The Market Monitor Minding the Nation's Business
By Luis Leoncio
The business sector does not seem comfortable with the prospect of Davao City Mayor Rodrigo Duterte succeeding President Aquino, as the peso and the stock index have been on a continued decline since he topped the pre-poll surveys that analysts attributed partly to increased political uncertainty.
The stock barometer extended its losing streak into a sixth day on Friday. with the Philippine Stock Exchange index (PSEi) losing 3.27 points to 7,159.29 from previous day’s 7,162.56 finish.
The peso also slumped 1.6 percent in April, as opinion polls showed that Duterte, who made inflammatory comments about rape and extra-judicial killings and who often spices up his speeches with profanities, extended his lead before the May 9 vote.
Duterte’s popularity has been boosted by peoples’ anxiety over crime and, like US presidential candidate Donald Trump, supporters praise him for “talking straight.”
As the election nears, Philippine bond risk has climbed from near an eight-month low and foreigners have pulled $41 million from local stocks this month.
“Duterte represents uncertainty,” Edwin Gutierrez, head of emerging-market sovereign debt at Aberdeen Asset Management Plc in London, said. “He’s a bit of a one-trick pony, with his law-and-order message. I don’t think he’d do anything to upset the apple cart with economic policy, but I don’t see economic reform as being his priority.”
“We could see the peso hitting 48 per dollar before heading back to 46.50 by the end of the year,” Jonathan Ravelas, chief market strategist at BDO Unibank Inc. in Manila, said. “It’s driven by fear and the normal reaction of local investors is to buy the dollar.”
Business anxiety over Duterte grew after he met with members of the Makati Business Club (MBC) and the Management Association of the Philippines (MAP) last April 27; MBC Chairman Ramon del Rosario Jr. said Duterte failed to provide the business leaders with details of his economic plans.
Duterte’s speech was laced with profanities that turned off most of his audience who were mostly waiting for him to spell out his program for the economy.
“Relax, I am not the man I am portrayed to be by some,” Duterte said in his speech that was met with uncomfortable laughter.
“I am castigated for being brutal and honest. It will be a bloody war, and for those who are already there, they will never go back,” he said.
The most that Duterte said that resembled a plan was to hire an additional 3,000 policemen and to double the salary of members of both the Philippine National Police (PNP) and the Armed Forces of the Philippines (AFP) so he can launch a “bloody war” against crime, the results of which he promised businessmen would be felt within weeks.
What Duterte said was not what the business executives wanted to hear, del Rosario said.
“I would have wanted him to discuss the economic policies and programs of a Duterte administration,” the MBC chairman said. “I think there is uncertainty because we did not hear enough on what he plans to do with the economy.”
Del Rosario also said he and his fellow business leaders “really never got a chance to know Duterte or his advisers. It is in that sense that there is some degree of uneasiness and uncertainty.” Del Rosario said. “That is not to say, however, that we are predicting negative things about him but I think ours (would be) a wait-and-see attitude.”
“His comments were a curv e ball to the market,” said Joey Cuyegkeng, economist at ING Groep NV in Manila. “It more or less shakes the confidence of investors that gains in reforms are irreversible. We estimate something like 70 to 80 percent of the peso’s weakness is attributable to the local developments.”
“Duterte’s governance philosophy doesn’t seem to have much focus on economic policy, and his lack of national experience is a drawback,” Mixo Das, a strategist at Nomura Holdings Inc. in Singapore, said.
Investment bank HSBC Holdings said political risk, a narrowing current-account surplus and greater central bank tolerance for currency weakness will weigh on the Philippines peso.
The Philippines currency, the best-performing in Southeast Asia in the three years through 2015, will drop 2 percent to P48.50 a dollar by year-end, Alastair Pinder, an Asian foreign-exchange strategist in Hong Kong for HSBC, wrote in a research note. Investors should look for opportunities to shore up the peso before risk events like May’s presidential elections, he wrote.
“While the outcome of the election is looking uncertain, one thing is for sure – Aquino’s replacement has big boots to fill,” wrote Pinder.
“We suspect the peso will be sensitive to the result this time around.”
In the latest HSBC Global Research report called “Philippine Elections 2016: Beyond the campaign noise,” however, it said there is “scant risk of an abrupt change of policy from the record of the Aquino administration.”
“There appears to be little risk to the Philippines’s economic outlook over the next year emanating from the elections –either positive or negative,” said HSBC.
“Over the short term, private consumption should remain robust due to remittance growth tracking 10 percent year-on-year in peso terms given the available data for the first quarter 2016,” the bank said.
The bank also assessed that “high-frequency indicators” such as credit growth and trade data all point to an increase in momentum in the first quarter and that there is a “palpable sense that certain policies, like the focus on infrastructure and improved fiscal efficiency, have benefitted the country and the electorate.”
HSBC added that, “encouragingly, most candidates plan to take the pro-growth agenda further by improving the Philippines’s competitiveness with regard to FDI through constitutional changes.”
“Some of the potential volatility that we anticipated has been cushioned by other factors,” said HSBC.
“For example, much of the uncertainty that had the potential to stir some volatility, such as Grace Poe’s eligibility to run, has been resolved. The broad weak- US dollar environment has also deflected some of the headwinds that may have otherwise been facing the peso.”
“Additionally, the lack of details on the candidates’ specific economic policies and the relatively homogenous stance of the frontrunners mean it is unlikely the markets will see one result as especially favorable. However, on the margin, Mar Roxas, who was nominated by Aquino himself, and Grace Poe are probably the two candidates who will follow Aquino’s legacy the closest,” noted HSBC.
“A victory by Rodrigo Duterte, on the other hand, could lead to greater uncertainty, given that he has led a more controversial campaign and his views differ the most from the current government policies,” it said.