The Economic Weather Report

First Quarter 2019 Outlook & Forecasts

Research Department
 The Economic Weather Report
Economic Outlook & Forecasts
First Quarter 2019

EXECUTIVE SUMMARY CONTENTS

Present Conditions
Executive Summary………………….…………...…1
 The Philippines posted a fourth-quarter real GDP growth of 6.1%, slightly External Sector..…………..……………………..…..2
higher than the revised third quarter growth of 6%. Full-year 2018 average
growth is now at 6.2% compared to 6.7% in 2017. The country is still one of Real Economy………………………………..….……3
the fastest growing economies in the ASEAN region. The expansion in the last Inflation ………………..………………………………4
quarter of 2018 was mainly driven by sustained Government expenditures,
vibrant Industry sector, and tempered Net Trade drag. Interest rates …………………..……………….…….5

Foreign exchange……………………………...….…6
 Inflation for 2018 came in at 5.2% from 2.9% in 2017. A broad-based increase
in the prices of Food and Non-food items influenced the higher inflation in Key facts and Indicators………………….………...7
2018. Nevertheless, inflation momentum started to slow down after peaking in At a Glance……………………………….……...…….8
September and is seen to continue easing this year.

 The Monetary Board (MB) has raised policy rates by a total of 175 basis points Report by
(bps) in 2018. The MB hiked rates from May until November to arrest second- Pauline May Ann Revillas
round effects of inflation. Research Analyst

 The NG incurred a fiscal deficit of P477.2 billion as of November. November Published by the
Metrobank Research Department
expenditures alone grew by 19%, while revenues grew by 7%. The government
programmed a full-year deficit of P523.7 billion for 2018.
Metropolitan Bank & Trust Co.
11/F Metrobank Plaza,
 After a robust expansion in 2017 and steady growth in 2018, global economic Sen. Gil J. Puyat Ave.
activity is seen to lose steam this year. Mounting risks have put emerging Makati City 1200, Metro Manila

markets and their domestic weaknesses front and center, highlighting the need Telephone: (632)857-9954
to fix their structural imbalances to avert damage from an uncertain external (632)857-9388
Fax: (632)817-6355
environment.

PHILIPPINES: AT A GLANCE
Outlook PHILIPPINES: AT A GLANCE
2017 2018
Real economy YTD YTD
 Higher economic expansion in the coming years is largely
hinged on faster investment spending growth alongside Real GDP Growth2000=100 6.7 6.2
increased spending in public infrastructure. 3Q 3Q

Inflation2012=100 2.9 5.2

Inflation September NNov v
 Inflation is seen to continue easing this year on base Interest Rates (91day Tbill,
2.15 3.54
effects, steady global oil prices, and impact of rice WAIR)
3Q Sep
tariffication bill on domestic supply.
Foreign Exchange 49.93 52.72
(end-of-period) December NOct v
Interest rates
 The further rise in interest rates could be tempered by Current Accounts
-$2.5B -$6.5B
easing inflationary pressures and “tamer” Fed rate hikes 019 2Q 3Q
3Q 3Q
this year.
Budget Surplus/Deficit -P350.6B -P477.2B
Foreign exchange November Nov
2.2% 3.22.3%.2%
 Emerging market currencies, including the Philippine as % of GDP
peso, remain vulnerable to developments in the global
economy – US-China trade conflict, softening global Gross Int’l Reserves $81.467B $79.193B
commodity prices, and tightening liquidity. September Oct

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 External Sector

Weakening momentum amid challenges

Prospects for the global economy has turned gloomy amid noted weakening
activity in some countries and heightened risks. Headwinds such as softening
financial market sentiment, trade tensions, and a slowing Chinese economy
According to the IMF,
continue to weigh on the outlook. risks to global growth are
While the US economy is expected to continue growing above its potential, intensifying..
signs are showing that the economy might be losing steam. Consumer
confidence in December tumbled as concerns mount regarding the outlook.
Moreover, the ISM manufacturing index logged its steepest month-on-month
decline since the last recession. The partial government shutdown also
appears set to dent the 1st quarter GDP print, with the impact seen to be
0.50 percentage points off economic growth.
The Eurozone economy began to decelerate in the second half of 2018 and
concerns are rising that the deceleration might still deepen and drag on. The
downside risks include the possibility of a no-deal Brexit, continued trade
tensions between the EU and the US, and financial market volatility. Given
that policy rates remain historically low, the European Central Bank will be in
a tight bind as it has no more room to further cut rates.
Economic growth in China also slowed as spillovers from financial
deleveraging and trade conflict with the US continue to weigh on economic
activity. Policymakers are expected to rely on both fiscal and monetary
policies to avert a sharp slowdown, however, the scale of the stimulus might
be limited compared to previous years.
A number of emerging economies also faced hurdles amid a strong US
dollar, financial market volatility, capital outflows, and currency pressures.
The softening global trade and tighter financing conditions will pose a more
challenging environment for emerging economies this year.

Global commodity prices volatile in 2018

Energy prices fluctuated in the second half of 2018, reflecting supply issues, Global commodity prices are seen to stabilize this year following
with sharp drops noted towards the end of the year. On the other hand, sharp movements in 2018
trade tensions between China and the US, including the imposition of tariffs
on a range of products, have had different effects on metals and agricultural
commodities.

Global crude oil prices averaged $68 per barrel last year, with prices
touching its peak of $86 per barrel in early October before falling sharply in
November. The increase in supply by the Organization of the Petroleum
Exporting Countries, coupled with the surge in the production in the US,
pulled crude oil prices down.

Metal prices also posted a sharp decline in the second half after increasing in
the early part of 2018 amid heightened trade tensions and a sustained
slowdown in the Chinese economy.

Agri prices, meanwhile, were largely affected by the substantial drop in

soybean prices towards the end of the year. The imposition of tariffs on
soybean from the US led to a 25% year-on-year cut in China’s imports of the
said commodity.

Following the sharp movements in 2018, global commodity prices are

expected to generally stabilize this year.

The many challenges ahead Downside risks to global economic growth have risen in the past few
months and the potential for upside surprises has waned
The International Monetary Fund said that downside risks are intensifying,
with the likelihood of financial stress further dampening prospects for
emerging economies. A synchronized slowdown in the economies of China
and the US also does not bode well for the global economy as policy
response could be limited for some countries.

Source: IMF Page| 2


Looking at the nominal GDP
growth, expansion is actually on a
sustained rise since the start of
2018… signifying that the
economy is still on a growth trend
and not slowing down
Source: PSA
Real Economy
Philippine economy still grows above 6%
Philippine economic growth capped 2018 still above the 6% level. In the
fourth quarter, the economy recorded a growth of 6.1% (based on
constant 2000 prices), slightly higher than the revised third quarter
growth of 6%, albeit lower compared to the 6.5% expansion recorded in
the same quarter in 2017. Full-year average real GDP growth came in at
6.2% from 6.7% in 2017.
Conversely, when you look at the nominal GDP or GDP based on current
prices, expansion is actually on a sustained rise since the start of 2018,
signifying that the economy is still on a growth trend and is actually not
slowing down. Real GDP growth was generally dragged down by a higher
GDP deflator.
The expansion in the last quarter of 2018 could be mainly attributed to
sustained Government expenditures, vibrant Industry sector, and
tempered Net Trade drag.
On the demand side, household spending growth surged in nominal
terms, indicating that domestic demand is still strong despite the high
inflation. Consumption spending, in real terms, would also have actually
been higher if not for the elevated consumer prices in 2018. Government
expenditures growth remained solid as National Government spending is
seen to come within, if not near, the target for the year. However,
investment spending or capital formation growth was lower, failing to
sustain its double-digit growth in the first there quarters, on the back of a
significant slowdown in its durable equipment subsector. The net trade
drag moderated as imports slowed down faster than exports during the
quarter.
On the supply side, growth of the Service subsectors slowed in the second
half of the year, with the transportation, storage, and communication
showing the biggest decline in the fourth quarter. The Industry sector
growth remained solid, supported by the strong performances of the
mining and quarrying, construction, and electricity, gas, and water
subsectors. The Agri sector managed to post a modest 1.7% growth after
dismal expansions in the first three quarters as the sector was battered by
unfavorable weather conditions and low production.
Still positive outlook for the domestic economy
Growth moving forward will still be supported by sustained expansions in
government spending, rebound in household consumption, and solid
performance of the industry and service sector.
GDP growth this year is seen to be higher on the back of base effects,
sustained infrastructure spending, and election-related spending.
Sustained infrastructure outlays are expected to underpin the growth in
investment spending. The government’s infra program will continue to
open more opportunities for the private sector to expand business
activities and increase capital spending. Furthermore, household
consumption spending is expected to be higher this year as inflation and
interest rates ease.
Our 2019 full-year forecast of 7.1% is with a downward bias as the delay
in the approval of the 2019 National Budget could dent GDP growth.
Moreover, wider trade deficit gaps, amid a possible global economic
slowdown and higher imports, could also temper growth.
Page| 3
 Inflation

Inflation slows down further

Headline inflation in December further eased to 5.1% from 6.0% in

November as inflation momentum continues to slow down. Full-year
inflation averaged at 5.2% from 2.9% in 2017.

The slowdown in the inflation rates for food and non-food items pushed
the overall inflation down. Almost all of the items under the food index
posted slower increases, especially rice, amid the ongoing harvest
season and additional supply from rice imports. Likewise, non-food
inflation moderated primarily due to lower transport inflation and softer
global oil prices.

Less upbeat consumer sentiment

Consumer sentiment continues to be less upbeat for the fourth quarter

to -22.5% from -7.1% in the third quarter. The current reading is the
Month-on-month inflation decelerated to -0.6% in December from -
lowest recorded since 2014 and has the largest drop posted since 2007.
0.2% in November, pointing to a sustained slowdown in inflation
Respondents attributed the negative outlook during the quarter to momentum
higher consumer prices, low income, increased household expenses, and
high unemployment rate. Likewise, sentiment for the next quarter and
the year ahead turned less positive.

For the first quarter of 2019, the spending outlook index of households
on basic goods and services fell to 42.3% from 45.7%. Fewer
respondents expected increased spending on food, non-alcoholic and Inflation this year is seen to
alcoholic beverages, clothing and footwear, house rent and furnishing, come in below the 4% level
water, electricity, fuel, communication, and restaurants, and cafés. amid base effects, sustained
The BSP measures consumer confidence across three component easing in food prices, and
indicators: the country’s economic condition, family financial situation, steady global oil prices
and family income.

Higher money supply growth

M3 growth was higher at 9.2% in December and reached P11.6 trillion

from 8.5% in the previous month. Demand for credit remained the main
driver of domestic liquidity growth. Bulk of bank loans for production
activities continued to be channeled to sectors like electricity, gas,
steam, and airconditioning supply, real estate activities, manufacturing,
financial and insurance activities, construction, and wholesale and retail
trade, among others. The growth in loans for household consumption
declined amid the slower expansion of loans for motor vehicles, credit
cards, and salary-based general purpose consumption.

Growth of net foreign assets (NFA) in peso terms grew by 1.3% after
declining by 3.2%, reflecting the increase in the gross international
reserves.

Inflationary pressures have abated

Inflation peaked in October and is seen to continue tapering off

gradually this year. Upside pressure on food prices have generally
moderated amid measures undertaken by the government to address
supply chain bottlenecks, especially of rice. Global oil prices, while Consumer sentiment in the fourth quarter of 2018 was the lowest
increasing from their November and December lows, are seen to remain recorded reading since 2014
within the $60 per barrel range amid growing concerns over global
economic growth.

Base effects, a sustained easing in food prices, the passing of the rice
tariffication bill, and steady global oil prices could see inflation coming in
below the 4% this year.

Source: PSA, BSP Page| 4

 Interest Rates
Investor appetite flock to the longer end of the curve

In the start of the year auctions, market demand showed that preference
is still for the longer end of the yield curve amid expectations of sustained
easing in inflation and possibly lesser Fed rate hikes this year.
The latest auctions showed
In the January 28 auction, the government partially awarded the 91-day
that market demand was high T-bill, but fully awarded the 182-day and one-year debt papers. The 91-
on the longer end of the yield day T-bill rate rose by 11.6 bps to 5.534%. Meanwhile, P6 billion worth of
182-day papers were sold at a yield of 5.892% from 5.914%, while P8
curve amid expectations of
billion worth of one-year debt paper were awarded at a rate of 5.946%
easing inflation from 5.969%. The government also opened a tap facility for the one-year
Tbill to maximize the strong demand and raised P8 billion more.

Last January 23, the government also raised P30 billion worth of 20-year
Treasury bonds through an auction and a tap facility. The debt note
fetched an average rate of 6.716% from 6.979%.

The first quarter domestic borrowing program is set at P360 billion, P240
billion of which are T-bills while the rest are T-bonds. Borrowing from
local and foreign sources for the whole year is programmed at P1.189
trillion.

Fiscal gap almost doubles

The yield curve for end-December 2018 has flattened amid easing
inflation and declining global oil prices
The government’s fiscal deficit for the January to November period almost
doubled, coming in at P477.2 billion from P243.5 billion posted in the
same period in 2017.
For November alone, the NG recorded a P39.1-billion deficit as
expenditures grew faster than revenues. Revenues for the month were
7% higher year-on-year at P259.7 billion while expenditures grew by 19%
to P298.8 billion. The government said that expenditures are expected to
ease in the last quarter of 2018 as it already front-loaded its projects in
the first nine months of the year.
The government has set the fiscal deficit target for 2019 at 3.2% of GDP
from 3% in 2018.

Five rate hikes for 2018

In its December Monetary Board (MB) meeting, the BSP decided to keep
policy rates steady after hiking rates five times in 2018. The BSP started
increasing policy rates in May and ended in November, with the
cumulative increases totaling 175 bps. Overnight RRP rate is still at
4.75%, while the overnight lending rate is at 5.25%, and the overnight
deposit rate is at 4.25%.

The MB noted that the latest inflation forecasts showed a lower path over
the policy horizon, with inflation setting within the target band of 2%-4%
for 2019 and 2020.

Interest rate direction

Expenditures for the first eleven months of 2018 have grown by an
average of 25% versus average revenue growth of 16%
The yield curve is seen to remain flat in the near term. The rise in the
short-end of the yield curve will be tempered by expectations of “tamed”
US Fed rate hikes next year. The long end, on the other hand, could start
going down on softening crude oil prices, easing inflation expectations,
and more issuances of longer-dated securities this year (because of the
higher programmed borrowing).

Source: BSP, BTr Page| 5

 Foreign Exchange Rate

Volatile financial markets

Capital flight, tightening global liquidity, and worries over US-China

trade tension caused volatility in the global financial market in 2018.

As investors lowered their exposure to riskier assets, emerging

market economies, including the Philippines, experienced net capital
outflows in the third quarter of 2018. From the start of 2018, the
Philippine peso depreciated by 5% as of the last trading day of the
year.

Factors that influence exchange rate behavior

Capital flows, in the form of foreign portfolio investments (FPI) in

stocks, securities and currency markets, yielded net inflows of $1.2
billion in 2018, a reversal from the net outflows of $195 million The Philippine peso appreciated from the previous P54:$1 levels on
recorded in 2017. The turnaround was despite downside risks such fears of a possible global economic slowdown
as trade tensions, US Fed rate hikes, weak peso, and elevated
domestic inflation. Portfolio investments registered during the year
were mainly in PSE-listed securities (71%), peso government
securities (20%), and other peso debt instruments (8.3%).

The country’s trade deficit for the January to November period was
recorded at $37.8 billion, higher than the $24.6 billion deficit posted
in the same period in 2017. Imports continued to grow at a faster
pace than exports amid the sustained rise in the importation of
capital goods and raw materials and intermediate goods.

OFW remittance flows for the first 11 months of 2018 posted a year-
on-year growth of 3.1% to $26.1 billion. The modest growth of
remittance flows last year was mainly driven by the repatriation of
OFWs from the Middle East as well as the closure of service facilities
on money service business of some global correspondent banks.

The country’s gross international reserves as of end-December rose

to $79.2 billion, from $75.7 billion in November, on the back of the Net inflows were recorded in 2018 despite external and internal risks
BSP’s forex operations, the government’s net foreign currency
deposits, and revaluation gains from the BSP’s gold holdings. The
level of reserves started to rise in November after posting steady
declines since the start of the year.

Push and pull for the peso

The USD is seen to come under pressure in the near term amid Foreign investors might edge
fears over a slowing economy and the likely end of its monetary
policy tightening cycle. Foreign investors might edge away from the away from the US dollar and
greenback and go back to emerging market currencies. go back to emerging market
currencies
Nevertheless, there is still depreciation pressure on the local
currency this year as emerging market currencies remain vulnerable
to developments in the global economy – escalating US-China trade
war and tightening global liquidity. Furthermore, the expectations
of higher imports on the back of the government’s massive infra
spending plan would still weigh on the peso.

Page| 6
Source: BSP, PDEx
 KEY FACTS & INDICATORS
According to the IMF, the global expansion has weakened and prospects for this year have turned uncertain.
Moving into this year, global financing conditions have tightened, industrial production has weakened, trade
tensions remain heightened, and some economies have experienced significant financial stress. Given these
headwinds, concern is growing that the global economic recovery has already lost momentum. Moreover, some
economies no longer have enough room for further policy response should the slowdown in the global economy
prove to be significant.

In the domestic front, the sustained increases in government, rebound in consumption spending, and pickup in
investment spending should support a higher GDP growth this year. Inflation is expected to continue easing amid
the impact of BSP policy rate hikes and non-monetary policy measures aimed at addressing domestic food
supply chain bottlenecks.

ACTUAL FORECASTS
FORECASTS
2017 2018 2019
GDP Growth 6.7% 6.2% 7.1% -.5%

Inflation 2.9% 5.2% 3.6 %

Overnight RRP 3.0% 4.75% 4.50%

(eop) (yearend) (yearend) (yearend)
Foreign Exchange 49.93 52.72 54.20
(eop) (yearend) (yearend) (yearend)
# estimate

MARKET WATCH
Government Bonds Yield eop
(BVAL) (as of 01.31.2019)
5Y T-Bond 6.228
10Y T-Bond 6.370
Rate eop
Currencies
(as of 01.2019)
USDPHP 52.120
JPYPHP 0.478
EURPHP 59.696
Value
Stock Market
(as of 01.31.2019)
PSEi 8,007.5
Rate
Policy Rates
(as of 01.2019)
BSP Overnight Lending 5.25
BSP Overnight RRP 4.75
BSP Overnight Deposit 4.25
Sovereign Ratings Rating Outlook
S&P BBB stable
Moody’s Baa2 stable
Fitch BBB stable
R&I BBB stable
Source: BSP

As of January 31, 2019

Page| 7

DISCLAIMER INFORMATION:
The report above is circulated for general information only. The opinions expressed are solely those of the contributors and are based on prevailing market
conditions and public sources that are believed to be reliable. Metrobank and the report contributors/support staff do not make any guarantees or representation
as to the accuracy, completeness or suitability of this report. The report may contain confidential or legally privileged material and may not be copied,
redistributed, or published without prior written consent. Opinions or strategies contained in this publication may change wi thout prior notice and should not take
the place of professional investment advice or sound judgment on the part of the reader.
 PHILIPPINES: AT A GLANCE
PHILIPPINES: AT A GLANCE
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019F

Real GDP Growth2000=100 7.6 3.9 6.8 7.2 6.1 5.9 6.9 6.7 6.2 7.1

Inflation2012=100 3.8* 4.6* 3.2* 2.6 3.6 0.7 1.3 2.9 5.2 3.6

Foreign Exchange (eop) 43.89 43.93 41.19 44.41 44.62 47.17 49.81 49.93 52.72 54.20

Current Accounts $7,179M $5,643M $6,949M $11,384M $10,756M $7,266M -$1,199M -$2,518M -$7,200M f/ -$8,500M

Budget Deficit -P314.0B -P197.8B -P242.8B -P164.1B -P73.1B -P121.7B -P353B -P351B -P520B f/ -P650B

as % of GDP 3.7% 2.0% 2.3% 1.4% 0.6% 0.9% 2.4% 2.2% 3.0% 3.2%

Gross Int’l Reserves $62,067M $75,302M $83,831M $83,749M $79,806M $80,667M $80,692M $81,569M $79,193M $80,000M

*base year is still 2006

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