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Fitch Solutions expects the PH peso to continue to deteriorate in 22 and 23.

Fitch Solutions Country Risk and Industry Research anticipated that the Philippines’ current account (CA) deficit would continue to grow, hence they predicted that the local currency would continue to depreciate both this year and the following.

According to a commentary that Fitch Solutions distributed to journalists on Thursday, the peso will typically exchange for PHP54.30 to a US dollar this year and PHP56.40 next.

Prior to this, it predicted that the average peso would cost PHP52.30 in 2022 and PHP53.00 in 2023.

The local currency is currently trading at a 55-level against the US dollar.

The analysis stated that “the increasing current account deficit of the Philippines coupled with tightening global monetary conditions will likely impose more downward pressure on the peso.”

Fitch Solutions now expects the country’s current account deficit (CA deficit) to rise from its prior level of 2.4 percent of GDP to around 4.3 percent.

According to data from the Bangko Sentral ng Pilipinas (BSP), the country’s CA deficit as of the first quarter of 2022 is approximately 5% of domestic output, up from 3.5% of GDP in the last quarter of 2021.

This development was linked to the 27.8% year-over-year increase in imports in the first three months of this year, which was larger than the 5.9% year-over-year increase in exports during the same period.

According to the report, “over the coming quarters, we expect the current account balance to stay in deficit due to elevated commodity prices and strong import demand, especially after the government adopted a wave of tariff cuts in an effort to temper increasing costs.”

These tariff reduction initiatives include extending the lower tariff rate for rice imported outside of South East Asia from 40–50% to 35–%; corn from 35––% to 5–%; pork from 30––% to 15––%; and the temporary abolition of the 7–% levy on coal until the end of 2022.

Relatively speaking, it stated that tightening monetary conditions weighs on risk attitudes, which widens the country’s CA deficit.

Capital will probably be moved away from emerging economies like the Philippines and towards fixed income assets in industrialized countries that are viewed as less hazardous as major central banks across the world become more hawkish and continue to hike rates rapidly, it said.

It claimed that interest rate differences would also be important because investors would favor US assets.

While the Federal Reserve is expected to announce a more aggressive raise, at roughly 150 basis points to lift the Fed Funds rate to 3.25 percent, Fitch Solutions projects that the BSP will increase its key rates by an additional 75 basis points until end-2022.

The BSP raised its benchmark interest rates a total of 50 basis points, or 25 basis points each in May and June of last year.

In a similar vein, the Fed’s interest rates have increased by 150 basis points — 25 in March, 50 in May, and 75 in June of last year.

As inflation in their respective nations continues to rise, it is expected that both central banks will announce additional rate rises and maintain their hawkish stance.

While annual inflation in the US is expected to be about 6.5 percent this year, Fitch Solutions predicts that domestic price rises will average 5.1 percent this year.

Hot money outflows are anticipated as a result of the US and Philippines’ real interest rate gap, according to the report.

For starters, inflation in the Philippines has increased from 5.4 percent in May to 6.1 percent in June, a rise from the 4.4 percent average for the first half of the year.

Last April, when it increased to 4.9 percent, the domestic inflation rate went above the government’s goal range of 2-4 percent.

The speed of the peso’s decline is expected to be rather steady, according to Fitch Solutions, because the Bangko Sentral ng Pilipinas (BSP) has enough foreign reserves to intervene in the FX (foreign exchange) market if necessary to reduce downside volatility.

Further, the central bank is willing to raise rates more aggressively to prevent the currency rate from “overshooting too much,” according to the new BSP governor Felipe Medalla, who has expressed a more hawkish approach, it claimed.

The opinion predicts that the peso would “trade broadly sideways” against the dollar in 2023.

The relaxation of limits on foreign ownership, which is expected to increase foreign direct investments, is one of the factors anticipated to support the local currency in the coming year (FDIs).

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