Intelligent Investing

Bad news getting worse

Last April, I discussed why I was expecting a “U” and not a “V” shaped recovery for the Philippines, even after the economy reopens from the lockdown.

While I was already bracing for bad news, what I am seeing so far today is worse than what I was expecting.


Earlier this month, the government disclosed that the Philippines’ first quarter gross domestic product (GDP) fell by 0.2 percent. This was much worse than the consensus forecast of a 2.7 percent growth.

If the economy already contracted during the first quarter with just two weeks of enhanced community quarantine (ECQ), what more should we expect in the second quarter? For April, almost the whole country was under ECQ, and this month, several areas continue to be under some form of quarantine. It is still uncertain if lockdowns will continue in June. However, even if lockdowns are completely lifted, the new normal will still be far from what it was before the COVID-19 pandemic broke out as people continue to practice social distancing. That said, the GDP contraction would probably be very steep in the second quarter such that the government’s forecast of a full year contraction of 2 to 3. 4 percent would most likely be reduced further.


Corporate earnings results have also been very disappoin­ting, with an overwhelming number of companies reporting wea­ker than expected first quarter profits. In fact, some companies already reported losses. Again, this materialized despite just two weeks of lock down. Although our research team at COL Financial already reduced our 2020 earnings forecasts by a median rate of 27 percent, it seems like our adjustment is still not enough.

As companies now have a better idea of how bad earnings or losses can be, massive layoffs will most likely materialize in the next few months as businesses prioritize sta­ying solvent. In fact, nume­rous companies have already reduced their capital expenditure programs and cut their dividends to preserve cash as they are bracing for hard times under the new normal.

And while our government has been very prudent in responding to the COVID-19 pandemic, with the Philippines’ stimulus being among the lowest in Asean (as a percentage of GDP), the Development Budget Coordination Committee (DBCC) recently announced that it now expects our country’s deficit to GDP to balloon to 8.1 percent this year, up from 3 to 5 percent previously. It also said it was projecting our debt-to-GDP ratio to jump to 50 percent by the end of the year from 39.6 percent as of end 2019. The said numbers are expected to deteriorate as wea­ker economic growth coupled with new incentives granted to businesses will result in lower government revenues.

Because of the government’s worsening financial position, the DBCC also announced the government would reduce its planned expenditures by 8.4 percent for 2021 and 13.1 percent for 2022. As a result, government spending will only increase by a CAGR (compound annual growth rate) of 3.5 percent from 2020 to 2022, down from 10 percent previously. This is bad news for the Philippine economy as its other growth drivers, namely the consumers, businesses and exports, are also expected to face challenges. Even worse, despite the government’s belt tightening initiative, our budget deficit is expected to remain high at 6 percent in 2021 and 5 percent in 2022, further pushing up the country’s debt to GDP ratio. The Philippine government’s deteriorating financial position could potentially lead to higher interest rates and a weaker peso.

Although I remain optimistic that we will eventually overcome this COVID-19 crisis, it is hard to expect the stock market’s strong performance the past few months to be sustainable in the short term as bad news continue to get worse. Admittedly, a lot of stocks are trading at ridiculously cheap valuations. However, to make money, investors who buy stocks today must be ready to face volatility and hold on to their positions for a very long time as it seems like the worst is not yet over. INQ

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