As part of its campaign on financial literacy and awareness, Sun Life Asset Management Company Inc. (SLAMCI), a subsidiary of Sun Life of Canada (Philippines) Inc., hosts a webinar on the market outlook in the Philippines for the year 2020 in light of the COVID-19 pandemic.
The effects of the COVID-19 pandemic continue to manifest in every one’s daily lives and the Philippine market and economy are no exception. Sun Life’s Chief Investments Officer Michael Gerard Enriquez shares the inevitable effects of the pandemic to the global and domestic economy to date.
Oil futures contracts for the months of May and June have reached negative prices as the demand for oil continues to drop. The number of jobless claims in the United States for the past 8 weeks are now in the 36 million range. Nevertheless, major global economies start to re-open albeit with a limited capacity.
Aggressive Responsive Measures of the Philippine Government
According to Enriquez, the Philippine government, particularly the Bangko Sentral ng Pilipinas (BSP) has been very quick and aggressive in addressing the crisis brought by the pandemic sharing that the BSP has already cut 125 basis points on the interest rates of BSP’s overnight repurchase facility to 2.75% this year with the expectation of additional decrease of 50 basis points in the coming months.
Enriquez further shares that BSP cut the Reserve Requirement Ratio (RRR) of BSP-supervised financial institutions of up to 400 bps for the year 2020. Sun Life further lauds and commends BSP’s move to purchase government bonds in the open market as part of the quantitative easing measures to increase liquidity in the economy and to encourage lending and investment from the public.
Meanwhile, the Bayanihan to Heal As One Act allows the government to realign the national budget to fight the effects of the COVID-19 including the allocation of P200 billion for 18 million Filipino families. On May 26, the House of Representatives Defeat COVID-19 Ad-Hoc Committee (DCC) approved three COVID-19 related bills including the Philippine “Economic Stimulus Act of 2020” (PESA) Bill which aims to provide a stimulus package particularly targeting private enterprises, SMSEs, and financial institutions such as insurance companies to boost the economy and soften the adverse economic impacts of the pandemic. On the same date, the DCC also approved the bills on the Financial Institutions Strategic Transfer Act (FIST) and “COVID-19 Related Anti-Discrimination Act.
COVID-19 pandemic effects on the Philippine market
Analysts expect the economy of the Philippines to contract. Accordingly, the Philippines is expecting its first GDP contraction since the Asian Crisis in 1997-1998. Economists also brace for a contraction in household consumption worse than the 1984-1985 Debt Crisis.
Philippine economy’s recovery from the recession is believed to be a U-shaped recovery whereby the GDP will be initially weak then slowly ramping up. U-shaped recoveries tend to last for one to two years from the bottom before it reaches its previous peak. During the recovery phase, markets are expected to be highly volatile. During these times, however, behavioral changes of the consuming public requires a new normal. Consequently, full economic recovery may take slightly longer than typical U-shaped recoveries.
While the government funding plans remain uncertain, the peso bond yields went down across the curve due to BSP’s quantitative easing methods of buying bonds in the open market. Economists believe that the government will be constrained in the long run to borrow heavily from the market to fund its efforts to stimulate the economy. Accordingly, the rates of the peso bond yields are expected to go higher in the coming months.
On the other hand, equity markets remain in the red as foreign institutions undertake measures to rebalance their funds and limit risks on their global portfolio. This continued foreign selling greatly affects the Philippine market index, as well as the market sentiment. Consequently, equities remain undervalued as opposed to bonds.
Philippine Market Outlook 2020
The lifting of the Modified Enhanced Community Quarantine in the Metro Manila allows industry players and economists to be optimistic on the recovery of the Philippine economy as the government starts to relax its quarantine measures.
The volatility of the financial markets remain despite a rebound from their recent lows. While major economies are already starting to re-open, restricted movement, capital, and human resources may nevertheless slow down full economic recovery.
Telcos and non-discretionary consumption-driven industries like basic household products are expected to recover faster from the effects of the pandemic. Likewise, telcos and logistics companies are bound to quickly get back on their feet as the digitalized new normal sets in. On the other hand, tourism, airlines, and hotels and hospitality industries are expected to slow down due to the effects of the pandemic on consumer behaviors.
A low touch economy might be prevalent in the next few months or years. “Until there is a vaccine, our behaviors will never be normal again”, remarks Enriquez. Market sentiment, however, can quickly change from fear to fear of missing out. Cautious market players always take on an optimistic view but remain cognizant of the risks as they continue to be fluid in light of the unprecedented economic effects of COVID-19.