BMI Research said it maintained a constructive view on the Philippine peso in spot terms and retained its forecast for the local currency to close the year at P50:$1, noting that positive and negative factors are roughly on balance.
The Fitch Group company said in a report its constructive view for the next six to 24 months was based on a robust economic growth outlook and inflationary expectations.
These positive factors are likely to offset the drag posed by higher commodity prices and weakness of the Chinese yuan, according to BMI.
“On the positive side, anchored inflationary expectations, and robust economic growth facilitated by the government’s expansionary fiscal plans, steady remittances inflows which are partly channeled to investment, and strong foreign direct investment (particularly from Japan and China) will be supportive of the peso,” it said.
Although price pressures are likely to continue to head higher over the coming quarters on the back of upward adjustments to electricity and administered prices, BMI said, inflation may average a benign 3.3 percent in 2017, which is slower than its 10-year historical average of 3.7 percent.
“On the negative side, while the peso’s real effective exchange rate has fallen some extent from its peak in Q115 and is looking more fairly valued, the currency remains slightly expensive, compared with its long-term historical average,” it said.
BMI believes that further yuan and yen weakness over the longer term is likely to prompt the Bangko Sentral ng Pilipinas (BSP) to intervene in the foreign exchange (FX) market to prevent further loss of export competitiveness.
Coupled with rising commodity prices, of which the Philippines is a net importer, this could act as a drag on the country’s external position and savings rate, it added.
Following President Rodrigo Duterte’s shift in foreign policy since he took office in June 2016, the Philippines is becoming increasingly reliant on Chinese and Japanese foreign direct investment and trade at a time when the former is trying to curb outbound capital outflows and manage its currency weakness, BMI noted.
On the other hand, Japan is struggling to rein in borrowing costs and cope with poor fiscal position.
BMI said the ongoing deterioration in the health of the Chinese economy will likely continue to undermine the yuan over the longer term, and could negatively impact the broader Asia emerging market currencies.
“Meanwhile, Japan’s extremely poor fiscal position necessitates continued loose monetary policy even as inflation pressures rise, and we expect this to weigh on the JPY,” it said.
“In total return terms, we expect the peso to outperform the greenback over a longer-term horizon,” it added. However, BMI believes that risks on the peso are tilted to the downside.
“On one hand, should the US economic growth story begin to falter and US equities roll over, we could see the Fed shift towards a more dovish monetary stance, and this would be bearish for the dollar, broadly speaking,” it noted.
The political outlook in Philippines could deteriorate more rapidly than we expected given the volatile nature of President Duterte and the deepening division between the President and Vice President Leonor Robredo’s camp.
“Moreover, the risk of a sharper-than-expected depreciation of the Chinese yuan continues to cast a shadow on emerging market FX,” it said.
Although the Philippines was not singled out as one of the 16 countries on Donald Trump’s trade imbalance investigation list, the US remains one of the Philippines’ largest sources of foreign direct investments and key trade partner.
“If Trump moves ahead to impose more protectionist measures, it would likely impact the peso negatively,” BMI said.