PHP: Is This A False Dawn?

      In the run-up to the presidential election on 9 May and even after the election, the intemperate remarks of president-elect Rodrigo Duterte sent foreign investors fleeing for cover.  There were also concerns that the incoming Duterte administration could reverse the economic policies of the Aquino administration and turn-back the pace of reforms and liberalization.  Since then, some of these concerns have dissipated and the PHP has recovered most of its losses, rising by 1.6% since election day as concerns waned of a reversal in economic reforms.

      Despite the initial feel-good factor, we believe this could dissipate as the reality of governing an entire country vs. that of a city hits. Despite his super-majority in the Congress, he could find that pushing his platform through the Congress might not be as easy as when he was mayor of Davao City especially after the honeymoon period wanes. These are some of the risks that we will be monitoring closely, and that could keep the USDPHP supported ahead.

      Still, the strong economic fundamentals to date should provide the backstop to any rapid bounce in the USDPHP. The expectations that the Fed rate hike will be gradual should also provide relief for the USDPHP, as higher yields in the Philippines could continue to attract foreign portfolio inflows. However, the uncertainty regarding Brexit and the US presidential elections could mitigate and keep the pair elevated.  Nevertheless, we expect the pair upmoves to be capped below the 48-figure this year. We maintain our forecast for the USDPHP to end 2Q at 47.000 before climbing higher towards 47.50 by end-3Q and then to 47.80 by end-2016. Thereafter, we expect the pair to settle lower to 47.50 by 1Q 2017 after the uncertainty surrounding these risks events dissipates.