The PSEi - PSE Composite Index & The Economy

...this Hanjin situation has affected the integrity of the financial sector significantly in the last couple of days hence proving its importance

Gov’t mulls takeover of Hanjin’s shipyard

OPTIONS for a resolution of debt troubles of Hanjin Heavy Industries and Construction Philippines (HHIC-Phil), which has entered rehabilitation, now include a possible government takeover of its facilities in Subic Bay Freeport in Central Luzon, the country’s Defense chief said on Wednesday.

Wednesday also saw a senior central bank official saying that banks may have to be more “proactive” in monitoring the financial condition of borrowers to which they have significant exposure, while a HHIC-Phil official said the company could return to profit three years from the entry of an investor.

During Senate deliberations on the proposed Department of National Defense 2019 budget, Defense Secretary Delfin N. Lorenzana said he posed the idea to President Rodrigo R. Duterte on Tuesday evening, adding that the latter was “very receptive” to the idea.

“While we sympathize with the financial woes of Hanjin, we are excited really by this development because we see the possibility of having our own shipbuilding capacity in the Philippines, especially large ships like what’s being built in Hanjin’s shipyard in Subic,” Mr. Lorenzana said.

“And so, the Flag Officer-in-Command Admiral (Robert A.) Empedrad reached out to me — I think yesterday or the other day — and I said, ‘why not we takeover the Hanjin [facility] and give it to the Navy to manage?’” he recalled.

“And so I brought this idea to the President last night and he’s very receptive to the idea. Although the Secretary of Finance… (Carlos G.) Dominguez (III) is also thinking of… how the local banks can recoup their investment there…”

Presidential Spokesperson Salvador S. Panelo declined to comment when asked to verify the development.

The South Korean shipbuilder’s debts to five of the country’s biggest banks have been estimated to total some $412-million.

Trade Undersecretary and Board of Investments managing director Ceferino S. Rodolfo said last week that two Chinese shipbuilders have expressed interest in acquiring HHIC-Phil.

Mr. Empedrad told senators in the hearing that the Philippine Navy “cannot take over totally the entire Hanjin [shipyard] but a portion probably…”

Senate Majority Leader Juan Miguel F. Zubiri proposed for management of the shipbuilding facility to be given to a private entity while the government takes a majority stake. “Instead of using funds to (buy ships) abroad, we are earning. Filipinos are building our ships and it’s under the control of the Department of National Defense. I think it’s a win-win solution,” he said.

Senator Panfilo M. Lacson, one of the Senate Finance committee’s vice-chairmen, said the P75 billion added to the Department of Public Works and Highways 2019 could help cover the government takeover. “There’s… P75 billion in the proposed budget… What if the government will just take over Hanjin[’s shipyard] and then bid out to possible partners, private entities, then let the Philippine Navy partner with private entity?” Mr. Lacson said.

The local banking sector will not reel from HHIC-Phil’s $412-million loan default, the central bank said on Wednesday, even as one of its senior officials flagged the need for lenders to be more “proactive” in vetting huge loans.

The Bangko Sentral ng Pilipinas (BSP) moved anew to calm markets, assuring that the five banks with big loan collectibles from the South Korean shipbuilder have what it takes to remain on solid ground.

“based on the results of the BSP’s stress-testing exercise, an assumed write-off of the loan exposures to Hanjin will have minimal impact on the industry’s CAR (capital adequacy ratio),” BSP said in a statement.

Industry-wide CAR stood at 15.36% as of September 2018, well above the eight percent global standard and the central bank’s 10% requirement, while liquidity coverage was more than enough at 157.6%, data showed.

The Rizal Commercial Banking Corp. (RCBC) had the biggest exposure with $145 million lent to HHIC-Phil, followed by the state-run Land Bank of the Philippines with $85 million; the Metropolitan Bank & Trust Co. (Metrobank) with $70 million; BDO Unibank, Inc. with $60 million and the Bank of the Philippine Islands (BPI) at $52 million.

“Based on the latest data, the BSP is confident about the local banks’ ability to manage this specific challenge. They are also equipped to handle the negotiations required to complete Hanjin’s corporate restructuring while remaining compliant with prudential regulations,” the central bank added.

Asked whether banks will need to tighten lending standards after Hanjin’s case, BSP Deputy Governor Chuchi G. Fonacier replied in a text message: “Partly yes, and partly on really being proactive in monitoring the financial condition and other developments of their borrowers, especially those with large exposures.”

In a separate statement on Wednesday, international debt watcher Fitch Ratings said that Philippine banks will not be shaken by HHIC-Phil’s problem debts, but noted that lenders with “more significant exposure” could see some pressure on their credit rating.

Referring to RCBC’s exposure to HHIC-Phil, Fitch noted that “[t]he full amount exceeds its 2017 net profit, and provisioning on these loans could result in the bank reporting at least one quarterly loss, implying some risk of capital impairment, although we do not expect the bank to set aside the full amount of its exposure.”

“The exposure of the three largest banks — BPI, BDO and Metrobank — is more manageable relative to their loan books and pre-provision profits,” the credit rater added.

“The sector- and company-specific causes suggest this case is unlikely to indicate broader stress across banks’ loan books…”

A HHIC-Phil executive, who asked not to be named, said by phone on Tuesday that the company expects to return to profit three years after the entry of an investor.

“We really see ourselves profiting after three years. We just have to be funded $12 million monthly,” the source said. “We’re open to any tie-up as long as the company can take care of the debt and provide for the operating capital.”

Among others, HHIC-Phil is banking on developments like the United Nations International Maritime Organization’s policy to cut the sulfur content of ship fuel to 0.5% from the current 3.5%. “That policy will take effect in 2020 and we can really make profit from that as there is only a small number of ships that meet that requirement,” the executive said. 



...this is not a good news

Philippine GDP growth seen slowing

PHILIPPINE economic growth will likely slow up to this year, according to latest estimates of a macroeconomic surveillance organization for the Association of Southeast Asian Nations (ASEAN) Plus 3 economies and HSBC Private Bank.

The ASEAN+3 Macroeconomic Research Office (AMRO) trimmed its Philippine GDP growth projections for 2018 and 2019.

AMRO sees gross domestic product (GDP) growth settling at 6.4% in 2018 and 6.3% in 2019 based on its January update of the ASEAN+3 Regional Economic Outlook (AREO) published on Wednesday.

This is slightly down from the 6.5% and 6.4% estimates for those years in AMRO’s October report.

If realized, growth will slow from the 6.7% logged in 2017.

This compares with the ASEAN+3 estimated average of 5.3% for 2018, down from 5.4% previously, and 5.1% for 2019, which was kept from the previous report.

AMRO’s inflation forecast for the Philippines in 2019 was also revised to three percent from 4.3%. This will moderate from the 5.2% inflation clocked in 2018, which breached the central bank’s 2-4% target range.

It is also faster than the region’s two percent and 2.2% average inflation estimates for 2018 and 2019, respectively — changed from 2.1% and two percent forecasts for the same respective years.

“Amid moderate growth performance with inflation starting to ease, some economies in the region have kept their interest rates on hold during their most recent policy meetings,” the report read, noting that “[t]he Philippines maintained the policy rate at 4.75%, following four rate rises since May, as the peso has strengthened slightly while inflation has started to moderate.”

Headline inflation reached a peak of 6.7% in September and October 2018, the fastest pace in nine years. The overall rise in prices of widely used goods slowed to six percent in November and eased further to 5.1% in December.

The surge in consumer prices has been blamed for slower-than-expected economic growth, traced to higher and new excise taxes on select goods and high world fuel prices.

Malacañang in September issued orders removing non-tariff barriers and streamlining procedures for food distribution.

The Bangko Sentral ng Pilipinas (BSP) raised interest rates by a total of 175 basis points in five Monetary Board meetings from May to November, and kept policy rates steady in its final meeting for 2018 in December.

GDP growth averaged 6.3% in the first three quarters of 2018, against the government’s downward-adjusted target of 6.5-6.9% for that year. For 2019, the target is at 7-8%.

AMRO’s latest forecasts compares with the World Bank’s 6.4% and 6.5% for 2018 and 2019 respectively, the Asian Development Bank’s 6.4% and 6.7% estimates for 2018 and 2019, respectively, the International Monetary Fund’s (IMF) 6.5% and 6.7% for the same years, and 6.7% of the Organization for Economic Cooperation and Development for both years.

Moreover, AMRO said in a separate blog post that the ASEAN+3 area — consisting of the 10 ASEAN members plus China, Japan and South Korea — faces a “high likelihood” of “high impact” risk from further escalation of the US-China trade conflict.

But it also noted that the area “has done well and remains the fastest growing region in the world”, with “most economies… growing at close to or slightly above potential with subdued inflation.”

The Philippines, along major ASEAN economies such as Indonesia, Malaysia, Thailand, and Korea “continue to have relatively strong external positions with adequate reserves and current account balances that are either in surplus or in small deficit,” AMRO said.

The regional surveillance body said that countries should rain vigilant for potential downside risks.

“For economies facing strong external headwinds and spillovers, policy makers have preemptively tightened monetary policy to help assuage market concerns. On the fiscal front, prudent public finances have allowed fiscal policy to play a crucial countercyclical role, helping to support growth. However, with the narrowing fiscal space, authorities would need to reprioritize spending to support structural reforms and growth,” AMRO said.

“Policy makers should continue to remain vigilant, with no room for complacency. Longer term structural reform agenda should also be pushed ahead, such as in building capacity and connectivity to foster resilience and enhance future growth prospects,” it added.

For HSBC, Philippine GDP growth will ease slightly this year due to higher interest rates even as private consumption is seen to remain strong.

HSBC projects GDP growth to moderate to six percent this year from the 6.2% projected for 2018.

“We anticipate the economic growth in the Philippines to stay relatively resilient, in line with the synchronized global slowdown scenario,” HSBC Private Banking Chief Market Strategist in Asia Fan Cheuk Wan said in a press conference on Wednesday.

For this year, the private lending unit of the HSBC Group expects the BSP to “approach the end of its tightening cycle” by hiking its benchmark rates by 25 basis points in the first quarter.

“We still have the excise tax increase. This will continue to underpin inflation concerns at the beginning of the year,” Ms. Fan added. “But after a Q1 BSP rate hike, and with the impact of the oil price correction of last year… we will start to see easing inflationary pressures in the Philippines.”

HSBC projects local headline inflation clocking in at 3.8% for whole-year 2019, well within the BSP’s 2-4% target band.

It also expects the “Philippine Stock Exchange index to recover to 8,600 by the end of 2019 after the sharp correction last year.”



...always net positive naman pagi ang epekto pag maraming pondo pumapasok

Hot money turns around in 2018

MORE FLIGHTY FOREIGN FUNDS entered the Philippines in 2018, beating the central bank’s expectation of a net outflow as investor optimism rebounded just before the year ended.

December saw $278.11 million in foreign portfolio investments net inflows, marking the second straight month of net inflows even if it was less than November’s $832.07 million and the year-ago $456.93 million, the Bangko Sentral ng Pilipinas (BSP) reported on Thursday.

These investments are referred to as “hot money,” as these funds enter and leave the country with ease.

Foreigners invested $1.58 billion for the month, but this was offset by $1.302 billion in withdrawn funds.

The December figure brought the full-year total to a $1.204-billion net inflow, marking a turnaround from 2017’s $195.4-million net outflow.

This is the biggest hot money inflow recorded since 2013, which saw $4.225 billion foreign funds retained in the local economy.

Last year’s net inflow even beat the $100-million net outflow expected by the central bank.

“This may be attributed to the large investment in a holding company… accompanied by investors’ optimism over the passage of the first phase of the government’s tax reform program,” the BSP statement read.

San Miguel Corp. raised P39.19 billion (about $744 million) in fresh capital in November through a follow-on offering for its subsidiary, San Miguel Food and Beverage, Inc.

On the other hand, the Tax Reform for Acceleration and Inclusion law took effect Jan. 1, which reduced personal income taxes while raising more revenues from additional levies on fuel, cars and sugar-sweetened drinks, to name a few.

Total inflows reached $16.034 billion this year, partly offset by $14.83 billion in outbound funds.

The largest inflows were recorded in the first quarter at $5.1 billion, which saw big-ticket share sales from Petron Corp. at roughly $500 million as well as a $400-million tender offer by port operator International Container Terminal Services, Inc.

About 71.4% of portfolio flows went to shares of listed companies, involving transactions that yielded net outflows worth $1.3 billion.

Foreign investors placed a fifth of their bets on peso-denominated government securities, which yielded a $1.2-billion net inflow. Other peso-denominated debt papers fetched $1.3 billion worth of investments, while peso time deposits received less than $1 million.

The United Kingdom, United States, Singapore, Netherlands and Hong Kong were the five biggest sources of hot money in 2018, while 78.8% of the outflows went to the US as investors regard it as safe haven.

Jonathan L. Ravelas, chief market strategist at BDO Unibank, Inc. pointed out that the hot money flows mirrored the movement of the Philippine Stock Exchange, coming from a roughly “10-month rout” for emerging markets.

“Eventually, the stock market recovered from the lows of the year and ended higher,” Mr. Ravelas said in a telephone interview when asked for comment.

Local financial markets took a beating last year as the Philippines reeled from surging inflation, which pushed yields up and sentiment down.

Michael L. Ricafort, economist at the Rizal Commercial Banking Corp., also noted that portfolio flows started to improve in November as inflation had “already started to ease from the near-decade high of 6.7%. Interest rates have also eased, with bond yields now on a decline.”

“Philippine economic and credit fundamentals remained solid, as partly attested by the affirmation of the country’s credit ratings as well as economic growth at six-percent levels in 2018 — among the slowest in three years partly due to higher inflation, but still among the highest/fastest in Asia/ASEAN — a sign of resilience,” Mr. Ricafort said.

BDO’s Mr. Ravelas also noted that 2019 will likely turn out to be a better year in terms of attracting more investments, saying: “With the stock market closer to 8,000 and the peso at the low-P52 level, it shows that you’ve seen the risks in 2018.”

“The water in the river is clear, investors are now willing to jump in.”

The BSP forecasts a $200-million net outflow for 2019, according to projections adopted in November last year.



Slower inflation gives BSP policy space

THE OVERALL INCREASE in prices of widely used goods cooled for the third straight month in January, marking the slowest year-on-year reading in 10 months and making the case for monetary authorities to keep interest rates steady at their meeting on Thursday.

Preliminary data which the Philippine Statistics Authority (PSA) released on Tuesday showed January inflation at 4.4%, slower than December’s 5.1% albeit faster than the 3.4% pace in January 2018.

January’s actual rate compares to the 4.5% median estimate in BusinessWorld’s poll of 12 economists and analysts late last week. It was, however, within the Bangko Sentral ng Pilipinas’ (BSP) 4.3-5.1% range for that month.

January’s reading marked the third straight month of decelerating inflation from a nine-year-high 6.7% in September and October and was the slowest since the 4.3% recorded in March last year.

Core inflation, which strips volatile prices of food and energy items, was 4.4% last month versus December’s 4.7% and January 2018’s 2.6%.

“Demand pressures are clearly receding given the sustained moderation in core inflation. The government’s non-monetary measures to ensure ample supply of key food commodities turned the tide against food price upsurge,” BSP Deputy Governor Diwa C. Guinigundo told reporters in a mobile phone message.

PSA data noted slower increments in the heavily weighted food and non-alcoholic beverages, which increased by 5.6% in January from 6.7% in December and 4.4% in January last year.

Other commodity groups that contributed to the slowdown were alcoholic beverages (16.1% from 21.7% in December); clothing and footwear (2.5% from 2.8%); housing, water, electricity, gas, and other fuels (four percent from 4.1%); health (4.3% from 4.8%); and transport (2.5% from 4%).

The food-alone index slowed to 5.1% from 6.3% in December. Specifically, decelerations were observed in the indices of rice (4.7% from 6% in November), meat (five percent from 5.5%); fish (7.8% from 9.9%), vegetables (5.6% from 8.1%); and fruits (2.2% from 3.8%).

“This clearly validates the lack of persistence of supply price pressures experienced for the most part of 2018 when oil prices surged by 60% with similarly sharp upturns in the prices of rice, meat, fish and vegetables,” Mr. Guinigundo said.

Nicholas Antonio T. Mapa, senior economist at ING Bank N.V. Manila, said that the January print was in line with the expectations. “Any cost push driven inflation pop tends to dissipate quickly once supply bottlenecks are mitigated. This trend will continue in next few months, barring any tightness in food supply or spikes in oil prices,” Mr. Mapa said.

The better-than-expected inflation result also makes room for the BSP to maintain benchmark rates in its first policy review for the year this Thursday.

“This latest positive outcome in inflation management gives the BSP more space to review its current monetary policy. With modest demand pressures, monetary policy could be slight on the brake,” Mr. Guinigundo added, echoing the dovish cues he gave last week.

The BSP official said on Friday that monetary authorities should not “immediately reverse course” on monetary policy, as they need to review how previous tightening moves are absorbed by financial markets and the economy before further adjustments can be made.

The Monetary Board fired off five consecutive rate hikes totaling 175 basis points (bp) last year to arrest surging inflation, marked with a back-to-back 50 bp tightening move just as prices were surging to multi-year highs.

In December, the BSP found scope to keep policy settings steady at the 4.25-5.25% range amid signs that inflation is on its way down, marked by two consecutive months of a sharp decline.

At the same time, Mr. Guinigundo has cautioned calls for the BSP to swiftly reduce bank reserves, as he highlighted the need for “tight” liquidity conditions before further cuts can be considered. He said that year-to-date inflation should also be below four percent before the reserve standard is reduced anew. “[T]he BSP needs the benefit of time and more observations. The BSP will be in a more strategic position to, one: ascertain the impact of the previous move to reduce RRR (reserve requirement ratio) and the subsequent tightening it had to implement in the face of potential second-round effects and disanchoring of inflation expectations and, two: chart the future path of monetary policy,” he added.

Monetary authorities slashed the RRR in two moves last year, which they described as “procedural” tweaks to reduce the cost of borrowing money in the financial system. Some bank analysts are betting that reserve cuts will come prior to any tweaks to the key policy rate.

In a joint statement on Tuesday, state economic managers noted that slowing headline inflation “was widely felt across all regions.”

“In particular, inflation in Metro Manila and other areas slowed to 4.6% and 4.4%, respectively. Inflation in the Autonomous Region in Muslim Mindanao was the highest at 6.1%,” the statement read.

“We also note that the price index of petroleum and fuels for transport equipment significantly dropped by 1.8% last month from 4.1% in December 2018. This partly contributed to lower transport cost and utility rates that further drove down inflation of non-food items.”

In a separate statement, the BSP said the latest inflation data were “in line with a target-consistent inflation path” as overall price increases are expected to slow further in 2019 and 2020.

“Domestic supply-side pressures are seen to further ease, while the impact of BSP monetary policy adjustments in 2018 is expected to continue to work their way through the economy,” the statement read.

The BSP sees full-year 2019 and 2020 headline inflation to average 3.2% and three percent, respectively, slower compared to the 5.2% finish in 2018 and crawling back to the 2-4% target band.

ANZ Research analysts Khoon Goh and Mustafa Arif said in a report that “[t]he moderation in core inflation suggests that underlying pressures are easing.”

“January data supports the [BSP’s] view that inflation is likely to glide lower in the coming months,” they said.

“As such, we expect the BSP to keep rates unchanged at its meeting on Thursday.”

Michael L. Ricafort, economist at the Rizal Commercial Banking Corp., shared this expectation, saying: “The latest inflation data would, at the very least, likely keep key local policy rates unchanged on the next monetary policy meeting on Thursday…”

“For the coming months of 2019, any sustained easing inflation trend, at some point, may eventually lead to [the] easing of local monetary policy,” Mr. Ricafort said.

“Banks’ reserve requirement ratio (from the current 18%) and/or local policy rate (from the current 4.75%) may be cut as soon as inflation goes back to the 2-4% target range, which may happen as early as [the second quarter of 2019].”

ING’s Mr. Mapa said another RRR cut could happen soon, with policy rate cuts “also a possibility” by May as economic growth would continue to display the “knock-off effects of aggressive tightening.”

Inflation’s good news comes three months ahead of the May 13 mid-term elections, and Malacañang said it was “pleased” with the latest report.

“With inflation further tapering down to a 10-month low of 4.4%, this Administration will oversee and ensure that its consequent effects at the market would be felt by the ordinary consumer,” Presidential Spokesperson Salvador S. Panelo said in a statement.

He recalled that last year’s soaring prices “tested our will as a nation.”

“Not disheartened nor cowed, we rose to the challenge as a people. With the President’s strong and decisive action, we remained focused and steadfast as we addressed the conditions that contributed significantly to inflation.” 



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