The Market Call




National Government’s (NG) decision to impose and extend Enhanced Community Quarantine (ECQ) for Luzon due to the fast spread of COVID-19 had the unintended consequence of knocking down the economy and the stock market. After all, Luzon’s accounted for 72.9% of GDP in 2018. Earlier optimism for a V-recovery has dissipated as supply chains, both domestic and international, got disrupted. Only the bond market showed brisk activity as bond yields fell back to pre-COVID crisis levels thanks to liquidity provided by BSP [via RRR and policy rate cuts] and National Government (NG) deficit spending to ensure safety nets for low-income families. We expect a robust recovery in H2 led by government’s strengthened infrastructure spending and weak inflation.



COVID-19 has morphed into a pandemic that has reached more than 100 countries by mid-March. Global and PH GDP growth will slow down significantly in Q1 as governments have taken more draconian measures and global supply chains have fractured. Lower inflation, a big BSP policy rate cut and acceleration of infrastructure and government spending should soften the blow. But while we feel more optimistic for H2, this may vanish if the virus’s spread and death toll do not significantly ease. Morbid fear and hysteria have driven investors to turn to cash rather than coldly stick to a risk-return approach.



Suddenly, it’s all about the new 2019 coronavirus (COVID-19) inflicting harm on the global economy and the financial markets. We expect it to slash PH tourism and Q1 GDP growth. But assuming that it ends in the summer like SARS, we see the economy roaring back starting Q2. Ramped up infrastructure and expansive private construction and consumer spending should lead domestic demand back into the driver seat. Renewed global economic slowdown which will drag down foreign interest rates, together with more favorable domestic developments easing inflation and another 25 bps cut in policy rates make bonds especially attractive in H1. However, the negative sentiment it has stirred, coupled with regulatory uncertainties, bodes ill for the PSEi for the same period. We do expect robust GDP rebound and strong corporate earnings.



We foresee renewed fast growth of 6.2% to 6.6% for the Philippine economy in 2020 as Q4-2019 GDP growth accelerated to 6.4% from 6% a quarter ago. The faster pace will likely spill over to the entire 2020 with similar drivers as in Q4-2019—NG operational and capital spending as well as solid consumer spending given the robust job gains in in the last three quarters of 2019. With NG P4.1-T budget already approved, infrastructure spending may soar by 34.6% as planned. Bond markets look attractive in H1 while the equities market will deliver once the fears of a global pandemic from coronavirus fade. However, a much stronger eruption of Taal volcano and prolonged spread of the novel corona virus could slow the economy slightly, but negative investor sentiment from it may delay PSEi’s recovery.










The overall outlook has turned rosier. At the macro level, huge employment gains in 2019 and the rapid decline in poverty rates from 2015 to 2018, plus low inflation rates (well within targets), renewed vigor in infrastructure spending, and robust OFW remittances should spur above-average consumer spending growth. Meanwhile, bond investors took a more cautious stance in November which showed tenders in auctions and volumes in secondary markets tumble, albeit with little effect on yields. The equity market proved resilient to the foreign selling (due to MSCI-EM rebalancing) and a more solid, consolidated base should provide a good springboard for PSEi’s upward thrust in 2020.



Vindicated for our view of a strong economic recovery starting H2, we see it at even a faster pace in Q4 and into 2020 than the 6.2% GDP growth recorded in Q3-2019. Lowest poverty rates (SWS) and low inflation should keep consumer spending at a quickened pace. Infrastructure spending will benefit not only from the 34.5% jump in NG budget for it but also from reactivation of Public-Private Partnership (PPP) into the Build, Build, Build (BBB) program of the administration. Resulting muscular domestic demand should offset external demand weakness, if any.



We see GDP growth accelerating to 6% in Q3 and faster in Q4, as domestic demand revs up further. With inflation holding below the 2% BSP floor in H2, and huge employment gains (supported by 2nd lowest self-rated poverty rate of 42% in Q3 as estimated by SWS), consumer spending shall show even more robust growth. Significantly lower interest rates from last year and NG catching up on infrastructure spending in H2 should drive investment spending higher. The two together and a neutral external account support our view. However, financial markets seemed unfriendly in September, although we see a likely rebound in the bond market in Q4, while the stock market outlook remains iffy.



We are bullish on the economic growth and inflation fronts. We expect Philippine growth to expand by 6.0% in Q3 and accelerate further to 6.5% in Q4 on the back of formidable new job creation by July 2019, inflation falling to 1.7% in August on track to go sub-1.5% by September and signs of resurgence in National Government (NG) spending to boost domestic demand starting Q3. We remain optimistic about the bond markets, but neutral on the equity market.



Despite PH inflation continuing to tumble to a 31-month low of 2.4% in July, and exports growth slightly positive for entire Q1, GDP growth in Q2 remained feeble at 5.5% only a tad slower than Q1. This resulted from a sizeable fall in National Government (NG) spending (esp. on infrastructure) in June and April, and in capital goods spending as well as weak agriculture output gains. This put an added downward push to equity prices, but the opposite, positive effect on bonds. Trading in the latter reached a 55-month high of P767.7-B led a plunge in yields for all tenors, especially at the short end.



June didn’t bring in strong rains, but rather more positive signs of economic recovery. These included: the plunge of inflation to 2.7%, the rally in National Government (NG) spending in May (up 8.9%, excluding interest payments), exports growth remaining in the black for the second month in a row, and more leeway for the Bangko Sentral ng Pilipinas (BSP) to further cut policy rates and reserve requirements ratio (RRR) with M3 meekly rising by 6.4% in May. The peso appreciated by 0.9% as the balance of trade deficit narrowed. These and the prospect of continuing lower interests in the US, fueled more optimism that spilled into the bond and stock markets by early July.



Key developments in May include the cut in Bangko Sentral ng Pilipinas (BSP) policy rate and in reserve requirement (100 bps) effective end of May, and commitment of the Finance Secretary to ramp up government spending with the April 15 approval of the 2019 National Government (NG) budget. NG has devised a catch up plan, especially for infrastructure spending to reach 5.2% of GDP for the year. The rise in inflation rate to 3.2% in May from 3.0% a month ago appears temporary and we expect it to fall below 3% by June and onward to below 2.0% by September.



The economy expanded only by 5.6% in Q1, due to the delayed approval of 2019 National Government (NG) budget resulting in slower infrastructure spending (-8.6%) and a larger current account deficit (which alone cut growth by almost 0.7% points). However, consumer spending gained a lot, with lower inflation and widespread election spending. Bangko Sentral ng Pilipinas’ (BSP) policy rate cut by 25 bps and reserve requirement ratio cut by 200 bps (phased from end May to end-July) should support a strong recovery starting Q2. The bond markets will likely fully benefit from the cuts more by July. The stock market, which managed to eke out a slight 0.4% rise, may have to wait until after the “ghost month” to break away from its trading range.



Encouraging economic data in March, i.e., further slump in inflation, ramped up spending by the National Government (NG) in February, and unabated gains in OFW remittances, keep us upbeat for Q1 GDP growth. Besides, weak money growth and the easing of inflation allow the Bangko Sentral ng Pilipinas (BSP) to cut reserve requirements (RRR) in Q2. Slower inflation sparked secondary bond trading to a 4-year high, but failed to thrust the equities market beyond its trading range.



The unabated easing of inflation to 3.8% in February and unemployment rate down to 5.2% in January 2019 showed the bright spots in the economy, while Overseas Filipino Workers (OFW) remittances in December and FY 2018 reached record levels. The dampeners included the declines in capital goods imports, exports, manufacturing, and weaker money growth in January. These had mixed effects on the financial markets. Demand for long-term T-bonds pulled yields down, while the PSEi dropped in February as foreign investors began to exit.



The Philippine economy expanded by 6.2% in 2018, marking the 7th consecutive year of above-6% growth, albeit slower than the 6.7% pace in 2017. Higher inflation due to a sharp rise in crude oil prices in the first 10 months of the year and delayed imports of rice put brakes on consumer spending. The best news is that inflation is rapidly falling, to 4.4% in January, as oil prices remained some 30% below its 2018 peak. Other positive reports include OFW remittances still on the rise, and the peso stabilizing. Investors in the capital market had plenty of cheers with the onset of 2019, as bond yields fell while the PSEi rose by 7.3% in January, 3rd fastest in East Asia + Asean regions.



Sharply falling inflation rate to 5.1% in December (and expected to hit BSP targets by Q1-2019), and a vigorous 43.6% gain in Infrastructure and Capital Outlays spending in November set the tone for other positive economic news released in early January. Exports stayed flat while OFW remittances continued to pile up in November. Even more encouraging data emerged in December for those economic indicators. While investors remained cautious in December, optimism reigned supreme at the onset of 2019 in both the bond and stock markets, despite a lower-than-expected GDP growth of 6.2% for 2018.