THE PESO could come under pressure due to the Philippines’ sustained current account deficit, Deutsche Bank Research said.
“The current account deficit has been widening on the back of improving infrastructure investments, which are, in turn, driving capital good imports sharply higher,” it said in a report.
The Bangko Sentral ng Pilipinas (BSP) reported a current account deficit of $4.25 billion in the first quarter, bringing the deficit-to-GDP ratio to 3.7%, up sharply from the year-earlier 1.9%.
Deutsche Bank cited several large-scale projects currently ongoing, such as the Metro Manila Subway project, the North-South Commuter Railway and the New Manila Airport.
The government is committed to spending 5-6% of gross domestic product (GDP) on infrastructure annually.
Given the pipeline of flagship projects, it said “the period of elevated import demand is likely to sustain for several years ahead.”
The government’s infrastructure lineup includes 207 projects valued at about P10 trillion.
“We are certainly strongly supportive of accelerating investments as it improves productivity and long-term prospects of both the country and the currency,” Deutsche Bank said.
“However, in the near-term FX pressure is likely to show up, with the BSP already signaling another two rate cuts later in the year.”
The peso closed at P56.63 to the dollar on Monday, against its P56.47 finish on Friday, according to the Bankers Association of the Philippines.
“The peso remains materially deviated from its underlying fundamentals, with momentum-driven strategies driving the outperformance in recent months,” it said.
“However, recent reversal in the currency’s momentum profile — and higher tariff rates proposed by the US at 20% in the July 9 letter than even the ‘Liberation Day’ rate of 17% — likely portends this period coming to an end.”
Deutsche Bank also noted that the balance of payments (BoP) deficit is unlikely to widen at the same pace as the current account deficit.
“One key BoP factor to consider, though, is the funding profile of the projects: which appears to be from overseas development financing and/or overseas FX bonds. Therefore, the basic BoP deficit should not widen as much as the current account deficit will.”
The BoP is expected to end at a $6.3 billion deficit this year, equivalent to 1.3% of GDP. — Luisa Maria Jacinta C. Jocson
