The Market Call




The economy has posted good numbers in March in terms of more jobs, a surge in National Gov ernment (NG) spending, expanding Manufactur ing sector, and capital goods imports getting back into positive territory. However, a renewed tight ening of quarantine (ECQ and MECQ) in Metro Manila+ due to the spike of COVID-19 cases and deaths to new records, has provided a headwind to a faster recovery. Bond markets will continue to recover from the huge jump in PH 10-year bond yields as the earlier views of even higher inflation has waned and U.S. Treasuries also on a downswing. The stock market will remain volatile due to the ECQ-MECQ and delays in vacci nations, even though some issues will become attractive.



New positive economic data have emerged, such as an improved jobs situation, slight YoY gain in BIR tax take in December, and Manufacturing PMI still in expansion mode. These provide reasons for greater optimism on the recovery. Headwinds still do exist, with inflation running faster, lower exports and OFW remittances at onset of 2021. But we think the nascent rebound would gain traction if the government works closely with the private sector for faster vaccine rollouts, ease on restrictions on medication (emergency situation), and simplify and unify LGU restrictions that have constrained people and goods movements.



Accelerating inflation, driven by the usual suspects (food and crude oil prices, the latter racing to a 13-month high by late February) and U.S. 10-year T-bond yields surging to around 1.5%, have dampened the beginning year optimism to a more somber mood in February. A resurgent Manufacturing sector provides a glimmer of hope for faster economic recovery, but the overhaul of fractured supply chains could take a little more time, aggravated in the past by the multiplicity of health certifications by city/municipality. Full-year GDP recovery may come only by end-2022. To be sure, financial markets have seen restiveness in February. Local 10-year T-bond yields climbed closer to 4.0% towards end-February, while PSEi has eased to sub-7,000 and may remain range bound until the economy and firms report significant month-on-month output gains.



The Philippine economy appears on the mend, even though its pace may not satisfy workers and small businesses who are still out in a limb. However, positive economic data—elevated government spending, increase in exports and in Overseas Filipino Workers’ (OFW) remittances support the hope for economy to normalize, albeit in a new way starting 2021. The country’s Gross International Reserves (GIR) has reached a record-high level of $109.8-B by the end of 2020, equivalent to 11.7 months of imports, the latter only lower than Taiwan, India, China and Thailand. The positives have kept investors active in the country’s equities and bond markets and its ROPs performing better than equivalent U.S. Treasuries.










A bit brighter outlook of both firms and consumers greets the economy in 2021. Not only do the Bangko Sentral ng Pilipinas’ (BSP) consumer and business surveys say so, but the financial markets say “Aye” as well. The country has issued 10.5- and 25-year ROPs totaling $2.8-B at record-low coupon rates, while PSEi has stayed well above 7,000 since early December despite some exits by foreign investors. The country’s gains vs COVID-19 and rollout of vaccines, support the relaxation of lockdowns while Christmas season spending climbs. Thus, we see a good economic recovery with a cautionary note. Positive data included Manufacturing PMI at 49.9 in December, while OFW remittances posted the third straight month of growth in October, and the country’s gross international reserves (GIR) hit another record high of $104.5-B or 11.2 months of import cover by end-November.



Signs of the nascent recovery emerged once again in October. Exports growth moved into positive territory (2.2% in September), while Overseas Filipino Workers’ (OFW) remittances had the highest growth for the year with a huge 9.1% uptick in September. Industrial production improved to single-digit decline. Bond markets remained tentative with the return of fears for higher interest rates as U.S. 10-year T-bond yields rose by 22 bps, while October inflation raced to 2.5% from 2.3% a month earlier. The stock market outperformed other bourses in the region with foreign net buying, albeit still small by early November, began to emerge. Thus, sentiment has turned more constructive, specially with the government relaxing further quarantine restrictions and Congress approving the Financial Institutions Strategic Transfer (FIST) and Government Financial Institutions Unified Initiatives to Distressed Enterprises for Economic Recovery (GUIDE) bills that will provide P70.0-B for lending to MSME’s by government banks and allow banks to transfer to distressed assets management firms beleaguered loans to MSMEs.



A shower of good news and less downbeat economic data suggest that the economy has surely, perhaps slowly, alighted on the recovery mode. Manufacturing PMI appeared to expand in September, inflation continued to ease to 2.3% in September, while the tax revenues dropped just beyond double-digit pace despite the lockdowns support this view. We do expect this to gain traction as the government has indicated willingness to ease COVID-19 induced restrictions in Q4, which should result in significantly greater construction and manufacturing activity as we approach the end of this dreadful 2020.



Surprisingly, positive economic data that surfaced later in August (e.g., employment, inflation, OFW, etc.) after the GDP plunge in Q2 suggest that a recovery, albeit still fairly mild, has began in earnest. The relaxation of quarantine restrictions, especially relating to public transportation and restaurants, with still tough health protocols, should reinforce this upward movement. While longer-dated bond yields continue to rise until mid September, the upside may be restrained as NG has added more than P900.0-B to its cash hoard by end-July. The equities should continue to trade around 6,000, but may exceed that in Q4 as the rebound of the economy and corporate earnings gain traction.



The PH economy appears to have bottomed out in Q2-2020 as GDP took a deep dive, while more economic data showed monthly gains. With the National Government (NG) able to raise P601.0-B in July to August 7th largely with the P516.3-B Retail Treasury Bond (RTB-24) issue, there is less pressure for it to over borrow from the domestic money market, even as long-tenor ROPs yields hit record lows. This will enable NG to step further on the accelerator on infrastructure and capital spending. We may also see the peak of inflation year-on-year (y-o-y) in August due to a low base a year ago. In sum, the rally in the bond markets will likely continue, but equities may have to wait for better earnings to get back on an upward trajectory.



Foreign investors poured more than $6.0-B in corporate bond issuances abroad since mid-June signaling confidence in PH economy’s resilience, even as the economy takes steady steps towards normalization despite quarantine constraints. Manufacturing PMI continued its ascent almost to the 50 level and National Government (NG) spending remained robust. Inflation may have risen to 2.5% in June, much above expectations, but that will not move much since the main driver, spiraling crude oil prices, has limited upside. Exports and OFW remittances may have suffered, but the trade deficit has fallen sharply and enabled the peso to grow slightly stronger in June. The financial markets look fine, especially the bond market which has seen record tenders for auctions and all-time low for 10-year T-bond yields. Rising domestic liquidity, especially with the huge corporate issuances offshore, along with steady inflation give positive rating for the bond markets. The equities market has recovered to the 6,000 to 6,500 range and became one of the top performers in the world. However, the PSEi may hit a second bottom if domestic infections continue to rise, but still above 5,000 supported by robust corporate fundraising this year given the very liquid domestic and foreign markets.



As widely expected, negative economic data surfaced in April. These include the huge drop in manufacturing, exports and imports, as restrictions due to the strict Enhanced Community Quarantine (ECQ) curtailed movements of workers and some supplies. We see, however, some “green shoots” sprouting in May seen in the big jump in Manufacturing PMI to above-40 level after a record low of 31.6 in April and in National Government (NG) spending which rocketed by 108.1% in April. Besides, money growth accelerated further to faster than 15% pace despite slower loan growth. The bond market hailed in more investors shown in a surge in tenders and secondary market trading, sending bond yields lower across the board. PSEi gained another 2.4% in May, landed and stayed above 6,000 by early June.



Despite an acceleration of National Government (NG) spending by 15.9% in March, the economy still succumbed to the effects of COVID-19 as it contracted slightly by 0.2% in Q1. Only food and vital goods/services kept the economy going as the government put in place a tight Enhanced Community Quarantine (ECQ) in Luzon for most of Q2. Inflation, however, slowed to 2.2% y-o-y in April while OFW remittances and lower balance of trade deficits gave a little strength to the peso. The 2021 outlook, however, appears brighter with the 2020 lost output overtaken by a rapid 8% to 9% GDP expansion. Bonds remained as the asset of choice as seen in plunging yields. The equities market managed to get back to above 5,500 but needs positive news both in the macro- economic and corporate fronts to bounce back.



National Government’s (NG) decision to impose and extend Enhanced Community Quarantine (ECQ) for Luzon due to the fast spread of COVID-19 had the unintended consequence of knocking down the economy and the stock market. After all, Luzon’s accounted for 72.9% of GDP in 2018. Earlier optimism for a V-recovery has dissipated as supply chains, both domestic and international, got disrupted. Only the bond market showed brisk activity as bond yields fell back to pre-COVID crisis levels thanks to liquidity provided by BSP [via RRR and policy rate cuts] and National Government (NG) deficit spending to ensure safety nets for low-income families. We expect a robust recovery in H2 led by government’s strengthened infrastructure spending and weak inflation.



COVID-19 has morphed into a pandemic that has reached more than 100 countries by mid-March. Global and PH GDP growth will slow down significantly in Q1 as governments have taken more draconian measures and global supply chains have fractured. Lower inflation, a big BSP policy rate cut and acceleration of infrastructure and government spending should soften the blow. But while we feel more optimistic for H2, this may vanish if the virus’s spread and death toll do not significantly ease. Morbid fear and hysteria have driven investors to turn to cash rather than coldly stick to a risk-return approach.



Suddenly, it’s all about the new 2019 coronavirus (COVID-19) inflicting harm on the global economy and the financial markets. We expect it to slash PH tourism and Q1 GDP growth. But assuming that it ends in the summer like SARS, we see the economy roaring back starting Q2. Ramped up infrastructure and expansive private construction and consumer spending should lead domestic demand back into the driver seat. Renewed global economic slowdown which will drag down foreign interest rates, together with more favorable domestic developments easing inflation and another 25 bps cut in policy rates make bonds especially attractive in H1. However, the negative sentiment it has stirred, coupled with regulatory uncertainties, bodes ill for the PSEi for the same period. We do expect robust GDP rebound and strong corporate earnings.



We foresee renewed fast growth of 6.2% to 6.6% for the Philippine economy in 2020 as Q4-2019 GDP growth accelerated to 6.4% from 6% a quarter ago. The faster pace will likely spill over to the entire 2020 with similar drivers as in Q4-2019—NG operational and capital spending as well as solid consumer spending given the robust job gains in in the last three quarters of 2019. With NG P4.1-T budget already approved, infrastructure spending may soar by 34.6% as planned. Bond markets look attractive in H1 while the equities market will deliver once the fears of a global pandemic from coronavirus fade. However, a much stronger eruption of Taal volcano and prolonged spread of the novel corona virus could slow the economy slightly, but negative investor sentiment from it may delay PSEi’s recovery.