Fitch unit cuts 2018-2019 peso outlooks
THE Philippine peso is looking “technically bearish,” a Fitch Group unit said as it lowered its end-2018 and end-2019 foreign exchange forecasts for the currency.
In a report released on Monday, Fitch Solutions noted that market sentiment and technicals remained stacked against peso, which has weakened by over 8 percent against the dollar since the start of the year.
The currency, which last week hit a near 13-year low of P54.325:$1, closed at P54.11 to the dollar on Monday.
The Fitch unit said that “fears of contagion from the financial crisis in Turkey and Argentina, coupled with rising US interest rates, will continue to fuel broader risk-off sentiment in EMs (emerging markets), resulting in further flight to safety by portfolio investors.”
Negative real interest rate differentials relative to the US were keeping the peso fundamentally weak but “it does not warrant such a sharp sell-off in our view given the strong economic fundamentals and a hawkish BSP (Bangko Sentral ng Pilipinas),” it added.
The central bank’s policymaking Monetary Board has raised key interest rates by a total of 150 basis points (bps) so far this year. The latest, a 50-bps increase announced last Thursday, raised the central bank’s overnight borrowing, lending and deposit rates to 4.50 percent, 5 percent and 4 percent, respectively.
Fitch Solutions also stressed that gross domestic product growth of 6 percent in the second quarter still made the Philippines one of the fastest growing economies in the world.
However, it said that “on balance, we are therefore revising our end-2018 Philippine peso … to PHP54.80/USD, from PHP54.00/USD previously.”
“This should take the average 2018 forecast for the currency down to PHP53.00/USD, from the year-to-date average of PHP52.52/USD (as of September 29),” the Fitch unit added.
It also offered a “slightly more bearish” outlook for next year, revising its end-2019 forecast to P56.33:$1, from P54:$1 previously, on the back of higher inflation and twin deficits in the country.
“We expect downside pressures to prevail, with inflation likely to average higher in the Philippines as compared with the US,” Fitch Solutions said, noting that it expects inflation to average 4.7 percent over 2019 and 2020 against 2.2 percent in the US.
It added that the government’s infrastructure program and the absence of a corresponding increase in direct and portfolio inflows or higher domestic savings would widen the country’s trade and current account deficits.
The trade deficit hit $3.546 billion in July, widening the year-to-date gap to $22.490 billion.
The current account hit a deficit of $3.087 billion in the first half, equivalent to 1.9 percent of gross domestic product.
Fitch Solutions said that risks to its latest peso view were weighted to the downside given expected tighter external financing from China, with which the Philippines has an increasing economic exposure, and the possibility of a full-blown US-China trade war.
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