The Philippines’ weakening external position and higher interest rates will continue to put pressure on the peso, Singapore-based bank DBS said as it retained expectations of a fall to P54 versus the US dollar by yearend.
“The currency has depreciated 5.8 percent year-to-date, more than the full-year depreciation of 5.4 percent and 4.7 percent seen in 2016 and 2015, respectively, to become the weakest currency in Asia ex Japan,” DBS said in a report released on Tuesday.
It noted that the peso had fallen to a 12-year low against the dollar on Monday, closing 25 centavos down at
P52.95:$1, the lowest since a P52.98 finish on July 3, 2006.
“The latest weakness was triggered by the trade deficit which widened to a cumulative $12.2 billion in the first four months, 1.6 times wider than the same period a year ago,” it added.
The trade shortfall is being pressured from both sides, DBS said, pointing to a 6.2 percent year-on-year decline in exports and a 10.5 percent increase in imports over the first four months of the year.
It also noted that the country’s foreign reserves had, for the first time since 2014, fallen below $80 billion to settle at $78.96 billion in May.
DBS also weighed in on the Bangko Sentral ng Pilipinas’ (BSP) decision last month to raise key interest rates, saying this was prompted by inflation having hit five-year highs.
The 25-basis point adjustment took the central bank’s overnight borrowing, lending and deposit rates to 3.25 percent, 3.75 percent and 3 percent, respectively.
May’s headline inflation of 4.6 percent brought the year-to-date average rate to 4.1 percent, above the BSP’s 2.0-4.0 percent target.
“We see one more hike later this year,” DBS said.
“With opinion divided on whether the economy is overheating, the peso is likely to keep its depreciation path towards 54 by end-2018,” it also said.