Fitch Solutions revises peso forecast for 2020, 2021

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Fitch Solutions revised its average 2020 and 2021 forecast for the Philippine peso forecasts as the local currency continues to outperform in the region, but a possible weakening is projected in the long-term partly on current account improvement reversal.

In a report dated December 23, the unit of Fitch Group’s new 2020 peso forecast is P49.60 while it is P47.50 for 2021.

For 2022, the projection is an average of P50.00 to a greenback.

Previously, the 2020 forecast was P49.75 while the 2021 forecast was P50.1.

“We believe the tailwinds that have driven the unit through 2020 will continue into 2021 and rising foreign interest would bolster further the unit,” the report said.

It said the local currency has improved by around 5.3 percent to a US dollar to date, higher than the 3.6 percent for the Asian dollar index.

It traced this performance to the weak domestic import demand, the strong external fundamentals upside from inflows from overseas Filipino workers (OFWs), and the Bangko Sentral ng Pilipinas’ (BSP) policies to address volatility of the currency.

“We believe these factors will broadly continue over the near term and will be aided by further dollar depreciation,” the report said.

Another plus for the local unit is the “higher risk appetite amongst investors focusing on low external financing and fiscal risks,” it added.

The peso’s low volatility, along with strong external financing fundamentals, are also seen as advantages for the local unit compared to other emerging market currencies.

These are deemed among the results of the central bank’s foreign exchange interventions, rising issuances and projected easier policy stance, with the key policy rates expected to remain at its current level until late next year.

“Indeed, part of expectation for the BSP to keep its key policy rate on hold until late 2021 is that it will seek to maintain a negative real rate to dissuade appreciatory pressures on the peso,” it added.

However, Fitch Solutions forecasts a 25-basis points hike in the central bank’s key rates in the last quarter of next year in line with projections that inflation rate will average at 3 percent next year.

“As such, the real policy rate will weaken the attractiveness of the unit,” it said.

Similarly, continued accumulation of the US dollar is expected to limit the peso’s appreciation but the report said the country’s strong external financing fundamentals “mean that a sharp depreciation of the unit remains unlikely.”

“As such, we forecast the unit to depreciate to an average of P50 per US dollar through 2022,” it added. CURRENTPH

 

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