Peso seen depreciating to 52 by 3rd quarter

MANILA, Philippines — The peso may depreciate further to 52 to $1 by the third quarter with the hawkish stance of the US Federal Reserve and the country’s widening current account shortfall, according to DBS Bank Ltd. of Singapore.

Philip Wee, foreign exchange strategist at DBS, said the door is open for the local currency to weaken to 52 to $1 on monetary policy divergence.

After appreciating to around 50 to $1 last December when the Bangko Sentral ng Pilipinas (BSP) announced plans to reduce the reserve requirement ratio amid rising COVID cases, the peso subsequently stayed above 51 to $1 last week as the government imposed stricter lockdown measures.

The National Capital Region (NCR) and nearby provinces have been placed under Alert Level 3 due to the resurgence of COVID infections after the Christmas and New Year holidays.

The peso lost P2.976 to close 2021 at 50.999 to $1 from 48.023 to $1 in 2020. For the first week of 2022, the local currency weakened by 0.351 centavos against the greenback.

Last Friday alone, the peso depreciated by 17 centavos to close at 51.35 from Thursday’s 51.18 to $1 after the rapid increase in new COVID daily cases.

Wee said DBS concurs with the BSP’s assessment that inflation may fall back into the two to four percent target this year after exceeding last year’s target due to elevated food prices and rising global oil prices.

Inflation peaked at a 32-month high of 4.9 percent in August last year before easing to a 12-month low of 3.6 percent in December.

According to DBS, the current account deficit of the Philippines is likely to widen as the country continues to recover from the pandemic-induced recession.

“Although growth will likely to be firmer in an election year, stronger domestic demand will widen the current account deficit. It was probably no coincidence that the peso-dollar rate bottomed last year after overseas foreign worker remittances failed to cover the widening trade deficit,” Wee said.

Economic managers see the country’s gross domestic product (GDP) expanding by seven to nine percent this year from the projected five to 5.5 percent last year after shrinking by 9.6 percent in 2020.

The country exited the pandemic-induced recession that stretched through five quarters with a back-to-back GDP growth of 12 percent in the second quarter and 7.1 percent in the third quarter of last year.   .

Wee said the minutes of the Federal Open Market Committee (FOMC) should remind markets that the US Fed has stopped describing inflation as transitory, doubled the pace of tapering asset purchases and signaled three rate hikes this year.

DBS sees the peso depreciating to 51.50 in the second quarter and 52 in the third quarter before bouncing back to 51.70 in the fourth quarter.