Investors rejoicing over the Philippine peso’s rally to a six-month high should beware: the currency is predicted to be Asia’s worst performer next year.
The peso will slide to 51 per dollar by end of 2018, a loss of 1.5 percent from current levels, according to the median estimate of a Bloomberg survey, with a most bearish projection of 56. The currency will be undermined as the current-account deficit widens, while the central bank is slow to raise interest rates from a record low, strategists and fund managers say.
“The peso remains vulnerable,” said Jonathan Ravelas, chief market strategist at BDO Unibank Inc. in Manila. “The external payments position will likely deteriorate further as more economic activity fuels demand for capital equipment and consumer goods,” he said, forecasting the currency will end next year at 52 per dollar.
The peso has whipsawed this year: sliding to an 11-year low of 51.85 per dollar in October before paring losses to close at 50.14 on Friday. It is still down 1.1 percent since the start of January.
The Philippines will post a current-account deficit of $100 million this year and that will swell to $700 million in 2018, Bangko Sentral ng Pilipinas forecast this month. The shortfall is set to increase as President Rodrigo Duterte’s $180-billion infrastructure plan pushes up imports.
“The Philippines doesn’t get a lot of investor inflow, and this is one of the biggest problems and why it tends to weaken off more aggressively than its regional peers when sentiment dies,” said Stephen Innes, head of trading for Asia Pacific at Oanda Corp. in Singapore. “It is still going to be the local whipping boy in the region.”
A forecast of 51 per dollar for year-end 2018 may be a bit optimistic if anything, he said.
Philippine policy makers have been in no rush to raise rates even after the Federal Reserve increased its benchmark this month for the third time this year. Central bank officials have defended their position by saying annual economic growth in excess of 6 percent is unlikely to cause overheating.
Not everyone is bearish. The peso has strengthened 3.1 percent from its October low as year-end remittance flows kicked in and Duterte signed a package of tax cuts into law.
“If you look at the valuation of the peso, it’s increasingly attractive,” said Roy Teo, a currency strategist at LGT Bank AG in Singapore. “Once Asian currencies in general do appreciate in 2018, BSP’s fears of peso appreciation versus the dollar should be less given that Asia accounts for about three quarters of their exports.”
LGT predicts the peso will strengthen to 50 by June 30, and reach 48 by the end of December.