The Philippines: Downside Risks Haven’t Dampened Spirits

Investors looking at emerging markets in the Asia-Pacific region will receive some salient economic data from the Philippines in the week ahead, including inflation and unemployment figures.

Market participants will likely consider Tuesday’s data releases as the highlights for the week, beginning with an update on the country’s rate of inflation, after the prior month slowed to 3.0%.

Tuesday, June 4

• Consumer Price Index (May)
• Unemployment Rate (Q2’19)

Indeed, consumer prices in the Philippines continued to decelerate in April – solidifying a downtrend since President Rodrigo Duterte signed into law a lift on rice import restrictions. The law, which came into effect in mid-February 2019, liberalized imports, exports, and trading of the commodity.

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In fact, the latest increase in the price of rice, at 0.02%, was among the slowest annual increment in the nation’s food index.

However, according to the Philippines Statistics Authority, April’s slowdown in the headline inflation rate was “mainly brought about” by the slower annual increase in the heavily-weighted food and non-alcoholic beverages index, which posted 3.0%.

Excluding selected food and energy items, the country’s core inflation decelerated to 3.4% in April 2019 from 3.5% in the prior month.

Amid the slower levels of inflation, the Bangko Sentral ng Pilipinas’ (BSP) earlier in May had decided to cut the interest rate on its overnight reverse repurchase (RRP) facility by 25bps to 4.5%, while reducing the overnight lending and deposit facility rates, accordingly.

Growth prospects

Fitch Ratings, which recently affirmed its investment-grade ‘BBB’ sovereign credit rating on the Philippines, with a stable outlook, observed that the 3.0% inflation level falls within the BSP’s target range of 2% to 4%.

Fitch analysts Sagarika Chandra and Stephen Schwartz said that the deceleration was facilitated by the passage of the rice tariffication law that lifts import restrictions, and “credit growth slowed
significantly.”

Overall, Fitch said it expects the country’s economy to grow at a pace of 6.1% in 2019 as “momentum is likely to recover” following a slowdown to 5.6% year-on-year in the first quarter from “weaker exports and government spending due to the delay in the passage of the 2019 budget.”

Chandra and Schwartz added that growth will “remain supported by strong private consumption and the government’s public-investment program, which targets an increase in infrastructure spending to about 7% of GDP by 2022 from 4.5% in 2017.”

Naturally, downside risks to the country’s otherwise optimistic outlook could come from China’s recent growth challenges, amid escalating US-China trade tensions, as well as volatile weather conditions and the potential for natural disasters, including earthquakes and volcanic activity.

The BSP had noted at its meeting in early May that the risks to the inflation outlook “remain broadly balanced for 2019 amid risks of a prolonged El Niño episode and higher-than-expected increases in global oil prices.

“For 2020, the risks continue to lean toward the downside as weaker global economic activity could temper commodity price pressures.”

Labor market data also on tap

Meanwhile, investors Tuesday will also receive an update on the Philippines unemployment rate, after the pace in January rose a notch to 5.2% from 5.1% in October 2018, while still hovering around the 5% mark since October 2017.

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In its inflation report for Q1 2019, the BSP noted that the nation’s labor market “shows improvement” compared to the January 2018 survey round. 

The central bank found that the results of the January 2019 round of the labor force survey (LFS) showed that the country’s employment rate rose slightly to 94.8% from 94.7%, while the rates of unemployment and underemployment declined to 5.2% from 5.3% and 15.6% from 18.0%, respectively.

However, in terms of the level of employment, the survey indicated an employment loss of 387 thousand, while the youth unemployment rate increased to 14.1% from 12.5% during the period.

Moreover, the BSP added that employment in agriculture has been declining for four straight quarters since the second quarter of 2018, which it partly attributes to the rising cost of inputs amid “low profit, limited access to credit, poor infrastructure, and vulnerability to environmental risks.

“The sector also continued to experience the spillover effects of tropical depression Usman that hit the country in the latter part of 2018.”

Stocks rise

Against this backdrop, equities in the Philippines – as evidenced by the iShares MSCI Philippines ETF (NYSEARCA: EPHE), which has among its top holdings SM Prime Holdings (PM: SPHXF), BDO Unibank (OTCMKTS: BDOUY) and Ayala Corp (OTCMKTS: AYALY) – have been on the upswing.

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The ETF has climbed roughly 8.9% from a recent mid-May trough of US$32.25, following an 8.67% downward slide in the front part of the month, according to the IBKR Trader Workstation.

Stocks in the Philippines, as well as in other emerging market countries, have also been generally benefiting from dovish global central bank monetary policies, including by the U.S. Federal Reserve. 

For the week ended May 29, Thomson Reuters/Lipper U.S. Fund Flows reported a net inflow of roughly US$151m into emerging market equity funds, while domestic equity funds posted outflows of US$18.4bn over the same period.

Market participants will likely be paying close attention to the Philippines rate of inflation for any further slowdown that may spur its central bank to cut rates further, as well as trade conditions and other external risks to its labor market and overall economic growth prospects.

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of the U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.