DBS sees new record low for peso in 2019

The peso may hit a new record-low of 56.5 to $1 next year amid overheating concerns, fueled by a widening current account deficit and high inflationary environment, according to DBS Bank Ltd. of Singapore.

In a report, DBS expects the peso to further weaken to 54.5 to $1 by end-2018 and 56.5 to $1 by the last quarter of 2019, lower than its earlier forecast of 54.4 to $1 for this year and $56 to $1 for next year.

“The odds of the Philippine peso hitting a new all-time low over the next 12 months cannot be fully discounted,” DBS said.

The peso has emerged as one of the weakest currencies in the region after shedding eight percent to pierce the 54 to $1 level. The local currency hit an all time low at 56.34 to a dollar in October 2004.

DBS said it sees the peso depreciating gradually over the next year, settling at 54.5 to $1 by the fourth quarter of 2018, then at 55 to $1 by the first quarter of 2019.

It is projected to further weaken to 55.5 to $1 by the second quarter and 56 to $1 by the third quarter, to finally settle at 56.5 to $1 by end-2019.

In its report, DBS said the Philippines has yet to assuage concerns that the economy is overheating. “The current account’s return into a deficit position is likely to be structural,” DBS said.

It added that the country’s trade deficit, which was brought about by the strong demand for imports, driven by the government’s high infrastructure spending, continued to overtake remittances from Filipinos abroad.

Despite overheating concerns, DBS said the Duterte administration has rejected the International Monetary Fund’s advice to adopt a more neutral fiscal stance and to lower its fiscal deficit ceiling to 2.4 – 2.5 percent of the country’s gross domestic product, instead of three – 3.2 percent.

Inflation rose to 6.7 percent in September, faster than the 6.4 percent recorded in the previous month and three percent in September last year.

The Bangko Sentral ng Pilipinas (BSP) earlier said this may have already been the inflation peak this year.

“CPI inflation has risen well above its official target and led to two aggressive hikes of 50 basis points each,” DBS said.

In its Sept. 27 meeting, the BSP’s Monetary Board delivered a back-to-back 50 basis point rate hike to anchor inflationary expectations, bringing to 150 basis points the cumulative increase in interest rates so far this year.

DBS expects the BSP to raise rates by another 50 basis points within the fourth quarter, 25 basis points in the first quarter of 2019, and another 25 basis points by the second quarter of 2019.