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Monday, October 23, 2017 | MANILA, PHILIPPINES
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   banking report
Date posted: Monday, May 29, 2017 | Manila, Philippines

1st Quarter Banking Report (2017)

Markets adjust as US Fed ups ante

FOR LOCAL financial markets, the adage of the Philippines catching a cold when the US sneezes still holds true.

In the first few months of the year, uncertainty remained the theme, as market players braced for the policy directions -- both fiscal and monetary -- in the US.

On the monetary front, Federal Reserve Chair Janet L. Yellen delivered last March the first of three interest rate hikes she signaled last December. The Fed raised its rates by 25 basis points to 0.75% to 1% at the end of its March 14-15 meeting.

On the fiscal front, market players were kept guessing over US President Donald J. Trump’s “phenomenal” tax plan and his administration’s health care reform bill. Should the former be realized, this could excite markets and push the dollar upwards.

However, the failure of the latter had raised doubts on his ability to fulfill his promise of a fiscal stimulus. This, considering that many Fed policy makers view Mr. Trump’s fiscal plans essential in determining the pace of US interest rate normalization.

At the start of the year, the peso started to flirt with the P50:US$1 mark when it closed at P49.98, its weakest finish since it ended at P49.99 against the greenback on Dec. 22, 2016. During that day’s trading, it opened at P50 flat, also its weakest point.

Market observers even called the peso the worst performing currency in Southeast Asia, after finishing 2016 at P49.72, losing 5.65% from its P47.06 close in 2015.

In the run-up to the Fed March meeting, the peso breached the P50:US$1 threshold at its close. The exchange rate ended the first quarter at P50.16, shedding 0.88% as compared to the 2.52% loss in the final three months of 2016.

Yields of the 91-day Treasury bill jumped by 89.41 basis points (bps) on a quarter-on-quarter basis while that of 10-year debt paper increased by 42.73 bps.

The Philippine Stock Exchange index (PSEi) increased by 6.89% to 7,311.72 for the first quarter, compared to 10.34% decrease in the final quarter of 2016. It would be a few days later when the benchmark index would return to 7,400 levels for the first time in almost six months due to massive foreign buying.

Last year saw the Philippine economy growing by 6.9%, its fastest growth in three years on the back of robust household consumption as well as improving government and investment spending.

The government pegged the economic expansion this year at between 6.5% and 7.5% Analysts expect the looming US Fed tightening, the Trump administration’s fiscal policies, and the United Kingdom’s “Brexit” to affect the country’s growth prospects in the second semester of the year.

“I think, in general, it’s still going to be how Brexit is coming along and what the US does because it still closely affects everyone. Especially the US interest rates -- it affects your FX (foreign exchange), your rates...” Consuelo D. Garcia, country head of ING Bank N.V., said.

Ildemarc C. Bautista, vice-president and research head at Metropolitan Bank & Trust Co. (Metrobank), concurred as these “translate to more volatile financial markets and a bigger import drag in peso terms.”

His overall outlook is positive “as domestic consumption is expected to remain robust and the real economy on track for growth despite market volatility.”

Lourdes Patricia P. Felipe, financial markets head at Standard Chartered Bank, agreed, saying that in general, external developments will have minimal risk impact on the Philippines at the latter half of the year due to its robust domestic demand.

Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines (UnionBank), said the anticipated US rate hikes might trigger the central bank to raise its own rates in the second half of the year.

Despite the impending series of “lift-off” in the US, local bank lending remains to be healthy as supported by the country’s robust domestic growth, analysts said.

Interest rate hikes in the US create some upward expectation for local interest rates to follow suit, leading an upward bias for borrowing rates, Metrobank’s Mr. Bautista explained.

“However, the system is still awash with liquidity that provides some counterbalance to this upward yield expectation, so the overall impact may be muted, perhaps even delayed.”

But should the two US rate hikes materialize this year, UnionBank’s Mr. Asuncion said that “[b]anks may have to rethink lending strategies and see if their margins are still protected moving forward.”

Economists noted that current rates are still accommodative of Philippine economic growth even as domestic inflation is heating up -- at 3.2% year-to-date -- as this is still within the 2%-4% target band for 2017.

While the BSP has downplayed having to move in sync with the Fed, Guian Angelo S. Dumalagan, market economist at Land Bank of the Philippines (Landbank), offered a different view: ““Given the rising interest rates in the US, the Philippines might also need to increase its policy rates in order to temper capital outflows to the US. The BSP might just need to hike rates once given that domestic inflation remains generally manageable.”

He added that the BSP might hike its policy rates by 25 bps by midyear in response to more US rate hikes.

“Our sense is that the BSP may hike the RRP and RP rates but this will be more about signaling than a marked change in policy stance,” Metrobank’s Mr. Bautista said, referring to the reverse repurchase rate and repurchase rate, respectively.

“Rates may go up by as much as 50 bps towards the end of the year although as usual, it is expected that the BSP will move based on data first and foremost.”

Landbank’s Mr. Dumalagan: The stock market might show limited upward potential in the second semester due to expectations of two more US rate hikes and geopolitical uncertainties in the US and Europe. While a lot depends on the pace of US monetary tightening, the trajectory of the PSEi might also be influenced by local developments, including plans of the government to hike public spending. The index could drop below 7,500 temporarily, but it might likely end the year between 7,500 and 7,700.

UnionBank’s Mr. Asuncion: I see that the second half performance will be better and more steadily going upward. This is based on the biggest downside risk for Philippine economic prospects, which are the uncertainties brought about by the threat of protectionism and the further slowdown of world trade. The Philippine stock market has been largely tracking outside events rather than smaller domestic developments. However, it should still be stressed that the Philippines’ economic growth story is intact and foreign investors see the potential for more growth expansion under increased government spending and further fiscal reforms.

Standard Chartered’s Ms. Felipe: It dipped to as low as P50.40 in the first quarter but it did a correction. It was the laggard amongst all currency. It did a correction at P49.40s even very quickly and then it went up again. But I think in the second half, we’ll still see the currency trading at the P50 handle, particularly on the back of geopolitical noise plus in particular in the third quarter. It’s a cyclical thing for third quarters. It’s not really high US dollar flow part of the year: you have very low OFW remittances; some people say it’s the ghost month, you know those kinds happened in that quarter. In general, during the year cycle, the third quarter is relatively slow and it picks up again during the fourth quarter.

Landbank’s Mr. Dumalagan: The peso might generally depreciate in the second semester due to expectations of more rate hikes from the US Federal Reserve and bets of more clarity regarding the Trump administration’s fiscal plans. However, volatility might be elevated due to persistent political concerns in Europe and the US. The Philippines’ strong macroeconomic fundamentals could temper the peso’s depreciation.

UnionBank’s Mr. Asuncion: I expect the peso to trade within the band of P50 and P52 for 2017 and 2018. However, it seems that it has actually retreated back to the P49 level, and it might be temporary because of the expected long holiday break. It is important to point out, however, that the strength of the peso was because of the weakness of the dollar, as a lackluster jobs report came out [in April].

Metrobank’s Mr. Bautista: We expect that the peso will be on a depreciation trend for the 2nd half as the US Fed continues with its rate hikes and as the country embarks on its ambitious infra spending program, which tends to boost imports for capital goods, raw materials, and intermediate products, and thus add further depreciation bias to the peso. In this case such peso weakening would be indicative of strong domestic consumption spending and robust local demand rather than as a sign of economic weakness that a lot of lay people mistakenly believe.

ING’s Ms. Garcia: We still think it’s going to slightly weaken up to P51.9 this year.

Standard Chartered’s Ms. Felipe: Well for the government securities yield, [we are looking] at the recent RTBs (retail Treasury bonds) which is all at the shorter end of the curve. I think in general, we’ll find the peso bond yields go higher in the second half of the year, primarily in the second quarter where you see all issuances focusing on the longer part of the curve now. [W]e find that there is some defensive moves of the market because of that move of the government and we find that the shorter end then has more relative value than the longer part of the curve. So that being said, I think there’s really some pressure on an upward trajectory that the recent seven-year issuance at four and a half was not fully awarded and it’s a good thing that the government has some liquidity buffer because of the RTB issuance.

Landbank’s Mr. Dumalagan: GS (government securities) yields are also expected to rise as a trend in the second semester due to bets of higher inflation and more US rate hikes. Domestic interest rates might peak in the third quarter before stabilizing towards the end of the year. Volatility might also be elevated because of persistent political concerns in Europe and the US.

UnionBank’s Mr. Asuncion: I see more of the same as that of 1H (first half) of 2017.

Metrobank’s Mr. Bautista: There might be some more upward bias in the short-term yields as the markets prefer to go to short-term papers and ride up the yield curve in expectations of higher interest rates. However, there might be some counterbalance expected from the still high domestic liquidity so there will be some toss-up in the 2nd half. -- Mark T. Amoguis

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