THE local currency’s weakness is seen to extend further up until next year, an international think tank says, with the peso being projected to hit the 56 to a dollar territory by the end of next year.
Fitch Solutions Inc. on Monday revised downward its forecast of the peso against the dollar to reflect further depreciation down the line.
In particular, Fitch Solutions now puts their end-2018 forecast at 54.8 against the greenback. The company sees the Philippine tender falling to 56.33 to a dollar by end of 2019.
Earlier, Fitch Solution’s forecast of the peso was to close both year at 54 to a dollar.
For 2018 the think tank believes the key driver in the coming months would be external developments, particularly as global investors fret over emerging market conditions and opt for safe-haven currencies such as the dollar.
“Fundamentally, the peso remains vulnerable due to negative real interest rates differentials vis-à-vis the US, but it does not warrant such a sharp selloff in our view given the strong economic fundamentals and a hawkish BSP [Bangko Sentral ng Pilipinas],” Fitch Solutions said in a statement.
“Furthermore, notwithstanding the slowing growth trajectory, the Philippines recorded real GDP [gross domestic product] expansion of 6 percent in [the second quarter of the year], placing the country as one of the fastest-growing economies globally. The fact that foreign direct investment [FDI] inflows into the Philippines surged by 42.4 percent year-on-year in the first half of 2018 to $ 5.8 billion, is indicative that fundamental investor sentiment remains positive, and that the sudden portfolio reversal is merely knee-jerk adjustment by bond investors,” it added.
Data from the Bankers Association of the Philippines (BAP) showed the peso traded at 54.11 to a dollar on Monday, weaker than the 54.02 to a dollar in the previous day’s trade.
For next year, however, Fitch Solutions sees a larger depreciation as internal woes, such as inflation and the wider current account deficit come to play. Risks to their outlook are also tilted toward the downside, the research firm added.
“The Philippines is increasing economic linkages and exposure to China [and moving away from the west], at a time when the US and China are experiencing rising trade tensions. With the Chinese yuan on a weakening trajectory, Beijing could tighten capital controls, leading to a drying up of external financing from China,” Fitch Solutions said.
“Furthermore, the outbreak of a full-blown trade war between the world’s largest and second-largest economy would lead to further risk-off sentiment,” it added.
Image credits: Nonie Reyes