Peso seen to stabilize while inflation will rise
The upside pressures to inflation – namely El Niño dry weather conditions and its impact on prices – will likely effect rates in the next months while the peso-US dollar exchange rate is seen to stabilize.
In a research note, Deutsche Bank AG’s latest assessment indicate that despite the main risk of rising inflation due to declines in agricultural output, the growth outlook at least is stable at six percent GDP for 2015 on increased public spending.
And as for the peso, Deutsche Bank strategists said at the moment, they are not worried about the peso except for movements in US Treasuries following the latest unchanged stance of the US Federal Reserve.
“The relative resilience of the peso can be explained by the economy’s strong macroeconomic fundamentals and comparatively small local bond and equity markets, with foreign presence roughly estimated to be 27 percent of market cap and 6-7 percent of bonds outstanding, respectively,” said Deutsche Bank.
It also noted strong support from the ample reserves of the Bangko Sentral ng Pilipinas and the steady remittances from overseas Filipinos as well as US dollar revenues from the business process outsourcing sector – all these buffers are useful in defending the peso against further depreciation.
Deutsche Bank economists said: “Philippine financial markets were not insulated from the recent turmoil triggered by the devaluation of the RMB.” During the month of August, the peso weakened two percent, the stock index was down six percent, and credit default swap spreads widened at least 25bps at the peak. “But despite the market sell-off, the Philippine peso was actually one of the better performers within EM (emerging markets).”
The German global bank reiterated that there “seems little still to be worried about in the peso markets” at least for now.
“And to the extent that the Fed this week signaled, if anything, its growing concerns about global growth, and the increasing likelihood of an even flatter trajectory on rates, US Treasuries might not pose too much of a risk for peso bond yields in the near term,” it said.
Deutsche Bank also noted that the inflation “trajectory” is “very well behaved”. The latest average is 1.6 percent versus the government target of two percent to four percent for 2015.