Peso pressures to bring rate back to R51:$1 this year

Economists expect the peso to generally weaken back to the P51-level versus the US greenback this year, mostly because of the fragile external accounts position of the country and capital flows on rising US interest rates.

ING Bank senior economist Joey Cuyegkeng continue to see a depreciating peso for 2018 but said they now see a “milder weakness” of R51.50 by year-end.

“The weak external payment position is likely to resurface as a reason,” said Cuyegkeng, citing the Bangko Sentral ng Pilipinas’s (BSP) $700 million deficit projection for the current account this year. “We expect the trade deficit to widen to show a worsening capacity of OFW remittances to finance the trade gap.”

Cuyegkeng said the Philippine trade deficit will also likely widen to $37 billion this year on a nine percent export gain and a 10 percent to 13 percent growth of imports. Stronger investment spending would lead to a higher import growth, he noted. “The difference between remittances and the trade gap worsens to $8 billion to $10 billion from 2017’s less than $7 billion.”

Cuyegkeng said the rising US interest rates and the impact of the tax reform program to inflation will further weaken the peso. “We believe that inflation pressures in 2018 would be more intense,” he said. The bank sees 3.7 percent average inflation for 2018, higher than BSP’s own forecast of 3.2 percent, because of higher higher commodity prices such as oil

Tax-reform related price pressures would also add to the price pressures. “We estimate that the direct impact of the tax reform-related excise taxes would result to a 0.8ppt to 1ppt increase. The indirect or second-round effects through higher transport fares and higher wages and production costs could add another 1ppt to prices,” said Cuyegkeng.

The peso will deal with more pressures when the BSP adjust its own rates this year, which the bank thinks will be 50 bps, possibly in the second and fourth quarters. “These would add to peso pressures (but) capital inflows could deliver some peso strength again this year,” he added.