BMI Research, a Fitch Group company, sees the peso weakening to 49 to $1 this year before recovering to 48 to $1 next year.
MANILA, Philippines – The peso is seen weakening further amid external headwinds as well as the negative investor sentiment on the Duterte administration that resulted in the four percent drop in the value of the local currency against the dollar.
BMI Research, a Fitch Group company, sees the peso weakening to 49 to $1 this year before recovering to 48 to $1 next year.
In its Philippine Country Risk Report, BMI Research said the local currency would continue to depreciate in the next few months after breaching the 48 to $1 level last month.
“We expect the Philippine peso to weaken further against the dollar in the coming months due to market uncertainty over Duterte’s increasingly unorthodox policies,” it said.
It pointed out the peso is expected to recover next year due to the cash remittances of Filipinos living and working abroad.
“Over the longer term, we hold a slight appreciatory bias on the currency as healthy growth-inflation dynamics facilitated by a large and steady remittances inflow will be supportive of the currency,” BMI Research said.
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The research arm expects the country’s current account surplus as a share of gross domestic product (GDP) to narrow significantly to 1.5 percent in 2016 and 0.9 percent in 2017.
However, it explained the deterioration of the Philippines’ external accounts should not be a major cause for alarm given the surge in imports has been largely driven by stronger manufacturing, construction, and investment activities.
“We believe that a significant portion of these imports will likely be channeled toward fixed capital formation which should contribute to headline growth. The country also boasts a healthy foreign reserves buffer and steady remittances inflow which should help preserve external stability,” BMI Research said.
The company downgraded the country’s short-term political risk index score to 64.6 from 66.3 as it expects the security situation in the Philippines to worsen over the coming months due to the Duterte administration’s heavy-handed approach on crime and drugs, as well as the military’s conflict with the Abu Sayyaf militant group in the South.
“The government’s crackdown on these outlaws is likely to lead to greater reprisals and an increase in frequency of terror attacks,” it said.
Joey Cuyegkeng, senior economist at ING Bank Manila, said the bank has revised its year-end rate back to the previous forecast of around 47.50 to $1 instead of 46.60 to $1.
Cuyegkeng said the peso’s weakness in September was the worst in 16 years or since 2000. “This reminds us of political events in 2000,” he said.
He said the local currency weakened significantly by 21 percent from August 2000 to early January 2001 and by as much as 36 percent from March 2000 to early January 2001.
According to him, the very weak local currency then reflected a full blown political event or risk. “There are some similarities and differences then and now. Economic fundamentals now are more robust,” Cuyegkeng said.
He cited the record high foreign exchange reserves, while cash remittances from overseas Filipinos and the robust business process outsourcing (BPO) sector serve as additional sources of US dollars.
