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Ready for growth

With inflation under control and a revitalised Build, Build, Build programme, there is optimism that Philippine growth will accelerate in 2020.

Although the first two quarters of 2019 were challenging for the Philippines, an uptick in the third quarter and positive indicators in the Christmas quarter are making the business community feel positive about 2020.

Much of the optimism is thanks to strong macroeconomic fundamentals and an inflation rate that is calming down. As such, the Philippines is doing much more than staying afloat.

And this is despite the mixed outlook beyond the country’s borders. As First Metro Investment Corporation’s (First Metro) president Rabboni Francis Arjonillo says, he expects “volatility to persist next year amid the US-China trade spat.  However, he believes that President Trump’s re-election chances are hinged on sustaining a strong economy and a trade deal would be most desired.”  Even though the Philippines has performed better than the majority of its neighbours, the Sino-US trade war has cast a shadow over many of the other economies in Asia this year with growth affected and the mood dampened.

Arjonillo also cites other geo-political risks political headwinds for next year, notably the protests in Hong Kong, triggered in the summer by the introduction of a bill that would allow the extradition of suspects to mainland China, and Brexit, the long withdrawal of the UK from the European Union.

In the capital markets, as Arjonillo explains, thanks to the slowdown in inflation, investors can look at both equities and fixed income. But there are broader prospects for investors too. “In the real economy, we see opportunities in the consumer-related sector, including retail, e-commerce, logistics, gaming and construction,” he said. For the medium term, he believes that utilities are worth looking at “due to rising demand”. And then there are the sectors where restrictions on foreign participation have eased.


But in the short term, foreign direct investment (FDI) is a specific headache for the Philippines. The Bangko Sentral ng Pilipinas (BSP), the country’s central bank, reported  that FDI inflow had fallen for the seventh month in a row. It dropped by 2.9% to $566 million in September. A year ago, monthly foreign investment figures stood at $582 million.

“We need to sustain inflow of foreign direct investments, which this year have dropped year-to-date to September by 36.9% to $5.1 billion,” said Arjonillo.

The central bank cites the gloomy global growth outlook and a general weak external environment as the reason for the fall. But, as Arjonillo explains, foreign hesitancy has more to do with anxiety related to the upcoming fiscal reform, the Corporate Income Tax and Incentives Rationalisation Act, better known by its abbreviated name, CITIRA.

“We do not see capital flight, but only a slowing in FDIs this year amid investors uncertainty over the Corporate Income Tax and Incentive Rationalisation Act. We expect foreign investments to return once the CITIRA is passed into law,” Arjonillo said. “The Philippines remains an attractive investment destination with its resilient macroeconomic fundamentals.”

The House of Representatives in September approved CITIRA, which will gradually reduce corporate income tax from its current rate of 30% to 20% by 2029, as well as remove fiscal incentives which have been classed as redundant. At the time of writing, the bill is still being discussed at a senate committee level. The governor of the central bank has said that he hopes that CITIRA will get the nod early in the new year, but foreign investors are likely to remain on the sidelines until it is passed.


While FDI remains in limbo, inflation and an accommodative central bank continue to support the economy. First off is the news that inflation appears to be under control once more. After hitting a high of 6.7% in October 2018, in November this year, the government announced that the previous month’s headline inflation had eased to 0.8%, the lowest recorded since May 2016, and it climbed only moderately the following month to 1.3%, according to the Philippine Statistics Authority (PSA).

This means that the inflation rate for the year is likely to come in at 2.5%, the lower end of the central bank’s expectations. And Arjonillo does not believe that it will spike next year. “We see inflation next year to remain within the BSP’s target of 2-4%,” he said.

This benign inflationary environment means that BSP governor Benjamin Diokno is expected to continue his policy of monetary easing after the central bank’s 175 basis point hikes in 2018, which were a response to that soaring inflation.

So far this year Diokno has trimmed 75bp from the key rates via three 25bp cuts in May, August and September and most market participants, like First Metro, believe that there is room to cut even more. “We expect 50bp of rate cuts in 2020,” Arjonillo said adding that it would happen sooner rather than later. “We expect the cuts to occur in the first half of 2020,” he added.


As for the peso, First Metro reckons that the national currency is likely to depreciate to around P53, partly due to the rising budget deficit, but perhaps more significantly due to the ramp-up of the government’s Build Build Build infrastructure programme.  An ambitious $180 billion programme that was developed by Rodrigo Duterte in 2016, in the honeymoon period at the beginning of his presidency, it was supposed to usher in a new era of roads, railways, airports and bridges.

The programme has had its critics thanks to a poor completion rate so far. Indeed, at the start of November there were complaints that only nine of the planned 75 projects had got off the drawing board. However, the president revitalised the plans in November. Duterte’s new plan consists of 100 priority projects, nearly half of which will be funded by investment from private companies, which could result in a much more streamlined approval process.  These moves all point towards an expanding economy. No wonder then that Arjonillo says that “we expect growth in the Philippines to recover in 2020.


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