Strong performer PHL peso seen weaker as dollar demand rises

THE Philippine peso—which has been the most robust emerging market currency in the past two years—is expected to lose some strength this year amid the resurgence of dollar demand.

Standard Chartered Bank (Stanchart), in a recent press event, projected the local currency to trade at P49.5 against the greenback by the end of the year. This is about 3 percent weaker than the current trading level of P48.

“We think the dollar/peso is going to go slightly higher, not materially, but we do expect slight weakness in the Philippine peso this year,” said Divya Devesh, the bank’s foreign exchange research head for the Association of Southeast Asian Nation (Asean) region and South Asia.

With the expectation of the economy opening up further, Devesh said imports are likely to see a rebound as well. “As imports pick up, I think the dollar demand comes back into the picture,” he explained, noting that this would weigh on the value of the peso this year.

The Stanchart analyst explained that last year’s contraction in imports was among the major supporting factors for the peso.

According to the Philippine Statistics Authority (PSA), the country’s total imported goods declined by 24.5 percent to $77.63 billion as of November 2020 from P102.88 billion year-on-year.

“2020 was largely a year of import contraction .... In 2021, we expect that to reverse,” Devesh added.

The local currency may also be overvalued now, Devesh explained, after gaining some momentum the past years.

On the last trading day of 2020, the peso ended at P48.02, which is about 5 percent stronger than its P50.63 closing on December 27, 2019. This is the local currency’s strongest finish in the past four years.

“Peso now is quite strong in valuation terms and most metrics probably suggest that peso is overvalued,” he said. “Although, we can discuss and debate as to how much overvaluation there is because you can get different answers depending on which variable you look at.”

“Peso does not enjoy a very strong support from real rates at this point,” he added, noting the accommodative monetary policy stance of the Monetary Board.

Devesh is expecting the peso to further weaken to P50 against the dollar next year.

On Friday last week, the peso settled at P48.085 against the greenback, which is 0.06 percent weaker than its closing on the previous day. The peso:dollar exchange has gone up by around six centavos or 0.1 percent year-to-date.

RCBC Chief Economist Michael L. Ricafort said that the peso has remained relatively strong despite the recent decline in value. The local currency has been consistently below the P48.10 levels for two months already, he noted.

“However, these would be offset by any pickup in importation, including some hedging for the payment of imports, also as the economy further recovers/re-opens from lockdowns,” he said in a recent report. Ricafort pegged immediate resistance within P48.10 to P48.12 levels.

Inflation uptick not worrisome

DESPITE projecting higher inflation this year, Stanchart Economist for Asia Chidu Narayanan is not worried by the uptick in consumer price growth, given the low base in 2020.

“It [inflation] is not going to be driven by increased activity or by overheating of the economy,” he explained during the same briefing.

For 2021, the foreign bank expects inflation to average at 3.5 percent. The figure is anticipated to go down to 3 percent next year.

The forecast is higher than the 2.9 percent average in 2021 projected by economists surveyed by the Bangko Sentral ng Pilipinas.

Narayanan said the economy should watch out for the impact of typhoons in the second half as this can drive up inflation anew. To recall, the onslaught of typhoons in the latter part of 2020 prompted food prices to go up.

In addition, the Stanchart economist noted that oil prices are expected to rise this year. This is seen to jack up transport costs as a result, he said.

The country’s annual average inflation last year registered at 2.6 percent, a little higher than the 2.5 percent in 2019. Still, it was within the government target band of 2.0 to 4.0 percent.

Consumption still low

CONSUMPTION is expected to remain low this year amid the economic slump, Narayanan said. It is only seen to return to prepandemic levels by 2022, he added.

For household spending to rise, the economist said that activities should increase as public sentiment enhances.

“For the sentiment to come back, we need daily infections to be under control,” he stressed.

At the same time, Narayanan said the employment rate should return to prepandemic levels to support private consumption.

According to PSA data, household expenditures at current prices dropped by over 6 percent to P9.68 trillion in the first three quarters of 2020 from P10.31 trillion yearon-year.

Gross domestic product (GDP), meanwhile, contracted by an average of 10 percent in January to November last year. Full-year 2020 figures will be announced this week.

Stanchart projects the country’s consumer-driven economy to decline by 8.9 percent. The foreign bank is expecting a rebound in GDP of 6.1 percent and 6.5 percent this year and in 2021, respectively.

The Cabinet-level Development Budget Coordination Committee earlier forecast that GDP will sink deeper by 8.5 percent to 9.5 percent in 2020 due to protracted lockdown measures.