Fitch: Peso to remain weak

The Philippine peso is expected to remain weak in the next three to six months, Fitch Solutions said.

“We at Fitch Solutions forecast the Philippine peso to remain on a weak footing over the short term as volatility picks up but fundamentals prove supportive. As such, we have revised our exchange rate forecast for 2021 to an average P48.40 per US dollar (USD), from P47.50/USD prior,” said Fitch Solutions in a report on Monday.

Fitch said the peso already weakened by 1.2 percent as of last March 16.

“The peso’s depreciation has occurred since February 15, when the rise in US Treasury yields accelerated weighing on emerging market (EM) assets. Investor appetite for the peso has been further dampened by rising oil prices, given the country’s net importer position, and a resurgence in Covid-19 (coronavirus disease 2019) cases in Manila in March. These headwinds are unlikely to abate in the near term, underscoring further peso depreciation,” the report pointed out.

Fitch said emerging markets’ currency volatility including the peso will remain elevated in the coming months.

“We have turned neutral to the dollar in the short term, as rising yields, technicals and valuations suggest a pause in the multi-quarter weakening trend. As long as the US dollar index stays above its key level of support at 89 to 90, the dollar could remain bid weighing on EM currencies and our view for a temporary trend of higher US treasury yields means EM currencies are likely to suffer, particularly in overvalued or growth underperforming markets,” said Fitch Solutions.

“We believe the Philippines is vulnerable to that narrative, given the relative strength index (RSI) is signaling some further scope for weakening within the technical wedge the unit has been trading in,” it added.

Fitch Solutions said elevated oil prices will also be an additional headwind to the peso.

“As an additional headwind, oil prices will remain elevated. Our oil and gas team has revised up their oil price outlook from an average of $58.0 per barrel (bbl) to $63.0/bbl in 2021, which will not only aggravate global inflationary pressures (and thus US treasury selling) but also increase the Philippines’ import bill,” said Fitch.

The report, however, noted that a sustained weakening of the peso will not likely happen as robust fundamentals would provide support.

It further said that the current account will remain in surplus this year that will bolster foreign currency reserves.

“Indeed, Philippines’ gross international reserves are larger than its gross external debts (109 percent as of September 2020), highlighting the country’s net external creditor position. Secondly, foreign holdings of local currency government debt are fairly minimal, at around 2.8 percent of the total outstanding as of February, compared to 7.0 percent end-2018, limiting the extent a sell-off of foreign holdings can drive the unit weaker,” said Fitch.

Economic recovery likely

In the next one to two years, Fitch Solutions said the Philippine economy will likely recover on the back of strong investment and easing of mobility restrictions.

It projected the country’s economy to grow by 7.6 percent in 2021 and 6.8 percent in 2022.

“Growth outperformance should boost appetite for Philippines assets and in turn, some appreciation in the peso towards the latter part of 2021. We believe the P48.00/USD support line will again be tested and expect the Bangko Sentral Ng Pilipinas (BSP) will intervene via reserve accumulation to stop the unit appreciating significantly past that level,” said Fitch.

For 2022, the peso is seen to average P50 per US dollar due to the strong credit growth and the expected loose fiscal stance.

The current account meanwhile is forecast to fall into deficit of 0.4 percent.

Fitch Solutions said the slow Covid-19 vaccine roll out is a risk to outlook.

“Issues around relatively low levels of trust in vaccines and the country’s largest populous pose challenges and ultimately could see the Philippines still implementing mobility restrictions in 2022, hampering economic activity,” it said.