Strong peso seen to weaken to P50 vs. dollar next year

MANILA, Philippines — The peso is seen returning to depreciation path next year as recovery prompts more imports, although the weakness would trigger a deterioration in debts accumulated during the pandemic.

After a historic 9.5% collapse in economic output in 2020, Fitch Solutions, a unit of the Fitch Group, sees the economy growing 7.6% this year and 6.8% next year.

Strong growth, propelled by a consumption bounce-back, would drag the local currency to P50-level in 2022 as businesses rush to convert their pesos into dollars to pay for increased imports to meet improving consumer appetite.

“Strong credit growth and an expected loose fiscal stance should see the peso trade weaker,” the Fitch unit said in a report on Monday.

“Twin fiscal and current account deficits will contribute to a weaker outlook for the peso,” it added.

Apart from being an indicator of economic recovery, a weak peso could also increase the value of remittances sent by overseas Filipino workers, giving their families at home more cash to spend during hard times. A stronger purchasing power, in turn, provides more support to the country's consumption-reliant economy.

But a currency slump will not be entirely good news because it will bloat the value of foreign debt that built up since last year when the Duterte administration searched for funds to foot the bill of a costly pandemic response. Finance department data show $13.35 billion has been borrowed from multilateral lenders and offshore investors as of March 17.

As it is, Fitch Solutions said there's so much room for the peso's weakness this year as US Treasury yields boost demand for dollars while rising world crude prices push up the country's import bill. Failure to arrest virus spread could also reduce the appeal of Philippine assets, adding more downward pressure to the local currency.

That said, Fitch Solutions now expects the local unit to hit P48.40 per dollar this year, weaker than its previous assumption of P47.50. But a sharp currency fall is unlikely to happen, Fitch Solutions said, thanks to the country's hefty foreign reserves while the central bank remains on hold for the entire 2021.

“As such, the BSP could sell reserves to offset any sudden depreciatory pressures on the peso,” it added.