Economist warns of PH asset price bubbles

A prolonged negative interest rate—or a situation when it gets costly for people to save money as interest rates can’t cope with consumer price increases—may create asset price bubbles, especially in the Philippine stock market, a top economist said.

In a research note on Friday, Emilio Neri Jr., lead economist at Ayala-led Bank of the Philippine Islands, said that with the upside surprise in the country’s November inflation rate—which spiked to 3.3 percent from 2.5 percent in October—the negative spread between the Bangko Sentral ng Pilipinas (BSP)’ policy interest rate and inflation had become even wider.

“It appears that the BSP is willing to tolerate this for now as the exchange rate remains stable. However, with the expected rebound in imports and oil prices rising in the coming months, as both private and public sectors already expressed their intention to resume importation of capital goods and raw materials for their expansion activities (which have been postponed this year because of the pandemic), the US dollar to Philippine peso exchange rate may move to 49 to $1 level in the first quarter,” he said.

Neri noted that the country’s year-to-date average inflation rate of 2.5 percent was far outpacing the “safe haven” one-year treasury bill rate of 1.7 percent, or 1.4 percent net of tax.

While the inflation path looks favorable in December onward, Neri noted that flood, swine flu and oil-related risks remained high, which could prolong negative real yields for the policy rate.

“Should this happen we might see a scenario where the BSP is compelled to hike rates at a time the economy continues to see weak GDP (gross domestic product) performance,” he said.

Due to the prolonged pandemic, the Philippines has fallen into an economic recession for the first time since 1998.

“Local bond yields may remain low in the near term given the monetary support provided by the BSP. However, risks related to inflation and the exchange rate remain elevated and can put a floor on further policy rate cuts and debt monetization efforts in the near term. Supply disruptions have kept food prices elevated and could be vulnerable to a surge in transport costs and trade restrictions,” he said.

The economist said this negative interest rate situation would pose a challenging environment for investors who were relying on interest income.

“On the other hand, negative real interest rates may also result in asset price bubbles, especially in the stock market as investors speculate on more BSP rate cuts, further depressing short-term yields and increasing risk taking to find higher-yielding (but riskier) corporate bonds, preferred and/or common shares,” Neri said.

He noted that the main-share Philippine Stock Exchange index (PSEi) was currently trading at about 19.2 times 2021 forecast earnings, which meant investors were willing to pay about 19.2 times the kind of money they expect to make from the basket of blue chips next year. The 15-year price-to-earnings ratio was at only 17 times projected earnings.

At its closing of 7,134.56 on Friday, the PSEi has actually declined by 680.7 points, or 8.7 percent, from last year’s finish. However, because earnings have dramatically declined this year due to the coronavirus pandemic and the consequent lockdowns, prices ended up higher relative to prospective earnings.

In the first nine months of the year, the 30 companies comprising the PSEi have seen an average 38.4 percent year-on-year drop in net profits. Three index companies—Bloomberry Resorts Corp., Jollibee Foods Corp. and San Miguel Corp.—have reported net losses during the nine-month period.

Meanwhile, foreign investors continued to dump local equities, with year-to-date net foreign selling estimated at $2.4 billion.

“Moreover, inflated home prices are already evident locally as more and more take advantage of the low interest rates environment. As is, Philippines already outperformed its Asian peers in terms of growth rate in home prices at 9.1 percent as of first quarter 2020,” Neri said.

On the spot foreign exchange market, Neri sees the peso slipping to the 49 level against the US dollar by the first quarter of 2021 as the country’s import levels start to normalize as businesses reopen after months of lockdowns. As of Friday, the peso closed at 48.04 against the US dollar.

Neri said one key risk to this foreign exchange outlook could be government underspending, especially in infrastructure. “With businesses still struggling, the lack of fiscal support and public construction may stall the recovery and dampen the demand for capital goods. Meanwhile, a decline in remittances amid the recession in other countries may exert additional pressure on the local currency,” he added. INQ