Trade spat dragged financial markets in Q1

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By Matthew Miguel L. Castillo

TARIFFS imposed by United States President Donald J. Trump, along with uncertain trade and fiscal policies, drove the local financial market’s movement in the first quarter of 2025, analysts said.

These factors are expected to persist in the second quarter as well, the central bank said.

The Philippine Stock Exchange index (PSEi), the barometer for the country’s stock market, closed at 6,180.72 in the first quarter, declining 10.5% from 6,903.53 a year earlier.

Meanwhile, data from the Bankers Association of the Philippines showed the peso closed at P57.21 against the dollar in the January-to-March period, weakening by 1.7% from P56.24 a year earlier.

At the secondary bond market, domestic yields fell by an average of 3.59 basis points (bps) annually based on the PHP Bloomberg Valuation (BVAL) Service Reference Rates posted on the Philippine Dealing System’s website as of end-March.

TRADE WAR WOES
Analysts attributed that US trade policies have been the primary catalyst of the domestic market movements during the period.

Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics, said that there was a lot of uncertainty in the global markets due to Mr. Trump’s unclear intentions on global tariffs.

This uncertainty, he added, will likely persist in the second quarter, “as uncertainty of the postponed and more punitive ‘reciprocal’ tariffs continues amid their 90-day pause.”

Metropolitan Bank & Trust Co. (Metrobank) Chief Economist Nicholas Antonio T. Mapa said that Mr. Trump’s stance on “US exceptionalism” was already expected by markets which drove their sentiment in the direction during the period.

For Reinielle Matt M. Erece, an economist at Oikonomia Advisory and Research, Inc., global financial markets were attentive to Mr. Trump’s plans and policies, similar with the fourth quarter.

Additionally, he said that new policies, especially on tariffs and taxes, will impact trade and interest rates. He added that gradual economic growth dragged domestic markets as growth expectations turned pessimistic.

Meanwhile, for Sun Life Investment Management and Trust Corp. economist Patrick M. Ella, Mr. Trump’s moves on trade seen in the last quarter “came worse than expected” from speculations held for his administration last year.

Early in February, Mr. Trump has signaled his plans to announce reciprocal tariffs on many countries, with the intent to reshape global trade relationships in favor of the US.

By April, Mr. Trump implemented a 10% blanket tariffs on all its trading partners. However, the plan to impose higher reciprocal tariffs on certain countries was paused for 90 days or until July.

Mr. Trump slapped a 17% reciprocal tariff in the Philippines, the second lowest among Association of Southeast Asian Nations member countries trailing behind Singapore’s baseline rate of 10%.

The Philippine economy grew by 5.4% in the first quarter, official government data showed, falling short of the 6%-8% target of the government for 2025.

The expansion was driven by government spending climbing to 18.7% and private consumption, which accounts for 70% of the national economy, picking up by 5.3%.

State spending was fueled by the government frontloading infrastructure spending before the 45-day election ban which started on late March while the growth in household spending was due to easing inflation.

For the Bangko Sentral ng Pilipinas (BSP), uncertainty surrounding US trade and fiscal policies, coupled with their perceived impact on the global economy, dragged the prices of local bonds, equities, and foreign exchange (FX) markets during the period.

However, it added that positive investor sentiment fueled by easing domestic inflation and heightened expectations of a policy interest rate reduction tempered the downturn in the domestic market.

Latest government data showed that in March, inflation eased by 1.8%, the slowest in almost five years since the 1.6% posted in May 2020.

This brought inflation to average 2.2% in the first quarter, settling within BSP’s target of 2-4%.

BSP RESUMES EASING CYCLE
On the other hand, the central bank has slashed key rates by a total of 100 bps since it began its easing cycle in August last year.

During its first policy meeting in February, the central bank held interest rates steady at 5.75%. But in its April meeting, the BSP cut borrowing costs by 25 bps, resuming its easing cycle.

Policy rate cuts are implemented by central banks to stimulate productivity and growth as lower rates allow for more spending in the economy when the threat of inflation is low.

For Pantheon’s Mr. Chanco, he said that it is still early to determine what implications the rate cuts have had on financial markets as it takes time for these rate cuts to translate into stronger real economic activity.

“Monetary policy in the Philippines remains very tight despite the cuts pursued to date. This is still very much reflected in business surveys who still see credit access and high interest rates as a material constraint,” Mr. Chanco said.

Meanwhile, Metrobank’s Mr. Mapa, rate cuts are designed to bolster growth through the credit channel, as monetary easing is expected to fire up modest capital formation.

Mr. Erece, on the other hand, expects monetary policy will be further relaxed this year but cautioned that even though there are foreign exchange risks looms with a dovish BSP and a hawkish US Federal Reserve, the underwhelming growth and employment indicators in the country highlight the need for expansionary fiscal and monetary measures.

“Rate cuts can spur growth through higher activity in lending. Furthermore, interest rates set by the central bank and bond yields follow a similar trend,” he explained.

He also noted that monetary policy can serve as benchmark of expectations on the economy as rate cuts signal confidence that inflation is managed and money can be “cheaper” again.

WHAT MARKET TRENDS SHOULD BE MONITORED
“Given a more manageable inflation outlook and emerging risks to growth, the BSP saw scope to further reduce the policy interest rate in April. The continued monetary policy easing cycle will help sustain domestic economic activity amid risks of a global slowdown,” the central bank said.

The BSP recognizes that tariffs and other policies in advanced economies could hinder global growth, which may pose downside risks to the local economy, it added.

It further explained that even though the country is relatively insulated from the tariff wars due to its limited exposure to the US, factors such as potential supply chain disruptions, weak global demand, and subdued investor sentiment could impact domestic growth.

“A more accommodative monetary policy stance should enable banks to allocate additional funds toward more productive uses, such as loans and investments,” the BSP said.

Additionally, it will continue to take a measured approach to monetary easing.

For Mr. Chanco, he believes that there is still a general under-appreciation of how sluggish economic growth is in the country regarding domestic demand.

“Markets may also favor the likes of the Philippines this year because its domestic demand driven economy is much less exposed to further flare-ups in global trade tensions,” he added.

Monetary policy easing may lead to increased capital expenditures by firms as borrowing costs decrease, which could result in higher consumer spending, Mr. Erece said.

“Monetary policy easing is something that the equities market monitor and rate cuts seem to be good news for the market,” he advised, adding that developments that include tariffs, trade conflicts, and political talks, should be monitored as well.

FIXED-INCOME MARKET
Mr. Chanco: Government bond yields probably have further room to fall from our vantage point, as more rate cuts are likely to be priced-in, with the Monetary Board likely to see more space for easing.

Mr. Erece: Bond yields may continue to slip especially on shorter tenors, especially as growth expectations and interest rate cuts continue while longer tenors may see higher yields again.

Mr. Mapa: BSP easing should support with investors also keeping an eye on [Bureau of the Treasury] issuance volume and timing.

EQUITIES
Mr. Erece: Strong earnings for most industries can boost confidence with the growth potential of publicly listed corporations. Rate cuts may be a sign of faster economic activity. Furthermore, rate cuts can also increase market premium, thus making equities more attractive.

Mr. Chanco: Equities will probably continue to recoup some of their [first quarter] losses, as long as the news on US trade talks with a host of countries continues to show forward progress before the end of the 90-day pause.

Mr. Ella: [They may move] sideways for the quarter.

FOREIGN EXCHANGE MARKET
Mr. Erece: A dovish BSP with a hawkish Fed may cause the peso to depreciate this year. Although the peso experienced an appreciation rally last March to April, this was mainly caused by the fall of the USD as seen by the [US Dollar Index].

Mr. Chanco: [The peso’s] recent strong run against the US dollar looks overdone, so I expect to see some downward retracement in the remaining weeks of the [second quarter].