In our previous article titled Stay Calm, SVB isn’t another Lehman Brothers, we argued that Silicon Valley Bank’s (SVB) failure does not follow a similar path as Lehman Brothers did back in 2008.

The fall of SVB was an idiosyncratic stress event, driven by aggressive interest rate risk-taking and the mismanagement of this risk by a large but still niche bank. It still pays, however, to be reminded of Lehman Brothers’ cautionary tale that led to the biggest financial crisis since the Great Depression.

Lehman Brothers’ collapse nearly 15 years ago is deemed the biggest bankruptcy in US history that marked the beginning of the 2008 Global Financial Crisis. What foreshadowed the deepening of the great recession?

What went wrong?

Lehman Brothers, which started as a humble dry-goods store in 1844, grew to become a global financial firm that provided investment banking, trading, brokerage, and other services in the US and globally. It was the fourth-largest investment bank in the United States at the time, even deemed “too big to fail”, with record earnings of more than USD 4 billion on revenues of USD 60 billion in 2007 – the year before its demise.

Many reasons point to Lehman falling apart, but the main trigger was its heavy exposure to the US housing market. From 2003 to 2004, the firm invested in mortgage lenders, some of which specialized in sub-prime mortgages or housing loans to individuals with lower credit scores and incomplete documentation, under the guise of greater economic inclusivity.

These lenders provided the underlying housing loans for Lehman’s own mortgage-backed securities (MBS) – bonds that derived interest and principal payments from ordinary Americans’ mortgage payments.

The bonds were popular with high net-worth individuals, institutional investors, and other banks because they offered premium yields and were tied to the US housing market, which continued to appreciate in value. Aggressive lending and MBS structuring activities continued well into 2006, despite the US housing market already peaking.

Lehman Brothers’ stock price peaked in February 2007 and began plummeting in September 2008.

By the end of 2007, Lehman had already acquired USD 111 billion worth of commercial or residential real estate-related assets and securities to which rating agencies and investors expressed concerns over illiquidity.

This left Lehman in a difficult position to bring in cash, hedge risks, or sell assets to reduce leverage in its balance sheet.

Subprime mortgage crisis

While Lehman was aggressively investing in real estate, the subprime mortgage crisis was already brewing. When house prices peaked in 2006, refinancing of mortgages and selling of mortgaged homes became a less feasible means of settling mortgage debt.

Sub-prime mortgages also started to fail in 2007 as borrowers could not keep up with the payments. This led to higher mortgage loss rates for lenders and investors. All of this, coupled with the expansion of mortgages to high-risk borrowers, turned the turmoil into a crisis that ultimately toppled Lehman.

Lehman Brothers invested heavily in high-risk real estate and subprime mortgages and could not raise enough cash when these markets turned south.

No saving by the Fed

Since Lehman Brothers was an investment bank, the US government could not nationalize it like it did with Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation). No regulator like the Federal Deposit Insurance Corporation (FDIC) could take over. The US Federal Reserve also could not guarantee a loan, as it did with Bear Stearns, another beleaguered bank at that time.

US Treasury Secretary Hank Paulson urged then Lehman President Richard Fuld to find a buyer as Bear Stearns had done. Paulson initially rejected Bank of America’s proposal for the government to cover USD 65 billion to USD 70 billion in projected losses.

Federal Reserve of New York President Tim Geithner and the nation’s top bankers spent a weekend trying to find funding for Lehman Brothers. But before they could, Bank of America backed out of the deal. Barclays also announced the following day that its British regulators would not approve a Lehman Brothers deal.

Everyone spent the rest of the day preparing for Lehman’s bankruptcy. Lehman Brothers, with its USD 619 billion in debts, was the largest corporate bankruptcy filing in US history.

Impact of Lehman’s bankruptcy

Lehman’s bankruptcy sent financial markets reeling. The Dow Jones Industrial Average (DJIA) fell by as much as 504.48 points and continued to drop until March 5, 2009. Investors also fled to the relative safety of US Treasury bonds, sending prices up and yields down.

Investors knew that Lehman’s bankruptcy threatened the financial institutions that held its bonds. Investors lost confidence in the money market fund when it announced losses of USD 785 billion in Lehman’s commercial paper.

On September 17, 2008, the chaos spread, and investors withdrew USD 196 billion from their money market accounts. The next day, Paulson and Fed Chair Ben Bernanke asked congressional leaders for USD 700 billion, which would allow the Treasury Department to buy shares of troubled banks and bail them out.

Congress rejected the proposal and the Dow went down by 777.68 points. In October 2008, the US Senate voted in favor of a revised USD 700 billion bailout bill that contained a tax cut and extended federal protection for bank deposits.

Who saved Lehman?

Following the bankruptcy filing, Barclays and Nomura Holdings eventually acquired the bulk of Lehman’s investment banking and trading operations. Barclays additionally picked up Lehman’s New York headquarters building.

Lehman’s collapse was a major contributor to what eventually became the Global Financial Crisis (GFC) of 2008. Many still wonder why Lehman was allowed to fail, rather than being rescued by the US government like so many other banks. One may think of the sheer size of Lehman’s debt and the woeful inadequacy of its assets to cover such debt.

Lessons after Lehman

Greater scrutiny of the financial system followed after the failure of Lehman Brothers and the GFC. In the US, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in order to subject banks to stress tests, particularly those that were “too big to fail.”

Internationally, banks agreed to set up the Basel-III framework, which required banks to meet higher capital buffers to absorb potential losses, before any profits could be redistributed to shareholders.

Banks were also required to build these capital buffers using their own reserves before they were allowed to source external funding. The crisis resulted in 8 million home foreclosures and a 40% average decline in housing prices.

While some form of subprime mortgage lending still exists today, lenders now require higher upfront down payments and interest rates to compensate them for the risk. Structuring and trading of MBS also continues, but with even stricter regulation and transparency requirements than before. The Fed itself is an active participant and provider of liquidity in the MBS market.

The purchase of Credit Suisse by its rival bank UBS—a deal facilitated by the Swiss government–was the culmination of years of struggles and desperate attempts to stay afloat by the 166-year-old bank. The buyout, while not a coincidence, comes at a time when several US banks have also been struggling.

One of the most salient and controversial implications of the UBS’s takeover of Credit Suisse is the write down of the latter’s high-risk bonds, called Additional Tier 1 (AT1) bonds, to zero. In effect, this means that Credit Suisse’s AT1 bonds are now worthless.

Now, as markets reel from recent developments in the financial sector, our regular investors ask: should we be worried about our Asian bank bonds?

What are AT1s?

AT1s are issued by banks as hybrid instruments—they have features of a high-yield bond but are also convertible to equity. Therefore, all AT1s are a form of contingent convertible or “CoCo” bonds. They are normally perpetual, with coupons fully discretionary and non-cumulative, and are subordinate—ranked beneath Tier 2 capital, which is below senior debt.

CoCos were introduced after the 2008 global financial crisis to increase banks’ buffers and avoid future government bail-outs.

This reform was a response to the risk of moral hazard, as the global financial crisis revealed that financial institutions tended to engage in risky investments with the notion that they’re “too big to fail” and that authorities would come to their aid, no matter how costly, when things go south.

Liquidity troubles, such as when a bank’s capital falls below a certain threshold, would trigger either a full or partial conversion of the CoCo bonds into equity at a discounted value, or in the case of Credit Suisse–a full write-off to zero to augment core capital. CoCos, in effect, serve as a loss absorption mechanism that cuts the bank’s debt.

A buyout and a bail-in

Whereas Credit Suisse’s AT1 bondholders effectively get nothing, no losses are imposed on the troubled bank’s senior bondholders as these securities are now an obligation of UBS.

More notably, Credit Suisse shareholders were offered CHF 0.76 for each share turning into UBS stock.

While this is way below latest market value (shares of Credit Suisse closed at CHF 1.86 on March 17; Credit Suisse’s biggest shareholder Saudi National Bank invested USD 1.5 billion at CHF 3.82 per share last year), this is still more than what shareholders typically receive relative to bondholders.

In a normal treatment for repayment, bondholders are expected to be better protected as they are usually prioritized over shareholders.

However, it is worth noting that, as stated in the prospectus of Credit Suisse’s AT1 bonds, the write-down was warranted by a Viability Event that stemmed from the Swiss authorities’ provision of a liquidity boost to the tune of CHF 40 billion.

According to CreditSights, this hefty liquidity support will be used by UBS to cover future losses from restructuring costs and from winding down Credit Suisse’s Investment Bank.

(Note: Credit Suisse also has Tier 2 CoCos, with a similar Viability Event clause, which have not been written down and are now presumed to be an obligation of rescuer UBS, according to CreditSights. Unlike the AT1s, this Tier 2 CoCo is dated, set to mature August 2023, and has must-pay coupons.)

Buyer beware

Following the Swiss regulators’ treatment of the USD 17.5-billion write-down, overall sentiment for AT1 bonds soured, the size of which is a staggering USD 275 billion in the global market.

We saw financials underperform and take most of the widening move seen in credits. Senior bonds and Tier 2’s of Asian banks traded as much as 30-50 bps wider yesterday. The broad risk-off sentiment also led Asian investment grade corporate papers wider by 10-40 bps. Selling activity was also apparent in Asian sovereign bond but spreads eventually decompressed by 15-20 bps on the day as bottom fishing emerged to support the market.

We note that even though bank bonds, including those issued by Philippine banks, have widened as much as 40-80 bps since the Silicon Valley Bank (SVB) fallout, most Asian bank senior bonds are flat or even lower in terms of overall yield, mostly due to a significant fall in US Treasury yields recently.

As expected, the most pressing queries from our regular bond investors are surrounding the knock-on effects on banks in Asia.

Resilience here

We see limited impact on Asian banks that we cover, as they maintain relatively well-diversified deposit structures and good capitalization levels and are therefore fairly insulated from the plights of SVB and Credit Suisse.

We share CreditSights’ view that within Asia, authorities are more supportive of their financial institutions, most notably in Korea, Japan and in China where their biggest banks have the government as shareholder.

The domestic banks in our coverage are systemically important financial institutions that are required to comply with Basel III liquidity standards. The strong capital position of the Philippines’ banking industry has allowed it to adopt minimum core capital and buffer requirements that are not only above Basel III requirements, but are also some of the highest among the Asian banks.

While we favor senior notes of systemically important banks in Asia, especially those that are required to be compliant to Basel III standards (unlike SVB) and consistently profitable recently (unlike Credit Suisse), we recommend maintaining a more defensive stance on financials, especially as we await further guidance on the path of interest rates—both from the US Fed and the BSP this week.

PATTY MEMBREBE is a Financial Markets Analyst at Metrobank – Institutional Investors Coverage Division, under the Market Strategy and Advisory Section. She communicates strategies on fixed income, rates, and portfolio solutions for our high-net-worth individual and institutional clients. She holds an AB Economics degree from Ateneo de Manila University and is currently pursuing graduate studies. In her free time, she enjoys watching indie films and attending gigs to support local indie music.

Recall that towards the end of last year, economists, analysts, and government officials were projecting inflation to peak in December, as this is usually the time of heightened consumption because of the holidays and the seasonal increase in OFW remittances. Inflation then reached 8.1%, which was the highest in 14 years, driven mainly by food & non-alcoholic beverages.

Unexpected peak

However, January’s whopping 8.7% inflation figure shocked many Filipinos, among them analysts who had a median estimate of 7.6% according to a BusinessWorld poll. This print also went beyond BSP’s projections of 7.5% to 8.3% at the time. What drove it this time?

Unexpectedly, the primary driver was housing, electricity, and other utilities as landlords adjusted rental rates to reflect the economic reopening and as energy prices rose, while the main contributor remains to be food & non-alcoholic beverages.

Also, the upsurge in said month’s inflation also continued to showcase the impact of second-round effects as core inflation continued to accelerate.

Another surprise in February

Though only inching down from the previous month’s reading, the February inflation rate of 8.6% was welcome news, as some were even expecting inflation to reach the 9% level during said month. Even BSP forecasted a range of 8.5% to 9.3%, and analysts’ median estimate was at 8.9% based on a BusinessWorld poll.

Transport-related prices were the driver for this deceleration which stemmed from a decline in gasoline and diesel prices.

Though some might have breathed sighs of relief, note that core inflation has still risen, jumping from 7.4% in January to 7.8% in February. Core inflation excludes volatile commodities such as food and energy, and so the upsurge in its numbers may manifest the persistent impact of second-round effects.

Sign of deceleration on the way?

Metrobank Research is expecting that inflation has already peaked last January 2023, barring any new supply and price shocks, and owing to base effects and moderating consumption amid high interest rates. The inflation trajectory for the remainder of the year is projected to be on a downward trend already, mirroring the inflation trend in 2022 (see below) but in reverse and starting from a higher level.

However, do not expect inflation to go down drastically – prices will most likely remain sticky and deceleration will happen at a gradual pace due to the second-order effects of inflation. Metrobank Research forecasts inflation, on average, to be at a range of 6% to 7% for the full-year 2023.

Upside risks

Upside risks to the call would be heightened second-round effects as inflation continues to be broad-based. A new bill seeking to increase the minimum wage across different regions for the private sector, on top of the continued tranches of wage hikes that started last June 2022 nationwide, could exacerbate second-order effects.

This could result in a wage-price spiral, which is a phenomenon where additional wages will be passed on to consumer prices by businesses, hence the term “spiral”.

China rebounding substantially owing to its zero-COVID exit late last year would also further aggravate inflation, reflected in higher prices of key commodities such as oil.

Downside risks

The expected slowdown in global economic growth, especially in the US and Europe, due to high interest rates could dampen inflationary pressures. Likewise, the lower-than-forecasted GDP print of China could also mean that global demand for goods would not rebound significantly and would not worsen price pressures.

So yes, we are expecting that deceleration is in sight, but let’s hope no more new supply shocks, geopolitical and external events, and other unforeseen circumstances come our way for a more smooth-sailing ride toward price stability.

ANNA ISABELLE “BEA” LEJANO is a Research & Business Analytics Officer at Metrobank, in charge of the bank’s research on the macroeconomy and the banking industry. She obtained her Bachelor’s degree in Business Economics from the University of the Philippines School of Economics and is currently taking up her Master’s in Economics degree at the Ateneo de Manila University. She cannot function without coffee.

In its recent National People’s Congress (NPC) where key economic targets for the year were outlined, China set a conservative economic growth target of around 5% for 2023 – the lowest target it has set in history. This came after it missed its growth target of 5.5% in 2022 and landed a 3% GDP growth (see figure 1 below).

Since China’s pivot from its zero-covid policy, the world has been keenly looking out for its next moves. Understandably so, given how significantly the country weighs in on global growth and commodity market movements. Given recession worries and projected slowdown of advanced economies, China’s comeback is expected to propel global demand.

While China’s rebound is expected in 2023, Chinese officials recognize the short and long-term risks ahead, such as the uncertain external environment, high inflation, its housing bubble, and declining workforce, which is why they set a cautious target.

But growth is still growth. Despite China’s more muted growth outlook, the anticipated expansion is still higher than last year’s 3%, which can still lend support to the global economy including the Philippines.

Moreover, this target may indicate a softer-than-expected comeback which may help ease inflation worries given jitters about the impact of China’s demand recovery to global prices.

What it means for PH

As one of the major trading partners of the Philippines, China’s growth–modest or not–is a welcome development especially for our exports and the tourism industry. The growth momentum of Philippine exports to China was deterred slightly in 2022 on account of the latter’s weak demand last year (see Figure 2). But demand may start to pick up again as China’s consumption recovers.

A recently signed Memorandum of Understanding (MoU) on Electronic Commerce Cooperation between China and PH may also further boost trading activity.

Moreover, Chinese tourists are set to return to the international travel scene. Chinese tourist arrivals to the Philippines have dipped since 2020 (see Figure 3) but a rebound could spur a faster recovery for the PH tourism industry.

We’ve noted in our previous article that much depends on how China will manage its pivot, and their recently laid down plans moving forward seem to take cautious steps amid the domestic and global uncertainties at hand.

Nevertheless, China has been showing signs of recovery. Retail sales are up based on their Jan-Feb 2023 data, their manufacturing data have exceeded expectations, and their credit growth back on the rise (per Bloomberg data).

China is indeed back, growth is underway, and spillover gains are expected.

INA 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.

WHAT HAPPENED LAST WEEK

The Philippine Stock Exchange index (PSEi) ended 0.98% lower week-on-week to 6,589.88 (-65.49 points). The market started the week in the green following stronger US equities and Asian peers and lower-than-expected local inflation data (February 2023: 8.6%). For the rest of the trading week, the benchmark index dropped as investors reduced risk amid the following:

(i) higher bond yields;

(ii) the possibility of a 50-basis-point hike by the US Fed; and

(iii) worries over troubled banks, namely, Silvergate and Silicon Valley Bank (SVB).

Meanwhile, on the local front, investors digested the country’s unemployment rate rising to 4.8% (December 2022: 4.3%) and foreign direct investments dropping by 23% year-on-year to USD 9.2 billion in 2022 (2021: USD 12 billion).

Top index performers were International Container Terminal Services, Inc. (ICT) (+6.5%), Universal Robina Corporation (URC) (+5.9%), and JG Summit (JGS) (+3.0%), while index laggards were Metro Pacific Investments Corp. (MPI) (-10.2%), AC Energy (ACEN) (-6.8%), and Aboitiz Equity Ventures (AEV) (-6.8%).

The index breadth was negative with 11 gainers versus 19 losers. The average daily turnover value was PHP 6.3 billion. Foreigners were net sellers by PHP 435.3 million.

WHAT TO EXPECT THIS WEEK

We expect a volatile market with a downward bias as all eyes are on the following:

(i) developing narrative on SVB — the US federal government has recently said that it won’t bailout SVB but will focus on its depositors, unlike in the previous financial crisis, which led to bank bailouts;

(ii) major earnings and data releases; and the

(iii) upcoming US Consumer Price Index (CPI) report on Tuesday, March 14, 2023 – which is projected to come in lower at 6.0%.

This, as well as the recent stronger-than-expected US change in nonfarm payrolls (February 2023: 311k) data, are considered key factors in determining the US Fed’s next course of action.

Meanwhile, local fuel prices are forecasted to have mixed movements in the coming week, with gasoline expected to increase by about PHP 0.80 to PHP 1.0 per liter and diesel expected to have no price change, or rolled back by PHP 0.10 per liter.

STOCK CALLS FOR THE WEEK

San Miguel Food and Beverage, Inc. (FB) — BUY ON BREAKOUT

Year-to-date, FB’s share price rose by as much as 41%, outperforming the PSE industrial sector, which rose by only 2.4% in the same period. The stock is currently trading above its key moving average prices (50-day, 100-day, and 200-day MAs).

That said, riding the stock’s positive momentum and buying on breakout is the optimal strategy. As for company guidance, our investment thesis on the stock remains intact: we like FB as a branded food and beverage (F&B) powerhouse – with its dominant market leadership across food, beer (>90% of market volume), and spirits (>40% of market volume) businesses.

FB is a major player in the Philippine consumption story. Accumulating FB once it breaks above PHP 55.00 is advisable. Set cut loss below PHP 52.00. Take profit at around PHP 61.0/PHP 63.0, PHP 70.0 for long-term investors.

Ayala Land, Inc. (ALI) — BUY

Since February 2023, ALI’s share price is down by as much as 9.7% amid higher interest rate concerns. The recent correction brought ALI to trade at oversold levels. That said, aggressive short-term traders / bargain hunters can attempt to take advantage of the stock trading at near oversold levels to ride the probable bounce.

The key risk for the stock is that the break below PHP 25.50 may result in further pullback. Given this, tight stops must be in place. Accumulating ALI at current levels is advisable. Set stop limit orders below PHP 25.40. Take profit at around PHP 29.00/PHP 30.70.

Robinsons Retail Holdings, Inc. (RRHI) — BUY ON BREAKOUT

We are of the view that a break above PHP 60.00 may indicate a more sustainable upside. Since the beginning of the year, key developments include RRHI’s acquisition of a 4.4% equity interest stake in Bank of the Philippine Islands (BPI) under a Share Purchase Agreement dated January 5, 2023, and the company’s reported 2022 attributable net income at PHP 5.74 billion (+26.7% year-on-year).

Excluding noncore items, core earnings surged 39.1% y-o-y to PHP 5.29 billion (albeit still below consensus/expectations) given the positive contribution across all business segments.

Moving forward, the management revealed a more aggressive expansion outlook at 180 to 200 net store additions and PHP 5-7 billion capital expenditure (capex) this year (2022: PHP 4.7 billion). Accumulating once RRHI breaks above PHP 60.00 is advisable. Set stop limit orders below PHP 57.00. Take profit at around PHP 67.00 to PHP 68.00, PHP 70.0 for long-term investors.

PSEi TECHNICAL ANALYSIS

Resistance: 6,800

Support: 6,400 / 6,600

The bears continued to dominate last week, with the PSEi closing below 6,600 anew. The MACD technical indicator confirms bearish momentum. The 100-day (~6,600) /200-day (~6,500) moving average prices have acted as an immediate support. However, if the index trades below the said levels, a retest of 6,400/6,200 is likely.

TRADING PLAN

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

KEY DATA RELEASES

Tuesday, March 14, 2023
– US CPI YoY for February 2023 (consensus estimate is 6.0%; January 2023: 6.4%);
– PH exports YoY for January 2023 (consensus estimate is 0.4%; December 2022: -9.7%);
– PH imports YoY for January 2023 (consensus estimate is -0.9%; December 2022: -9.9%);
– OF cash remittances YoY for January 2023 on Tue-Sat, 14-18 March 2023 (consensus estimate is 5.3%; December 2022: 5.8%)

Thursday, March 16, 2023
– Corporate Earnings: Converge (CNVRG)
– Corporate Earnings: San Miguel Corporation (SMC)

Friday, March 17, 2023
– Corporate Earnings: LT Group Inc. (LTG)

PH inflation slightly eased to 8.6% in February 2023, primarily driven by the deceleration in transport-related prices amid lower gasoline and diesel prices. Though prices are expected to remain elevated, inflation is seen to have likely peaked already in Q1 and is projected to be on a downward trajectory, barring any new supply shocks.

PH policy rates are then expected to peak at the 6.25% to 6.5% levels, but cuts might be on the horizon once data clearly shows that PH inflation is subsiding.

On another note, with more hawkish signals from the US Fed, the peso has relatively weakened at the PHP55/USD level.

Considering these new developments, here is our updated forecast for 2023 and 2024:

For more information on the performance and outlook for several macroeconomic indicators, as well as local and global macroeconomic news, please download the full report (released March 9, 2023) here.

Amid forecasts of a global recession in 2023 by some analysts, the Philippines is still poised to see economic growth, according to Marc Bautista, Head of Metrobank Research.

In his presentation at the recently concluded economic briefing organized by Metrobank, Marc Bautista, Head of Metrobank Research, downplayed some analysts’ forecasts that the global economy is in an economic recession. Instead, he described it as a global slowdown.

He said global commodity prices, while elevated throughout 2023, will be on a descending trend. This is because the global slowdown will put less pressure on commodity prices, which means the Philippines can import more products to fuel domestic consumption.

“The Philippines imports a lot because we’re a growing economy. We import our way out of our needs. We have infrastructure spending by the government, revenge travel, and increased consumer spending,” he said.

“Good economic growth”

In terms of real gross domestic product (GDP) growth for the year, Bautista set Metrobank’s forecast to between 6 and 7 percent.

“Our call is that there will be good economic growth and in

The numbers are in, and the Philippines posted 7.6% real gross domestic product (GDP) growth in 2022 which went beyond market expectations and government targets.

Of course, this is a welcome surprise, bringing in some hint of optimism despite gloomy projections of what’s to come in 2023.

Zooming in, which industries grew and contributed to this better-than-expected growth?

Top industries

In terms of share, wholesale and retail trade and repair of motor vehicles and motorcycles continued to hold the largest share (18.1%) of the pie, followed by manufacturing (17.2%), financial and insurance activities (10.1%), and agriculture, forestry, and fisheries sectors (9.6%) comprising more than half of the country’s total domestic output at current prices.

Wholesale trade and retail businesses, along with repair of motor vehicles and motorcycles, contributed much of the gross value added (GVA) and share to GDP.

Wholesale and retail trade (including repair of motor vehicles and motorcycles) expanded by 13.8% in 2022 as the economy’s reopening triggered revenge spending that translated to growth in retail trade (comprising 80% of the whole sector), which grew by 14.6% vs last year.

Moreover, the country’s reopening also brought back and boosted factory operations benefiting the manufacturing sector, which grew by 10.9% in 2022 driven by growth in the manufacture of food products (13.6%), chemical products (19%), and computer, electronics, and optical products (2.7%). Exports of electronic products, which is the country’s top export commodity, also posted gains in 2022 and grew by 27%.

The growth rates of wholesale and retail trade as well as manufacturing reflect the effects of a wider economic reopening in the country.

Meanwhile, despite high input prices, weather disturbances, and diseases that confronted the agriculture, fisheries, and forestry (AFF) sector, the industry still managed to expand by 7.6% at current prices (and with 0.5% real growth).

Palay, which as the largest share to AFF, grew by 3.1%, while the rest of the top contributors to the sector posted higher growth. However, GVA of Bananas (which is among the country’s top agricultural export commodities) contracted by nearly a quarter.

The agriculture, fisheries, and forestry (AFF) sector remains resilient despite high input costs.

Industry prospects

Demand is expected to soften in 2023 as high prices and high interest rates reduce consumers’ purchasing power. Consumer and business sentiment for the next 12 months turned less optimistic based on BSP’s Consumer and Business Expectations surveys in the fourth quarter of 2022, which may indicate more wary spending in the succeeding months. This may pose challenges to the wholesale and retail, real estate, and accommodation and other food service industries that rely heavily on consumption.

Meanwhile, China’s comeback may offer gains to the country’s exports as it continues to be the Philippines’ major export partner, which may translate to a still robust performance for the manufacturing sector.

The agriculture sector may continue to confront challenges from high input costs and weather disturbances, which then calls for interventions to support local production. The construction industry may benefit from the government’s continued infrastructure projects, while the upcoming commercial operations of LNG terminals may boost output for the electricity, steam, water, and waste management sector.

But despite the headwinds on the horizon, opportunities still abound. While projections on the country’s and global economic growth may seem unexceptional, who knows? Hopefully, we’re in for another surprise.

INA 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.

The Philippine economy expanded by 7.6% annually in 2022, the highest in almost half a century. This figure even exceeded the government’s Development Budget Coordinating Committee (DBCC)’s forecast of 6.5% to 7.5%. Full-year gross domestic product (GDP) at constant prices last year already exceeded pre-pandemic (2019) levels.

Consumption primarily boosted output last year, along with the Services sector, amid the country’s full re-opening as COVID-19 cases plunged. (See our report here where we discuss FY 2022 GDP at length.)

Momentum is shifting

The recently released Q4 2022 GDP data recorded a surprising 7.2% growth, which went beyond median analyst forecasts. Among Asian economies that have already released their 4th quarter GDP figures, the Philippines grew the fastest. Despite this, Q4 data is already showing some signs of a shift in momentum in the economy:

Consumption grew by 7.0%, slower than the prior quarters in 2022 and slower than 7.5% during the same period in 2021.

Investment spending accelerated at a much-muted pace by 5.9% in the 4th quarter, compared to the 20%+ levels from Q1 to Q3 of 2022 and compared to the substantial 14.2% growth in Q4 2021.

Imports clipped a lackluster growth of 5.9%, compared to 14.3% during the same period in 2021 and versus double-digit growths in the first three quarters of 2022.

Though exports were considerably bolstered by 14.6% in Q4 2022 versus 7.7% during the same period in 2021, monthly trade data showed that December exports hit an all-time low since February 2021, and trade deficit as of yearend 2022 grew by about 38% compared to that of 2021.

The above observations could be tell-tale signs of the following:

Consumption

While consumption growth got boosted in 2022, pent-up demand is likely fading already, as the effects of inflation bite into the purchasing power of individuals, coupled with rising interest rates. Last year’s high consumption was mainly driven by the country’s re-opening along with base effects. With inflation seen to persist this year, the country’s consumption performance in 2022 will be difficult to exceed or even sustain this year.

Investments

One of the notable figures in the Q4 2022 GDP data was the sharp plunge in the growth of investments. This could already reflect the effect of the aggressive monetary tightening of the Bangko Sentral ng Pilipinas (BSP). As further rate hikes are in the cards, this might further affect investment prospects.

Imports

An easing of imports may be an indicator that there is a slowdown in domestic demand, given that the Philippines is an import-dependent economy. Because imports and investments have recently slowed, this may hint, again, that the contractionary monetary policy is already taking effect.

Exports

There may be a tapering of demand for the Philippines’ exports given the continued Russian-Ukraine conflict and the possible recession in Europe and the US, as well as the slowdown of advanced economies.

To add, because of the foreseen drop in economic growth in some countries, remittances to the Philippines might likewise be affected.

Bright spots and areas for improvement

Inflation may further peak by Q1 of 2023. Though prices are expected to be elevated due to second-round effects, continued supply chain disruptions, and the global energy crunch, among others, inflation is seen to be on a downward trajectory throughout 2023. This could signal the end of the rate hikes of the BSP by 1st half of 2023.

Hopefully, this will translate to a gradual strengthening of consumption, barring any further external headwinds, though 2022 consumption will most possibly not be replicated this year.

Additionally, the booming tourism and business process outsourcing (BPO) industries in 2022, among others, can hopefully help bolster growth this year as well, and continued infrastructure spending by the government is expected to buoy the economic performance of the country in 2023.

Though it might be a difficult year ahead for the Philippines, the hope is that the resilience of the country in the face of rising costs, interest rates, and heightened geopolitical tensions last year could still manifest this year.

This is with the help of the planned interventions of the government to sustain high levels of growth as outlined in the Philippine Development Plan (PDP) 2023-2028, such as promoting competition and improving regulatory efficiency, promoting trade and investments, enhancing inter-industry linkages, and advancing R&D, technology, and innovation to hopefully revitalize industry, reinvigorate services, and modernize agriculture and agri-business. Thus, our forecast of GDP growth for 2023 is at 6%-7%, though this is biased towards the lower end of the range, as the aforementioned risks loom.

Still, it is hoped that in 2023, the story for the Philippines would be better than expected, like 2022 was.

ANNA ISABELLE “BEA” LEJANO  is a Research & Business Analytics Officer at Metrobank, in charge of the bank’s research on the macroeconomy and the banking industry. She obtained her Bachelor’s degree in Business Economics from the University of the Philippines School of Economics and is currently taking up her Master’s in Economics degree at the Ateneo de Manila University. She cannot function without coffee.

The gross domestic product (GDP) in the fourth quarter of 2022 reached a whopping 7.2%, higher than the median analyst forecast of 6.8%. This brought the full-year GDP growth to 7.6%, which exceeded even the government’s target of 6.5% to 7.5%.

Last year’s GDP at constant prices has already exceeded pre-pandemic (2019) levels, driven by higher consumption, government spending, and exports, among others. Indeed, the Philippines was able to weather through an environment of high inflation and interest rates, as well as weather disturbances, external events, and geopolitical tensions.

In this report, we highlight the major components and sectors that buoyed the country’s output, and our outlook for the coming year.

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