DOMESTIC FINANCIAL MARKETS rebounded for the most part in the third quarter as the gradual easing of quarantine restrictions, waves of positive news on the development of potential coronavirus disease 2019 (COVID-19) vaccine trials, and slight pickup in the global economic activity lifted investor sentiment at home.
In the third quarter, the peso averaged P48.94 against the dollar, appreciating three percent from the previous quarter’s average of P50.45:$1, Bangko Sentral ng Pilipinas (BSP) data showed. Likewise, the local unit appreciated by 5.4% compared with the P51.74-to-a-dollar average seen in the third quarter of 2019.
At home, bond auctions conducted in the third quarter indicated robust demand. Treasury-bill (T-bill) auctions conducted in the July to September period saw total subscription for the quarter amounting to around P970.48 billion, which is around 3.3 times the P298-billion aggregate offered amount. This oversubscription amount of P672.48 billion, however, was lower compared with the P1-trillion oversubscription posted in the previous quarter.
Similarly, Treasury-bond (T-bond) auctions during the period had a total subscription amount of P293.83 billion, almost twice more than the offered amount of P150 billion.
The Treasury also offered five-year retail Treasury bonds during the quarter, which raised P516.3 billion with a coupon rate of 2.625%.
In the secondary bond market, domestic yields were higher by a range of 10.8 basis points (bps) for the three-year T-bonds to 33.3 bps for the 20-year T-bonds compared with end-June levels. On the other hand, yields for the three-month, six-month, one-year, two-year papers were lower by 73.8 bps, 42 bps, 31.6 bps, and 5.1 bps, respectively. On average, yields were lower by 1.6 bps during the reference period, according to the PHP Bloomberg Valuation Service Reference Rates published on the Philippine Dealing System’s website.
For equities, the benchmark Philippine Stock Exchange index (PSEi) closed at 5,864.23 on Sept. 30, 5.5% lower compared with the PSEi close of 6,207.72 on June 30. Despite this, the third-quarter average of 5,992.8 was 2.6% higher than the second-quarter average of 5,839.2.
In an e-mail to BusinessWorld, the Bangko Sentral ng Pilipinas (BSP) attributed movements in market activity to several factors that include, among others, the gradual easing of quarantine restrictions; the increasing reports of probable vaccines from the US, China, and Russia; and the substantial monetary stimulus by the central bank coupled with the recent passage of Republic Act No. 11494 or the Bayanihan to Recover as One Act (Bayanihan II).
“In [the third quarter], both public and private sectors took advantage of the ample liquidity in the domestic bond market. The increase in government issuances reflected the continuous need of the National Government (NG) to counter the impact of the coronavirus disease 2019 (COVID-19) pandemic in the country. The NG took advantage of ample domestic liquidity coming, in part, from the enhanced liquidity measures implemented by the BSP during the quarter,” the BSP said.
“Meanwhile, local firms opted to tap the bond market as an alternative funding option amid the tightened lending requirements of banks as they manage their capital and non-performing loans,” the central bank added.
The government gradually lifted lockdown restrictions starting June, although Metro Manila and nearby areas returned to a strict lockdown for two weeks in August to curb the rise in COVID-19 cases.
Signed into law on Sept. 11, Bayanihan II aims to help affected sectors recover from the pandemic through relief measures and programs up until it expires on Dec. 19. It allocated P140 billion to aid heavily affected sectors and another P25.5 billion in standby funds in case there is excess revenue for other programs. This is a follow up to the first Bayanihan law (Bayanihan to Heal as One Act) signed last March 24, which granted President Rodrigo R. Duterte special powers to realign the funders under the 2019 and 2020 national budgets to COVID-19 measures until June 24 when the law expired.
On the other hand, the BSP also noted the worsening trade tensions between US and China, the uncertainty over the proposed US stimulus plan, renewed COVID-19 lockdown measures in Europe, and the mostly pessimistic view among US Federal Reserve officials about the US economic recovery through dovish statements that rates will stay low until 2023 as among the factors that “partly tempered” gains in the market, particularly on equities.
WHAT INDICATORS TO WATCH OUT FOR
Given the flurry of developments at home and abroad, BusinessWorld asked the analysts on what indicators should investors keep tabs on.
“Indicators worth watching as we move forward will be consumer sentiment and mobility indices as these go hand-in-hand; better mobility will mean the improved ability for households to consume and this is 70% of the GDP,” said Security Bank Corp. Chief Economist Robert Dan J. Roces.
“The manufacturing PMI (purchasing managers index) will also be important to track to see how both local and international orders are affecting the sector. Foreign exchange levels, if it depreciates, means higher demand for the US dollar and likely indicative of better exports as well. Government spending data will also be important to let us see the extent of the complementary fiscal response to recent monetary actions,” Mr. Roces added.
For UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion, a major development to consider would be the transition of the US presidency and COVID-19 vaccine developments.
“Domestically, the control of the virus spread is a major indicator that all investors should be watching out for. A possibility of another round of fiscal stimulus would also be something that one should be keen about,” Mr. Asuncion said.
Rizal Commercial Banking Corp. (RCBC) Economist Michael L. Ricafort looks at vaccine developments, the further easing in monetary policy and in new COVID-19 cases, and the progress on the passage of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act and the Financial Institutions Strategic Transfer (FIST) Act as part of the government’s recovery program.
To recall, CREATE looks to cut corporate income tax to 25% and streamline the tax incentive system, while FIST looks to allow financial institutions to offload bad loans to asset management companies.
ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa looks at the likelihood of procuring the COVID-19 vaccines and further fiscal stimulus.
“I am, however, not very optimistic on either as the Philippines is not just negotiating with pharmaceutical companies when most other peers have safely secured their doses. More troubling, the vaccine czar indicated that vaccine rollout may take as long as three to five years, which would dent consumer confidence in the medium term. Lastly, fiscal stimulus has largely been absent in 2020 and should this persist, we run the risk of posting sub-par growth numbers while debt piles up, a potentially dangerous place in terms of credit ratings downgrade territory,” Mr. Mapa explained.
ECONOMIC RECOVERY (?)
Latest government data show economic output declining by 11.5% in the third quarter, bringing the total contraction in GDP for the three quarters to 10%.
For Security Bank’s Mr. Roces, economic recovery “is still fraught with uncertainties.”
“The faster development of a vaccine provides some upsides. The path to a new normal, however, may be too early to tell at the moment,” he said.
UnionBank’s Mr. Asuncion expects a five-percent year-on-year decline in the fourth quarter, but looks at a positive quarter-on-quarter economic growth.
“With the economy continuously opening up and the government’s push to recoil restrictions to movement, the economy is expected to fare better,” Mr. Asuncion said.
RCBC’s Mr. Ricafort expects a better showing for the Philippine economy in the fourth quarter.
“Exports, foreign direct investments, and remittances data are bright spots for the economy, as these are back to pre-COVID-19 levels,” he said.
“Seasonal increase in consumer and business spending in preparation for the Christmas holidays would also help spur greater economic activities that would lead to some improvement in GDP data for the fourth quarter, with narrower contraction, at the very least. Faster rollout of the Bayanihan II funds would partly help stimulate more economic activities in the last three months of 2020,” Mr. Ricafort said.
On the other hand, ING Bank’s Mr. Mapa is not so optimistic.
“The downright lack of commensurate support from the fiscal authorities is glaring in comparison to our neighbors and we are paying the price as ASEAN (Association of Southeast Asian Nations) peers exit double-digit contractions while we are in the midst of our deep recession,” Mr. Mapa said.
“[The fourth quarter] will likely slide to an ever more severe drop in GDP on the lack of fiscal stimulus coupled with recent storm damages from a string of severe typhoons. That and the absence of the usual holiday cheer will mean [the fourth quarter] will be unfortunately less merry and bright with our forecast pointing to the [first quarter of 2021] still being negative. The freefall in capital goods imports, meanwhile, signal that a recovery cannot be counted on even in the medium term as our productive capacity quickly fades,” he added.
With these in mind, see the BSP’s and analysts’ outlook for each of the key markets. — Lourdes O. Pilar
FIXED INCOME MARKET
BSP: We expect the bond market to function properly following the liquidity-enhancing measures deployed by the BSP such as the purchases of government securities from the National Government under repurchase agreement and from banks in the secondary market. As a result, robust demand across all tenors should be seen as the market remains liquid.
Security Bank’s Mr. Roces: We expect yields to slowly retrace pre-pandemic levels on the back of more borrowing to fund pandemic expenses.
UnionBank’s Mr. Asuncion: There will definitely be portfolio realignments moving forward, anticipating a strong economic recovery (better than 2020, of course) in 2021. This year, high market liquidity has market players preferring short-tenor assets, and this is expected to continue with potential further monetary policy easing by the BSP early next year. According to BSP Deputy Gov. [Francisco G. Dakila, Jr.], BSP’s policy rate is “nowhere close to zero,” while its reserve requirement ratio remains high relative to its peers. While we concur with this assessment, the timing for another round of rate easing will be in [the first half of 2021] when updated GDP news (and other indicators) will still show recovery prospects stuck in low gear or struggling to emerge out of negative territory.
RCBC’s Mr. Ricafort: Relatively benign inflation and the continued huge excess liquidity in the financial system would still support the low interest rate environment. However, this is offset by further recovery in both the local and global economy that would lead to some healthy upward correction in local bond interest rate benchmarks (PHP BVAL yields) from unusually low levels, already up recently by about 0.30-0.60 from record lows.
Upward correction in US/global bond yields from record lows posted in July-August 2020 amid improvement in economic data and the need to issue more bonds to partly finance record stimulus measures would be a risk factor in terms of lower bond prices from record highs. As an offsetting factor, excess liquidity in the financial system would temper any further upward correction in bond yields.
Expect less supply from the BTr and the gradual lifting of support from BSP. A pickup in inflation coupled with sustained dovish comments from BSP Governor Benjamin E. Diokno may cause the yield curve to steepen.
BSP: Over the near term, the Philippine equities market may be expected to improve further, reflecting the recovery of business activities, and improved investor sentiment given the expected availability of two coronavirus vaccines [referring to Germany’s Pfizer and US’s Moderna reporting positive developments over experimental candidates]. This should result in the continued reopening of the Philippine economy, and which, accompanied by substantial policy support from the fiscal and monetary authorities, could lift further the expectation of a strong economic recovery and sustain investors’ buying momentum.
Security Bank’s Mr. Roces: Economic recovery, better corporate earnings next year, and a vaccine distribution in [the second half of 2021] to drive the market.
UnionBank’s Mr. Asuncion: The PSEi will continue to be highly dependent on offshore developments and will continue to keep an eye on the status of the COVID-19 spread. We may see slight corrections toward the end of 2020 and a better 2021 probably staying above the 7,000-level. As the economic growth becomes better, corporate incomes will be more positive, resulting in a higher PSEi level.
RCBC’s Mr. Ricafort: Near record-low interest rates locally and in many other countries around the world would prompt some investors to search for higher returns in the equity markets, especially for those with the risk appetite/tolerance for riskier asset classes.
Lingering excess liquidity in the financial system would also support some liquidity-driven gains in the financial markets such as in the equity markets, especially as global market risk appetite improves with the recovery in economic data. Measures to further re-open the economy would fundamentally support further pick-up in economic activities and investment valuations.
ING Bank’s Mr. Mapa: We expect bouts of weakness tied to souring sentiment, should Philippine GDP lag regional peers and we expect the Philippines to lag the rest of ASEAN in a big way.
FOREIGN EXCHANGE MARKET
BSP: The peso will continue to be supported by fundamentals in the long run. Amid the pandemic, the peso-dollar market has generally remained stable in line with the country’s economic fundamentals (i.e., a manageable inflation environment, a strong and resilient banking system, and a prudent fiscal position). Based on BSP estimates, the peso is currently fairly valued and, in the long run, will continue to be supported by the said fundamentals even as the market, at times, will reflect short-term investor sentiment and external factors.
Security Bank’s Mr. Roces: Peso may depreciate on the wider trade deficit and lengthy negative real interest rates. Vaccine prospects will also rejuvenate economic activity worldwide and may cause some disinterest in peso assets.
UnionBank’s Mr. Asuncion: Trade is the anchor of US dollar-Philippine peso prices as we have seen in recent years. In 2020, imports collapsed and the peso continued to strengthen because of a smaller trade surplus (due to weaker imports)… In 2021, the US dollar may be weaker because of the expectation of a smooth US presidential transition and a waning coronavirus outbreak as the new administration deals with the pandemic. Thus, this adds pressure to a stronger peso, but a strong economic recovery of the country may prop the peso to be weaker. Overall, we expect the peso to breach the P50-level in 2021.
RCBC’s Mr. Ricafort: Much of the peso exchange rate’s strength… has been due to slower demand for imports since the COVID-19 lockdowns… Going forward, any further recovery in the local economy could correspondingly lead to faster demand for imports and the US dollars needed to pay for imports.
ING Bank’s Mr. Mapa: Likely still on an appreciation trend in the near term as imports remain soft as the economy is running wounded. A weak dollar scenario would mean a relatively strong peso until import demand returns.