Peso faces more headwinds in H2

MANILA, Philippines — The peso is seen weakening further in the second half of the year after emerging as the worst performing currency in ASEAN due to a slower tightening pace by the Bangko Sentral ng Pilipinas (BSP).

In its latest foreign exchange monthly outlook, ANZ Research anticipates further weakness of the peso as it breached  the 55 to $1 level to close at 55.06 to $1, its weakest in almost 17 years or since closing at 55.08 to $1 on Oct. 27, 2005.

The local currency has so far depreciated by a little over eight percent to close at 55.09 to $1 last Friday from the end-2021 level of 50.999 to $1.

“Headwinds for the peso are expected to continue over the second half of 2022 as the country’s external sector metrics drop. Strong domestic demand, fuelled by remittances growth and government spending, will firm up import growth. This will add to the current account deficit, whereas export growth will lower,” ANZ Research said.

It pointed out that the Philippines faces several domestic and external challenges including the aggressive tightening by the US Federal Reserve to address rising inflation, which are contributing to the weakness.

“Persistent US dollar strength throughout June due to an aggressive Fed hiking cycle has been the leading cause for peso weakness. However, we think the US dollar strength has peaked, which should alleviate pressure on the peso in the near term,” ANZ said.

On the domestic front, ANZ sees inflation remaining above five percent over the next few months after quickening to 5.4 percent in May, the highest since 2018 from 4.9 percent in April due to rising oil and food prices caused by the Russia-Ukraine war.

“As a result, the chance of a faster rate hike has increased. The divergence in pace of rate hikes between the BSP and the US Fed is expected to be a major headwind for the peso. As a result, it will remain on the weaker side in 2022, with the central bank expected to use its tools to absorb only short-term market volatility,” ANZ said.

To curb rising inflationary pressures, the BSP’s Monetary Board has delivered back-to-back 25 basis-point (bps) rate hikes in May and June that brought the benchmark rate to 2.5 percent from an all-time low of two percent.

It started its interest rate liftoff when it delivered a 25 bps rate hike last May 19, the first in more than three years or since November 2018, to address the emergence of second round effects through wage hikes and transport fare increases.

It would be recalled that the central bank slashed interest rates by 200 bps in 2020 as part of its COVID-19 response measures that brought the overnight reverse repurchase rate at an all-time low of two percent.

ANZ sees the BSP delivering another 100 bps in rate increases this year to bring the benchmark interest rate to 3.5 percent and another 50 bps to four percent by the first quarter of next year.

“A slower hiking pace by the BSP and high inflation have increased the headwinds for the PHP,” ANZ said.

Meanwhile, BSP senior director Paolo Redentor Alegre said the results of the Q2 2022 Business Expectations Survey (BES) showed that companies expect the peso to depreciate further in the third quarter  as well as the next 12 months.

Likewise, Alegre said businesses expect inflation to settle at 4.1 percent in the third quarter and the next 12 months, slightly above the BSP target of two to four percent.

“Firms expect a weak peso, and higher borrowing and inflation rates in Q2 2022 and in the near term,” Alegre said.