Peso seen to weaken until next year amid pandemic

MANILA – The peso is expected to trade within a wide range this and next year given the pandemic-related developments, as policy responses impact on investors’ confidence on the economy in general, Fitch Solutions said.

In a report dated Sept. 20, Fitch Solutions Country Risk and Industry Research forecasts the peso to trade between PHP49 to PHP52 against a US dollar for the next three to six months.

The local currency is projected to average at PHP40.20 to a greenback this year, and at PHP51 next year.

These are weaker than the research firm’s earlier forecast of PHP48.10 average for the peso this year and PHP49.00 average for 2022.

“We at Fitch Solutions expect the Philippine peso to weaken within a wide range over the near term, as uncertainty around the pandemic and its policy response weigh on investor confidence,” the report said.

On Monday, the local unit closed at 50.24 against the US dollar, weaker than its 49-level finishes last week.

The report said its forecast range for the local currency was based on the continued uncertainty on government measures against the coronavirus disease 2019 (Covid-19), the loose monetary policy stance, and the weakening fundamentals, with the latter due to the pandemic.

“Asian currencies have remained under pressure in Q321 (third quarter of 2021) due to the region’s slow pace of vaccinations, Delta variant outbreaks and renewed restrictions, signs of slower growth in China and limited hawkish guidance by central banks,” it said.

It said central banks in other regions have turned hawkish, with the US Federal Reserve signaling a possible asset purchase tapering in the next few quarters.

“While we expect the US dollar to trade neutral providing a favourable backdrop for EM (emerging market) assets in the near term, we note that uncertainty around the Covid-19 situation and global inflationary pressures could result in bouts of volatility,” the report added.

It said that with the Bangko Sentral ng Pilipinas (BSP) still on an accommodative policy stance, domestic nominal and real policy rates are “relatively less attractive.”

“The risks in the near term are that the Philippines faces another surge in cases which sets the economy back further and requires policy to remain accommodative for longer, weakening the investors’ appetite for the peso further and seeing the unit test support at PHP52.00/US dollar,” it said.

Meanwhile, the report said that for the next six to 24 months, the peso is “fairly valued relative to its long-term average” based on the real effective exchange rate standpoint.

“We see some upside as the economy over time rebounds strongly towards its pre-pandemic growth rate of 6.4 percent (as averaged from 2010 to 2019), which in turn should prove attractive relative to developed market growth rates as well as Asia growth more broadly,” it said.

This development, the report said, is expected to boost investors’ appetite, especially because of the proposed foreign ownership policy easing on utilities and retail sector.

This measure “could boost foreign direct investment into the Philippines providing support for the peso”, it added.