8 percent to $90.98 billion in the first 10 months from $77.87 billion in the same period last year, while exports slipped 1.2 percent to $57.07 billion from $57.75 billion.
“We forecast export growth of 12 percent and import growth of 10 percent for the year. Growth in capital- goods imports is likely to dip below 10 percent in 2019 from 16.4 percent in January-September 2018, driving slower import growth and a narrower deficit,” Narayanan said.
The economist pointed out upside risks to import growth arise from higher capital-goods and crude oil imports due to price effects.
Meanwhile, he said export growth is likely to ease on lower global demand and as support from the 2017-18 recovery fades.
“The Philippines is likely to be less directly impacted by the US-China trade war than ASEAN peers given its low trade to gross domestic product ratio of 50 percent,” he added.
He said StanChart sees the current account deficit easing to 1.3 percent of GDP in 2019 and one percent of GDP in 2020 from the projected 1.3 percent of GDP this year.
The Bangko Sentral ng Pilipinas (BSP) is looking at a wider current account deficit of $6.4 billion or 1.9 percent of GDP this year from $2.2 billion or 0.7 percent of GDP last year. For 2019, the shortfall is seen widening further to $8.4 billion or 2.3 percent of GDP.
The central bank said the country’s balance of payments (BOP) deficit would also widen to $5.5 billion or 1.6 percent of GDP this year from $900 million or 0.3 percent of GDP last year before easing to $3.5 billion or one percent of GDP next year.
StanChart also expects remittances to grow between three and five percent in 2019.
“Growth in remittances is likely to stabilize in the low single digits over the medium term as growth moderates in the West and growth in overseas Filipino workers faces a structural slowdown,” Narayanan said.
On the other hand, he said tourism potential would remain under-tapped in the near term, with tourism receipts at only two percent of GDP.