First Metro: PH economy to thrive in a year of volatility

January 11, 2023

First Metro Investment Corporation expects the Philippine economy to remain resilient and continue to grow this year albeit slower than 2022.

First Metro president Jose Patricio Dumlao said, “Amidst the unexpected challenges in the global economy in the past year, the Philippines pulled through and grew 7.7% (in the first nine months) driven by strong domestic demand. This year, we continue to anticipate external headwinds – slower global growth, interest rates and inflation will remain elevated and volatility will persist – which will temper growth. In the face of all this, the economy will remain resilient and is expected to expand by 6.0%.”

GDP growth will continue to be fueled by robust domestic demand. The reopening of the economy, removal of restrictions on people’s mobility and business operations are expected to push household consumption, employment, services and government spending.

“The country’s macroeconomic fundamentals remain strong. Our gross international reserves (GIR) which stood at USD96 billon is at a comfortable level. This is equivalent to over 7 months’ worth of imports. Our debt-to-GDP ratio is still manageable – 63% in 2022 and 64-65% in 2023. This is anticipated to decline starting 2024,” added Mr. Dumlao.

Inflation will remain elevated at 4.5% as a result of higher oil prices globally affecting the local prices of food and commodities in the local market.

OFW remittances, which grew by 3.1% in 2022, will likely increase by 3-5% this year.

The peso will still be in depreciation mode due to persistent uncertainties and aggressive monetary tightening in the US. It is projected to trade within the P57-59 range vs the dollar.

In 2022, the Monetary Board hiked policy rates seven times for a total of 350 basis points. As central banks continue to manage stubborn inflation, interest rates will continue to rise from its current levels. After rates peak in the second quarter of this year, the yield curve is expected to retrace its path to levels below end December 2022 by about 12.5-50 basis points. We see as well a slight steepening of the curve with the 2-year vs 10-year spread increasing back up to around 150 basis points.

In the debt markets, frequent issuers are anticipated to come back through refinancing opportunities but may exhibit caution in the early part of the year until there’s a better picture on the trajectory of inflation and interest rates. Issuances should pick-up in the second half.

In the equity markets, given the economy’s positive growth prospects and improving investor sentiment, the Philippines Stock Exchange Index (PSEi) is expected to hit 7,500 underpinned by earnings per share (EPS) growth of 15% and 15x PE.

In terms of investing strategy, in light of a persistent high inflation and elevated interest rate environment, stock selection is key. Companies with low debt and high capitalization are preferred as well as those with big market share, strong cash flow and are able to give out generous dividends. Stocks with exposure to themes that are linked to the basic needs of the country are projected to perform well. These themes include greater energy sufficiency, fuel security, disruptive technology, renewables and sustainability.