Peso to remain strong due to weak $, low imports

MANILA, Philippines — Economists expect the peso to remain strong until the end of the year despite the economic fallout from the  COVID-19 pandemic.

Michael Ricafort, chief economist at Rizal Commercial Banking Corp., said the peso may still continue its gradual appreciation trend for the rest of the year due to low imports as a result of a slowdown in economic activity, weak dollar, and record high gross international reserves (GIR).

These, Ricafort said, provide great cushion and support for the peso, which rallied to its strongest level in nearly four years last week. The local currency closed at 48.62  last Friday, its strongest level in nearly four years or since Nov. 7, 2016 when it closed at 48.585 to $1.

“Next important support is at 48 to 48.50 to $1 level, which serves as the gateway prior to peso appreciation into the 47 levels, although the peso appreciation trend has been consistently gradual and relatively slow in recent weeks and months,” Ricafort said.

Since the start of the year, the peso has appreciated by more than four percent from 50.635 to $1 in end 2019.

However, Ricafort said the further reopening of the economy, as well as the slowdown in COVID-19 cases and the development of a vaccine, could stem or curb the further appreciation of the local currency against the dollar.

ING Bank Manila senior economist Nicholas Mapa said the peso is still one of the best performing currencies as the country’s external position showed a surplus in the current account coupled with copious foreign borrowing by the national government.

“The big story surrounding the peso is the substantial drop  in import activity, which has helped the peso appreciate, but at the expense of capital formation and potential output,” Mapa said.

Mapa said the balance of   dollar and peso would be skewed toward a surplus as the national government has borrowed roughly $7.5 billion and plans to issue another $2.5 billion before the year ends to augment its war chest against the impact of the pandemic.

“Against a backdrop of still lackluster economic activity, we do not expect a pickup in import demand over the next few months. Thus, we expect the peso to remain relatively strong in the near term, but this strength may be at the expense of future growth potential,” Mapa said.

A strong peso helps limit imported inflation, makes the purchase of crucial imports more affordable and caps debt payments.

On the flip side, a stronger local currency could be a bane for exporters and remittance recipients as their dollars translate to less peso purchasing power, while also making exports more expensive relative to peers.

On the other hand, Union Bank chief economist Ruben Carlo Asuncion said the local currency may weaken back to the 49 to 50 to $1 as  the economy reopens.

“The slight weakening from currently about sub-49 to the sub-50 forecast can be attributed to continued re-opening of the economy and the adjustment of consumers and firms to the new way of doing things,” Asuncion said.

Asuncion said an early or a miraculous vaccine breakthrough might quicken economic recovery and help accelerate the peso’s depreciation.

Asuncion   attributed the strength of the peso to the tepid economic activity brought about by the   pandemic, resulting in the absence of demand for the greenback.

“Furthermore, we have also seen the protracted weakness of the  dollar due to various domestic (COVID-19 and politics) and trade (China) reasons that contribute to the general trend of the peso,” Asuncion said.