The Market Call




The economy expanded only by 5.6% in Q1, due to the delayed approval of 2019 National Government (NG) budget resulting in slower infrastructure spending (-8.6%) and a larger current account deficit (which alone cut growth by almost 0.7% points). However, consumer spending gained a lot, with lower inflation and widespread election spending. Bangko Sentral ng Pilipinas’ (BSP) policy rate cut by 25 bps and reserve requirement ratio cut by 200 bps (phased from end May to end-July) should support a strong recovery starting Q2. The bond markets will likely fully benefit from the cuts more by July. The stock market, which managed to eke out a slight 0.4% rise, may have to wait until after the “ghost month” to break away from its trading range.



Encouraging economic data in March, i.e., further slump in inflation, ramped up spending by the National Government (NG) in February, and unabated gains in OFW remittances, keep us upbeat for Q1 GDP growth. Besides, weak money growth and the easing of inflation allow the Bangko Sentral ng Pilipinas (BSP) to cut reserve requirements (RRR) in Q2. Slower inflation sparked secondary bond trading to a 4-year high, but failed to thrust the equities market beyond its trading range.



The unabated easing of inflation to 3.8% in February and unemployment rate down to 5.2% in January 2019 showed the bright spots in the economy, while Overseas Filipino Workers (OFW) remittances in December and FY 2018 reached record levels. The dampeners included the declines in capital goods imports, exports, manufacturing, and weaker money growth in January. These had mixed effects on the financial markets. Demand for long-term T-bonds pulled yields down, while the PSEi dropped in February as foreign investors began to exit.



The Philippine economy expanded by 6.2% in 2018, marking the 7th consecutive year of above-6% growth, albeit slower than the 6.7% pace in 2017. Higher inflation due to a sharp rise in crude oil prices in the first 10 months of the year and delayed imports of rice put brakes on consumer spending. The best news is that inflation is rapidly falling, to 4.4% in January, as oil prices remained some 30% below its 2018 peak. Other positive reports include OFW remittances still on the rise, and the peso stabilizing. Investors in the capital market had plenty of cheers with the onset of 2019, as bond yields fell while the PSEi rose by 7.3% in January, 3rd fastest in East Asia + Asean regions.



Sharply falling inflation rate to 5.1% in December (and expected to hit BSP targets by Q1-2019), and a vigorous 43.6% gain in Infrastructure and Capital Outlays spending in November set the tone for other positive economic news released in early January. Exports stayed flat while OFW remittances continued to pile up in November. Even more encouraging data emerged in December for those economic indicators. While investors remained cautious in December, optimism reigned supreme at the onset of 2019 in both the bond and stock markets, despite a lower-than-expected GDP growth of 6.2% for 2018.










The Philippine economy continued to emit positive signals for Q4 and beyond. Underemployment rate plummeted to a record low of 13.3% by October, while National Government’s (NG) infrastructure & capital outlays and capital goods imports retained their elevated growth paths. In addition, headline inflation dropped to 6% in November from 6.7% a month ago, signaling deceleration to fall within Bangko Sentral ng Pilipinas’ (BSP) inflation target by H2-2019. Despite a minor slowdown in exports, the peso appreciated significantly in November as the US dollar faltered and inflation appeared contained. Both the bond and stock markets recovered during the month, as emerging market assets looked attractive.



Slower-than-expected Q3 GDP growth of 6.1% still meant the 3rd fastest in East & Southeast Asia. This came as a result of poor, typhoon-dampened agricultural output, and weaker consumer spending due to elevated inflation. Nonetheless, infrastructure and capital outlays and capital goods imports remained elevated and should drive faster growth in Q4 and beyond, with some support from improving exports. Bond markets returned to life in October and after the Monetary Board (MB) raise policy rates by 25 bps to 4.75%. PSEi showed the least decline in October in the region, and recovered above bear market threshold by mid-November.



The economy likely expanded faster in Q3 than the 6% posted for Q2, as red-hot investment spending and robust manufacturing sector stepped up on the accelerator. Capital goods imports soared by 39% in July, while National Government (NG) spending added fuel to growth with a 29% uptick, likely driven by infrastructure and capital outlays. Exports had its third consecutive month of growth, albeit still at a mild pace. Accelerating inflation in September to 6.7%, highest in the region, will put some brakes on consumer spending as it has done for the bond and stock markets.



New positive economic data have failed to dominate the financial markets as faster inflation and renewed peso weakness have clouded the overall picture. Capital goods soared by 30.1% in June, while the volume of industrial production (VOPI) again rose double-digits at 11.8% in July. Exports appear to have turned a corner as growth entered positive territory in June and July. We expect the Monetary Board to lift policy rates by 50 basis points (bps) to 4.5% this month as it seeks to cool inflationary expectations and exchange rate pressures.



Just after very strong numbers (above-20% upticks) emerged from investment spending, infrastructure and capital outlays, foreign direct investments, and volume of industrial production index in Q2, the Philippine Statistics Authority reported an underwhelming 6% GDP growth for Q2, a substantial deceleration from 6.6% in Q1. The locus of the weakness came from the demand side, particularly the larger deficit in the trade of goods and services. It could also be attributed to faster inflation which clocked at 5.7% in July, shortly after which Bangko Sentral ng Pilipinas (BSP) raised its policy rates by 50 bps to 4%. The reported slowdown also contrasted with the positive performances of the equities and bond markets.



Muscular real economy indicators, like bulked up growth in infrastructure spending, capital goods imports, and manufacturing output, and foreign direct investments should carry the economy to faster GDP growth in Q2 to at least 7%. This improves on the 6.8% recorded in Q1. The positive data should overcome some negative sentiment—e.g., inflation speeding up, peso under siege—in Q2 and set the stage for the higher growth trajectory for the rest of the year.



Domestic demand will again widely offset weak external demand, as the government’s infrastructure works (+95.9% in April) and PPP project hum, while the manufacturing sector’s growth pace in April (+31.1%, fastest in eight years) and employment gains should boost consumer spending. Inflation, which reached 4.6% in May from 4.5% in April, appears to be peaking. But exports continued its negative streak. The rout of the peso by June will likely reverse after the BSP raised its policy rates by 25 bps to 3.5% on June 20. That may have a sobering effect on the bond and equities markets which had been skidding by June.



Led by Investment spending of both the public and private sectors, Gross Domestic Product (GDP) got back into a faster growth track with a 6.8% uptick in Q1, up from 6.5% in both Q1 and Q4-2017, second best in East Asia. Manufacturing sector again outperformed the Services Sector handily. Higher inflation at 4.5% in April constrained consumer spending as crude oil prices pierced the $70/barrel resistance.



Even as the Philippine economy revs up to race faster, bond yields appear to have galloped uncontrollaby as earnings yields (E/P) to 10-year bond yield spreads suggest and US Treasuries have tracked a downward trend since its peak in mid-February. The PH economy appears to have had roaring 2018 start as capital goods imports rose by 16.9%, while National Government spending (exclusive of interest payments) to boost Infrastructure expenditures climbed by 25.2% in January, and Manufacturing output surged by 24.8%, the fastest in seven years.



Superb annual job growth to January 2018, record $10 B FDIs, and strong finish for infrastructure in FY 2017 all point to an acceleration in the growth path. Significant upticks in the manufacturing sector and capital goods imports in January add to our optimism of above-7% GDP growth in Q1-2018.



Foreign direct investments (FDI) into the country streaked to a record-high of $8.7-B YTD in November even as domestic investors and government infrastructure spending drove Gross Domestic Product (GDP) to a 6.7% full-year growth in 2017. These translated into a 16.1% surge in capital goods imports in November. As added booster, exports posted slightly positive gains, while Overseas Filipino Workers? (OFW) remittances continued to expand. The fly-in-the-ointment came from the sharp rise in inflation to 4% in January from 3.3% in December, mostly attributable to higher food and crude oil prices, as well anticipated increases in fuel taxes and some other indirect taxes. While trading volumes and auctions gained in the GS bond market, yields headed north as US Treasuries showed the way. The stock market racked up 6 new records in January but consolidation appeared underway as the market looked overbought, while the US stock market?s plunge into early February pulled the local bourse in the same direction.



2017 ended with a bang! With infrastructure spending soaring by ~45% in November and exports still on the rise, our GDP growth forecast of 6.5% to 7% for the full year 2017 appears a no-brainer. Foreign domestic investments have reached $7.9 B YTD by October, nearly the full year 2017 record, even as capital goods imports have recovered. Inflation remained at 3.3% in December, while OFW remittances kept their vitality. The equities market continued to shine, with PSEi ending with another record of 8,558.42 (the 14th for 2017, and 2nd best in Asia), but the bond market saw higher yields, as investors priced in Fed and PH Monetary Board rate hikes in 2018.