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Inflation hits a record low in the Philippines but GDP growth holds firm

Philippines inflation continued its downward trajectory in August, falling to 1.7%, the lowest in 34 months. With GDP growth holding steady, First Metro Corporation president Rabboni Francis Arjonillo predicts tax reforms will encourage further foreign investment.

Bolstered by the government’s efforts, the Philippines inflation numbers fell to 1.7% in August, a far cry from the worrying levels of last year when it hit 6.4% in August.

According to First Metro Investment Corporation (First Metro), the investment banking arm of the Metrobank Group, and the University of Asia and the Pacific’s Capital Market Research units’ recent monthly report, it’s a trend that’s set to continue in the short-term. The report’s authors believe inflation may hover around 1.5% in September.

Lower domestic fuel prices, sustained downward adjustments in electricity, slower increases in heavy-weighted commodity prices – including rice – were primary reasons for the fall. First Metro believes growth drivers in the second half of 2019 (H2) will be increased government infrastructure spending, and a rebound in consumer spending due to easing inflation and resilient remittances from overseas workers.

The passage of important tax reforms is also likely see 2019 end on a high note, according to First Metro president Rabboni Francis Arjonillo. “The passage of these bills before the year’s end will provide some clarity in the regulatory framework for foreign direct investments and local investments, and they’re also an affirmation of the nation’s recent triple B+ rating by S&P,” Arjonillo said.  


In an effort to increase liquidity and stimulate the economy further, the Bangko Sentral ng Pilipinas (BSP) cut policy rates by another 25 basis points (bps) in August. In another boost to liquidity, First Metro predicts the central bank will further trim banks’ reserve requirement ratio (RRR) requirements by another 200 bps before the end of this year.

Arjonillo believes the nation’s liquidity situation has further room to move but says the central bank is proving supportive. “The BSP is very responsive and is providing market guidance for more credit easing. As such, we've seen the return of the IPOs that were earlier sidelined by market-related uncertainties,” he said.  

The peso continued to make gains against the US dollar, showing a fourth consecutive year-on-year appreciation, partially boosted by the dollar’s weakness and the slowdown of global growth. The US Federal Reserve’s (The Fed’s) decision to cut interest rates also triggered gains for the peso, aided by the Philippines’ downward trending inflation and recent rate cuts.

However, the peso may see some volatility in the months ahead. Despite appreciating up until July 2019, a recovery in the US dollar means the peso, which began depreciating in August, will continue to do so for the remainder of H2, in view of faster money growth, lower domestic interest rates and balance of trade deficits due to the acceleration of infrastructure spending.


The nation’s GDP continues to expand, reaching 5.5% in the second quarter (Q2), 0.1 percentage point slower than the previous quarter, largely due to the combined effects of the nation’s 2019 budget impasse, prolonged dry spell (El Niño), an election ban on new construction, and ongoing US-China trade issues. But expanding liquidity due to policy rate cuts and RRR, a ramping-up in government spending, and robust remittances are likely to encourage consumer spending this year.

Taking these factors into account, First Metro’s believes that the nation’s 2019 GDP will remain within the 6-6.5% range, albeit the lower end of this scale.


July’s bond market was buzzing with the secondary market trading of government securities reaching a 55-month high touching over $39.4 billion, fuelled by falling domestic inflation and US bond yields.

The downwards trend of bond yields looks set to continue, driven by investors fear of a US recession; flattening yield curves and the possibility of further policy rate cuts by The Fed, adding to domestic monetary moves.

Predicting yields for 10-year T-bonds to fall below 4% in the coming months, First Metro expects corporates to increase bond issuances as firms take advantage of lower interest rates. 

Another record for corporate bond trading of P12.9 billion was set in July – a 155.5% increase from the P5.1 billion traded in June 2019. The nation’s top five corporate issuers included SMC Global Power, SM Prime Holdings, JG Summit Holdings, Ayala Land and Ayala Corporation whose total trading volumes hit P3.6 billion, a month-on-month gain of 28%.

Between June and July, the yield curve for Republic of the Philippines US dollar-denominated bonds flattened slightly as yields from longer tenors fell and shorter tenors edged upwards.         

Tempted by good corporate earnings and lower inflation, foreign sellers returned to stock markets as buyers, after three months of net outflows; a rebound that resulted in a net inflow of P3.7 billion in July.    


Against these positive signs, the Philippines still faces some very real challenges. These include a weakening peso, the rebalancing of the MSCI’s Emerging Markets index, falling government spending year-on-year (y-o-y), and a rally in gold prices as investors seek safe havens.

The peso’s strength amid improving trade balance is temporary, as the trade deficit is expected to increase in H2, driven by a rebounding economy and increased construction. Imports for the first seven months of the year dropped by 1.5% year-on-year to $62.7 billion, while exports were flat resulting in a slightly lower trade deficit of $22.3 billion, down by 4% year-on-year.

Whether inflation continues its downward trajectory in the fourth quarter and beyond, remains to be seen. “The Philippines is of course vulnerable not only to the global trade war but to the global headwinds in general,” Arjonillo said. “The Philippines is largely a domestic-demand driven economy, and our hopes for continued growth rests, not so much on trade, but private consumption.”

It also remains to be seen what impact the recent announcement that African swine fever had spread to pig farms near Manila will have on the nation’s $4.9 billion pork industry and on consumption, given pork accounts for 60% of meat consumed locally. However, the National Economic Development Authority has stated that it will not have any significant impact on inflation this year, as consumers can substitute pork with other meat products.

More First Metro insights are available here.

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