Peso seen falling to 55 to $1 by year-end

MANILA, Philippines — The local currency is expected to come under pressure as the country’s external position worsens, ending 2019 at 55 to a dollar, London-based Capital Economics said.

In a report, the macroeconomy research firm said the Philippines’ current account deficit is expected to widen further after bloating in the first quarter of the year.

“A larger current account deficit makes the currency more vulnerable to sudden shifts in global risk appetite. 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. Our forecast is for the peso to reach 55 to the US dollar by end-2019,” it said in the report.

Because of this, the central bank can be expected to be cautious in loosening policy.

“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 25-basis point rate cuts over the remainder of the year, with the next cut likely to be on Thursday,” said Capital Economics.

Citing data from the BSP, the firm noted that the country’s current account deficit stood at $1.2 billion in the first quarter of the year or 1.5 percent of gross domestic product (GDP).

Capital economics expects the current account deficit to widen further, averaging three percent of GDP for the whole of 2019.

It also noted that the trade balance, which is by far the largest component of the current account, “looks likely to fall further into deficit.”

Exports have been very weak, shrinking by two percent year-on-year 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,” Capital Economics said.

In contrast, import growth, which has slowed sharply in recent months, is likely to rebound because of increase in infrastructure spending.

“Delays in passing the 2019 government budget held up spending on infrastructure, which in previous quarters had driven a surge in imports of raw materials and capital goods. With the budget now passed and spending set to rebound, import growth is likely to strengthen,” the firm said.

It noted that it will be unlikely that remittances (which are included as part of the current account) will offset the widening trade deficit.

Remittances are likely to be held back by slower economic growth in the Middle East and the US, which combined account for around 50 percent of total remittances to the Philippines.

“We expect the dollar value of remittances to grow by an annual average of just three percent over the coming year. This would be roughly half the average rate recorded over the past decade,” it said.