First Metro: Philippine economy will bounce back strong

August 12, 2020

First Metro Investment Corporation, the investment banking arm of the Metrobank Group, is confident the Philippine economy is strong enough to withstand the headwinds brought about by the COVID-19 pandemic.

Newly appointed First Metro president Jose Patricio Dumlao said, “We have gone through so many crises in the past and we have shown, time and again, our resilience as a country in overcoming the toughest of crises. The difference this time is that we are coming from a stronger position. The country’s macroeconomic fundametals are on solid ground, the banking industry is well capitalized, and our debt-to-GDP ratio when we entered the pandemic was at a historic low of 39.6%, which provides us enough fiscal buffers. Yes, uncertainty remains and we are not downplaying the unprecedented effects of this crisis, but we are confident on our country’s ability to bounce back.”

Mr. Dumlao added, “Before the pandemic, we are among the fastest growing economies in Asia, with an average GDP growth of 6.6% from 2016-2019. During the pandemic, while other countries around the world were either downgraded or given a negative outlook, the Philippines’ sovereign rating was affirmed by international credit rating agencies, maintaining our investment grade levels. And very recently the Japan Credit Rating Agency upgraded our credit rating to A- from BBB+, a resounding vote of confidence on the country’s economic resilience, credit worthiness and long term prospects.”

The country’s GDP is expected to contract by 8-9% by year-end but will bounce back in 2021 and the long term prospects look rosy. Economic recovery will be slow and difficult for the remainder of the year as COVID-19 cases continue to increase. Thus, the BSP is expected to continue its accomodative monetary policy to support the recovery efforts in the economy.

Inflation will remain muted at 2.5%, which is well within the target of the BSP.

Remittances from overseas Filipino workers is expected to decline by 8-12% for the full year 2020.

While most Asian currencies depreciated against the dollar, the Philippine peso has shown strength during the pandemic underpinned by the country’s strong external payments position. The peso will remain stable for the remainder of the year and is projected to trade within P50-51 to a dollar.

To help stimulate the economy, the BSP continued to apply an accommodative monetary policy, having cut policy rates four times in the first half of the year for a total of 175 basis points (bps). While noting recent statements by the BSP, another rate cut is possible before the year ends along with a possible reduction of up to 200bps on banks’ reserve requirement from 12% to 10%, not to mention BSP’s continued open market operations. Thus, the yield curve is anticipated to shift downwards by 20-35 bps by the end of the year.

The current level of the benchmark Philippine Stock Exchange index (PSEi) creates an opening. It’s a rare buying opportunity for investors, which we have not seen in the last 10 years. The upside is the economic recovery that should enable the PSEi to climb higher to 6,500-7,000 in the second half of this year, supported by expansionary fiscal policy drivers (i.e. Bayanihan 2 package of up to P1.7 trillion) and the BSP’s accommodative monetary policy. This target range represents an earnings recovery from the depth of an estimated 30 percent correction in EPS growth this year and a 28% recovery next year. Price earnings ratio (PE) is projected to be 18x-19x or a reversion to the mean 5-year PE range.

In the debt capital market, a resurgence of offshore USD issuances was seen in the first half of the year with 13 names tapping the global market amounting to USD6.8 billion (approximately P340 billion). This increased interest in offshore bond issuances is likely to continue for the remainder of the year as previous issuances were met with strong demand from international investors seeking higher yielding assets. In the equity capital market, the additional fiscal policy stimulus to support businesses in the context of the pandemic should trigger a risk-on sentiment by investors looking at every good news as a reason to invest and push the market higher. Issuances, like IPOs and REITs, that were derailed earlier this year due to the pandemic are expected to come to market this 2nd half of the year.