MUFG expects peso to rebound in 2nd half

MUFG Global Markets Research expects the peso to strengthen against the dollar in the second half of the year as it sees inflation easing and the country’s current account deficit narrowing.

“Fundamentals were more domestically supported and externally dragged in 2022. There may be some partial reversal in 2023. A more balanced current account outlook and some potential easing in inflationary expectations are likely supportive of some peso stability in 2023,” MUFG Global Markets Research said in a report on Friday.

It sees the peso ending the first quarter at P56 a dollar, slightly weaker than its 2022 close of P55.755. This could drop further to P56.50 at the end of the second quarter.

However, it sees the peso rebounding to P55.50 against the greenback by the end of the third quarter. It expects the local unit to end 2023 at P54.50.

MUFG Global Markets Research said they see the country’s current account posting a smaller deficit of 4.8% of gross domestic product (GDP) this year from the expected 5.6% of GDP in 2022.

“We see slight improvements from the services and secondary income balances, due to expected growth in the business process outsourcing and overseas foreign workers’ remittances. At the same time, the reduction in import bills as food and energy prices come off will also likely reduce the merchandise goods’ deficit from the trough of 17.6% of GDP in Q1-2022,” it said.

It said headline and core inflation may remain high this year “partly due to imported price pressures and weather-related disruptions.”

This could lead to more rate increases from the Bangko Sentral ng Pilipinas (BSP), which would support the currency, it said.

“We see food inflation hovering around 8-9% between Q1- to Q3-2023 before easing to 5.5% by December 2023. This will mean that the BSP hikes further to 6.25% in the coming months, to fight against inflation and excessive currency volatility. Inflation may still be above the 2-4% target in the coming quarters before coming off in late-2023,” MUFG Global Markets Research added.

Headline inflation averaged 5.8% in 2022, matching the BSP’s forecast but faster than its 2-4% target.

Rising inflation caused the central bank to hike benchmark interest rates by 350 basis points in 2022, bringing its policy rate to 5.5%.