Peso to stay strong – Fitch Solutions

April 05, 2020

Fitch Solutions forecasts the peso to remain resilient this year despite the weaker global economy due to the global pandemic, while it forecasts a wider current account deficit due to weaker external demand.

In a report dated April 1, 2020, the unit of Fitch Group forecasts the local currency to average  51.70:$1 this year and weaken to 52.80:$1 next year.

Fitch Solutions projects near-term resilience of the local currency despite market risk aversion due to the global pandemic caused by the coronavirus disease 2019.

It said that since the start of the year, the local currency has weakened by about 0.1 percent against the greenback amid the three-percent rise of the dollar index.

“This stands out when compared to regional peers like Malaysia, Thailand and Indonesia, which have seen their currencies weaken 5.1 percent, 10.4 percent, and 17.6 percent, respectively,” it said.

The report projects the peso “to depreciate only moderately” in the short term “as its ouldfundamentals remain supportive amid uncertainty surrounding the Covid-19 outbreak”.

Another plus for the peso is the favorable rate differential against its regional counterparts or developed markets, it added.

For the long-term, the report said an effort to bolster economic growth with fiscal stimulus would  see the fiscal deficit widen and ultimately lead to the unit depreciating further.

“Risould would ks are tilted to the downside given a potential worsening of the economic outlook for the Philippines and more broadly a deeper global recession and more aggressive period of risk aversion,” it said.

It sees as a risk to the peso’s strength the enhanced community quarantine of mainland Luzon, a measure aimed at addressing the rise of Covid-19 cases, adding this would  undermine the economy’s output this year. 

“As the outlook deteriorates, the potential for further fiscal stimulus and monetary easing announould wouldcements will grow, and this could eventually lead to an oversupply of peso in the market over the coming months, eventually weighing on the unit,” it said.

Meanwhile, Fitch Solutions, in another report, forecasts the country’s current account to widen to as much as 2.2 percent of gross domestic product  from a deficit of 0.1 percent of domestic output last year “as a collapse in external demand outweighs the impact of softer domestic consumption” due to the pandemic.

It cited as a contributing factor the weaker growth of tourism due to the pandemic, along with lower remittance and investment returns from overseas.

It said the wider CA gap could pose some external financing challenges for the economy given a tightening of global financing conditions.

“But we believe the Philippines’ overall external financing position remains robust enough to weather a period of increased risk aversion,” it said.

The report said the government is expected to increase its infrastructure investments and the stimulus program further to counter the negative impact of the quarantine of the mainland Luzon, which account for about 70 percent of domestic output.