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7:00pm    26 February 2010    Philippine Stock Exchange Index   3043.75  (+0.412%)

Since we are coming to a weekend, we have time to look at the macro economic outlook in the Philippines.  If you recall from the price action of last year’s rally, when investor had a conviction that the global economy was recovering, they took the entire market higher.  It was on the third week of March 2009.  We can scan the landscape and examine existing macro fundamentals.

The overall outlook for the Philippine economy for the remaining months of the first semester is moderately positive as we expect the following:

Gross Domestic Product (GDP) growth for Q1 is likely to be below 3%, considering a 2-3% decline in agricultural output due to El Nino, and strong peso that will limit the stimulative effect of OFW remittances. Growth may only be slightly faster in Q2 due to heightened election spending.  December 2009 exports showed a second consecutive month of growth (y-o-y) of 23.6%.  Exports amounted to $3.30B, a billion higher than the $2.68 B of the same month in 2008. This resulted to a year-to-date level of  $38.3 B, 21.9% lower than $49.1 B a year ago.  Because the increasing East Asian markets are growing fast, the outlook for exports will keep growth in the positive territory.

Inflation will remain range-bound between 4.0% to 4.6% in the coming months despite the recovery in crude oil and metallic mineral prices, because of weak domestic aggregate demand.  Recent inflation figures showed that inflation rate eased in January 2010 at 4.3% (y-o-y) slightly lower than the 4.4% posted in December.  The food index was down from 5.2% (y-o-y) to 4.3% in January.  Crude oil was also stable between $70 to $80 during the period creating very little pressure on other commodities.

The National Government’s deficit will track more closely the targets for H1 considering improved tax revenues in the first two months of the year  due mainly to the relatively faster pace of GDP growth compared to last year’s average of 0.9%.  The December figures gives some light on the emerging deficit for 2010.  Tax revenues went up by 15.2%, the first positive growth since June 2009 and the first in double-digits in 14 months.  The Bureau of Customs (BOC) managed only a fairly flat 0.4% growth in collections because imports are not yet that strong.  The Bureau of Internal Revenue (BIR), on the other hand, posted exceptional increase of 19.9%.  What is encouraging are the initial reports from the two agencies which point to above-target performances in January 2010.

Overseas Filipino Workers (OFW) dollar remittances have been kept a double-digit growth pace in the last two months of the year.  The higher clip of remittances than last year and increased corporate savings, total liquidity of the financial system will remain robust.  When matched against weak demand for money, especially, with the National Government financing most of its deficit from foreign capital markets, interest rates are likely to drift downward in H1.  This assumes an unchanged monetary policy.  With the economic recovery remaining tepid, the BSP has enough leeway to even ease policy rates further.

The Balance of Payments.  While exports will post above 20% (yo-y) growth record, imports (which has a higher base) will move in tandem.  Given higher crude oil prices and larger rice imports compared to 2009, the trade balance will see a slightly wider deficit.  Fortunately, a sufficient amount for targeted foreign exchange reserves accumulation would still be available from the rise in OFW remittances.   The US dollar should continue its recovery with European markets being suppressed by Greece and the weaker Mediterranean countries and Ireland.  With interest rates lower in H1, the peso should be biased weaker and volatility of the peso might be more pronounced in the middle months of the year compared to the first two months of 2010.

This is the backdrop of my outlook on the Philippine market as of this month.  Notice that the important economic factors are growth, inflation, fiscal position of the national government and the balance of payments.  Interest rates and foreign exchange rates will move in response to the former indicators.

Right now, the economic outlook does not look ba at all.  It is actually the political picture that provides greater uncertainty.  The consensus among market professionals is that our market will be constrained by the forthcoming elections in May.

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