The downtrend in inflation which is expected to decelerate further to below 4% by H2-2019 is likely to boost consumer demand. Along with robust spending on infrastructure and capital outlays, election-related spending and job generation, we think that PH economic growth is poised for a faster expansion in 2019. We think MB’s policy hiking cycle has ended as brakes on inflation get a better grip in 2019. However, with banks’ liquidity positions tightened by Basel 3, we expect a 2 percentage points reserve requirement cut in 2019 and a policy rate cut by H2-2019.
With interest rates in the US down for more than transitory reasons, we think the local bond market will move more in response to local developments. While the banking system has liquidity needs to meet Basel 3 requirements, these can be met by BSP cutting reserve requirements without changing its policy stance. As for higher NG borrowings, higher domestic savings arising from fast growth should cover most of it. Thus, inflation will be the main factor that we focus on. Since we think that inflation is definitely on the way to within BSP inflation target by H2-2019, investing in local bonds look promising for 2019.
Rapidly dropping inflation, erasure of crude oil gains in 2018, election spending and continued ramping up of infrastructure and capital goods spending point towards stronger domestic demand and earning prospects, providing impetus for a rebound in the local equity market in 2019. Fragility in global markets could dampen the positive outlook.