Archives: Business World Article

Headline inflation cooled to its slowest pace in 20 months in November amid easing prices of food as well as restaurant and accommodation services, the Philippine Statistics Authority (PSA) said on Tuesday.

Preliminary data from the PSA showed headline inflation climbed 4.1% in November, slower than 4.9% in October and 8% in November 2022.

This was the slowest inflation rate in 20 months or since the 4% seen in March 2022.

It was also lower than the median estimate of 4.4% in a BusinessWorld poll of 15 analysts conducted last week, and at the lower end of the 4-4.8% forecast range of the Bangko Sentral ng Pilipinas (BSP).

However, November inflation was still above the 2-4% target for the 20^th straight month.

Month on month, the consumer price index was nil in November from -0.3% in the previous month.

For the January-to-November period, inflation averaged 6.2%, faster than 5.6% in the same period a year ago. This is still above the BSP’s full-year baseline forecast of 6%.

“(Inflation) is going down and without shocks that will happen in the next three weeks, we will see inflation going down,” National Statistician Claire Dennis S. Mapa said in mixed English and Filipino at a briefing on Tuesday.

Core inflation, which discounts volatile prices of food and fuel, also eased to 4.7% in November from 5.3% in October and 6.5% in November 2022.

In the eleven months to November, core inflation averaged 6.8%.

“However, there are risks such as rice and oil prices. The situation in November was good because prices of gasoline and diesel have been going down. But we will see what the prices are this December,” Mr. Mapa said.

He said the sharp slowdown in November inflation was mainly due to easing food prices, as the heavily weighted food and non-alcoholic beverages index fell to 5.7% in November from 7% in the previous month.

Food inflation decelerated to 5.8% in November from 7.1% in October and 10.3% a year prior. This was the slowest rise in food inflation since 5.2% in May 2022.

Mr. Mapa said the deceleration in food inflation was mainly due to the 2% decline in the vegetables, tubers, plantains, cooking bananas and pulses index, a reversal from the 11.9% growth a month ago.

The slower annual increases in fish and other seafood (4.9% in November from 5.6% in October) and sugar, confectionery and desserts (1.5% from 4.9%) also contributed to the downward trend in food inflation.

On the other hand, higher year-on-year growth rates were observed in the indices of rice (15.8% from 13.2%), and milk, other dairy products and eggs (7.6% from 7.5%).

The average price of regular milled rice last month went up to PHP 46.73 per kilo from PHP 45.42 per kilo in October. The average price of well-milled rice also rose to PHP 51.99 per kilo in November from an average of PHP 51 per kilo a month earlier.

The slowdown in November inflation is also attributed to the 0.8% decrease in the transport index from the 1% growth a month ago. The restaurants and accommodation services index also slowed to 5.6% in November from 6.3% in the previous month.

In November alone, oil companies cut pump prices by PHP 1.90 a liter for gasoline, PHP 4.45 a liter for diesel, and PHP 3.3 a liter for kerosene, data from the Energy department showed.

Meanwhile, inflation in the National Capital Region slowed to 4.2% in November from 4.9% in October, while inflation in areas outside Metro Manila eased to 4.1% from 4.9% in the prior month.

The November inflation rate for the bottom 30% of income households slowed to 4.9% from 5.3% in October and 9.2% last year. The 10-month average stood at 6.9%.

The National Economic and Development Authority (NEDA) in a statement said the slower November inflation can be attributed to the timely implementation of measures to stabilize food supply amid domestic and external headwinds.

“With the right interventions in place, including the proper and timely deployment of trade policy, we are confident that we can effectively manage inflation and prevent unnecessary upticks in prices of goods and commodities to safeguard the purchasing power of Filipino families, especially those from the most vulnerable sectors,” NEDA Secretary Arsenio M. Balisacan said.

‘Sufficiently tight’
Meanwhile, the Bangko Sentral ng Pilipinas (BSP) said it needs to “keep monetary policy settings sufficiently tight until a sustained downtrend in inflation becomes evident.”

“The latest inflation outturn is consistent with the BSP’s projections that inflation will likely moderate over the near term due to easing supply-side price pressures and negative base effects,” it said in a statement.

The BSP said the balance of risks to the inflation outlook “still leans significantly towards the upside.”

“Key upside risks are associated with the potential impact of higher transport charges, electricity rates, and international oil prices, as well as higher-than-expected minimum wage adjustments in areas outside the National Capital Region,” it said.

A weaker-than-expected global recovery and government measures to mitigate the impact of El Niño could further reduce inflation.

The BSP sees inflation averaging at 6% in 2023 and 3.7% in 2024, before falling further to 3.2% in 2025.

“The BSP will continue to monitor inflation expectations and second-round effects and take appropriate action as needed to bring inflation back to the target, in keeping with the BSP’s price stability mandate,” it said.

Last month, the BSP kept its target reverse repurchase rate at a 16-year high of 6.5%. The BSP raised borrowing costs by a total of 450 basis points (bps) from May 2022 to October 2023 to tame inflation.

Bank of the Philippine Islands (BPI) Lead Economist Emilio S. Neri, Jr. said it is possible for inflation to fall below 4% in December and may even reach 3% in the first quarter of 2024 in the absence of supply shocks.

However, Mr. Neri said inflation could rebound to 4% or higher in the second quarter, especially if the effect of El Niño is worse than expected, Mr. Neri said.

“Rice prices are likely to remain the primary factor contributing to inflation in the near future. Local supply continues to be at a level where rice inflation is usually double digit… The price of rice may stay high as long as supply stays at this level,” he said.

Globally, rice supply remains a concern due to a decline in production in major exporting countries like India. The Philippines imports around 15% of its rice requirement every year.

Mr. Neri said BPI sees inflation averaging at 6% this year, before easing to 3.7% in 2024.

“It might be premature to expect rate cuts in the near future despite the improving outlook for inflation. The BSP might need to keep interest rates elevated for most of next year especially given the possibility of an inflation rebound in the second quarter of 2024,” he said.

HSBC economist for ASEAN Aris Dacanay said the consistent inflation downtrend should give the BSP room to pause at the Dec. 14 Monetary Board meeting, but rate cuts are still not on the table as there are many upside risks to inflation. 

“That said, we continue to expect the BSP to stay pat for longer based on inflation — more so with the need to mind the gap between the Fed and the BSP policy rates to help support the peso,” he said.

The US central bank kept borrowing costs unchanged at 5.25-5.5% for the second straight month in November. This was after it hiked policy rates by 525 bps from March 2022 to July 2023.

Following the release of the November inflation data, the peso closed at PHP 55.32 per dollar on Tuesday, strengthening by two centavos from its PHP 55.34 finish on Monday.

This was the peso’s strongest close since its PHP 55.19 per dollar finish on Aug. 2.

“We only expect the BSP to begin its easing cycle right after the Fed does its first rate cut. Our baseline view is for the Fed to do its first policy rate cut in the third quarter of 2024,” Mr. Dacanay added. — By Keisha B. Ta-asan, Reporter

The World Bank maintained its Philippine gross domestic product (GDP) growth outlook for this year and 2024.

In its latest Philippine Economic Update, the multilateral lender said it expects GDP to expand by 5.6% this year and by 5.8% next year, unchanged from its projections last October.

The World Bank’s forecasts are below the government’s 6-7% and 6.5-8% growth targets for this year and 2024, respectively.

“We haven’t changed our projections (from) October. The reason is we haven’t seen many shocks or policy surprises, which is by itself, good news,” World Bank Philippines Senior Economist Ralph van Doorn said at a media briefing on Tuesday.

The Philippine economy grew by 5.9% in the third quarter, bringing the nine-month average GDP growth at 5.5%.

The World Bank said an improvement in domestic demand is expected to fuel a “modest increase” in GDP growth to an average of 5.8% in 2024 to 2025.

“Services are expected to drive growth due to the ongoing recovery of the tourism sector and the consistent performance of the IT-BPO industry, which is likely to spur job creation, increase household incomes, and benefit consumption and tourism-adjacent industries,” it added.

On the demand side, the World Bank said that household spending will remain the main growth driver amid a strong labor market, steady remittances, and easing inflation.

Meanwhile, investments are expected to slow this year before picking up next year until 2025 thanks to recent investment reforms and the Philippine government’s “commitment to public investment despite ongoing fiscal consolidation.”

World Bank Country Director for the Philippines Ndiame Diop said that the Philippines continues to outperform many of its peers in the region in terms of growth.

“Despite the challenging global environment that resulted in a slowdown for many countries in the region, the Philippines stands out as among the top performers. This achievement can be attributed to the country’s resilience, resilient domestic demand, which helps mitigate the impact of external headwinds,” he said.

“We anticipate that the Philippine economy will continue to exhibit strong performance in the next few years. This growth will be propelled by a healthy labor market and declining inflation, which will stimulate robust household consumption,” Mr. Diop added.

However, Mr. Van Doorn said that risks are tilted to the downside and could dampen growth, citing external factors such as geopolitical tensions, trade restrictions on agricultural products, and persistent inflation.

On the domestic front, El Niño and other climate risks could also threaten food supply, he added.

To sustain growth in the long term, the World Bank said the Philippines should focus on structural reforms to boost productivity and improve its competitiveness.

“In the medium term, it’s important to implement investment reforms, implement fiscal consolidation, invest in human capital, strengthen water security and sanitation which are key to safeguard growth, reduce poverty, and increase the country’s growth potential,” Mr. Van Doorn said.

Meanwhile, the World Bank kept inflation forecasts unchanged at 5.9% for this year and 3.6% next year.

“While headline inflation is expected to remain elevated in 2023, it is projected to decline to within the target range in 2024,” the bank said.

“Following a year and a half of tight monetary policy, the return of headline inflation to within the target range in the first quarter of 2024 is expected to keep the policy rate steady in the short term,” it added.

Headline inflation eased further to 4.1% in November, slower than 4.9% in October and 8% in the same month in 2022.

November marked the 20^th straight month that inflation was above the central bank’s 2-4% target range.

“Concerns over a possible resurgence of high inflation and tight monetary policies in advanced economies will continue to weigh on the Bangko Sentral ng Pilipinas’ (BSP) decision to reduce interest rates,” the World Bank added.

The BSP kept its key policy rate at 6.5% at its latest meeting, the highest in 16 years. Since May 2022, the central bank has raised borrowing costs by a total of 450 basis points.

The BSP’s next policy meeting is on Dec. 14. — Luisa Maria Jacinta C. Jocson

The expected surge in household spending during the holiday season may not be enough to ensure that Philippine annual gross domestic product (GDP) growth will hit the government’s 6-7% target, analysts said.

“We don’t think the holiday spending will provide a meaningful boost to annual growth, as pandemic-related restrictions were already mostly loosened during the same period last year so this will likely not affect annual comparison much,” Makoto Tsuchiya, assistant economist at Oxford Economics, said in an e-mail.

Economic managers have kept the 6-7% full-year target range, even as GDP growth averaged 5.5% as of end-September.

The economy would need to grow by 7.2% in the fourth quarter to meet the lower end of the government’s GDP growth goal.

“I don’t see the government’s target for 2023 as being feasible, at all, despite the stronger-than-expected result for the third quarter… the holiday shouldn’t matter too much in year-on-year growth terms, which by definition strips out the impact of such seasonality,” Pantheon Chief Emerging Asia Economist Miguel Chanco said in an e-mail.

Philippine GDP expanded by 5.9% in the third quarter, ending three consecutive quarters of slowing growth.

Mr. Chanco said the third-quarter growth print was mainly driven by the spike in government spending.

“More importantly, the third-quarter headline growth bounce masked a continued slowdown in private consumption growth, which is the economy’s main engine,” he added.

Household consumption, which typically accounts for about three-fourths of the economy, grew by 5% in the third quarter. This was slower than the 8% growth a year ago and 5.5% in the previous quarter. It was also the weakest rise in household consumption in two years.

Domestic consumption is expected to surge in the fourth quarter as consumers spend more during the holidays. However, elevated inflation may put a damper on holiday spending.

“From third-quarter data, it is obvious that the private sector has been softening, and the growth was led by the public sector. However, given the accumulated debt and limited fiscal space, the government won’t be able to fully offset the weakness in the private sector,” Mr. Tsuchiya said.

Oxford Economics expects Philippine GDP growth to average 5% this year amid muted demand.

“External demand will remain subdued given the slowing global economy, while investment will be hampered by elevated interest rates and low external demand. This will translate to the labor market weakness, when households already need to tighten their purse strings given the need to rebuild savings,” he added.

Mr. Chanco also noted that the Bangko Sentral ng Pilipinas (BSP) could cut rates to support economic growth as inflation eases.

“As fiscal policy is still stretched from the COVID-era expansion of the deficit, the only real macroeconomic policy lever that’s available in the Philippines is a gradual unwinding of the BSP’s aggressive rate hikes, which should be doable in the not-too-distant future, as long as inflation continues to trend downwards in the coming months,” he added.

At last month’s policy meeting, the BSP kept borrowing costs steady at 6.5%, the highest in 16 years. From May 2022 to October, BSP raised policy rates by a total of 450 bps to curb inflation.

BMI Country Risk and Industry Research last month said it projects household spending in the Philippines to grow by 6.3% in 2024.

“Our consumer spending outlook will be more positive, relative to 2023, as economic growth persists, and consumption levels normalize. Easing inflationary pressures and healthy employment will form the base for stable consumer spending,” BMI, a unit of Fitch Solutions, said in a note in November.

However, it said that high levels of household debt remain a risk to the consumer outlook.

“It limits the future availability of debt, but also draws on current disposable income levels, especially as debt servicing costs increase on the back of interest rate increases,” BMI added. — By Luisa Maria Jacinta C. Jocson, Reporter

The government made a full award of the reissued Treasury bonds (T-bonds) it auctioned off on Tuesday at a lower average rate after headline inflation eased in November.

The Bureau of the Treasury (BTr) raised PHP 20 billion as planned via the reissued 10-year bonds it offered on Tuesday as total bids reached PHP 40.651 billion, or more than twice the amount on the auction block.

The bonds, which have a remaining life of nine years and eight months, were awarded at an average rate of 6.224%, with accepted yields ranging from 6.15% to 6.244%.

The average rate of the reissued bonds dropped by 55.7 basis points (bps) from 6.781% quoted for the papers when they were last offered on Nov. 14. This was also 40.1 bps below the 6.625% coupon for the series.

However, the average yield was 1.1 bps higher than the 6.213% quoted for the 10-year bond and 6.3 bps above the 6.161% seen for the same bond series at the secondary market before Tuesday’s auction, based on PHP Bloomberg Valuation Service Reference Rates data provided by the Treasury.

The average rate of the reissued bonds declined from the previous award following slower inflation last month, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

“The release of softer-than-expected Philippine headline inflation for November 2023 has likewise lowered expectations for bond yields,” a trader said in an e-mail.

Headline inflation slowed to a 4.1% in November from 4.9% in October and 8% in November 2022, data released by the Philippine Statistics Authority on Tuesday showed. This was the lowest rate seen since March 2022’s 4%.

This was near the lower end of the Bangko Sentral ng Pilipinas’ (BSP) 4-4.8% estimate for the month and was below the 4.4% median estimate of 15 economists in a BusinessWorld poll conducted last week.

For the first 11 months, inflation averaged 6.2%, faster than 5.6% in the same period last year and still well above the BSP’s 2-4% target and 6% baseline forecast for 2023.

T-bond rates declined amid expectations of rate cuts by the US Federal Reserve next year, Mr. Ricafort added.

Markets are pricing in a rate cut from the Fed by the first half of 2024.

The US central bank kept its target rate steady at the 5.25%-5.5% range for a second straight time during its Oct. 31-Nov. 1 meeting.

It has hiked rates by a cumulative 525 bps since it began its tightening cycle in March 2022.

The Fed will hold its last policy review for this year on Dec. 12-13.

The BTr wants to raise PHP 60 billion from the domestic market this month, or PHP 20 billion via T-bills and PHP 40 billion via T-bonds.

The government borrows from local and foreign sources to help fund its budget deficit, which is capped at 6.1% of gross domestic product this year. — A.M.C. Sy

Digital banks in the Philippines might be unable to compete strongly against lenders with brick-and-mortar presence in the medium term, Fitch Ratings said on Monday.

In a commentary written by Tamma Febrian and Willie Tanoto, directors of its Asia-Pacific banking team, the debt watcher said the Philippines offers “significant potential” for digital banks because of its large unbanked population.

“(But) we do not believe it will shake competitive dynamics within the Philippine banking sector significantly in the medium term. We expect their impact on the ratings of Fitch-rated banks will be limited,” it added.

In 2021, the Bangko Sentral ng Pilipinas (BSP) capped the number of digital banking licenses to six to monitor the development of the sector, ensure competition, and boost its regulatory capacity.

The six online lenders that got licenses to operate in the country were Tonik Digital Bank, Inc.; GoTyme of the Gokongwei group and Singapore-based Tyme; Maya Bank of Voyager Innovations, Inc.; Overseas Filipino Bank, a subsidiary of Land Bank of the Philippines; UNObank of DigibankASIA Pte. Ltd.; and UnionDigital of Union Bank of the Philippines, Inc.

Despite rapid growth in the past two years, the market share of system deposits of all digital banks was still less than 0.4% as of end-June, according to Fitch Ratings.

Low average deposits per customer also suggest that digital lenders have yet to capture most of their depositors’ operating accounts, the debt watcher said. 

“We expect digital banks will continue to compete aggressively for deposits over the next two years as they seek to refine their business models and build the scale necessary for sustainable operations,” it said.

Fitch noted that most digital lenders compete with pricing to attract new customers. However, this has become more difficult due to the higher interest rate environment.

“We believe that this pricing-focused strategy is unlikely to be sustainable in the long run, though it should support continued expansion of the digital bank segment over the next two to three years,” Fitch said.

Digitalization has also allowed easier account-switching and clients tend to move deposits quickly when promotional rates run out, it said. Digital banks, especially those that compete solely on pricing, may not be able to retain customers for long.

“We believe those digital banks that are backed by established corporates with complementary business lines and extensive customer bases will enjoy a competitive advantage relative to other digital peers in the longer run and are likely to enjoy stronger growth in the near to medium term,” Fitch said.

The debt watcher also said that high funding costs influence online lenders’ risk appetite, which encourages lending to higher-yielding but higher-risk segments such as unsecured personal and small- to medium-sized enterprise (SME) loans.

“This should help the banks maintain positive credit spreads, though we expect most digital banks to continue to make a loss in the near term due to high credit costs and sustained investments as they build their franchises and expand their customer base,” it said.

The BSP raised borrowing costs by 450 basis points from May 2022 to October 2023, bringing the benchmark interest rate to a 16-year high of 6.5%.

“Retail-loan quality in the Philippines has historically been more volatile and weaker than that for corporate loans, and we believe digital banks will face a difficult challenge in managing their retail-loan risks — in light of their focus on higher risk segments and the underbanked population,” Fitch said.

Based on the latest BSP data, the total nonperforming loan (NPL) ratio of digital banks stood at 8.5% as of September, significantly higher than the 3.4% NPL ratio of the whole Philippine banking system.

“(Digital banks’) weaker asset quality has weighed on their profitability, with impairment charges equivalent to more than 40% of revenue in the first nine months of the year,” Fitch said.

BSP data also showed that digital banks’ return on assets stood at -2.73% as of end-September, equivalent to an annualized net loss of PHP 2.25 billion. 

Meanwhile, the total assets of the digital banking group were at PHP 82.29 billion in the first nine months of the year.

“Robust economic growth prospects for the Philippines should provide some support to borrower-repayment capacity and asset quality in 2024-2025 for both digital and incumbent banks,” Fitch said.

The debt watcher sees the Philippine economy growing by 6.3% on average over the medium term.

“This could improve the prospects for digital banks to achieve profitability and operational sustainability, it said. However, we believe the nature of digital banks’ loan books and customer base means they will be more exposed if there is an economic shock outside of Fitch’s baseline assumptions.”   

In November, Fitch Ratings affirmed the Philippines’ investment grade rating at “BBB” and maintained its “stable” outlook, citing the economy’s strong medium-term growth prospects. — By Keisha B. Ta-asan, Reporter

Philippine goods and service exports are likely to grow by low single digits next year, according to an industry group.

Philippine Exporters Confederation, Inc. (Philexport) President Sergio R. Ortiz-Luis, Jr. said the outlook is better for next year, as the industry missed this year’s export target under the Philippine Export Development Plan (PEDP).

“But one of the big parts of our exports are semiconductors and they don’t expect to meet their original target, that is why it is services that will drive the growth,” he told reporters on the sidelines of the National Exporters Week on Monday.

“Most of these will be in tourism and allied industries like transportation. The business process outsourcing (BPO) industry will also be a big part because as a matter of fact we are number one in voice BPO despite competing with India.”

Last week, the Semiconductor and Electronics Industries in the Philippines Foundation, Inc. said the industry’s exports would contract by 9-10% this year and will be flat next year.

For this year, Mr. Ortiz-Luis said the industry is still trying to reach at least USD 100 billion in export value.

Under the PEDP, merchandise and service exports were initially projected to hit USD 126.8 billion this year and USD 143.4 billion in 2024.

Asked about the export growth target for next year, Mr. Ortiz-Luis said: “Most probably, it will post a (low) single-digit growth. If we are able to register double-digit growth, we will be able to reach USD 126 billion [in export value] next year.”

He noted the USD 126-billion target would most likely be reached by 2025 due to weak external demand amid rising geopolitical tensions and high inflation.

The Development Budget Coordination Committee (DBCC) projected the export of goods to grow by 6% starting next year until 2028.

Meanwhile, Mr. Ortiz-Luis said the PEDP would be under constant recalibration because of changing geopolitical and economic conditions.

“But while we are recalibrating it, slowly but surely, we are seeing that our exports are growing,” he added.

Bianca Pearl R. Sykimte, director of the Department of Trade and Industry Export Marketing Bureau, said there is a need to revisit the PEDP to take external developments into consideration.

“The international trading environment has been very volatile and the emphasis of the PEDP is really to develop agile exporters,” she told reporters.

“We cannot really predict what will happen in the future but what is crucial is that our exporters are very competitive so they can easily adjust to opportunities and threats in the international economy,” she added.

Ms. Sykimte said recalibrated targets would take into account economic growth and supply capability.

The DTI earlier projected exports of goods and services to grow by at least 5% this year or just a bit more favorable than the DBCC’s projected export growth target of 1% for goods and 6% for services.

“Most likely, we will still meet the targets for service exports, but in terms of merchandise exports, that is where it will be difficult because 60% of what we export are electronic products,” Ms. Sykimte said.

“On the agriculture front there has been a decline in the value of prices of coconut oil, which is a billion-dollar commodity export for us. These are the factors affecting our exports,” she added. — Justine Irish D. Tabile