Peso may strengthen to 54:$1 by end-2023

MANILA, Philippines — ANZ Research sees the peso appreciating over the next two years after slumping to an all-time low of 59 to $1 in October last year amid the series of aggressive rate hikes delivered by the US Federal Reserve to tame inflation.

In its Q2 Asia Economic Outlook, ANZ said the peso may strengthen to 54 to $1 in end-2023 and further to 53.40 to $1 by end-2024.

The peso has weakened for two consecutive years to 50.999 to $1 in 2021 and further to 55.755 to $1 in 2022 from 48.023 to $1 in 2020.

The local currency ended 2022 weaker by 9.3 percent after slumping by as much as 15.7 percent to hit an all-time low of 59 to $1 in October last year.

The peso appreciated to its strongest level of 53.68 to $1 on Feb. 3 amid the series of aggressive rate hikes and the active intervention by the Bangko Sentral ng Pilipinas (BSP) in the foreign exchange market to tame inflation and stabilize the local currency.

As of April 5, the peso had gained 2.4 percent to close at 54.4 to $1 from the end-2022 level of 55.755 to $1.

“The Philippine peso was broadly resilient against growing headwinds in the first quarter, gaining about 2.5 percent as the dollar softened. The BSP has delivered steady hikes to tame inflation and maintain price stability, albeit with partial success,” ANZ said.

Since its interest rate liftoff in May last year, the BSP has raised key policy rates by 425 basis points. This brought the benchmark interest rate to a 16-year high of 6.25 percent from an all-time low of two percent.

Inflation averaged 8.3 percent in the first quarter, well above the BSP target range of two to four percent, despite easing significantly to a six-month low of 7.6 percent in March from 8.6 percent in February.

“The inflation momentum remains strong; so has household consumption despite the rate hikes,” ANZ said.

It sees the consumer price index (CPI) accelerating to 5.9 percent this year as the battle against inflation will be long drawn before easing to 3.2 percent next year from 5.8 percent last year.

According to ANZ, the country’s balance of payments position is seen narrowing significantly to $300 million this year before reverting to a surplus of $1.6 billion next year from an all-time high of $7.3 billion deficit last year.

Likewise, the country’s current account balance is seen narrowing to $16.7 billion in 2023 and further to $14.8 billion in 2024 from a record high of $17.8 billion in 2022.

“Although slowing export demand poses a challenge, it will be offset by reduced import demand, thus allowing for an improvement in the external balances. We expect the peso to appreciate gradually to 54 per $1 by yearend,” ANZ said.

The Philippines’ import bill is also seen to decline from an all-time high of $137.2 billion in 2022, led by both slower demand and further correction in global commodity prices.

ANZ penned a slower gross domestic product (GDP) growth for the Philippines at 5.8 percent for 2023 and five percent in 2024, with resilient private consumption serving as key driver of the expansion.

After exiting the pandemic-induced recession with a 5.7 percent expansion in 2021 from a contraction of 9.6 percent in 2020, the country managed to sustain the momentum with a 7.6 percent GDP growth in 2022.

“Consequently, we anticipate net exports to pose a milder drag on growth despite the export slowdown. Overall, we expect GDP growth at 5.8 percent in 2023,” ANZ said.

This is lower than the six to seven percent GDP growth target set by the Cabinet-level Development Budget Coordination Committee.