4 weeks ago
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The US dollar's strength is expected to linger for the rest of the year, potentially hiking borrowing costs for emerging markets like the Philippines, according to the Washington-based Institute of International Finance (IIF).
"A strong US dollar will be a key feature of 2025 and beyond. While market expectations of Federal Reserve easing have fluctuated, the dollar's resilience remains a headwind for EMs [emerging markets], particularly those reliant on external borrowing," IIF senior economist Jonathan Fortun said in Feb. 18 report.
The IIF noted that the Philippine peso was among Asian currencies that have borne the brunt of a stronger dollar, alongside the weaker Chinese yuan, Indonesia rupiah, and South Korean won.
After US President Donald Trump won the November 2024 election sealing his return to the White House and his push for protectionist trade measures like tariffs, the peso slid to the 59:$1 level against the greenback.
A number of financial institutions and think tanks have projected the peso to depreciate beyond the 60:$1 mark this year.
The appreciating dollar comes on the back of expectations that the US Federal Reserve would keep interest rates higher for longer.
"A more prolonged period of high US rates poses significant challenges for EMs, as it strengthens the dollar, increases external funding costs, and dampens the appeal of EM assets relative to US fixed income," the IIF said.
As such, the IIF anticipates central banks in EMs to "face renewed pressure to maintain or even hike rates to defend their currencies, complicating domestic economic conditions."
After the Bangko Sentral ng Pilipinas (BSP) paused from monetary policy easing, the peso gained a bit last week and entered the 57:$1 territory, although this week's trading brought the domestic currency back to the weaker 58 level.
BSP Governor Eli M. Remolona Jr. has attributed the Monetary Board's decision to retain the key policy rate at 5.75 percent to significantly higher uncertainty over global economic policies impacting on the domestic economy.
For the IIF, EM debt markets, in general, are facing an uncertain outlook. "The combination of US policy shifts, geopolitical developments, and global monetary conditions suggests that volatility will persist."
In the case of bonds, "investors have become more discerning, favoring countries with stable macroeconomic fundamentals while avoiding those with heightened fiscal vulnerabilities."
The IIF also pointed to a growing "differentiation" among EMs competing for investment flows.
"As global financial conditions tighten and geopolitical risks rise, investors are allocating capital more selectively... The need for EM policymakers to maintain credibility in monetary and fiscal policy is becoming even more pressing to sustain investor confidence," it said.
"The differentiation across the EM complex will likely deepen, with capital increasingly flowing to countries demonstrating macroeconomic stability and policy consistency," it added.
