LOCAL economists shared mixed views on the direction of the country’s dollar reserves in the coming months, but they agreed on one thing— the local currency is expected to reverse its appreciation run and weaken toward the end of the year.
Two of the country’s external indicators—its gross international reserves (GIR), as well as the value of the Philippine peso against the US dollar—have shown significant signs of recovery in the first half of the year after their relative rundown in 2018.
In particular, the Bangko Sentral ng Pilipinas (BSP) reported just last week that the country’s GIR—or the level of dollar holdings the central bank has in a given period—marked its eighth consecutive rise in June this year to hit $85.38 billion.
The GIR took a beating toward the end of the year in 2018, moving to seven-year lows as the BSP battled to smoothen out volatilities in the then-depreciating value of the local currency against the dollar. It also came at a time when sentiment was down due to the accelerating inflation, which also peaked at 6.7 percent during those months.
This follows the peso’s continuous appreciation versus the dollar, as it averaged at 51.80 to a dollar in June this year, from the 53.05 average in the same month last year. The peso also showed continuous strength against the dollar in July, as it ended Monday’s trade at 51.31 to a dollar.
However, this appreciation run is not likely to last, economists agree, as several local developments are likely to put pressure on the peso toward the latter months of the year.
ING Bank Manila economist Nicholas Mapa said he expects the peso to be affected by depreciation pressures as imports build up in the “ber” months given seasonality.
“However, if portfolio and direct investment flows continue, we could see this pressure mitigated to some extent,” he said. Economist Robert Dan Roces, meanwhile, said their models at Security Bank show the local currency ending the year with somewhere between 52 to 53 to a dollar.
“We still expect the peso to be weaker from current levels by the finish line, with reasons mainly from: our twin deficits with a growing Current Account negative balance, US Fed pausing and higher probability of one rate cut this second half of the year, BSP looking to aggressively cut policy rates as well to support investments, BPOs, [business-pricess outsourcing] and remittances,” Roces said.
Rizal Commercial Banking Corp. (RCBC) economist Michael Ricafort, meanwhile, has a more conservative view of the peso—with expectations of an end-year value hitting a ceiling of 52.2 to a dollar. Should sentiment be even more positive, the peso could hit 51.5 to a dollar by end year, according to Ricafort.
The country’s GIR, however, is a different story.
RCBC’s Ricafort said he expects the country’s dollar defenses to increase further toward the end of the year and even post new record highs due to the following factors: the Philippines’s S&P upgrade to BBB+, possible continuation of net foreign portfolio investment inflows amid easing in inflation and local interest rates, continued growth in the country’s structural US dollar/foreign currency inflows and proceeds from the government’s foreign bond issuances.
Security Bank’s Roces, meanwhile, said he expects the country’s GIR to thin further to the tune of $75 billion this year.
“It’s just an estimate based on sustainability of inflow, and also our external debt servicing schedule. The current level is already [on a] par with last month’s so we’ll have to see if the upward momentum has peaked or will still be sustained in the next two months,” Roces said.
ING’s Mapa, meanwhile, expressed confidence that the level of the country’s dollar reserves has been enough and will still be enough in the near-term amid its projected movement.
“We note other studies on GIR adequacy from IMF [International Monetary Fund] research papers that show the Philippines has more than ample GIR to deal with bouts of stark risk off tone so there should be no concern on GIR levels and we may likely not need to carry out unwarranted GIR buildup at the expense of economic growth,” Mapa said.
