2019 a better year for financial markets despite headwinds — economists

ECONOMISTS expect local financial markets to rebound this year following a challenging 2018 even as uncertainties both at home and abroad remain.

“In the last three months of 2018, financial markets were weighed down on the domestic front by: rising domestic inflation and interest rates; the moderation in the Philippine economic outlook; and expectations of the delayed approval of Philippine Government’s budget. At the same time, on the external front, slowing global growth due to fresh geopolitical tensions and normalizing US [Federal Reserve] monetary policy also helped dampen investor sentiments,” the Bangko Sentral ng Pilipinas (BSP) said in an e-mail to BusinessWorld.

In the fourth quarter, the peso averaged P53.26:$1, appreciating 0.52% from the previous quarter’s average of P53.54:$1, BSP data showed. Meanwhile, a separate data by the Department of Finance showed the peso depreciating by 5.43% to the US dollar by yearend to P52.56, marking the fourth-worst performance among 12 Asian currencies after India’s rupee (9.23%), Indonesia’s rupiah (6.16%) and China’s yuan (5.69%), and faring worse than a 3.03% average depreciation among the currencies covered.

Meanwhile, in the secondary market, government debt yields for all maturities increased in December 2018 by a range of 175 basis points (bps) for the 25-year tenor to 301.5 bps for the one-year paper compared to the same period in 2017, according to data from the Philippine Dealing & Exchange Corp.

For equities, the Philippine Stock Exchange index (PSEi) closed the fourth quarter at 7,466.02, up 2.6% from the third quarter and an improvement from the third quarter’s 1.2% gain.

The PSEi opened the quarter on a downtrend as it reflected global trends that were mostly driven by the ongoing US-China trade war and subdued global economic growth. A slight rally was observed in November but was tempered following concerns of a reenacted national budget. Local shares finally rebounded in December on news of slowing domestic inflation and the cooling off of trade tensions between the world’s two biggest economies.

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.

At the external front, the last three months of 2018 saw the US Fed raise its benchmark interest rate by a quarter-point — the fourth time in 2018 and the ninth since it began normalizing rates in 2015. The US central bank forecasted two more rate hikes this year, lower than the three rate hikes that was previously expected.

Lingering geopolitical risks also continue to affect the market. “The continued trade tensions between the US and China, fresh geopolitical tensions between the US and several other countries like Iran, North Korea, and Syria weighed on markets,” the BSP said.

“In December, rising optimism over possibly warmer trade relations between the United States and China following their decision during the G20 Summit to suspend the imposition of new tariffs until January next year and positive comments made by President Trump on reaching a trade deal with China provided a boost to markets in the last month of the year,” the BSP added.

WORST IN DOMESTIC INFLATION ALREADY SEEN

Last year saw inflation picking up for nine straight months, peaking at a nineyear-high 6.7% in September and October before easing to 6% in November and 5.1% in December. This brought the full-year 2018 average at 5.2% against the Bangko Sentral ng Pilipinas’ (BSP) 2-4% target range for 2018 and was the fastest since 2008’s 8.2%.

This easing trend prompted central bank officials to keep interest rates steady in their Dec. 13 meeting with expectations that inflation will decelerate over the next two years. Likewise, the market expects inflation to be on its downward trend amid dropping world crude oil prices as well as normalizing food prices.

Prior to the December decision, the BSP raised interest rates five consecutive times since May, with two straight hikes worth 50 bps launched in August and September as inflation surged followed by a 25-bp increase in its Nov. 15 meeting.

For 2018, benchmark interest rates have risen by a total of 175 bps, with the key policy rate now at 4.75% — the highest in nine years.

Economists are in agreement that inflationary pressures would ease this year.

“Average inflation is projected to revert to the target range in 2019 at 3.2% (from 3.5%) and 2020 at 3% (from 3.3%),” the BSP said.

The central bank attributed the downward adjustment primarily to the decline in global crude oil prices, the lower-thanexpected inflation in November last year, the approved rollback in jeepney fares, and the monetary policy adjustments that led to a stronger peso and slower domestic liquidity growth.

Dubai crude, which is the benchmark for local fuel prices, averaged $66.70 per barrel (/bbl) in the fourth quarter, 9.9% down compared to the previous quarter’s $74.03/bbl average. The last three months saw the oil price peak at $83.95/ bbl in Oct. 3 before settling at $53.02/bbl by the last day of 2018.

ING Bank N.V. Manila senior economist Nicholas Antonio T. Mapa said that aside from easing oil prices, inflation will likely slow down on base effects and lower food prices through the rice tariffication law: “All in all, we expect inflation back within target by early second quarter 2019,” he said.

For Rizal Commercial Banking Corp. (RCBC) economist Michael L. Ricafort, “the worst in inflation has already been seen.”

When inflation was rising in the early part of 2018, the local financial markets posted declines in terms of price. Now that inflation has already sustained its declining trend, the local financial markets have already bottomed out and led to further price gains,” he added.

For Mr. Ricafort, the inflation rate could go down to average 3.5% or even lower once the tariffication law takes effect in the early part of 2019.

“With the sustained decline in inflation rate, local interest rates could fundamentally continue to go down as well, leading to lower bond yield, higher prices of equities, and a stronger peso,” he said.

President Rodrigo R. Duterte signed into law the rice tariffication bill earlier this month. The law effectively liberalizes the import process for rice while taking away the role in importing of the National Food Authority. In place of the old system, private importers will pay a tariff of 35% on grain shipped from Southeast Asia, raising revenue for the government and also funding a rice industry competitiveness fund.

Emilio S. Neri, Jr., lead economist at the Bank of the Philippine Islands (BPI) said that with the possibility of inflation returning to the BSP target and with sustained economic growth, the central bank has “little reason” to adjust key rates throughout this year.

“We think that reducing the policy rate is still premature considering the uncertainties abroad which could lead to a sharp peso depreciation. The current level of rates allows the central bank to prevent foreign exchange