EQUITIES MARKET

the downward-revised 6.5%-6.9% government growth target for 2018.

While economists expect economic growth to remain robust this year, their expectations on whether or not the government target of 7%-8% will be met is mixed.

For BPI’s Mr. Neri, growth is expected to grow by at least 6.5% in 2019: “With inflation now in a downtrend, the economy has the opportunity to return to the sweet spot of low-inflation and high growth just as election spending boosts overall demand…,” he said, noting that growth is usually faster in election years.

“The expected decline in long-term market interest rates due to lower inflation and the forthcoming [RRR] cuts of the BSP would also support capital expenditures.”

UnionBank’s Mr. Asuncion looks at 2019 economic growth to clock in at 6.8% driven by increased government spending and election-related spending while tagging agriculture and net exports as primary drags to growth.

Meanwhile, RCBC’s Mr. Ricafort looks at the economy growing at 6.5%-7% on account of easing inflation, lower interest rates, higher government spending on infrastructure projects amid plans to exempt these from the election ban and election-related spending, among others.

ING’s Mr. Mapa said that the economy breaching the growth target is possible, but only if the economy “fires on all cylinders” through both monetary and fiscal stimuli.

“[G]iven that economic growth does appear to be losing some steam and with inflation returning back to target, perhaps the BSP can look to afford the economy some breathing space with their price stability mandate safeguarded,” ING’s Mr. Mapa said.

“The budget delay and the election ban may throw a monkey wrench into the fiscal boost and we might have to hope that the economy can quickly absorb the likely ‘back-loaded’ fiscal push in the second half,” he said.

Monetary policy stimulus can help boost consumption and private investments, the ING economist added.

“If it remains in its current not so accommodative state, we can only expect the recent aggressive tightening to continue to feed into the economy and slow it down further given its 9-12 month lag effect,” he added.

The national government has been operating under a reenacted budget with the latest spending plan yet to be signed by President Rodrigo R. Duterte, since Congress ratified the 2019 budget only last Feb. 8 following months of bicameral bickering over alleged irregular fund insertions. This has left new programs and projects unfunded at least for the first quarter — which would likely hurt growth for the period.

“Without the infrastructure budget of close to about P1 trillion in 2019, the implementation of the ‘Build, Build, Build’ program is expected to slow down. This delay will be detrimental to the nation’s growth performance and likely temper investor sentiments,” the BSP said.

With these developments, how would local financial markets perform in the coming months? Below are the outlooks for each of the key markets.

• “Investor sentiments at the start of 2019 appeared more optimistic. Easing domestic inflation, lower crude oil prices, election-related spending and continued ramping up of infrastructure and capital goods spending point toward stronger domestic demand and earning prospects, providing impetus for a rebound in the equities market in the first quarter of 2019. However, potential challenges to the uptick of local shares include: the late approval of Philippine Government’s budget; the late approval of the US Federal Government budget that resulted in a partial US government shutdown; continuing tensions between the US and China; and the likelihood of further US Fed rate hikes than the two originally forecasted for the year.”

• “Positive, but with signs of slowing growth both onshore and globally, it will be hard to see the [PSEi] push much further unless we see some form of stimulus, from abroad (Fed turns extremely dovish) or domestically (BSP rate cuts and or strong data).”

• “Easing inflation and consistent net foreign buying of Philippine stocks since the start of 2019 would support further upside for the local stock market. Lower inflation increases corporate profits and reduces borrowing/financing costs of companies, thereby leading to higher valuations, assuming all other factors are the same.”

• “If the inflation continues to ease, a recovery in equities market is expected. The market will be advanced by the strong earnings of domestic companies and the strength of foreign corporations.”

• “The local stock market may outperform its regional counterparts this quarter given the foreign inflows brought by lower inflation.”

FIXED-INCOME MARKET:

• “The Philippine bond market is expected to be influenced mainly by issuances of government securities. It is further expected that the government will continue to favor domestic borrowings from foreign sources to limit the country’s exposure to foreign exchange risks.”

“Meanwhile, some corporations might tap the debt securities market to support their funding requirements. This may be limited as we remain a bank centric economy where it is easier and less costly to avail bank financing than to issue bonds.”

“It may be noted that there have been continuing efforts to further develop the Philippine capital markets. For example, the BSP issued Circular 983 that set a zeropercent reserve requirement ratio on repo transactions to encourage more players and in turn enhance price discovery and liquidity in the market. This complements the decision of the Bureau of Internal Revenue (BIR) to exempt repo transactions under the program from documentary stamp tax (DST). These initiatives will reduce transaction costs for the repo market and encourage debt issuances by corporations.”

• “Likely still to be positive, but rally appears to be past its peak.”

• “[The] sustained decline in inflation [and a] more dovish US Federal Reserve amid the USChina trade war… would correspondingly lead to the continued easing trend in bond yields, provided that the peso exchange rate remains relatively stable or stronger. Possible cut in banks’ RRR and key policy rates especially if inflation goes back to the 2%-4% target range in the coming months of 2019 could lead to further declines in bond yields.”

• “High interest rates tend to encourage investors to invest them in fixed-income securities like bonds. The upward pressure on yields is mainly due to inflation which consequently keeps upward pressure on yields.

• “Local [government securities’] yields may decline modestly especially on the long end of the [yield] curve because of lower inflation expectations. However, upward pressure may come from the borrowing activities of the government, especially if the [Bureau of the Treasury] does a huge [Retail Treasury Bond] issuance that could tighten liquidity. The yield curve may remain flat this [first] quarter, but it may steepen slightly in the succeeding months once inflation is within target.”

FOREIGN EXCHANGE MARKET

• “Over the next few months, the peso’s flexibility can partly reflect external developments that may relatively affect local market sentiment. These include: i) shift towards protectionism; ii) fasterthan-expected monetary policy normalization in the US; iii) aggressive rollback in financial regulations in the US; iv) greater-than-expected slowdown in China; v) weak demand, low inflation and weak balance sheet in advanced economies; and vi) non-economic factors including geopolitical concerns.“

“However, over the policy horizon, the peso is expected to be broadly stable and reasonably flexible to reflect changing demand and supply conditions in the foreign exchange market. The expected growth in foreign exchange inflows from overseas Filipino (OF) remittances and Business Process Outsourcing (BPO) revenues in 2019 of 3.0 percent and 8.0 percent, respectively; the sustained inflows from foreign direct investments, tourism receipts; the ample level of the country’s gross international reserves; and most importantly, the country’s firm macroeconomic fundamentals are expected to provide support to the peso. Likewise, the credit rating upgrades that the country earned over the last few years and reaffirmed in recent months are expected to sustain market confidence towards the Philippine financial markets and provide stability to the local currency.”

• “Peso is seen to move sideways with a weakening bias as portfolio inflows are unable to offset current account woes.”

• “Lower inflation increases the purchasing power of the peso exchange rate versus the US dollar. Consistent net foreign portfolio investment inflows since the start of 2019 [would] also support the peso… This partly offsets the effects of a relatively wider trade deficit.”

“On external factors, a more dovish US Federal Reserve… amid the lingering USChina trade war and the record 35-day US government shutdown that both resulted to slower US economic growth prospects, supported the recent declines of the US dollar versus major global currencies.”

• “The peso will continue to depreciate due to this huge infrastructure development. Seasonal and intermittent strengthening periods are anticipated due to the inflows of personal remittances from overseas Filipinos, and service sectors (such as BPO and Tourism).”

• “[Peso-to-US dollar exchange rate] may trade within the P52:$1 to P53:$1 range in the near term with peso support coming from foreign buying in the local stock market. However, we expect the peso to depreciate in the medium term as fundamentals remain the same, i.e., the country’s substantial trade deficit would continue to drive the depreciation of the peso.” —