The Market Call




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.










Foreign direct investments skyrocketed by 68% in September, while exports continued its positive run into September. To help achieve faster growth, inflation eased to 3.3% in November. On the other hand, the equities market saw the initial signs of foreign selling. But bond yields rise due to feeble demand in anticipation of the Fed policy rate hike in December and strong employment data in the US.



GDP growth of 6.9% in Q3 exceeds expectations, bolstered by infrastructure spending and exports, supported by high investor confidence as PSEi chalks up seven records since October. Public construction soared by 12.6% in Q3 growth, while exports of goods and services jump by 17.2%. OFW remittances in both US dollars and peso terms accelerated to 9.4% and 17.4%, respectively in August. Exports’ rise of 9.4% in August further domestic demand. Government bond yields fell in October, amid rise in the secondary market. PSEi maintains its 3rd place standing with YTD surge of 21.6% in October with high of 8,523 by November 6.



GDP to Expand by ≥ 6.5% in Q3 as domestic demand and external demand (exports) propel growth. Domestic demand will count on NG spending which in August soared over 10% for 4th successive month, and on consumer spending which banks on OFW peso remittances, already on 3rd month of above-12% gains. Exports — reflecting external demand — returned into the double-digit growth territory as advanced economies expand above expectations.



Philippine economy keeps fast growth pace, expanding by 6.5% in Q2, slightly faster than 6.4% in Q1, and the best in ASEAN.


  • National Government (NG) ramps up spending in Q2 and begins Q3 with infrastructure spending growing by 25% in July.
  • Investment expenditures still led domestic demand, albeit slightly slower than Q1.
  • Exports grew by another 20% to provide the needed added boost.
  • Manufacturing output gains remained robust, while the Services sector put a below-par uptick of only 6.1%



Faster NG Spending in June + Rise in Exports by 13.7% = Faster Q2 GDP.


  • NG spending (excluding interest payments) accelerated to 23.4% in June from 21.4% in May.
  • Capital goods imports bounce back by 20.1% in May after a minor slip in April.
  • Together with Industrial output up by 5.8% in May, domestic demand should improve from 5.9% in Q1.
  • A further boost should come from exports, which in May expanded by 13.7%.
  • The bond market showed a slowdown in demand, while the PSEi continued to rise.



Infra Spending Surge and Positive Data Signal Robust Growth in Q2, H2


  • Investment-led growth déjà vu as spending on Infrastructure & Capitals surged by 31.4% in May
  • Manufacturing kept a robust growth of 5.9% in April.
  • Exports provided the added boost with a 12.1% expansion in April.
  • Inflation slowed to a year low of 2.8% in June, enabling the Monetary Board to keep policy rates on hold.
  • Trading in the bond markets slowed but yields, especially at the short-end, fall.
  • The stock market continued its upward climb posting a 14.3% YTD growth in H1 as foreigners return.



The Philippine economy is expected to record a stronger growth in H1 and hit a 7% (or higher) full-year growth as robust investment spending continues and foreign direct investments perks up. Higher peso equivalent of the remittances and the slower inflation upticks should encourage more consumption. NG?s promise to accelerate infrastructure spending should shore up domestic demand. Moreover, the improved external demand should be a positive catalyst to GDP growth.



The economy is expected to achieve 7% or higher GDP growth in Q1 as solid recovery of agriculture (+4% to 5%) and double-digit expansion of exports add the needed boost for GDP to hit 7% or higher. Capital goods imports and construction spending should continue to lead robust investment spending. Continued vitality of manufacturing sector and consumer spending should shore up domestic demand. Inflation will likely remain around 3.4% to 3.5% until Q3, well within the BSP?s target range, due to falling food and crude oil prices.



The current account?s positive balance should hold with OFW remittances enough to cover balance of trade deficits. The economy should expand by 6.5% to 7% in Q1-2017 with exports providing the new boost to robust domestic demand. Strong consumer spending and sustained manufacturing sector activity will continue to propel domestic demand, bolstered by OFW remittances. Inflation should stabilize at 3.5% up to Q3, thanks to easing food prices and crude oil prices, reeling from abundant supply and more oil from shale.



Despite a high base in Q1-2016, we think GDP growth in Q1-2017 will exceed 6.5% as all indicators, except faster inflation, signal sturdy output expansion in the current quarter. With particularly robust manufacturing output gains in the last two months of 2016, capital goods imports should continue to post above-20% gain in Q1-2017. With bloated domestic demand and exports gaining ground, Q1 performance should again signal much vigor in the economy. While inflation breached 3% in February, we think it should stabilize just above it, as crude oil prices have shown limited upside, and food price inflation can slow down with the inflow of more rice imports. The exchange rate should remain above P50/$ for the rest of H1-2017. The U.S. economy and dollar?s bulging muscle shall continue to provide pressure on the peso.



With BSP?s Consumer Confidence index still in positive territory and better global economic outlook, the Philippine economy is on track along a 7% GDP growth path. The agricultural sector should rebound starting Q1-2017 and post modest growth for the year. Investment spending will continue to drive the economic expansion as capital goods are expected to register double-digit gains for most of 2017. Manufacturing sector, which together with another banner year for Constructions industry, should propel industrial output to a pace of 8% or better. We expect headline inflation to hit 3% and hover around it in H1 as crude oil prices have stabilized at current levels while food supply should improve with better agricultural performance and early rice imports. The outlook for H2 may be less sanguine if the proposed excise taxes on petroleum products become effective then. Given the solid gains of the US economy and slight improvement in the Eurozone, we expect exports growth to become positive, albeit at a low single-digit pace in H1. Despite a slight improvement in the external sector, we foresee continued depreciation pressure on the US/PHP rate in Q1 but at a milder pace than in H2-2016.



Latest economic data released by the government indicate that the Philippine economy is firmly on track along a 7% or higher growth path. The 2.1 M new jobs in 2016 will likely support the trend of 1.1 M Filipinos annually moving out of poverty between 2012 to 2015 into 2016 and beyond. This, together with higher peso value for OFW remittances, will ensure a solid base of 7% & above growth in consumer spending, which accounts for more than 70% of GDP. But investment spending should remain as the main growth driver, as we expect continued double-digit growth in capital goods imports, similar to the construction sector. The latter will be buoyed up by aggressive infrastructure spending by the government and private residential and commercial construction that have shown a recent pick-up. FDIs will resume to take a faster pace in 2017 as PH economic numbers continue to impress foreign investors, especially the Japanese, Chinese, Koreans, and Taiwanese. These Asian investors will offset any slowdown of U.S. and Eurozone investments (excluding UK) should they continue to focus on non-economic issues. Exports should register more positive gains in 2017 and thus contribute a little to economic growth. OFW remittances (in USD) growth should remain subdued at the 2% to 4% range, but peso-wise, the peso?s expected depreciation should help these remittances to provide additional stimulus to the economy. Finally, while there may be periods of peso appreciation, the overall trend of a depreciation will likely continue in 2017, albeit at a slower pace than 2016. The U.S. economy will continue to improve slowly but surely as we?ve seen positive data consistently in the past quarter.









With global economy improving slightly to a 3.4% growth in 2017 from 3.1% expected for 2016 according to the International Monetary Fund's (IMF) projections as of October 2016, the external environment appears less daunting and encourages us to be more optimistic for 2017. Domestic demand may slow down only slightly in Q4 as investments continue its energetic run, while consumer spending should maintain its above-7% growth path considering that the employment situation has improved in Q3 while OFW remittances in both US$ and peso terms should provide robust purchasing power to households. Capital goods spending, as a result of the sustained gains in manufacturing output, shall continue to lead growth with an expansion of close to 15% in Q4.