The day after his apparent win in this week’s presidential race, Ferdinand Marcos Jr. faced the bleak prospect of getting little help in boosting a troubled economy.
This, after JP Morgan Research gave the Philippines the lowest possible score of “underweight,” ranking the country last among Southeast Asian economies in its order of preference in equity investment strategy.
JP Morgan is one of the world’s leading investment houses and its recommendations carry much weight among global investors.
JP Morgan’s ASEAN Equity Strategy report released on May 9 also had unwelcome news for the country’s real estate sector, lowering its grade to neutral.
The report said: “We recommend selling into a possible post-election hope rally in line with the Philippines Equity Strategy team’s view.”
The financial services giant added that the Philippines’ equities “face myriad challenges, including twin deficits, higher inflation, slower government spending in the quarter after the election, high public debt, risk of a valuation de-rating and potential earnings growth disappointment.”
The soon-to-exit Duterte administration was forced to borrow heavily to pay for the health crisis caused by the coronavirus pandemic. At the start of this year, the country’s debt had reached PHP12 trillion (about US$240 billion).
An increased risk of a valuation de-rating that could be exacerbated by portfolio outflows, the domestic monetary tightening cycle and retail investors shifting to safe havens like bonds or bank deposits was also cited by JP Morgan as factors causing the Philippines to sink to the bottom of countries in the region as sound places to invest funds.
Fitch Ratings had earlier adjusted its investment outlook for the Philippines, from stable to negative with expectations that growth prospects are likely to be dim for the short term.
Moody’s Analytics, meanwhile, said this week that the Philippines faces a major headache as the market has turned jittery on fears of high inflation.
JP Morgan also said that “reopening benefits from the Gross Domestic Product (GDP) growth trajectory will wane next year and put strong pressure on the government to deliver on capital outlay spending acceleration.”
The means that the incoming administration will likely fail to attain the growth targets set by the current administration for this year.
The investment and financial services company said higher commodity prices will weigh heavily on the country’s current account flows. Moreover, fiscal spending will also be affected because the Philippines is a net energy importer with oil and raw materials accounting for more than 50 percent of imports. This is equivalent to more than 15 percent of GDP, or the sum total of all the goods and services produced by a country excluding earnings from foreign-based workers.
Added JP Morgan’s report: “If the commodity prices continue to stay elevated, it will have important implications for the Philippines, an economy grappling with twin deficits.”
For the near term, JP Morgan forecasts risks of downward earning revisions across various key sectors such as banks, real estate, consumer goods, and power generation emerging from the quick rise in the prices of oil, energy, and agriculture commodity prices.
The company further expects inflation due to rising oil prices and reduced real income to drag private consumption, which accounts for more than 75 percent of the country’s GDP.
JP Morgan sees a possible 20 percent oil price hike to translate to a plus 0.8 percent to the consumer price index and a minus 0.4 percent to GDP.
This scenario will likely challenge the Bangko Sentral ng Filipinas’ capability to control inflation and may force the Central Bank to raise policy rates “more quickly than anticipated.”
It should be noted that pump prices of gasoline and diesel products in the Philippines are among the highest in the region.
Meanwhile, JP Morgan expects private Philippine companies to experience lackluster growth in the short term, noting that its 2022 outlook for the Philippines had been based on a strong consumption rebound to underpin a 25 percent year-on-year earnings per share recovery.
But “headwinds from inflation, a depreciating peso, and weaker sentiment will impact the pace of the recovery and GDP growth disappointment,” said JP Morgan.