Peso to weaken further to 48:$1 this year – ING

MANILA, Philippines – Dutch financial giant ING Bank sees the peso weakening further by as much as four percent against the dollar this year due to the normalization of interest rates in the US and the economic slowdown in China.

Joey Cuyegkeng, senior economist at ING Bank Manila, said the peso is expected to depreciate further by three to four percent to 48.80 to $1 this year after shedding 5.2 percent against the greenback last year.

“We are more bearish and expect the Philippine peso to head toward 48.80 this year despite the favorable economic fundamentals,” Cuyegkeng said.

The peso shed 5.2 percent to settle at 47.06 on Dec. 29, 2015 from 44.72 to $1 on Dec. 29, 2014.

Cuyegkeng said depressed Asian currencies would continue to linger this year due to the interest rate hike in the US, growth concerns in China and emerging market economies, the plunge in commodity prices particularly oil, and the heightened credit risks against emerging markets.

“The Philippine peso like other Asian currencies incurred losses in 2015 but the losses were more moderate. The peso in 2016 would likely be no different from 2015. External factors had a more dominant impact on peso in 2015 even as economic fundamentals have held up relatively better,” Cuyegkeng said.

Cuyegkeng said the country’s growth prospects for 2016 have been moderated due to the severe and prolonged El Niño weather condition, as well as the slowdown in China.

“The economy faces challenges thrust upon us by El Niño, weak global trade including slower China growth and leadership uncertainty,” he said.

Cuyegkeng said the country’s gross domestic product (GDP) is expected to expand six percent this year and next year.

He said the growth in construction and manufacturing sectors are expected to more than cover the one percent contraction in the agriculture sector brought about by the impact of El Niño.

ING Bank raised its inflation forecast to 1.7 percent this year and to 2.9 percent next year. Inflation is seen kicking up to 2.5 percent later this year and to 3.5 percent in 2017.

Cuyegkeng said monetary policy is expected to remain prudent in 2016 and 2017 even as inflation trends higher.

The BSP has kept interest rates for 10 straight policy-setting meetings since October 2014. The overnight lending rate is currently pegged at four percent and the overnight borrowing rate is at six percent.

The central bank is expected to introduce the interest rate corridor (IRC) system in the second quarter of the year to help improve the transmission of monetary policy.

“BSP’s policy rate hikes in 2016 is to keep interest rate differentials steady and address rising inflation of 2017 while moderating peso’s weakness as the US Fed raises its benchmark rate by at least 50 basis points,” he said.