Strong fundamentals can drive local financial marts to new highs

MANILA, Philippines - Strong fundamentals could drive local financial markets to new highs this year, an investment bank said, as foreign investors remain attracted to the Philippines’ economic success.

The peso is seen to hitting 39.50 versus the greenback, bond yields could decline by as much as 50 basis points, while the local bourse still has “some room” for a further bull run, ING Bank said yesterday.

“Economic fundamentals continue to show strength. There are risks, of course, but I guess most of the risks will be manageable,” ING economist Jose Cuyegkeng said in an economic forum in Makati City.

Growth could come in at 6.1 percent this year, Cuyegkeng said, slower than the 6.6-percent expansion last year, but still within the government’s six to seven-percent target. For 2014, this could slow to 5.9 percent.

Strong consumption, election spending and investments will be key drivers this year, he noted.

In general, however, the Philippines is expected to post a “trend growth” of six percent by the end of the Aquino administration in 2016, something that could entice investors and support the foreign exchange, bond and stock markets.

As for the peso, Timothy Condon, ING economist for Asia, said in the same forum a looming “currency war” –  where most major currencies are seen to depreciate –will not post threat to the peso’s gains. The peso was Asia’s second best performer last year.

“The peso is one that is going to be resilient in the face of contagion of depreciating yen,” he explained. For 2014, the local unit could average a stronger 38.50 to a dollar. It closed at 40.675 yesterday.

Further “downside” in local bond yields also exists, Cuyegkeng said, predicting an average drop of 20 basis points ‘without rating upgrade” and by a hefty 50 basis points if investment grade is granted.

On last Monday’s auction, the 91-day Treasury bill (T-bill) rate— benchmark of short-term bank loans— remained at record-low of 0.05 percent, while those from six-month and one-year papers, despite rising, remained below one percent.

“Investment grade rating could come in the next 12 months. Who knows, Fitch may actually spring a surprise,” Cuyegkeng said. Debt watcher Fitch Ratings is scheduled to conduct its annual review of the country this quarter.

The equity market, on the other hand, will gain its signal from first quarter growth results as well as developments in the bidding of public-private partnership (PPP) projects, he explained. The benchmark Philippine Stock Exchange index has hit 15 record-highs this year.

“So growth and PPP will provide legs to stock market especially if valuations are getting stretched,” he pointed out.

Other forecasts

Other forecasts were shared by the ING, including inflation of 3.7 percent and 3.8 percent for this year and the next. Reserves, which just hit a record of $85.761 billion in January, could hit “slightly closer” at $90 billion in the next two years.

As for fiscal policy, Cuyegkeng said budget deficit could fall at 1.9 percent of economic output for 2013 and 2014.