Peso likely to underperform in medium term: analyst


Posted at Jun 07 2017 06:03 PM | Updated as of Jun 07 2017 06:26 PM

MANILA - The Philippines' balance of payments (BOP) position will cause the peso to underperform in the medium term, according to a currency analyst at Standard Chartered. 

"It is still very much a function of the Philippine trade deficit which continues to widen driven by a strong capital goods imports," said Divya Devesh, Asia foreign exchange strategist at Standard Chartered. 

Devesh said imports of capital goods, such as machinery used to produce other goods, bodes well for the growth of the domestic economy. However, this also tends to weaken the local currency, according to Devesh. 

"Unfortunately as we have see in the rest of Asia, when you have growth which is primarily led by higher capital goods imports, your currency tends to be under pressure," Devesh added. 

The Philippines posted BOP deficits for six straight months before posting finally posting a surplus last April. 

The BOP is the sum of all the business transactions the country does with the rest of the world.

Besides the country's BOP position, another factor that would cause the peso to remain weak is its high valuation. 

"We still think that the peso is overvalued though not at the same extent as it was 2 years back," said Devesh. 

"In mid 2015, we thought that the peso was almost 17 percent overvalued. Today, it is less than 5 percent overvalued but still slightly in the overvaluation territory. I think that also suggests that there is more room on the downside for the Philippine peso," he added. 

Devesh said the diplomatic row in the Middle East is unlikely to affect the peso's performance as Qatar's contribution to remittances is relatively low. If oil prices spike because of the row between Qatar and Saudi Arabia's allies, the peso might be affected. 

He added that it is still too early to tell if the tax reform package will have any effect on the peso, as the Senate has yet to pass it.