The research arm of credit rater Fitch Group has maintained its bearish stance on the Philippine peso, as it expects the local currency to even weaken as accommodative policy stances and a worsening current account weigh on the local currency.
In a research note on Friday, Jan. 14, Fitch Solutions said they expect the peso’s gradual depreciatory trend will persist over the near term as investors favor emerging currencies with higher carry and more hawkish central banks, against the backdrop of US monetary tightening.
"In addition, the worsening outlook for the Philippines' current account balance and the likely return of ‘twin deficits’ risks will further reduce the peso’s attractiveness to investors,” Fitch Solutions said.
In 2021, the peso weakened by 5.8 percent against the US dollar, as the Philippine economy was hampered once again by COVID-19 outbreaks, resulting in policymakers continuing monetary and fiscal support.
“We had expected for further currency volatility and weakness in our last update in September and the unit has depreciated 1.9 percent against the US dollar since then, trading to the weaker end of our P49.00-52.00/USD range as forecast,” Fitch Solutions said.
In 2022, Fitch Solutions is forecasting that the peso will trade within a range of P51 to P52 against the US dollar.
“Momentum indicators suggest the peso is somewhat oversold and we expect it to consolidate around P51.00/USD, having fallen below the psychological support level. We see the next support level at P52.00/USD, which the peso could begin to test in H122,” the research firm said.
While Fitch Solutions expects the real policy rate to become less negative this year, it noted that the dovish stance of the Bangko Sentral Ng Pilipinas (BSP) is likely to weigh on the unit in the near term.
Last Jan. 11, BSP Governor Benjamin Diokno stated that the central bank was unlikely to hike its policy rate in the first semester of the year, instead looking to cut the reserve requirement ratio and pare back its government bond buying program over the year.
“The statement can be seen as the BSP’s willingness to support growth at the cost of some peso weakness, which we expect to materialize as the US Fed begins its hiking cycle,” Fitch Solutions said.
Moreover, Fitch Solutions also expects strong supply of Philippine government bonds given its still supportive fiscal stance.
“There could be some downward pressure on bond prices if the central bank comes under pressure to curb its bond purchases at a faster pace,” Fitch Solutions said.
On the upside, Fitch Solutions is projecting that inflation will come down in 2022, from an average of 4.4 percent in 2021 to an average of 3.7 percent.