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Monday, October 23, 2017 | MANILA, PHILIPPINES
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   banking report
Date posted: Tuesday, February 28, 2017 | Manila, Philippines

4th Quarter Banking Report (2016)

Geopolitics seen a key risk for financial markets

THE JURY is still out on how best to describe what to expect in the financial markets this year after a "very challenging" 2016.

Last year saw the US Federal Reserve deliver its second interest rate increase since the Global Financial Crisis of 2008-2009. While last December’s hike was largely expected, financial markets had turned to Fed Chairperson Janet L. Yellen’s signal that up to three more increases were forthcoming this year.

The Fed rate hike came amid the continued divergence among advanced economies, with the US’ growth picking up, while the recovery in the EU and Japan was losing steam.

Add to the pot the rising political risk, not from the usual suspect of emerging markets, but from those same advanced economies, as the UK elects to leave the EU and months later, Donald Trump secures the US presidency on a platform of trade protectionism and anti-immigration.

The upsets on both sides of the Atlantic happened in the second-half of 2016, and so the full extent of their impact is expected to play out this year. Mr. Trump assumed the presidency only last January, while in Europe, elections are scheduled in key EU states.

In the Philippines, investors got a taste of the policy shift of the new President Rodrigo R. Duterte, who announced a pivot towards China and Russia, and away from long-time ally the US. Add to that an anti-illegal drugs campaign that has raised a furor not only among human rights groups, but also in the US and EU.

Against this backdrop of political noise and uneven global growth, the local equities market posted its second straight year of loss. The benchmark PSEi closed 2016 with a year-on-year decline of 1.6% to 6,840.64, albeit narrower than the 3.85% retreat in 2015.

Tighter US monetary policy has pushed up Philippine yields, with the 91-day Treasury bill gaining 47.37 basis points (bps) quarter on quarter and the 10-year Treasury bond rising by 98.26 bps.

Tighter US policy has abetted a strong US dollar, which coupled with the Organization of the Petroleum Exporting Countries’ (OPEC) cap on production, has sent the peso to a 10-year low vis-à-vis the greenback. The peso closed 2016 at 49.72 against the dollar, making the local currency emerging Asia’s worst performer.

The bearishness in local financial markets defied the solid turnout of the real economy, as the Philippines’ gross domestic product (GDP) last year grew at its fastest in three years on the back of a resilient consumer sector and brisker government and investment spending.

For this year, most bets are for continued expansion in the Philippines’ GDP on the back of the government’s vow to hike infrastructure spending. The Fed’s tightening cycle notwithstanding, the Bangko Sentral ng Pilipinas (BSP) has said its current monetary policy settings remain appropriate, and at the start of this year kept steady its policy rates, citing within forecast inflation expectations.

Some analysts however are penciling in an increase in the BSP’s policy rates, as inflation continued to move closer to within the central bank’s target range amid the normalization in oil prices.

Cheuk Wan Fan of Hong Kong and Shanghai Banking Corp. (HSBC) expects the BSP to tighten monetary policy before end-2017, in order to preserve the real interest rate differential vis-à-vis the US as domestic inflation bottoms out.

Union Bank of the Philippines Chief Economist Ruben Carlo O. Asuncion sees the BSP hiking rates earlier, perhaps by midyear: “But, I still stand by my assessment that the BSP has enough policy space amidst the possible headwinds and actual interest rate hikes by the Fed.”

Ildemarc C. Bautista, research head of Metropolitan Bank & Trust Co., expects a 50-bps increase in 2017, with some upward pressure exerted as well on market yield curves, although the still high liquidity in the system should serve as a counterbalance to the upward pressure.

In contrast, Standard Chartered Bank’s Chidu Narayanan said they expect the BSP to maintain a neutral stance and keep rates unchanged throughout 2017.

“However, we expect BSP to cut the reserve requirement ratio to 15.0% in 2017, from 20%, in order to provide more liquidity,” he said.

Guian Angelo S. Dumalagan, market economist at the Land Bank of the Philippines: The PSE index might hit 7,500 by yearend, supported by the country’s 6.5% growth and stabilizing economic conditions abroad. The country’s sound macroeconomic fundamentals might continue to attract foreign capital, especially from economies with ample liquidity. Despite upbeat domestic economic conditions, local stocks might not rise significantly due to political uncertainties in the Eurozone and the US. Higher outflows to the US as result of two 25-bp rate hikes by the Federal Reserve might also temper the increase in local stocks. Moreover, rising domestic interest rates might weigh down on the local index by raising borrowing costs.

HSBC’s Ms. Fan: I think for the Philippine market we anticipate around 7% earnings growth mainly because of our expectation of a moderate slowdown in industrial production growth. …The key growth driver for the local stock market will be the infrastructure and construction related sector.

BDO Unibank, Inc.: The outlook for the equities market remains positive for medium- to long-term on the sustained growth in corporate earnings (particularly of blue chip stocks) in tandem with the country’s economic expansion.

Standard Chartered’s Mr. Narayanan: We expect modest peso depreciation (2.5%) in 2017 given the compression of the current account surplus, slight overvaluation, and a relatively hands-off approach by the central bank.

Landbank’s Mr. Dumalagan: The peso might hit the 50.5 level against the dollar this year, driven primarily by two 25-bp increase in the federal funds rate and likely stronger economic growth in the US under the Trump administration. The economic expansion of the US might accelerate to 2.3% in 2017, supported by additional fiscal stimulus. Moreover, the peso might also depreciate due to reduced demand for riskier currencies as a result of political noise in the Eurozone and the US. A potential 25-bp hike in domestic policy rates and a continuing improvement in the Philippines’ macroeconomic fundamentals may temper the peso’s depreciation by keeping domestic returns competitive.

UnionBank’s Mr. Asuncion: 50-52 for 2017 if and when the US interest rates actually move higher and move more frequently as indicated by the US Fed officials. Of course, a weaker Philippine peso has upsides for exporters and OFW remittances.

Metrobank’s Mr. Bautista: Depreciation past the 51 level on the back of US Fed rate hikes and higher imports.

HSBC’s Ms. Fan: Peso-dollar rate to stay within the 48.00-50.00 range

BDO: The peso may be pressured by Fed rate hikes, uncertainties over US President Trump’s policies and narrowing current account surplus.

Standard Chartered’s Mr. Narayanan: Our outlook is underpinned by strong domestic growth, a stable policy regime and inflation within BSP’s target band. Meanwhile, the bear steepening of the US Treasury yield curve amid reflationary pressure and the likelihood of a steeper Fed rate-hiking path pose exogenous risk to peso bonds.”

Landbank’s Mr. Dumalagan: The increase in domestic interest rates would lead to marked-to-market losses for fixed-income securities. This is because interest rates and bond prices move in opposite directions...There might be more demand for shorter securities, as the prices of these notes are less sensitive to interest rate movements. This means that rising interest rates would not reduce the market value of these notes as much. The relative price stability of shorter securities might make them more attractive to investors...GS (government securities) yields might rise by at least 25 bs, driven by a 3% rise in domestic consumer prices, a 25-bp hike in Philippine policy rates and two 25-bp increases in the federal funds rate. The rise in GS yields might be tempered by safe-haven buying amid political and economic uncertainties in the Eurozone and the US. Reduced but still sizable monetary accommodation in China, Japan and the Eurozone might also limit the rise in GS yields by keeping global liquidity abundant, despite tighter policy settings in the US. On the local front, the likely cut in the reserve requirement ratio for Philippine banks might also temper the increase in GS yields by keeping domestic money supply ample.

BDO: The outlook for fixed-income securities is more volatile given potential increases in interest rates...Bulk of demand will come from the short-end given the market’s anticipation of rising interest rates. -- with a report from Lourdes O. Pilar

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