Peso seen to strengthen to 46:$1 this year

British banking giant HSBC expects the peso to strengthen further to 46 to $1 by the end of 2021 on the back of the country’s sound macroeconomic fundamentals, weak dollar and strong inflows.

In its 2021 investment outlook virtual press conference, HSBC private banking and wealth management managing director and chief investment officer of Asia Cheuk Wan Fan said the continued strength of the peso would be fueled by the Philippines’ current account (CA) surplus.

“We expect the peso to close at 46 versus the dollar by the end of this year,” Fan told reporters.

The Bangko Sentral ng Pilipinas (BSP) sees the country booking a current account surplus of $3.1 billion or 0.8 percent of gross domestic product (GDP) this year from the projected $6 billion or 1.6 percent of GDP last year.

Fan said the peso is one of the best performing currencies among emerging markets, driven by the country’s strong current account position, rebound in exports earnings, and the generally weak dollar.

Last year, the peso gained by more than five percent to close at 48.04 to $1 versus the end 2019 level of 50.635 to $1. This was the strongest level for the peso since closing at 47.99 to $1 on Sept. 23, 2016.

Fan said remittances from overseas Filipino workers (OFWs) would remain solid, contributing to the further strengthening of the local currency.

“This will underpin a pretty stable path for the peso. So we are actually expecting the peso to stay firm at 46 by the end of this year as well as 2022,” Fan said.

According to HSBC, the Philippine economy would bounce back with a growth of 6.5 percent in 2021 and 2022 due to renewed infrastructure investments and gradual economic normalization with the COVID-19 vaccine rollout.

“However, the Philippine economy will likely stay below its 2019 levels by end-2021. The country’s public debt will continue to rise over the next couple of years to above 60 percent of GDP, as wider fiscal deficits become the new norm after the pandemic crisis,” Fan said.

Fan said the Monetary Board would likely keep the benchmark interest rate at a record low of two percent after slashing the level by 200 basis points last year as part of aggressive COVID-19 response measures.

Fan said the central bank would further lower the reserve requirement ratio by another 200 basis points in the second half after reducing the level by 200 basis points last year.

“On the fiscal front, the government’s priority is to pass the 2021 budget which proposes a 10 percent increase in government spending from last year. Inflationary pressure should remain benign, but upside risks loom as lockdown restrictions ease and economic activity normalizes later this year,” Fan said.