Bernardo M. Villegas
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Rebalancing Strategy
published: Mar 31, 2017



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Economic Forecasts for Current Year

          I have been joining road shows organized by the First Metrobank Investment Corporation, the biggest local investment bank, in various cities of the Philippines as well outside the country.  Business people in various regions highly appreciate this service of FMIC especially in these times of uncertainties in both the domestic and global economies.  Backed by research of economists of the University of Asia and the Pacific, the top executives of FMIC have shared freely with their clients and others valuable information that is needed by every business to plan their operations for the current year and beyond.  The theme of the entire briefing is “Riding the Winds of Change.”  I would like to share with my readers the key data on the Philippine economy that have been presented in these road shows.

         The GDP forecast of 7 to 7.5% for 2017 is on the high side of the government target, which is 6.5 to 7.5 % for the entire year.  FMIC expects the Philippine economy to sustain its growth in 2017 driven by higher capital investments as the government ramps up infrastructure spending, while the proposed tax reforms (expected to be in place by June of this year) can buoy consumption spending as the middle-income households are the major beneficiaries of income tax reduction.  Consumer spending will continue to benefit from OFW remittances which will sustain its growth of 2 to 4% annually and enhanced by the depreciation of the peso which is expected to average for the year P51 to $1.  Inflation is expected to moderately rise by 2.8 to 3.2% during the current year.  The tax reforms are seen to be inflationary.  According to the Department of Finance, the comprehensive tax reforms can have a 1.8% inflation effect due to its stimulative effect resulting from higher disposable income of middle-income households.  Oil prices are not likely to rise beyond $60/barrel due to increased supply coming from shale gas in the United States.  According to the BSP, inflation will range between 2 to 4% for the whole year.

         FMIC expects exports to recover in 2017.  The strengthening of the US economy, which accounts for 16% of the country’s total exports, and the moderate recovery of the global economy are expected to lift Philippine exports growth to 5-8%.  The country’s improved relationship with China (our third largest export market) is also expected to further boost exports.  The BSP is more conservative in its forecast of export at 2%.  Imports will be growing at double-digit levels of 10 to 14% as capital spending rises (mainly due to infrastructure projects) as well as higher oil imports.  Infrastructure spending is expected to be 5 to 5.5% of GDP.  BSP expects imports to rise at 10%.  The exchange rate will average at P51 to $1 as the peso comes under pressure from a strengthening US dollar with expected higher growth of the US economy and several increases in US interest rates.   

         Interest rates in 2017 are expected to rise by 20 to 50 basis points from its year-end 2016 level.  The short-end of the curve is expected to go up by 20 basis points, the belly by 30 basis points and the long-end by 50 basis points.  These forecasts are in line with expectations of higher policy rate in the US and the PH, increased spending for infrastructure, higher inflation and risks coming from China’s economy and uncertainties in the policies of President Donald Trump of the US.  The National Government Debt to GDP will be at a low of 42 to 43% (one of the lowest in the region).  The Bank’s experts on the stock market are making the fearless forecast that the index will be at 7,500 by year end, a projection assuming an Earning Per Share growth rate (forward) of 8% (based on Bloomberg estimate) and Price Earning ratio of 17x.  This implies an upside of 10% from the year-end PSEI level of 6,840 (as of December 29, 2016).

            As regards capital market issuances, FMIC expects a flurry of companies tapping the capital market in the first semester of the year.  There will a window for new equities issue in 2017.  Valuation will be very important.  Issuers are expected to be companies who are market leaders in their sector and have strong track records.  Merger and Acquisition (M&A) valuations will become reasonable given market development.  It would be advisable for companies to acquire foreign and domestic targets.  As rates go up, weak companies are expected to face more challenges, creating opportunities for consolidation.  FMIC plans more road shows, not only in key Philippine cities, but in leading Northeast Asian cities in China, Taiwan, South Korea and Japan, the main beneficiaries of increased interest of Philippine firms following the “rebalancing strategy” of President Duterte.  These are the countries that will most likely help the Philippines in implementing major infrastructure projects and in giving a big boost to manufacturing. For comments, my email address is bernardo.villegas@uap.asia