As the year draws to a close, the Philippine economy is showing resilience, riding out a regional drag caused by ongoing US-China trade negotiations and an overall slowing global economy.
On November 5, the government announced that October’s headline inflation had eased to 0.8%, the lowest recorded since May 2016, and a marked drop from its 6.7% high in October 2018. Inflation’s downward trajectory is partly attributed to the decline in prices of some heavily weighted commodities, and lower oil and electricity prices.
Importantly, this year’s annual inflation is within the government’s target range of 2%-4%. First Metro Investment Corporation (First Metro) and the University of Asia and Pacific’s Capital Market Research unit’s October report – The Market Call – predicts annual inflation to remain around 2.5% this year with only mild inflationary pressures expected.
The resumption of government infrastructure spending, which jumped 53.9% year-on-year in September, combined with the Bangko Sentral ng Pilipinas (BSP) accommodative monetary policy – following cuts in policy rates by 75bps and reserve ratio by 400bps until now – helped boost the nation’s GDP hopes in the fourth quarter of 2019. Higher employment, and lower inflation is also encouraging consumer spending.
Growth averaged 5.5% in the first half of 2019 (lower than government forecasts of 6-7%), but the nation’s GDP grew to 6.2% in the third quarter. Growth in the fourth quarter is expected to accelerate to at least 6.5%, driven by sustained spending gains in the infrastructure, private construction, consumer and government sectors.
The Philippines should close off the year with annualised GDP at 6%. The World Bank foresees the nation’s GDP lifting to 6.1% (2020) and 6.2% (2021), with consumption as a key economic driver. However, ongoing uncertainty surrounding the US-China trade negotiations could adversely impact GDP figures in the final quarter of this year.
Inflation rates, year-on-year
Source: Philippines Statistics Authority
MACROECONOMICS AND LIQUIDITY
While imports persist in exceeding export revenue, there is evidence of this gap narrowing. Imports of capital goods remained weak in the second half of 2019, up by just 0.3% year-on-year in September, mainly dragged by the huge drop in big-ticket items ships, aircraft and photographic equipment.
Overall, a slowdown in most categories of imports saw this sector fall by 10.5% year-on-year to reach $9 billion in September. The decline in exports in September by 2.6% resulted in a much lower balance of trade deficit of $3.1 billion, a 16.4% increase month-on-month from $2.7 billion in August.
Domestic liquidity expanded at a faster pace in October at 8.5% from previous month’s 7.7% following various policy rates and reserve ratio cuts implemented by the central bank this year.
The peso strengthened in October against the US dollar, gaining 1.2% (change of peso average for the month) in October amid softer price upticks and dollar inflows from overseas Filipino workers' remittances and Philippine offshore gaming operations.
MIXED MESSAGES
Bond investment regained attractiveness as real 10-year Treasury bond yields reached a 42-month high of 3.8% in September – exceeding their 7-year average of 1.62%. These yields combined with declining inflation are likely to prove attractive to investors wanting to re-enter the market. On the downside, auctions and secondary markets hit pause, due to global uncertainty, the ongoing US-China trade spat and declining US manufacturing jobs and foreign investors exits continued with heavy net foreign selling adding a downward pressure on the PSEi.
Trading for corporate bonds was brisk in October with an 81.6% gain year-on- year and 25.8% month-on-month. Corporate issuances could spike until the first quarter of 2020, as firms take advantage of relatively low benchmark yields.
With the BSP’s judicious monetary policies, low inflation, and strong growth, the Philippines economy is shaping up well as it heads into a new year.
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