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K-Shaped recovery comes to emerging markets as rich get richer

Look no further than emerging markets for evidence that the K-shaped recovery is taking hold.

Stocks and currencies from wealthier developing nations are outperforming their poorer peers amid the coronavirus outbreak, magnifying the gap between the “haves” and “have-nots” of the global economy. The gulf may even get wider if the pandemic leads to deeper recessions in less wealthy nations due to their lower capacity for containing the virus.

A Bloomberg study of 17 emerging markets (EM) has found a 42% correlation between gross domestic product per capita and stock performance since the virus-fueled risk sell-off began on Jan. 20 until early this week. The correlation between GDP per capita and currency returns was 31%.

As long as the virus lasts the K-shaped divergence will continue, said Rob Subbaraman, global head of macro research at Nomura Holdings Inc. in Singapore. “In the EM world with rapidly rising debt and deep recessions, the cost of servicing debt is going to get more burdensome and we cannot rule out some financial crises or major debt restructuring.”

Wealthier emerging markets have been better placed to rebound from the March sell-off due to more advanced technology and governance that have given them greater flexibility to respond to the pandemic. They have been able to limit the impact of lockdowns and social distancing, make larger fiscal responses, and are better equipped with the resources needed to curb the outbreak, such as hospitals, test centers, and quarantine facilities.

Countries such as South Korea and Poland have seen the smallest increase in economic disruptions, according to an effective lockdown index compiled by Goldman Sachs Group Inc. The gauge takes into account a combination of government restrictions that suppress activity and adds social distancing numbers based on Google mobility data. There has been a negative correlation of 54% between Goldman’s gauges and per capita GDP. In turn, countries with the lowest lockdown index have tended to see the best stock market and currency performance.

WIDEST IN ASIA

The rich-poor divide among emerging markets is widest in Asia. The stock returns from the four economies with per capita GDP above $10,000 last year—China, South Korea, Taiwan, and Malaysia—has been 20% above that of the nations which fall below that level, including India, Indonesia, the Philippines, and Thailand. While this is partly due to the number of technology companies listed in the former countries, it is also due to the fact that authorities there have been able to spend more to reassure citizens and investors.

South Korea’s fiscal response to the pandemic, including three supplementary budgets, totals 270 trillion won ($228 billion), or about 14% of GDP, providing support to the stock market even as the local outbreak has worsened. In contrast, the Philippine government has said it’s unable to fund the 1.3 trillion pesos ($27 billion) stimulus package approved in June. The nation’s stock market is the region’s worst performer this year, dropping more than 25%.

Looking ahead, lower rates of infection, greater policy space, and stronger health services may help more affluent countries maintain their lead in the economic recovery.

Richer emerging economies are likely to gain access to effective coronavirus vaccines sooner, following the steps of wealthy developed nations. There is even a risk bigger economies will monopolize supply, a scenario that played out in the 2009 swine flu pandemic.

“Not many emerging markets have access to cutting-edge technology, and they will continue to struggle,” said Tsutomu Soma, a bond trader at Monex Inc. in Tokyo. “We will continue to see the divergence in developed and emerging markets going forward.” — Bloomberg

Note: Simon Flint is an emerging-market strategist at Bloomberg News. The observations he makes are his own and not intended as investment advice.

Unemployment hits 10% in July

LATEST official labor data showed a decline in the country’s unemployment and underemployment rates in July compared to April, but were higher when compared to July of last year.

Preliminary results of the Philippine Statistics Authority’s July 2020 round of the Labor Force Survey (LFS) put the unemployment rate at 10% versus 17.7% in April 2020 and 5.4% in July 2019.

This is equivalent to 4.571 million jobless Filipinos, lower than 7.254 million in April, but higher than 2.437 million in July last year.

Likewise, the underemployment rate — the proportion of those already working, but still looking for more work or longer working hours — was 17.3%, down from 18.9% in April but higher than 13.6% in July 2019.

In absolute terms, underemployed Filipinos numbered 7.137 million, higher than 6.388 million and 5.799 million in April 2020 and July 2019, respectively.

The size of the labor force was approximately 45.877 million out of the 74.061 million Filipinos aged at least 15 years old, yielding a labor force participation rate (LFPR) of 61.9%. This was higher than the 55.6% in April, but lower than 62.1% in the same survey round last year.

The employment rate, which is the proportion of the employed to the total labor force, registered at 90%. This was higher than the 82.3% in the previous survey round, but lower than last year’s 94.6%. The actual number of employed Filipinos reached 41.306 million as compared to April’s 33.764 million and July 2019’s 42.521 million. — Michelle Anne P. Soliman

Nationwide round-up

New police chief to focus on drug trade high-value targets

THE NEW police chief, Lt. Gen. Camilo P. Cascolan, will be focusing on the capture and filing of charges against big-time drug dealers. “We will see to it that we will build up cases most especially against high-value individuals,” he said in an interview over Teleradyo on Wednesday, his first day as head of the Philippine National Police (PNP). Mr. Cascolan also acknowledged that street pushers and users, who have been the main casualties in the government’s controversial anti-drug campaign, should not be killed and instead be tapped as leads to the drug trade’s main players. He is one of the authors of Oplan Double Barrel, which became the PNP’s flagship program in the anti-drugs campaign. Previously designated as the PNP’s deputy chief for administration, Mr. Cascolan is due to leave the service on Nov. 10 upon reaching the mandatory retirement age of 56. With just two months at the top post, he said he still aims to institute lasting changes with the ongoing “cleansing” program for the 209,000-strong police force. — Emmanuel Tupas/PHILSTAR and Gillian M. Cortez

Ban on transfer of inmates to jails extended

THE SUSPENSION on the transfer of inmates to jails has been extended to September 30, the Office of the Court Administrator announced Wednesday. In a circular, Court Administrator Jose Midas P. Marquez ordered the continued ban on the issuance of commitment orders of inmates to prison units of the Bureau of Jail Management and Penology (BJMP) and the Bureau of Corrections (BuCor). The court administrator cited the different levels of community quarantine imposed around the country. The suspension on moving inmates to BJMP and BuCor units was first implemented in July to help prevent the spread of coronavirus, especially with most facilities operating at congested levels. The first circular was prompted by a request from Interior Secretary Eduardo M. Año and BuCor Director General Gerald Q. Bantag. President Rodrigo R. Duterte on Monday placed Metro Manila, the provinces of Bulacan and Batangas, and the cities of Tacloban and Bacolod under general community quarantine (GCQ) until September 30. The rest of the country is under the more relaxed modified GCQ except for Iligan City, which is under a stricter lockdown. The Supreme Court earlier issued guidelines addressing congestion in jails to prevent coronavirus outbreaks, including the release of indigent inmates through reduced bail or own recognizance. The court also allowed hearings through video teleconferencing while judges have been directed to release inmates who have served the minimum penalty of their sentence and those who have no witnesses for their cases. The Justice department also approved the rules that eased the requirements for the grant of parole and executive clemency to prisoners. — Vann Marlo M. Villegas

FDI net inflows bounce back in May

THE CENTRAL BANK sees net inflows of foreign direct investments to reach $4.1 billion this year. — REUTERS

FOREIGN INVESTMENTS into the Philippines jumped by 42% in May, reversing three months of decline due to the coronavirus pandemic’s impact on investor confidence, the central bank said on Wednesday.

Data from the Bangko Sentral ng Pilipinas (BSP) showed net inflows of foreign direct investments (FDI) rose to $399 million in May from $280 million a year ago. Inflows in May also improved by 28% from April’s $311 million.

Despite the rebound in May, year-to-date FDI inflows declined by a fourth to $2.379 billion from $3.196 billion a year ago.

“The stronger FDI performance during the month (of May) relative to the level last year was on account of the increase in nonresidents’ net investments in equity capital and debt instruments,” the BSP said in a statement.

In May, net investments in debt instruments climbed 40.8% year on year to $236 million, while reinvested earnings dropped by 23.7% to $85 million.

Equity other than reinvestment of earnings shot up to $738 million from $1 million last year. This as placements rose by 8.1% to $80 million while withdrawals plunged by 96% to $3 million.

During the month, placements came mainly from Japan, Singapore and the United States where restriction measures were gradually eased. The BSP said most investments went to the manufacturing, financial and insurance, and real estate industries.

Inflows to equity and investment fund shares also increased by 44.8% to $162 million year on year.

The BSP said FDI net inflows could reach $4.1 billion this year, more than half its $8.8-billion projection given last year.

In 2019, FDI net inflows fell by 23.1% to $7.647 billion as investor sentiment was weighed down by global uncertainty, regulatory risks and delays in the Philippines’ tax reform program.

The rebound in May amid the lockdown could be due to lagged effects of FDI entry in the country, said John Paolo R. Rivera, an economist from the Asian Institute of Management.

“This growth may be due to agreements and transactions already sealed maybe as early as 2019 which took effect only during this period,” Mr. Rivera said in a text message.

“Alternatively, the Philippines has alternative locations where FDIs are directed,” he said.

“Not all FDIs settled in COVID-19 hardly hit areas such as NCR (National Capital Region). The diversity of possibilities for an archipelagic economy like the Philippines might have been a factor for sustained FDI growth,” he added.

UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said the higher FDI inflows in May may could lift sentiment in the country as it grapples with the coronavirus crisis.

“Even if it were coming from a rather low base, the green sign is a welcome sign for an economy needing positive news, especially from domestic economic data,” Mr. Asuncion said in an e-mail.

Analysts said urgent policies will make or break the recovery track for FDI in the coming months as the COVID-19 pandemic weighs on investor sentiment.

Policy reforms that will be critical to FDI inflows include the passage of the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) bill and amendments to the Public Service Act (PSA), Mr. Asuncion said.

The first bill, which will slash income tax to 25% from 30% is pending at the Senate. Amendments to the PSA, which will lift foreign ownership restrictions in certain sectors is also being tackled by a Senate committee.

The Philippines’ ability to control the coronavirus pandemic will determine whether it can attract more FDI, Mr. Rivera said.

“Note also that other ASEAN countries are very successful in containing the pandemic — they are all potential destinations for FDIs,” he added.

On Wednesday, the Health department reported 2,218 new coronavirus infections, bringing the total to 226,440. The death toll has reached 3,623. — Luz Wendy T. Noble

Philippines leaps to 50th place in global innovation index

By Jenina P. Ibañez, Reporter

THE Philippines moved up four spots to 50th out of 131 economies on an annual list that measures their performance in innovation, becoming one of four Asian countries with the most significant progress.

The Global Innovation Index 2020, which is prepared by Cornell University, INSEAD, and the World Intellectual Property Organization, said the Philippines joined China, Vietnam, and India as countries that have shown the biggest improvement in ranking.

The Philippines reached its highest rank so far as it breaks into the top 50, after ranking 100th as recently as 2014. In 2019, the Philippines jumped 19 spots to 54th.

Philippines improves in global innovation index ranking

The country’s innovation input jumped six places to 70th, while its innovation output climbed one spot to 41st. The former measures institutions, human capital and research, infrastructure, as well as market and business sophistication. The latter measures knowledge, technology, and creative output.

The Philippines according to the report improved the most in market sophistication, ranking 86th. It placed higher in investments (85th), mostly due to improved ease of protecting minority investors (71st).

“At the sub-pillar level, strengths for the Philippines are in trade, competition, and market scale (20th), knowledge absorption (7th), and knowledge diffusion (8th),” it said.

“Other relative strengths include indicators utility models by origin (8th), productivity growth (6th), high-tech net exports (3rd), ICT services exports (8th), firms offering formal training (7th), creative goods exports (10th), e-participation (19th), and high-tech imports (1st).”

In terms of weaknesses, the Philippines ranked 104th in regulatory environment as the cost of redundancy dismissal puts the country at 113th.

Under market sophistication, the country’s credit was at 118th, with ease of getting credit at 113th.

Science and Technology Secretary Fortunato T. dela Peña, writing a chapter in the report, said the Philippines has been working to fund more projects outside Metro Manila.

He supported the Philippine Innovation Act, which will scale up education and research, as well as the Innovative Startup Act, which incentivizes businesses working on innovative entrepreneurship.

“The need to integrate policies and programs to propel innovation initiatives in the country should follow a whole-of-government approach,” he said.

The Department of Science and Technology (DoST) in February said it planned to improve the country’s ranking through research in  key agricultural sectors like coconut and livestock.

Mr. Dela Peña had said that the department would continue to provide research support for start-ups at the development stage.

The top 10 countries in the Global Innovation Index were: Switzerland, Sweden, the United States, United Kingdom, Netherlands, Denmark, Finland, Singapore, Germany and South Korea.

Other Southeast Asian countries on the list include Malaysia (33rd), Vietnam (42nd), Thailand (44th), Brunei (71st), Indonesia (85th) and Cambodia (110th).

Philippines improves in global innovation index ranking

THE Philippines moved up four spots to 50th out of 131 economies on an annual list that measures their performance in innovation, becoming one of four Asian countries with the most significant progress. Read the full story.

Philippines improves in global innovation index ranking

NG debt swells to P9.2 T

NATIONAL GOVERNMENT (NG) debt rose by 1.2% to P9.16 trillion as of end-July, as it borrowed more to finance its coronavirus disease 2019 (COVID-19) response and offset weak revenues amid the economic slowdown.

Data from the Bureau of the Treasury (BTr) on Wednesday showed the debt portfolio was 18.5% higher than its end-December 2019 level of P7.73 trillion.

About two-thirds of the debt was sourced domestically, while 32% came from external sources.

Outstanding domestic debt edged up 1.1% to P6.25 trillion from the end-June level of P6.19 trillion, as the government availed itself of more loans and issued more local government securities.

To date, domestic debt has risen by 22% or P1.1 trillion higher since the start of 2020.

Outstanding government securities issued inched up 1.1% to P5.955 trillion from July and 13.4% up year on year.

The external debt stock hit P2.908 trillion as of end-July, up 1.5% from P2.864 trillion in June and higher by 14% from a year ago.

The increase was largely due to more loans that month worth P64 billion, pushing the outstanding foreign loans by 4.9% to P1.226 trillion. The total was 26% higher year on year.

The BTr said the debt stock rose by P18.75 billion due to the appreciation of third-currency denominated external loans, which more than offset the P38.88 billion net effect of a stronger local currency.

The Treasury said the peso appreciated to P49.114 against the greenback at the end July from P49.79 a dollar in end June.

Between January and July, the government got P280 billion ($5.7 billion) in program loans from foreign lenders and P15.05 billion ($310 million) in project loans. Proceeds from these loans will be used for the government’s pandemic response and infrastructure program.

Offshore bond issuances have reached P1.682 trillion so far, down 0.8% from a month ago but still 6.3% higher year on year.

“The total NG guaranteed obligations decreased by P1.18 billion or 0.3% month-on-month to P458.83 billion in July.,” BTr said.

The lower level of guarantees was due to the net redemption of both local and external guarantees amounting to P0.33 billion and P0.42 billion, respectively,” it added.

The government plans to borrow P3 trillion this year to plug its budget deficit, seen to hit 9.6% of gross domestic product.

It plans to maintain a 74:26 borrowing mix in favor of domestic sources to mitigate external volatilities and shocks. — B.M.Laforga

BoC beats collection goal in August

THE Bureau of Customs (BoC) on Wednesday said it surpassed its reduced collection target by nearly a third in August, although year-to-date revenues were still down as import volume continued to be affected by strict lockdown measures.

Citing preliminary data, BoC said in a statement it collected P44.631 billion last month, exceeding its P33.675-billion target by P10.96 billion. This marked the third straight month the bureau exceeded its revenue goal, which was slashed amid an economic slowdown.

“The BoC’s positive revenue collection performance (against the monthly target) is attributed to the improved valuation and intensified collection efforts of all the ports,” it said.

However, the August collection was still 16.7% lower than the P53.59 billion posted in August 2019, based on separate data from the Bureau of the Treasury.

The decline was largely due to lower import volume, Vincent Philip C. Maronilla, assistant commissioner heading the Post Clearance Audit Group and the BoC’s spokesman, said in a Viber message.

“Although the volume is starting to increase, it’s still down compared with the same period last year,” he added, without providing details.

Customs said nine of the 17 collection districts — Tacloban, Zamboanga, Aparri, Limay, Clark, Cebu, Subic, Cagayan De Oro and Davao — exceeded their targets last month.

In the eight months to August, the bureau generated P347.636 billion, 3.95% higher than its P334.44-billion target for the period but still lower by 15.5% year on year.

The impact of the strict lockdown from mid-March to May on trade volume continued to hurt the bureau’s collections, according to Mr. Maronilla.

Official data showed merchandise imports dropped by 29% from a year ago to $39.03 billion in the first half.

“We are, however, confident we can recover the deficit in the next few months,” he added.

Customs must collect P506.15 billion for the full year 2020, 6.6% less than the previous goal of P542 billion and nearly a third lower than its pre-pandemic target of P730 billion.

Much of the country was placed under a strict lockdown from mid-March to May before quarantine rules were slowly eased starting June.

Metro Manila is now under a general community quarantine until Sept. 30. — Beatrice M. Laforga

Fruitas eyes more partners for store expansion

FRUITAS Holdings, Inc. targets to open more multi-product stores in 25 new locations by yearend as it partners with more food retailers.

In a statement on Wednesday, the food and beverage kiosk operator said it is trying to secure new locations for its store network expansion, and 10 new stores would open by end-September.

Fruitas in May said part of its strategy to cope with the coronavirus pandemic is opening free-standing stores that offer different products. The stores will carry the brands Babot’s Farm and Soy & Bean.

To support this plan, the company has been partnering with food retailers to carry their products or create its own brand.

It said it has partnered with Carmen’s Best Ice Cream and Malaysia’s Jim’s Recipe to carry their ice cream and sponge cake products in selected locations.

It is also working with a Chinese bakery in Manila to produce mooncake under Soy & Bean. Fruitas is building a new production facility for its soy products.

The company said it is looking to introduce branded nuts, coffee beans and cacao beans from Babot’s Farm. It is also planning a deal with a bakery.

“We have long-term confidence in the Philippine economy and like the Filipino in adversity, we will remain focused on building a better future,” Fruitas President and Chief Executive Officer Lester C. Yu said in the statement.

Since the start of the pandemic, Fruitas has partnered with Pan de Manila, Bukidnon Milk Company and PeriPeri Corp. to expand its distribution channels. It has allotted P270 million for capital spending to convert and expand its stores.

Fruitas posted a P12.35-million net loss in the six months through June, reversing its P51.97 million net income in the same period last year after most of its stores were closed when Luzon was under a strict coronavirus lockdown.

It had 1,068 stores as of end-2019, distributed across more than 20 brands such as Fruitas Fresh from Babot’s Farm, Buko Loco, De Original Jamaican Pattie, Johnn Lemon, Juice Avenue, Black Pearl, and Sabroso Lechon.

Fruitas shares shed 0.85% or a centavo to P1.17 each on Wednesday. — Denise A. Valdez

Appellate court junks damage lawsuit against Semirara

SEMIRARA Mining and Power Corp. said a claim for damages filed by a building company has been junked for good.

The Court of Appeals denied the appeal of Bauer Foundations Philippines, Inc., which sued the Consunji-led power company for damages after its drilling operations were allegedly disrupted eight years ago, Semirara told the stock exchange on Wednesday.

The miner hired Bauer in 2012 to drill 122 holes at its coal mining area on Semirara Island in Caluya, Antique province in southern Philippines.

“The agreement generally covered the construction of numerous drilled shafts of 1.2-meter diameter with a depth of 150 meters to be filled with grout and/or concrete,” it said.

But since Bauer was only able to use one rig, instead of two, Semirara then mobilized its own rig, anticipating that the construction company would not be finished within the agreed period. The work was expected to be completed by January 2013.

Bauer’s lone rig broke down on Jan. 18, 2014, and two days later, it pulled out its equipment and discontinued operations in the mining area. It only completed 87 holes, Semirara said.

In May that year, Bauer sued Semirara before a Quezon City court against Semirara. It claimed damages worth P7 million for the unfinished 35 holes, as well as P500,000 in exemplary damages and P100,000 in litigation costs.

“Contrary however to the allegations of Bauer, it is Bauer which failed to perform and deliver based on the timeline as agreed,” Semirara said.

Three years later, the court dismissed Bauer’s lawsuit, prompting it to elevate the case to the appellate court in November 2017.

Semirara shares lost 0.41% to P9.80 each at the close of trading on Wednesday. — Adam J. Ang

Cirtek resells P545-M bonds to repay debt

CIRTEK Holdings Philippines Corp. has reissued P545.2 million worth of bonds to refinance its short-term debt and support the capital spending of its US-based unit.

The electronics manufacturer told the exchange on Wednesday it listed the debt at the Philippine Dealing and Exchange Corp. (PDEx) earlier this week.

The bonds, which will mature on Feb. 18, 2021, were reissued under Cirtek’s P2-billion commercial paper program. The Securities and Exchange Commission gave the company a permit to sell securities in February.

“The company intends to use the proceeds from the offer to partially retire its short-term obligations maturing in 2020, and to finance working capital requirements of its subsidiary, namely Quintel USA, Inc. as it takes part in the creation of a truly 5G-enabled world,” it said.

The debt securities got a PRS A credit rating from Philippine Ratings Services Corp., which means the company has above average capacity to meet its obligations.

In July, Cirtek listed P494 million of debt on PDEx also maturing on Feb. 18, 2021, under the same P2-billion commercial paper program. Proceeds from the offer were likewise meant to support the company’s short-term loans and the capital expenditures of its US subsidiary.

Cirtek earlier said Quintel USA was seeking to participate in 5G deployment in the US by selling antennas.

On Tuesday, Cirtek told the exchange its board of directors had approved the sale of as many as 33 million preferred shares through a private placement, to be offered to qualified buyers at $1 each.

The shares will come from the company’s unissued preferred B2 shares.

Cirtek’s net income more than doubled to $2.63 million in the first quarter due to improved margins and lower expenses.

Cirtek shares lost 1.57% or nine centavos to P5.65 each at the close of trading on Wednesday. — Denise A. Valdez

Government asked to allow motorcycle taxis during crisis

MOTORCYCLE taxi company JoyRide on Wednesday urged the government anew to let motorcycle taxis operate amid limited public transportation during a coronavirus pandemic.

While Congress is discussing measures that seek to legalize motorcycles as a new mode of transportation, the government can extend the pilot study on its viability, which ended in March, JoyRide business adviser Edwin D. Rodriguez said by telephone on Wednesday.

Congressmen on Tuesday supported the return of motorcycles on the road during a hearing, JoyRide spokesman Jose Emmanuel M. Eala said by telephone.

The House transportation committee supposedly wanted to endorse this to an inter-agency task force against the coronavirus.

“The recommendation was to resume the motorcycle taxi service and extend the pilot run,” Mr. Eala said.

Once the task force approves the congressional recommendation, it will be referred to the Transportation department, which is the implementing agency, he added.

“We cannot go full blast insofar as modes of transportation are concerned,” Mr. Eala said. “It is the position of ride-hailing service providers that the motorcycle taxi is a better alternative at this time.”

Transportation Assistant Secretary Goddes Hope O. Libiran said Congress might have to pass a resolution for another pilot program on motorcycle taxis.

“There has to be a recommendation from Congress before the task force can decide,” she said in Filipino.

Mr. Eala said the original pilot expired but was extended on Dec. 23 for three more months. “I think the idea of the House of Representatives is to urge the inter-agency task force to extend the pilot run in the same manner,” he added. — Arjay L. Balinbin