Stockbroker SB Equities Inc. said the peso is poised to weaken as the economy gradually opens.
For the year, the peso has appreciated by 4 percent, a “relatively fast rate” compared to other Asian currencies, SB Equites said.
The Security Bank-affiliated stockbroker said the strengthening of the peso can be attributed to the country’s improving balance of payment (BOP).
Between January and July, the country accumulated a cumulative BOP surplus of $4.1 billion, largely a result of the government’s heavy foreign borrowing and narrowing trade deficit amid the coronavirus pandemic, “that combined, have outweighed the foreign portfolio investment net outflows and decreases in foreign direct investments net inflows, overseas Filipino remittances, and net receipts in trade in services,” SB Equities said.
This led for the country to run a gross international reserve (GIR) of $98.6 billion as of end-July, equivalent to 8.9 months of import cover for the country.
“Foreign investments (excluding foreign deposits, foreign securities) and gold holdings accounted for 82 percent and 13 percent, respectively, of the GIR,” SB Equities said.
“The month-on-month increase in the GIR raised the import cover to 8.9 months from 8.5 and the short-term external debt cover to 7.6 times from 7.2. These external liquidity buffers are more than enough to insulate the PH economy from external shocks,” it added.
“We run a regression analysis to determine the link between the rate of change in USD-PHP and the BOP position. With a monthly frequency spanning January 2014 to July 2020, we find there is a positive significant relationship between the BOP position and the monthly change in the reciprocal of USD:PHP. This implies that the BOP surplus is a significant factor for the Philippine peso appreciation,” SB Equities said.
The stronger peso makes import cheap vis-a-vis the export which coupled with the weakened dollar lowers local currency cost for imports for the country.
“Coupled with gradual reopening of sectors and resumption of economic activity, we expect Philippine import demand to gain traction. This would translate into a widening of the trade deficit, a shrinking of the BOP surplus, and depreciation pressure on the Philippine peso,” SB Equities said.
“We maintain our yearend USD:PHP forecasts at 49.60 for 2020 and 50.20 for 2021,” it added. (R. Castro)