Economic growth should accelerate to 6% in 2024 from 5.5% last year driven by strong employment, much softer inflation and robust infrastructure spending. NG capital outlays (incl. infrastructures) should again reach at least 5% of GDP in 2024; in addition, large PPP infra projects (considered “Private Construction") have gained traction and likely to accelerate. These, together with inflation average of 3.8% full year (from 6% in 2023), should bolster consumer spending. The peso, however, will remain in depreciation mode due to large trade deficits and U.S. Fed inaction on policy rate cuts until mid-year.
Fixed Income Outlook
The bond market's rally in the last two months of 2023 ended at the onset of January as Fed officials pushed back on market views of early 2024 rate cut. U.S. job gains in December above market expectations and a slightly faster inflation print provided the basis for the cautionary statements. However, the January rise in U.S. bond yields appeared to have peaked at 4.15%, and this has already impacted PH bond yields. Peso bond yields will likely depend on domestic inflation and NG borrowings. The latter mirrors Q3-2023 BTr issuances and therefore not extraordinary. The local inflation print in Q1 will have a greater impact on bond yield movements. However, we expect 10-year benchmark yields to end the year between 5.25% and 5.75% as inflation rates ease and policy rates fall.
Philippine equity investors launched 2024 with more optimism, sending the PSEi higher by 3.6% to 6,680.45 by mid-January. The brighter macroeconomic, inflation and interest rate outlooks together with robust corporate earnings growth should provide substantial basis for the more sanguine view. Besides, expected policy rate cuts by the Fed and/or BSP late in H1 or early Q3 should add momentum to PSEi to reach 7,000 to 7,500 in 2024. Robust corporate earnings expanding by 11% and a slight upgrade of market PE to 12.6x to 13.6x would provide solid fundamentals to the more positive sentiment.