Peso seen rising to 47:$1

MANILA, Philippines — The peso is expected to strengthen further in the coming months, ending the year at 47 to a dollar as the trade deficit narrows and remittances rebound, according to London-based think tank Capital Economics.

In a research brief over the weekend, the firm said Emerging Asia’s best-performing currency is now at its highest level against the dollar since late 2016.

The main factor behind the peso’s outperformance has been the improvement in the country’s external position, which has two drivers.

The first is a sharp narrowing of the trade deficit as imports decline on the back of a slump in the domestic economy.

The second driver is a rebound in remittances, which are equivalent to around 10 percent of gross domestic product.

Cash sent home by overseas Filipino workers rose by 7.8 percent year-on-year in July, the highest level this year, sparking optimism that inflows are resilient amid the pandemic.

“We expect the peso to strengthen further over the coming months.  Bringing this all together, we think the peso will end the year at 47.0 to the US dollar,” Capital Economics said.

The country’s current account can be expected to remain in a healthy  surplus over the coming quarters, which should continue to provide support to the currency.

It registered a surplus of $4.4 billion in the second quarter, a reversal of the $931 million deficit posted in the same period in 2019.

With the recovery in domestic demand set to be much slower than that of exports, the trade deficit is likely to narrow further.

Meanwhile, remittances should continue to rise.

“Given the poor near-term prospects for the domestic economy, overseas Filipino workers are likely to continue to send remittances back home to support their families through the crisis,” said Capital Economics.