Infra to shore up late-year growth — UA&P, FMIC

SLOWER GROWTH in the three months to September will be offset in the rest of the year by strong infrastructure spending, First Metro Investment Corp. (FMIC) and the University of Asia and the Pacific (UA&P) said in a report.

The two institutions said in their jointly-issued Market Call that major public- private partnership (PPP) projects and infrastructure spending are expected to provide a strong finish for the year.

Gross domestic product (GDP) expanded 6.9% in the first half of 2016, according to data released by the Philippine Statistics Authority (PSA). Third-quarter GDP data are due today.

Investment and consumer spending will continue to drive economic growth later in the year, they said.

“Investment- led growth remains the dominant feature of the economy’s strength, while sturdy consumer spending provides solid support,” the institutions said, with manufacturing and construction boosting the industry and the services sectors.

Inflation will remain close to 2% in the last quarter while the full-year projection for headline inflation will be at 1.8%.

“The pullback of oil prices from their recent peak shows that these will not pose a threat to inflation in the coming months,” the institutions said in their report.

Oil prices fell below $ 45 per barrel despite the Organization of the Petroleum Exporting Countries’ attempt to rally prices by limiting supply.

“Despite an expected Fed policy rate hike in December, we do not think the BSP ( Bangko Sentral ng Pilipinas) will change its current policy stance , given weak inflationary pressures and headline inflation hugging the lower end of its target,” the report said although some tightening may be ordered by the central bank to avoid a market bubble in real estate.

FMIC and UA&P also expect exports to begin a recovery in the fourth quarter, “but this will hardly be sufficient to avoid an overall decline for the year.”

Mirroring the views expressed by Socioeconomic Planning Secretary Ernesto M. Pernia and Finance Secretary Carlos G. Dominguez III, FMIC and UA&P are optimistic that the peso’s depreciation will positively affect overseas Filipino workers ( OFWs), exporters, business processes outsourcing ( BPO) companies and other domestic producers.

Mr. Pernia said on Monday that a weaker peso spurs consumption, which is the main growth driver for the country, adding that the advantages outweigh the disadvantages.

Mr. Dominguez on the other hand said that the weakening of peso will boost the competitiveness of the BPO sector and make the business case for such operations more attractive in the face of a more protectionist US trade policy.

Basing the forecasts on speedy growth in capital goods imports and foreign direct investments ( FDIs) as well as higher government spending and robust consumer spending, FMIC and UA&P expects the third quarter’s GDP to expand to 6.8%.

This forecast also came as poverty incidence in the Philippines declined to 21.9% in 2015.

FIXED-INCOME MARKETS

Bond yields are expected to move sideways as bonds with 10-60 yields appear to be higher, jumping by around 20 basis points ( bps) since end- October.

“Nonetheless, the sustainability of the upward movements remains unclear. The financial system seems still awash with liquidity if we consider that the 91-day T-bill rates is still below 1.5% while the BSP’s latest 28-day Term Deposit Facility (TDF) auction brought yields up further to 2.737% on bids nearly double the P120 B ( billion) on offer,” said the report.

This indicates an excess of cash supply in the financial system.

The Bangko Sentral ng Pilipinas may retain auction rates below the 3% policy rate while it assesses the local and global markets for its next policy moves.

“Thus, while local bond yields may initially follow the moves of in the US Treasuries market, domestic liquidity and inflation will also have important impact on where the yields would settle by the end of 2016,” said FMIC and UA&P.

As the Christmas season approaches, corporate bond issuances are expected to slow down.

“We see limited upside in the speads of ROPs (medium to long-term bonds) over US Treasuries before the year ends, even though a general risk aversion towards EM (emerging market) bonds may rise,” according to the statement. Investors will likely head back to the sidelines as they await the implications of a Trump presidency for the US economy and EMs.

As for the local bourse, political and global volatility will continue to dampen investor sentiment.

“Assuming Philippine economic fundamentals to remain constructive and earnings continue to grow, the market could eventually decouple from political and external risks,” FMIC and UA&P reported.

They also said that investors prefer to take advantage of selloffs and are on the lookout for mispriced stocks.

Investors also tend to favor consumer staples, high dividend and low beta stocks, as well as tourism stocks and companies with a link to the China growth story.

Market Call is a monthly publication of the School of Economics of the UA&P in partnership with FMIC.