Peso seen ending 2019 at P55:$1 amid ‘worsening external position’

MANILA, Philippines — The Philippine peso could come under pressure anew on the back of the country’s “worsening” external position, a London-based think tank said, adding that the central bank would likely “tread cautiously” as it cuts rates amid gloomy outlook on the local currency.

In a commentary sent to reporters Monday, Capital Economics Asia economist Alex Holmes said he expects the peso to end 2019 at P55 against the US dollar. If realized, this would be weaker than the local unit’s 2018 finish of P52.58 versus the greenback.

Holmes said a larger current account deficit makes the peso “more vulnerable” to sudden shifts in global risk appetite.

Citing data from the Bangko Sentral ng Pilipinas, Capital Economics reported that the Philippines’ current account deficit stood at $1.2 billion in the first quarter, or equivalent to 1.5% of the nation’s gross domestic product.

The gap could widen further and average 3.0% of GDP this year, Holmes said, adding that remittances, which form part of the current account, are likely to be held back by slower economic growth in major sources the Middle East and the United States.

READ: Remittances slow in April, but remain above BSP target

“With the trade war between the US and China intensifying and slowing US growth likely to weigh on investor sentiment, we think the peso is likely to come under renewed downward pressure over the coming months,” Holmes said.

“The poor outlook for the currency is one of the reasons why we think the central bank is likely to tread cautiously as it continues to loosen monetary policy over the coming months. We expect just two more 25bp rate cuts over the remainder of the year, with the next cut likely to be on Thursday (June 20),” he added.

The Philippines has been posting large trade gaps since 2017 amid a sustained rise in imports to feed the Duterte government’s ambitious infrastructure program, reversing the nation’s current account surplus to a deficit and pressuring the peso.

The current account position is an important indicator about the economy’s health. It measures the net transfer of real resources between the domestic economy and the rest of the world.

If the current account balance is in surplus, the country is a “net lender” to the rest of the world. Net lending occurs when the national saving is more than the country’s investment in real assets.

If in deficit, the country is said to be a “user of funds” and thus, is considered as net borrower from abroad in order to fill in the shortage.

According to Holmes of Capital Economics, the Philippines’ trade balance “looks likely to fall further into deficit.”

“Exports have been very weak, shrinking by 2% y/y in the first four months of the year. Given rising trade tensions and slowing global growth, we think export growth will remain in the doldrums throughout 2019,” he said.

The BSP expects a current account deficit of $10.1 billion in 2019, revising its projection of $8.1 billion made in November. The new forecast is equivalent to 2.8% of GDP. — Ian Nicolas Cigaral