ANZ sees peso weakening to 53.50 this year, 54 next year

ANZ Research sees the peso weakening further to 53.50 to $1 this year and to 54 to $1 next year as the Bangko Sentral ng Pilipinas (BSP) has yet to switch to tightening mode amid rising inflation.

In its latest Asia economic outlook for the second quarter, ANZ said the weakness of the local currency would emanate from the widening current account (CA) deficit.

The external position of the Philippines has been weakening due to the ballooning trade and CA deficit caused by strong imports, particularly of capital equipment and raw materials to support the expanding economy.

The Philippines booked a CA shortfall of $2.5 billion or 0.8 percent of gross domestic product (GDP) from a small deficit of $100 million in 2016. In 2013, it registered a CA surplus equivalent to 4.2 percent of GDP.

“Unlike India and Indonesia, which run current account deficits but have strong foreign portfolio inflows to fund them, the Philippines has not been able to attract sufficient portfolio inflows, though a rise in net foreign direct investment flows has helped take some pressure off,” the investment bank said.

Latest data from the BSP showed the country booked a record FDI inflow of $10 billion last year from the previous alltime high of $8 billion in 2016.

ANZ Research noted the BSP’s Monetary Board has been reluctant to raise interest rates amid rising inflation, due primarily to the first round effects the implementation of Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) Law last January.

As a result, inflation kicked up to 3.9 percent in February, using the base year 2012, from 3.4 percent in January, bringing the average inflation to 3.7 percent in the first two months of the year. The BSP has set an inflation target of two to four percent between 2018 and 2020.

Based on its lat- est assessment, the central bank now expects inflation to average 3.9 instead of 3.8 percent, and 3.5 percent for 2019.

ANZ Research said the current pace of growth in domestic demand implies a further worsening of the current account and higher inflation. It expects inflation to accelerate to 4.1 percent this year before easing to 3.4 percent next year.

“Even though the central bank has refrained from hiking the policy rate, bond yields have risen, reflecting investors’ concerns over inflation. At the same time, policymakers remain comfortable with a weaker currency,” it added.

Despite rising inflation, the BSP has maintained an accommodative stance to support the growing economy over the past three years. It last raised benchmark rates by 25 basis points in September 2014.

“Policymakers remain comfortable with a weaker currency, and have shown reluctance to increase interest rates in order to slow down domestic demand. Hence, we expect the peso to weaken further on the back of continued deterioration in the current account. We forecast the peso to end 2018 at 53.50,” ANZ said.

The peso is the worst performing currency in the region, depreciating by about four percent to hit a fresh 11-year low and hovering in the 52 to $1 level.

BSP Deputy Governor Diwa Guinigundo said the central bank has had focus and discipline in avoiding unnecessary overreactions, resulting in longof term stability of prices, expectations, and credibility since shifting to the inflation targeting framework in 2002.