Philippines

Peso seen stable but risks ahead on external dev’t

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Peso seen stable but risks ahead on external dev’t
By Joann Villanueva

MANILA (Philippines News Agency) – Fitch Solutions sees the Philippine peso to remain stable against the US dollar, but its weakness is also expected not because of domestic monetary easing but by developments overseas.

In a report dated September 30, the unit of Fitch Group forecasts the local currency to average at 52.10 to a greenback this year, 53.00 in 2020, and 52.80 in 2021.

It noted the local unit “has remained relatively stable” before the rate-setting meetings of the Bangko Sentral ng Pilipinas’ policy-making Monetary Board (MB) last August and September, as investors expected the Board to further slash the central bank’s key rates.

The peso has been on a see-saw on news related to the US-China trade issues and geopolitical concerns, among others.

The report said the local unit fell about 3 percent last August on risk-off sentiments because of the US-China trade concerns “but has yet to fully pare back its losses against the dollar as tensions appear to be cooling somewhat.”

It projects the local currency to dip further in the coming quarters as trade discussions between the two largest economies in the world are still in unclear.

“As such, we believe that risks are tilted to further weakness, with the US dollar on a steady march stronger and the BSP unperturbed by the prospect of peso depreciation, given Philippines’ exports have struggled through 2019 and BSP reserves are back to healthier levels, with 7.5x import cover as of August,” it said.

The report also noted a “significant rate repricing by markets” in the coming days on account of its projection that Federal Reserve is done easing rates for the year after the 25 basis points cut last September.

“…we believe the BSP’s dovish stance against this backdrop will prove unfavorable for the peso,” it said.

Fitch Solutions also believes that the local currency’s “slight overvaluation on a real effective exchange rate basis will also contribute to investor aversion”, especially since the central bank continue to have a dovish stance.

“That said, the weakness we expect will be moderate and we do not believe the peso is among the most vulnerable across emerging market currencies,” it said, citing that the country’s “net external creditor position, strong reserves and relatively low gross external debt reduces its overall vulnerabilities to a strong dollar.” (PNA)

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