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Peso boost only ‘temporary,’seen at ₧57-₧59 to $ in 2023

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THE Philippine peso is not expected to continue strengthening this year and the recent performance of the currency is only temporary, according to a local think tank.

     In a briefing on Wednesday, First Metro Investment Corporation-University of Asia & the Pacific Capital Markets Research said the Philippine peso is expected to depreciate and settle at the P57 to P59 range against the dollar this year.

“Now we are experiencing strength in the peso. We also expect the dollar to weaken. So I think the peso will probably trade around that range. And as Dr. (Victor) Abola also mentioned  . . .  the depreciation of the peso is not necessarily bad for the country, especially for consumers because a lot of our citizens are very much dependent on OFW remittances which has been consistently growing, of course at different levels. So I think consumer spending will still be strong this year,” First Metro president Jose Patricio Dumlao said.

UA&P economist Victor A. Abola also said there are a number of reasons for this depreciation, including the country’s trade deficit which is expected to continue widening this year.

However, latest data released by the Philippine Statistics Authority (PSA) on Tuesday indicated that the trade deficit declined 21.9 percent in November 2022, the lowest since the 41.3 percent recorded in November 2020.

Exports grew 13.2 percent in November 2022, the second consecutive month of double-digit growth; while imports contracted 1.9 percent, also the lowest since November 2020 (Full story here: https://businessmirror.com.ph/2023/01/11/trade-deficit-in-november-falls-to-2-year-low-psa/).

“Our deficit right now is more than 40 percent of our imports, meaning we cannot finance that by exports. So that alone, as we see in the current account, is going to still be negative actually, according to even BSP’s projections,” Abola explained.

“So that’s going to create that pressure on the peso. Even though the dollar will strengthen little by little, the domestic environment will put a lot of pressure on the peso still,” he added.

Abola said another reason for the depreciation is the need to rebuild the country’s reserves. given that the Gross International Reserves (GIR) is now equivalent to 7.3 months’ worth of imports of goods and payments of services and primary income.

While this indicates that the reserves are adequate to cover payments for the country’s foreign liabilities, public and private, falling due within the immediate 12-month period, this was still significantly lower than the level the country started from, Abola said.

He added that the country’s reserves were largely composed of borrowings in 2021 and 2022 instead of actual inflows such as those coming from Overseas Filipino Worker (OFW) remittances.

“A lot of the reserves had been borrowed. The increase [in reserves] of about P20 billion [that] we’ve seen in 2022 and 2021 was basically borrowing. That’s not a very sound way of building your reserves. You have to build the reserves from actual inflows coming from the country like during the time when our OFW earnings were exceeding our trade deficits,” Abola said.

Oxford Economics

Meanwhile, Oxford Economics said the Philippine peso and the Thai Baht are among the currencies in the region that suffered from significant depreciations.

The United Kingdom-based think tank said the pressure to depreciate is strongest among importers like the Philippines. The country is a net oil and food importer.

Oxford Economics also noted that in terms of the Financial Conditions Index (FCI), the Philippines and Thailand were “performing poorly.”

“The Philippines, where our financial conditions index is the tightest among the five economies (ASEAN-5), is also where the central bank has tightened policy most aggressively. Long-term rates have risen the most since the start of 2022, while the Philippines’ peso and equity prices have underperformed,” Oxford Economics said.

On Tuesday, the Philippine peso reached its strongest level against the US dollar in almost seven months on the back of expectations of slower rate hikes and a weaker greenback.

The peso closed at P54.87 to the US dollar. It reached a high of P54.95 to the dollar and a low of P54.8 to the greenback.

This is the strongest level of the peso since June 29, 2022 when it closed at P54.757 to the US dollar. The peso breached the P54 level at P54.005 last June 21, 2022.

“Our traders largely think that the strength of the PHP is due to the USD’s weakness on the back of slower US Fed rate hike expectations. As a result, markets have started to price in a 25bps (basis points) hike by the US Fed in their February policy meeting,” Unionbank Chief Economist Ruben Carlo Asuncion told BusinessMirror on Tuesday.

“The USD-PHP drop, in today’s trading, was only halted at the P54.80 level due to bids from ‘suspected’ BSP agent banks. Some corporate demand was also seen at these levels which helped keep the pair supported,” he added.

Asuncion also said the lower-than-expected trade deficit in November 2022 may have also contributed to the strengthening of the peso against the US dollar.

“There is growing belief that after the 25bps hike this February, the US Fed may seriously ponder pausing. Fed futures further show a potential cut in rates by the end of 2023. So, it will be difficult to assess how sustainable the USD-PHP strength is because of the gamut of moving parts,” he explained.

Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla said expectations that other currencies will strengthen against the dollar in the coming months also improves the peso’s chances to strengthen.

Medalla said the Euro and the Japanese yen are expected to strengthen against the US dollar. The same is expected for the Korean won and other currencies.

“There are signs that the extremely strong dollar seems to be over,” Medalla said. “The yen is getting stronger, the euro is getting stronger. And almost by the design of the global economy, so will the peso, and so will the Korean won and many other currencies.”

US inflation

Meanwhile, Rizal Commercial Banking Corporation (RCBC) chief economist Michael Ricafort said US inflation is one of the major factors in the possible performance of the Philippine peso in the coming months.

He said any easing in US inflation would reduce the need for the US Federal Reserve to raise interest rates in the coming months. This will weaken the US dollar improving the chances of the Philippine peso to strengthen.

Ricafort said the “major support over the past 8 months: P54.15 to P54.20 levels, which help keep intact the underlying upward trend since April 2022.”

“Immediate resistance: P55 psychological mark. Next minor resistance levels over the past 3 months: P55.80 to P56.40 levels,” he added.

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