Political risk to add to peso pressure —BMI
HEIGHTENED political risks coupled with the Philippines’ rising exposure to China could cause the peso to weaken further in the months ahead, analysts at BMI Research said, even as they noted that strong economic growth should provide some support to the local currency.
Economists at the Fitch unit said the peso could depreciate more against the greenback over the short term, with rising political noise adding to market uncertainty that has been driving investor bias against emerging market currencies.
“We believe that there is further scope for modest PHP weakness over the near term given the negative technical picture and heightened political risk in the Philippines,” BMI Research said in a report, while clarifying that downward movements are likely to be contained.
“[T]he political outlook in Philippines could deteriorate more rapidly than we expected given the volatile nature of President Duterte and the deepening division between the President and VicePresident’s camps in both the executive and legislative branches.”
BMI Research had previously noted “heightened risk” of political instability in the Philippines that could “disrupt policy formation” especially in Congress.
In particular, much- needed reform laws could be held hostage should Congress decide to prioritize purely political issues such as the impeachment complaints lodged against President Rodrigo R. Duterte and Vice- President Maria Leonor “Leni” G. Robredo.
Policy shifts in the United States under a “protectionist” stance of new President Donald J. Trump are also seen to affect overall currency movements, the research unit said, especially as the country stands as one of the biggest sources of direct investments and remittances.
The analysts penciled in just one more rate hike in the United States after the two since December, against market expectations of two more increases at 25 basis points ( bp) each within 2017.
In turn, the Bangko Sentral ng Pilipinas (BSP) is expected to respond with its own tightening moves within the year
to preserve “real interest differentials” and smoothen currency movements.
Traders have attributed the peso’s continued weakness to a “wait- and- see” stance taken by investors, with preference for safe- haven currencies like the US dollar amid expectations that the Federal Reserve will continue rate normalization. The peso has been trading above the P50 level since Feb. 17 ahead of the Fed’s decision in March to hike rates by another 25 bp — the same magnitude seen in December 2015 and 2016. The local currency ended trading yesterday at P50.175 to the greenback, 0.9% weaker than its P49.72- per- dollar finish last year.
BMI expects the local unit to end the year at P50- to- a- dollar on the back of the country’s solid growth story. “On the positive side, anchored inflationary expectations and robust economic growth facilitated by the government’s expansionary fiscal plans, steady remittances inflows which are partly channelled to investment and strong foreign direct investment (particularly from Japan and China) will be supportive of the peso,” the report read.