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Second wind: Philippines economic uplift likely in H2

The second half of 2019 should see the Philippines economy regaining momentum as increased government spending, combined with the possibility of further central bank rate cuts, look set to tempt investors back in.

The Philippines economy is witnessing rising tourist numbers a bounce in overseas remittances, and inflation coming back under control – all supporting of a positive outlook for the second half of 2019.

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’ June report, inflation fell to 2.7% y-o-y, its lowest point since September 2017, and well below the 3.2% recorded in May.

Driven downwards by a drop in rice and oil prices, together with a strengthening peso, the mid-year inflation figure is not only lower than anticipated but also well within the central bank’s target of 2-4% (2018-20).

First Metro’s president, Rabboni Francis Arjonillo, believes falling inflation will also act as a strong stimulus to consumers. “After slower than expected growth in the first quarter of the year, we expect the rest of 2019 to be better. The government’s catch-up plan to bring infrastructure spending to 5.2% of GDP is very encouraging, and would strongly support our growth expectation,” Arjonillo said.

Although the nation’s GDP hitting a four-year low of 5.6% in the first quarter of this year, First Metro predicts the economy will see growth of between 6-6.5% by year-end, driven domestically by solid consumer, government and investment spending.


Renewed interest in the nation as a holiday destination is also contributing to First Metro’s positive outlook. Visitor numbers increased by 8.5%, to 2.87 million, in the first four months of 2019, and, according to Arjonillo, this means around 8.2 million tourists will visit the Philippines by year’s end, a significant bounce from 2018 results of 7.1 million overseas visitors.

Personal cash remittances from Filipinos working abroad injected $2.7 billion into the local economy in April. Based on this data, First Metro’s analysts expect overall growth in remittances at 2-4% this year. When added to a rebound in government infrastructure spending – up 7.8% y-o-y in May, (or 8.9% if interest payments are excluded) – the June report states that the combined impact of increased construction and an uptick in cash inflows will help fuel domestic demand drivers in the second half of 2019.


Arjonillo believes markets are likely to remain conducive to bond investment in the second half of the year. “First Metro anticipates that the Bangko Sentral ng Pilipinas [BSP] will cut the reserve requirement by 1-2%, and this could potentially reduce policy rates by 50 basis points from their current levels. These cuts should produce positive effects for the economy and the financial markets because there would be more funds available for consumers and businesses,” he said.

July’s widely anticipated US Federal Reserve rate cut, and the possibility of further rate cuts, also fuelled investor optimism in the nation’s bond and stock markets.

The local bond market remained bullish in both primary and secondary markets as it entered the second half of 2019, driving yields down. First Metro’s analysts believe that

10-year T-bond yields, which reached 5.7% as of June 30, could drop below 4.5% in the current quarter (Q3), on the back of falling interest rates, BSP rate cuts and the central bank’s June announcement of a uniform 4% reserve ratio requirement (RRR) for long-term negotiable certificates of time deposits, issued by banks and financial institutions.

This move by the BSP was designed to injected greater liquidity and deepen financial markets. The decision helped local bonds to rally by around 200 basis points, from their January level. 

In the second half of 2019, Arjonillo expects the Philippine Stock Exchange index to recover, stabilising somewhere within the 8,400-8,800 range, with a price to earnings ratio of up to 19 times. He also expects to see a recovery in corporate earnings, from 8.6% early in 2019 to around 10%.

The fixed-income market is turning out to be a star performer this year and looks set to surpass its record-breaking 2017 volume with its performance in the first half of 2019 already exceeding 2018 levels. First Metro’s analysts said much of this year’s volume came from the government’s 22nd tranche of retail treasury bonds, whose size – P236 billion ($4.63 billion) – is nearly double that of the 2018 issuance, in addition to bank bonds, which raised P95 billion.

In comparison, the equities market looks somewhat lackluster, only raising P16 billion to date (comprised of a P8 billion stock rights offering from the Philippine Savings Bank and some private placements). But First Metro’s analysts expect volume to recover, given the renewed interest around REITs, as well as the resumption of IPOs.


Total Corporate Trading Volume (in Million Pesos)

Source: Philippine Dealing Systems (PDS)






Source: Philippine Dealing Systems (PDS)


But risks to the Philippines’ positive outlook still linger.

The global economic slowdown and ongoing US-China trade talks, with further official discussions not scheduled to take place until September, are both having an adverse impact on local exports which are expected to grow weaker at around 2-6%.

The June Market Call report indicates imports are likely to continue to outpace the nation’s exports and it anticipate these are likely to sustain growth of 10-14% on the back of strong government infrastructure spending and private investments. It also sees lower demand for manufacturing and rising inventories as a sign of a slowdown in this sector for the year ahead.

Arjonillo anticipates that the peso will remain under pressure for the rest of the year and estimates it will trade at P52 to P53 to the US dollar; it may even depreciate slightly due to the BSP’s reduction in RRR and measures to rebuild its gross international reserves. While the peso rallied against the US dollar in June, First Metro’s analysts see this as temporary, with fundamentals, including the weakness in the US dollar, all contributing to a negative currency outlook in the second half of 2019.

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