Peso to stay above P50 till Q3 2022

MANILA, Philippines — The peso may stay above the 50 to $1 level until the third quarter of next year before appreciating to 49.90 to $1 toward the end of 2022 and further to 49.50 in end-2023, according to ANZ Research.

In a report, ANZ said the peso may appreciate gradually in 2022 from 50.40 to $1 in the first quarter to 50.30 in the second, 50.10 in the third and 49.90 in the fourth quarter.

“We forecast the peso to recover to 49.90 by the end of 2022. The risks are tilted toward a weaker currency if the economic recovery proves to be much stronger than expected, pushing inflation further above the central bank’s target and leading to a worsening in the current account deficit,” ANZ said.

ANZ said the deterioration in the Philippines’ current account position has been the major drag on the peso this year.

“With the recovery in domestic demand set to broaden into 2022, alongside a likely ramp-up in infrastructure spending, imports will rise further. High global oil prices will buoy the import bill hence the trade deficit is likely to stay wide,” it said.

It said the peso’s strong performance in 2020 was unwound in 2021 as the country’s external position flipped around.

With the easing of global lockdowns, ANZ said it saw a relapse in the external position as imports rose on higher global oil prices unlike in 2020 when pandemic-induced lockdowns led to a sharp contraction in the gross domestic product (GDP), a collapse in imports, and hence a return to current account surpluses which lifted the peso.

ANZ noted: “2021 saw a relapse in the external position as imports rose, boosted by high oil prices despite domestic challenges.”

According to ANZ, the increase in remittances from overseas Filipino workers (OFWs) would boost the local currency.

“Although remittance flows had started to improve, they were insufficient to offset the increase in the trade deficit, causing the overall external position to worsen. This has been the major driver behind the peso’s weakness in 2021, aside from a stronger dollar. How the external position evolves in 2022 will be key to the peso’s performance,” ANZ said.

Higher remittances growth will not only help to boost consumption growth in the domestic economy, but also help offset the trade deficit and support the peso, ANZ said.

It said that a recovery in business process outsourcing (BPO) receipts would also help to offset the trade deficit. “In addition, the business process outsourcing (BPO) sector will continue its recovery in 2022 after it was negatively impacted by the pandemic in 2020, which will help prevent a deterioration in the current account,” ANZ said.

The investment bank said imports would likely hold up on the back of a recovery in domestic demand following eased restrictions.

ANZ pointed out mobility data is already back to pre-pandemic levels, signaling a quicker pace of recovery in the near term.

It also said the elevated oil prices would keep the oil import bill high, while a likely ramp-up in infrastructure spending last year may cause a further increase in imports.

On the other hand, export growth is unlikely to match import growth, meaning that the trade deficit is set to stay wide, ANZ said.

For 2023, the peso is seen appreciating further to 49.80 to $1 in the first quarter, 49.70 in the second, 49.60 in the third, and 49.50 in the fourth quarter.