The peso tumbled to a new 10-year low of 50.545 against the US dollar Monday, as domestic and external developments combined to create downward pressures on the local currency.
Business Monitor International, a unit of Fitch Group, said it was now expecting the peso to close at 50.50 against the greenback at the end of 2017, down from its earlier estimate of 50 a dollar, as it took into account the fragile political outlook in the Philippines and the expected additional rate hikes by the US Federal Reserve.
“We note that risks to our peso view are weighted to the downside. Firstly, the political outlook in Philippines could deteriorate more rapidly than we expected given the volatile nature of President Duterte and the deep division between the President and Vice President’s camp in both the executive and legislative branches,” BMI said in a report Monday.
“Secondly, should the US Fed hike interest rates faster than we expect, this could see hot money outflows intensify which would be negative for the PHP,” it said.
It said the Trump administration’s more protectionist policies could also negatively affect the Philippine economy and its external position.
BMI considered the Philippine peso as one of the worst-performing currencies in Asia, after it fell below the 50-a-dollar mark in June.
It said while there was scope for further spot weakness over the coming months given rising real rates in developed markets, the local currency was not expected to weaken excessively.
“Additionally, we expect the Bangko Sentral Ng Pilipinas to tighten its policy rate by 50bps before end-2017, which should see real interest rate spread move in favor of the PHP. While we are revising our forecast for the peso to reach P50.50/US dollar at end-2017, up from P50/USD previously, we remain constructive on the unit in total return terms,” BMI said.
BMI said the peso was expected to remain fairly stable over the coming quarters, averaging around P50.75 a dollar in 2018.
“On the positive side, although we expect structural inflation in the Philippines to average higher than the US due to persistently high loan and money supply growth, inflationary pressures are likely to remain anchored at around 4 percent over the coming quarters due to credible monetary policy in the country,” BMI said.
Finance Secretary Carlos Dominguez III said a “slightly devalued” peso was not bad at all because it would benefit the economy through higher value of remittances from overseas Filipino workers and business process outsourcing revenues.
