Updated 6-Feb 2014

Philippines

 

INVESTMENT VIEW

  • What’s new?

    • FX: Whiskers below 45.50, USD/PHP is near its lowest level in three years - sustained by the combined impact of Fed taper, EM volatility and a central bank that appears to be falling 'behind the curve' in addressing accelerating inflation (Dec-2013: 4.1%, the highest in two years). The peso is ~10% weaker than its near five-year high in Jan-2013.

    • Rates: Philippine RPGB bond yields have ticked higher, but still offer among the lowest real, inflation-adjusted yields in the region. On 6 Feb, the BSP opted to keep its benchmark policy rate steady at 3.50% or negative 70bp in real - inflation-adjusted - terms.

  • What’s next? 

    • FX: PHP should be riped for a reversal given attractive FX Valuations - and underperformance vs Asia FX - in spite of robust external accounts. However, low Carry may continue to contribute to near-term peso-selling pressure. Moreover, the BSP's relatively sanguine view on inflation makes us reluctant to more bullish on the peso until either Feb-2014 CPI nears 5% upper threshold or the BSP signals a more hawkish tone leading up to its 27 Mar MPC.

    • Rates: We expect yields to adjust higher with a steepening bias to reflect inflation risks, though there is a clear preference by monetary authorities - and even the Treasury office - to keep rates suppressed.

  • Quick links:

 

Philippines CPI

Philippines CPI

Philippines CPI basket weights

Philippines CPI basket weights

South China Sea territorial claims

South China Sea territorial claims

Pres. Aquino approval rating

Pres. Aquino approval rating

Philippine RPGBs

Philippine RPGBs

EMgist's connection to BSP

EMgist's connection to BSP

 

KEY ISSUES + CONTEXT

 

 

Inflation: Recent pick-up could herald higher-than-desired inflation

 

  • What's new?: Inflation remained elevated in Jan-2014 (4.2% vs 4.1% in Dec-2013 and the BSP's estimate of 3.4-4.3%). This is the highest y-o-y rate in two years and the Philippines is one country in Asia where inflation is beginning to become an issue. The NSO statistics office attributes the pick-up to a "higher annual increment in the heavily-weighted food and non-alcoholic beverages index," with the Food and Beverages index rising to 5.5% from 4.8% in Dec-2013. The rise in December was attributed to supply disruptions caused by Typhoon Haiyan as well as a hike in electricity prices. 

  • What's next?: Although inflation for now remains within the central bank’s 3-5% target range and 2014 forecast average (4.5%), the BSP's loose monetary policy has depressed real, inflation-adjusted yields to among the lowest in EM. We also monitor potential pass-through effects from a weaker peso, which has declined ~10% since Jan-2013. The BSP estimates inflation to average 4.5% in 2014.

  • How'd we get here?: Inflation during 2013 averaged 3%, though the 4Q13 average accelerated to 3.4% (vs. 2.4% in 3Q13) due to price pressures in both food (weather-related supply disruptions and seasonal holiday demand) and non-food components (higher electricity rates). The BSP targets inflation to average 3-5% y-o-y in 2014.

  • Quick links: 

 

 

Monetary policy: BSP is sanguine (complacent?) despite accelerated inflation risks

 

  • What’s new?: The BSP opted to keep rates on hold at its 6 Feb MPC meeting (no surprises here). Inflation risks were flagged. Here is a transcript of the key paragraphs in its statement:

    • "The Monetary Board’s decision is based on its assessment that the inflation environment remains manageable. While inflation forecasts have slightly risen due to the recent increase in global oil prices, utility rate adjustments, and the impact of the recent typhoons, the future inflation path continues to be within the target over the policy horizon since the uptick is expected to be largely transitory. Meanwhile, market expectations of inflation remain consistent with the target range.

    • "Nonetheless, the Monetary Board is mindful that the balance of risks to the inflation outlook is still weighted toward the upside given the potential increases in food prices as well as the pending petitions for further adjustments in utility rates.

    • "At the same time, the Monetary Board pays close attention to the evolving economic growth and liquidity dynamics and their implications for price and financial stability. While global economic conditions could be challenging, prospects for domestic activity are expected to stay firm, supported by buoyant domestic demand as well as favorable consumer and business sentiment. Moreover, as credit expands in lock-step with output growth, the economy’s improved absorptive capacity will likewise be sustained, thus mitigating inflation pressures."

    • The BSP appears to have become slightly more hawkish, from a relatively dovish bias. The recent bout of EM risk aversion is unlikely to sway the BSP towards a rate hike as signalled by a statement from BSP Gov. Tetangco (2 Feb): "Tweaking policy rates to address short-term financial market volatility could likely create unintended consequences, and heighten volatility even more ... Policy-rate changes are not necessarily the most appropriate response at this time." While the benchmark policy rate is at a record low of 3.50%, onshore peso rates suggest even easier monetary conditions after 150bp in 2013-cumulative cuts to the BSP's rates on Special Deposit Accounts (SDAs).

  • What’s next?: The BSP meets next on 27 Mar and its decision will be largely guided by Feb and Mar CPI prints and to the extent it approaches the BSP's 5% threshold (2014 target: 4% +/- 1ppt).

    • Forecasts

      • "Our central scenario on BSP policy rates remains neutral through end-2014 with a rising probability of a mild SDA rate hike." - Emilio Neri Jr., Economist at Bank of Philippine Islands (BPI) (Inquirer, 4 Feb)

  • How'd we get here?: In its Dec-2013 MPC, the BSP maintained overnight borrowing and lending rates at 3.5% and 5.5%, respectively - record lows since Oct-2012. Money supply has increased since the BSP phased out its SDAs in 2013, with domestic liquidity expanding more than 30% every month since Jul-2013, according to BAML, citing BSP data.

  • Quick links

 

 

OTHER KEY ISSUES

 

  • Growth: 4Q13 GDP clocked in at 6.5% y-o-y even after the effects of Super Typhoon Haiyan (Nov-2013) and beating economist estimates of 6%. This compares to 6.9% in 3Q14 for a full-year 2013 GDP of 7.2%. 

    • Forecasts: IMF upgraded its 2014 forecast for Philippine economic growth to 6.3% (23 Jan) on the back of typhoon reconstruction efforts (and related fiscal stimulus) and an expected rise in merchandise exports.

 

  • Fiscal policy: The 2015 national budget has been capped at PHP 2.6trn, with the government seeking to support economic growth and the continued reconstruction of areas devastated by typhoon Yolanda. The proposal is 15.1% or PHP 342bn more than the PHP 2.265trn-budget for 2014. Aquino plans to increase spending to a record this year while seeking more than USD 8bn of investments in highways and airports to improve infrastructure and create jobs.

    • Post-typhoon reconstruction: Budget Secretary Butch Abad has said the government will be spending PHP 360.8bn over three years towards rebuilding efforts. Typhoon Haiyan (a.k.a. Yoland) devastated parts of the central Philippines last Nov. 8, leaving over 6,200 people dead and causing an estimated PHP 571bn (USD 12.6bn) in damages, according to the Economic Planning Agency.

 

  • Debt management: The Philippines issued a dollar bond in Jan-2014, capitalizing on its newly-won investment-grade status from Moody’s, S&P and Fitch in 2013. In Jan-2014, the Bureau of the Treasury (BTr) conducted a debt exchange in which USD 1.08bn worth of 10-year ROPs were issued in exchange for USD-denominated bonds maturing between 2015 and 2025 in a bid to create benchmark bonds and lengthen the sovereign's debt maturity profile. 

    • FX weakness has a modest impact on external debt payments: Interest payments rise by PHP 2bn for every 1-peso depreciation against the dollar, according to the Development Budget Coordinating Committee (DBCC)

    • The government’s gross domestic borrowings in 2014 are estimated to reach PHP 715bn (down 2.7% from last year’s PHP 735bn).

 

  • Balance of payments: The Philippines recorded a 2013 BOP surplus of USD 5.1bn due to continued growth of Overseas Filipino Worker (OFW) remittances and increased service export receipts from tourism and business process outsourcing (BPO). Current Account for 2013 was recorded at 4.1% of GDP and Goldman Sachs forecasts a widening to 4.3% in 2014-15 in spite of the prospect of infrastructure-driven imports. Interestingly, net portfolio inflows reached USD 4.3bn in 2013 despite anecdotral evidence of foreign redemptions and selling of Philippine assets during 2H13, which suggests that peso-selling may have been driven by domestic savers.

 

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  • Equity market developments: San Miguel Corp. is entertaining offers for stakes in its cash-generating brewery and gin units as the company looks to diversify away from its core beverage market and make an energy acquisition.

 

  • Domestic politics: Public satisfaction with Pres. "Noynoy" Aquino remains high compared to his predecessors. The most recent Social Weather Stations (SWS) survey (11-16 Dec-2013) showed that 71% of respondents were satisfied, 10% ambivalent and 19% dissatisfied with the administration’s general performance. 

    • Peace accord in Mindanao: The Philippine government faces challenges implementing an accord aimed at ending decades of conflict in Mindanao. The risk is that the peace accord is spoiled by continued fighting between splinter groups (e.g. Bangsamoro Islamic Freedom Fighters - BIFF) and private armies that were excluded from the deal. An independent body will schedule the phasing out of arms over the next two years, during which programs will be put in place to help fighters move to civilian life, according to the agreement signed 25 Jan-2014 by the government and Moro Islamic Liberation Front (MILF) in Kuala Lumpur.

 

  • Philippines-China relat​ions: Bilateral relations between China and the Philippines have deteriorated under Pres. Aquino. The Philippine government has been vocal in its concern over Chinese activity in the South China Sea (increasingly dubbed the "West Philippine Sea" in Manila). The two countries have been locked in a tense dispute since 2012, when Chinese ships took control of Scarborough Shoal. Moreover, tensions with Hong Kong have soured after the SAR imposed sanctions on visa-free entry for Philippine officials and diplomats as it continues to demand an apology to victims of a 2010 hostage crisis in Manila.

 

 

KEY RESOURCES

  • Government

    • Bangko Sentral ng Pilipinas (BSP): Home, Statistics, ...

    • Philippine Statistics Authority - National Statistical Coordination Board (NSCB): Home, ...

 

 

News Scan ("Philippines")

 

 

Recent News

  • Tetangco says emerging-market rate moves may not be appropriate (Bloomberg, 3 Feb)

  • BSP unfazed by peso's weakness (BusinessWorld, 29 Jan)

  • BSP 4Q13 Inflation Report (BSP, 24 Jan-2014)

 

 

What do others say? Selection of remarkable quotes + views from commentators worth following:

 

FX:

  • "The governor sent a clear signal that he won’t raise interest rates to address temporary market volatility. There is a bias for the peso to weaken further but we have to remember that the BSP has near-record foreign reserves and has the capability to arrest any unwarranted peso drop". - Roland Avante, president of Philippine Business Bank. (Bloomberg, 4 Feb)

 

  • "It appears the answer lies in the comparatively low domestic yields on peso instruments versus other Asian fixed income and by extension, a narrower differential vs. US treasury yields." - Romeo L. Bernardo and Marie-Christine Tang, GlobalSource on why the peso is depreciating more than Asian currencies (BusinessWorld, 22 Jan)​

 

  • Pioneer Investments sees 45-47 as a “good entry” point (Bloomberg, 20 Jan).

 

Rates:

  • "We haven’t invested in the country for an extended period due to the bonds offering very little in terms of yield. We are seeing extensive inflationary pressures building." - Anders Faergemann, senior fund manager at PineBridge Investments (Bloomberg, 21 Jan)

 

CONTACT US

Email: strategist@emgist.com

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