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Great expectations: Philippines economy pulls ahead

With the nation’s May election process finalised, the 2019 national government budget passed the post, and a policy rate cut, the Philippines economy now looks set to meet an official economic forecast of GDP growth at around 6.5%.

According to First Metro Investment Corporation (First Metro) and the University of Asia and the Pacific’s Capital Market Research units’ May report – The Market Call – the Philippines remains one of Asia’s best performing economies, despite May’s inflation rate rising slightly by 0.2% to 3.2%.

Recent central bank policy rate cuts and reserve ratio cuts being phased in between May and July are likely to support a strong recovery in the second half of the year, with bond investors remaining bullish. First Metro’s analysts share some key insights about how 2019 is shaping up for the nation, and the latest market trends likely to impact the second half of 2019.

Q Will May’s election results inject more investment confidence and growth in H2?

A With the landslide victory of the administration, bets have strengthened about President Rodrigo Duterte’s hold on the legislature. The results signal a fresh mandate for the president that could boost his fiscal and economic reform agenda for the second half of his term. 

Several landmark laws were passed in the first half of President Duterte’s term such as Tax Reform for Acceleration and Inclusion (TRAIN 1) Act, that widened the country’s tax base and raised government revenues, and the rice tariffication law which pushed domestic rice prices lower.

However, several bills are still pending in Congress such as the other packages of the Comprehensive Tax Reform Program (CTRP), especially TRAIN 2 or the Trabaho Bill which aims to reduce corporate income tax and rationalise fiscal incentives.

Q Will the Bangko Sentral ng Pilipinas  (BSP) policy rate cut (25bps) and reserve requirement ratio (RRR) cut (200 bps) help to stimulate growth?

The impact of these cuts is likely to take effect in the second half of the year.
The RRR cut should produce positive effects for the economy and the financial markets as there would be more funds available for consumers and businesses which could boost economic growth.

The policy rate cut and RRR cuts are aimed at stimulating  growth to propel the economy forward, to cheapen the cost of money, encourage borrowings, spur consumption spending, ensure affordability of consumption goods, and secure the ability of people to pay for loans and debts. 

The 2% reduction in the RRR (to be carried out in phases between May to July) will release around P180 billion ($19.5 million) of money into the system. With more funds flowing into the system, coupled with a sustained fall in inflation (with the year-to-date average of 3.5% now within the BSP’s 2-4% target), we have seen the 10-year interest rates dropping by 73 bps to 5.06% from 5.8% prior to the policy rate cut announcement on May 9, 2019. In addition, the BSP also hopes to attract more foreign investments because financial conditions are looser and therefore more conducive to business expansion, resulting in a more positive environment for businesses seeking funds. 

Q How has this sentiment affected the bond market?

Since the announcement of the policy rate cut on May 9, the market has reacted positively.
The Philippine 10-year has dropped to 5% from a high of 5.8% in May. There’s been buying in the long-end of the curve and prices have gone up.

Q What impact is the ongoing US-China trade issue having on the Philippines?

Our exports of semi-conductors and electronics will be affected because we are strongly linked with Japan, the US and ASEAN. Semi-conductors are the largest export product of the Philippines, comprising 40% of the country’s total exports.

Exports of electronic products year-to-date for April fell by 0.6% to $11.9 billion. In the same period, exports and imports of semi-conductors dropped by 1.8% to $8.6 billion and 0.4% to $6.2 billion, respectively. The Philippine Statistics Authority reported that China has the 3rd largest share of the Philippines’ total exports of $21.9 billion – comprising 13.1% ($2.8 billion) in exports from January to April 2019.

Q Were GDP figures for Q1 disappointing and if so, what caused these headwinds?

The main reasons the Philippines experienced a growth slowdown and disappointing results for the first quarter of 2019, were a combination of weak purchasing power, due to inflation spill-over, and the national government budget delay. 

Nonetheless, we believe that growth will pick up beginning Q2-2019 as inflation continues to remain low and the government ramps up spending, especially on infrastructure, to further boost consumption spending. More liquidity and the resulting decline in interest rates have already boosted the bond and stock markets and the positive sentiment should also flow into the real economy.

Q May’s inflation rose to 3.2%, the first rise in six months – up 0.2% from April, when it reached a 16 month low. What are your predictions for the second half of this year?

Inflation is expected to resume its deceleration in June to below 3% and below 2% by September.

Global oil prices have been going down and have entered the bear market—reflected in local pump prices decreasing by P2/litre while rice prices continue to drop and the peso remains stable. Also, electricity rates were slashed for the second straight month in June by P0.1948/kilowatt. As a result, we expect inflation to remain relatively low for the rest of the year.


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