The Philippine macroeconomic picture could still turn uglier, with consumer prices surging further, gnawing on growth and investor confidence, but the environment will get much better next year, leading insurer Sun Life Financial Philippines said.
For 2018, Sun Life tempered its gross domestic product (GDP) growth forecast to 6.4 percent from 7 percent as higher-than-expected inflation had curbed consumption, Sun Life Philippines chief investment officer Michael Gerard Enriquez said in a market outlook briefing yesterday.
Inflation, on the other hand, likely probed 7 percent in September and has yet to peak. Enriquez said inflation might remain under pressure, especially with crop damage inflicted by Typhoon “Ompong,” and peak at slightly above 7 percent by the first quarter of 2019.
Amid a challenging macroeconomic environment, Sun Life is quite bearish on the stock market, forecasting the Philippine Stock Exchange index (PSEi) to end the year at 7,000 to 7,200 based on a “bottoms-up” approach which values individual stocks to come up with the index forecast rather than using a general price-to-earnings assumption.
“There will be more negatives before we see positives in the economy but it doesn’t mean there’s no opportunity to enter markets right now,” Enriquez said, adding that this was the time to pick up equities.
Starting next year, Enriquez said inflation—which measures the average increase in the prices of goods and services typically consumed by local households—should “normalize” and ease to a full-year average of 4.1 percent from around 5 percent this year. This is seen to further ease to 3 percent by 2020 or well within the 2-4 percent goal of the inflation-targeting Bangko Sentral ng Pilipinas (BSP).
Apart from the BSP regaining the market’s confidence that it could control inflation expectations with its recently-aggressive interest rate hikes, Enriquez said Sun Life’s assumption that inflation would normalize by 2019 largely hinged on the passage of the rice tariffication bill. This legislation will pave the way for the replacement of the quantitative restrictions on rice imports with tariff, removing unnecessary government intervention in the rice market, and thereby ensuring adequate supply of this main staple.
The shortfall in rice supply, along with the upsurge in oil prices and the higher excise taxes on vehicles, fuel and sweetened beverages, all contributed to the spike in the inflation rate this year.
After raising its key interest rates by a total of 150 basis points this year, Enriquez said the BSP might further tighten interest rates by 25 basis points more this year and by another 25-50 basis points in the first quarter of 2019.
As inflation normalises next year, Enriquez said the Philippine domestic economy could grow at a faster clip of 7 percent.
Meanwhile, Sun Life expects the peso to stabilize at P53.80:$1 this yearend and appreciate to P52.90:$1 by next year.
The currency appreciation projected this year factored in the seasonal influx of overseas remittances during the Christmas season as well as a massive initial public offering (IPO) worth as much as P141.8 billion planned by San Miguel Food and Beverage this year. If this IPO does not push through this year, Enriquez said the peso would likely end the year at the P54:$1 levels.
With normalizing inflation next year, Enriquez said this would also shore up the value of the peso, which is currently among the weakest currencies in Asia-Pacific this year.
By next year, Sun Life also expects the PSEi to recover to the 8,000 levels.