The Philippines: A deep dive into external balances, Peso to fall - ANZ

Dhiraj Nim, FX Analyst and Sanjay Mathur, Chief Economist - Southeast Asia & India at Australia and New Zealand banking group (ANZ) note that the Philippine Peso is likely to be negatively affected by the sluggish global trade environment.

Key Quotes:

“In our view, export performance is still important as it has a bearing on the current account balance and by implication, sets the speed limit for domestic demand.

In this context, the current backdrop of weak global trade and the downturn in the global technology cycle does matter to the Philippine economy. We estimate trade elasticities for the Philippines and conclude that the external and domestic demand are the dominant respective drivers of exports and imports. In contrast, the exchange rate has a relatively minor bearing. 

Accordingly, Philippine exports are unlikely to be spared from the sluggish global trade environment, but imports will likely stay firm as the government steps up its infrastructure spending. The delay in the enactment of the 2019 budget had provided only a temporary reprieve.

A corollary of this divergence in exports and imports is that the external position is set to deteriorate in the remainder of 2019 and 2020, potentially to its widest level since the early 2000s.

Consequently, depreciation pressure on the peso should rise. We forecast USD/PHP at 53.0 and 53.50 at end-2019 and end-2020, respectively.”