Fitch unit revises peso forecast

A Fitch Group unit revised its forecast for the Philippine exchange rate in 2020 and 2021 to average P49.60:$1 and P47.50:$1, respectively, from P49.75:$1 and P50.10:$1.

In a report on Thursday, Fitch Solutions said they see the P48:$1 resistance to become support as the Philippine peso trades in a range of P46 to P48:$1 over the short term.

It noted that the peso has been an “outperforming currency” this year, as it improved 5.3 percent year-to-date as opposed to the 3.6 percent of the Asian Dollar Index.

“Key drivers of the unit’s strength have been weak domestic import demand, the Philippines’ strong external fundamentals, surprises to the upside from remittance inflows and the Bangko Sentral ng Pilipinas’ policies to curb market volatility,” the report said.

Fitch Solutions sees the factors continuing over the near term, supported by further dollar depreciation.

The unit is also expected to be buoyed by the higher risk appetite of investors focusing on low external financing and fiscal risks.

Fitch added that the low volatility of the peso and the strong external financing fundamentals of the country reduce its risk perception relative to emerging market peers.

Over the longer term, Fitch Solutions sees peso to average P47.50:$1 through 2021.

It said this reflects an expectation for the unit to trade from the P46 to P50:$1 range towards the latter half of the year.

The Fitch unit said the key driver for this will be the reversal of the current account balance improvement.

“We forecast the current account surplus to shrink from 3.5 percent of GDP (gross domestic product) in 2020 to 1 percent in 2021, before falling into a deficit of 0.4 percent in 2022. The worsening current account balance trajectory will weigh on the peso and could prompt speculative bets in anticipation of such depreciatory pressures, further weighing on the unit,” Fitch explained.

Meanwhile, Fitch Solutions said a rise in local coronavirus disease 2019 cases and reimposition of lockdown measures could affect the peso moving forward.

“This has generally suppressed households’ import demand, with exporting sectors allowed to maintain operations and such supported the unit. Therefore, appreciation could prove stronger than expected,” the Fitch unit added.