Peso seen to weaken to 55.5:$1 this year

The peso is now expected to hit 55.5 to a dollar instead of 54.5 this year as it continues to weaken due to the runaway inflation as well as external shocks that include the US-China trade war as well as the contagion effect from other emerging markets.

In its latest Asia Economic Monthly, Nomura Securities Ltd. said it sees the local currency hitting 55 to $1 in the third quarter before further dropping to 55.5 to $1 in the fourth quarter.

It added currencies in Asia, including the peso, remain vulnerable to emerging market risk aversion and pressure on current account deficit.

Nomura said the intervention of the Bangko Sentral ng Pilipinas (BSP) in the foreign exchange market has helped keep the peso steady.

“However, there are recent signs that BSP is allowing more foreign exchange depreciation,” it said.

The peso almost touched the 54 to $1 level, hitting an intraday low of 53.975 last Friday. It is one of the weakest currencies in the region, depreciating over six percent to hit its lowest level in almost 13 years at 53.8 to $1 last Thursday.

The weak peso benefits exporters but is a problem for importers who need to shell out more dollars for their imports.

“The desire for currency weakness could itself trigger further weakness, if exporters delay delivering their dollar receipts and importers rush to buy dollars in anticipation of further weakness; this, in turn, could drive further capital outflows and trigger further currency weakness, and so on,” it added.

Moreover, Nomura said higher inflation driven by a weaker currency could fuel inflation expectations and further currency weakness.

“The Philippines is a case in point; there, authorities initially adopted a laissez faire approach to peso weakness, but this triggered resident outflows and fuelled inflation, which ultimately prompted BSP to hike rates more aggressively,” Nomura added.

The BSP’s Monetary Board is under pressure to deliver another 50-basis point rate hike as inflation averaged 4.8 percent in the first eight months of the year, exceeding the central bank’s high end target of four percent.

Growth in the consumer price index (CPI) leapt to a fresh nine-year high of 6.4 percent in August from 5.7 percent in July due to higher oil and food prices, weak peso and the impact of the implementation

of Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) Law.

BSP Governor Nestor Espenilla Jr. had said the central bank is considering an offcycle policy meeting ahead of the Sept. 27 schedule to tackle recent economic and monetary developments.

Espenilla also announced the revival of the hedging facility for eligible companies with foreign exchange obligations launched during the height of the Asian financial crisis more than two decades ago to calm the foreign exchange market.

The currency rate risk protection program (CRPP) facility for “eligible corporates with foreign exchange obligations based on more liberalized rules would be reactivated to reduce the risk of sharp movements in the prices of foreign currencies. It reduces cash flow uncertainties, improves financial decision-making and facilitates cash conservation and planning for capital needs.

Under the facility, the parties agree that on the maturity of the forward contract, only the net difference between the contracted forward rate and the market rate would be settled and paid in pesos.