By Christine Joyce S. Castañeda, Senior Researcher
THE weaker-than-expected economic growth, coupled with persisting domestic inflation concerns and geopolitical tensions continue to send local financial markets on a spin in the July-September period, with local and foreign headwinds providing a mixed outlook on financial markets moving forward.
In the third quarter, the peso averaged P53.54:$1, depreciating 2.1% from the previous quarter’s average of P52.43:$1, Bangko Sentral ng Pilipinas (BSP) data showed. Year on year, the peso depreciated against the greenback by 5.1% from the P50.84:$1 average in the same period last year.
The period also saw the peso breaching to as low as P54.33 per dollar last Sept.26 — the weakest in nearly 13 years since it closed at P54.43 on Nov. 22, 2005.
Meanwhile, in the secondary bond market, yields on the 91-day Treasury bills and 10-year bonds were up by 40.23 basis points (bps) and 81.31 bps, respectively, during the quarter, according to data from the Philippine Dealing & Exchange Corp.
For equities, the Philippine Stock Exchange index (PSEi) closed the July-September period at 7,276.82, up by a mere 1.2%, which is a reversal from the previous quarter’s 9.9% loss. Year to date, the PSEi was down by 16.6%.
The BSP cited external and local factors that affected the financial markets in the third quarter.
“On the external front, uncertainty over the pace, timing and magnitude of the US Fed’s path to normalization have affected emerging markets including the Philippines,” BSP said in an e-mail to BusinessWorld.
According to the central bank, these factors resulted in capital flows, currency depreciations and inflationary pressures.
The BSP also added that the “increasing threats of inward-looking or protectionist policies (specifically, US policies towards China) as well as geopolitical risks” affected emerging markets, including the Philippines, last quarter.
“On the domestic front, rising inflationary pressures amid a booming economy, increase in excise tax and global oil price hikes were likewise seen as significant contributors to market sentiment during the quarter,” the BSP said, adding that adverse weather conditions affected inflation expectations and market sentiments last quarter.
For his part, Guian Angelo S. Dumalagan, market economist at Land Bank of the Philippines (LANDBANK), classified the factors that affected the performance of local financial markets last quarter into three main areas: domestic growth, geopolitics, and monetary policy.
Mr. Dumalagan noted that at the start of the third quarter, market players were positive that the economy will accelerate this year, brought by the administration’s “Build, Build, Build” program. However, concerns over domestic inflation “intensified,” resulting in weaker-than-expected economic growth and downward revisions in growth prospects.
“Likewise, geopolitics also influenced market movements in the third quarter. Majority of these conflicts were US-related, such as the conflict between Turkey and the US about the release of a detained Evangelical Christian pastor,” the economist said, referring to the spat between Washington and Ankara over an American pastor accused of participating in a failed coup two years ago, the Syrian civil war, and other diplomatic issues.
The economist also cited the US-China trade talks which caused “massive global volatility” and caused fears of a global growth slowdown. Monetary policy was also attributed as a “top market-mover.”
During the quarter, the BSP raised policy rates by 100 bps — with an increase of 50-bps apiece in its August and September meetings. The central bank again raised rates for the fifth consecutive time this year last Nov. 15 by a softer 25 bps. For the year, rates increased by 175 bps.
Aside from the BSP, the US Federal Reserve also raised its policy rates by 25 bps in its September meeting, leaving intact plans to gradually tighten policy there.
For Ruben Carlo O. Asuncion, chief economist at the Union Bank of the Philippines (UnionBank), the factors that weighed in on local financial markets in the third quarter were “rising domestic inflation and inflation expectations, peso depreciation, the BSP rate hike, ‘faster-than-expected’ monetary normalization in advanced economies, and geopolitical tensions abroad.”
Meanwhile, Michael L. Ricafort, economist at the Rizal Commercial Banking Corp. (RCBC), added the wider local budget deficit as one of the major catalysts last quarter.
Data from the Philippine Statistics Authority (PSA) showed that the economy grew to its slowest pace in three years last quarter due to tempered household spending. Gross domestic product (GDP) grew by 6.1% year on year, slower than the previous quarter’s revised 6.2% and the 7.2% recorded in the same period in 2017.
GDP growth averaged 6.3% in the first three quarters, slower compared to the 6.8% posted in the same period in 2017, and is below the government’s downward-adjusted 6.5-6.9% target range for 2018.
Meanwhile, inflation for the July-September period averaged 6.3%, faster than the previous quarter’s 4.8% and the 2.7% in 2017’s comparable period.
On the other hand, the government’s fiscal deficit widened to P378.2 billion in the first nine months of the year, Bureau of the Treasury data showed. This was 78% higher than the P213.1 billion shortfall in 2017’s comparable period.
GDP AND INFLATION OUTLOOK
Analysts believe it would not be easy to reach the government’s growth target this year. To reach the lower end of the government’s target, the economy needs to expand by at least 7% in the final quarter of the year.
ING Bank N.V. Manila senior economist Nicholas Antonio T. Mapa said growth will “likely fall short” despite the administration’s rapid spending.
“[C]onsumption may provide less of a punch after consumers wilt under the double whammy of inflation and elevated borrowing costs,” Mr. Mapa added. “The export sector’s anemic performance despite supposed gain in competitiveness from a weaker currency will also keep a lid on our growth outlook.”
Meanwhile, RCBC’s Mr. Ricafort expects growth to be at 6.5%-6.7% this quarter saying that the chance of meeting this year’s goal is low due to the elevated inflation and local interest rates which could slow down economic growth.
For his part, UnionBank’s Mr. Asuncion said growth could be at 6.6% this quarter. The chief economist also showed concerns that the target may not be hit due to higher-than-expected inflation, weakening currency and rising global oil prices.
“Moreover, delays in the massive infrastructure projects will not push the growth of the country,” Mr. Asuncion added.
Meanwhile, for LANDBANK’s Mr. Dumalagan, with expectations of slower increase in the price of widely-used goods in the remaining months of the year, consumer spending might accelerate and an improvement in capital formation may also be seen. He expects GDP to grow by at least 6.3% in the last quarter of 2018.
Asked about the factors that might affect economic performance this quarter and next year, the BSP cited the “stagnant output in agriculture; natural hazards (e.g. typhoons); high inflation and second-round effects; delays in the implementation of inflation-related mitigating measures, infrastructure and reconstruction projects, and delay in legislation of priority bills; legislation of restrictive employment protection; policy uncertainty in mining and; security risks.”
As for the external factors, the central bank said the “slower global growth, escalation of trade tensions, policy normalization in advanced economies, contagion risks from selected emerging economies, increase in global oil prices and build-up of financial sector risks and excessive credit growth” could impact the country’s performance.
For inflation, the BSP adjusted its 2018 full-year inflation forecast to 5.3% from 5.2% previously due to the increase in transport fares. By next year, inflation is seen to settle at 3.5% from 4.3%. For 2020, BSP expects prices to rise by 3.3% from 3.2%.
“[T]he forecast for 2019 was lower due mainly to the impact of the suspension of the excise tax on oil, impact of rice tariffication, decline in global crude oil prices and the monetary adjustment by the BSP, which resulted in a stronger peso and slower domestic liquidity growth,” the BSP said.
Below are the outlooks for each of the key markets:
EQUITIES MARKET
BSP: “Investors’ bullish outlook over the country’s economic growth and corporate earnings following the enactment of the TRAIN law in December 2017 and anticipation of higher government infrastructure spending due to the “Build, Build, Build” program is expected to provide further support to the main index. Furthermore, the planned integration of the fixed income exchange and equities market, a step to make domestic capital market more efficient and cost effective, is expected to make domestic financial markets more robust and more attractive to both foreign and local investors throughout the rest of 2018.”
UnionBank’s Mr. Asuncion: “A recovery in equities market is expected when inflation starts to ease. The market will be advanced by the strong earnings of domestic companies and the strength of US and Chinese corporations.”
LANDBANK’s Mr. Dumalagan: “Local stocks may bounce back in the fourth quarter, as investors’ risk appetite might improve following the rebound in domestic growth and the deceleration in local inflation. Rate hike concerns, however, may limit potential gains.”
ING’s Mr. Mapa: “[P]ositive as growth still seen above 6% and inflation slowing”
RCBC’s Mr. Ricafort: “PSEi could seasonally rise towards the end of 2018 (accounting year-end when there could be some window-dressing activities) and some bargain-hunting after recently trading near two-year lows, partly inspired by prospects of easing inflationary pressures that could fundamentally improve corporate earnings, valuations, and overall economic growth.”
FIXED-INCOME MARKET
BSP: “The Philippine government is expected to continue to source its borrowings from the local sector at about 80%, while the remaining 20% will be from external sources. This allows the government to take advantage of the liquidity in the Philippine financial markets and at the same time reduce the exposure to the risk of foreign interest rate movements.
With regard to bond yields, the Development Budget Coordination Committee (DBCC) maintained its 364-day T-bill rate assumptions at 2.5% to 4.0% in 2018. It also maintained the foreign interest rate assumptions as indicated by the six-month London Interbank Offered Rate (LIBOR) at 1.5% to 2.5% for the same period. In terms of credit spreads, volatility will be sensitive to domestic and external developments in the short term.”
Mr. Asuncion: “High interest rates tend to encourage investors to invest them in fixed-income securities like bonds. The upward pressure on yields is mainly due to inflation which consequently keeps upward pressure on yields.”
Mr. Dumalagan: “Domestic yields are expected to show some downward correction amid easing local price pressures and safe-haven buying amid lingering concerns about global trade. The drop in yields, however, might be short-lived due to the rate hikes of the BSP and the US Federal Reserve.”
Mr. Mapa: “May see yields move lower and inflation seen to taper off.”
Mr. Ricafort: “Local interest rates could continue to ease, after sharply rising to near-decade highs in the third week of October 2018, amid easing inflationary pressures (lower prices of food/rice amid increased importation, harvest season, and other non-monetary measures to increase supply and lower food/rice prices; lower oil/petroleum prices with huge rollbacks as global oil prices sharply declined in [the fourth quarter of] 2018 to near eight-month lows; stronger peso exchange rate among the best in three months in view of the seasonal increase in the conversion of OFW remittances for Christmas-related spending and tuition payments for [the fourth quarter of] 2018.
Most local interest rates have already eased by about -0.50 from their highs posted in the third week of October 2018 and still up by near +300 basis points since the start of 2018 and still up by about +500 basis points from the lows two years ago.
Proposed tariffication of rice imports and planned suspension of further hike on fuel/petroleum excise taxes scheduled in January 2019 (under the TRAIN Law) could help ease inflation, especially in 2019.”
FOREIGN EXCHANGE MARKET
BSP: “In the midst of challenging developments in the external sector (trade and capital flows) and the global market uncertainty (e.g., trade policy uncertainty, Brexit negotiations, geopolitical developments, and normalization in the US and other advanced economies), financial markets in Q4 2018 are expected to be broadly stable. In the foreign exchange (FX) market, the BSP continues to adhere to a market-determined FX rate policy wherein the value of the exchange rate and relative value of the peso is determined by the supply and demand of FX in the market. The BSP ensures there is orderly price discovery in the foreign exchange market. When warranted, the BSP stands ready to provide liquidity and ensure that legitimate demands for foreign currency are satisfied.”
Mr. Asuncion: “The peso is expected to start stabilizing due to surging remittance, although depreciation may still persist due to widening trade deficit, more capital investments and the massive infrastructure development program of the Duterte administration.”
Mr. Dumalagan: “The peso might move sideways against the dollar in the remaining months of the year, as improving local conditions may somewhat soften the impact of global trade concerns and the steady rate hike of the US Federal Reserve. Positive local developments may come in the form of easing price pressures, stronger fourth-quarter GDP growth, and more competitive interest rates on account of the BSP’s aggressive rate adjustments this year.”
Mr. Mapa: “[S]een to benefit from both structural flows (remittances and BPO) in tandem with capital flows (FDI, ROP issuance) but external environment will be the wild card”
Mr. Ricafort: “The widely expected seasonal increase in the conversion of OFW remittances to pesos in [the fourth quarter] for Christmas-related spending and some tuition payments could still lead to seasonal gains in the peso as well into the Christmas season.”
“Other emerging market currencies have corrected/strengthened vs. the US dollar recently after some weakness in the earlier part of 2018. This could also support similar gains in the peso.”

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