Fitch Solutions sees weaker peso in 2022

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FITCH Solutions sees a weaker Philippine peso against the US dollar this year amid the “near-term dovish stance” of the central bank and the “worsening outlook” for the country’s current account balance.

“We at Fitch Solutions maintain our bearish stance on the Philippine peso but now expect the unit to trade even weaker as accommodative policy stances and a worsening current account weigh,” the Fitch unit said in a commentary on Friday.

Fitch Solutions revised upward their average exchange rate forecast for the year to P51.80:$1 from previous P51:$1.

The peso spot rate dipped by 5.8 percent against the US dollar last year.

The firm noted that they expected more currency volatility and weakness in their September update and since then, the unit has declined by 1.9 percent, trading to the weaker end of their P49 to P52 per $1 forecast.

Fitch Solutions said they expect the gradual depreciatory trend to continue in the short term as investors “favor emerging currencies with higher carry and more hawkish central banks, against the backdrop of US monetary tightening.”

Despite seeing real policy rate to be “less negative” this year, Fitch Rating said the dovish stance of the Bangko Sentral ng Pilipinas (BSP) could weigh on the unit in the near term.

The firm cited an interview with BSP Governor Benjamin Diokno last January 11, where the central bank head said the BSP is unlikely to hike policy rate in the first half and instead is looking to cut the reserve requirement ratio and pare back its government bond buying program over the year.

“The statement can be seen as the BSP’s willingness to support growth at the cost of some peso weakness, which we expect to materialize as the US Fed begins its hiking cycle,” Fitch Solutions said.

Fitch Solutions also sees the “deteriorating” current account outlook to weigh on the peso.

“A combination of elevated commodity prices and rebounding domestic demand for imports will see the current account revert back into a deficit over the course of 2022,” it said.

The firm said the current account surplus narrowed to $1.5 billion in September from $3.8 billion in August, while the trade deficit widened to $4.7 billion in November from $4 billion in October.

“This will ultimately result in an increased need for foreign currency to fund the current account deficit in 2022 and weigh on the peso, which when combined with the fiscal deficit will result in ‘twin deficits’ risks for the unit,” the firm explained.

The Fitch unit also sees the aggressive monetary tightening cycle of the US Fed to impact the local currency amid their expectations for “twin deficits” this year.

“Tighter dollar liquidity conditions as the Philippines requires greater external financing could put pressure on the unit, although the Philippines’ high reserves buffer would limit the extent of the depreciatory pressures,” it said.