Peso expected to strengthen further to 47 to $1
In a report, Capital Economics economist for Asia Alex Holmes said the peso may strengthen further in the coming months.
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Peso expected to strengthen further to 47 to $1
Lawrence Agcaoili (The Philippine Star) - September 21, 2020 - 12:00am

MANILA, Philippines — London-based think tank Capital Economics expects the peso to further appreciate to 47 to $1 by the end of the year on the back of the country’s robust external position and narrowing trade deficit.

In a report, Capital Economics economist for Asia Alex Holmes said the peso may strengthen further in the coming months.

“We think the peso will end the year at 47 to the dollar, up from 48.4 currently (we had previously expected it to drop back to 50),” Holmes said.

The local currency gained 11.5 centavos to close at 48.395 on Friday from 48.51 to $1 a day earlier. The peso gained 4.4 percent compared to the end-2019 level of 50.635 to $1.

Holmes said the main factor behind the peso’s strong performance has been the improvement in the country’s external position.

He cited the sharp narrowing of the trade deficit on the back of the drop in imports primarily due to a slump in the domestic economy.

According to Capital Economics, remittances from overseas Filipino workers (OFWs) rebounded for the second straight month, rising close to eight percent in July.

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

The economist also noted the current account surplus recorded by the Philippines in the second quarter.

Latest data from the Bangko Sentral ng Pilipinas (BSP) showed the country booked a current account surplus of $4.36 billion in the first half, reversing the $2.64 billion deficit recorded in the same period last year.

“We expect the current account to remain in a healthy surplus over the coming quarters, which should continue to provide support to the currency. With the recovery in domestic demand set to be much slower than that of exports, the trade deficit is likely to narrow further,” Holmes said.

The BSP is expecting a CA deficit of $1.9 billion, or 0.5 percent of GDP, this year and $4.4 billion, or 1.1 percent of GDP, next year.

Other factors are also likely to support the peso, Holmes said, including the recent strength of the Chinese renminbi, record low interest rates in the developed world and a further gradual improvement in global risk appetite.

BSP Governor Benjamin Diokno earlier said the peso is likely to remain stable on the back of the country’s strong macroeconomic fundamentals amid the COVID-19 pandemic.

“The peso’s strength can be attributed to sound macroeconomic fundamentals characterized by a benign inflation environment, a strong and resilient banking system, prudent fiscal position and a sufficient level of international reserve buffer,” Diokno said.

The country’s gross international reserves stood at a record $98.95 billion in end August.

The BSP continues to adhere to a freely floating exchange rate in line with its mandate to promote price stability and consistent with its inflation targeting framework for monetary policy.

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