The super-typhoon, Mangkhut, one of the largest ever-recorded in the region, hit the northern-tip of Luzon island. First Metro Investment Corporation (First Metro) and the University of Asia and the Pacific’s Capital Markets Research analysts predict its aftermath will certainly have an impact on September’s inflation figures.
Since it’s still early days an exact economic forecast is hard to establish.
The crucial question is whether the damage from this single event will exceed that caused by the nearly month-long monsoon rains and flooding that covered almost the entire island of Luzon in August 2018.
While the dramatic impact of Mangkhut was broadcast worldwide and talked about on social media, the impact on the country’s inflation would likely be much less than in August. In any case, First Metro believes it may only add an additional 0.1% to the Philippines’ annual average inflation, given the main disruption, in the short term, is to vegetable supply which originates from the island’s Baguio-Benguet region.
While Cagayan is a rice producer, much more rice production comes from Central Luzon, Southern Luzon, Visayas and Mindanao which suffered little from the super-typhoon. Rice supply seems to have stabilised by mid-September according to reports.
FOCUS ON INFLATION
Mangkhut aside, the Philippines remains one of Asia’s fastest growing economies with 13 straight quarters where the gross domestic product (GDP) growth stood at 6% or above.
However, inflation continues to be of concern. First Metro’s September report reveals the nation’s inflation continued its upward trajectory in the third quarter of 2018, an acceleration the report attributes largely to food supply problems pushing up prices to a nine-year high of 6.4% in August 2018.
On September 27, 2018, in an effort to rein in and slow inflation, the Bangko Sentral ng Pilipinas (BSP) stepped up and lifted rates by another 50 basis points (bps). The much anticipated move to cool inflationary expectations and exchange rate pressures, follows back to back rate hikes of 25 bps in both June and May and 50 bps in August.
While the policy rate move should provide market support for the peso, First Metro’s report predicts it won’t necessarily guarantee an uptick for the nation’s embattled stock market with its analysts predicting that the market will need to be convinced that inflation is definitely easing, in tandem with external conditions such as contagion worries on emerging markets.
However, in a more positive move, the Philippine peso rose in August 2018 to P53.27/$1, after it fell to a 10-year low at P53.44/$1 in July 2018. August’s result is notable for being its first upward shift after seven consecutive months of decline but overall First Metro analysts predict the currency is likely to be placed under P54/$1 by year’s end.
MARKET MOVES
According to First Metro’s analysts, local bond markets came alive in August, only to slump once again to a risk-off mode in early September 2018. Volumes and yields improved in both primary and secondary markets while yields in Philippine government dollar-denominated bonds (ROPS) also shed a few basis points for longer tenors but not quite as much as those for equivalent US Treasury bonds.
A number of firms announced plans to issue bonds before the end of the year, in an effort to snag good yields before they race higher.
Investor concerns about contagion in emerging markets in terms of exchange rates and bond yields could force domestic interest rates higher. However, First Metro believes that bonds could regain their attractiveness once the real 10-year yields reach 3% which may occur sometime before the end of 2018.
NET POSITIVES
While storm clouds continue to gather around inflation, First Metro believes the nation’s economy still has much to offer.
Investment spending continued its elevated path – a positive move for local employment and job creation.
Approximately 488,000 net new jobs were created in the year ending July 2018, causing the unemployment rate to fall to 5.4% from 5.6%; the service sector providing the most jobs. While the unemployment rate in the Philippines has been decreasing, it remains one of the highest in the ASEAN region, ahead of Indonesia, Malaysia, Myanmar, Singapore, Vietnam and Thailand.
National government spending on infrastructure and capital outlays increased by double digits in 13 of the last 15 months, capped by a 33.9% jump in July 2018 which boosted year-to-date spending by 22.6%.
Overall, while infrastructure spending is a government priority, large public-private partnership projects (considered as private construction) are likely to add to the nation’s ongoing and upcoming infrastructure projects. Robust capital goods imports and the manufacturing sector output should add to domestic demand while exports should move into positive territory in the second half of 2018 after six consecutive months of being in the red.
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