Political Uncertainty and Inflation Pressures Weigh on Philippine Peso

Political uncertainty surrounding the impeachment trial of Vice President Sara Duterte is contributing to a challenging environment for the Philippine peso, according to a report by ING Economics. The commentary highlights that investor sentiment is being negatively impacted, which may delay essential economic reforms and hinder the recovery of growth.

As of last Friday, the peso closed at P61.587 to the dollar, a slight improvement from the previous day. However, the currency remains close to its record low of P61.75:$1, which it approached amid escalating tensions between Iran and the United States. Analysts from ING predict that the peso will likely trade around P61.70:$1 in the coming month, with a potential slight strengthening to P61.50 over the next three months.

“At the same time, rising political uncertainty following the vice president’s impeachment are weighing on investor sentiment.”ING Economics

Despite a recent easing of inflation, with the consumer price growth slowing to 6.4 percent in June from 6.8 percent in May, ING cautioned that this moderation is not sufficient for the Bangko Sentral ng Pilipinas (BSP) to declare victory over inflation. The central bank has been grappling with persistent inflationary pressures, which are exacerbated by factors such as wage increases and rising core inflation, now at 4.4 percent, up from 4.1 percent the previous month.

“ING cautioned that the moderation was insufficient for the BSP to conclude that inflation had been fully brought under control.”ING Economics

ING's analysis underscores that the BSP is expected to maintain a vigilant stance on inflation, potentially raising its benchmark interest rate by another 50 basis points this year. This follows two earlier increases that brought the key rate to 4.75 percent. The central bank aims to keep inflation expectations anchored, as inflation is projected to remain above target levels until next year.

In a related forecast, the Fitch Group's BMI has indicated that the peso could fall to a new record low of P63:$1 this year, citing factors such as the ongoing US-Iran conflict, the firmness of the US dollar, and seasonal peaks in import demand. However, BMI anticipates a slight recovery for the peso, projecting it will strengthen to P61.00:$1 by the end of 2026 as global oil prices stabilize and remittance inflows increase.

“BMI stated that a renewed escalation in the US-Iran conflict, US dollar firmness and seasonal peak in import demand will weigh on the peso in the near term.”BMI

As the political landscape evolves with the impeachment trial, which adds to existing uncertainties, analysts emphasize the importance of maintaining investor confidence to facilitate economic growth and reform. The interplay of political developments and economic indicators will be crucial in shaping the trajectory of the Philippine peso in the coming months.