We have now updated our thoughts on PHP for the 2nd half of the year. These are below:
At the start of 2017 we expected USDPHP to trade between 48-50 and, for the most part, this has been correct. In more recent times, however, sentiment has turned more negative on the peso and, at the start of the second half of the year, it is at its weakest level against the USD since 2006.
Sentiment has shifted more on a relative than absolute basis against the PHP. Low volatility markets have promoted the profitability of carry trades – borrowing money in low interest currencies like CHF, SEK and EUR and investing in higher yielding currencies, mainly in emerging markets. PHP is not a chosen beneficiary of these flows however due to concerns over the Duterte administration and its low relative interest rates (3% vs 6.5% in Indonesia and 6.25% in India) and therefore is being overlooked from an investment point of view.
Carry trade enthusiasm can turn on a pin head though and the moves elsewhere could easily see the selling pressure on the PHP lessen. There is always the possibility that the Central Bank of the Philippines raises rates.
These predictions outline the high, low, median and mean expectations for the above currency pair as found by a Bloomberg survey of banks and brokers and should only be used for illustrative purposes. Source: Bloomberg
In conclusion we maintain our guidance from the beginning of the year that while this may not take place until the end of the year, any move in Philippine bond yields that maintain a decent spread over their US counterparts will allow for some support for the currency.
The Philippines economy is waiting on policy from two elections – both the local election that saw President Duterte take the reins and the beginning of the Trump Presidency. Investment, both national and inbound from elsewhere, is somewhat subdued into the end of 2016 and this will likely persist as long as uncertainty over the government’s policy agenda remains.
The Philippines is one country that we expect to cosy up to China more following the decline of TPP.
One thing that the Philippines has that is rare in Emerging Market Asia is a central bank that is likely to raise interest rates in 2017. While this may not take place until the end of the year, any move in Philippine bond yields that maintain a decent spread over their US counterparts will allow for some support for the currency.
We also see that the Philippine economy is rather insulated from ‘portfolio effects’ i.e. global equity market volatility will have a benign effect on the economy due to the limited exposure of international investors to local equities and bonds and therefore outflows should not be a concern.
We also expect local reserves of foreign currency to increase, further buffering import levels and financial stability.
Inflation is likely to be boosted through 2017 following a cut in income taxes but subsequent increases in petroleum and a removal of some VAT exemptions. This however all depends on how quickly Congress can vote on and authorise these changes and progress has been pitifully slow for many a year.
The peso should remain between 48-50 against the USD but upside risk to 52.00 remains into the beginning of the Trump Presidency.