Trade gap, inflation to push local currency past P54:$1

THE PESO could weaken further to breach the P54 level against the dollar this year amid a persistent trade gap and faster inflation, analysts at BMI Research said, with recent rate hikes still not enough to keep the currency competitive.

In a report, the Fitch unit said the peso will likely continue its depreciation streak to average P52.50 versus the greenback for 2018, which is weaker than their previous estimate of P51.90 per dollar.

“Fundamentally, the peso remains vulnerable due to negative real interest rates as headline inflation ( at 4.6% year- on-year in May) is significantly above the Bangko Sentral ng Pilipinas’ (BSP) policy rate of 3.50%,” the research firm said in the report published yesterday.

“In our view, the interest rate is too low for an economy that is expanding by close to 7.0%, and this concern has also been echoed by bond investors who are demanding higher returns for their expectations of higher inflation.”

The peso has been trading above P53 since mid-June, which analysts said reflected market cautiousness amid uncertainties in both domestic and global markets.

BMI said the peso remains to be among the worst performers in the region, noting that they are still seeing “room for further weakness” for the coming months. Inflation has averaged 4.1% for the first five months of 2018, with May’s reading clocking in the fastest in at least five years. This has merited back-to-back policy rate increases from the BSP, although the research unit said the central bank will need to tighten rates anew just to catch up.

Price increases are seen to trend above four percent for the months ahead, especially as BMI expects rapid credit growth to keep putting pressure on inflation. In turn, they said one more rate hike is needed from the BSP within 2018.

“While the BSP hiked its benchmark interest rates by a total of 50bps ( basis points) in May and June, and signalled that it is prepared to continue hiking to safeguard macroeconomic stability, this is likely to be offset by rising interest rates globally,” BMI said, pointing out expected rate increases in the United States and in the Euro area.

Intensifying trade tensions with China and the Eurozone could also dampen investor appetite towards emerging markets like the Philippines, the report noted.

A wider trade deficit due to a surge in government spending is also weighing on the peso, as the infrastructure boom pushes up imports growth. These are only partially offset by foreign investment inflows.

Despite this, BMI expects the trade deficit to receive a boost

from “large and stable” remittance inflows, which in turn will lend some support to the peso.

The current account settled at $208-million deficit during the first quarter of 2018. This is narrower than the $860-million deficit logged during the same period last year.

The Finance department said in an economic bulletin that the latest current account data “remains healthy” despite sustained outflows.

“Maintaining good macroeconomic fundamentals by keeping the budget deficit manageable, keeping interest rates at the level that sustains the volume of investments and allowing the exchange rate to maintain its competitive level will enable the country to sustain economic growth in the medium term,” the department said.