The title of my article today (Oct. 23, 20212) is what I thought investors should do in reaction to what economist Victor Abola discussed in an economic briefing with the press last week.
Abola is the current program director for Strategic Business Economics Program of the University of Asia and the Pacific. His presentation revolved on “Petroleum Prices and Exchange Rates as Potential Sources of Inflation.” It included a commentary on how the country had confronted these issues, thus the added title “And the Philippine Response.”
On petroleum prices
Abola expected crude oil prices to drop further next year. Behind this forecast, he cited increased production capacity from the non-Opec countries and the growing impact of natural gas production in the last two years from the Appalachian basin in the United States.
According to Abola, the government was correct in adopting the oil deregulation program. The country has actually derived beneficial effects in the management of oil prices. Oil deregulation resulted in “lower average ROE of the three major oil companies.” In their study during the “regulated period” covering 1994 to 1996, he noted that the average ROE was 23 percent. This fell to 13 percent under the “deregulated regime” covering 1998 to 2011.
On the removal of subsidies due to the deregulation program, the study stressed that “the ratio of local pump prices to world prices is lower and less volatile than (during) the regulated period.” This was in addition to the observation that the deregulation program has actually promoted competition to temper retail pump prices and made the country actually achieve what he described as “fair pump prices.”
As he noted, pump prices tended to be lower in areas where there are more competing retail outlets. This is not to mention the participation of some 800 small independent players whose presence in the market has certainly contributed to the lowering of oil product prices, too. Accordingly, from 3,500 retail outlets at the start of the program, this has grown by 27.4 percent, or 4,459, as of the end of 2011.
But what will certainly keep down pump prices, according to him, is the small impact created by a rise on oil prices to inflation. A 10-percent change in oil prices, based on their price model, results in only a 0.66-percent change in inflation. Applying this to the forecast made by the Energy Information Administration of the US Department of Energy, which claims that the price of Brent crude will drop by 7.5 percent in 2013, this will translate only to a minus 0.5 percent impact on inflation. In actual Philippine pump prices, this will lead to an average decline of P3.20 a liter for unleaded gas and P3 a liter for diesel.
On exchange rates
While the exchange rate is not a major tool for growth as it has an unfavorable impact on inflation, Abola concurred with the government’s current effort to control the country’s exchange rate to be a part of the program to foster growth. A further depreciation of the peso can actually help boost exports, more employment and income.
A strong local currency could bring about increased import dependence and massive job losses because the price of local exports can become more expensive and less competitive while foreign goods become cheaper. When this happens, this will lead to increased importation which, in turn, leads to actual employment increase in the foreign country and reciprocally undermine local employment.
Under a lower currency regime, imports will become more expensive. This will force domestic companies to source alternative or otherwise needed materials locally and effectively bolster local employment. A lower exchange rate is not necessarily a sign of weaker economic status. Korea is one example. The exchange rate of the Korean won to the dollar is about KRW 1,105.91 to US$1 as compared to P41.38 to US$1. Yet, according to him, Korea is estimated to be 10 times bigger and stronger than the Philippine economy at present.
The more compelling reason for this strategy, however, is the result of their calculations in the relationship—positive or negative—between the country’s exchange rate and inflation. He said that a 10-percent change in the prevailing exchange rates would only result in a 0.3-percent change in inflation. The pass-through effect (ERPT) is so small that a further depreciation of the peso could be used as an alternative tool for growth.
In summary, Abola said he was “bullish about the inflation outlook.” He clarified this by saying: “I don’t expect inflation to be a very big problem this coming year and most probably the years to come,” a conclusion that conforms with the forecast of the government on inflation to “stay around 3 to 5 percent every year until 2016 with economic growth also to peak at 7.5 to 8.5 percent by 2016.”
This hype on the Philippine economy seems to have caught on in the market’s imagination even long before last week’s economic briefing. If you will notice some stocks have been in play long before this. One that I have not mentioned yet is Pepsi-Cola Products Philippines Inc. (PIP). PIP is the licensed bottler and distributor of PepsiCo Inc. and Pepsi Lipton International Ltd. in the Philippines. It manufactures Pepsi-Cola, 7Up, Mountain Dew, Mirinda, Mug, Gatorade, Lipton, Tropicana/Twister, Propel and Sting.
From the PSE website, PIP has a reported 52-week low of P2 and a 52-week high of P4.92 a share. Based on its reported financial data at the PSE website, PIP has a reported net income of P0.08 a share as of the end of 2011. Attendant to this, the price of PIP traded between P2 and P2.50 in 2011.
Following the deadline for the submission of operating results for the second quarter, the price of PIP suddenly came alive because, if you look closely, the cumulative net income of PIP as of the end of June amounted to a whopping P0.16 a share. At current prices, PIP shares have gone up by more than 80 percent.
If the price of PIP is already spellbinding, the ongoing stock play in Lucio Co’s Alcorn Gold resources Corp. (APM) will blow your mind away. Not that exactly loved by everyone—but for having delivered performance points where it mattered, which has propelled the share price of his listed Puregold Price Club Inc. (PGOLD) to where it is now (P30 and above)—the play has turned from interesting to captivating. It has kept a friend to text incessantly asking for the very answer that only Lucio Co and his financial adviser, Stevie CuUnjieng of Evercore Partners, know at the moment.