Since the outsized GDP expansion in Q1 rested on higher employment over the past six months, we think Q2 gain may not significantly ease. True, the economy faces a somewhat narrower window for fiscal expansion and inflation may continue to rise, the appointment of technocrats in the new President’s economic team should ease concerns, since we have faced much worse fiscal and inflation episodes in the New Millennium. Industry should continue to lead GDP growth in Q2 and likely for FY 2022, but Services sector won’t lag much due to the removal of capacity restrictions in accommodation and transport sub-sectors. The peso should remain in a mild depreciation mode due to burgeoning trade deficits and the technical correction of the U.S. dollar from overbought levels.
Fixed Income Outlook
The U.S. Fed will likely carry out its plans for 50 bps hikes in its next meetings, even as it seemed unlikely to do a 75 bps increase. While the U.S. job market remains tight, the Fed seems bent on bringing down the 40-year inflation rates. We expect the Fed actions and local inflation rate racing beyond 5% by May to put upward pressure on PH 10-year yields. Nonetheless, the strong NG cash position until Q3 may limit its borrowing and its addition to this pressure.
Faster inflation and looming policy rate hikes both in the U.S. and the Philippines, compounded by the Russia-Ukraine war and lockdowns in China have dampened investor sentiment leading to a 6.6% tumble of the PSEi in April. Only three stocks in the PSEi—WLCON, TEL, and EMP—withstood the global selloff. The return of investors' confidence is likely to be more dependent on the continuity of reform-minded policies of the current President by the administration of President-elect Marcos Jr, but may open it more to Public-Private Partnerships (PPP) framework as debt-to-GDP ratios hit pre-Aquino III levels. Besides, earnings of listed companies should remain robust as early Q1 reports suggest.