Over the past few months, the country’s debt stock level has been growing at a pace that many consider potentially risky.

In April, it settled at a higher level of PHP 13.91 trillion, growing by 0.4% from PHP 13.86 trillion in March 2023. This has been the Philippines’ highest debt level yet and it can’t be said that it’s going down anytime soon. What led to this surge in debt in the first place?

Since 2006, the country’s debt-to-GDP ratio has been well below the so-called threshold of 60%, while the fiscal deficit has been at -3.6% of GDP at the maximum. However, the unanticipated shock triggered by the pandemic pushed the country’s deficit further down, prompting more borrowings to finance a pandemic response and fund the country’s way to recovery while keeping its infrastructure programs going. This then pushed up the debt-to-GDP ratio to levels breaching 60%.

The government projections above show that the debt-to-GDP may hover above 60% until next year.

According to a 2022 study by the Philippine Institute for Development Studies (PIDS), around half of the debt accumulated in 2020, at the peak of the pandemic, was actually allocated as cash buffers. These funds were part of a precautionary measure in case the pandemic dragged on. The government has reportedly maintained this practice of setting aside cash buffers to date.

More to come, as planned

Every year the government sets its target borrowing for the year and the next years, considering its projected deficit and upcoming maturities, among other things. For 2023, the government intends to borrow PHP 2.2 trillion, from which PHP 1.6 trillion will be sourced domestically, and is bound to grow further in 2024 and slightly decline in 2025, with the deficit seen to gradually ease per year

A gradual decline in fiscal deficit is expected.

Debt payoff: Maturities ahead

With the Bureau of the Treasury (BTr) already fulfilling 69% of the government’s borrowing program as of end-May, there is a few years’ worth of maturities that is needed to be pre-funded. The Philippines’ debt maturity profile shows that the BTr has room to issue another Retail Treasury Bond (RTB) as early as next month ahead of the first chunky maturity in August worth PHP 141 billion, followed by a PHP 144 billion in September.

The government has a bit of room to issue for 2026 (3 years), 2029 (6 years), and 2030 (7 years). It is also possible that they will issue an odd-tenored RTB (e.g., 5.5 or 6.5 years) just like last April with Fixed Rate Treasury Note (FXTN) 13-1, the first series of its kind. We therefore expect sizable issuances in order to pre-fund these maturities.

The Bureau of the Treasury has room for sizable issuances for the government’s budgetary needs.

Managing our debt

Over the next years, the country’s Medium-Term Fiscal Framework (MTFF) aims to lower the debt-to-GDP and deficit-to-GDP ratios simultaneously.

Analysts and economists alike acknowledge that there’s still a long way to go before the country’s debt goes back to comfortable levels, even challenging MTFF’s targets by 2028, considering upcoming maturities, projected deficits, and infrastructure projects that will need funding.

The good news, however, is that the country’s current debt situation driven by the pandemic is not as deep-rooted, or even self-inflicted as in past debt episodes, and is therefore manageable. How can this be attained? According to studies, analysts’ views, and our own analysis, here’s how:

1. Strategic utilization of accumulated cash buffers. The utilization of debt to accumulate cash buffers, which was earlier mentioned to be around half of the debt accumulated during the height of the pandemic, creates the potential for a significant reduction in future debt. By subtracting the government’s cash reserves, the debt-to-GDP ratio’s behavior would exhibit a similar pattern, but at a significantly lower level.
2. Grow, grow, grow. Another approach to gradually decrease the debt-to-GDP ratio is, of course, to expand the denominator, the GDP, at a faster pace than the numerator, which is debt. As GDP growth improves, the debt burden will naturally decline over time. Encouragingly, GDP growth has already surpassed pre-pandemic levels in 2022 and is poised to follow its pre-pandemic trajectory from hereon. This should be combined with minimal acquisition of substantial new debt.
3. Channel debt into high-yield investments for maximum impact. Furthermore, to get the economy rolling, governments must keep spending. It’s like injecting energy into the system, and this is why debt is incurred. But focus should be on areas such as human capital (i.e., education and skills) and infrastructure that create multiplier effects on the economy, generating more jobs and benefits, leading to a proportionally larger increase in national output vis-à-vis the amount spent.
4. Avoid policy reversals. In addressing the mounting debt, it’s vital to understand that the pandemic, not flawed policies, drove its recent surge. To rein in the debt, PIDS emphasizes the need to steer clear of policy reversals that hinder income generation, lead to unwarranted increases in government spending (such as expansive entitlement programs), and undermine previous pre-pandemic debt reduction measures.
5. Have clear fiscal rules. In a study done by Esquivel and Samano in April 2023, it was recognized that having debt rules creates confidence in financial markets, leading to lower sovereign spreads or lower interest rates on government loans. The rollout of the country’s MTFF last year instills confidence in the market, helps stabilize expectations, and sets the stage for lower sovereign spreads which can ease the debt burden.

Implementing these strategies can effectively tame debt and improve the debt-to-GDP ratio, unless, of course, there are unforeseen macro-fiscal disruptions such as a sudden economic downturn (e.g., sudden surge in COVID-19 cases), natural calamities demanding significant expenditures, or adverse currency and interest rate fluctuations triggered by higher US rates, leading to currency depreciation, potentially amplifying foreign debt obligations, and escalating the burden of debt servicing.

Despite the potential challenges and risks mentioned, we remain optimistic about the Philippines’ future. With anticipated robust growth, sustained infrastructure spending and other investments which generate multiplier effects, and hopefully prudent fiscal governance, we expect a gradual decline in the debt-to-GDP ratio.

While the timeline may extend beyond government projections, the goal of going below the “debt threshold” appears within reach.

INA JUDITH CALABIO is a Research & Business Analytics Officer at Metrobank in charge of the bank’s research on industries. She loves OPM and you’ll occasionally find her at the front row at the gigs of her favorite bands.

ANNA ISABELLE “BEA” LEJANO  is a Research & Business Analytics Officer at Metrobank, overseeing research on the macroeconomy and the banking sector. She earned her BS in Business Economics degree from the University of the Philippines Diliman and is currently pursuing her MA in Economics at the Ateneo de Manila University. In her free time, Bea enjoys playing tennis and spinning. She cannot function without coffee.

GERALDINE WAMBANGCO is a Financial Markets Analyst at the Institutional Investors Coverage Division, Financial Markets Sector, at Metrobank. She provides research and investment insights to high-net-worth clients. She is also a recent graduate of the bank’s Financial Markets Sector Training Program (FMSTP). She holds a Master’s in Industrial Economics (cum laude) from the University of Asia and the Pacific (UA&P). She takes a liking to history, astronomy, and Korean pop music.

For those who have invested in funds that put money in US assets, should they worry about sticky inflation?

It can’t be helped. However, understanding the forces behind the prices of goods and services in the US may help ease their worries, or inform their investment decisions.

US headline Consumer Price Index (CPI) year-on-year (YoY) inflation considerably eased to 4.0% in May 2023 from 4.9% in April, marking the slowest easing since March 2021. The May inflation print came out lower than anticipated, as base effects from a significant 8.6% CPI inflation print in the same month last year helped bring down this year’s YoY data.

On a monthly basis, headline CPI only increased by 0.1% month-on-month (MoM) in May from 0.4% in April, mainly driven by decreases in energy prices including gasoline and electricity.

Headline inflation has been consistently going down since July 2022.

Although US headline inflation seems to be going back down to earth, some signs point to a still-elevated and still-sticky inflation. Core inflation, for instance, only meagerly eased to 5.3% in May from 5.5% in the previous month and did not subside with a 0.4% MoM increase, same as the past two months, indicating persistent price pressures keeping core inflation sticky. This led the US Fed to caution that two more hikes may still be underway.

Core inflation doesn’t seem to match the rate of decrease in headline inflation.

What could be keeping core inflation high? It’s the sticky rents.

Shelter, which includes rent, takes a significantly large chunk in the US CPI basket (averaging ~34% for headline inflation and ~43% for core inflation) in the past year keeping the core inflation stubbornly high. Shelter costs have been increasing since February 2021 (from 1.5%), reaching its highest in March 2023 (8.2%), and only moderately eased to 8.0% this May.

Shelter has a significant contribution to both headline and core inflation.

No wonder core inflation remains high, given little downward movement in shelter costs. In fact, excluding food, energy, and shelter altogether gives an inflation print of only 3.4% in May. Rental costs surged post-lockdowns in the US mainly driven by the boost in demand in rental homes due to remote work set-up and the increased preference for solo living.

If we exclude shelter, food, and energy, inflation doesn’t look as bad.

Will rents ever go down?

Metrobank’s research partner, CreditSights, uses the MoM changes in the S&P Case-Shiller Home Price Index (HPI) from 18 months ago (lagged 18 months) to determine the MoM changes in shelter CPI. The shelter CPI closely follows the trends of the S&P Case-Shiller HPI, which measures the changes in the value of the US residential housing market by looking at single-family home purchase prices.

Note that lags for home prices are used since the CPI for shelter, which includes rent, tends to follow changes in home prices with a delay of four to six quarters. This is because it takes time for lease agreements to be renewed. Landlords usually renew leases every 12 months or longer. As a result, changes in home prices don’t immediately affect new lease contracts and rental/shelter costs for at least a year.

CreditSights, through their analysis, suggests that based on the changes in the S&P Case-Shiller HPI from 18 months ago, shelter costs could continue to rise for another month or two before shifting into a more continuous and steadier downward trajectory during the second half of the year.

Meanwhile, Metrobank’s forecast of the US headline CPI inflation supports the implication of CreditSights’ analysis, with yearend print seen dropping to 2.2% albeit still slightly above the Fed’s target. This yields a full-year average of 3.2% this year.

Deceleration down the road

Should the anticipated decline in shelter costs manifest in the succeeding months, this could mean a considerable decline in both headline and core inflation later this year.

The Fed, having acknowledged the connection between housing prices and the cost of shelter, will most likely consider this in their succeeding policy decisions. Hence, despite having recently signaled two more hikes, it may still change its mind.

INA JUDITH CALABIO is a Research & Business Analytics Officer at Metrobank in charge of the bank’s research on industries. She loves OPM and you’ll occasionally find her at the front row at the gigs of her favorite bands.

ANNA ISABELLE “BEA” LEJANO  is a Research & Business Analytics Officer at Metrobank, overseeing research on the macroeconomy and the banking sector. She earned her BS in Business Economics degree from the University of the Philippines Diliman and is currently pursuing her MA in Economics at the Ateneo de Manila University. In her free time, Bea enjoys playing tennis and spinning. She cannot function without coffee.

After 10 straight interest rate hikes, the US Federal Reserve decided to proceed with a “hawkish pause” in their monetary policy tightening campaign, a decision that will grant much-needed relief to consumers amid still elevated inflation. Policymakers left the target range unchanged at 5% to 5.25% to allow time to assess the impact of past hikes.

Historically, a Fed pause has been good news for investors and a boon for stocks. This time, however, the move suggests more of a “skip” than a “pause” as Fed officials think rates will need to rise further. Investing under this different scenario pose certain risks, especially when equities markets like the S&P 500 are performing well. It may be tempting to interpret the pause as a green light to increase investment in the stock market, but some caution is needed.

Hawkish bluff?

The latest Fed “dot plot” – a graphical representation of the Federal Open Market Committee’s (FOMC) members’ expectations for future rate changes – suggests two additional quarter-point rate hikes are likely within this year. Policymakers believe that rates may need to go higher than previously expected to bring down high and stubborn inflation.

However, investors are calling the Fed’s bluff on its hawkish projections, as even Fed Chair Jerome Powell has affirmed the projections to tame sticky inflation. US inflation, which eased to 4% in May, further added to investors’ optimism that the Fed could avoid a hard landing. This pushed the S&P 500 to finish its 5th positive day in a row, the first such streak since November 2021.

Equity markets paid more attention to signals of the US Federal Reserve approaching its terminal rate, despite fresh projections of further monetary tightening before the end of the year.

A case of FOMO

History shows that the prospects for the current bull market to keep running are good, if policymakers opt for a longer pause before delivering the next rate increase they are signaling. Pauses in the Fed’s interest rate hikes have often been associated with bullish markets, providing potential opportunities for investors.

Specifically, a pattern has been observed where a series of interest rate increases followed by a pause sees stock prices rally. According to a Bloomberg Intelligence study, six instances since the 1970s revealed that extended pauses following rate hikes, particularly those lasting three months or longer, tend to correlate with an upswing in the S&P 500 Index.

But things change if the central bank skips just one meeting before resuming its hikes. For example, when the Fed stopped its tightening cycle in April and resumed it in May, stocks fell 1.5% in the next three months. The current bull market appears to have been triggered by a similar pattern: a sequence of 10 consecutive interest rate hikes followed by a pause.

As we previously said, do not chase the rally. In our previous article about the recent rally, technical analysis suggested that the S&P 500 has reached the hard resistance level of 4,420 driven by the AI euphoria.

The last time prices accelerated this quickly was during the Dotcom bubble of March 2000 and November 2004. The rally may continue to push higher and even re-test the all-time highs seen in January 2022, but lingering uncertainties do not support it.

The S&P 500 has rallied the past two weeks, driven by AI and the technology sector.

If we find ourselves in a “skip,” between two hikes rather than an extended pause, forecasting market behavior becomes more complex. Typically, these “skips” tend to be less predictable than their longer “pause” counterparts, mainly because the brief duration without interest rate alterations doesn’t afford markets ample time to adapt and recalibrate.

Timing is important

As we always tell our clients, wait for the real pivot. We think that the results of the June Fed dot plot were done to prevent the markets from aggressively pricing in Fed rate cuts this year. Powell has reiterated that the Fed expects to raise interest rates one or two more times this year, but at a slower pace to avoid tipping the economy into a recession. The market is pricing in a little less one hike for July, with no full rate cut priced in anymore for the year.

We still think the Fed will continue with the pause throughout the year. If two Fed hikes materialize this year, we think the BSP will keep rates unchanged at 6.25% until the end of 2023.

BSP Governor Felipe Medalla said after the June 22 Monetary Board (MB) meeting that the central bank may consider cutting rates if headline inflation falls below 3% in January to February 2024. We do not think the BSP will match any possible Fed rate hikes, as the BSP’s policy actions will be largely driven by its inflation target.

We maintain our year-end official forecast of the BSP policy rate at 6%, with a 25-basis-point (bp) cut in December. We think that the impact on the USD/PHP exchange rate will be minimal, even if the interest rate differential (IRD) tightens to 75 bps.

Future interest rate expectations matter more, in which case both the Fed and BSP will be cutting in 2024, and the BSP was able to replenish its foreign currency reserves up to USD 100.6 billion as of end-May.

GERALDINE WAMBANGCO is a Financial Markets Analyst at the Institutional Investors Coverage Division, Financial Markets Sector, at Metrobank. She provides research and investment insights to high-net-worth clients. She is also a recent graduate of the bank’s Financial Markets Sector Training Program (FMSTP). She holds a Master’s in Industrial Economics (cum laude) from the University of Asia and the Pacific (UA&P). She takes a liking to history and Korean pop music.

RENZO TAN AND MARCO SIY are interns under the Institutional Investors Coverage Division (IICD) of Metrobank. Renzo is currently studying at the University of Massachusetts Amherst, while Marco is studying at Georgetown University’s McDonough School of Business. Both are avid foodies and somewhat entomophobes.

Market Levels (week-on-week)

Last week:

The peso government securities (GS) market opened in muted fashion last week with little activity observed as most investors and dealers wait for firmer leads to move yields either way.

Some buying activity was initially seen in 9-year bonds given their decent pick-up in yields against longer-dated securities, but interest quickly faded. The relatively weak 6-year auction reception for the reissuance of Fixed Rate Treasury Note (FXTN) 7-67 caused appetite for risk to

The US stock indices reached critical resistance levels following the month-long push triggered by artificial intelligence, or AI, after the resolution of the US debt crisis. Hitting these levels opens up the opportunity for profit taking amid high interest rates, slowing global growth, and lingering inflationary pressures.

Hitching on the AI bandwagon: Things are looking up in the markets, or so it seems.

Over the past month, roughly 10 mega-cap technology stocks have lifted US markets as the “AI euphoria” continued. The herding phenomenon in markets has triggered a “FOMO” mentality in the AI space with the launch of ChatGPT.

Despite hitting key resistance levels, US markets remain “bullish” in the short to medium term with the VIX (fear index) recording 13.4, the lowest seen since before the COVID pandemic.

No fear except the fear of missing out in the markets.

This FOMO has triggered markets to enter a new stage of “complacency,” with the recent run-up being one of the fastest since 2004 and the build-up to the 2000 tech bubble.

A deeper look into the S&P 500 tells us that:

1. US markets are bullish – looking at “arrow A” we can easily identify higher highs and higher lows, forming an up-trending channel.
2. The market’s rally is extended – the run-up since the resolution of the debt crisis was too fast and a correction or pause is needed.
3. The S&P will likely retest the support – the S&P500 has recently bounced-off the 4,420-resistance level and likely to re-test the 4,300 support “Line B”.
4. Momentum confirms price action – Momentum has also reached a resistance level “line C” and also indicates a temporary decline in the short term.
5. Weak market breadth – the FOMO induced by AI has made this rally very top heavy and highly vulnerable to exhaustion.

The arrow A represents the bullishness in the S&P 500, while line B is the support line which may likely be retested amid the backdrop of optimism. The momentum also seems to have reached a peak as shown by line C, suggesting a temporary decline in the short term.

Wrap-up

Due to the irrational behavior of markets, it is unknown how long this rally will last as no long-term sell signal has yet to be identified. If the price were to break above the 4,420-resistance level, the S&P 500 opens up to re-testing the all-time high of 4,800, which was last seen in January 2022.

Considering the uncertain global economic backdrop and technical signals, taking into account risk management, taking small profits, or the reduction of market risk may be advisable given the strong run-up we have already seen.

US markets may have entered a “technical bull market” as it rose 20% from the 2022 lows, but underlying indicators are showing biases to market tops rather than market bottoms.

KYLE TAN is an Investment Officer at Metrobank’s Trust Banking Group, managing the bank’s offshore Unit Investment Trust Funds (UITF). He holds a master’s degree in financial engineering from the De La Salle University and is a Level 2 passer of the Chartered Market Technician (CMT) certification course. He spends his free time working out, training at the gun range, or hunting for rare Star Wars collectibles.

The US dollar is still the king of foreign reserve currencies, followed by the euro at a distant second.

On the other hand, many are dismissing the Chinese renminbi as a possible major reserve currency to rival the dollar. Although it is already a reserve currency by itself, it is held at levels much lower than the Japanese yen and the British pound sterling in terms of global holdings.

So why is the renminbi being dismissed? This is mainly because it is managed under a fixed-exchange rate system, so the amount of renminbi in circulation has to be controlled in order to better manage the peg. This simply means that, for the naysayers, there cannot be enough Chinese currency for economies to hold due to the constriction of supply.

However, this argument rings hollow when one considers the fact that the US dollar itself surpassed the British pound sterling as the biggest reserve currency in the previous century at a time when the dollar was still pegged to gold.

Break away from the gold standard

This means that while the dollar was under a peg, it became the dominant currency reserve all the same. It was only in 1971 when the US broke away from the gold standard and the dollar became fiat money, with the US able to simply print more money whenever it needed without having to be constrained by anything. So clearly, having fiat money and printing so much money at will is not a prerequisite to being a dominant reserve currency, as the dollar was before 1971.

So why did the US dollar not lose its status when it was not tied up to the value of gold anymore and the US was printing dollars like mad?

The main reason for that is because there was demand for the dollar per se, initially because there was a real need for US output and, later, because Saudi Arabian oil had to be paid in US dollars (the “petrodollar”).

Real demand

All told, all the printed money by the US could simply flow outside and get stored as reserves for products paid in US dollars because there was a real demand for it.

Now consider China. Currently, it is still considered the world’s manufacturer, and its manufacturing output is sought globally. This means the renminbi has value because it can purchase desirable Chinese output.

Additionally, Saudi Arabian oil can now be purchased in renminbi, making the case for the “petroyuan” and creating more demand for renminbi, as was the case previously with petrodollars. With more countries moving out of US dollars as a result of the moves to diversify currency reserves, the renminbi is a natural candidate to replace whatever the dollar cedes in global reserves.

Likelihood of multipolarity

So, will the renminbi overtake the dollar?

Perhaps this question only matters in a “there can only be one” mindset, that is, if it is not the dollar, then it must be the renminbi, or vice versa. This need not be so. In the days before the absolute dominance of the US dollar, the norm was more of a multipolarity of major reserve currencies.*

Given the rising demand for the renminbi, it can likely take its place alongside the dollar and the euro as leading global currencies, and, if so, this might just be a return to an old normal of multipolarity rather than an overthrow of the US dollar by the renminbi.

* The Rise and Fall of the Dollar, or When did the Dollar replace the Sterling as the Leading International Currency? by Barry Eichengreen and Marc Flandreau (2008)

MARC BAUTISTA, CFA, is Vice President and Head of Research & Business Analytics at Metrobank, in charge of the bank’s macroeconomic, industry, and financial market analysis and research. He loves teaching finance and investments, portfolio management, statistics, financial derivatives, economics, etc. in a university setting. He plays guitar in a rock band and loves learning other languages, especially Spanish, promoting its recovery as a heritage language in the Philippines.

WHAT HAPPENED LAST WEEK

Last week, the Philippine Stock Exchange (PSEi) closed below 6,400 at 6,393.55 (-114.79 points; -1.76% week-on-week) as investors digested the implications of the US Fed’s signal of two or more rate hikes by the end of 2023. On the local front, the Bangko Sentral ng Pilipinas (BSP) decided to keep key interest rates unchanged at 6.25% and lowered its 2023 inflation forecast to 5.4% (from 5.5%).

Furthermore, consumer stocks led by Universal Robina Corporation (URC) and Monde Nissin Corp. (MONDE) slipped following news of the government’s plan to impose taxes on salty snacks, junk food, and sugary drinks.

WHAT TO EXPECT THIS WEEK

This week, we expect the market to bounce as it hovers at key support levels. If the PSEi fails to break back above the 6,400 key resistance level, the market will retest the next support levels at 6,200 and 6,000.

The market will also price in the announcement of Eli Remolona as the new Bangko Sentral ng Pilipinas (BSP) governor starting July 3, 2023, events in Russia over the weekend, and other upcoming key data releases. Local fuel prices are expected to increase by about PHP 0.90 to PHP 1.10 per liter of diesel and PHP 0.10 to PHP 0.30 per liter of gasoline.

PSEi TECHNICAL ANALYSIS AND TRADNG PLAN

Resistance: 6,400/6,600

Support: 6,000/6,200

The market continued to trade sideways with a downward bias as it retested the 6,400 support level, closing slightly below at 6,393.6 by the end of the trading week. Furthermore, the index stayed under its key moving averages (20-day, 50-day, 100-day, and 200-day) with the MACD (moving average convergence/divergence) remaining below both the signal and zero lines, which indicates that the bears remain in control.

We believe that should the PSEi correct further from its current 6,400 level, the market can retest the next support levels at 6,200 and 6,000. Moreover, we think that only once the PSEi breaks above the 6,600 resistance will there be a reversal of the market’s short-term downtrend.

Gradually accumulate once the PSEi trades back above 6,800.

STOCK CALLS FOR THE WEEK

International Container Terminal Services, Inc. (ICT) — BUY on Breakout

International Container Terminal Services, Inc. (ICT) formed a continuation diamond bullish pattern, breaking out of a consolidation period. Breaking out of the diamonds boundary line signals the resumption of the prior uptrend. Moreover, the counter is currently trading above its long-term MA (200-day) complemented by a 30-day average daily value turnover of 210.8 million. Hence, we think that the counter could sustain its uptrend if it breaks out of its 50-day and 100-day moving averages. Accumulating once ICT breaks above PHP 205.00 is advisable. Set stop limit orders below PHP 187.00. Take profit at around PHP 246.00 to PHP 256.00.

Shakey’s Pizza Asia Ventures (PIZZA) — BUY ON PullBacks

For company guidance, PIZZA recognizes that the outperformance in the 1st quarter of 2023 was partly driven by a relatively lower base from last year. Nonetheless, PIZZA expects its revenues and net income to grow by at least 20% y-o-y for 2023, barring new major externalities. Those who bought from our buying level of PHP 8.70 should continue to hold. Meanwhile, those looking to accumulate can buy PIZZA once the stock pulls back to PHP 8.70. Set stop limit orders below PHP 8.00. Take profit at around PHP 10.00/PHP 10.50.

Greenergy Holdings Inc. (GREEN) — BUY ON Pullbacks

Greenergy Holdings Inc. (GREEN) formed an inverse head and shoulders pattern in its daily chart. In its disclosure dated January 13, 2023, GREEN announced property dividends with an entitlement ratio of 0.056 share of Agrinurture, Inc. (ANI) for every one share of GREEN with an ex-date of June 27, 2023.

GREEN also posted its highest volume last trading week (June 12-16, 2023) since 2019 when volume reached ~267.1 million on January 31, 2019. Accumulating once GREEN pulls back to PHP 1.25 is advisable. Set stop limit orders below PHP 1.15 and take profits at around PHP 1.44/PHP 1.45.

KEY DATA RELEASES

1.) Philippine Budget Balance for May 2023 on Tuesday, June 27, 2023 (April 2023: 66.8 billion);

2.) Philippine Money Supply M3 SRF y-o-y for May 2023 on Wednesday, June 28, 2023 (April 2023: 6.6%);

3.) Philippine Bank Lending y-o-y for May 2023 on Wednesday, June 28, 2023 (April 2023: 9.3%);

4.) Philippine Bank lending net of RRPs y-o-y for May 2023 on Wednesday, June 28, 2023 (April 2023: 9.7%); and

5.) US Initial Jobless Claims as of June 24, 2023, on Thursday, June 29, 2023 (May 2023: 264k)

The Philippines is in a good position to reap the rewards of good demographic dividends. According to a June 2023 data report of Philippine Statistics Authority (PSA), the country’s median age is 25.3 years old, which is one of the youngest median ages in Asia. The household population by age group also favors those in the 15- to 64-year-old range, who take up 69.3 million out of the total population of 109 million. These figures seem to promise a strong and stable workforce for years to come.

This relatively young, low median population can potentially push the country’s economic future forwards even after our neighbors’ workforces have begun to shrink.

The three phases of demographic transition

Demographic dividends refer to the economic benefits that result from a country’s changing age demographics, particularly when the working-age population grows relative to the non-working population. An economy can be divided into three age groups that are associated with a particular phase of transition.

The first group contains the youngest individuals who have not yet entered the workforce. Countries with a large portion of the population comprising this group typically have high birth rates, rapid population growth, and low mortality, which are typically associated with the first phase of the demographic transition. Although currently unable to work yet, this young population will eventually contribute to a strong economic workforce, known as the early phase of population dividends.

The second group consists of workers who drive economic growth. Countries with a large portion of the working-age population are usually in the second phase of the demographic transition. Previously dependent young individuals start working, boosting the aging but still productive workforce. Both the incoming and existing working generations collaborate to create a large working-class population. However, the demographic dividend, or its window of opportunity, has a limited duration since the percentage of older individuals increases.

The third group comprises retirees and pensioners who have finished their working years. Similar to the youngest group, they rely on the working-age population for support. Known as the late phase, the older generation retires from the economy, with a minority still engaged in work. The country’s demographics shift toward an older population dividend.

The case of the Philippines

The Philippines is currently still in the first phase of this process and has yet to transition to the second phase. The Philippines’ population growth is stable as seen from the population pyramid on the left below. We can see those retirees older than 65 make up only a minority of the population, while the youngest demographics are the majority.

This structure of having more young people than old ones – coupled with the Philippines’ still positive yet decreasing fertility rate of 2.77 children per woman – suggests that there is reasonable population growth still occurring.

The Philippines is only in the first phase of demographic transition, characterized by a large proportion of the population under 15 years of age.

The population is predominantly made up of young people who are not yet able to work but with the potential to provide a strong working population soon. This abundance of young people within a country may be considered a disadvantage as they still require substantial resources, such as food, health services, school, etc. But their presence is still a good sign for the Philippines, as they would eventually become that is if enough resources are there to improve human capital.

How are other countries faring?

As an economy that is still in the early phase of demographic transition, the Philippines’ population representation still takes a regular pyramidal shape, with the much younger population taking up the majority s unlike than Thailand’s or Japan’s.

On the other hand, Thailand shows a population where the predominant age groups are those who are 25-60 years old or the prime working age. This phase is best for the occurrence of the demographic dividend and economic growth, but this window of opportunity will cease to exist once the country transitions to the late phase.

Japan is a textbook example of the late phase of the demographic transition where there is a large retiree population being supported by a relatively small working-age population: only possible in extremely efficient economies where the per capita output of a few workers can still support the whole country or where lots of immigrant labor is used.

Recall that the Japanese economic miracle following the Second World War (1945-1960s) is a prime example of a demographic transition from the early to intermediate phase, demonstrating the impact of Japan’s efficient population control. Japan’s population pyramid is now very top heavy which indicates an aging population in the process of declining growth.

Transitioning to the second phase

For the Philippines, our population growth is strong and stable. The National Economic Development and Authority (NEDA) thinks that the Philippines will need to sustain this growth until at least the year 2050 to benefit from the demographic dividend.

Excessive population growth is often a concern to governments due to the fear that a country’s ability to support a population will eventually be outpaced by its growth. This is only true if a government fails to make adequate investments and policy changes to improve human capital.

The Philippine government should focus on transitioning to the second phase to reap from demographic dividend, possibly by the next decade. One specific area that needs investments includes the education sector with a focus on improving technical skills, well-being, creativity, and experiences.

Likewise, a productive workforce with greater economic efficiency is the most important factor when taking advantage of good demographic dividends. The government should also invest in supporting local industries who would need more workers to boost production. Foreign investments like multinational firms can also establish or expand their operations in the Philippines as it has a huge surplus of young, multitalented, work quality-oriented and highly trainable workforce.

In the second phase of demographic dividend, an educated and employed population could naturally cause birth rates to stabilize at a sustainable level. The eventual upside to this is higher consumption that translates to economic growth.

(Edited by Ina Calabio, Bea Lejano, and Geraldine Wambangco)

RENZO TAN AND MARCO SIY are interns under the Institutional Investors Coverage Division (IICD) of Metrobank. Renzo is currently studying at the University of Massachusetts Amherst, while Marco is studying at Georgetown University’s McDonough School of Business.

INA CALABIO and ANNA ISABELLE “BEA” LEJANO are Research & Business Analytics Officers at Metrobank. Ina is in charge of the bank’s research on industries, while Bea is in charge of the bank’s research on macroeconomy and the banking industry.

GERALDINE WAMBANGCO is a Financial Markets Analyst at the Institutional Investors Coverage Division, Financial Markets Sector, at Metrobank. She provides research and investment insights to high-net-worth clients.

The Bangko Sentral ng Pilipinas (BSP) kept the overnight reverse repurchase (RRP) rate unchanged at 6.25% in its latest Monetary Board meeting for the second time, after nine (9) consecutive policy increases since 2022, given the continued easing of inflation.

BSP Governor Felipe Medalla emphasized that the central bank’s policy rate decisions moving forward will likely be driven more by domestic inflation conditions, rather than the Fed’s next moves, especially with other global bank actions keeping the dollar weak, turning in our favor.

Nevertheless, Medalla noted that the pause will allow the BSP to assess current economic conditions and that, should inflation reach sub-4% levels for 2 consecutive months, the BSP is open to cuts. Furthermore, the BSP’s recent inflation forecast suggests inflation should already hit 2-3% by the last quarter. If this happens, cuts may happen towards year-end.

Given this, we maintain our overnight interest rate projection of 6.0% by year-end as we await the succeeding months’ inflation print.

See our full report for further details.

WHAT HAPPENED LAST WEEK

Defensiveness drove last week’s price action in the peso government securities (GS) market, as dealers and investors waited for key risk events to conclude.

On Tuesday, the Bureau of the Treasury (BTr) was seen fully awarding the reissuance of 15-year Fixed Rate Treasury Note (FXTN) 20-22 at an average of 6.085% and a high of 6.18%. The auction was awarded at the higher end of the market’s expected range on uncertainty ahead of the US Federal Open Market Committee (FOMC) meeting last Wednesday.

The subdued auction participation caused yields on other bonds to realign higher, with no new positive catalyst to improve sentiment. On a week-on-week basis, yields moved higher by as much as 17.5 basis points (bps).

Market Levels (week-on-week)