Netherlands-based financial giant ING sees the Philippine peso grappling with the country’s wider fiscal and current account deficits, offsetting the local currency’s relief from a softer United States (US) dollar.

“While the Philippine peso may benefit from US dollar weakness, we think REER [real effective exchange rate] overvaluation and fiscal deficit concerns will continue to be headwinds,” Deepali Bhargava, head of research at ING Asia-Pacific, said in the bank’s latest foreign exchange (FX) forecasts published last Monday, Sept. 15.

As of end-July, the national government’s fiscal deficit widened by 22 percent to ₱784.4 billion from ₱642.8 billion in the same period last year, even as the budget shortfall narrowed in the month of July alone.

It can be recalled that the expansion of the country’s total revenues was outpaced by its spending.

Total revenues collected in the first seven months hit ₱2.73 trillion, 4.6-percent higher than last year’s ₱2.61 trillion. Meanwhile, public spending from January to July expanded 8.3 percent to ₱3.52 trillion from ₱3.25 trillion last year.

Still, the year-to-date fiscal deficit remains “well within and on track” with the revised full-year ceiling of ₱1.56 trillion, or 5.5 percent of gross domestic product (GDP), according to the Bureau of the Treasury (BTr).

Based on the national government’s fiscal program, this deficit will narrow to 5.3 percent of GDP in 2026, 4.8 percent in 2027, and 4.3 percent in 2028.

“Moreover, the external balance of payments (BOP) remained negative in July,” Bhargava said.

Data from the Bangko Sentral ng Pilipinas (BSP) showed that the BOP, which reflects the country’s transactions with the rest of the world, swung sharply to a deficit of $5.8 billion in January to July from a surplus of $1.5 billion in the same period last year.

Additionally, the country’s current account deficit widened to $9.18 billion in the first half of 2025, a 13.6-percent increase from $8.08 billion last year. Based on BSP data, the deficit was driven by imports outpacing exports to meet strong domestic demand.

ING reported that the peso modestly gained strength against the US dollars, appreciating by 0.2 percent in August. The peso entered August at its weakest level of ₱58.145:$1, but gradually strengthened to the ₱57:$1 and ₱56:$1 levels through the second week of the month.

It can be recalled, however, that the local currency hit its strongest level of ₱56.72 against the US dollar on Aug. 12, before fluctuating between the ₱57:$1 and ₱56:$1 levels, and closing the month at ₱57.13:$1.

Bhargava said the modest peso appreciation last month was “largely driven by a slowdown in foreign outflows from the equity market as the markets digested the higher-than-expected tariffs.”

Bhargava is “mildly bullish” on her outlook for the peso, saying that from a spot rate of ₱57.13:$1, she expects it to weaken to ₱57.25:$1 after a month, and further to ₱57.5:$1 after three months. However, it is seen to regain footing against the greenback at around ₱57:$1 in six months, and sustain this level within the next year.

On the monetary front, Bhargava expects the BSP to proceed with one final interest rate cut by year-end from the current five-percent policy rate, citing her outlook for “softer GDP growth in the second half of 2025.” The central bank signaled earlier that the next policy rate reduction could mark the end of the easing cycle.

Bhargava argued that the expected BSP easing, coupled with “elevated inflation,” would reduce the “real” interest rate—the rate adjusted for inflation—from 3.5 percent to about 2.75 percent by year-end, “likely” putting pressure on the peso.