US interest-rate increases will continue to put pressure on the peso, Singapore-based bank DBS said as it sees new lows for the local currency next year.
In its monthly “Economic & Strategy Research” report released over the weekend, DBS claimed that the dollar’s uptrend would extend into the middle of 2019, as the US Federal Reserve (Fed) is expected to keep increasing rates every quarter to 2.50 percent by end-2018 and 3.50 percent by end-2019.
“The [dollar’s] recovery since 2Q18 (second quarter of 2018) has been attributed to [the] shift in the Fed’s monetary stance from accommodative to neutral,” it said.
Economies that relied the most on external borrowing would see the most pressure on their exchange rates, DBS said.
The lender also said the peso was one of three Asian currencies that would face sustained pressure next year if US rates continued to rise.
“The twin (current account and fiscal) deficit currencies — Indian rupee, Indonesian rupiah and Philippine peso — are expected to keep depreciating throughout the Fed hike cycle that ends in 4Q19 (fourth quarter of 2019),” it added.
While noting that the Philippines’ twin deficit is likely to be structural, DBS warned that the peso was likely to continue its plunge.
“The current account’s return into a deficit position is likely to be structural… The Duterte administration has rejected the IMF’s (International Monetary Fund) advice to lower its fiscal deficit to [the] more neutral targets of 2.4-2.5 percent of GDP (gross domestic product) from 3-3.2 percent,” the bank said.
The country’s current account — a major component of balance of payments — hit a deficit of $3.087 billion in the first half of 2018, equivalent to 1.9 percent of GDP.
Meanwhile, the government’s budget deficit widened by 78 percent in January-to-September to $378.2 billion from $213.1 billion a year ago, based on latest available data.
Despite its positive view, DBS pointed out that “the odds of the Philippine peso hitting a new all-time low over the next 12 months cannot be fully discounted.”
It projected that the currency would likely end this year at P54.5:$1 before plummeting to P55:$1, P55.55:$1, P56:$1, and P56.50:$1, respectively, from the first to fourth quarters of 2019.
The peso has fallen to near 13-year lows to the P54:$1 level and is often described as Asia’s worst-performing currency this year. But the local unit has been showing signs of recovery in the past weeks, closing at P53.64:$1 on Friday, up 16 centavos from the previous day’s figure.