Boom time for Philippines spells more hardship for laggard peso

Southeast Asia’s worst-performing currency of 2016 is in for another tough year with President Rodrigo Duterte’s spending plans seen boosting imports just as rising US interest rates spur capital outflows.

The peso is forecast to be collateral damage as an economy growing faster than 7 per cent and the government’s infrastructure programme drive demand for inward shipments. This year will be the first in about a decade when the amount of money Filipinos send home from overseas will be lower than the trade deficit, estimates ING Groep NV.

“It’s a challenging situation for the peso for the next couple of years,” said Joey Cuyegkeng, an economist at the Dutch lender in Manila. “A very strong domestic sector requires imports of both consumer goods and durable equipment as the economy expands and moves into investment-driven growth.”

The peso, which dropped 5.2 per cent against the dollar in 2016, will fall a further 4.4 per cent to 52 by the end of this year, predicted Cuyegkeng. The uncertain international environment, with Donald Trump poised to take office as US president, and nervousness over President Duterte’s pivot toward China is likely to push investors to demand a peso premium, he said.

The peso strengthened 0.04 per cent to 49.76 a dollar as of 11:44am in Manila, while the Philippine Stock Exchange Index rose 1.8 per cent.

Divided opinion

Duterte’s fiery outbursts and unpredictability, together with high valuations, also damped the allure of Philippine shares in the second half of 2016. The benchmark index dropped 16 per cent from a peak in mid-July to finish the year down 1.6 per cent. Opinion is divided on the prospects for this year, with Deutsche Asset Management and Nomura Holdings Inc predicting a rebound, while Morgan Stanley and Credit Suisse Group AG see more losses.

Political risk

The government is forecasting a 10 per cent jump in imports in 2017, compared with a 4 per cent rise in remittances. Money sent home by Filipinos living abroad accounts for around a tenth of the nation’s economy.

Alan Cayetano, the Manila-based head of foreign-exchange trading at Bank of the Philippine Islands, is pencilling in a rate of 51.5 to 52 pesos per dollar by the end of 2017. That’s more bearish than the median estimate of 50.8 of 21 analysts surveyed by Bloomberg.

The peso will weaken at a slower pace this year than in 2016 as major developments like higher US rates and more local spending are mostly priced-in, said Cayetano.

“But that’s barring any unforeseen events,” he said. “What can affect the peso locally will be politics.

source : gulfnews