Vanishing current account buffer raises peso risk

THE OUTLOOK for the Philippine peso — Asia’s worst-performing currency — just keeps getting grimmer.

May’s trade shortfall was the biggest in data going back to 1980 as the nation heads for its first annual current-account deficit in 15 years.

President Rodrigo R. Duterte has just extended martial law in the southern island of Mindanao as the government battles Islamic State-linked militants in a two-month conflict that shows few signs of ending soon.

Saudi Arabia’s blockade of Qatar, which hosts around 250,000 Filipino workers, is raising concern remittances could slow.

The Philippines’ worsening external position increases its reliance on foreign financing and amplifies the downside for the currency as the siege in Marawi City adds a layer of political risk.

The falling peso has made a central bank plan to cut lenders’ reserve requirements more challenging, Deputy Governor Diwa C. Guinigundo said this week.

“Marawi is more important now that the current account has fallen to zero,” said Nizam Idris, head of strategy for fixed income and currencies at Macquarie Bank Ltd. in Singapore.

“When you have uncertainties the lack of a current-account buffer will definitely impact your currency more than it used to in the past.”

The current-account deficit may widen to $1.6 billion in 2018, from an estimated $600 million shortfall this year, Mr. Guinigundo said on Thursday.

Mr. Idris sees the peso falling to 52 per dollar by yearend, 2.8% weaker than current levels.

Other analysts are also getting more pessimistic, with the median end-2017 estimate dropping 1.2% so far in July to P50.80 to the greenback.

The Philippine currency has already lost 1.6% this year, the worst performance among emerging markets after Argentina’s peso.

The Philippine peso on Thursday opened 0.2% stronger at P50.53 to the dollar, marked its strongest point at P50.48 and weakest at P50.59, before paring gains to close 0.16% stronger at P50.56 to the greenback from Wednesday’s P50.64-per-dollar finish.

“We’ve taken a relatively more negative view of the peso in the last few months,” said Mitul Kotecha, head of Asian foreign-exchange and rates strategy in Singapore at Barclays Plc, the most-accurate peso forecaster in Bloomberg rankings last quarter.

“We see some risks around remittances too,” said Mr. Kotecha, who has a year-end estimate of P50.5 a dollar.

Money sent home by Filipinos living overseas accounts for almost a 10^th of the nation’s gross domestic product (GDP).

The Philippines stopped the deployment of workers to Qatar for a week in June shortly after Saudi Arabia and other states cut off diplomatic and economic ties with the Gulf nation.

Given that around four percent of remittances came from Qatar last year, “it bears watching what happens to their economy,” said Jose Mario I. Cuyegkeng, an economist at ING Groep NV in Manila.

He said he revised his year-end peso forecast this month to P51.3 per dollar from around P49.

INFLOWS SUBDUED
While the peso has bucked this year’s trend of gains in emerging-market currencies, Philippine stocks have still done well.

The nation’s benchmark gauge has risen 18% in 2017, while GDP increased 6.4% in the first quarter, among the fastest rates in Asia.

The current account has deteriorated and is unlikely to improve, but “we’re still comfortable with the Philippines macro story,” said Jean-Charles Sambor, London-based deputy head of emerging-market fixed income at BNP Paribas Asset Management.

“A weaker currency isn’t always bad news.”

Strong domestic demand and a much-needed government infrastructure program have worsened the trade balance, analysts at HSBC Holdings Plc led by Paul Mackel in Hong Kong, said in a note on Wednesday.

The peso has become more reliant on capital flows, “but the external sector is unlikely to ride to the rescue” and the central bank may have to play a more active role in managing the currency, they wrote.

The Philippines has only managed to attract $1.1 billion of stock and bond inflows this year amid an emerging-market rally, compared with $8.6 billion in Indonesia and $4.6 billion in Thailand. More Federal Reserve interest-rate increases and growing hawkishness among global central banks will also make Philippine assets less appealing.

“Portfolio flows remain subdued compared to its Asian peers, which suggests some difficulties for external financing particularly if political risks remain,” said Trinh Nguyen, a senior economist at Natixis SA in Hong Kong, who sees the Philippine currency ending the year at 52 a dollar.

“The peso will be under pressure in the coming quarters.” — Bloomberg