2017 augurs higher interest rates on fiscal spur
CHANGE — and anticipation of it — has affected the mood in the domestic financial markets.
For the third quarter, markets wrenched amid shifts on the domestic and international fronts: Anticipation of a second hike in the US Federal Reserve’s policy rate by the end of the year, the UK decision to exit the EU, President Rodrigo R. Duterte’s pivot to China and away from the US — and all of these happening against the backdrop of a weak global recovery.
For the third quarter, the Philippine Stock Exchange index ( PSEi) shed 2.14% to 7,629.73. Foreign net selling on the stock market reached P2.68 billion last Sept. 7, the highest since the P24.33 billion recorded in September of last year.
The peso depreciated against the US dollar to its lowest level in seven years. The peso dropped to its lowest level for the quarter at P48.50 against the greenback on Sept. 30. It was also the peso’s weakest close since it ended at P48.62 on Sept. 4, 2009.
The yield of the 91-day Treasury bill lost 17.10 basis points ( bps) quarter-on-quarter, while that of the 10-year bond dropped 57.28 bps. Year to date, yields of the 91- day and 10-year papers were down by 108.10 bps and 45.45 bps, respectively.
The Fed has since put off by at least a month any change in its policy rates, as its Nov. 1- 2 meeting came within days of the US presidential election. Nonetheless, the US central bank hinted of a hike in December given the improving American economy. The last time the Fed hiked rates was in December 2015.
While financial markets remained sensitive to external stimuli, Bangko Sentral ng Pilipinas ( BSP) Governor Amando M. Tetangco, Jr. believes there is still sufficient support from the country’s firm macroeconomic fundamentals — which according to him, distinguishes our market from other emerging market economies — to keep “real money” global funds invested in the country.
“Our growth prospects continue to be strong,” Mr. Tetangco said in an e- mail to BusinessWorld, citing “high- frequency leading indicators.”
“BSP forecasts inflation to be manageable over the policy horizon; and we have policy space to address risks to this outlook. We have ample foreign exchange reserves; and expect FX flows from receipts from the BPO and tourism sectors and remittances from overseas to continue to rise,” Mr. Tetangco said.
“Furthermore, there is ample domestic liquidity, while credit growth continues to keep pace with the requirements of the economy,” he added.
The economy grew 7.1% in the July- September period, outperforming China, Vietnam, Indonesia and Malaysia. With that figure, the country only needs to grow by at least 3.4% in the fourth quarter to reach the low-end target of 6% and 6.9% to meet the higher end of 7%.
Money supply had grown by 12.6% to P8.840 trillion in September from the P7.851 trillion recorded in the same period last year.
The country’s manufacturing purchasing manager’s index (PMI) — a composite of five subcomponents — have been consistently above the 50 threshold. A PMI reading above 50 reflects improvement in business conditions..
Sales of motor vehicles reached 292,502 in the ten months ending October, 24.49% higher than the 234,951 last year, data from the ASEAN Automotive Federation showed.
Inflation averaged 1.6% in the first 10 months of 2016 against an official 2%-4% full-year target range. And this was despite the economy growing at its fastest in three years during the third quarter.
Gross international reserves stood at $ 85.754 billion last month — lower than the upwardly revised $86.139 billion in September but higher than the $81.098 billion posted a year ago — enough to cover 10 months’ worth of import payments. At this amount, the country can also settle 6.1 times the country’s short- term external debt, and is well above the central bank’s $82.7 billion full-year projection and the $80.667 billion logged at end-2015.
In the first three quarters, cash remittances by overseas Filipino workers (OFWs) totaled $20.025 billion, 4.83% higher than the $ 19.103 billion recorded during the comparable period last year. Remittances have helped fuel consumer spending, which remains the biggest contributor to economic growth.
Net foreign direct investments (FDIs) to the Philippines for the first eight months of the year totaled $ 5.406 billion, up 71.13% from the $3.159 billion in 2015.
With the possibility of a Fed rate hike in December, how will this affect local financial markets?
FIXED-INCOME MARKET
Going forward, analysts see higher interest rates, tracking global yields, as well as the Duterte administration’s plan to jack up borrowing to finance a more ambitious infrastructure program.
The proposed P3.35- trillion national budget for next year will see funding for public infrastructure increase by 13.79% to P860.65 billion, or 5.4% of the gross domestic product, from P756.44 billion this year.
Ildemarc C. Baustista, assistant vice-president and head of research at Metropolitan Bank & Trust Co., expects domestic rates to remain largely flattish although with some upward bias due to inflationary expectations, a weaker peso and market volatility in anticipation of rising US interest rates.
Nicholas Antonio T. Mapa, associate economist at the Bank of the Philippine Islands ( BPI) agreed: “With the Fed signaling a change in stance, expect a reversal in capital flows from East to West, dragging on almost all financial markets in the Philippines.”
Adding President Duterte’s bigger infrastructure budget to the equation, an increase in government spending, especially if it is financed through debt, could raise domestic rates by boosting demand for local funds.
Another key US signal is whether its new president will deliver on campaign promises of protectionism and a higher fiscal deficit.
Jonathan L. Ravelas, chief marketing strategist at BDO Unibank, Inc., sees an attraction to the US economy and with this, money all over the world will start adjusting.
However, he noted that since these are still campaign promises, the US is still on a “wait and see” condition until such time president-elect Trump officially assumes the office on Jan. 20.
For the meantime, he said: “People will prefer to hold on cash until we get clearer signs...”
For HSBC, the election of Mr. Trump could mark a “slight U- turn” in the US- Philippines relations. Even if President Duterte appointed as special envoy to the US for trade, investment and economic affairs a known business partner of Mr. Trump, former ambassador Jose E. B. Antonio, HSBC still sees a delay in FDI inflows coming into the country brought about by heightened political uncertainty.
First Metro Investment Corp. ( FMIC) and University of Asia and the Pacific (UA&P), in its November issue of The Market Call, said they expect a “slight upward bias in yields as market players digest the Trump presidency but have priced in much of the expected Fed policy rate hike in December.”
FOREIGN CURRENCY, EQUITIES
FMIC and UA&P also expect peso-dollar rate to be within P46.50- P47.50, whereas HSBC sees the foreign exchange rate higher at P49.4 by year end and at P50.7 by next year.
Guian Angelo S. Dumalagan, a Chartered Financial Analyst, agreed some weakness is in the cards in the near term: “The peso might initially weaken due to safe-haven buying, but it might eventually appreciate amid dampened rate hike expectations and increased uncertainty over the US economy’s future prospects.”
For the stock market, BPI’s Mr. Mapa noted that foreign selling may hinder the gains of the index as capital flows back to the West.
With these, should we go long or short on fixed-income and equities?
“Prior to Mr. Trump’s victory, going long on equities and short on fixed income might probably be a reasonable strategy due to bets of a US rate hike this year and views of generally stable US economic prospects,” said Mr. Dumalagan.
“However, this tactic might not be that straightforward now due to uncertainties brought about by Mr. Trump’s win,” Mr. Dumalagan added.
“Increased market volatility might prompt the US Federal Reserve to delay its rate hike, leading to a possible recovery in stocks and a drop in yields in the next 12 months. If this were case, then going long on fixed income might also make sense. A lot depends on how markets would react to Mr. Trump’s unexpected victory.”