Philippine Inflation Data for May is headlined to be at 7.1-7.9% in the latest release of the BSP, largely driven by rising prices of rice, vegetables, and meat, and the inability of the Peso to meet expectations. This heightened inflation has raised eyebrows across the board. But the bigger questions till stands. What’s steps are we taking in reshaping this existential shakiness of Philippine investments and securities?
But this result is not largely unexpected and has been in fact, priced in by the market. With the PSEI plunging towards 5768.67 levels , trading well below its 90 (6151.27) and 30(5947.9707) day averages.
Which quite frankly is unnerving. But we are not surprised. The index has been down -4.91% YTD, initially fueled by the Iran and US conflict which resulted in prices to sky-rocket, at the same time have also been hammered by existential tensions in the Philippine Government, particularly the Senate.
Since the start of the Philippines Economic turndown brought upon by the Flood Control Scandal last January, utilities have been holding their ground such as $MER and $MYNLD. Banks in the Philippines should be a logical fallback, but its yields have not been attractive enough for their corroding prices in companies such as $MBT and $BPI, and it’s not hard to not understand why. When Central Bank rates sit at 4.5% and inflation flashes at 7.9%, the looming threat of Non-Performing Loans, despite the potential yields on newer loans, makes it easy to realize why most stocks are down. Expect Real-Estate and Consumer-Discretionary to both be in tough spots this month as well.
With raging inflation added to the mix, it’s not difficult to say that the Philippines is in a serious situation. But the hard truth is still on the table and interest-rate hiking can only do so much. The Philippines is structurally heavily reliant on a service-oriented economy and remittances. Unless we see serious structural catalysts soon, specifically moving up the global value chain into high-margin sectors like semiconductor manufacturing or heavy industry—the Philippines is bound to weather the same economic headwinds and inflationary storms perpetually. If we don't pivot our export complexity, we remain completely exposed to the whims of the US Fed and global commodity prices, something we have definitely seen today.
To combat this 7.9% inflation, the BSP is reportedly eyeing a rate hike of up to 50 basis points from the current 4.5%. Yet, this has done little to stop the bleeding in Net Foreign Buying. The lack of foreign interest in Philippine markets boils down to uncompensated currency risk. Because the US Federal Reserve is maintaining high rates to fight sticky domestic inflation, the interest rate differential between the US and the Philippines remains stubbornly tight. Foreign investors are looking at our markets and realizing a harsh reality: a decent Philippine yield means absolutely nothing if the Peso depreciates against the Dollar before they can repatriate their funds. Consequently, capital flies to the safety of the US Dollar. The BSP is left in a bind—forced to hike rates to defend the Peso and stop capital flight, effectively accepting an economic slowdown as collateral damage.
Boris L.
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